LuLaRoe has agreed to settle one of the many striking cases that have waged against it in recent years. On Tuesday, Washington State Attorney General Bob Ferguson revealed that the Corona, California-based multi-level marketing company (“MLM”) will pay almost $5 million to settle the lawsuit that the state of Washington filed against it and several of its executives in early 2019, accusing the headline-making apparel company of operating as a pyramid scheme in violation of the Anti-Pyramid Promotional Scheme Act, as well as Washington’s Consumer Protection Act, all while promising to help women achieve financial freedom.

Formally launched in 2013 by DeAnne Stidham, who was a single mother of seven children when she launched the company, according to the company’s (since-edited) website, LuLaRoe rose to fame thanks in large part to its network of tens of thousands of commission-based “consultants” scattered throughout the U.S. Fueled mostly by stay-at-home moms in search of extra cash and by Facebook posts that boasted about LuLaRoe’s colorful, comfortable clothing, including its much-buzzed-about printed (and defective) leggings, LuLaRoe was reportedly generating $2.3 billion annual revenue in 2018, “making the five-year-old brand about the size of J.Crew,” according to Bloomberg, and earning it the title of one of the largest MLM companies in the U.S.

As the thriving business that Stidham was running with her husband Mark Stidham was in the midst of sky-rocketing growth (it booked sales gains of 600 percent as of 2016, per CBS), it swiftly started to implode. The chips started to publicly fall in 2017 when LuLaRoe was named in a flurry of widely-publicized class action lawsuits, including one that sought $1 billion in damages, and another that accused the company of violating the Racketeer Influenced and Corrupt Organizations Act, the federal statute enacted in 1970 to provide the government with tools in the fight against organized crime. Regardless of the points of differentiation between the various lawsuits filed in courts across the U.S., all of them painted the company as little more than a toxic “pyramid scheme,” and accused it and its founders of scamming women across the country out of millions of dollars.

Among those suits: the case filed by Washington State, which asserted in its January 25, 2019 complaint that the company’s former bonus structure constituted a pyramid scheme, while “its claims regarding sustainability, profitability, and inventory refunds” amounted to legally-actionable examples of deceptive marketing.

At the heart of the Washington State case is the allegation that LuLaRoe is not actually an MLM business but an illegal pyramid scheme. While pyramid schemes “can look remarkably like legitimate MLM business opportunities,” according to the Federal Trade Commission, the difference between the two is that in pyramid schemes an individual’s “income is based mostly on how many people he/she recruits, not how much product he/she sells.” That is precisely how LuLaRoe was operating before the company changed its bonus structure in July 2017, according to Washington State, which asserted that LuLaRoe “incentivized existing consultants to recruit and sponsor new consultants, and to encourage them and their recruits to purchase large amounts of inventory, by basing its bonus structure on the dollar amount of wholesale orders paid for, instead of on bona-fide retail sales to end-consumers.”

The result, according to the state’s suit, was an illegal pyramid scheme – with the name referring to the fact that most participants fall in the lowest income tier and far fewer occupy the top spots – that violates Washington’s Anti-Pyramid Promotional Scheme law. (The company changed this bonus structure in July 2017 to provide bonuses based solely on sales to consumers.)

In case that was not enough, the complaint accused LuLaRoe of making “deceptive claims” about the nature of its business model and profitability in order to encourage more consumers to become consultants. For example, Washington State alleged that “the company’s annual disclosure statements only include ‘active’ consultants who have met minimum purchase thresholds,” thereby, “omitting consultants who fared worse.” At the same time, “LuLaRoe never published a 2017 Income Statement, leaving a 2016 Income Statement on its website, which was not reflective of 2017 when business declined.” As a result, the company “misled prospective consultants who evaluated whether to join” the company in 2017. 

Beyond that, “LuLaRoe tricked consumers into buying into its pyramid scheme with deceptive claims of high profits and refunds for unsold merchandise.” For instance, the company “advertised that consultants could make ‘full-time pay’ for ‘part-time work,’” and highlighted consultants who made $10,000 to $500,000 a month, promising that LuLaRoe “is a business that is going to bring in a lot of money for you, a lot of money.” Counsel for Washington State argued that “the pyramid scheme structure ensured that the primary business opportunity from joining LuLaRoe was through recruiting, not retail sales,” and as a result, “a majority of Washington consultants reported less than $10,000 profits in total from their LuLaRoe business, and nearly one-third of consultants reported losses.”  

