Saturday, May 19, 2007

Seller of Web Design Businesses Banned from Franchising

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

A company that sold franchises for Web site design and promotion services to businesses and the company's owner have agreed to refrain from promoting or selling franchises or business opportunities in order to settle Federal Trade Commission charges that they violated the Commission's franchise disclosure rule.

Under the terms of a final judgment entered by the federal district court in Miami, the company and its owner were also required to pay $160,000, which will be used for consumer redress.

According to a complaint filed in August 2005, the defendants sold franchises to market Web site promotion software and services to small and medium-size businesses under the "Netspace" trademark. The defendants' Web site suggested that a prospective franchisee would earn substantial amounts of money, the FTC alleged.

High Profitability, Proprietary Software

In their sales campaign, the defendants represented that their Netspace franchises were highly profitable because the defendants had developed propriety software and provided design, consulting, and other services that would be easy for Netspace franchisees to sell to their future small-to-mid-size business clients.

A "final high-pressure sales push" culminated in the disclosure that the prospective franchisee had been "awarded" a Netspace franchise at a cost ranging from $30,000 to $100,000 for a master franchise, according to the FTC's complaint.

Alleged Misrepresentations, Violation of Franchise Rule

The agency claimed that a consumer who purchased the franchise was not likely to earn substantial income and that the defendants' representations about their software were false and misleading. In addition, the FTC alleged that the defendants violated the Commission's franchise disclosure rule by failing to provide prospective franchisees with complete and accurate disclosure documents.

The company's owner was subject to an injunction prohibiting deceptive conduct in violation of the FTC Act, and this fact was not disclosed to prospective franchisees. The defendants also violated the Commission's franchise rule through their earnings claims to prospective franchisees, according to the agency.

The case is FTC v. Netfran Development Corp., FTC File No. 042 3225. The May 15, 2007 final judgment and a news release appear at the FTC website.

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