Opinion
Case No. 4:18-cv-03771 YGR
2022-06-15
IN RE PFA INSURANCE MARKETING LITIGATION.
ORDER GRANTING IN PART AND DENYING IN PART MOTIONS FOR SUMMARY JUDGMENT; ORDER RE: MOTIONS TO SEAL
Re: Dkt. Nos. 252, 263, 253, 255, 258, 262, 264, 270, 271, 273, 275, 277, 279, 280, 293.
Yvonne Gonzalez Rogers, United States District Court Judge.
Plaintiffs Dalton Chen and Youxiang Eileen Wang bring this class action against defendants Life Insurance Company of the
Southwest ("LSW") and Premier Financial Alliance ("PFA") for state-law claims arising out of defendants' alleged endless chain scheme. Now pending are two motions for summary judgment brought by each defendant, Docket Nos. 252, 263, and motions to seal material filed in connection with the same, Docket Nos. 253, 255, 258, 262, 264, 270, 271, 273, 275, 277, 279, 280, 293.
There are also several motions to exclude expert testimony: Docket Nos. 254 (William Keep), 256 (Christopher Snyder), 260 (Larry Stern), and 265 (Bill Post). Because the expert testimony at issue in these motions is not necessary to the resolution of the present motions for summary judgment, the Court will address the motions to exclude in a separate order.
Having carefully considered the pleadings, the record, the parties' briefs, and the argument presented at the hearing held on May 31, 2022, and for the reasons set forth below, the Court GRANTS IN PART AND DENIES IN PART the motions for summary judgment and it GRANTS IN PART AND DENIES IN PART the motions to seal.
I. MOTIONS TO SEAL
As a preliminary matter, both sides have submitted administrative motions to seal documents or portions of documents offered in support of their summary judgment motions. See Docket Nos. 253, 255, 258, 262, 264, 270, 271, 273, 275, 277, 279, 280, 293. The standard for sealing documents in connection with summary judgment motions requires a showing of "compelling reasons supported by specific factual findings" as set forth in Pintos v. Pacific Creditors Ass'n, 605 F.3d 665, 678 (9th Cir. 2010). The Court finds that the sealing requests here are over-broad in light of that standard and that compelling reasons have not been established to seal certain documents to the extent requested. The Court has considered the basis offered for sealing, as well as the significance to the Court's decision of the portions sought to be sealed, in determining which portions to cite or quote in this order. The motions to seal are granted only insofar as they are not necessary to the Court's analysis as set forth in this order.
Therefore, to the extent that the Court has quoted or recited in this order the contents of any specific portion of a document or material subject to a motion to seal, the Court DENIES the motion to seal that information for lack of compelling reasons shown. The motions to seal are otherwise GRANTED for compelling reasons shown.
II. BACKGROUND
In the Consolidated Class Action Complaint, Docket No. 131, plaintiffs allege as follows:
LSW sells life insurance products through an alleged fraudulent multilevel marketing scheme that is jointly operated by LSW and PFA. The alleged scheme targets immigrants and their families with promises of financial success derived from recruiting people to join PFA and sell "the Living Life Indexed Universal Life Insurance" policy ("Living Life policy") issued by LSW, which is co-branded by LSW under the trade name National Life Group ("NLG") and PFA. Id. ¶¶ 1, 81. This policy is offered only through PFA, meaning that a person cannot buy this policy unless it buys it through PFA. Id. ¶ 51. The Living Life policy is an indexed universal life ("IUL") insurance policy, meaning that it provides a permanent life insurance benefit, as well as a cash component based on a rate of return tied to a financial index, subject to a cap, floor, and participation rate set by the insurer. Id. ¶ 2. Indexed
universal life insurance is generally regarded as more complex than other forms of permanent life insurance. Id.
Pursuant to the alleged fraudulent scheme at issue, PFA instructed plaintiffs and other PFA "associates" or "agents" to recruit other people to sell the Living Life policy, who, in turn, will be instructed to recruit more people to sell the Living Life policy, and so forth. Id. ¶ 3. Prospective PFA associates are exposed to representations indicating that, by recruiting more associates, they will be able to achieve financial success and independence, but they are not informed that their actual prospects for financial success and advancement within PFA are very low and that only very few make significant amounts of money or make it to the top of the PFA hierarchy. Id. ¶¶ 3-4. Prospective PFA associates are also exposed to representations indicating that purchasing a Living Life policy will assist them in selling policies to others, in advancing through PFA's hierarchy, and in achieving success and personal wealth. See, e.g., id. ¶¶ 28-29, 33-34. PFA does not disclose that those at the top of the chain will be able to reap the greatest financial benefits from the scheme or that those at the bottom of the chain will be disappointed if the supply of new recruits is exhausted. Id. ¶ 4.
Plaintiffs allege that they would not have joined PFA or purchased Living Life policies if they had known about their true chances of success at PFA. Id. ¶¶ 130, 138, 147.
Plaintiffs assert claims for violations of (1) the Endless Chain Scheme law, Cal. Penal Code § 327, as a predicate for their claim under the unlawful prong of the Unfair Competition Law ("UCL"), Cal. Bus. & Prof. Code § 17200, et seq.; (2) the UCL under the unlawful and unfair prongs as to both defendants, and under the fraudulent prong as to PFA only; and (3) the New Jersey Consumer Fraud Act ("NJCFA"), N.J. Stat. § 56:8-1, et seq.; in addition to (4) fraud as to PFA only; and (5) civil conspiracy.
With respect to all claims, plaintiffs allege that both defendants acted as a principal, agent, or partner of the other, and aided and abetted the other, in connection with the alleged scheme. Id. ¶¶ 92-93.
On May 14, 2021, plaintiffs moved for certification of proposed classes under Rules 23(b)(2) and 23(b)(3) based on their claims under each of the three prongs of the UCL and the New Jersey Consumer Fraud Act. On November 3, 2021, the Court granted the motion for certification as to a California subclass under Rule 23(b)(3) with respect to plaintiffs' claims under the unlawful and unfair prongs of the UCL. See Docket No. 239. The Court otherwise denied the motion without prejudice. See id.
The California subclass is comprised of:
All persons who enrolled as Premier associates and purchased one or more Living Life policies within California between January 1, 2014 and the present.
Excluded from the proposed class are defendants defined as LSW and PFA, "their parents, affiliates, subsidiaries, legal representatives, predecessors, successors, assigns, employees, any entity in which one of these Defendants has a controlling interest or which has a controlling interest in one of these Defendants, and relevant nonparties National Life Insurance Company, NLV Financial Corporation, Mehran Assadi, David Carroll, Jack Wu, Aggie Wu, Rex Wu, Hermic Bacus, Bill Hong, and Lan Zhang." Docket No. 239 at 38 n.9. "Also excluded from the class are the legal representatives, successors, assigns, and immediate family members of Defendants and these relevant nonparties; all individuals who reached the level of Provisional Field Director, Qualified Field Director, Senior Field Director, Regional Field Director, Area Field Director, National Field Director, Executive Field Director or Senior Executive Field Director at PFA; and the judicial officers to whom this matter is assigned and their immediate family members and staff." Id.
See id. at 38.
III. LEGAL STANDARD
The parties do not dispute the general summary judgment standard, which is
well-known and well-established, including the inferences to be given and the burdens. Fed. R. Civ. P. 56; Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Eisenberg v. Ins. Co. of N. Am., 815 F.2d 1285, 1288-89 (9th Cir. 1987).
IV. DISCUSSION
A. Plaintiffs' Objections to Certain Evidence
Before turning to the substance of the summary judgment motions, the Court first addresses plaintiffs' objections to some of the evidence presented.
Plaintiffs request that the Court decline to consider certain evidence filed by PFA in support of its motion for summary judgment, namely statements in David Carrol's declaration stating that PFA prioritizes training its agents over recruitment, as well as an entire declaration by a P-Trac accountant, which states that the $125 technology fee is paid directly to P-Trac. Docket No. 271-2 at 15. Plaintiffs argue that they would be prejudiced if the Court considers this evidence in light of PFA's conduct in discovery, namely (1) PFA's failure to produce its head trainer, Jack Wu, for a deposition despite a court order requiring that he appear for deposition; and (2) PFA's and P-Trac's refusal "to provide any discovery concerning P-Trac" to plaintiffs. See id. In support of the request, plaintiffs cite cases in which courts have imposed Federal Rule of Civil Procedure 37 sanctions for discovery misconduct. See id.
In this district, a party seeking sanctions under Federal Rule of Civil Procedure 37 in connection with a dispute about discovery is required to file a separate motion and notice such motion for a hearing, and that motion must be made as soon as practicable after the filing party learns of the circumstances that it alleges make the motion appropriate. See Civil L.R. 37-4 (providing that a request for sanctions under Rule 37 in connection with a dispute about discovery must comply with Civil Local Rule 7-8); Civil L.R. 7-8 (providing that a motion for sanctions must be separately filed and noticed for a hearing and must be made "as soon as practicable after the filing party learns of the circumstances that it alleges make the motion appropriate").
Here, plaintiffs' request for the exclusion of the evidence in question does not comply with Civil Local Rules 37-4 and 7-8, as plaintiffs failed to file a separate motion for sanctions as soon as they discovered the purported discovery misconduct in question. The Court, therefore, DENIES plaintiffs' request on that basis.
B. Motions for Summary Judgment
Each defendant moves for summary judgment. PFA moves as to plaintiffs' claims under the UCL's unlawful prong and unfair prong, the NJCFA, for fraud, and for civil conspiracy. LSW moves as to the same claims, except fraud. However, LSW also moves as to plaintiffs' requests for injunctive relief, and plaintiffs' theories of liability premised on agency, partnership, aiding and abetting, and co-conspiracy. Below, the Court addresses the issues raised in defendants' motions on a claim-by-claim basis. 1. Claim under the unlawful prong of the UCL based on violations of the Endless Chain Scheme law
As noted above, plaintiffs assert a claim against both defendants under the unlawful prong of the UCL premised on alleged violations of California's Endless Chain Scheme law ("ECL"), California Penal Code § 327, arising out of PFA's recruitment-based marketing scheme. The Court certified the California subclass with respect to this claim under Rule 23(b)(3).
California Penal Code § 327 provides:
Every person who contrives, prepares, sets up, proposes, or operates any endless chain is guilty of a public offense, and is punishable by imprisonment in the county jail not exceeding one year or in state prison for 16 months, two, or three years.
As used in this section, an "endless chain" means any scheme for the disposal or distribution of property whereby a participant pays a valuable consideration for the chance to receive compensation for introducing one or more additional persons into participation in the scheme or for the chance to receive compensation when a person introduced by the participant introduces a new participant. Compensation, as used in this section, does not mean or include payment based upon sales made to persons who are not participants in the scheme and who are not purchasing in order to participate in the scheme.
A violation of the ECL turns on whether a participant pays "valuable consideration for the chance to receive compensation" for recruiting others into the scheme. That a scheme permits a participant to have the "ability to sell products" to persons who do not participate in the scheme "does not convert an endless chain scheme into a legitimate business." See People v. Sweeney, 228 Cal. App. 4th 142, 150, 175 Cal.Rptr.3d 31 (2014). Liability depends on whether the "focus" and the attendant benefits of the scheme are based on "the recruitment of more members to buy into the scheme" rather than "the product sales themselves[.]" Id. (noting that "a marketing plan under which prospective distributors are led to believe that they will make large amounts of money by recruiting additional distributors is illegal"); see also Bounds v. Figurettes, Inc., 135 Cal. App. 3d 1, 19, 185 Cal.Rptr. 480 (1982) ("[R]etail sales do not legalize the pyramid marketing scheme which violates Penal Code section 327. The plan becomes illegal because it is part of the overall marketing plan which depends upon an endless chain of middlemen.").
The ECL is a criminal statute that can carry misdemeanor or felony penalties. See Cal. Penal Code § 327. Victims of an ECL scheme may seek to rescind the contract upon which the scheme is based and recover their net losses incurred pursuant to the scheme. See Cal. Civ. Code § 1689.2 ("A participant in an endless chain scheme ... may rescind the contract upon which the scheme is based, and may recover all consideration paid pursuant to the scheme, less any amounts paid or consideration provided to the participant pursuant to the scheme.").
In this civil action, the alleged ECL violations serve only as a predicate for plaintiffs' unlawful-prong UCL claim. In other words, the alleged violations of the ECL are actionable in this civil action only because the UCL makes them independently actionable. See Cel-Tech Commc'ns, Inc. v. Los Angeles Cellular Tel. Co., 20 Cal. 4th 163, 180, 83 Cal.Rptr.2d 548, 973 P.2d 527 (1999) ("By proscribing any unlawful business practice, section 17200 borrows violations of other laws and treats them as unlawful practices that the unfair
competition law makes independently actionable.") (citation and internal quotation marks omitted). Because the alleged ECL violations are actionable pursuant to the UCL, any remedies must be issued pursuant to the UCL, Cal. Bus. & Prof. Code § 17300, and not the ECL.
