Upon an en banc review of an earlier ruling by a three-judge appellate panel, the 5th U.S. Circuit Court of Appeals has overturned the finding of the appellate panel and instead affirmed a district court's certification of a class action suit against Stream Gas & Electric, its marketing unit Ignite Holdings, and affiliates

In a ruling which market participants said could upend the MLM sales channel (see background here), the district court had earlier "certified" the class action suit against Stream Energy by applying a "fraud on the market" doctrine, which the district court said obviates the need for individualized evidence; it was enough that plaintiffs had simply alleged that Stream Energy operates an illegal pyramid scheme to proceed on a class action basis.

Notably, the suit had been filed under the Racketeer Influenced and Corrupt Organizations (RICO) Act

Stream appealed the district court's certification ruling by arguing, among other things, that the court erred in granting class action status since precedent demands that RICO allegations require an examination of individual claims, not those of a class.

The appeals court's three-judge panel agreed, and decertified the lawsuit in an October 16, 2015 opinion. In such opinion, the panel found questions regarding individual plaintiffs’ reliance on the defendants’ alleged fraudulent representations predominated over any common issues, and thus failed to meet the threshold for class action certification under Federal Rule of Procedure 23(b)(3).

Plaintiffs sought en banc review which was granted.

And the 5th Circuit's en banc opinion essentially re-certified the lawsuit, affirming the district court's certification.

As described by the en banc opinion, "The narrow issue in this case is whether the Plaintiffs may prove RICO causation through common proof such that individualized issues will not predominate at trial. The import of this inquiry is whether class certification is appropriate under Federal Rule of Civil Procedure 23(b)(3)."

"The Defendants’ challenge to predominance rests on their belief that this causation element will require individualized proof. But that premise, and thus much of their opposition to class certification, is at odds with recent decisions from the Supreme Court and this court emphasizing that RICO claims predicated on mail and wire fraud do not require first-party reliance to establish that the injuries were proximately caused by the fraud," the en banc opinion noted

"Whether the Plaintiffs relied on a misrepresentation about the scheme is thus not determinative of whether the Plaintiffs can prove proximate causation under Bridge. As was true in that case, the class members here can prove injury 'by reason of' a pattern of mail fraud even if [they have] not relied on any misrepresentations.' The participants’ injuries arise from the scheme’s payment structure, and the inherent concealment of the inevitableness of those injuries," the en banc opinion said

"The Defendants might well prove that Ignite is a legal multi-level marketing program. That question, however, is left to be resolved in the first instance at the district court," the en banc opinion noted

See the en banc opinion here

The en banc opinion also addresses an analysis of whether an individual's knowledge that a particular investment constituted an illegal pyramid scheme could serve as an intervening cause that would break the, "chain of causation," required for fraud-based RICO claims.

Alison Frankel has a good summation of the court's finding on this issue here

Stream offered the following statement:

"Stream will continue to vigorously defend its rights and the rule of law, and strongly upholds the position that the company sells real services to real people (as cited by Judges Jones and Clement in their dissenting opinions). Keeping customers as the company’s number one focus, Stream is committed to growing the company and offering the best possible service experience."

Counsel for plaintiffs noted that total number of independent associates includes more than 240,000 people, but approximately 80,000 of them are precluded from joining the class action due to arbitration clauses in their contracts with Stream.

Tags:
MLM   Network Marketing   Multi-level marketing  

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