Torres v. SGE Management LLC
Filing
169
MEMORANDUM OPINION AND ORDER granting in part and denying in part 121 Motion for Class Certification. (Signed by Judge Kenneth M. Hoyt) Parties notified.(chorace)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
JUAN RAMON TORRES, et al,
Plaintiffs,
VS.
SGE MANAGEMENT LLC, et al,
Defendants.
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CIVIL ACTION NO. 4:09-CV-2056
MEMORANDUM OPINION AND ORDER
I.
INTRODUCTION
Pending before the Court is the plaintiffs’, Juan Torres and Eugene Robison (collectively,
“the plaintiffs”), motion for class certification pursuant to Rule 23 of the Federal Rules of Civil
Procedure (Docket No. 121). Also before the Court is the defendants’, SGE Management et al.
(“the defendants”), response (Docket No. 129) and the plaintiffs’ reply (Docket No. 134). On
November 6, 2013, the Court heard oral argument and received expert testimony on the relevant
issues. Having carefully reviewed the parties’ submissions, the record and the applicable law, the
Court finds and concludes as follows.
II.
FACTUAL BACKGROUND
Ignite, the marketing arm of Stream Electric, is a retailer of electricity and natural gas
services that conducts its sales through a system in which independent employees (known as
independent agents, “IAs”) make sales to customers and recruit individuals to become new IAs.
The plaintiffs are former IAs. Premised upon their experiences in that capacity, they bring this
suit, alleging violations of 42 U.S.C. § 1962(c) and (d), the Racketeer Influenced and Corrupt
Organizations Act (“RICO”), by the defendants.
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Under Ignite’s business structure, which the defendants describe as multi-level
marketing, IAs are categorized in one of multiple tiers. An IA begins his tenure with the
company as an “associate” and works his way into higher tiers by selling energy accounts and
recruiting new IAs. An IA can sell energy accounts to commercial entities (Commercial
Compensation Plan) or households (Residential Compensation Plan). An IA’s pay varies
depending on how many IAs he recruits, the number of sales he makes, the entity making the
purchase (commercial or residential) and the sales of his recruits.
The manner in which an IA may make sales or recruit is highly circumscribed by Ignite’s
Policies and Procedures and Training Workbook, both of which are among the initial materials
provided to all IAs. Before IAs begin recruiting, they are trained and provided with approved
marketing materials to use when meeting with potential recruits. IAs are encouraged to do live
presentations of the Ignite business opportunity to recruits, and ideally, take the recruit to a live
public presentation, put on by Ignite or an experienced IA.
After their tenure with Ignite, the plaintiffs brought this suit, naming as defendants
various business entities associated with Ignite, and certain employees of Ignite. In this suit, the
plaintiffs assert that Ignite is an illicit pyramid scheme run by the defendants, the operation of
which violates RICO. They claim mail fraud and wire fraud as the predicate RICO offenses.
The plaintiffs allege that they were injured by the defendants’ operation of the pyramid
scheme because they lost money as a result of becoming IAs—the $329 sign-up fee and any
monthly payments for the Ignite “homesite” (i.e. personal website) was greater than the pay they
received from Ignite for working as IAs. The plaintiffs seek to certify a class composed of the
236,544 IAs who have lost money as a result of the defendants’ operation of the pyramid
scheme.
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III.
LEGAL STANDARD
“To obtain class certification, parties must satisfy Rule 23(a)’s four threshold
requirements, as well as the requirements of Rule 23(b)(1), (2), or (3).” Maldonado v. Ochsner
Clinic Foundation, 493, F.3d 521, 523 (5th Cir. 2007) (citing Amchem Prods., Inc. v. Windsor,
521 U.S. 591, 613-14 (1997). This is not a pleading exercise; the party seeking certification must
affirmatively establish that the proposed class meets the requirements of Rule 23. See Wal-Mart
Stores, Inc. v. Dukes, 131 S.Ct. 2541, 2551 (2011) (“Rule 23 does not set forth a mere pleading
standard.”).
Before certifying a class, the court “must conduct a rigorous analysis of the Rule 23
prerequisites.” M.D. ex rel. Stukenberg v. Perry, 675 F.3d 832, 837 (5th Cir. 2012) (internal
citation omitted). In conducting that analysis “sometimes it may be necessary to probe beyond
the pleadings,” and the court may need to evaluate “the merits of the plaintiff’s underlying
claims.” Wal-Mart, 131 S.Ct. at 2551.
