Kerrigan et al v. VISALUS, INC. et al

Filing 75

OPINION AND ORDER Granting in Part and Denying in Part Defendants' 61 and 62 Motions to Dismiss. Signed by District Judge Matthew F. Leitman. (HMon)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION
TIMOTHY KERRIGAN et al.,
Plaintiffs,

Case No. 14-cv-12693
Hon. Matthew F. Leitman

v.
VISALUS, INC. et al.,
Defendants.
________________________________/

OPINION AND ORDER GRANTING IN PART AND DENYING IN PART
DEFENDANTS’ MOTIONS TO DISMISS (ECF ## 61, 62)

In

their

First

Amended

Complaint,

Plaintiffs

Timothy

Kerrigan

(“Kerrigan”), Lori Mikovich (“Mikovich”), and Ryan Valli (“Valli”) (collectively,
“Plaintiffs”) allege that they were defrauded by an illegal scheme created and
operated by the Defendants. Plaintiffs say that in 2012 and 2013 they attended
events promoting Defendant ViSalus, Inc. (“ViSalus”), a retailer of weight-loss
shakes. (See First Am. Compl., ECF #55 at ¶¶ 8-14.) Plaintiffs allege that at these
events, they were misled into paying to enroll in the “ViSalus Program” – the
system through which “individual promoters” (“IPs”) earn commissions and
bonuses for selling ViSalus products and recruiting other IPs. Plaintiffs insist that
the ViSalus Program is a fraudulent pyramid scheme, and they claim that they lost
all of the money they paid to ViSalus to enroll in the program.
Plaintiffs first filed this action against ViSalus and many individuals and
entities allegedly associated with ViSalus on July 9, 2014 (the “Complaint”). (See
ECF #1.) Plaintiffs alleged in the Complaint that the Defendants violated, and
conspired to violate, the Racketeer Influenced and Corrupt Organizations Act, 18
U.S.C. § 1961 et seq. (“RICO”). (See id.) Plaintiffs also alleged that Defendants
violated several Michigan statutes. Finally, Plaintiffs asserted multiple claims
under Michigan common law. (See id.) The Defendants moved to dismiss the
Complaint under Rule 12(b)(6) of the Federal Rules of Civil Procedure (see ECF
## 35-37), and, by written order, the Court granted the motions in part and directed

1

Plaintiffs to file a First Amended Complaint (the “First Dismissal Order”). (See
ECF #54.) On July 10, 2015, Plaintiffs filed a First Amended Complaint.1 (See
ECF #55.) Defendants have now again moved under Rule 12(b)(6) to dismiss
many of the claims brought against them (the “Motions”).2 (See ECF ## 61, 62.)
For the reasons explained below, the Motions are GRANTED IN PART and
DENIED IN PART.
I.
In the First Amended Complaint, Plaintiffs assert the following claims
against the Defendants:


In count one (see First Am. Compl. at ¶¶ 117-200), Plaintiffs allege
that Defendants ViSalus, Robert Goergen, Sr. (“Goergen Sr.”), Todd
Goergen (“Goergen”), Nick Sarnicola (“Sarnicola”), Ryan Blair
(“Blair”), Blake Mallen (“Mallen”), Jason O’Toole (“O’Toole”), Kyle

1

The Court included a detailed recitation of the alleged factual background in the
First Dismissal Order. (See First Dismissal Order at 2-10, Pg. ID 883-91.) The
Court incorporates that recitation by reference. In addition, Plaintiffs have
included many new allegations against the Defendants in the First Amended
Complaint. Any additional factual allegations that are relevant to a determination
of the currently pending motions to dismiss will be identified and discussed herein.
For the purposes of this Opinion and Order, the Court accepts these factual
allegations as true.
2

Plaintiffs have brought the First Amended Complaint against some, but not all, of
the Defendants named in the Complaint. Plaintiffs have not re-pleaded any
allegations against individuals Jake Trzcinski, Lavon Craig, Anthony Lucero,
Rhonda Lucero, and Joshua Jackson. Nor have Plaintiffs re-pleaded any
allegations against entities ViSalus Holdings, LLC, Mojos Legacy, LLC, Fragmob,
LLC, iCentris, Inc., and Jakertz, Inc.

2

Pacetti, Jr. (“Pacetti”), Michael Craig (“Craig”), Aaron Fortner
(“Fortner”), Rachel Jackson (“Jackson”), Frank Varon (“Varon”), Lori
Petrilli (“Petrilli”), Tara Wilson (“Wilson”), and Timothy Kirkland
(“T. Kirkland”) violated Section 1962(c) of RICO through their
operation and promotion of the ViSalus Program.


In count two (see id. at ¶¶ 201-214), Plaintiffs claim that all
Defendants violated Section 1962(d) of RICO by conspiring to violate
Section 1962(c).



In count three (see id. at ¶¶ 215-223), Plaintiffs assert that Defendants
ViSalus, Goergen Sr., Goergen, Sarnicola, Blair3, and Mallen (the
“ViSalus Defendants”) violated 5 U.S.C. § 78j(b) (“Section 10b”) and
17 C.F.R. § 240.10b-5 (“Rule 10b-5”) of the federal securities laws.



In count four (see id. at ¶¶ 224-230), Plaintiffs allege that all
Defendants violated 15 U.S.C. § 77l(a)(2) (“Section 12(2)”) of the
federal securities laws.



In count five (see id. at ¶¶ 231-234) Plaintiffs assert that ViSalus
violated Section 903b of the Michigan Consumer Protection Act (the
“MCPA”).



In count six (see id. at ¶¶ 235-244), Plaintiffs claim that all
Defendants violated Sections 903 and 911(c)(3) of the MCPA.



In count seven (see id. at ¶¶ 245-252), Plaintiffs allege that all
Defendants – except for ViSalus – have been unjustly enriched.

3

In the title to count three, Plaintiffs assert that they are bringing this count
against, among others, “Sarnicola, Blake, and Mallen.” (First. Am. Compl. at 173,
Pg. ID 1133) (emphasis added.) No Defendant has the last name “Blake.” It
appears Plaintiffs meant to name Ryan Blair in this count, and that the word
“Blake” was a typographical error.

3



In count eight (see id. at ¶¶ 253-258), Plaintiffs assert that ViSalus has
engaged in statutory and/or common law conversion in violation of
Michigan law.



In count nine (see id. at ¶¶ 259-264), Plaintiffs claim that all
Defendants engaged in a civil conspiracy.



In count ten (see id. at ¶¶ 265-269), Plaintiffs allege that ViSalus
violated Section 28 of the Michigan Franchise Investment Law (the
“MFIL”).



And, finally, in count eleven (see id. at ¶¶ 270-274), Plaintiffs assert
that all Defendants violated Section 5 of the MFIL.

On August 31, 2015, Defendants filed the Motions, seeking to dismiss many of the
claims Plaintiffs have asserted in the First Amended Complaint.4 (See ECF ## 61,
62.) The Court heard oral argument on the Motions on January 20, 2016.
II.
In the Motions, Defendants seek relief pursuant to Federal Rule of Civil
Procedure 12(b)(6). Rule 12(b)(6) provides for dismissal of a complaint when a
plaintiff fails to state a claim upon which relief can be granted. See Fed. R. Civ. P.
12(b)(6). “To survive a motion to dismiss” under Rule 12(b)(6), “a complaint must
contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is
plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678, (2009) (quoting Bell

4

None of the Defendants have moved to dismiss counts five, eight, and ten of the
First Amended Complaint. In addition, ViSalus, Goergen Sr., Goergen, Blair, and
Mallen have not moved to dismiss count nine.

4

Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)). A claim is facially plausible
when a plaintiff pleads factual content that permits a court to reasonably infer that
the defendant is liable for the alleged misconduct. Id. (citing Twombly, 550 U.S. at
556). When assessing the sufficiency of a plaintiff’s claim, a district court must
accept all of a complaint’s factual allegations as true. See Ziegler v. IBP Hog Mkt.,
Inc., 249 F.3d 509, 512 (6th Cir. 2001). “Mere conclusions,” however, “are not
entitled to the assumption of truth.

While legal conclusions can provide the

complaint's framework, they must be supported by factual allegations.” Iqbal, 556
U.S. at 664. A plaintiff must therefore provide “more than labels and conclusions,”
or “a formulaic recitation of the elements of a cause of action” to survive a motion
to dismiss. Twombly, 550 U.S. at 556. “Threadbare recitals of the elements of a
cause of action, supported by mere conclusory statements, do not suffice.” Id. In
addition, where, as here, there are allegations of fraud or mistake, Federal Rule of
Civil Procedure 9(b) requires a plaintiff to “state with particularity the
circumstances constituting fraud or mistake,” but “[m]alice, intent, knowledge, and
other conditions of a person’s mind may be alleged generally.” See Fed. R. Civ.
P. 9(b).

5

III.
(The Substantive RICO Claims)
Section 1962(c) of RICO provides that
[i]t shall be unlawful for any person employed by or
associated with any enterprise engaged in, or the
activities of which affect, interstate or foreign commerce,
to conduct or participate, directly or indirectly, in the
conduct of such enterprise’s affairs through a pattern of
racketeering activity or collection of unlawful debt.
18 U.S.C. § 1962(c). “To state a RICO claim, a plaintiff must plead the following
elements: (1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering
activity.” Ouwinga v. Benistar 419 Plan Servs., Inc., 694 F.3d 783, 792 (6th Cir.
2012) (internal quotation marks omitted). A “pattern of racketeering activity”
requires at least two predicate acts – i.e., certain offenses enumerated in 18 U.S.C.
§ 1961(1) – that occur within a ten-year period. See Moon v. Harrison Piping
Supply, 465 F.3d 719, 723 (6th Cir. 2006) (citing 18 U.S.C. § 1961(5)).
As described above, in count one of the First Amended Complaint, Plaintiffs
allege that the ViSalus Defendants5, O’Toole, Pacetti, Fortner, Jackson, Craig,
Wilson, Varon, Petrilli, and T. Kirkland violated Section 1962(c) (the “Section
1962(c) Claim”). (See First Am. Compl. at ¶¶ 117-200.) These Defendants have
now moved to dismiss the Section 1962(c) Claim on various grounds. The Court

5

Previously defined herein as ViSalus, Goergen Sr., Goergen, Sarnicola, Blair, and
Mallen.

