Dealers Association Sues PMD for Fraud

COLUMBUS, Ohio – The Associated Licensees of PMD, LLC has filed a lawsuit against Power Marketing Direct, Inc. (PMD) and four of its top executives alleging they perpetrated fraud in their business operations and through a “bait and switch” tactic to recruit dealers.

But the litigation doesn’t stop there. Also named is its newly formed franchise entity PMD Furniture Direct, Inc. Illinois regulators notified the furniture company that the licenses that were sold may actually be franchises. According to the Federal Trade Commission’s franchise rule, and the state law, PMD cannot sell franchises without being registered. Out of compliance with the Federal Trade Commission rule, PMD changed its course from being a licensee/dealer operation to that of a business format franchise.

Attorneys Caroline Worley and Michael DeWitt filed a complaint in Franklin County, Ohio on behalf of 23 dealers and the licensee association. The lawsuit claims that PMD’s fraudulent activity started with an elaborate recruitment scheme. It accuses corporate executives of acting maliciously to commit unlawful acts to prospects by portraying an unrealistic profile of the company in embellishing the furniture chain’s operation and numbers. PMD operated as a “middleman” company, selling furniture to dealers for various third-party vendors.  It collected a substantial “license” fee from investors giving them the right to use PMD’s intellectual property, which they stated they owned. As dealers, they were granted the exclusive right to use certain furniture brands under the company’s “proprietary” system.

Executives named in the lawsuit are PMD’s founder, president and CEO Jeffrey S. Hosking, chief marketing officer Joseph J. Armetta, chief operating officer Jerry K. Williams and chief financial officer Robert Swan. All four principals are believed to hold the same positions in both the parent company and the franchising company.

One plaintiff, Richard Dooley, a dealer since 2001 and PMD’s national director of placement until last July, did not want to comment on the issues of the litigation but stated, “I think if people read the lawsuit it will speak for itself. It walks people through the fraudulent process that the company used.”

Alleged Dealer Recruitment and Marketing Scheme

According to the complaint, Hosking developed the Power Marketing Direct business model using his previous experience as owner and sales manager of Vector Marketing. Legal documents show Vector as a troubled company, accused by state officials of preying on college students to sell cutlery through a recruitment program.

A PMD Furniture job ad placed in Careerbuilders.com

Using similar advertising techniques, Hosking recruited dealers for PMD by placing ads for non-existent high-paying executive positions through careerbuilders.com and monster.com. When job seekers responded, PMD took them through a lengthy convoluted interview process with corporate executives, eventually letting them know that they were in the top 15 percent of all job applicants. Company agents then gave a hard sell on why applicants should consider purchasing a PMD license instead, stating that it was a much more lucrative opportunity than being employed by the company.

As part of the sales process, chief marketing officer Joe Armetta represented to applicants that PMD was a $70 million company, which was growing rapidly and had a failure rate of only 10% a year. The prospect was assured that he/she was qualified to be a dealer capable of making a $200,000 income, the same as other PMD dealers, according to the complaint.

Dealers in the lawsuit claim that because they believed and relied on all the representations given to them by corporate executives, they executed their agreements for the ten-year term and made the required payment. The one-time license fee was in the range of $10,000 to $35,000. Dealers were required to purchase all inventory from PMD, which included a mark-up on every item from 10% to 75%.  Although PMD received rebates and other considerations from suppliers based on volume, dealers allege that the information was kept secret from them. The license agreement also gave PMD the unilateral right to terminate dealers’ contract “for any reason” and “without cause” with a 30-day written notice.

PMD’s Turn of Events

The lawsuit reveals that starting in August 2008, there was a change in Power Marketing Direct’s business practices.

First, monster.com and careerbuilders.com sent notification to PMD that complaints had been filed alleging that the company was offering business/franchise opportunities on the job recruiters’ websites and not direct job/employment opportunities as required. As a result, the two career sites altered their policy to disallow the practice.  That same month, the Attorney General for the State of Illinois sent a certified letter to PMD defendants questioning the company’s possible activity of engaging in franchise sales without being legally registered.