IV.
ANALYSIS AND DISCUSSION
The Court begins its analysis with an evaluation of Rule 23(a)’s requirements.
A.
FRCP 23(a)
The four requirements of Rule 23(a) are generally referred to as numerosity,
commonality, typicality and adequacy.
i.
Numerosity
Rule 23(a)(1) requires the class to be so numerous that joinder of all members is
impracticable. The plaintiffs seek to certify a class of 236,544 people. The defendants do not
challenge certification on this basis. The Court finds the proposed class to be sufficiently
numerous to satisfy Rule 23(a)(1).
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ii.
Commonality
Rule 23(a)(2) requires that there be questions of law or fact common to the class. The
plaintiff must “demonstrate that the class members ‘have suffered the same injury,’” Wal-Mart,
131 S.Ct. at 2551 (quoting General Telephone Co. of Southwest v. Falcon, 457 U.S. 147, 156
(1982)), and that “the claims of every class member depend upon a common contention that is
capable of classwide resolution.” Stukenberg, 675 F.3d at 838 (quoting Wal-Mart, 131 S.Ct. at
2551). In other words, the contention must be “of such a nature that determination of its truth or
falsity will resolve an issue that is central to the validity of each one of the claims in one stroke.”
Id.
The plaintiffs assert that the injury suffered by each class member was the net loss after
the $329 initial sign-up fee to acquire the Ignite business opportunity and any monthly fees paid
to maintain their Ignite homesite. They argue that there are a multitude of common questions,
including: whether the defendants have formed a RICO enterprise; whether the defendants have
engaged in a scheme to defraud as defined in 18 U.S.C. § 1341(a); whether the defendants used
mail or wire services to effectuate their allegedly illegal conspiracy; whether the defendants
multi-level marketing scheme was devised and implemented as a facially illegal pyramid
scheme; whether the class members have collectively been harmed by the defendants’ activities;
and so on. The plaintiffs contend that these common questions will generate common answers
that will help resolve this litigation.
The defendants argue that Robison’s pursuit of the Commercial Compensation Plan is
fatal to class certification because his claim does not present a question in common with most of
the class. This is so, they assert, because the undisputed fact is that the vast majority of IAs
pursued the Residential Compensation Plan. The defendants contend that whether the
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Commercial Plan is a pyramid scheme is a separate question from whether the Residential Plan
is a pyramid scheme. Because the lead plaintiff does not have this fundamental question in
common with the great majority of the class, the defendants argue that commonality is not met.
In reply, the plaintiffs argue that “the existence of the pyramid revolves around the
legality of the system in toto, not whether a percentage of the 274,000 people who signed up
intended to sell to their friends, their neighbors, the local business owner, or elsewhere.”
In the Court’s view, the gravamen of the plaintiffs’ complaint is that the defendants, with
use of the mails and wires, operated an illegal pyramid scheme through which they defrauded the
class members. The questions outlined by the plaintiffs are central to the validity of all the class
members’ claims and the resolution of those questions would determine the validity of the claims
in one stroke. The defendants either did or did not form a RICO enterprise; they either did or did
not engage in a section 1341(a) scheme to defraud; they either did or did not use mail or wire
services in the course of the scheme; they either did or did not operate an illegal pyramid
scheme; the operation of that scheme either did or did not harm the class members. Those
questions will generate answers common to the class; they do not turn based on the individual
class member considered. The Court is satisfied that those answers will drive the resolution of
this litigation. Accordingly, the Court finds that commonality is met.1
iii.
Typicality
Rule 23(a)(3) requires that the claims of the representative party be typical of the claims
of the proposed class. Typicality is satisfied when the representative plaintiff’s claims arise from
the same event or practice or course of conduct that gives rise to the claims of other class
members, and if his or her claims are based on the same legal theory. See 7A Charles Alan
1
Tellingly, the Court has been pointed to no evidence (and finds none) that an IA who intended to sell to
commercial entites actually locked himself into that decision and could not later begin selling to households.
