Court: District Court, E.D. Michigan; June 12, 2015; Federal District Court
The court has issued an opinion and order partially granting and partially denying defendants’ motions to dismiss in a case involving plaintiffs Timothy Kerrigan, Lori Mikovich, and Ryan M. Valli, who allege they lost money invested in ViSalus, Inc. Plaintiffs claim ViSalus operates a pyramid scheme, asserting violations of the Racketeer Influenced and Corrupt Organizations Act (RICO) and various Michigan state laws. The court's ruling requires the plaintiffs to file an amended complaint.
ViSalus, headquartered in Troy, Michigan, sells powdered weight-loss products through a network of individual promoters (IPs) who earn commissions and bonuses for sales and recruiting new IPs. The company advertises this opportunity as having "unlimited earning potential," claiming that IPs can earn thousands of dollars monthly and have received significant bonuses, including BMW cars.
To enroll in the ViSalus Program, prospective IPs must pay an enrollment fee, which ranges from $49 for basic membership to $499-$999 for distribution kits that include product samples, in addition to a $29 monthly website subscription. IPs earn compensation through sales commissions, recruitment bonuses, and commissions from sales made by recruits they enroll. To maintain active status and eligibility for commissions, an IP must generate at least $125 in monthly sales, with commissions applying to sales exceeding $200.
An Independent Promoter (IP) in the ViSalus Program earns commissions based on monthly sales: 10% for sales between $201 and $500, 15% for sales between $501 and $1,000, and 20% for sales between $1,000 and $2,500. For example, an IP generating $500 in sales earns $30, while $1,000 and $2,500 yield $105 and $405 respectively. Additionally, IPs receive bonuses for recruiting new members, including a "Fast Start Bonus" of $50 to $180 for enrolling a new recruit who purchases a distribution kit, and a "First Order Bonus" of 20% on the first sale made to a new enrollee. ViSalus allocates 2% of its revenue to a "Rising Star Weekly Enrollers Pool," guaranteeing at least $75 weekly to qualifying IPs who recruit three new members.
IPs also earn a "Team Commission" of 5% on sales generated by recruits they directly enroll (first-level downline) and an additional 5% on sales from recruits of their first-level downline (second-level downline). IPs may earn further bonuses for sales down additional levels, with potential earnings highlighted as $72,324 monthly from Team Commissions by effectively recruiting.
The ViSalus market is described as "saturated," with a significant drop in the number of IPs after attracting over 100,000 members. Most IPs recruited between 2010 and 2013 reportedly lost their initial investment of at least $499, while higher-level IPs and insiders profited significantly from lucrative contracts and selling interests in the company.
The plaintiffs in this action are individuals from Michigan who enrolled as IPs in 2012 or 2013, alleging financial losses from their investment in the ViSalus Program. They are suing 31 defendants, including ViSalus and its corporate shareholders, such as ViSalus Holdings, Ropart Asset Management Fund, LLC, and Ropart Asset Management Fund II, LLC, which are private equity funds connected to ViSalus.
Five individuals, referred to as the Individual Insider Defendants, are named in the lawsuit for their roles and interests in ViSalus. Robert Goergen, Sr. is a partial owner of the Ropart Entities and serves on ViSalus's executive board. Todd Goergen is the Chief Operating Officer, while Ryan Blair is the Chief Executive Officer and a founder. Nick Sarnicola, also a founder and "Global Ambassador," controls nearly 75% of the company’s "down-line" and is a shareholder. Blake Mallen, another founder, has a performance-based contract with ViSalus.
Additionally, 15 individuals known as the IP Defendants are included for promoting the ViSalus Program. Many have backgrounds in multi-level marketing and have received special incentives and preferential treatment within the ViSalus structure. They also operate personal websites promoting ViSalus and appear in promotional materials showcasing their financial achievements.
The lawsuit names five companies, the Corporate Promoter Defendants, which are significant distributors for ViSalus. Four of these companies are owned by the IP Defendants and facilitate the funneling of proceeds from the ViSalus Program. One company, Wealth Builder International LLC, has been ordered to cease selling unregistered business opportunities, and its ownership remains unknown.
Lastly, two technology service providers, the Vendor Defendants, are included: FragMob, LLC, which developed a mobile application and credit-card devices for ViSalus, and iCentris, which creates custom database software for tracking sales and calculating commissions. Blair, Sarnicola, and Mallen have ownership interests in FragMob and iCentris, and Goergen serves on FragMob's board.
Plaintiffs initiated a nine-count Complaint on July 9, 2014, representing themselves and a class of individuals in the ViSalus Program who incurred financial losses. Key allegations include:
- **Counts I and III**: Federal RICO violations. Count I asserts Defendants established an enterprise operating as a pyramid scheme and engaged in racketeering through wire and mail fraud, violating 18 U.S.C. § 1962(c) and the Hobbs Act. Count II charges Defendants Blair, Sarnicola, and Mallen with receiving and reinvesting income from this racketeering activity in violation of 18 U.S.C. § 1962(a). Count III alleges conspiracy violations under 18 U.S.C. § 1962(d).
