Federal Trade Com'n v. Minuteman Press

• Decision Date: 05 October 1998
• Docket Number: No. 93-CV-2496 (DRH).,93-CV-2496 (DRH).
• Citation: 53 F.Supp.2d 248
• Parties: FEDERAL TRADE COMMISSION, Plaintiff, v. MINUTEMAN PRESS, et al., Defendants.
• Court: U.S. District Court — Eastern District of New York

Page 248

53 F.Supp.2d 248

FEDERAL TRADE COMMISSION, Plaintiff, v. MINUTEMAN PRESS, et al., Defendants.

No. 93-CV-2496 (DRH).

United States District Court, E.D. New York.

October 5, 1998.

COPYRIGHT MATERIAL OMITTED

Patricia S. Howard, Paul H. Luehr, John A. Singer, Washington, DC, Ronald L. Waldman, New York City, for plaintiff.

Herz & Ryder, Farmingdale, New York, by Edward B. Ryder, Quadrino & Schwartz, P.C., Garden City, New York, by Richard J. Quadrino, Evan S. Schwartz, for defendants.

MEMORANDUM AND ORDER

HURLEY, District Judge.

INTRODUCTION

The Federal Trade Commission ("FTC" or "Commission") commenced the present action to halt alleged deceptive practices in the sale of Minuteman Press International, Inc. ("Minuteman") print shop franchises and Speedy Sign-A-Rama, U.S.A., Inc. ("Speedy") sign-making franchises.

In its complaint, the FTC alleges that defendants violated (1) Section 5(a) of the Federal Trade Commission Act (the "FTC Act"), 15 U.S.C. § 45(a), which prohibits "unfair or deceptive acts or practices in or affecting commerce," and (2) the FTC's Trade Regulation entitled "Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures" ("Franchise Rule" or the "Rule"), 16 C.F.R. Part 436, by:

a. falsely representing to prospective franchisees that they would achieve specific gross sales levels;

b. falsely representing to prospective franchisees that one-third of their gross sales would be profit;

c. failing to disclose to prospective franchisees, before mid-1991, that defendants imposed on franchisees a substantial transfer/training fee upon the assignment or sale of franchises;

d. making earnings claims concerning gross sales and profit levels to prospective franchisees without having contemporaneous substantiating documentation, and without providing earnings claims documents; and e. making earnings claims to prospective franchisees in contradiction to the express statement in defendants' general disclosure documents that defendants do not make earnings representations.

The relief sought includes, inter alia, issuance of a permanent injunction and redress for consumers allegedly harmed by defendants' activities.

The Court bifurcated the trial. The first phase of the trial addressed defendants' liability and plaintiff's request for injunctive relief. The second phase of the trial will address the amount of redress, if any.

The purpose of this decision is to provide Findings of Fact and Conclusions of Law, pursuant to Federal Rule of Civil Procedure ("Rule") 52, and to direct the entry of a judgment for a permanent injunction pursuant to Rule 58.

FINDINGS OF FACT

1. Gross Sales Representations Made by Defendants to Prospective Minuteman and Speedy Franchisees

The marketing of Minuteman and Speedy franchises during the time frame alleged in the complaint commonly entailed gross sales claims being made by defendants to prospective franchisees. The record is replete with credible evidence compelling that conclusion, including:

a) The Tucson, Arizona Tape. On January 9, 1993, an investigator for the Arizona Attorney General, posing as a prospective franchisee at a business opportunity show in Tucson, Arizona, secretly taped a sales presentation made to him by two upper-echelon Minuteman employees, viz., Gary Rockwell and Jeff White. Mr. White provided a narrative overview of Minuteman by citing the monthly sales figures realized by a number of stores, including some "doing well over $150,000 to $200,000 a month," (Pl.'s Ex. 20 at 9; Pl.'s Ex. 21),¹ with Mr. Rockwell cautioning that "[w]hat is typical or average is about $30,000 monthly gross sales." (Pl.'s Ex. 20 at 12.)

b) Gross Monthly Minuteman Sales Figures Given to Trial Witnesses. The sales presentation given by Messrs. White and Rockwell was not an aberration from what typically was said by Minuteman representatives at business opportunity shows and in other sales settings. Among the witnesses called by the Commission who were furnished with specific Minuteman sales information as prospective franchisees were, inter alia: (1) William Beasom — "30 thousand dollars in sales for my operation would be no problem," (Tr. at 196); (2) Dale Sekovich, an undercover FTC investigator, acting as a prospective franchisee, was told by two Minuteman executives at a business opportunity show in Anaheim, California that he "could make 30 to 35,000 per month gross [sales] after the first year," (Tr. at 1058-59, 1069); and (3) Jim Karlson — "he said Minuteman stores generally do about $30,000 a month," (Tr. at 1956).

c) Paravate Testimony Re Speedy Sales Script. Richard Paravate, a long-term associate of Roy Titus and a former vice president of Speedy, testified about the Corporation's standard sales presentation for business opportunity shows. Indeed, he produced the script. (Pl.'s Ex. 110.) In that highly detailed six page document, which concludes with the comment "Be sure to shake EVERYBODY's hand," the salesperson is instructed to advise prospective franchisees that Speedy opened its "first pilot [company] store in late 1986" in an "average type of town" and "did over $20,000 in sales" in the second month of operation. (Id. at unnumbered p. 4.)

Mr. Paravate testified that the script was to be followed exactly. (Tr. at 3010 ("[Y]ou follow it to a T. You don't deviate.").) d) Gross Monthly Speedy Sales Figures Given to Trial Witnesses. The script for use at business opportunity shows apparently had a counterpart for use in other sales situations, as evidenced by, inter alia, the testimony of the following witnesses called by the Commission: (1) Roger Varney — told by Regional Vice President Jay Hanley that "many stores are doing sales up to 20,000 by the end of the year and get off fairly quick," (Tr. at 816); and by defendant Roy Titus — "many stores [are] doing up to $20,000 by the end of the first year," (Tr. at 824); (2) Lois Hamilton — "within a year we should be making $25,000 a month in gross sales," (Tr. at 1670); (3) Robert Storey — "the typical stores were doing twenty to thirty thousand dollars a month in gross sales after two or three months," (Tr. at 574); and (4) Thomas Mohr—"Mr. [Raymond] Titus told me I could expect to do sales of 20 to $25,000 per month, and that I would reach these levels in approximately six to nine months," (Tr. at 6301).

2. Profit Representations Made by Defendants to Prospective Minuteman and Speedy Franchisees

In addition to furnishing prospective franchisees with gross monthly sales figures, Minuteman and Speedy often made profitability claims, usually along the following lines: Franchisees could expect that one-third of gross sales would be for fixed costs, one-third would be variable costs, and one-third would be profit. The evidence that such representations were made is formidable, including:

a) Paravate Testimony Re Speedy Sales Script. The Speedy script includes:

We were spoiled with the high-profit potential in the printing business. The industry's rule is 1/3, 1/3 and 1/3. In other words, a store doing $30,000 a month in sales should net $10,000 in profits. We don't really adhere to that because we have seen material costs as high as 38% and as low as 22%. We feel that in the sign industry the profit margin is as good, if not a little better than in printing.

(Ex. 110 at unnumbered p. 4.)

b) Minuteman Profitability Claims Made to Trial Witnesses. The following witnesses, inter alia, were recipients of profitability claims made by Minuteman representatives: (1) Donald Alexander — "[h]e actually put it down on a napkin, wrote it out. One-third, one-third, one-third. And also after four months I should be turning a profit," (Tr. at 2373); (2) Terry Pizzuto — "he again told us that the way it was working is that you will achieve $30,000 in a very short period of time. One-third of what the shop made would be profit," (Tr. at 2473); (3) Pamela Phillips — "[h]e said we could expect about 25 to 30,000 the first year, and at 16,000 we would start making a profit. It would break down to a third, a third, a third," (Tr. at 1568); (4) Jim Karlson — during a visit at Minuteman's home office on Long Island, he was told — in Roy Titus's presence if not by Mr. Titus himself — that "the break out was ... a third, a third and a third," (Tr. at 1971); and (5) Joseph Paradiso —in describing the frequency with which the one-third, one-third, one-third breakdown was mentioned to him — testified "[i]t was many, many times. It was like the bible. It was thrown out to me over and over. Many times," (Tr. at 373).

c) Speedy Profitability Claims Made to Trial Witnesses. The following witnesses, inter alia, were recipients of profitability claims made by Speedy representatives: (1) Roy Ashkenaz — he was told that one-third of gross sales would be profit by Regional Vice President Bob Emmett, (Tr. at 1083), and by defendant Roy Titus, (Tr. at 1096); (2) Lois Hamilton — "[m]y husband and I wanted to know from Mark [i.e., Regional Vice President Mark Johnson] what we could expect if we made an investment in the sign company and Mark said that within a year we should be making 25,000 a month in gross sales. And based on that figure, that it would break down to be about a third, that it would break down to be a third materials and labor costs, a third overhead, and a third profit," (Tr. at 1670); (3) Thomas Pitner — was told at a business opportunity show in Atlanta by Speedy Regional Vice President Bill Lewis "that the stores that were opening up at that time were doing $20,000 worth of volume a month the first month, and he said that you could realize a third, a third, a third in terms of the profits," (Tr. at 3231); and (4) Robert Storey— "[h]e said that they had determined that their sales dollar was broken down by one-third materials and supplies, one-third overhead, and one-third profits," (Tr. at 567).

3. Conclusions Re Gross Sales and Profitability Claims Made by ...