UNITED STATES DISTRICT COURT
Plaintiff, the Federal Trade Commission (“Commission”), for its complaint alleges as follows: 1. The Commission brings this action under Sections 13(b) and 19 of the Federal Trade Commission Act (“FTC Act”), 15 U.S.C. §§ 53(b) and 57b, to obtain preliminary and permanent injunctive relief, rescission, restitution, disgorgement and other equitable relief for defendants’ violations 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"), 16 C.F.R. Part 436. JURISDICTION AND VENUE 2. This Court has subject matter jurisdiction over plaintiff’s claim pursuant to 28 U.S.C. §§ 1331, 1337(a) and 1345, and 15 U.S.C. §§ 53(b) and 57b. 3. Venue in the Western District of Washington is proper under 28 U.S.C. § 1391(b) and (c) and 15 U.S.C. § 53(b). THE PARTIES 4. Plaintiff, the Federal Trade Commission, is an independent agency of the United States Government created by statute. 15 U.S.C. § 41, et seq. The Commission is charged, inter alia, with enforcement of Section 5(a) of the FTC Act, 15 U.S.C. § 45(a), which prohibits unfair or deceptive acts or practices in or affecting commerce, as well as enforcement of the Franchise Rule, 16 C.F.R. Part 436. The Commission is authorized to initiate federal district court proceedings to enjoin violations of the FTC Act, and to secure such equitable relief as may be appropriate in each case, including consumer restitution and disgorgement. 15 U.S.C. §§ 53(b) and 57b. 5. Defendant, TouchNet, Inc. (TouchNet), is a Washington corporation with its principal place of business at 600 108th Avenue, NE, Suite 202, Bellevue, Washington. TouchNet transacts business in the Western District of Washington, through the marketing and sale of Internet consulting business ventures. 6. Defendant, TouchTone Telecommunications & Advertising Inc. (TouchTone), is a Washington corporation with its principal place of business at 600 108th Avenue, NE, Suite 202, Bellevue, Washington. TouchTone transacts business in the Western District of Washington, through the marketing and sale of Internet consulting business ventures, and has marketed and sold pay-per-call 900 number and prepaid phone card business ventures. 7. Defendant Eric Carino is an officer and owner of TouchNet and TouchTone. 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 defendants, including the acts and practices set forth in this complaint. He resides and transacts business in the Western District of Washington. 8. Defendant Malissa Carino is an officer of TouchNet and TouchTone. At all times material to this complaint, acting alone or in concert with others, she has formulated, directed, controlled or participated in the acts and practices of the corporate defendants, including the acts and practices set forth in this complaint. She resides and transacts business in the Western District of Washington. COMMERCE 9. At all times material to this complaint, defendants have maintained a substantial course of trade in or affecting commerce, as “commerce” is defined in Section 4 of the FTC Act, 15 U.S.C. § 44. DEFENDANTS’ BUSINESS PRACTICES 10. Since at least 1995, defendants Eric and Malissa Carino through TouchNet and TouchTone have been engaged in a common course of conduct to offer and sell purportedly profitable business ventures in innovative communications fields, for a minimum investment of $895 - $3,195. TOUCHNET’S BUSINESS PRACTICES 11. From late 1996 to the present, TouchNet in conjunction with TouchTone, hereafter TouchNet, has advertised in newspapers nationwide an Internet consulting business venture. Typical statements made in the ads include, but are not limited to, the following:
The ads also state that TouchNet is offering a free seminar and instructs consumers to call an 800 number to reserve their spot at TouchNet’s upcoming seminar, being held at a nearby hotel. 12. TouchNet’s free Internet consulting seminars last about two hours and are merely sales presentations for TouchNet’s business opportunity, which entails becoming an "Internet consultant," purportedly selling Web pages to businesses who want a presence on the Internet but lack the necessary computer expertise. During the seminars, Eric Carino makes numerous statements that TouchNet’s Internet Mall, World Virtual City, enables its consultants to make large amounts of money by selling web pages to businesses that want to become members of World Virtual City. For example, Carino typically makes the following statements during his slide presentation:
13. Carino also shows slides that include testimonials from satisfied TouchNet consultants. A typical testimonial states:
14. To make this money, consumers must pay $3,195 for "in-depth" training from TouchNet. Carino uses incentives and urgency to get people to purchase TouchNet’s business opportunity at the seminar. He states that the training session is limited to 10 people and that the first four people who register will receive two free Web pages on World Virtual City that can be resold to businesses. TOUCHTONE’S BUSINESS PRACTICES 15. Before TouchNet started offering its Internet consulting business opportunity, TouchTone sold two other business opportunities through free seminars. In the beginning of 1996, TouchTone advertised a prepaid phone card business venture, and in 1995 TouchTone advertised a pay-per-call 900 number business venture. Both business opportunities claimed that consumers, without any experience, could make thousands of dollars a month. To make this money the ads instructed consumers to call an 800 number to reserve their spot at TouchTone’s upcoming free seminar, being held at a nearby hotel. 