Luce Deposition

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I N D E X
WITNESS
WAYNE ALAN LUCE
Called by the Plaintiff:
DIRECT EXAMINATION BY MR. FIX
STIPULATIONS
103
CERTIFICATE OF REPORTER OATH
104
REPORTER'S DEPOSITION CERTIFICATE
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CERTIFICATE OF DEPONENT
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ERRATA SHEET
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PAGE
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E X H I B I T S
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(Exhibits 1 - 358 previously marked.)
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NO.
DESCRIPTION
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359
Expert Report of Wayne Alan Luce
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For The Record, Inc.

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UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA
WESTERN DIVISION
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FEDERAL TRADE COMMISSION,
Plaintiff,
Case No.:
vs.
BURNLOUNGE, INC., a corporation;

JUAN ALEXANDER ARNOLD,
an individual;
JOHN TAYLOR, an individual;
ROB DEBOER, an individual; and
SCOTT ELLIOTT, an individual,
CV 07 3654 GW FMOx
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Defendants.
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DEPOSITION OF WAYNE ALAN LUCE
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Taken on Behalf of the Plaintiff
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DATE TAKEN:
Wednesday, November 5, 2008
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TIME:
2:02 p.m. - 4:47 p.m.
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PLACE:
Renaissance Hotel Orlando

5445 Forbes Place
Orlando, Florida
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STENOGRAPHICALLY REPORTED BY:

Loretta Lee, FPR
Certified Florida Professional Reporter

(301) 870-8025 - www.ftrinc.net - (800) 921-5555
APPEARANCES:
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Counsel for Plaintiff:

David Fix, Esquire
Federal Trade Commission
225 Peachtree Street, N.E.
Suite 1500
Atlanta, Georgia 30303
(404) 656-1353
Appeared via telephone conference call
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Counsel for Defendants:

Lawrence B. Steinberg, Esquire
Buchalter Nemer
1000 Wilshire Boulevard
Suite 1500
Los Angeles, California 90017
(310) 460-4481
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P R O C E E D I N G S
(Deposition Exhibit No. 359 marked for
identification.)
(Witness sworn.)
THE WITNESS:
MR. FIX:
I do.
I'd like to state for the record
that this is a deposition of Wayne Alan Luce
being conducted in the case Federal Trade
Commission versus BurnLounge, Inc. et al., civil
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number CV 07 3654 GW, brought in the United
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States District Court, Central District of
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California, Western Division.
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The deposition is being held at the Ramada
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Renaissance motel, a conference room in Orlando,
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Florida.
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My name is David Fix.
I'm an attorney with
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the Federal Trade Commission, and I'm conducting
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this deposition telephonically.
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Would the other parties note their
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appearance, please.
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MR. STEINBERG:
Lawrence Steinberg for
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defendants BurnLounge, Inc. and Juan Alexander
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Arnold.
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THE WITNESS:
Wayne Alan Luce.
///

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WAYNE ALAN LUCE,
called as a witness by the Plaintiff, having been
first duly sworn, testified as follows:
DIRECT EXAMINATION
BY MR. FIX:
Q.
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Mr. Luce, could you give me your address,
please.
A.
Yes.
7 South Point Drive, Asheville,
North Carolina 28804.

Q.
And, Mr. Luce, could you describe for me
your educational background.

A.
I have 12 years of public school education;
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an undergraduate degree in history; a juris doctorate
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degree from Vanderbilt School of Law, Vanderbilt
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University; and a master's in business administration
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from the Crummer School of Business, Rollins College,
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Winter Park, Florida.
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Q.
When did you receive your bachelor's degree?
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A.
1967.
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Q.
And can you describe for me your master's
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degree?
A.
Master's in business administration under an
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executive MBA program from the years 1984 to 1986.
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It was a general business executive -- executive MBA
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program curriculum.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555
Q.
And what college was that again?
A.
The Crummer School of Business at Rollins
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College, Winter Park, Florida.

Q.
And when you were an undergraduate, did you
ever take any courses in economics?
A.
No.
Q.
Did you ever take any courses in statistics?
A.
Yes.
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In my MBA
program I took statistics courses.

Q.
And during your MBA program, did you ever
take any courses in economics?
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A.
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economics.
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Q.
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Undergraduate, no, no.
One general survey course in business
In addition to that, you haven't had any
economic training?
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A.
No.
17
Q.
And can you describe for me your statistics
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course?
A.
It was a basic statistics course.
It was a
20
required part of the curriculum for the MBA program.
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Basic --
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Q.
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A.
Beyond that basic course, no.
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Q.
So you wouldn't consider yourself an expert
25
-- any training in statistics?
in either economics or statistics, would you?

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A.
I would not.
Q.
When did you attend law school?
A.
1967 to 1970.
Q.
And is there any particular specialty you
had when you were in law school?
A.
No.
Q.
And after you graduated from law school,
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what was your first job?

A.
Assistant city attorney for the city of
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Rochester, New York, Monroe County, state of
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New York.
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Q.
And how long did you occupy that position?
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A.
From June of 1970 until January of 1972.
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About 18 months.
Q.
And what was your -- what were your general
duties in that position?

A.
Two-fold.
I represented the fire department
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in litigation matters primarily as defense counsel,
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and I helped draft and prepare regulations and city
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ordinances for consideration by the city council.
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Q.
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next job?
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A.
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And after January of 1972, what was your
I was employed as associate general counsel
of the Direct Selling Association in Washington, D.C.

Q.
And during what period of time were you

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associate general counsel?
A.
From January of 1972 until July of 1976.
Q.
And what were your general duties as
associate general counsel of the Direct Selling
Association?
A.
To represent the industry, the trade
association, which DSA was a trade association of, in
those days, about 90 direct selling companies, before
agencies, regulatory boards, city council,
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governmental forums, and state legislatures.

Q.
And when you say "represent," could you give
me a little more description of what that entailed?

A.
Generally I was either promoting the passage
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of certain types of consumer protection legislation,
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or I was opposing certain types of proposed
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legislation that I thought would unfairly or
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adversely affect the industry.
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Q.
And so this was essentially a lobbying
effort on behalf of the Direct Selling Association?
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A.
That's correct.
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Q.
Is there anything you did during your job in
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addition to advocating various legislative matters?

A.
We developed and administered a
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self-regulatory code of ethics on behalf of the
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association.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555
Q.
And what did this consist of?
A.
In those years, '72 to '76, it was primarily
a code of ethics intended to protect the purchasers
of the products of the various direct selling
companies that were member companies.
Q.
You say "purchasers of the products."
Can
you tell me a little bit what types of things you
were concerned with?
A.
We were concerned with products that did not
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conform to the product claims, we were concerned with
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defective products, we were concerned with service
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elements as part of the sales proposition that were
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not lived up to, nondelivery of products, things of
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that nature where the consumer had made a complaint
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to the company relative to the quality,
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effectiveness, or use of the product that the company
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had not responded to in a reasonable manner or in a
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reasonable time.
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Q.
When -- you mentioned you left the Direct
Selling Association in the summer of --
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MR. STEINBERG:
1976.
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BY MR. FIX:
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Q.
-- 1976.
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A.
I was hired from the association to take
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What did you do next?
over the in-house law department at Tupperware Home

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Parties.
Q.
And where was Tupperware Home Parties
located?
A.
Orlando, Florida.
Q.
And what's the business of Tupperware?
A.
Tupperware Home Parties was a direct selling
company that sold plastic food storage and serving
containers in the U.S. and in 144 countries around
the world.
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Q.
Would they sell them through a network of
independent distributors?
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A.
Yes.
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Q.
And did the independent distributors
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primarily sell them through the use of home party
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atmospheres?
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A.
Primarily, but not exclusively, yes.
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Q.
And did the Tupperware representatives have
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any inventory?
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A.
Yes, in some cases.
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Q.
But in a lot of cases they just placed the
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order directly with the company?
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A.
Correct.
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Q.
And about what percentage of the
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representatives actually maintained any kind of
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inventory?

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A.
Probably less than ten percent.
I mean,
that's a guess because we didn't have any actual
data.
inventory to do business.
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But there was no requirement to maintain any
Q.
And was Tupperware a multi-level marketing
company?
A.
At that point, no.
Q.
Did it become a multi-level marketing
company?
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A.
Yes.
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Q.
When was this?
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A.
After I had left the company in the late
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1990s and continuing to evolve their compensation
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plan.
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compensation plan was 2006.
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Q.
I believe the latest iteration of their
But during the time that you were involved
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with Tupperware, it was not a multi-level, it was
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just plain direct sales?
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A.
It was an uni-level compensation plan with a
stair-step program.
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My last three years at Tupperware we were
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using -- running pilot tests on a multi-level
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compensation plan.
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Q.
And in the multi-level compensation plan at
Tupperware, your pilot test, did -- was there any

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requirement to have any inventory?
A.
No.
Q.
Did you -- when did you leave Tupperware?
A.
September of 1992.
Q.
Why did you leave Tupperware?
A.
I was hired by a British publishing company,
Dorling Kindersley Publishing Company, to start from
scratch a party plan direct selling company with a
multi-level compensation plan to sell children's
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books, videos, and CD-ROMS.
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Q.
And what company was that?
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A.
Dorling Kindersley.
We operated under the
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trade name DK Family Learning here in the
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United States.
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Q.
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Learning?
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A.
I was founder, president, and CEO.
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Q.
Was it a multi-level marketing company?
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A.
Yes.
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Q.
And in this, did people acquire inventory --
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A.
No.
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Q.
-- or did they -- did they just place orders
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And what was your position with DK Family
with the company?

A.
They primarily placed orders with the
company beyond a sample kit.
Some would frequently

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purchase inventory to sell off the table,
particularly around holiday time.
purchase inventory to sell at fairs and bazaars or
for fund-raising events.
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Q.
Some would
But most of the sales were order sales, not
inventory sales?
A.
Correct.
Q.
And what was your next -- how long were you
with the party company?
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A.
From 1992 to 1998.
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Q.
And what did you do in 1998?
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A.
I left DK Family Learning to assume the
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position as senior vice president of sales and
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marketing for PartyLite Gifts, Inc., headquartered in
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Plymouth, Massachusetts.
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PartyLite was a multi-level party plan sales

company selling candles and candle accessories.
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Q.
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position?
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A.
And what were your responsibilities in that
I was responsible for all of the U.S. sales
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and marketing activities for the PartyLite sales
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program in the U.S.
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Q.
About how many distributors did PartyLite
have during the time you were there?

A.
Yeah, it varied slightly, but it was running

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in the neighborhood of 80,000.

Q.
Now, with regard to the 80,000 distributors,
would these distributors purchase inventory?
A.
Some, yes.
Q.
And then some wouldn't?
A.
Some would not, that's correct.
Q.
Do you know about what proportion would just
place orders directly with the company and not have
any inventory?
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A.
Probably, and this is -- this is a probably.
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I don't have data on it.
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percent.
But probably around 90
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Q.
So 90 percent didn't have any inventory?
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A.
Beyond their samples.
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Q.
Yeah.
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A.
That's correct.
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Q.
And what did you -- what is your next
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position?
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A.
I left PartyLite -- I'm trying to remember
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whether it was March '99 or March 2000 -- and began
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my own consulting firm, Luce and Associates.
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Q.
And why did you leave and form your own
company?
A.
Well, primarily because I was commuting to
Plymouth, Massachusetts from Orlando, Florida.
And

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while I enjoyed the work very much, I disliked the
commuting aspect.
two years of that, I determined that I would rather
be at home here in Florida with my family and not
commuting any longer.
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Q.
And after two years -- or nearly
And can you tell me about when you -- or
when you formed Luce and Associates?

A.
It would have been in the spring of 2000, I
believe.
Q.
And how many employees currently does Luce
and Associates have?
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A.
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associates.
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than we do as an employment firm.
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Q.
Luce and Associates has one employee and six

We run -- we operate more as a co-op
Can you explain to me a little bit what you
mean by that?
A.
Sure.
There are six other members of the
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firm besides myself with varying areas of expertise
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in direct selling.
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advertising, the maintenance of the website, the
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administration, the membership dues in the Direct
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Selling Association.
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another on a referral fee basis when we can assist
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one another with various projects, but we operate
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essentially as independent consultants within the
We share the cost of the
We refer business to one

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cooperative.
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I have -- I have one employee who works

directly for me.
Q.
And do you have an office other than a home
office?
A.
No.
Q.
So does the -- does the employee work at
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your home office?

