This case concerns an alleged fraudulent scheme to promote certain third-party companies offering multi-level marketing and training programs. The Amended Complaint (the "Complaint") asserts racketeering and conspiracy claims under the Racketeer Influenced and Corrupt Organizations Act,
I. BACKGROUND
The following facts are taken from the Complaint and are accepted as true only for purposes of this motion. See Doe v. Columbia Univ. ,
A. Defendants' Promotion of Third-Party Companies
For over a decade, Defendants operated a complex enterprise through which they promoted third-party companies offering consumer-facing business opportunities and training programs. The companies included two "multi-level marketing" programs, ACN Opportunity, LLC ("ACN") and TTN, LLC (d/b/a "The Trump Network"), and a "live-seminar program," Business Strategies Group, LLC (d/b/a "The Trump Institute") (collectively, the "Third-Party Programs").
In 2005, Defendants agreed to promote and endorse ACN. ACN is a company offering products and services through independent salespeople known as "Independent Business Owners," or "IBOs." In order to sell these products and services, IBOs must pay an initial sign-up fee and an annual renewal fee. From 2013 until 2016, these fees were $499 and $149, respectively. IBOs can earn commissions for selling ACN products and services, and can receive additional bonuses when they meet certain sales targets. IBOs can also earn money by recruiting others to sign up as IBOs. When an existing IBO recruits a new IBO, the recruit becomes part of the existing IBO's "downline," and the existing IBO becomes part of the recruit's "upline." IBOs can receive a commission on the sales generated by members of their downline.
Key to ACN's recruiting operation are small group events hosted by IBOs in their own homes or at local hotels and event spaces. These meetings are the primary mechanism through which consumers are recruited to become IBOs. ACN also stages ticketed multi-day events, often billed as "Training Events" or "International Conventions." These events function as motivational rallies and are a substantial source of revenue for ACN.
In exchange for financial inducements that were never disclosed to the public, Defendants promoted and endorsed ACN in promotional videos, in print and online media, at ACN events and in episodes of The Celebrity Apprentice , a television program hosted by Trump that featured Ivanka Trump and Donald Trump, Jr. Through these channels, Defendants deliberately misled consumers regarding the nature of ACN's business. First, Defendants misled consumers into believing that ACN offered a reasonable probability of commercial success. Defendants accomplished this by misrepresenting (a) the risk inherent in the ACN business opportunity, (b) the profitability to consumers of the ACN business opportunity and multi-level marketing programs in general and (c) the market for ACN's products and services. Second, Trump falsely represented that the reason he supported ACN was because it offered a reasonable probability of commercial success. He never disclosed that he was being paid millions of dollars for his endorsement. Third, Defendants falsely represented that Trump's endorsement was predicated on appropriate due diligence,
ACN's association with Trump and the Trump brand was "extremely powerful in the minds of investors." In published testimonials, "IBOs attributed their decision to join ACN to Trump's endorsement."
ACN was not the only third-party company to be promoted and endorsed by Defendants. In the mid-2000s, a company affiliated with Defendants, Trump University, LLC, entered into a licensing agreement with Business Strategies Group, LLC to form "The Trump Institute." The Trump Institute was a live-seminar program that purported to teach Trump's "secrets to success" in the real estate industry. In 2009, Defendants entered into a licensing agreement with Ideal Health, a multi-level marketing company. Pursuant to this agreement, Ideal Health was officially rebranded "The Trump Network." As they had done with ACN, Defendants disseminated a series of knowingly false statements regarding The Trump Institute and The Trump Network: (1) that the programs offered consumers a reasonable probability of commercial success, (2) that Trump endorsed the programs because they offered a reasonable probability of commercial success and (3) that Trump's endorsements were predicated on extensive due diligence, inside information and personal experience.
B. Plaintiffs' Investments in ACN
1. Plaintiff Doe
Plaintiff Doe, a citizen of California, was invited to attend her first ACN meeting by a friend who told her that the company "was a great opportunity for them both to make money." At the meeting, a promotional video prominently featuring Trump was played. It was Trump's endorsement of ACN that "sold [Doe] on the opportunity."