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Wright & Mary Kay Kane, Federal Practice & Procedure § 1764 (3d ed. 2005); see also
Archdiocese of Milwaukee Supporting Fund, Inc. v. Halliburton Co., 2012 WL 565997, at *2
(N.D. Tex. Jan. 27, 2012) aff'd sub nom. Erica P. John Fund, Inc. v. Halliburton Co., 718 F.3d
423 (5th Cir. 2013) cert. granted, 134 S. Ct. 636 (U.S. 2013).
The defendants argue that because Robison pursued the Commercial Compensation Plan,
while the vast majority of IAs pursued the Residential Compensation Plan, his claim is not
typical of those of the rest of the class. For the reasons previously discussed, the Court rejects
this contention. The Court finds that the claims of the representative plaintiffs are typical of those
of the proposed class. The representatives, like all class members, allegedly suffered an
economic loss as a result of their unwitting participation in an allegedly illegal pyramid scheme.
iv.
Adequacy
Rule 23(a)(4) requires a determination that the representative party will fairly and
adequately protect the interests of the class. “A plaintiff must show that plaintiff’s counsel has
the zeal and competence to represent the class, and that the proposed class representative is
willing and able to take an active role in controlling the litigation and protecting the absent class
members.” Id. at *2 (citing Berger v. Compaq Computer Corp., 257 F.3d 475, 479 (5th Cir.
2001)). The 23(a)(4) inquiry also serves to uncover conflicts of interest between the
representative plaintiff and the proposed class. Berger, 257 F.3d at 480.
Counsel for the plaintiffs have extensive experience in class action litigation that makes
them well-qualified to represent this class. Further, counsel have invested significant time and
resources in this litigation, and shown themselves to be zealous advocates. The plaintiffs are
prototypical IAs, willing to take an active role in controlling the litigation and protecting absent
class members, as evidenced by obtaining reversal of an adverse determination on a dispositive
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motion. Finally, the Court knows of no conflict of interest between the plaintiffs and other
members of the putative class. Therefore, the Court finds that adequacy is met.
Having concluded that the Rule 23(a) requirements are met, the Court now turns to the
23(b) inquiry. The plaintiffs seek certification under 23(b)(2) and (3).
B.
FRCP 23(b)(2)
Certification under Rule 23(b)(2) is only available when the party opposing the class has
acted or refused to act on grounds that apply generally to the class, so that final injunctive relief
or corresponding declaratory relief is appropriate respecting the class as a whole. The focus is
“on the defendants’ alleged unlawful conduct, not on individual injury.” Rodrigues v.
Countrywide, 695 F.3d 360, 362-63 (5th Cir. 2012). Certification under 23(b)(2) is not
permissible “when each class member would be entitled to an individualized award of monetary
damages.” Wal-Mart, 131 S. Ct. at 2557. However, where the requested monetary relief is
incidental to the requested injunctive or declaratory relief, certification may be proper. Id. at
2560 (discussing the exception recognized by the Fifth Circuit in Allison v. Citgo Petroleum
Corp., 151 F.3d 402 (5th Cir. 1998) and declining to reach the issue); see Allison, 151 F.3d at
413-15 (explaining the exception and its underlying rationale).
Although in limited instances a party may seek both injunctive and monetary relief under
rule 23(b)(2), “certification under [the provision] is appropriate only if members of the proposed
class would benefit from the injunctive relief they request.” In re Monumental Life Ins. Co., 365
F.3d 408, 416 (5th Cir. 2004). As such, “the question whether the proposed class members are
properly seeking such relief is antecedent to the question whether that relief would predominate
over money damages.” Id.
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The plaintiffs seek an order enjoining the defendants from continued operation of the
alleged pyramid scheme and any further engagement in unlawful, fraudulent or deceptive acts.
The defendants argue that the plaintiffs do not have standing to request injunctive relief, and
even if they did, certification under 23(b)(2) is improper because the claim for money damages
predominates over the claim for injunctive relief.
The Court agrees with the defendants that the plaintiffs do not have standing to seek an
injunction. A party seeking injunctive relief must “demonstrate either continuing harm or a real
or immediate threat of repeated injury in the future.” Grant ex rel. Family Eldercare v. Gilbert,
324 F.3d 383, 388 (5th Cir. 2003); see also Howard v. Green, 783 F.2d 1311, 1313 n.2 (5th Cir.
1986) (“Past exposure to illegal conduct would not in itself show a present case or controversy
for injunctive relief ... if unaccompanied by any present adverse effects.”) (citing Los Angeles v.