The UCL provides a cause of action for "any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising." Cal. Bus. & Profs. Code § 17200. Its coverage has been described as "sweeping," and its standard for wrongful business conduct is "intentionally broad," allowing courts "maximum discretion to prohibit new schemes to defraud." In re First Alliance Mortg. Co., 471 F.3d 977, 995 (9th Cir. 2006) (citation omitted). A defendant can be liable under the UCL either directly or indirectly. See People v. Toomey, 157 Cal. App. 3d 1, 15, 203 Cal. Rptr. 642 (1984).
The remedies that a prevailing plaintiff can obtain under the UCL are set forth in California Business and Professions Code § 17300. That statute "authorizes orders that are necessary to prevent practices that constitute unfair competition and to make 'orders or judgments ... as may be necessary to restore' to persons in interest any money or property acquired by unfair competition." Cortez v. Purolator Air Filtration Prod. Co., 23 Cal. 4th 163, 176, 96 Cal.Rptr.2d 518, 999 P.2d 706 (2000) (quoting Cal. Bus. & Prof. Code § 17300). Remedies available under the UCL are limited to "forms of equitable relief" and do not include damages or non-restitutionary disgorgement. See In re First Alliance, 471 F.3d at 996.
"In the context of the UCL, 'restitution' is meant to restore the status quo by returning to the plaintiff funds in which he or she has an ownership interest, and is so limited." In re First Alliance, 471 F.3d at 996 (citation omitted). "Under the UCL, disgorgement is available as a remedy only to the extent that it constitutes restitution." Ferrington v. McAfee, Inc., No. 10-CV-01455-LHK, 2010 WL 3910169, at *7 (N.D. Cal. Oct. 5, 2010) (citation omitted).
Each defendant seeks summary judgment as to plaintiffs' claim under the unlawful prong of the UCL. Below, the Court addresses each of the arguments made by each defendant, in turn.
a. Article III Standing
PFA argues that plaintiffs lack Article III standing as to the unlawful-prong UCL claim because PFA itself has no ability to redress any injuries that plaintiffs may have suffered as a result of the alleged scheme. More specifically, PFA contends that plaintiffs' requested remedies at class certification were limited to optional recission of the Living Life policies. Since PFA is not a party to the Living Life policies, it has no power under California law to rescind such policies. PFA further argues that, while the class members' agreement with PFA required class members to pay a $125 fee, plaintiffs do not seek rescission of that agreement or reimbursement of the $125 fee as a remedy for their unlawful-prong claim. Accordingly, PFA contends that plaintiffs' UCL unlawful-prong claim fails for lack of the redressability required for Article III standing.
Plaintiffs do not dispute that they seek optional rescission, nor do they dispute that PFA cannot effectuate the rescission. Instead, plaintiffs argue that the redressability requirement for Article III standing is more lax than what PFA represents it to be, as it requires only that the plaintiff's injuries be fairly traceable to the defendant's conduct and that such injuries be likely to be redressed by a favorable judicial decision ordering the requested relief.
Plaintiffs contend that "[t]he Supreme Court has not held that the underlying redress must be provided by a particular defendant for the plaintiff to have standing to sue that defendant." Docket No. 271-2 at 11.
To establish Article III standing, a plaintiff must show "(i) that he suffered an injury in fact that is concrete, particularized, and actual or imminent; (ii) that the injury was likely caused by the defendant; and (iii) that the injury would likely be redressed by judicial relief." TransUnion LLC v. Ramirez, 594 U.S. 413, 141 S. Ct. 2190, 2203, 210 L.Ed.2d 568 (2021) (citing Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61, 112 S.Ct. 2130, 119 L.Ed.2d 351 (1992)) (emphasis supplied). Only the last of these requirements, redressability, is at issue here. "To establish redressability, a plaintiff must show that it is 'likely, as opposed to merely speculative, that the injury will be redressed by a favorable decision.'" M.S. v. Brown, 902 F.3d 1076, 1083 (9th Cir. 2018) (quoting Lujan, 504 U.S. at 561, 112 S.Ct. 2130). The "burden ... is 'relatively modest.'" Id. (quoting Renee v. Duncan, 686 F.3d 1002, 1013 (9th Cir. 2012)). A plaintiff "need not demonstrate that there is a guarantee that [the] injuries will be redressed by a favorable decision[.]" Id. (citation and internal quotation marks omitted). "[R]ather, a plaintiff need only show a substantial likelihood that the relief sought would redress the injury[.]" Id. (citation and internal quotation marks omitted).
Here, with respect to this claim, plaintiffs seek optional rescission of the Living Life policies and, for those class members who do so opt, or whose policies were surrendered or lapsed, plaintiffs also seek to recover "the net money they lost pursuant to Defendants' scheme[.]" See Pls.' Trial Plan at 7, Docket No. 208-1 (emphasis supplied). Id. The Court's order certifying a California subclass recognized that plaintiffs seek optional rescission of the Living Life policies and that any class member who opted to rescind his or her policy would receive a net payment that would take into account the premium payments paid, minus any offsets for benefits or commissions received, and that this calculation of refunds could be done using LSW's transactional data, which includes information as to commissions paid by LSW to PFA associates. See Docket No. 239 at 33-36.
Plaintiffs' trial plan provides:
Plaintiffs do not propose a class trial on damages but seek to rescind their insurance contracts as allowed under the Endless Chain Law, UCL, and NJCFA. LSW collected revenue from policy sales, insurance premiums and surrender charges pursuant to Defendants' scheme. Therefore, if the Court finds in favor of Plaintiffs on liability, consistent with Civil Code section 1689.2 and the equitable remedies provisions of the UCL and NJCFA, the class members will be notified of the verdict and permitted to elect between: (a) rescinding their Policies and receiving the net money they lost pursuant to Defendants' scheme, including premium payments and surrender charges, and (b) retaining their Policies. Class members who already surrendered their Policies or whose Policies lapsed will be allowed to recover their net losses. Individual awards, including any offsets, will be determined based upon transactional data in LSW's records.
Docket No. 208-1 at 7 (emphasis supplied) (footnotes omitted).
PFA has cited no binding authority showing that, in order to satisfy the redressability requirement for Article III standing, the remedies that a plaintiff requests must specifically be provided by a particular defendant as opposed to some other party in the case or a third party. The only authorities that PFA cites that
address Article III issues are inapposite because, in those cases, Article III standing was found to be lacking on mootness grounds or because the plaintiff was unable to trace the alleged injuries to the defendant. The absence of Article III standing did not turn on whether the plaintiff's alleged injuries were redressable.
Most of PFA's cited authorities do not address Article III issues; they are, therefore, inapposite. See Wong v. Stoler, 237 Cal. App. 4th 1375, 1385, 188 Cal.Rptr.3d 674 (2015), as modified on denial of reh'g (June 23, 2015) (analyzing rescission rights in the context of a claim for breach of a residential purchase agreement); Seman v. Nat'l City Home Equity, No. 10-11009, 2010 WL 4608785, at *2 (E.D. Mich. Nov. 5, 2010) (dismissing contractual "claims seeking money damages" on the ground that the defendant did not assume the liabilities in question pursuant to a contract); Willoughby v. Wal-Mart, Assocs., Inc., No. 104CV849-T(WO), 2005 WL 2465738, at *1 (M.D. Ala. Oct. 6, 2005) (remanding ERISA claims to state court on the ground that the defendant could not be sued under ERISA because it is not a plan or fiduciary under ERISA).
See Nome Eskimo Cmty. v. Babbitt, 67 F.3d 813, 816 (9th Cir. 1995) (holding that the district court "correctly decided that the case was moot" because the relief sought was declaratory judgment, an injunction, and an accounting related to a lease sale that was cancelled while the litigation was pending); Funtanilla v. Adams, No. 104CV06312OWWTAGHC, 2006 WL 768632, at *4 (E.D. Cal. Mar. 24, 2006) (holding that "the claims in the petition [for a writ of habeas corpus] are moot" because the petition was predicated on the alleged failure by the defendant to restore certain credits but such credits were restored during the litigation); Nitelshpur v. Soc. Sec. Admin., No. CV080642SJOMLG, 2008 WL 5262423, at *1 (C.D. Cal. Dec. 17, 2008) (holding that the case was "moot" because the plaintiff's claims were predicated on a loss of benefits but his "benefits were never reduced" and, thus, "there is no relief available to Plaintiff"); Siemers v. Wells Fargo & Co., No. C 05-04518 WHA, 2006 WL 3041090, at *7 (N.D. Cal. Oct. 24, 2006) (dismissing claim against defendant because "Plaintiff has not alleged any injury 'traceable to the challenged action of [that defendant]").
On the other hand, relevant opinions by the Ninth Circuit and Supreme Court suggest that the redressability requirement can be met even where the defendant in question would not be providing the relief that would redress the plaintiff's injury. These opinions indicate that the redressability requirement turns on whether the plaintiff is able to show that a judicial decision is likely to result in actions, either by the defendant in question or by some other party in the case or third party, that would redress the plaintiff's injuries. See M.S. v. Brown, 902 F.3d at 1083 ("If, however, a favorable judicial decision would not require the defendant to redress the plaintiff's claimed injury, the plaintiff cannot demonstrate redressability ... unless she adduces facts to show that the defendant or a third party are nonetheless likely to provide redress as a result of the decision[.]") (emphasis supplied); cf. Lujan, 504 U.S. at 568-69, 112 S.Ct. 2130 (holding that the redressability requirement for Article III standing was not satisfied in relevant part because the actions that could redress the plaintiffs' injuries would need to be effectuated by third-party agencies that "were not parties to the suit" and because there was no evidence that these agencies would act in any particular way in response to a judicial decision in plaintiffs' favor); ASARCO Inc. v. Kadish, 490 U.S. 605, 615, 109 S.Ct. 2037, 104 L.Ed.2d 696 (1989) (finding that the redressability requirement was not met because "[w]hether the association's claims of economic injury would be redressed by a favorable decision in this case depends on the unfettered choices made by independent actors not before the courts"). These authorities suggest that, so long as it is the case that a
favorable judicial decision is reasonably likely to result in a party or third party providing the relief that would redress the plaintiff's injuries, then the redressability requirement is met.
Here, the claim at issue is brought under the UCL's unlawful prong based on the theory that defendants acted in concert to operate a scheme that constitutes an unlawful endless chain scheme under the ECL, and that class members purchased a Living Life policy based on the representations that were made to them as part of that scheme. As discussed in more detail below, a genuine issue of material of fact exists as to whether both defendants can be held liable under this theory.
In the event that liability is found, the UCL gives the Court broad discretion to "make such orders or judgments, including the appointment of a receiver, as may be necessary to prevent the use or employment by any person of any practice which constitutes unfair competition, as defined in this chapter, or as may be necessary to restore to any person in interest any money or property, real or personal, which may have been acquired by means of such unfair competition." Troyk v. Farmers Grp., Inc., 171 Cal. App. 4th 1305, 1338, 90 Cal.Rptr.3d 589 (2009) (citing Cal. Bus. & Prof. Code § 17203). As discussed in this Court's order on class certification, rescission followed by restitution "can be an appropriate remedy" under the UCL. See Spann v. J.C. Penney Corp., No. SA CV 12-0215 FMO, 2015 WL 1526559, at *6 (C.D. Cal. Mar. 23, 2015); see also People v. Superior Court (Jayhill), 9 Cal. 3d 283, 286, 107 Cal.Rptr. 192, 507 P.2d 1400 (1973) (noting that "the opportunity to rescind his contract, return the products, and obtain a refund" was within the court's equitable powers under the UCL); Cortez, 23 Cal. 4th at 177, 96 Cal.Rptr.2d 518, 999 P.2d 706 (citing Jayhill with approval and stating that the court has the equitable power under the UCL to approve "the return of money acquired from an individual to that individual").
PFA has not shown that this Court lacks the equitable power under the UCL to order LSW to rescind the policies of class members who request to exercise that option, or to order both defendants to restore to plaintiffs the "net money they lost pursuant to Defendants' scheme" once LSW effectuates the rescission of any policies that class members opt to rescind. In fact, PFA concedes that there is no dispute that plaintiffs' injuries would be redressed by a judicial decision requiring LSW, which is a defendant in this action, to provide class members the option to rescind their Living Life policies and recover the net money
Troyk, 171 Cal. App. 4th at 1340, 90 Cal. Rptr.3d 589, suggests that this Court could order PFA to restore to class members who opt to rescind their policies (and once such policies are rescinded by LSW) the net money they lost pursuant to the alleged scheme to the extent that evidence at trial shows that PFA benefitted from the payments that class members made to LSW in connection with their policies. In that case, the California Court of Appeal held that a plaintiff could seek restitution under the UCL from a defendant who was not the "direct recipient" of the money or property that the plaintiffs allegedly lost because there was evidence raising the inference that the defendant benefitted from another's receipt of such money or property. See id. (holding that the "case law does not support Farmers' argument that they cannot be liable for restitution under the UCL because Prematic, rather than FIE or FGI, was the direct recipient of the service charges," and reasoning that, in Shersher v. Superior Ct., 154 Cal. App. 4th 1491, 1500, 65 Cal.Rptr.3d 634 (2007), "the court held that the plaintiff... could state a UCL cause of action for restitution against a manufacturer even though the plaintiff purchased the product from, and paid money directly to, a retailer").
they lost as a result of the alleged scheme by employing LSW's transactional data to make the necessary calculations. See Docket No. 286-0 at 8 ("PFA does not dispute that 'A decision granting Plaintiffs' requested relief of optional policy cancellation will redress the harm in this case,' Pl. Opp. at 12:19-20, but only because LSW can rescind the policies."). The absence of any dispute as to whether it is reasonably likely that plaintiffs' injuries would be redressed by a judicial decision ordering the relief that plaintiffs request is sufficient for this Court to find that the redressability requirement is satisfied as to plaintiffs' unlawful-prong claim against PFA. See ASARCO, 490 U.S. at 615-16, 109 S.Ct. 2037 ("[T]he basic inquiry, for each party seeking to invoke the authority of the federal courts, is whether that party alleges personal injury that is fairly traceable to the challenged conduct and likely to be redressed by the requested relief.") (internal citations omitted); cf. TransUnion, 141 S. Ct. at 2203 ("If the plaintiff does not claim to have suffered an injury that the defendant caused and the court can remedy, there is no case or controversy for the federal court to resolve.") (citation and internal quotation marks omitted).
