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Get in Shape Franchise, Inc. v. TFL Fishers, LLC

United States District Court, D. Massachusetts

March 9, 2016

GET IN SHAPE FRANCHISE, INC., Plaintiff
v.
TFL FISHERS, LLC; ROSALYN R. HARRIS; THINNER FOR LIFE, INC.; and FIT CHICKS, LLC, Defendants.

MEMORANDUM AND ORDER

PATTI B. SARIS CHIEF UNITED STATES DISTRICT JUDGE

INTRODUCTION

This case involves a dispute between a franchisor of small group fitness studios for women and a former franchisee. Plaintiff Get In Shape Franchise, Inc. (GISFW) is a Massachusetts corporation with more than eighty franchise locations in sixteen states across the country that do business under the name “Get In Shape For Women.” GISFW brings this action against a former franchisee, TFL Fishers, LLC, alleging trademark infringement, breach of contract, breach of the covenants of good faith and fair dealing, unjust enrichment, unfair competition, and fraud. Defendant TFL Fishers, LLC, is an Indiana limited liability company; Defendant Rosalyn R. Harris is an Indiana resident and the president and sole member of TFL Fishers. Ms. Harris signed a franchise agreement with GISFW as the president of TFL Fishers in April 2013.

Ms. Harris owned and operated a GISFW studio in Fishers, Indiana pursuant to the franchise agreement for just over two years before terminating the agreement via email in June 2015. Shortly before termination, she filed the necessary paperwork with the State of Indiana to register Defendant Fit Chicks, LLC- an Indiana limited liability company owned by Ms. Harris’s sister, Constance Harris.[1] Upon termination of the franchise agreement, Rosalyn Harris sold all the equipment and machines in the Fishers studio to her sister for $1, and began operating the studio under the name “Fit Chicks.” Rosalyn Harris currently serves as a full-time, volunteer manager at Fit Chicks.

GISFW now moves for a preliminary injunction enjoining the defendants from operating the allegedly competing business Fit Chicks, and from using GISFW’s confidential information, in violation of the franchise agreement. Rosalyn Harris appears pro se, and argues that the Court should dismiss the case for lack of subject matter jurisdiction, lack of personal jurisdiction, and improper venue. Alternatively, she argues that the Court should deny GISFW’s motion for a preliminary injunction on the grounds that GISFW failed to establish a likelihood of success on the merits, and failed to establish that it will suffer irreparable harm if the motion is denied. The other defendants have not appeared in the case.

After hearing, [2] the Court DENIES Ms. Harris’s motion to dismiss for lack of subject matter jurisdiction, lack of personal jurisdiction, and improper venue (Docket No. 22), and ALLOWS in part GISFW’s motion for a preliminary injunction (Docket No. 6) as against Ms. Harris. The Court further TRANSFERS the case to the Southern District of Indiana under 28 U.S.C. § 1404(a) and 28 U.S.C. § 1406(a).

FACTS

The following facts are taken from the Complaint (Docket No. 1), the deposition of Rosalyn Harris (Docket No. 47, Ex. 1), and the operative franchise agreement (Docket No. 50, Ex. 1). They are undisputed, except where stated otherwise.

I. The Warm-Up

On April 1, 2013, Ms. Harris, in her capacity as president of TFL Fishers, LLC, entered into a written franchise agreement with GISFW authorizing TFL Fishers to own, operate, and do business as “Get In Shape For Women” in Fishers, Indiana. Ms. Harris agreed to pay a transfer fee of $14, 500 to GISFW through a one-year financing arrangement to assume rights to the Fishers, Indiana territory through July 28, 2020.[3] Shortly thereafter, she assumed operation of a GISFW studio located at 11720 Olio Road, Suite 800, Fishers, Indiana.

Pursuant to the franchise agreement, Ms. Harris agreed to pay GISFW six percent of gross sales as royalties; to operate the studio in compliance with all GISFW systems and standards; to only use the GISFW system, names, and marks for the operation of the studio; and to attend an annual conference and various training sessions in Massachusetts, including a management training program called “Franchise School.” Ms. Harris attended five days of Franchise School at the GISFW corporate office in Needham, Massachusetts in 2013, at the start of the franchise relationship. Ms. Harris also acknowledged in the agreement that she obtained “knowledge of proprietary matters, techniques, and business procedures of Franchisor that are necessary and essential to the operation of the Studio, ” which she did not know prior to execution of the contract. Docket No. 50, Ex. 1 ¶ 10(a).

