BurnLounge Appeal Decision:
Guidance on Pyramid v. Legitimate MLM and the Role of Personal Use in Pyramid Analysis
By Jeffrey A. Babener
On June 2, 2014, in the case of FTC v. BurnLounge, the U.S. Court of Appeals for the Ninth Circuit issued a seminal decision, affirming a lower court finding that the BurnLounge MLM (multilevel marketing) program was an illegal pyramid scheme, in violation of section 5(a) of the Federal Trade Commission Act, a decision that will dramatically impact the landscape of direct selling to provide guidance on two fundamental legal issues:
(1) What activity constitutes a “pyramid scheme?”
(2) What is the role of “personal use” (by distributors) in pyramid case analysis?
Stakeholders: “We Won!!” Proxy Wars…….
Victory has 100 fathers and defeat is an orphan. John Kennedy (1961)
As with any inconclusive war, the stakeholders offered immediate statements of victory or vindication.
That is, other than BurnLounge. BurnLounge lost, and a permanent injunction was affirmed.
However, BurnLounge was a proxy war on the tests for “pyramid” and the role of “personal use” in pyramid analysis, among the interested parties, short sellers of publicly traded direct selling companies, publicly traded direct selling companies, industry spokespersons such as the DSA, the FTC, MLM critics, etc.
Each, in turn, issued press releases or statements claiming victory and validation of their respective positions.
The BurnLounge decision offered guidance for all stakeholders and a clear message for “going forward.”
To Short Sellers:
Rethink your criticism of direct selling companies. Distributors’ personal use is a legitimate end destination for product sales. Criticism of personal use is not a valid criticism. So long as distributor purchases are not merely incidental to the business opportunity, such purchases in reasonable amounts for personal use, coupled with rewards for one’s own purchases, as well as use by non-distributors and other distributors is as legitimate as a sale to a non-distributor customer, and is not a basis for a pyramid.
To the FTC:
Congratulations, you won this case on the facts presented. However, since the Omnitrition case (1996), you have been arguing the wrong legal standard on personal use for more than 15 years, albeit a slight diversion in a 2004 FTC Advisory Opinion that recognized legitimacy of personal use. The court pointed out: “The FTC counters that ‘internal sales to other Moguls cannot be sales to ultimate users consistent with Koscot.'” The court proceeded to roundly reject this contention noting that this argument is not “supported by the case law.” And so the message to the FTC is that personal use criticism will not be accepted in the future and the FTC should look back to its 2004 Advisory Opinion position.
To the Industry:
Accept your victory on recognition of personal use as a legitimate destination for product and representative of “sales to ultimate users.” However, “get your act together,” and adopt “best practices” methods and rules that promote product use over mere recruiting. The presence of personal use is not “a free ticket out of trouble.” It will be viewed as part of a legitimate MLM, but it is only one factor for the case by case fact based analysis of the “economic reality” of an entire program in which the acid test will be that the predominant and primary motivation of distributor purchases is for personal use or resale and not merely to qualify for rewards in the program by personal purchases and recruitment of others to do the same.
Major Impact of the BurnLounge Case…
To read the full article, visit MLMLegal.com.
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