|ELIZABETH M. GRANT
MARC M. GROMAN
Federal Trade Commission
600 Pennsylvania Ave., NW
Washington, DC 20580
202-326-3299; 326-2042; 326-3395 (fax)
RAYMOND MCKOWN CA Bar # 150975
ATTORNEYS FOR PLAINTIFF
UNITED STATES DISTRICT COURT
Plaintiff, the Federal Trade Commission ("FTC" or "the Commission"), for its complaint alleges as follows:
1. The FTC 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 secure preliminary and permanent injunctive relief, rescission of contracts, restitution, disgorgement, and other equitable relief for defendants' unfair and deceptive acts and 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"), 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), and 1345, and 15 U.S.C. §§ 53(b) and 57b.
3. Venue in the United States District Court for the Central District of California, Eastern Division, is proper under 28 U.S.C. §§ 1391(b) and (c), and 15 U.S.C. § 53(b).
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. The Commission also enforces the Franchise Rule. 16 C.F.R. Part 436. A violation of the Franchise Rule is a violation of the FTC Act. Section 18(d)(3) of the FTC Act, 15 U.S.C. § 57a(d)(3), and 16 C.F.R. § 436.1. The Commission is authorized to initiate federal district court proceedings, by its own attorneys, to enjoin violations of the FTC Act and the Franchise Rule, and to secure such equitable relief as may be appropriate in each case. 15 U.S.C. §§ 53(b) and 57b.
5. Defendant The Car Wash Guys International, Inc. ("CWGI") was incorporated in 1996 and transacts and has transacted business in the Central District of California. CWGI uses a business address of 5699 Kanan Road, #130, Agoura Hills, California 91301, which is a mail drop. CWGI actually conducts business from the residence of defendant Lance Winslow, III.
6. Defendant Wash Guy.com, Inc. ("Washguy") was incorporated in 1999 and transacts and has transacted business in the District of Arizona, and the Central District of California. Washguy's business address is 2125 E. 5th Street, Suite 106, Tempe, Arizona 85281. Washguy is the successor company to and a broker for defendant CWGI. Washguy sells CWGI franchises. Washguy also does business using the names The Awning Wash Guys, The Plane Wash Guys, The Concrete Wash Guys, The Restaurant Wash Guys, The Jet Wash Guys, The Headstone Wash Guys, The Deck Wash Guys, Property Mgt. Wash Guys, The RV Wash Guys, The Car Dealership Wash Guys, The Gas Station Wash Guys, and The Truck Wash Guys.
7. Defendant Lance Winslow, III ("Winslow") is the founder and president of both defendant corporations. Winslow also goes under the names Lance Winslow, II, and Lance R. Winslow. 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 set forth in this complaint. Winslow resides at 43750 Carmel Circle, Palm Desert, CA 92550. Winslow transacts or has transacted business in the Central District of California.
8. Defendant Michelle Portney ("Portney") is the wife of Defendant Winslow, and is actively involved in the CWGI business. 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 set forth in this complaint. Portney resides at 43750 Carmel Circle, Palm Desert, CA 92550. Portney transacts or has transacted business in the Central District of California.
9. At all times relevant to this complaint, defendants have maintained a substantial course of trade in the advertising, offering, offering for sale, and selling of mobile car wash franchises in or affecting commerce, as "commerce" is defined in Section 4 of the FTC Act, 15 U.S.C. § 44.
10. "World Wide Web" or "Web" means a system used on the Internet for cross-referencing and retrieving information. A "Web site" is a set of electronic documents, usually a home page and subordinate pages, readily viewable on a computer by anyone with access to the Web, standard software, and knowledge of the Web site's location or address.
11. "Internet" means a worldwide system of linked computer networks that use a common protocol (TCP/IP) to deliver and receive information. The "Internet" includes, but is not limited to, the following forms of electronic communication: electronic mail, the World Wide Web, newsgroups, Internet Relay Chat, and file transfer protocols.
DEFENDANTS' BUSINESS PRACTICES
12. Since approximately April 1997, defendants CWGI, Winslow, and his wife Michelle Portney have operated as mobile car wash franchisors. Since at least January 2000, defendants Washguy.com, successor company to CWGI, Winslow, and Portney have operated as mobile car wash franchisors. Defendants promote, offer to sell, and sell mobile car washing franchises throughout the United States. Franchisees use mobile car wash truck units to clean cars, trucks, and other motor vehicles, and perform other washing work, in a specified territory.