A.
No, the employee works in St. Cloud,
Florida.
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Q.
And what does the employee do?
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A.
The employee is -- handles all of the
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accounting and tax work for myself and the other
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associates.
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she also conducts training demonstrations on software
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compensation planning management systems and order
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product -- and product ordering systems, online
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product ordering systems.
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Q.
She makes the travel arrangements, and
I'd like to direct your attention to your
declaration.
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A.
Yes, sir.
22
Q.
And you mention there --
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MR. STEINBERG:
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David.
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perjury.
Excuse me just one minute,
I'm not aware that it's under penalty of

Am I missing something?

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MR. FIX:
I stand corrected.
Excuse me, to your expert report.
THE WITNESS:
BY MR. FIX:
Q.
Okay.
You mention during your career you have -MR. STEINBERG:
Excuse me.
Just for the
record, you may want to state this has been
marked as Exhibit 359.
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MR. FIX:
MR. STEINBERG:
Yes, that's what I just
said.
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MR. FIX:
14
BY MR. FIX:
15
Q.
16
Just for the record, I
will -- it's marked as Exhibit 359; isn't it?
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All right.
Yeah.
You mentioned in the expert report you were
CEO of Wild Tree, Inc.
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A.
Correct.
18
Q.
And when were you CEO?
19
A.
2006 to -- no -- yeah -- February of 2006
20
through December of 2008.
I was simultaneously also
21
operating my consulting firm.
22
Q.
And what does Wild Tree do?
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A.
Well, Wild Tree is a multi-level party plan
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sales company selling a line of all-natural food
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products.

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Q.
When you mention it's a party plan, can you
describe that for me?

A.
The primary method of selling is to sell to
a group of individuals at one time to demonstrate the
products and present them to a group of individuals
at one time rather than one-on-one sales.
Q.
So it would be like Tupperware?
A.
Yes, very similar.
Q.
And on Wild Tree do most of the independent
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sales representative have inventory?

A.
Yes, at certain times of the year,
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particularly during the holiday time where they can
13
sell off their tables.
14
15
Q.
But other times of the year they wouldn't
necessarily have to have inventory?
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A.
Correct.
17
Q.
And you said you left there in -- or when
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did you leave there?

A.
I stepped down as CEO in December of 2007.
I'm still a member of the board and a shareholder.
21
Q.
And can you tell me why you stepped down?
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A.
Yes.
Essentially the -- I stepped into the
23
position in order to get the company moving and back
24
on a growth pattern and to train the founder of the
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company, Leslie Montie, in how to more effectively

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operate the company as CEO.
had accomplished that goal, I stepped back.
Q.
And then when -- when I
So they were -- you initially got in touch
with some -- because they were a client of Luce and
Associates?
A.
Yes.
Q.
Now, you mentioned that Luce and
Associates -- again directing your attention to your
summary and qualifications on your expert report.
10
That you are a consultant in compensation plan design
11
and implementation.
12
13
Can you describe for me what that is?

A.
Well, yes.
A company will come to me under
14
one of two circumstances.
15
the request that I examine an existing compensation
16
plan to see whether there are methods of improving it
17
or changing the ratios of payout or accelerating some
18
aspect of the plan for what they perceive to be a
19
business benefit.
20
They will come to me with
The second and more common work is that a
21
group of individuals will come to me with a product
22
idea and they want to build a direct selling company,
23
to start a direct selling company, and they will look
24
to me to help them design a compensation structure
25
that is suitable both for their product line spread

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and mix and the price points and also affordable
under the margins that they would have to spend on
compensation.
Q.
Do you provide, in the course of your
consulting duties in the compensation plan, do you
ever provide any legal advice concerning the legality
of the compensation plan?
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9
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A.
No.
What I will do is recommend that they
have all plans reviewed by counsel.

Q.
So you don't function as legal review of
their plans?
12
A.
I do not.
13
Q.
Are you currently a practicing lawyer?
14
A.
No.
15
Q.
And when's the last time you practiced law?
16
A.
1990.
17
Q.
Are you currently a member of any bar
18
association?
19
A.
No.
20
Q.
When's the last time you have been a member
21
of a bar association?
22
A.
I think 2003.
23
Q.
And which one was that?
24
A.
Florida.
25
Q.
Since then you've let your bar association

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lapse because you're just not practicing law?
A.
Correct.
Q.
Now, in the last page of your expert report
you mention the Direct Sales Association and the
Direct Selling Educational Foundation.
A.
Correct.
Q.
You mentioned that you've been a member of
the board of directors of the Direct Selling
Association.
10
A.
Yes.
11
Q.
During what period of time were you a member
12
13
of the board?
A.
I cannot remember the first year I was
14
actually elected to the board.
15
somewhere between 1985 and 1990.
16
continuously on the board of directors, up to and
17
including serving as chairman of the board, through
18
about 2000 or 2001.
19
20
Q.
I think it was
And I served
And during what period of time were you
chairman of the board of directors?
21
A.
'97, '98.
22
Q.
And in 2001 you ceased being a member of the
23
board?
24
A.
25
When I started my firm in 2000, I became a
supplier member as opposed to an active member, and I

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had finished my term as immediate past chairman, so I
was no longer eligible to be a member of the board.
3
4
Q.
That's because you had become a supplier
member?
A.
Correct.
Q.
And can you explain to me what a supplier
member is?
A.
A supplier member is a company or an
individual or a partnership that provides services,
10
or goods and services, goods and products to direct
11
selling companies to aid them in their businesses.
12
Q.
Can law firms be a supplier company?
13
A.
Yes, and a number are.
14
Q.
And there are number of other consulting
15
companies that are supplier members; is that correct?
16
A.
Yes, there are.
17
Q.
You mentioned you were a member of the board
18
of directors of the Direct Selling Educational
19
Foundation.
20
A.
I still am.
21
Q.
Can you tell me what that is.
22
A.
The Direct Selling Education Foundation is a
23
501(c)3 public interest foundation that works
24
primarily with academics, funding academic research
25
about the direct selling method of distribution, and

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works with consumer organizations ranging from the
National Association of Attorneys General to the
National Association of Consumer Administrators and
the National Consumers Union to promote best
practices for the protection of consumers out in the
marketplace, and also funds research and work in
minority business and in women empowerment business
organizations, both domestically and abroad.
Q.
What association does the Direct Selling
10
Educational Foundation have to the Direct Selling
11
Association?
12
A.
The Direct Selling Education Foundation was
13
originally funded in 1973, founded and funded by
14
members of the Direct Selling Association, by member
15
companies and individuals, as a public-interest
16
organization interested in promoting direct sales.
17
18
19
Q.
And during what period of time did you chair
the board directors?

A.
Let's see, that would have been -- that
20
would have been '96, '97, I think.
21
was chairman of the DSA itself.
The year before I
22
Q.
And you mentioned you're still a member of
23
the board?
24
A.
I rejoined the board this past summer.
25
Q.
Now, you mentioned on the second page of

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your -- or third page of your expert report that
you've published a list of articles.
A.
Yes.
Q.
And did you attach them as an Exhibit A to
your expert report?
A.
I did not.
Q.
Is there some reason why you didn't attach
8
9
I will be happy to provide them.
it as Exhibit A?
A.
At the time I filed the exhibit, I did not
10
have the complete list handy.
11
procured it from the magazine.
12
Q.
13
to us?
14
A.
15
16
I would ask, could you make that available
Sure.
It will be several days until I can
get back to my office in Asheville.

Q.
17
18
I have subsequently
That's fine.
Just when you get time.
You'll probably want to send it to your

attorney, too.
19
A.
Yes.
20
Q.
Now, you mentioned you've been retained
21
twice before as an expert witness?
22
A.
Correct.
23
Q.
Can you tell me, first, when these were --
24
25
when these times were?

A.
The first situation was on or about 2003.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555
25
cannot remember exactly.
I was retained, but the
matter was subsequently resolved and I never went to
formulating a -- or submitting an opinion.
Q.
And who retained you?
A.
An attorney by the name of Brook Murphy in
Oklahoma on behalf of the company Prepaid Legal
Services.
Q.
So did you do any work on that case?
A.
No, not really.
10
Q.
What was that case about?
11
A.
My memory is that there was a dispute
12
between independent distributors and the company over
13
something relating to the compensation plan.
14
Q.
Can you recall what it was?
15
A.
I do not.
I never got into the details,
16
never received any documents or supporting
17
information.
18
19
20
21
Q.
What is the other case that you've been
retained as an expert?
A.
case.
The case was the House of Lloyd bankruptcy

And that was in 2005, 2006, as I recall.
22
Q.
23
that case?
24
A.
25
What was the nature of your engagement in
I was requested to review the information as
to whether the business had -- whether the business

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26
was in the process of being turned around and moving
forward in its sales turnaround plan.
Q.
Did you ever prepare an expert report in
that case?
A.
I did.
Q.
Did you ever testify in that case?
A.
Deposition.
MR. STEINBERG:
I'd like to take a
one-minute break, please.
We'll be right back.
10
MR. FIX:
11
(A short recess was taken.)
12
BY MR. FIX:
13
Q.
14
Sure.
Do you have a copy of the expert report that
you prepared in that case?
15
A.
With me?
16
Q.
Did you have it with you -- yeah, do you
17
have it with you?
18
A.
No.
19
Q.
Do you have it at your office?
20
A.
I'm not sure.
I disposed of many of the
21
records when I moved from Orlando, Florida to
22
Asheville, North Carolina seven months ago.
23
Q.
Do you have a copy of your deposition
24
transcript?
25
A.
No.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555
27
Q.
transcript?
A.
No.
Q.
Did you give a copy of your expert report to
5
6
Have you ever had a copy of your deposition
Mr. Steinberg?
A.
No.
MR. STEINBERG:
probably missed it.
subsequent deposition.
10
11
MR. FIX:
David, maybe I missed it.

Did Mr. Luce say -- I see,
I apologize.
I think he said that he doesn't
have any deposition transcript.
12
MR. STEINBERG:
No, I understand that.
13
just didn't recall him saying he had his
14
deposition taken, but I see that now.
15
apologize.
16
MR. FIX:
17
MR. STEINBERG:
18
BY MR. FIX:
19
Q.
All right.
Yeah, I think he said that he did.

Okay.
Now, what was the first contact
20
you ever had about -- with anybody concerning the
21
preparation of your expert report?
22
A.
I was approached at an industry meeting last
23
spring by Spencer Reese, who simply wanted to know if
24
I would be willing to be an expert witness.
25
Q.
And who is Spencer Reese?

(301) 870-8025 - www.ftrinc.net - (800) 921-5555
28
1
2
A.
He is an attorney, supplier member to the
Direct Selling Association.
Q.
When was this meeting?
A.
I believe it was relative to the spring --
5
6
the March board meeting last spring.

Q.
And what did -- did he tell you anything
about what type of expert, what type of company he
was looking for an expert for?
A.
Compensation expert.
10
Q.
Did he say anything more than that?
11
A.
Actually, no.
12
Q.
And what did you tell Mr. Reese?
13
A.
That I would be willing to speak to whoever
14
15
wanted to inquire about my services.

Q.
And did Mr. Reese tell you what company was
16
involved with -- what the company was that was
17
interested in procuring an expert opinion?
18
19
A.
I can't really recall whether he said my
client or said the company name.
I can't recall.
20
Q.
And did you have any further contact with
21
Mr. Reese?
22
A.
About this matter?
23
Q.
Yeah.
24
A.
No.
25
Q.
And had you known -- before Mr. Reese

(301) 870-8025 - www.ftrinc.net - (800) 921-5555
29
contacted you, had you known him previously?
A.
Oh, I've known him for many years.
Q.
In what capacity?
A.
As a supplier member to the trade
association and its member companies.
programs with Spencer, and I have referred companies
to Spencer seeking legal advice.
8
9
Q.
I have been on
And is Mr. Reese and his law firm a supplier
member of the DSA?
10
A.
Yes.
11
Q.
And what's the next contact you had with
12
regard to your expert report?
13
A.
I was contacted by Mr. Steinberg's firm.
14
Q.
And when was this?
15
A.
I want to say May, June.
16
I didn't record
the exact date.
17
Q.
This is May, June 2008?
18
A.
Yes, sir.
19
Q.
And who in that firm contacted you?
20
A.
I believe I was initially contacted by a
21
paralegal to set up a telephone appointment with
22
Mr. Steinberg and another one of his partners, whose
23
name I forget.
24
25
Q.
And did you subsequently have this telephone
conversation with him?

