The Federal Trade Commission (FTC) has launched action against the coffee franchise Qargo Coffee and its founders for failing to disclose key information required under the FTC’s Franchise Rule. The agency, in their complaint filing, alleged Qargo, along with founders Mark Bastorous, Bernadette Bastorous, and Samir Shenouda, of omitting crucial details from their franchise disclosure documents (FDD), putting potential franchisees at risk.
Qargo Coffee, which began offering franchises nationwide in May 2020, is under scrutiny for withholding important information that franchisees need to assess the risks of investing in the business. According to the FTC’s complaint, the coffee shop franchise violated the Franchise Rule by failing to provide adequate disclosures, including the business history of its executives and accurate timelines for franchisees to get their shops operational. Notably, one of the founders had undisclosed ties to the troubled burger franchise Burgerim.
“Before franchisees take on the risk and investment of starting a business, they deserve to know basic information about the opportunity upfront—from the franchise’s overall financial health to the time it would take to set up shop,” said FTC Chair Lina M. Khan. “The FTC will continue using all its tools to ensure that franchisees, small businesses, and entrepreneurs can get a fair shot.”
The FTC also pointed out that Qargo referred to its California franchisees as “licensees” and failed to provide them with any franchise disclosure documents, which are required by law.
Misleading Practices and Heavy Penalties
In addition to violating the Franchise Rule, the FTC alleged that Qargo and its founders engaged in unfair practices by making false representations to prospective franchisees. For example, the company misrepresented the length of time required to open a franchise and failed to disclose any bankruptcies tied to its executives.
A proposed settlement includes a $1,258,575 judgment, though due to the defendants’ claimed inability to pay, they will be required to pay $30,000, with the remainder suspended. The settlement further mandates that Qargo and its founders notify franchisees and licensees of their right to rescind their contracts without penalty, while also prohibiting the enforcement of non-compete clauses for those who rescind.
The FTC’s unanimous decision to pursue the case (with a 5-0 vote) sends a strong message that franchisors must adhere to the law, ensuring fair business practices and transparency. The complaint was filed in the U.S. District Court for the Southern District of Florida and will be enforced once signed by a judge.
This action marks the FTC’s second case in recent years addressing Franchise Rule violations and underscores the agency’s commitment to protecting small business owners from deceptive practices.
NOTE From FTC Release: “The Commission files a complaint when it has “reason to believe” that the named defendants are violating or are about to violate the law and it appears to the Commission that a proceeding is in the public interest. Stipulated final orders have the force of law when approved and signed by the District Court judge.”
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