Consolidated International Tool & Oil, Inc

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IN THE MATTER OF CONSOLIDATED INTERNATIONAL TOOL & OIL, INC. ET AL.

CONSENT ORDER, ETC., IN REGARD TO ALLEGED VIOLATION OF THE FEDERAL TRADE COMMISSION ACT Docket C-27,4. Complaint, Oct. 1975-Decision, Oct. , 1975 Consent order requiring a Rockford, 11., seller of distributorships for automotive products, tools, electrical products, recording tapes, and other products, among other things to cease making unsubstantiated earings claims, false claims concerning the quality and quantity of locations and products they wil provide distributors, and connections or arrngements with nationally advertised corporations. Further, respondents must notify prospective customers that their contracts are not final and binding until a distributor is satisfied with his account locations and has been supplied with suffcient products for his displays.

Appearances For the Commission: J am.es F. Drzewiecki. For the respondents: Patrick H. Sreenan Rockford, Il1. COMPLAINT Pursuant to the provisions of the Federal Trade Commission Act and by virtue of the authority vested in it by said Act, the Federal Trade Commission, having reason to believe that Consolidated International Tool & Oil, Inc., a corporation, Globe Marketing & Services, Inc., a corporation, and Joseph La Franka, individually and as an officer of said corporations, and also doing business as Consolidated Distributing Co., hereinafter sometimes referred to as respondents have violated the provisions of said Act, and it appearing to the Commission that a proceeding by it in respect thereof would be in the public interest, hereby issues its complaint stating its charges in that respect as follows:

PARAGRAPH 1. Respondent Consolidated International Tool & Oil 946 Complaint Inc., is a corporation organized, existing and doing business under and by virtue of the laws of the State of Ilinois, with its principal office and place of business formerly located at 4304 Charles St., Rockford, Ill. Respondent Globe Marketing & Services, Inc., is a corporation organized, existing and doing business under and by virtue of the laws of the State of Ilinois, with its principal offce and place of business formerly located at 4304 Charles St., Rockford, Ill. Respondent Joseph La Franka is an individual and officer of respondent corporations and also does business as Consolidated Distributing Co. He formulates, directs and controls the acts and practices of said business entities including the acts and practices hereinafter set forth. His address is 1211 Florist Dr., Rockford, Ill. PAR. 2. Respondents are now, and for some time have been engaged in the advertising, offering for sale, sale and distribution of distributorships for automotive products, tools, electrical products, recording tapes and various other products to distributors. These products are purchased by distributors for resale to the public. PAR. 3. In the course and conduct of their business, respondents for some time have caused, their said products to be shipped from their place of business in the State of Ilinois to distributors located in various other States of the United States, and at all times mentioned herein have maintained, a substantial course of trade in or affecting commerce, as "commerce" is defined in the Federal Trade Commission Act, as amended.

PAR. 4. Respondents insert advertisements in newspapers, soliciting persons to become distributors for respondent corporations. Typical and ilustrative but not all inclusive of the statements and representations made in newspapers and various promotional materials are the following:

Excellent opportunity for additional Part-Time Income of $6 00 to $8,00 or, a Full-Time Income of $15 000 or more.

EARNINGS UP TO:

$800 per month par-time 000 per month full-time NO SELLING 100% MONEY BACK GUARANTEE WE OFFER: Pre-established accounts Complete training Full Company Support Defined temtory Continued Support and Assistance Guarnteed Investment Secured investment: $6 500 This is an excellent opportunity for persons who qualiy. 948 EDERAL TRADE COMMISSION DECISIONS Complaint 86 F.

IMPORTANT TO INSTALL IMMEDIATELY Install all of your displays immediately after your locations have been secured. Don t put it off. Do it IMMEDIA TEL Y! INITIAL DISPLAY LOADING Be certain all displays are fully loaded immediate use by the consumer.

PAR. 5. By and through the use of the aforesaid statements and respondentsothers of similar import not specifically set forth herein, represent directly or by implication that: $800 or more per L A person can expect to earn between $500 and month by devoting part time to bis distributorship, and that he can expect to earn between $1250 and $2000 or more per month by devoting full time to his distributorship.