The franchise agreement also contains a covenant not to compete, grants GISFW the right of first refusal should the franchisee receive an offer to purchase the studio, and outlines detailed post-termination procedures in the event that one of the parties terminates the agreement. More specifically, section 13 of the franchise agreement prohibits the franchisee from “directly or indirectly” owning, maintaining, operating, engaging in, being employed by, or otherwise having any interest in “any fitness center, health club, personal training studio, or any other business concepts that directly compete with Get In Shape For Women® within an 8 mile radius” of the studio, or any other GISFW location, for two years following termination of the agreement. Docket No. 50, Ex. 1 ¶ 13(b). Section 13 specifically lists “starting any new business in competition with [GISFW], ” “[a]ssisting in starting any new business in competition with [GISFW], ” and “[s]oliciting franchisees or clients from [GISFW]” as examples of prohibited competitive activities. Id.

Section 16(d) requires the franchisee to notify GISFW of any bona fide written offers to purchase the studio, grants GISFW the right to purchase the studio itself for the same price and on the same terms as the offer, and requires the franchisee to obtain GISFW’s prior written approval for any sale. Id. ¶ 16(d). Section 18 of the agreement specifies the duties and obligations of the franchisee upon termination of the agreement, including requirements to cease using the GISFW system and “confidential methods, procedures, descriptions of products, and techniques;” turn over all customer lists, records, and files; cease holding itself out as a present or former GISFW franchisee; and comply with the covenant not to compete. Id. ¶ 18(a)-(b), (e). Section 18 also grants GISFW the right to purchase “any or all inventory, equipment, supplies, signs, advertising materials, and items bearing Franchisor’s Names and Marks, at fair market value, ” and to assume the lease for the studio location, upon termination. Id. ¶ 18(f)-(g).

Finally, section 19 contains an arbitration clause, choice-of-law provision, forum-selection clause, and attorneys’ fees provision. Section 19(c) states:

Except insofar as Franchisor elects to enforce this Agreement by judicial process, injunction, or specific performance (as hereinabove provided), all disputes and claims relating to any provision hereof, any specification, standard or operating procedure, or any other obligation of Franchisee prescribed by the Franchisor, or any obligation of Franchisor, or the breach thereof (including without limitation, any specification, standard or operating procedure or any other obligation of Franchisee or Franchisor, which is illegal or otherwise unenforceable or voidable under any law, ordinance, or ruling) shall be settled by mandatory binding arbitration in Norfolk County, Massachusetts . . . .

Id. ¶ 19(c). Section 19(g) contains the choice-of-law provision and forum-selection clause: “Except to the extent governed by the U.S. Trademark Act of 1946 (Lanham Act, 15 U.S.C. Section 1501 et. seq.) or the U.S. Arbitration Act, this Agreement shall be governed by the laws of the State of Massachusetts, and venue shall lie in Norfolk County, Massachusetts.” Id. ¶ 19(g).

Section 19(h) specifies that the franchisor “shall be entitled to recover reasonable attorneys’ fees and court costs” from the franchisee in the event that it “incurs legal fees in enforcing” the franchise agreement. Id. ¶ 19(h). Significantly, there is an “Indiana Addendum to the Franchise Agreement, ” which states that, notwithstanding anything to the contrary in the agreement, “the laws of the State of Indiana supersede any provisions in the offering circular, the Agreement, or the State of Incorporation law, if these provisions are in conflict with Indiana law.” Docket No. 50, Ex. 1 at 130. The Indiana Addendum further specifies that “any provision in the Agreement which limits in any manner whatsoever litigation brought for breach of the Agreement will be void to the extent that [it] . . . violates the Indiana Deceptive Franchise Practices Law.” Id.

