497417651327Possible shift

In 2014, the ABA Journal called the Fifth Circuit the “nation’s most divisive, controversial and conservative appeals court”. Liberal blog Jezebel deemed it “exceedingly conservative”. Even The Wall Street Journal described the court this year as “conservative-leaning”.

But in a recent case over limits on voting rights, the court ruled for the left-leaning opponents of the restrictions. And last week, the court sitting en banc voted 11-5 to revive a $250+ million class action. Torres v. S.G.E. Management, L.L.C., No. 14-20128 (5th Cir. Sept. 30, 2016) (en banc).

Has the court’s center of gravity shifted?

Conservative court

Those who describe the Fifth Circuit as conservative or defense-friendly tend to point to the court’s sizable majority of Republican appointees. Even now, after more than seven years of appointments by a Democratic President, the Republican appointees on the Fifth Circuit hold a two-to-one majority (10-5).

On the civil side, judicial conservativism generally means a high degree of openness to defense arguments that make lawsuits procedurally or substantively harder for plaintiffs to win. Class actions, which raise the stakes to defendants by aggregating many similar claims into one proceeding, have fared especially poorly. In 2010, for instance, a sister court claimed that the Fifth Circuit seemed to believe it could “set up its own criteria for certification of securities class actions” and could “‘tighten’ Rule 23’s requirements.” Schleicher v. Wendt, 618 F.3d 679, 686 (7th Cir. 2010) (Easterbrook, C.J.); see Class Certification in Antitrust Cases: A Brave New World, Mar. 25, 2011, The Contingency.

Plaintiffs lawyers generally, and class action counsel in particular, avoided federal courts in Louisiana, Mississippi, and Texas, which the Fifth Circuit covers, if they could.

Pyramid scheme

The occasion for the court’s possible move towards the middle came in a case involving claims that a pyramid scheme victimized more than 200,000 people.

One of the defendants, Stream Energy, buys and sells electricity and natural gas but produces neither. It also barely breaks even. Why does it bother?

The explanation that the plaintiffs in Torres v. S.G.E. Management, L.L.C., No. 4:09-cv-2056 (S.D. Tex.), gave pointed to Stream’s marketing arm, Ignite, which they alleged made plenty of money through a multi-level marketing (MLM) scheme.

MLMs enlist people to sell a service or product while also giving them the right to receive commissions on sales by people that they recruit.

The Torres plaintiffs urged that Ignite crossed the line from legitimate MLM into pyramid scheme territory. They claimed that the 236,544 people who tried to make a go of Ignite’s MLM program never had a fair chance to earn a profit. More than 85 percent of all “Independent Associates” of Ignite in fact lost money. They brought suit against Stream, Ignite, and others under the Racketeer-Influenced and Corrupt Organizations Act.

They asked the district court to certify the case as a class action, seeking to recoup losses of more than $87 million times three (around $261 million).

Certification, then vacation

On January 13, 2014, U.S. District Judge Kenneth Hoyt certified the class under Rule 23(a) and Rule 23(b)(3), ruling that issues common to all class members predominated over individual issues and made class treatment of the RICO claims proper. But on Oct. 16, 2015, a Fifth Circuit panel, by a 2-1 vote, vacated the certification order.

The dissenting judge, Jacques Wiener, wrote:

I am compelled to respectfully dissent today by the realization that the panel majority’s opinion will vaccinate illegal pyramid schemes against all civil litigation, immunizing them not just from class actions but ultimately from all judicial challenges. By erecting this barrier to class certification based on nothing more than the theoretical possibility of prior knowledge of illegality, the panel majority creates an insurmountable barrier in this circuit to future class certification of cases that claim the presence of an illegal pyramid scheme. But, even worse, because individuals who are duped into joining such schemes uniformly invest relatively few dollars, none will possibly be able to afford to litigate their individual claims separately. Absent the availability of a class action, there simply will be no possibility of court challenges to such pyramid schemes.

Torres v. S.G.E. Management, L.L.C., No. 14-20128, slip op. at 24 (5th Cir. Oct. 16, 2015).

Going en banc

The panel decision did not last. On March 12, 2016, the court granted the Torres plaintiffs’ petition for rehearing en banc. The full court of 15 active circuit judges (plus Senior Circuit Judge Wiener, who sat on the panel and thus qualified to sit with his active duty colleagues), heard argument on May 25, 2016.

Four months later, the court issued its ruling. By a more than two-to-one margin, the court rejected the panel’s demanding test for certification. Common questions predominated, the 11-5 court held, because the plaintiffs could prove that RICO-style fraud caused their losses with evidence common to all class members.

