A Miami-based coffee company that allegedly sold 59 franchises in several states and collected more than $1.25 million in fees is being accused by the U.S. Federal Trade Commission of violating the federal 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.
Qargo Coffee faces a rare complaint brought by the FTC, which proposed a $1.3 million judgment against the company and its officers, Mark and Bernadette Bastorous and Samir Shenouda. Citing their inability to pay that amount, however, the FTC proposed a reduced fine of $30,000, with the remaining penalties suspended unless a court finds they failed to disclose material assets or misled the court about their financials.
The complaint, announced October 16, is only the second filed by the FTC against a company for violating federal franchise rules in 17 years. The FTC in 2022 sued restaurant franchise Burgerim for defrauding more than 1,500 people and collecting tens of millions of dollars in fees. Earlier this year a federal court banned Burgerim and its founder from selling franchises in the United States.
The failure of Qargo Coffee to disclose one founder’s ties to Burgerim is among the disclosure violations alleged by the FTC. Mark Bastorous was the burger franchise’s area developer in Florida, information omitted from Qargo’s franchise disclosure document.
The company also failed to disclose the founders’ history of filing for bankruptcy. Mark and Bernadette Bastorous, also known as Mark and Bernadette Bass, opened a Steak ‘n Shake franchise in 2014 and their restaurant “soon faced financial challenges,” according to the complaint. They filed for Chapter 7 bankruptcy in 2017.
The agency in its complaint also said the company sold franchises in California without providing franchisees with an FDD and instead “attempted to avoid California’s franchise-registration law by characterizing their offering within that state—and only that state—as a ‘distributorship.’”
Qargo is also accused of misleading prospective franchisees about the time it takes to open a store. The FTC in court filings said the company told potential owners a typical franchisee could get open within four months of signing their franchise agreement.
“But these representations are false, as Defendants are keenly aware that their franchisees have either failed to open at all, or have taken much, much longer to open,” the commission said.
Qargo Coffee, founded in 2020, had two stores open at the end of 2023, according to its most recent FDD, with a sold-but-not-open figure of 22 and 117 franchise outlets projected to open in the next fiscal year. Its website lists 10 open locations as of October 17 and 10 as “opening soon.”
The FTC’s proposed order requires Qargo to provide written notice to franchisees informing them of their ability to rescind their contracts. It does not stipulate any repayment of fees. It does prohibit the company from enforcing or threatening to enforce any noncompete agreement and requires compliance with the Franchise Rule.
Shenouda, listed in Qargo’s 2024 FDD as CEO, did not immediately respond to a request for comment. Jason Power, an attorney with Barber Power Law Group and counsel for Qargo Coffee, also did not respond to a request for comment.
“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,” FTC Chair Lina Khan said in a statement. “The FTC will continue using all its tools to ensure that franchisees, small businesses, and entrepreneurs can get a fair shot.”
This most recent lawsuit further signals the tougher stance taken by the FTC as it examines the franchise model. The agency this summer issued new guidance that was critical of franchisors’ growing use of extra fees charged to franchisees.
It also published a list of what it called the “top dozen concerns raised by franchisees” during its 2023 request for information. The FTC reopened the comment period for the RFI and extended the deadline for public comment to October 24. Comments can be made at regulations.gov.