FTC v. BurnLounge, Inc., No. 12-55926 (9th Cir. 2014)
Annotate this CaseThe FTC filed suit against BurnLounge, a multi-level marketing business, alleging violation of section 5(a) of the Federal Trade Commission Act (FTCA), 15 U.S.C. 45(a)(1). The court agreed with the district court that BurnLounge was an illegal pyramid scheme in violation of the FTCA, in light of Webster v. Omnitron International, Inc., 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. Further, the district court did not abuse its discretion by admitting the FTC's expert's testimony because it was relevant and reliable. Accordingly, the court affirmed the district court's order granting a permanent injunction against BurnLoundge's continued operation.
Court Description: Federal Trade Commission. The panel affirmed the district court’s order granting a permanent injunction against BurnLounge, Inc.’s continued operation based on the court’s holding that BurnLounge’s multi-level marketing business was an illegal pyramid scheme in violation of § 5(a) of the Federal Trade Commission Act. BurnLounge operated a multi-level marketing business that offered participants the ability to become “Independent Retailers” of music and other merchandise. Independent Retailers could earn points redeemable for music or merchandise, or they could pay an additional fee to become “Moguls” and earn cash rewards. The panel held that BurnLounge’s scheme satisfied both prongs of the Webster v. Omnitron International, Inc., 79 F.3d 776 (9th Cir. 1996), pyramid scheme test because Moguls paid for the right to sell products, the rewards BurnLounge paid were primarily for recruitment, and Moguls were clearly motivated by the opportunity to earn cash rewards from recruitment. The panel also held that the district court did not abuse its discretion in admitting the Federal Trade Commission’s expert testimony because the testimony was relevant and reliable.
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