Westlaw.UK
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79 F.3d 776, Fed. Sec. L. Rep. P 99,071, RICO Bus.Disp.Guide 9274, 96 Cal. Daily Op. Serv. 1419, 96 Daily Journ-al D.A.R. 2427
(Cite as: 79 F.3d 776)
United States Court of Appeals, Ninth Circuit. Shaun WEBSTER and Robert Ligon, Plaintiffs-Appellants,
v.
OMNITRITION INTERNATIONAL, INC.; Jim Fobair; Roger Daley; Charles Ragus; and Jerry Rubin, Defendants-Appellees.
Shaun WEBSTER and Robert Ligon, Plaintiffs-Appellants,
v.
Douglas ADKINS; and Gardere & Wynne, De-fendants-Appellees.
Nos. 94-16477, 94-16478.
Argued and Submitted Sept. 12, 1995. Decided March 4, 1996.
Distributors of company’s health and skin care products, who had lost money, brought suit against company and its principals, alleging exist-ence of illegal pyramid scheme. The United States District Court for the Northern District of California, Saundra Brown Armstrong, J., granted summary judgment to defendants and appeal was taken. The Court of Appeals, Beezer, Circuit Judge, held that: (1) material issues of fact, pre-cluding summary judgment, existed as to whether arrangement under which distributors wishing to attain status of “supervisor” purchased large quantities of merchandise, and were to receive commissions on purchases made by later re-cruited distributors, was a pyramid scheme by virtue of emphasizing remuneration through per-sonnel recruitment rather than product sales; (2) result was not changed by existence of some safe-guards purporting to require that there be sales to ultimate users supporting increases in distribution force; (3) material issues of fact, precluding sum-mary judgment, existed as to whether federal se-curities laws had been violated in connection with creation of scheme; (4) material issues of fact, precluding summary judgment, existed as to whether Racketeer Influenced and Corrupt Or-ganizations Act (RICO) had been violated; (5) material issues of fact, precluding summary judg-ment, existed as to whether state laws prohibiting “endless chain” marketing schemes have been vi-olated; (6) material issues of fact, precluding summary judgment existed as to whether state law prohibiting use of false or deceptive market-ing practices had been violated; (7) statute of lim-itations had run on federal securities law claims against attorney who had advised company in cre-ation of scheme; (8) attorney had not violated RICO; and (9) material issues of fact, precluding summary judgment, existed as to whether attor-ney had made an actionable false representation under state law.
Affirmed in part; reversed in part and re-manded.
West Headnotes
[1] Federal Courts 170B 776
170B Federal Courts
170BVIII Courts of Appeals
170BVIII(K) Scope, Standards, and Extent
170BVIII(K)1 In General
170Bk776 k. Trial de novo. Most Cited Cases
Court of Appeals reviews grant of summary judgment de novo, to determine whether district court correctly applied relevant substantive law and, viewing evidence in light most favorable to nonmoving party, whether there were genuine is-sues of material fact.
[2] Antitrust and Trade Regulation 29T 231
29T Antitrust and Trade Regulation
29TIII Statutory Unfair Trade Practices and Consumer Protection
29TIII(C) Particular Subjects and Regula-tions
29Tk231 k. Pyramid, chain, or referral sale plans. Most Cited Cases
(Formerly 92Hk12 Consumer Protection)
Sine qua non of “pyramid” scheme is right to receive, in return for recruiting other participants into product sales program, rewards unrelated to sale of product to ultimate users.
[3] Federal Civil Procedure 170A 2491.9
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79 F.3d 776, Fed. Sec. L. Rep. P 99,071,RICO Bus.Disp.Guide 9274, 96 Cal. Daily Op. Serv. 1419, 96 Daily Journ-al D.A.R. 2427
(Cite as: 79 F.3d 776)
170A Federal Civil Procedure
170AXVII Judgment
170AXVII(C) Summary Judgment
170AXVII(C)2 Particular Cases
170Ak2491.9 k. Consumer protec-tion and unfair trade practices, cases involving. Most Cited Cases
(Formerly 170Ak2481)
Material issues of fact, precluding summary judgment, existed as to whether company’s sys-tem for selling vitamin and skin care products was an illegal pyramid scheme, even though com-pany claimed it had safeguards which prevented recruitment of new distributors from outpacing revenues derived from product sales, precluding necessary pyramid scheme finding that revenues were obtained from distributor recruitment that distributor certify sales to ten customers per month was in-sufficient to insure that product sales revenue supported increases in numbers of distributors, there was no indication that company was enfor-cing another rule requiring that distributors have sold 70 percent of products previously purchased, and there was no showing that company enforced its buy-back rule, under which company was to repurchase inventory of retiring distributors at 90 percent of invoice price, on merchandise less than three months old.