Lyons, 461 U.S. 95, 102 (1983)). By the terms of the complaint, it is clear that any harm the class
is alleged to have suffered occurred in the past. There is no allegation of present adverse effects
or a threat of future harm to the class members.2
Rule 23(b)(2) certification is “inappropriate when the majority of the class does not face
future harm.” Maldonago, 493 F.3d at 525 (citing Bolin v. Sears, Roebuck & Co., 231 F.3d 970,
978 (5th Cir. 2000)). Where, as here, not a single member of the putative class of over 200,000
faces present adverse effects or a threat of future harm, 23(b)(2) cannot be the means by which
the class is certified, and the plaintiffs must look elsewhere.3
2
That an injunction would prevent potential IAs from being duped by the alleged pyramid scheme is of no moment;
those potential IAs are not members of the proposed class.
3
The Court notes that the plaintiffs have specifically requested injunctive relief and not declaratory relief. (Docket
No. 60, Second Am. Compl. at 13 ¶ e). Because the Court will not read into the complaint what is not there, whether
the plaintiffs could properly request declaratory relief has not been considered. Further, because the Court finds that
the plaintiffs do not have standing for certification under 23(b)(2), the Court does not decide whether the requested
monetary relief is incidental to the request for injunctive relief.
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C.
FRCP 23(b)(3)
Class certification under Rule 23(b)(3) is only available when common questions
predominate over any questions affecting individual class members, and when class resolution is
the best means of fair and efficient adjudication of the controversy. See Amchem 521 U.S. at 615
(quoting Fed. R. Civ. P. 23(b)(3)). “The predominance inquiry is more demanding than the
commonality requirement of Rule 23(a) and requires courts to consider how a trial on the merits
would be conducted if a class were certified.” Maldonado, 493 F.3d at 525. The focus is on
whether the proposed class is “sufficiently cohesive to warrant adjudication by representation.”
Amchem, 521 U.S. at 623. “[T]he superiority analysis requires an understanding of the relevant
claims, defenses, facts, and substantive law presented in the case.” Maldonado, 493 F.3d at 525.
Economies of time, effort and expense, and the promotion of uniform decisions as to persons
similarly situated, without sacrificing procedural fairness, are important considerations. See Fed.
R. Civ. P. 23(b)(3), 1996 Amendment, Advisory Committee Notes.
Because the 23(b)(3) inquiry requires the Court to consider how a trial on the merits
would be conducted, the Court begins with an examination of the plaintiffs’ RICO claim.
i.
RICO Substantive Law
Any person injured in his business or property by reason of a violation of section 1962
can bring a civil cause of action. See 18 U.S.C. § 1964(c). To prove a violation of section
1962(c) or (d), a plaintiff must establish three elements: “(1) a person4 who engages in (2) a
pattern of racketeering activity5 (3) connected to the acquisition, establishment, conduct, or
4
A “person” is an individual or entity capable of holding a legal or beneficial interest in property. See Whelan v.
Winchester Production Co., 319 F.3d 225, 229 n.3 (5th Cir. 2003).
5
“Racketeering activity” is any of the predicate acts defined in 18 U.S.C. § 1961(1), which includes mail fraud and
wire fraud.
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control of an enterprise6.” St. Paul Mercury Ins. Co. v. Williamson, 224 F.3d 425, 439 (5th Cir.
2000) (quoting Delta Truck & Tractor, Inc. v. J.I. Case Co., 855 F.2d 241, 242 (5th Cir. 1988)
(emphasis omitted, footnotes added). The person who engages in the racketeering activity must
be distinct from the enterprise, and the enterprise must be distinct from the series of predicate
acts that constitute the racketeering activity. Id. For a plaintiff to prevail in a civil RICO action
alleging mail and wire fraud, he must “establish proximate cause in order to show injury ‘by
reason of’ a RICO violation.” Bridge v. Phoenix Bond & Indem. Co., 553 U.S. 639, 654 (2008).
Proximate cause is a flexible concept—not a black letter rule—that demands “some direct
relation between the injury asserted and the injurious conduct alleged.” Id.
ii.