And all the while, the company allegedly violated the state’s Consumer Protection Act by “misrepresenting and failing to honor its refund policies.” LuLaRoe warranted that unsold merchandise “would be refunded at 100 percent, plus free shipping, should the consultants decide to stop selling for LuLaRoe.” The state asserted that such a claim turned out not to be true, and therefore, “Many Washingtonians lost money and were left with piles of unsold merchandise and broken promises from LuLaRoe.” After all, in order to become a LuLaRoe “consultant,” new members are required to purchase “onboarding packages” that consist of LuLaRoe garments and that range in cost between $5,000 and upwards of $9,000.

“A survey of 215 current and former consultants, conducted by Flynn, the consultant in Florida, puts the typical initial investment at about $7,000,” Bloomberg reported in 2018, noting that “this is unusually high for a direct selling company; Mary Kay, for example, offers a $100 makeup starter kit.”

According to a CBS investigation in 2017, LuLaRoe also recommended that “salespeople keep about $20,000 in inventory at any given time and encourages consultants continually to invest in their businesses,” all under the guise that unsold merchandise could be returned to the company in exchange for a 100 percent refund. “Despite the company’s buyback policy – in connection with which LuLaRoe has vowed to buyback 100 percent of a consultant’s unsold inventory that is in ‘acceptable condition’ if a consultant wishes to cease working with the company – it has ceased to do so,” CBS found.

Fast forward to this week, and the Attorney General’s Office has revealed that LuLaRoe has agreed to pay $4.75 million to settle the state’s case, albeit without admitting any wrongdoing. 

As first reported by the AP, Attorney General Bob Ferguson confirmed that “$4 million of the settlement will be distributed to about 3,000 Washington residents who were recruited to the company.” In a statement, Ferguson said on Tuesday, “Every Washington retailer who lost money under LuLaRoe’s pyramid structure will receive restitution.” 

*The case is State of Washington v. LuLaRoe, 19-2-02325-2 SEA.

A trademark fight between a burgeoning sneaker marketplace and a British fashion brand has come to a quiet close. On the heels of a New York federal court granting apparel brand Goat Fashion’s motion for a preliminary injunction in late September, and thereby, barring Goat Group’s corporate entity, 1661, Inc. from selling apparel on its buzzy resale marketplace due to the similarity of the two brands’ names and the resulting likelihood that consumers will confuse the two like-named but unaffiliated parties’ goods/services and cause Goat Fashion to suffer “irreparable harm,” the parties have settled their legal feud.

The newly-revealed settlement comes after the nearly 20-year old Goat Fashion filed suit against 1661, Inc. in December 2019 for trademark infringement and breach of contract, arguing that the sneaker upstart  is  “willfully disregarding” its well-established intellectual property rights, namely, its rights in the “Goat” trademark in the U.S., which Goat Fashion says that it has consistently used since 2003 and has “spent a substantial amount of time, money, and resources advertising its apparel under” that name. 

Pointing to examples of potential confusion, Goat Fashion asserted in its complaint that its website has been bombarded with searches for terms like “Yeezy’” –  the name of a collection of sneakers produced by adidas and Kanye West – which “is the most popular search term on its website,” despite the fact that the British fashion brand does not sell athletic footwear. Similarly, Goat Fashion asserts that its e-commerce site has “received searches for ‘Supreme shirt,’ ‘Gucci belt,’ and ‘hoodie,’ each of which is an item of apparel or an apparel-related accessory sold by 1661.” 

These searches “strongly suggest that consumers are inclined to confuse Goat Fashion’s and 1661’s [resale] platforms,” Judge Paul Engelmayer of the U.S. District Court for the Southern District of New York asserted in his preliminary injunction order this fall

In filing suit last year, Goat Fashion also claimed that 1661, Inc. is running afoul of the co-existence agreement that the parties entered into in April 2017, which established that in order to alleviate potential confusion in the marketplace and enable to two companies to co-exist peacefully, Goat Fashion would “continue to use its GOAT mark for goods and services related to clothing,” while 1661, Inc. would “limit its use of its GOAT mark [within that class] to services in connection with its online marketplace … ‘athletic and sporting footwear,’ i.e., sneakers.” 