Accordingly, the Court DENIES PFA's motion for summary judgment as to plaintiffs' unlawful-prong claim against it to the extent that it is premised on the theory that the redressability requirement of Article III is not met as to this claim.
b. Elements of an ECL Violation with Respect to PFA
PFA argues that it is entitled to summary judgment as to plaintiffs' unlawful-prong claim against it because they cannot establish that PFA committed an ECL violation. LSW also makes some arguments in support of PFA's motion for summary judgment as to this issue.
PFA argues that, for the purpose of resolving the question of whether an ECL violation exists, i.e., whether PFA's multi-level marketing business constitutes an actionable endless chain scheme, the Court should rely on the test described In re Koscot Interplanetary, Inc., 86 F.T.C. 1106, 1181 (1975), aff'd. sub nom. Turner v. FTC, 580 F.2d 701 (D.C. Cir. 1978) ("Koscot test"). In Webster v. Omnitrition Int'l, Inc., the Ninth Circuit held that the Koscot test can be used determine whether a multi-level marketing business is a pyramid scheme whose operation "constitutes fraud" in violation of "several federal anti-fraud statutes." 79 F.3d 776, 781-82 (9th Cir. 1996) ("Omnitrition").
Under the Koscot test, a pyramid scheme is "characterized by the payment by participants of money to the company in return for which they receive (1) the right to sell a product and (2) the right to receive in return for recruiting other participants into the program rewards which are unrelated to sale of the product to ultimate users." Id. at 781. "The satisfaction of the second element of the Koscot test is the sine qua non of a pyramid scheme[.]" Id. (citation omitted). The defining feature of a pyramid scheme is that it "may make money for those at the top of the chain or pyramid, but 'must end up disappointing those at the bottom who can find no recruits.'" Id. (quoting In re Koscot, 86 F.T.C. at 1181).
In a subsequent case involving an alleged illegal pyramid scheme, the Ninth Circuit emphasized that, "[t]o determine whether a MLM [multi-level marketing] business is a pyramid, a court must look at how the MLM business operates in practice." FTC v. BurnLounge, Inc., 753 F.3d 878, 883 (9th Cir. 2014) (citation omitted) (emphasis supplied).
In Omnitrition, the Ninth Circuit held that the Koscot test could be used to determine
whether a violation of the ECL existed, because the definition of an endless chain scheme under the ECL "is equivalent, if not identical, to the Koscot test." 79 F.3d at 787.
Since Omnitrition, some courts in this circuit have recognized that the Koscot test and the ECL are very similar, but not co-extensive. See, e.g., Bostick v. Herbalife Int'l of Am. Inc., No. CV 13-02488-BRO, 2013 WL 12131732, at *4 (C.D. Cal. Oct. 11, 2013) ("The Ninth Circuit has determined that the test for section 327 is nearly identical to the Koscot test."); Shuxin Li v. EFT Holdings, Inc., No. CV 13-8832 DSF (CWX), 2015 WL 12747812, at *1 (C.D. Cal. July 21, 2015) ("An 'endless chain' for the purposes of California law is substantively the same as a "pyramid scheme" as defined by the Ninth Circuit.").
Because the Koscot test for identifying a pyramid scheme that violates federal anti-fraud statutes is "equivalent" to the definition of an endless chain scheme under the ECL, the Court will employ the Koscot test for the purpose of analyzing whether PFA is entitled to summary judgment on the basis that there is no violation of the ECL. If a genuine issue of material fact exists as to whether the Koscot test is met, then a genuine issue of material fact exists as to whether there is a violation of the ECL. See id. (concluding that, because there is a genuine issue of material fact as to whether a marketing scheme was an unlawful pyramid scheme under federal antifraud statutes based on the Koscot test, "there also is a genuine issue of material fact as to whether it is an 'Endless Chain' scheme under § 327").
i. First prong of the Koscot test
As noted, the first prong of the Koscot test requires the payment by participants of money to the company in return for which they receive the right to sell a product. See Omnitrition, 79 F.3d at 781. For the reasons discussed below, the Court finds that a genuine issue of material fact exists as to whether the alleged scheme satisfies this first prong.
PFA argues that the two payments that plaintiffs have identified in the complaint as being made by plaintiffs in connection with the alleged scheme, namely a $125 "technology fee" and the purchase of a Living Life policy, do not satisfy the first element of the Koscot test. The Court analyzes each of these two payments in turn.
As to the first payment, PFA argues that the $125 fee that new PFA associates are required to pay when they join PFA cannot satisfy the first element of the Koscot test because it is paid to a third-party (P-Trac), and not defendants, and the Koscot test requires that it be paid to "the company." PFA relies on two declarations. First, it identifies the accountant of third-party P-Trac, which states that the "$125 Technology Fee is paid directly to P-Trac, and P-Trac reports those payments as income and taxes thereon." Clifford Davis Decl. ¶ 4, Docket No. 252-4. Next, it cites the declaration of PFA CEO David Carroll, which states that "[n]one of the $125 Technology Fee is paid to PFA—it is used to pay for development and maintenance of the website that these people use for emails, life insurance policy and training information, to track progress prior to becoming licensed and to access other business materials." Carroll Decl. ¶ 8, Docket No. 252-2. PFA also argues that the $125 fee does not give PFA associates the right to sell any Living Life policies, because a PFA associate's ability to sell Living Life policies depends on whether he or she becomes licensed to sell insurance policies and becomes appointed by LSW to sell policies.
Plaintiffs respond that "Koscot's reference to a payment 'to the company' is dicta, and who receives the payment from participants is not dispositive because otherwise, a pyramid operation could avoid
accountability simply by routing participation fees through a third party." Docket No. 271-2 at 18. Plaintiffs further argue that the ECL, in contrast to the Koscot test, "does not require that the payment be made directly to the company[.]" Id. at 18. Plaintiffs contend that, even if the "to the company" aspect of the first Koscot prong were not dicta, plaintiffs have pointed to sufficient evidence based on which a reasonable factfinder could find that the $125 fee is paid to PFA and not a third party. Plaintiffs also argue that the payment of the $125 fee gave participants the right to sell a product because the fee was a precondition to being able to sell Living Life policies as a licensed PFA associate and because the fee allowed unlicensed PFA associates to set up and participate in training sales.
The Court agrees with plaintiffs that the "to the company" phrase in the first prong of the Koscot test is inconsistent with the plain language of the ECL, which does not require that consideration be paid to any particular person or entity in order for liability to exist. See Cal. Penal Code § 327 ("As used in this section, an 'endless chain' means any scheme for the disposal or distribution of property whereby a participant pays a valuable consideration for the chance to receive compensation for introducing one or more additional persons into participation in the scheme or for the chance to receive compensation when a person introduced by the participant introduces a new participant.").
The Court need not reach the question of whether the difference between the plain language of the ECL and the language used in the Koscot test matters to the resolution of the present motions, however, because plaintiffs have pointed to sufficient evidence that would allow a reasonable factfinder to conclude that the $125 is paid to PFA (i.e., to "the company" as the Koscot test requires), and is not paid directly to a third party. This evidence includes: (1) the testimony of PFA's Rule 30(b)(6) designee, Kelly Martin, that the $125 fee is a "join fee" that is "intended to defray the cost of providing services to the associates who enroll with PFA," PFA Rule 30(b)(6) Dep. Tr. at 25-26, Docket No. 272-5; (2) a declaration that Martin filed early in this litigation, which states that the $125 fee gets PFA recruits "access to PFA's proprietary marketing database and systems," see Kelly Martin Decl. ¶ 6, Docket No. 95-1; (3) PFA training materials, which state that the $125 fee was to be "collect[ed]" by PFA associates and do not state that the $125 fee would go to a third party instead of PFA, see, e.g., Docket No. 181-21 (PFA000016) (instructing PFA associates to "collect the check" after making an initial presentation to a recruit); (4) testimony by PFA's CEO, David Carroll, that new PFA recruits can pay the $125 fee at PFA's Financial Opportunity Seminars, which are presentations given by PFA leaders, David Carroll Dep. Tr. at 194, Docket No. 182-8; and (5) a receipt that named plaintiff Chen produced, which states that the $125 fee that he paid when he joined PFA was paid to "Premier Financial Alliance," see Docket No. 272-12 (PLT007505). Plaintiffs also have pointed to sufficient evidence based on which a reasonable factfinder could find that payment of the $125 fee was a prerequisite to acquiring the right to sell the Living Life policy and that, therefore, the right to sell the Living Life policies, and to gain rewards as part of the PFA program, depended on paying the $125 fee. Plaintiffs have pointed to evidence showing that, in order to sell the Living Life policy, which was a life insurance product sold exclusively by PFA, and to receive rewards from such sales, a recruit first had to become a PFA associate; to become a PFA associate, a recruit had to sign the PFA Marketing Agreement and pay the $125 fee. See PFA Marketing Agreement at 5, Docket No. 252-3; Carroll Decl. ¶ 7, Docket No. 252-2.
PFA argues that plaintiffs "cannot sandbag PFA" by relying on this receipt to oppose its summary judgment motion. See Docket No. 286 at 10. PFA contends that "the document was not produced until December 2, 2021— 1½ years after Chen's documents had been requested, 9 months after Chen's deposition had been completed, and 4 months after discovery had closed." Id. As discussed above, in this district, the exclusion of evidence as a sanction for alleged discovery misconduct requires the filing of a separate motion. PFA never filed such a motion in connection with the purportedly tardy production of this receipt. Accordingly, to the extent that PFA is requesting in its brief that the Court decline to consider this receipt for the purpose of resolving the present motions, the Court denies the request for failure to comply with the local rules. Notably, PFA does not dispute the authenticity of the receipt in question.
While PFA and LSW argue that the $125 fee cannot satisfy the first element of the Koscot test because only PFA associates who were licensed to sell insurance could sell policies, and the payment of the $125 fee did not make a person capable of selling policies, evidence exists to dispute this theory. Plaintiffs have pointed to evidence showing that PFA associates who paid the $125 fee but who were not yet licensed could participate in the sale of Living Life policies by setting up "training sales" for their uplines. PFA's training materials encouraged PFA associates who were not yet licensed to set up, within thirty days of joining PFA, either three or five "training sales" for licensed PFA associates to execute so that the new PFA recruits could become eligible to receive higher rewards in the form of higher commission percentages on their eventual sales (once they became licensed) and more promotion points. See, e.g., Docket No. 181-39 (PLT001711 and PLT001721).
In a footnote in its reply, and without any argument or citation to authority, LSW objects to the Court's consideration of this document (Docket No. 181-39) on the basis that it constitutes "inadmissible hearsay." See Docket No. 293-4 at 3 n.1. The Court overrules the objection for the purpose of resolving the present motions. The document in question is a training presentation produced in this litigation that PFA associates used to train other PFA associates. See, e.g., Girard Decl. ¶ 16, Docket No. 181-7: Bacus Dep. Tr. at 175-77, Docket No. 294-3. This is sufficient for the Court to infer, for the purpose of resolving the present motions, that the statements in the document are not hearsay under Federal Rule of Evidence 802(d)(2). See Fed. R. Evid. 802(d)(2)(D) & (E) (providing, in relevant part, that an opposing party's statement is not hearsay if it was made by the party's agent or employee or was made by the party's coconspirator during and in furtherance of the conspiracy).
In light of the foregoing, a genuine issue of material fact exists as to whether the first prong of the Koscot test is satisfied by virtue of the $125 fee.
As noted, there is a second "payment" that plaintiffs contend could also satisfy the first prong of the Koscot test, independently from the $125 fee, namely the purchase of a Living Life policy.
