Sunday, April 22, 2007

Insufficient Presale Disclosures Violated FTC Franchise Rule

This posting was written by Pete Reap, editor of CCH Business Franchise Guide.

Two corporations and three individual officers and directors of the corporations violated the FTC franchise rule by making insufficient disclosures to prospective purchasers of public access Internet kiosks sold by the companies, a federal district court in Miami has ruled.

The defendants were jointly and severally liable to purchasers of the business, for varying portions of the more than $48 million defrauded from purchasers of the businesses.

The business ventures sold by the defendants were "franchises" under the meaning of the rule, according to the court. The defendants provided some prospective purchasers with a Franchise Disclosure Document, acknowledging in the document itself that the kiosk businesses were business opportunity ventures subject to the franchise rule.

Salespersons for the companies made material representations that, in exchange for a payment of $9,000 to $100,000 (depending on the number of kiosks purchased), consumers would receive kiosks that would each generate, at the very minimum, income from $1,000 to $2,000 per month.

In actuality, none of the 31 consumers who provided declarations in the litigation achieved even close to the earnings promised by the defendants, the court noted. There was no evidence indicating that any purchaser had recouped even his initial investment, within the first year as promised, or at all.

The disclosure documents provided by the defendants were deficient in violation of the rule in several ways, the court held. Specifically: (1) they did not include the names and business experiences of current directors and officers of the companies for the previous five years; (2) they did not disclose the range of time that had elapsed between the signing of the franchise agreement and site selection; and (3) they did not include a reasonable basis for earnings claims made to prospective purchasers during oral sales presentations, in written solicitations.

The case is FTC v. Transnet Wireless Corp., DC Fla., CCH Business Franchise Guide ¶13,563.

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