(301) 870-8025 - www.ftrinc.net - (800) 921-5555
30
A.
I did.
Q.
And about when was that?
A.
Again, middle, late June.
I really can't
recall precisely.
Q.
And what was said during that telephone
conference?
A.
My recollection is that he primarily made
inquiries as to my experience and my credentials and
my knowledge and understanding of compensation plans
10
and direct selling and multi-level compensation
11
plans.
12
Q.
Did he tell you who he represented?
13
A.
I believe he did at that point.
14
Q.
You believe he did, or he didn't?
15
A.
I believe he did mention the name of his
16
17
18
19
client.
Q.
Did he tell you during that conversation
what he was interested in?

A.
As I recall, there was a general description
20
that this was an action involving the Federal Trade
21
Commission who was alleging certain allegations
22
against the client BurnLounge, some of which those
23
allegations involved the compensation plan.
24
25
Q.
Prior to the time that Mr. Steinberg told
you BurnLounge was involved, had you ever heard of

(301) 870-8025 - www.ftrinc.net - (800) 921-5555
31
BurnLounge?
A.
No.
Q.
What was the next contact you had with
4
5
Mr. Steinberg?
A.
Again, as I recall, several weeks later I
was notified that they would, in fact, like to use me
as an expert witness, and we executed a retention
letter.
Q.
At the time that you had executed the
10
retention letter, did you know anything about what
11
BurnLounge compensation plan was?
12
A.
No.
13
Q.
Did you know what Mr. Steinberg wanted you
14
to do?
15
A.
In general terms he wanted me to examine the
16
BurnLounge compensation plan, which he described as,
17
I believe, a binary plan, and determine whether the
18
plan itself violated any kind of ethical or legal
19
strictures.
20
Q.
And did he say what kind of ethical or legal
21
strictures he was interested in seeing whether or not
22
it violated?
23
24
25
A.
No.
I mean -- well, in general -- no, I
don't believe he did.

Q.
And about when did this -- when did you

(301) 870-8025 - www.ftrinc.net - (800) 921-5555
32
1
2
execute the retention -- the retention letter?

A.
Again, I'm going from memory, and I'm not
sure of the time span, but I believe it was in
middle, late June.
There was a period of time between the first
conversation and the execution of the retention
letter, and I frankly can't recall how long that was.
Maybe as much as early July.
Q.
Do you have a copy of the retention letter?
A.
In my files in Asheville, yes.
10
Q.
And did the retention letter mention how
11
much you would charge him?
12
A.
Yes, it did.
13
Q.
Did it mention what was the --
14
15
How much were you going to charge him?

A.
Well, I set out in my first -- second
16
conversation with Mr. Steinberg that I charge 275 an
17
hour, $2200 a day for work that I do in my office, or
18
$3,000 a day for work that I do on site.
19
And on site in this circumstance would
20
include things like court dates and deposition.
21
don't travel -- I don't charge for travel days.
22
23
Q.
Now, did you -- did you -- was there any
maximum amount dictated in your retention letter?
24
A.
No, I don't believe so.
25
Q.
Did you -- when you discussed it with

(301) 870-8025 - www.ftrinc.net - (800) 921-5555
33
Mr. Steinberg, did you tell him how much you thought
the total bill would be?
A.
No.
Q.
Did he ask?
A.
I don't believe so.
Q.
All right.
7
8
9
with anybody from Mr. Steinberg's law firm?

A.
I began to receive some basic documents
surrounding the lawsuit from one of Mr. Steinberg's
10
paralegals.
11
Q.
12
13
14
What's the next contact you had
I received --
Now, did you give Mr. Steinberg a list of
what you would like to see concerning the lawsuit?

A.
I did not give Mr. Steinberg a list.
asked me what I essentially needed to get started.
15
And at that point I asked to see the
16
complaint, the answer to the complaint, the
17
BurnLounge compensation packages, and
18
Dr. Vander Nat's declarations.
19
20
Q.
You mentioned the complaint and the answer
to the complaint.
So that was sent to you?
21
A.
Yes.
22
Q.
And Dr. Vander Nat's declarations.
23
He
Which
declarations were initially sent to you?
24
A.
25
filed.
I believe the first three or four that he

I believe there's five altogether, five

(301) 870-8025 - www.ftrinc.net - (800) 921-5555
34
documents.
Q.
Yeah.
A.
And I got the last one more recently.
Q.
When you say "more recently," what --
A.
Two weeks ago.
Q.
Now, you mentioned you were sent a copy of
the compensation plan?
A.
Correct.
Q.
How many different plans did you look at?
10
A.
Two.
11
Q.
And what -- do you recall the dates on the
12
plans?
13
A.
Yes -- well, roughly.
The most recent plan
14
went into effect in April, I believe, of '06 -- '07.
15
And then the plan before that came in in '06.
16
the '06 and '07 plans.
17
Q.
So do you remember when in '06?
18
A.
I do not at the moment.
19
20
MR. STEINBERG:
MR. FIX:
22
BY MR. FIX:
23
Q.
25
Dave, we gave him the one
reference in Dr. Vander Nat's declaration.
21
24
It was
Okay.
Now, you mentioned you received the -- did
you receive subsequently any additional documents?

A.
I received the declaration of Kevin Grimes

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35
and I received the declaration of Rob DeBoer and I
received several other related documents.
3
4
Q.
was the declaration of Rob DeBoer?
5
6
How long was the -- how long a declaration
A.
I can't remember the precise page count, but
it was numerous pages.
Q.
Was it a declaration, or was it a
deposition?
A.
I believe that it was a -- it may have been
10
a transcription of a deposition, but I'm not -- I'm
11
not -- let me go look at my notes here.
12
It's a declaration.
13
14
Q.
Do you know what the date of the declaration
was?
15
A.
I do not recall.
16
Q.
Do you have it with you?
17
A.
I do not.
18
MR. STEINBERG:
19
mistaken.
20
declaration.
I have never seen a DeBoer
21
MR. FIX:
22
reason I'm asking.
23
I think Mr. Luce is
I haven't either.
THE WITNESS:
That's the
Then I may have been confused.
24
It may have been a transcript of a deposition.
25
know that --

(301) 870-8025 - www.ftrinc.net - (800) 921-5555
36
BY MR. FIX:
Q.
-- when you received that?
A.
That would have been probably in August.
That did not come with the initial documents.
5
6
I referred to it as declaration on my expert

report, so I may have been mistaken.
Q.
And did you read that deposition transcript?
A.
I did at the time, yes.
Q.
Did you ever receive -- did you ever receive
10
11
any other information?

A.
I received some documents relating to
12
various receipts that the company copied, with
13
documents of receipts the company had spent in
14
developing their technology and their product line,
15
and I received more recently a spreadsheet involving
16
the participation of the various people involved in
17
the BurnLounge marketing program.
18
Q.
Is there anything else you received?
19
A.
The Federal Trade Commission advisory
20
opinion on pyramid scheme analysis from January 2004
21
that was sent to the Direct Selling Association.
22
Q.
Anything else?
23
A.
I have received other documents, most of
24
which I did not use in my analysis and cannot
25
remember at this time exactly what they are.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555
37
1
2
Q.
So there are no other documents you used in
your analysis other than the ones that you've listed?
A.
Correct.
Q.
So you never received any exhibits that were
submitted along with the Federal Trade Commission's
application for a temporary restraining order?
A.
I believe I did receive some documents in
support of that application.
They -- I don't recall
at this point exactly that they were.
When I
10
initially reviewed the documents, I picked those
11
documents that seemed pertinent to what I was asked
12
to address.
13
Q.
So you didn't rely upon any of the exhibits
14
that were submitted in response or along with the
15
temporary -- request for temporary restraining order?
16
A.
No.
17
Q.
And the only documents you relied upon are
18
those that you list in your expert report?
19
A.
Yes.
20
Q.
Now, you mentioned you recently received a
21
spreadsheet.
22
A.
Yes, within the last several weeks.
23
Q.
Can you recall, the last two weeks?
24
25
Last
three weeks?
A.
I think it was in the last two weeks, but I

(301) 870-8025 - www.ftrinc.net - (800) 921-5555
38
can't be precisely sure.
traveling.
Q.
Have you looked at it?
A.
I looked at it long enough to identify what
5
6
7
It came while I was
So when I got home, it was there.
it was, and nothing beyond that.

Q.
Have you tried to examine the numbers or
studied the numbers or analyzed the numbers?
A.
No.
Q.
So have you looked at anything other than
10
the first page?
11
A.
No.
12
Q.
How much time did you spend looking at it?
13
A.
The most recent document?
14
Q.
Yeah.
15
A.
A minute, maybe two.
16
Q.
Now, after you received these materials,
17
what's the next thing you did in preparation of the
18
expert report, to prepare the expert report?
19
A.
Well, I went through the complaint, I went
20
through the application for the temporary restraining
21
order, I went through the defense, including the
22
declaration of Kevin Grimes.
23
each of Dr. Vander Nat's declarations that I had at
24
that point in time.
25
read the transcript or material relating to Rob
I then went through
And I -- when I received it, I

(301) 870-8025 - www.ftrinc.net - (800) 921-5555
39
1
2
3
DeBoer.
Q.
Did you receive the transcript of Rob DeBoer
before you prepared your expert report?
A.
Yes.
Q.
When did you prepare your expert report?
A.
I submitted the expert report on the 25th of
September, and the drafting of it took place in the
period of two or three days before that.
9
10
11
Q.
So you would have -- during what period of
time did you work on the expert report?

A.
I reviewed materials as I received them.
12
But then when I sat down to prepare the expert
13
report, I went back through and read the materials
14
that I thought were most critical to my analysis.
15
And that would have been in the period between the
16
20th and the 25th of December -- September.
17
18
19
20
21
22
Q.
And so you finished preparing the expert
report on the 25th of December?

A.
September.
And it was probably the night
before.
Q.
Now, after you prepared the expert report,
did you send it to Mr. Steinberg?
23
A.
Yes.
24
Q.
And before you -- while you were preparing
25
the expert report, did you talk to him about what you

(301) 870-8025 - www.ftrinc.net - (800) 921-5555
40
1
2
were preparing?
A.
We had one conversation of a general nature
that related to the parameters of the report and the
scope of what they were asking me to discuss.
Q.
And when was that?
A.
I cannot remember the exact date, but it was
prior to my preparation of the report.
Q.
Was it in early September?
A.
It would have been in probably the middle of
10
September.
11
for the exact date.
12
Q.
But, again, I'd have to check my calendar
And other than that one conversation, you
13
had no other conversations with Mr. Steinberg
14
relating to preparation of the report?
15
16
A.
I believe it was one.
There may have been
two, but I believe it was one.
17
Q.
18
opine on?
19
A.
And what did he tell you he wanted you to
Basically the -- to understand and be able
20
to explain the binary compensation plan and to
21
address whether the plan was -- created an illegal or
22
unacceptable practice.
23
Q.
So it was to determine whether or not the
24
plan was inherently illegal or inherently
25
unacceptable?

(301) 870-8025 - www.ftrinc.net - (800) 921-5555
41
A.
Yes.
Q.
It wasn't really to determine whether or not
as in practice, as implemented in practice, it was
lawful or not?
5
6
7
A.
That's correct.
I'm not sure how you divide
between the two.

Q.
Now, after you submitted the report, what is
the next -- what's the next thing you did with regard
to BurnLounge?
10
A.
11
services.
12
Q.
And how much was the invoice for?
13
A.
I think altogether it was 9,000 and change.
14
15
16
I think send them an invoice for my
I don't remember the exact number.

Q.
And after Mr. Steinberg received the report,
did he -- did you do any further work on the report?
17
A.
No.
18
Q.
Now, before you prepared the report, did you
19
20
review any of the financial records of BurnLounge?

A.
I reviewed the data sent to me relating to
21
the expenditures BurnLounge had made for equipment,
22
software, rights and licenses to music, cost of the
23
products, things of that nature, yes.
24
25
Q.
Other than that, did you review any of the
financial information of BurnLounge other than these

(301) 870-8025 - www.ftrinc.net - (800) 921-5555
42
invoices --
A.
No.
Q.
-- you just referenced?
A.
No.
Q.
Your answer is no?
A.
No.
Q.
Did you review any records concerning the
amount of digital music BurnLounge sold?
A.
Not for preparing the report, no.
10
Q.
Did you review any information concerning
11
12
13
14
15
the amount of bonus and commissions BurnLounge paid?

