Mau v. L.A. Fitness Int'l Llc

749 F.Supp.2d 845

Jay MAU, etc., Plaintiff,

v.L.A. FITNESS INTERNATIONAL, LLC, etc., Defendant.

No. 10 C 1411.

United States District Court, N.D. Illinois, Eastern Division.

Nov. 10, 2010.

Richard Joseph Doherty, James Michael Smith, Louis Carey Ludwig, Bock & Hatch LLC, Chicago, IL, for Plaintiff.Emily Mulder Milman, Robert Radasevich, Neal, Gerber & Eisenberg, Chicago, IL, for Defendant.

MEMORANDUM OPINION AND ORDER

MILTON I. SHADUR, Senior District Judge.

Jay Mau (“Mau”), individually and as the proposed representative of a putative class, has filed a six-count complaint against L.A. Fitness International, LLC. (“Fitness”), claiming that Fitness wrongfully imposed a uniform early termination fee provision on its clients under its fitness services agreements (“Agreements”) in violation of Illinois law. Fitness has moved for summary judgment under Fed.R.Civ.P. (“Rule”) 56, and the motion has been fully briefed. For the reasons stated here, Fitness' motion is denied and its so-called “Voluntary Termination Clause” (hereafter simply “Termination Clause”) is held to impose an unenforceable penalty.

Summary Judgment Standard

Every Rule 56 movant bears the burden of establishing ¹ the absence of any genuine issue of material fact ( Celotex Corp. v. Catrett, 477 U.S. 317, 322–23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986)). For that purpose courts consider the evidentiary record in the light most favorable to nonmovants and draw all reasonable inferences in their favor ( Lesch v. Crown Cork & Seal Co., 282 F.3d 467, 471 (7th Cir.2002)). But a nonmovant must produce more than “a mere scintilla of evidence” to support the position that a genuine issue of material fact exists ( Wheeler v. Lawson, 539 F.3d 629, 634 (7th Cir.2008)) and “must come forward with specific facts demonstrating that there is a genuine issue for trial” ( id.).

Ultimately summary judgment is warranted only if a reasonable jury could not return a verdict for the nonmovant ( Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986)). What follows then is a summary of the facts,² viewed of course in the light most favorable to nonmovant Mau—a requirement applied within any limitations created by the extent of his compliance (or noncompliance) with the strictures of this District Court's LR 56.1, adopted to implement Rule 56.

Factual Background

On October 2, 2009 then 71–year–old Mau entered into an Agreement with Fitness for himself and his fiancee (M. St. ¶ 1). That contract entitled Mau and his fiancee to four personal training sessions per month at Fitness' health clubs for a period of 12 months ( id. ¶ 2). In exchange for the promised services, Mau made an initial payment of $170 ($50 administrative fee plus $120 for the first month's training sessions) and agreed to have his 11 additional monthly payments of $120 each charged to his credit card (F. St. ¶ 7). In part Fitness' printed form contained this Termination Clause:

Voluntary Termination: Client may voluntarily terminate this Agreement at any time by doing the following: (1) giving LAF 30 days' written notice of cancellation to be sent by registered mail, return receipt requested, and (2) paying a fee equal to 50% of the remaining balance as of the notice, in addition to any and all fees incurred, including, but not limited to, any late fees, return fees, collection fees, etc.

Mau scheduled personal training sessions for himself and his fiancee on four occasions (M. St. ¶ 5). Mau found his October 7 session unsatisfactory because the trainer did not adequately communicate to him how he should exercise ( id. ¶ 15). On October 9 the trainer that was scheduled to work out with Mau did not show up, and an uncertified personal trainer worked out with Mau instead ( id. ¶ 16). Next Mau and his fiancee experienced physical pain after their workout with a trainer on October 16 ( id. ¶ 17). Finally, on October 21 no trainer appeared at Mau's scheduled personal training appointment ( id. ¶ 18).

On October 28 Mau cancelled his Agreement as a result of what he viewed as poor performance by Fitness (M. St. ¶ 19). Fitness charged $660 to Mau's credit card account and provided Mau with a corresponding “Receipt for Training Buyout” (F. St. ¶ 17; M. St. ¶ 21). Soon after that Mau called Fitness' corporate representative to demand a full refund of the $660 fee (M. Resp. ¶ 12). After that demand was refused, Mau lodged a complaint with the Better Business Bureau in November 2009 (M. St. ¶ 24). Just a few days later Fitness offered Mau a refund of $120, which he accepted under protest (M. St. ¶¶ 25–26).