- **Count IV**: Violations of the Michigan Consumer Protection Act (MCPA). Plaintiffs claim Defendants used deception and misrepresentation to induce financial loss and offered unregistered business opportunities exceeding $500, violating M.C.L. 445.903 and M.C.L. 445.903b, respectively. They also allege unfair or deceptive trade practices under M.C.L. 445.911.
- **Count V**: Unjust enrichment claims against Defendants, asserting that they received payments derived from Plaintiffs' revenue and should not retain these gains.
- **Count VI**: Statutory and common law conversion, alleging Defendants wrongfully asserted control over Plaintiffs’ funds used for enrollment in the ViSalus Program.
- **Count VII**: Civil conspiracy to profit through a pyramid scheme.
- **Count VIII**: Violations of Michigan’s Franchise Investment Law (MFIL), claiming that Defendants' promotion of the ViSalus Program constituted a franchise offering that violated the MFIL.
- **Count IX**: Request for a constructive trust and accounting to determine the total amount of Plaintiffs’ losses.
Overall, Plaintiffs seek legal redress for various alleged illegal activities conducted by Defendants in relation to the ViSalus Program.
Defendants have filed a motion to dismiss Plaintiffs’ Complaint in its entirety, citing violations of Federal Rules of Civil Procedure 8(a), 9(b), and 12(b)(6). They assert that Plaintiffs failed to adequately plead facts to support claims that the ViSalus Program constituted a pyramid scheme. Furthermore, Defendants argue that the Private Securities Litigation Reform Act (PSLRA) bars Plaintiffs’ RICO claims because the alleged behaviors could be classified as securities fraud. Alternatively, they contend that Plaintiffs have not sufficiently established all necessary elements of a RICO claim. Additionally, Defendants claim that all state law claims also fail as a matter of law, with iCentris specifically arguing that Plaintiffs failed to connect it to the alleged pyramid scheme, rendering all claims against it invalid.
The Court held oral arguments on April 20, 2015, and allowed for supplemental briefs regarding proximate causation concerning the RICO violations, which were submitted by April 30, 2015. The legal standards governing the motion to dismiss include Rule 8(a), which mandates a clear statement of the claim, Rule 9(b), which requires particularity in fraud allegations, and Rule 12(b)(6), which allows dismissal for failure to state a claim. A complaint must present sufficient factual matter to support a plausible claim for relief, with the court accepting all factual allegations as true while disregarding mere legal conclusions or unsupported assertions. A plaintiff must provide more than vague labels or recitations of elements to survive dismissal.
Defendants argue that Plaintiffs have not sufficiently alleged that the ViSalus Program constitutes a pyramid scheme, claiming this deficiency undermines all nine of Plaintiffs’ claims. While acknowledging that the allegations suggest a possible pyramid scheme, Defendants assert they do not reach the necessary threshold of plausibility. However, the Court finds that Plaintiffs' allegations do meet this threshold. The applicable definition of a pyramid scheme, derived from In re Koscot Interplanetary, Inc., requires participants to pay money to the company to gain the right to sell products and receive rewards for recruiting others, with the critical factor being that rewards must be primarily for recruitment, not sales.
Plaintiffs allege that new independent promoters (IPs) must pay enrollment fees ranging from $49 to $999 to participate in the program. Defendants contest this by stating that the minimum fee is too low to constitute a significant investment, but they provide no legal backing for this claim. Plaintiffs assert they invested at least $499 each, satisfying the "payment of money" element of the Koscot definition.
Moreover, Plaintiffs contend that the compensation structure of the ViSalus Program incentivizes recruitment over sales, noting that while average monthly sales yield minimal commissions, recruitment activities provide substantial bonuses. For example, IPs can earn significant rewards through bonuses for enrolling new recruits, suggesting that the program's focus is on recruitment rather than legitimate product sales. Thus, Plaintiffs argue that the financial incentives strongly encourage IPs to prioritize recruitment activities.
The excerpt emphasizes that the ViSalus Program encourages recruitment over retail sales, which raises concerns about its business model potentially resembling a pyramid scheme. Plaintiffs highlight promotional materials and training that prioritize recruitment, including advertisements that suggest financial rewards for referrals and events focused on quickly recruiting new participants. Allegations against ViSalus mirror those in the Day v. Fortune Hi-Tech Marketing case, where plaintiffs claimed Fortune operated a pyramid scheme under the federal RICO Act, emphasizing recruitment as the primary source of income rather than product sales. The Day court found sufficient allegations to support the existence of a plausible pyramid scheme, noting that the focus on recruitment was evident through statements from officials, training methods, and compensation structures. In the current case, defendants have not adequately differentiated their situation from the allegations made in Day, despite arguing that the earlier case did not directly challenge the plausibility of pyramid scheme claims.