A.
Only that which was contained in
Dr. Vander Nat's declarations.

Q.
So you had no reason to -- you have no other
knowledge of the --
16
A.
Excuse me?
17
Q.
You have no other knowledge of the bonuses
18
and commissions that was paid?
19
A.
Correct.
20
Q.
Did you ever review any documentation
21
concerning how many participants in the BurnLounge
22
compensation plan received, in bonuses and
23
commissions, less than they paid to participate in
24
the plan?
25
A.
Only --

(301) 870-8025 - www.ftrinc.net - (800) 921-5555
43
MR. STEINBERG:
Objection, lacks foundation.
There's been no testimony that anybody paid
anything to participate in the plan.
think Mr. Luce has --
MR. FIX:
MR. STEINBERG:
MR. FIX:
Let me finish my objection,
I'll withdraw the question and ask
another one.
10
11
Let me withdraw the question.
please.
8
9
And I don't
MR. STEINBERG:
Thank you.
And I don't
think Mr. Luce has so testified.
12
MR. FIX:
13
MR. STEINBERG:
14
BY MR. FIX:
15
Q.
No, I'm not saying he did.

Okay.
Thank you.
I'm asking, did you review any documents
16
concerning the amount of money participants received
17
in bonuses and commissions?
18
A.
Only that information contained in the
19
declarations of Dr. Vander Nat; and Kevin Grimes's
20
declaration, I believe, also mentioned that.
21
22
23
24
25
Q.
Did you review any information concerning
whether or not participants lost money in the plan?

MR. STEINBERG:
ambiguous.
Objection.
Vague and
Lacks foundation.
You can answer.

(301) 870-8025 - www.ftrinc.net - (800) 921-5555
44
BY MR. FIX:
Q.
You can answer.
A.
Once again, only the information contained
4
5
6
in the documents that I've already described.

Q.
So Vander Nat's declaration, Grimes's
declaration?
A.
Correct.
Q.
You didn't receive -- you didn't -- let me
withdraw that.
10
Are you aware that Dr. Vander Nat's
11
declaration contains a theoretical model concerning
12
how many people he predicts will lose money?
13
14
Are you aware of that part of his

deposition --
15
A.
Yep.
16
Q.
-- declaration?
17
A.
Yes, I am.
18
Q.
Did you ever review any empirical data to
19
determine whether or not his projections were, in
20
fact, true?
21
A.
No, I did not.
22
Q.
Did you ever ask to review that information?
23
A.
No, I did not.
24
Q.
In addition to review of these documents you
25
just testified about, is there anything else you did

(301) 870-8025 - www.ftrinc.net - (800) 921-5555
45
to learn about BurnLounge before you prepared your
report?
3
4
A.
I did some personal looking around the
internet for music-related services and products.
Q.
And what did you find?
A.
That there are lots of musical-related
services and products and product packages available
in the marketplace.
Q.
When did you do this?
10
A.
It would have been in the period of
11
September, prior to preparing my report and as part
12
of trying to familiarize myself with the
13
music industry.
14
Q.
Is there anything else you did?
15
A.
No.
16
Q.
Did you interview anybody --
17
A.
No.
18
Q.
-- connected with BurnLounge?
19
A.
No.
20
Q.
You mentioned that you read the declaration
21
of Kevin Grimes.
Did you talk to Mr. Grimes?
22
A.
No.
23
Q.
Do you know Mr. Grimes?
24
A.
I do.
25
Q.
And how do you know him?

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46
A.
From his attendance at Direct Selling
Association meetings and from situations in the past
where I had referred clients to him and even further
back than that when he was counsel for a member
company by the name of Maluca (phonetic), when he was
in-house counsel.
Q.
So you've known him a long time?
A.
Long time.
Q.
And he's a law partner of Mr. Reese's; is
10
that correct?
11
A.
Yes.
12
Q.
Now, let me go back to your expert report.
13
On the very first page you state you were
14
retained on the following issues:
The design and
15
characteristics of the BurnLounge, Inc. binary
16
compensation plan; is that correct?
17
A.
Correct.
18
Q.
And the second thing you were to determine
19
is whether the design of the compensation plan
20
promotes conduct amounting to an illegal pyramid
21
activity.
22
A.
Yes.
23
Q.
What, in your mind, is an illegal pyramid?
24
A.
An illegal pyramid is one where there is no
25
value to the product or -- true value in the

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47
marketplace to the product or service that's being
purchased by the participants in the pyramid, and
that the purchase of that valueless item actually
funds the scheme itself.
5
6
Q.
for your definition?
7
8
9
And do you know where -- what's the basis
Where do you come up with that definition?

A.
Forty years of experience as a direct seller
in this marketplace.
10
Q.
Is it based upon any legal analysis?
11
A.
It's based upon a practical analysis of what
12
differentiates a pyramid from a legitimate direct
13
sales opportunity.
14
practice issues; but when you come down to a
15
fundamental pyramid, in my view it circulates around
16
inappropriate inventory loading.
17
18
19
20
21
22
Q.
You have other types of trade
So the key on whether or not it's a pyramid
is whether or not there's inventory loading?

A.
It's one of the primary focuses of the
anti-pyramid legislation, in my view.

Q.
But isn't it possible to have a pyramid
where you don't have any inventory?
23
A.
Yes, it is possible.
24
Q.
So just because you don't have any inventory
25
loading isn't dispositive of whether or not it's a

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48
pyramid, is it?
A.
No.
Q.
And is it possible in your view of unlawful
pyramid activity to have an unlawful pyramid if the
products have some value?
6
7
A.
I'm sorry?
Would you repeat the question,
please?
(Record read by the reporter.)
MR. STEINBERG:
Gary, are you satisfied you
10
have the question worded the way you want it, or
11
do you want to try it again?
12
13
MR. FIX:
See if he can answer.
And if not,
I'll try again.
14
MR. STEINBERG:
15
THE WITNESS:
That's fine.
Yes, it is possible to have an
16
illegal pyramid when there are products that have
17
value present.
18
BY MR. FIX:
19
Q.
On what -- if you were trying to determine
20
whether or not a pyramid is -- or a multi-level
21
marketing company is a pyramid, what are the factors
22
you look at, in your opinion?
23
A.
The first thing I look at is whether the
24
goods or services being proffered by the company have
25
value in the marketplace as products.

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49
1
2
3
Q.
And what do you mean by "value in the
marketplace as products"?
A.
That they are a reasonably-priced product of
a similar sort or nature that is otherwise available
in the marketplace through other competitors.
6
7
Q.
Do the products have to be more or less
identical to the similarly-priced products?
A.
No.
Q.
Are you ever concerned about how much a
10
product is marked up over the acquisition cost?
11
A.
No.
12
Q.
So if a product -- if I bought a herbal
13
medicine for five dollars and sold it for $100, this
14
wouldn't be troubling in your analysis?
15
A.
If the marketplace for that medicine of
16
similar quality and quantity was somewhere between
17
80 and $120, I wouldn't be bothered at all.
18
have nothing to do with the pyramid.
19
20
Q.
Profits
And the amount of mark-up, in your opinion,
has nothing to do with the pyramid?
21
A.
No.
22
Q.
What other factor, in addition to the value,
23
do you look at in determining whether a multi-level
24
marketing company is a pyramid?
25
A.
Were there other deceptive practices

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50
involved.
Q.
3
4
5
6
7
8
9
And what do you have in mind in this -- what
other type of deceptive practices?

A.
Was there fraud involved, was there
misrepresentation involved.
Q.
Can you describe what type of fraud you
would look at?

A.
I would look at areas surrounding the sale
of the product itself.
10
Q.
Can you be a little more detailed what --
11
A.
Did they misstate the value of the product,
12
did they overstate the value of the product, did they
13
make a product claim for the product that the product
14
cannot fulfill.
15
Q.
I guess my question is:
How is this
16
relevant to the question of whether or not it's an
17
illegal pyramid?
18
A.
Because they usually go together.
19
Q.
But they can be separate?
20
A.
But they can be separate.
21
MR. STEINBERG:
22
finish his question.
23
transcript.
24
BY MR. FIX:
25
Q.
I mean --
Mr. Luce, please let Mr. Fix

We'll have a more clear
What else do you -- on the

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51
misrepresentations, are you ever concerned about
whether or not the amount of money that a participant
in the multi-level marketing can make, potentially
make, is misstated?
5
6
Is that something that is relevant to your

consideration?
A.
practice.
Q.
10
11
That can be another form of deceptive
Is this, in your experience, a fairly common
form of deceptive practices in pyramids?

A.
It's a fairly commonly-alleged form of
12
deceptive practice sometimes related to pyramids,
13
sometimes not.
14
Q.
What else would you look at to determine
15
whether or not a multi-level marketing company was a
16
pyramid?
17
A.
The fundamental issue is whether or not
18
there is a viable product for sale that is being
19
purchased and consumed by end users.
20
Q.
Is there anything else?
21
A.
That's the primary issue in my analysis.
22
Q.
Do you know anybody else who adopts your
23
24
25
analytical framework?
A.
I think most direct sellers adopt my
analysis to a certain extent.

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52
Again, the fundamental issue of which the
pyramiding cases were built was built around
inventory-loading issues and items of no real
marketplace value.
Q.
And would your position be, in your belief,
consistent with the position of the Direct Selling
Association?
A.
Yes, I believe so.
Q.
In addition to the Direct Selling
10
Association, is there anybody else who -- and other
11
members of the direct selling community, is there
12
anyone else who would adopt your position of what is
13
a pyramid?
14
A.
You have a number of state anti-pyramiding
15
statutes that are built fundamentally around that
16
premise.
17
18
Q.
Can you tell me which state statutes these
are?
19
A.
Not off the top of my head.
20
Q.
Is one of them Utah?
21
A.
No -- well, I can't recall the Utah statute.
22
I think it's been amended since I last looked at it.
23
Q.
Is one of them Texas?
24
A.
No.
25
Q.
Are these the state statutes that are

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53
referenced in your expert report when you cite, on
page 8, when you cite Mr. Kevin Grimes?
A.
Mr. Grimes cited, I believe, seven statutes
that have taken the position that internal
consumption is legitimate.
Q.
And are these the same statutes --
A.
Among the same statutes, yes.
8
9
10
But there are
nearly 20 states that have anti-pyramiding statutes.

Q.
And is it your position that all 20 states
would adopt the same analysis that you do?
11
A.
No.
12
Q.
Which states wouldn't?
13
A.
Off the top of my head, I can't recall, sir.
14
15
16
I haven't practiced law since 1990.

Q.
Can you recall which states would agree with
your position?
17
A.
Not off the top of my head.
18
Q.
Do you know if the Federal Trade Commission
19
20
21
22
23
agrees with your position?

A.
The Federal Trade Commission does not agree
with my position.
Q.
Do you know if the Ninth Circuit Court of
Appeals agrees with your position?
24
A.
I don't know.
25
Q.
But you're not -- let me withdraw that.

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54
1
2
Now, you state on page 5 of your expert

report, the second full paragraph --
MR. STEINBERG:
Excuse me, David.
Are you
using the page numbers on the top of the fax
legend or the bottom of the page?
6
7
MR. FIX:
I'm trying to use the ones on the
bottom.
MR. STEINBERG:
MR. FIX:
10
page 5.
11
BY MR. FIX:
12
Q.
13
Okay.
It's page 5.
I'm sorry.
It's
It's the conclusion of your section on
multi-level compensation plans.
14
A.
Uh-huh.
15
Q.
You state, "The important point here is that
16
binary plans are among the commonly employed plan
17
designs used throughout the legitimate direct sales
18
industry and are not inherently unethical or unlawful
19
as Dr. Vander Nat's opinion expressed in his various
20
declarations in this case imply."
21
Do you know what sentence I'm referring to?
22
A.
Yes.
23
Q.
Can you tell me what specific portions of
24
Dr. Vander Nat's declarations imply that binary plans
25
are inherently unethical?

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55
A.
Actually, he does not take the position that
binary plans in general are inherently unethical, but
the totality of his five declarations, four at the
time I wrote my opinion, is that this plan and the
mechanics and structure of this plan led to unethical
and unlawful behavior and were designed for that
purpose.
8
9
10
Q.
they were designed for that purpose?
He does say
that was the effect of it.
11
12
What in his declaration -- where does he say
Let me ask you another question.
I don't
want to be argumentative.
13
You're not saying that Dr. Vander Nat says
14
that binary plans are inherently unlawful, are you?
15
A.
No, I am not.
16
Q.
He's saying that the BurnLounge plan as
17
implemented resulted in unlawful activity; is that
18
correct?
19
20
A.
I think he is saying more directly that the
BurnLounge plan as designed led to unlawful activity.
21
Q.
And it is your contention that it didn't?
22
A.
It is my contention that it did not.
23
Q.
What facts -- let me withdraw that.
24
So you're not -- you are no longer
25
contending that it's Dr. Vander Nat's position that

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56
binary plans are inherently deceptive?
2
3
MR. STEINBERG:
Are you asking if he's
changing the opinion on page 5?
MR. FIX:
Yeah.
THE WITNESS:
I am not.
BY MR. FIX:
Q.
You're not changing your opinion?
A.
No.
Q.
So you're still contending that
10
Dr. Vander Nat states that binary plans are
11
inherently deceptive or inherently unethical?
12
A.
I'm stating that, in my view, the totality
13
of Dr. Vander Nat's four declarations that I reviewed
14
prior to preparing my opinion were that the binary
15
plan employed by BurnLounge was inherently unlawful
16
and deceptive.
17
Q.
Yeah.
Unethical and deceptive, unlawful.

