United States District Court, E.D. Michigan, Southern Division
OPINION AND ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTIONS TO DISMISS (ECF ##35-37) AND DIRECTING PLAINTIFFS TO FILE AN AMENDED COMPLAINT
MATTHEW F. LEITMAN, District Judge.
In 2012 or 2013, Plaintiffs Timothy Kerrigan, Lori Mikovich, and Ryan M. Valli (collectively, "Plaintiffs") each paid money to Defendant Visalus, Inc. ("Visalus") for the opportunity to sell Visalus' weight-loss products. Plaintiffs now allege that they lost the money that they paid to Visalus. Plaintiffs claim that Visalus operates a pyramid scheme.
In this action, Plaintiffs assert claims against Visalus and numerous allegedly-related parties (collectively, the "Defendants") for violations of the Racketeer Influenced and Corrupt Organizations ("RICO") Act, 18 U.S.C. § 1961 et seq., and various Michigan state laws. ( See the "Complaint, " ECF #1.) The Defendants have moved to dismiss. ( See the "Motions, " ECF #35-37.) For the reasons explained below, the Motions are GRANTED IN PART and DENIED IN PART. Plaintiffs are directed to file an Amended Complaint as set forth below.
RELEVANT FACTUAL ALLEGATIONS
Visalus is a retailer of powdered weight-loss shakes and products. The company is headquartered in Troy, Michigan. ( See Compl. at ¶¶1, 11, 52.) Visalus maintains a network of "individual promoters" ("IPs") who sell Visalus' weight-loss products and recruit other IPs to do the same. ( See id. at ¶¶67-68.) Visalus pays each IP commissions and/or bonuses for selling the weight-loss products and for recruiting new IPs. ( See id. at ¶¶73-74.) The system through which IPs earn commissions and/or bonuses for sales and recruitment is hereinafter referred to as the "Visalus Program."
B. How the Visalus Program Works
1. Visalus Promotes the Opportunity to Enroll in the Visalus Program
Visalus advertises the chance to enroll as an IP in the Visalus Program as a "business opportunity" with "unlimited earning potential." ( Id. at ¶¶93, 101.) Among other things, Visalus claims that its IPs can earn thousands of dollars per month through the Visalus Program and are eligible for bonuses of up to $1, 000, 000. ( See id. at ¶¶96-102.) Visalus also touts that it has given away more than 600 BMW automobiles to successful IPs. ( See id. at ¶103.) Visalus promotes the Visalus Program through social media, Internet advertisements, and promotional videos. ( See id. at ¶¶94, 98-101, 113-14.)
Visalus also relies on its network of IPs to advertise the Visalus Program. ( See id. at ¶125.) Visalus encourages IPs to host "challenge parties" for friends and family to encourage them to enroll as IPs. ( See id. ) In addition, Visalus urges IPs to promote the benefits of becoming an IP in the Visalus Program whenever they sell Visalus products to a customer. ( See id. )
2. IPs Enroll in the Visalus Program By Paying Money to Visalus
A new IP must pay an enrollment fee to Visalus in order to join the Visalus Program and thereby obtain the right to sell Visalus' products. ( See id. at ¶68.) A new enrollee can become a "basic" IP for $49, or the enrollee can pay $499-$999 for "distribution kits" that include product samples. ( See id. ) In addition, new IPs are automatically subscribed to Visalus' proprietary website for $29 per month. ( See id. at ¶¶68-69.) Upon enrollment, new IPs are also given the option to purchase a recurring auto-shipment of Visalus shakes for $49-$250 per month. ( See id. at ¶¶68-69.)
3. Visalus Compensates its IPs Through Sales Commissions and Recruitment Bonuses
Visalus compensates IPs enrolled in the Visalus Program in three ways: (1) commissions for selling Visalus products, (2) bonuses for recruiting other people who enroll as IPs, and (3) commissions and/or bonuses for product sales and recruitment by the new recruits whom the IP enrolls into the Visalus Program. ( See id. at ¶¶73-74, 78.)
