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Some 100 Curves Franchisees Head to Jury Trial after Ruling on Summary Judgment Claims

After being embattled in litigation for the past two years with Curves International Inc., a franchisor of a 30-minute fitness concept designed for women, franchisees are now readied for a three-week jury trial, to commence on April 10, 2017. The Texas district judge issued his order on March 6, denying many of Curves' motion for summary judgment claims, and scheduled the pre-trial conference.

The legal action was initially filed in Missouri state court on June 1, 2015 by 111 franchisees who owned 83 franchised centers. They alleged 165 counts against Curves International Inc., Curves International Holdings Inc., and company founder Howard "Gary" Heavin. The franchisees basically claimed that Curves misrepresented information relevant to their decision to enter franchise agreements with Curves and that the franchisor later violated those agreements.

Curves then moved the case to Texas federal court, in the eastern district, and the judge granted in part and denied in part Curves' motion to dismiss based on the statute of limitations. The court grouped the claims presented against Curves into three broad categories based on the time frames in which the relevant events allegedly occurred.

The first category of claims was based on misrepresentations allegedly made by Curves regarding the financial prospects of purchasing a Curves franchise and the franchisor's alleged failure to provide opening assistance as promised in the franchise agreements. The second category of claims related to various demands made by Curves after the franchises opened that allegedly required additional unanticipated payments by franchisees. The third category of claims consisted of alleged breaches of the franchise agreements based on Curves failure to perform its obligations to provide opening assistance, training, periodic review of franchisees' sales, ongoing support, maintenance, protected territories, and advertising.

The claims were based on Texas common law, the Texas Business Opportunity Act, and the Texas Deceptive Trade Practices Act.

After assessing the claims of each of the 83 franchise units owned by Curves franchisees, the court determined that only 23 had claims in the first category not precluded by the statute of limitations, but that 75 franchises had claims in the second and third categories not precluded by the statute of limitations. The court dismissed the claims it determined were necessarily foreclosed by the statutes of limitations based on the pleadings, dismissing nine plaintiff franchisees entirely because they had no remaining claims. Franchisees also filed a notice of partial dismissal, dismissing 96 of their initial 165 counts without prejudice, mainly under the Texas Business Opportunity Act and the Texas Deceptive Trade Practices Act.

Franchisees amend complaint, now 62 claims, founder Gary Heavin dismissed

After the case was transferred to Texas from Missouri, franchisees filed their amended complaint. Curves then filed its motion requesting that the court dismiss all claims alleging a breach of the covenant of good faith and fair dealing. After franchisees conceded, the motion was granted. The parties then together filed a stipulation to dismiss all claims against Curves founder Howard Gary Heavin and Curves International Holdings Inc. Those were dismissed with prejudice on June 20, 2016.

After further filings the only remaining claims at issue on summary judgment are 62 filed by various franchisees for breach of contract. They generally allege that Curves failed to provide the services they agreed to as the franchisor in the franchise agreement. That included assisting franchisees in opening their centers, providing them the training necessary to run their franchise, periodic reviews of franchisees' operations, ongoing support, protected territories, and advertising.

First, Curves, in arguing that it was entitled to its summary judgment claims, asserted that the language in the franchise agreements does not obligate it to perform those duties listed by franchisees. The franchisor contends that it had "complete discretion" on whether or not it would provide them under a "Reasonable Business Judgment" provision of the contracts. Curves relies on Section 7 of the franchise agreement, Services Available to Franchisees.

Second, Curves argued that the statute of limitations bar nearly all of franchisees' claims. Third, Curves asserts that certain franchisees released any claims they had against the franchisor when they signed release agreements. Curves also argues that franchisees have no viable theory of damages.

U.S. District Judge Robert Pitman rejected Curves first argument for two reasons. First and most obviously, Curves fails to acknowledge that Section 7 of the franchise agreement is not the only clause of the agreement that provides some affirmative obligations by Curves that are named in franchisee-plaintiffs' complaint. The judge lists them in other areas of the contracts. Judge Pitman also rejects the company's argument that because the last sentence of Section 7 uses the discretionary term "may," it has the sole discretion to determine what services to perform and how to perform them. He asserts, "An obligation that is entirely discretionary is no longer an obligation." He adds that the interpretation Curves asks the court to adopt would render that section of the franchise agreement "meaningless or illusory."