The parties’ harmonious relationship did not last long, and in fact, their deal broke down in July 2019 when Goat Fashion claims that it refused to consent to 1661’s request to use the GOAT mark on clothing in addition to athletic and sporting footwear. As Goat Fashion alleged in its complaint, “Rather than negotiating a license agreement,” which Goat Fashion says that it offered, 1661, Inc. opted to “willfully disregard [its] trademark rights and … the 2017 consent agreement,” and in October 2019, began selling its own GOAT branded clothes through its mobile app anyway in furtherance of an ambitious attempt to expand its offerings beyond sneakers.

Interestingly, the court was not persuaded by 1661, Inc.’s argument that it was on the right side of the law because it merely “operat[es] as a ‘middleman’ between buyers and sellers” and that it “does not itself manufacture or sell the products” on its platform.” (This mirrors the argument that Amazon has routinely made in connection with the lawsuits filed against it over products offered up/sold on its third-party marketplace site). 

The court found these argument to be “factually dubious,” stating that “as Goat Fashion has demonstrated, 1661 does not limit its use of the GOAT mark to the authentication of apparel goods or the facilitation of third-party sales,” and instead, uses the GOAT mark on its e-commerce platform, on its product packaging, and in connection with the actual sales documentation and customer service associated with its site. “These activities are typically conducted by and associated with an online retailer or marketplace,” according to the court, which found that Goat Fashion established a likelihood of success on its breach of contract claim. 

The preliminary injunction – which was slated to be in effect for the duration of the litigation – put an abrupt halt to 1661’s grand plans for expansion. The equitable remedy that the court handed to Goat Fashion followed just days from news that 10-year old Goat Group had raised $200 million in funding in order to “further its expansion into new apparel and product categories, as well as its efforts to work with more brands to sell their products directly on its platform,” the Wall Street Journal reported on September 23. 

Fast forward two months and counsel for Goat Fashion filed a stipulation of voluntary dismissal on November 25, stating that it “is hereby stipulated and agreed by and between the parties and/or their respective counsel(s) that the action is voluntarily dismissed, with prejudice” – which means that Goat Fashion cannot file suit against 1661 on the same grounds again at a later date – “and without costs.” 

A representative for Goat Fashion confirmed to TFL on Monday that “this litigation is now concluded with a settlement reached between the two parties.” Given that the preliminary injunction is limited to the duration of the case, itself, and since the terms of the parties’ settlement are confidential, it remains to be seen whether Goat Group will have to go back to the drawing board in terms of the branding if it wants to offer up apparel and accessories on its site. However, it is worth noting that as of the time of publication, the “apparel” section on the Goat website delivers the following message, “There were no matching results. Please try a different search.”

A rep for 1661, Inc. was not immediately available for comment.

*The case is Goat Fashion Ltd. v. 1661, Inc., 1:19-cv-11045 (SDNY).

L’Oreal and Drunk Elephant have managed to settle a high-stakes fight over their respective Vitamin C products two years after the case was filed. According to a joint stipulation of dismissal filed with the U.S. District Court for the Western District of Texas late last month, the parties alerted the court that they have agreed to “dismiss all claims against [Drunk Elephant] in this matter with prejudice, and all counterclaims against [L’Oreal] in this matter without prejudice, [with] each party to bearing its own costs, attorneys’ fees, and expenses.” The court formally disposed of the case a day later on October 27. 

The dismissal comes on the heels of the American arm of French giant L’Oreal slapping its smaller rival Drunk Elephant with a headline-making suit, accusing Drunk Elephant of infringing one of its valuable utility patents by way of the cult-followed 8-year-old brand’s award-winning and highly-buzzed-about $80-per-ounce Vitamin C serum. In its November 2018 complaint, L’Oreal asserted that Drunk Elephant’s C-Firma Day Serum contains a patent-protected chemical makeup that mirrors that of L’Oreal-owned brand Skinceuticals’ more expensive C E Ferulic Serum. As a result, L’Oreal argued that Drunk Elephant was directly infringing a utility patent (no. 7,179,841) that it has held since 2007. 