6

concludes the Section 1962(c) Claim is viable against some Defendants but not
others.
A.
In the First Dismissal Order, the Court held that “in order to state a [Section]
1962(c) claim against any Defendant, Plaintiffs must allege that [that] Defendant
actually committed two predicate acts.” (First Dismissal Order at 48, Pg. ID 929.)
Four Defendants – Goergen Sr., Goergen, Varon, and Petrilli – challenge the
Section 1962(c) Claim on the basis that the First Amended Complaint fails to
allege that they personally committed two RICO predicate acts. Plaintiffs counter
that they have sufficiently pleaded that each of these Defendants committed at least
two predicate acts of mail and/or wire fraud.

The Court agrees with the

Defendants. The Court will therefore dismiss the Section 1962(c) Claim against
Goergen Sr., Goergen, Varon, and Petrilli.
Plaintiffs allege that Goergen Sr. committed mail and/or wire fraud through
the following actions:


Goergen Sr. appeared in a video “called ‘Billionaire, Bob Goergen
CEO Blyth Inc.’” in which he “predicted ‘exponential growth’ . . . for
ViSalus.”

An unidentified person or entity posted the video on

YouTube. (First Am. Compl. at ¶130.)


Defendant Blair interviewed and publicly praised Goergen Sr. for his
“mentorship of the ViSalus business” and “involve[ment] in business
decisions of [ViSalus], particularly since its near collapse in the 2008
7

recession.” ViSalus is alleged to have published a video of Blair’s
interview of Goergen Sr. on the internet. (Id. at ¶133.)


Goergen Sr. “[p]ublicly acknowledged [his] connection to the running
and operation of ViSalus” and was identified on a website promoting
the ViSalus Program as a member of the ViSalus “Executive Team.”
The author of the website is unidentified. (Id. at first ¶138.6)



On two identified occasions, Goergen Sr. spoke at ViSalus events
which ViSalus and other identified parties later published online.7
(See id. at second ¶138.)

These allegations, even if true, would not establish that Goergen Sr.
committed two acts of mail and/or wire fraud. In order to commit mail and/or wire
fraud, a defendant must, among other things, actually use the mails or wires and/or
cause another to use the mails or wires. See, e.g., Heinrich v. Waiting Angels
Adoption Servs., Inc., 668 F.3d 393, 404 (6th Cir. 2012) (elements of mail and wire
fraud include the “use of the mails in furtherance of the scheme” and/or the “use
[of] the wires in furtherance of the scheme to defraud”). Plaintiffs simply do not
allege that Goergen Sr. either used the mails or wires on at least two occasions or
caused someone else to do so. Indeed, while Plaintiffs repeatedly allege – in the

6

The Fist Amended Complaint contains two paragraphs labeled as paragraph 138.
(See First Am. Compl. at 76-77, Pg. ID 1036-1037.) It appears that both
paragraphs labeled as paragraph 138 allege that Goergen Sr. committed mail
and/or wire fraud. (See id. at 119-121, Pg. ID 1079-1081.)
7

The statements and videos identified in the second paragraph 138 are the same
statements and videos previously identified in paragraphs 130 and 133.

8

passive voice – that Goergen Sr. was featured in videos published online, Plaintiffs
fail to plead any facts that would support a finding that Goergen Sr. caused the
videos to be published online, authorized their publication, or even had knowledge
that the videos were posted on the internet. Accordingly, the Section 1962(c)
Claim fails as to Goergen Sr.
Plaintiffs assert that Goergen committed the following predicate acts of mail
and/or wire fraud:


Goergen “[p]ublicly acknowledged [his] connection to the running
and operation of ViSalus” and was identified on a website promoting
the ViSalus Program as a member of the ViSalus “Executive Team.”
The author of the website is unidentified. (First Am. Compl. at first
¶138.)



Goergen was “identified” on the ViSalus website as a “founding
investor” in the company and a “leader[]” of the company’s “board.”
(Id. at ¶139.)



Goergen was identified in public statements and on the ViSalus
website as the “Chief Operating Officer” and “Chief Strategy Officer”
of ViSalus. (Id.)



Goergen attended a party promoting ViSalus at Sarnicola’s home.
Video of portions of the party were published online by an
unidentified party as a way of promoting ViSalus. (See id. at ¶141.)



Goergen appeared at public events promoting ViSalus which were
written about in stories posted on the internet by third parties. (See
id.)

9

These mail and/or wire fraud allegations are deficient for the same reasons
that the mail and/or wire fraud allegations against Goergen Sr. were insufficient.
Many of the allegations against Goergen are made in the passive voice and fail to
plead that Goergen himself knew that any videos or articles would be posted online
or that he caused them to be published online. Moreover, the allegations that
Goergen appeared at public events (or, in the case of the party at Sarnicola’s home,
an apparently private event) and made public comments do not establish that
Goergen used the mails and/or wires. And while these allegations and others made
against Goergen are enough to state other plausible claims against him, the alleged
conduct simply does not amount to mail or wire fraud. See, e.g., Heinrich, 668
F.3d at 404. Plaintiffs have failed to identify two or more RICO predicate acts
with respect to Goergen, and their Section 1962(c) Claim against him fails.
Plaintiffs allege that Varon and Petrilli committed the following predicate
acts of mail and/or wire fraud:


They agreed to be “featured in various ViSalus materials” and “were
“knowing and willing participants in the promotion of the ViSalus
pyramid scheme.” (Id. at ¶164.)



They appeared at various ViSalus events as “keynote speakers” and,
at least one time, as the recipients of a $500,000 check.

An

unidentified party posted video of at least one of these public
appearances on YouTube. (Id.)

10



They conducted “numerous recruiting seminars” in which they
emphasized the financial rewards individuals could gain from
participating in the ViSalus Program. (Id.)



They gave an “interview” – published by a third party on website not
operated by ViSalus – in which they promote the ViSalus Program,
claim that “hundreds” of people “won a free BMW” through the
ViSalus Program, and otherwise claim that anyone can be successful
if they sign up as a ViSalus IP. (Id. at ¶165.8)

As the Court concluded with Goergen Sr. and Goergen, appearing at public
events and making public statements at those events, standing alone, does not
amount to mail and/or wire fraud. And there are no factual allegations that Varon
or Petrilli caused the videos of their public appearances to be posted on the
internet. Moreover, Plaintiffs have not alleged that Varon or Petrilli published
and/or caused to be published any of the interviews they gave. Thus, Plaintiffs
have not alleged that Varon or Petrilli committed at least two acts of mail or wire
fraud. The Court therefore will dismiss Plaintiffs’ Section 1962(c) Claim against
Goergen Sr., Goergen, Varon and Petrilli.

8

Plaintiffs also claim that paragraph 156 includes allegations against Petrilli (see,
e.g., First Am. Compl. at 144, Pg. ID 1104) but that paragraph does not relate to
Petrilli. Instead, that paragraph states allegations against Defendant Jackson. (See
id. at ¶156.)

11

B.
In the First Dismissal Order, the Court held that in order to sufficiently
allege the causation element of their Section 1962(c) Claim, Plaintiffs “must allege
a clear causal connection between [each] Defendant’s alleged predicate acts and
their injuries.” (ECF #54 at 53, Pg. ID 934.) The Court explained that Plaintiffs
needed to plead “a logical theory directly linking each Defendant’s predicate acts
to their alleged injuries.” (Id.) A plaintiff can satisfy this requirement by pleading
facts that “show that the defendants’ wrongful conduct was a substantial and
foreseeable cause of the injury and the relationship between the wrongful conduct
and the injury is logical and not speculative.” In re ClassicStar Mare Lease Litig.,
727 F.3d 473, 487 (6th Cir. 2013) (internal quotation marks omitted) (emphasis
added).
In the Motions, Defendants argue that Plaintiffs have failed to satisfy these
causation pleading requirements. Plaintiffs counter that they have alleged a logical
theory directly linking each Defendant to their claimed injuries. The Court
concludes that Plaintiffs have sufficiently alleged proximate cause as to ViSalus,
Sarnicola, Blair, and Mallen, but have not done so with respect to the remaining

12

Defendants named in the Section 1962(c) Claim (O’Toole, Pacetti, Fortner,
Jackson, Craig, Wilson, and T. Kirkland). 9
1.
The proximate cause allegations against ViSalus, Sarnicola, Blair, and
Mallen are sufficient to state a Section 1962(c) claim against these Defendants.
Plaintiffs have alleged that these Defendants created and implemented the ViSalus
Program, a fraudulent pyramid scheme that was intended to defraud individuals in
Plaintiffs’ position, and that the ViSalus Program did in fact defraud them. Stated
another way, Plaintiffs contend that these Defendants devised a fraudulent scheme,
“aimed” it at them, and hit their mark.

For instance, Plaintiffs allege that

Sarnicola, Blair, and Mallen:


Were “co-founders and principle creators of the [ViSalus] pyramid
scheme.” (First Am. Compl. at ¶¶ 126, 212.)



Were ViSalus’s “top controlling management” and were “the
company’s frontmen to the public.” (Id. at ¶131.)



Were “personally involved in [ViSalus’s] strategic decision-making[]
and otherwise managed the significant affairs of [ViSalus].” (Id.)

9

Because the Court has concluded that Plaintiffs have failed to plead the required
predicate acts against Defendants Goergen Sr., Goergen, Varon, and Petrilli, it will
not analyze the other requirements of Plaintiffs’ Section 1962(c) Claim against
these Defendants.

13



“[A]ppeared at the ViSalus meetings and conventions . . . [and]
allowed their presentations to be recorded and distributed” to promote
the ViSalus Program. (Id.)