II. The Cool Down

The relationship between GISFW and Ms. Harris appears to have started to cool down in early 2015. In May, Ms. Harris failed to attend a mandatory training program and failed to participate in a mandatory postcard-marketing program required by the franchise agreement. On June 24, 2015, Ms. Harris sent an email to Louis DeFrancisco, president of GISFW, notifying GISFW that she had sold the assets of the Fishers studio to a third party and was closing the studio. GISFW emailed her back and asked to speak with her immediately to discuss the contractual and legal issues involved with the closing, but Ms. Harris did not respond. On June 30, 2015, GISFW learned that the Fishers studio had not closed, but was now operating under the name “Fit Chicks.” A photo taken on June 30, 2015, revealed that the GISFW building sign had only been partially covered by a tarp sign reading “Fit Chicks, ” and that an A-frame marketing sign displaying the GISFW name and logo remained in place out front of the studio. Ms. Harris admits that she did not remove the GISFW building sign until July 27, 2015, and that the GISFW A-frame sign remained out front of the studio for at least two weeks after she began operating as Fit Chicks. She has now replaced both with Fit Chicks signs. Ms. Harris also initially continued to display the GISFW name and logo on her website, http://coachrozharris.com, and used a GISFW Facebook page to market Fit Chicks after the studio sale. Ms. Harris is no longer using the GISFW Facebook page, and has removed all references to GISFW from her website.

III. Stretching Out

Ms. Harris filed the Articles of Organization for Fit Chicks, LLC, with the Indiana Secretary of State on June 18, 2015, which became effective on July 1, 2015. The entity’s address is 11720 Olio Road, Suite 800, Fishers, Indiana, which is the same location as the former GISFW studio. Ms. Harris is listed as the registered agent, and there are no other officers, managers, or principals listed as affiliated with Fit Chicks. Her personal home address and phone number are listed on Fit Chicks’s business tax application filed with the State of Indiana.

Ms. Harris testified at her deposition that her sister, Constance Harris, owns Fit Chicks. When Rosalyn Harris stopped operating the Fishers location as a GISFW studio, she sold all the equipment in the studio-including treadmills, ellipticals, dumbbells, weight machines, and a desktop computer-to her sister for $1. Ms. Harris also testified that Fit Chicks is honoring all the pre-paid customer contracts from the time when the studio operated under the GISFW name. Meanwhile, GISFW contends that it has received complaints from former customers that Ms. Harris has increased the per-session training price and denied customers refunds. Both parties agree that Fit Chicks is now servicing many of the same clients from the time when the studio operated as a GISFW franchise.

Ms. Harris’s sister lives in Atlanta, Georgia, where she has a full-time job as a real estate accountant. She does not have a background in fitness or nutrition, and does not spend any time in the Fit Chicks studio on a weekly basis. According to Rosalyn Harris, her sister spends roughly ten hours per week working on Fit Chicks matters remotely.

Ms. Harris currently serves as the “volunteer manager” for the Fit Chicks studio; she volunteers in this capacity forty hours per week. Harris Dep., Docket No. 47, Ex. 1 at 72:10-15. As the “volunteer manager, ” she runs the day-to-day operations of the studio, including soliciting clients, engaging in marketing activities, paying the studio’s rent and bills, and occasionally training clients and consulting with clients on nutrition. Ms. Harris has access to Fit Chicks’s bank accounts, and is authorized to sign checks on behalf of Fit Chicks. She developed the workout program used in the Fit Chicks studio. Her office for her separate life coaching business is located in the studio, and the lease to the studio space is under her name alone. She pays the rent for the studio space each month, and is reimbursed by Fit Chicks. She is not paid for her work as a volunteer manager, but she is occasionally paid when she serves as a trainer for clients. Ms. Harris intends to continue serving as a volunteer manager until at least July 2016. The head personal trainer at the studio, Kelli Price, also serves as an assistant manager, and works in the studio roughly forty hours per week. There are two other staff members associated with Fit Chicks: another personal trainer and an unpaid intern.

On June 30, 2015, GISFW sent Ms. Harris three written notices: (1) a cease and desist letter demanding that Ms. Harris cease operation of the Fit Chicks studio and comply with the termination procedures in the franchise agreement, (2) a demand for payment of $44, 973.56 for future royalties due to GISFW for the remainder of the contract term (through July 28, 2020) and $14, 500 for the transfer fee that would have been paid to GISFW if Ms. Harris had complied with the franchise agreement procedures for a studio sale, and (3) a for-cause termination notice outlining the ways in which Ms. Harris has allegedly breached the franchise agreement. For example, GISFW alleges that Ms. Harris used a separate credit card processing application, instead of the web-based reporting application required by the franchise agreement, in order to underreport gross sales, and thereby reduce the royalty payments due to GISFW. Ms. Harris responded to these notices by simply stating that she does not own Fit Chicks. GISFW filed the current action shortly thereafter on July 21, 2015, and moved for a preliminary injunction one week later.

