Smith v. Lifevantage Corp., Case No. 2:18-cv-00621 DN PMW
| Decision Date | 05 December 2019 |
| Docket Number | Case No. 2:18-cv-00621 DN PMW |
| Parties | Brian SMITH, individually, Michael Ilardo, individually, Plaintiffs, v. LIFEVANTAGE CORPORATION, a corporation; and Darren Jensen, an individual, Defendants. |
| Court | U.S. District Court — District of Utah |
Amy L. Marino, Marino Law PLLC, Andrew J. Kochanowski, Pro Hac Vice, Sommers Schwartz PC, Southfield, MI, J. Benjamin King, Pro Hac Vice, Reid Collins & Tsai LLP, Dallas, TX, Lance C. Young, Pro Hac Vice, Law Office of Lance C. Young, Ann Arbor, MI, R. Adam Swick, Pro Hac Vice, Reid Collins & Tsai LLP, Austin, TX, Steven A. Christensen, Christensen Young & Associates PLLC, Sandy, UT, for Plaintiffs.
Bradley D. Ryynanen, Pro Hac Vice, John Sanders, C.C., Jr., Pro Hac Vice, Rex A. Mann, Pro Hac Vice, Thomas M. Melsheimer, Pro Hac Vice, Katrina G. Eash, Pro Hac Vice, Winston & Strawn LLP, Dallas, TX, David C. Reymann, Pro Hac Vice, Jeffrey J. Hunt, Robert S. Clark, Bryan S. Johansen, Parr Brown Gee & Loveless, Salt Lake City, UT, for Defendants.
Defendants LifeVantage Corporation and Darren Jensen moved to dismiss (the "Motion")1 Plaintiffs Brian Smith and Michael Ilardo's First Amended Class Action Complaint.2 Plaintiffs responded and requested leave to file an amended complaint if the Motion to Dismiss is granted.3 Defendants replied in support of the Motion.4
The Complaint alleges securities fraud, sale of an unregistered security, antitrust violations, and unjust enrichment. These claims stem from Plaintiffs' involvement as Distributors of LifeVantage products.5 Defendants' Motion to Dismiss argues Plaintiffs have not pleaded fraud with the exacting degree of particularity demanded by Fed. R. Civ. Pro. 9(b) and the Private Securities Litigation Reform Act ("PSLRA").6 Defendants also argue that Distributorship agreements are not required to be registered as securities.7 Defendants further argue that Plaintiffs have failed to plead sufficient facts to state a claim for antitrust violations or unjust enrichment.8
Under a scheme liability framework, Plaintiffs have plausibly stated a claim for violation of Rule 10b-5 of the Securities Act. However, Plaintiffs have failed to plausibly allege facts stating claims for sale of an unregistered security; violation of the Sherman and Clayton Acts; and unjust enrichment. Therefore, Defendants' Motion to Dismiss9 is DENIED in part and GRANTED in part.
