Court Watch

Reported cases brought by the Federal Trade Commission under the FTC Franchise Rule are rare, largely because most targets do not have the resources to go to battle with the federal government. In Federal Trade Commission v. Network Services Depot, Inc. 2010 WL 3211724 (9th Cir. Aug. 16, 2010), the FTC filed suit in Nevada against the promoters of an Internet kiosk business opportunity. The case is worthy of attention because of its interesting facts that deal with the quantum of proof necessary to hold individual owners and executives liable for equitable monetary relief. Further, the case is important for the franchise bar because it imposed a constructive trust on legal fees paid to the attorneys representing the defendants.

The business opportunity ' the sale of Internet kiosks to be located in airports, hotels, etc., with minimum guaranteed returns to the purchasers ' proved to be a Ponzi scheme, with a small fraction of kiosks ever installed and the “guarantees” being paid by new investors. The original promoter, Network Services Depot, Inc. (“NSD”), contracted with a vending company, Bikini Vending Corp., and its related entities (“BVC”), to install the kiosks. BVC managed the enterprise and guaranteed NSD's customers would receive a minimum return each month. BVC falsely reported robust sales, but the scheme unraveled as a result of a TV expos' and employees jumping ship. NSD also claimed to be a victim, paying BVC millions for installation of kiosks that never were installed. When BVC's activities became public, NSD's owner went to the FBI and cooperated in recording incriminating conversations with BVC.