Settlement With New York State's Largest Karate School Chain Ends Deceptive Practices
Attorney General Spitzer today announced a settlement with the owner of the state's largest chain of karate schools, which will end the school's deceptive sales tactics, refund $36,000 to consumers and require the owner to comply with New York state franchise law.
The settlement requires that Daniel Schulmann, the owner of Tiger Schulmann's Karate Centers, and the entities he controls, pay $195,000 in penalties and costs and register the school as a franchise with the Attorney General's office. Forty two New York consumers will receive refunds averaging $850.
The Attorney General had charged that Schulmann violated the state's Deceptive Acts and Practices Statute, the Health Club Services Act, the Franchise Act and the Executive and Judiciary laws. Although Schulmann operates 35 karate centers, including 15 in the tri-state area, he denied in court that the chain was a franchise. Spitzer's investigation found otherwise.
"The repeated and persistent violations of the law by Tiger Schulmann's Karate Centers and Daniel Schulmann demonstrated his disregard for consumers and franchisees alike," Spitzer said. "We will not allow New York consumers and investors to be bullied or deceived by the illegal business tactics used by this operator."
Spitzer also found that the school engaged in "bait and switch" sales tactics to entice consumers into signing up for karate classes. Students paid an initial fee of $1,500 for 150 classes. However, high pressure sales tactics were used to induce students who had not completed the 150 classes to sign a second contract for intermediate classes, which cost $3,525 for 250 sessions. Refunds were not given for unused classes and students could not advance to the next level of instruction without signing the more expensive contract. Thus, students were being charged $5,000 for 400 classes.
Daniel Schulmann, the sole shareholder of UAK Management Company, the franchisor of the karate centers, denied that the chain bearing his name was a franchise even though all the centers paid franchise fees, taught the same style of karate, used the same logos and pooled their monies for advertising.
The settlement also requires Schulmann to register the centers as a franchise, offer New York franchisees the option of ending their agreement with Schulmann and to provide frianchisees a copy of the prospectus of UAK Management Company.
"To the detriment of several investors, Schulmann sold several franchises and then terminated these franchisees without registering a prospectus with my office and without providing them a prospectus, which is required by state law," Spitzer said. "The law requires Tiger Schulmann to disclose the financial history of the company and other material information on how it operates its business so that prospective franchisees can make informed investment decisions."
As part of the settlement, Schulmann agreed to end 11 defamation lawsuits he filed against a franchisee shortly after the franchisee testified in court for the Attorney General. In addition, UAK's franchise registration filings will be monitored by the National Franchise Council. UAK officials will also be required to attend franchise sales law training.
Assistant Attorney General William Estes said more than 50 consumer complaints had been received by the Attorney General's office and other agencies concerning the business practices of Tiger Schulmann's Karate Centers.
The centers are also being investigated by the Pennsylvania Attorney General's Office.
Assistant Attorney General Joseph Punturo, head of the Franchise Section, and Assistant Attorney General William Estes handled the case, under the supervision of Investor Protection and Securities Bureau Chief Eric Dinallo and Consumer Frauds Bureau Chief Tom Conway.