The Ninth Circuit confirmed Burn Lounge is a pyramid scheme because participants bought expensive packages mainly to chase bonuses, not to use the products. The court looked at who actually bought what and ruled that internal sales can count only if the product has real value and people buy for legitimate reasons, not just to qualify for commissions.
Okay, folks, got some really big news for you today. I wish that I was in a more professional setting, but we have some really big news to announce. The Burn Lounge decision came out of the ninth Circuit. So I'm at the DSA annual event here in Orlando, meeting some great folks, learning some new things. All the executives are here, all the lawyers are here. And the biggest event to happen in the industry is breaking right now. So you're probably not going to get a lot of feedback for a couple of days on the industry's reaction to this opinion. But and please forgive me for a lack of refinement if I'm not completely precise about what this opinion Sundays. I've taken 10 minutes to digest it. Here's the deal. Burn Lounge is still a pyramid scheme. No surprises there. The main thing that sank the ship was motivation. Why were the participants in Burn Lounge buying the products? The ninth Circuit held that the motivation was primarily money driven. People were buying products to qualify for bonuses. Nothing really new there with the court using that kind of a standard to assess a pyramid scheme. Number one, backtrack a little bit. Read the opinion because it's very well written and it's. We haven't had an opinion come out of an appellate court maybe since 1996. So it's been a long time. And so how do they prove motivation? They looked at purchasing patterns, right? Those two words are key. Purchasing patterns. Participants bought the more expensive items. Almost 90% of the participants bought the more expensive packages, whereas the non participants bought the cheaper items. Maybe 6%. And again, this is a lack of precision. I asked you to forgive me on. But a very small fraction of non participants bought the expensive products. And so those two contrasted, painted a picture that people bought products to qualify. So purchasing patterns, I thought that was interesting. It's a clever way to deduce motivation for buying product. Here's where it's fascinating. The court designates an entire section on what does it mean to be an ultimate user. If you recall, when it comes to pyramiding, the second element to the second element is rewards unrelated to product sales to ultimate users. Those of us in the industry, we commonly argue successfully that participants, people in the network, when they buy, it's okay if commissions are generated and flow up line. There's nothing wrong with that as long as people are buying for the right reason. And the court for the most part agreed with that logic. Burn Lounge, they threw a Hail Mary pass. Larry Steinberg, he's a great lawyer, he did a good job at oral argument and he wasn't persuasive. His argument was that, well, if the products have any value, that the commissions should be fine. The court says, no, no, no, no. The products need to have value, and paying commissions on internal consumption is okay. That's what the court puts push back on the ftc's argument, which, in my opinion, is great news. And I wish I had the verbiage in front of me, but actually, I do have it in front of me. The ftc says that internal sales to moguls, that's participants. Cannot be considered sales to ultimate users. The 9th Circuit pushed back, and they says, as long as there's value there. And people are buying for the right reasons, And I think they allude to the fact that as long as there are some consumer protections, that those commissions are okay. So the opinion goes on. Peter vandernaert, burnt lounge, Argued that he shouldn't be accepted as an expert. Due to the fact that he hasn't published anything in 12 years. And he has a very difficult standard to understand. The court didn't really spend a whole lot of time on that issue. They just said, yeah, he's a qualified expert. Deal with it. It was a very short section of the opinion. To give you guys context. You guys and gals. I think this is good for herbalife. I think it's really good for the industry. Because if you're out there selling a valuable product, and you've got consumer safeguards, and you've got stats that show that your products are moving to customers, that your products have value, and this is key. If you do not have incentives in your plan. To encourage people to load up on more inventory Than what they can sell or use, you're going to be okay. So wall street's going to do what it does with this opinion. I think it's really good news. Give me a day, and I'll probably have some more refined thoughts on the subject. But big day. Big day in the industry, and that's a wrap, so take care. Feel free to send me your questions. Bye. Bye.
