Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION NEWS: Fitness center franchisor alleges breach of non-compete agreement by former franchisee, (Oct 24, 2013)

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

Fitness center franchisor Snap Fitness, Inc. has filed a complaint in the federal district court in Detroit against a former franchisee that allegedly violated a covenant against competition by operating a competing fitness facility at the site of the previous franchise, and that infringed Snap’s trademarks in marketing the new facility, among other claims (Snap Fitness, Inc. v. M2J, LLC, filed October 23, 2013).

Snap Fitness is a franchisor of a proprietary system for operating a fitness and workout club. According to the complaint, Snap entered into a franchise agreement in 2008, giving M2J, LLC the right to operate a Snap Fitness facility in Howell, Michigan. The agreement contained a non-compete provision preventing M2J from operating a fitness center after expiration of the agreement within three miles of the licensed location or within a ten-mile radius of any Snap Fitness Center. M2J’s principal agreed to be personally bound by this provision through a separate personal guaranty agreement, the complaint alleged. M2J and its principal also agreed to immediately remove Snap’s trademarks from their premises once their association with Snap ended, and to return all copies of Snap’s manual.

The agreement provided that it would cover not just M2J and its principal, but also the principal’s spouse and “all guarantors, officers, directors, members, managers, partners, as the case may be, and holders of any ownership interest” in M2J.

In September 2013, the principal allegedly informed Snap that he did not intend to renew the franchise agreement. However, the day after the franchise agreement expired, a post appeared on the franchise’s Facebook page, describing a purported change in ownership and the conversion of the facility to a competing fitness center called “Endeavor Fitness.” The post offered free enrollment to all Snap Fitness members.

According to Snap, an investigation revealed that the parents of M2J’s principal had organized Endeavor Fitness LLC and the principal and his father had appeared at a planning commission meeting in support of an application to build a new Endeavor Fitness facility.

Snap sent a letter to the principal, advising him that his involvement in the operation of a competing fitness facility at the site of his former Snap Fitness facility violated the covenant against competition, that his use of Snap’s name and trademark to promote his competing business violated Snap’s trademark rights, and that Snap intended to exercise its right under the franchise agreement to purchase the facility’s equipment and certain other assets.

Subsequently, Snap allegedly received an e-mail from an attorney, claiming to represent M2J and the principal and falsely stating that the principal had “no affiliation” with Endeavor Fitness. The e-mail also claimed that the facility’s equipment had been turned over to a creditor, even though the principal had previously represented that he had sold it.

The complaint alleges that the defendants’ operation of a competing fitness center on the site of the previous Snap Fitness facility violates the franchise agreement’s covenant against competition and that their planned opening of an additional Endeavor Fitness facility would “allow them to capitalize impermissibly on the confidential information” that M2J and its principal received as a Snap franchisee.

The complaint asserts infringement of Snap’s federally registered trademarks, false designation of origin, breach of contract over Snap’s right to purchase the facility’s assets, breach of contract over the breach of the covenant against competition by M2J and its principal, tortious interference with contract as to Endeavor Fitness, LLC and individuals associated with it, civil conspiracy, and attorneys’ fees and costs pursuant to a contract provision permitting recovery of them by Snap in connection with its enforcement of the franchise agreement.

The complaint seeks preliminary and permanent injunctions barring the use of Snap’s trademarks or marks confusingly similar to them, requiring that signs and advertising materials using Snap’s trademarks be removed, precluding the use of Snap’s trade dress, and prohibiting the operation of any fitness center within three miles of the former Snap fitness facility or within ten miles of any Snap Fitness center for two years after the defendants’ compliance with their post-expiration obligations. The complaint also seeks an order specifically enforcing the other post-expiration obligations of the franchise agreement, an award of damages for the trademark infringement, an award of damages for tortious interference with contract and civil conspiracy, an award of attorneys’ fees and costs, an order specifically enforcing Snap’s right to purchase the facility’s assets, and any other just and proper relief.

The case is No. 2:13-cv-14449-DML-MAR.

Attorneys: Jason J. Stover and Kerry L. Bundy (Faegre Baker Daniels LLP) for Snap Fitness, Inc.

Companies: Snap Fitness, Inc.; M2J, LLC; Endeavor Fitness, LLC

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