But you're not contending that
18
Dr. Vander Nat says binary plans in general are
19
inherently deceptive?
20
21
MR. STEINBERG:
MR. FIX:
23
MR. STEINBERG:
25
That's
a clear implication of his reports, David.
22
24
I'm contending that.
Will you let him answer, Larry?

I am, and he did answer.
He
said he hasn't changed the opinion in his report.

MR. FIX:
I'm going to have to ask him the

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57
question over again.
MR. STEINBERG:
MR. FIX:
Go ahead.
Excuse me.
Let me go to another
subject.
BY MR. FIX:
Q.
Now, going on to the next paragraph, the
title is, "The BurnLounge product offerings and
binary compensation program do not constitute an
illegal pyramid scheme."
10
You state that your opinion is based on
11
"...my extensive activities and experience with the
12
development and implication of Direct Selling
13
Association Code of Ethics, the direct selling
14
industry's self regulation program."
15
Can you explain to me what experience you
16
have had with the Direct Selling Association Code of
17
Ethics as relates to pyramid schemes?
18
A.
As counsel for the association from '72 to
19
'76, I was involved not only with the drafting of
20
amendments to the code of ethics but in giving
21
opinions to member companies as to the impact and
22
aspect of the code of ethics.
23
In 1989 to 1991 I chaired the industry
24
ethics and self-regulation committee, which was
25
charged with the purpose of amending the code of

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58
ethics at that time to include consumers of the
opportunity, as well as consumers of the product.
And at that time --
Q.
Let me -- so during the period 1992 --
excuse me, 1972 to 1976, as you previously testified,
as I understand it, the code of ethics didn't have
anything to do with pyramid schemes --
A.
That is correct.
Q.
-- it had to do with product --
10
A.
That is correct.
11
Q.
12
A.
That is correct.
13
Q.
So there's nothing in your '72 to '76
-- misrepresentation?
14
experience when you were employed by DSA that you're
15
relying upon?
16
A.
No, that's not correct.
Obviously we
17
followed the early cases and the early regulatory
18
legislative efforts to curb the abusive practices of
19
pyramiding as part of our responsibilities as counsel
20
for the association.
21
We also were involved in the development,
22
both pro and con, of various anti-pyramiding
23
proposals at the state level.
24
Q.
This is in the period 1972 to '76?
25
A.
Yes.

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59
Q.
And then what -- from '76 on what --
until -- you mentioned -- you mentioned from '89 to
'91 --
A.
Well --
Q.
-- you had some --
A.
-- from the period of '76 to 1990, I was
general counsel of Tupperware Home Parties, a direct
selling company operating within the United States.
And as part of my responsibilities I needed to be
10
familiar with the aspects of pyramiding from both a
11
regulatory and a legal compliance point of view.
12
In 1989 I undertook the task on behalf of
13
the association of amending the Direct Selling
14
Association Code of Ethics to incorporate into it
15
provisions that -- to oppose inventory loading and
16
exaggerated earnings claims.
17
Q.
That was in 1989?
18
A.
Well, it took two years to review the
19
materials and develop the amendments that were
20
ultimately passed by the board directors and
21
incorporated in the code.
22
Q.
Now, during the time you were with
23
Tupperware, there's no pyramid concerns of Tupperware
24
was there?
25
marketing company?
It was -- it wasn't a multi-level

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60
1
2
3
4
5
A.
No.
But many of the early -- well, no, the
answer is no.
Q.
So you weren't concerned with Tupperware
being a pyramid?
A.
No, but I was very concerned with
overreaching regulations that would improperly define
what was or was not an unlawful activity.
8
9
10
11
12
Q.
And you wanted to make sure it didn't -- any
legislation didn't impact Tupperware?

A.
Didn't adversely impact Tupperware, that's
correct.
Q.
Do you know how Direct Selling Association
13
implements its code of ethics, how they -- or what
14
policies and procedures they have adopted to make
15
sure that the -- their members comply with it?
16
A.
Yes.
I have a general familiarity, and it's
17
been a consistent program since the code's inception
18
in 1968.
19
accepted for membership in the trade association, as
20
part of their application process pledges to not only
21
adopt but to uphold the provisions of the code of
22
ethics relative to the practices that are described
23
therein.
24
25
Every member company, when they are
There is an independent code administrator

appointed each year by the board directors who

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61
adjudicates any code complaints that come in from
consumers or field sales representatives, members of
the various field sales independent contractors,
sales people of the various companies, relating to
code violations.
Q.
Do you know if any company has ever been
disciplined for violation of the DSA Code of Ethics
as it relates to operation of a pyramid scheme?
A.
Yes.
10
Q.
Who?
11
A.
In -- well, depends on how you define
12
discipline.
13
membership.
14
Q.
Has anybody ever been expelled or expulled?
15
A.
No, but --
The ultimate is expulsion from the
16
MR. STEINBERG:
17
MR. FIX:
18
THE WITNESS:
Not expelled nor expulled.
Close enough.
It's expulsion from the
19
membership and the turning over of the code
20
administrator's findings to the appropriate
21
regulatory or legal authorities.
22
BY MR. FIX:
23
Q.
That has never happened?
24
A.
That has yet to happen.
25
What does happen frequently is the code

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62
administrator makes an adjudication that either
results in the consumer being made whole or the
company changing or correcting the practice that led
to the violation.
5
6
Q.
And that's happened frequently.
Do you know if any DSA companies have ever
been sued for being unlawful pyramids?
A.
Yes.
Q.
Do you know if Omnitrition was a member of
the Direct Selling Association?
10
A.
They were.
11
Q.
Were they expelled?
12
A.
If -- no, they were not expelled.
13
Q.
Do you know if Equinox International was a
14
member of the Direct Selling Association?
15
A.
They were.
16
Q.
Did the Direct Selling Association take any
17
action with regard to Equinox as a result of being --
18
them being accused of being a pyramid scheme?
19
20
A.
something, which you may not be aware of.
21
22
23
24
25
It would be helpful, I think, if I explain
Are you familiar with the anti-trust

provision of the Norpendington (phonetic) -Q.
Yes.
MR. STEINBERG:
Hold on.
answer his questions, please.
Mr. Luce, just

We don't have to

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63
convince Mr. Fix of anything.
answer his questions.
THE WITNESS:
We just need to
In both the Equinox and the
Omnitrition case, the legal authorities dealt
with the issue.
BY MR. FIX:
Q.
But the Direct Selling Association did not?
A.
Within individual code complaints filed
9
10
11
against the companies, it did.

Q.
How about are you familiar with a company
called Trek Alliance?
12
A.
Vaguely.
13
Q.
Was Trek Alliance a member of the Direct
14
Selling Association?
15
A.
Yes, they are.
16
Q.
Are you familiar with a company called
17
JewelWay?
18
A.
I'm sorry?
19
Q.
Are you familiar with a company called
20
JewelWay?
21
A.
JewelWay?
22
Q.
Yeah.
23
A.
I do not know that company.
24
Q.
Let me direct your attention to page 6 of
25
your expert report, if I could.
In the first full

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64
paragraph you state that, "All agree that the Amway
case in early 70's set many of the precedents that
have been followed in later years and much of
Dr. Vander Nat's analysis and opinion in this case
are derived from the economic analysis of retail
sales first developed and used in that case."
Do you see that statement you made?
A.
I do.
Q.
What's your basis for that statement?
10
A.
The similarity of approach employed in the
11
Vander Nat declaration versus the similarity of
12
analysis and approach that was used in the Amway
13
case.
14
Q.
How are they similar?
15
A.
In the sense that they focused on the
16
question of the retail value, or lack thereof, of the
17
products and services involved.
18
19
20
Q.
In what aspect did the Amway decision focus
on retail value?
A.
The Amway decision didn't have to go there
21
because they determined that it was an
22
inventory-loading situation, among other things, and
23
it was based upon --
24
25
Q.
Let me just -- I don't -- so Amway -MR. STEINBERG:
Well --

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65
BY MR. FIX:
Q.
-- did focus on retail value; is that
correct?
A.
Amway did focus on retail value in the sense
that it was an inventory-loading situation and that
there was not a reasonable degree of probability that
the products could be sold at what they were paid
for.
9
10
Q.
But the Amway -- Amway decision ruled that
Amway was not a pyramid; isn't that correct?
11
A.
That's correct.
12
Q.
And why -- basis of your opinion, why did
13
the court rule that -- let me withdraw that.
14
15
16
Why in the court's decision, in the Amway

decision, focuses on retail value?
A.
Ultimately the Amway decision focused on
17
retail value in the sense of creating what has come
18
to be known as the 70 percent rule.
19
Q.
Can you explain that to me?
20
A.
It related to the idea of what is a retail
21
sale.
22
Q.
23
value?
24
A.
25
How did that have anything to do with retail
It had to do with the question of what --
whether sales were being made at retail, and the

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66
retail -- it had to do with whether the sales were
being made at retail.
3
4
5
6
7
Q.
But not the value of the product; is that
correct?
A.
The question of the value of the product and
the sales related to retail tests are tied together.

Q.
I just -- I don't want to be argumentative,
but I don't understand how they're tied together in
the Amway decision.
10
A.
The basis of the 70 percent rule was the
11
determination that if at least 70 percent of the
12
products were being sold at retail, that the products
13
themselves had a legitimate retail value and that
14
that was the business source of revenue for the
15
business, selling of products with a legitimate
16
retail value.
17
18
Q.
Wasn't the purpose of the 70 percent rule to
prevent inventory loading?
19
A.
Yes.
20
Q.
And you couldn't order any additional
21
products unless you sold -- already sold 70 percent?
22
A.
Correct.
23
Q.
So the function of the 70 percent rule was
24
for -- to guard against inventory loading; is that
25
correct?

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67
A.
That was one of its functions.
Q.
And was the -- was another one of the
Amway defenses the guarantee to buy the products
back?
A.
The refund policy, yes.
Q.
Yes.
And that also protected against retail
loading?
A.
Yes.
Q.
Inventory loading?
10
A.
Yes.
11
Q.
And these so-called Amway defenses don't
12
have anything to do with whether the product has any
13
value, do they?
14
15
16
A.
I guess we will have to agree to disagree on
that.
Q.
So you can have a situation where the
17
product had a considerable amount of value and if
18
there were no buy-back provisions and no 70 percent
19
rule, the courts could still rule that it was a
20
pyramid; is that correct?
21
22
23
A.
I don't think you can give an answer to that
question based simply on those facts.

Q.
So you think you'd have to know more facts
24
in order to determine whether or not a company was a
25
pyramid scheme?

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68
A.
Yes.
Q.
And one of the facts do you think
important -- it's important in making an analysis of
whether or not a company is a pyramid scheme on how
the products are sold, what's being sold?
A.
I think that the first thing that I look at
in determining the viability of any situation is
whether a legitimate product is being sold at a
reasonable price as compared to other products in the
10
11
marketplace.
Q.
Do you look at what the sales presentation
12
is on whether or not a product is being sold or an
13
income opportunity is being sold?
14
A.
Not in relation to the product.
15
Q.
In relation to whether or not a company is a
16
pyramid scheme, do you think it is relevant what the
17
sales presentation is?
18
A.
The sales presentation is not necessarily
19
relevant to whether a company is a pyramid.
20
be relevant for some other issue that relates to the
21
law, but it's not necessarily relevant to whether a
22
company is a pyramid.
23
24
25
Q.
It may
So you don't think you have to look at how
the product is being sold, is that your answer?

MR. STEINBERG:
That's not what he said.