Doe paid the $499 sign-up fee to become an IBO. Shortly thereafter, senior IBOs told Doe that attending an ACN convention in Palm Springs "would be a great way to begin her career with ACN," and they implied that Trump would make an appearance. Doe decided to attend the convention for several reasons, but the most important reason was that she wanted to meet Trump. At the Palm Springs convention, Trump was prominently featured, but he did not appear in person. Doe's cumulative expenses from the convention totaled almost $1,500.
After the convention, Doe remained fully committed to ACN. Senior IBOs told her that she had to attend ACN meetings in order to be successful. Each meeting cost $20, and Doe often attended two meetings per month. Doe felt "substantial pressure" to attend these meetings, which often caused her to miss shifts at work.
Approximately six months after she signed up as an IBO, Doe attended a national ACN convention in Cleveland, Ohio. Senior IBOs told Doe that the convention "could not be missed," emphasizing "the community, the training and, importantly, that Trump might be there as a special guest." Doe's total investment in attending the Cleveland convention was approximately $2,000. Doe also attended a multi-day event in Detroit, Michigan, again investing substantial amounts of money to attend in the hopes of seeing or meeting Trump.
Trump's support for ACN -- including specific statements touting ACN -- had encouraged Doe to join and persevere with ACN. But eventually, during her second year as an IBO, Doe came to the realization that ACN did not provide average IBOs a realistic chance of making a profit. Doe cut her losses and ceased to participate in ACN. She had earned only $38.
Plaintiff Loe, a citizen of California, was invited to attend an informational meeting about ACN by a co-worker at the Salvation Army. The meeting was held at a hotel in Los Angeles, and began with short speeches by ACN representatives, followed by a promotional video prominently featuring Trump. Trump's endorsement "was the key factor" that induced Loe to join ACN. When he joined and while he was associated with ACN, Loe heard and relied on specific statements from Trump, which are detailed in the Complaint.
Loe had very limited success with ACN. During his time with ACN, he was able to recruit only one other IBO. Loe sold ACN services to friends, in one instance registering services in his own name for a friend who promised to pay him back, but who never did.
Loe attended twenty-five to thirty ACN meetings, each one costing $10 to $20. Loe felt "substantial pressure" to attend these meetings, and when he missed one "he was criticized and shunned by more senior IBOs." Loe also attended three larger ACN events -- the national convention in Cleveland and two multi-day events in Palm Springs and Detroit. Loe borrowed money from his team members to attend these events, "hopeful that if he continued investing in pursuing the ACN business opportunity he would ultimately recoup his initial investment."
But Loe ultimately concluded that ACN "was not a good moneymaking opportunity." When the time came for his annual renewal, he chose not to pay the renewal fee. Despite his efforts, Loe never received any income from ACN.
3. Plaintiff Roe
Plaintiff Roe, a citizen of Maryland, learned about ACN from an IBO who told him that "he had a business opportunity for him." The IBO showed Roe an ACN magazine and gave Roe his ACN business card. Two weeks later, Roe called the number on the business card, and the IBO sent Roe "an informational video that boasted of the lifestyle ACN would provide." The IBO convinced Roe to join an online conference with IBOs and potential recruits. After the online conference, the IBO pressed Roe to sign up, but Roe said that he would have to think about it. The IBO then invited Roe to attend an ACN convention.
Roe decided to do additional research on ACN. In his research, he came across an online video of Trump and Ivanka Trump promoting ACN. Trump's statements were the "turning point .... Roe believed that by promoting the company, the Trumps were telling others that they too could make money and become successful business owners like him by investing in ACN."
Roe attended the convention and was excited about the opportunity offered by ACN. The IBO continued to call Roe to recruit him, but the $499 sign-up fee was financially out of reach. Roe was finally able to afford the fee after winning $300 at a casino and $200 from a lottery ticket. The IBO who recruited Roe became his mentor, and during his first month with ACN the IBO "repeatedly called him and would always give him an ACN motivational speech." When he was recruited and during his time with ACN, Roe heard and relied on specific statements by Trump, which are detailed in the Complaint.