16. Both the 900 number and phone card seminars lasted about two hours and were merely sales presentations for the business opportunity TouchTone was selling. During both seminars, Eric Carino made numerous statements that TouchTone’s state-of-the-art technology enabled the attendees to make thousands of dollars if they purchased TouchTone’s business opportunity. To reinforce the earnings claims, Carino used a slide show that demonstrated the earnings attendees would make based on TouchTone’s experience. Under TouchTone’s usual scenario, purchasers of its business opportunity would make thousands of dollars a month. 17. TouchTone stated that its prepaid phone card business venture involved the distribution of phone cards. Seminar attendees would purchase phone cards from TouchTone and then give them to people with the claim that using the cards saved money on long distance calls. People then called TouchTone and bought prepaid time in $25 increments. Then when the cards were used for long distance phone calls, the TouchTone distributor received a 20% commission. 18. TouchTone stated that its pay-per-call 900 number business venture involved the advertising of 900 numbers. TouchTone’s customers purchased "turnkey" automated 900 number "programs" from TouchTone, which they advertised in their local areas. TouchTone handled everything else that was needed to operate a 900 number business, such as format, content and billing. TouchTone’s customers made money by receiving a portion of the revenue generated when consumers called the 900 number "programs" that TouchTone’s customers had purchased and advertised. 19. At the end of both business opportunity seminars, Carino encouraged seminar attendees to purchase the business opportunity immediately by using high pressure sales tactics. VIOLATIONS OF SECTION 5 OF THE FTC ACT COUNT I 20. In the course of offering for sale or selling Internet consulting business opportunities, defendants represent, expressly or by implication, that purchasers can reasonably expect to make thousands of dollars per month. 21. In truth and in fact, few, if any, purchasers attain the specific level of earnings represented by the defendants. 22. Therefore, defendants' representations, including but not limited to those set forth in Paragraph 20, are 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 II 23. In the course of offering for sale or selling prepaid phone card and pay-per-call 900 number business opportunities, defendants represented, expressly or by implication, that purchasers could reasonably expect to make thousands of dollars per month. 24. In truth and in fact, few, if any, purchasers attained the specific level of earnings represented by the defendants. 25. Therefore, defendants' representations, including but not limited to those set forth in Paragraph 23, were false and misleading and constituted deceptive acts or practices in violation of Section 5(a) of the FTC Act, 15 U.S.C. § 45(a). VIOLATIONS OF THE FRANCHISE RULE 26. 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). 27. In the course of offering for sale or selling franchises, defendants have provided, or represented they will provide, significant assistance to the purchaser in the purchaser’s method of operation. 28. 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 the names and addresses, of other franchisees. 16 C.F.R. § 436.1(a)(1)-(a)(20). Disclosure of this information enables a prospective franchisee to assess any potential risks involved in the purchase of the franchise. 29. The Franchise Rule additionally requires: (1) that the franchisor give prospective franchisees a document disclosing the material basis (or the lack of such basis) for any oral, written, or visual earnings or profit representations it makes to a prospective franchisee, 16 C.F.R. § 436.1(b)-(e); and (2) that the franchisor, in immediate conjunction with any generally disseminated earnings claim, disclose the number and percentage of prior purchasers known to have earned as much or more than the amount claimed, and include a warning that the earnings claim is only an estimate. 16 C.F.R. § 436.1(e)(3)-(4). 30. 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). COUNT III 31. In numerous instances in connection with the offering of franchises, as "franchise" is defined in the Franchise Rule, 16 C.F.R. § 436.2(a), defendants have failed to provide prospective franchisees with a basic disclosure document, thereby violating Section 436.1(a) of the Franchise Rule, 16 C.F.R. § 436.1(a), and Section 5(a) of the FTC Act, 15 U.S.C. § 45(a). COUNT IV 32.In numerous instances in connection with the offering of franchises, as "franchise" is defined in the Franchise Rule, 16 C.F.R. § 436.2(a), defendants have made earnings claims within the meaning of the Franchise Rule, 16 C.F.R. § 436.1(b)-(e), but have failed to give prospective franchisees the earnings claim document required by the Franchise Rule, thereby violating Sections 436.1(b)-(e) of the Franchise Rule, 16 C.F.R. § 436.1.(b)-(e), and Section 5(a) of the FTC Act, 15 U.S.C. § 45(a). INJURY 33. Defendants’ violations of Section 5 of the FTC Act, as set forth above, have caused and continue to cause substantial injury to consumers. Absent injunctive relief by this Court, defendants are likely to continue to injure consumers. THIS COURT’S POWER TO GRANT RELIEF 34. Section 13(b) of the FTC Act, 15 U.S.C. § 53(b), empowers this Court to grant injunctive and ancillary relief, including consumer redress, disgorgement and restitution, to prevent and remedy any violations of any provision of law enforced by the 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 the defendants’ violations of the Franchise Rule, including the recession and reformation of contracts and the refund of money. 36. This Court, in the exercise of its equitable jurisdiction, may award other ancillary relief to remedy the injury caused by the defendants’ law violations. PRAYER FOR RELIEF WHEREFORE the Commission 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: ___________, 1998. Respectfully submitted, Debra Valentine _________________________ |