Enforceability of the Termination Clause

On Fitness' current motion the core legal dispute ³ is whether the Termination Clause in the Agreement is enforceable. That being so, both Mau and Fitness focus too much on legal terminology and formal legal tests, rather than on whether the Termination Clause imposes an unenforceable penalty. This opinion will focus squarely on that issue, which is a question of law ( Checkers Eight Ltd. P'ship v. Hawkins, 241 F.3d 558, 562 (7th Cir.2001)).⁴

Our Court of Appeals repeatedly confirms that penalty clauses remain unenforceable under Illinois law (see, e.g., River E. Plaza, LLC. v. Variable Annuity Life Ins. Co., 498 F.3d 718, 722 (7th Cir.2007)).⁵ Fitness argues that whether the Termination Clause is a penalty under Illinois law should be analyzed under an alternative-performance rubric (F. Mem. 3–7). It is of course an odd locution to speak of the compelled payment under the Termination Clause as a kind of “performance”—but even if that label were attached to it, that would not necessarily mean that the type of alternative-performance analysis most comprehensively conducted by the Court in River E. should be employed here or, even if employed, would be dispositive.

Fundamentally an alternative-performance analysis is conducted in response to the suggestion of an “attempt to disguise a provision for a penalty that purports to make payment of the amount an alternative performance under the contract” ( Restatement (Second) of Contracts § 356 cmt. c (1981)(hereafter cited simply “cmt. c”)). As River E., 498 F.3d at 722, quoting cmt. c, says:

[A] court will look to the substance of the agreement to determine whether ... the parties have attempted to disguise a provision for a penalty that is unenforceable.... In determining whether a contract is one for alternative performances, the relative value of the alternatives may be decisive.

Of course “the underlying question is whether [a] clause is punitive in nature” ( id.). Courts should expect to find non-punitive forms of alternative performance clauses, as opposed to traditional liquidated damage clauses, where “the primary object of an alternative contract is performance, and it thus looks to a continuation of the relationship between the parties, rather than to its termination” (24 Williston on Contracts § 65:7 (Richard Lord, ed., 4th ed. 2010)).

This exposition of the alternative-performance analysis makes clear that such an analysis is not really applicable here. First, by definition there was and is no expectation of a continuing relationship between Mau and Fitness—exactly the opposite is true. Mau simply wanted to end his contract with Fitness and presumably find another place to work out, if he chooses to continue to do so.

Surely the situation can more fairly be classified as nonperformance (indeed, nonperformance by Fitness rather than by Mau, when his version is credited as it must be on the current motion), rather than alternative performance. For one thing, Mau's actions can be contrasted to the situation in River E., where the borrower and lender may well have had an ongoing financial relationship extending to different loans or new business.

More importantly, Mau's forced payment of a fee under the Termination Clause does not bestow on him the substantial economic benefit realized by the borrower in River E. from prepaying the loan that it had received—a benefit that made that situation a plausible case for alternative performance. ⁶ Finally, even if an alternative—performance analysis were somehow found to be appropriate here, the fact that the Termination Clause allowed Mau to pay less than the amount he would have owed for the full contract term would not answer the question whether the Termination Clause is a penalty clause. Instead it would demonstrate only that the Termination Clause is not an “attempt to disguise a provision for a penalty that purports to make payment of the amount an alternative performance under the contract” (cmt. c).⁷ Proving that negative does not prove that the Termination Clause is enforceable. To address fully “the real question [of] whether the clause is a penalty intended to secure performance” ( River E., 498 F.3d at 725), further discussion is required.

In contrast to Fitness' focus on the alternative-performance analysis as a method for assessing whether the Termination Clause is a penalty clause, M. Mem. 6–7 engages in a liquidated damages clause analysis in answering that same question. While Mau's cancellation of the Agreement was surely not a contractual breach, it did represent a significant non-conformity with the terms of the Agreement.⁸ Without question the Termination Clause was a means of putting pressure on Mau to adhere to the original terms of the Agreement instead of cancelling the Agreement and refusing to pay Fitness for the use of its personal training services.

Thus the cases comparing liquidated damages for breach with unenforceable penalties might perhaps be thought to provide a useful, if imperfect, analogy here.⁹ And in that respect Energy Plus Consulting, LLC v. Ill. Fuel Co., 371 F.3d 907, 909 (7th Cir.2004)(internal quotation marks omitted) most recently recited the test under Illinois law for determining if a contract clause is an enforceable liquidated damages provision as contrasted with an...