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Ocean Sky International L.L.C. v. The Limu Co., L.L.C.

United States District Court, W.D. Louisiana, Monroe Division

October 1, 2018

OCEAN SKY INTERNATIONAL, L.L.C., ET AL.
v.
THE LIMU COMPANY, L.L.C., ET AL.

          TERRY A. DOUGHTY MAG. JUDGE.

          REPORT AND RECOMMENDATION

          KAREN L. HAYES UNITED STATES MAGISTRATE JUDGE.

         Before the undersigned Magistrate Judge, on reference from the District Court, is a compound motion to dismiss for lack of personal jurisdiction, Fed.R.Civ.P. 12(b)(2), and for failure to state a claim upon which relief can be granted, Fed.R.Civ.P. 12(b)(6), filed by defendants, The Limu Company, L.L.C. (“LIMU”) and Gary Raser. [doc. # 25]. For reasons that follow, it is recommended that the motion to dismiss be denied, in its entirety.

         Background

         On April 19, 2018, Ocean Sky International, Inc. and Suni Enterprises, Inc.[1] filed the instant diversity suit, 28 U.S.C. § 1332, against the Limu Company, L.L.C. (“LIMU”), Gary Raser (LIMU's CEO and founder), plus other unknown individuals and entities fictitiously named as, “Does 1-25.” Plaintiffs alleged in their complaint that,

LIMU is a multi-level marketing company - otherwise known as an “MLM” company - that manufactures and distributes dietary supplements worldwide. As with other MLM companies, LIMU markets and sells products through a network of independent distributors (also referred to as “Promoters”) who are remunerated pursuant to a “Compensation Plan, ” which provides for a structured series of rankings, commissions, and bonuses based upon their sales volumes and the sales of distributors placed beneath them.
The individuals that are aligned below a particular distributor are known as that distributor's “downline” or “downline organization.” The downline may also be referred to as a “genealogy.”
To become a distributor for LIMU, an individual must submit a “Distributor Application.” By submitting the Distributor Application, distributors are required to purchase products in order to earn any commissions and are strongly encouraged to purchase a $499.00 or $999.00 fast track pack (“Packs”) to earn in all areas of compensation. Once purchasing a Pack, the distributor may either resell the products to his or her customer base, or, in the alternative, may consume the products for their own benefit.
Once the distributor receives his or her identification number, a contract is formed between LIMU and the distributor. The Distributor Application, Compensation Plan, and Policies & Procedures collectively comprise LIMU's “Distributor Agreement.”
According to the terms of the Distributor Agreement, specifically Section 8(c)(ii) of LIMU's Policies & Procedures, a distributor may only be terminated for cause.
LIMU entices distributors to join its sales force through the offer of the “MLM Promise.” The MLM Promise is a representation that if a distributor works hard and builds his or her downline, then after a few years, the distributor can sit back and enjoy a care-free lifestyle by living off the distributor's residual commissions generated by his or her downline organization. In some instances, LIMU represents the MLM Promise by indicating to its distributors that they “can build generational wealth.”
The promise of a lifestyle change is what entices many distributors to join LIMU. However, in reality, once a distributor works hard to achieve a high rank with the corresponding income level, LIMU uses pre-textual reasons to terminate the distributor and summarily confiscates his or her downline and residual income for LIMU's own benefit. Since LIMU cuts off the distributor's income, the distributor is left without any funds to assert his or her rights, and this is what LIMU counts on.

(Amend. Compl., ¶¶ 10-13, 16-19).

         Plaintiffs' predecessors-in-interest joined LIMU in 2004. (Amend. Compl., ¶ 25). Plaintiffs, in turn, joined LIMU based upon the MLM Promise made by Raser and other LIMU corporate representatives. Id. “Plaintiffs believed that after they built their downline organization to a certain level of success they would be able to possess sufficient residual income from their downline to allow them to enjoy a more leisurely lifestyle.” Id., ¶ 26. By some unspecified date, plaintiffs achieved LIMU's top rank, and were earning approximately $75, 000 per month, collectively. Id., ¶ 27.

         On, or around November 1, 2017, Raser told the owner of Ocean Sky and another LIMU distributor that they needed to start enrolling more distributors quickly, or it was over. Id., ¶¶ 32-33. Thereafter, the relationship between LIMU and plaintiffs quickly deteriorated, and on December 11, 2017, LIMU suspended Ocean Sky and Suni's distributorships because of multiple alleged violations of LIMU's Policies and Procedures. Id., ¶¶ 41-42. On March 12, 2018, LIMU formally terminated Ocean Sky and Suni's distributorships. Id., ¶ 43.

