Kerrigan v. Visalus, Inc.

• Decision Date: 12 June 2015
• Docket Number: Case No. 14–cv–12693.
• Citation: 112 F.Supp.3d 580
• Parties: Timothy KERRIGAN et al., Plaintiffs, v. VISALUS, INC. et al., Defendants.
• Court: U.S. District Court — Eastern District of Michigan

112 F.Supp.3d 580

Timothy KERRIGAN et al., Plaintiffs,

v.VISALUS, INC. et al., Defendants.

Case No. 14–cv–12693.

United States District Court, E.D. Michigan, Southern Division.

Signed June 12, 2015.

Brent Caldwell, Matthew J.M. Prebeg, Prebeg Faucett & Abbott PLLC, Houston, TX, Sarah Lindsay Rickard, Andrew Kochanowski, Sommers Schwartz PC, Southfield, MI, for Plaintiffs.

Barry M. Rosenbaum, Gregory M. Krause, Seyburn, Kahn, Southfield, MI, Brian A. Howie, Edward A. Salanga, James A. Ryan, Kevin D. Quigley, Quarles & Brady LLP, Phoenix, AZ, Mitra Jafary–Hariri, Nicholas B. Gorga, Honigman Miller Schwartz and Cohn LLP, Detroit, MI, Amy Sitner Applin, Emily M. Ballenberger, Zausmer, Kaufman, August, Caldwell & Tayler, Farmington Hills, MI, for Defendants.

OPINION AND ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTIONS TO DISMISS (ECF 35–37) AND DIRECTING PLAINTIFFS TO FILE AN AMENDED COMPLAINT

MATTHEW F. LEITMAN, District Judge.

In 2012 or 2013, Plaintiffs Timothy Kerrigan, Lori Mikovich, and Ryan M. Valli (collectively, "Plaintiffs") each paid money to Defendant ViSalus, Inc. ("ViSalus") for the opportunity to sell ViSalus' weight-loss products. Plaintiffs now allege that they lost the money that they paid to ViSalus. Plaintiffs claim that ViSalus operates a pyramid scheme.

In this action, Plaintiffs assert claims against ViSalus and numerous allegedly-related parties (collectively, the "Defendants") for violations of the Racketeer Influenced and Corrupt Organizations ("RICO") Act, 18 U.S.C. § 1961 et seq., and various Michigan state laws. (See the "Complaint," ECF # 1.) The Defendants have moved to dismiss. (See the "Motions," ECF # 35–37.) For the reasons explained below, the Motions are GRANTED IN PART and DENIED IN PART. Plaintiffs are directed to file an Amended Complaint as set forth below.

RELEVANT FACTUAL ALLEGATIONS¹

A. ViSalus

ViSalus is a retailer of powdered weight-loss shakes and products. The company is headquartered in Troy, Michigan. (See Compl. at ¶¶ 1, 11, 52.) ViSalus maintains a network of "individual promoters" ("IPs") who sell ViSalus' weight-loss products and recruit other IPs to do the same. (See id. at ¶¶ 67–68.) ViSalus pays each IP commissions and/or bonuses for selling the weight-loss products and for recruiting new IPs. (See id. at ¶¶ 73–74.) The system through which IPs earn commissions and/or bonuses for sales and recruitment is hereinafter referred to as the "ViSalus Program."

B. How the ViSalus Program Works

1. ViSalus Promotes the Opportunity to Enroll in the ViSalus Program

ViSalus advertises the chance to enroll as an IP in the ViSalus Program as a "business opportunity" with "unlimited earning potential." (Id. at ¶¶ 93, 101.) Among other things, ViSalus claims that its IPs can earn thousands of dollars per month through the ViSalus Program and are eligible for bonuses of up to $1,000,000. (See id. at ¶¶ 96–102.) ViSalus also touts that it has given away more than 600 BMW automobiles to successful IPs. (See id. at ¶ 103.) ViSalus promotes the ViSalus Program through social media, Internet advertisements, and promotional videos. (See id. at ¶¶ 94, 98–101, 113–14.)

ViSalus also relies on its network of IPs to advertise the ViSalus Program. (See id. at ¶ 125.) ViSalus encourages IPs to host "challenge parties" for friends and family to encourage them to enroll as IPs. (See id. ) In addition, ViSalus urges IPs to promote the benefits of becoming an IP in the ViSalus Program whenever they sell ViSalus products to a customer. (See id. )

2. IPs Enroll in the ViSalus Program By Paying Money to ViSalus

A new IP must pay an enrollment fee to ViSalus in order to join the ViSalus Program and thereby obtain the right to sell ViSalus' products. (See id. at ¶ 68.) A new enrollee can become a "basic" IP for $49, or the enrollee can pay $499–$999 for "distribution kits" that include product samples. (See id. ) In addition, new IPs are automatically subscribed to ViSalus' proprietary website for $29 per month. (See id. at ¶¶ 68–69.) Upon enrollment, new IPs are also given the option to purchase a recurring auto-shipment of ViSalus shakes for $49–$250 per month. (See id. at ¶¶ 68–69.)

3. ViSalus Compensates its IPs Through Sales Commissions and Recruitment Bonuses

ViSalus compensates IPs enrolled in the ViSalus Program in three ways: (1) commissions for selling ViSalus products, (2) bonuses for recruiting other people who enroll as IPs, and (3) commissions and/or bonuses for product sales and recruitment by the new recruits whom the IP enrolls into the ViSalus Program. (See id. at ¶¶ 73–74, 78.)