First, "active" IPs receive commissions from Visalus for their monthly sales of Visalus weight-loss products. ( See id. at ¶73.) In order to remain "active" - and thus, eligible to receive commissions - an IP must generate sales of $125 per month. ( See id. ) Visalus pays commissions on all sales by an active IP in excess of $200 per month. ( See id. ) An IP earns a 10-percent commission on monthly sales between $201 and $500; 15-percent on monthly sales between $501 and $1, 000; and 20-percent on monthly sales between $1, 000 and $2, 500. ( See id. ) Thus, for example, an active IP would receive $30 in commissions for generating $500 in monthly sales; $105 in commissions for $1, 000 in monthly sales; and $405 in commissions for $2, 500 in monthly sales. ( See id. )
Second, Visalus pays IPs bonuses related to the recruitment of new IPs. ( See id. at ¶74.) For instance, Visalus pays a "Fast Start Bonus" ranging from $50 to $180 whenever an IP enrolls a new recruit who purchases a distribution kit. ( See id. at ¶76.) In addition, Visalus offers a "First Order Bonus" equal to 20 percent of the initial sale that an IP makes to a new enrollee. ( See id. at ¶75.) Visalus also earmarks two percent of its revenue to the "Rising Star Weekly Enrollers Pool, " which is paid out on a weekly basis to IPs who qualify by, among other things, recruiting three new IPs into the Visalus Program. ( See id. at ¶80.) An IP who qualifies for the "Rising Star Weekly Enrollers Pool" is guaranteed to receive at least $75 per week. ( See id. )
Finally, Visalus rewards an IP for sales in his or her "downline" - i.e., sales by recruits whom the IP directly or indirectly enrolls into the Visalus Program. ( See id. at ¶78.) Visalus pays each IP a "Team Commission" equal to five percent of the sales revenue generated by every recruit that the IP directly enrolls in the Visalus Program (the "first-level downline"). ( See id. ) Visalus also pays each IP a five percent "Team Commission" on sales by new IPs recruited by his or her first-level downline (the "second-level downline"). ( See id. ) IPs can earn additional bonuses for sales farther down his or her downline. ( See id. ) For instance, Visalus states that "[i]f you personally sponsored 3 [a]ctive [IPs] who each have 3 customers on a $49 [auto-shipment] every month, and duplicated that effort through 8 levels of referral, you would earn $72, 324 per month just from your Team Commissions!" ( Id. at ¶79 (emphasis in original).)
4. The Market for the Visalus Program is Saturated, and Most IPs Lost the Money that They Paid to Visalus
As a result of the emphasis that Visalus places on recruitment, Visalus has "attracted well over 100, 000" IPs into the Visalus Program. ( Id. at ¶6.) However, the market for the Visalus Program is now "saturated" and the number of IPs has dropped precipitously. ( Id. at ¶134.) "All or virtually all of the IPs who were recruited between 2010 and 2013... lost their money paid to Visalus for the business opportunity.'" ( Id. at ¶136.) Meanwhile, high-level IPs and Visalus insiders have profited handsomely through generous employment contracts and/or by selling their interests in the company. ( See id. at ¶¶22-31, 136.)
C. The Parties in this Action
1. The Plaintiffs
In 2012 or 2013, Plaintiffs each paid Visalus at least $499 in order to enroll as IPs in the Visalus Program. ( See id. at ¶¶8-10.) Plaintiffs allege that they lost the money that they paid to Visalus. ( See id. at ¶136.) Each Plaintiff is a resident of Michigan. ( See id. at ¶¶8-10.)
