Fifth Circuit Creates an “Insurmountable Barrier” to Pyramid Class Actions

In the Fifth Circuit of the United States Court of Appeals, bringing a class action lawsuit against an alleged pyramid schemes just got a heck of a lot harder. According to one of the three Circuit Judges presiding over the case, the court’s decision gives illegal pyramid schemes a “Teflon coating” and protects them “not only from class actions but from any suits claiming fraud.” The entire opinion can be read here.

The case, titled Torres v. S.G.E. Mgmt. LLC (Stream Energy), was a class action suit against the multi-level marketing program Ignite Energy. Plaintiffs were formerly participants in the multi-level marketing venture Ignite, an MLM designed to promote energy services. The Plaintiffs claimed they participated in the venture and ultimately lost money as a result of Ignite’s false misrepresentations that it was a legitimate business. The backbone of Plaintiff’s cause of action rested upon their allegations that Ignite violated the Racketeer Influenced and Corrupt Organizations (“RICO”) Act through mail and wire fraud activity. In order to prove fraudulent mail and wire activity caused their injury, i.e., the loss of their money due to fraudulent promotions online, the law required that Plaintiffs prove they relied on Ignite’s fraudulent misrepresentations claiming to be a legitimate business.

In order to understand the issues surrounding the case, certain legal background and context are necessary. Before a large number of people (“class”), all with a common interest in a particular matter, can sue or be sued, the Federal Rules of Civil Procedure demand what’s called “class certification”. Basically, class certification requires, among other things, that there be questions common to all members of the class. Additionally, these common questions must predominate over any questions that affect only individual class members. As an example, if an individual ate a moldy hamburger at a restaurant, it would not be a “common” issue that would justify class certification. On the flip side, if an individual was overcharged 5% on a cell phone bill, and that strategy was used for all other customers, the “common interest” would certainly exist to justify class certification.