Fitness Together Franchise, L.L.C. v. EM Fitness, L.L.C.

FITNESS TOGETHER FRANCHISE, L.L.C., Plaintiff, v. EM FITNESS, L.L.C.; FT THREE, L.L.C.; FT POLAND, L.L.C.;AXIO FITNESS CANFIELD, L.L.C.; AXIO FITNESS HOWLAND, L.L.C.;AXIO FITNESS POLAND, L.L.C.; andERIN MELLINGER, Defendants.

Civil Action No. 1:20-cv-02757-DDD-STV

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO

October 16, 2020

Judge Daniel D. Domenico

ORDER DENYING AXIO DEFENDANTS' MOTION TO DISMISS AND GRANTING IN PART FITNESS TOGETHER FRANCHISE LLC'S MOTION FOR A PRELIMINARY INJUNCTION

In a standard franchise agreement, the franchisor allows the franchisee to use its marketing materials, trademarks, trade secrets, and client lists to set up a new business. In return, the franchisee typically pays a fee for the right to operate that franchised business.

But what happens when the franchisee later wants to strike out on her own? If, as is normally the case, her franchise agreements contain noncompetition clauses, she must either wait until the specified period has passed or move outside the specified geographic area. In this case, the defendants, who operated fitness studios franchised by the plaintiff, did neither. Instead they terminated their franchises, created new companies and immediately began to operate studios under a new name in the same locations, with the same staff, same clients, and same services.

The plaintiff franchisor has sued and moved the court to enjoin operation of those studios pending trial on the merits. At least for purposes of this motion, the defendants do not dispute that the new studios violate the terms of the noncompetition clause. The only real dispute at this point is whether this court has jurisdiction over the new entities that own them, which were organized in Ohio. The court concludes that it does, and therefore denies the motion to dismiss filed by those entities and grants in part the plaintiff's motion for a preliminary injunction.

BACKGROUND

Plaintiff Fitness Together Franchise, L.L.C. ("Fitness Together") and Defendants Erin Mellinger, EM Fitness, L.L.C., FT Three L.L.C., and FT Poland, L.L.C. (collectively, the "Franchisee Defendants") entered into three separate franchise agreements for three gyms respectively owned by these three Franchisee Defendant LLCs. (Docs. 46-3 (agreement for the Poland, Ohio studio), 46-4 (agreement for the Howland, Ohio studio), 46-5 (agreement for the Canfield, Ohio studio) (collectively, the "Franchise Agreements").) Ms. Mellinger is the owner of the three LLC Franchisee Defendants, which she claims are "now-defunct." (Doc. 46-46 at p. 1.) All agreements had an initial term of ten years. (Doc. 46-3 at p. 8; Doc. 46-4 at p. 11; Doc. 46-5 at p. 8.)

First, Ms. Mellinger signed the agreement for her studio in Poland, Ohio as an individual, and that agreement had an effective date of September 30, 2011. (Doc. 46-3 at p. 44.) That agreement granted Ms. Mellinger the right to open a Fitness Together franchise gym in Poland, Ohio. (Id. at p. 45.) In the event of termination of the agreement, theagreement bars Ms. Mellinger and any "Bound Party" from having any interest in a fitness studio within a three-mile radius of the franchise gym for two years. (Id. at pp. 35-36.) The contract defines "Bound Parties" to include directors or other owners of the gym, Ms. Mellinger's spouse, and her "immediate family member[s]." (Id. at p. 35.) The agreement also provides that Fitness Together would transmit its confidential information, including purported trade secrets, to Ms. Mellinger for purposes of operating the gym. (Id. at p. 36.) That section of the agreement restricts Ms. Mellinger's use of trade secrets and had an accompanying assignment clause relating to certain intellectual property created during the term of the agreement. (Id. at pp. 36-37.) The agreement has a Colorado choice-of-law clause, a Colorado forum-selection clause, and a binding-arbitration clause governed by the Federal Arbitration Act. (Id. at pp. 37-39.) But the contract also contains a clause stating that "Nothing in this Agreement shall prevent us or you from seeking injunctive relief in appropriate cases to prevent irreparable harm." (Id. at p. 42.)

Second, Ms. Mellinger signed the agreement for her Howland, Ohio studio on behalf of FT Three L.L.C. (Doc. 46-4 at pp. 52-53.) That agreement has an effective date of October 1, 2013. (Id. at p. 53.) Like the Poland agreement, the Howland Agreement has substantially similar clauses covering non-competition for two years within a three-mile radius of the gym (Id. at pp. 42-43); bound parties (Id. at p. 42); trade secrets and intellectual property (Id. at pp. 43-44); and forum selection, choice of law, arbitration, and injunctive relief (Id. at pp. 44-47, 50).

