Franchisee Associations

For franchise systems, the recent action by the FTC against Darden Gardens regarding their gift cards is instructive. The FTC complaint can be read here.

"According to the FTC's complaint, Darden advertised its gift cards on television and radio, and in its restaurants and Web sites. Darden represented that consumers could redeem the cards to buy goods or services at its restaurants equal to the card's monetary value. But Darden did not disclose adequately the "dormancy fees" that would be deducted after a certain period of time. For cards sold before February 2004, after 15 months of non-use, a $1.50 dormancy fee was deducted from the card's balance for each month of inactivity; for cards sold after February 2004, the monthly fee was deducted after 24 months of non-use."

"Darden Restaurants Inc., which owns restaurant chains Olive Garden, Red Lobster, Smokey Bones, and Bahama Breeze, agreed to settle Federal Trade Commission charges that it engaged in deceptive practices in advertising and selling its gift cards. As part of the settlement, Darden will restore fees that were deducted from consumers' gift cards and disclose fees or expiration dates in future gift card sales. This is the agency's second law enforcement action involving allegedly deceptive gift card sales."

The other FTC Action was against K-Mart, which was similar.

"The FTC's complaint alleges that since 2003, Kmart did not disclose adequately that after 24 months of non-use, a $2.10 "dormancy fee" would be deducted from the card's balance for each month of inactivity, resulting in a $50.40 reduction from the card's value if the card was not used for 24 months. In many instances, the Commission alleges, consumers did not learn of the fee until they attempted to use their cards."

There have been similar lawsuits. The Attorney General of New Hampshire filed the suit in November of 2004, charging that Simon was in violation of a provision of the Consumer Protection Act that forbids the selling of gift certificates that bear expiration dates or fees that reduce the value of the gift certificate. In its lawsuit, the State noted that the Simon Gift Card, a prepaid debit card sold at shopping malls owned or operated by Simon, has both an expiration date and fees that are charged against the value of the card."

Tivo settled a class action regarding its gift cards. "Every state has a different set of rules, but in the Golden State, you're not allowed to put an expiration date on a gift certificate, except in very rare instances. This is largely because gift certificates are typically purchased with cash and it's not fair for a consumer to lose out on a service just because they didn't move quickly enough or because they received the gift on a later date. When it comes to rebates, coupons and other discounts anything goes, but once a consumer has purchased a gift certificate, it's good for life as far as California is concerned."

The FTC has published their own gift card buying brochure, but the best summary and comparisons of gift cards comes from the Montgomery County Office of Consumer Protection.

The Montgomery County of Consumer Protection organized their review of gift cards into these five categories: a) Is a Replacement Cards Available, b) Can the Gift Card be used to buy from the Website, c) Is there an Expiration date, d) Are there fees, and e) Are the expiration and the fees clearly disclosed on the card and the company's website.

The Montgomery County of Consumer Protection annual assessment provides a franchise system with a useful checklist.

Should franchise systems adopt the California rule, and have no expiration dates on their gift cards? This seems like a fairly consumer friendly move. But there is a problem here.

Court Orders Three Individuals to Stop Illegal
The FTC's Complaint: According to the FTC's complaint, filed in September 2005, since at least 2004, the defendants used outbound telemarketing to contact consumers in the United States, falsely offering major credit cards, such as MasterCard and Visa, to people who agreed to have the defendants electronically debit their bank accounts for an advance fee of $249. The defendants typically claimed that the credit cards would have a $2,000 credit limit, zero percent interest, and no annual fees, and often targeted their offers at consumers with poor credit histories. Consumers who provided their bank account information did not receive a major credit card, but instead were sent an application for either a "stored value card" or "cash card" that had no line of credit associated with it and could be used only if the consumer first loaded funds onto the card. The complaint also alleged that the defendants violated the law by calling consumers on the FTC's National Do Not Call Registry.

