FTC Takes Action Against Qargo Coffee for Franchise Rule Violations

The Federal Trade Commission has taken action against coffee shop franchise Qargo Coffee and its founders for failing to disclose critical information required by the Franchise Rule, including one founder’s ties to burger franchise BurgerIM, leaving prospective franchisees in the dark when deciding whether to invest in the franchise.

In its complaint, the FTC alleged that Qargo and founders Mark Bastorous, Bernadette Bastorous, and Samir Shenouda violated the FTC’s Franchise Rule—the agency’s second case in recent years alleging violations of the Franchise Rule.

“Before franchisees take on the risk and investment of starting a business, they deserve to know basic information about the opportunity upfront—from the franchise’s overall financial health to the time it would take to set up shop,” said FTC Chair Lina M. Khan. “The FTC will continue using all its tools to ensure that franchisees, small businesses, and entrepreneurs can get a fair shot.”

The complaint notes that Qargo’s founders, which have offered a coffee shop franchise throughout the country since May 2020, violated the Franchise Rule by failing to provide prospective franchisees with critical information needed to weigh the risks and benefits of purchasing a huge investment like a franchise in Qargo’s franchise disclosure document (FDD). The FTC also alleged that Qargo called its franchisees in California “licensees” and completely failed to provide prospects in California with any FDD.

In addition, the Commission alleged that Qargo and its founders violated the FTC Act by engaging in unfair practices and making misrepresentations to prospective franchisees. For example, defendants omitted information about the business history and experience of its executives and made misrepresentations about how long it takes for franchises to get off the ground and whether there were any bankruptcies that needed to be disclosed.

The proposed order against Qargo and its founders imposes a $1,258,575 judgment. Based on the proposed defendants’ inability to pay the full amount, the proposed order requires the defendants to pay $30,000, with the remaining judgment suspended. The proposed order also:

• Requires Qargo and its founders to provide written notice to its franchisees and licensees, informing them of their right to rescind their contracts without penalty;
• Prohibits the defendants from enforcing or threatening to enforce any noncompete agreement or provision against any franchisee or licensee who rescinds their contract;
• Prohibits the defendants from making misrepresentations or deceptive omissions of any fact material to prospective franchisees; and
• Requires the defendants to comply with the Franchise Rule, including by providing franchise disclosure documents to prospective franchisees.

The Commission vote authorizing the staff to file the complaint and stipulated final order was 5-0. FTC filed the complaint and final order in the U.S. District Court for the Southern District of Florida.

NOTE: The Commission files a complaint when it has “reason to believe” that the named defendants are violating or are about to violate the law and it appears to the Commission that a proceeding is in the public interest. Stipulated final orders have the force of law when approved and signed by the District Court judge.

FTC’s lead attorneys on this matter are Christine M. Todaro and Josh Doan in the FTC’s Bureau of Consumer Protection.