Motions in the case of Day argued that the plaintiffs did not sufficiently allege a scheme to defraud. In response, the plaintiffs claimed that the complaint identified Fortune as a pyramid scheme, which constitutes a per se scheme to defraud. The Day court recognized that the allegations regarding Fortune, similar to those about the ViSalus Program, plausibly described a pyramid scheme, leading to the conclusion that the plaintiffs had alleged enough facts to suggest that the ViSalus Program is a pyramid scheme. Consequently, the court planned to examine the plaintiffs' RICO claims and state law claims.
Defendants contended that the plaintiffs’ RICO claims were barred by the PSLRA, which prohibits using conduct actionable as securities fraud to support a RICO violation. The PSLRA aims to prevent the use of securities fraud as a predicate act for RICO claims. The defendants argued that the opportunity to enroll in the ViSalus Program constituted a security, meaning their allegedly fraudulent marketing scheme would fall under securities fraud, thus invoking the PSLRA's restrictions. However, the court determined that the ViSalus Business Opportunity is not necessarily a security as a matter of law at this stage, and while the defendants might prove otherwise later, the court could not conclude that the PSLRA barred the plaintiffs' RICO claims.
Regarding the definition of a security under federal law, which includes investment contracts, the court referenced the Howey test for determining whether something qualifies as an investment contract, which requires an investment of money, a common enterprise, and profits derived solely from the efforts of others. The ViSalus Business Opportunity meets the first two criteria of the Howey test, as the plaintiffs acknowledged the involvement of an investment of money, leaving the third criterion still to be determined.
The ViSalus Program is classified as a common enterprise based on two legal approaches: vertical and horizontal commonality. Vertical commonality ties the fortunes of investors to the promoter's success, emphasizing the dependency of investor outcomes on the efforts of those managing the investment, as established in cases like SEC v. Glenn W. Turner Enterprises, Inc. and SEC v. SG Ltd. Conversely, horizontal commonality involves a pooling of investor assets, where profits and risks are shared proportionately among all investors. This method requires a more stringent analysis and has been applied in decisions such as SEC v. Infinity Group Co.
The Sixth Circuit's stance on these approaches has evolved. Initially, it seemed to favor the less stringent vertical commonality approach but later adopted the more rigorous horizontal commonality approach without explicitly rejecting its earlier position. The circuit has consistently maintained that establishing a common enterprise necessitates demonstrating both vertical ties between seller and buyer and a horizontal relationship amongst investors, indicating a pooling of contributions that benefits all participants. This was reiterated in Newmyer v. Philatelic Leasing, Inc. and other cases, establishing that mere vertical relationships are insufficient for defining investment contracts.
The Sixth Circuit, in Davis v. Avco Fin. Svcs. Inc., adopted the vertical commonality approach to assess whether a pyramid scheme qualifies as an investment contract, aligning with earlier decisions from the Ninth and Fifth Circuits. This approach became particularly relevant in the context of the alleged pyramid scheme in Davis, where the court determined that the business opportunity in question constituted an investment contract. Vertical commonality is established when investors and scheme operators share profits generated from recruiting new members, as highlighted by the Seventh Circuit's interpretation. In the ViSalus Program, when an independent participant (IP) recruits a new member, both the participant and ViSalus profit, demonstrating vertical commonality.
However, the court cannot yet conclude that the ViSalus Program meets the "profits from others" element of the Howey investment contract test. This component does not require profits to come solely from others' efforts; rather, it allows for a broader interpretation that includes situations where the efforts of others are significantly influential in the success of the investment. The Sixth Circuit has recognized this broader interpretation in prior cases, asserting that significant managerial efforts by non-investors can satisfy this element of the test.
Plaintiffs allege that the profits of individual promoters (IPs) in the ViSalus Program primarily depend on the efforts of ViSalus and its employees rather than on the IPs' own efforts. They point to ViSalus's provision of essential marketing materials, national recruiting events, and specific training resources, suggesting that these significantly influence an IP's ability to profit. The allegations indicate that the success of an IP also relies on the recruitment efforts of their downline. A precedent case, SEC v. Int’l Loan Network, Inc., supports that such reliance can satisfy the "profits from others" element of the investment contract test. However, ViSalus claims that individual efforts are crucial for success, asserting that IPs are responsible for their own marketing and recruitment activities. They emphasize that IPs operate as independent contractors and may not follow ViSalus's marketing strategies or policies. Plaintiffs also assert that bonuses for new recruits depend on the IP's recruiting success. Given these conflicting claims, the Court cannot definitively conclude that the "profits from others" element is satisfied under the Howey test, nor can it determine if the ViSalus Business Opportunity constitutes a security at this stage. Consequently, Defendants' argument that the PSLRA bars Plaintiffs' RICO claims cannot prevail. The Court also evaluates the sufficiency of Plaintiffs’ three RICO claims, which are based on the assertion that Defendants formed an “association in fact” to operate the ViSalus Program.
