~~; oa37 FIRST LEGAL St ~e 714.541 8182 JAMES W. DENISON (State Bar No.155337) srenf HEED... 21550 Oxnard Street, Suite 300, PMB 8 cent US RSE Woodland Hills, California 91367 Telephone: 818-224-5250 AUG 17 2009 Facsimile: 818-224-5245 ‘ALAN CARLSON, Cg ong Coun Attomey for Plaintiff ROL < XTREME FITNESS CENTERS, LLC AY D Duran SUPERIOR COURT FOR THE STATE OF CALIFORNIA FOR THE COUNTY OF ORANGE 30-3 FAX XTREME FITNESS CENTERS, LLC,a_ } CASENO. 00293986 California limited liability company, compan ror: Plaintiff, } @) DECLARATORYRELIEF; Q) VIOLATION OF CALIFORNIA vs. FRANCHISE INVESTMENT LAW; LA BOXING FRANCHISE a CORPORATION, a California corporations} @ Perron Sane and DOES | - 100, inclusive, } ) Defendants. JUDGE JOSEPHINE S. TUCKER DEPT. W12 ‘COMPLAINT FOR: (1) DECLARATORYRELIEF: @) VIOLATION OF ‘CALIFORNIA FRANCHISE INVESTMENT LAW: (3} VIOLATION OF UNFAIR COMPETITION LAW10 ul 12 1B 4 15 16 7 18, 19 20 2 22 23, 24 25 26 27 28 ~~ e837 FIRST LEGAL, “~~ 714541 e182 Plaintiff XTREME FITNESS CENTERS, LLC, for its complaint against defendant LA BOXING FRANCHISE CORPORATION, and DOES 1 - 100, alleges as follows: JURISDICTION AND VENUE 1, Jurisdiction is proper in this Court in that the amount in controversy exceeds $25,000, and plaintiff is informed and believes and on that basis alleges that defendant LA. Boxing Franchise Corporation is a California corporation with its principal place of business in the State of California and in this district. 2. Venue is proper in this district in that the defendant is subject to personal jurisdiction in this district, and the franchise agreement at issue provides that venue is to be located in this district. 3. The franchise agreement at issue contains an arbitration clause; however, the clause states that a party “may” pursue arbitration, not that arbitration is mandatory. ‘Moreover, to the extent that plaintiff seeks declaratory and other equitable relief, including declaratory relief regarding enforceability of the arbitration clause, adjudication is proper in ‘this court and not in arbitration. NATURE OF DISPUTE 4. LA Boxing Franchise Corporation (“LAB”) was, until this year, a registered franchisor of a supposedly unique, turnkey boxing and kickboxing franchise system including purportedly proprietary training regimens, products, and equipment. The LAB franchise system as represented to prospective franchisees, however, was in stark contrast to the system in which franchisees such as plaintiff actually found themselves after investing hundreds of thousands of dollars. Although claiming to employ impressive sounding advertising programs to promote gym membership, after collecting franchisee fees, LAB's president Anthony Geisler merely used the franchisee marketing fund like a | | personalexpenseraccount, paying for beer and fastfood, groceries, and gas instead of actual preparation of marketing materials or advertising expenses. In a similar vein of deception, to entice franchisees to join, LAB provided ifitealistically low estiniates Of the investment) 1 COMPLADYT FOR: (1) DECLARATORYRELIEF, 2) VIOLATION OF ‘CALIFORNIA FRANCHISE INVESTMENT LAWs (3) VIOLATION OF UNFAIR COMPETITION LAW~'¥ er ora! mao | tisenisees WoMlaURELHSTEGUEANORRRKE, When te anchisees opened thee eons though, LAB itself eharged them fr above the market rate on equipment and) | proauesmanasteaiytnetranciseagreeMeMD This ocoured despite LAB's representation in its Uniform Franchise Offering Circular (“UFOC") that it purportedly did not receive any remuneration from its authorized suppliers. LAB’s insistence on deriving huge profits from its franchisees, combined with its failure to provide adequate training and support, has SED] its franchisees trapped in a money-losing venture that is impossible to sustain. PARTIES 5. Plaintiff XTreme Fitness Centers, LLC (“Plaintiff”), isa limited liability company duly licensed to do business in the State of California, with its principal place of business in the city of San Jose, California. 6. Plaintiff is informed and believes and on that basis alleges that defendant LA Boxing Franchise Corporation is a California corporation with its principal place of business in Santa Ana, California. 7. Plaintiff is ignorant of the true names and capacities of defendants served herein as DOES 1-100, inclusive, and therefore sues these defendants by such fictitious names. Plaintiff is informed and believes and on that basis alleges that each of the fictitiously named defendants is legally responsible in some manner for the acts or omissions herein alleged and legally caused injury and damage to the Plaintiff as herein alleged. Plaintiff will amend this complaint to allege their true names and capacities when ascertained. 