The complaint named the following entities as defendants, both individually and as corporate officers: Sean Somma aka Sean Soma, individually and as an officer of corporate defendants Centurion Financial Benefits LLC and 1629936 Ontario Ltd, also dba Spectra Financial Benefits; Antonio Marchese aka Tony Marchese, individually and as an officer of corporate defendant 1644738 Ontario Ltd., also dba Sureway Beneficial, Simple Choice Benefits, and Oxford Financial Benefits; Tony Andreopoulos, individually and as an officer of corporate defendants American Getaway Vacations Inc., Credence Travel Processing Inc., and Topstar Media Inc., also dba Integra Financial Benefits; and Dennis Andreopoulos, individually and as an officer of corporate defendants American Getaway Vacations Inc. and Topstar Media Inc., also dba Integra Financial Benefits.

The complaint also charged the following corporations: Centurion Financial Benefits LLC; 1629936 Ontario Ltd., also dba Centurion Financial Benefits; 1644738 Ontario Ltd, dba Integra Financial Benefits; American Getaway Vacations Inc., also dba Integra Financial Benefits; Credence Travel Processing Inc., dba Integra Financial Benefits; and Topstar Media Inc., also dba Integra Financial Benefits. The FTC filed an amended complaint in December 2006, adding several corporate and individual defendants. Litigation continues against all defendants other than Somma, Cholette, Marchese, and Dennis Andreopoulos, whom the Commission voluntarily dismissed as a defendant.

The Stipulated Final Orders: The court orders announced today against defendants Soma, Cholette, and Marchese include strong injunctive relief that will help ensure that they do not engage in similar illegal conduct in the future. Specifically, the orders prohibit the defendants from making misrepresentations regarding credit cards or any other product, program, or service offered to consumers. They prohibit the defendants from violating the Do Not Call provisions of the Telemarketing Sales Rule and from selling, leasing, or transferring the information in their customer lists to anyone. In addition, the orders subject them to strict monitoring and compliance requirements.

Finally, the orders contain an avalanche clause that would require the defendants to pay more than $9.8 million, the total amount of consumer injury caused by the scam, if they are found to have misrepresented their financial condition. The orders also require them to cooperate with the FTC in its ongoing litigation against the remaining Centurion defendants.

From the DFA, "The judge in the United States District Court for the District of Minnesota granted the franchisees' motion for summary judgment. Effectively this ruling determined that the franchise agreements preclude the PULSE mandate and requires Domino's to provide franchisees with specifications for computer hardware and software so that the franchisees can acquire such computer hardware and software from any source. More particularly, the judge ruled that:

1. Section 8.2 precludes Domino's from mandating PULSE, or any other computer system, for that matter.

2. Section 8.2 requires Domino's to provide franchisees with the specifications for a computer system.

3. Specifications and/or standards are guides to constructing a finished product, and therefore they cannot be a finished product.

4. Section 8.2 requires Domino's to provide franchisees with specifications for computer hardware and software that would render it possible to obtain such items from multiple sources.

Given this ruling it is even more critical that you do not sign the current PULSE License Agreement, since the signing of such an agreement could impact your ability to exercise your rights under the franchise agreement, as clarified by the District Court ruling.

As stated in the past, we are neither pro-PULSE or anti-PULSE, we simply are pleased that the District Court has confirmed our belief that we have the right to acquire computer equipment meeting Domino's reasonable specifications from any source."

The entire ruling can be read here., and the DFA's press release is here.

This is area of commerce is going to be increasingly important. Domino's spent years developing the Pulse system, no doubt in part to track the consumer preference information.

What is emerges from a reading of the Court order that Domino's developed the new computer system without involving the Franchisee Association on how to share the additional revenue or information gathered.

Without such input and collaboration, it is no wonder why the DFA opposed the mandatory use of the Pulse system.

