Federal Trade Commission v. BurnLounge, Inc.
753 F.3d 878
| 9th Cir. | 2014Background
- FTC sued BurnLounge under FTCA § 5(a) for operating an alleged pyramid scheme from 2005–2007.
- BurnLounge offered Retailer and Mogul programs; Moguls earned cash rewards for recruitment.
- District court found BurnLounge’s pyramid-like structure, with rewards tied to recruitment, violated the FTCA.
- BurnLounge and Arnold challenged the district court’s findings and the admissibility of Vander Nat’s expert testimony.
- Court applied Omnitrition/MLS framework to determine whether BurnLounge was an illegal pyramid.
- Court affirmed district court’s ruling and Vander Nat testimony; consumer-harm issues reserved in a separate disposition.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether BurnLounge was an illegal pyramid under Omnitrition. | FTC: focus on recruitment and cash rewards unrelated to retail sales. | BurnLounge: rewards not completely unrelated to product sales; Amway distinction. | BurnLounge is an illegal pyramid under Omnitrition. |
| Whether Vander Nat’s testimony was admissible under Daubert/Kumho. | Vander Nat provided relevant, reliable economic analysis of the pyramid structure. | Testimony relied on improper or novel methods not properly scoped to Omnitrition. | District court did not abuse discretion; Vander Nat’s testimony admissible. |
| Whether internal consumption defeats pyramid findings under Omnitrition. | Internal purchases can be part of the model without defeating a pyramid. | Internal consumption might negate rewards being tied to recruitment. | Internal consumption does not negate the recruitment-focused rewards; BurnLounge still a pyramid. |
Key Cases Cited
- Omnitrition International, Inc. v. United States, 79 F.3d 776 (9th Cir. 1996) (pyramid test: rewards for recruiting must be unrelated to product sales)
- Gold Unlimited, Inc. v. FTC, 177 F.3d 472 (6th Cir. 1999) (recruitment-focused MLMs may be pyramids; rewards tied to recruitment)
- Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (U.S. 1993) (gatekeeping for admissibility of expert testimony)
- Kumho Tire Co., Ltd. v. Carmichael, 526 U.S. 137 (U.S. 1999) (Daubert gatekeeping applies to all expert testimony; case-specific)
- Allen v. Iranon, 283 F.3d 1070 (9th Cir. 2002) (clear-error standard for bench-trial fact findings; de novo for law)