Fitness Franchisors Avoid Franchise Regulations

LOS ANGELES – America’s health and fitness craze has generated a $78 billion revenue worldwide, according to First Research, a leading provider of market analysis tools for various industries. But there is one disturbing question as to how these fitness studios and exercise plans are skyrocketing the growth. How many are operating as unlawful franchises through licensing opportunities, certified training programs and dance party workouts.

One fitness studio felt the sting of a state franchise regulator last July. The Minnesota Commission of Commerce issued a cease and desist order to Fitness Evolution, which disclosed that they had five locations operating in the state, one owning three licenses. The company advertised that it was not a franchise. In the cease and desist letter, Fitness Evolution and its officers, directors, employees and others were ordered to discontinue offering or selling franchises in the state of Minnesota, until its franchise registration was in compliance. The regulator also required that within 60 days Fitness Evolution had to show proof that rescission offers had been received by all franchisees, showing the current status of each one. It further ordered that the company had to pay a penalty of $5,000.00.

California’s Department of Corporations sent a desist and refrain order May 29, 2012 to Pop Physique. Beginning in August 2011, the company’s offer to prospective buyers was to purchase “exclusive license agreements.”  The license gave them the right to establish and operate its “boutique ballet barre” fitness and exercise studios” under Pop Physique’s distinctive name and trademarks. When Pop Physique’s webs began advertising in May 2012 that it had eight studios in California and an additional three coming soon, it caught the attention of regulators. They immediately recognized Pop Physique’s program for selling licenses as a franchise under the state’s Franchise Investment Law.

In exchange for payment of a $15,000 license fee and 5 percent monthly gross royalties, Pop Physique said it would supply its “partners” with an exclusive territory, rights to use its trademark name and logo, initial training for teachers and staff. It also provided detailed sales and marketing plans, and support in real estate selection, marketing, design, opening and build-out. Licensees are also required to procure prior agreement for all promotions and price adjustments offered to customers and only sell Pop Physique merchandise or carry brands consistent with the Pop Physique image. After its investigation, California concluded in its cease and desist order, “That’s a franchise.”

After B3 Studios, LLC was sent a cease and desist order by Washington State Securities Division the company entered a consent order. It was determined to be selling franchises in the state without being registered, as required by Washington Franchise Investment Protection Act. B3 offered and sold licenses to Oregon and Washington residents to operate barre3 fitness studios in the Vancouver and Bellevue, Washington area.  The company offered its “unique exercise methods and programs for instructions,” the use of its trademarks, service and trade names, copyrighted material to prospective licensees, and required an initial fee of $10,000 from buyers with an ongoing fee of 3 percent.

There is a vast number of fitness and health clubs and exercise programs advertised on the Internet worldwide. Lagree Fitness in Burbank, California, is one that is questionable regarding its sales technique. The company has used different names over the past five years, although owned by the same person, Sebastien Lagree. Lagree Fitness operates over 70 locations according to its lagreefitness.com/licensing/website. It promotes, “LAGREE FITNESS is one of the fastest growing and hottest workouts in the fitness industry. Become part of our fast expanding network of studios and offer your clients the latest craze in Hollywood’s hot fitness industry.” But it adds, “Lagree Fitness is NOT a franchise. We do not require a lengthy contract or royalty fees, nor do we interfere with how studio owners would like to run their business. Lagree Fitness is a licensing opportunity. The website lists two different opportunities. Licensing (not a franchise), and Certification for its Proformer and Megaformer equipment.

The New York Times reported this month that Lagree has built an empire selling thousands of his machines at a cost of $7,000 each. While most Megaformers are sold to fitness studios that license his method, he also sells to celebrity devotees, including Sofia Vergara and Kim Kardashian.

