Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION NEWS: Fitness franchisee allegedly violated post-termination procedures, (Aug 11, 2015)

By Linda O’Brien, J.D., LL.M.

A former franchisee of a women’s fitness franchise intentionally harmed the goodwill of the franchisor through his unauthorized termination of the franchise agreement and failure to comply with the agreement’s post-termination procedures, according to a complaint filed in the federal district court in Boston (Get In Shape Franchise, Inc. v. Caldwell, August 10, 2015).

Get In Shape Franchise, Inc. (GISFW) franchises “Get In Shape For Women” studios, which offer small group personal training programs for women.

According to the complaint, in March 2012, GISFW entered into a written franchise agreement with William Caldwell to operate a GISFW studio in Durham, North Carolina. Pursuant to the agreement, Caldwell paid a transfer fee to assume the rights to the territory and was required to pay six percent of gross sales as royalties in exchange for the authority to do business as “Get In Shape For Women.” Upon termination of the agreement, Caldwell was required to cease using the franchisor’s systems, names, and marks; comply with his covenant not to compete; return all materials provided to the franchisee; return all confidential and proprietary materials related to the operation of the studio; and pay any money owed to the franchisor. The agreement could not be assigned or transferred without the prior consent of the franchisor.

The complaint states that, in June 2015, GISFW received an email from Caldwell that his Durham studio was closed and prior notice had been given regarding the closing. GISFW responded that no prior notice was received and inquired as to what prompted the closing of the studio and what steps were taken to care for the existing GISFW clients. Caldwell failed to provide further information about why he abruptly closed the studio without GISFW’s necessary consent.

GISFW contacted the studio and discovered that Caldwell had not closed down the studio but instead sold the assets of the studio to a competing business called Synergy Fitness For Her. Further, the training manager for Synergy Fitness For Her is a former employee of the GISFW Durham studio who was approved as a GISFW franchise manager after completing the GISFW “Franchise School” training program. In July 2015, GISFW sent notices to Caldwell, demanding that he comply with the post-termination procedures set forth in the franchise agreement and pay for the loss of future royalties due to the unauthorized closing and sale of the Durham studio, the complaint states.

The complaint also alleges that Caldwell failed to return the Durham studio client list to GISFW. Since there is no record whether Durham studio clients sought refunds of their paid-in-full contracts, GISFW believes Caldwell sold the client list to Synergy Fitness For Her and Synergy Fitness For Her continues to provide fitness services to those clients. Additionally, Synergy Fitness For Her allegedly advertises the use of the MindBody Online application for scheduling, client data, and processing payments. MindBody was the only approved vendor that GISFW franchisees were to use for scheduling, client data, and processing payments. Based on photographs on the Synergy Fitness For Her website, the Durham studio did not undergo significant renovations before reopening as Synergy Fitness For Her and the equipment, color schemes, services, and trade dress of GISFW were still being used in the operation of the Synergy Fitness For Her, the franchisor claimed.

Due to Caldwell’s unauthorized termination of the franchise agreement and failure to follow post-termination procedures, GISFW allegedly (1) was unable to collect royalty payments for the remainder of the agreement through the termination date, (2) suffered harm through the disclosure of its systems, standards, and intellectual property to a direct competitor, and (3) lost the ability to assume the operation of the Durham studio as a corporate location.

The plaintiff asserts claims for breach of contract, breach of the covenants of good faith and fair dealing, unjust enrichment, and unfair competition. The action seeks damages, costs of suit, attorney fees, and any other just and proper relief.

The case is No. 1:15-cv-13118-NMG.

Attorneys: Lee Harrington (Nixon Peabody LLP) and Sarah J. Carlin for Get In Shape Franchise, Inc.

Companies: Get In Shape Franchise, Inc.; TransformationNation I, LLC

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