2. There is no sellng required of a distributor. 3. Respondents guarantee to return the entire investment to a distributor if he is not satisfied with the distributorship. 4. All account locations assigned to a distributor have been established by respondents prior to signng of a contract by distributor. 5. Respondents offer complete training to distributor. 6. Respondents offer distributor continuing support and assistance in making his distributorship a success.

7. Distributor is assigned a defined and exclusive terrtory in which all of his accounts wil be established and in which no other distributor for respondent may operate.

8. Respondents guarantee distributor's investment against loss. 9. Respondents are selective with regard to persons qualified to become distributors.

10. Respondents wil provide distributor with products for his displays on a timely basis.

PAR. 6. In truth and in fact:

1. A person cannot expect to earn between $500 and $800 or more per month by devoting par time to his distributorship, nor can he expect to earn between $1250 and $2000 or more per month by devoting full time to his distributorship. Such earnings claims are greatly in excess of the profit that wil accrue in a great majority of cases no matter how much time is devoted to the distributorship. 2. Sellng is required of a distributor if profitable locations are to be obtained.

3. Respondents have never returned the entire investment to a distributor who is not satisfied with the distributorship. 4. Account locations assigned to a distributor have not been established by respondents prior to signing of a contract by distributor. In a majority of cases respondents have not established account locations until after the distributor has signed a contract. 5. Respondents do not offer distributor complete training. The only ._ .'___U- 946 Complaint training given is in the form of general suggestions in a "Distributor Operating Manual."

6. Respondents have failed in some instances to support and assist distributor in making his distributorship a success. 7. Though respondents may purport . to assign a distributor a defined and exclusive territory, frequently his assigned accounts are outside this terrtory; terrtorial boundares overlap and distributors are not assigned exclusive terrtories.

8. Respondents in no way guarantee a distributor s investment against loss.

9. Respondents are not selective with regard to persons qualifed to become distributors. The only requirement for becoming a distributor is the price of the initial investment.

10. Respondents do not provide distributor with products .for his displays on a timely basis.

Therefore, the statements and representations as set forth in Paragraphs Four and ive were, and are, false, misleading and deceptive.

PAR. 7. In the further course and conduct of their business as aforesaid, and in furtherance of their purpose of inducing the purchase of their distributorships, respondents direct varous newspapers to print advertisements containing corporate logos of STP Corporation the BernzOmatic Corporation, General Electric Company and Superscope, Inc. The use of these logos in newspaper advertising and on other printed matter disseminated by respondents represents, directly or by implication, that respondents are closely affiiated with the said corporations.

In fact, respondents are not closely affiiated, nor are they affiiated in any way, with the said corporations. Rather, the relationship between respondents and the said corporations is basically that of buyer and seller.

Therefore, the acts and practices set forth above were, and are, false misleading and deceptive.

PAR. 8. In the further course and conduct of their business as aforesaid, respondents cause persons who respond to advertisements to contact respondents' sales representatives. For the purpose of inducing said salesthe sale of distributorships offered by respondents, representatives make to prospective distributors many statements and representations, directly or by implication, regarding opportunities available to distributors and assistance given to distributors by respondents. Among and typical, but not all inclusive, of such statements and representations are the following: Complaint 86 F.

A distributor wil earn between $12 000 and $30 000 or more per year.

2. A distributor can expect an average sale ofa certain. specified amount of merchandise per day.

3. A distributor can recover his initial investmel)t within one year. 4. Accounts wil be set up by respondents in profitable sales producing locations.

5. All accounts wil be within the certain radius of distributor home stipulated in distributor s contract. 6. Accounts wil be in an exclusive terrtory where no other distributor for respondent may operate.

7. Respondents will set up 20 separate physical account locations for distributor.

S. Accounts wil be set up shortly after distributor signs his contract.

9. A distributor wil be able to sell STP products for less than the price charged by retail stores in his area. 10. Respondents would at some undetermined future time become the sole STP dealer in the distributor s area. 11. A distributor would have exclusive dealership for STP products in his terrtory.

