Court: District Court, E.D. California; June 28, 2010; Federal District Court
Terry Delamater, the plaintiff and franchisee of Anytime Fitness, is involved in a contractual dispute with Anytime Fitness, LLC regarding multiple franchise agreements that mandate mediation prior to litigation or arbitration. Delamater seeks a declaration that mediation should occur in California and that the non-competition clauses in the agreements are void under California law. The court reviewed cross motions for summary judgment and ultimately denied Delamater's motion while granting Anytime Fitness' motion, resulting in the dismissal of Delamater's complaint without prejudice.
Anytime Fitness operates over 1,200 fitness facilities, with Delamater having entered into an Area Development Agreement in December 2004 to establish franchises in Kern County, California. He signed four franchise agreements, with the Oildale Agreement terminating in December 2009, while the Tehachapi and Westchester Agreements remain in effect. Notably, the Tehachapi and Westchester Agreements are governed by Minnesota law, and the Westchester Agreement includes a state-specific addendum that may not be enforceable under California law.
The franchise agreements contain non-competition clauses that restrict Delamater from engaging in competing fitness businesses during the term of the agreements and, in the case of the Westchester Agreement, even after termination. Additionally, a mediation clause requires both parties to mediate disputes related to the agreements for a minimum of four hours before initiating any legal action or arbitration, except when Anytime Fitness seeks equitable relief or recovery of owed amounts.
Upon written notice to mediate, the notified party must select a mediator from an independent mediation service within ten days. If they fail to do so, the notifying party may either disregard the mediation requirement or select the mediator themselves. The mediator must have a minimum of five years' experience in franchise operations or franchise law. Costs for mediation will be shared equally between the parties. The mediator will determine the location, which must be in a metropolitan area of at least 250,000 people, not within 100 miles of either party’s principal office, unless otherwise agreed. If either party initiates legal action without mediation (and the other party hasn't failed to engage), the court or arbitrator will dismiss the case without prejudice and award attorneys' fees to the dismissing party. If dismissal is refused, the initiating party will bear the other party's legal costs.
On October 19, 2009, Delamater sought written assurance from Anytime Fitness that it would not interfere with his plans to open a fitness center or enforce non-compete clauses. Following this, Anytime Fitness threatened litigation regarding the validity of non-compete clauses in various agreements. Delamater requested mediation before the Oildale Agreement expired on December 7, 2009, proposing a retired judge in California as the mediator. Anytime Fitness agreed but requested mediation consistent with Franchise Agreements at a mediator-selected location, which was proposed to be Atlanta. On November 18, 2009, Delamater filed a complaint seeking a declaratory judgment on three points: mediation must occur in California, the non-competition clauses are unenforceable, and his operation of a non-affiliated Anytime Fitness center does not violate the Franchise Agreements.
Delamater seeks injunctive relief to prevent Anytime Fitness from enforcing non-competition clauses and interfering with his Oildale fitness gym operations. On December 8, 2009, Delamater filed a motion for summary judgment, followed by Anytime Fitness's cross motion on December 28, 2009. Anytime Fitness transitioned from a corporation to a limited liability company on December 11, 2009, with qualifications to conduct business established on December 7, 2009, and January 15, 2010. On February 1, 2010, Anytime Fitness submitted a reply, which Delamater contested as untimely on February 2, 2010, the same day Anytime Fitness filed counterclaims alleging breach of franchise agreements, violation of a non-compete covenant, and breach of personal guaranties.
The summary judgment framework states that it is appropriate when there is no genuine issue of material fact, allowing for judgment as a matter of law (Fed. R. Civ. P. 56(c)). The moving party must demonstrate the absence of material fact, while the non-moving party must provide specific evidence to show a genuine issue exists. General allegations are insufficient; the opposing party must present a factual basis for inferences. Evidence that is merely colorable or insufficiently probative cannot defeat a motion for summary judgment. The court has discretion to consider evidence not formally presented but is not obligated to search the entire file for such evidence.
If the non-moving party does not present sufficient evidence to establish a genuine issue of material fact, the moving party is entitled to summary judgment. Delamater seeks summary judgment based on four arguments: 1) the mediation forum selection provisions in the Franchise Agreements violate California law by requiring mediation outside California; 2) public policy favors mediation in California; 3) non-competition clauses are unenforceable under California law; and 4) Anytime Fitness lacks the capacity to bring an action in California per Cal. Corp.Code. 17456(a).
In contrast, Anytime Fitness argues for summary judgment on two grounds: 1) the Franchise Agreements mandate mediation before any legal action can proceed, and Delamater failed to initiate mediation; 2) the mediation forum selection clause, potentially requiring mediation outside California, is valid.
Regarding Anytime Fitness’ capacity to file a complaint, Delamater claims that Anytime Fitness LLC is ineligible to pursue legal action in California because it is a new entity not registered to do business in the state, and there is no proof of assignment from Anytime Fitness Inc. Anytime Fitness counters that both Anytime Fitness Inc. and LLC were authorized to conduct business in California during the litigation, and that Anytime Fitness LLC retains the same rights and obligations as Anytime Fitness Inc.
Cal. Corp.Code. 17456(a) stipulates that a foreign limited liability company must register to maintain legal actions in California. Anytime Fitness LLC argues compliance with this law since it was converted from Anytime Fitness Inc. and retained all rights and obligations. Under Minnesota law, the converted company is considered the same entity as the original, maintaining all assets, liabilities, and legal rights. There is no evidence of Anytime Fitness Inc. being suspended or dissolved, thus Anytime Fitness LLC's motions were valid as if the conversion had not occurred. Both Anytime Fitness LLC and Inc. were registered to do business in California at the time of filing the motions.
