Lifevantage securities fraud class-action certification denied
Lifevantage has prevailed against consumers forming a class-action against it.
The decision was handed down on April 19th, effectively ending plans to sue Lifevantage as a class for securities fraud.
The LifeVantage proposed class-action was filed back in 2018. Since filing it’s been progressively gutted.
The original complaint alleged Lifevantage was a pyramid scheme.
The majority of its retail sales are monthly sales to its Distributors purchasing product in order to participate in the compensation system and remain eligible to receive bonuses.
Distributors really can only make money by bringing in new Distributors – a classic pyramid scheme.
New Distributors are told or strongly encouraged to agree to an automatic shipment program of $100 or more per month in product, secured by their credit cards, and to pay for “training” and other accoutrements of being a Distributor.
Each new Distributor is placed in his or her recruiter’s “downline,” with a portion of their initial purchase being kicked “upline” to the recruiter and others up the chain.
LifeVantage’s MLM system further encourages Distributors to expend thousands of dollars in additional product purchases, event fees and expenses, and other miscellaneous fees.
In December 2019, Lifevantage scored a partial motion to dismiss against the Plaintiffs’ claims.
A year later Plaintiffs suffered another blow, when their complaint was reduced to securities fraud.
Plaintiffs filed the present motion for class certification on June 15, 2021.
Defendants filed a response on July 13, 2021, and Plaintiffs replied on July 27, 2021.
The court held a hearing on Plaintiffs’ motion for class certification on March 28, 2022.
Lifevantage argued against class certification on the grounds of
- typicality and adequacy and
- various individual issues “will predominate over common issues”.
If none of those terms make sense to you, don’t worry I’ll explain each as we get into it below.
Ascertainability pertains to be Plaintiffs having identified victims of the alleged pyramid scheme.
To that end Lifevantage argued Plaintiffs
failed to provide some of the information needed to determine who meets one of the class criteria, financial loss.
Such information includes revenue derived via product reselling, alleged value derived from consumption of purchased products and tracking of business expenses.
On this point, Plaintiffs prevailed.
Assuming that the missing data is necessary to identify which distributors suffered a financial loss, the court is not convinced that these reasons alone require denying class certification.
Typicality and Adequacy is broken down into two parts.
Typicality pertains to whether proposed Class Representatives, the Plaintiffs in this case, have interests that
are sufficiently aligned with those of the other class members because of claims and injuries they share in common.
In other words, did the Class Representatives go through the same experience as the class they seek to represent.
Adequacy pertains to uncovering any conflict of interest between proposed Class Representatives and the class.
Lifevantage filed a counterclaim against one of the Plaintiffs in mid 2021. The company argued that this filing would differentiate the Plaintiff and proposed Class Representative from other class members.
The counterclaim alleges that Ilardo breached his distributorship agreement by recruiting LifeVantage distributors to join other MLMs, mischaracterizing the efficacy of Lifevantage’s products to customers, and failing to keep records of his personal retail sales.
Defendants argue that because Plaintiffs have alleged that Lifevantage’s distributorship program is a pyramid scheme in part because of false and misleading statements made about its products and compensation system, Ilardo’s defense against accusations that he made such statements while recruiting other distributors will place him in conflict with other class members.
At the very least, Defendants argue, mounting a defense would distract Ilardo from adequately representing the entire class’s interests.
“We’re not a pyramid scheme. But if we were you contributed to us being one so we’re clearly not a pyramid scheme.” I think that about sums up the tangled web Lifevantage wove on this one.
Thankfully the court was having none of it.
The court disagrees. The fact that Ilardo will have to defend himself against a counterclaim does not, alone, preclude a finding of typicality and adequacy.
The mere existence of a counterclaim against a class representative does not, on its own, put him or her in conflict with the class’s interests.
Any conflict Defendants’ counterclaim creates here, if it does so at all, is not a substantial one.
Whether Ilardo breached his contract, by making misleading statements about LifeVantage’s products or otherwise, is unrelated to whether Lifevantage’s distributorships are securities and whether the distributorship program and compensation plan operate as a pyramid scheme.
The same is true as to whether Defendants engaged in deceptive acts to conceal the program’s true nature.
Various individual issues is where the proposed class-action fell apart.
Having concluded that Plaintiffs’ proposed class satisfies all four requirements of Rule 23(a), the court must now consider whether a class action may be maintained pursuant to Rule 23(b).
Plaintiffs assert that a class action is appropriate under both Rule 23(b)(2) and (3).
A class action may be maintained if Rule 23(a) is satisfied and if:
(2) the party opposing the class has acted or refused to act on grounds that apply generally to the class, so that final injunctive relief or corresponding declaratory relief is appropriate respecting the class as a whole; or
(3) the court finds that the questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy.
Breaking these down further;
23(b)(2) pertains to Lifevantage’s alleged conduct affecting all proposed class members equally.
