The opinion of the court was delivered by: SPATT
MEMORANDUM OF DECISION AND ORDER
This case arises from the individual and corporate defendants' business of marketing and selling a business opportunity, which consisted of processing and submitting claims on behalf of doctors and dentists to insurance companies for payment. The plaintiff Federal Trade Commission (the "FTC" or the "Commission") initiated this action in November 1996 pursuant to the Federal Trade Commission Act ("FTCA"), 15 U.S.C. §§ 53(b) and 57b, seeking consumer redress, restitution, disgorgement, contract rescission and injunctive relief for the defendants' alleged unfair and deceptive acts or practices, in violation of Section 59(a) of the FTCA, 15 U.S.C. § 45(a), and for alleged violations of the FTC's Trade Regulation Rule entitled "Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures" (the "Franchise Rule"), 16 C.F.R. § 436.
The FTC contends that the defendants lied to prospective purchasers about material aspects of the business opportunity, including: the amount of money that prospects could earn through the business opportunity; the amount of ongoing assistance the defendants would provide; and the number of medical and dental offices interested in purchasing the services. In addition, the Commission contends that the defendants did not comply with the Franchise Rule by: (1) failing to disclose documents with twenty categories of information material to a prospect's decision with regard to the purchase of a franchise or business opportunity, 16 C.F.R. 436.1(a); and (2) failing to provide prospects with written substantiation of earnings claims, 16 C.F.R. 436.1(b)(3), (c)(3) and (e)(3).
This matter is before the Court on the FTC's motion for summary judgment against all the defendants: P.M.C.S., Inc. ("PMCS"); Dennis Harmon ("D. Harmon"); Philip T. Bukowsky ("Bukowsky); Jay Lerner ("Lerner"); M.B.C., Inc. ("MBC"); Jason Harmon ("J. Harmon"); Aqua Marketing Group, Inc. ("Aqua"); and Todd Deming ("Deming"). The Court observes that Aqua and Deming are the only defendants who submitted papers in opposition to summary judgment. The remaining defendants have not responded to the Commission's motion. The Court also notes that Aqua and Deming were the only defendants who submitted an Answer to the Amended Complaint, which the FTC filed on March 7, 1997. In fact, the docket reflects that none of the defendants, except for Aqua and Deming, have communicated with the Court since January 1997, over a year and a half ago. Two of the defendants, D. Harmon and Lerner, refused to answer any questions during their deposition, and, according to the FTC, "recently pled guilty to felony mail fraud in connection with the marketing of the PMCS business opportunity." In the Court's view, with the exception of defendants Aqua and Deming, the defendants have declined to defend themselves in this litigation, and the Court would be justified in finding them in default. At the very least, their failure to participate in this litigation and oppose the FTC's motion may be viewed as constituting a concession that summary judgment is appropriate as against them. Accordingly, the Court grants the FTC's motion for summary judgment with respect to the defendants PMCS, D. Harmon, Bukowsky, Lerner, MBC, and J. Harmon.
The remainder of this opinion addresses the FTC's motion for summary judgment against the two defendants who oppose it, namely, Deming and Aqua.
Except where indicated otherwise, the following facts are undisputed.
The defendant PMCS is a Delaware corporation with a principal place of business in Great Neck, New York, located in the District where this Court sits. The defendant D. Harmon is an officer and sole shareholder, Lerner is a silent partner and Bukowski is an officer of PMCS. The defendant MBC is a Delaware Corporation with a principal place of business in Bayside, New York, also located in the Eastern District of New York. J. Harmon is the sole corporate officer of MBC. The PMCS and MBC businesses were virtually identical and indistinguishable: both were in the business of selling and promoting computerized medical billing business ventures, and the companies used the same forms, operated in the same space, intermingled their files, and had an overlapping sales force.
Beginning approximately in 1994, PMCS and MBC sold business opportunity packages to consumers for a fee ranging between $ 5,995 and $ 7,495. According to the FTC, the packages principally included medical billing computer software which may be purchased at a retail cost of approximately $ 69. The packages were advertised as including the following: a two-day training session on how to use the software; marketing tips; a "qualified lead" list of interested doctors and dentists in the consumer's area to whom the consumer should attempt to market the billing services; and follow-up support from PMCS or MBC regarding marketing, sales tips, software-related questions and business development. The advertising and promotional material boasted that purchasers could use a "home computer to earn $ 23,000 a year working only 28 minutes a day," that they could "make $ 23,000 a year processing insurance claims for one doctor" and could earn between $ 50,000 and $ 250,000 or more per year using the program.
On May 22, 1996, the defendant Aqua -- a Nevada corporation with a principal place of business in Hilton Head South Carolina -- entered into a written contract with PMCS under which Aqua agreed to serve as the exclusive provider of marketing services for PMCS and the business opportunities it sold (the "PMCS Agreement"). The defendant Deming is Aqua's president and sole shareholder. Pursuant to the PMCS Agreement, from May 22, 1996 until November 1996, when the FTC initiated this action, Aqua hired and trained independent sales representatives to sell the PMCS opportunity, and distributed advertising and promotional materials. Under the agreement, PMCS retained "full control and approval of all promotional material given to prospective licensees."
On November 5, 1996, the Commission initiated this cause of action against the original defendants -- PMCS, D. Harmon and Bukowsky -- and simultaneously filed an ex parte motion for a temporary restraining order ("TRO"), an asset freeze, and the appointment of a temporary receiver for the corporate defendant PMCS. This Court granted the motion and entered a TRO on November 6, 1996 and appointed Chester Salomon, Esq., as the temporary receiver. Approximately three weeks later, on November 26, 1996, the original defendants agreed to a stipulated preliminary injunction, which the Court "So Ordered." The remaining defendants, Lerner, J. Harmon, MBC, Deming and Aqua, were added to the complaint on February 5, 1997.
The Commission now moves for summary judgment, in support of which it submits evidence, including: (1) PMCS' promotional materials and advertisements; (2) declarations from customers who purchased the business opportunities; (3) customer complaints; and (4) a survey of 29, randomly-selected purchasers of the PMCS business opportunity prepared at the FTC's request by Dr. Thomas Maronick, who holds a doctorate in Business Administration.
The FTC argues that its evidence indicates the defendants misled consumers in several key respects about the business opportunities sold. First, the FTC contends that the defendants misrepresented to customers the amount of earnings they could anticipate. The advertising and promotional material claimed that a purchaser could "earn $ 23,000 a year working only 28 minutes a day," could "make $ 23,000 a year processing insurance claims for one doctor" and could earn between $ 50,000 and $ 250,000 or more each year using the PMCS program. However, according ...