In its complaint, L’Oreal alleged that its patent-protected compound – namely, “stabilized ascorbic acid compositions and methods” that “provide enhanced stability, enhanced solubility and an enhanced photo-protective effect [for ascorbic acid] as compared to prior compositions” – is embodied in Skinceuticals’ $180 C E Ferulic serum. By manufacturing and offering for sale the C-Firma Day Serum, L’Oreal said that Drunk Elephant was making use of the invention at the center of its ‘841 patent without the authorization to do so. (The exact problem with Drunk Elephant’s product, according to L’Oreal? It contains a specific “single-phase solution composition” of a cinnamic acid derivative selected from p-coumaric acid, ferulic acid, caffeic acid, sinapinic acid; cis and trans isomers; an alkanediol; and water and mirrors that of L’Oreal’s patent-protected composite.”)

“Despite knowledge of the ’841 Patent as early as September 21, 2018, when L’Oréal informed Drunk Elephant of [such] infringement via letter,” L’Oreal alleged that Houston, Texas-based Drunk Elephant “continues to encourage, instruct, enable, and otherwise cause its customers to use its products, which infringe the ’841 Patent.”

In its initial response to the lawsuit in June 2019, Drunk Elephant “specifically denied” that its C-Firma Day Serum “infringes any valid claim [included in L’Oreal’s] ’841 patent,” and explicitly rejected L’Oreal’s argument that the patent prevents it from “manufacturing and selling any Drunk Elephant products,” including the C-Firma Day Serum.

Inequitable Conduct 

Last month’s dismissal comes almost exactly a year after the court tossed out one of the counterclaims that Drunk Elephant’s lodged against L’Oreal, in which the now-Shiseido-owned company attempted to sidestep liability by asserting that at least part of L’Oreal’s patent was invalid. In its June 2019 answer, Drunk Elephant asserted several counterclaims, including one that accused L’Oreal of engaging in inequitable conduct, thereby, making its ‘841 patent unenforceable.

To be exact, Drunk Elephant asserted that L’Oreal failed to properly alert the U.S. Patent and Trademark Office” (“USPTO”) of two previously-issued patents that were “material to the patentability of [its own] ‘841 patent,” and that would have caused the USPTO to refused to “allow at least one claim of the ‘841 Patent had [it] been aware of them, alone or in combination with other prior art, and based on the state of the art at the time.” Drunk Elephant argued that the existing patents were owned by “entities ‘related’ to L’Oréal USA,” and thus, L’Oréal “knew about the withheld patents during prosecution of and prior to the [USPTO’s] issuance of the ‘841 patent.”

By knowing about and failing to cite the existing patents in connection with its own patent application for the Vitamin C compound, Drunk Elephant argued that L’Oréal “breached their duty of disclosure by intentionally withholding the [patents] from the USPTO with the intent to deceive the Patent Office into granting the ‘841 patent.” 

In response, L’Oreal argued that Drunk Elephant failed to sufficiently establish that it “made an affirmative misrepresentation of material fact, failed to disclose material information, or submitted false material information, and [that it] intended to deceive the [USPTO].” Specifically, L’Oreal asserted that Drunk Elephant “fails to identify any individual associated with the prosecution or filing of the application that issued as the ‘841 patent and therefore, [that it] owed a duty of disclosure to the USPTO.” The beauty giant argued that Drunk Elephant fell short in setting forth “facts that would plausibly suggest that any individual(s) associated with the filing or prosecution of the ‘841 patent had actual knowledge of” the two previously-issued patents held by entities related to L’Oréal.

Drunk Elephant’s “allegations are conclusory,” L’Oreal argued, and its attempt “to impute collective knowledge” on L’Oreal about the existing patents – and with it, a duty of disclosure to the USPTO – are “deficient.” 

Fast forward to November 2019 and the court dismissed Drunk Elephant’s inequitable conduct counterclaim for failure to state a claim. And fast forward again by a year and the case has come to a close in its entirety, with the parties’ out-of-court resolution remaining confidential. (It is worth noting that Drunk Elephant’s blockbuster C-Firma remains on shelves).