Regarding Curves' argument that many of the franchisees' claims are barred by the four-year statute of limitations, that evidence shows that any breach of contract had to occur more than four years before the franchisees filed their lawsuit, Judge Pitman said Curves' reasoning was flawed. He first denied the argument on summary judgment where Curves provided no evidence related to a particular franchisee-plaintiff or claim mentioned in its evidence. And even with respect to claims and franchisees that Curves did provide summary judgment evidence, the judge said the evidence was insufficient to warrant summary judgment.

Curves had submitted with its motion for summary judgment copies of agreements for 19 different franchisee plaintiffs "that release all claims arising out of their franchise agreements." The franchisor asserts that the releases bar the claims of all plaintiff franchisees who signed them. The franchisees responded that the release agreements are unconscionable and should not be enforced.

Because each release agreement varies in important ways, in the date it was signed and its exact scope, the court addressed both, whether the release encompassed any of the franchisee-plaintiffs' remaining claims and, if so, whether they have raised an issue of material fact as to whether the release agreement is unconscionable.

In light of his analysis, the judge granted in part and denied in part Curves' summary judgment claims, and denied its summary judgment claims as to all of the franchisees' remaining claims. Lastly, Judge Pitman denied the franchisees' motion for a continuance and scheduled a final pretrial conference for March 24.

Judge addresses damages

Curves' final summary judgment argument was that franchisee-plaintiffs have no evidence of any recoverable damages during the limitations period. The franchisor states that the only evidence they have is regarding the losses or gains reported on their taxes during each year their franchise operated. The company contends that "does nothing to demonstrate a causal connection between those losses and the actions of Curves."

Franchisees responded, arguing that the losses reported in their tax returns were directly caused by Curves' breaches, and that the testimony of the company's founder, Gary Heavin, is sufficient to support their claim for damages. Franchisees had submitted the testimony of Gary Heavin, who suggested that "a Curves franchisee can expect to make approximately $30,000 in profit a year in running a franchise."

Texas-based Curves International Inc. founders Gary and Diane Heavin opened their first 30-minute fitness and weight-loss center in 1992 in Harlingen, Texas. By 2006 Curves became one of the fastest-growing fitness studios, reporting it had 10,000 locations worldwide, with 7,848 located in the U.S. Then in 2009-2010, the fitness franchise shrunk by a third, down to 5,209.

In September 2012 North Castle Partners, a private equity firm, completed its investment in Curves' parent company. Approximately a year later Curves acquired the Jenny Craig weight loss and weight management system.

The case has now been reassigned from Judge Pitman to Judge Shelly D. Dick from the Middle District of Louisiana, who will travel to Waco, Texas to preside over the trial. Court documents show a Motion in Limine was filed on March 20, "excluding any testimony, exhibits, arguments or other evidence of any income tax benefits that any franchisee-plaintiffs may have received or are entitled to receive in the future as a result of net operating losses plaintiffs incurred as a result of the operation of their Curves franchises."

Curves responded on March 28, stating the franchisees have not disclosed competent evidence of causation or amount of either "losses" or "lost profits." They rely only on speculation. Curves attorneys further argue, "Losses reported on tax returns do not provide a reasonable basis for computing damages." They also request that founder Gary Heavin's quoted testimony be excluded at trial.

Lead counsel for Curves International Quentin R. Wittrock of Gray Plant Mooty did not respond to a request for comments on the case going forward.

Attorney Jonathan E. Fortman of Florissant, Missouri, representing the franchisees, expressed to Blue MauMau, "My clients look forward to presenting their case to the jury and are confident that when the jury considers all of the evidence they will find in the favor of plaintiffs.  I am proud and honored to represent such a great group of people who showed incredible courage and commitment to get to this point in the case." 


Related Articles:

AttachmentSize
Franchisees' Motion in Limine.pdf328.96 KB
Curves' Motion in Limine on Damages Theories.pdf91.1 KB
Judge Pitman Order 3.6.17.pdf318.15 KB
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