“Distribute[d] professionally-edited videos posted on the [internet]
which tout the success of the [ViSalus Program], [ViSalus], and
themselves” and which promoted to potential recruits “how easy it is
to start earning an income” through the ViSalus Program. (Id. at ¶90.)



“[I]ntended to falsely convey the impression to people like Plaintiffs
that participation as a ViSalus IP was legal; that they had a reasonable
opportunity to make money; that people just like them were able to
make generous income; and that the commissions or bonuses they
would receive would come from the sale of desirable product.” (Id. at
¶195.)



“Directly authored and/or approved of the dissemination of the
ViSalus compensation plan,” which was given to each Plaintiff at the
ViSalus events they attended and used to induce Plaintiffs to enroll as
ViSalus IPs. (Id. at ¶196.)



Had the “goal” of having potential recruits like Plaintiffs “subscribe,
by the payment of money to ViSalus, to the compensation plan.” (Id.)



Had “personally [] active roles in promoting the ViSalus
compensation plan and pitching the idea that the ViSalus
compensation plan is a viable and attractive ‘business opportunity.’”
(Id. at ¶143; see also ¶144.)



Implemented plans to “hugely expand[] and accelerat[e] the growth of
the pyramid scheme” by “increasing recruitment of unsuspecting
people to join the pyramid scheme.” (Id. at ¶134.)

14



“Control[led] and direct[ed] [] websites, web presentations, events,
sponsored conventions, and speeches” promoting the ViSalus
Program. (Id. at ¶171.)

Plaintiffs allege that the fraudulent mechanisms created and put in place by
these Defendants induced them to sign up as ViSalus IPs and to lose the money
they paid to ViSalus. (See, e.g., id. at ¶8.)

Plaintiffs have therefore sufficiently

pleaded that the actions of ViSalus, Sarnicola, Blair, and Mallen were a
“substantial” and “foreseeable” cause of their alleged injuries. In re ClassicStar
Mare Lease Litig., 727 F.3d at 487. Accordingly, Plaintiffs have sufficiently
alleged that the predicate acts of these Defendants proximately caused their alleged
injuries.10

10

Certain language in the First Dismissal Order could arguably be read to stand for
the proposition that where a RICO plaintiff alleges predicate acts of mail or wire
fraud, he must connect his injury to a specific mailing or wiring in order to
establish causation. (See First Dismissal Order at 52-53, Pg. ID 933-34.) That is
not the rule, and the Court did not mean to so hold. As the Court explained, a
RICO plaintiff must directly connect his injury to the defendant’s predicate acts.
Importantly, an alleged predicate act of mail or wire fraud consists of more than
just the mailing or the wiring. Indeed, the mailing or wiring is simply the “hook”
that brings the alleged fraud within the jurisdiction of the federal courts. The
predicate act includes the scheme to defraud as well as the mailing or wiring.
Thus, where a RICO plaintiff alleges predicate acts of mail or wire fraud, the
causation inquiry may expand beyond the acts of mailing and wiring and may
include a consideration of each defendant’s personal conduct within the fraudulent
scheme and whether that conduct directly injured the plaintiff. See Wallace v.
Midwest Fin. & Mortg. Serv., 714 F.3d 414, 419-21 (6th Cir. 2013) (finding
causation satisfied where court was able to “trace a straight line” between
defendants’ conduct within a fraudulent scheme and plaintiff’s injuries).

15

2.
Plaintiffs’ causation allegations against Defendants O’Toole, Pacetti,
Fortner, Jackson, Craig, Wilson, and T. Kirkland are deficient. Plaintiffs have not
sufficiently alleged that the purportedly-fraudulent conduct by these Defendants
“led directly to [their] injuries.” Bridge v. Phoenix Bond & Indem., 553 U.S. 639,
655 (2008). The Court will therefore dismiss the Section 1962(c) Claim against
these Defendants.
Plaintiffs allege that these Defendants (among other things) promoted the
ViSalus Program at recruiting events, in videos posted on the internet, and in
advertisements.

But Plaintiffs do not allege that they ever met any of these

Defendants, saw any of these Defendants make presentations (either online or in
person), watched or read any of the videos or promotional materials these
Defendants allegedly disseminated, or engaged in any transactions with these
Defendants. Instead, Plaintiffs allege that these Defendants made false statements
in promotional materials and videos “that a prospective purchaser, like each
Plaintiff, could easily find.” (Pls.’ Resp. Br. at 14, ECF #67 at 19, Pg. ID 1696)
(emphasis added.) But Plaintiffs do not allege that they actually did “find” any of
the alleged false statements these Defendants purportedly made, nor do Plaintiffs
allege that any of the false statements by these Defendants directly impacted them
(Plaintiffs) in any way. The link between the promotional activities of these

16

Defendants is too attenuated from Plaintiffs’ injuries to satisfy the required causal
connection required for Plaintiffs’ Section 1962(c) Claim.
Plaintiffs respond that, under Bridge, supra, they need not plead that they
personally relied on any statement any of these Defendants may have made. While
that is true, Plaintiffs still need to plead “some direct relation between the injury
asserted and the injurious conduct alleged.” Heinrich, 668 F.3d at 405 (quoting
Holmes v. Sec. Investor Pro. Corp., 503 U.S. 258, 268 (1992)). And they have
failed to do so. Plaintiffs have simply not alleged that “wrongful conduct” by these
Defendants “was a substantial and foreseeable cause of the[ir] injur[ies].” In re
ClassicStar Mare Lease Litig., 727 F.3d at 487. Plaintiffs’ causation allegations
against these Defendants are therefore insufficient.
At oral argument, Plaintiffs’ counsel offered the following theory of
causation against these Defendants: (1) they were videotaped accepting large fake
checks or giving misleading pitches at ViSalus-sponsored events; (2) they intended
that these videos would be shown at other ViSalus-sponsored events and made
available on the internet; and (3) Plaintiffs saw these videos at ViSalus-sponsored
events they attended. (See January 20, 2016 Hrg. Tr., ECF #72 at 36-38, Pg. ID
1857-59.)

Plaintiffs’ counsel insisted that these videos made Plaintiffs more

susceptible to the sales pitch made by the ViSalus representatives at the events

17

Plaintiffs attended and thus caused Plaintiffs’ injuries. (See id.) This argument
fails for two reasons.
First, the First Amended Complaint does not allege that the Plaintiffs
actually saw any videos featuring these Defendants. Rather, Plaintiffs allege, for
example, only that “[t]he [ViSalus events] attended by [Plaintiff] Kerrigan also
featured check-presentation ceremonies like the one in the Miami convention . . .
where, among others, Defendant Craig was shown with a $1M check and
Defendant Rachel Jackson with a $500,000 check.” (First Am. Compl. at ¶8)
(emphasis added.) Allegations that Plaintiffs saw videos or re-enactments “like”
the ones in which the Defendants participated do not establish the required direct
link between Plaintiffs’ injuries and alleged misconduct by these Defendants.
Second, and in any event, in Heinrich, supra, the Sixth Circuit rejected a
theory of causation much like Plaintiffs’ theory based upon Defendants’
appearances in the videos. The plaintiffs in Heinrich were parents seeking to adopt
children through an agency.

They claimed, among other things, that certain

individuals associated with the agency defrauded them into making payments to
adopt children who were not actually available to be adopted. The plaintiffs
asserted RICO claims and alleged that the defendants committed predicate acts of
mail and wire fraud. In an attempt to satisfy the causation element of their RICO
claim, the plaintiffs asserted that certain defendants caused their injury by sending

18

them false reference letters (in support of the agency) that made the plaintiffs more
willing to trust the agency’s false promises of available children. The Sixth Circuit
rejected this theory of RICO causation:
[Plaintiffs’ causation] argument appears to be that the
positive references served as an inducement to do
business with Waiting Angels. But any injuries they may
have suffered were not the direct result of the alleged
fraudulent conduct. Rather, the false references helped
put the [plaintiffs] in a position to be defrauded by other,
unrelated representations concerning the availability of
specific children or how adoption fees will be spent. The
false references, while perhaps a “but for” cause of the
[plaintiffs’] injuries, did not proximately result in any
harm to their business or property.
Heinrich, 668 F.3d at 405 (emphasis added).
The same analysis would apply here if the Plaintiffs had actually heard the
allegedly false statements allegedly made by these Defendants in the videos. Like
the fraudulent reference letters in Heinrich, the videos that allegedly featured these
Defendants would merely have “help[ed] put the [Plaintiffs] in a position to be
defrauded by other, unrelated representations” made by the ViSalus representatives
at the events Plaintiffs actually attended.11 For this additional reason, Plaintiffs’

11

The Court recognizes, as it did in the First Dismissal Order (see ECF #54 at 5354 n.22, Pg. ID 934-35), that proximate cause is often better addressed at the
summary judgment stage rather than on a motion to dismiss. See Trollinger v.
Tyson Foods, Inc., 370 F.3d 602, 615 (6th Cir. 2004). The Court again notes,
however, that the Sixth Circuit has, on multiple occasions, addressed proximate
causation under Section 1962(c) at the pleading stage, and has found causation

19

causation allegations against Defendants O’Toole, Pacetti, Fortner, Jackson, Craig,
Wilson, and T. Kirkland are deficient.
C.
Defendants ViSalus, Sarnicola, Blair, and Mallen argue that Plaintiffs have
failed to state a Section 1962(c) Claim against them because Plaintiffs have not
pleaded that they acted with scienter. Plaintiffs can satisfy this requirement by
pleading that these Defendants “acted either with a specific intent to defraud or
with recklessness with respect to potentially misleading information.” Heinrich,
668 F.3d at 404. These Defendants maintain that the Plaintiffs have failed to meet
this standard because “the line between a legitimate multi-level marketing system
and an illegal pyramid scheme is blurry at best,” (ECF #62 at 19, Pg. ID 1643), and
Plaintiffs have not pleaded facts that “support a plausible inference that [these
Defendants] knew that ViSalus [was] a pyramid scheme and thus acted with
fraudulent intent in failing to disclose that supposed fact.” (ECF #62 at 17, Pg. ID
1641) (emphasis removed). The Court disagrees.12

allegations deficient at that stage. See Heinrich, 668 F.3d at 405-07 (alleged mail
and wire fraud did not satisfy RICO proximate causation requirement); Pik-Coal
Co. v. Big Rivers Electric Corp., 200 F.3d 884 (6th Cir. 2000) (same).
12

Because the Court has concluded that Plaintiffs have failed to plead the required
causation against Defendants O’Toole, Pacetti, Fortner, Jackson, Craig, Wilson,
and T. Kirkland, it will not analyze whether Plaintiffs have sufficiently pleaded
that these Defendants acted with the requisite scienter.

