Music service changes business model for FTC

Digital music vendor BurnLounge changes its business model after an FTC complaint.

A digital music service accused by the U.S. Federal Trade Commission of running an illegal pyramid scheme has changed its business model and has worked out an agreement with the agency, the company said.

BurnLounge has eliminated the "network marketing" portion of its business that was targeted by the FTC, the company said.

The FTC's complaint accused BurnLounge of making deceptive earnings claims for members who paid between US$29.95 and US$429.95 a year for one of the company's product packages. Members were supposed to be paid to sell digital music and movies to others, but the FTC alleged that BurnLounge's compensation program primarily provided payments for the recruiting of new participants, not on the retail sale of products.

Most BurnLounge members would lose money if they only sold music and didn't recruit other members, the FTC alleged.

BurnLounge said it has reached an agreement with the FTC. But FTC spokeswoman Claudia Bourne Farrell, said Friday she couldn't comment on the matter until the judge in the case signs an order dealing with the agency complaint. The FTC has negotiated with BurnLounge, she confirmed.

The FTC, in a complaint filed in U.S. District Court for the Central District of California June 6, sued BurnLounge and four individuals, including the company's former CEO and three BurnLounge members who had marketed subscriptions to others, said D.J. Poyfair, lead outside counsel for BurnLounge and a partner with Shughart Thomson & Kilroy PC. Three of those four, including former CEO Alex Arnold, have not approved a proposed agreement with the FTC.

The judge in the case endorsed the agreement Tuesday, but the final language has not yet been officially approved, Poyfair said. A hearing for the three defendants who have not signed on to the agreement is set for July 5, he said.

BurnLounge had been moving toward eliminating the multilevel marketing portion of its business, but the FTC complaint forced its hands, Poyfair said.

FTC complaints of this nature typically result in a company being shut down with an injunction, but BurnLounge survived intact, Poyfair said. "This is a big deal in terms of FTC litigation history," he said. "This was, from business standpoint, a huge win for BurnLounge."

BurnLounge announced June 18 that it that it had accepted the resignation of CEO Arnold, replacing him with Grant D. Johnson, a founding managing partner at Benevolent Capital, a hedge fund, and the owner of music label Tomato Records. Then on June 21, the company said it was changing its business model by dumping its network marketing plan and increasing rewards for the sale of music by members.

"Network marketing was a unique channel to promote our products, but the strategic decision to voluntarily remove this part of our business was the right decision on all fronts," Johnson said in a statement. "We are aggressively moving forward and will focus on our new free model to help fuel the next evolution of business growth."

BurnLounge disputed the FTC's allegations, but changing the business model was the best way to move forward, BurnLounge said.

Join the newsletter!

Error: Please check your email address.
Rocket to Success - Your 10 Tips for Smarter ERP System Selection
Keep up with the latest tech news, reviews and previews by subscribing to the Good Gear Guide newsletter.

Grant Gross

IDG News Service
Show Comments

Cool Tech

Breitling Superocean Heritage Chronographe 44

Learn more >

SanDisk MicroSDXC™ for Nintendo® Switch™

Learn more >

Toys for Boys

Family Friendly

Panasonic 4K UHD Blu-Ray Player and Full HD Recorder with Netflix - UBT1GL-K

Learn more >

Stocking Stuffer

Razer DeathAdder Expert Ergonomic Gaming Mouse

Learn more >

Christmas Gift Guide

Click for more ›

Most Popular Reviews

Latest Articles

Resources

PCW Evaluation Team

Walid Mikhael

Brother QL-820NWB Professional Label Printer

It’s easy to set up, it’s compact and quiet when printing and to top if off, the print quality is excellent. This is hands down the best printer I’ve used for printing labels.

Ben Ramsden

Sharp PN-40TC1 Huddle Board

Brainstorming, innovation, problem solving, and negotiation have all become much more productive and valuable if people can easily collaborate in real time with minimal friction.

Sarah Ieroianni

Brother QL-820NWB Professional Label Printer

The print quality also does not disappoint, it’s clear, bold, doesn’t smudge and the text is perfectly sized.

Ratchada Dunn

Sharp PN-40TC1 Huddle Board

The Huddle Board’s built in program; Sharp Touch Viewing software allows us to easily manipulate and edit our documents (jpegs and PDFs) all at the same time on the dashboard.

George Khoury

Sharp PN-40TC1 Huddle Board

The biggest perks for me would be that it comes with easy to use and comprehensive programs that make the collaboration process a whole lot more intuitive and organic

David Coyle

Brother PocketJet PJ-773 A4 Portable Thermal Printer

I rate the printer as a 5 out of 5 stars as it has been able to fit seamlessly into my busy and mobile lifestyle.

Featured Content

Product Launch Showcase

Latest Jobs

Don’t have an account? Sign up here

Don't have an account? Sign up now

Forgot password?