Plaintiffs filed three RICO claims against Defendants alleging violations of 18 U.S.C. § 1962. The first claim asserts that Defendants engaged in racketeering activities, including mail fraud, wire fraud, and obtaining property through wrongful means under the Hobbs Act. The second claim alleges that Defendants Blair, Sarnicola, and Mallen received income from these racketeering activities and reinvested it into the enterprise. The third claim contends that all Defendants conspired to violate § 1962(c) and that Blair, Sarnicola, and Mallen conspired to violate § 1962(a).
However, the court faces challenges in evaluating the RICO claims due to plaintiffs' "group pleading," where they collectively accuse all 31 Defendants without specifying individual actions. This lack of specificity in allegations, such as the broad assertion that all Defendants promoted the ViSalus Program and engaged in fraud, makes it difficult to assess each Defendant's liability. Plaintiffs have made generalized claims regarding the use of mail and internet for fraudulent activities, but such "shotgun" allegations do not suffice to establish individual RICO liability. The court references a precedent case to underline the inadequacy of these collective allegations.
In a RICO case involving mail fraud allegations, plaintiffs cannot broadly assert claims against all defendants without specificity. The court highlights that the plaintiffs' vague allegations are confusing, as it is clear from their own narrative that not all defendants participated in the alleged fraudulent acts. For example, some defendants are merely described as providing software and database services, while others are identified as shareholders with limited involvement. Yet, plaintiffs have made sweeping RICO allegations against all defendants, suggesting they collectively engaged in distributing promotional materials and utilizing the internet for publicizing the ViSalus Program, despite the implausibility of such claims for certain defendants.
The court emphasizes the difficulty in analyzing RICO claims due to this group pleading, indicating that each defendant deserves an individualized assessment of their liability. Acknowledging the potential for a viable RICO claim against some defendants, the court instructs the plaintiffs to amend their claims to allow for a clearer evaluation of each defendant's actions.
To establish a claim under Section 1962(c), plaintiffs must demonstrate: (1) conduct, (2) of an enterprise, (3) through a pattern, and (4) of racketeering activity. A "pattern of racketeering activity" requires at least two predicate acts occurring within a ten-year period, as outlined in relevant statutes and case law. The court will address specific legal disputes regarding the sufficiency of the plaintiffs' RICO allegations while requiring more precise pleading.
Defendants contend that Plaintiffs' RICO claim is insufficient due to a lack of specific allegations regarding each Defendant's involvement in the alleged RICO Enterprise. They assert that Plaintiffs have not established that each Defendant committed two 'predicate acts,' nor have they demonstrated a causal link between these acts and the alleged injuries. Moreover, the Defendants argue that there is no evidence of any predicate act involving a violation of the Hobbs Act.
To establish a claim under 18 U.S.C. § 1962(c), Plaintiffs must prove that each Defendant participated in the operation or management of the alleged RICO Enterprise's affairs. The Court clarifies that participation is not limited to upper management; lower-level participants can also be liable if they make decisions or knowingly carry out actions that affect the enterprise. However, Plaintiffs have not adequately alleged such participation by each Defendant.
Specifically, the allegations against the Corporate Promoter Defendants are insufficient, primarily asserting that they acted as vehicles for the IP Defendants’ proceeds from the ViSalus Program. These allegations do not indicate that the Corporate Promoter Defendants made decisions or engaged in activities on behalf of the ViSalus Program. Similarly, Plaintiffs have failed to demonstrate that the Vendor Defendants participated in the RICO Enterprise. Legal precedent indicates that mere business relationships or services rendered do not constitute participation in a RICO enterprise, particularly if the individuals are outside the direct chain of command of the enterprise's operations.
Participation in a RICO enterprise cannot be established merely by providing services to an enterprise, even with knowledge of its illicit nature. A plaintiff's vague allegations of a vendor's involvement in a RICO enterprise do not suffice for a claim under 18 U.S.C. § 1962(c). In the complaint, Vendor Defendants FragMob and iCentris are described as contractors for ViSalus, responsible for specific tasks without any claim that they made business decisions or had a financial interest in the enterprise beyond their fees for services rendered. This insufficiently alleges their participation in the RICO enterprise.
Similarly, ViSalus Holdings is not adequately alleged to have participated in the enterprise, as there are no facts indicating it made decisions or knowingly acted on behalf of the enterprise. The Ropart Entities are identified as shareholders of ViSalus, but plaintiffs fail to specify the extent of their ownership or any contractual rights that would grant them control over ViSalus. Allegations of control by the Ropart Entities lack plausibility without additional supporting facts. The plaintiffs' argument is based on the mere assumption that the involvement of certain individuals in both the Ropart Entities and ViSalus implies the exercise of control by the Ropart Entities, which is insufficient for establishing participation in the RICO enterprise.
