Burnlounge Decision!

Hi everyone. Kevin thompson here from themlmatorney.com I've got some breaking news for you right now. The Burn Lounge decision has finally been rendered. Burn Lounge was a company that was sued as a pyramid scheme by the Federal Trade Commission in 2007. The trial concluded in December of 2008 and we just now got the opinion two and a half years later. So the judge, he took his time on this one or let time get past them. Either way, this is a really important decision for the people in our profession. And if you're an executive for an MLM company or if you're an entrepreneur looking to start a company, this is a must read because the judge goes to great lengths explaining the factors that he used that led him to his ultimate conclusion that Bern Lounge was a pyramid scheme. And there's a saying that the best teacher is experience and the best experience is always somebody else's. And in this case, Burn Rams got hit with a 17 million dollar judgment. And in my opinion, a lot of the mistakes were easily avoidable. How they had some simple safeguards in their model. And of course, Hindsight is always 2020. But this is a must read for you executives in the space and for you future entrepreneurs. Now, with that said, I'm going to do a multi part series on this one case. There's a lot of information, there's too much information to cover in one video. There's a lot of things in this opinion that I agree with and that should make for a good conversation. And there's also a lot of items in this case that I take strong exception to that we'll have a conversation about in the future. But for purposes of this video, I want to give you the essential core of what led this judge to reach his decision. And ultimately it boils down to the M and M factor. And that's what I pulled from this case. Motive and marketability. Motive is important because the judge in this case and regulators in general, they want to assess why are people buying the product. If the product is merely incidental to a pay plan, then it's indicative of a pyramid scheme. As an example, suppose there was a company that sells $10,000 lemonade and they say, hey, just buy the lemonade for yourself. Recruit some folks who buy the $10,000 lemonade. You can make a lot of money. Clearly the motivation behind people buying the lemonade is not so much for value, they're doing it to earn income. That was really apparent in this case. The judge took a very close look at the motivations that led people to purchase the Burnley owned services. And ultimately he found that the Burnley of products were not really that marketable. The price points were not really warranted. They were gratuitously inflated to support the pay plan. The other M is marketability. Marketability is key. Marketability was discussed a lot in this case, in this opinion, more so than I've ever read in a pyramid case before. He dedicated several pages to the marketability of the Burn Lounge service. Now, it'll probably help you to learn a little bit about Burn Lounge's model. Burn Lounge was a company where a participant could pay 30 bucks. They get a replicated website, and from that site they can sell music, sort of like an itunes. You know, have your own iTunes store, and customers can go to that website. They can purchase songs for a buck. They can purchase albums for 10 bucks. And the commissions are all upline. Now, of course, the margins were not in music. The music margins are small. And you can't really support a competitive pay plan on anemic margins. And so what got Burn Lounger in trouble was the addition of these other services, these premium packages where they call them exclusive or VIP. You pay 120 bucks, you get a subscription to a magazine and something else. You pay $420 for the VIP package, and you get a DVD of the month program, plus a magazine and some other things. Now, Burn Lounge submitted some expert testimony, and the expert said, hey, this stuff is legitimate. The price points are good compared to what's out there in the marketplace. And after reading this decision, I learned a really important fact. If you need to use an expert to prove the marketability of your product, it's game over. It's already done. It's not a good idea. The ultimate determining factor to prove marketability of a product is customer sales. In this case, the judge concluded that burn Lounge only 3% of their company revenue, which was $30 million, I think only 3% came from external customers. That's another thing we learned in this case. The judge was not persuaded by Bern Lounge's argument that. That they said, hey, our distributors are customers. They're one and the same. The judge didn't buy it. And he in fact held that for purposes of pyramid scheme analysis, you need external sales to at least demonstrate that your product is truly marketable and worth the price points. And given that 97% of Bernal's revenue came from within the sales force, that really was a huge factor. That led the judge to conclude that this was a pyramid scheme. So motivation is key. Marketability is Key marketability of product. And the best way to prove marketability of product is to show some customer sales. And so some of the my fear with respect to this case was that this case was holding the FTC back. They were waiting for this decision. They've been waiting for two and a half years. The FTC has not sued a network marketing company since 2007. It's been four years. That's a long time for them to be dormant. So the thought process is that maybe they're going to re engage in the space. And so for you companies out there, I strongly encourage you to beef up those customer numbers because if the regulators come knocking on your door, if you can show some good customer data, it makes for a really strong argument that people are getting a good deal. And they're not just in your business. They're for the income opportunity, but they're actually there to receive value from the products and services that you're offering. So that's key. Beef up those customer numbers, have some strong customer incentive programs and you'll likely never have an issue. Now, what we don't know in this case and what the Burnhouse judge did not elaborate on is that how much customer data do you need? He said that 3% is pretty pathetic. Is 10% okay? 20%, 30%, 40%? He doesn't quite say so. The best defense against a grizzly bear is to make sure you can outrun the slowest person in your group. And when it comes to pyramid scheme analysis, the higher your customer numbers, the safer you'll be. So with that said, we're going to have multiple videos on this case. We're going to learn a lot. They talk about income claims. They have all kinds of weird formulas to quantify consumer harm that I found interesting. And read it, take some time to read it and tell me what you think. Tell me if it's in line with your expectation of how the law should be. You take care and have a wonderful day.