Oral arguments in the FTC v. BurnLounge appeal, currently pending in the U.S. Ninth Circuit Court of Appeals, took place last Friday, December 6^th at 9:00 am PST in Pasadena, California,  before a three judge panel.  A final decision is not expected until the second or third quarter of 2014.

The primary argument put forward by BurnLounge’s counsel, Lawrence Steinberg, in support of the company not being a pyramid scheme was based on the products being real and tangible products sold to ultimate consumers.  This prompted a line of questioning from the judges relating to a “but for” test, or asking whether a consumer would have purchased the products, ‘but for’ the business opportunity.  This line of questioning appears to support at least one of the judge’s beliefs that the products did in fact have some value.  BurnLounge pointed out a ‘but for’ test is not the current state of the law and invited the Court to create and apply that as the standard going forward.  This discussion also led to BurnLonge’s counsel briefly discussing the amicus brief filed by DSA, stating it was very informative as to what constitutes a pyramid versus a legitimate direct selling company, while clearly articulating the brief did not take a position on the facts of the case or argue on behalf of BurnLounge.  In addition to detailing each product package and their included items, BurnLounge argued the district court erred in allowing Dr. VanderNat’s testimony.  BurnLounge argued Dr. VanderNat did not interview any BurnLounge participants and did not have any knowledge or data as to the specific workings of the BurnLounge business model and opportunity.  BurnLounge also pointed out Dr. VanderNat has never found a company to be a legitimate one in his many years of offering testimony on behalf of the FTC. 

The judge’s focused their questioning of the FTC on the damages portion of the district court’s decision and as a result, the FTC’s counsel, Burke Kappler, spent the majority of his argument focused on the damages.  The FTC reiterated their argument of the various product packages having no value and not being sold to ultimate consumers, however the judges were very curious as to how the products could have no value, insisting that all products have some sort of value, going back to the ‘but for’ discussion during BurnLounge’s argument.  Towards the end of the FTC’s time allotment, one of the judges noted that internal consumption had not been discussed and asked the FTC to address the issue.  The FTC replied that it is not and has not ever argued that internal consumption is not permitted or illegal and went on to state “[internal consumption] is absolutely permitted.”

By way of background, the case began on June 6, 2007, when the FTC filed a complaint in the U.S. District Court for the Central District of California against BurnLounge, Inc. The complaint charged that BurnLounge was operating an illegal pyramid scheme which sold opportunities to operate on-line digital music stores. The FTC sought a permanent halt to the alleged illegal pyramid practices as well as other illegal practices set forth in the complaint.  The FTC specifically alleged the defendants operated an illegal pyramid scheme, made deceptive earnings claims, and failed to disclose that most consumers who invested in BurnLounge did not receive a substantial income, but lost money instead. The agency alleged these practices violated Section 5 of the FTC Act.  In July 2011, the District Court issued its statement of decision, later entering a final judgment. 

Subsequent to the District Court’s ruling, the case was appealed to the Ninth Circuit Court of Appeals in July, 2012.  DSA filed an amicus brief arguing against the dicta language cited by the District Court in BurnLounge from the Webster v. Omnitrition definition of “prohibited marketing scheme”.  DSA took no position on the merits of BurnLounge, instead focusing solely on the ramifications of an overly broad application of one sentence in the definition of a “Prohibited Marketing Scheme” in the District Court’s amended final judgment and order that was the subject of the appeal: “For purposes of this definition, ‘sale of products or services to ultimate users’ does not include sales to other participants or recruits or to the participants’ own accounts.”  This sentence has potentially significant adverse consequences for DSA member companies, because it appears to prohibit compensation based on purchases by participants or on sales by one participant to another.  The thrust of DSA’s amicus was to point out to the Court if the Omnitrition dicta language becomes embedded in the definition of “pyramid scheme” itself, it could present problems for legitimate direct selling companies.  In sum, the amicus aimed to educate the Court on the possible ramifications of the single sentence and its potential to harm hundreds of legitimate businesses—and millions of their consumers and salespersons—by endorsing the conclusion that legitimate direct selling companies that base compensation at least in part on product purchases by direct salespersons for their personal consumption and use are unlawful “pyramid schemes.”