On October 16, 2015, in Torres v. S.G.E. Mgmt., LLC et al., the US Court of Appeals for the Fifth Circuit held that, for the purposes of the predominance requirement for class actions brought under Federal Rule of Civil Procedure (FRCP) 23(b)(3), class-wide reliance cannot be inferred merely because the plaintiffs were defrauded by a business alleged to be a pyramid scheme (No. 14-20128, (5th Cir. Oct. 16, 2015)).

The plaintiffs brought a class action under the Racketeer Influenced and Corrupt Organizations Act (RICO) against S.G.E. Management and its co-defendants. The defendant recruited fee-paying "Independent Associates" (IA’s) who both sell gas and electricity to customers and recruit more IA's. The plaintiffs alleged that they were defrauded into thinking this was a legitimate enterprise, but it was instead an illegal pyramid scheme, whereby the real aim was not to sell the underlying product but to recruit others to become IA's and pay fees. The defendants argued that class certification was inappropriate because individualized questions of reliance and knowledge predominated over any common issues, defeating class certification under FRCP 23(b)(3).

The district court certified the class. While the district court found that no particular misrepresentation could establish class-wide reliance, the court held that the jury could infer reliance based on the fact that the defendants were engaged in a pyramid scheme. A pyramid scheme, by definition, is an illegal enterprise in which the vast majority of participants will lose money, and the only way to make money is to victimize others, typically family and friends. No one would have rationally joined the enterprise knowing that it was an illegal pyramid scheme.

The Fifth Circuit reversed. It reasoned that a person may participate knowingly in a pyramid scheme. While most participants lose money, some people at the top do make money, and a class member may have joined the enterprise hoping or expecting to be at the top. This will differ depending on the investor, and therefore there can be no class-wide inference that, merely because the enterprise is an alleged pyramid scheme, no individual would have rationally joined it had he or she known.