PFA and LSW argue that the purchase of a LSW policy cannot satisfy the first element of the Koscot test as a matter of law because it is undisputed that purchasing a Living Life policy is not a formal requirement for becoming a PFA associate that can receive rewards as part of the PFA program or for becoming eligible to sell Living Life policies. Both defendants contend that the absence of a formal requirement to purchase Living Life policies is evidenced by their records, which show that only approximately 23% of PFA associates are listed in LSW's records as being
policyholders with respect to a Living Life policy. See Puglisi Decl. ¶ 22, Docket No. 263-1. LSW also argues that each purchase of a Living Life policy was the result of the individual considerations of the purchaser, and that, because the Living Life policy premiums were paid exclusively to LSW, the purchase of a Living Life policy cannot be construed as a payment to PFA within the meaning of the Koscot test.
The California class that was certified under Rule 23(b)(3) includes only PFA associates who purchased a Living Life policy.
Plaintiffs respond that the first prong of the Koscot test can be satisfied by the purchase of a Living Life policy because purchasing it was a "practical" requirement to achieving the full benefits of the PFA program. Plaintiffs rely on FTC v. Vemma Nutrition Co., No. CV-15-01578-PHX-JJT, 2015 WL 11118111, at *3 (D. Ariz. Sept. 18, 2015) ("Vemma"), to support this argument.
In Vemma, the district court held that first prong of the Koscot test can be satisfied by a practical requirement to purchase product in order to achieve the full benefits of the program. 2015 WL 11118111, at *3. The Vemma court found that the first prong of the Koscot test was satisfied based on the evidence before it, which showed that the defendant's "training materials are designed to make new Affiliates buy a $600 Affiliate Pack, which makes payment for the right to sell a Vemma product if not a written requirement, a practical one." Id. (emphasis supplied). "[E]ligibility for certain bonuses [wa]s contingent" on the purchase of this pack. Id. at *2.
Neither defendant disputes that Vemma holds that the first element of the Koscot test can be satisfied by a practical requirement to purchase a product in order to achieve the full benefits of the program. PFA does not acknowledge, much less distinguish, Vemma, and LSW's attempt to distinguish Vemma fails.
LSW argues that Vemma is distinguishable because, in that case, "inventory loading (the purchase of bulk inventory for resale) was a condition to full participation in the schemes." See Docket No. 293-4 at 14. The Court is not persuaded. The question of whether there was inventory loading in the scheme analyzed by the Vemma court was irrelevant to that court's finding that the first prong of the Koscot test was satisfied. In any case, as discussed below, plaintiffs have pointed to evidence from which a reasonable factfinder could find that PFA's scheme resulted in PFA members engaging in inventory loading.
The Court finds the reasoning in Vemma to be persuasive and consistent with the Ninth Circuit's holding that the determination of whether an illegal multi-level marketing scheme exists must be based on how the business operates "in practice." BurnLounge, 753 F.3d at 883 (emphasis supplied). The Court, therefore, adopts the Vemma court's conclusion that the first Koscot prong can be met with a practical requirement to purchase product to receive the full benefits of the program.
Here, plaintiffs have pointed to evidence based on which a reasonable factfinder could find that PFA encouraged new associates to purchase a Living Life policy as a step they needed to take before getting licensed and appointed to sell policies and as a necessary step to achieving maximum rewards under the PFA program. This evidence includes (1) training materials that state that "becom[ing] a client" is one of the initial and "[u]rgent/[i]mportant" steps in the
Becoming a client means to purchase a policy. See Bacus Dep. at 178, Docket No. 208-7 ("Q. 'Become a client' means buying a National Life insurance policy, does it not? A. Yes.").
process to get on the "Fast Track" for succeeding as a PFA associate, and that this step must be completed before getting licensed and appointed to sell policies and before completing the "training sales" and recruitment quotas of the 3.3.30 and 5.5.30 programs. As discussed above, these programs enable a PFA associate to maximize the commission percentages and promotion points on eventual licensed sales, see Docket No. 181-39 (PLT001712 & PLT001720); and (2) training materials urging new recruits to "become a client" on the basis that doing so would facilitate their sales of the Living Life policy to others, see Docket No. 181-39 (PLT001731) ("Become a client (You can't sell to others what you don't own)"). A reasonable factfinder could find, based on this evidence, that the step of "becoming a client" by purchasing a Living Life policy could have been perceived by new PFA recruits as a practical requirement that they needed to complete before they could receive the full benefits of the PFA program, which, under Vemma, satisfies the first prong of the Koscot test.
As noted, LSW argues that every sale of a Living Life policy was the result of the individual choice of the purchaser, and that it was not the result of it being a requirement for becoming a successful PFA associate. Plaintiffs have pointed to evidence that undermines that theory. The evidence suggests that some PFA associates purchased a policy based on statements or conduct of other PFA associates as part of the alleged scheme that indicated that the purchase of a policy was necessary to becoming a successful PFA associate. See, e.g., Chen Dep. Tr. at 169, Docket No. 263-6 (testifying that he purchased a Living Life policy because he "wanted to do the business right" and so he "could start to try to do the business"); id. at 54 (testifying that purchasing a policy was not an explicit requirement "but it was implied that, you know, you should buy the policy yourself, and then they say if you don't buy the policy yourself, then how can you sell the policy about something you don't own yourself or you don't know about?"); Wang Dep. Tr. at 87-88 (testifying that nobody told her that she would need to purchase a policy "to be a PFA associate" but another PFA associate told her during "many" training sessions that "if you don't purchase the policy, you just can't sell it").
Defendants next argue that it is undisputed that premiums for Living Life policies were paid to LSW and not to PFA, and, for that reason, the purchase of a Living Life policy cannot satisfy the first prong of the Koscot test with respect to PFA as a matter of law. This argument ignores that plaintiffs' theory of liability as to their unlawful-prong claim is based on PFA and LSW acting jointly in operating the alleged scheme. Defendants cite no authority showing that an ECL violation is defeated as a matter of law where, as here, the alleged scheme involves two corporate defendants who allegedly acted in concert and the payment in question was made to one of the corporate defendants but not the other. In fact, relevant authorities suggest otherwise. For example, in Figurettes, 135 Cal. App. 3d at 5, 22, 185 Cal.Rptr. 480, one defendant corporation marketed products manufactured by another defendant corporation and the alleged endless chain scheme involved product purchases by participants from only the former defendant corporation (the sales organization). There, the court of appeals concluded that the "two corporate defendants" (as well as other defendants) were liable for the ECL violations.
In light of the foregoing, a genuine issue of material fact exists as to whether the first prong of the Koscot test is also satisfied by virtue of the purchase of a Living
Life policy pursuant to a practical requirement to do so.
ii. Second prong of the Koscot test
As noted, the second prong of the Koscot test looks to whether participants receive the right to receive rewards in return for recruiting other participants into the program that are unrelated to sale of the product to ultimate users. Omnitrition, 79 F.3d at 781. This prong is the "sine qua non" of a pyramid scheme. See id. Additionally, it is intended to identify the presence of features in the scheme that are indicative of a pyramid structure in which those at the bottom of the pyramid are likely to fail to achieve the financial benefits that only those at the top of the pyramid can achieve through recruiting. See id. at 782 ("'As is apparent, the presence of this second element, recruitment with rewards unrelated to product sales, is nothing more than an elaborate chain letter device in which individuals who pay a valuable consideration with the expectation of recouping it to some degree via recruitment are bound to be disappointed.'") (quoting In re Koscot, 86 F.T.C. at 1181).
PFA and LSW argue that the rewards that PFA associates receive for recruiting others are not "unrelated to the sale of product to ultimate users" as required under the second Koscot prong, but, in fact, are related. The commissions and rewards that are provided to PFA associates are provided only if there is an actual sale of a Living Life policy. No commissions or rewards are provided to PFA associates, including pursuant to the 3.3.30 and 5.5.30 plans or otherwise, unless there is a sale of a Living Life policy. Accordingly, defendants contend that any commissions or rewards provided to PFA associates always are related to the sale of a product. Defendants further argue that most of the sales of the Living Life policy by PFA associates were to persons who were not PFA associates and were, therefore, ultimate users. Defendants compared all of the names of PFA associates in PFA's records and cross-referenced them with the names of policyholders in LSW's records, and only 22.7% of the names of PFA associates appear as policyholders in LSW's records. Puglisi Decl. ¶ 22, Docket No. 263-1. Defendants argue that these calculations show that only 22.7% of the sales of Living Life policies by PFA associates were to other participants in the scheme.
The determination as to whether the second prong of the Koscot test is satisfied turns on whether "[t]he promise of lucrative rewards for recruiting others tends to induce participants to focus on the recruitment side of the business at the expense of their retail marketing efforts, making it unlikely that meaningful opportunities for retail sales will occur." Omnitrition, 79 F.3d at 782 (emphasis supplied); see also BurnLounge, 753 F.3d at 887 (finding that the second Koscot prong was satisfied because "BurnLounge incentivized recruiting participants, not product sales" that were made outside of the context of recruiting new participants and earning rewards related to such recruitment). In other words, what matters the most under the second prong of the Koscot test is whether the scheme's reward system tends to incentivize participants to prioritize bringing others into the scheme over making product sales that are unrelated to recruitment or to rewards that have a connection to recruitment. That is a factual determination that must be made on a case-by-case basis based on how the company operates in practice. See BurnLounge, 753 F.3d at 883; Vemma, 2015 WL 11118111, at *3 ("In evaluating whether the rewards paid to distributors come primarily from recruiting, rather than the sale of products to ultimate users,
courts look beyond a company's policies and procedures and examine how the company operates in practice.") (emphasis supplied).
The Ninth Circuit has held that this intensely factual inquiry cannot be resolved by merely looking to whether the rewards at issue had a connection to product sales, or to whether some of the product sales for which participants could receive rewards were to program participants versus non-program participants. See BurnLounge, 753 F.3d at 886 ("The second prong of the Omnitrition test does not require that rewards for recruiting be 'completely' unrelated to the sale of products. If it did, any illegal MLM business could save itself from liability by engaging in some retail sales."); see also id. at 886-88 (holding that the fact that there were some internal product sales that were unrelated to the opportunity to earn rewards as part of the program was not dispositive of whether the second Koscot prong was satisfied). For this reason, defendants' citation to evidence showing that the PFA rewards at issue were related to product sales, and that a portion of those product sales were to non-PFA associates, does not compel a finding that defendants are entitled to summary judgment on the basis that the second Koscot prong is not met. Defendants' evidence is relevant to the determination of whether the second Koscot prong is satisfied, but it is not dispositive.
Defendants' data about policy sales do not entitle them to summary judgment as to the second Koscot prong for the additional reason that plaintiffs contend that defendants have undercounted the number of sales that were made for the purpose of qualifying for recruitment-related rewards under the PFA program. Plaintiffs point to evidence, which defendants have not acknowledged, suggesting that some sales of Living Life policies by PFA agents were for or on behalf of family members or close contacts of new PFA recruits for the purpose of enabling the new recruits to qualify for rewards under the PFA program. See, e.g., Wang Decl. ¶ 4, Docket No. 181-2 (purchased multiple policies, including some for family member, to satisfy the 5.5.30 program quotas); see also Docket No. 182-13 (email among LSW employees stating that "PFA structure is to have newer agents complete 'training policies' with their uplines.... [that] are typically written on the agent themselves and potentially their family members" and stating that a PFA associate "had three policies written for herself and her family members by her upline"); Docket No. 181-21 (PFA000005) (training document stating that PFA specifically trains PFA associates to "tap-root" each new recruit's "warm market").
In Omnitrition, the Ninth Circuit held that summary judgment in favor of the defendants was inappropriate because the plaintiffs had pointed to evidence showing that "the mere structure of the program" suggested that the "focus" of the scheme was "in promoting the program rather than selling the products," and evidence showing that participants in the scheme were encouraged by the scheme to recruit others as quickly as possible. 79 F.3d at 782.
In this case, plaintiffs have pointed to evidence similar to that which the Ninth Circuit in Omnitrition considered to be adequate to create a genuine issue of material fact. It includes: (1) evidence suggesting that the structure of the scheme is focused on recruiting and promoting the program to new recruits instead of on selling products outside of the context of recruiting or qualifying for recruitment-related rewards under the PFA program, see, e.g., Docket No. 181-32 (PFA000493) ("Money Game" brochure promoting PFA program as allowing an associate to generate part-time income of $13,800 per month, where $5,400 of it is made by three downline associates who each make four sales per month); Docket No. 181-20
(PFA00051) (advertising PFA's "Infinity Builders Plan" through which a person earns $60,360 per month, with $43,200 generated by downlines); Docket No. 181-39 (PLT001727) (stating that "if you run the system the RIGHT way, you only need to find [~5] sales on your own in your entire PFA career because after that, you will get sales from your team!"); see also Wayne Meadows, III, Dep. Tr. at 47-48, Docket No. 207-6 (PFA associate testifying that he does not believe that he could have realized his level of success "absent recruiting"); Docket No. 182-13 (email by LSW compliance employee stating that "PFA model is focused on recruitment, and less about life insurance"); and (2) evidence suggesting that PFA associates were encouraged to recruit quickly in order to reap the most rewards, see, e.g., Docket No. 181-39 (PLT001719) (training document stating that "critical component" is "SPEED"); Docket No. 181-39 (PLT001721) (training document stating that a PFA associate would receive higher commission percentages and promotion points if he or she recruits either three or five new PFA associates and sells three or five policies within thirty days of joining PFA). In light of this evidence, the Court cannot conclude, as a matter of law, that the second Koscot prong is not met.
