Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION NEWS: Window business charged with failing to provide presale disclosures to franchisee, (Feb 10, 2015)

By Linda O’Brien, J.D., LL.M.

A door-to-door window sales business operator engaged in deceptive practices by (1) marketing its sales of window sales business opportunities as license agreements when those arrangements were, in fact, the sales of franchises and (2) failing to provide pre-sale disclosures to prospective purchasers, according to a complaint filed in the federal district court in Pittsburgh (Untitled 3, LLC v. Apex Energy Group, LLC, February 6, 2015).

Apex Energy Group operates a door-to-door window sales business and sells window sales business opportunities.

The complaint states that, in 2012, a developer for Apex contacted a manager at Untitled 3 to discuss a window sales opportunity nominally being marketed as a mere licensing arrangement. The developer circulated a baseless pro forma (financial performance representations) designed to oversell Untitled 3 on the merits of making a business purchase from Apex. In order to elicit Untitled 3’s agreement to make a business purchase, Apex made unsupported financial performance representations regarding the performance of existing businesses established elsewhere in the country and the likely financial benefits if Untitled 3 purchased the window sales business.

The plaintiff relied on the representations of Apex and the pro forma and moved forward with the purchase in 2013. The agreement, titled a “license” agreement, gave the purchaser the right to implement the Apex System in an exclusive territory. In return, the purchaser was required to pay Apex a $70,000 fee and seven percent of its gross sales. The business sold by Apex qualified as a franchise, according to the plaintiff. Nevertheless, Apex routinely sells businesses that it refers to as “licenses” without first providing prospective franchisees with Franchise Disclosure Documents (FDDs), as required by the FTC Amended Franchise Disclosure Rule, the complaint alleges.

According to the complaint, the franchised business did not perform anywhere near as well as projected by Apex and Untitled 3 has reasonable basis to question whether the pro forma presented by Apex was based on the actual results of any meaningful percentage of existing Apex franchised businesses. The FTC’s Amended Franchise Rule requires a franchisor to provide certain disclosures to prospective franchisees contained in a written FDD prior to the purchase of the franchise. Apex failed to honor the disclosure obligation, misleading the plaintiff into purchasing a license to use Apex’s window sales business format.

Because Untitled 3 did not receive a pre-sale disclosure from Apex that met the requirements of the FTC rule, it was left to rely upon Apex’s pro forma. The pro forma given to the plaintiff misrepresented that the business had the likelihood of financial benefits that it did not, in fact, have and that the business format would generate substantial financial benefits for the plaintiff that it did not. Untitled 3 began operating in its assigned market immediately after completing the training process in February 2013 and the business sales and profits never approached either of the top gross sales figures identified in the pro forma. Furthermore, the plaintiff is unaware of any system licensee/franchisee who has achieved the sales revenues and/or gross profits highlighted in Apex’s pro forma, the complaint charges.

The plaintiff asserts claims for constructive fraud, fraudulent concealment, breach of contract, and violations of the Indiana Deceptive Consumer Sales Act and Pennsylvania Unfair Trade Practices and Consumer Protection Law. The action seeks declaratory relief, rescission, restitution, actual, exemplary, and treble damages, costs of suit, attorney fees, and any other just and proper relief.

The case is No. 2:15-cv-00163-MRH.

Attorneys: Thomas J. Michael, Sr. (The Commerce Law Group, LLC) for Untitled 3, LLC.

Companies: Untitled 3, LLC; Apex Energy Group, LLC

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