United States District Court, E.D. Kentucky, Central Division, Lexington
MEMORANDUM OPINION & ORDER
GREGORY F. VAN TATENHOVE, District Judge.
Plaintiffs Yvonne Day, Leonard Haslag, James McCormick, and John W. Turner, on behalf of themselves and a purported class of similarly situated individuals, claim that Defendants Fortune Hi-Tech Marketing, Inc. and its high-level members carried out a pyramid scheme at their expense. Therefore, the Day Plaintiffs claim that they can recover damages under various provisions of the Racketeer Influenced and Corrupt Organizations Act, the Kentucky Consumer Protection Act, and the Kentucky Pyramid Sales Act. The Fortune Defendants move to dismiss these claims as improperly pled in the Complaint. In relation to the federal claims, the Fortune Defendants argue that the Complaint fails to detail what each of them did wrong, lacks the requisite particularity in describing the alleged racketeering activity, and relies on investment activity that is not improper under the RICO statutes. The Fortune Defendants argue that the state claims should also be dismissed due to a lack of a contractual relationship and because the claims are barred by a prior action initiated by the Kentucky Attorney General. For the reasons that follow, the Fortune Defendants' motions to dismiss shall be GRANTED in part and DENIED in part.
Fortune Hi-Tech Marketing, Inc. was a Kentucky corporation that operated from September 11, 2000 to early 2013. During that time, Fortune held itself out to be a legitimate corporation that used "relationship marketing" to sell products through so-called "Independent Representatives." [R. 1 at 13-14]. All members of Fortune are considered Independent Representatives, but various additional titles were given to those who had met certain criteria and therefore advanced to higher levels within the company's structure. Participants could initially join Fortune for $75 as a "Representative, " but recruitment presentations highly encouraged participants to pay $299 to join Fortune as a "Manager." [R. 1 at 14-15]. Fortune charged Managers a $199 fee each year and offered a "Fortune Back Office" website that required a $20 initial setup fee and a $24.95 recurring monthly payment. [R. 1 at 15, 21]. Successful Managers could advance to become Qualified Representatives, then Regional Sales Managers, followed by Executive Sales Managers, National Sales Managers, and finally Presidential Ambassadors. [R. 1 at 15]. At each level, Independent Representatives could earn compensation by "recruiting and sponsoring new representatives; and commissions from sales of products and services by themselves and by recruits in their downline.'" [R. 1 at 15].
According to Fortune's policies and procedures, some of the compensation and opportunity for advancement was tied to the sale of products. Only "Qualified" Independent Representatives had access to bonuses and compensation from recruitment of and sales by downstream Independent Representatives. The "Qualified" designation was placed before an Independent Representative's position in the company if that representative sold an adequate and predetermined quantity of Fortune products each month. [R. 1 at 22]. However, the Day Plaintiff's contend that this was a mere formality. According to the Day Plaintiffs, Fortune encouraged Independent Representatives to buy products themselves or to have new Independent Representatives purchase products when signing up instead of selling the products to third parties that were not part of the Fortune organization. [ Id. ] After joining Fortune, new Independent Representatives would generally purchase products themselves to earn "customer points" so that bonuses could be paid to their sponsors. The Complaint describes customer points as simply being the required amount of Fortune goods that must be purchased to receive benefits. [ Id. ] For example, in addition to paying fees to join Fortune as an Independent Representative, the Fortune Back Office website was often one of a new Independent Representative's first purchases. This purchase qualified as one customer point towards the three initially needed to become a "Qualified" member of the organization.