LSW argues that the second Koscot prong cannot be met as a matter of law because insurance policies are unlike other products in that they are "necessarily for personal use," are "individually underwritten," and cannot be resold to others. Docket No. 262-5 at 22; Docket No. 293-4 at 1. The Court is not persuaded. LSW has cited no authority showing that the Koscot test cannot be satisfied if the alleged scheme involves the sale of an insurance policy as opposed to some other product. According to the Ninth Circuit's discussion of the Koscot test in Omnitrition, the purpose of the Koscot test is to help identify a specific type of conduct that "constitutes fraud," namely the operation of a scheme that entices participants to pay "valuable consideration with the expectation of recouping it to some degree via recruitment" but where the participants are "bound to be disappointed" because only those at the very top of the scheme's structure will be able to significantly profit from recruitment. See Omnitrition, 79 F.3d at 781-82. ("Like chain letters, pyramid schemes may make money for those at the top of the chain or pyramid, but 'must end up disappointing those at the bottom who can find no recruits.'") (citation omitted). This suggests that, regardless of the product involved, what matters is whether participants are induced to pay money as part of the scheme and to recruit others into the scheme under the guise that doing so would allow them to reap financial rewards. The evidence discussed above would allow a reasonable factfinder to find that the scheme at issue here fits those criteria, even if the product involved is an insurance policy as opposed to something else. The Court, therefore, declines to adopt LSW's argument that the second prong of the Koscot test is defeated as a matter of law merely because of the type of product involved in the alleged scheme.
In light of the foregoing, the Court finds that a reasonable factfinder could find that the second prong of the Koscot test is met.
iii. The Amway defense and inventory loading
LSW next argues that the "Amway defense" applies here and "allows the Court to find that there was no pyramid scheme as a matter of law." Docket No. 262-5 at 16.
Where the Koscot elements have been satisfied, a defendant may attempt to "rebut pyramid allegations" by showing that it has policies in place similar to those in
In re Amway Corp., 93 F.T.C. 618 (1979), where the FTC found that the defendant in that case (Amway) was not operating a pyramid scheme. See Omnitrition, 79 F.3d at 782. The policies that defeated liability in In re Amway "prevented inventory loading and encouraged retail sales" as demonstrated after a "full trial." Id. "The policies adopted by Amway were as follows: (1) participants were required to buy back from any person they recruited any saleable, unsold inventory upon the recruit's leaving Amway, (2) every participant was required to sell at wholesale or retail at least 70% of the products bought in a given month in order to receive a bonus for that month, and (3) in order to receive a bonus in a month, each participant was required to submit proof of retail sales made to ten different consumers." Id. at 783.
In Omnitrition, the defendants argued that they were entitled to summary judgment on the basis that they had policies "modeled on Amway's." Id. The Ninth Circuit held that the question of whether the "existence and enforcement of rules like Amway's" could allow the defendant to avoid liability depended on whether the defendants can point to "evidence that the program's safeguards are enforced and actually serve to deter inventory loading and encourage retail sales." Id. The Ninth Circuit found that the defendants failed to meet that burden and held that they were not entitled to summary judgment based on their Amway-based policies because they did not point to "sufficient evidence to establish as a matter of law that [their] rules actually work" in deterring inventory loading and encouraging retail sales. Id. (emphasis in the original).
Here, LSW contends that "inventory loading was impossible" as PFA associates "could not be required to purchase policies in bulk and resell them to customers," as policies were underwritten to individual policyholders[.]" Id. at 17. LSW has not pointed to any policies that safeguard against inventory loading or that encourage retail sales, much less shown that there is sufficient evidence to establish as a matter of law that any such policies are effective. Under Omnitrition, the invocation of the Amway defense requires not only the identification of policies that serve to deter inventory loading and encourage retail sales, but also an evidentiary showing that the policies "actually work" in achieving those goals. See id. Defendants' failure to do either of those things compels a denial of their motion for summary judgment based on the "Amway defense."
This distinguishes the facts here from those in Whole Living, Inc. v. Tolman, 344 F. Supp. 2d 739, 746 (D. Utah 2004), which LSW cites for the proposition that there is no pyramid scheme here. There, the court found that the alleged scheme was not an illegal pyramid scheme under Utah law on the basis that there was evidence that the operators of the alleged scheme employed at least one Amway policy effectively. See id. (finding that the alleged scheme "does have at least one of the same rules as the Amway plan—the 70% rule. There is no evidence in this case that the 70% rule is not effective or enforced").
LSW's arguments regarding inventory loading appear to be based on the notion that, if defendants are able to show that there was no inventory loading, then the Koscot test cannot be met and they cannot be held liable. See Docket No. 293-4 at 2 (arguing that plaintiffs "have no legal authority to support a finding of a pyramid scheme here, where 'inventory loading' (a hallmark of pyramid schemes) is impossible").
Inventory loading is a practice that is sometimes employed by pyramid scheme participants in an effort to ensure that they continue to remain eligible to receive rewards under the scheme. It involves
purchasing at least the minimum amount of product from the defendant that qualifies them for such rewards and doing so for the purpose of receiving the rewards, as opposed to the purchasing the product for the purpose of selling it to consumers based on consumer demand for the product. See Omnitrition, 79 F.3d at 783 n.3 ("Inventory loading" occurs "when distributors make the minimum required purchases to receive recruitment-based bonuses without reselling the products to consumers."); Vemma, 2015 WL 11118111, at *3 ("The incentivization of recruitment over retail sales can lead to 'inventory loading'—the purchase of product for the purpose of remaining eligible for bonuses."). The presence of inventory loading can help determine whether the second element of the Koscot test is satisfied depending on specifics of the particular scheme at issue. See Vemma, 2015 WL 11118111, at *4 (holding that "evidence that distributors purchase and consume product for the purpose of qualifying for recruitment incentives is evidence of a pyramid scheme" and finding that the second Koscot prong is met in part based on finding that participants "are very likely engaging in inventory loading"). However, inventory loading is not an element of or requirement for satisfying the Koscot test. In other words, a plaintiff need not show that the scheme participants are engaging in inventory loading in order to establish that the Koscot test is met. For example, in BurnLounge, 753 F.3d at 884-886, the Ninth Circuit affirmed a district court's finding that the defendants were liable for operating an illegal pyramid scheme without discussing the presence or absence of inventory loading; the holding was based instead on evidence that supported the conclusion that "[r]ecruiting was built into the compensation structure in that recruiting led to eligibility for cash rewards, and more recruiting led to higher rewards."
Even assuming that evidence of inventory loading were required to satisfy the second element of the Koscot test, which defendants have not shown is actually the case, plaintiffs have pointed to evidence from which a reasonable factfinder could find that the alleged scheme's reward structure resulted in PFA participants engaging in inventory loading. Whether a purchase of a Living Life policy counts as a sale that is indicative of inventory loading for the purpose of the second prong of the Koscot test depends on whether the purchase was motivated by a desire to qualify for rewards offered by the scheme as opposed to some other reason that was unrelated to PFA's reward structure. See Vemma, 2015 WL 11118111, at *2-3 (holding that "an ultimate user under the second Koscot prong is limited to one who would have purchased a product even if not for the income opportunity"). Here, plaintiffs have pointed to evidence supporting a finding that PFA associates purchased multiple LSW policies to qualify for rewards under the alleged scheme, namely those offered under the 5.5.30 program. See, e.g., Wang Decl. ¶ 4, Docket No. 181-2; Chen Decl. ¶¶ 5-8, Docket No. 181-1; see also Docket No. 182-13 (email among LSW employees stating that "PFA structure is to have newer agents complete 'training policies' with their uplines.... [that] are typically written on the agent themselves and potentially their family members" and stating that a PFA associate "had three policies written for herself and her family members by her upline").
Because a genuine issue of fact exists as to both prongs of the Koscot test, the Court DENIES PFA's motion for summary judgment as to plaintiffs' unlawful-prong claim against it to the extent that it is predicated on the argument that plaintiffs cannot establish a violation of the ECL. c. LSW's Direct Liability for an ECL Violation
LSW argues that "[p]laintiffs cannot establish any basis to extend liability to Southwest for a recruiting scheme that PFA allegedly operated" because LSW is a separate entity from PFA and LSW's business activities were separate from PFA's recruitment activities and LSW did not have control or "input into the alleged scheme." Docket No. 262-5 at 7. LSW argues that PFA is one of thousands of independent marketing organizations with which it works on an independent-contractor basis and it has no control over how PFA recruits new members, the statements that PFA makes to recruit agents, how many people PFA recruits, how PFA compensates or promotes recruits, or the fees that PFA charges to new associates. LSW also argues that PFA contractually retains control, judgment, and discretion over its business.
Plaintiffs proffer facts disputing this theory, which suggest that LSW is a primary participant in a scheme that violated the ECL. With these facts, plaintiffs seek to show that LSW has direct liability with respect to plaintiffs' unlawful-prong claim by virtue of having "operated" the alleged scheme. Specifically, plaintiffs point to evidence that they contend shows that LSW participates in PFA's marketing plan and directs how PFA markets and sells LSW's products. Plaintiffs further contend that LSW works closely with PFA to design the alleged scheme's sales activities, and LSW's CEO actively reinforces the recruiting message to PFA members, consistent with LSW's financial interest in maximizing sales of LSW policies.
Neither party disputes that a person is directly liable for a violation of California Penal Code § 327 if that person "contrives, prepares, sets up, proposes, or operates" an endless chain scheme. See People v. Sanchez, 62 Cal. App. 4th 460, 467, 72 Cal.Rptr.2d 782 (1998) ("Penal Code section 327 provides for criminal penalties for '[e]very person who contrives, prepares, sets up, proposes, or operates any endless chain.'"). Here, plaintiffs contend that LSW is directly liable for a violation of § 327 because it "operates" the alleged scheme. The California Court of Appeal construed the term "operates" in the context of the ECL as meaning "to manage and to keep in operation" and as "denot[ing] ongoing conduct which advances the progress of an existing entity"; the term "operates" does not "encompass mere participation." Id. at 471, 72 Cal. Rptr.2d 782.
Notwithstanding LSW's own proffer, plaintiffs have identified sufficient evidence from which a reasonable factfinder could find that LSW has engaged in ongoing conduct that advances the progress of the scheme and goes beyond mere participation in the scheme. This evidence raises the inference that LSW had a financial incentive to collaborate with PFA and that LSW acted in furtherance of PFA's activities in the context of the alleged scheme.
It includes: (1) evidence showing that the Living Life policy is "co-branded" with PFA. Assadi Dep. Tr. at 31, Docket No. 273-4; (2) deposition testimony by Jennifer Warfield, a Vice President at LSW, that LSW and PFA are in a "partnership to sell life insurance together," Warfield Dep. Tr. at 16, Docket No. 182-10, and by LSW's CEO, Mehran Assadi, that described PFA as LSW's "partner of the decade," Assadi Dep. Tr. at 60, Docket No. 273-4; (3) evidence that PFA has been the "top selling agency" for LSW since 2014 in the independent distribution channel, Warfield Dep. Tr. at 16, Docket No. 182-10; (4) evidence suggesting that LSW retained control over and awareness of advertisements of its products, see, e.g., Assadi Dep.
Tr. at 31-34, Docket No. 273-4; (5) testimony by David Carroll, PFA's founder and CEO, that PFA would not train its agents to sell a policy in a way that was not known to LSW, Carroll Dep. Tr. at 85, Docket No. 182-8; (6) evidence suggesting that LSW acted in furtherance of PFA's recruitment-focused marketing efforts, see, e.g., Assadi Dep. Tr. at 97-98, Docket No. 273-4 (Assadi admitting that he used the phrase "recruit or die" at PFA conferences promoting PFA and LSW); Carroll Dep. Tr. at 141-42, Docket No. 182-8 (PFA's CEO, David Carroll, testifying that Assadi would "strategize" with him before PFA conferences); Docket No. 181-17 at 3 (PFA's initial disclosures listing Assadi as a person with "experience with PFA's training and marketing practices and procedures"); (7) evidence that LSW received information over the years indicating that PFA's recruitment-based marketing scheme was leading to irregularities in how LSW policies were being sold, see, e.g., Docket No. 182-36 (LSW employees discussing in an email marketing agencies, including PFA, that "focus[] on recruitment" and noting that part of the recruiting scheme of these agencies "involves (we suspect) ... purchase of a life insurance policy" and stating "[w]e have seen countless examples" where there are irregularities in the sale of policies in this context); Docket No. 182-13 (email among LSW employees stating that PFA's "structure is to have newer agents complete 'training policies' with their uplines.... [that] are typically written on the agent themselves and potentially their family members" and stating that one of the "various fraud scenarios" that have been "observed" in the context of the "training policies" requirement involves a new PFA recruit who "isn't aware they were buying life insurance when they 'signed up' to become a PFA agent"); (8) evidence showing that LSW compliance employees repeatedly expressed frustration in emails about the lack of meaningful response to irregularities in the sale of LSW policies that PFA's recruitment-focused operation was causing, see, e.g., Docket. No. 182-58 (email to Jennifer Warfield from LSW compliance employee regarding "training sale" of a policy in which the "writing agent" was not present for the sale and customers "never met with" the licensed agent and stating that he is "frustrated that this level of defense seems to occur on every investigation regardless of severity"); Docket No. 182-59 (LSW employees noting that "I think we can prove fraud in one case" involving a PFA associate); (9) emails showing that LSW compliance employees discussed internally PFA's recruitment scheme as being akin to a pyramid scheme, see Docket No. 182-13 (LSW compliance employee stating in email that "PFA model is focused on recruitment, and less about life insurance" and responding yes, when asked if that is "akin to a pyramid scheme" and further stating "but don't let Distribution hear that. Mid Level Marketing is how they pitch it.... I have a whole file on this stuff"); (10) evidence suggesting that LSW involved PFA's CEO, David Carroll, in investigations of incidents involving questionable sales practices by PFA associates and that LSW was receptive to input by Carroll as to how to deal with such incidents, see, e.g., Docket No. 182-49 ("Carroll called to reverse decision to terminate agent ... asked to send warning letter ... warning letter sent"); Docket. No. 182-55 ("It has only been 2 weeks but PFA wants us to reconsider termination."); (11) evidence suggesting that LSW executives discussed by email developing a Living Life product that "may be priced to spin off more comp for David," see Docket No. 182-64; (12) evidence suggesting that LSW had a role in directing PFA's business activities, see, e.g., Warfield Dep. Tr. 145, Docket No.