2. The Defendants
Plaintiffs bring this action against 31 different defendants (collectively, the "Defendants"). The Defendants and their alleged connections to the Visalus Program are as follows:
a. Visalus and its Corporate Shareholders
Plaintiffs have named Visalus and three companies that directly or indirectly own shares in Visalus as defendants. ( See id. at ¶¶11-14.) Defendant Visalus Holdings, LLC ("Visalus Holdings") directly owns or owned shares of Visalus. ( See id. at ¶12.) Defendants Ropart Asset Management Fund, LLC ("Ropart Asset") and Ropart Asset Management Fund II, LLC ("Ropart Asset II") (collectively, the "Ropart Entities") are Connecticut-based private equity funds that own or owned shares in Visalus and/or Visalus Holdings. ( See id. at ¶¶13-14.)
b. The Individual Insider Defendants
Plaintiffs also name as defendants five individuals who own an interest in and/or hold an executive role with Visalus and/or Visalus Holdings (collectively, the "Individual Insider Defendants"):
Defendant Robert Goergen, Sr. ("Goergen Sr.") is a partial owner of the Ropart Entities. ( See id. at ¶15.) Goergen Sr. serves on the executive board of Visalus and has appeared in Visalus-sponsored videos. ( See id. )
Defendant Todd Goergen ("Goergen") is the Chief Operating Officer of Visalus. ( See id. at ¶16.) In addition, Goergen is or was employed by the Ropart Entities. ( See id. )
Defendant Ryan Blair ("Blair") is the Chief Executive Officer and a shareholder of Visalus. ( See id. at ¶17.) Blair identifies himself as one of the founders of Visalus. ( See id. at ¶19.)
Defendant Nick Sarnicola ("Sarnicola") is a "Global Ambassador" for Visalus. ( See id. at ¶18.) Sarnicola describes himself as one of the founders of Visalus, and he controls almost 75 percent of the company's "downline." ( See id. ) Sarnicola is also a shareholder of Visalus. ( See id. )
Defendant Blake Mallen ("Mallen") also identifies himself as one of the founders of Visalus. ( See id. at ¶19.) Mallen has a performance-based contract with the company. ( See id. )
c. The IP Defendants
Plaintiffs also name as defendants 15 individuals who are paid to promote the Visalus Program (collectively, the "IP Defendants"). ( See id. at ¶¶22-31.) Prior to becoming affiliated with Visalus, many of the IP Defendants were successful promoters for other companies that, like Visalus, are "multi-level marketing companies" that rely on promoters to both sell products and recruit other promoters. ( See id. at ¶¶22-23, 25-26, 28-31.) Visalus has given certain IP Defendants special incentive payments and has preferentially moved them "upline" of other IPs enrolled in the Visalus Program. ( See id. at ¶¶22-23, 28-31.) Many of the IP Defendants operate their own websites promoting Visalus. ( See id. at ¶¶22, 25-27, 30-31.) Some of the IP Defendants are featured in Visalus promotional materials touting their financial success by, among other things, holding large, cardboard checks in amounts ranging from $250, 000 to $1, 000, 000. ( See id. at ¶¶26, 29-30.)
d. The Corporate Promoter Defendants
Plaintiffs name as defendants five companies that are "significant distributors for Visalus" (collectively, the "Corporate Promoter Defendants"). ( Id. at ¶¶34-38.) Four of the Corporate Promoter Defendants - Mojos Legacy, LLC; JakeTrz, Inc.; Residual Marketing, Inc.; and Freedom Legacy, LLC - are owned by one or more of the IP Defendants (the "IP Corporate Promoter Defendants"). ( See id. at ¶¶34-35, 37-38.) The Corporate Promoter Defendants are the "vehicle[s] through which [certain] proceeds from the Visalus [Program] have been funneled." ( Id. )
The final Corporate Promoter Defendant, Wealth Builder International LLC, "was ordered to desist from selling unregistered business opportunities by the State of Washington and may no longer be in operation." ( Id. at ¶36.) The ownership of Wealth Builder International LLC is unknown. ( See id. )
e. The Vendor Defendants
Finally, Plaintiffs name as defendants two companies that provide technology services to Visalus (the "Vendor Defendants"). Defendant FragMob, LLC ("FragMob") was paid by Visalus to develop a mobile phone application and credit-card swipe devices that Visalus used in its business operations. ( See id. at ¶41.) Defendant iCentris "performs software and database services" for Visalus. ( Id. at ¶42.) Specifically, iCentris "develop[s] custom database software for tracking... upline' and downline' sales and calculate[s] commissions and bonuses." ( Id. at ¶42.) Blair, Sarnicola, and Mallen own interests in FragMob and iCentris. ( See id. at ¶¶41-42.) In addition, Georgen sits on FragMob's board of directors. ( See id. at ¶41.)
