Misinformation and deception: When the FTC comes knocking!

In October of 2014, Oren Loni formed Burgerim Group, USA  for the purpose of offering and selling a casual, fast food burger concept nationwide.  From 2015 through 2019, Burgerim, through the use of traditional and social media, touted itself as the fastest growing burger franchise in the country. When contacted by individuals interested in the concept, Burgerim representatives advised that not only was the franchise fee reasonable, and able to be financed, in part, or paid at a later date, but that Burgerim would also assist in all other matters with respect to opening a franchise and, quite surprisingly, that the potential franchisee could cancel the franchise agreement...for a refund.  For some, it sounded too good to be true.

Over the course of four years, Burgerim sold over 1,500 franchises nationwide, generating nearly $58 million in franchise fees.  For many franchisees, funds previously set aside for retirement were used to pay the franchise fee, with others placing the debt on personal credit cards.  Once the franchise fee was paid, franchisees begin working with internal Burgerim representatives on the next phases of development, including location, build-out and financing.  It was at that time, as many franchisees complained, that problems arose. The problem began first with unrealistic options for financing, including personal loans and second mortgages, then with unsuitable or unrealistic locations, and lastly exorbitant construction costs.  This caused many to seek refunds, and others to close locations soon after opening due to significant financial struggles.  Although Burgerim did pay a significant amount in refunds between 2017 and 2019, a timeframe in which in excess of 280 franchisees cancelled their franchise agreement, additional problems, mainly financial, began to mount for Burgerim, ultimately resulting in Loni fleeing the country.  In late 2019, franchisees were advised that Burgerim had hired counsel to address its financial distress, with a new chief executive officer being appointed.  It was also around this time that Burgerim formed a separate entity, Burgerim Group, Inc. (“Group”), as Burgerim’s successor company.

Based on Burgerim’s past conduct, detailed in voluminous complaints by disgruntled franchisees, the Commissioner of Financial Protection and Innovation for the State of California filed an action against Burgerim, Group, and Loni (i) for the entry and implementation of a desist and refrain order, (ii) for the assessment of administrative penalties, and (iii) for ancillary relief.  In February of 2021, an order was entered by the Department of Financial Protection and Innovation for the State of California (the “Department Order”) that assessed nearly $4 million of penalties, in the aggregate, against the parties.  However, Burgerim, Group and Loni’s problems were far from over.

Enter the Federal Trade Commission, or FTC. In what, by all accounts, appears to be its first significant franchisor enforcement action in nearly ten years, the FTC filed suit against Burgerim, Group and Loni in February of 2022 in the United States District Court, Central District of California.  In its complaint, the FTC sought a permanent injunction, monetary judgments for civil penalties and consumer redress, in addition to other related relief, against Burgerim, Group and Loni.  The FTC’s complaint addressed many of the facts and circumstances that were previously outlined in the Department Order, alleging that the conduct and practices of Burgerim, Group and Loni were deceptive in violation of Section 5 of the FTC Act, 15 U.S.C. § 45, and the Franchise Rule, 16 C.F.R. 436.  Though each were properly served, Burgerim, Group and Loni failed to answer or otherwise respond to the complaint and, on January 19, 2024, the Court entered default judgment against each (the “Default Order”).  Pursuant to the Default Order, each of Burgerim, Group and Loni were permanently restrained and enjoined from (i) promoting or offering any franchise for sale, (ii) misrepresenting, expressly or otherwise, with respect to the sale of any product or service, any material aspect of any refund or cancellation policy, and (iii) misrepresenting, expressly or otherwise, with respect to the sale of any franchise, business venture or opportunity, among other things, any income achieved, or likely to be achieved, the length of time to recoup investment, and the amount of assistance that will be provided.  Furthermore, the Court entered monetary judgments of significance against Burgerim, Group, and Loni; specifically $7,750,000, jointly and severally, as a civil penalty, and $48,476,689, jointly and severally, for consumer redress.

Although the judgment granted in favor of the FTC, in addition to the prior Department Order, each appear beneficial to the franchisees that were duped by Loni, it is only material if Burgerim, Group and/or Loni have the ability to pay, which appears unlikely.  If there is a foundational value to be found in the rise and fall of Burgerim, it is this: before investing in any franchise concept, it is imperative that all aspects of the offering are vetted and that qualified and experienced advisors are consulted.  As the old adage goes, when something sounds too good to be true, it usually is.