182-10 (deposition testimony by Warfield, Vice President at LSW, describing a circus-themed PFA national meeting for which Warfield proposed discussing herself (on behalf of LSW) as a "ringleader" and "showcasing all the ways [LSW] will help support [PFA] to expand their business... and lead them to greater (death-defying) heights"); Docket No. 182-24 (LSW-produced notes of a meeting with PFA's CEO and his team that states that recruiting, and specifically, "recruit or die," was discussed as a growth strategy and that PFA's CEO "[a]grees with Mehran [LSW's CEO] — Recruit or Die").
The evidence just described is sufficient for the question of whether LSW can be held directly liable for operating an endless chain scheme to go to trial. While defendants advance their own interpretation of some of the evidence just described, the Court may not weigh the evidence at the summary judgment stage.
Relying on People v. Ramirez, 79 Cal. App. 4th 408, 415, 94 Cal.Rptr.2d 76 (2000), LSW argues that "operat[ing]" an endless chain scheme "requires control over or active involvement in the scheme." Docket No. 293-4 at 6. In that case, the California Court of Appeal rejected the argument that "operates" requires a "supervisory role or ha[ving] any control over the operation"; it held that "operates" does not encompass "a supervisory requirement" and only requires more than "mere participation." Id. Based on the evidence discussed above, a reasonable factfinder could conclude that LSW engaged in conduct that was more than "mere participation" in the alleged scheme.
In light of the foregoing, a genuine issue of material fact exists as to whether LSW operated the alleged scheme in violation of the ECL and has direct liability with respect to plaintiffs' unlawful-prong UCL claim. The Court DENIES LSW's motion as to this claim.
d. LSW Secondary Liability for an ECL Violation
LSW argues that plaintiffs' unlawful-prong claim against it fails to the extent that it is premised on a theory of secondary liability under theories of agency, partnership, aiding and abetting, and conspiracy. The Court addresses each of these theories in turn.
The parties represent that, although an alter ego theory of secondary liability is alleged in the operative complaint, plaintiffs have agreed that they are no longer pursuing that theory. See Docket No. 273-3 at 12.
i. Agency
LSW argues that plaintiff's agency theory fails because the operative contract between LSW and PFA provides that PFA is an independent contractor of LSW. See Puglisi Decl., Ex. A § 1.3, Docket No. 262-8 (contract under which PFA sells insurance policies for LSW). LSW further contends that this contract provides that PFA retained contractual control, judgment, and discretion over its business activities. LSW acknowledges that an independent contractor can nevertheless form an agency relationship, but it contends that no such relationship was formed here because plaintiffs "have not raised any facts to show that the parties assented to Southwest's right to control PFA." Docket No. 293-4 at 9. LSW argues that LSW's authority to review PFA's marketing materials was limited to materials that described LSW products. LSW acknowledges that "Southwest can (and does) terminate individual agents from their appointments with Southwest," but it argues that it has no contractual right to control PFA's recruiting practices and has no right to control how PFA disciplines or otherwise treats its members. Id. at 10. Finally,
LSW argues that an agency theory of liability predicated on ratification of PFA's recruiting activities by LSW would also fail because PFA could not incur any liability on behalf of LSW and because LSW did not know all the facts concerning PFA's alleged scheme. Id. at 11.
Plaintiffs respond that LSW's control and direction over the sales and marketing tactics that PFA uses to sell LSW policies gives rise to triable issues regarding LSW's liability as PFA's principal under an agency relationship. Docket No. 273-2 at 12. Plaintiffs contend that, notwithstanding the noted contract language, an agency relationship was created based on (i) the parties' actions based on LSW's right to control PFA's advertising, (ii) LSW's power to discipline PFA associates, and (iii) LSW's ratification of PFA's activities by choosing not to act after becoming aware that PFA's scheme was resulting in complaints and irregularities with respect to the sale of LSW's policies and by continuing the relationship with PFA to receive financial benefits from it. Id.
"An agent is one who represents another, called the principal, in dealing with third persons." City of Los Angeles v. Meyers Bros. Parking Sys., 54 Cal. App. 3d 135, 138, 126 Cal.Rptr. 545 (1975) (citing Cal. Civ. Code § 2295). "Agency and independent contractorship are not necessarily mutually exclusive legal categories as independent contractor and servant or employee are. In other words, an agent may also be an independent contractor." Id. "One who contracts to act on behalf of another and subject to the other's control, except with respect to his physical conduct, is both an agent and an independent contractor." Id. (citation omitted).
"An actual agency also may be created by ratification." van't Rood v. Cnty. of Santa Clara, 113 Cal. App. 4th 549, 571, 6 Cal.Rptr.3d 746 (2003) (citing Cal. Civ. Code § 2307). But "ratification can be made only in the manner that would have been necessary to confer an original authority for the act ratified[.]" Id. "Where a writing is not required, a principal may ratify an agency 'by accepting or retaining the benefit of the act, with notice thereof.'" Id. (citing Cal. Civ. Code § 2310). "But 'ratification is possible only when the person whose unauthorized act is to be accepted purported to act as agent for the ratifying party.'" Id. "Proof of an agency relationship may be established by evidence of the acts of the parties and their oral and written communications." Id. at 573, 6 Cal.Rptr.3d 746 (citation and internal quotation marks omitted).
Here, the undisputed fact that LSW's contract with PFA stated that PFA would act as independent contractor in the course of selling LSW's policies is not dispositive of the question of whether an agency relationship exists between defendants. An agency relationship may exist notwithstanding the existence of an independent-contractor relationship.
Plaintiffs have pointed to sufficient facts based on which a reasonable factfinder could find that LSW and PFA had an understanding pursuant to which PFA would act on behalf of, and subject to the control of, LSW in the context of the alleged scheme at issue and that LSW accepted or retained the benefits of PFA's conduct in the context of the alleged scheme and, thereby, ratified that conduct. The evidence that would support this finding includes that discussed above in the context of LSW's direct liability for an ECL violation, which the Court does not repeat here. Some of that evidence suggests that LSW has control over all advertisements of its products, and the power to discipline agents who violate LSW's conduct standards, see, e.g., Assadi Dep. Tr. at
32-34, 117, and that PFA would not train its agents to sell a policy in a way that was not known to LSW, suggesting that PFA operated as if under LSW's control, Carroll Dep. Tr. at 85, Docket No. 182-8. Some of the evidence also suggests that LSW sought to require that PFA continue with the "recruit or die" strategy, see Docket No. 182-24 (LSW meeting notes stating that PFA's CEO "[a]grees with Mehran [LSW's CEO] — Recruit or Die"), and that LSW exerted control over PFA's scheme by imposing production requirements on PFA as a condition to maintaining current commission levels; if such production requirements were not met, LSW reserved the right to modify the commissions that LSW would pay to PFA, see, e.g. Docket No. 182-60. Some of the evidence also suggests that LSW was aware that PFA's recruiting-focused scheme was leading to irregularities in the sale of LSW policies and that, rather than terminating the relationship with PFA, LSW continued it (thereby ratifying PFA's conduct) in light of the fact that PFA was one of LSW's top performing marketing partners. See, e.g., Warfield Dep. Tr. at 16, 145, Docket No. 182-10; Docket No. 182-36; Docket No. 182-13; Docket No. 182-64.
Because PFA's recruitment-focused marketing scheme impacted and involved the sale of LSW's products, a reasonable factfinder could find that LSW's authority over the marketing of its products would have extended to PFA's recruitment-focused marketing scheme.
The authorities that LSW cites for the proposition that no agency relationship exists here as a matter of law are distinguishable. In each case, the court found that there could be no liability under a ratification theory because the requisite showing for an agency relationship was not made. See Thomas v. Taco Bell Corp., 582 F. App'x 678, 680 (9th Cir. 2014) (holding that the defendant could not be liable under a theory that he ratified a tort because there was no evidence that the tortfeasors were agents of the defendant); Batzel v. Smith, 333 F.3d 1018, 1036 (9th Cir. 2003) (similar); Ewing v. Freedom Forever LLC, No. 20-CV-880-JLS (AHG), 2021 WL 1087100, at *3 (S.D. Cal. Mar. 22, 2021) (similar).
Accordingly, the Court DENIES LSW's summary judgment motion as to plaintiffs' agency theory of liability.
ii. Partnership
In its reply, LSW argues that plaintiffs' unlawful-prong claim fails as a matter of law to the extent that it is predicated on the existence of a partnership for four reasons: One, LSW and PFA are separate entities and PFA is an independent contractor of LSW. LSW argues that a partnership cannot be presumed even if it were the case that LSW and PFA shared profits, because California Corporations Code § 16202(c)(3)(B) provides that the presumption that a partnership exists where the purported partners share profits does not apply where the profits were received in payment for services as an independent contractor, which is the case here. Two, a partnership does not exist on the basis that either LSW or PFA used the word "partner" to describe the other. Three, any profits that LSW earned were from policy sales made by PFA-affiliated associates and that any such profits "went only on Southwest's books." See Docket No. 293-4 at 8. Four, LSW and PFA did not share losses, because their contract provides that
LSW did not address plaintiffs' partnership theory of liability in its opening brief. See generally Docket No. 262-5. In its reply, LSW states that plaintiffs did not raise this theory in their pre-filing letter brief preceding the summary judgment motion. Docket No. 293-4 at 7 n.2.
PFA has no authority to incur liabilities or obligations on behalf of Southwest.
Plaintiffs proffer numerous facts to dispute this theory: LSW and PFA formed a partnership because LSW and PFA sell co-branded Living Life policies and PFA is LSW's largest independent sales agency; LSW has "profited handsomely from its collaboration with PFA"; LSW oversees and controls how PFA markets and sells its insurance products; LSW has the power to discipline any agents who run afoul of LSW's standards of conduct; and LSW's CEO, Assadi, described PFA as an "amazing partner of our company." Docket No. 273-2 at 11-12.
Under California law, "the association of two or more persons to carry on as co-owners a business for profit forms a partnership, whether or not the persons intend to form a partnership." Cal. Corp. Code § 16202(a). "A person who receives a share of the profits of a business is presumed to be a partner in the business, unless the profits were received for" reasons that include, in relevant part, "payment for services as an independent contractor or of wages or other compensation to an employee." Id. §§ 16202(c)(3) & 16202(c)(3)(B).
The "intention of the parties to carry on a definite business as co owners" can be determined from the terms of the parties' agreement or from the surrounding circumstances." Greene v. Brooks, 235 Cal. App. 2d 161, 165-66, 45 Cal.Rptr. 99 (1965) (citations omitted). "Some degree of participation by partners in management and control of the business is one of the primary elements of partnership." Id. (citations omitted). Additionally, "to form a partnership or joint venture, the parties must either explicitly agree to share profits or engage in conduct from which an agreement to do so may be assumed." Beautiful Slides, Inc. v. Allen, No. 17-CV-01091-MMC, 2017 WL 3782304, at *4 (N.D. Cal. Aug. 31, 2017); see also Simmons v. Ware, 213 Cal. App. 4th 1035, 1054, 153 Cal.Rptr.3d 178 (2013), as modified on denial of reh'g (Mar. 13, 2013) ("Agreement to share in the profits and losses of the enterprise is also essential to a joint venture, although there is some authority to the effect that the sharing of losses is not necessary.").
