Court Gives New Wind to Pyramid Scheme Claims

     CHICAGO (CN) – The 7th Circuit revived pyramid scheme allegations in a federal class action against a website whose customers sell each other the right to act as travel agencies.
     Illinois-based, commonly called YTB, offers training and a website from which users can sell their travel packages in exchange for a base fee and percentage of each sale.
     A class action sought $5 million in damages for more than 100 individuals nationwide who have participated in YTB’s at-home travel-agency program.
     YTB sells its own travel packages, but they do not represent a substantial portion of revenue. The class claimed that YTB relies on its users to bring more potential “travel agents” to the site, creating more selling opportunities for users.
     “The defendant corporations have taken over half a billion dollars from their unsophisticated customers, selling them on the dream of cheap travel and million dollar pay-outs when the only way that plaintiffs and their class could make a net profit was by recruiting others to join the illegal pyramid scheme,” the complaint stated.
     The business model can only deliver profits to users if other persons continue to join the site, in violation of the Illinois Consumer Fraud Act, the class claims.
     “While over half of the its customers received no travel commissions at all, the directors of YTB International, Inc. each paid themselves multi-million dollar salaries while also siphoning tens of millions of dollars from their publicly traded corporation to privately owned corporations that they owned and controlled,” the class claimed.
     But U.S. District Judge Patrick Murphy declined to rule on whether YTB constituted a pyramid scheme. Murphy first ruled that YTB’s transactions with residents of states other than Illinois fall outside of the Illinois Consumer Fraud Act and dismissed those plaintiffs. He then dismissed the suit, determining that the controversy belonged in state court since there were no out-of-state defendants.
     A three-judge panel reversed, ruling that the two-step process was improper for determining jurisdiction.
     “Although the district judge many times wrote that the non-Illinois plaintiffs lack ‘standing,’ the word is not an accurate description of what the court held,” Chief Judge Frank Easterbrook wrote.
     Judge Murphy’s decision is more accurately described as a ruling on the merits, which found that the Illinois Consumer Fraud Act does not apply to customers outside of Illinois.
     But this determination was also a misstep, the court held. Since the out-of-state plaintiffs had been injured, they had standing. And since their injury occurred in Illinois, they could be included in a federal class action under the Illinois Consumer Fraud Act. Whether the class should be certified under Illinois law remains a decision for the District Court.
     “If we can’t say that the complaint and answer contain enough to point unerringly to Illinois law, we can say that the complaint does not defeat application of Illinois law,” Easterbrook wrote, remanding the case to Murphy for further proceedings.

%d bloggers like this: