North American Marketing Systems, Inc., based in Colorado, and its owner, Patrick Wherley, have agreed to pay a $33,000 civil penalty to settle Federal Trade Commission charges that they failed to provide the pre-sale disclosures required by the FTC's Franchise Rule to prospective purchasers of their gumball vending machine business opportunities. The Department of Justice ("DOJ"), at the request of the FTC, filed a suit against the defendants as part of "Project Biz-illion$," a nationwide crackdown on fraudulent business opportunities. Under the terms of the settlement, the defendants are also prohibited from violating the FTC's Franchise Rule and making false and misleading representations in connection with the sale of business opportunity ventures.
The settlement announced today ends the litigation in this case, which was among 22 cases the FTC referred to the DOJ for filing as part of "Project Biz-illion$," a multi-prong state/federal attack on business opportunity scams. This case, like most of the "Project Biz-illion$" actions, was launched against defendants who advertised in the classified section of daily newspapers to peddle payphone, vending machine, display rack, and work-at-home scams.
According to the FTC, the defendants, located in Littleton, Colorado, promoted and sold gumball vending machines that resemble antique gas pumps. The defendants' advertisements contained statements such as:
Local Vending Route
Only $4995 Invest."
When potential investors called the toll-free number listed in the ads, they were sent a package of promotional materials, including an introductory letter, a publication entitled "Vending ... The Good Life!," a purchase agreement, an audio tape entitled "Vending Overview," and samples of gourmet gumballs. The company offered consumers four different purchase plans: Plan A consisted of eight gumball machines for $9,495; Plan B -- 16 machines for $16,995; Plan C -- 24 machines for $24,995; and Plan D -- 32 machines for $32,000. Prospective purchasers were told that because of the novelty of the gumball machines, they would be able to obtain prime vending locations.
The FTC alleged that the defendants' promotional materials included claims of specific earnings that prospective purchasers could expect to achieve from each vending machine. However, according to the FTC's complaint, the defendants failed to provide prospective purchasers with an earnings claim document providing written substantiation for the defendants' earnings claims, including the number and percentage of prior purchasers who had earned that much, as the Franchise Rule requires. The complaint also alleged that the defendants failed to provide prospective purchasers with a basic disclosure document that included the names, addresses, and telephone numbers of prior purchasers, as required by the Franchise Rule, to help potential purchasers protect themselves from false profitability claims.
In addition to the civil penalty, the settlement prohibits future violations of the Franchise Rule; false and misleading representations in connection with the sale of business opportunities; and the sale of the defendants' customer lists. The settlement, which requires the court's approval, also contains various recordkeeping and reporting requirements designed to assist the FTC in monitoring the defendants' compliance.
The Commission vote authorizing staff to refer the proposed settlement to the Department of Justice for filing was 5-0. The stipulated judgment and order was filed in the U.S. District Court for the District of Colorado, in Denver, and approved by the court on May 18, 2001.
NOTE: This stipulated judgment and order is for settlement purposes only and does not constitute an admission by the defendants of a law violation. Consent judgments have the force of law when signed by the judge.
Copies of the legal documents associated with these cases are available from the FTC’s Web site at http://www.ftc.gov and also from the FTC’s Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580. The FTC works for the consumer to prevent fraudulent, deceptive, and unfair business practices in the marketplace and to provide information to help consumers spot, stop, and avoid them. To file a complaint in English or Spanish (bilingual counselors are available to take complaints), or to get free information on any of 150 consumer topics, call toll-free, 1-877-FTC-HELP (1-877-382-4357), or use the complaint form at http://www.ftc.gov. The FTC enters Internet, telemarketing, identity theft, and other fraud-related complaints into Consumer Sentinel, a secure, online database available to thousands of civil and criminal law enforcement agencies in the U.S. and abroad.
(FTC Matter No. X000040; Civil Action No. 00-N-317)