First, "active" IPs receive commissions from ViSalus for their monthly sales of ViSalus weight-loss products. (See id. at ¶ 73.) In order to remain "active"—and thus, eligible to receive commissions—an IP must generate sales of $125 per month. (See id. ) ViSalus pays commissions on all sales by an active IP in excess of $200 per month. (See id. ) An IP earns a 10–percent commission on monthly sales between $201 and $500; 15–percent on monthly sales between $501 and $1,000; and 20–percent on monthly sales between $1,000 and $2,500. (See id. ) Thus, for example, an active IP would receive $30 in commissions for generating $500 in monthly sales; $105 in commissions for $1,000 in monthly sales; and $405 in commissions for $2,500 in monthly sales. (See id. )

Second, ViSalus pays IPs bonuses related to the recruitment of new IPs. (See id. at ¶ 74.) For instance, ViSalus pays a "Fast Start Bonus" ranging from $50 to $180 whenever an IP enrolls a new recruit who purchases a distribution kit. (See id. at ¶ 76.) In addition, ViSalus offers a "First Order Bonus" equal to 20 percent of the initial sale that an IP makes to a new enrollee. (See id. at ¶ 75.) ViSalus also earmarks two percent of its revenue to the "Rising Star Weekly Enrollers Pool," which is paid out on a weekly basis to IPs who qualify by, among other things, recruiting three new IPs into the ViSalus Program. (See id. at ¶ 80.) An IP who qualifies for the "Rising Star Weekly Enrollers Pool" is guaranteed to receive at least $75 per week. (See id. )

Finally, ViSalus rewards an IP for sales in his or her "downline"—i.e., sales by recruits whom the IP directly or indirectly enrolls into the ViSalus Program. (See id. at ¶ 78.) ViSalus pays each IP a "Team Commission" equal to five percent of the sales revenue generated by every recruit that the IP directly enrolls in the ViSalus Program (the "first-level downline"). (See id. ) ViSalus also pays each IP a five percent "Team Commission" on sales by new IPs recruited by his or her first-level downline (the "second-level downline"). (See id. ) IPs can earn additional bonuses for sales farther down his or her downline. (See id. ) For instance, ViSalus states that "[i]f you personally sponsored 3[a]ctive [IPs] who each have 3 customers on a $49 [auto-shipment] every month, and duplicated that effort through 8 levels of referral, you would earn $72,324 per month just from your Team Commissions!" (Id. at ¶ 79 (emphasis in original).)

4. The Market for the ViSalus Program is Saturated, and Most IPs Lost the Money that They Paid to ViSalus

As a result of the emphasis that ViSalus places on recruitment, ViSalus has "attracted well over 100,000" IPs into the ViSalus Program. (Id. at ¶ 6.) However, the market for the ViSalus Program is now "saturated" and the number of IPs has dropped precipitously. (Id. at ¶ 134.) "All or virtually all of the IPs who were recruited between 2010 and 2013 ... lost their money paid to ViSalus for the ‘business opportunity.’ " (Id. at ¶ 136.) Meanwhile, high-level IPs and ViSalus insiders have profited handsomely through generous employment contracts and/or by selling their interests in the company. (See id. at ¶¶ 22–31, 136.)

C. The Parties in this Action

1. The Plaintiffs

In 2012 or 2013, Plaintiffs each paid ViSalus at least $499 in order to enroll as IPs in the ViSalus Program. (See id. at ¶¶ 8–10.) Plaintiffs allege that they lost the money that they paid to ViSalus. (See id. at ¶ 136.) Each Plaintiff is a resident of Michigan. (See id. at ¶¶ 8–10.)

2. The Defendants

Plaintiffs bring this action against 31 different defendants (collectively, the "Defendants"). The Defendants and their alleged connections to the ViSalus Program are as follows:

a. ViSalus and its Corporate Shareholders

Plaintiffs have named ViSalus and three companies that directly or indirectly own shares in ViSalus as defendants. (See id. at ¶¶ 11–14.) Defendant ViSalus Holdings, LLC ("ViSalus Holdings") directly owns or owned shares of ViSalus. (See id. at ¶ 12.) Defendants Ropart Asset Management Fund, LLC ("Ropart Asset") and Ropart Asset Management Fund II, LLC ("Ropart Asset II") (collectively, the "Ropart Entities") are Connecticut-based private equity funds that own or owned shares in ViSalus and/or ViSalus Holdings. (See id. at ¶¶ 13–14.)

b. The Individual Insider Defendants

Plaintiffs also name as defendants five individuals who own an interest in and/or hold an executive role with ViSalus and/or ViSalus Holdings (collectively, the "Individual Insider Defendants"):

• Defendant Robert Goergen, Sr. ("Goergen Sr.") is a partial owner of the Ropart Entities. (See id. at ¶ 15.) Goergen Sr. serves on the executive board of ViSalus and has appeared in ViSalus-sponsored videos. (See id. )

• Defendant Todd Goergen ("Goergen") is the Chief Operating Officer of ViSalus. (See id. at ¶ 16.) In addition, Goergen is or was employed by the Ropart Entities. (See id. )

• Defendant Ryan Blair ("Blair") is the Chief Executive Officer and a shareholder of ViSalus. (See id. at ¶ 17.) Blair identifies himself as one of the founders of ViSalus. (See id. at ¶ 19.)

• Defendant Nick Sarnicola ("Sarnicola") is a "Global Ambassador" for ViSalus. (See id. at ¶ 18.) Sarnicola describes himself as one of the founders of ViSalus, and he controls almost 75 percent of the company's "downline." (See id. ) Sarnicola is also a shareholder of ViSalus. (See id. )

•

...