BurnLounge, Inc.

A music business where the music barely mattered

BurnLounge presented itself as a cutting edge way to sell digital music through multi-level marketing. Participants bought in at prices from $29.95 to $429.95 plus monthly fees, and more than 56,000 consumers joined.

Music sales accounted for only a small percentage of the company’s sales. The FTC charged that while participants were compensated for music and album sales, most compensation came from recruiting others, and that the operation was an illegal pyramid scheme with deceptive earnings claims that failed to disclose that most participants in such schemes lose money.

The appeal, which is the part worth reading

BurnLounge, Juan Alexander Arnold and John Taylor appealed. In June 2014 the Ninth Circuit upheld the district court, finding the scheme illegal “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.”

The court made a point that matters well beyond this case: the legal test does not require that rewards be completely unrelated to product sales. Recruiting was built into the compensation structure, recruiting led to eligibility for cash rewards, and more recruiting led to higher rewards. That was enough.

The money

In 2012 the court ordered the defendants to pay collectively close to $17 million in consumer redress. BurnLounge, Inc. and Arnold were ordered to pay $16,245,799, John Taylor $620,138, and Rob DeBoer $150,000. A further defendant, Scott Elliott, had settled in 2007 and gave up $20,000.

In June 2015 the FTC mailed 52,099 checks totaling almost $1.9 million.

What is not established

The supplied documents do not give a total figure for what consumers paid in.