UNITED STATES DISTRICT COURT UNITED STATES OF AMERICA, Plaintiff, vs. QX INTERNATIONAL, INC., a corporation, and ANTHONY F. FRANCIS, individually and as an officer of the corporation, Defendants. Civil Action No. COMPLAINT FOR CIVIL PENALTIES, CONSUMER REDRESS, PERMANENT INJUNCTION AND OTHER EQUITABLE RELIEF Plaintiff, the United States of America, acting upon notification and authorization to the Attorney General by the Federal Trade Commission ("FTC" or "the Commission"), pursuant to Section 16(a)(1) of the Federal Trade Commission Act ("FTC Act"), 15 U.S.C § 56(a)(1), for its complaint alleges: 1. Plaintiff brings this action under Sections 5(a)(1), 5(m)(1)(A), 9, 13(b), 16(a) and 19 of the Federal Trade Commission Act, 15 U.S.C. §§ 45(a)(1), 45(m)(1)(A), 49, 53(b), 56(a) and 57b, to secure civil penalties, consumer redress, a permanent injunction, and other equitable relief for defendants' unfair or deceptive acts or practices in violation of Section 5(a) of the FTC Act, 15 U.S.C. § 45(a), and the FTC's Trade Regulation Rule entitled "Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures" ("the Franchise Rule" or "the Rule"), 16 C.F.R. Part 436. JURISDICTION AND VENUE 2. This Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1331, 1337(a), 1345 and 1355 and 15 U.S.C. §§ 45(m)(1)(A), 49, 53(b), 56(a) and 57b. This action arises under 15 U.S.C. § 45(a)(1). 3. Venue in the United States District Court for the Northern District of Texas is proper under 28 U.S.C. §§ 1391(b) and (c) and 1395(a), and 15 U.S.C. § 53(b). DEFENDANTS 4. Defendant QX International, Inc. ("QX") was incorporated in Texas and had its principal place of business at 5750 Rufe Snow Drive, Suite 130, Fort Worth, Texas 76180. The company also had an office at 110 North Main Street, Palmer, Texas 75152 and has recently listed its address as 2406 Pistachio, Irving, Texas 75063 in a Chapter Seven petition filed in United States Bankruptcy Court in Dallas on November 7, 1997. Plaintiff is excepted from the automatic stay under 11 U.S.C. § 362(b)(5). QX offered for sale and sold display rack distributorships for automobile engine lubricant products. QX transacted business in the Northern District of Texas, Dallas Division. 5. Defendant Anthony Francis is an officer, director, and principal owner of defendant QX. At all times material to this complaint, acting alone or in concert with others, he has formulated, directed, controlled, or participated in the acts and practices of defendant QX, including the acts and practices set forth in this complaint. He transacted business in the Northern District of Texas, Dallas Division. COMMERCE 6. At all times relevant to this complaint, defendants maintained a substantial course of trade or business in the offering for sale and sale of display rack distributorships for automobile engine lubricant products, in or affecting commerce, as "commerce" is defined in Section 4 of the FTC Act, 15 U.S.C. § 44. DEFENDANTS' BUSINESS ACTIVITIES 7. Beginning in at least February 1992, defendants have engaged in a common scheme to promote, offer for sale, and sell purportedly profitable automobile engine lubricant product distributorships to members of the public. The defendants placed numerous newspaper classified advertisements informing consumers that they could earn from $4,000 to $10,000 a month. The distributorships offered for sale by defendants ranged in price from approximately $13,000 to $28,000 and consisted of display racks and automotive lubricants and additives to be placed in retail stores and other commercial outlets for consignment sale. After being contacted by potential distributors and arranging for a face-to-face meeting, defendants induced consumers to purchase their distributorships with representations that the distributors would have potential annual incomes ranging from approximately $12,000 to $356,000, depending upon the number of locations and the number of sales per location. The defendants also made claims regarding the success of the defendants' existing distributorships. Additionally, the defendants represented that QX would provide marketing assistance consisting of point-of-sale video and audio tapes and a national advertising campaign. VIOLATIONS OF SECTION 5 OF THE FTC ACT COUNT ONE 8. In the course of offering for sale and selling automobile engine lubricant product display rack distributorships, defendants represented, expressly or by implication, that purchasers could reasonably expect to achieve a specific level of earnings, such as sales of three to six products per day per location or earnings of $35,000-$100,000 per year, or that such figures were average estimates of the sales or earnings purchasers could reasonably expect. 9. In truth and in fact, few, if any, purchasers attained the specific level of earnings represented by defendants, nor were such figures average estimates of the sales or earnings purchasers could reasonably expect. 10. Therefore, defendants' representations as set forth in Paragraph 8 were false and misleading, and constitute deceptive acts or practices in violation of Section 5(a) of the FTC Act, 15 U.S.C. § 45(a). COUNT TWO 11. In the course of offering for sale and selling automobile engine lubricant product display rack distributorships, defendants represented, expressly or by implication, that certain company-selected references had purchased one of defendants' distributorships, or would provide reliable descriptions of the references' experiences with defendants' business venture. 12. In truth and in fact, in numerous instances, defendants' references had not purchased one of defendants' distributorships, or did not provide reliable descriptions of the references' experiences with defendants' business venture. 13. Therefore, defendants' representations as set forth in Paragraph 11 were false and misleading, and constitute deceptive acts or practices in violation of Section 5(a) of the FTC Act, 15 U.S.C. § 45(a). COUNT THREE 14. In the course of offering for sale and selling automobile engine lubricant product display rack distributorships, defendants represented, expressly or by implication, that they would sell only one distributorship within a certain geographic area either permanently or for a certain period of time. 15. In truth and in fact, in numerous instances, defendants sold more than one distributorship within a certain geographic area during the time period in which defendants represented they would limit sales. 16. Therefore, defendants' representations as set forth in Paragraph 14 were false and misleading, and constitute deceptive acts or practices in violation of Section 5(a) of the FTC Act, 15 U.S.C. § 45(a). COUNT FOUR 17. In the course of offering for sale and selling automobile engine lubricant product display rack distributorships, defendants represented, expressly or by implication, that certain locating companies they provided or recommended were typically successful in placing distributorship purchasers’ display racks in profitable locations. 18. In truth and in fact, the locating companies that defendants provided or recommended were not typically successful in placing distributorship purchasers’ display racks in profitable locations. 19. Therefore, defendants' representations as set forth in Paragraph 17 were false and misleading, and constitute deceptive acts or practices in violation of Section 5(a) of the FTC Act, 15 U.S.C. § 45(a). COUNT FIVE 20. In the course of offering for sale and selling automobile engine lubricant product display rack distributorships, defendants represented, expressly or by implication, that defendants would provide significant advertising assistance to purchasers of defendants' business venture, including but not necessarily limited to a national ad campaign for QX products, preparation and distribution to distributorship purchasers of advertisements ready for placement in newspapers, and creation and distribution of a point-of-sale video tape promoting QX products. 21. In truth and in fact, in numerous instances, defendants did not provide significant advertising assistance to purchasers of their business ventures. 22. Therefore, defendants' representations as set forth in Paragraph 20 were false and misleading, and constitute deceptive acts or practices in violation of Section 5(a) of the FTC Act, 15 U.S.C. § 45(a). THE FRANCHISE RULE 23. The Franchise Rule, promulgated by the Commission on October 21, 1979, under Section 18 of the FTC Act, 15 U.S.C. § 57a, has since that date remained in full force and effect. 24. The display rack distributorships sold by defendants are franchises, as "franchise" is defined in Section 436.2(a) of the Franchise Rule, 16 C.F.R. § 436.2(a). 