While modest commission and advancement could be made through selling services and products, the Day Plaintiffs contend that the focus of the organization and the source of most of the income and upward mobility were in the recruitment of members. [R. 1 at 18]. The Day Plaintiffs support this contention with several allegations which, at this stage in the action, this Court must accept as true. First, the Day Plaintiffs claim that top level Fortune managers and Independent Representatives encouraged new Independent Representatives to recruit new members rather than sell goods to third parties. They cite to a YouTube recruitment video in which Presidential Ambassador Joel McNinch states, "As a regional manager, every time you go out and personally enroll a new manager who gathers three customers, you're going to earn a $200 bonus." [R. 1 at 16]. He went on to emphasize the significant amount of money to be earned and drew attention to the exponential effect of downline benefits in the organization. McNinch said, "As these reps start to bring in reps, not only do you earn an override percentage of their customers, but you earn a $100 customer acquisition bonus for every rep that's gathered by any of your reps.... $100, $100, $100 unlimited for every rep that joins." [R. 1 at 16]. McNinch summarized the presentation by stating, "We're not looking to sign you up and sell you something; we're looking for team members." [ Id ]. The Complaint also refers to Presidential Ambassador Mike Misenheimer, who gave a recruitment presentation in which he said the key to making money in Fortune is to, "get a rep, get a rep, get a rep.... The whole thing's about getting the preliminary stuff out of the way, and getting to regional [sales manager] fast." [R. 1 at 17].
The Day Plaintiffs allege that these sentiments were not limited to two Presidential Ambassadors but were enshrined in the official training materials. The written materials for "Business Building Steps" encourage Independent Representatives to feel comfortable with the fact that they can be successful without being salespersons. [R. 1 at 17]. The Business Building Steps handout then omits any discussion of techniques for selling products to third parties and focuses instead on approaching and inviting members of an Independent Representative's social circle to join Fortune themselves and become "partners" in the business. [R. 1 at 17; See Exhibit 2].
The Day Plaintiffs further allege that a significant portion of the compensation awarded to Independent Representatives was through bonuses that were given for recruiting new managers. An Independent Representative received a "Quick Start Bonus" when he or she recruited and sponsored a new manager that was able to gain three personal customer points within his or her first sixty days of enrollment. [R. 1 at 18]. New members were highly encouraged to make these purchases themselves upon enrolling so that the Quick Start Bonus was awarded to the upstream Independent Representatives. [ Id. ] In addition, there was a "Quick Start Bonus Override" that awarded $5 to an Independent Representative when a manager was recruited between two and seven levels downline. If the newly recruited manager was on level eight, the Quick Start Bonus Override was $10. [ Id. ] During the year prior to the commencement of this action, these amounts had been significantly raised.
Further recruitment bonuses could be realized once an Independent Representative rose to the level of Regional Sales Manager. At this point, the Independent Representative could receive customer acquisition bonuses. When a new manager was recruited by Independent Representative on any level of a Regional Sales Manager's downline and that manager qualified for a Quick Start Bonus, the Regional Sales Manager received $100. [R. 1 at 19]. Once sixteen managers were recruited to the same downline group, the Regional Sales Manager received $200 per new recruit [ Id ]. These bonuses were even greater for those in the Executive Sales Manager or National Sales Manager positions as they received bonuses for each newly recruited manager in the downline that qualified for a Quick Start Bonus. [ Id. ]
Beyond the signup costs and the initial and recurring website costs, Fortune encouraged new Independent Representatives to pay $299 to complete the training to become a "Trainer Coach." [R. 1 at 19]. This provided additional incentive for Independent Representatives to recruit and train new managers. Trainer Coaches were paid $40 for each new manager they trained. [ Id. ] This training could be as elementary as familiarizing new managers with use of their Fortune Back Office websites and having them sign a form. [ Id. ] Regardless of the training intensity, a participant paid $299 and a Trainer Coach was compensated $40 for training a new manager. Trainer Coaches were required to pay $100 per year to Fortune in order to maintain their status as an eligible Trainer Coach. [ Id. ] Just as the managers could advance up the pyramid by recruiting additional Independent Representatives, so too could Trainer Coaches increase their income by training others. When an Independent Representative became a Regional Sales Manager they could pay $200 to become a "Certified Regional Trainer." [R. 1 at 19]. Certified Regional Trainers were compensated with $80 payments for each new manager that they trained. [ Id. ]