[4] Securities Regulation 349B 5.24
349B Securities Regulation
349BI Federal Regulation
349BI(A) In General
349Bk5 Securities, What Are
349Bk5.24 k. Distributorships; pyr-amid schemes. Most Cited Cases
Scheme under which distributors of health and skin care products could become “supervisors” by purchasing specified large amount of product, and would then be entitled to commissions on purchases made by distributors they recruited, was an “investment contract” for purposes of federal securities laws even though company claimed that distributors received reven-ue from program based on their own hard work rather than efforts of others, as was case with in-vestment contracts; distributors’ efforts were es-sentially managerial, and success of scheme in-volved efforts of other persons actually selling product. Securities Act of 1933, § 12(1, 2), 15 U.S.C.A. § 771 (1, 2); Securities Exchange Act of 1934, § 10(b), 15 U.S.C.A. § 78j(b); 17 CFR § 240.10b-5(c).
[5] Federal Civil Procedure 170A 2511
170A Federal Civil Procedure
170AXVII Judgment
170AXVII(C) Summary Judgment
170AXVII(C)2 Particular Cases
170Ak2511 k. Securities cases in general. Most Cited Cases
Material issues of fact, precluding summary judgment, existed as to whether promoters of scheme to distribute health and skin care products had made misrepresentations, in violation of fed-eral securities law; assuming that arrangement under which distributors could become “supervisors” by purchasing large quantity of merchandise, and could receive commissions on purchases of merchandise made by later recruited distributors, was ultimately found to involve an “investment control,” promoters would be deemed to have made misrepresentation by fail-ing to inform prospective distributors that pyram-id scheme was involved and that persons who be-came distributors late in life of scheme would be sure to lose money. Securities Act of 1933, § 12(1, 2), 15 U.S.C.A. § 771 (1, 2); Securities Ex-change Act of 1934, § 10(b), 15 U.S.C.A. § 78j(b); 17 CFR § 240.10b-5(c).
[6] Securities Regulation 349B 60.19
349B Securities Regulation
349BI Federal Regulation
349BI(C) Trading and Markets
349BI(C)7 Fraud and Manipulation
349Bk60.17 Manipulative, Decept-ive or Fraudulent Conduct
349Bk60.19 Particular con-duct. Most Cited Cases
Operation of pyramid scheme violates rule 10b-5 prohibition against engaging in “act, prac-tice or course of business which operates as fraud of deceit upon any person.” 17 C.F.R. § 240.10b-5.
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79 F.3d 776, Fed. Sec. L. Rep. P 99,071, RICO Bus.Disp.Guide 9274, 96 Cal. Daily Op. Serv. 1419, 96 Daily Journ-al D.A.R. 2427
(Cite as: 79 F.3d 776)
[7] Federal Civil Procedure 170A 2509.5
170A Federal Civil Procedure
170AXVII Judgment
170AXVII(C) Summary Judgment
170AXVII(C)2 Particular Cases
170Ak2509.5 k. Racketeering cases.
Most Cited Cases
(Formerly 170Ak2481)
Material issues of fact, precluding summary judgment, existed as to whether company had vi-olated Racketeer Influenced and Corrupt Organizations Act (RICO) by operating illegal pyramid scheme of product distribution, involving creation of classes of supervisors who purchased large quantities of merchandise and received commis-sions on purchases made by distributors sub-sequently recruited by them; there were fact ques-tions as to whether conduct of company involved mail and wire fraud or securities fraud, creating triable fact issue as to whether there were predic-ate acts to support RICO claim. 18 U.S.C.A. § 1961(1)(B, D).
[8] Federal Civil Procedure 170A 2509.5
170A Federal Civil Procedure
170 AXVII Judgment
170 AXVII(C) Summary Judgment
170 AXVII(C)2 Particular Cases
170 Ak2509.5 k. Racketeering cases.
Most Cited Cases
(Formerly 170Ak2481)
Material issues of fact, precluding summary judgment, existed as to whether company violated Racketeer Influenced and Corrupt Organizations Act (RICO) in distribution of its health and skin care products, even though it was claimed that al-leged predicate acts of mail and wire fraud relat-ing to recruitment by “supervisors” of other distributors for whom supervisors were given com-mission credit, in furtherance of pyramid scheme, did not show intent to defraud; facts showing cre-ation and operation of pyramid were indicative themselves of specific intent to defraud, for sum-mary judgment purposes. 18 U.S.C.A. § 1961(1) (B,D).
