The United States Court of Appeals for the Ninth Circuit upheld a previous ruling that BurnLounge operated an illegal pyramid scheme, denying the company's appeal. This decision solidified the findings from a 2012 order which barred defendants from operating such schemes and mandated approximately $17 million in damages.
BurnLounge, launched in 2004, relied on affiliates known as "Moguls." These Moguls purchased "music-related merchandise and packages of music-related merchandise" to qualify for commissions. The Federal Trade Commission shut down BurnLounge in 2007, citing its structure as a pyramid scheme.
Evidence showed that Mogul package sales generated 92.6% of BurnLounge's revenue in 2006, its only full year of operation. Music sales accounted for a mere 4.9% of total revenue during the same period. The district court characterized BurnLounge's bonus system as "a labyrinth of obfuscation." It found that 93.84% of all Moguls never recouped their initial investment.
The district court also determined that BurnLounge's marketing primarily focused on recruiting new participants through package sales. Following the initial loss in court, defendants were ordered to pay a total of $17 million for consumer redress. BurnLounge and Juan Alexander Arnold were responsible for $16,245,799, John Taylor for $620,138, and Rob DeBoer for $150,000.
The Ninth Circuit panel affirmed that BurnLounge's scheme met both criteria of the Webster v. Omnitrition International, Inc. pyramid scheme test. Moguls paid for the right to sell products, and the rewards BurnLounge paid were primarily for recruitment. Moguls were clearly motivated by the chance to earn cash.
The district court previously found that purchasing a package was mandatory for participation as a Retailer or Mogul. Because Moguls earned cash for selling these packages, the court concluded that Moguls "by default received compensation for recruiting others into the program."