BurnLounge Breakdown

Hi everyone out there, Kevin Thompson here, mlm, attorney and managing partner at Thompson Burton. And we're gonna do a fireside chat minus the fire. We're gonna have a free flowing dialogue here about the Burn Lounge decision. So this is a very important decision. It's the most important opinion that we've had in close to 20 years that affected network marketing industry. So we're going to talk about it if you want tons of detail. I wrote and published an article over@ seekingalpha.com it's over 4,000 words, so check it out. Now, if you don't like to read or if you find that sort of content boring, this video is for you. We're going to break it down first. It's important to understand the significance. Again, we haven't had an appellate decision in over 20 years in that case. In my opinion, it wasn't really crystal clear. It didn't really help separate good network marketing programs from bad. And there were some dicta that came out of that case. It's the omnitrition case back in the mid-90s. In that opinion, the court said that basically commissions generated by the sales force, commissions generated via internal consumption when distributors buy product for personal use, it's a recruitment reward. That's dicta. Now what is dicta? Dicta is verbiage in an opinion that's not really central to the holding itself and the omnitrition decision. They just had to decide if the case was appropriate for dismissal. Omnitrition got the lawsuit dismissed and the other side appealed. The case got kicked back to trial. So bad facts make bad law. Fast forward 20 years later, here we are with the Burn Lounge decision. Now, in Burn Lounge, some very important issues were teed up, specifically whether or not Burn Lounge was a pyramid scheme. Rarely do you have decisions in this industry decided by an appellate court. You know, the case has to go to trial, there has to be a trial, there has to be an appeal. And in most cases the matters are settled out of court. So it's a big deal. The stakes were high. I want to impress upon you that the stakes were incredibly high with this case because the FTC was taking the position it was a Hail Mary pass. They probably knew it was a long shot. They were taking the position that along the lines of the omnitrition dicta, that commissions generated via internal consumption should be categorized as recruitment rewards. And if the program is primarily funded by recruitment rewards, then it's a pyramid scheme. So in other words, if people are buying for personal consumption, the Resulting commissions shouldn't be treated as sales to ultimate users. They should be treated as recruitment rewards. If the court was persuaded, and thankfully the court was not persuaded with that argument, the majority of network marketing companies out there would not have been able to meet that kind of burden. Because in a lot of programs, the majority of revenue comes from the participants themselves buying for personal use and or resale. Here's where it gets tricky, right? Going forward, it was a challenge before, it's a challenge going forward. But we have some good factors in this opinion that we're going to talk about. Dan McCrum wrote an article over at Financial Times and he put it perfectly. I can't put it any better than he put it. He said there's a spectrum where you've got a legitimate company and on that spectrum it transitions from legitimacy to. To scumbaggery, right? Where a company goes from being legitimate to where it becomes a scumbag, for lack of a better way of putting it. And that spectrum is where every company in the industry falls, right? They're either legitimate or they're either a scumbag. And the scumbag side of the spectrum is companies that sell bullshit products. They sell thousand dollar lemonade. They rely primarily on the opportunity to drive consumption. They're selling a product that has no consumer demand. So how can you tell the difference between legitimate companies and scumbag companies? Pyramid schemes. The court and Burn Lounge said it's essentially a fact intensive product process. It's a fact specific process. There's no bright line test. And fast forward. What year is it? 2014. Fast forward almost six years ago when I wrote an ebook titled Saving the Industry by Defining the Gray. That young man, six years ago. That was before I had kids. Actually, it was right after I had my first child. It was a long time ago. I spotted this problem because there's an ocean of gray between good from bad, between legitimacy from scumbaggery. And you had bad companies disguising themselves as legitimate network marketing companies. And that hurts the space. And it's not easy for regulators to get rid of these companies. It's not easy for consumers to distinguish these companies, and that's bad. And so the thesis of that e book was that we need to make it. We need to make the rules clear to help consumers and also to help regulators weed out the bad companies and also to discourage the scumbags from launching companies into space. Because here's the deal, if the wall were clear, you'd have fewer people taking a swing in the space from my Perspective. I've represented a lot of different business owners in this space. A lot of them great people, some of them not so great people. The ones that are not so great, you'd be surprised. They think their product's amazing. They think their baby is beautiful and that their