Locke Lord QuickStudy: Does the Recent Fifth Circuit En Banc Opinion Revitalize Class Actions?

October 14, 2016
The Fifth Circuit recently reversed a published panel opinion (805 F.3d 145) and affirmed a trial court’s certification of a class of individuals who paid money to become sales representatives in what is alleged to be a pyramid scheme. The case is Torres v. S.G.E. Management, LLC, ___ F.3d ___, No. 14–20128, 2016 WL 5746309 (5th Cir. Sept. 30, 2016) (en banc).

The court’s treatment of the issue of individual reliance by each class member is noteworthy. A class action cannot be certified if individual issues predominate over common issues. Questions of individual reliance often defeat certification. In Torres, however, the court used the principle that individual reliance is not an element of a RICO claim based on mail or wire fraud to find there were no individual issues that precluded certification. The court held the relevant legal inquiry is causation not reliance—whether the alleged RICO violation lead directly to plaintiffs’ injuries. The court found Rule 23’s predominance requirement satisfied on the basis of a common causation issue

In his dissent, Judge Jolly summarized the majority opinion succinctly:

The majority concludes that the plaintiffs do not need to make any showing of reliance to establish proximate cause under RICO. Citing the Supreme Court’s decision in Bridge v. Phoenix Bond & Indemnity Co., 553 U.S. 639 (2008), and this circuit’s recent decision in Allstate Insurance Co. v. Plambeck, 802 F.3d 665 (5th Cir. 2015), the majority opinion holds that the plaintiffs have satisfied Rule 23’s predominance requirement for RICO proximate cause simply because the plaintiffs have made a sufficient showing that Ignite is an illegal pyramid scheme, and that they lost money by investing. The majority thus asserts that the plaintiffs do not need to show that the defendants made any false representation upon which the plaintiffs relied to make their losing investment.

The court approved of two theories under which causation could be proved by common facts, both of which were linked to common proof that one of the defendant entities (Ignite) was a pyramid scheme and not legitimate multi-level marketing company.

First, the court held that RICO claims predicated on mail or wire fraud (unlike most common law fraud claims) do not require proof of first-party reliance. Rather, a plaintiff need only show losses caused “by reason of” the defendants’ operation of a fraudulent scheme. The court concluded that because pyramid schemes are per se mail fraud, one who participates in a pyramid scheme can be harmed “by reason of” the fraud regardless whether he or she relied on a misrepresentation about the scheme.

Second, the court held “[a] jury may reasonably infer that, in deciding to pay to become [a sales rep], the Plaintiffs relied on Ignite’s implicit representation that it is a legal multi-level marketing program, when it is in fact a fraudulent pyramid scheme.”

Plaintiffs seeking to certify a class will certainly use this opinion to argue that individual reliance is no longer a significant tool to avoid certification, at least where there are common misrepresentations upon which reliance may be inferred or there is a claimed per se violation of a statute. Such efforts are likely to be seen wherever a party can argue a presumption of reliance should arise based on common misrepresentations to the entire class or where the defendant entity is alleged to be engaged in conduct other than its stated purpose. We can expect more RICO suits and more class actions.

A number of arguments can be made to combat such efforts.
  • Parties can offer proof of individual issues that undercut any presumption of reliance or causation based on common misrepresentations. The majority was clear: “Had the Defendants presented evidence that could rebut the Plaintiffs’ common inference of reliance on an individualized basis, we and the district court might have concluded that individual issues of reliance would predominate at trial.”
  • Parties can argue that the opinion is limited by its facts to cases involving pyramid schemes. 
  • Parties can argue that the opinion has no bearing where the underlying substantive claim is not a RICO violation based on mail or wire fraud.
  • Parties can rely on language in the majority opinion that acknowledges that inferred reliance is not always appropriate. 

While there are clear tools to combat certification after Torres, there is certainly reason to wonder whether the class certification winds have changed at the Fifth Circuit.