PROCEDURAL HISTORY AND PLAINTIFFS' CLAIMS IN THIS ACTION
Plaintiffs filed their nine-count Complaint on July 9, 2014. ( See Compl.) Plaintiffs bring their claims on their own behalf and on behalf of a purported class of all IPs in the Visalus Program who suffered a financial loss. ( See id. at ¶138.)
Counts I-III of Plaintiffs' Complaint allege federal RICO violations. Count I alleges that Defendants formed an enterprise in fact, operated an alleged pyramid scheme, and participated in the enterprise through a pattern of racketeering activity in violation of 18 U.S.C. § 1962(c). ( See id. at ¶¶184-85.) Specifically, Plaintiffs allege that Defendants engaged in wire fraud and/or mail fraud and obtained property through "inherently wrongful means" in violation of the Hobbs Act, 18 U.S.C. § 1951(b)(2). ( See id. at ¶¶168-73.) Count II alleges that Defendants Blair, Sarnicola, and Mallen received income derived from the pattern of racketeering activity and reinvested that income into the RICO enterprise in violation of 18 U.S.C. § 1962(a). ( See id. at ¶¶186-88.) Count III alleges that (1) the Defendants conspired to violate § 1962(c) and (2) Blair, Sarnicola, and Mallen conspired to violate § 1962(a), each in violation of 18 U.S.C. § 1962(d). ( See id. at ¶¶189-96.)
Count IV alleges several violations of the Michigan Consumer Protection Act ("MCPA"), M.C.L. § 445.901 et seq. Plaintiffs contend that Defendants violated M.C.L. § 445.903 by "us[ing] deception, false pretense, misrepresentation, and omit[ing] key facts to induce [P]laintiffs... to enter into an agreement with Visalus and suffer a financial loss thereby." ( See id. at ¶202.) Plaintiffs also assert that Defendants violated M.C.L. § 445.903b by offering unregistered business opportunities to potential IPs for more than $500. ( See id. at ¶203.) Plaintiffs further claim that Defendants violated M.C.L. § 445.911 by engaging in conduct declared by a federal circuit court of appeals or the United States Supreme Court to constitute an unfair or deceptive trade practice under 15 U.S.C. § 45(a)(1). ( See id. at ¶205.)
Count V alleges that certain Defendants were unjustly enriched. Specifically, Plaintiffs contend that Visalus, the Ropart Entities, Georgen Sr., Goergen, Blair, Sarnicola, Mallen, the IP Defendants, and the IP Corporate Promoter Defendants have each received substantial payments from Visalus or by selling their interests in Visalus. ( See id. at ¶¶211-213.) Plaintiffs contend that "[t]he revenue that resulted in these payments came from the Plaintiffs and... [i]t would be unjust to permit these [D]efendants to retain these ill-gotten gains." ( Id. at ¶215.)
Count VI alleges statutory and common law conversion. Plaintiffs contend that the Defendants violated M.C.L. § 600.2919a and committed common law conversion by "wrongfully exert[ing] dominion over [P]laintiffs' funds" - i.e., the funds that Defendants allegedly induced Plaintiffs to pay in order to enroll in the Visalus Program. ( Id. at ¶219.)
Count VII alleges that Defendants engaged in a civil conspiracy to "obtain a profit by way of a pyramid scheme." ( Id. at ¶225.)
Count VIII alleges violations of Michigan's Franchise Investment Law ("MFIL"), M.C.L. § 445.1501 et seq. Plaintiffs contend that Defendants' promotion of the Visalus Program constituted the offering of a franchise under the MFIL, and that Defendants' conduct violated the MFIL. ( See id. at ¶233.)
In Count IX, Plaintiffs seek the imposition of a constructive trust and an accounting "to identify the full amount" of Plaintiffs' losses. ( Id. at ¶241.)