In March 2017, Roe began to suspect that ACN was a scam. Roe realized that he was not making any money, and that Trump's statements about ACN were false. Roe did not renew his ACN registration and his account was terminated. He did not recover any of the money that he invested in ACN.
Plaintiff Moe, a citizen of Pennsylvania, signed up as an IBO in April 2013. Moe's niece introduced Moe to ACN and invited her to an ACN award ceremony. Soon after arriving at the ceremony, it became clear to Moe that the main purpose of the event was to recruit IBOs. The organizers of the event played a five-minute promotional video that prominently featured Trump. After watching this video, "Moe knew that she was going to sign up for ACN."
As an IBO, Moe attended ACN meetings in order "to widen her network and continue to develop her skills." Meetings occurred almost every weekend and cost between $5 and $10 to attend. At the meetings, organizers would remind IBOs of Trump's involvement with and endorsement of ACN. Moe also attended four extended weekend seminars that cost $49 to $69. Moe believed the senior IBOs who told her that these meetings were "important and necessary for her success."
During her second year as an IBO, Moe paid the registration fee for the national ACN convention in Los Angeles, believing that "attending the convention was necessary for her to succeed." After paying the fee, however, it became clear that the costs of attending the convention would be too high, and she decided not to attend. In December 2014, "Moe realized that she was not going to make any money in ACN," and she declined to renew her membership.
II. STANDARD
"A case is properly dismissed for lack of subject matter jurisdiction under Rule 12(b)(1) when the district court lacks the statutory or constitutional power to adjudicate it." John Brady v. Int'l Bhd. of Teamsters, Local 817 ,
To survive a motion to dismiss under Rule 12(b)(6), "a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.' " Ashcroft v. Iqbal ,
III. DISCUSSION
A. RICO Claims
To state a civil RICO claim under
To plead a substantive RICO violation, a complaint must allege that the defendant engaged in "(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity." See Cruz v. FXDirectDealer, LLC ,
To plead proximate cause, a complaint must allege a "direct relation between the injury asserted and the injurious conduct alleged." See Holmes v. Secs. Inv'r Prot. Corp. ,
As discussed below, the Complaint does not sufficiently plead that Defendants' conduct was the proximate cause of Plaintiffs' losses. Accordingly, the substantive RICO and RICO conspiracy claims, Counts I and II, are dismissed.
1. Proximate Cause Requirement
The requirement of proximate cause for civil RICO cases has its genesis in Holmes v. Securities Investor Protection Corp. The plaintiff, a nonprofit corporation that insured the funds of brokerage customers, paid nearly $13 million to cover losses attendant to the failure of two broker-dealers.
The Supreme Court held that the plaintiff had not established its right to sue under civil RICO because it had not demonstrated that the stock manipulators' conduct was the proximate cause of the losses.
Although the court in Holmes looked to the common law for the requirement of proximate cause for civil RICO claims, the court's causation inquiry was not rooted in the foreseeability of the injury. Holmes ,
The requirement of a direct causal relation, the Holmes court explained, served vital considerations of judicial administrability and convenience. See id. at 268-69,
Subsequent cases have confirmed that, even at the pleading stage, civil RICO's direct relation requirement is
Likewise, in Hemi Group , a plurality of the Supreme Court held that New York City had not stated a RICO claim against a merchant that had failed to furnish statutorily-required disclosures about its customers to the New York state government, making it difficult for the city to pursue tax evaders. See Hemi Group ,
The Second Circuit's decision in Empire Merchants is instructive regarding a civil RICO plaintiff's pleading burden. In Empire Merchants , a distributor with exclusive rights to distribute certain brands of liquor in New York sued competing distributors for illegally smuggling liquor into the state from Maryland. See Empire Merchants ,
These cases do not mean that, at the pleading stage, a defendant may break the chain of causation merely by citing a trivial factor ancillary to the defendant's
The Supreme Court's decision in Bridge v. Phoenix Bond & Indemnity Co. ,
In sum, to state a civil RICO claim, the connection between the defendant's conduct and the plaintiff's injury must be "direct" and "straightforward," Holmes ,
2. Application
