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Class Action Lawsuit "Certified" Which Threatens Entire Channel of Retail Energy Marketing

January 29, 2014

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Copyright 2010-13
Reporting by Paul Ring •

A class action lawsuit against a retail supplier has been "certified" to proceed on a class action basis, opening the door for similar suits and potentially threatening the viability for the entire multi-level marketing sales channel approach used by retail suppliers.

Specifically, a class action lawsuit filed by the Clearman Law Firm in 2009 against Stream Gas & Electric, its marketing unit Ignite Holdings, several subsidiaries, and several affiliated individuals, has now been "certified" by a federal district court judge, meaning the suit can proceed on a class-action basis.

This ruling is purely procedural, and does not address the merits of the suit, but had certification been denied, such denial would have been fatal to the plaintiffs.

Stream Energy immediately sought to appeal the district court's certification ruling, arguing that, "it violates both Fifth Circuit and Supreme Court precedent, in two distinct respects."

In particular, the class action sought by plaintiffs was filed under the Racketeer Influenced and Corrupt Organizations (RICO) Act, and alleged Stream's business relied on an illegal "pyramid" scheme.

However, Stream said that adjudication of the RICO allegations requires an examination of individual claims, not those of a class.

"To begin with, a time-honored principle of Fifth Circuit law precludes class certification: There is no fraud if a plaintiff knew the truth about, or did not rely on, the alleged misrepresentation. These questions concern a plaintiff's subjective state of mind, so the answers will naturally vary from plaintiff to plaintiff. And a defendant has the right to defend itself, by asking each plaintiff these questions. Accordingly, these claims typically must be tried individually, not as a class," Stream said.

"Not surprisingly, then, this Court [Fifth Circuit Court of Appeals] has never approved class certification in a RICO fraud case. To the contrary, it has repeatedly denied class certification in RICO fraud cases, based on the need for individualized inquiry regarding knowledge and reliance. And this case should be no different," Stream said.

Stream also said that the certification ruling erred because, "[u]nder Supreme Court precedent, Plaintiffs were required to prove -- not merely allege -- the existence of a pyramid scheme, in order to certify the class."

"But as the district court made clear, Plaintiffs only alleged a pyramid scheme. They could not prove it. Quite the contrary, the undisputed evidence confirms that Stream Energy does not operate a pyramid scheme. People can -- and thousands do -- make profits solely by selling energy, without recruiting a single IA [independent associate]. This fact alone precludes any holding that Stream Energy operates a pyramid scheme," Stream said.

According to Stream's request to file an immediate appeal, the district court erred in finding that Plaintiffs, "did not have to establish reliance on an individualized basis in this case, based on a narrower legal theory."

"The district court analogized this case to the 'fraud on the market' doctrine, which obviates the need for individualized evidence of reliance in securities fraud cases, provided that the plaintiffs prove the existence of an efficient market. Based upon that theory, the court held that it was enough that Plaintiffs had simply alleged that Stream Energy operates a pyramid scheme. The court granted class certification solely on this ground."

This ruling, if upheld, could open the floodgates of litigation against any network marketing company, or indeed, any other company engaged in commerce.

In short, complainants could bring class action suits against companies and be assured of certification as a class action by merely alleging that the business in question is an illegal pyramid scheme, without having to first establish it as such. There would be a low hurdle for trial lawyers, using aggrieved independent associates, to target retail energy suppliers using network marketing, while they would be incented to do so due to the trebled civil RICO damages available.

With regard to the underlying suit, Stream has "forcefully" denied the allegations, calling the suit, "groundless and without merit."

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