LifeVantage granted partial class-action motion to dismiss
The first major case update in the LifeVantage class-action has seen the company granted a partial motion to dismiss.
Plaintiffs Brian Smith and Michael Ilardo sued LifeVantage back in January 2018.
Claims leveled against LifeVantage in the lawsuit include the company is a pyramid scheme. Several counts also pertain to RICO violations, as well as securities fraud.
In response to the lawsuit, LifeVantage filed a Motion to Dismiss.
In its analysis of the motion to dismiss, the court acknowledged the Plaintiff’s assertion that “investment in a pyramid scheme is itself a security”.
This was the foundation of alleged violations of the Securities and Exchange Act, which
forbids the use of “any manipulative or deceptive device or contrivance” that would violate any “such rules and regulations as the Commission may prescribe.”
(And) prohibits the employment of “any device, scheme, or artifice to defraud” as well as “any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person” when transacting in securities.
To hold up in court, scienter must be proven. That is “a mental state embracing intent to deceive, manipulate, or defraud.
In their motion to dismiss, LifeVantage argued
Plaintiffs cannot assert an “inherently fraudulent” pyramid scheme and expect to survive a motion to dismiss, because Plaintiffs “fail to identify any specific statements.”
The court agreed, describing the “voluminous complaint” as nearing that of a “puzzle pleading”.
Puzzle pleading occurs when a complaint is so voluminous and ineffectively organized as to “place the burden on the reader” to “solve the puzzle” of the plaintiff’s claims.
Plaintiffs’ lengthy Amended Complaint contains no reference to specific statements where the identity of the person making the statement, the time and circumstances of the statement, and the consequences of the statement are clearly stated.
Moreover, statements praising business products and prospects are employed by many businesses to express an optimistic view of themselves to investors. These statements are not considered fraudulent.
That was typically be enough to knock out a securities fraud allegation, however the court ruled that the count survived via scheme liability.
A claim under Rule 10b-5 can be pleaded under a theory of “scheme liability.”
Plaintiffs allege that the business opportunity that they joined was actually an illegal pyramid scheme.
An allegation of scheme liability “hinges on the performance of an inherently deceptive act that is distinct from an alleged misstatement.”
Under a scheme liability framework, Plaintiffs must show that Defendants “participated in an illegitimate, sham or inherently deceptive transaction where [their] conduct or role ha[d] the purpose and effect of creating a false appearance.”
This district has recognized scheme liability.
Therefore, the question on this 12(b)(6) motion is not whether Plaintiffs have identified specific statements, but have plausibly pleaded facts supporting an inherently fraudulent scheme.
Plaintiffs have alleged enough plausible facts in their Complaint to state a claim for scheme liability under Rule 10b-5.
The cancer claims Brian Smith was pitched on were also accepted as a “statement of a claim that is facially plausible”.
Conversely, the court upheld that Plaintiff’s failed on their claim for
- sale of unlicensed securities;
- antitrust violations;
- fraud committed on the USPT;
- a Walker Process claim;
- unjust enrichment.
Interestingly, the court upheld the Plaintiff’s burden of proof regarding scienter. LiveVantage’s arguments with respect to scienter were deemed “unconvincing”.
Plaintiffs allege that Defendants knew that they were perpetrating a pyramid scheme or something so dangerously close that it risked being found to be a pyramid scheme.
Plaintiffs further allege, for example, that seven of the eight ways Distributors may earn commissions “are based, directly or indirectly” on recruiting.”
Defendants designed this method of compensation, so it is not an “unseen warning sign” of which Defendants may be negligently unaware.
The financial data Plaintiffs gathered is relevant when viewed holistically with this and Plaintiffs’ other allegations.
At the motion to dismiss stage, it is enough that, seen in the light most favorable to the non-moving party, the allegation that Defendants acted with scienter is at least as plausible as the competing inferences.
The court didn’t get drawn into ultimately how scienter might play out in court, only that at this stage granting LiveVantage’s motion to dismiss on this specific count “would be inappropriate”.
In light of the court’s order, which is mostly a win for LifeVantage, the Plaintiffs have been given fourteen days to file a second amended complaint.
Based on the December 5th order date, that gives us a December 19th deadline.
As at the time of publication an amended complaint has yet to be filed. Stay tuned…
Update 2nd December 2020 – An amended complaint was eventually filed. LifeVantage moved to dismiss two of the three counts in it.
On November 25th 2020 the court partially granted LifeVantage’s motion.