Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—C.D. Cal.: FTC’s Business Opportunity Rule does not apply to excess inventory location business plan, (Aug 2, 2013)

By Tobias J. Gillett, J.D., LL.M.

The FTC’s Business Opportunity Rule did not apply to a company’s sale of a business plan under which consumers would locate third party companies with excess inventory in exchange for a share of any profits the company might make from selling the inventory, the federal district court in Los Angeles has ruled (United States v. The Zaken Corp., July 31, 2013, Pregerson, D.). The court therefore denied the government’s motion for a preliminary injunction against the company.

The Zaken Corp. offers a “Wealth Building Home Business Plan” to consumers for $148.00, plus shipping, which tells consumers how to locate businesses with excess inventories. The consumers can then inform Zaken about inventories they have identified, and if Zaken successfully buys the products and sells them for a profit Zaken pays the consumers fifty percent of the net proceeds. Zaken advertises that “2 to 4 hours a week working this business will earn [participants] an average of $3,000 to $6,000.”

On November 9, 2012, the government filed suit against Zaken and Tirian Zaken as an individual for violations of the FTC’s Business Opportunity Rule. In the present motion, the court addressed the government’s motion for a preliminary injunction against further violations of the Rule and for the defendants to preserve their assets.

The court observed that “a private party seeking a preliminary injunction generally must show (1) that he is likely to succeed on the merits, (2) that he is likely to suffer irreparable harm in the absence of preliminary relief, (3) that the balance of equities tips in his favor, and (4) that an injunction is in the public interest.” However, the court noted that Section 13(b) of the FTC Act establishes a “more lenient standard,” under which “irreparable injury is presumed.” Therefore, the only issue before the court was “whether the government has shown a likelihood of success on the merits.”

The court concluded that the government did not establish a likelihood of success on the merits because the Business Opportunity Rule did not apply to the defendants’ activities. The court explained that the Rule defines a “business opportunity” as an arrangement in which “[t]he seller, expressly or by implication, orally or in writing, represents that the seller or one or more designated persons will: (i) [p]rovide locations for the use or operation of equipment, displays, vending machines, or similar devices, owned, leased, controlled, or paid for by the purchaser; or (ii) [p]rovide outlets, accounts, or customers, including, but not limited to, Internet outlets, accounts, or customers, for the purchaser’s goods or services; or (iii) [b]uy back any or all of the goods or services that the purchaser makes, produces, fabricates, grows, breeds, modifies, or provides, including but not limited to providing payment for such services as, for example, stuffing envelopes from the purchaser’s home.”

The court noted initially that defendants did not represent that they “will” take any of the actions listed in the third prong of the Rule, only that they may take such actions if a deal for excess inventory is consummated and if Zaken can sell the merchandise at a profit.

Moreover, the court rejected the government’s contention that Zaken fell within the Rule because the defendants promised that Zaken would itself serve as the consumers’ customer for purposes of the provision regarding “[p]rovid[ing] outlets, accounts, or customers.” The court observed that the ordinary meaning of “customer,” as evidenced by dictionary definitions, “requires a purchase of some sort,” but that Zaken “never purchases a service from consumers.” Consumers would not “necessarily receive or require anything of value in exchange for the information they share with Zaken,” and even when their information did result in a transaction the consumer would not be a party to it. Further, Zaken did not provide outlets for the consumers’ goods or services, but rather provided outlets for merchandise that did not belong to the consumers.

Zaken also did not fall under the provision regarding “buy back” of a purchaser’s goods or services, according to the court. The court noted that the Rule did not “provide insight as to how one might ‘buy back’ a service,” but did provide an example of an arrangement falling within the scope of the provision, that of “providing payments” for “stuffing envelopes from the purchaser’s home.” Zaken did not “offer to ‘provide payment’ to consumers in exchange for any service or good,” but rather “in essence offers consumers an incentive to provide information that may or may not yield them some ultimate benefit.” Therefore, the court found that applying the Rule to the “contingency arrangement” between Zaken and consumers would be “inconsistent” with the provision requiring “at the very least, that a seller of a business opportunity pay the purchaser for performing a service.”

The case is No. CV 12-09631 DDP (MANx).

Attorneys: William I. Rothbard (Law Office of William I. Rothbard) for The Zaken Corp.

Companies: The Zaken Corp.

Cases: FranchisingDistribution ConsumerProtection FederalTradeCommissionNews CaliforniaNews