In October 2008, Hosking announced to dealers at the chain’s national sales conference that PMD was restricted in its ability to grow and prosper due to federal regulations governing licensing agencies. A new company, a franchisor, was being formed. Armetta explained that the changes had nothing to do with recent decisions made by monster.com or careerbuilders.com, and that PMD had done nothing wrong.  Armetta also reaffirmed that the FTC’s revision of its franchise rule in July 2008, had no bearing on PMD’s prior operation, reinforcing the company’s position that PMD had done nothing wrong in the past, since it was not previously a franchise. A sample trademark agreement was then distributed to dealers with instructions. They were told that a franchise disclosure document would be mailed to each dealer. Once they signed it, they would then become a franchisee. The company officials assured the dealers that all was “business as usual.”

From October 2008 to May 2009, company principals continued to reassure dealers that all was well. The changes being made would benefit PMD dealers. In February 2009, Hosking announced in the magazine Furniture Today that they were switching the company’s dealership operation to a franchise business-format model in order to excel the chain’s growth. He said the company had 90 licensee-owned stores and through a conversion program it hoped to position itself to seek prospects that typically have greater access to capital. Hosking predicted that PMD would stand out as a lucrative option when it joined the ranks of franchisors. He gave a glowing report on the strength of the company and cited one rookie dealer “who made $269,000 [annual] net profit on an initial investment between $50,000 and $100,000.”

Power Marketing Direct sent its first version of the franchise disclosure document (FDD), dated June 30, 2009, to top-ranked dealers and PMD’s management team. PMD stated that the FDD would be sent out in waves due to the administrative difficulties associated with it.” Dealers were opposed to the document because of the restrictions it placed on them.

The complaint states that PMD responded, “it is what it is, we don’t care if you sign it or not, we are moving on, with or without you.” When most dealers rejected the franchise document, PMD responded that in doing so it would result in the licensees paying higher prices. Company support would be diminished. PMD said it’s focus would be on the franchised business.

After revising its FDD in September 2009, plaintiff dealers formed the Associated Licensees of PMD in December for purposes of attempting to work with the company as a collective group. Hosking announced at conferences that he looked forward to working with the independent association.

At the company’s national sales conference in Phoenix on January 12, Hosking and Armetta orally made untrue and disparaging remarks about the licensee association dealers, according to the lawsuit. That evening, Hosking made an official announcement that dealers were to cease using the trademarks of the Power Marketing Direct entity, including the Royal Heritage exclusive brands, and that the licensees would be replaced.

On February 15, 2010, a representative from the plaintiff dealers’ association sent Hosking a letter to give written notice of PMD’s breach of contract for terminating the use of PMD’s intellectual property in violation of each licensee agreement, giving the company five days to respond. According to the complaint, PMD has yet to respond.

Attorney Rex Elliott, representing one of the defendants stated, “At the time you entered into your License Agreement and at this time, Power Marketing Direct does not own any trademarks or service marks.”

But plaintiffs disagree with Elliott’s statement, which he says is based on allegations in the complaint and the documents attached in the exhibits, saying it “appears to be completely false or extremely misleading, at best.” Attorneys for the franchising firm state that PMD has claimed countless times in advertising material, on PMD’s website, and in multiple correspondences that it owns certain “Marks” and place the “TM” after such marks.

On March 1, 2010, the Associated Licensees of PMD filed its lawsuit in the Common Please Court of Franklin County, Ohio.

Response to the Litigation

Plaintiff attorney Caroline Worley of Worley Law LLC declined to make a comment regarding the complaint she and Michael DeWitt of Mason Law Firm filed on behalf of the dealers. In addition to the fraud claims, plaintiff dealers are listing the additional causes of action against PMD defendants: fraudulent concealment, intentional misrepresentation, violation of the Ohio Business Opportunity Plans Act, civil conspiracy, breach of contract, defamation and negligent misrepresentation. They are seeking punitive damages, including an award of three times the amount of actual damages and attorney fees, and rescission of each dealer and licensee agreement.

Sheila Vitale, general counsel to PMD Furniture Direct, referred comment to outside counsel Rex Elliott of Cooper & Elliott. He said they would be filing an answer to the dealers’ complaint in the next few days. “We will be responding to this lawsuit with a very, very vigorous defense and a pursuit of our own claims against these plaintiffs.” Elliott exclaimed that the lawsuit was frivolous, adding, “There is no merit to the suit. The allegations are false. It is very disappointing.”