12. A distributor wil receive original parts tune-up kits from respondents.

13. A distributor wil be supplied with a great variety of products exhibited to him by respondents.

14. A distributor wil have 90 days to pay for all products ordered from respondents.

15. Respondents wil pay freight costs for shipment of products to distributor.

PAR. 9. In truth and in fact:

1. F' , if any, distributors have earned more than $12 00 per year. 2. A distributor cannot expect an average sale of a certain specified amount of merchandise per day.

3. Few, if any, of respondents' distributors have recovered their initial investment within one year.

4. Accounts are not set up by respondents in profitable sales producing locations. They are usually set up marginal places of business.

5. Accounts are often located outside the certain radius of distributor s home stipulated in distributor s contract. 6. Accounts are often not in an exclusive terrtory where no other distributor for respondent may operate. Terrtories often overlap with more than one distributor sharing a terrtory or even a single location. 946 Complaint 7. Respondents do not set up 20 separate physical account locations for distributor. Often respondents count each display rack in one physical location as a single account.

8. Accounts are not set up shortly after distributor signs his contract. Often there are protracteJJ delays by respondents in setting up accounts.

9. A distributor is seldom able to sell STP products for less than the price charged by retail stores in his area. 10. Respondents never were, nor ever had the opportunity to become, sole STP dealers in any area. Thus there was no possibilty that all STP products sold in any area would be sold through respondents' distributors.

II. A distributor never had, nor is he likely to ever have, exclusive dealership for STP products in his telTitory. 12. A distributor does not receive original pars tune-up kits from respondents.

13. A distributor is not supplied with the great variety of products exhibited to him by respondents.

14. A distributor does not have 90 days to pay for all products ordered from respondents. He must pay cash when ordering. 15. Respondents do not pay freight costs for shipment of products to distributor. Distributor must pay these costs himself. Therefore, the statements and representations as set forth in Paragraph Eight were, and are, false, misleading and deceptive. PAR. 10. In the further course and conduct of their business as aforesaid, and in furtherance of their purpose of inducing the purchase of their distributorships, respondents' sales representatives give prospective distributors the names and addresses of alleged "successful distributors" for respondents. Respondents' sales representatives tell prospective distributors to contact these "successful distributors." For the purpose of inducing the sale of distributorships offered by respondents, such usuccessful distributors" make to prospective distributors many statements and representations, directly or by implication, regarding opportunities available to purchasers of distributorships. Among and typical, but not all inclusive, of such statements and representations are that:

1. They are distributors for respondents.

2. They are extremely successful, earning $25 000 or more per year as distributors for respondents.

PAR. 11. In truth and in fact:

1. They are not, and never have been, distributors for respondents. 2. They are not extremely successful, and do not earn $25 000 or more per year as distributors for respondents. 217-1840 - 76 - 61 Decision and Order 86 F. Therefore, the statements and representations as set forth in Paragraph Ten were, and are, false, misleading and deceptive. PAR. 12. By directing prospective distributors to such "successful distributors," respondents are furthering and abetting the deception of the public in the manner and as to the things hereinbefore alleged. PAR. 13. In the course and conduct of their aforesaid business, and at all times mentioned herein, respondents have been, and now are, in substantial competition in commerce, with corporations, firms and individuals engaged in the sale and distribution of similar distributorships.

PAR. 14. The use by respondents of the aforesaid false, misleading and deceptive statements, representations, acts and practices has had and now has the tendency and capacity to mislead and deceive a substantial portion of the purchasing public into the erroneous and mistaken belief that said statements and representations were and are true and complete, and to induce a substantial number thereof to purchase said distributorships offered by respondents by reason of said erroneous and mistaken belief.

PAR. 15. The aforesaid acts and practices of respondents, as herein alleged, were and are all to the prejudice and injury of the public and of respondents' competitors and constituted, and now constitute, unfair and deceptive acts and practices in commerce, in violation of Section 5 of the Federal Trade Commission Act.

