At the center of the $5.1 billion market for essential oils is a behemoth, a company called Young Living, which brings in revenue of more than $1 billion a year, with its sales growth topping 800 percent over the last five years, and its membership pool creeping towards 3 million. If you ask Lehi, Utah-based Young Living’s president and chief operating officer, Jared Turner, what is driving the company’s burgeoning success, he will tell you that it is a direct result of – and “a testament to” – the “increased knowledge and education of the benefits of essential oils and a cultural shift to wellness and plant-based products.”
If you ask Young Living member Julie O’Shaughnessy, she will tell you something else entirely. She will tell you that the nearly 30-year old company’s financial success can be tied to its operation as a “cult-like pyramid scheme.” That is what she asserted in the proposed class action lawsuit that she filed against Young Living in a Texas federal court in April 2019, citing violations of the Racketeer Influenced Corrupt Organizations Act (“RICO”), the 50-year old federal law that has historically been used to take down organized criminal organizations, whether that be drug-trafficking motorcycle gang members or those affiliated with the Italian-American mafia.
More recently, RICO has been used in an increasingly expansive number of contexts. As Quartz noted this month, the statute – which applies when “an individual or entity commits two offenses, including [but not limited to] murder, extortion, securities fraud, and other serious crimes, within a 10-year period” – was “never designed only for the mob.” In furtherance of that fact, the reach of the statute has been expanded by courts since its initial enactment half a century ago to encompass civil wrongs, as opposed to merely criminal ones, thereby, making it an appropriate cause of action to target “Big Pharma execs, the international football governing body FIFA, Wall Street brokerage houses, and even members of Congress.”
As recently as this month, the Department of Justice pointed to RICO in connection with its prosecution of Huawei Technologies, the Chinese tech giant accused to stealing U.S. trade secrets. And according to O’Shaughnessy, a RICO charge is similarly fitting for Young Living, a multi-level marketing (“MLM”) company in the business of selling essential oils due to its alleged pattern of engaging in “racketeering activity [by way of] wire and mail fraud.”
O’Shaughnessy claims that by operating in accordance with a “complex and intentionally hard-to-understand multi-layer compensation/participation structure … that emphasizes recruitment [of members] over actual product sales,” thereby, ensuring that “every new member will almost certainly lose large sums of money, Young Living crosses the line “from legitimate MLM [entity] to an illegal pyramid scheme,” a claim that the company denied in its formal response to the lawsuit.
In addition to denying the allegations lodged against it, Young Living argued that the case should be transferred to arbitration, a non-public form of alternative dispute resolution, since all Young Living member agreements contain an arbitration clause, which requires “any controversy or claim arising out of or relating to the agreement, or the breach thereof, will be settled by arbitration.”
In an initial determination, a Magistrate Judge for the U.S. District Court for the Western District of Texas found that Young Living failed to demonstrate that O’Shaughnessy entered into a binding arbitration agreement, as conflicting provisions in the Young Living member agreement made it so that neither O’Shaughnessy nor other members could have a “definite understanding that [they] agreed to arbitrate all claims arising out of the member agreement.” And the district court agreed.
Now, before the case can actually proceed in court on merits, Young Living has appealed that decision, asking the Court of Appeals for the Fifth Court to shoot down the lower court’s decision, and require, instead, that the matter be handled out of the public eye and in the confines of arbitration. At the center of the company’s appeal is a pair of provisions in its member agreement, one that requires that conflicts be handled via arbitration, and another, which states that the agreement “will be interpreted and construed in accordance with the laws of the State of Utah … [and] any legal action concerning the agreement will be brought in the state and federal courts located in Salt Lake City, Utah.”
Counsel for O’Shaughnessy argues that the presence of those two “irreconcilably conflicting provisions” means that the arbitration agreement is not binding. Young Living, on the other hand, asserts in its appeal that “the district court failed to harmonize [these] provisions, even though they are plainly reconcilable.” In a filing early this month, Young Living asks the appeals court to do just that: determine that “the Arbitration Clause and the Forum Selection Clause can be harmonized because the Forum Selection Clause ‘concerns only disputes that are not subject to arbitration, such as a challenge to the validity of the Arbitration Provision, or enforcement of an arbitration award,’” and compel arbitration.
The Young Living case comes as no small number of entities within the $36 billion-plus MLM industry in the U.S. are facing increased scrutiny in the form of regulator action and consumer litigation. Critics, including the Federal Trade Commission (“FTC”), claim that many of these ventures operate in accordance with a business model that focuses on recruiting “downline” and getting new distributors to buy the product, rather than on actual sales to consumers, making them akin to legally off-limits pyramid schemes.
For instance, in January 2019, a federal judge in Arizona granted the FTC’s request to temporarily shut down the MLM Success By Health, as well as taking the more extreme step to freeze the assets of top executives. Meanwhile, big-money class action lawsuits, such as those that have been filed against LuLaRoe, are underway.
LuLaRoe has become a magnet for multi-million dollar (and one billion dollar) lawsuits due to its alleged pattern of “paying millions to those few at the top of the company at the expense of the many at the bottom through a ‘pyramid scheme’ or ‘endless chain,’” as many as 80,000 people, according to plaintiffs, thereby, running afoul of the law. A core claim in at least one of the lawsuits that LaLaRoe has faced to date? RICO.
In furtherance of the $1 billion proposed class action lawsuit that they filed in federal court in California in October 2017, former LuLaRoe sales reps Aki Berry, Cheryl Hayton, and Tiffany Scheffer claim that they were recruited by LuLaRoe reps, and were “unknowingly” pulled into “a pyramid scheme” that would “grow at an exponential rate such that it peaked and began to implode within a few short years.”
The three women alleged in that lawsuit that LuLaRoe and its directors “willfully and intentionally violated and continue to violate RICO and California law with the goal of obtaining money, directly and indirectly, through a pattern of racketeering activities.” In particular, they claimed that the defendants “reaped large profits for themselves based on false representations,” all while engaging “in various forms of illegal activity, including (a) mail fraud, (b) wire fraud, and (c) conspiracy.” That lawsuit quietly settled in January 2018, with the terms of the parties’ agreement remaining under wraps.
Despite mounting criticism and a seemingly endless stream of litigation, this is unlikely to be the end of the MLM. Máire O’Sullivan, a Lecturer in Marketing and Advertising at Edge Hill University, says that “while individual MLM companies have risen and fallen over the years, the model itself – which promises easy money and an alluring community – has withstood a number of court challenges over the years, and will likely continue to do so.”
And if the cases to date are any indication, this will continue to be ripe territory for the swiftly-expanding use of RICO claims.