9th Circuit Affirms Admission of Economics Expert Witness In FTC Pyramid Scheme Case

Case:

Federal Trade Commission v. BurnLounge, Inc., et al., Nos. 12–55926, 12–56197, 12–56228, Ninth Circuit U.S. Court of Appeals; June 2, 1014

Background:

The Federal Trade Commission (FTC) asserted claims of unfair and deceptive practices against multi-level marketing business BurnLounge, Inc., and its chief operating officer for allegedly operating a pyramid scheme.

The scheme involved offering participants the ability to become “independent retailers” of music and other merchandise. Participants then earned points redeemable for music or merchandise. Or, they could pay an additional fee and become “moguls” and earn case rewards.

The U.S. District Court for the Central District of California denied the defendants’ request to exclude expert testimony from Dr. Peter Vander Nat. After a bench trial, the District Court found the defendants violated the Federal Trade Commission Act and granted the FTC’s request for a permanent injunction. It imposed penalties against the defendants. The defendants appealed.

Economics Expert Witness:

Vander Nat, who holds a doctorate in economics, testified about whether BurnLounge was a pyramid and about the amount of consumer harm. He interpreted BurnLounge’s sales data. His conclusions were based on that data, his previous experience analyzing pyramids, his previous experiences testifying in similar cases, his published article on the difference between pyramids and legal marketing programs, and his personal experience spending several weeks analyzing BurnLounge’s business model.

Admissibility of Keyword Economics Expert Witness:

The Ninth Circuit U.S. Court of Appeals found Vander Nat’s testimony was relevant and reliable under Daubert (Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579, 113 S.Ct. 2786, 125 L.Ed.2d 469 [1993]). It said the FTC used his analysis of BurnLounge’s own data to show how BurnLounge’s business worked in practice.

“BurnLounge’s data convincingly illustrated the disproportionate rate at which Moguls were motivated by the chance to earn cash rewards rather than the merchandise BurnLounge included in the packages,” the panel said. “Vander Nat was qualified to testify and it was proper for the district court to decide that his testimony would be helpful to the trier of fact (here the court).”

The panel affirmed the finding that BurnLounge was an illegal pyramid scheme. Its focus was recruitment, and the rewards it paid in the form of cash bonuses were tied to recruitment rather than to the sale of merchandise.