Antitrust Law Daily Wrap Up, RICO—S.D. Tex.: Class certification of independent agents granted in pyramid operation action, (Jan 16, 2014)

By Linda O’Brien, J.D., LL.M.

The federal district court in Houston has granted class certification under RICO to a putative class of former independent sales agents of an energy services provider (Torres v. SGE Management LLC, January 13, 2014, Hoyt, K.). Thus, the plaintiffs’ proposed class sufficiently satisfied the prerequisites of Federal Rule of Civil Procedure 23(a) and (b)(3). However, the plaintiffs’ lacked standing to seek injunctive relief under Rule 23(b)(2).

Ignite Holdings LTD, a marketing entity for Stream Gas & Electric LTD (SGE), is a retailer of electricity and natural gas services that conducts its sales using independent agents (IAs) who make sales to customers and recruit individuals to become new IAs. Under Ignite’s business structure, an IA begins his tenure with the company as an associate and moves to higher tiers by selling energy accounts and recruiting new IAs. An IA’s compensation varies based on how many IAs he recruits, the number of sales, the entity making the purchase (commercial or residential), and the sales of his recruits. The manner in which an IA makes sales or recruits is described by the company’s policy, procedures and training workbook. IAs are provided with approved marketing materials to use when recruiting and encouraged to make public presentations of Ignite business opportunities.

Former IAs filed suit against Ignite and SGE alleging mail fraud, wire fraud, and the operation of an illicit pyramid scheme in violation of RICO and moved for class certification.

Rule 23(a). According to the court, the plaintiffs established that the class was so numerous that joinder of all class members was impracticable. The plaintiffs also demonstrated that the class members suffered a common injury by paying an initial sign-up fee to acquire the Ignite business opportunity and monthly fees to maintain their Ignite website, and the issues of the defendants’ use of the mail and wires to operate their scheme was common to the class. Further, the plaintiffs showed that the claims of class representatives were typical of the class and the representative parties will fairly and adequately protect the interests of the class.

Rule 23(b)(3). The court also determined that the plaintiffs demonstrated that common questions predominated over issues affecting individual class members and that class resolution was a fair and efficient means to adjudicate the controversy. To prove a RICO violation, a plaintiff must show a person who engages in a pattern of racketeering activity connected to control of an enterprise. The former IAs demonstrated that proximate cause could be reasonably inferred from Ignite’s enticement to invest in the business opportunity was acted upon by the former IAs who purchased a worthless product. Although individual class members signed up to be an IA for various reasons, it would reasonable to conclude that every class member believed they were joining a lawful venture. Additionally, a class action was a superior method to adjudicate the controversy and would promote uniform decisions among similarly situated individuals. Thus, class certification was proper under Rule 23(b)(3).

Rule 23(b)(2). However, the plaintiffs lacked standing to request certification under Rule 23(b)(2). In this case, injunctive relief was inappropriate as any alleged harm to the class occurred in the past and there was no allegation of a threat of harm in the future.

The case is No. 4:09-CV-2056.

Attorneys: Scott Monroe Clearman (ClearmanPrebeg, LLP) for Juan Ramon Torres. Michael K. Hurst (Gruber Hurst Johansen Hail Shank LLP) for SGE Management LLC, Ignite Holdings Ltd. and Stream Gas & Electric Ltd.

Companies: SGE Management LLC; Ignite Holdings Ltd.; Stream Gas & Electric Ltd.

Cases: RICO TexasNews