Plaintiff Brian Smith enrolled as a LifeVantage Distributor in March 2016, hoping to make an income and support his cancer charity while he was unable to work outside the home.10 Smith spent over $1,000 to sign up and obtain LifeVantage products to sell. Smith also signed up to purchase more products automatically.11 Smith attempted to use social media to sell these products, but because other Distributors in his area were already using social media for this very purpose, Smith did not sell any of product he purchased.12 Smith was also unsuccessful in enrolling any new Distributors.13
Plaintiff Michael Ilardo became a LifeVantage Distributor in February 2017, hoping to create an income that would support him as he attempted to establish an evangelical ministry.14 Ilardo spent approximately $1,800 signing up as a LifeVantage Distributor.15 But Ilardo found few customers.16
Both Plaintiffs allege that they lost money by joining LifeVantage.17 Plaintiffs' central allegation is that LifeVantage is an illegal pyramid scheme rather than a legitimate multi-level marketing ("MLM") business.18 Specifically, Plaintiffs bring the following causes of action against the Defendants: (1) Violation of Section 10(b) of the Securities Exchange Act And Rule 10b-5; (2) Violation of 15 U.S.C. § 77l(a)(1) and (2) ; (3) Violations of Sections 1 and 2 of the Sherman Act 15 U.S.C. § 1, 2, and Sections 4 of the Clayton Act, 15 U.S.C. § 15 ; (4) Unjust Enrichment. Defendants request dismissal of all of the causes of action in Plaintiffs' First Amended Class Action Complaint under Rule 12(b)(6) and Rule 9(b) of the Federal Rules of Civil Procedure.19
Dismissal is appropriate under Rule 12(b)(6) when the complaint, standing alone, is legally insufficient to state a claim upon which relief may be granted.20 Each cause of action must be supported by enough sufficient, well-pleaded facts to be plausible on its face.21 In reviewing a complaint on a Rule 12(b)(6) motion to dismiss, factual allegations are accepted as true and reasonable inferences are drawn in a light most favorable to the plaintiff.22 However, "the plausibility standard ... asks for more than a sheer possibility that a defendant has acted unlawfully."23 Therefore, to show an entitlement to relief, the facts must "permit the court to infer more than the mere possibility of misconduct."24
Under Rule 9(b), a party making allegations of fraud must "state with particularity the circumstances constituting fraud."25 When the fraud alleged is a species of securities fraud, the complaint must also satisfy the requirements of the Private Securities Litigation Reform Act ("PSLRA"). "The PSLRA requires plaintiffs to state with particularity both the facts constituting the alleged violation, and the facts evidencing scienter, i.e., the defendant's intention to ‘deceive, manipulate, or defraud.’ "26
As an initial matter, liability under Rule 10b-5 attaches only "in connection with the purchase or sale of any security."27 A threshold question is whether a Distributorship in LifeVantage is a security. Defendants do not argue in their motion to dismiss that a LifeVantage Distributorship is not a security. Plaintiffs allege that the combination of the Compensation Plan ("Plan"), the Policies and Procedures, and the Distributor Enrollment Form is "an offering for investment and a security under federal securities laws."28 Plaintiffs allege that seven out of eight ways for a Distributor to earn money as described in the Plan are "directly tied to recruiting"29 and forming a downline of Plan participants whose sales supplement the Distributor's income.30
In S.E.C. v. W.J. Howey Co. , the Supreme Court defined an investment contract under Federal Securities law as "a contract, transaction, or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party."31 Courts, including the Tenth Circuit, have broadly interpreted the Howey test so that "the word ‘solely’ must not be given an unduly restrictive application."32 Therefore, investment in the Plan, where profit comes "if not solely, at least predominantly from the efforts of others, namely of the downline members,"33 falls under the definition of an investment contract governed by securities laws.
Moreover, Plaintiffs allege that the LifeVantage MLM structure constitutes a pyramid scheme. "Investment in a pyramid scheme is itself a security.34 As is discussed below, this allegation is key to Plaintiffs' 10b-5 claim.
Plaintiffs allege that Defendants have violated Section 10(b) of the Securities Exchange Act and its associated Rule 10b-5.35 Section 10(b) forbids the use of "any manipulative or deceptive device or contrivance" that would violate any "such rules and regulations as the Commission may prescribe."36
Rule 10b-5 operates under the authority granted by Section 10(b), 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.37 To state a 10b-5 claim, Plaintiffs must allege facts showing this type of fraud or deceit, made with scienter.38 Scienter is "a mental state embracing intent to deceive, manipulate, or defraud."39 The Tenth Circuit acknowledges both fraudulent intent and recklessness as satisfying the scienter requirement.40
Defendants argue that Plaintiffs fail to allege sufficient facts to state a claim under the Securities Exchange Act.41 Defendants contend that Plaintiffs cannot assert an "inherently fraudulent42 " pyramid scheme and expect to survive a motion to dismiss, because Plaintiffs "fail[ ] to identify any specific statements."43 When a plaintiff alleges fraud by misleading statements or omissions, the fraudulent statements must be set forth specifically.44 In such circumstances, the Tenth Circuit has required inclusion of "the time, place, and contents of the false representation, the identity of the party making the false statements and the consequences thereof."45 Specifically, to state...
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