What does this mean for other franchise systems, who seek to share revenue or information by introducing new point of sale systems? Well unfortunately, like all hard won franchisee victories, this ruling would have been different had the franchisor thought to include computers and point of sale systems under items that had to be supplied by the franchisor in the contract. Would you like to bet about what is on the agenda for the next IFA's legal conference?

Let's hope that the DFA and the franchisor can now put behind them this contentious litigaiton and work together on setting joint goals, and devising fair procedures to split the value from obtaining those joint goals fairly. Ironically, there are great gains to be had for both

According to a FTC Press Release, FTC Charges Pitchmen with Deceptive Magazine Subscription Telemarketing

The Federal Trade Commission has charged several Pennsylvania-based defendants with violating the FTC Act and the Telemarketing Sales Rule (TSR) by calling consumers and telling them they were eligible to receive 'valuable coupons' for groceries and other items, when in fact they were luring them into signing up to purchase unwanted magazine subscriptions. The Commission's complaint states that the defendants, collectively known as Magazine Solutions, often did not tell consumers up-front that to get the coupons they had to buy the subscriptions, and sometimes claimed the magazines were free or that the consumers only had to pay shipping and handling. When consumers tried to cancel their orders, many found it was nearly impossible to do, and were stuck with subscriptions to magazines they never wanted in the first place.

According to the Commission's complaint, the defendants violated Section 5 of the FTC Act and the TSR through their sale of magazine subscriptions and a coupon-redemption program. Since at least 2002, the FTC contends, they telemarketed to consumers nationwide in a campaign that supposedly offered free coupons worth over $1,000, but actually was a pitch for magazine subscriptions.

According to the complaint, defendants typically place a series of telephone calls to consumers in which they misrepresent that they are calling to conduct a survey; misrepresent that they are not selling anything; and misrepresent that the consumer will receive valuable coupons worth over $1000. Eventually, defendants disclose that to receive the coupons consumers must agree to receive magazine subscriptions, but misrepresent the total cost and terms of the subscriptions.

The Commission also charges that many consumers refused defendants' offer and agreed only to receive information about it in the mail, yet defendants misrepresent that these consumers are legally obligated to pay and attempt to collect a monthly fee from them. The defendants also threaten to take legal action to collect payment from consumers if necessary, but do not. The FTC contends that in many cases, consumers never got the coupons that they were promised or never agreed to the defendants' offer to begin with, yet were charged hundreds of dollars and harassed and threatened by the defendants when they refused to pay for their 'service.' The defendants also reported consumers' failure to pay to credit bureaus.

The Commission specifically alleged that the defendants violated the TSR when they called consumers and often did not make it clear that they were offering products for sale, failed to disclose the total cost of their program before obtaining payment information, made misrepresentations to induce consumers to make a purchase, and misrepresented their cancellation policy.

The complaint names the following individuals and organizations as defendants: 1) Magazine Solutions, LLC, a Pennsylvania limited liability company also doing business as (d/b/a) MagazineSolutions, United Publishers' Service, and Read-N-Save America; 2) United Publishers' Service, Inc., also d/b/a Magazine Solutions, MagazineSolutions, and Read-N-Save America; 3) Joseph Martinelli, individually and as an officer of Magazine Solutions, LLC and United Publishers' Service, Inc.; 4) Barbara DeRiggi, a/k/a Barbara Nicely, individually and as a manager of Magazine Solutions, LLC and United Publishers' Service, Inc.; and 4) James Rushnock, a/k/a Jay Gilbert, individually and as a manager of Magazine Solutions, LLC and United Publishers' Service, Inc.

The FTC's complaint seeks to permanently bar the deceptive marketing and freeze the defendants' assets to preserve them for consumer redress. The Commission's filing comes shortly after the Pennsylvania Attorney General's Office filed contempt charges against defendant United Publishers' Service, Inc. for violating a previous court order prohibiting the company from, among other things, violating Pennsylvania's consumer protection law and the FTC's TSR.