COMPLT52.DOJ

IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF NEW YORK

UNITED STATES OF AMERICA, Plaintiff,

v.

GLOBAL TOY DISTRIBUTORS, INC., a New York Corporation;
RICHARD D. PATETTA, individually and as an officer of the corporation; and
GEORGE J. McDERMOTT, individually, Defendants.

Civil Action No. CV-97-

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), 13(b), 16(a) and 19 of the FTC Act, 15 U.S.C.   45(a)(1), 45(m)(1)(A), 53(b), 56(a) and 57b, to secure civil penalties, consumer redress, a permanent injunction and other equitable relief for defendants' violations of 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), 53(b), 56(a) and 57b. This action arises under 15 U.S.C.  45(a)(1).

3. Venue in the Eastern District of New York is proper under 28 U.S.C.   1391(b) and (c) and 1395(a), and 15 U.S.C.  53(b).

DEFENDANTS

4. Defendant Global Toy Distributors, Inc. ("Global"), a New York corporation with its principal place of business at 843-B Father Capadanno Boulevard, Staten Island, New York 10305, promotes and sells to investors carousel display rack business ventures for the sale of Disney and other licensed products to the public. Global transacts business in the Eastern District of New York.

5. Defendant Richard D. Patetta is the President of Global. In connection with the matters alleged herein, he has transacted business in the Eastern District of New York. 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 the corporate defendant, including the acts and practices set forth in this complaint.

6. George J. McDermott is the National Director of Global. In connection with the matters alleged herein, he transacts business in the Eastern District of New York. 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 the corporate defendant, including the acts and practices set forth in this complaint.

COMMERCE

7. At all times relevant to this complaint, the defendants have maintained a substantial course of trade in the offering for sale and sale of carousel display rack business ventures in or affecting commerce, as "commerce" is defined in Section 4 of the FTC Act, 15 U.S.C.  44.

DEFENDANTS' BUSINESS ACTIVITIES

8. Since at least November of 1996, the defendants have offered and sold display rack business ventures to prospective purchasers. In order to induce consumers to make a minimum investment of approximately five thousand dollars ($5,000) the defendants have exploited the Disney name and other popular trademarks, representing that carousel racks displaying these products are successful and profitable because of the popularity of these licensed products. The defendants also have made representations about the earnings potential of the business venture without providing prospective purchasers with the information required by the Commission's Franchise Rule that they need to evaluate these claims and the business venture itself.

THE FRANCHISE RULE

9. The business ventures sold by the defendants are franchises, as "franchise" is defined in Section 436.2(a) of the Franchise Rule, 16 C.F.R.  436.2(a).

10. 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 and its officers, the terms and conditions under which the franchise operates, and information about other franchisees. 16 C.F.R.  436.1(a)(1) - (20). Disclosure of this information enables a prospective franchisee to assess the potential risks involved in the purchase of the franchise.

11. The Franchise Rule additionally requires: (1) that the franchisor have 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).

12. 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 ONE

13. 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 have failed to provide prospective franchisees with accurate and complete disclosure documents 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 of the FTC Act, 15 U.S.C. 45.

COUNT TWO

14. 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 have made earnings claims within the meaning of the Rule, 16 C.F.R.  436.1(b)-(e), but have failed to provide prospective franchisees the earnings claim document required by the Rule or have failed to disclose the information required by the Rule in immediate conjunction with such claims, thereby violating Sections 436.1(b)-(e) of the Rule, 16 C.F.R.  436.1(b)-(e), and Section 5 of the FTC Act, 15 U.S.C. 45.

CONSUMER INJURY

15. Consumers in the United States have suffered and will suffer substantial monetary loss as a result of defendants' unlawful acts or practices. Absent injunctive relief by this Court, defendants are likely to continue to injure consumers and harm the public interest.

THIS COURT'S POWER TO GRANT RELIEF

16. Section 13(b) of the FTC Act, 15 U.S.C.  53(b), empowers this Court to grant injunctive and other ancillary relief, including consumer redress, disgorgement and restitution, to prevent and remedy any violations of any provision of law enforced by the Federal Trade Commission.

17. Section 5(m)(1)(A) of the FTC Act, 15 U.S.C.  45(m)(1)(A), authorizes this Court to award civil penalties of not more than $11,000 for each violation of the Franchise Rule. The defendants' violations of the Rule were committed with the knowledge required by Section 5(m)(1)(A) of the FTC Act, 15 U.S.C.  45(m)(1)(A).

18. 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.

19. This Court, in the exercise of its equitable jurisdiction, may award ancillary relief to remedy injury, caused defendants' violations of the FTC Act and the Franchise Rule.

PRAYER FOR RELIEF

WHEREFORE, plaintiff requests that this Court, as authorized by Sections 5(a)(1), 5(m)(1)(A), 13(b) and 19 of the FTC Act, 15 U.S.C.   45(a)(1), 45(m)(1)(A), 53(b), and 57b, and pursuant to its own equitable powers:

1. Enter judgment against the defendants and in favor of the plaintiff for each violation alleged in this complaint;
 
2. Permanently enjoin the defendants from violating the Franchise Rule and the FTC Act;
 
3. Award plaintiff monetary civil penalties, in an amount to be determined at trial, from each defendant for every violation of the Franchise Rule;
 
4. Award such relief as the Court finds necessary to redress injury to consumers resulting from the defendants' violations of the Franchise Rule and the FTC Act, including but not limited to, rescission of contracts, the refund of monies paid, and the disgorgement of ill-gotten monies; and
 
5. Award plaintiff the costs of bringing this action, as well as such other and additional relief as the Court may determine to be just and proper.

DATED: Brooklyn, New York

July , 1997

Of Counsel:

EILEEN HARRINGTON
Associate Director for
Marketing Practices
Federal Trade Commission
Washington, DC 20580

LAURIE M. MEEHAN
SARAH G. REZNEK
Attorneys
Federal Trade Commission
Washington, DC 20580
(202) 326-3755 .

FOR THE UNITED STATES OF AMERICA

FRANK W. HUNGER
Assistant Attorney General
Civil Division

ZACHARY W. CARTER
United States Attorney

By:

ELLIOT M. SCHACHNER
Assistant United States Attorney
One Pierrepont Plaza, 14th Fl
Brooklyn, NY 11201
(718) 254-6053

DOUGLAS ROSS (DR 7290)
Office of Consumer Litigation
U.S. Department of Justice
P.O. Box 386
Washington, DC 20044
(202) 514-1874