Florida-Based Medical Equipment Business Franchisors Settle FTC Charges

Majors Medical Supply, Inc., of Boca Raton, Florida, and its two corporate officers have agreed to settle Federal Trade Commission charges that they made false claims about the income franchisees could make and the start-up costs of investing in their medical equipment business ventures. Among other provisions, the settlement provides for the liquidation of Majors Medical Supply's corporate assets; requires the individual defendants -- Stuart Phillips and Joanne Phillips -- for five years to post a $1 million bond each before involving themselves in the sale of any franchise or business opportunity; and prohibits them from misrepresenting the likely income, profits or sales of any product or service they offer in the future.

The FTC filed charges in federal district court against these defendants as part of "Operation Missed Fortune," a federal-state enforcement crackdown on business opportunity and employment schemes that involved more that 75 total actions by the FTC and securities regulators or Attorneys General from 25 states (See Nov. 13, 1996 Operation Missed Fortune news release, as well as consumer education materials on business opportunities on the Internet at the FTC's website at www.ftc.gov). The FTC said in announcing the crackdown that false profit or earnings claims are a hallmark of deceptive business opportunity schemes and urged consumers to insist on getting written substantiation for such claims, as well as a list of other franchisees so that they can talk with them and visit their businesses.

In this case, the defendants sold franchises, operating under the "Majors Medical Supply" trade name, for the sale and rental of durable medical equipment, such as wheel chairs and hospital beds. Franchisees were to sell the equipment to individuals and then the defendants, on behalf of the franchisees, were to bill those individuals' third-party payers (such as insurance companies and Medicare) for payment. The franchisee fee was a minimum $25,000.

The FTC said in papers filed with the court that the defendants often failed to submit invoices for payments within promised time frames, causing franchisees to receive no payments or to receive payments late, so that they experienced a negative cash flow or lost their investment. According to the FTC complaint detailing the charges, the defendants misrepresented the initial investment necessary for the first three months of operation, misrepresented the amount of profit they would achieve after that time, failed to provide prospective franchisees with a complete or accurate basic disclosure document as required by the FTC's Franchise Rule, and provide the earnings claim substantiation document that also is required by that rule.

Upon filing of the Commission complaint, the court issued a temporary restraining order against the defendants barring the challenged conduct, appointing a receiver over the corporate defendant and freezing the assets of all three defendants. The settlement announced today would end the litigation.

The proposed settlement, a stipulated judgment that requires the court's approval to become binding, includes provisions that would restrain Majors Medical Supply from misrepresenting any material fact in connection with the sale of a franchise or business opportunity and from violating the FTC's Franchise Rule, and permit the liquidation of all corporate assets. In addition, the settlement provisions that pertain to Stuart and Joanne Phillips would:

• require them, for five years, to post a $1 million performance bond before having any involvement in the sale of franchises or business ventures;

• prohibit them from making false or misleading statements about the income, profits or sales volume achieved or achievable through the use of any product or service, the cost of any product or service, or the length to time it may or will take to recoup the cost or service (this would apply to any business opportunity, or any other product or service they offer);

• require them to comply with the Franchise Rule;

• require them to transfer their stock in Majors Medical Supply to end their affiliation with the company, to release franchisees from any contractual obligations and return any shares they hold in franchisees' businesses to the franchisees;

• allow the FTC to impose a $5 million judgment on them, should the Commission find that they have misrepresented or omitted any assets in their financial statements; and

• require that securities inherited by Stuart Phillips be liquidated and placed into escrow subject to resolution of a tax lien, with any remaining funds to be used for redress to consumers.

The settlement also contains various record keeping and reporting provisions designed to assist the FTC in monitoring the defendants' compliance.

The Commission vote to file the stipulated permanent injunction in court was 4-0. It was filed on Sept. 19 in U.S. District Court for the Southern District of Florida, Northern Division, in Fort Lauderdale, and requires the court's approval to become binding.

NOTE: This consent judgment is for settlement purposes only and does not constitute an admission by the defendant of a law violation. Consent judgments have the force of law when signed by the judge.

Copies of the documents associated with this case and Operation Missed Fortune are available from the FTC's web site at http://www.ftc.gov and also 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 news as it is announced, call the FTC NewsPhone recording at 202-326-2710.

(FTC File No. X970007)

(Civil Action No. CIV-97-8743-MIDDLEBROOKS)