25. The Franchise Rule requires a franchisor to provide prospective franchisees with a complete and accurate basic disclosure statement containing twenty categories of information, including information about the history of the franchisor, the terms and conditions under which the franchise operates, and information about other franchisees, 16 C.F.R. § 436.1(a). Disclosure of this information enables a prospective franchisee to assess potential risks involved in the purchase of the franchise. 26. The Franchise Rule additionally requires: (1) that the franchisor possess a reasonable basis for any oral, written, or visual earnings or profit representations made by a franchisor to a prospective franchisee, 16 C.F.R. § 436.1(b)(2), (c)(2) and (e)(1); (2) that the franchisor provide to prospective franchisees a document containing information substantiating the earnings claim, 16 C.F.R. § 436.1(b)-(e); and (3) that the franchisor, in immediate conjunction with any generally disseminated earnings claim, disclose the material basis (or the lack of such basis) for the earnings claim and include a warning that the earnings claim is only an estimate, 16 C.F.R. § 436.1(e)(3)-(4). 27. Pursuant to Section 18(d)(3) of the FTC Act, 15 U.S.C. § 57a(d)(3), and 16 C.F.R. § 436.1, violations of the Franchise Rule constitute unfair or deceptive acts or practices in or affecting commerce, in violation of Section 5(a) of the FTC Act, 15 U.S.C. § 45(a). VIOLATIONS OF THE FRANCHISE RULE COUNT SIX 28. In numerous instances in connection with the offering of franchises, as "franchise" is defined in the Rule, 16 C.F.R. § 436.2(a), defendants failed to provide prospective franchisees with an accurate and complete disclosure document within the time period required by the Franchise Rule, thereby violating Section 436.1(a) of the Rule, 16 C.F.R. § 436.1(a), and Section 5(a) of the FTC Act, 15 U.S.C. § 45(a). COUNT SEVEN 29. In numerous instances in connection with the offering of franchises, as "franchise" is defined in the Rule, 16 C.F.R. § 436.2(a), defendants made earnings claims within the meaning of the Rule, 16 C.F.R. § 436.1(b)-(e), but failed to provide prospective franchisees with the earnings claim document required by the Rule, and failed to disclose the information required by the Rule in immediate conjunction with such claims, thereby violating Section 436.1(b)-(e) of the Rule, 16 C.F.R. § 436.1(b)-(e), and Section 5(a) of the FTC Act, 15 U.S.C. § 45(a). CIVIL PENALTIES, CONSUMER REDRESS AND INJUNCTION 30. Defendants violated the Franchise Rule as described above with knowledge as set forth in Section 5(m)(1)(A) of the FTC Act, 15 U.S.C. § 45(m)(1)(A). 31. Each sale or attempted sale, during the five years preceding the filing of this complaint, of defendants’ business opportunities in which defendants violated the Franchise Rule in one or more of the ways described above constitutes a separate violation for which plaintiff seeks monetary civil penalties. 32. Section 5(m)(1)(A) of the FTC Act, 15 U.S.C. § 45(m)(1)(A), authorizes the Court to award monetary civil penalties of not more than $11,000 for each such violation of the Franchise Rule. 33. Consumers in many areas of the United States have suffered substantial monetary loss as a result of defendants' unlawful acts or practices. 34. Section 13(b) of the FTC Act, 15 U.S.C. § 53(b), empowers this Court to grant equitable relief, including consumer redress, disgorgement and restitution, to prevent and remedy any violations of any provision of law enforced by the Federal Trade Commission. 35. Section 19 of the FTC Act, 15 U.S.C. § 57b, authorizes this Court to grant such relief as the Court finds necessary to redress injury to consumers or other persons resulting from defendants' violations of the Franchise Rule, including the rescission and reformation of contracts and the refund of money. 36. This Court, in the exercise of its equitable jurisdiction, may award other relief to remedy injury caused by defendants' law violations. PRAYER FOR RELIEF WHEREFORE, plaintiff respectfully requests that this Court, as authorized by Sections 13(b) and 19 of the FTC Act, 15 U.S.C. §§ 53(b) and 57b, and pursuant to its own equitable powers:
Dated:
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