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BY MR. FIX:
Q.
-- pyramid analysis?
MR. STEINBERG:
MR. FIX:
That's not what he said.
Why don't you read back what he
said.
(Record read by the reporter.)
MR. FIX:
BY MR. FIX:
Q.
Let me go to something else.
Let me go back to any initial question
10
before I got sidetracked.
You mentioned that
11
Dr. Vander Nat applies the same analysis as is
12
applied in the Amway opinion.
13
Can you explain to me what -- is there any
14
specific paragraphs or paragraph in his declaration
15
that supports that conclusion?
16
A.
I believe the statement I used that
17
Dr. Vander Nat's economic analysis and opinions are
18
derived from the economic analysis that was applied
19
in the Amway case.
20
identical.
21
Q.
22
23
24
25
I did not say he used the
How do you know how -- what is the source of
Dr. Vander Nat's opinions?

A.
Because his opinions have been relatively
consistent for many years.

Q.
How do you know that?

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A.
I've been aware of Dr. Vander Nat's opinions
relative to multi-level marketing programs and
pyramid programs for some period.
Q.
opinions?
A.
And how are you aware of Dr. Vander Nat's
Because in my course as a general counsel I
was -- I paid attention to what was happening in the
world of pyramiding and business opportunities.
9
10
Mr. Fix, I wonder if we can take a

five-minute break?
11
MR. FIX:
12
MR. STEINBERG:
13
Can we take ten minutes?

Okay.
I have 3:45.
Reconvene at 3:55.
14
15
BY MR. FIX:
16
Q.
Again on paragraph 6 you make the statement,
17
in the year following the Amway decision -- "In the
18
years following the Amway decision the holdings in
19
that case have been applied in a number of follow up
20
cases with some modifications and clarifications as
21
noted in the Defendant's brief in this case."
22
Can you tell me what you mean by that
23
sentence?
24
A.
25
Well, they've taken the basic rulings or the
basic elements of the Amway FTC case and it's

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71
become -- to some extent parts of it have been
doctrine over the years relating to inventory
loading, relating the 70 percent rule, relating to
economic analysis; and various courts at the state
and federal level have followed or modified that
precedent.
Q.
And you go on to say, "...some pyramid
schemes moved away from requiring the purchase of
large amounts of overvalued product inventory to
10
requiring the purchase of various types of overvalued
11
services such as training programs and materials."
12
13
Can you explain to me what this is?

A.
Well, again, this was a practice that some
14
pyramid schemes adopted wherein to avoid some of the
15
inventory-loading issues, they created these sort of
16
non-product-related services, training programs,
17
seminars, how-to business programs on disks and other
18
various types of things to which they applied an
19
unrealistic value, and then used that, the sale of
20
that product, as the method of funding the elements
21
of the scheme.
22
Q.
And you go on to say, "In cases pursued by
23
the FTC, the Vander Nat type of economic retail
24
analysis model was usually employed to smoke out
25
whether there was a real business involved or whether

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72
it was all smoke and mirrors intentionally designed
to hide the fact that there was no real business
proposition here."
4
5
Can you explain to me what you mean by that?

A.
Well, in essence, the type of analysis
Dr. Vander Nat does is useful to help determine one
aspect of a case, and that is whether or not there's
any real economic value or viable marketplace value
to whatever is being purchased by the participants in
10
the scheme that provides the funding for the scheme.
11
It can be a useful diagnostic tool in that
12
regard, and it was particularly useful in cases
13
involving actual inventory loading or pseudo
14
inventory loading like some of these training
15
programs and unrelated retail sale product materials.
16
17
Q.
So, as you say, the Vander Nat analysis can
be a useful diagnostic tool?
18
A.
Correct.
19
Q.
And you then go on to say, "However, there
20
are two weaknesses to the Vander Nat analysis.
21
first is that this analysis stumbles over the issue
22
of self consumption."
23
The
Can you tell me what that means --
24
A.
Well --
25
Q.
-- in your opinion?

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73
A.
Yes.
I believe that Dr. Vander Nat made two
improper assumptions upon which to base, then, his
economic analysis, which led to his opinion that this
was an unlawful pyramid scheme.
The first, as I said, is the issue of
self-consumption.
This particular product and set of
products sold by BurnLounge relating to the music
business has a high degree of comparable products in
the marketplace, and it is a very large business for
10
the consumption of music either as individual
11
products or as packages of products.
12
self-consumption, the legitimate self-consumption
13
factor of this case simply seemed to be ignored by
14
Dr. Vander Nat in creating his economic analysis.
15
And the
He -- well, that's the end of that
16
statement.
17
Q.
Sure.
Now, do you think that a multi-level
18
marketing company that relies 100 percent on
19
self-consumption can be -- is a pyramid scheme?
20
A.
Not necessarily.
21
Q.
Is there some degree of sales outside of the
22
organization that is necessary in order to avoid
23
being called a pyramid?
24
A.
I don't believe so.
25
Q.
So you think that you can have a 100 percent

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74
self-consumption, legitimate, multi-level marketing
company?
A.
Yes, I believe that's possible.
Q.
Now, in the next page you talk about the
event pass on the fourth line down.
A.
Yes.
Q.
Can you tell me what the event pass is?
A.
You're talking about the Live Nation event
pass?
10
Q.
Yes.
11
A.
The event pass was one feature of the VIP
12
package.
13
enabled the holder of the pass to attend Live Nation
14
concert events with special backstage or access
15
privileges not available to regular ticket holders,
16
if I remember correctly, at ten or so concert
17
locations.
18
Q.
19
20
It's one of the products that was sold that
Do you know when the event pass was first
offered by BurnLounge?
A.
I do not recall at what point it was added
21
into the package of products.
22
were continually developing and upgrading the product
23
packages.
24
Q.
25
My memory is that they
You don't remember when the event package
was added; is that correct?

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75
1
2
A.
I do not remember precisely when the event
package was added.
Q.
Do you remember approximately when it was?
A.
No.
Q.
Now, you state in the last sentence of that
paragraph, "Here the convenience of being able to
access all of these products in one place may well be
the driver."
A.
Uh-huh.
10
Q.
Do you have any evidence to base that
11
12
13
14
statement on?
A.
Only in the sense of a general consumer
myself of products.
Q.
But do you have any -- other than just your
15
general personal experience, is there anything in the
16
evidence that you have examined that supports that
17
conclusion?
18
A.
19
20
There's nothing in the evidence that
suggests that conclusion is not reasonable.

Q.
Now, you say in the next paragraph,
21
"...there has been a growing recognition that
22
self-consumption by the sales force is both one of
23
the attractions of network marketing and a reality of
24
the marketplace."
25
Do you recall saying that?

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76
A.
Yes.
Q.
And you give an example, two examples.
One
is Avon.
are self-consumption as opposed to sales to
retailers?
A.
I do not know precisely.
Q.
Do you know approximately?
A.
I would -- this is a general experience with
9
10
Do you know what percentage of Avon sales
other companies, and it would be somewhere between 10

and 30 percent.
11
Q.
Is self-consumption?
12
A.
That is my estimate.
13
14
15
I do not have data
from Avon to support that.

Q.
And the other 80 would be sales to people
outside of the organization; is that correct?
16
A.
Perhaps, yes.
17
Q.
And with regard to Tupperware, what is the
18
19
20
21
22
percentage with regard to Tupperware?

A.
We never had actual survey data, but our
belief was between 7 and 15 percent.

Q.
Was sales within the organization or
self-consumption?
23
A.
Yes.
24
Q.
And 85 percent were sales outside of the
25
organization; is that correct?

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77
A.
We assumed that.
Q.
Now, you say on the next statement -- next
paragraph, "Kevin Grimes noted in his Declaration of
June 26, 2007 that seven states have recognized that
personal consumption is lawful part of a compensation
program."
Do you see that sentence?
A.
Yes.
Q.
Do you know what states they are?
10
A.
I cannot at this moment.
11
Q.
And there are -- how many states have
12
13
14
15
anti-pyramiding laws?
A.
I believe the number is in the 20s.
I don't
know the precise number.

Q.
So if Mr. Grimes is correct that there are
16
seven that recognize personal consumption, the
17
remainder don't recognize personal consumption; is
18
that correct?
19
A.
Not necessarily.
20
Q.
What do you mean "not necessarily"?
21
A.
They may not address the subject at all.
22
Q.
Do you have any knowledge about state laws
23
other than that contained in Mr. Grimes's
24
declaration?
25
A.
No, I was primarily referencing Mr. Grimes's

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78
1
2
3
4
declaration.
Q.
And you don't have any independent knowledge
of what the state laws are; is that correct?

A.
I am aware from reports to the Direct
Selling Association from time to time about the
passage of state laws that recognize the lawfulness
of personal consumption, without recalling the exact
details of which states.
Q.
Other than this general awareness, do you
10
have any specific awareness of any given state
11
statute?
12
A.
No.
13
Q.
Are you aware that a major portion of the --
14
or a large part of the direct selling's lobbying
15
efforts is directed toward getting states to
16
recognize the validity of personal consumption?
17
A.
I am aware that that's one of the issues
18
that the Direct Selling Association supports.
19
percentage of that their effort is, I don't know.
20
21
Q.
What
But you are aware that that's an effort that
they support in various states across the country?
22
A.
Yes.
23
Q.
Now, on the next statement you reference --
24
next paragraph, excuse me, "Mr. Grimes also noted the
25
DSA 1999 study which indicated that 68% of the

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79
individuals that join direct selling companies do so
for non-financial reasons."
Do you have any knowledge of the study
other than what is reported in Mr. Grimes's
declaration?
A.
Yes, I remember it at the time it was made.
Q.
Do you know who prepared that study?
A.
I believe it was part of a Nathan Associates
study, but I'm not certain of that.
We've had the
10
Robert Nathan group do a number of studies over the
11
years.
12
Q.
Do you know which companies did that survey?
13
A.
If I remember correctly, more than half of
14
the Direct Selling Association companies participated
15
in that particular survey.
16
many surveys over the years, and I'm not sure I'm
17
remembering the exact one as to the number that
18
participated.
19
20
Q.
But, again, we've done
Did you look at the study before you
prepared your declaration?
21
A.
No.
22
Q.
So you relied on Mr. Grimes to --
23
A.
I relied on Mr. Grimes's reference of it and
24
my own memory of it and the fact that I conducted
25
similar surveys in many companies that I have managed

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80
over the years.
consistent.
Q.
Do direct selling companies vary in the
amount of -- let me withdraw that question.
5
6
The numbers are reasonably
How many direct selling companies are there

in the country?
A.
We don't really know for certain because
there are so many mom and pop companies.
I believe
the association at this time has between 4- and 500
10
members, and I think I recall at the last meeting
11
that there was something like 100 new company
12
applications.
13
from my part, we don't know the exact number of
14
direct selling --
So the truthful answer is, at least
15
Q.
But there's several hundred of them?
16
A.
More than that.
17
18
19
Probably somewhere between
500 and 1000.

Q.
And these companies offer a wide variety of
different products?
20
A.
Yes.
And more and more services, also.
21
Q.
And are the types of people that are
22
attracted to these companies, do they differ
23
depending upon the company?
24
25
MR. STEINBERG:
Objection.
Vague and
ambiguous.

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81
BY MR. FIX:
Q.
You can go ahead and answer.
A.
Well, different product categories attract
different kinds of people.
interested in health will be attracted to vitamin
products.
will be attracted to clothing companies.
Q.
People that are
People that are interested in clothing
Now, you mentioned that the second faulty
assumption of Dr. Vander Nat "...is that everyone who
10
purchased the BurnLounge Exclusive or VIP product and
11
services package did so solely as a business
12
investment and not for personal consumption
13
purposes."
14
15
16
What facts do you have to base the fact that

this is a faulty assumption?
A.
Basically Dr. Vander Nat's own analysis.
If
17
you look at the ratios that he put forth in his later
18
declarations, suggesting that there were only --
19
there was something like $346 of revenue for every
20
dollar of retail sales.
21
sales the sales of songs and albums.
22
assumption that the other product sales were not
23
related to retail sales, and therefore concludes that
24
they can only be for the purpose of pursuing the
25
business opportunity.
He only counts as retail

He creates the

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82
I mean, that's the only reasonable
assumption you can draw from these charts in that
particular analysis.
Q.
But do you have any evidence that people who
bought the VIP package didn't buy it for a business
investment, any facts that you are aware of?
A.
A certain number of the Mogul purchasers, I
think the number was in the neighborhood of 40
percent, never received any commission whatsoever,
10
never pursued the business opportunity whatsoever.
11
Q.
What -- do you attach any significance to
12
the fact that Dr. Vander Nat stresses that of the
13
40,000 or so VIP packages, only 300-and-some people
14
chose not to participate in the compensation plan?
15
Do you think that's a relevant fact?
16
A.
No.
17
Q.
So you think Dr. Vander Nat overstates the
18
importance of that?
19
A.
I believe he does.
20
Q.
What reason would someone -- let me withdraw
21
22
that.
MR. STEINBERG:
David, are you referring to
23
something specific in Dr. Vander Nat's
24
declaration?
25
number is coming from.
I don't know where the 40,000

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83
MR. FIX:
I think that that's the number of
Mogul purchases, VIP Mogul purchases.
it in his declaration.
MR. STEINBERG:
Okay.
I can find
That's fine.
I just
didn't know if you were talking about something
specific or not.
you're referring to.
MR. FIX:
I recall what
Yeah, I think -- and my
understanding is Mr. Luce -- I don't want to --
10
BY MR. FIX:
11
Q.
12
That's fine.
Let me direct your attention to -- excuse
me.
13
You mention in paragraph -- I think it's the
14
first full paragraph on page 8, the next-to-last page
15
of your declaration.
16
expensive and experienced talent and invested
17
significant amounts of capital to create software
18
products bundled together with other products and
19
services to cater to this audience."
20
21
22
"To that end, the company hired
What expensive and experienced talent did

the company hire?
A.
Primary in the form of software engineers,
23
both freelance and internally, to run their systems.
24
They also bought licenses, they invested in product
25
development.

