Smith v. LifeVantage Corp.
| Decision Date | 18 April 2022 |
| Docket Number | 2:18-cv-621 |
| Parties | BRIAN SMITH and MICHAEL ILARDO, individually and on behalf of a class of similarly situated individuals, Plaintiffs, v. LIFEVANTAGE CORPORATION, a Delaware Corporation, and DARREN JENSEN, an individual, Defendants. |
| Court | U.S. District Court — District of Utah |
MEMORANDUM DECISION AND ORDER DENYING [169] LEAD PLAINTIFFS' MOTION FOR CLASS CERTIFICATION
This matter is before the court on Plaintiffs' Motion for Class Certification under Federal Rule of Civil Procedure 23.[1] They seek to represent a class of individuals who lost money participating in Defendant LifeVantage Corporation's (LifeVantage) distributorship program.[2]Defendants have filed a response opposing certification on various grounds [3] and Plaintiffs have filed a reply.[4] The court has also held a hearing.[5] For the reasons that follow Plaintiffs' Motion for Class Certification is DENIED WITHOUT PREJUDICE.
LifeVantage is a multinational corporation based in Utah that develops and sells wellness supplements and personal care products.[6] Since 2009, its business model has been based on multi-level marketing (MLM), meaning that its products are sold primarily through a hierarchical “network of independent distributors.”[7] Under LifeVantage's model, recruiting and educating new distributors is left primarily to already existing distributors.[8] When a distributor recruits a new distributor, the recruited distributor becomes part of the recruiter's “downline” and the recruiter is in the recruited distributor's “upline.”[9] As this process repeats with each new generation of distributors, multiple levels of distributors are created, hence the name “multi-level marketing.”[10]
LifeVantage presents its distributorship program as a “business opportunity” through which individuals can earn commissions and other financial rewards by buying and selling products and recruiting new distributors.[11] To become a distributor, individuals must be sponsored by another distributor, submit an application, agree to LifeVantage's Distributor Agreement, and purchase an “Enrollment Pack.”[12] New distributors are required to purchase at least a $50 “Start Kit, ” though they are strongly encouraged to purchase much more expensive enrollment packs that include extra marketing materials and samples of LifeVantage products.[13]
Once enrolled, distributors must satisfy a minimum “Personal Sales Volume” (PV) requirement each month to qualify for almost all forms of compensation under LifeVantage's compensation plan.[14] A portion of this monthly PV requirement must come from purchases made by the distributor.[15] Otherwise, the forms and amount of compensation a distributor receives are based on which of LifeVantage's 12 distributor ranks the distributor has reached.[16] Distributors move up in rank, and thus qualify for additional and larger commissions and bonuses, by recruiting additional distributors and satisfying specific “Organizational Sales Volume” (OV) requirements.[17] A distributor's monthly OV is the combination of their own PV and the volume of product bought or sold by all distributors in their downline that month.[18]
Plaintiffs Brian Smith and Michael Ilardo both participated in LifeVantage's distributorship program.[19] Smith is a Connecticut resident who became a distributor in March 2016 after hearing about LifeVantage's products and “business opportunity” from another distributor.[20] However, soon after joining the distributorship program, Smith discovered that he was but one of several distributors trying to sell in his area, and he was unable to sell any products or recruit downline distributors, despite his best efforts.[21] Smith came to believe that the only real way to make money in the program was to recruit other distributors, and he became further disenchanted with the program upon realizing that he personally would have to purchase LifeVantage products every month to qualify for commissions and remain a distributor.[22] Smith estimates that he spent well over $1, 000 to be a distributor and received few, if any, commission payments.[23]
Ilardo's story is much the same. He is a New York resident who became a LifeVantage distributor in February 2017.[24] He had previously sold products for another MLM company and came across LifeVantage's distributorship program while speaking with an upline leader from his former MLM company.[25] Ilardo remained a distributor for 18 months, during which he purchased the most expensive enrollment pack, approximately $300 in product, training videos and business materials each month, and tickets for LifeVantage training events and conventions.[26] Ilardo was able to recruit a couple of distributors to his downline and earn some commissions but overall found that customers showed little, if any, interest in buying LifeVantage's products.[27] He came to believe that the only way he could recoup the costs of becoming and remaining a distributor was by recruiting other distributors.[28] He estimates that he lost over $8, 000 participating in LifeVantage's distributorship program.[29]
On January 24, 2018, Smith filed a class action complaint against LifeVantage and several individual defendants in the United States District Court for the District of Connecticut, claiming that LifeVantage's distributorship program is a pyramid scheme.[30] The case was transferred to the District of Utah several months later, [31] after which Smith amended his complaint to add a new plaintiff, Ilardo, and drop all but one of the individual defendants, Darren Jensen, LifeVantage's CEO at the time.[32]
In November 2018, Defendants moved to dismiss Plaintiffs' amended class action complaint.[33] The court granted the motion in part, dismissing all except Plaintiffs' “scheme liability” claim under § 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5(a) and (c), and granted Plaintiffs leave to amend their complaint.[34] Plaintiffs filed a second amended class action complaint soon thereafter, asserting a scheme liability claim under § 10(b) and Rule 10b-5, unjust enrichment, and new claims under § 12(a)(1) and (2) of the Securities and Exchange Act of 1933.[35] Another motion to dismiss Plaintiffs' § 12(a) and unjust enrichment claims soon followed.[36] And, in November 2020, the court granted the motion except as to Plaintiffs' claim under § 12(a)(2).[37] Accordingly, Plaintiffs' case now proceeds on two claims of securities fraud: (1) a scheme liability claim under § 10(b) and Rule 10-b5(a) and (c) and (2) a fraudulent prospectus claim under § 12(a)(2).[38]
Plaintiffs filed the present motion for class certification on June 15, 2021.[39] Defendants filed a response on July 13, 2021, and Plaintiffs replied on July 27, 2021.[40] Defendants, who had sought leave to file an amended answer and assert a counterclaim against Ilardo on April 30, 2021, were granted leave to do so on July 21, 2021, shortly after filing their response to Plaintiffs' motion for class certification.[41] Defendants filed their amended answer and counterclaim against Ilardo on July 23, 2021, and Ilardo filed an answer on August 13, 2021.[42]The court held a hearing on Plaintiffs' motion for class certification on March 28, 2022.[43]
Class actions are “an exception to the usual rule that litigation is conducted by and on behalf of the individual named parties only.”[44] Federal Rule of Civil Procedure 23(a) allows individuals to litigate on behalf of a class only if:
These requirements are known, respectively, as the “numerosity, ” “commonality, ” “typicality, ” and “adequacy” requirements.
If the requirements of Rule 23(a) have been met, the party seeking class certification must then show that the proposed class action is maintainable under Rule 23(b). Here, Plaintiffs seek certification under Rule 23(b)(2) and (3). Rule 23(b)(2) permits a class action when “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.” And Rule 23(b)(3) permits a class action when “the court finds that the questions of law or fact common to class members predominate over any question affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy.”[46] Rule 23(b)(3)'s requirements are known as the “predominance” and “superiority” requirements.
The parties seeking class certification bear the burden of showing that each of these requirements is “clearly met.”[47] And the court is required to conduct a “rigorous analysis” to assure that the parties seeking class certification have met their burden.[48]
DISCUSSION
The proposed “Class Period” runs from January 24 2015, until the present.[50] Plaintiffs assert that class membership can be determined from LifeVantage's...
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