The Complaint lacks sufficient plausible allegations to support the assumption that each Defendant committed two predicate acts necessary for a RICO claim under 18 U.S.C. § 1962(c). The Defendants assert that Plaintiffs must individually allege two predicate acts for each Defendant, while Plaintiffs argue that demonstrating two predicate acts by the RICO Enterprise as a whole is adequate. However, numerous courts have held that in a multi-defendant § 1962(c) action, each defendant must be alleged to have committed at least two predicate acts. The statute's plain language supports this requirement, as it focuses on individual participation in a pattern of racketeering activity. The distinction between § 1962(c) and § 1962(d) is critical; the former targets individual conduct, whereas the latter addresses collective actions within a conspiracy. Therefore, courts have rejected arguments that treat § 1962(c) as if it were a conspiracy statute. Plaintiffs also suggest an alternative approach to satisfy their predicate act requirements by alleging that each Defendant joined a fraudulent scheme and allowed another participant to further that scheme, but this does not meet the individual act requirement mandated by § 1962(c).
Plaintiffs assert that they have made the necessary allegations against each Defendant regarding participation in racketeering activities, citing specific cases to support their claims. However, two main issues are identified. First, merely allowing someone else to commit predicate acts does not equate to active participation in a racketeering enterprise; the defendants must engage in decision-making or actions related to the racketeering activity. Second, Plaintiffs have failed to sufficiently allege that any Defendant encouraged or knowingly allowed others to commit predicate acts, particularly regarding the Vendor Defendants and others involved in the RICO enterprise.
To successfully establish a claim under 18 U.S.C. § 1962(c), Plaintiffs must demonstrate that each Defendant actually committed two predicate acts, which they have not adequately done due to vague group allegations in their Complaint. In their Amended Complaint, Plaintiffs can only pursue claims against Defendants they specifically allege to have committed these acts.
Moreover, while Defendants argue that Plaintiffs need to identify specific misrepresentations related to the alleged mail and wire fraud, the Court clarifies that such detailed requirements under Federal Rule of Civil Procedure 9(b) only apply when fraud is based on misrepresentations. If fraud is claimed based on a scheme that doesn’t involve specific misleading statements, then a general description of the fraudulent scheme and its connection to the mail or wire communications suffices. In this case, Plaintiffs’ allegations do not rely on misrepresentations but rather on an overarching fraudulent scheme.
Plaintiffs assert that Defendants engaged in a pyramid scheme, constituting a scheme to defraud, which violates mail and wire fraud statutes. Unlike a misrepresentation fraud theory, this allows Plaintiffs to describe the fraudulent scheme and each Defendant's role without needing to specify misrepresentations. However, Plaintiffs have failed to demonstrate a clear causal relationship between each Defendant's alleged predicate acts and the injuries claimed. To establish a claim under 18 U.S.C. § 1962(c), Plaintiffs must show that the predicate act was both a 'but for' and proximate cause of their injuries. Defendants contend that the Complaint lacks this causal connection, while Plaintiffs argue they only need to show they were intended targets of the fraudulent scheme. Plaintiffs reference the Sixth Circuit case Wallace, which stated that demonstrating use of mail in a fraudulent scheme and resulting injuries suffices for causation. However, this interpretation does not alter the requirement for a direct causal link between a defendant's acts and the plaintiffs' injuries, a principle upheld by both the Supreme Court and Sixth Circuit prior to Wallace. Additionally, the Wallace case is distinguishable because the plaintiff there identified specific mailings and wire transfers linked to his injuries, unlike the Plaintiffs in this case.
Plaintiffs have failed to establish a causal link between their alleged injuries and specific predicate acts committed by each Defendant, as required under 18 U.S.C. § 1962(c). They did not demonstrate personal receipt or awareness of communications or promotions from the IP Defendants, nor did they indicate being influenced by others who were. Their claims only suggest they belong to a general class targeted by the Defendants' activities, which is insufficient for the causation element.
To adequately state a claim under § 1962(c), Plaintiffs must present a logical theory linking each Defendant’s actions to their injuries. While reliance on the Defendant's communications can support a proximate cause claim, it is not mandatory for establishing causation. Moreover, Plaintiffs did not sufficiently plead violations of the Hobbs Act, which prohibits obtaining property through wrongful use of threats or fear. They invoked a “fear of economic harm” theory but did not provide adequate factual allegations to support their claims, particularly in demonstrating that Defendants obtained property through wrongful threats or fear. Their allegations regarding a past conflict involving ViSalus and a competitor, along with claims of hiring a private investigator to purloin materials, do not meet the necessary legal standards for a Hobbs Act violation.