Anytime Fitness Inc. was authorized to conduct business in California starting December 7, 2009, while Anytime Fitness LLC gained authorization on January 15, 2010. Anytime Fitness LLC legally filed a motion for summary judgment on December 28, 2009, as it is considered the same entity as Anytime Fitness Inc., which was already qualified to operate in California. Additionally, Anytime Fitness LLC filed a counter complaint on February 2, 2010, after being qualified to conduct business. Consequently, Anytime Fitness LLC had the capacity to file both the complaint and the motion for summary judgment in California.
Regarding the enforceability of the mediation forum selection provision in their Franchise Agreements, it is stipulated that disputes must be mediated before any litigation or arbitration can occur. Delamater acknowledges the mediation requirement but contests the validity of the clause that mandates mediation outside California, claiming it violates California Business Professions Code 20040.5, which invalidates any franchise agreement provision that restricts venue to a non-California forum for claims arising within the state.
The court finds the mediation forum selection provision enforceable, stating that Delamater failed to demonstrate that 20040.5 applies to nonbinding mediation provisions. He referenced cases where 20040.5 voided litigation or arbitration provisions but did not provide any case law to invalidate a similar mediation clause. The court noted that 20040.5 only pertains to claims for relief, which arise when a party asserts a right in a legal action or arbitration. The interpretation of "claim" in this context means a demand for relief, and the court concluded that the statute does not preclude mediation from occurring outside California as long as no claim has been asserted.
Mediation differs from arbitration and litigation as it does not involve parties asserting claims or seeking legal remedies. It is facilitated by a neutral mediator who aids in reaching a voluntary agreement without imposing decisions. In the context of Franchise Agreements, the parties agreed to binding arbitration for all "disputes and claims," indicating no intention to submit claims to mediation. Legislative history supports that California's law, 20040.5, does not invalidate the mediation forum selection provision. The bill aimed to protect California franchisees from being forced to litigate in out-of-state courts, which can impose significant burdens. The mediation clause requires only a four-hour mediation, which does not equate to the costs associated with litigation or arbitration. Delamater's challenge to the provision based on public policy is unconvincing; he cites Jones v. GNC Franchising, where a forum selection clause was deemed unenforceable due to California's strong public policy. However, the current mediation provision does not compel litigation outside California, thus aligning with state policy. Delamater has not demonstrated that 20040.5 would invalidate the mediation requirement.
Jones is distinguishable because it involved a venue provision mandating the franchisee to litigate outside California, whereas the current mediation provision does not require Delamater to mediate outside California. Delamater is not obligated to resolve his claims through mediation, which is non-binding and aims for voluntary resolution. Unlike arbitration or litigation, a mediator does not impose a binding decision. Delamater cites Roberts v. Synergistic International, LLC, where a franchise holder was compelled to arbitrate in Texas according to a forum selection clause. However, the court in Roberts found an addendum void due to lack of a mutual agreement. In contrast, no such addendum modifying the mediation provision exists in this case. The parties executed a state-specific addendum applicable to venue but did not restrict mediation to Minnesota or reference it, meaning the addendum only pertains to litigation venue. Delamater incorrectly asserts that Roberts allowed arbitration in California; in fact, the court required the parties to negotiate a mutually agreeable arbitration location, which they did. The Roberts court did not mandate arbitration in California. Ultimately, the lack of mediation engagement, as stipulated in the contract, justifies dismissal of the case, affirming the enforceability of the mediation forum selection clause and supporting summary judgment in favor of Anytime Fitness.
Delamater did not fulfill the necessary condition precedent to initiate litigation, leading to the dismissal of his complaint against Anytime Fitness without prejudice, as it was deemed premature. The Court granted Anytime Fitness' motion for summary judgment and denied Delamater's motion for summary judgment. Additionally, the Court awarded Anytime Fitness the right to seek attorneys' fees for defending against Delamater's motion, noting that Delamater violated the mediation requirement. The Court ordered: 1. Granting of Anytime Fitness' motion for summary judgment; 2. Dismissal of Delamater's complaint without prejudice; 3. Denial of Delamater's motion for summary judgment; 4. Permission for Anytime Fitness to document its incurred attorneys' fees and costs. Delamater is identified as a resident of Bakersfield, California, and operates as Family Fitness of Royal, LLC. The lawsuit, filed on November 18, 2009, involves Anytime Fitness, a Minnesota corporation. The Court emphasized the enforceability of the mediation provision before litigation can proceed and refrained from addressing other arguments or the validity of the arbitration clause, as those issues were not raised by either party.
The parties are required to mediate all disputes related to the agreement, with the court interpreting this as a nonbinding mediation provision due to the absence of any reference to binding mediation. The American Arbitration Association (AAA) is designated to provide administrative services for alternative dispute resolution, and the Franchise Agreements stipulate that arbitration will follow AAA rules. The National Arbitration Forum also offers mediation and arbitration services. In the context of cross motions for summary judgment, the court notes that while Anytime Fitness has filed a counter complaint, the current motions pertain solely to Delamater's complaint, and the court does not comment on the counter complaint. Anytime Fitness sought sanctions under 28 U.S.C. § 1927, arguing that Delamater's decision to litigate warranted penalties; however, the court clarifies that § 1927 does not apply to initial filings. Citing case law, the court denies Anytime Fitness' request for sanctions.