13. Defendants use Internet Web sites, located at www.carwashguys.com and www.washguy.com, promotional videos, CDs, and in-person and telephonic sales presentations to advertise their mobile car wash franchise opportunities. Defendants attract potential franchisees by making representations as to the amount of money a potential purchaser can reasonably expect to earn with the franchise. For example, on their Web sites, and in their promotional videos and CDs, defendants boast company profits of over $30,000,000 per year. Defendants also represent that franchisees should expect to earn $8,000 per month for the first three months of operation, then $10,000, and as high as $33,000 per month in subsequent months. Defendant Winslow specifically states in the promotional video, "Most all of our franchisees are clearing $1,000 a week. I don't know anyone who is making less than that" (emphasis added). Defendants' CD specifically states, "Units gross about $130,000 each."
14. As further proof of potential earnings, defendants profile several franchisees on the www.carwashguys.com Web site. These biographical sketches often misrepresent how well a particular franchisee is doing. For example, defendants claim that one franchisee maintains several large customer accounts that in fact he has never had. Defendants' Web site falsely states or implies that many of the franchisees profiled have been very successful.
15. To achieve these promised earnings levels, defendants offer prospective franchisees a "turnkey business" for $52,380 to $65,380. Defendants represent that franchisees who pay this amount receive: a carwashing truck and necessary equipment; a computer, printer and basic software; list of clientele, route, and customer base; a portable cellular phone; an in-depth marketing blitz; other startup services; payment of certain business expenses; and ongoing assistance. Defendants promise to provide "more support than any franchise you've ever seen," including access to "national" client accounts and spare trucks in case of breakdowns.
16. Defendants do not sell a "turnkey" business. Franchisees must put the business together themselves. For example, franchisees must purchase their own trucks and deliver them to defendants' "approved" vendors located in Arizona and California to obtain defendants' required modifications. Defendants claim that these modifications will enable franchisees to operate their franchises more efficiently and will result in franchisees' reaching the promised earnings levels. In actuality, franchisees find that defendants' required modifications put excess weight load on the trucks, which causes repeated mechanical breakdowns, costly repairs, and lost customers. This contributes to franchisees' inability to realize the earnings promised by defendants.
17. Defendants claim that the cost of their "turnkey" business includes marketing, and a list of clients and routes. Defendants call this their "Bonzai [sic] and Blitz Marketing methods." Defendants promise that this program will secure, prior to the opening of a franchise, client accounts worth no less than $8,000, "sometimes more." Defendants claim that they, "do [all of] the marketing for and set up accounts for franchisees." However, defendants' marketing methods consist of little more than defendants Winslow and Portney (and possibly one or two others) handing out flyers announcing the new business and collecting business cards from passers-by.
18. Defendants further claim that the cost of their "turnkey" business includes securing a customer base for each franchisee either by securing accounts through their "Bonzai and Blitz Marketing methods" or by promising franchisees that they will share in CWGI's numerous national customer accounts. Defendants' business plan also lists over 100 cities, law enforcement agencies, and major corporations with whom defendants purportedly have secured "national" car washing contracts. Defendants promise franchisees local business from these purported national accounts, but, in fact, franchisees receive none.
19. Defendants claim that the cost of their "turnkey" business includes additional start-up services, such as defendants' payment of a business telephone, first month's liability insurance, first and last month's payment of major medical insurance, and help with securing SBA loans and business licenses. Defendants rarely, if ever, provide franchisees with any such start-up assistance. Defendants also do not provide ongoing assistance.
20. Defendant Winslow, often accompanied by Portney, typically meets with each prospective franchisee in person. At these meetings, defendant Winslow reiterates the earnings representations described above, and promises potential franchisees an income of at least $10,000 per month. Winslow also reiterates the claim that all of the franchises are doing exceptionally well. Appended to the CWGI franchise agreement is a list of supposedly active franchisees. In actuality, many of them have not done well, have lost thousands of dollars, or are no longer in business.
21. Defendants' business plan promises potential franchisees that operation of one truck alone can earn a franchisee approximately $125,000 per year. In several cases, Winslow assured new franchisees that he would make them a "millionaire." Although defendant Winslow also boasts that he operates a fleet of 17 trucks himself, and that he earns a net yearly profit of $30,000 - $50,000 per truck, defendants' UFOC states, "The Company does not presently own any working units."
