Stream Energy is a retail gas and electrical energy provider whose business model allows prospective salesmen to purchase the right to sell its products and to recruit new salesmen. In 2014, some former salesmen brought a class-action lawsuit against Stream for fraud, alleging that the company’s business model constituted an illegal pyramid scheme.
But unusually for a fraud claim, the plaintiffs argued that they didn’t need to identify any specific misrepresentations made by Stream that might have convinced particular class members to become salesmen. Instead, the plaintiffs claimed that simply offering membership in an illegally structured business would be fraud in and of itself, even if people joined with full knowledge of all risks and benefits.
A federal district court in Texas certified the class, so Stream appealed that decision to the U.S. Court of Appeals for the Fifth Circuit. A three-judge panel reversed the district court, holding that a class could not be certified because each plaintiff must individually prove that he was subject to a misrepresentation. But the entire Fifth Circuit then reheard the appeal and ruled for the plaintiffs. The court didn’t rule on whether Stream was in fact engaged in an illegal pyramid scheme, but did affirm the class certification, accepting the plaintiff’s theory that a single proof of illegal structuring would prove a fraud against every one of Stream’s salespeople.
Read more at https://www.cato.org/blog/be-liable-fraud-you-have-have-actually-defrauded-someone
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