Contentions of the Parties
The defendants argue that certification under Rule 23(b)(3) is improper because common
questions do not predominate over questions affecting individual class members. More
specifically, the defendants contend that the plaintiffs cannot establish proximate cause, on a
classwide basis with classwide proof, that each of the nearly 250,000 proposed class members
over the course of many years were defrauded by the defendants. Instead, the argument goes, to
establish proximate cause, the plaintiffs will have to introduce individualized evidence as to
which alleged misstatements each IA read or heard, and the extent to which that misstatement
induced him to join Ignite.
The defendants also argue that to the extent the class relies on the pyramid scheme claim
so as to establish classwide proof based on evidence of “whether the Compensation Plan
emphasized recruiting over customer gathering,”7 the deficiency is still not cured. (Docket No.
6
An “enterprise” is “a group of persons or entities associating together for the common purpose of engaging in a
course of conduct.” Whalen, 319 F.3d at 229 (citing United States v. Turkette, 425 U.S. 576, 583 (1981)).
7
The defendants maintain that this is not the standard by which the legality of a multi-level marketing plan is
determined.
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121, Pls.’ Mot. for Class Certification, App. III, Ex. 2 at ¶ 15). Because of the regular promotion
activities conducted by Ignite, the economic incentives of the Compensation Plan vary wildly
among the class members, depending on when they became IAs. The defendants argue that even
under the plaintiffs’ proposed legal standard, the answer to whether the defendants operated an
illegal pyramid scheme could be different for each IA depending on the promotions available
when he enrolled.
In sum, the defendants argue that without individualized proof, the plaintiffs will not be
able to establish proximate cause between the asserted injury and alleged RICO scheme, and
because questions affecting individual class members will predominate over common questions,
the proposed class is not eligible for (b)(3) certification.
The plaintiffs, citing Bridge, assert that first-party reliance is not necessary to bring a
civil RICO claim predicated on mail or wire fraud, and therefore, they will not have to submit
individualized evidence as to each IA. They argue that proximate cause in this instance is akin to
a fraud-on-the-market scheme in which it can be rationally inferred that the enticement to invest
(i.e. the representations made by the defendants that Ignite is a lucrative financial opportunity)
was acted upon by the purchasers of the worthless product (i.e. the 274,000 IAs). The plaintiffs
allege that every IA signed the Policies and Procedures, which requires each signatory to
acknowledge that he was given and read the materials offered by the defendants. They further
allege that the defendants require IAs to use only approved marketing material when recruiting
new IAs. Thus, they argue, the existence of 274,000 IAs is circumstantial evidence of classwide
reliance (and thus proximate cause) on the defendants’ misrepresentations. Accordingly, the
plaintiffs maintain, no individual class member need testify about which particular
misrepresentation induced him to sign up as an IA.
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iii.
Analysis
In Bridge, the Cook County Treasurer’s Office auctioned off various tax liens, and the
plaintiffs alleged that the defendants circumvented the rules by filing false attestations with the
Treasurer’s Office, and thereby obtained more than their fair share of liens. The Supreme Court
rejected the defendants’ first-party reliance argument—that to recover under RICO for mail
fraud, the plaintiffs must show that they relied on the alleged false statements, and because the
false statements were sent to the Treasurer’s Office and never seen by the plaintiffs, the plaintiffs
had no claim under the statute. The Court observed, “a person can be injured ‘by reason of’ a
pattern of mail fraud even if he has not relied on any misrepresentations.” Id. at 649. The Court
held that RICO’s “by reason of” language only requires the plaintiff to show that the defendant’s
violation was the proximate cause of his injury. Id. at 654. First-party reliance is not an element
of a RICO claim predicated on mail or wire fraud, and the plaintiff need not establish first-party
reliance to prevail. Id. at 661. The Court then found that third-party reliance—the Treasurer’s
Office relied on the defendants’ misrepresentations and the plaintiffs were thereby injured—was
sufficient to establish proximate cause. Id. at 658. The Court concluded its opinion cautioning,
“none of this is to say that a RICO plaintiff who alleged injury ‘by reason of’ a pattern of mail
fraud can prevail without showing that someone relied on the defendant’s misrepresentations”
and “the complete absence of reliance may prevent the plaintiff from establishing proximate
cause.” Id. at 658-59 (emphasis in original).
