The U.S. Federal Trade Commission filed a rare complaint against a Miami-based coffee shop chain, accusing the company of violating franchise rules by failing to provide prospective franchisees with proper information before they signed on to open a store.
The commission is proposing a $1.3 million judgment against Qargo and its officers, Mark and Bernadette Bastorous and Samir Shenouda. But the FTC, citing their inability to pay the full amount, is proposing a suspended judgment with a reduced fine of $30,000.
It is just the second complaint that the FTC has filed against a company for violating federal franchise rules in 17 years. The last one was Burgerim, which was sued in 2022 for defrauding some 1,500 franchisees of millions in franchise fees.
Qargo allegedly sold 59 franchises all over the country starting in 2021. The FTC said that the company sold franchises in California without providing franchisees with a franchise disclosure document (FDD), a compilation of various information about the offering required of all such franchises.
The agency called its California franchisees “licensees,” the FTC said.
In other states, the FTC said, Qargo didn’t provide certain information in the FDDs it did provide operators, notably the founders’ history of filing for bankruptcy. Those documents also omitted Mark Bastorous’s role in Burgerim. Bastorous was the burger franchise’s area developer in Florida.
The FTC also accused Qargo of telling prospective franchisees that they could get their store up and running within four months. “Defendants are keenly aware that their franchisees have either failed to open at all or have taken much, much longer to open,” the commission’s complaint says.
The commission’s proposed order requires Qargo and its founders to provide written notice to franchisees informing them of their ability to rescind their contracts. It also prohibits the company from threatening to enforce any noncompete agreement and requires Qargo to comply with the federal franchise rule.
“Before franchisees take on the risk and investment of starting a business, they deserve to know basic information about the opportunity up front, from the franchise’s overall financial health to the time it would take to set up shop,” FTC Chair Lina Khan said in a statement.
The lawsuit is indicative of a more aggressive stand against problems in the franchise sector than the FTC has traditionally taken.
The agency has largely stayed away from franchise regulation, requiring companies to publish an FDD but rarely enforcing violations of that rule.
In the Burgerim case, the company was ultimately fined $56 million and told not to sell franchises but the franchise appears largely to be defunct. Oren Loni, the brand’s founder who shut the corporate offices in late 2019 and fled the country, agreed to a $1,000 fine and a ban on selling franchises in the U.S.
Beyond that, however, the FTC has taken more deliberate regulatory actions, telling franchisors they can’t charge undisclosed fees and that they can’t take action against franchisees that take complaints to the government. The commission also published a list of complaints franchisees have with franchising.
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