Beauty and the Dupe

As for the case, as a whole, it sheds light on the ultra-competitive nature of the $500 billion-plus global beauty industry, which is rapidly evolving as Gen Z and millennials prioritize wellness, clean beauty, and the adoption of more proactive skincare regimens, complete with buzzy ingredients, such as niacinamide, hyaluronic acid, and various different vitamins. This shift has forced established names, such as L’Oreal, to revamp their offerings as traditional makeup products have largely fallen out of favor among younger consumers, and in several key cases, to acquire digitally-friendly startups, thereby, leading to an M&A spree in the beauty space

In October 2019, for instance, Japanese giant Shiseido revealed that it would pay $845 million for a 100 percent stake Drunk Elephant in what was called “the most anticipated beauty M&A deal of 2019.” That deal came amid a flurry of others, including Coty Inc.’s headline-making acquisition of a 51 percent stake in reality star-turned-makeup mogul Kylie Jenner’s Kylie Cosmetics for $600 in November 2019; Coty’s subsequent deal with Kim Kardashian’s KKW brand; Estée Lauder Company’s taking full ownership of Have & Be Co., the South Korean skincare company that owns Dr. Jart+ cosmetics to assume full ownership; and Puig’s reported $1.5 billion acquisition of Charlotte Tilbury, which was confirmed in June. 

Aside from its place in the larger landscape of beauty M&As deals aimed at enabling stalwart beauty names to court younger shoppers with upstart brands, Drunk Elephant and its allegedly infringing product is demonstrative of another existing trend largely brought about by demand from younger consumers: dupes. Far from a little-known practice, dupes – or cheaper alternatives to higher-end beauty products – have become a mainstay of the beauty industry. For years, mass-market beauty brands, capitalizing on consumer enthusiasm for affordable cosmetics and beauty goods, have been offering products with the same characteristics or qualities as the popular products of their higher-end competitors. 

The practice has accelerated in the recent years, as “some of the best-loved products in the beauty industry are incredibly expensive,” Cheryl Wischhover previously wrote for Vox. As such, “There is an enthusiastic group of superfans who will test (or “swatch”) products like eye shadow and lipstick to find cheaper versions that are good matches for the pricier originals,” and post their findings on dedicated Instagram pages and popular makeup review blogs. 

As many of the most in-demand products in the beauty/cosmetics space have shifted beyond hot-selling lipsticks and contouring kits to vitamin and mineral-dense skincare products, which can be far more expensive than even their expensive makeup counterparts, dupes have readily evolved, too. 

In terms of the legal ins-and-outs of duping, those can vary. In many cases, dupes are legally on the up-and-up since neither the design of standard makeup palettes, for example, nor the idea of a tube of lipstick or a generic pink blush are protected by law. Moreover, brand owners certainly cannot initiate trademark proceedings over a rival’s use of descriptive terms, such as “nude,” “highlight,” or “shine” –  which are some of most commonly used cosmetics terms.

That does not mean that brand owners are entirely without recourse when they are ripped off, though. Causes of action may arise when these dupe-offering companies re-create other brands’ packaging, as the non-functional elements of product packaging fall within the bounds of trade dress or design patent protection. So, when the distinctive, non-functional design elements of a makeup compact, for instance, are replicated, that could give rise to trade dress infringement claims, but only if those elements serve a source-identifying function in the minds of consumers.

Patent protection – both of the design and utility type – may be options, as well, as the case at hand indicates. And still yet, in some cases, such as the one that Charlotte Tilbury filed against British company Aldi (and won), copyright infringement claims can come into play connection with dupes. 

*The case is L’Oréal USA Creative, Inc. v. Drunk Elephant, LLC, 1:18-cv-00982 (W.D.Tex.)

Advance Publications, the owner of Vogue and its parent company Condé Nast, has agreed to drop the lawsuit that it filed in a New York federal court in September 2018 against designer and activist Nareasha Willis in connection with her use of the trademark “Black Vogue.” In filing suit, the New York-based publishing giant accused Willis and her company Avenue N, LLC of running afoul of federal trademark law, and specifically, its rights in the name of the 127-year old marquee magazine, by using the “Black Vogue” mark “in commerce for the purposes of selling apparel items.”