Though the plaintiffs are correct that they are not required to show first-party reliance,
the defendants are equally correct that the plaintiffs must establish proximate cause. The crux of
the disagreement is whether there is a manner of proof whereby the plaintiffs can establish
classwide proximate cause. Unsurprisingly, the plaintiffs believe there is such a manner of proof.
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The defendants, on the other hand, believe the plaintiffs can only make out proximate cause on
an individualized basis—by showing first-party reliance on various misrepresentations or parsing
out the economic incentives present when each individual class member signed up to be an IA.8
The plaintiffs seek 23(b)(3) certification on the theory that because IAs were only
allowed to use the defendants’ marketing materials (allegedly replete with fraudulent
misstatements)9 when they recruited new IAs, and every class member signed the Policies and
Procedures (which contained at least one misstatement)10 when they became IAs, classwide
reliance can be shown without resort to individual testimony. Simply put, the plaintiffs’ position
is that because every class member saw at least one of the many documents that contained
fraudulent misstatements, classwide reliance can be shown. The Court disagrees.
Even assuming that all the defendants’ marketing materials contained misstatements and
omissions, and that IAs were required to adhere to those materials when recruiting new IAs, it is
not apparent, and could not be determined without individual testimony, which specific materials
each IA used when recruiting other IAs. Establishing proximate cause in this instance would
require each class member to testify or otherwise provide evidence as to which materials he saw,
the misstatements he read or heard, and the extent those misstatements induced him to become
an IA. Similarly, even assuming the sole identified misstatement in the Policies and Procedures
is actually a misstatement, each IA would still be required to provide the counterintuitive
testimony that it was that specific misstatement that induced him to become an IA.11
8
The plaintiffs have not, indeed could not under these facts, claim third-party reliance.
See generally Docket No. 121, Pls.’ Mot. for Class Certification, FRE 1006 Misrepresentations and Omissions
Chart, App. III, Ex. 8.
10
Id. at ¶ 29.
11
The notion is counterintuitive because it appears that the Policies and Procedures is similar to an employee
manual in that it spells out the dos and don’ts of the position and articulates the legal relationship between Ignite and
the IA. As such, it would presumably be given only to those who have made the decision to become IAs; not used as
a recruiting device. If these assumptions are correct, then the Policies and Procedures could not have been the
catalyst for an IA becoming an IA.
9
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Equally true, the defendants would be entitled to cross-examine each class member on the
substance of his testimony. It is at least possible that some number of the class members saw
none of the materials or presentations by the defendants and only signed up to become an IA at
the prodding of a friend or neighbor IA who did not use those recruitment aids. Furthermore, it
could be the case that some especially entrepreneurial class members read the allegedly
fraudulent claims about how easy it was to make money, maintained a healthy degree of
skepticism regarding those claims, but became IAs nonetheless because they believed they
(though not necessarily everyone else) would make a significant amount of money, even if not as
much as advertised. Again, the defenants would be entitled to explore all these areas.
In that vein, this case is similar to David v. Signal International, LLC, 2012 U.S. Dist.
LEXIS 114247, at *106-12 (E.D. La. Jan. 3, 2012). There the plaintiffs, citizens of India,
pursued a market approach theory of reliance whereby first-party reliance could be proven by
circumstantial, classwide evidence. They claimed that the class members traveled to the United
States and worked for the defendant under deplorable conditions because they were enticed by
the false promise of a green card. The court rejected the theory because undisputed facts
evidenced many possible reasons any given class member came to the United States to work for
the defendant.12
Here, as in David, individualized reliance issues as to the plaintiffs’ knowledge,
motivations and expectations bear heavily on the proximate cause analysis, rendering 23(b)(3)
certification unavailable under that theory.
12
For example, the court observed that some of the class members had previously worked in the United States and
therefore must have understood the temporary nature of the H-2B visas they had been issued, yet they still went to
work for the defendant. David, 2012 U.S. Dist. LEXIS 114247, at *108-09. Another possible reason the court noted
was testimony that some of the class members were so adamant about coming to the United States that they were
willing to do so even though it might mean not getting a green card. Id. at 109.