The Complaint fails to plead proximate causation because it does not allege a direct relation between Defendants' conduct and Plaintiffs' losses. At most, the Complaint pleads a "but for" theory of causation: "But for Defendants' fraudulent promotion and endorsement of ACN," Plaintiffs would not have incurred the costs and expenses associated with becoming IBOs -- "sign up" and "renewal fees," expenses incurred in "attending meetings and ... conventions," the costs of "business tools" and recruiting expenses and foregone income from other sources. As discussed above, but for causation alone does not satisfy RICO's causation requirement. See Moore ,
In determining whether a defendant's conduct proximately caused a plaintiff's loss, the threshold question is what constitutes the "loss." The above quoted language from the Complaint makes clear that Plaintiffs' claimed losses are the monies they were induced to pay as IBOs. The loss amount is necessarily each Plaintiff's net loss, rather than gross expenditures. See generally RESTATEMENT (SECOND) OF TORTS § 903 cmt. a (1979) ("When there has been harm only to the pecuniary interests of a person, compensatory damages are designed to place him in a position substantially equivalent in a pecuniary way to that which he would have occupied had no tort been committed.") Accordingly, the Complaint seeks to certify a "Nationwide Damages Class" of individuals who suffered net monetary losses from their association with ACN -- "all persons and entities who invested in, subscribed to or made payments to ACN ... or its affiliates, but did not recoup an amount equal to or [greater] than those payments from ACN."
The Complaint fails to plead proximate causation because it does not allege a direct relation between Defendants' conduct and Plaintiffs' losses. Numerous intervening factors may account for Plaintiffs' inability to recover their investments in ACN. Plaintiffs' lack of success could be attributable to the inherent challenges of multi-level marketing, Plaintiffs' capabilities as salespeople and the extent of Plaintiffs' existing networks to whom Plaintiffs could sell ACN products and recruit new IBOs. The losses may also be attributable to the market for ACN products in the Plaintiffs' localities and ACN's business practices -- legitimate or otherwise -- separate from Defendants' role. These factors, contributing in whole or part to Plaintiffs' losses, make the question of Defendants' responsibility the sort of "intricate, uncertain inquir[y]" that the proximate cause requirement is intended to avert. See Anza ,
The absence of a direct relation in this case can be illustrated by the following hypothetical. Suppose that two class members each paid $1,000 to ACN in registration fees and expenses, induced to invest by Defendants' endorsements. The class members are identical in all respects except for one -- Class Member A earned $700 in revenue from participating in ACN, but Class Member B earned only $200. As to each class member, what is the loss attributable to the Defendants' conduct? As the loss is the extent to which Plaintiffs did not recover their investments in ACN, conceivably Defendants could be charged with having caused a $300 loss to Class Member A and an $800 loss to Class Member B. Yet, if Plaintiffs' inability to recover their investments is attributable to their own sales capabilities or the extent of their existing networks, this would unmoor the loss from the Defendants' conduct. The $500 difference in Defendants' liability to Class Member A and Class Member B could not be imputed to anything that Defendants did, contravening the principle "that the compensable injury flowing from a RICO violation necessarily is the harm caused by the predicate acts." Hemi Group ,
It is also unclear whether Defendants were the direct cause of Plaintiffs' payments to ACN. Plaintiff Doe was introduced to ACN by a friend who told her that "the company was a great opportunity ... to make money." After she joined ACN, Doe was pressured by other IBOs into attending ACN meetings, for which Doe was charged a fee. Plaintiff Loe attended his first ACN meeting at the behest of a co-worker. As an IBO, he too paid to attend meetings, and when he missed meetings he was "criticized and shunned." An IBO sent Plaintiff Roe a recruitment video "that boasted of the lifestyle ACN would provide." The IBO pressured Roe to invest on multiple occasions, and once Roe did, the IBO would repeatedly call him to give "ACN motivational speech[es]." Plaintiff Moe was introduced to ACN by a family member. Like the others, Moe paid money to attend meetings and seminars that other IBOs told her "were important and necessary for her success."
