The U.S. Court of Appeals in San Francisco rules that digital music seller BurnLounge is an illegal pyramid scheme because its distributors pay for the right to sell products and are motivated primarily by payments by the company for recruiting new members. The income from merchandise sales is incidental to the income from recruiting. The court did not state that commissions paid to the sales force, rather than customers outside of the firm's distributor network, are illegal.
Observers of Herbalife (HLF -0.1%) have been closely watching this case. Many believe the court's ruling is a positive for the company because it clarifies the issue of paying commissions to distributors purchasing products. Multilevel marketing attorney Kevin Thompson says, "As long as the products have legitimate value the company will be in a good position to thwart off pyramid arguments."