(CN) - The online digital music retailer BurnLounge operated illegally as a pyramid scheme, the 9th Circuit ruled.
The Federal Trade Commission (FTC) targeted the now defunct multi-level marketing company in 2007 and ultimately won a $17 million judgment against BurnLounge, Juan Alexander Arnold and John Taylor, on behalf of about 56,000 consumers.
The FTC said in 2012 that the company had "lured" consumers "from around the country by masquerading as a legitimate multi-level marketing program and making misleading claims about earnings to be made."
The agency claimed that the BurnLounge made little from actual music sales, but raked in millions of dollars through a marketing scheme whereby "Moguls" paid for the right to sell music and music-related products while earning rewards for recruiting others to do so. Such "Moguls" paid from $29.95 to $429.95 per year, plus monthly fees, to become "Independent Retailers" and earn cash rewards for convincing others to do the same.
After a trial In Los Angeles, U.S. District Judge George H. Wu found that BurnLounge violated the Federal Trade Commission Act (FTCA) by operating an illegal pyramid scheme.
A unanimous appellate panel affirmed on Monday.
"We agree with the district court that BurnLounge was an illegal pyramid scheme in violation of the FTCA 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," wrote Judge Morgan Christen for the panel.
In a separate, unpublished ruling, the 9th Circuit sent the $17 million judgment back to Los Angeles "to clarify the basis for the calculation of consumer harm it attributed to sales of BurnLounge's Basic packages or to redo the calculation."
BurnLounge ceased operating in 2007. As of Monday its online presence consisted of a site teasing "BurnLounge 3" without further details.