MATTHEW F. LEITMAN, District Judge.
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 Plaintiffs to file a First Amended Complaint (the "First Dismissal Order"). (See ECF #54.) On July 10, 2015, Plaintiffs filed a First Amended Complaint.
In the First Amended Complaint, Plaintiffs assert the following claims against the Defendants:
On August 31, 2015, Defendants filed the Motions, seeking to dismiss many of the claims Plaintiffs have asserted in the First Amended Complaint.
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 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).
Section 1962(c) of RICO provides that
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 Defendants
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:
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 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:
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:
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.
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 Defendants named in the Section 1962(c) Claim (O'Toole, Pacetti, Fortner, Jackson, Craig, Wilson, and T. Kirkland).
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:
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.
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 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 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 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:
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.
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.
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:
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.
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.
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 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.
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.
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 Management Fund II, LLC, Freedom Legacy, LLC, Wealth Builder International, Inc., and Residual Marketing, Inc. (hereinafter the "Entity Defendants").
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 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:
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.
In count three of the First Amended Complaint, Plaintiffs allege — as an alternative theory of liability to their claims under RICO — that the ViSalus Defendants
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.
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:
(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) read and relied upon the compensation plan and (2) saw and relied upon specific advertisements. That amendment will cure the current reliance deficiency.
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 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.
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. §78u-4(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 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.
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 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 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.").
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.
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
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. 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),
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 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 14-15, 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.
In count six of the First Amended Complaint, Plaintiffs allege that all Defendants violated Section 903 of the MCPA. (See First Am. Compl. at ¶¶ 235-244.) 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 10b-5(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 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.
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
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).
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 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.
The Court does agree, however, that the unjust enrichment claim fails against the Entity Defendants
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 ¶¶ 259-264.) 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 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 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 1605-1607.) But, as the Court explained in detail above, such an agreement among the Promoter Defendants may be inferred from the detailed factual allegations included in the First Amended Complaint.
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 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.
For the reasons stated above,
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.
