Antitrust Law Daily Wrap Up, RICO—E.D. Mich.: Weight loss system marketers, executives unable to avoid pyramid scheme suit, (Mar 10, 2016)

By Linda O’Brien, J.D., LL.M.

A group of consumers alleged sufficient facts to pursue racketeering claims against a marketer of weight loss products and three company executives for engaging in a fraudulent pyramid scheme, which misled consumers to enroll in its weight loss system in order to earn commissions by recruiting other consumers, the federal district court in Detroit has ruled (Kerrigan v. ViSalus, Inc., March 9, 2016, Leitman, M.).

Consumers Timothy Kerrigan, Lori Mikovich, and Ryan Valli attended events in 2012 and 2013 that promoted ViSalus, a marketer of weight loss and dietary supplement products. They were recruited to pay to enroll in the ViSalus Program, a system through which “individual promoters” (IPs) earned commissions and bonuses for selling ViSalus products and recruiting other IPs.

In July 2014, the three consumers filed suit against ViSalus and other individuals and entities associated with ViSalus, alleging, in part, that the ViSalus Program was a fraudulent pyramid scheme, in violation of the Racketeer Influenced and Corrupt Organizations Act (RICO). The defendants moved for dismissal of all claims.

Proximate cause. The court found that the plaintiffs sufficiently pleaded that the actions of ViSalus and its co-founders, Nick Sarnicola, Ryan Blair, and Blake Mallen, were the substantial and foreseeable cause of the plaintiffs’ injuries. The plaintiffs alleged that the three individual defendants were the co-creators of the ViSalus pyramid scheme, were the company’s front men to the public, were personally involved in strategic decision-making, distributed videos on the Internet which touted the success of the ViSalus Program, directly authored the ViSalus compensation plan, and implemented plans to expand the growth of the pyramid scheme. The plaintiffs also alleged that the fraudulent mechanisms created by the defendants induced them to sign up as ViSalus IPs and to lose the money they paid to ViSalus. Thus, they sufficiently alleged that the predicate acts of these defendants proximately caused their claimed injuries, in the court’s view.

Scienter. Additionally, the plaintiffs adequately pleaded that those four defendants acted with the requisite scienter. The court noted that the plaintiffs alleged the three individuals had prior experience with recruiting-based network marketing schemes, knew that an illegal pyramid scheme was based on the recruitment of new members rather than making actual sales, and implemented a system in which ViSalus promoters would make fraudulent pitches in support of the ViSalus Program. Therefore, the plaintiffs showed that these defendants acted with a specific intent to defraud.

RICO enterprise. Furthermore, the court determined that the plaintiffs sufficiently pleaded the existence of a distinct RICO enterprise. The plaintiffs’ complaint alleges that the enterprise consisted of ViSalus, its officers, and numerous independent outside promoters. The company provided the overall structure for the program, while the IPs promoted ViSalus products to unwitting recruits. The alleged enterprise had two key features, each of which played a central role in the scheme.

Predicate acts. However, the plaintiffs failed to adequately allege that two founding investors and two ViSalus distributors, who appeared in promotional videos, personally committed two RICO predicate acts. According to the court, the plaintiffs failed to set forth any facts that those defendants caused the videos to be published online, authorized their publication, or even had knowledge that the videos were posted on the Internet. The plaintiffs also failed to sufficiently allege that the purported fraudulent conduct of seven other distributors led directly to their injuries. The plaintiffs did not allege that they met any of these defendants, saw any of their presentations, or watched any of the videos these defendants allegedly disseminated. Thus, the claims against those defendants were dismissed.

The case is No. 2:14-cv-12693-MFL-DRG.

Attorneys: Brent Caldwell (Pregeg Faucett & Abbott PLLC) for Timothy Kerrigan. Barry M. Rosenbaum (Seyburn, Kahn, PC) for ViSalus, Inc., Ropart Asset Management Fund, LLC and Ropart Asset Management Fund II, LLC.

Companies: ViSalus, Inc.; Ropart Asset Management Fund, LLC; Ropart Asset Management Fund II, LLC

Cases: RICO MichiganNews