20

The First Amended Complaint contains myriad specific allegations that
Sarnicola, Blair, and Mallen (1) understood that the dividing line between a
legitimate multi-level marketing company and an illegal pyramid scheme turned on
whether the operation focused on recruitment of new members rather than upon
making actual sales, (2) knew that the ViSalus Program focused more on recruiting
new IPs than selling ViSalus’s weight-loss products, and (3) created and
implemented a system in which ViSalus promoters across the country would make
fraudulent pitches in support of the ViSalus Program.

By way of example,

Plaintiffs allege that:


Sarnicola, Blair, and Mallen “had prior experience with recruitingbased network marketing schemes,” and, “by 2005,” knew that
“ViSalus was operating a pyramid scheme, an enterprise in which
recruiting members predominated over selling of product.” (First Am.
Compl. at ¶125.)



ViSalus’s own website stated that Mallen “had a decade of network
marketing experience prior to the founding of ViSalus.” (Id. at ¶126)
(internal quotation marks omitted.)



Sarnicola “had a long history of involvement with multi-level
marketing companies.” (Id. at ¶127.)



Sarnicola, Blair, and Mallen “oversaw the operation of the [ViSalus]
compensation plan” and were “personally involved in the company’s
strategic decision-making, and otherwise managed the significant
affairs of [ViSalus].” (Id. at ¶131.)

21



Sarnicola, Blair, and Mallen “orchestrated” the hiring of distributors
from other companies who were “presented as distributors just like
innocent recruits when in fact” they were given far more favorable
treatment than the recruits – treatment that unfairly enabled them to
succeed while the recruits would fail. (Id. at ¶135.)



Sarnicola, Blair, and Mallen “were aware that [ViSalus’s] valuation
depended on . . . illegal recruiting activities . . . fueled by recruiting
bonuses.” (Id. at ¶142.)



Sarnicola, Blair, and Mallen “made all fundamental decisions
regarding [the ViSalus Program’s] operation and finances and knew
that the true facts concerning the operation of the [program] fit every
criterion of an illegal pyramid or were reckless to that possibility.”
(Id. at ¶187.)

Based on these and other allegations in the First Amended Complaint (many of
which are identified above), the Court concludes that Plaintiffs have successfully
pleaded that Defendants ViSalus, Sarnicola, Mallen, and Blair acted with the
requisite scienter.
D.
Defendant ViSalus seeks dismissal of Plaintiffs’ Section 1962(c) Claim on
the ground that “Plaintiffs have not pled the existence of a RICO enterprise distinct
from ViSalus itself.” (ECF #62 at 22, Pg. ID 1646.) The Court concludes that
Plaintiffs have pled a distinct enterprise.

22

To plead a Section 1962(c) claim, a plaintiff “must allege . . . the existence
of two distinct entities: (1) a ‘person’; and (2) an ‘enterprise’ that is not simply the
same ‘person’ referred to by a different name.” In Re ClassicStar Mare Lease
Litig, 727 F.3d at 490 (internal quotation marks omitted). Under this principle,
“known as the ‘non-identity’ or ‘distinctness’ requirement,” a corporation “may
not be liable under Section 1962(c) for participating in the affairs of an enterprise
that consists only of its own subdivisions, agents, or members. An organization
cannot join with its own members to undertake regular corporate activity and
thereby become an enterprise distinct from itself.” Id. (quoting Begala v. PNC
Bank, 214 F.3d 776, 781 (6th Cir. 2000)). But an organization can join with
independent entities and individuals to form a distinct enterprise.

Thus, in

ClassicStar, the Sixth Circuit held that the “distinctness” requirement was satisfied
where, among other things, “the alleged RICO enterprise was comprised of other
entities that were neither owned by [the defendant organization] nor acting as its
agents.” Id.
The allegations in the First Amended Complaint satisfy the “distinctness”
requirement. Plaintiffs have alleged that the enterprise consisted of ViSalus, its
officers, and numerous independent outside promoters (the IPs).

Importantly,

Plaintiffs allege that the IPs played a role in the enterprise that was wholly distinct
from that of ViSalus. Plaintiffs claim that IPs promoted ViSalus products and the

23

ViSalus lifestyle to unwitting recruits. (See, e.g., First Am. Compl. at ¶¶ 96, 156,
158.) Meanwhile, ViSalus, the corporate entity, provided the overall structure for
the ViSalus Program and was responsible for the company’s day-to-day operations,
such as mailing out weight-loss products to customers and IPs who purchased
them. (See id. at ¶¶ 47, 176.) That ViSalus and the IPs played different roles in
the alleged scheme underscores that the overall enterprise was distinct from
ViSalus.
ViSalus counters that Plaintiffs have not satisfied the standard for
distinctness established by the United States Court of Appeals for the Seventh
Circuit in Fitzgerald v. Chrysler Corp., 116 F.3d 225 (7th Cir. 1997).

In

Fitzgerald, the plaintiffs brought a RICO class action against Chrysler and its
dealers alleging various acts of fraud related to the sale of vehicle warranties. The
Seventh Circuit held that the plaintiffs’ RICO claim failed as to Chrysler because
the plaintiffs had failed to plead that Chrysler and its dealers were sufficiently
distinct. The Seventh Circuit stressed that the dealers had only an “incidental role
in the alleged fraud” and did not add “an air of legitimacy” to the sale of the
warranties. Id. at 227-28. The court concluded that Chrysler did “not establish[]
dealerships in order to fool car buyers into thinking that they are not dealing with
the ‘racketeer’ Chrysler, or to enable Chrysler to engage in fraud on a scale that
would be impossible if it internalized the dealership function.” Id. at 228.

24

But here, Plaintiffs allege that the IPs played more than an incidental role in
the fraud – far more. Plaintiffs contend that the IPs played a central role in the
overall scheme by duping potential recruits into signing up for the ViSalus
Program. Plaintiffs also allege that the IPs added a critical “air of legitimacy” to
the ViSalus Program by posing as false success stories and promoting the idea that
anybody could become rich through the ViSalus Program. The alleged enterprise
here thus has the two key features missing from the enterprise alleged in
Fitzgerald. Thus, Fitzgerald does not support dismissal of the Section 1962(c)
Claim against ViSalus.
IV.
(The RICO Conspiracy Claim)
Plaintiffs allege that all of the Defendants named in the First Amended
Complaint violated Section 1962(d) of RICO by conspiring to violate Section
1962(c) (the “RICO Conspiracy Claim”). (See First Am. Compl. at ¶¶ 201-214.)
Defendants argue that the RICO Conspiracy Claim fails as a matter of law because
Plaintiffs have failed to allege that any of the Defendants committed a substantive
violation of Section 1962(c). (ECF #62 at 27 n.17, Pg. ID 1651, citing Heinrich,
668 F.3d at 411; see also ECF #61 at 9-10, Pg. ID 1600-01.) The Court concludes
that Plaintiffs have sufficiently alleged the RICO Conspiracy Claim against all of
the Defendants other than Ropart Asset Management Fund, LLC, Ropart Asset

25

Management Fund II, LLC, Freedom Legacy, LLC, Wealth Builder International,
Inc., and Residual Marketing, Inc. (hereinafter the “Entity Defendants”).13 The
Court will therefore dismiss the RICO Conspiracy Claim against the Entity
Defendants only.
The Sixth Circuit has held that in order “[t]o plausibly state a claim for a
violation of 18 U.S.C. § 1962(d), plaintiffs must successfully allege all the
elements of a RICO violation, as well as alleging the existence of an illicit
agreement to violate the substantive RICO provision.” Heinrich, 668 F.3d at 411
(internal quotation marks omitted). But this does not mean that in order to assert a
RICO conspiracy claim against a particular defendant, a plaintiff must first assert a
viable substantive RICO claim against that defendant. Indeed, the Sixth Circuit
has expressly held that a defendant may be liable for RICO conspiracy under
Section 1962(d) even where the defendant has not personally committed a
substantive RICO violation. See United States v. Driver, 535 F.3d 424, 432 (6th
Cir. 2008) (holding that even if the defendant did not violate Section 1962(c), he
could still be found to have violated Section 1962(d)). Instead, in order to state a

13

The Court has reviewed the RICO conspiracy allegations against the Entity
Defendants and concludes they are insufficient to state a viable RICO conspiracy
claim. The Entity Defendants are alleged to be wholly-owned and/or controlled by
certain of the individual Defendants, but Plaintiffs have not pleaded factual
allegations to support a finding that these entities entered into any agreement to
violate Section 1962(c).

