Kerrigan v. Visalus, Inc.
112 F. Supp. 3d 580
E.D. Mich.2015Background
- Plaintiffs (three Michigan residents) paid to join ViSalus’s multi‑level promoter program (IPs) in 2012–2013 and allege they lost those funds; they sued ViSalus and 30 other related entities/individuals claiming RICO and multiple Michigan state law violations.
- The ViSalus Program: new IPs pay enrollment fees and optional product/auto‑ship subscriptions; IPs earn small retail commissions and larger bonuses/commissions tied to recruiting and downline sales.
- Plaintiffs allege the Program is a pyramid scheme that prioritized recruitment over retail sales, caused widespread losses to recruits, and funneled proceeds to insiders, promoters, vendors, and corporate shareholders.
- Defendants moved to dismiss under Rules 8, 9(b), and 12(b)(6), arguing (inter alia) that plaintiffs failed to plausibly plead a pyramid scheme, that the PSLRA bars RICO because the opportunity is a security, that RICO predicates and causation are inadequately pled, and that many state claims fail.
- The Court: found plaintiffs plausibly alleged a pyramid scheme (Koscot/Howey test context), denied dismissal of several claims in part, but identified major pleading defects (group/shotgun pleading, failure to tie predicate acts and proximate causation to each defendant, inadequate Rule 9(b) particulars) and ordered amendment; iCentris was dismissed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether plaintiffs plausibly alleged the ViSalus Program is a pyramid scheme | Program rewards recruitment over retail sales; training/ads emphasize recruiting; plaintiffs lost enrollment money | Payments are small and retail sales exist so scheme allegation is implausible | Court: Plaintiffs plausibly alleged a pyramid scheme under Koscot/Omnitrition/BurnLounge standards — denial on this ground |
| Whether RICO claims are barred by the PSLRA because the business opportunity is a security | RICO predicates are not securities fraud; Howey third‑element (profits from others) not established as a matter of law | The ViSalus Business Opportunity is an investment contract (Howey) so PSLRA blocks RICO | Court: Cannot resolve as a matter of law at dismissal — first two Howey elements met but third (profits from others) unclear; denial of PSLRA dismissal at this stage |
| Whether plaintiffs sufficiently pleaded RICO predicate acts, participation, and proximate causation against each defendant | Enterprise committed mail/wire fraud via pyramid scheme; group allegations suffice to show participation and causation by defendants | Plaintiffs used impermissible group/shotgun pleading; each defendant must be alleged to have committed at least two predicate acts, and proximate causation to each plaintiff/injury must be pleaded | Court: Group pleading is deficient. For §1962(c) plaintiffs must allege (and, for each defendant, plead) at least two predicate acts and show proximate causation—dismissal as pleaded, leave to amend to allege acts/causation individually |
| Whether state law claims (MCPA, MFIL, conversion, unjust enrichment, conspiracy, accounting/constructive trust) survive | Plaintiffs assert multiple state claims based on same pyramid theory | Defendants argue statutory elements and Rule 9(b) (where fraud alleged) are unmet; some claims inapplicable to non‑sellers or require particularity; remedies (accounting, constructive trust) improper as independent claims | Court: Mixed — ViSalus liable under M.C.L. §445.903b (unregistered business opportunity) and MFIL claims against ViSalus (and rescission theory), but most MCPA §445.903 fraud claims fail for lack of Rule 9(b) particularity; many state claims dismissed as to several defendants (e.g., conversion only as to ViSalus; iCentris dismissed entirely); accounting and constructive trust not viable independent claims |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (plausibility standard for pleading)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) (pleading requires more than labels and conclusions)
- SEC v. Howey Co., 328 U.S. 293 (1946) (investment‑contract test for “security”)
- United States v. Gold Unlimited, Inc., 177 F.3d 472 (6th Cir. 1999) (adopts Koscot definition of pyramid scheme)
- Fed. Trade Comm’n v. BurnLounge, Inc., 753 F.3d 878 (9th Cir. 2014) (rewards primarily for recruitment indicate pyramid scheme)
- Webster v. Omnitrition Int’l, Inc., 79 F.3d 776 (9th Cir. 1996) (structure rewarding recruitment undermines retail sales defense)
- Reves v. Ernst & Young, 507 U.S. 170 (1993) (RICO participation requires operation or management participation)
- Holmes v. Securities Investor Protection Corp., 503 U.S. 258 (1992) (RICO proximate cause requires direct relation between injury and predicate act)
- Bridge v. Phoenix Bond & Indem. Co., 553 U.S. 639 (2008) (mail/wire use in furtherance of scheme may establish proximate causation without direct reliance)
- Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479 (1985) (essence of §1962(c) is commission of predicate acts in connection with enterprise)
- Davis v. Avco Financial Services, 739 F.2d 1057 (6th Cir. 1984) (discusses vertical commonality in pyramid scheme securities analysis)