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To the extent the plaintiffs seek 23(b)(3) certification based on a fraud-on-the-market
theory and the common sense inference that IAs were duped into joining a pyramid scheme, the
Court finds that the class can be certified. Although the litany of reasons any individual class
member signed up to become an IA may vary, common sense compels the conclusion that every
IA believed they were joining a lawful venture. That the defendants’ business opportunity is
allegedly an unlawful pyramid scheme in which the vast majority of participants are sure to lose
money, gives rise to an inference that the only reason the class members paid the $329 sign-up
fee (and possibly other fees) is because the true nature of the “opportunity” was disguised as
something it was not. As such, establishing proximate cause would not be an individualized
inquiry; rather, it could be determined as to all the class members at once. Because it can
rationally be assumed (at least without any contravening evidence) that the legality of the Ignite
program was a bedrock assumption of every class member, a showing that the program was
actually a facially illegal pyramid scheme would provide the necessary proximate cause.13 The
defendants’ knowing misrepresentations about the scheme directly resulted in the losses incurred
by the defrauded class members.14
The plaintiffs’ theory is not novel. In Negrete v. Allianz Life Insurance Co. of North
America, the plaintiffs in a RICO class action sought to prove causation on a classwide basis on
the theory that reliance on the defendant’s alleged misrepresentations is the common sense
13
The concept of proximate cause ensures “a sufficiently direct relationship between the defendant’s wrongful
conduct and the plaintiff’s injury.” Bridge, 553 U.S. at 657. If the plaintiffs’ allegations are true, their alleged
injury—the loss of money—is the direct result of the defendants’ fraud. See id. at 658. “It [is] a foreseeable and
natural consequence of [the defendants’] [pyramid] scheme” that the vast majority of the unwitting IAs would lose
money. Id.
14
To the extent this seems to conflict with the Court’s reasoning in denying 23(b)(3) certification under the
plaintiffs’ misrepresentation theory, the Court notes that the misrepresentation theory rested on the fact that every IA
read or saw at least one of the many misstatements in the defendants’ marketing materials and Policies and
Procedures. Whereas here, all the class members are presumed to be relying on the same misrepresentation—that the
Ignite business opportunity was a legal, non-fraudulent venture. In the former scenario, individual issues would
predominate for the reasons previously stated. In this latter scenario, the issue is classwide.
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explanation for class members’ purchasing decisions. 287 F.R.D. 590, 611-12 (C.D. Cal. 2012).
The court allowed the plaintiffs to prove classwide reliance under that theory, explaining:
“That [the defendant’s] annuities are allegedly inferior in value and
performance to comparable investment products…gives rise to an inference
that consumers decided to purchase the ‘inferior’ annuities because of the
standardized marketing materials at issue…for they otherwise had no reason to
do so. Consumers are nearly certain to rely on prominent (and prominently
marketed) features of a product which they purchase, particularly where there
are not otherwise compelling reasons for purchasing a product that is allegedly
worth less than the purchase price.”
287 F.R.D. at 612.
Similarly, in Peterson v. H & R Block Tax Services, Inc., the court certified the class
under the presumption that the class members relied on the defendant’s alleged
misrepresentations. 174 F.R.D. 78, 84-85 (N.D. Ill. 1997). The court so concluded because it
found the presumption logical and the allegations in the complaint made reliance apparent. The
plaintiffs alleged that each class member paid a significant fee for a service for which no class
member was eligible. The court held that reliance was apparent because “it is inconceivable that
the class members would rationally choose to pay a fee for a service they knew was
unavailable.” Id.
The central claim in the case before this Court is that the defendants purported to be
offering a potentially lucrative business opportunity for an initial fee of $329 when in actuality
all that was being offered was a position as a pawn in an illegal pyramid scheme. It defies
rational thought that the class members would knowingly pay for that “opportunity.” Because
both logical inference and circumstantial evidence allow the class members to establish
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proximate cause on a classwide basis, the Court finds that common, rather than individual issues,
predominate.15
The Court also finds that a class action is the superior method of adjudication of this
controversy. Having carefully reviewed the facts, claims and substantive law, the Court is
convinced that a class action would promote economies of time and uniform decisions among
similarly situated individuals. The Court also takes note of the fact that in light of the relatively
small individual claims at issue, relief is unlikely if each proposed class member proceeded
individually. See Amchem, 521 U.S. at 616.