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84
They typically were pursuing the business
activities of a product-oriented company based upon
the invoices and the expenditures that I reviewed.
Q.
So you base the statement that they hired
expensive and talented talent on the invoices that
you reviewed?
A.
And on the testimony -- on the
declaration -- on the declaration or transcript of
Mr. DeBoer.
10
Q.
Is it Mr. DeBoer, or Mr. Grimes?
11
A.
Mr. DeBoer.
12
Q.
Do you know who Mr. DeBoer was?
13
A.
I believe he's one of the two founders of
14
Mr. Grimes --
the company.
15
No, he was a music guy, as I recall.
16
MR. STEINBERG:
17
Mr. Fix, that Mr. Luce is mistaken.
18
19
I think we can stipulate,
Mr. DeBoer is a co-defendant, Mr. Luce.

He's an independent retailer.
20
BY MR. FIX:
21
Q.
Let me go back, and maybe I can clear
22
something up.
23
discussing that one of the documents you relied upon
24
was the declaration of Rob DeBoer.
25
You mentioned earlier on when we were
Is the declaration you relied on the

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85
declaration of Ryan Dadd?
A.
No.
Q.
So you still say you relied on the
declaration of Rob DeBoer?
MR. STEINBERG:
-- sort of fits the
description you gave a few minutes ago, which is
why Mr. Fix is asking you that question.
8
9
THE WITNESS:
confused the two gentlemen.
10
BY MR. FIX:
11
Q.
12
13
14
15
It's possible that I have
And it's possible you didn't rely upon the
deposition of Mr. DeBoer?

A.
It's possible that I have confused the names
of the two gentlemen, yes.

Q.
And it's possible that you relied upon the
16
declaration of Ryan Dadd in addition to the
17
declaration of Kevin Grimes; is that your testimony?
18
A.
Yes, that is possible.
19
MR. STEINBERG:
David, I can check on that.
20
I'm happy to do so.
21
recall sending Mr. Luce the DeBoer deposition
22
transcript.
23
don't remember doing it.
As I sit here today, I don't
I'm not saying I didn't do it, but I
24
MR. FIX:
I don't think it's a big deal.
25
MR. STEINBERG:
Well, actually, Mr. Dadd had

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86
a lot of information in his declaration, so I'm
actually confused myself now.
think, like I'm presuming you think, that
Mr. Luce got the name wrong.
perhaps.
do that.
7
8
9
10
And I tend to
They're both RD, so
So we should clear this up, and we will
MR. FIX:
That's fine.
I won't belabor the
point.
BY MR. FIX:
Q.
You conclude this paragraph by saying that
11
BurnLounge continued "...developing and enriching its
12
product offerings by adding features and services to
13
enhance the value of the product packages to
14
potential user buyers."
15
No. 7 to Mr. Grimes.
16
17
And you have a footnote
So for this statement are you relying upon

Mr. Grimes's declaration?
18
A.
I am.
19
Q.
Are you relying on anything other than
20
21
22
Mr. Grimes's declaration?

A.
Primarily Mr. Grimes's recommendation (sic)
is my recollection.
23
Q.
And are you aware that Mr. Grimes was an
24
attorney --
25
A.
Yes.

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87
Q.
-- at BurnLounge?
A.
Yes.
Q.
In the next paragraph you contrast
legitimate businesses and pyramids as the company's
focus on products.
What's your basis for stating that just
because you focus on the product that that somehow
makes you not a pyramid scheme?
A.
Generally speaking, pyramid schemes have a
10
short life duration because the abusive practices of
11
the scheme itself are only really attractive to a
12
small segment of the population.
13
Product companies invest for the repeat sale
14
and the brand name acceptance of their product over
15
the long haul and the ability of the sales force to
16
both use the product themselves and sell the product
17
to other people over a long period of time.
18
It has been my experience in viewing the
19
history of pyramid companies that they tend to be
20
limited-product-focus companies, sometimes what we
21
refer to as one-trick ponies; that the focus of the
22
business is not product-oriented, it is on the
23
business opportunity only.
24
25
Q.
But it can be -- you can have companies that
expend an enormous amount of money for products that

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88
can also be a pyramid scheme?
2
3
A.
I'm sorry, I missed -- spend enormous
amounts of money that isn't product?
Q.
That is devoted to producing products that
are still focused on the business opportunity are, in
effect, a pyramid scheme?
A.
It is conceivable that you could have a
company that has both some expenditure in products
and overlaid an inappropriate pyramid scheme on it.
10
Yes, that is conceivable.
11
12
Q.
And it would depend upon the particular fact
of the company and how the company operated?
13
A.
It could.
Not necessarily, but it could.
14
Q.
But in order to determine, wouldn't you have
15
to look at the details of the compensation plan?
16
it's marketed?
17
How they conducted their business?
MR. STEINBERG:
18
How
Objection, compound.
Break
that down, please.
19
BY MR. FIX:
20
Q.
If you have an inquiry whether a company who
21
had invested a lot of money to develop the product
22
was a pyramid scheme, you would have to look at how
23
the company actually operated and practiced, wouldn't
24
you?
25
A.
Yes.

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89
Q.
Now, in the last paragraph on this page, you
state that, "In the BurnLounge program nearly 25% of
the purchasers of BurnLounge are Retailers."
4
5
Can you tell me what that means?

A.
Well, under the way that the compensation
plan was established, they were essentially
individuals who were in -- part of the program had
purchased products for retail but were not
necessarily part of the compensation structure for
10
business investment purposes or for business pursuit
11
purposes.
12
Q.
So you're defining retailers as people who
13
had purchased products but who had not decided to
14
become Moguls.
15
A.
Is that your definition of retailers?
I'm basically defining retailers in this
16
context as people who do not appear to be motivated
17
by the opportunity to enroll others.
18
19
20
Q.
And how do you arrive at the 75 to -- 25
percent figure?
A.
Excuse me.
The 25 percent figure, I believe, was
21
mentioned in several of the other declarations,
22
including -- and I'm going from memory here --
23
Mr. Grimes's declaration.
24
25
Q.
Other than Mr. Grimes's declaration, do you
have any indication of the fact that 25 percent of

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90
1
2
the purchasers of BurnLounge are retailers?

A.
I primarily -- I primarily relied upon
Mr. Grimes's recollection -- Mr. Grimes's
declaration.
Q.
Have you examined any financial record of
BurnLounge to verify the truth or falsity of that
statement?
A.
I have not.
Q.
Do you know how many of the people you
10
define as retailers purchased product packages?
11
A.
I do not.
12
Q.
Do you know if any of them did?
13
A.
I do not.
14
Q.
Did you ever attempt to determine for these
15
25 percent of the retailers if they purchased product
16
packages?
17
A.
No, I did not.
18
Q.
Do you think that's an important inquiry?
19
A.
Not necessarily for the purpose of the point
20
I was making.
21
Q.
What point is that point you were making?
22
A.
That a significant number of people were
23
involved with BurnLounge that had no interest in
24
enrolling others.
25
Q.
You think that's 25 percent?

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91
A.
I'm suggesting that the number of people
involved as a percentage, according to Mr. Grimes, as
25 percent were in the category called retailers.
4
5
Q.
Do you know how many of these retailers did
nothing other than purchase music?
A.
I do not.
Q.
Is that a relevant consideration for you?
A.
Not necessarily.
Q.
Do you know what percentage of people who
10
purchased packages didn't enroll in the compensation
11
program by becoming a Mogul?
12
A.
I do not.
13
Q.
Do you think that's an important inquiry?
14
A.
No.
15
Q.
Why not?
16
A.
Because I believe the entire fundamental
17
assumption used in the Vander Nat analysis is that
18
the basic packages, whether it's basic VIP --
19
exclusive or VIP, were not retail products that had a
20
reasonable retail value.
21
underlying faulty assumption behind Dr. Vander Nat's
22
analysis.
23
to those packages, Dr. Vander Nat's analysis falls
24
apart.
25
Q.
That, I believe, is the
If you grant retail value and consumption
In your opinion?

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92
A.
In my opinion.
Q.
What is the basis of your opinion that the
3
4
product packages had value?

A.
My own knowledge based on my own research,
which is not extensive, and I'm certainly not an
expert, in the music products and services business
available online through other sources; as well as
being a concert-goer myself, a rather extensive
concert-goer, the value of apparent access and
10
savings of an event pass; and the cost of setting up
11
a retail operation online, which is what the basic
12
package provided.
13
Q.
Is there anything else?
14
A.
I'm not an expert in the value.
15
Q.
Have you ever viewed the BurnLounge
16
University?
17
A.
18
19
20
Briefly some -- in the description of it.
have not actually gone online to participate in it.
Q.
Can you -- how would you go online to
participate in it?
21
A.
At this stage I don't think I can.
22
Q.
Could you at any point in time?
23
A.
No, I could not as -- I could not have.
24
Q.
So you don't know what is in the BurnLounge
25
University?

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93
A.
I do not know.
Q.
You don't know if it has any value or not
because you never looked at it?
A.
That's correct.
Q.
The event pass -- you're from Asheville,
North Carolina.
A.
That's correct.
Q.
Would the event pass be of any particular
9
10
11
12
13
use to you to attend a concert in Los Angeles?

A.
Potentially, yes.
I've traveled all over
the country over the years to attend concerts.

Q.
Do you know what BurnLounge paid to acquire
the event pass?
14
A.
No.
15
Q.
Do you think that's relevant?
16
A.
No.
17
Q.
You don't think that's relevant to assessing
18
19
the potential retail value of -A.
I think the only thing that's relevant to
20
assessing the retail value is what a similar type of
21
product or program might go for in the marketplace.
22
23
24
25
Q.
Do you know what similar type of program
might go for in the marketplace to the event pass?

A.
Backstage concert event passes can go
anywhere from 100 to $1000 apiece, if you can get

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94
them.
Getting them is often the problem.
Q.
Do you know what BurnLounge sold them for?
A.
They were part of the package of the VIP
4
5
6
7
8
9
10
package.
Q.
Do you know what they sold them for
individually?
A.
I do not recall what they sold them for
individually.
Q.
But they did sell them individually, to the
best of your recollection?
11
A.
No, I don't believe so.
12
Q.
You mentioned that also in this paragraph,
13
"Kevin Grimes declaration provides a reasonable way
14
to think about the cumulative value of each of the
15
product packages."
16
Do you see that?
17
A.
Yes.
18
Q.
What part of Grimes's declaration provides
19
20
that?
A.
I don't have the document in front of me,
21
but my recollection is that he went down through a
22
discussion of the products and the various
23
availability of such products in the marketplace.
24
25
Q.
And so in your expert report you're relying
upon Mr. Grimes's discussion?

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95
A.
And my own knowledge and understanding of
the products and services available in the
marketplace.
Q.
Now, you mentioned in the last sentence,
"The fact that Retailers can convert to Moguls at any
time without ever buying an Exclusive or VIP package
and that Moguls can qualify for bonuses without
selling Exclusive or VIP packages certainly
undermines that position."
10
11
12
Now, can a retailer convert to a Mogul if he

hadn't bought a product package?
A.
He has to buy the -- he has to pay the Mogul
13
fees.
14
remember, quite frankly.
15
read the last iteration of the compensation plan.
16
believe he had to buy the VIP packages as well at
17
that point.
18
later economic decision.
19
20
21
22
23
Q.
And I believe at that stage -- I'm trying to

It's been some time since I
I
But to me that's a subsequent and a
So a person couldn't convert to a Mogul at
any time without buying a package?

