FTC Stops Coffee Shop Franchisors From Using Inadequate Disclosure Documents

A company and its officers, selling coffee shop franchises under the trade name “Barista’s Daily Grind,” have settled Federal Trade Commission charges that they gave consumers inadequate disclosure documents and made earnings claims without the required documentation. The settlement agreement prohibits the defendants from violating the Franchise Rule in the future and requires them to take compliance training offered by the International Franchise Association before selling any franchises.

According to the FTC, Barista’s and Friends, Inc. sold at least 18 franchises for $40,000 each. For the fee, the franchisees got the right to use the Barista’s trade name and sell their authorized products. The FTC charged that the disclosure documents that defendants furnished
to prospective franchisees lacked many of the items of information required by the Franchise Rule, including:

• audited financial statements, including a balance sheet and an income statement;
• a cover page that among other things advises prospective franchisees to discuss the franchise offering with an advisor such as a lawyer or accountant and advises prospective franchisees to report anything wrong or anything important that’s been left out;
• the names, addresses, and telephone numbers of: the ten franchised outlets nearest the prospective franchisee’s intended location, all franchisees of the franchisor, or all franchisees of the franchisor in the state in which the prospective franchisee lives or where the proposed franchise is to be located;
• the business experience of the franchisor, including the length of time the franchisor has conducted a business of the type to be operated by the franchisee; and
• the business experience during the past five years of the franchisor’s current directors and executive directors.

In addition, the FTC alleged that even though the defendants provided projected earnings claims to prospective franchisees, the defendants did not provide consumers with an earnings claims document as required by law.

The complaint and stipulated final order, filed for the FTC by the US Department of Justice named Barista’s and Friends, Inc. and its principals Steven Sickler (President and Co-Chief Operating Officer) and Cathy Mettenbrick (Vice President, Secretary, Treasurer, and Co-Chief Operating Officer.)

The order enters a $242,000 civil penalty, suspended based on sworn financial disclosure documents. The defendants are prohibited from further violations of the Franchise Rule. The FTC would like to thank the Office of Consumer Litigation, the Department of Justice, and the U.S. Attorney’s Office for the District of Nebraska for their assistance in this matter.

The Commission vote to refer the complaint and stipulated final order to the Department of Justice for filing was 5-0.

The complaint and stipulated final order were filed on October 17, 2007 in the U.S. District Court for the District of Nebraska by the Department of Justice at the request of the FTC.

NOTE: This consent decree is for settlement purposes only and does not constitute an admission by the defendant of a law violation. A consent decree is subject to court approval and has the force of law when signed by the judge.

The FTC works for the consumer to prevent fraudulent, deceptive, and unfair business practices and to provide information to help spot, stop, and avoid them. To file a complaint in English or Spanish, click http://www.ftc.gov/ftc/complaint.shtm or call 1-877-382-4357. The FTC enters Internet, telemarketing, identity theft, and other fraud-related complaints into Consumer Sentinel, a secure, online database available to more than 1,600 civil and criminal law enforcement agencies in the U.S. and abroad. For free information on a variety of consumer topics, click http://ftc.gov/bcp/consumer.shtm.