Tuesday, June 3, 2014
Ninth Circuit Court of Appeals Upholds Ruling That Digital Music Site Was a Pyramid Scheme
By a MetNews Staff Writer
The Federal Trade Commission properly targeted the now-defunct digital music retailer BurnLounge as a pyramid scheme, the Ninth U.S. Circuit Court of Appeals ruled yesterday.
“We agree with the district court that BurnLounge was an illegal pyramid scheme in violation of the FTCA 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,” Judge Morgan Christen wrote for the panel.
The company operated for two years before stipulating to a preliminary injunction that the FTC sought to shut down its “Mogul” program in 2007. The agency ultimately won a $17 million judgment against BurnLounge, CEO Juan Alexander Arnold, and a fellow principal, John Taylor, on behalf of about 56,000 consumers.
The FTC said in 2012 that the company had “lured” consumers “from around the country by masquerading as a legitimate multi-level marketing program and making misleading claims about earnings to be made.”
The agency claimed that the BurnLounge made little from actual music sales, but raked in millions of dollars through a marketing scheme whereby “Moguls” paid for the right to sell music and music-related products while earning cash rewards for recruiting others to do so. Such “Moguls” paid from $29.95 to $429.95 per year, plus monthly fees, the commission said.
After a trial In Los Angeles, U.S. District Judge George H. Wu found that BurnLounge violated the Federal Trade Commission Act by operating an illegal pyramid scheme. Wu described BurnLounge’s bonus system as “a labyrinth of obfuscation,” finding that 93.84 percent of Moguls never recouped their investment.
Christen, joined by Judges Harry Pregerson and Marsha S. Berzon, rejected the claim that BurnLounge was a legitimate multilevel marketing program. She agreed with the district judge that participants were paying for rights unrelated to the sale of the product to end users.
In a separate, unpublished, memorandum, the panel sent the $17 million judgment back to the district court “to clarify the basis for the calculation of consumer harm it attributed to sales of BurnLounge’s Basic packages or to redo the calculation.”
As of yesterday, BurnLounge’s online presence consisted of a site teasing “BL 3” and the words “Get Ready.”
The case is Federal Trade Commission v. BurnLounge, Inc., 12-55926 .
Copyright 2014, Metropolitan News Company