Legal Matters

by Simon Lord

last updated 05/04/2013

– the story of the gym franchise
and the franchisee who took down the signs

by Simon Lord

last updated 05/04/2013

April 2013 - A dispute between Club Physical and a multi-unit franchisee was only resolved after a lot of publicity and a lot of legal fees

The high-profile dispute commenced on 8 February 2013 when Stuart Holder, who was a multiple franchisee of Club Physical through his three Colven companies, rebranded his three gyms without warning as Jolt Fitness. Existing Club Physical members found themselves transferred to the new brand and staff were similarly surprised.

The matter went to Court on 26 February with Club Physical seeking an injunction against Jolt Fitness to require it to stop trading, while Jolt Fitness sought an injunction to stop Club Physical using the database to contact members of the three re-branded gyms. The case was seen by many in the franchise sector as having implications for the agreements. The three gyms, at Westgate, Three Kings and Botany Downs in Auckland, represented a third of the nine-gym group.

During the Court hearing, lawyers for Mr Holder claimed that the franchisor had failed to provide proper support, failed to adjust the business model to allow for new competition and had produced marketing campaigns that members found offensive, Club Physical rejected all these claims. The franchisor also noted that the action had come just as a waiver of franchise fees had come to an end.

Forcing Resolution

Demonstrators outside Club Physical, Westgate, which was re-branded by a franchisee.The decision published by the respected Justice Helen Winkelmann on 7 March was that the first injunction was granted and Jolt Fitness must immediately stop trading from its three existing premises and, in one case, within 5kms of the existing premises. The counter injunction was denied, allowing Club Physical to use the database. Read an analysis of the judgment by barrister Deirdre Watson. Jolt Fitness posted an appeal on 8th March as a result of which the judge granted a stay until Monday 18 March 'to allow the parties to progress discussions towards an amicable resolution of the dispute.' This was later extended until Monday 25 March.

Under this pressure, an agreement was reached for Club Physical franchisor Paul Richards to take over the leases and restore all three gyms as Club Physical, with original branding and classes from 30 March. Most of the staff were re-employed by Club Physical. He said the gyms would be run as company-owned outlets and that Club Physical would not be rushing into any new franchise agreements.’

Even after the hand-over, however, it seems that there is still disagreement between the parties as to what was included in the agreement. According to a posting on the Jolt Fitness Facebook page dated 31 March, 'Everything that was on "the list" for each of the clubs was in the clubs at hand over. Claims by Club Physical that imply goods were stolen are mischievous, disingenuous and so an out right lie... We may now be forced to follow the same legal process that other ex Franchisees followed to prevent Mr. Richards from denigrating and defaming their names with false claims of theft.'

Costs and Brand Damage

No details of the nature of the settlement between the parties have been released. Lawyers for Mr Holder originally told the judge that if the Jolt Fitness gyms were forced to stop trading, the imposition of the injunction would 'terminate the defendants’ business with catastrophic effect.' 'The fourth defendant (Mr Holder) would lose his $2.1 million capital investment in the business, and the first three defendants (the Colven companies) would be rendered insolvent.'

The costs for both parties involved in this dispute would have been considerable: apart from such direct costs as legal fees, signage and promotional material; PR consultants’ fees and lost or cancelled memberships, there would also be damage to brand value and, of course, considerable distraction for both parties from their core businesses.

Warring in Public

An unusual aspect of the dispute was the way that the professional media and social media were utilised to gather public support among gym members, many of whom appear fiercely loyal to one side or the other. View the Facebook pages for Club Physical and Jolt Fitness. Club Physical also issued press releases, appeared on Campbell Live and arranged a demonstration of upset members outside one of the gyms.

Taking franchise disputes into the public arena in this way can be dangerous; one group of Australian academics has termed it ‘kamikaze conflict’.  However, some mediators regard conflict as a potential stimulus for improvements in a franchise system.

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