Now, two years after it filed suit, Advance has agreed to voluntarily dismiss its case, albeit with a few conditions. On the heels of the parties reaching a potential settlement late last month, as indicated by a filing on May 26 (one day after the death of George Floyd), Judge Alvin Hellerstein signed off on a Consent Judgment and Order on June 3, which permanently bars Willis and Avenue N, LLC from using “Black Vogue” or “any other confusingly similar mark” from now. The Judgment and Order, which is the product of an agreement between the parties, states that neither Willis nor any individuals or companies acting on her behalf may use any “reproduction or colorable imitation of the ‘Vogue’ mark, including any such use of the word ‘Vogue’ alone or in connection with any other wording, as a hashtag, metatag, advertising keyword, username or domain name on or in connection with any Internet website or social media.” 

Moreover, the Judgment and Order prohibits Willis and Avenue N from “registering or applying to register the ‘Black Vogue’ mark or any other confusingly similar mark, reproduction or colorable imitation of the ‘Vogue’ mark,” and requires them to “withdraw, abandon and cancel any and all trademark registrations … any marks that include the word Vogue, including all pending trademark applications for the Black Vogue mark.” 

In exchange for the defendants immediately and permanently discontinuing their use of the “Black Vogue” mark and any similar marks, Advance has agreed to drop the trademark infringement and dilution, unfair competition claims that it filed against them, and “waive any and all damages, profits and any other monetary recovery to which it may otherwise have been entitled in this action.” However, the Judgment and Order notes that Advance “may reopen this action or commence a new action to seek all such damages, profits and/or any other monetary recovery available in this action” if it can show that Willis or her company has violated the Consent Judgment and Order at any later date. 

Advance first filed suit back in 2018, shortly after Willis filed a trademark application to register the “Black Vogue” name with the U.S. Patent and Trademark for use on an array of garments and accessories, with the publisher alleging that Willis’ use of the Black Vogue mark on garments, such as sweatshirts and t-shirts,” was likely to cause confusion among consumers, and to damage to its well-known and “highly acclaimed” Vogue trademarks. It further claimed that Willis’ use of the mark amounted to “willful disregard [for] its longstanding trademark rights in the Vogue trademark” and her “willful attempt to trade upon the goodwill that [it] has developed in its [Vogue] marks over the last 125 years.” 

In her formal response to Advance’s complaint, Willis denied the majority of its allegations, arguing that her mark “does not mirror [Advance’s] Vogue trademark,” and that Advance “has suffered no damage as a result of [her] conduct.” Willis’ counsel further asserted in the answer that despite Advance’s claims, “Willis and [her company] did not need authorization from [Advance] to use the Black Vogue mark,” but received it, nonetheless – although indirectly – when its publication Teen Vogue posted “articles about the defendants’ use of Black Vogue and positively promoted [their] use of Black Vogue.”

Interestingly enough, Advance-owned Teen Vogue ran a glowing story on Willis in May 2018, just months before Advance filed suit, stating that “at just 25-years-old, Nareasha launched her fashion brand Black Vogue to present an alternative, more inclusive, fashion image.” The article continued on to assert that at the time of the brand’s launch, “Nareasha felt that mainstream platforms were not doing enough to properly highlight the positive contributions of black people in fashion,” an industry that continues to be shrouded in racism – from the runway to the helm of big-name brands.

At the time that Advance filed suit, Willis said in a statement, “I started the Black Vogue movement with one goal in mind: to start a conversation that was long overdue and to shake the fashion industry so that my people, people from the African diaspora, are acknowledged, celebrated and given their deserved respect and recognition. The fashion industry has lacked diversity for years yet it still continues to appropriate black culture via style, dress, hair etc. … I created ‘black vogue’ to address this problem and provide an outlet for black people to celebrate themselves.”

*The case is Advance Magazine Publishers, Inc. v. Nareasha D. Willis, 1:18-cv-8912 (SDNY). 

Fashion Nova is expected to pay $9.3 million for “failing to properly notify customers and give them the chance to cancel their orders when [it] failed to ship merchandise in a timely manner.” In furtherance of a proposed settlement with the Federal Trade Commission (“FTC”), which was announced on Tuesday, the California-based retailer is also allegedly on the hook for “illegally using gift cards to compensate consumers for unshipped merchandise instead of issuing refunds,” which similarly runs afoul of federal rules.

