Case: 12-55926 01/04/2013 ID: 8462489 DktEntry: 21-1 Page: 1 of 69 No. 12-55926 Consolidated with Case No. 12-56197 and Case No. 12-56288 UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT Federal Trade Commission, Plaintiff and Cross-Appellant, v. BurnLounge, Inc., Juan Alexander Arnold, and John Taylor, Defendants and Appellants. and Rob DeBoer, Defendant. Appeal from the United States District Court for the Central District of California Case No. 2:07-03654 Hon. George Wu APPELLANTS’ OPENING BRIEF BY BURNLOUNGE, INC. AND JUAN ALEXANDER ARNOLD BUCHALTER NEMER, P.C. Lawrence B. Steinberg (State Bar No. 101966) Efrat M. Cogan (State Bar No. 132131) 1000 Wilshire Boulevard, Suite 1500 Los Angeles, California 90017-2457 Telephone: (213) 891-0700 Facsimile: (213) 896-0400 Attorneys for Defendants and Appellants BURNLOUNGE, INC. and JUAN ALEXANDER ARNOLD Case: 12-55926 01/04/2013 ID: 8462489 DktEntry: 21-1 Page: 2 of 69 TABLE OF CONTENTS PAGE I. SUMMARY OF FACTS AND ARGUMENT ......................... 1 II. STATEMENT OF ISSUES...................................................... 3 III. STATEMENT OF FACTS ...................................................... 5 A. Multi-Level Marketing ................................................... 5 B. The Appellants ............................................................... 7 1. BurnLounge, Inc. ................................................. 7 2. Juan Alexander Arnold ........................................ 8 C. BurnLounge’s Products and Their Costs. ....................... 9 1. The Customizable E-Store and Related Software .............................................................. 9 2. BurnLounge Magazine ........................................10 3. BurnLounge Presents ..........................................10 4. BurnLounge University ......................................11 5. Live Nation Event Pass .......................................11 D. BurnLounge’s Policies and Procedures and Compensation Plan .......................................................11 E. BurnLounge in Operation .............................................15 1. Salaries Paid .......................................................15 2. Income Claims ....................................................15 F. Sales .............................................................................16 G. The FTC Secretly Begins an Investigation of BurnLounge and Then Shuts it Down ...........................18 i Case: 12-55926 01/04/2013 ID: 8462489 DktEntry: 21-1 Page: 3 of 69 TABLE OF CONTENTS (cont.) PAGE H. PROCEDURAL HISTORY ..........................................20 1. The Claims in Issue.............................................20 2. Trial ....................................................................20 3. Vander Nat Testimony ........................................20 4. Nolte Testimony .................................................22 5. The Trial Court’s Denial of BurnLounge’s Daubert Motion to Exclude Vander Nat’s Testimony ...........................................................24 6. Statement of Decision .........................................25 7. The Judgment, Post-Judgment Motions, and this Appeal ...................................................29 IV. ARGUMENT..........................................................................29 A. The District Court Did Not Correctly Apply the Koscot/Omnitrition Test for Analyzing the Existence of a Pyramid. ................................................29 1. The Pyramid Test ................................................30 2. The FTC Had the Burden of Proving the Products and Product Packages Lacked Value and/or Did Not Constitute Legitimate Sales ........33 a. The Amway Decision, and the FTC’s Own Staff Advisory Opinion, Demonstrate The FTC’s Failure to Prove the Existence of a Pyramid ..............34 ii Case: 12-55926 01/04/2013 ID: 8462489 DktEntry: 21-1 Page: 4 of 69 TABLE OF CONTENTS (cont.) PAGE b. The Other Pyramid Cases Relied on by the District Court Are Distinguishable and by those Distinctions, Show that BurnLounge is Not a Pyramid ...................37 c. BurnLounge did not Share Any of the Improper Characteristics of Omnitrition, Five Star Auto or Holiday Magic ..............39 3. The FTC Likewise Failed to Prove that Those Who Purchased Product Packages Were Not Motivated, at Least in Part, By the Value of the Products ........................................................41 4. The District Court Impermissibly Shifted The Burden of Proof on Product Value and Consumer Motivation to BurnLounge in the First Instance ......................................................42 B. Vander Nat’s Testimony, Both In Support of Pyramid and Damages, Was Inadmissible ...................................43 