26

viable RICO conspiracy claim against a particular defendant, a plaintiff must
sufficiently allege “that a co-conspirator violated Section 1962(c)” and that the
defendant “agreed to further or facilitate the criminal endeavor by agreeing that
someone, although not necessarily himself, would ‘commit two predicate acts.’”
Siddle v. Crants, 650 F. Supp. 2d 773, 785 (M.D. Tenn. 2009) (quoting Driver, 535
F.3d at 432).
Plaintiffs have satisfied this standard. As explained above, Plaintiffs have
sufficiently alleged that Defendants ViSalus, Sarnicola, Blair, and Mallen
committed substantive RICO violations under Section 1962(c). And Plaintiffs
have sufficiently pleaded that those four Defendants and the remaining individual
Defendants entered into an agreement under which they all agreed (1) to further the
criminal endeavor and (2) that one of the members of the conspiracy would
commit a pattern of predicate acts. This agreement “can be inferred from the
individual defendants’ involvement” in the alleged scheme. Heinrich, 668 F.3d at
411. See also In Re ClassicStar Mare Lease Litig., 823 F. Supp. 2d 599, 638 (E.D.
Ky. 2011) (conspiracy to violate RICO “may be inferred from circumstantial
evidence which may reasonably be interpreted as participation in common plan”).
The following allegations, among others, support an inference that the
Defendants entered into a common plan or scheme to violate Section 1962(c) of
RICO:

27



Based on agreements made between them and Sarnicola, “Defendants
O’Toole, Varon, Petrilli, Pacetti, Fortner, Wilson, and [T.] Kirkland
all agreed to join [ViSalus] by leaving other network marketing
companies between 2009 and 2011[] [and] to actively expand the
promoter base for ViSalus.” (First Am. Compl. at ¶149.)



Defendants O’Toole, Varon, Petrilli, Pacetti, Fortner, Wilson, and T.
Kirkland, “in return for payments and inducements not made available
to the targets of the pyramid scheme,” agreed to “pitch[] the notion of
wealth, BMW’s and six-figure incomes if [targets of the scheme]
‘joined’ the [ViSalus] ‘business opportunity.’” (Id.)



Defendants O’Toole, Varon, Petrilli, Pacetti, Fortner, Wilson, and T.
Kirkland “understood that the role they were to play was to recruit as
many unsuspecting people as possible into the ViSalus scheme, to
pretend that they were simply people ‘just like’ unwitting participants
invited to attend the ViSalus presentation[s], that they were to use
scripted materials at the conventions, that they were to appear in ads
and to give false testimonials. Each of them understood and knew,
based on their prior experience, that the ViSalus plan promoted
recruiting over product sales. Each of them understood that they were
to use social media to coat the Internet in the message that ViSalus
was a great income opportunity. Each of them understood that the
terms of their distributor relationship with ViSalus was materially
different than the people they were to recruit.” (Id.)



Defendants O’Toole, Varon, Petrilli, Pacetti, Fortner, Wilson, and T.
Kirkland “made false statements intended to be disseminated to
unsuspecting recruits . . . all with the intent to lure people into the
system that each [of these] Defendant[s] knew was highly unlikely to
28

make any money, or could only make money by committing illegal
recruiting activities, i.e., victimizing someone else.” (Id. at ¶150.)


Defendant Fortner (1) was given “undisclosed special incentives,
payments or deals to be placed within the commission-payment
scheme ahead of or ‘upline’ of Plaintiffs and others” and “agreed that
this arrangement be kept undisclosed from innocent recruits” (id. at
¶153), (2) “falsely claimed” to make hundreds of thousands of dollars
from the ViSalus Program (id. ¶154), and (3) “[w]as a knowing and
willing participant in the promotion of the ViSalus pyramid scheme.”
(Id. at ¶155.)



Defendant Jackson (1) made “false and misleading” claims about her
supposed “success” with ViSalus (id. at ¶156), (2) received “certain
payments or benefits and agreed that this arrangement be kept from
innocent recruits” (id.), and (3) “[w]as a knowing and willing
participant in the promotion of the ViSalus pyramid scheme.” (Id. at
¶157.)



Defendant Craig (1) “was formerly the ViSalus Director of Sales,
North America” (id. at ¶159), (2) “obtained [] substantial undisclosed
benefits or payments promised by ViSalus,” (id.), and (3) “was a
knowing and willing participant in the promotion of the ViSalus
pyramid scheme.” (Id.)



Defendant H. Kirkland “appeared and allowed herself to be portrayed
as a ‘successful’ promoter holding a check which she knew was false.
She knew or reasonably should have known that the compensation
system she and her husband were selling, touting or offering to people
like the Plaintiffs was a recruiting-based pyramid scheme.” (Id. at
¶207.)
29



Goergen acted as ViSalus’s “Chief Operating Officer” and, later, was
the company’s “Chief Operating Officer.” (Id. at ¶131.)



In 2008, after Goergen Sr. invested substantial funds in ViSalus
through a second company he controlled (see id. at ¶¶ 125-130),
Goergen Sr. and Goergen “agreed” with ViSalus, Sarnicola, Blair, and
Mallen “to pump up the ViSalus revenues by hugely expanding the
growth of the pyramid scheme. This was with the goal of greatly
increasing recruitment of unsuspecting people to join the pyramid
scheme.” (Id. at ¶134.)



“From 2008-2013,” Goergen[] Sr. and Goergen, along with Sarnicola,
Blair, and Mallen, “controlled the direction and strategy of ViSalus’s
operation of the pyramid scheme.” (Id. at ¶132.)



Goergen Sr. and Goergen, together with the other ViSalus Defendants,
“directly authored and/or approved of the dissemination of the
ViSalus compensation plan….” (Id. at ¶196.)

From these allegations and others in the First Amended Complaint, the
Court can infer that the Defendants, except for the Entity Defendants noted above,
agreed to participate in a common plan that harmed Plaintiffs. Plaintiffs have
therefore stated a sufficient claim under Section 1962(d) against these Defendants.
V.
(The Securities Fraud Claims Under Section 10b and Rule 10b-5)
In count three of the First Amended Complaint, Plaintiffs allege – as an
alternative theory of liability to their claims under RICO – that the ViSalus

30

Defendants14 violated Section 10b (5 U.S.C. § 78j(b)) and Rule 10b-5 (17 C.F.R.
§ 240.10b-5) of the federal securities laws. (See First Am. Compl. at ¶¶ 215-223.)
Under these provisions, “in connection with the purchase or sale of any security,”
it is unlawful
(a) To employ any device, scheme, or artifice to defraud
(b) To make any untrue statement of a material fact or to
omit to state a material fact necessary in order to make
the statements made, in the light of the circumstances
under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business
which operates or would operate as a fraud or deceit
upon any person[.]
17 CFR § 240.10b-5(a)-(c).
Plaintiffs maintain that the ViSalus Defendants violated Rule 10b-5(b) by
making material misrepresentations and/or omissions and violated Rules 10b-5(a)
and (c) by operating a fraudulent scheme. The Court will address these two
theories of liability in turn.15

14

Previously identified as ViSalus, Goergen Sr., Goergen, Sarnicola, Blair, and
Mallen.
15

Plaintiffs concede that the First Amended Complaint, as currently pleaded, does
not expressly state a “scheme to defraud” claim under Rule 10b-5(a) and (c). But
Plaintiffs have argued both to the ViSalus Defendants and the Court that such a
“scheme” claim can be inferred from the totality of their allegations. The Court
will thus analyze both the “misrepresentation” claim under Rule 10b-5(b) and the
“scheme liability” claim for the sake of efficiency.

31

A.
To state a claim under Rule 10b-5(b), “a plaintiff must [plead] and prove: (1)
a material misrepresentation or omission by the defendant, (2) scienter, (3) a
connection between the misrepresentation or omission and the purchase or sale of a
security, (4) reliance upon the misrepresentation or omission, and (5) loss
causation.” Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 128 S.
Ct. 157 (2008).

In addition, a private plaintiff bringing a securities fraud claim

under Rule 10b-5(b) must satisfy the requirements of the Private Securities
Litigation Reform Act, 15 U.S.C. § 78u-4 (the “PSLRA”). Among other things,
the PSLRA requires a plaintiff to “specify each statement alleged to have been
misleading, [and] the reason or reasons why the statement is misleading,” 15
U.S.C. §78u-4(b)(1), and a plaintiff must “state with particularity facts giving rise
to a strong inference that the defendants acted with the required state of mind.” 15
U.S.C. §78u-4(b)(2).
In their 10b-5(b) claim, Plaintiffs allege that the ViSalus Defendants:
made material misrepresentations and/or omissions in
connection with the sale of distributorships to Plaintiffs
and the class. The Defendants falsely represented that
they were conveying a legal business opportunity, when,
in fact, they and each of them knew or recklessly ignored
that Plaintiffs were purchasing an interest in an illegal
pyramid scheme. . . . In the alternative, Defendants’
actions omitted material facts, i.e., that they were selling
an interest in a pyramid scheme, in connection with the
sale of distributorships.
32

(First Am. Compl. at ¶218).

At oral argument, Plaintiffs clarified that the

misrepresentations and/or omissions underlying this claim appeared in (1) the
ViSalus compensation plan and (2) various advertisements promoting the ViSalus
Program. (See Tr., ECF #72 at 68, Pg. ID 1889.) The documents containing the
claimed misrepresentations and/or omissions are attached to the First Amended
Complaint as Exhibits A and B. (See ECF ## 55-1 – 55-3.)
The ViSalus Defendants attack Plaintiffs’ 10b-5(b) claim on several
grounds. First, the ViSalus Defendants argue that Plaintiffs have failed to plead
that they relied on “a single misrepresentation or omission” when they signed up to
become a ViSalus IP.

(See ECF #62 at 11-12, Pg. ID 1635-36.)

Plaintiffs

acknowledged at oral argument that, as currently pleaded, the First Amended
Complaint does not contain any allegations that Plaintiffs actually saw or read
either the compensation plan or the ViSalus advertisements that form the entirety
of Plaintiffs’ 10b-5(b) claim. (See Tr. at 70, Pg. ID 1891.) But Plaintiffs’ counsel
represented to the Court that Plaintiffs could make such allegations if given the
opportunity to file a Second Amended Complaint. (See id.) The Court will
therefore dismiss Plaintiffs’ 10b-5(b) claim but permit them to file a Second
Amended Complaint amending this claim to allege that the named Plaintiffs (1)

33

read and relied upon the compensation plan and (2) saw and relied upon specific
advertisements. That amendment will cure the current reliance deficiency.16
The ViSalus Defendants next argue that liability under Rule 10b-5(b) “is
limited to the ‘maker’ of the misrepresentation or omission,” Janus Capital Group,
Inc. v. First Derivative Traders, 131 S. Ct. 2296 (2011), and that here “the only
‘maker’ of an alleged misrepresentation or mission is ViSalus.” (ECF #62 at 3-4,
Pg. ID 1627-28.) The ViSalus Defendants thus argue that Plaintiffs have failed to
state a 10b-5(b) claim against any of them except for ViSalus. The Court agrees.
Notably, Plaintiffs’ briefing offers no substantive response to the ViSalus
Defendants’ argument that ViSalus is the sole “maker” of the statements at issue.
And at oral argument, Plaintiffs could not identify any “maker” of the
advertisements other than ViSalus.

