Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—D. Mass.: Franchisees must arbitrate claims against Planet Fitness despite claim that Planet Fitness had fraudulently induced them to enter franchise agreements, (Jul 23, 2013)

By Tobias J. Gillett, J.D., LL.M.

Two fitness center franchisees and their companies must separately arbitrate their claims against Pla-Fit Franchise, LLC (PFF), the franchisor for Planet Fitness Centers, even though they alleged that they were fraudulently induced into entering into the franchise agreements, the federal district court in Boston has ruled (World Gym, Inc. v. Pla-Fit Franchise, LLC, July 19, 2013, Casper, D.). The franchisees also had to arbitrate their claims against a third party company that managed bank accounts the franchise agreement required the franchisees to establish, even though the third party company was not a signatory to the franchise agreement.

On June 7, 2006, Patrick H. Catino and Kevin Lavelle entered into franchise agreements with PFF to transition their fitness centers into franchise Planet Fitness Centers. Before they entered the agreements, PFF’s founder and president allegedly informed them that they could retain their APEX personal training program and that PFF would not encroach on the territory of an existing Planet Fitness location. The agreements also required the franchisees to establish designated bank accounts from which PFF could withdraw funds that were due it, and the franchisees contracted with Twin Oaks Software Development, Inc. to process their membership fees and maintain them in designated accounts.

According to the complaint, however, PFF ordered the removal of the APEX program in 2008, and barred all personal training at all Planet Fitness locations in 2010. PFF also granted several licenses to open Planet Fitness locations within two to six miles of the plaintiffs’ franchises. Finally, PFF allegedly directed Twin Oaks to transfer funds from the franchisees’ accounts, purportedly as part of the franchisees’ contribution to an advertising fund, even though a PFF representative had told the franchisees they could opt out of the fund.

The franchisees filed suit against PFF and Twin Oaks, asserting a variety of claims. PFF and Twin Oaks each moved to dismiss and compel arbitration.

The court rejected the franchisees’ argument that, although some of their claims were concededly within the scope of the arbitration clause, PFF had fraudulently induced them to enter into the franchise agreements, and therefore the arbitration clause was invalid. The court explained that in Granite Rock Co. v. Int’l Bhd. Of Teamsters, 130 S.Ct. 2847 (2010) the Supreme Court had found that Section 2 of the Federal Arbitration Act requires courts to “treat an arbitration clause as severable from the contract in which it appears and enforce it according to its terms unless the party resisting arbitration specifically challenges the enforceability of arbitration clause itself, or claims that the agreement to arbitrate was never concluded.”

Here, the franchisees had alleged fraud in the inducement as to the agreements as a whole, but not as to the arbitration clause. Therefore, the fraud claims did not render the arbitration clause unenforceable, according to the court.

The court also dispensed with the franchisees’ argument that their claims for breach of the covenant of good faith and fair dealing fell outside the scope of the arbitration clause. Since Massachusetts law required an underlying contract to support claims of breach of the covenant of good faith and fair dealing, and since the relationship between PFF and the franchisees was governed by the franchise agreement, the claims for breach of the covenant of good faith and fair dealing fell within the scope of the arbitration clause.

Therefore, the franchisees had to arbitrate their claims against PFF. Since the arbitration clause provided that “arbitration proceedings shall be conducted on an individual basis and not on a multi-plaintiff, consolidated, collective or class-wide basis,” the franchisees had to arbitrate their claims separately.

The franchisees also had to arbitrate their claims against Twin Oaks, even though it was not a party to the franchise agreements, according to the court. The court explained that the “[f]ederal courts have been willing to estop a signatory from avoiding arbitration with a nonsignatory when the issues the nonsignatory is seeking to resolve in arbitration are intertwined with the agreements that the estopped party has signed.”

Here, the franchisees did not “dispute that Twin Oaks has a cognizable argument to join the arbitration in regard to its breach of contract claims.” The court also found that the franchisees’ Massachusetts statutory claims were “sufficiently intertwined with the franchise agreement,” because they were based on allegations that “Twin Oaks breached its contractual duty by permitting PFF to directly withdraw funds from the plaintiffs’ account without the necessary authority,” and that “Twin Oaks knowingly permitted PFF to gain unauthorized access to its account.”

Moreover, the franchise agreements required the franchisees to open the accounts at issue, and “whether it was impermissible for Twin Oaks to transfer the contested funds to PFF is dependent upon the authority granted to PFF under the franchise agreements to withdraw funds.” Therefore, Twin Oaks’ status as a nonsignatory was not “a sufficient basis to deny arbitration and the plaintiffs, as a matter of equitable estoppel, shall not avoid arbitrating their claims against Twin oaks.”

The case is Civil Action No. 12-11620-DJC.

Attorneys: John Ferris Dow for World Gym, Inc. Arthur L. Pressman (Nixon & Peabody, LLP) for Pla-Fit Franchise, LLC. Alfred A. DiVincentis (Halloran & Sage LLP) for Twin Oaks Software Development, Inc.

Companies: World Gym, Inc.; Patricko, Inc.; Pla-Fit Franchise, LLC; Twin Oaks Software Development, Inc.

Cases: FranchisingDistribution MassachusettsNews