[9] Federal Civil Procedure 170A 2509.5
170A Federal Civil Procedure
170AXVII Judgment
170 AXVII(C) Summary Judgment
170 AXVII(C)2 Particular Cases
170 Ak2509.5 k. Racketeering cases.
Most Cited Cases
(Formerly 170 Ak2481)
Material issues of fact, precluding summary judgment that Racketeer Influenced and Corrupt Organizations Act (RICO) had been violated, ex-isted as to whether RICO’s enterprise requirement was satisfied by company’s distribution arrange-ment for its health and skin care products, in-volving creation of alleged pyramid scheme in connection with recruitment of distributors; while RICO mandated that enterprise be shown to exist separate and apart from alleged racketeering activity, corporation itself could serve as that sep-arate entity. 18 U.S.C.A. § 1961 (1)(B, D).
[10] Conspiracy 91 2
91 Conspiracy
91I Civil Liability
91I(A) Acts Constituting Conspiracy and Liability Therefor
91k1 Nature and Elements in General
91k2 k. Combination. Most Cited Cases
It is possible for corporation to engage in RICO conspiracy with its own officers and rep-resentatives. 18 U.S.C.A. § 1962(d).
[11] Federal Civil Procedure 170A 2491.9
170A Federal Civil Procedure
170 AXVII Judgment
170 AXVII(C) Summary Judgment
170 AXVII(C)2 Particular Cases
170 Ak2491.9 k. Consumer protec-tion and unfair trade practices, cases involving.
Most Cited Cases
(Formerly 170 Ak2481)
Material issues of fact, precluding summary judgment, existed as to whether company’s ar-rangement for product distribution violated Cali-fornia statute prohibiting “endless chain” market-ing schemes; arrangement involved creation of “supervisors” who became such by purchasing large quantities of merchandise and recruiting
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79 F.3d 776, Fed. Sec. L. Rep. P 99,071, RICO Bus.Disp.Guide 9274, 96 Cal. Daily Op. Serv. 1419, 96 Daily Journ-al D.A.R. 2427
(Cite as: 79 F.3d 776)
other distributors, receiving commissions based upon other distributors’ purchases; although there were provisions to verify that products were be-ing sold to ultimate users they were insufficient to insure that sales were keeping pace with expansion of distribution network. West’s Ann.Cal.Penal Code § 327.
[12] Federal Civil Procedure 170A 2491.9
170A Federal Civil Procedure
170 AXVII Judgment
170 AXVII(C) Summary Judgment
170 AXVII(C)2 Particular Cases
170 Ak2491.9 k. Consumer protec-tion and unfair trade practices, cases involving.
Most Cited Cases
(Formerly 170 Ak2481)
Material issues of fact, precluding summary judgment, existed as to whether manufacturer’s scheme of distributing its health and skin care products violated state statute prohibiting use of false or deceptive marketing practices, and creat-ing cause of action for a person damaged by such practices; there was triable fact issue as to wheth-er distribution system, which involved creation of “supervisors” who became such by purchasing large quantities of company’s merchandise and re-cruiting other distributors, from whom they ob-tained a commission based on volume of those distributors’ purchases, violated state statute pro-hibiting “endless chain” transactions, and if an “endless chain” violation was found, “deceptive marketing practice” finding would also be made.
West’s Ann.Cal.Bus. & Prof Code § § 17200 et seq., 17500 et seq.; West’s Ann.Cal.Penal Code § 327.
[13] Federal Civil Procedure 170A 2515
170A Federal Civil Procedure
170 AXVII Judgment
170 AXVII(C) Summary Judgment
170 AXVII(C)2 Particular Cases
170 Ak2515 k. Tort cases in general.
Most Cited Cases
Material issues of fact, precluding summary judgment, existed as to whether company com-mitted common law fraud by creating a distribu-tion system involving supervisors, who attained that status by purchasing large volume of com-pany’s merchandise, and then received commis-sions based on purchases by distributors they later recruited; misrepresentation, knowledge of falsity and intent to induce reliance would follow from finding that pyramid scheme existed, com-pany had argued that no pyramid scheme was in-volved and prospective distributors would be jus-tified in relying on statements, and distributors had alleged damages.
[14] Limitation of Actions 241 124
241 Limitation of Actions
241II Computation of Period of Limitation
241II(H) Commencement of Proceeding; Relation Back
241k124 k. Intervention or bringing in new parties. Most Cited Cases
Securities Regulation 349B 134
349B Securities Regulation
349BI Federal Regulation
349BI(E) Remedies
349BI(E)1 In General
349Bk134 k. Time to sue and limita-tions. Most Cited Cases
One year statute of limitations precluded suit against attorneys that allegedly participated in creation of a company’s pyramid scheme to mar-ket its products; complaints were not amended to include attorneys until more than one year after initial filing, and complainants knew or had reas-on to know of existence of alleged pyramid scheme at time of original filing. Securities Act of 1933, § § 12(1, 2), (13), 15 U.S.C.A. § § 771 (1, 2) 77m; Securities Exchange Act of 1934, § 10(b) 15 U.S.C.A. § 78j(b).
