Antitrust Lawyer Blog Commentary on Current Developments

FTC Recovers $160,000 for Franchisees Who Bought Web Services Businesses

On May 15, the FTC banned Elliot Krasnow from ever promoting or selling franchises or business opportunities ever again. Along with his company Netvertise, Inc, Krasnow returned $160,000 to consumers after the FTC charged that they used bogus earnings claims to lure franchisees into buying their Web services businesses, and failed to tell customers that the owner was under a previous FTC order for deceptively promoting rare coins.

Netvertise, Inc. and Elliot Krasnow allegedly violated federal law when they sold franchises for Web site design and promotion services to businesses. The franchises, which cost between $20,000 to $100,000, offered various Internet services to small and medium-sized businesses, including the construction and promotion of Web sites, use of e-mail marketing, and off-site data protection. The franchise included Netspace’s Search Engine Optimizing software, which they claimed would allow franchisees to create high-quality Web sites for clients that would appear on the first page of results from an Internet search engine.

Krasnow allegedly overstated the value of the Netspace software and misrepresented that franchisees would earn substantial incomes. The complaint also charged that the earnings claims were unsubstantiated and that the defendants provided consumers with defective disclosure documents. In 1990, Krasnow had to pay $400,000 and prohibited misrepresentations when dealing in rare coins. The franchise disclosure documents did not disclose this to franchisees as required by law. The defendants also did not provide franchisees with an earnings claim document even though they made earnings claims to potential buyers. In fact, even though they made oral representations, the defendants’ basic disclosure document said no earnings claims were made.

FTC’s settlement with the defendants prohibits them from marketing or selling any business arrangement covered by the Franchise Rule or the Business Opportunity Rule. The defendants are prohibited from misrepresenting any business ventures or investment opportunities, including misrepresenting: the likelihood that purchasers will earn a substantial income, the amount of income purchasers can expect to receive, the amount of income anyone who already purchased has received, and any risks involved. The order requires the defendants pay $160,000, which will be used for consumer redress. If the defendants misrepresented their financial status, they will be liable for the full judgment amount of $500,000.

The Commission vote to authorize staff to file the stipulated final order was 5-0. The stipulated final order for permanent injunction was filed May 9, 2007.

Camelia Mazard
(202) 589-1834
cmazard@dbmlawgroup.com