baby is marketable and worth the price points that they're charging. And so to convince these people not to do a network marketing concept is tough. If the law. If the rules were more clear, they wouldn't even try. So that was the thesis of the ebook. Fast forward to today. Fast forward to the Burn Lounge opinion. In summary, Burn Lounge was held to be a pyramid scheme. Go figure. The FTC submitted an argument that commissions via internal consumption should be treated as a recruitment reward. And if a program is primarily driven by recruitment rewards, it's a pyramid scheme. Again, using that standard, the majority of companies in the industry would be held to be a pyramid scheme. The court did a great job. The 9th Circuit in the Burn Lounge case crafted a good decision. So Burn Lounge is a pyramid scheme. The court was not persuaded by the FTC's argument. In fact, the court said that essentially the standard is now a pyramid scheme is when there are rewards that are unrelated to product sales to ultimate users. Okay, rewards. Let's see here. Unrelated to product sales to ultimate users. Participants can be ultimate users. It doesn't mean it's automatic. But if participants buy for personal consumption, they can be considered an ultimate user. In fact, the court dedicated an entire section to the definition of ultimate user, which is really good. So what's happening is we've got this ocean of gray separating good from bad, and that gray is shrinking a little bit. And here's why. Because in this opinion, when it explains why Burn Lounge is a pyramid scheme, the court illustrated some factors that it relied upon in deducing that Burn Lounge was a pyramid scheme. Right. So remember that spectrum between legitimacy and scumbaggery. Right. Good. From pyramid scheme, there are factors that the court will look at to determine where on that spectrum a company will fall. And let me go through the factors. They are. Number one, lack of consumer. Legitimate consumer demand. Marketable product. Is the product worth the price that you're charging? There needs to be legitimate consumer demand for the product. I see so many programs out there right now. This is just an example. I'm not saying this is an epidemic, but this is an example where they sell an advertising opportunity. You spend money in this program, and they're going to advertise your program. Well, are these ads effective? Is there actually Traffic on the website because I can get ad exposure on Facebook, I can get ad exposure on Google and I can pay for click. I can literally pay for performance. And so you're competing with these tremendous ad networks out there, and yet this startup company is going to sell advertising space or ad space. Right. Is the demand for the product legitimate or is it driven solely by the opportunity? So legitimate consumer demand number two, purchasing patterns. This was key to me. This was interesting and it makes perfect sense. The court looked at the amount of product bought by Burn lounge participants and they said that 60% of burn lounge participants bought the high ticket item, which was over $500, I think maybe 450. And that of the external customers, only 3% bought the high ticket items. So the purchase pattern indicated that participants were buying not really for value. They were buying so they can qualify for more money. Purchasing pattern is pretty significant. You see a lot of companies out there where the auto ship requirements are ridiculous. People are asked to spend. Maybe they're asked to buy eight bottles of juice a month. Well, that's fine. You can argue that, hey, it's a production requirement, they got to sell it and all this stuff. But if the customer, if the average customer isn't spending a comparable amount of money on the inventory, then it's indicative of a pyramid scheme. It's not a determining factor, but it's a factor. The purchase pattern. Now, if you're a company that sells hard goods where you expect people to move a significant amount of inventory, well, then you need to make sure that the retail sales are actually happening. You need to make sure that the inventory is moving. If the inventory doesn't move, there needs to be a generous return policy where if people get stuck with inventory, they get their money back. That's a separate factor. So purchase patterns to stay on purchase patterns real quick. For companies that sell high ticket items, $5,000 items in a network marketing format, if 100% of your volume comes from your participants and you get zero activity from customers, that's indicative of a pyramid scheme. So be wary. That's significant lack of value. That's consumer demand that we talked about earlier. Requirements to buy premium products to qualify. This is where burnouts got kind of stupid. In order to qualify for deeper commissions, you had to buy. And the court says, well, if that's the structure of your pay plan, people are buying primarily to qualify for the money, not so much for the inherent value. And in fact, that leads to a culture of recruitment. That's a factor. Smart network marketing companies are not going to do that. They're not going to blatantly require that you buy to qualify for commissions. What they're going to do is they're going to say, well, hey, you have to move, you have to move a certain amount of inventory each month to qualify. I think in the future that's going to change. I think it, I'm not saying it