Defendants have now moved to dismiss Plaintiffs' Complaint in its entirety pursuant to Fed.R.Civ.P. 8(a), 9(b), and 12(b)(6). ( See the Motions.) Defendants move to dismiss on several grounds:
The Defendants argue that Plaintiffs have not adequately pleaded facts establishing that the Visalus Program was a pyramid scheme ( see Visalus Defendants' Mot. at 5, Pg. ID 321; Additional Defendants' Mot. at 4, Pg. ID 289; iCentris' Mot. at 6, Pg. ID 253);
The Defendants contend that the Private Securities Litigation Reform Act ("PSLRA"), as codified in 18 U.S.C. § 1964(c), bars Plaintiffs' RICO claims because the underlying alleged conduct would be actionable as a claim for securities fraud ( see Visalus Defendants' Mot. at 16, Pg. ID 332; Additional Defendants' Mot. at 4, Pg. ID 289; iCentris' Mot. at 6, Pg. ID 253);
The Defendants argue, in the alternative, that Plaintiffs' RICO claims fail as a matter of law because Plaintiffs have not sufficiently alleged every essential element of a RICO claim ( see Visalus Defendants' Mot. at 20-25, Pg. ID 336-41; Additional Defendants' Mot. at 5-16, Pg. ID 290-301; iCentris' Mot. at 7-13, Pg. ID 254-60);
The Defendants contend that each of Plaintiffs' state law claims fails as a matter of law ( see Visalus Defendants' Mot. at 25-34, Pg. ID 341-50; Additional Defendants' Mot. at 16, Pg. ID 301; iCentris' Mot. at 14-16, Pg. ID 261-63); and
iCentris argues that Plaintiffs have not alleged any facts connecting iCentris to the alleged pyramid scheme and that all of Plaintiffs' claims as to iCentris therefore fail as a matter of law ( see iCentris Mot.).
The Court heard oral argument on the Motions on April 20, 2015. ( See Transcript, ECF #53.) The Court thereafter permitted the parties to file supplemental briefs on the issue of proximate causation as to the alleged RICO violations. The parties filed their supplemental briefs on April 30, 2015. ( See ECF ##49-52.)
GOVERNING LEGAL STANDARDS
Defendants seek relief under Federal Rules of Civil Procedure 8(a), 9(b), and 12(b)(6). Rule 8(a) requires a plaintiff to give "a short and plain statement of the claim showing the pleader is entitled to relief." Fed.R.Civ.P. 8(a)(2). Rule 9(b) provides that when pleading fraud or mistake, a plaintiff must "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).
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.
I. PLAINTIFFS' PYRAMID SCHEME ALLEGATIONS
Defendants first argue that Plaintiffs have not adequately alleged that the Visalus Program is a pyramid scheme. ( See Visalus Defendants' Mot. at 5, Pg. ID 321.) Defendants contend that this shortcoming is fatal to Plaintiffs' Complaint because each of their nine claims is premised on the allegation that the Visalus Program is in fact a pyramid scheme. ( See id. ) Defendants candidly acknowledge that Plaintiffs' factual allegations would allow the Court to infer that the Visalus Program is a possible pyramid scheme, but they argue that the allegations "stop short of the line between possibility and plausibility. " ( Id. at 6, Pg. ID 322 (quoting Iqbal, 556 U.S. at 678) (emphasis added).) The Court believes that the Plaintiffs' allegations do cross that line and do plausibly allege that the Visalus Program is a pyramid scheme.
The parties agree that the applicable definition of a pyramid scheme is derived from In re Koscot Interplanetary, Inc., 86 F.T.C. 1106 (1975). The In re Koscot definition provides that a pyramid scheme is
characterized by the payment by participants of money to the company in return for which they receive (1) the right to sell a product and (2) the right to receive in return for recruiting other participants into the program rewards which are unrelated to sale of the product to ultimate users.
Id. at 1181. The Sixth Circuit has adopted this definition of a pyramid scheme. See United States v. Gold Unlimited, Inc., ...