In a victory for the Federal Trade Commission, a federal appeals court has upheld a district court ruling that BurnLounge, a multi-level marketing business, and several associated individuals, operated a pyramid scheme causing millions of dollars of consumer harm. The court order permanently halted the defendants’ marketing methods, which lured more than 56,000 consumers by pretending to be a legitimate multi-level marketing program and making misleading claims about how much money participants could earn.
In 2007, the FTC alleged that BurnLounge Inc., Juan Alexander Arnold, John Taylor, Rob DeBoer and Scott Elliott sold opportunities to operate on-line digital music stores, but that the scheme was really an illegal pyramid scheme. In 2008, Elliott agreed to a settlement with the FTC that prohibited him from participating in any pyramid scheme or other prohibited marketing scheme, and from making false earning claims, and required him to give up $20,000 in ill-gotten gains.
In 2012, the U.S. District Court for the Central District of California, Western Division, ordered the other defendants collectively to pay $16.2 million in redress, and prohibited them from engaging in pyramid, Ponzi, or chain letter schemes or any schemes in which compensation for recruitment is unrelated to the sale of product to customers who are not participants. The order also barred them from making misrepresentations about multi-level marketing operations or business ventures, including misrepresentations about sales, income, profitability, or legality.
BurnLounge, Arnold and Taylor appealed the district court ruling. On June 2, 2014, the U.S. Court of Appeals for the Ninth Circuit upheld the lower court’s findings, stating, in part, “We agree with the district court that BurnLounge was an illegal pyramid scheme . . . 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.”
The appeals court found that the legal test of a pyramid scheme does not require that the rewards be “completely” unrelated to the sale of products. The court noted that “[r]ecruiting was built into the compensation structure in that recruiting led to eligibility for cash rewards, and more recruiting led to higher rewards.” The court further stated that in this instance “the rewards for recruiting were ‘unrelated’ to sales to ultimate users because BurnLounge incentivized recruiting participants, not product sales.”
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