[15] Conspiracy 91 9
91 Conspiracy
91I Civil Liability
91I(A) Acts Constituting Conspiracy and Liability Therefor
91k9 k. Conspiracy to defraud. Most Cited Cases
Attorney who had assisted in setting up a dis-tribution scheme for company’s health and skin
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79 F.3d 776, Fed. Sec. L. Rep. P 99,071, RICO Bus.Disp.Guide 9274, 96 Cal. Daily Op. Serv. 1419, 96 Daily Journ-al D.A.R. 2427
(Cite as: 79 F.3d 776)
care products, which was alleged to involve illeg-al pyramid arrangement, was not liable under RICO to persons who had become distributors late in life of pyramid and had lost money; attor-neys had not participated in operation or manage-ment of enterprise, and had not conspired to viol-ate RICO. 18 U.S.C.A. § 1962(c)(d).
[16] Attorney and Client 45 26
45 Attorney and Client
45I The Office of Attorney
45I(B) Privileges, Disabilities, and Liabilities
45k26 k. Duties and liabilities to ad-verse parties and to third persons. Most Cited Cases
Attorney that advised company in setting up a product distribution scheme alleged to be an il-legal pyramid arrangement was not liable to com-plaining distributors who lost money due to their late entrance into program based upon violation of California penal statute prohibiting “endless chain” scheme; attorney’s role in creation of ar-rangement was too minimal to impose liability. West’s Ann.Cal.Penal Code § 327; West’s Ann.Cal.Bus. & Prof. Code § 17200.
[17] Federal Civil Procedure 170A 2491.9
170AFederal Civil Procedure
170 AXVII Judgment
170 AXVII(C) Summary Judgment
170 AXVII(C)2 Particular Cases
170 Ak2491.9 k. Consumer protec-tion and unfair trade practices, cases involving.
Most Cited Cases
(Formerly 170 Ak2481)
Federal Civil Procedure 170A 2515
170A Federal Civil Procedure
170 AXVII Judgment
170 AXVII(C) Summary Judgment
170 AXVII(C)2 Particular Cases
170 Ak2515 k. Tort cases in general.
Most Cited Cases
Material issue of fact, precluding summary judgment, existed as to whether attorney who had advised company in creation of product distribu-tion scheme alleged to be illegal pyramid ar-rangement was liable under statute prohibiting making of an untrue or misleading advertising statement, and under common law fraud; there was evidence that attorney had made a statement in a promotional video that company’s profits were driven by retail sales and could never be considered a pyramid scheme. West’s Ann.Cal.Bus. & Prof.Code § § 17200, 17500.
*779 Richard M. Heimann and Karen E. Karpen, Lieff, Cabraser & Heimann, San Francisco, Cali-fornia, for plaintiffs-appellants.
William Christopher Carmody, Dallas, Texas; Robert T. Sullwold, Orrick, Herrington & Sutcliffe, San Francisco, California; Edward King, San Francisco California, for defendants-ap-pellees.
Appeal from the United States District Court for the Northern District of California; Saundra B. Armstrong, District Judge, Presiding.
Before CHOY, BEEZER and DAVID R. THOMPSON, Circuit Judges.
BEEZER, Circuit Judge:
We consider what constitutes an inherently fraudulent pyramid scheme for purposes of sever-al federal antifraud statutes.
Shaun Webster and Robert Ligon represent a class of participants (collectively “Webster”) in a “multi level marketing) program*780 promoted by Omnitrition International, Inc. (“Omnitrition”). Webster alleges that Omnitri-tion, Roger Daley, Charles Ragus, James Fobair and Jerry Rubin operated an inherently fraudulent pyramid scheme under both California and feder-al law. Webster amended the complain to add as defendants Omnitrition’s outside counsel, Douglas Adkins, and his law firm, Gardere & Wynne, L.L.P. (collectively “Attorney Defend-ants”).
The district court granted summary judgment in favor of all defendants, holding that Omnitri-tion’s program was not a pyramid scheme as a
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79 F.3d 776, Fed. Sec. L. Rep. P 99,071, RICO Bus.Disp.Guide 9274, 96 Cal. Daily Op. Serv. 1419, 96 Daily Journ-al D.A.R. 2427
(Cite as: 79 F.3d 776)
matter of law. The court also held that the federal securities claims against the Attorney Defendants were barred by the statute of limitations.
Webster appeals, claiming that there are dis-puted issues of material fact as well as errors of law. We have jurisdiction and we affirm in part and reverse in part.