Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION NEWS: Curves charged with failing to inform prospective franchisee about planned sale of franchise system, (Apr 1, 2014)

By John W. Arden, J.D., LL.M.

Fitness club franchisor Curves International fraudulently induced prospective franchisees to purchase a franchise by making false statements about the ownership of the franchise system and failing to disclose a plan to sell the system to a private equity firm, according to a complaint filed in the U.S. District Court for the Western District of Washington (Brooks v. Curves International, Inc., March 31, 2014). The franchisees claimed that Curves violated the Washington Franchise Investment Protection Act and the Texas Deceptive Trade Practices Act and committed fraud and fraud by omission.

Dawn and Rydel Brooks expressed interest in purchasing an existing Curves franchise in Stanwood/Camano Island, Washington. In April 2012, Curves provided them with a Franchise Disclosure Document (FDD), containing information about the franchisor and the Curves franchises. The couple brought in a partner, Ronald O’Brien, to help them qualify financially to buy the franchise. Throughout June 2012, Dawn Brooks completed various training sessions with a Curves representative regarding club set up, staffing, and leadership. During this time, Curves never mentioned that it was about to be acquired by private equity firm North Castle Partnership, the franchisees alleged.

The franchisees and Curves executed the final franchise agreement on June 28, 2012. The takeover of the franchise was scheduled to occur on July 1, 2012. On that same day, the owners of Curves allegedly executed an agreement selling the franchise system to North Castle. From July to November 2012, the franchisees worked with a Curves club developer, who stressed the importance of adhering to the Curves systems. During this time, the franchisor suggested—but did not require—that the franchisees adopt the new diet and club transformation program. The Brookses chose not to implement this program, since their club members did not express interest in adding a diet plan to their fitness programs. Throughout the training period, the franchisees were not told that the diet program would become a requirement or that Curves was under new ownership, the complaint claimed.

On October 2012, the franchisees allegedly learned for the first time about the sale of Curves to North Castle. Just three months after their purchase of the franchise, they were told by the club developer that “everything you know about Curves is about to change.” In November 2012, the franchisees were told that they would be required to comply fully with the new “Curves Clean Standards” and implement the diet program. The franchisee was told that adoption of the new requirements would increase profitability by 70 percent. However, this increase never occurred. Dawn Brooks found that the requirements fundamentally changed the spirit of the club that she had purchased, the complaint said. A new 30-minute workout promotion, created in partnership with Jillian Michaels, was problematic for the majority of the club members of the Brooks’ franchise, who were over 65 years old. As a result of these changes, the franchisee allegedly lost $92,900, including the franchise purchase price, royalty fees, and lost earnings.

The franchisees claimed that Curves violated the Washington Franchise Investment Protection Act by engaging in fraudulent and deceptive conduct in the offer or sale of a franchise. By approving the sale of a Curves franchise to a franchisee without disclosing that the franchise system would be purchased by an investment group only three days after the signing of the franchise agreement, Curves failed to provide information necessary to make the FDD and training materials not misleading, the complaint charged. “The fact that ownership changed on the very day that Franchisee took over their Club shows that the Franchisor failed to provide necessary information that would have conflicted starkly with the information in the FDD.” This conduct further constituted a false, misleading, or deceptive act or practice within the Texas Deceptive Trade Practices Act; common law fraud; and fraud by omission, the franchisees charged.

The complaint requested rescission of the franchise agreement, actual damages of $92,900, and treble damages under the Franchise Investment Protection Act, in addition to attorney fees, costs of suit, and any relief deemed just and proper.

The case is No. 2:14-cv-00473.

Attorneys: Howard E. Bundy (Bundy Law Firm PLLC) and W. Michael Garner (W. Michael Garner, P.A.) for Dawn and Rydel Brooks and Ronald O’Brien.

Companies: Curves International, Inc.; North Castle Partners

News: FranchisingDistribution WashingtonNews