One of the Federal Trade Commission’s (FTC) steamiest actions against a franchisor occurred in October 2024 when the agency announced a settlement with Qargo Coffee and several of its officers. The FTC alleged that Qargo violated the FTC Act, 15 U.S.C.§45(a), which prohibits unfair or deceptive practices in commerce; and the Franchise Rule, 16 C.F.R. part 436, which is a presale disclosure rule applicable to the sale of franchises.
The FTC making a public example of a franchisor is rarer than a pound of Kopi Luwak beans. With that in mind, Lusthaus Law blended this case study into an Insight, with strong notes that accentuate why many NY franchisors should avoid committing the same mistakes.
History of Qargo
Qargo Coffee is a Florida-based coffee shop franchise founded in May 2020 that has seemingly signed nearly 90 franchise and distribution agreements since 2022. Qargo prides itself on apparently serving Lavazza, a prominent Italian brand of coffee and products, and its locations include traditional coffee shops, small-format stores, and drive-thrus.
Allegations Against Qargo Coffee
The FTC’s Code of Federal Regulations contains the Franchise Rule, which obligates franchisors to provide to prospective buyers with a Franchise Disclosure Document (FDD). The FDD is intended to provide prospective purchasers of franchises material information to help them weigh the risks and benefits of such an investment. The FTC’s complaint highlighted two primary violations of the Franchise Rule:
- Failure to Provide FDDs: Qargo Coffee allegedly did not furnish prospective franchisees with the mandatory FDDs, which are essential for informed decision-making.
- Incomplete Information in FDDs: When FDDs were supplied, they reportedly lacked crucial details, undermining their effectiveness.
Additionally, the FTC accused Qargo Coffee of violating the FTC Act and Franchise Rule by:
- Misrepresenting Store Opening Timelines: Providing false information about how quickly franchisees could launch their locations.
- Withholding Key Information: Failing to disclose important aspects of the business history and experience of its officers. This includes one founder’s ties to a burger franchise, which could have created conflicts of interest for franchisees.
Whether the owners of the franchise company were misinformed, misguided, or simply thought they could avoid transparency is irrelevant. It simply underscores the need for a qualified franchise lawyer to ensure franchisors comply with applicable franchise laws.
FTC Settlement Terms
To address these allegations, Qargo Coffee agreed to:
- Ensure Transparency: Provide accurate and complete information to future franchisees, adhering strictly to the Franchise Rule.
- Offer Contract Cancellation: Allow existing franchisees the option to cancel their contracts without penalty.
- Non-Enforcement of Non-Compete Clauses: Refrain from enforcing or threatening to enforce any non-compete provisions against franchisees who choose to cancel their contracts.
- Monetary Judgment: Imposition of a judgment in the amount of $1,258,575, which was suspended based on Qargo Coffee’s inability to pay. However, if it is found that they misrepresented their financial status, the full amount will become immediately payable.
Implications for Franchisors
The FTC has been actively monitoring and addressing unfair practices in franchising. The Qargo settlement serves as a critical reminder for all franchisors about the importance of compliance with the Franchise Rule and state franchise laws. In July 2024, the FTC issued a warning to franchisors regarding unfair and deceptive practices imposed on franchisees, marking these as illegal. The FTC will continue to enforce this rule in 2025, despite its eventual change in leadership.
Franchisors are urged to collaborate with their NY franchise lawyers to conduct thorough compliance checks to ensure adherence to all regulatory requirements. This will establish the grounds for transparent and fair relationships with franchisees. Furthermore, it will help avoid million-dollar fines and reputational damage.
Contact Lusthaus Law
Lusthaus Law’s website is a resource for New York franchisors and franchisees. We have published two downloadable and complimentary e-books and our Insights blog is regularly updated to reflect industry trends and recent achievements in client representation.
Contact us today to learn more about how Lusthaus Law P.C. can help you navigate a clear path for your franchise’s successful future.