Here, plaintiffs have not pointed to any evidence from which a reasonable factfinder could infer that an explicit agreement to share profits existed between LSW or PFA, or conduct from which an agreement to do so could be found. Plaintiffs have not identified the "profits" that LSW and PFA agreed (explicitly or implicitly) to share, what the source of those profits is, or how such profits are shared between LSW and PFA. Plaintiffs state only that LSW has "profited handsomely" from its collaboration with PFA. In support, plaintiffs point to a document that shows the aggregate face value of the policies sold by "PFA producers," see Docket No. 182-17, and to a presentation slide showing that the weighted net annualized premium for LSW policies that PFA sold from 2008 to 2019 increased during that time period from almost $4 million to more than $77 million, Docket No. 182-65. Neither of these documents, which speaks only to the value of the policies sold by PFA, indicates that LSW and PFA agreed to share "profits." If anything, these materials may indicate the revenue that LSW has made from policies that were sold by PFA; revenue is not the same as "profits." See Simmons, 213 Cal. App. 4th at 1055, 153 Cal.Rptr.3d 178 ("The 'profits' of a business generally signifies an excess of the value of returns over the value of advances, or ... the excess of receipts over expenditures, or... the receipts of a business, deducting
current expenses; it is the equivalent to net receipts.") (citations and internal quotation marks omitted).
Further, LSW has shown that the commissions that PFA may have received as part of the parties' agreement pursuant to which PFA sells LSW policies as LSW's independent contractor do not, as a matter of law, give rise to a presumption that a partnership exists. See Cal. Corp. Code §§ 16202(c)(3) & 16202(c)(3)(B) (providing that "[a] person who receives a share of the profits of a business is presumed to be a partner in the business, unless the profits were received for" reasons that include, in relevant part, "payment for services as an independent contractor or of wages or other compensation to an employee") (emphasis supplied). LSW has also shown that courts have held that the payment of "commissions" from one purported partner to the other is not indicative of an "agreement to share the 'profits'" of the joint venture. See EduMoz, LLC v. Republic of Mozambique, No. CV1302309MMMCWX, 2015 WL 13697385, at *18 (C.D. Cal. Apr. 20, 2015).
The only other evidence proffered as giving rise to a partnership is Assadi's description of PFA as an "amazing partner of our company"; the fact that Living Life policies were "co-branded"; and that LSW retained control over how PFA marketed its products and that it could discipline PFA associate who violated LSW's standards of conduct. Plaintiffs have not shown that this evidence is indicative of an implicit agreement to share profits, nor have they pointed to any case in which a court has held that similar evidence could create a genuine issue of material fact as to the existence of a partnership.
The cases that plaintiffs cite for the proposition that a reasonable factfinder could find that LSW and PFA were partners are distinguishable. Each involved evidence showing that there was sharing of profits between the partners, which is absent here. In McClung v. Saito, the court held that a partnership existed because the purported partners signed a joint venture agreement pursuant to which they agreed to acquire property that would be owned by the joint venture and to share the "net profits from that enterprise." 4 Cal. App. 3d 143, 150, 84 Cal.Rptr. 44 (1970). In DeMartini v. DeMartini, the Ninth Circuit held that a genuine issue of fact existed as to the existence of a partnership because there was "evidence that could show that the couples shared profits, participated in the management of the property, and held themselves out as a partnership when leading the property." 833 F. App'x 128, 131 (9th Cir. 2020) (emphasis supplied). In Weiner v. Fleischman, 54 Cal. 3d 476, 483, 286 Cal.Rptr. 40, 816 P.2d 892 (1991), the California Supreme Court held that the trial court erred in instructing the jury that an oral joint venture agreement had to be established by clear and convincing evidence, as opposed to by a preponderance of the evidence. The California Supreme Court did not consider whether the oral joint venture agreement at issue satisfied the preponderance of the evidence standard. It simply held that it was appropriate to remand for a new trial under the correct standard. Id. Notably, however, the California Supreme Court's brief discussion of the oral joint venture agreement at issue, which was dicta, indicates that it involved an oral agreement between the purported partners to "equally share" the fee that they would collect for finding a third-party buyer for a company's stock, suggesting that the purported joint venture agreement expressly contemplated the sharing of profits. Id. at 480, 286 Cal.Rptr. 40, 816 P.2d 892.
In light of the foregoing, the Court GRANTS LSW's motion for summary judgment
as to plaintiffs' theory of liability predicated on the existence of a partnership between LSW and PFA.
iii. Aiding and Abetting
LSW argues that plaintiffs' aiding-and-abetting theory fails because they have no evidence showing that LSW had actual knowledge that PFA was operating a pyramid scheme or that LSW substantially assisted the scheme. LSW contends that it never investigated whether PFA was operating a pyramid scheme and suspicions about the legality about what it was doing are insufficient to establish actual knowledge. LSW also contends that it did not control or provide input into PFA's recruiting structure or activities and LSW's conduct was limited to performing the same general business activities it performed in connection with its relationship with other marketing companies.
Plaintiffs disagree and cite the same evidence discussed above in connection with LSW's liability for violating the ECL and liability under an agency theory. They claim that this evidence is sufficient for a factfinder to find that LSW had actual knowledge of PFA's misleading sales practices and that it nevertheless continued its relationship with PFA and acted in furtherance of the alleged scheme.
To establish aiding and abetting liability under California law, a plaintiff must establish that the defendant: (1) had "actual knowledge of the specific primary wrong" and (2) "substantially assisted" it. See In re First Alliance, 471 F.3d at 993 (citing Casey v. U.S. Bank Nat. Ass'n, 127 Cal. App.4th 1138, 26 Cal.Rptr.3d 401 (2005)). To satisfy the knowledge prong, the defendant must have "actual knowledge of the specific primary wrong the defendant substantially assisted." Id. (citation and internal quotation marks omitted). That a defendant had a "vague suspicion of wrong doing" or knew of "wrongful or illegal conduct" does not suffice. Id. at 993 n. 4 (citation and quotation marks omitted). "A plaintiff may prove actual knowledge through inference or circumstantial evidence." Simi Mgmt. Corp. v. Bank of Am., N.A., 930 F. Supp. 2d 1082, 1099 (N.D. Cal. 2013).
Here, plaintiffs have pointed to sufficient evidence upon which a reasonable factfinder could find that the elements for aiding and abetting liability are met; that evidence is the same evidence discussed above in connection with LSW's direct liability as an operator of an endless chain scheme in violation of the ECL and liability under an agency theory. That evidence would support a reasonable finding that LSW (1) was aware that PFA's scheme was focused on recruitment and was resulting in questionable policy sales and sales conduct that appeared to be motivated by PFA's recruitment-related incentives and marketing practices, and (2) substantially assisted PFA in continuing to operate the scheme despite the red flags. See In re First Alliance, 471 F.3d at 999 ("That Lehman came upon red flags which were seemingly ignored was enough to establish actual knowledge under the California aiding and abetting standard.").
LSW's arguments to the contrary are premised on its own self-serving interpretations of the evidence. Those interpretations do not defeat plaintiffs' showing that a genuine issue of material fact exists as to whether LSW aided and abetted PFA's conduct.
Further, the cases upon which LSW relies in this regard are distinguishable. There, the alleged aiders-and-abettors were transactional platforms (1) whose actions were limited to those that they normally performed in the course of enabling transactions on their platforms, and (2) who did not knowingly facilitate the tort.
See Barrett v. Apple Inc., 523 F. Supp. 3d 1132, 1149 (N.D. Cal. 2021) (dismissing aiding-and-abetting claim against Apple based on alleged gift card scam that employed Apple's App Store for failure to plausibly allege that Apple substantially assisted scammers, reasoning that Apple's actions were like those of "financial institutions whose services were allegedly utilized by third-party wrongdoers" in the course of the tort, which are insufficient to "meet the standards of third-party liability"); Perfect 10, Inc. v. Visa Int'l Serv. Ass'n, 494 F.3d 788, 809 (9th Cir. 2007) (affirming dismissal of aiding-and-abetting claim because defendants "merely process credit card payments"). Here, based on the evidence discussed above, the Court cannot conclude, as a matter of law, that LSW is akin to transactional platform that merely enables transactions for PFA.
Accordingly, the Court DENIES LSW's motion for summary judgment with respect to plaintiffs' aiding-and-abetting theory of liability.
iv. Conspiracy
LSW argues that it is entitled to summary judgment as to plaintiffs' theory that it was a co-conspirator of PFA with respect to the alleged scheme on the basis that plaintiffs cannot show that it had an agreement with PFA to commit a wrongful act.
Plaintiffs argue that the same evidence supporting LSW's liability as an aider and abettor supports its liability as co-conspirator with respect to the alleged scheme.
Under California law, conspiracy requires knowledge of a plan to engage in the specific wrongful conduct at issue, and agreement to participate in that plan. See Kidron v. Movie Acquisition Corp., 40 Cal. App. 4th 1571, 1582, 47 Cal.Rptr.2d 752 (1995). The "finder of fact may infer the requisite concurrence and knowledge from the nature of the acts done, the parties' relations to each other, and the common interest of the alleged conspirators." Novartis Vaccines & Diagnostics, Inc. v. Stop Huntingdon Animal Cruelty USA, Inc., 143 Cal. App. 4th 1284, 1300, 50 Cal.Rptr.3d 27 (2006). A plaintiff need not "produce evidence showing that the defendants met and actually agreed to undertake the performance of the unlawful act." Black v. Sullivan, 48 Cal. App. 3d 557, 567, 122 Cal.Rptr. 119 (1975). "Tacit consent is enough to prove a conspiracy" so long as the conspirator "concurred in the tortious scheme with knowledge of its unlawful purpose." Schwartz v. Pillsbury Inc., 969 F.2d 840, 844 (9th Cir. 1992).
The Court agrees with plaintiffs that the same evidence supporting both LSW's liability as an aider and abettor and for a violation of the ECL, also supports its liability as a co-conspirator of PFA. See Bowoto v. Chevron Corp., No. C 99-02506 SI, 2007 WL 2349336, at *15 (N.D. Cal. Aug. 14, 2007) (holding that "the same evidence of aiding and abetting, discussed above, would allow a jury to reasonably infer knowledge and agreement" required for a conspiracy claim). The Court does not repeat the evidence here, but notes that the evidence included LSW meeting notes stating that PFA's CEO "[a]grees with Mehran [LSW's CEO] — Recruit or Die" in the context of discussing growth strategies. See Docket No. 182-24.
e. UCL Standing
With respect to the unlawful-prong of the UCL, LSW argues that plaintiffs lack standing for three reasons: First, there is no causal connection between the optional rescission of Living Life policies that plaintiffs seek and the alleged scheme given LSW's lack of involvement in PFA's recruitment activities which form the basis of the claim. Second, there is no connection between the alleged scheme involving
PFA's recruitment activities and LSW's underwriting of Living Life policies given that the latter is an individualized process. Docket No. 262-5 at 5-6. Finally, to the extent that any remedies can be awarded as a result of an established ECL violation, they are limited to those authorized under California Civil Code § 1689.2, which are rescission of "the contract upon which the scheme is based" which LSW claims is the payment of the $125 fee required for PFA membership given the class certification order. Thus, plaintiffs' remedies must be limited to the rescission of the contract between class members and PFA. Id. at 4-7, 17.
Plaintiffs disagree for largely the same reasons referenced above. First, they argue the optional rescission of the LSW policies is appropriate and causally connected to the challenged conduct because LSW's policy sales through PFA as part of the alleged scheme were the but-for cause of their economic loss from purchasing an LSW policy. Second, pursuant to the alleged scheme, purchase of a Living Life policy was a practical requirement for advancement and success at PFA. Docket No. 273-2 at 23. Third, their claims are not predicated on LSW's "provision of insurance services" through underwriting and issuing life insurance policies; instead, they are predicated on the sales and marketing practices in which PFA and LSW participate. Id. Finally, the fact that plaintiffs do not seek recovery of the $125 fee as a remedy is irrelevant to whether they have UCL standing, because they need not seek to recover that fee "for it to be probative of liability[.]" Id. at 24.
A "private individual has standing to bring a UCL action only if he or she 'has suffered injury in fact and has lost money or property as a result of the unfair competition.'" Troyk v. Farmers Grp., Inc., 171 Cal. App. 4th at 1339, 90 Cal.Rptr.3d 589 (quoting Cal. Bus. & Prof. Code, § 17204). While courts have not yet defined the requirements for establishing causation for the purpose of UCL standing, in Troyk, the California Court of Appeal stated that it "discern[ed] no legislative intent from [§ 17024]'s language that would require a standard of causation more stringent than the 'a substantial factor' standard that applies to negligence actions ... for a plaintiff to have UCL standing." Id. at 1349 n.33, 90 Cal.Rptr.3d 589. "[A] substantial factor in causing harm is a factor that a reasonable person would consider to have contributed to the harm. It must be more than a remote or trivial factor. It does not have to be the only cause of the harm." Id. (citation and alteration omitted).
