FTC v. BurnLounge, Inc.

A multi-level marketing business can be classified as a pyramid scheme when it satisfies the two-prong Webster v. Omnitron International, Inc. test, by making people buy the rights to sell that business’ product and providing cash incentives for recruiting new participants to purchase the right to sell that product.

BurnLounge, Inc. (“BurnLounge”) was a multi-level marketing business. As a result, the Federal Trade Commission (“FTC”) become increasingly suspicious of illegal operations due to the way BurnLounge was structured. BurnLounge sold music and merchandise to their customers through two different prongs of their business: “Independent Retailers” and “Moguls.” The retailer prong allowed people to buy into the business in order to sell music and merchandise to customers. Under this prong, the Independent Retailers who participated would redeem “BurnRewards” either for merchandise or music. Under the second prong of the business, individuals could buy into the company by becoming “Moguls.” Here, however, individuals could redeem their “BurnRewards” for cash, unlike the retail prong that could only redeem their rewards for just music or merchandise. The trial court held that because of the Mogul prong, BurnLounge was pyramid scheme that resulted in the trial court issuing a permanent injunction against the company. BurnLounge CEO, Juan Alexander Arnold and participant, John Taylor, appealed the permanent injunction enforced against them. The Ninth Circuit held that BurnLounge was operating under a pyramid scheme because BurnLounge met the criteria set forth in Webster v. Omnitron International, Inc. BurnLounge sold the right that was given to individuals to sell BurnLounge products, and the right to receive incentives as a result of recruiting other participants. Additionally, the panel held that those rewards do not need to be completely related to the sale of products. Therefore, BurnLounge was in violation of the Federal Trade Commission Act § 5(a). Accordingly, the panel held that the district court correctly ruled that BurnLounge was a pyramid scheme and a permanent injunction should be placed against them. AFFIRMED.