This month the United States Court of Appeals for the Ninth Circuit passed down a long-awaited decision in the case of FTC v. BurnLounge Inc. The Federal Trade Commission brought a pyramid complaint against the New York City-based company in 2007.
Digital music seller BurnLounge positioned itself as a breed of network marketing company that enabled independent retailers to sell music through online “BurnPages.” The company’s labyrinthine compensation plan included multiple income opportunities, with extra incentives based upon the sale of premium packages rather than actual merchandise.
The recent ruling upholds a 2012 judgment barring the defendants from operating a pyramid scheme and ordering the payment of $17 million in damages. The opinion provoked a flurry of related opinions on its implications, for Herbalife in particular and direct selling in general. We’ve rounded up commentary from industry legal experts and other interested parties to provide a better understanding of the precedent established in BurnLounge.
- Herbalife Comments on Supportive Ruling by United States Court of Appeals for the Ninth Circuit “Today’s decision by the United States Court of Appeals for the Ninth Circuit in FTC v. BurnLounge Inc. validates product consumption by participants as a legitimate measure of demand for multi-level marketing companies and rejects Bill Ackman’s fundamental thesis against Herbalife.”
- Court Ruling Clarifies Protections Regarding Pyramid Schemes by DSA President Joseph Mariano “This ruling has far deeper implications than may be apparent from the relatively little amount of media coverage it received, as it clearly and directly addresses several questions that have been raised about the direct selling business model in recent months.”
- Battle over BurnLounge: Both Sides Claim Victory by MLM attorney Kevin Thompson “One thing is clear: The gray space in MLM law separating legitimate direct selling companies from pyramid schemes has been minimized considerably.”
- Pershing Square Responds to Recent Ruling in ‘FTC v. BurnLounge Inc.’ “The notion that the Ninth Circuit’s decision is a vindication of Herbalife is absurd. The case certainly does not support Herbalife’s position that sales of products to distributors who tried—but failed—to succeed in their pursuit of the Herbalife business should be regarded as true retail sales.”
- BurnLounge Appeal Decision by MLM attorney Jeffrey Babener “[TheBurnLounge decision] will dramatically impact the landscape of direct selling to provide guidance on two fundamental legal issues: (1) What activity constitutes a pyramid scheme? (2) What is the role of ‘personal use’ (by distributors) in pyramid case analysis?”