C. The District Court’s Award of Monetary Relief Was Unauthorized By Statute and Excessive ........................45 1. The FTC Was Not Entitled to any Award of Monetary Relief ..................................................45 a. The FTC may Not Pursue Any Monetary Award Pursuant to 15 U.S.C. Section 53(b) ............................45 b. Even if the Trial Court Were Authorized to Award Some Form of Monetary Relief, the Award at Issue Impermissibly Constituted Legal, Not Equitable, Relief .......................................49 iii Case: 12-55926 01/04/2013 ID: 8462489 DktEntry: 21-1 Page: 5 of 69 TABLE OF CONTENTS (cont.) PAGE 2. Arnold May Not Be Held Jointly and Severally Liable with BurnLounge for the Monetary Award. ................................................................51 3. The Amount of the Monetary award is Excessive. ...........................................................52 a. The District Court Erred in Assessing Any Monetary Award Because There Was No Pyramid Liability and/or Because There were No Competent Evidence of “Damages” Flowing From a Pyramid. ......52 b. Even if The District Court Could Have Awarded Some Monetary Relief, The Reasoning that Supported Its Award Demonstrates That the Award Was Excessive. .................................................54 4. There Was No Evidence Introduced to Justify a $1.6 Million Disgorgement Award Against Arnold.................................................................56 V. CONCLUSION ......................................................................56 iv Case: 12-55926 01/04/2013 ID: 8462489 DktEntry: 21-1 Page: 6 of 69 TABLE OF AUTHORITIES PAGE Cases Arch Ins. Co. v. Precision Stone, Inc., 584 F.3d 33 (2d Cir. 2009) ....................................................................45 Blackwell v. Strain, 2012 U.S. App. LEXIS 19186 (10th Cir. 2012) .....................................41 Branch v. Smith, 538 U.S. 254, 123 S. Ct. 1429, 155 L. Ed. 2d 407 (2003) ......................46 California First Amendment Coalition v. Calderon, 150 F.3d 976 (9th Cir. 1998) .................................................................30 Cano v. Cont'l Airlines, Inc., 193 Fed. Appx. 664 (9th Cir. 2006) .......................................................44 Coleman v. Quaker Oates Co., 232 F.3d 1271 (9th Cir. 2007) ...............................................................41 Daubert v. Merrell Dow Pharmaceuticals, Inc., 43 F.3d 1311 (9th Cir. 1995) (Daubert II) .............................................44 DeSaracho v. Custom Food Machinery, Inc., 206 F.3d 874 (9th Cir. 2000) .................................................................43 Dhillon v. BBC Holdings, Inc., 2009 U.S. Dist. LEXIS 28865 (W.D. Wash. 2009) ................................33 Erlenbaugh v. United States, 409 U.S. 239, 93 S. Ct. 477, 34 L. Ed. 2d 446 (1972) ............................46 Export Group v. Reef Indus., Inc., 54 F.3d 1466 (9th Cir. 1995) .................................................................48 FTC v. Amy Travel Serv., Inc., 875 F.2d 564 (7th Cir. 1989) .................................................................48 FTC v. H. N. Singer, Inc., 668 F.2d 1107, 1111 (9th Cir. 1982) ......................................... 47, 48, 49 v Case: 12-55926 01/04/2013 ID: 8462489 DktEntry: 21-1 Page: 7 of 69 TABLE OF AUTHORITIES (cont.) PAGE FTC v. Kuykendall, 371 F.3d 745 (10th Cir. 2004) ...............................................................45 FTC v. Publ’g Clearing House, Inc. 104 F.3d 1168 (9th Cir. 1996) ......................................................... 51, 52 GE v. Joiner, 522 U.S. 136 (1997) ..............................................................................43 Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204, 122 S. Ct. 708, 151 L. Ed. 2d 635 (2002) .................. 49, 50 Green Mt. Chrysler Plymouth Dodge Jeep v. Crombie, 508 F.Supp.2d 295 (D. Vt. 2007) ..........................................................44 Honolulu Joint Apprenticeship and Training Comm. v. Foster, 332 F.3d 1234 (9th Cir. 2003) ...............................................................50 In re Ger-Ro-Mar, Inc., 518 F.2d 22 (2nd Cir. 1975) ........................................................... passim Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 114 S. Ct. 1673, 128 L. Ed. 2d 391 (1994) ......................49 Kumho Tire Co. v. Carmichael, 526 U.S. 137 (1999) ........................................................................ 24, 43 Meghrig v. KFC Western, Inc., 516 U.S. 479, 116 S. Ct. 1251, 134 L. Ed. 2d 12 (1996) ........................49 Purcell v. Gonzalez, 549 U.S. 1 (2006) ..................................................................................30 Torres-Lopez v. May, 111 F.3d