According to proposed settlement, which consists of an order for permanent injunction and monetary judgment, as filed with the U.S. District Court for the Central District of California on Monday, the FTC alleges that Fashion Nova violated the federal Mail, Internet, Or Telephone Order Merchandise Rule (“Mail Order Rule”) when it did not ship orders that consumers placed on its e-commerce site within the estimated time frame it provided to consumers, and then failed to engage in the legally-mandated measures in connection with such delays, namely, to provide those consumers with “a revised shipping date which is no more than 30 days later than the original shipment date” and to give them the opportunity to cancel the order.

According to the FTC’s Mail Order Rule – which applies to merchandise sold to consumers online, by mail, or by phone – when a retailer “is unable to ship merchandise by the original shipment date,” it must “offer to the buyer, clearly and conspicuously and without prior demand, an option either to consent to a delay in shipping or to cancel the buyer’s order and receive a Prompt Refund.” Fashion Nova allegedly did no such thing, as it failed to notify consumers of the delays and did not give them the opportunity to cancel their existing orders in light of such delays.

More than that, though, the FTC points to the unwillingness of the Southern California-based fast fashion brand, which came under fire late last year for its alleged reliance on domestic sweatshops to produce its cheap, trendy garments and accessories, to provide consumers with proper refunds even for items that they had paid for but that Fashion Nova did not ship to them, “including where such item was out of stock or where [it] shipped a materially different item,” as required by law.

Instead of providing a refund in the same form as the original payment, “it was the company’s policy to issue gift cards, which are not considered refunds under the Mail Order Rule,” according to the FTC. 

Still yet, in addition to failing to ship products as promised, and thereafter, failing to notify consumers of shipping delays and provide them with the option to cancel the orders in exchange for a refund, the FTC claims in a statement released on Tuesday that Fashion Nova further misled consumers by using specific phrases – such as “Fast Shipping,” “2-Day Shipping,” and “Expect Your Items Quick!” – in connection with its online shipping, and then “failing to meet [any of those] shipping promises to consumers.”

In accordance with the proposed settlement, which must be signed off on by a U.S. District Court for the Central District of California judge, Fashion Nova will be required to pay $9.3 million in order to refund consumers who were damaged by its alleged violations of the Mail Order Rule. “Of that nearly $10 million sum, $7.04 million will be sent to the FTC for use in refunding consumers and $2.26 million must be refunded directly by the company to consumers,” according to FTC, which states that “consumers who received gift cards instead of refunds when the company violated the Mail Order Rule will be eligible for refunds under the settlement.” 

In terms of equitable remedies, the settlement calls for Fashion Nova to be legally barred from “soliciting any order for the sale of merchandise unless, at the time of solicitation, [it] has a reasonable basis to expect that it will be able to ship any ordered merchandise to the buyer by that original shipment date, which is either: within that time clearly and conspicuously stated in any such solicitation; or if no time is clearly and conspicuously stated, within 1 day after Receipt of a properly completed order from the buyer.” The company will also be prohibited from “providing any buyer with any revised shipping date, unless, at the time the representation is made, [it] has a reasonable basis for making such representation,” and engaging in any other acts that violate the Mail Order Rule.

Speaking of the proposed settlement on Tuesday, Andrew Smith, Director of the FTC’s Bureau of Consumer Protection, stated, “The same rules that we have enforced for nearly 50 years against catalogers and other mail-order companies also apply to online sellers. Online retailers need to know that our Mail Order Rule requires them to notify customers in the event of shipping delays and offer the right to cancel with a full refund—not just a gift card or a store credit.”

The settlement comes on the heels of a similar investigation and settlement that saw Fashion Nova reach a nearly $2 million deal with prosecutors in four counties in California in December 2019 after repeatedly running afoul of a state law that requires companies to ship orders to consumers within 30 days. In furtherance of that settlement,Fashion Nova agreed to pay $250,000 in restitution to the customers effected, along with $1.5 million in penalties and costs in order to shake the charges brought against it by the District Attorneys of Los Angeles, Alameda, Napa and Sonoma counties.

*The case is Federal Trade Commission v. Fashion Nova, Inc., 2:20-cv-03641 (C.D.Cal.).