Appeals Court Agrees with FTC: BurnLounge Was A Pyramid Scheme

UPDATED 10:12 A.M. EDT (JUNE 3) U.S.A. The U.S. Court of Appeals for the 9th Circuit today agreed with both a lower court and the Federal Trade Commission: BurnLounge was a pyramid scheme.

Much to the dismay of some MLMers, the case demonstrates that a company that makes some retail sales still can be a pyramid scheme if rewards derived by participants largely came from recruitment, not from product sales.

“We agree with the district court that BurnLounge was an illegal pyramid scheme in violation of the [Federal Trade Commission Act] because BurnLounge’s focus was recruitment, and because the rewards it paid in the form of cash bonuses were tied to recruitment rather than the sale of merchandise,” a three-judge panel ruled.

The panel further ruled that the lower court did not err when it admitted testimony by Peter Vander Nat, an FTC expert who holds a doctorate in economics and an advanced degree in mathematics. BurnLounge had sought to strike the testimony.

Circuit Judge Morgan Christen wrote the opinion for the panel, which unanimously found BurnLounge was a pyramid scheme.

U.S. District Judge George H. Wu of the Central District of California made the pyramid ruling in 2012, ordering the company, CEO Juan Alexander Arnold and other pitchmen to pay about $17 million.

Read the 2014 Appeals Court ruling which, among other things, discusses the applications of the Omnitrition International Inc. and Koscot Interplanetary Inc. pyramid cases on the BurnLounge case.

Precisely what percentage of retail sales defeats charges of pyramid-selling remains an open question, with courts choosing to look at how the MLM business operates in practice, rather than how an MLM firm may spin things.

In BurnLounge, Wu found that the the program’s bonus system was “a labyrinth of obfuscation” that resulted in a “93.84% failure rate for all Moguls,” all of whom were required to pay a fee to become Moguls and earn cash rewards, according to the appeals panel.