8. Atal times relevant herein, each of the defendants was the agent of each of the remaining defendants, and was acting within the purpose and scope of such agency, and each defendant ratified and approved the acts of his or her agents. GENERAL ALLEGATIONS 9. Plaintiff is informed and believes and on that basis alleges that, prior to 2004, LA Boxing had been the trade name of a number of kickboxing and fitness gyms owned and operated by a group of former athletic training instructors. Plaintiff is further informed 2 COMPLAINT FOR: (1) DECLARATORYRELIEF, (2) VIOLATION OF ‘CALIFORNIA FRANCHISE INVESTMENT LAW, ()) VIOLATION OF UNFAIR COMPETITION LAWSewmywau u 13 14 15 16 7 18 19 20 21 2 23 24 26 27 28 “~~; oas7 rest iron sg 714 Sas 8182 and believes and on that basis alleges that, in 2004, the owners of the LA Boxing gyms joined with Anthony Geisler to form LAB, in order to franchise the kickboxing gym concept. Geisler’s prior business experience had been as CEO of a half-dozen tech companies during the dot.com boom such as Interactive Solution Corporation, a casino software development company. Although Geisler continues to be president of LAB, none of the trainer founders of LAB are currently with the company, Indeed, two of the three founders have been involved in litigation adverse to LAB and/or Geisler in this Court 10. Plaintiff is informed and believes and on that basis alleges that, under Geisler’s direction, LAB was operated in a manner resembling that of one Geisler’s tech companies readying itself to be acquired, with an emphasis on accelerating profits in the short term rather than laying the foundation for a sustainable franchise system. Among other things, plaintiff is informed and believes and on that basis alleges, LAB under Geisler determined to derive substantial profits, not merely from franchisees’ royalties based on gym membershi sales, but from the franchisees themselves, by requiring franchisees to purchase goods and equipment at huge markups, sometimes charging franchisees double the price LAB paid vendors. This may have made LAB’s financial statements resemble that of a fast growing enterprise, but the costs of products and equipment that LAB forced its franchisees to bear made it impossible for franchisees to operate their gyms at a profit. 11. By July 2006, when Plaintiff purchased its LAB franchise, Plaintiff is informed and believes and on that basis alleges, LAB was aware that the cost estimates it had provided franchisees regarding starting up an LAB gym had been an issue. In the 2006 UFOC that LAB provided to Plaintiff, though, LAB continued to provide estimates that, Plaintiff is informed and believes and on that basis alleges, were unrealistically low compared with franchisees’ actual costs, Moreover, the UFOC gave no indication that the prices LAB had been charging franchisees for mandatory products and equipment had been marked up so that LAB could profit off its franchisees. Instead, the UFOC stated: “Neither we, nor any of our affiliates receive payments, rebates or other consideration from approved suppliers.” 3 ‘COMPLAINT FOR: (1) DECLARATORYRELIEF; (2) VIOLATION OF (CALIFORNIA FRANCHISE INVESTMENT LAW; (3) VIOLATION OF UNFAIR COMPETITION LAWwoe Cea ane 10 ul 2 B 4 15 16 7 18 19 20 2 2B 24 25 26 7 28 ~~ oas7 FIRST LEGAL: “"S 714541 8182 12. The UFOC further represented that LAB “will generally promote your business through advertising and public relations campaigns.” To that end, the LAB franchise agreement that was provided to Plaintiff (the “Franchise Agreement”) contained provisions for the establishment of an advertising cooperative “for the exclusive purpose of administering equitable advertising programs that fairly distribute the costs of developing .. standardized promotional materials for use by all the members in the Coperative’s Local Advertising ....” If such a cooperative was established, franchisees were to contribute 2 percent of gross revenues toward a Marketing Fund “to meet the costs of conducting regional advertising and promotional activities (including the cost of advertising. ‘campaigns, test marketing, marketing surveys, public relations activities and marketing materials) ....” The Franchise Agreement further listed the expenditures for which the Marketing Fund would be authorized ~ specifically, “costs of preparing and producing associated materials and programs as [LAB] determine[s], including video, audio and written advertising materials employing advertising agencies; sponsorship of sporting, charitable or similar events, administering regional and mult-regional advertising programs including purchasing direct mail and other media advertising, and employing advertising agencies to assist with marketing efforts; and supporting public relations, market research and other advertising, promotional and marketing activities.” The Marketing Fund was also supposed to be subject to annual audits by independent certified public accountants. 