23(b)(3) pertains to identification of a general issue or issues that are common to class members. This issue or these issues must not be secondary to an issue or issues that affect only some class members.
With respect to 23(b)(2) the court found;
Plaintiffs ask that Defendants be estopped from operating a pyramid scheme.
However, as it currently stands, this request is too vague to maintain a class action under Rule 23(b)(2). Plaintiffs have not adequately specified which acts Defendants have engaged in that must be restrained.
Nor have they specified how a single injunction provides appropriate relief for every class member.
In fact, the primary, if not exclusive, form of relief Plaintiffs seek for class members is monetary damages, and Rule 23(b)(2) “does not authorize class certification when each class member would be entitled to an individualized award of monetary damages.”
Therefore, Plaintiffs’ motion for class certification under Rule 23(b)(2) must be denied.
To summarize, if they prevailed, the class would likely be awarded monetary damages. The award of these damages is going to be different for each class member.
With respect to 23(b)(3), the court found a mixture of common and individual issues.
There are three issues over which there is a dispute: whether distributors relied on the deceptive acts alleged, whether class members’ losses were caused by the alleged fraudulent scheme, and whether distributors were injured as well as the amount of their damages.
The court will determine whether these issues are common or individual and then proceed to weighing whether common or individual issues predominate.
Here things again fell apart with respect to damages.
Contrary to Plaintiffs’ assertions, damages are an individual issue here.
The evidence to prove damages varies from class member to class member and must be evaluated on an individualized basis.
Plaintiffs have not met their burden of showing why common issues predominate despite the need for individualized damages determinations.
Because Plaintiffs have failed to do so, their motion for class certification must be denied.
As far as I’m aware that’s pretty much the end of the case. I don’t see Lifevantage’s counterclaims progressing but will continue to monitor the docket for updates.
Overall I think it’s a bit disappointing to see the case against Lifevantage come to a halt.
BehindMLM last reviewed Lifevantage in 2019. We once again pointed out mandatory autoship lent itself to Lifevantage operating as a pyramid scheme.
My primary criticisms of LifeVantage back in 2015 were mandatory affiliate autoship and a lack of retail focus, so let’s focus on those two points first.
Unfortunately LifeVantage still requires affiliates to purchase at least 40 PV of product each month.
Not only is it pay to play, but it also encourages self-funded commission qualification. By that I mean a LifeVantage affiliate is far more likely to purchase 100 to 200 PV of product each month, as opposed to that same volume being retail.
As affirmed by the FTC, MLM companies without significant retail sales volume are operating as pyramid schemes.
Here I feel a civil class-action lawsuit is a limited approach (I’m not a lawyer though, so can’t make a call on whether the case was handled appropriately or not).
I’d much rather see the FTC come in and make a case based on Lifevantage’s own internal data.
We know Lifevantage has mandatory autoship, meaning the majority of affiliates are likely self-qualifying for commissions.
We also know the company fails to track retail sales outside of orders placed directly with the company:
The counterclaim alleges that Ilardo breached his distributorship agreement by recruiting LifeVantage distributors to join other MLMs, mischaracterizing the efficacy of LifeVantage’s products to customers, and failing to keep records of his personal retail sales.
I would be very surprised to learn, company-wide, that whatever affiliates are spending on autoship each month is less than verified retail sales volume.
The topic of “value” from affiliate purchases also came up in the class-action.
Defendants argue that data regarding distributors’ personal consumption and retail sales is needed to determine whether they suffered a financial loss because distributors derived value from consuming or reselling the products.
Yet Plaintiffs’ proposed method for calculating financial loss from Lifevantage’s records would count the amount distributors paid for products as losses even if they were personally consumed or resold.
If damages were calculated in this way Plaintiffs class would include, and provide an improper windfall for, distributors who did not actually suffer a financial loss.
Here we have retail sales not used as metric to determine whether Lifevantage is a pyramid scheme, but rather to ascertain whether class certification is appropriate.
Fair enough. You need to certify the class before proceeding with the case but again I feel this is a limitation of the class process.
I’m not a particular fan of class-action lawsuits attempting to do the job of regulators. But I also understand consumers feeling they have no alternative in the wake of regulatory inaction.
Both lawsuits are ongoing, partially due to constraints introduced by the Supreme Court siding with scammers last year.
Left unable to hold pyramid scammers financially liable, the FTC is looking to use the Business Opportunity Rule to resume regulation of fraud. That also is playing out.
I feel until we see the final outcome of current major FTC cases, and whatever happens with the Business Opportunity Rule, that MLM pyramid regulation in the US is kind of limbo.
According to one of Plaintiffs’ expert’s calculations, over 157,000 distributors collectively lost more than $389 million between January 2014 and February 2020.
Outside of the constraints of a class-action, Lifevantage certainly appears to be a substantial case worthy of FTC investigation.