DISCUSSION

I. Subject Matter Jurisdiction

To survive a motion to dismiss under Federal Rule of Civil Procedure 12(b)(1), the plaintiff has the burden of establishing that subject matter jurisdiction exists. See Calderon-Serra v. Wilmington Trust Co., 715 F.3d 14, 17 (1st Cir. 2013). “When a district court considers a Rule 12(b)(1) motion, it must credit the plaintiff’s well-pled factual allegations and draw all reasonable inferences in the plaintiff’s favor.” Merlonghi v. United States, 620 F.3d 50, 54 (1st Cir. 2010). “The district court may also consider whatever evidence has been submitted, such as the depositions and exhibits.” Id. (internal quotation marks and citations omitted); see also Carroll v. United States, 661 F.3d 87, 94 (1st Cir. 2011) (“In evaluating a motion to dismiss under Rule 12(b)(1) for lack of subject matter jurisdiction, we construe plaintiffs’ complaint liberally and ordinarily may consider whatever evidence has been submitted, such as depositions and exhibits.” (internal quotation marks and citations omitted)).

Here, GISFW argues that the Court has federal question jurisdiction because the case involves a claim for trademark infringement, and thus arises under the Lanham Act, 15 U.S.C. §§ 1051-1128. Alternatively, GISFW alleges that the Court has diversity jurisdiction under 28 U.S.C. § 1332 because the amount in controversy is reasonably likely to exceed $75, 000 and the parties are citizens of different states. Ms. Harris contends that the Court lacks subject matter jurisdiction because she has ceased using GISFW’s marks, and the amount in controversy cannot possibly exceed $75, 000.

A. Federal Question Jurisdiction

Under 28 U.S.C. § 1338, district courts “have original jurisdiction of any civil action arising under any Act of Congress relating to . . . trademarks, ” and of “any civil action asserting a claim of unfair competition when joined with a substantial and related claim under the . . . trademark laws.” 28 U.S.C. § 1338(a)-(b). The Lanham Act also provides for federal jurisdiction over trademark actions arising under the statute: “The district and territorial courts of the United States shall have original jurisdiction . . . of all actions arising under this chapter, without regard to the amount in controversy or to diversity or lack of diversity of citizenship of the parties.” 15 U.S.C. § 1121.

Given that 28 U.S.C. § 1338 and 15 U.S.C. § 1121 use the same “arising under” language as the general federal question statute, 28 U.S.C. § 1331, courts apply a similar analysis to determine whether a case arises under federal trademark law. See Christianson v. Colt Indus. Operating Corp., 486 U.S. 800, 807-09 (1988) (applying the 28 U.S.C. § 1331 analysis to a patent law case under 28 U.S.C. § 1338); Duncan v. Stuetzle, 76 F.3d 1480, 1485-86 (9th Cir. 1996) (applying the 28 U.S.C. § 1331 analysis to a trademark law case). Jurisdiction under 28 U.S.C. § 1338 and the Lanham Act extends “only to those cases in which a well-pleaded complaint establishes either that federal [trademark] law creates the cause of action or that the plaintiff’s right to relief necessarily depends on resolution of a substantial question of federal [trademark] law, in that [trademark] law is a necessary element of one of the well-pleaded claims.” Christianson, 486 U.S. at 809.

The underlying facts in trademark cases often give rise to claims alleging both violations of the Lanham Act under federal law and breach of contract under state law. See, e.g., Mother Waddles Perpetual Mission, Inc. v. Frazier, 904 F.Supp. 603, 607 (E.D. Mich. 1995); Foxrun Workshop, Ltd. v. Klone Mfg., Inc., 686 F.Supp. 86, 87-88 (S.D.N.Y. 1988). The mere existence of a trademark does not confer jurisdiction over a contract dispute. Mother Waddles, 904 F.Supp. at 607.