needs to change, but in the future, the monthly volume requirements, it's going to go bye bye. Where distributors have the option of buying. If they don't want to buy, they don't have to and they're going to be fully qualified. It's not going to happen soon, but possibly in a year or two, I bet that's what's going to happen. And I wouldn't complain about it because the reality is a lot of companies, they get participants excited, they get them involved and these people get on auto ship and they buy this stuff every month at prices they wouldn't pay in quantities they never would buy. But they do it primarily to qualify for commissions. So again, most companies don't blatantly require that people buy. They'll say that people have, distributors have to move the inventory and of course distributors will then buy to satisfy that requirement. That's wiggle room in the space that in my opinion needs to go away. So Burn Lounge dead on arrival requirements to buy. Emphasis of the marketing program. This is more art than science, but the court said that the majority of Burn Lounge's materials was focused on recruitment. It was focused on the financial opportunity, it was focused on lifestyle. Smart network marketing companies are going to focus their material on product. It sounds obvious, but I'm telling you, a lot of people don't do it. For young companies. They need a lot of momentum to get going and to get momentum. The focus is on the pay plan and how unique the pay plan is and how fast the payouts are and how easy it is to make money in the program. And so what you do though is it's all about duplication. If you start that way, it's a cancer that you can't cure. I'm not going to say you can't do it. It's difficult, it's difficult to go from a recruitment culture to a product culture because what attracted the people during your recruitment phase, they're going to be turned off when you start talking about product because recruitment will slow down and they'll join the next program. So emphasis of the marketing program, the emphasis needs to be on value. The final element I've got here is Lack of consumer safeguards, really, it boils down to a good refund policy. So Amway back in the mid-70s survived largely because of what has been phrased as the Amway safeguards. They had policies in place to protect distributors from inventory. Loading. The most important policy that I'm going to talk about here is the buyback rule. So back then Amway said if you can't sell the inventory, you got 12 months to send it back to the company and they'll refund the money. That's significant. Burnlabs obviously didn't have that. It was a technology company. The transaction was final the moment that the credit card was processed. Going forward in this industry, it's really important for companies to make it easy for consumers to get their money back. Now with hard goods, it's easy. I say easy, it depends on what you're selling. But as long as there's not a spoliation issue where the product spoils, or as long as it's not a seasonal item like clothing, you should be able to offer distributors a 12 month buyback. Shame on you if you don't offer them a buyback. If you can take the product back into inventory and move it. If people buy product under the influence of a pay plan and they just can't sell it and they don't want to use it, they should be able to get their money back. So going forward, even technology companies, it's really important that companies make it very easy for consumers to get their money back. Now if distributors buy product and they use it, there's nothing to return. They get some benefit out of it. There's going to be a population of people that are pissed off. They came in, they got excited, they spent lots of money and you can't, you know, I'm not here to judge them because at the end of the day, they're humiliated, they're embarrassed, they're out a lot of money. You're always going to have a population of people, in my opinion, like that. Network marketing is different. For example, when I ran track and field at Tennessee, I wanted to be a national champion. I really felt like I had it in me to do it. I was an All American, but I wasn't a national champion. And I didn't feel like a failure. I didn't feel like my coach misled me during the recruitment process. I didn't complain. I'm not mad. A lot of the athletes that came to the program, they don't blame anybody, they don't blame the coaches. It's sort of understood that results depend a lot on individual efforts. A lot of network marketing programs, that's not the case. These people are led to believe that success is easy, and they're misled about the amount of work it takes to be successful. And so they go into this thing with a certain understanding that if I just do xyz, I'll earn abc. And then they perpetuate that myth to their friends and family, and it turns out it's not true. They're pissed. So how can we minimize that population? How can we prevent the harm from happening? How can we get better with the messaging up front? So, guys, that's a lot. There's a lot in this post. There's a lot going on. Hopefully you found it helpful. And if you want to learn more, I'll provide a link underneath this post to the full article that I wrote. 4,000 words. So dig in. And of course, if you like it, share the share this video or hit the plus one button or hit the like button. Do whatever you guys. Take care. See ya.