Here, as noted, a genuine issue of material fact exists as to whether LSW operated the alleged scheme as a result of which plaintiffs purchased Living Life policies. In light of this, a reasonable factfinder could find that LSW's conduct in connection with the alleged scheme was a substantial factor that contributed to plaintiffs' economic losses stemming from the purchase of Living Life policies. Further, as discussed above, the remedy of optional rescission of the Living Life policies is within the Court's equitable powers under the UCL. LSW's reliance on California Civil Code § 1689.2 for the proposition that the Court can only rescind "the contract upon which the scheme is based" where an ECL violation is found is misplaced; because plaintiffs' claim is under the UCL
LSW's authorities are distinguishable for this reason. See Giron v. Hong Kong, No. 215CV08869ODWJC, 2017 WL 5495504, at *10 (C.D. Cal. Nov. 15, 2017) ("Plaintiffs never connect HSBC USA's conduct with the harm allegedly suffered by Plaintiffs, which they must do to survive summary judgment" as to their UCL claim and other claims).
(and the alleged ECL violation is merely its predicate), the Court's remedial powers arise out of the UCL, not the ECL.
The Court, therefore, DENIES LSW's motion for summary judgment as to plaintiffs' unlawful-prong claim to the extent that it based on the lack of UCL standing.
2. Claim under the UCL's Unfair Prong
Plaintiffs' UCL claim under the unfair prong is premised on defendants' operation of the alleged scheme in violation of California's public policy as declared in the ECL, which prohibits endless chain schemes. Docket No. 131 ¶ 120. The Court certified the California subclass with respect to this claim to the extent that it was premised on the alleged conduct that violates the ECL. See Order at 28, Docket No. 239.
PFA moves for summary judgment as to this claim on the ground that plaintiffs have not shown that they have met the redressability requirement for Article III standing. PFA makes the same arguments that it made in connection with plaintiffs' unlawful-prong claim.
The Court DENIES PFA's motion for the same reasons discussed above in connection with plaintiffs' unlawful-prong claim.
LSW also moves for summary judgment as to plaintiffs' unfair-prong claim against it. LSW contends that plaintiffs, in their pre-filing letter, refer to a new theory of liability that involves LSW's alleged promotion of the Living Life policy as a "tax-free retirement." Docket No. 262-5 at 18. LSW argues that, to the extent that plaintiffs seek to rely on theories arising out of "point-of-sale compliance infractions like a statement about 'tax free retirement' in PFA marketing material," the Court must grant summary judgment in its favor because such theories were not alleged in the complaint and defendants would be prejudiced if plaintiffs were allowed to assert them now, after the close of discovery. Id.
Plaintiffs do not address this argument by LSW in their opposition. Plaintiffs argue only that their claim under the unfair prong is not based solely on the existence of a scheme in violation of the ECL, and that the conduct that could give rise to an ECL violation may be "unfair" in violation of the UCL even if not unlawful under the ECL. See Docket No. 273-2 at 25.
The Court agrees with LSW that the allegations in the operative complaint do not include any factual matter regarding LSW's purported promotion of the Living Life policy as a "tax-free retirement." See generally Docket No. 131. Accordingly, the Court declines to permit plaintiffs to proceed with such a theory at trial. That said, because the Court has concluded that a genuine issue of material fact exists as to whether defendants violated the ECL, and because plaintiffs' unfair-prong claim is predicated on litigated conduct that may give rise to that violation, the Court DENIES LSW's motion for summary judgment as to plaintiffs' unfair-prong claim.
3. Common Law Fraud
Plaintiffs assert a claim for fraud against PFA only, which is premised on allegations that PFA knowingly and intentionally concealed from plaintiffs that its business operates as a pyramid scheme, wherein the only way to progress in the hierarchy is to recruit more members and only those at the very top realize the personal wealth that is advertised in PFA's marketing materials. It also is premised on allegations that PFA misrepresented to PFA recruits that buying a Living Life policy would facilitate their ability to succeed in selling LSW policies and would result in personal wealth, without revealing that only very few achieve that wealth.
The Court has not certified any class with respect to this claim. Accordingly, the common law fraud claim alleged in the operative complaint is brought on an individual
basis by named plaintiffs Chen (who is a resident of California) and Wang (who is a resident of New Jersey).
PFA seeks summary judgment with respect to this claim on the following four grounds:
First, PFA argues plaintiffs "cannot establish the intent required to prevail" on the claim, as "PFA did not and does not believe that it is a pyramid scheme[.]" Docket No. 252 at 14. Second, plaintiff Chen's fraud claim fails as a matter of law because it is premised on his "subjective belief" that the money-making opportunity would be easier than it was represented to him. Id. Third, plaintiff Wang's fraud claim fails because she testified at her deposition that she was told that she would have to work hard at selling life insurance to be successful at PFA, and that evidence undermines the notion that PFA misrepresented the opportunity to succeed at PFA. Id. Finally, plaintiff Wang's fraud claim fails as a matter of law because she has failed to "establish damages," as she earned more than $20,000 selling LSW policies and she admitted that nobody told her that she was required to purchase an LSW policy. Docket No. 252 at 15.
Under California law, "[t]he familiar elements of a fraud cause of action are (1) misrepresentations of material fact, (2) knowledge of falsity, (3) intent to induce reliance, (4) justifiable reliance and (5) resulting damage." Omnitrition, 79 F.3d at 788 (citing Cicone v. URS Corp., 183 Cal. App. 3d 194, 227 Cal.Rptr. 887 (1986)). The elements for a fraud claim under New Jersey law are substantially similar, if not identical.
A fraud claim under New Jersey law requires a showing that the defendant: (1) made a representation or omission of a material fact; (2) with knowledge of its falsity; (3) intending that the representation or omission be relied upon; (4) which resulted in reasonable reliance; and (5) damages. Jewish Ctr. of Sussex Cnty. v. Whale, 86 N.J. 619, 624, 432 A.2d 521 (1981).
In Omnitrition, the Ninth Circuit held that, if a genuine issue of material fact exists as to whether a business practice violates the ECL, then a genuine issue of material fact also exists with respect to the first four elements of a "cause of action for common law fraud." 79 F.3d at 788. This is because the evidence necessary for the first three elements is also necessary for a claim under the ECL. See id. ("Misrepresentations, knowledge and intent follow from the inherently fraudulent nature of a pyramid scheme as a matter of law[.]"). As to the fourth element, the Ninth Circuit held that reliance could also be inferred from the evidence supporting the ECL violation. See id. (holding that reliance can be inferred where there is a genuine issue of fact as to whether there is an ECL violation because "very reason for the per se illegality of Endless Chain schemes is their inherent deceptiveness and the fact that the 'futility' of the plan is not 'apparent to the consumer participant'"). Accordingly, under Omnitrition, PFA cannot obtain summary judgment as to the individual common law fraud claims against it on the basis that the first four elements of the claims are not met; this is because a genuine issue of material fact exists as to those elements by virtue of the fact that a genuine issue of material fact exists as to whether defendants violated the ECL.
That leaves the fifth and final element: damages.
PFA does not make any argument as to the element of damages with respect to plaintiff Chen. Accordingly, the Court DENIES PFA's summary judgment motion as
to individual plaintiff Chen's fraud claim against PFA.
With respect to named plaintiff Wang, as noted, she admitted during her deposition that she sold two policies and earned more than $20,000 as a result. Plaintiffs do not dispute these facts but argue, without citing any evidence, that she nevertheless suffered damages because "she wasted her time and effort on a futile opportunity that promised much more." See Docket No. 271-2 at 24.
In Omnitrition, the Ninth Circuit held that there was a genuine issue of material fact as to the plaintiffs' fraud-claim-related damages because "[one plaintiff] testified that he never made back what he put into the scheme and [the other plaintiff] testified that he lost approximately $5,000 in the scheme." 79 F.3d at 788. Here, plaintiffs have pointed to no evidence to show that Wang suffered damages, much less sufficient evidence from which a reasonable factfinder could find that Wang "never made back" what she put into the scheme or that she otherwise lost money that she has not recovered because of the scheme. Accordingly, the Court GRANTS PFA's motion for summary judgment as to Wang's individual fraud claim against PFA.
4. New Jersey Consumer Fraud Act
Named plaintiff Wang asserts a claim under the NJCFA against both defendants, which is predicated on the same alleged scheme and conduct that could give rise to a violation of the ECL. This claim has not been certified for class treatment.
PFA moves for summary judgment as to plaintiff Wang's claim based on the conclusory argument that the claim "fails as a matter of law because it seeks relief— rescission of her life insurance policy—that cannot be obtained from PFA." Docket No. 252-0 at 13. In other words, PFA appears to assert the same Article III redressability argument that the Court already considered and rejected in connection with plaintiffs' unlawful-prong claim under the UCL.
PFA has not shown that this Court lacks the power under the NJCFA to order LSW to provide Wang with the option to rescind her policies and to order both defendants to restore her net losses once the policies are rescinded. PFA also has not shown that Wang's injuries would not be redressed by a judicial decision ordering the relief just described. Accordingly, the Court DENIES PFA's motion with respect to this claim.
LSW argues that, "if the Court grants Southwest's motion for summary judgment as to the ECL and UCL claims, it should also grant summary judgment as to Plaintiff Wang's third claim under the New Jersey Consumer Fraud Act." Docket No. 262-5 at 18. Because the Court has denied LSW's motion as to plaintiffs' UCL claims, the Court DENIES LSW's motion for summary judgment as to Wang's NJCFA claim.
5. Requests for Prospective Injunctive Relief
LSW argues that defendants are entitled to summary judgment as to plaintiffs' requests for prospective injunctive relief because each of the named plaintiffs lacks standing to pursue such relief. In essence, each named plaintiff has allowed his or her Living Life policy to lapse and neither intends to continue participating in PFA. Thus, LSW argues that neither plaintiff can establish the risk of future harm that is required for Article III standing to seek prospective injunctive relief. Docket No. 262-5 at 18.
Plaintiffs respond, in a footnote, that they "are no longer seeking injunctive relief, [and] they do not oppose the Court granting summary judgment on their individual injunctive relief claims." See Docket
No. 273-2 at 23 n.10. Plaintiffs argue, however, that because "[d]efendants moved for summary judgment before the class members received notice of the Court's certification, [d]efendants are not entitled to summary judgment on the injunctive relief claims held by unnamed class members." See id. LSW does not respond to plaintiffs' argument that their requests for injunctive relief are preserved with respect to unnamed class members even if summary judgment is granted in defendants' favor with respect to the named plaintiffs' individual requests for prospective injunctive relief.
The Court GRANTS summary judgment in defendants' favor with respect to the named plaintiffs' requests for prospective injunctive relief. This ruling does not impact any claims for prospective injunctive relief that unnamed class members could have, because no Rule 23(b)(2) class has been certified, and because notice to the Rule 23(b)(3) California subclass that was certified has not been received by the class members, according to plaintiffs' undisputed representations. See Schwarzschild v. Tse, 69 F.3d 293, 297 (9th Cir. 1995) (holding that, where defendants obtain summary judgment before the class has been properly certified or before notice has been sent, "the district court's decision binds only the named plaintiffs").
6. Civil Conspiracy
Both defendants argue that plaintiffs' civil conspiracy claim fails as a matter of law because California law does not recognize a standalone claim for civil conspiracy. Plaintiffs argue that they "pled civil conspiracy both as a theory of liability ... and as a cause of action at common law." Docket No. 271-2 at 25.
"Under California law, there is no separate and distinct tort cause of action for civil conspiracy." Entertainment Research Group, Inc. v. Genesis Creative Group, Inc., 122 F.3d 1211, 1228 (9th Cir. 1997) (citing Applied Equipment Corp. v. Litton Saudi Arabia Ltd., 7 Cal.4th 503, 28 Cal. Rptr. 2d 475, 480, 869 P.2d 454 (1994) ("Conspiracy is not an independent tort; it cannot create a duty or abrogate an immunity. It allows tort recovery only against a party who already owes the duty and is not immune from liability based on applicable substantive tort law principles.")).
In Entertainment Research Group, Inc., the Ninth Circuit granted summary judgment as to a standalone claim for civil conspiracy on the basis that it had "decided to affirm the district court as to all other tort causes of action." Id. The panel reasoned that, "to have a valid civil conspiracy cause of action, there must be another tort upon which [the plaintiff] could base its conspiracy claim." Id. This implies that a claim for civil conspiracy can remain in a case unless no underlying tort remains in the action.
Here, the Court has denied summary judgment with respect to the underlying torts for plaintiffs' conspiracy cause of action. Because the underlying torts for the conspiracy claim remain at issue, the Court DENIES the motion for summary judgment with respect to the civil conspiracy claim.
V. CONCLUSION
For the foregoing reasons, the Court GRANTS IN PART AND DENIES IN PART defendants' motions for summary judgment.
The Court GRANTS the motions with respect to the named plaintiffs' request for prospective injunctive relief; plaintiffs' theory of liability against LSW predicated on the existence of a partnership between LSW and PFA; and named plaintiff Wang's claim for fraud against PFA. The Court otherwise DENIES the motions for summary judgment. The Court GRANTS IN
PART AND DENIES IN PART the parties' motions to seal, as discussed above.
This order terminates docket numbers 252, 263, 253, 255, 258, 262, 264, 270, 271, 273, 275, 277, 279, 280, 293.
The Court SETS a Case Management Conference for July 11, 2022, at 1:45 p.m. Five business days prior, the parties shall file a proposed joint schedule outlining dates with respect to all pretrial filings and provide any conflicts with trial dates in 2023.
IT IS SO ORDERED.