The conduct of these third parties bears on the question of proximate cause. In Kerrigan v. Visalus, Inc. , No. 14 Civ. 12693,
The multitude of intervening factors and third-party conduct attenuating the link between Defendants' conduct and Plaintiffs' losses compels the conclusion that the Complaint does not sufficiently plead proximate cause. This conclusion is buttressed by the profound difficulties that would ensue in "ascertain[ing] the amount of [Plaintiffs'] damages attributable to [Defendants' RICO] violation, as distinct from other, independent factors." See Holmes ,
Citing several cases, Plaintiffs argue that proximate cause is demonstrated where a defendant "misrepresents investment risk, or the value of a particular investment," or "fraudulently induce[s] plaintiffs to put their money into something that was other (and less valuable) than what the defendants had represented." The cases cited by Plaintiffs are not on point.
Plaintiffs cite three cases involving only state statutory and common law claims, Blue Cross & Blue Shield of Minn. v. Wells Fargo Bank, N.A. , No. 11 Civ. 2529,
The RICO cases cited by Plaintiffs also do not support their contention that the causal link in this case is sufficiently direct. In Bank of China v. NBM L.L.C. , No. 01 Civ. 0815,
In Lukaszuk v. Sudeen , No. 02 Civ. 5143,
Similarly, proximate cause was adequately pleaded in Chambers v. King Buick GMC, LLC ,
Likewise, in De Sole v. Knoedler Gallery, LLC ,
The other case Plaintiffs cite is no more compelling. In Eclectic Properties East, LLC v. Marcus & Millichap Co. , No. 09 Civ. 511,
Finally, Plaintiffs argue that "[t]he requirement, if any, to plead a causal link does not place on Plaintiffs a further pleading obligation to rule out other contributing factors or alternative causal explanations," citing Loreley Fin. (Jersey) No. 3 Ltd. v. Wells Fargo Sec., LLC ,
B. State Claims
The Court has subject matter jurisdiction over the state law claims pursuant to CAFA. CAFA "confer[s] federal jurisdiction over certain class actions where: (1) the proposed class contains at least 100 members (the numerosity requirement); (2) minimal diversity exists between the parties, (i.e., where [at least one plaintiff] is a citizen of a State different from any defendant); and (3) the aggregate amount in controversy exceeds $5,000,000." Purdue Pharma L.P. v. Kentucky ,
Plaintiffs have demonstrated a reasonable probability that "the proposed class contains at least 100 members." Purdue Pharma ,
The amount in controversy element is satisfied because the Complaint asserts that the amount in controversy exceeds $5,000,000, and Defendants have not demonstrated "to a legal certainty that the plaintiff could not recover the amount alleged or that the damages alleged were feigned to satisfy jurisdictional minimums." Pyskaty ,
IV. CONCLUSION
For the foregoing reasons, Defendants' motion to dismiss is GRANTED with respect to the RICO claims (Counts I and II), and they are dismissed. Defendants' motion is denied with respect to the state law claims (Counts III through VIII), and they survive. Plaintiffs' motion to strike (Dkt. No. 87) and Defendants' motion for oral argument (Dkt. No. 89) are denied as moot.
Notes
Because the Complaint does not plead proximate cause, resulting in the dismissal of both RICO claims, this Opinion does not address whether the Complaint pleads a substantive RICO violation.
Although Holmes addressed actions under § 1964(c), its proximate cause holding applies to actions under § 1964(d) as well. See European Cmty. v. RJR Nabisco, Inc. ,
The Complaint seeks certification of the Nationwide Damages Class and state-specific damages sub-classes under Federal Rule of Civil Procedure 23(b)(3). The Complaint also seeks to certify a Nationwide Equitable Class and state-specific equitable sub-classes under Rule 23(b)(1)(A) and/or 23(b)(2), seeking injunctive and declaratory relief, and other equitable relief on behalf of "all persons and entities who invested in, subscribed to, or made payments to [ACN] or its affiliates." The RICO claims are brought on behalf of both putative nationwide classes.
A fourth case cited by Plaintiffs, In re Evans ,
Although the defendants asserted that the increase in price may have been caused by "a hot real estate market and the additional value from a long-term lease," see Eclectic Properties ,