Third, Ms. Mellinger signed the agreement for her Canfield, Ohio studio on behalf of EM Fitness L.L.C. (Doc. 46-5 at pp. 52-53.) That agreement has an effective date of August 20, 2018. (Id. at p. 52.) Like the Poland and Howland agreements, the Canfield agreement has substantially similar clauses covering non-competition for two years withina three-mile radius of the gym (Id. at pp. 41-42); bound parties—with the exception that "immediate family members" are not included (Id. at p. 41); trade secrets and intellectual property (Id. at pp. 42-43); and forum selection and choice of law. (Id. at pp. 44-45.) The Canfield Agreement, notably, exempts claims arising out of breach of the non-compete provisions or trade secret misappropriation from arbitration. (Id. at p. 46.)

In April 2020, Ms. Mellinger informed Fitness Together that she desired to close her gyms so that she could open new ones under a different brand and asked Fitness Together to waive the non-compete provisions in the Franchise Agreements. (Doc. 13 at ¶¶ 48-49.) Fitness Together declined, but Ms. Mellinger and Fitness Together began negotiating a termination of the Franchise Agreements. (Id. at ¶¶ 50-51.) The parties signed a termination agreement on July 30, 2020 that terminated the three Franchise Agreements. (Doc. 46-6 (the "Termination Agreement").) Pursuant to that agreement, Ms. Mellinger agreed to discontinue operations at her three gyms and to direct her clients to other Fitness Together gyms. (Doc. 46-6 at pp. 2-3.) In exchange for $48,000, Fitness Together agreed to reduce the duration of the non-compete provisions under the Franchise Agreements from two years to one year. (Id. at p. 4.) Provisions of the Franchise Agreements governing non-competition (except as modified in the termination agreement), governing law, confidential information, dispute resolution, and litigation survived the Termination Agreement. (Id.)

During the negotiation of the Termination Agreement, Ms. Mellinger allegedly formed Axio Fitness Canfield, L.L.C., Axio Fitness Howland, L.L.C., and Axio Fitness Poland, L.L.C. (collectively, the "Axio Defendants") with the intent to violate the terms of that Termination Agreement. Fitness Together has provided substantial evidence connectingMs. Mellinger and the Franchisee Defendants to the Axio Defendants' conduct, including:

• An email purportedly written by a Franchisee Defendant employee describing Ms. Mellinger as "breaking away from corporate" and "opening [new gyms] under Erin's new name of Axio Fitness." (Doc. 46-8 at p. 1.)

• Emails demonstrating that Ms. Mellinger used her Fitness Together-issued email to discuss buying new fitness equipment for the Axio gyms post-Termination Agreement. (Doc. 46-12 at p. 1.)

• Emails demonstrating that agents of the Franchisee Defendants used a Fitness Together-issued email address to arrange client sessions for a new Axio gym post-Termination Agreement. (Doc. 46-17 at pp. 1-3.)

• A screenshot of the Axio Fitness website—which has since been changed—taken post-Termination Agreement that lists Erin Mellinger as "Owner" of the Axio gyms. (Doc. 13 at ¶¶ 66-67.)

• Evidence that someone registered domain names for "axiofitness.com" on April 19, 2020. (Doc. 13 at ¶ 58.) And evidence that the same month, someone created new Facebook pages for "Axio Fitness" locations in the three cities where the Franchisee Defendants operated. (Id. at ¶ 59.)

• Evidence that, two days before the Termination Agreement was signed, registration papers for the Axio Defendants werefiled with the Ohio Secretary of State, listing Ms. Mellinger's mother as agent for service of process. (Doc. 46-7.)

• Evidence that, within a month of the Termination Agreement being signed, there were new gyms open at the former franchise locations under the name "Axio Fitness." (See Doc. 13 at ¶ 61.)

• Photographs purportedly showing that the Axio Defendants were using Fitness Together's trademarks on their signage and door mat at one location. (Id. at ¶¶ 77-78.)

Fitness Together filed this suit seeking an emergency temporary restraining order against the Franchisee Defendants. (Docs. 1, 3.) The court denied that motion but allowed Fitness Together to re-file its motion for a temporary restraining order as a motion for a preliminary injunction. (Doc. 10.) Fitness Together did so. (Doc. 14.) And Fitness Together amended its complaint to add the Axio Defendants to the suit. (Doc. 13.)

The Franchisee Defendants filed a response to Plaintiff's motion for preliminary injunction in which they ostensibly stipulated to the relief sought by Plaintiffs. (Doc. 23 at p. 2.) The Axio Defendants responded to the preliminary-injunction motion by filing a motion to dismiss, arguing that the court lacks personal jurisdiction and therefore cannot enjoin them. (Doc. 22.) The court held a hearing on the parties' motions. (Doc. 45.)

ANALYSIS

I. Motion to Dismiss for Lack of Personal Jurisdiction

"The plaintiff bears the burden of establishing personal jurisdiction over the defendant." Behagen v. Amateur Basketball Ass'n of U.S.A., 744 F.2d 731, 733 (10th Cir. 1984) (citation omitted). "Prior to trial, however, when a motion to dismiss for lack of jurisdiction is decided on the basis of affidavits and other written...