13, In addition to receiving the UOC and Franchise Agreement materials regarding marketing, Plaintiff was informed by the LAB representative who sold it the franchise at issue: LA BOXING Franchise Corporation utilizes a variety of professionally designed marketing tools to promote your franchise. We offer a wealth of support for your local marketing campaigns, from television and radio advertising to direct mail and point-of-sale materials and telemarketing campaigns. Our experienced marketing and public relations executives supervise the ‘ongoing development of innovative, hard-hitting promotional and fitness-oriented 4 COMPLAINT FOR: (1) DECLARATORYRELIEF; (2) VIOLATION OF ‘CALIFORNIA FRANCHISE INVESTMENT LAW: (3) VIOLATION OF UNFAIR COMPETITION LAW10 12 13 14 15 16 7 18 19 20 21 2 23 24 25 26 27 28 ~~ 837 FIRST ioe 7454 ata programs. As the number of gyms increases in your geographic area, you will enjoy many additional benefits of cooperative advertising campaigns and local publicity coordinated through your regional advertising council. 14. LAB further represented that it provided full training and ongoing support, and that it would locate qualified employees, including professional boxers, as part of the “tumkey” franchise it provided to franchisees. In the Franchise Agreement, LAB further promised to provide continued assistance and support, including periodic visits by “field representatives” to assist in the development and operation of the franchise,” in addition to other forms of assistance in marketing and training. 15, Based on the representations and promises set forth in paragraphs 11 through 14 above, on July 6, 2006, Plaintiff's principals entered into the Franchise Agreement, pursuant to which Plaintiff determined to open an LAB gym in San Jose. Plaintiff entered into a lease of space for the gym in April 2007 and opened the gym for operation in July 2007. 16. The level of assistance Plaintiff received in selecting a site for its gym and in readying the location to open was far below that which Plaintiff had expected. Among other things, LAB did not seek out competent employees on Plaintiff's behalf or provide periodic on-site assistance in the development and operation of the franchise through its field representatives. In fact, Plaintiff is unaware of LAB employing any field representatives, and Plaintiff has never been visited by field representatives offering assistance of any kind. 17, During the time that Plaintiff operated its LAB franchise, it also became apparent that the Marketing Fund was not being put to the uses designated in the Franchise Agreement. In February 2009, in response to franchisee complaints that the Marketing Fund had been taking franchisee royalty contributions without any accountability for how the funds had been spent, LAB provided a “reconciliation” statement purporting to identify how the money had been spent on marketing. The reconciliation indicated that in many instances Geisler had spent the money on “Sam Adams Bar 10,” “Carl's Jr..” “El Pollo 5 COMPLAINT FOR: (1) DECLARATORYRELIEF: 2) VIOLATION OF ‘CALIFORNIA FRANCHISE INVESTMENT LAW; (3) VIOLATION OF UNFAIR COMPETITION LAWCe wane 10 u 12 1B 4 15 16 v 18 19 20 2 2 23 24 25 26 ou 28 Ce 0837 FIRST LEGAL: * 714 541 8182 Loco,” “Chevron,” “7-Eleven,” “Vons,” and similar recipients. In other instances the ‘transactions were listed as “cash” and “LA Boxing Franchise,” without any indication of how the money was spent. 18. _ By the time LAB provided the so-called marketing reconciliation in early 2009, it had also become apparent that Plaintiff's San Jose franchise could not operate at a profit, given the substantial borrowing costs Plaintiff had incurred paying for the equipment and products LAB required it to purchase, along with the many costs of starting up the franchise that LAB had underestimated. In considering its options, Plaintisf investigated what it would cost to continue to operate its gym if it ceased to be a franchise, Plaintiff Jeamed that, had it not been an LAB franchisee, it would have been able to obtain substantially the same products and equipment on the open market for a fraction of the cost it had been paying LAB. 19, In April 2009, Plaintiff sent LAB a letter addressing the foregoing and various other issues it had had with the LAB franchise system. Plaintiff suggested that the Patties negotiate a termination of their franchise relationship, as is permitted by the Franchise Agreement. On May 18, 2009, LAB responded by denying Plaintiff's contentions and threatening that, if Plaintiff attempted an early exit from the LAB system, Plaintiff would suffer the consequences of Article 13 of the Franchise Agreement. Article 13 includes, among other things, a liquidated damages clause that requires the franchisee to pay 36 months’ worth of royalties, calculated, in Plaintiffs’ case, in which the franchise had been operating for less than 36 months, as “projected on a 36-calendar month basis.” 