Around this time last year, we wrote an article about a Fifth Circuit decision that would have made pyramid class action litigation nearly an impossibility. After deciding to rehear the case, the Fifth Circuit recognized the logical fallacy of its prior decision and came to a different (and in my opinion) correct conclusion. The full court decision is here. We’re not surprised at all at the Fifth Circuit’s decision.
If you’ll recall, the Fifth Circuit’s decision in Torres v. S.G.E. Mgmt. LLC (Stream Energy) was to require the plaintiff to prove that every single class member (everyone allegedly defrauded) relied on the misrepresentations that Ignite was a legal multi-level marketing program. The Court, engaging in a bizarre mental exercise, found it entirely reasonable that some class members would have knowingly chosen to invest in Ignite even in lieu of it possibly acting as a pyramid scheme. In so many words, the Court stated that people, motivated to make money, are willing to do stupid things. As a result of the Court’s belief of some class members’ “hypothetical” knowledge of illegality, the class was decertified and the case seemingly at a dead-end.
Plaintiffs filed to have the decision reviewed en banc. An en banc review is when all the judges of a particular court (here, sixteen of the presiding judges of the Fifth Circuit Court of Appeals bench) choose to rehear a case already decided by a three-person panel of judges.
The en banc Court decided to reverse the previous ruling and certify the class on the basis that Plaintiffs reliance or non-reliance on any misrepresentations concerning Ignite’s illegality was inconsequential. The Court relied on legal precedence (i.e., Koscot and Webster v. Omnitrition cases) that found pyramid schemes to be inherently fraudulent. Because such schemes are inherently fraudulent, participants can be harmed regardless of whether they rely upon any misrepresentation of the scheme’s legality or not.
In addition to reversing the decision, the en banc Court invalidated the logic used by the previous Court to support its argument. The en banc Court found it unreasonable for individuals to knowingly join a pyramid scheme, as “pyramid schemes are inherently deceptive and operate only by concealing their fraudulent nature.” The en banc Court acknowledged that “whether a multi-level marketing program is fraudulent or legitimate depends on its internal structure,” and, therefore, determined class action members were unlikely to possess the ability to discern whether Ignite was legal or not. Additionally, the en banc Court emphasized the lack of evidence Defendant failed to present which would have indicated a class member joined in spite of his or her awareness of the scheme’s fraud.
WHAT DOES THIS MEAN?
Simply put, the Fifth Circuit decided to let Plaintiffs play ball. Rather than prevent members from having their day in court, the case can now move forward. This ruling does not mean Ignite is in fact a pyramid scheme, but instead leaves such a determination up to a jury. After hearing evidence presented by both sides, a jury will ultimately decide whether or not Ignite acted as a pyramid scheme and defrauded its participants. And of course, Ignite can always write a sizeable check to settle the case.
Regarding this case’s impact on the industry in general, it’s easier for class action litigation to proceed. Before the Stream case, class action litigation against network marketing companies was already hard. The Stream decision (now overturned) made it near-impossible to pursue a class action case. Now, I expect more action.
In my opinion, this decision makes much more sense. If no arbiter exists to reign in possible bad behavior, what’s to prevent companies from engaging in fraudulent behavior free from penalty. As the Seinfeld character Cosmo Kramer once said, “Let’s face it, without rules there’s chaos.”
What do you think? Should the Court have overruled its prior decision?