         Plaintiffs contend that LIMU's actions were fraudulent, made in bad faith, and constitute a breach of the Distributor Agreement. Id., ¶ 44. Accordingly, they seek damages for breach of written and oral contracts (against LIMU and DOES 1-25); for fraud and negligent misrepresentation (against all defendants); and for detrimental reliance (against LIMU).

         On June 6, 2018, LIMU and Raser filed the instant motion to dismiss. Defendants contend that the court lacks personal jurisdiction to entertain the suit against Raser. In addition, defendants seek dismissal of plaintiffs' claims on the merits for failure to state a claim upon which relief can be granted. Plaintiffs filed their opposition to the motion to dismiss on June 27, 2018. [doc. # 27]. Defendants filed a reply brief on July 9, 2018. [doc. # 30]. Plaintiffs filed a sur-reply on September 10, 2018, and an amended complaint on September 12, 2018. [doc. #s 36 & 37].[2] Thus, the matter is ripe.

         Analysis

         I.

         Personal Jurisdiction

         a) Law

         A federal district court sitting in diversity may exercise personal jurisdiction over a nonresident defendant as long as, (1) the long-arm statute of the forum state confers personal jurisdiction over that defendant; and (2) exercise of such jurisdiction by the forum state does not transgress due process protections under the United States Constitution. Latshaw v. Johnston, 167 F.3d 208, 211 (5th Cir. 1999). Louisiana's long-arm statute extends jurisdiction to the full limits of the United States Constitution. See La. R.S. § 13:3201(B). Accordingly, the sole issue here is whether exercising in personam jurisdiction over the non-resident defendant comports with federal due process. Jackson v. Tanfoglio Giuseppe, S.R.L., 615 F.3d 579, 584 (5th Cir.2010) (citation omitted).

         For personal jurisdiction to satisfy due process requirements, the plaintiff must establish that “(1) the defendant purposefully availed himself of the benefits and protections of the forum state by establishing ‘minimum contacts' with the forum state, and (2) the exercise of personal jurisdiction over that defendant does not offend ‘traditional notions of fair play and substantial justice.'” Moncrief Oil Intern., Inc. v. OAO Gazprom, 481 F.3d 309, 311 (5th Cir. 2007) (citations omitted).

         Though minimum contacts may give rise to either “general” or “specific” jurisdiction, [3]plaintiffs argue only the latter, which exists when the “plaintiff's cause of action . . . arises out of or results from the defendant's forum-related contacts.” Willow Bend, L.L.C. v. Downtown ABQ Partners, L.L.C., 612 F.3d 390, 392 (5th Cir.2010). Stated differently, “[s]pecific or case-linked jurisdiction depends on an affiliatio[n] between the forum and the underlying controversy (i.e., an activity or an occurrence that takes place in the forum State and is therefore subject to the State's regulation).” Walden v. Fiore, 571 U.S. 277, 134 S.Ct. 1115, 1125, n.6 (2014) (citations and internal quotation marks omitted).

         The Fifth Circuit applies a three-step analysis for the specific jurisdiction inquiry:

(1) whether the defendant has minimum contacts with the forum state, i.e., whether it purposely directed its activities toward the forum state or purposefully availed itself of the privileges of conducting activities there; (2) whether the plaintiff's cause of action arises out of or results from the defendant's forum-related contacts; and (3) whether the exercise of personal jurisdiction is fair and reasonable.

Monkton Ins. Servs., Ltd. v. Ritter, 768 F.3d 429, 433 (5th Cir.2014) (citing Seiferth v. Helicopteros Atuneros, Inc., 472 F.3d 266, 271 (5th Cir.2006)).

         If plaintiff can successfully establish the first two prongs, then the burden shifts to defendant to show that exercising jurisdiction would prove unfair or unreasonable. Id.

         “For a State to exercise jurisdiction consistent with due process, the defendant's suit-related conduct must create a substantial connection with the forum State.” Walden, supra. The court must look to the defendant's contacts with the forum state itself, not the defendant's contacts with persons who reside there. Id. (citation omitted). In other words, “[d]ue process requires that a defendant be haled into court in a forum State based on his own affiliation with the State, not based on the ‘random, ...


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