In many fraud cases, the majority noted, the need to prove that the plaintiff relied on a false statement or misleading omission made class treatment too plaintiff-specific for class treatment. The Torres case differed, the court ruled, partly because RICO softens the “reliance” element of fraud:

As the Supreme Court put it in Bridge v. Phoenix Bond & Indemnity Co.: “[A] person can be injured ‘by reason of’ a pattern of mail fraud even if he has not relied on any misrepresentations.” The Court explained that “[p]roof that the plaintiff relied on the defendant’s misrepresentations may in some cases be sufficient to establish proximate cause, but there is no sound reason to conclude that such proof is always necessary.” It further recognized that “the absence of first-party reliance may in some cases tend to show that an injury was not sufficiently direct to satisfy § 1964(c)’s proximate-cause requirement, but it is not in and of itself dispositive.”

Torres v. S.G.E. Management, L.L.C., No. 14-20128 (5th Cir. Sept. 30, 2016) (en banc) (quoting Bridge v. Phoenix Bond & Indemnity Co., 553 U.S. 639, 649 & 659 (2008)) (footnotes omitted).

The majority opinion, which Circuit Judges Wiener and Gregg Costa co-authored, concluded that Bridge permitted the Torres plaintiffs to prove that fraud caused damage to the entire class in either of two ways:

  • By showing “that the Defendants are operating a pyramid scheme as opposed to a lawful multi-level marketing program” because “[p]yramid schemes are ‘inherently fraudulent’ and are per se mail fraud, a RICO predicate act.” Id. at 12 (footnote omitted).
  • By proving that Ignite held itself “out as a legitimate multi-level marketing program, when in fact it was a fraudulent pyramid scheme” and by that “misrepresentation” defendants caused class members to pay to join Ignite and spend more money in a futile effort to earn a profit. Id. at 16.


Five judges dissented, in three separate opinions.

Each stressed the dissenters’ belief, in the words of Circuit Judge Jolly, that “a person could rationally invest in a pyramid scheme with the hope that he or she might profit significantly, notwithstanding knowledge that a majority of participants will likely be losers.” Id. at 36. He went on:

As for the majority’s altruistic suggestion that an inference of reliance is appropriate because no rational individual would ever knowingly chance defrauding others in an effort to make money for herself, I respectfully suggest that our criminal docket demonstrates the error of this assumption.

Id. Circuit Judge Edith Jones added:

If this isn’t stacking the deck legally, I don’t know what is. But I surmise that even plaintiffs’ counsel do not really believe Stream runs an “illegal pyramid marketing scheme.” Had they truly believed this, they could have invoked the Department of Justice or FTC to assist in shutting Stream down. Instead, they claim to be suing to recover about $329 apiece for over 200,000 IAs who, they assert, lost money on their “investments” with Stream. This amount, nearly $60 million, would be trebled pursuant to RICO, exposing Stream to over $190 million in potential damages, plus contingent attorneys’ fees. Since this is far more than Stream is worth, however, the plaintiffs’ attorneys must either want to take over the business themselves or simply strong-arm a settlement, leaving the “illegal pyramid scheme” in place until it pays off.

Id. at 40.

Green shoots?

On its face, the disagreement between the majority and the dissents boils down to a dispute over an evidentiary question: whether a court should allow a jury to infer that the inherently fraudulent nature of a pyramid scheme caused substantially all class members to lose money trying to make a go of it.

The dissenters appear to consider the inference a misreading of human nature. They focus on the view that people make stupid and dishonest choices all the time and that therefore more than a few class members chose to become IAs in the delusional or crooked belief they could beat the 85 percent odds against them.

The dissenters also may believe that need to prevent dumb and dishonest people from reaping what they regard as an undue gain justifies depriving all the rest of an effective remedy. (Two in the dissenting group go further, suspecting that the whole enterprise amounts to a scheme by “the plaintiffs’ attorneys” to “simply strong-arm a settlement” and collect “contingent attorneys’ fees” while “leaving the ‘illegal pyramid scheme’ in place until it pays off.”)

With the exception of Circuit Judge Catharina Haynes, all of the Fifth Circuit judges who dissented in Torres also dissented in the voting-rights case, Veasey v. Abbott, No. 14-41127 (5th Cir. July 20, 2016) (en banc). Two of the dissenters in Veasey, Circuit Judges Jerry Smith and Jennifer Elrod, joined the majority in Torres. Eight of the 15 active judges thus took the pro-plaintiff side of both cases.

That bare majority — as well as the vacancy of two seats on the court and an impending third vacancy when Circuit Judge Eugene Davis takes senior status at the end of 2016 — signals a court in transition. The outcome of the November election will affect whether the transition will continue or reverse. But for now the court seems to favor moderation.