CrossFit, in Washington D.C. touts itself as “forging elite fitness,” a company that operates an “affiliate” program. The company aims “to provide a program that will best prepare trainees for any physical contingency—not only for the unknown, but for the unknowable.” A recent  brandchannel.com article states that Crossfit licenses its name to more than 9,000 affiliated gyms for an annual fee ($3,000), but confesses having thousands of affiliated locations across the world makes it extremely hard to fish out the “reals” from the “fakes.”   The report says, “After all, part of the success of a brand could be directly related to how well they police their trademark(s), and CrossFit’s legal team is no stranger to the good ol’ cease and desist letter. The brand has previously gone after Cross Gym, CrossFat, Caldera Cross-Fit, CrosFitFood and Don’t Cross Me, I’m Fit, to name a few.”

CrossFit is also dealing with the threat of becoming a generic term, as did the Pilates workout brands. A federal judge ruled “pilates” to be a generic term and free for unrestricted use. The article says if there are no signals to identify a brand’s authenticity, relevance, consistency and presence, it creates an open opportunity for others to move in on the brand and for customers to become ill-informed.”

Today, one of the most popular programs is Zumba, allowing participants to dance their way to fitness. Incessantly featured on television worldwide, Zumba has taken the fitness industry by storm. Zumba Fitness promotes that it is a global lifestyle brand that fuses fitness, entertainment and culture into an exhilarating dance-party workout. Coined “fitness-parties,” Zumba classes blend upbeat world rhythms with easy-to-follow choreography, which provide effective, total-body workouts.

Founded in 2001, the company is now the largest branded fitness program in the world, reporting more than 12 million weekly class participants in over 110,000 locations across more than 125 countries. Coined “fitness-parties,” Zumba classes blend upbeat world rhythms with easy-to-follow choreography, which provide effective, total-body workouts. Part of Zumba’s program is the Zumba Instructor Network (ZIN), which teaches instructors to succeed. It promotes, “Only ZIN Members can access the full power of the Zumba brand, and get exclusive resources to become successful instructors, entrepreneurs and community leaders. You can become a ZIN Member for US$30 per month during or after your Basic 1 Instructor Training or Jump Start Gold™ Training!”

Zunba Fitness recently announced it is teaming up with Mad Dogg Athletics, Inc. to combat counterfeiting of their brands in Mexico. They state that they are committed to enforcing trademarks to ensure that their customers receive the exceptional quality they have come to expect. They systematically enforce their rights through cease and desist letters.

Last May Rochelle “Shelley” Spandorf, of Davis Wright Tremaine, and two of her firm colleagues, Jennifer Brockett and Anna Buono, delved into the fitness confusion to find out what, if anything, differentiates a non-franchise certification fitness program from a franchise. They did their analysis through companies’ websites. 

Spandorf explained that a substantial amount of their practice involves evaluating if licensing and distribution programs are franchises. “If many of these are illegal franchises, then not only have these companies violated franchise sales laws, but they are engaging in unfair competition with competitors and others who do comply with franchise laws,” she stated. She said one of their clients is in the same general market (fitness classes) and he continually asks why he has to comply with the laws if everyone else in his industry does not comply.

In an American Bar Association Law Journal article the California attorneys analyzed in detail how the Federal Trade Commission excluded “bona fide” certification programs from its regulation of franchising. It states, “As a result, there remains a dearth of guidance on what precisely constitutes a bona fide, or non-franchise, certification program.” They concluded that the exclusion is “narrow, and very few, if any promoters, who aim to profit by licensing so-called certification programs are likely to qualify.”  They remind fitness companies, “Merely calling a licensing program a “certification” program, however, will not remove it from franchise regulation.”

Spandorf said she understands that government budgets are tight, but lax public enforcement only encourages the proliferation of programs like these where each company copies its format based on a competitor’s program and probably wrongly assumes that if the competitor is a non-franchise, then its program must also be a non-franchise. “Lax public enforcement also makes it harder for attorneys to convince their clients to believe them when they describe the risks of not complying with franchise laws,” Spandorf stated.