The five remaining defendants in a Federal Trade Commission case involving a franchisor of self-improvement courses and products have agreed to pay a total of $320,000 in civil penalties to settle charges that they violated a 1970 FTC settlement by misrepresenting to prospective franchisees the ease of selling these items and the income they could expect to earn. The Waco, Texas-based franchisor, SMI/USA, Inc. and three of its current and former officials, also violated the FTC's Franchise Rule by failing to provide franchisees with an earnings claims document and other required information. Under the proposed settlements, four of the defendants would be required to pay civil penalties and be prohibited from failing to disclose information to prospective franchisees in the future, as required by the Franchise Rule.
The settlements are with Paul J. Meyer, SMI/USA's owner and chairman of the board, and other current and former officers of the company: Charles G. Williams, William "Bill" Garner and James L. Sirbasku.
The $320,000 in total civil penalties is the third largest penalty imposed for Franchise Rule violations since 1984.
The FTC's Franchise Rule requires a franchisor to provide prospective franchisees with a complete and accurate basic disclosure document containing 20 categories of information, including the history of the franchisor, its managers, litigation history, and information about other franchisees. If a franchisor chooses to make earnings claims, the rule requires it to have a reasonable basis for those claims and to provide a document to prospective franchisees to substantiate them.
In 1970, the FTC first charged SMI/USA and Meyer with misleading potential franchisees by, among other things, telling them that success as a distributor did not require any special ability other than a desire to succeed and that they could look forward to earning sizable incomes. The FTC said that SMI/USA and Meyer failed to disclose to prospective distributors pertinent information, such as median and gross sales and franchisee turnover, which likely would have helped them in evaluating their chances for success or failure. SMI/USA and Meyer settled the allegations by agreeing not to make such misrepresentations and to provide a copy of the FTC's order to each of their salesmen and to disclose certain statistical information to prospective franchisees.
In October 1993, the FTC again charged SMI/USA and Meyer, along with company officers Joseph Haney, former president of SMI/USA subsidiary, Success Motivation Institute, Inc.; John Appel, former president of another SMI subsidiary, Leadership Management, Inc., Williams, Sirbasku and Garner. The Commission alleged that they violated the 1970 order by making false earnings claims, and that all except Garner failed to provide timely disclosures to prospects. The FTC also alleged that all but Garner violated the rule by failing to provide prospective franchisees with accurate information about the turnover rate of franchisees, and failing to disclose information to the prospective franchisees within the time frame required by the rule. Appel and Haney settled the charges by agreeing to pay a total of $30,000 in civil penalties and not failing to make disclosures required by the rule.
Under these proposed settlements, SMI/USA and Meyer would pay a $300,000 civil penalty. Williams and Sirbasku each would pay $10,000. In addition, all four defendants would be required to keep records and file reports with the Commission. SMI/USA, Meyer and Williams would be banned from engaging in any conduct prohibited by the underlying order. SMI/USA, Meyer, Williams and Sirbasku would be prohibited from failing to disclose information to prospects as required by the rule. Sirbasku and Garner also would be prohibited from marketing business opportunities to sell personal improvement programs.
The proposed settlements were filed today in U.S. District Court for the Northern District of Texas in Dallas by the Department of Justice on behalf of the FTC.
The Commission vote to authorize the filing was 5-0.
NOTE: These consent decrees are for settlement purposes only and do not constitute an admission by the defendants of a law violation. Consent decrees have the force of law when signed by the judge.
The FTC has the following brochures available free for consumers that offer tips on buying a franchise or business opportunity: "Franchise and Business Opportunities," "A Consumer Guide to Buying a Franchise," "Business Opportunity Scams: Vending Machines and Display Racks," and "Shopping at a Franchise Exposition." Copies of these brochures and of the complaint and settlements in this case are available from the FTC's Public Reference Branch, Room 130, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580; 202-326-2222; TTY for the hearing impaired 1-866-653-4261. To find out the latest FTC news as it is announced, call the FTC NewsPhone recording at 202-326-2710. FTC news releases and other materials also are available on the Internet at the FTC's World Wide Web Site at: http://www.ftc.gov
(FTC File No. X94 0003)
(FTC Docket No. C-1768)
(Civil Action No. 3-94-CV-58-T)