Juan Torres v. S.G.E. Management, L.L.C., e
838 F.3d 629
| 5th Cir. | 2016Background
- Stream Energy operated a multilevel-marketing arm, Ignite, that sold retail energy and recruited Independent Associates (IAs) who paid an upfront fee (~$329) and optional website fees to sell energy and recruit others.
- IAs earned small commissions on energy customers (MEI) but larger leadership/recruitment bonuses for building downlines; plaintiffs allege this structure functioned as a pyramid scheme that funneled money up the chain.
- Plaintiffs (former IAs) sued under RICO predicated on mail and wire fraud, alleging widespread losses (over 86% of IAs lost money) and sought class certification of losing IAs under Rule 23(b)(3).
- The district court denied certification for a theory based on individualized reliance on particular misstatements, but certified the class based on common proof theories: (1) proving Ignite is a pyramid scheme (Bridge causation theory) and (2) an inference that IAs relied on Ignite’s implicit representation of legitimacy.
- This court, en banc, reviewed whether RICO causation and predominance can be shown with common proof and affirmed class certification, holding that (a) proving a pyramid scheme can establish proximate cause under Bridge and (b) a classwide inference of reliance is permissible here, given the scheme’s inherent deceptiveness and absence of evidence that class members knew of the fraud.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether RICO proximate cause can be proved classwide (predominance) | RICO causation can be shown by common proof that Ignite operated a fraudulent pyramid scheme, so individualized reliance is unnecessary | Individualized reliance or knowledge will predominate and defeat Rule 23(b)(3) certification | Held: Common proof that Ignite is a pyramid scheme can establish proximate cause under Bridge; common issues predominate |
| Whether first‑party reliance is an element for RICO claims predicated on mail/wire fraud | Reliance not required; Bridge permits proximate-cause proof without individual reliance | Reliance is necessary — without it, individualized causation inquiries will predominate | Held: Reliance is not an element; Bridge and circuit precedent permit proximate-cause proof without first‑party reliance |
| Whether a classwide inference of reliance on Ignite’s implicit representation of legitimacy is permissible | A jury may infer that IAs paid to join because they reasonably assumed Ignite was a legitimate MLM; pyramid schemes are inherently deceptive and few (if any) knew the fraud | Any inference must be limited; defendants argue some IAs had notice or other rational reasons to join, creating individual issues | Held: A classwide inference of reliance is permissible here because (1) pyramid schemes inherently conceal illegality and (2) defendants produced no evidence that any class member knew of the fraud; district court may revisit if individualized rebuttal evidence later appears |
| Whether evidence of individualized knowledge or other individual motivations defeats predominance | Plaintiffs: record lacks evidence that any class member knowingly joined despite awareness of fraud; conjecture is insufficient to defeat certification | Defendants: promotional materials, compensation docs, media, and recruiters conveyed the scheme’s recruitment focus and could show many members knew or suspected the risk | Held: Absence of admissible evidence that class members knew of fraud supports certification; speculative or hypothetical evidence of a few knowing members does not defeat predominance |
Key Cases Cited
- Bridge v. Phoenix Bond & Indem. Co., 553 U.S. 639 (permitting RICO proximate-cause proof without first‑party reliance)
- Allstate Ins. Co. v. Plambeck, 802 F.3d 665 (5th Cir.) (applying Bridge to hold reliance not required for mail/wire fraud RICO claims)
- Erica P. John Fund, Inc. v. Halliburton Co., 563 U.S. 804 (reaffirming that individualized rebuttal of marketwide inference does not automatically defeat predominance)
- Sandwich Chef of Tex., Inc. v. Reliance Nat'l Indem. Ins. Co., 319 F.3d 205 (5th Cir.) (decertification where record showed individualized knowledge/negotiation undercut predominance)
- Klay v. Humana, Inc., 382 F.3d 1241 (11th Cir.) (approving classwide inference of reliance where misrepresentation went to the heart of the transaction)
- In re U.S. Foodservice Inc. Pricing Litig., 729 F.3d 108 (2d Cir.) (permitting classwide inference of reliance where paying an inflated invoice constitutes circumstantial proof of reliance)
- CGC Holding Co. v. Broad & Cassel, 773 F.3d 1076 (10th Cir.) (approving inferred reliance where no rational actor would have paid nonrefundable fees knowing the lender would not fund loans)