With respect to the compensation plan,

Plaintiffs argued only that Sarnicola, Blair, Mallen, Goergen Sr., and Goergen
made the statements therein because they were the plan’s “authors.” (Hearing Tr.
at 69, Pg. ID 1890; see also First Am. Compl. at ¶196.) But Janus expressly
rejected the argument that authoring or drafting a statement is the same as making

16

As stated above, Plaintiffs’ Rule 10b-5(b) claim fails to state a claim against any
of the ViSalus Defendants because Plaintiffs have failed to plead the required
element of reliance. However, for the sake of efficiency and to provide maximum
guidance to the parties, the Court will examine and rule on the ViSalus
Defendants’ remaining arguments with respect to the Rule 10b-5(b) claim on the
assumption that Plaintiffs will be able to cure the lack of reliance allegations
through the filing of a Second Amended Complaint.

34

the statement. See Janus, 131 S. Ct. at 2303 (rejecting argument that “‘make’
should be defined as ‘create’”). Moreover, the Supreme Court in Janus stressed
that “attribution within a statement or implicit from surrounding circumstances is
strong evidence that a statement was made by – and only by – the party to whom it
is attributed,” Janus, 131 S. Ct. at 2302 (emphasis added), and the only ViSalus
Defendant identified in the compensation plan is ViSalus.

The plan never

mentions, much less attributes its contents to, Sarnicola, Blair, Mallen, Goergen
Sr., Goergen, or any other individual. (See ECF #55-1.) Because Plaintiffs have
failed to rebut the ViSalus Defendants’ argument that ViSalus is the sole “maker”
of the statements in question, Plaintiffs’ Rule 10b-5(b) claim fails as to all ViSalus
Defendants except ViSalus.17

17

In a footnote in a section of Plaintiffs’ response brief discussing a wholly
separate issue – whether Plaintiffs have pleaded the required scienter for their Rule
10b-5 claim – Plaintiffs maintain that the ViSalus Defendants “acknowledge[d in
the Motions] that responsibility for the business opportunity extends to the
individuals who created it and caused it to be distributed.” (Pls.’ Br. at 27 n.35,
Pg. ID 1709.) In support of this position, Plaintiffs’ cite to a Section of
Defendants’ motion in which Plaintiffs contend the ViSalus Defendants
“acknowledge” that, under Janus, the “‘maker’ of a statement is the ‘person or
entity with ultimate authority over the statement, including its content and whether
and how to communicate it.” (ECF #62 at 4, Pg. ID 1628 (quoting Janus, 131 S.
Ct. at 2302)). But the ViSalus Defendants certainly have not “acknowledged” that
any of them “made” the statements at issue. It is conceivable that Plaintiffs could
present a theory, supported by specific factual allegations and supporting case law,
as to how the individual ViSalus Defendants qualify as the “makers” of the
compensation plan. But they have not yet done so.

35

ViSalus next argues that Plaintiffs’ 10b-5(b) claim fails because Plaintiffs
have failed to plead that ViSalus acted with the required scienter. (See ECF #62 at
7-11, Pg. ID 1631-35.) ViSalus contends that even if the knowledge of Sarnicola,
Blair, and Mallen could be imputed to the company, see In Re Omnicare Sec.
Litig., 769 F.3d 455, 476 (6th Cir. 2014) (holding that under certain circumstances,
the knowledge (and thus, scienter) of a company’s officers or agents may be
imputed to the company), “the facts alleged do not support a strong inference that
any of the individual defendants . . . knew that ViSalus was a pyramid scheme.”
(See id. at 11, Pg. ID 1635.) ViSalus thus argues that Plaintiffs have fallen short of
the demanding scienter standard that the PSLRA demands. (See id.)
The Court acknowledges that the PSLRA requires Plaintiffs to plead
particular facts that “give[] rise to a strong inference” of scienter. 15 U.S.C. §78u4(b)(1). But the Court concludes that this standard is satisfied here. As explained
above, the First Amended Complaint contains detailed allegations that Sarnicola,
Blair, and Mallen (1) knew the dividing line between a legitimate multi-level
marketing company and an illegal pyramid scheme, (2) knew that ViSalus fell on
the wrong side of that line, and (3) knew that promoters across the country were
actively misleading people in an effort to sign up more IPs for the ViSalus
Program. (See, e.g., First Am. Compl. at ¶¶ 125-127, 131, 135, 142, 187.) These

36

allegations satisfy even the heightened scienter pleading standard under the
PSLRA.
ViSalus also argues that the key omission identified by Plaintiffs – the
failure to state in the compensation plan and promotional materials that the ViSalus
Program was a pyramid scheme – is not actionable under Rule 10b-5(b) because
ViSalus had no obligation to disclose that alleged fact. ViSalus argues that that
alleged fact constitutes “soft information,” and it contends that “soft information”
need only be disclosed “only if it is virtually as certain as hard facts.” (ECF #62 at
5, Pg. ID 1629, quoting Zaluski v. United Am. Healthcare Corp., 527 F.3d 564,
572 (6th Cir. 2008).) But there is an exception to that rule: “if a complaint
adequately alleges that the defendants knew of the illegal nature of their conduct at
the time they made the allegedly material misstatement, courts will impose a duty
of disclosure.” Chamberlain v. Reddy Ice Holdings, Inc., 757 F. Supp. 2d 683, 707
(E.D. Mich. 2010). As described above, Plaintiffs have sufficiently alleged in the
First Amended Complaint that ViSalus (through its principals) knew that its
conduct was an illegal and fraudulent pyramid scheme.18 Accordingly, ViSalus

18

Defendants’ counsel candidly conceded at oral argument that if the “factual
allegations in the Complaint were sufficient to establish certain Defendants knew
that what they were saying was a misrepresentation or omission” then the Court
would have to “deny the motion with regards to those Defendants.” (January 20,
2016 Hrg. Tr., ECF #72 at 88, Pg. ID 1909.)

37

had a duty to disclose that alleged fact to potential ViSalus IPs, and the omission of
that alleged is actionable.
B.
Plaintiffs also maintain that the ViSalus Defendants participated in a
“scheme to defraud” in violation of Rules 10b-5(a) and (c). These provisions make
it illegal “to employ any device, scheme, or artifice to defraud” and “to engage in
any act, practice, or course of business which operates or would operate as a fraud
or deceit upon any person, in connection with the purchase or sale of any security.”
17 CFR § 240.10b-5(a), (c). “To state a claim based on conduct that violates Rule
10b-5(a) and (c), [a] plaintiff must allege that a defendant (1) committed a
deceptive or manipulative act, (2) with scienter, that (3) the act affected the market
for securities or was otherwise in connection with their purchase or sale, and that
(4) defendants' actions caused the plaintiffs’ injuries.” In re Parmalat Sec. Litig.,
376 F. Supp. 2d 472, 492 (S.D.N.Y. 2005) (emphasis removed) (testing claims
under 10b-5(a) and (c) against the same pleading standard). In addition, because
scheme liability claims “sound in fraud,” a plaintiff must also satisfy the pleading
requirements of Rule 9(b) by “specify[ing] what deceptive or manipulative acts
were performed, which defendants performed them, when the acts were performed,
and what effect the scheme had on investors in the securities at issue.” Id. Finally,
in order to state a viable scheme liability claim, a plaintiff must identify an

38

allegedly “deceptive or manipulative act” by the defendant beyond making a
misstatement or omission (which is prohibited under Rule 10b5-(b)). See, e.g.,
Benzon v. Morgan Stanley Distrib., Inc., 420 F.3d 598, 610 (6th Cir. 2005) (“Rules
10b-5(a) and (c) encompass conduct beyond disclosure violations”) (emphasis
added).
The ViSalus Defendants first argue that Plaintiffs’ scheme liability claim
under Rules 10b–5(a) and (c) fails because Plaintiffs have “not described . . . any
inherently deceptive conduct that furthered the scheme[] which is separate and
apart from the misrepresentations or omissions alleged in support of their Rule
10b-5(b) claims.” (Defs.’ Supp. Br., ECF #73 at 2, Pg. ID 1933) (emphasis
removed). The Court disagrees.
As described above, Plaintiffs have alleged that the ViSalus Defendants
knowingly created, implemented, and operated a pyramid scheme. That conduct is
inherently fraudulent wholly apart from any allegedly-misleading statements. See
e.g., United States v. Gold Unlimited, 177 F.3d 472, 484 (6th Cir. 1999)
(“Unquestionably, an illegal pyramid scheme constitutes a scheme to defraud.”).
Simply put, the operators of a pyramid scheme engage in fraudulent and deceptive
conduct even if the operators make no false statements to potential enrollees about
the enrollees’ chances for success. Thus, the “operation of a pyramid scheme
violates 10b-5's prohibition against engaging in an ‘act, practice or course of

39

business which operates as a fraud or deceit upon any person.’”

Webster v.

Omnitrition Int’l., Inc., 79 F.3d 776, 785 (9th Cir. 1996) (quoting 17 C.F.R. §
240.10b-5(c)); see also In re Silicon Graphics, Inc. Sec. Litig., 970 F. Supp. 746,
761 (N.D. Cal. 1997) (“[P]articipants may … be liable [under Rule 10b-5] for their
involvement in a pyramid scheme.”).19
The ViSalus Defendants also argue that Plaintiffs have failed to plead that
they operated the alleged scheme with the required particularity. The Court again
disagrees. As described above, the Plaintiffs have sufficiently alleged that the
ViSalus Defendants created, structured, operated, funded, and controlled the
alleged pyramid scheme. The Court is satisfied that the Plaintiffs have sufficiently
pleaded their scheme liability claim against the ViSalus Defendants.