22. As a result of defendants' inflated earnings claims and their failure to provide franchisees with the promised "turnkey" business, few, if any, franchisees ever realize the earnings promised by defendants.
VIOLATIONS OF SECTION 5 OF THE FTC ACT
23. Section 5(a) of the FTC Act, 15 U.S.C. § 45(a), provides that unfair or deceptive acts or practices in or affecting commerce are unlawful. Misrepresentations and omissions of material facts made to induce a reasonable consumer to purchase a franchise are deceptive acts or practices that are prohibited by Section 5(a) of the Act.
24. In numerous instances, in the course of advertising, offering, offering for sale, or selling of car wash franchises, defendants have represented, directly or by implication, that purchasers can reasonably expect to earn substantial profits or achieve a specific level of earnings, including, but not limited to, profits such as $4,000 to $10,000 per month per unit.
25. In truth and in fact, in numerous instances, purchasers of defendants' franchises fail to earn substantial profits and fail to attain the specific level of earnings represented by defendants.
26. Therefore, defendants' representations, as set forth in paragraph 24, above, are false and deceptive, in violation of Section 5 of the FTC Act, 15 U.S.C. § 45.
27. In numerous instances, in the course of advertising, offering, offering for sale, or selling of franchises, defendants represent to consumers, directly or by implication, that they provide purchasers with a turnkey operation including substantial pre-opening and ongoing support services.
28. In truth and in fact, in numerous instances, defendants do not provide purchasers with a turnkey operation including substantial pre-opening and ongoing support services.
39. Therefore, defendants' representations, as set forth in paragraph 27, above, are false and deceptive, in violation of Section 5 of the FTC Act, 15 U.S.C. § 45.
THE FRANCHISE RULE
30. Defendants sold franchises, as "franchise" is defined in Section 436.2(a) of the Franchise Rule, 16 C.F.R. § 436.2(a).
31. 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, information about other franchisees, and information about franchisee obligations to purchase supplies only from approved vendors. 16 C.F.R. §§ 436.1(a)(1)-(a)(20). Disclosure of this information enables a prospective franchisee to assess potential risks involved in the purchase of the franchise.
32. As a matter of policy, the FTC allows franchisors to comply with this provision by furnishing prospective franchisees with a complete and accurate document in the Uniform Franchise Offering Circular ("UFOC") format, adopted by the Midwest Securities Commissioner's Association on September 2, 1975, and as approved by the FTC on December 21, 1975, and as approved by the FTC on December 21, 1978 (43 Fed. Reg. 59722), as revised by the North American Securities Administrators Association ("NASAA") and approved by the Commission on June 15, 1987 (52 Fed. Reg. 22686), and as further revised by NASAA on April 25, 1993 and approved by the Commission on December 30, 1993 (58 Fed. Reg. 69224). Here, the defendants opted to utilize the UFOC format to make their disclosures.
33. The Franchise Rule additionally requires that the franchisor provide to prospective franchisees a document containing information substantiating any oral, written, or visual earnings or profit representations made by a franchisor to a prospective franchisee. 16 C.F.R. §§ 436.1(b)-(e).
34. The Franchise Rule prohibits franchisors from making any claim or representation that contradicts information in the disclosure document. 16 C.F.R. § 436.1(f).
35. 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
36. 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 representations within the meaning of the Franchise Rule, 16 C.F.R. §§ 436.1(b)-(e), but have failed to provide prospective franchisees with the earnings claim document required by the Franchise Rule (or in the alternative Item 19 of the UFOC), thereby violating Sections 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).
37. 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, contrary to their express representation in their disclosure document that they do not make any earnings representations, and have made other claims inconsistent with their disclosure document.
38. Therefore, defendants have made statements inconsistent with their disclosure document, in violation of Section 436.1(f) of the Franchise Rule, 16 C.F.R. § 436.1(f).
39. Consumers throughout the United States have suffered substantial monetary losses as a result of the 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
40. 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 FTC.
41. 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.
42. This Court, in the exercise of its equitable jurisdiction, may award other ancillary relief to remedy injury caused by defendants' law violations.
PRAYER FOR RELIEF
WHEREFORE, plaintiff 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:
Elizabeth M. Grant