A.
I cannot recall precisely if that was the
case or not.
Q.
You mention in your last page, "As mentioned
24
earlier, Dr. Vander Nat's economic analysis
25
methodology was first developed to help diagnose the

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96
presence of inventory loading violations."
2
3
What do you base that statement on?

A.
I base it on my own interpretation of the
development of anti-pyramiding positions on the basis
of the FTC over the last essentially 30 years, and
that many of the factors and elements that were
raised in looking at inventory-loading issues and
whether or not they were genuine retail products, had
legitimate economic value in the marketplace, are
10
similar to the arguments that Dr. Vander Nat puts
11
forth in this analysis.
12
Q.
Are you aware of the fact that the Federal
13
Trade Commission has brought several pyramid cases
14
involving multi-level marketers where inventory
15
loading is not an issue?
16
A.
Yes.
17
Q.
And are you aware that Dr. Vander Nat has
18
provided expert declarations in these cases?
19
A.
Yes.
20
Q.
So I guess I'm confused about why you say
21
that inventory loading is an integral part of
22
Dr. Vander Nat's analysis.
23
A.
Because I believe that Dr. Vander Nat has
24
basically one analytical approach that he tries to
25
squeeze into any set of facts that he looks at.
And

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97
in this case the analytical approach is premised on
the idea that the products -- the basic, the VIP, and
the exclusive products -- are not legitimate retail
products, that the buyers of those products are not
legitimate retail consumers, and that the products
themselves have no legitimate retail value in the
marketplace.
on all of those assumptions.
9
10
11
Q.
And I believe he is fundamentally wrong
But your disagreement with Dr. Vander Nat
has nothing to do with inventory loading?

A.
I believe that the analysis that
12
Dr. Vander Nat employs was originally employed as a
13
method of smoking out inventory loading and the
14
related aspect of valueless products or services
15
being used with no retail value to fund the pyramid
16
activity.
17
in each case that he approaches and tries to make the
18
facts of the case fit his preconceived notion.
19
you look at the analysis he does in his declarations
20
relating to the value supposedly of revenue versus
21
retail sales, you see the -- you see the problem that
22
I'm pointing to.
23
I believe he applies that similar analysis
If
The only way that analysis of his holds up
24
is if you grant to -- if you do not grant two things:
25
One, that there is legitimate consumption of

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98
the products by the BurnLounge participants
themselves, that they wanted the products simply for
what the products offered as products, and these
products had retail value.
And two, that the only reason anybody bought
a product was to pursue the economic opportunity of
the business.
8
9
10
And I believe that is his theory.
I can't find anything in the facts to

support that theory.
Q.
Now, you state in the last sentence of this
11
paragraph, "He artfully tries to build his analysis
12
around both of those propositions, but they just do
13
not stand up under scrutiny considering the evidence
14
and testimony in this case."
15
16
17
Can you tell me what evidence there is that

supports your statement?
A.
There is evidence and testimony in the case
18
as to the value of the products that are being
19
offered.
20
21
Q.
What evidence and testimony do you rely
upon?
22
A.
I rely upon primarily the statements of
23
Mr. Grimes.
24
into the development of the products -- and it could
25
be that I meant to talk about Mr. Dadd's declaration
It may be the investment that was put

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99
as opposed to Mr. DeBoer's -- but he went into
extensively how these products were developed, and
then I go into my own experience and knowledge of
buying music-related products and services.
5
6
Q.
And that is the evidence that you're relying
upon?
A.
Yes.
Q.
How about the testimony?
9
10
What testimony are
you relying upon?

A.
Again, the testimony of the declaration of
11
Mr. Grimes, the declaration of Mr. Dadd, if that's,
12
in fact, who it was.
13
14
Q.
And that would primarily be it.
So the evidence and testimony are the
declarations of Grimes and Dadd; is that correct?
15
A.
Yes.
16
Q.
And nothing else?
17
A.
I'm not aware of everything else that might
18
19
20
21
22
be in the record, but that's what I relied upon.

Q.
That's -- but you can only base your
opinions upon what you are aware of; is that correct?

A.
Yes, including my own investigation as to
what's available.
23
Q.
In the marketplace?
24
A.
In the marketplace.
25
MR. FIX:
I think I'm done.
Can you give me

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100
about two minutes?
MR. STEINBERG:
MR. FIX:
at this time.
going to supply us with certain discovery with
regard to Mr. Luce.
MR. STEINBERG:
Sure.
I don't have any further questions

However, I believe you guys were
I haven't reviewed the
response to document request in detail.
My
10
impression, David, is that we were supposed to
11
send you Mr. Luce's retainer letter and his bill
12
he's rendered --
13
MR. FIX:
14
production --
Yeah, we also have a document
15
MR. STEINBERG:
16
MR. FIX:
I understand.
-- request, and I think
17
Ms. Caldren (phonetic) was handling that in your
18
office --
19
MR. STEINBERG:
20
MR. FIX:
That's right.
-- and was supposed to get us
21
yesterday some documents, and we haven't received
22
anything.
23
MR. STEINBERG:
First of all, if you're
24
suggesting that you want the right to reconvene
25
the deposition based on subsequently-produced

(301) 870-8025 - www.ftrinc.net - (800) 921-5555
101
documents, I have no problem with that.
2
3
MR. FIX:
The chance of me wanting to do it
is very slight -- that possibility.
MR. STEINBERG:
David, I just don't want to
mislead you.
but I am informed by the people in Los Angeles
that there were substantial objections interposed
based on the timeliness of the document request.
And my impression is that they were providing the
10
bill on the engagement letters and not much more,
11
but I could be mistaken on the scope of the
12
objections.
13
MR. FIX:
I haven't looked at them carefully,
I think you are.
I think you
14
generally objected, but then you said you were
15
going to provide everything.
16
MR. STEINBERG:
Well, then that's what's
17
being worked on.
18
reconvening with respect to any additional
19
documents that are produced.
20
21
MR. FIX:
So I have no problem with your
Okay.
Subject to that, that's
fine.
22
And I want to thank you very much, Mr. Luce.
23
THE WITNESS:
I did want to make one further
24
statement, if I might, in answer to one of your
25
questions.

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102
MR. FIX:
Sure.
THE WITNESS:
That's fine.
Well, you asked, you know,
what I relied upon in reaching my conclusion for
my last statement.
But subsequent to my submitting my report,
I've had the opportunity to review the statements
of Dr. Larry Chonko and David Nolte as
to the economic value of the products, and I
believe their statements pretty much confirmed my
10
own opinion and the other evidence and testimony
11
in the case.
12
MR. FIX:
That's fine.
13
MR. STEINBERG:
We'll ask the court reporter
14
to mail us the transcript.
We'll get the
15
transcript signed and let you know if Mr. Luce
16
makes any changes.
17
MR. FIX:
18
And can we get an ASCII copy tonight?
19
(Deposition concluded at 4:47 p.m.)
Okay.
20
21
22
23
24
25

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103
STIPULATIONS
2
3
IT WAS STIPULATED BETWEEN counsel for the
respective parties, with the consent of the witness,
that reading and signing of the foregoing deposition
by the witness be reserved.
7
8
9
10
THEREUPON, the deposition of

WAYNE ALAN LUCE, taken at the instance of the
Plaintiff, was concluded at 4:47 p.m.
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25

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104
CERTIFICATE OF REPORTER OATH
2
3
STATE OF FLORIDA
COUNTY OF POLK
5
6
I, the undersigned authority, hereby certify
that the witness named herein personally appeared
before me and was duly sworn on November 5, 2008.
9
10
11
WITNESS my hand and official seal this

7th day of November 2008.
12
13
14
15
16
________________________________________
17
LORETTA LEE, FPR
18
NOTARY PUBLIC - STATE OF FLORIDA
19
MY COMMISSION NO.:
20
EXPIRES:
21
SCLAFANI WILLIAMS COURT REPORTERS, INC.
DD 802826
AUGUST 12, 2012
22
23
24
25

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105
REPORTER'S DEPOSITION CERTIFICATE
2
3
STATE OF FLORIDA
COUNTY OF POLK
5
6
I, Loretta Lee, Florida Professional Reporter
and Notary Public in and for the State of Florida at
large, hereby certify that the witness appeared
before me for the taking of the foregoing deposition,
10
and that I was authorized to and did stenographically
11
and electronically report the deposition, and that
12
the transcript is a true and complete record of my
13
stenographic notes and recordings thereof.
14
I FURTHER CERTIFY that I am neither an
15
attorney, nor counsel for the parties to this cause,
16
nor a relative or employee of any attorney or party
17
connected with this litigation, nor am I financially
18
interested in the outcome of this action.
19
20
DATED THIS 7th day of November 2008 at

Lakeland, Polk County, Florida.
21
22
23
24
_______________________________________
Loretta Lee, FPR
SCLAFANI WILLIAMS COURT REPORTERS, INC.
25

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106
CERTIFICATE OF DEPONENT
2
3
I hereby certify that I have read and
examined the foregoing transcript, and the same is a
true and accurate record of the testimony given by
me.
Any additions or corrections that I feel
are necessary, I will attach on a separate sheet of
paper to the original transcript.
10
11
__________________________
12
WAYNE ALAN LUCE
13
14
I hereby certify that the individual
15
representing himself/herself to be the above-named
16
individual, appeared before me this ____ day of
17
______________, 2008, and executed the above
18
certificate in my presence.
19
20
NOTARY PUBLIC IN AND FOR
21
22
MY COMMISSION EXPIRES:
23
24
25

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107
WITNESS:
WAYNE ALAN LUCE
DATE:
CASE TITLE:
NOVEMBER 5, 2008
FTC v. BURNLOUNGE, INC., ET AL.
4
5
Please note any errors and the corrections thereof on
this errata sheet.
any change or correction.
"To correct stenographic error," or "To clarify the
record," or "To conform with the facts."
10
PAGE
LINE
The rules require a reason for
CORRECTION
It may be general, such as
REASON FOR CHANGE
11
12
13
14
15
16
17
18
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20
21
22
23
24
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(301) 870-8025 - www.ftrinc.net - (800) 921-5555

Luce Deposition

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Luce Deposition

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1

WAYNE ALAN LUCE

Called by the Plaintiff:

DIRECT EXAMINATION BY MR. FIX

CERTIFICATE OF REPORTER OATH

REPORTER'S DEPOSITION CERTIFICATE

(Exhibits 1 - 358 previously marked.)

Expert Report of Wayne Alan Luce

For The Record, Inc.

UNITED STATES DISTRICT COURT

FEDERAL TRADE COMMISSION,

BURNLOUNGE, INC., a corporation;

DEPOSITION OF WAYNE ALAN LUCE

Taken on Behalf of the Plaintiff

Wednesday, November 5, 2008

2:02 p.m. - 4:47 p.m.

Renaissance Hotel Orlando

STENOGRAPHICALLY REPORTED BY:

For The Record, Inc.

Counsel for Plaintiff:

Counsel for Defendants:

For The Record, Inc.

(Deposition Exhibit No. 359 marked for

I'd like to state for the record

that this is a deposition of Wayne Alan Luce

being conducted in the case Federal Trade

Commission versus BurnLounge, Inc. et al., civil

number CV 07 3654 GW, brought in the United

States District Court, Central District of

California, Western Division.

The deposition is being held at the Ramada

Renaissance motel, a conference room in Orlando,

My name is David Fix.

I'm an attorney with

the Federal Trade Commission, and I'm conducting

this deposition telephonically.

Would the other parties note their

Lawrence Steinberg for

defendants BurnLounge, Inc. and Juan Alexander

Wayne Alan Luce.

For The Record, Inc.

WAYNE ALAN LUCE,

called as a witness by the Plaintiff, having been

first duly sworn, testified as follows:

Mr. Luce, could you give me your address,

7 South Point Drive, Asheville,

North Carolina 28804.

And, Mr. Luce, could you describe for me

your educational background.

I have 12 years of public school education;

an undergraduate degree in history; a juris doctorate

degree from Vanderbilt School of Law, Vanderbilt

University; and a master's in business administration

from the Crummer School of Business, Rollins College,

Winter Park, Florida.

When did you receive your bachelor's degree?

And can you describe for me your master's

Master's in business administration under an

executive MBA program from the years 1984 to 1986.

It was a general business executive -- executive MBA

For The Record, Inc.

And what college was that again?

The Crummer School of Business at Rollins

College, Winter Park, Florida.

And when you were an undergraduate, did you

ever take any courses in economics?

Did you ever take any courses in statistics?