Allegations of actions contributing to a pyramid scheme do not sufficiently support a Hobbs Act violation based on "fear of economic harm." Plaintiffs claim that ViSalus and its officers hired an investigator to steal from former distributors and withheld funds, yet they fail to demonstrate that any defendants threatened these distributors or that the distributors feared harm. Additionally, a causal link between the alleged conduct and plaintiffs' losses is absent. Should plaintiffs pursue a Hobbs Act violation in their Amended Complaint, they must clearly articulate how the conduct violates the Act and its connection to their injuries.
For the Section 1962(a) claim, which prohibits the use or investment of income derived from racketeering in an enterprise, plaintiffs assert that the Investor Defendants—Blair, Sarnicola, and Mallen—received income from racketeering and used it to invest in ViSalus, perpetuating the pyramid scheme. However, the Investor Defendants argue that plaintiffs did not adequately plead that these defendants engaged in racketeering activity before 2008, which is necessary to establish that their investments were from such proceeds. The court agrees, stating plaintiffs have failed to demonstrate that they individually engaged in any pattern of racketeering and that the funds invested were derived from such activity. To properly state a 1962(a) claim in their Amended Complaint, plaintiffs must specify when each Investor Defendant received income from racketeering, identify the pattern of racketeering, and detail when investments were made in the Alleged RICO Enterprise.
Under Section 1962(d), which criminalizes conspiracy to violate the other sections, plaintiffs allege that the defendants conspired to violate both 1962(c) and 1962(a). However, they must provide sufficient details to substantiate their 1962(d) claim.
Plaintiffs' Complaint does not sufficiently allege all elements of RICO violations under 18 U.S.C. §§ 1962(c) and 1962(a) due to group pleading issues. To establish a viable RICO conspiracy claim under § 1962(d), Plaintiffs must correct deficiencies in at least one of their RICO claims.
Regarding state law claims, Plaintiffs successfully assert a claim against ViSalus under Section 3b of the Michigan Consumer Protection Act (MCPA), M.C.L. 445.903b, for offering unregistered business opportunities. This section requires sellers of business opportunities to notify the Attorney General if the total payment exceeds $500. Plaintiffs allege payments of at least $499 plus additional monthly fees, thus satisfying this requirement.
However, claims against other Defendants under MCPA § 445.903b fail as this provision only applies to the seller, ViSalus. ViSalus contends that Plaintiffs did not demonstrate damages from the alleged failure to register, but Plaintiffs assert they suffered damages due to MCPA violations, including the registration issue.
In contrast, Plaintiffs' claims under MCPA § 445.903, which prohibits deceptive practices in trade, are dismissed. Defendants argue this section does not apply to franchise transactions, which Plaintiffs themselves acknowledge in their Michigan Franchise Investment Law (MFIL) claim, asserting that the defendants' actions constitute a franchise offering.
Plaintiffs' assertion that Defendants offered a franchise does not bar their claims under M.C.L. 445.903 and the Michigan Franchise Investment Law (MFIL), despite potential inconsistencies in their allegations. Under Federal Rule of Civil Procedure 8(d)(3), parties can state multiple claims regardless of their consistency. However, Defendants argue for dismissal, claiming Plaintiffs did not explicitly state that their allegations under the Michigan Consumer Protection Act (MCPA) and MFIL were pleaded in the alternative. Defendants failed to present binding authority that necessitates such explicitness for dismissal.
While Plaintiffs are allowed to plead their 445.903 claim in the alternative, they have inadequately alleged this claim. To comply with Rule 9(b), Plaintiffs must detail the circumstances of fraud or mistake, including specifying the fraudulent statements, identifying the speaker, and detailing when and where these statements occurred. Plaintiffs have not identified any specific fraudulent statements that led them to enroll in the ViSalus Program and have only made general allegations without the necessary particulars.
Additionally, regarding the MCPA claim under Section 11 (M.C.L. 445.911), Plaintiffs allege Defendants engaged in unfair trade practices. However, they have not cited a specific federal appellate court decision that meets the statutory requirements, a point contested by Defendants. Plaintiffs argue that the MCPA does not mandate citation of a specific federal appellate case in their complaint.
Plaintiffs argue that the Michigan Consumer Protection Act (MCPA) only requires the existence of a case that meets the criteria of § 445.911. However, they have not cited any federal appellate case reported within 30 days prior to the alleged unfair or deceptive acts by Defendants. They reference *Fed. Trade Comm’n v. Equinox Int’l Corp.*, an unreported district court decision, and *BurnLounge*, which was reported in 2014, long after Plaintiffs' enrollment in the ViSalus Program in 2012 or 2013. Consequently, they fail to establish a claim under § 445.911.