For new Independent Representatives to be able to receive the actual commission for sales made by those in their downline, they had to recruit and sponsor a new manager. [R. 1 at 21]. Therefore, even some commission from legitimate sales to third party individuals outside the Fortune organization was triggered through the recruitment of additional managers. [ Id. ] After selling three Fortune products and recruiting a manager, an Independent Representative received commission on the products sold by managers they have recruited themselves. Though Fortune had a policy that no more than two of the three points initially earned can be from the Independent Representative's own household, the Complaint alleges that Fortune "neither track[ed] nor enforce[ed] this policy." [ Id. ]
Finally, the Day Plaintiffs state that the process of advancement through the company provides factual support for their assertion that Fortune was a pyramid scheme focused on recruitment of members over product sales. According to the Complaint, by earning ten customer points the Independent Representative could earn commission on levels one through eight and could become eligible to be promoted from a new manager to a "Qualified Representative." [R. 1 at 22]. To be promoted to Regional Sales Manager, a Qualified Representative must have developed twelve managers within his first five levels and have ten active customer points per month. A Regional Sales Manager could advance to Executive Sales Manager by earning fifteen customer points per month, developing six Regional Sales Managers, and having a minimum of ninety managers within his or her downline. [R. 1 at 23]. Executive Sales Managers could advance to the second highest level in Fortune, National Sales Manager, by maintaining the fifteen customer points per month, having six Qualified Executive Sales Managers, ninety managers within the regional sales manager group, and 450 managers within the Executive Sales Manager group. [ Id. ] Finally, a National Sales Manager could advance to the highest rank within Fortune and become a Presidential Ambassador by maintaining fifteen customer points per month, having three Qualified National Sales Managers within part of their downline, 1, 620 managers within his or her National Sales Manager group, and a monthly income in excess of $100, 000. [R. at 24]. In addition to significant commission and downline bonuses, Presidential Ambassadors must also be appointed by the directors of Fortune as they are awarded a share of profits from the entire organization. [ Id. ] Therefore, the Day Plaintiffs allege that the entire advancement and compensation system within Fortune was directly related to recruiting new Independent Representatives and building a large downline network that would trigger continued bonuses through constant and ever-increasing recruitment efforts. [R. 1 at 24].
Plaintiffs Yvonne Day, Leonard Haslag, James McCormick, and John W. Turner, who were Independent Representatives with the organization, believe these facts show that Fortune and its high level agents were operating a pyramid scheme at their expense. They initiated the instant action in September 2011 to recover the damages under the Racketeer Influenced and Corrupt Organizations Act, the Kentucky Consumer Protection Act, and the Kentucky Pyramid Sales Act. They assert claims against Fortune Hi-Tech Marketing, Inc., Paul Orberson (President and Founder),  Thomas A. Mills (Chief Executive Officer), David Mills (Chief Operating Officer), Jeff Orberson (Chief Business Officer), Billy Stahl, and Simon Davies, as well as several enumerated members of the two highest tiers of Independent Representatives, "Presidential Ambassadors" and "National Sales Managers." Jeff Orberson, David Mills, Billy Stahl, and Simon Davies counter that the Day Plaintiffs have improperly pled their claims, which should be dismissed under Federal Rule of Civil Procedure 12(b)(6). Though these defendants have now settled and entered an agreed order of dismissal with the Day Plaintiffs,  their arguments have been incorporated by reference into numerous other motions to dismiss filed by the other named defendants, most of whom are proceeding pro se. Thus, while the settling Defendants are no longer party to this action, the Court shall consider their arguments as they apply to the remaining defendants.
Generally speaking, the Fortune Defendants have filed their motions to dismiss pursuant to Rules 12(b)(6) of the Federal Rules of Civil Procedure. Federal Rule of Civil Procedure 12(b)(6) allows a defendant to seek dismissal of a complaint which fails to state a claim upon with relief can be granted. Fed.R.Civ.P. 12(b)(6). In reviewing a Rule 12(b)(6) motion, the Court "accept[s] all the Plaintiffs' factual allegations as true and construe[s] the complaint in the light most favorable to the Plaintiffs." Hill v. Blue Cross & Blue Shield of Mich., 409 F.3d 710, 716 (6th Cir. 2005). For a claim to be viable, the complaint must, at a minimum, "give the defendant fair notice of what the... claim is and the grounds upon which it rests, " Bell Atl. Corp. v. Twombly, 550 U.S. 544, 554-55 (2007) (quoting Conley v. Gibson, 355 U.S. 41, 47 (1957)). Further, "[t]o survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 678 ...