DECISION AND ORDER The Federal Trade Commission having initiated an investigation of certain acts and practices of the respondents named in the caption hereof, and the respondents having been furnished thereafter with a copy of a draft of complaint which the Chicago Regional Offce proposed to present to the Commission for its consideration and which if issued by the Commission, would charge respondents with violation of the Federal Trade Commission Act; and The respondents and counsel for the Commission having thereafter executed an agreement containing a consent order, an admission by the respondents of all the jurisdictional facts set forth in the aforesaid draft of complaint, a statement that the signing of said agreement is for settlement purposes only and does not constitute an admission by respondents that the law has been violated as alleged in such complaint and waivers and other provisions as required by the Commission rules; and The Commission having thereafter considered the matter and having determined that it had reason to believe that the respondents have violated the said Act, and that complaint should issue stating its CONSOLIDATED INTERNATIONAL TOOL & OIL, INC., ET AL. 953 946 Decision and Order charges in that respect, and having thereupon accepted the executed consent agreement and placed such agreement on the public record for a period of sixty (60) days, now in further conformity with . the procedure prescribed in Section 2.:34(b) of its rules, the Commission hereby issues its complaint, makes the following jurisdictional findings and enters the following order:

1. Respondent Consolidated International Tool & Oil, Inc. is a corporation organized, existing and doing business under and by virtue of the laws of the State of Ilinois, with its offce and principal place of business formerly located at 4304 Charles St., Rockford, Ill. Respondent Globe Marketing & Services, Inc. is a corporation organized, existing and doing business under and by virtue of the laws of the State of Ilinois, with its offce and principal place of business formerly located at 4:304 Charles St., Rockford, Il. Respondent Joseph La Franka is an individual and an offcer of said corporations, and also does business as Consolidated Distributing Co. He formulates, directs and controls the policies, acts and practices of said business entities and his address is 1211 Florist Dr., Rockford, Il. 2. The Federal Trade Commission has jurisdiction of the subject matter of this proceeding and of the respondents, and the proceeding is in the public interest.

ORDER It is ordered That respondents Consolidated International Tool & Oil, Inc., a corporation, Globe Marketing & Services, Inc., a corporation their successors and assigns, and offcers and Joseph La Franka individually and as an officer of said corporations and doing business as Consolidated Distributing Co., and respondents' offcers, agents representatives and employees, directly or through any corporation subsidiary, division or other device, in connection with the advertising, offering for sale, sale or distribution of distributorships for automotive products, tools, electrical products, recording tapes and any other products to distributors for resale to the public, or in connection with any other product or service, in commerce, as "commerce" is defined in the Federal Trade Commission Act, do forthwith cease and desist from: 1. Representing, directly or by implication, orally or in writing, that:

a. Distributors of respondents' products can or will derive any stated amount of sales, income, gross or net profits, unless: 1. Such sales, income or profits are reasonably likely to be achieved by the person to whom the representation is made; 2. The basis and assumptions for such representation are set forth in detail;

Decision and Order 86 F. 3. Such representation and the underlying data have been prepared in accordance with generally accepted accounting principles; 4. In immediate conjunction therewith, the following statement is clearly and conspicuously disclosed: "THERE IS NO ASSURANCE THAT INCOME AND PROFIT PROJECTIONS WILL BE AT- TAINED BY ANY SPECIFIC DISTRIBUTOR. THEY ARE MERE- L Y ESTIMATES." and 5. The amounts represented are not in excess of sales, income or profits actually achieved by existing distributors; and where distributors have not been in operation long enough to indicate what sales income or profits may result, making any representation of such to a prospective distributor.

6. . Respondents maintain adequate records (a) which disclose the facts upon which any claims of the type discussed in Paragraph a. of this order are based; and (b) from which the validity of any claim of the type discussed in Paragraph a. of this order can be determined. b. Persons investing in respondents' distributorships are assured of profitable income from the distributorships. c. Persons investing in respondents' distributorships can expect an average sale of a certain specified amount of merchandise per day, or any other period of time, unless in fact the average number of sales represented is that of a substantial number of distributors. d. Sellng is not required of distributors in order to profitably operate a distributorship.

e. A distributor s entire investment, or any portion thereof, will be returned if he is not satisfied with the distributorship. f. Account locations assigned to a distributor have been established prior to signing of a contract by distributor. g. Persons investing in respondents' distributorships will receive complete training enabling them to become self-sufficient distributors unless complete details of the training are explained to a prospective distributor prior to his signing of a contract. h. Respondents will provide a distributor full and continuing support and assistance in making his distributorship a success. i. Persons investing in respondents' distributorships wil be granted an exclusive terrtory in which to sell products purchased from respondents, and in which no other distributor for respondents may operate.

j. All accounts established for a distributor will be within a certain radius of distributor s home.

k. A distributor s investment in respondents' distributorship is guaranteed in any way against loss.

