There was a big court ruling yesterday regarding BurnLounge vs FTC. Our readers (for those who have not died of boredom yet) are likely not interested in BurnLounge itself, but rather, readers, hedge funds, pundits etc. are probably interested in the ramifications for Herbalife Ltd. (NYSE:HLF). Surprisingly (or perhaps not), both longs and shorts of Herbalife claimed victory after the ruling. Below is the full court ruling, and readers can check it out and form their own opinion.
Herbalife Ltd. (NYSE:HLF) you decide
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BurnLounge operated from 2005 to 2007 and sold music, music-related merchandise, and packages of music-related merchandise. Customers could participate in BurnLounge in three ways: they could buy music and merchandise; they could buy a package to become an Independent Retailer with the ability to earn credits redeemable for music and merchandise; or they could buy a package and pay an additional fee to become a Mogul with the ability to earn credits redeemable for cash. In 2007, the FTC commenced this action and the parties stipulated to a preliminary injunction that prohibited BurnLounge from continuing to operate its Mogul program. After a bench trial, the district court concluded that BurnLounge and the individual defendants had violated FTCA § 5(a), issued a permanent injunction, and imposed monetary awards against the defendants.
A. BurnLounge’s Business
1. The basics of BurnLounge
The evidence at trial showed that BurnLounge’s business had two primary aspects—its Retailer program and its Mogul program. Individuals could become Independent Retailers of online music by purchasing one of BurnLounge’s three
We affirm the district court’s holding that BurnLounge was an illegal pyramid scheme, in violation of § 5(a) of the FTCA. BurnLounge’s scheme satisfied both prongs of the Omnitrition test because Moguls paid for the right to sellproducts, the rewards BurnLounge paid were primarily for recruitment, and Moguls were clearly motivated by the opportunity to earn cash rewards from recruitment. We reject the argument raised by BurnLounge and Arnold that the district court abused its discretion when it admitted Vander Nat’s testimony because the testimony was relevant and reliable. The district court’s decision as to these two issues is AFFIRMED.7
See the full court document PDF here and embedded below in scribd.