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Class Action Defense Cases-Seastrom v. Neways: California Appellate Court Affirms Order Refusing To Certify Class Action Because Putative Class Representatives Were Potential Defendants In The Same Action

Distributors of Dietary Supplements were not Adequate Class Representatives in Class Action Against Manufacturer Because Goal of Class is Disgorgement of Profits but Putative Class Representatives’ Self-Interest would be to Retain Profits Realized from Drug Sales

Plaintiffs filed a putative class action against Neways and others alleging inter alia unfair competition arising out of the sale of a dietary supplement without a prescription. Seastrom v. Neways, Inc., 149 Cal.App.4th 1496, 1499 (Cal.App. 2007). Defendant manufactured and distributed an oral spray called BioGevity as an anti-aging dietary supplement. Id. BioGevity contained HGH, which cannot be sold without a prescription, but defendant did not require a prescription to purchase the product, id. The class action complaint alleged that Neways and its independent distributors engaged in a pyramid sales scheme in which distributors could purchase BioGevity for $59-$66 per bottle, with a suggested retail price of $84.35-$94.40, and “keep the difference between the wholesale and retail prices on products they sold directly, and to commissions on the sale of products by distributors under them in the pyramid scheme.” Id. The putative class action alleged that some distributors had upwards of 8,800 “downline” distributors in the “pyramid” and made millions of dollars off the pyramid scheme, id. The court denied the motion of two distributors, acting as putative class representatives, to certify the lawsuit as a class action, and the Court of Appeal affirmed.

Following an investigation by the U.S. Attorney’s Office into Neways’ sale of BioGevity without prescriptions, “In September 2003 Neways pleaded guilty to knowingly selling approximately 100,000 bottles of a product that contained HGH in violation of [federal law] and to criminal forfeiture under sections 333(e)(3) and 853(a)(1).” Seastrom, at 1499-1500. The company also paid $1.75 million as part of a stipulated fine and forfeiture of profits from the sale of BioGevity; in return, the federal government agreed not to prosecute Neways distributors. Id., at 1500. In June 2003, just before Neways resolved the U.S. Attorney’s investigation, an unfair competition lawsuit was filed against Neways by a Marc Lewis. Id. However, because Lewis had never purchased BioGevity, he lacked standing to prosecute the class action after California voters enacted Proposition 64, id.

Eventually two distributors who had profited from the sale of BioGevity became the new putative class representatives and asserted in their Fourth Amended complaint causes of action for fraud, breach of contract, rescission and violation of Business and Professions Code section 17200 et seq., and they moved the court to certify the litigation as a class action brought “consisting of “all persons who purchased BioGevity containing somatropin or an analogue thereof.” Seastrom, at 1500. The court denied the motion, finding that plaintiffs’ claims were “not typical” of those of other class members, and that plaintiffs “would not adequately represent the class.” Id. Distributors appealed.

The appellate court began by setting forth the general rule, “‘The party seeking certification as a class representative must establish the existence of an ascertainable class and a well-defined community of interest among the class members. … The community of interest requirement embodies three factors: (1) predominant common questions of law or fact; (2) class representatives with claims or defenses typical of the class; and (3) class representatives who can adequately represent the class.’…” Seastrom, at 1500-01 (citations omitted).

The Court of Appeal’s summary of the trial court’s ruling at page 1501 clearly established the propriety of the lower court’s order:

In denying class certification, the court found Seastrom and Hutcheson did not demonstrate their claims are typical of the class, or that they would adequately and fairly represent the class. The court was concerned with “how high they were up in the pyramid [at Neways] and the possible ramifications of that,” and “what was their involvement with Quantum Leap and the possible ramifications of that.” The court elaborated that “if I certify a class with these two class representatives and defendant showed that [they] were high in the pyramid, made a lot of money in the pyramid, knew of the requirement for a prescription for the product … that, to me, is the vulnerability or potential vulnerability … of these two prospective representatives.” Seastrom and Hutcheson’s counsel acknowledged that if they were class representatives, they would testify at trial and be subject to cross-examination on their positions in the Neways hierarchy and their prior experience at Quantum Leap.

The court was also concerned Seastrom and Hutcheson may not have suffered any compensable damage, as they profited on their distribution of BioGevity. Further, the court pointed out that Seastrom and Hutcheson had acknowledged in their depositions that they were potentially subject to civil claims “by buyers downstream of them on the distribution line,” and that was “some concern” to them.

The appellate court explained that the trial court could not have ruled otherwise, “Given that [plaintiffs] are potential defendants in the proposed class action, they have an insurmountable conflict.” Seastrom, at 1502 (italics in original). As the goal of class members would likely be disgorgement of profits realized by Neways and its distributors, but plaintiffs’ self-interest would be served by permitting them, as distributors, to retain their profits, plaintiffs could not represent the class adequately. Id. Accordingly, the trial court order was affirmed, id., at 1505.

NOTE: The fact pattern is truly bizarre. The appellate court noted that “the [trial] court appropriately questioned whether this action ‘is a preemptive strike by the two class representatives.’” Seastrom, at 1502.

Download PDF file of Seastrom v. Neways