946 Decision and Order 1. Any criteria other than the abilty to provide the price of initial investment are used in the selection of respondents' distributors. m. Respondents wil provide distributors with products for their displays on a timely basis.

n. Respondents are in any way affiliated with any firm whose products they merely resell; or misrepresenting in any way their status with or relation to any other business organization or product. o. Persons investing in respondents' distributorships wil receive the return of their investment within any specified period of time. p. Respondents wil obtain profitable sales producing account locations for their distributors; or misrepresenting in any way the type of business estahlishment or premises in which account locations will be established.

q. Any certain number of accounts will be established by respondents, unless in fact this number corresponds with the actual number of physical account locations finally established by respondents. r. Respondents wil set up accounts for distributor shortly after distributor signs his contract.

s. A distributor wil be able to sell any product sold to him by respondents for less than the price charged by others selling the same product at the same distributive level in the distributor s trade area. t. Respondents are, or wil become, sale dealers, franchisees or distributors of any product in any area.

u. A distributor wil be the exclusive dealer or distributor in his area for any product sold by respondents.

v. A distributor wil receive from respondents any products other than those which respondents in fact wil make available to distributor. w. Terms of payment for products supplied to distributors by respondents are anything other than cash.

x. Respondents wil pay freight costs for shipment of products to distributors.

y. Any person is a distributor, employee, representative or agent of respondents unless in fact that person actually holds the position he is represented to hold.

It is further ordered That respondents make the following disclosures to all prospective purchasers of their distributorships: 1. State in writing in all contracts and purchase agreements: a. That the contract or purchase agreement is not final and binding until respondents have completely performed their obligations thereunder by establishing account locations satisfactory to the purchaser, and by providing the purchaser with sufficient inventory to fill his initialdisplays.b. That full refund of a prospective purchaser s investment will be Decision and Order 86 F. made at any time during the period described in Paragraph l(a) above upon written request from the prospective purchaser. It is further ordered That respondents furnish each prospective purchaser of respondents' distributorships with a copy of the completed contract or purchase agreement proposed to be used at least fifteen (15) business days prior to the date the agreement is to be consummated.

It is further ordered That respondents:

a. Distribute a copy of this order to each of their operating divisions.

b. Deliver a copy of this order to all prospective purchasers of respondents' products, services or distributorships at least fifteen (15) days prior to the signing of a contract or purchase agreement, and secure from each such prospective purchaser a signed statement acknowledging receipt of said order.

c. Deliver a copy of this order to all present and future salesmen or other persons engaged in the sale of respondents' products, services or distributorships, and require that each of these said persons sign a statement clearly stating his intention to be bound by and to conform to the requirements of this order; retain said statement during the period said person is employed or engaged; and make said statements available to the Commission s staff for inspection and copying upon request.

d. Institute a program of continuing surveilance adequate to reveal whether each person described in subparagraph (c) of this paragraph is conforming to the requirements of this order. e. Discontinue dealing with or terminate the use or engagement of any person who refuses to sign a statement as described in subparagraph (c) of this paragraph, or who continues on his own any act or practice prohibited by this order.

It is further ordered That respondents notify the Commission at least thirty (30) days prior to any proposed change in the corporate respondents such as dissolution, assignment or sale resulting in the emergence of successor corporations, creation or dissolution of subsidiaries or any other change in the corporations which may affect compliance obligations arising out of the order. It is further ordered That the individual respondent named herein promptly notify the Commission of the discontinuance of his present business or employment and of his affiiation with a new business or employment. Such notice shall include respondent' s current business address and a statement as to the nature of the business or employment in which he is engaged as well as a description of his duties and responsibilities.

957 Complaint It i" further ordered That the respondents herein shall wjthin sixty (60) days after service upon them of this order, fie with the Commission a report, in writing, settng forth in detail the manner and form in which they have complied with this order.