For these reasons, the Court finds certification under Rule 23(b)(3) to be proper.
D.
Class Members Subject to Arbitration
The parties disagree about which IAs are eligible for inclusion in the putative class.
Because the Court has certified the class, it is now necessary to resolve this dispute.
i.
Arbitration Clause as to Fifth Circuit Torres Decision
When this action was first filed, the defendants filed a motion to dismiss arguing, inter
alia, that all IAs were subject to the arbitration agreement they entered into with the
defendants.16 The Court granted the motion, but the Fifth Circuit reversed, finding the agreement
to arbitrate illusory and thus void. See Torres v. SGE Management, 397 F. App’x 63, 66 (5th Cir.
2010). After remand and as the litigation proceeded, Ignite modified its arbitration clause in an
attempt to cure the deficiencies identified by the Fifth Circuit. On March 3, 2011, it amended its
15
The Court is unpersuaded by the defendants’ contention that calculating damages would require individualized
mini-trials, precluding certification. Here, damages are capable of computation by objective standards. Steering
Committee v. Exxon Mobil Corp., 461 F.3d 598, 602 (5th Cir. 2006) (“[C]alculating damages on an individual basis
will not…preclude class certification…where individual damages [can] be determined by reference to a
mathematical or formulaic calculation”) (citation omitted). Furthermore, the pertinent records are in the defendants’
possession. Although the damage calculations only provide a snapshot in time, that photograph can be taken on the
eve of trial so as to provide the most up-to-date picture of who has lost money and the exact amount of the loss.
16
The arbitration agreement is contained in the Policies and Procedures that all IAs signed upon becoming IAs.
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Policies and Procedures to include the modified arbitration agreement, which became effective
April 3, 2011.
The defendants then submitted a motion to amend their answer to add an affirmative
defense and the motion was granted. The new defense is that all IAs who joined Ignite on or after
the effective date of the new arbitration agreement are subject to arbitration and cannot be a
member of this class. Having reviewed the Fifth Circuit’s opinion in Torres and the amended
arbitration agreement, the Court finds that the deficiencies have been cured. Accordingly, the
class is limited to IAs who joined Ignite beginning January 1, 2005, through April 2, 2011.
ii.
Arbitration Clause as to Eleventh Circuit Betts Decision
In Betts v. SGE Management, the Eleventh Circuit found Ignite’s original arbitration
agreement (the one the Fifth Circuit found illusory and void) to be valid and enforceable. 402 F.
App’x 475 (11th Cir. 2010). Accordingly, it dismissed the case and its putative class of 10,000
IAs, all residents of Georgia, and required them to submit to arbitration if they wished to pursue
their claims. The defendants allege that instead of the Georgia IAs initiating arbitration
proceedings, the plaintiffs in this action expanded the scope of the proposed class to include the
Georgia IAs.
The four elements of res judicata are: “(1) the parties are identical or in privity; (2) the
judgment in the prior action was rendered by a court of competent jurisdiction; (3) the prior
action was concluded by a final judgment on the merits; and (4) the same claim or cause of
action was involved in both actions.” Test Masters Educational Services, Inc. v. Singh, 438 F.3d
559, 571 (5th Cir. 2005) (citing Petro-Hunt, L.L.C. v. United States, 365 F.3d 385, 395 (5th Cir.
2004). Because the Court is satisfied that all the element of res judicata are met here, the Georgia
IAs are bound by the decision in Betts, and cannot be included in the certified class.
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V.
CONCLUSION
For the foregoing reasons, the plaintiffs’ motion for class certification under Rule
23(b)(2) is DENIED and the motion for class certification under Rule 23(b)(3) is GRANTED.
The class will consist of all IAs who joined Ignite on or after January 1, 2005, through April 2,
2011, excluding the IAs subject to the Eleventh Circuit opinion in Betts. The Court appoints,
from the law firms Clearman Prebeg LLP and Sommers Schwartz P.C., Scott Clearman, Andrew
Kochanowski and Matthew Prebeg as class counsel.
IT IS SO ORDERED.
SIGNED on this 13th day of January, 2014.
___________________________________
Kenneth M. Hoyt
United States District Judge
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