A suit arises under federal trademark law “if the complaint is for a remedy expressly granted by the Act, ” such as a suit for infringement. T.B. Harms Co. v. Eliscu, 339 F.2d 823, 828 (2d Cir. 1964) (Friendly, J.); see also Royal v. Leading Edge Prods., Inc., 833 F.2d 1, 2 (1st Cir. 1987) (adopting the T.B. Harms test). Courts differentiate between suits that merely involve disputes “over royalty payments or the sufficiency of payments under a license agreement, ” which do not constitute federal claims, and cases alleging damage to a trademark’s reputation. Mother Waddles, 904 F.Supp. at 608, 610.

Here, GISFW has alleged violations of the Lanham Act, and claims damage to the trademark’s reputation. GISFW argued that the defendants’ marketing and promotion of Fit Chicks at the Fishers studio, while continuing to display the GISFW name and logo, was likely to cause confusion, mistake, or deception by suggesting that the Fit Chicks studio meets the quality standards that GISFW requires of its franchisees. GISFW further alleged that this use of its name and logo “cause[d] dilution and disparagement of the distinctive quality of the Get In Shape Name and GISFW Marks.” Docket No. 1 at 12. Ms. Harris does not deny that she continued to display the GISFW logo and marks out front of the studio, and on her website, after she began operating as Fit Chicks. Given the alleged damage to the GISFW trademark’s reputation, the Court has subject matter jurisdiction under 28 U.S.C. § 1338 and 15 U.S.C. § 1121.

The above analysis holds true even if Ms. Harris has ceased to use the GISFW name and logo at the Fit Chicks studio and on her website. Although cessation might make a request for an injunction moot, it does not affect the fact that the plaintiff claims injury to the trademark itself, a claim that gives rise to federal jurisdiction. See Mother Waddles, 904 F.Supp. at 611.

B. Diversity Jurisdiction

The Court also has diversity jurisdiction under 28 U.S.C. § 1332. District courts have “original jurisdiction of all civil actions where the matter in controversy exceeds the sum or value of $75, 000, exclusive of interest and costs, and is between . . . citizens of different states.” 28 U.S.C. § 1332(a)(1). The parties agree that this case is between citizens of different states, [4] but dispute whether the case satisfies the $75, 000 amount-in-controversy requirement.

The Supreme Court outlined the now “longstanding test for determining whether a party has met the amount-in-controversy minimum” in St. Paul Mercury Indemnity Co. v. Red Cab Co., 303 U.S. 283, 288-89 (1938):

The rule governing dismissal for want of jurisdiction in cases brought in the federal court is that, unless the law gives a different rule, the sum claimed by the plaintiff controls if the claim is apparently made in good faith. It must appear to a legal certainty that the claim is really for less than the jurisdictional amount to justify dismissal.

Spielman v. Genzyme Corp., 251 F.3d 1, 5 (1st Cir. 2001) (describing and quoting St. Paul, 303 U.S. at 288-89). “Under St. Paul, a plaintiff’s general allegation of damages that meet the amount requirement suffices unless questioned by the opposing party or the court.” Id. at 5; see also Abdel-Aleem v. OPK Biotech LLC, 665 F.3d 38, 41 (1st Cir. 2012).

Once the opposing party challenges the amount, “the party seeking to invoke jurisdiction has the burden of alleging with sufficient particularity facts indicating that it is not a legal certainty that the claim involves less than the jurisdictional amount.” Id. “A party may meet this burden by amending the pleadings or by submitting affidavits.” Dep’t of Recreation & Sports of P.R. v. World Boxing Ass’n, 942 F.2d 84, 88 (1st Cir. 1991). “Courts determine whether a party has met the amount-in- controversy requirement by looking to the circumstances at the time the complaint is filed.” Spielman, 251 F.3d at 5 (internal quotation marks and citations omitted).

Here, Ms. Harris challenges GISFW’s general assertion that the amount-in-controversy requirement is satisfied. In the Complaint, GISFW does not state a particular amount in controversy, but argues it is “reasonably likely to exceed the value of $75, 000.” Docket No. 1 ¶ 2. First, GISFW alleges damages for breach of contract due to the defendants’ “under reporting of gross sales during operation, and unapproved closing of the Fishers Studio.” Id. ΒΆ 39. GISFW does not specify an amount by which Ms. Harris allegedly underreported sales, but if Ms. Harris ...


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