In Count V, Plaintiffs allege unjust enrichment against multiple defendants, claiming these parties were unjustly enriched through the Plaintiffs' involvement in the ViSalus Program, arguing that the financial benefits they received from the pyramid scheme rightfully belong to Plaintiffs. To succeed in an unjust enrichment claim, a plaintiff must show that the defendant received a benefit from the plaintiff and that retaining this benefit creates an inequity for the plaintiff. Defendants seek dismissal of this claim, asserting that Plaintiffs have not demonstrated that they conferred any benefit on the defendants, as they are merely seeking the return of payments made by ViSalus to others, which does not support an unjust enrichment claim. They cite *Karaus v. Bank of N.Y. Mellon* to support their position, noting that a third party cannot be held liable for unjust enrichment if they did not directly benefit from a contract between two other parties. In *Karaus*, the court ruled in favor of the bank, as it was uninvolved in the agreement between the plaintiff and the homeowner, highlighting the need for direct benefit to establish unjust enrichment.
Plaintiffs argue that the defendant indirectly benefited from their actions through involvement in a fraudulent scheme, asserting that unjust enrichment claims can succeed even without direct benefit conferred by the plaintiff, as established in the case of Karnus. The court acknowledged the potential for recovery if the defendant engaged in misleading conduct causing the plaintiff's loss. A third party is not considered unjustly enriched merely by benefiting from a contract between two others unless the benefiting party requested the benefit or misled the others involved. Numerous cases support that a defendant can unjustly obtain benefits through an intermediary, particularly when wrongdoing is present. However, the Plaintiffs’ allegations are deemed overly broad and vague, preventing the court from determining if they have adequately stated a claim for unjust enrichment against the specific defendants mentioned. For a valid claim, the plaintiffs must clearly link each defendant's actions and enrichment to their losses, as causation is a critical element of unjust enrichment claims.
In Count VI, Plaintiffs allege statutory and common law conversion against all defendants, except for ViSalus, claiming wrongful dominion over their funds. Common law conversion is defined as any wrongful act exerted over another's personal property, while Michigan's conversion statute addresses both common-law conversion and the knowing receipt of converted property. Michigan law differentiates between conversion claims related to money and those involving other property, with claims for conversion of money being permissible only in limited circumstances.
To establish a claim for conversion of money, a plaintiff must demonstrate that the defendant had a duty to return specific money entrusted to them. In this case, the plaintiffs allege that they paid money to ViSalus, which then distributed funds to the other defendants. However, the plaintiffs' claim against the defendants (other than ViSalus) fails because they do not allege that these defendants received the specific money paid to ViSalus, which undermines their conversion claims. ViSalus argues that the plaintiffs consented to the transactions, but the plaintiffs counter that they provided their funds through a fraudulent scheme, meaning consent does not negate their conversion claims. While ViSalus may have defenses against these claims, it has not demonstrated that the claims fail as a matter of law at this stage.
Regarding the civil conspiracy claim (Count VII), the plaintiffs assert that the defendants engaged in a conspiracy to profit from a pyramid scheme. However, a civil conspiracy claim requires proof of a separate, actionable tort, and since the plaintiffs have not adequately pleaded such a tort, their conspiracy claim cannot stand. The complaint lacks clarity in distinguishing the actions of each defendant and fails to establish a viable tort claim, necessitating potential amendments to their complaint.
In Count VIII, the plaintiffs allege violations of the Michigan Franchise Investment Law (MFIL) against certain defendants, asserting that they have viable claims under specific provisions of the MFIL.
Section 13 of the Michigan Franchise Investment Law (MFIL) prohibits selling a franchise if the franchisor engages in illegal activities. Section 25 forbids publishing false or misleading advertisements related to franchise offers. Section 28 bans participation in pyramid or chain promotions, defining such schemes as requiring a participant to invest in exchange for compensation by recruiting others. The plaintiffs can assert claims for rescission under Sections 13, 25, and 28, but only against ViSalus, as it is the only defendant with whom they allege a contractual relationship. To pursue rescission, plaintiffs must establish the existence of a contract, which they have done only concerning ViSalus.
Additionally, plaintiffs have a claim under Section 5 of the MFIL, which prohibits defrauding in franchise transactions and making untrue statements of material fact. They allege that the defendants engaged in a fraudulent scheme but do not claim reliance on specific statements. The defendants argue that reliance is necessary for a claim under Section 5(a), but this has not been established as a requirement. Case law cited by the defendants pertains to Section 5(b), which involves untrue statements, and does not preclude a claim under Section 5(a) without reliance. Therefore, the court has not found grounds to dismiss the Section 5(a) claim against the defendants.