19

A number of courts have held that a defendant may be liable under a scheme
liability theory where he “arrang[ed] for the dissemination of false or misleading
statements” that promoted a scheme to defraud. SEC v. Farmer, 2015 WL
5838867, at *15-16 (S.D. Tex. Oct. 7, 2015); SEC v. Crushen, 888 F. Supp. 2d
1299, 1308 (S.D. Fla. 2012) (granting summary judgment to plaintiff where
plaintiff claimed, among other things, that defendant created a deceptive media
campaign). Here, Plaintiffs have alleged that the ViSalus Defendants arranged for
numerous individuals to falsely promote ViSalus across the country. Because the
Court has concluded that the ViSalus Defendants’ operation of the alleged pyramid
scheme itself is inherently fraudulent conduct, it need not decide at this time
whether the ViSalus Defendants could also be liable under the scheme liability
theories advanced in Farmer and Crushen. If necessary, the Court can revisit this
question at the summary judgment stage of the proceedings.

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VI.
(The Securities Fraud Claim Under Section 12(2))
In count four of the First Amended Complaint, Plaintiffs allege that all
Defendants violated Section 12(2) of the Securities Act of 1933, 15 U.S.C. §
771(2). This section provides that any person who
offers or sells a security . . . by the use of any means or
instruments of transportation or communication in
interstate commerce or of the mails, by means of a
prospectus or oral communication, which includes an
untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements,
in the light of the circumstances under which they were
made, not misleading (the purchaser not knowing of such
untruth or omission), and who shall not sustain the
burden of proof that he did not know, and in the exercise
of reasonable care could not have known, of such untruth
or omission, shall be liable . . . to the person purchasing
such security from him.
In Pinter v. Dahl, 486 U.S. 622 (1988), the United States Supreme Court
addressed the scope of a “seller” of a security under a related statute, 15 U.S.C.
§ 771(1) (“Section 12(1)”). The Supreme Court held that in order to qualify as a
“seller” under Section 12(1), a defendant must either (1) “pass[] title, or other
interest in the security, to the buyer for value,” id. at 642, or (2) “successfully
solicit[] the purchase” of a security.

Id. at 649.

Thus, “[b]eing merely a

‘substantial factor’ in causing the sale . . . is not sufficient in itself to render a
defendant liable” if the Defendant did not solicit the ultimate purchase. Id. at 654.

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The Sixth Circuit “appl[ies] this test” for “seller” status to claims brought under
Section 12(2). Smith v. Am. Nat’l Bank & Trust Co., 982 F.2d 936, 942 (6th Cir.
1992).
The Defendants argue that only ViSalus meets the definition of “seller”
applicable to Section 12(2) claim. The Court agrees and will dismiss the Section
12(2) claim against all Defendants except for ViSalus.
ViSalus is the only Defendant alleged to have passed to Plaintiffs any
interest in a security. Thus, the remaining Defendants could be deemed Section
12(2) “sellers” only if they “solicited” Plaintiffs’ purchase of securities. They did
not.

“To count as ‘solicitation,’ the seller must, at a minimum, directly

communicate with the buyer,” Rosenzweig v. Azurix Corp., 332 F.3d 854, 871 (5th
Cir. 2003),20 and Plaintiffs do not allege that they had any direct contact with any
of the remaining Defendants. Thus, the remaining Defendants did not solicit any
of the Plaintiffs’ purchases and are not “sellers” under Section 12(2).
Plaintiffs counter that several federal courts have found a “solicitation” even
in the absence of direct contact between a plaintiff and a defendant. (See Pls.’
Supp. Br., ECF #74 at 6-7, Pg. ID 1948-49, citing, among other cases, In re Sirrom

20

See also In re Nat’l Century Fin. Enters., Inc., 846 F. Supp. 2d 828, 904 (S.D.
Ohio 2012) (noting that a “solicitation” requires direct contact); Pullins v. Klimley,
2008 WL 85871, at *16 (S.D. Ohio Jan. 7, 2000) (“To establish liability as a seller,
a plaintiff must demonstrate direct and active participation in the solicitation of the
immediate sale.”).  

42

Capital Corp. Sec. Litig., 84 F. Supp. 2d 933, 945 (M.D. Tenn. 1999), In re Trade
Partners, Inc. Investors Litig., 2008 U.S. Dist. LEXIS 66464, at **66-68 (W.D.
Mich. Aug. 15, 2008), and In re Prison Realty Sec. Litig., 117 F. Supp. 2d 681
(M.D. Tenn. 2000).) However, even if the Court adopted the broader view urged
by Plaintiffs – that a solicitation does not require direct contact – that would be no
help to Plaintiffs here. A solicitor becomes a “seller” under Section 12(2) only if
he solicits “the purchase” under attack, Pinter, 486 U.S. at 649 (emphasis added),
and while Plaintiffs allege that the certain individual Defendants engaged in
solicitation activities, they do not allege that they actually saw and/or were aware
the specific activities by the individual Defendants. Thus, even under the broader
view of “solicitation” urged by Plaintiffs, the individual Defendants do not qualify
as Section 12(2) “sellers.”
ViSalus further argues that Plaintiffs’ Section 12(2) claim fails because it
(ViSalus) did not have a duty to disclose “soft information.” (See ECF #62 at 1415, Pg. ID 1638-1639.) But for all of the reasons stated above, the Court concludes
that under the facts alleged in the First Amended Complaint, ViSalus did have a
duty to disclose. Thus, Plaintiffs may pursue their Section 12(2) claim against
ViSalus.

43

VII.
(The Claim Under Section 903 of the MCPA)
In count six of the First Amended Complaint, Plaintiffs allege that all
Defendants violated Section 903 of the MCPA. (See First Am. Compl. at ¶¶ 235244.) Section 903 prohibits, among other things, deceptive practices in the conduct
of trade or commerce. See MCL § 445.903. Plaintiffs allege that Defendants
violated Section 903 of the MCPA “in that they authored or knowingly permitted
and encouraged the dissemination of the ViSalus compensation plan.” (Id. at
¶237.)

All Defendants except for ViSalus have moved to dismiss Plaintiffs’

Section 903 claim on the basis that Plaintiffs have failed to plead that Defendants
committed a deceptive act with the required particularity. (See ECF #62 at 27, Pg.
ID 1651; ECF # 61 at 10-12, Pg. ID 1601-03.) The Court concludes that this count
fails against all Defendants because the First Amended Complaint does not
currently contain an allegation that the Plaintiffs read and/or relied upon the
compensation plan. The Court will therefore dismiss the section 903 claim against
all Defendants. However, as described above with respect to Plaintiffs’ Rule 10b5(b) claim, Plaintiffs’ counsel represented to the Court that this deficiency could be
cured through the filing of a Second Amended Complaint. The Court will allow
such an amendment. Once so amended, the Court concludes that this count will
state a viable Section 903 claim against Defendants ViSalus, Sarnicola, Blair, and

44

Mallen, but not against any of the other Defendants.
As described in detail above, Plaintiffs allege that Sarnicola, Blair, Mallen,
Goergen Sr., and Goergen drafted the misleading compensation plan and put in
place the mechanisms through which ViSalus delivered the plan to potential IPs.
(See, e.g., First Am. Compl. at ¶196.) At the pleading stage, these allegations are
sufficient to state a claim that Sarnicola, Blair, Mallen, Goergen Sr., and Goergen
violated Section 903 once Plaintiffs file a Second Amended Complaint that alleges
that they read and/or relied upon the compensation plan.
However, Plaintiffs have failed to sufficiently connect any of the remaining
Defendants to their (the Plaintiffs’) receipt and review of the compensation plan.
For instance, Plaintiffs do not allege that any other Defendants gave them the plan,
showed them the plan, told them to review the plan, established the marketing
program that led to their review of the plan, and/or directed anyone else to show
them the plan. Thus, Plaintiffs have failed to plead the required specific facts
necessary to state against these Defendants a viable Section 903 claim related to
the compensation plan.

45

VIII.
(The Claim Under Section 911(3)(c) of the MCPA)
Plaintiffs allege in count six of the First Amended Complaint that
Defendants violated MCL § 445.911.

(See First Am. Compl. at ¶243.) That

provision bars a party from engaging in any
method, act, or practice in trade or commerce declared by
a circuit court of appeals or the supreme court of the
United States to be an unfair or deceptive trade act or
practice within the meaning of … 15 U.S.C. § 45(a)(1),
in a decision which affirms or directs the affirmance of a
cease and desist order issued by the [F]ederal [T]rade
[C]omission . . . and which is officially reported not less
than 30 days before the method, act, or practice on which
the action is based occurs.
M.C.L. § 445.911(3)(c) (emphasis added).
However, Plaintiffs have failed to identify any “officially reported” decision
of the United States Supreme Court or of a United States Court of Appeals that
qualifies under this provision.

In the First Amended Complaint, Plaintiffs

identified three decisions: FTC v. Skybiz.com, 57 Fed. App’x 374 (10th Cir. 2003);
In re Koscot Interplanetary, Inc., 86 F.T.C. 1106 (1975), aff’d sub nom. Turner v.
FTC, 520 F.2d 701 (D.C. Cir. 1978), and Ger-Ro Mar, Inc. v. FTC, 518 F.2d 33
(2d Cir. 1975).21 Both Skybiz.com and In re Koscot are unpublished decisions.
And while Plaintiffs have argued that an “unpublished” decision qualifies as an

21

Plaintiffs’ counsel could not identify any other cases when questioned at oral
argument. (See Tr. at 99-100, Pg. ID 1920-1921.)

46

“officially reported” one for purposes of Section 911(3)(c), they have not cited any
authority for that proposition.

