BurnLounge Appeal Moves Forward

Filing of Briefs

The parties have begun filing their briefs in the appeal of the federal District Court’s decision and order in the widely followed FTC vs. BurnLounge, Inc. et.al. case (see March Business Associate Advisory for a summary of the case and Order).

The case generated widespread concern in the direct selling community when the District Court found that the BurnLounge mlm program was an illegal pyramid scheme, and ordered the Company (by then defunct), its founder, and two of its top independent distributors to pay nearly $17 million in redress. Of particular concern to many is language in the Court’s final decision and order defining a “Prohibited Marketing Scheme” as one in which participants “…receive rewards for recruiting other participants into the program, and those rewards are unrelated to the sale of products or services to ultimate users. 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.” (Emphasis supplied).

The defendants’ brief argues the district court’s judgment should be reversed for several reasons, including:(1) The court did not properly apply the test for determining the existence of a pyramid; (2) It improperly shifted the burden of proof from the FTC to BurnLounge; (3) It relied on inadmissible and incompetent “expert testimony”; (4) It ordered damages which were unauthorized by statute, not restitutionary in nature, and which were excessive in any event.

An Amicus Curiae (Friend of the Court) brief has been filed by the Direct Selling Association taking no position on the merits of the case but urging the appellate court not to allow an overly broad application of the definition language highlighted above or to otherwise endorse 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.”

Other briefs, including those of The Federal Trade Commission and the individual defendants are scheduled for filing at various times up until April 15, 2013. Oral arguments have not yet been scheduled but probably will occur sometime during the fourth quarter of calendar 2013. Absent further requests for extensions of time, we might expect a decision from the Court of Appeals in the Spring of 2014.