Plaintiffs' claim under 5(a) against iCentris is dismissed because they failed to plausibly allege that iCentris engaged in fraudulent conduct related to the ViSalus Program. Additionally, Plaintiffs' request for an accounting and constructive trust in Count IX is also dismissed. An accounting is deemed an extraordinary equitable remedy, only available when legal remedies are inadequate, and Plaintiffs did not demonstrate that discovery would not suffice to determine their alleged losses, especially since they acknowledged that iCentris's software could track all transactions. Furthermore, a constructive trust cannot be claimed as it is merely a remedy without an independent cause of action. Consequently, the court grants iCentris' motion to dismiss and partially grants the motions to dismiss from the ViSalus Defendants and Additional Defendants. Plaintiffs are ordered to file an Amended Complaint by July 10, 2015, to address the identified deficiencies.
Plaintiffs must include a completed chart as an Appendix to their Amended Complaint if they plead RICO claims, to assist the Court in understanding the complex allegations against numerous Defendants. The IP Defendants include several individuals and entities tied to ViSalus. The Court has received three motions to dismiss from various groups of Defendants, with the ViSalus Defendants’ Motion representing multiple parties. The Court recognizes a connection between bonuses earned by Independent Promoters (IPs) and the purchase of ViSalus merchandise by recruits. However, it cites a Ninth Circuit ruling indicating that rewards received in such schemes are primarily for recruitment rather than product sales. The ViSalus Defendants suggest that the alleged conduct could be actionable under securities fraud laws, referencing legal precedents that highlight the structure of pyramid schemes and their financial dynamics. The Court acknowledges the relevance of a Prospectus filed with the Securities and Exchange Commission, which has been referenced in the Plaintiffs' Complaint and attached to the ViSalus Defendants' Motion, allowing it to be considered in the context of the motions under Rule 12(b)(6).
The Court's review of a motion to dismiss under Rule 12(b)(6) typically restricts consideration to the pleadings; introducing external documents changes the motion to one for summary judgment. However, documents attached by the defendant that are referenced in the plaintiff's complaint and central to the claims are included as part of the pleadings. In this instance, the plaintiffs reference excerpts from the Prospectus, which are key to their assertion that the ViSalus Program constitutes a pyramid scheme, allowing the Court to consider these excerpts without converting the motion. The defendants may reassert this argument during summary judgment, particularly regarding the application of the Howey investment contract test. The Court also dismisses the plaintiffs' claim that the PSLRA does not inhibit their RICO claim, stating that if the ViSalus Business Opportunity were classified as a security, it would be integral to the alleged scheme, which the plaintiffs assert is vital to the operation of the ViSalus Program.
The Court highlights that the plaintiffs have not provided sufficient details about the Ropart Entities' ownership in ViSalus or whether they are controlling shareholders. The complaint's terminology is unclear, referencing "ViSalus" ambiguously to include both ViSalus, Inc. and its shareholder, ViSalus Holdings, complicating allegations related to violations of the Hobbs Act. The Court assumes, without deciding, that the plaintiffs have adequately alleged the existence of a RICO enterprise but notes that the complaint often fails to connect individual defendants' alleged wrongful actions to the corporate entities. Claims against the Vendor Defendants lack sufficient factual support linking their liability to the alleged misconduct of individual shareholders or employees associated with the ViSalus Program.
Defendants are not liable under 18 U.S.C. § 1962(c) unless each commits at least two predicate acts of racketeering activity, as established in case law including DeFalco v. Bernas and Raineri Construction, LLC v. Taylor. Allegations of predicate acts must be specific to each defendant rather than aggregated across multiple defendants. Although plaintiffs argue that a multi-defendant enterprise does not require each defendant to commit two acts, this claim is countered by the principle that each must still demonstrate individual culpability. The precedent from Jackson v. Segwick Claims Management Services, which suggested otherwise, is vacated and lacks authoritative weight. Additionally, Rule 9(b) requires detailed pleading of fraudulent schemes, which complements the necessity for alleging two predicate acts per defendant. Courts emphasize that issues of proximate causation are more appropriately addressed during the summary judgment phase rather than at the motion to dismiss stage.
The Sixth Circuit has previously found allegations of proximate causation under 18 U.S.C. § 1962(c) deficient at the pleading stage, as seen in cases like Heinrich and Canyon County. If causation allegations against any defendant in the plaintiffs’ Amended Complaint are inadequate, the court will dismiss the § 1962(c) claim for that defendant. The plaintiffs' Hobbs Act allegations also face deficiencies, particularly regarding the definition of the "seller" under Michigan law, which clarifies that the seller is the commercial entity, ViSalus, and not its agents. The Additional Defendants and iCentris support the arguments against the plaintiffs’ state law claims, which also exhibit group pleading deficiencies, such as failing to specify which defendants engaged in alleged deceptive practices under the Michigan Consumer Protection Act (MCPA). Furthermore, the plaintiffs acknowledge that they cannot pursue an unjust enrichment claim against ViSalus due to express contracts governing their transactions. This aligns with case law indicating that unjust enrichment is not actionable between contracting parties. While not directly applicable, precedents suggest that causation is essential for such claims. The plaintiffs concede that rescission is their sole remedy for the alleged violations of specific statutory provisions.