Ger-Ro Mar, which is an officially reported

decision affirming in part a cease and desist order issued by the FTC, is no help to
Plaintiffs. As Defendants accurately point out, the United States Court of Appeals
for the Second Circuit in Ger-Ro Mar actually reversed that portion of the FTC’s
order finding the existence of a pyramid scheme. Thus, Ger-Ro Mar is not a
reported decision affirming a cease and desist order directed at conduct like that
alleged here. Because Plaintiffs have failed to identify any decision that qualifies
under the statute, their claim under MCL § 445.911 fails as a matter of law.
IX.
(Unjust Enrichment)
In count seven of the First Amended Complaint, the Plaintiffs allege that all
Defendants (except for ViSalus) were unjustly enriched. (See First Am. Compl. at
¶¶245-258.) Defendants seek dismissal of this claim on two grounds.
First, Defendants argue that “the facts alleged do not plausibly connect the
enrichment each Defendant received and the benefit each Plaintiff conferred.”
(ECF #62 at 29, Pg. ID 1653; see also ECF #61 at 13, Pg. ID 1604.) But Plaintiffs
have pleaded that the individual Defendants were “upline from the Plaintiffs” in
the ViSalus pyramid and that this placement caused the Defendants to receive
“bonuses and commissions . . . . [w]hich were necessarily funded by a portion of

47

the Plaintiffs’ [purchases].” (First Am. Compl. at ¶250.) By alleging that each
individual Defendant received some portion of the money Plaintiffs’ paid to
ViSalus (as that money was directly funneled upline), Plaintiffs have sufficiently
connected their own losses to a gain by the individual Defendants.
Second, Defendants argue that “the unjust enrichment claim fails because
there is no underlying tort claim remaining against the individual Defendants who
were allegedly unjustly enriched.” (ECF #62 at 29-30, Pg. ID 1653-54.) However,
the Court is not aware of any authority that a claim for unjust enrichment under
Michigan law must rest on an underlying tort, and Defendants have not cited any
such authority. Unjust enrichment is a quasi-contractual remedy, and Michigan
courts generally apply contractual, not tort-based, rules to unjust enrichment
claims. See, e.g., Miller v. Laidlaw & Co. (UK) Ltd., No. 11-12086, 2012 WL
1068705, at *11 (E.D. Mich. Mar. 29, 2012) (“Claims for unjust enrichment are the
equitable counterpart to a claim for breach of contract and Michigan courts have
held that statute of limitations apply to equitable claims by analogy.”).
Defendants have not persuaded the Court that Plaintiffs’ unjust enrichment claim
fails because it does not rest on an underlying tort.

48

The Court does agree, however, that the unjust enrichment claim fails
against the Entity Defendants22.

The connection between the detriment to

Plaintiffs and the alleged benefit to the Entity Defendants is simply too attenuated
to state a viable unjust enrichment claim. Plaintiffs have stated a viable unjust
enrichment claim against the individual Defendants but not the Entity Defendants.
X.
(Claim for Civil Conspiracy)
In count nine of the First Amended Complaint, Plaintiffs assert that all
Defendants engaged in a civil conspiracy to commit various common law torts and
other unlawful acts (such as violating RICO). (See First Am. Compl. at ¶¶ 259264.) The Entity Defendants and Defendants Sarnicola, O’Toole, Pacetti, Fortner,
Jackson, Craig, Wilson, Varon, Petrilli, T. Kirkland, H. Kirkland, Varon, and
Petrilli (for purposes of this paragraph only, the “Promoter Defendants”), have now
moved to dismiss this count on two grounds. (See ECF #61 at 14-16, Pg. ID
1605-07.)
First, the Promoter Defendants and the Entity Defendants argue that
Plaintiffs have failed to state a claim for civil conspiracy because Plaintiffs have
not pleaded that each of the Promoter and Entity Defendants individually

22

Previously defined herein as Ropart Asset Management Fund, LLC, Ropart
Asset Management Fund II, LLC, Freedom Legacy, LLC, Wealth Builder
International, Inc., and Residual Marketing, Inc.

49

committed a separate tort. (See id. at 14, Pg. ID 1605.) In support of this position,
the Promoter Defendants and the Entity Defendants understandably rely on the
portion of the First Dismissal Order in which the Court dismissed Plaintiffs’ civil
conspiracy claim because Plaintiffs had not pleaded “a separate, actionable tort as
to each Defendant.” (First Dismissal Order at 70, Pg. ID 951.) The Court rested
this holding on the long-standing rule under Michigan law that “a claim for civil
conspiracy may not exist in the air; rather, it is necessary to prove a separate,
actionable tort.” (Id., quoting Advocacy Org. for Patients and Providers v. Auto
Club Ins. Ass’n, 670 N.W.2d 569, 580 (Mich. Ct. App. 2003).)
Upon additional review, the Court concludes that it read the Michigan
separate, actionable tort rule too broadly. The rule states only that Plaintiffs must
plead a “separate, actionable tort,” not that such a tort must be pleaded against
each member of the alleged conspiracy. And the Court’s broad reading – requiring
an actionable tort to be pleaded against all alleged conspirators – renders the notion
of a conspiracy superfluous: where all of the conspirators have personally
committed an underlying tort, the conspiracy claim would simply duplicate the
underlying tort claims.
Moreover, a defendant who enters into an agreement with another person
who actually commits a tort or crime can plainly be liable for conspiracy even
where the defendant does not personally commit the underlying tort or substantive

50

offense. See, e.g., Driver, supra (holding that defendant may be liable for RICO
conspiracy even where he does not personally commit an underlying substantive
RICO violation); BancorpSouth Bank v. Herter, 643 F. Supp. 2d 1041, 1056 (W.D.
Tenn. 2009) (“Conspiracy . . . imposes liability on persons who, although not
actually committing a tort themselves, share with the immediate tortfeasors a
common plan or design in its perpetration. By participation in a civil conspiracy, a
coconspirator effectively adopts as his or her own the torts of other coconspirators
within the ambit of the conspiracy.” (emphasis added)). Thus, the Court concludes
that under a proper application of Michigan’s separate, actionable tort rule, in order
to plead a viable conspiracy claim, a plaintiff must sufficiently plead (1) an
underlying tort claim against at least one of the defendants and (2) that the other
defendants entered into an agreement with the tortfeasor that included the
commission of the tort. Plaintiffs have done that.
Second, the Promoter Defendants and the Entity Defendants argue that
Plaintiffs have failed to sufficiently plead that these Defendants entered into any
conspiracy – with ViSalus or anyone else. (See ECF #61 at 14-16, Pg. ID 16051607.) But, as the Court explained in detail above, such an agreement among the
Promoter Defendants may be inferred from the detailed factual allegations

51

included in the First Amended Complaint.23 (See, e.g., First Am. Compl. at ¶212,
Pg. ID 1409.) The Promoter Defendants have therefore not presented any basis
under which the Court may dismiss Plaintiffs’ civil conspiracy claim.
XI.
(Claim Under Section 5 of the MFIL)
In count eleven of the First Amended Complaint, Plaintiffs allege that all
Defendants violated Section 5 of the MFIL, MCL § 445.1505. (See First Am.
Compl. at ¶¶ 270-274.)

Section 5(a) of the MFIL prohibits a person from

“employ[ing] any device, scheme, or artifice to defraud” in connection with the
filing, offer, sale, or purchase of any franchise. M.C.L. § 445.1505(a). Plaintiffs
allege that Defendants violated this provision when they engaged in a “scheme” to
defraud Plaintiffs by having them sign up for the ViSalus Program. (See First Am.
Compl. at ¶273.) The Defendants argue that liability under Section 5 is limited to
persons who offer or sell a franchise and that Plaintiffs’ Section 5 claims should
thus be dismissed against all Defendants other than ViSalus. The Court agrees.
While Section 5 sets forth certain prohibited conduct, it does not contain its
own private right of action authorizing a private plaintiff to sue for its violation. A
different section of the MFIL, Section 31, MCL § 445.1531, is the only provision

23

The Court does agree, for the same reasons discussed above with respect to
Plaintiffs’ RICO claim under Section 1962(d), that Plaintiffs have failed to state a
cognizable conspiracy claim against the Entity Defendants.  

52

of the MFIL that creates a private right of action. Thus, a plaintiff seeking to sue
for a violation of Section 5 can only do so by bringing a claim under Section 31.
Section 31 authorizes a private civil action against a person “who offers or
sells a franchise in violation of Section 5.” MCL § 445.1531 (emphasis added).
Thus, Section 31 “only imposes liability on a person who offers or sells a franchise
in violation of [Section] 5.” Franchise Mgmt. Unlimited, Inc. v. Am.'s Favorite
Chicken, 561 N.W.2d 123, 129 (Mich. Ct. App. 1997). Since ViSalus is the only
Defendant who offered or sold an alleged franchise to Plaintiffs, the claim for
violation of Section 5 of the MFIL fails as to all other Defendants.
XII.
(Conclusion and Summary of Ruling)
For the reasons stated above, IT IS HEREBY ORDERED that the Motions
(ECF ## 61, 62) are GRANTED IN PART AND DENIED IN PART as
described above. In summary, the Court dismisses the following claims:


Count one is DISMISSED against all Defendants except for ViSalus,
Sarnicola, Blair, and Mallen.



Count two is DISMISSED against the Entity Defendants only.



Plaintiffs’ 10b-5(b) claim in count three is DISMISSED against all
Defendants.



Count four is DISMISSED against all Defendants except for ViSalus.



Count six is DISMISSED against all Defendants.



Count nine is DISMISSED against the Entity Defendants only.

53



Count eleven is DISMISSED against all Defendants except for
ViSalus.

The Court will convene a telephone call with counsel for all parties to
discuss the filing of a Second Amended Complaint; the possible curing of the
pleading deficiencies identified herein; and the next steps in this action.
IT IS SO ORDERED.
s/Matthew F. Leitman
MATTHEW F. LEITMAN
UNITED STATES DISTRICT JUDGE
Dated: March 9, 2016
I hereby certify that a copy of the foregoing document was served upon the parties
and/or counsel of record on March 9, 2016, by electronic means and/or ordinary
mail.
s/Holly A. Monda
Case Manager
[phone]

54