20. In May through August 2009, Plaintiff continued to attempt to negotiate a termination of the Franchise Agreement or, in the alternative, the conditions under which Plaintiff would be willing to continue as an LAB franchisee. Plaintiff pointed out the legal basis for its claims, including rescission under California’s Franchise Investment Law (°CFIL”), but Plaintiff also identified possible ways in which LAB could cure LAB's failures to honor its obligations. Plaintiff also offered to enter into a tolling agreement so that the parties could continue to negotiate without Plaintiff suffering the running of the 6 COMPLAMVE FOR: (1) DECLARATORYRELIEF: (2) VIOLATION OF (CALIFORNIA FRANCHISE INVESTMENT LAW, (3) VIOLATION OF UNFAIR COMPETITION LAWWawa ~~ oas7 FIRST LEGAL oe 714 541 0162 statute of limitations under the CFIL. LAB responded by indicating it would bring legal proceedings, and it then broke off the discussions without responding to the last several communications from Plaintiff. FIRST CAUSE OF ACTI (Declaratory Relief) 21. Plaintiff realleges and incorporates by reference paragraphs 1 through 20 above as though fully set forth herein. 22. Anactual controversy has arisen and now exists between Plaintiff, on the one hand, and LAB, on the other, regarding the enforceability of certain provisions of the Franchise Agreement as set forth below. 23. First, the Franchise Agreement contains arbitration provisions. Specifically, Article 18 of the Franchise Agreement provides, in pertinent part: Any controversy or claim under this Agreement, including any claim that this Agreement, or any part of this Agreement, is invalid, illegal or otherwise voidable or void, including any claim of fraud in the inducement, may be submitted to arbitration, if determined by the parties when the dispute arises, before the American Arbitration Association in accordance with its commercial arbitration rules, or any other mutually agreeable arbitration association by one arbitrator. The obligation to mediate or arbitrate is not binding on either party for claims involving the Intellectual Property; claims involving any lease of real property between the parties or their related entities; the Franchisee's obligations upon the termination, transfer or expiration of this Agreement; any encumbrances or transfers restricted under this Agreement concerning interests in the Franchisee, the LA Boxing Franchise and this Agreement; matters involving actions that may impair the good will associated with the Intellectual Property; matters involving claims of danger, health or safety involving the Franchisee, the employees, customers or the public; or requests for restraining orders, injunctions or other procedures in a court 7 CCOMPLART FOR: (1) DECLARATORYRELIEF, (2) VIOLATION OF (CALIFORNIA FRANCHISE INVESTMENT LAW: (3) VIOLATION OF UNFAIR COMPETITION LAWaan -— ons FIRST LEGAL “~ 714541 8182 of competent jurisdiction to obtain specific perfonnance when deemed necessary by any court to preserve the status quo or prevent irreparable injury pending resolution by mediation or arbitration of the actual dispute between the parties. If any arbitration, legal action or other proceeding is begun for the enforcement of this Agreement, of for an alleged dispute, breach, default or misrepresentation under any term of this Agreement, the prevailing party is entitled to recover reasonable prein: tion and post-institution attorneys’ fees, court costs and all expenses even if not taxable as court costs (including all fees and expenses incident to arbitration, appellate, bankruptcy and post-judgment proceedings), incurred in the action or proceeding, in addition to any other relief that the party is entitled, 24. A declaratory judgment is necessary regarding the enforceability of Article 18 of the Franchise Agreement, in that the provisions are ambiguous, fail to reflect a meeting of the minds that arbitration will be mandatory, and resemble the type of one-sided arbitration provisions in franchise agreements, allowing the franchisor but not the franchisee to choose arbitration or litigation, which California courts have held are unenforceable as unconscionable. Indeed, LAB has indicated that it does not view the arbitration provisions as binding on it, as it has initiated litigation concerning another franchisee’s franchise agreement in this Court, and LAB has sought a jury trial in that action. In the alternative, if the arbitration provisions are enforceable, those portions that ‘would require Plaintiff to pay the costs and fees associated with vindicating its statutory tights under the CFIL and the Unfair Competition Law (“UCL”) must be stricken, and LAB. must be ordered to pay Plaintiff's portion of any such costs and fees in any arbitration LAB plans to initiate. 8 COMPLAINT FOR: (1) DECLARATORYRELIER, (2} VIOLATION OF ‘CALIFORNIA FRANCHISE INVESTMENT LAW; (3) VIOLATION OF UNFAIR COMPETITION LAWCm a awe 10 uw 12 B 14 15 16 7 18 19 20 2 22 2B 24 25 26 7 28 “~ oss RST: tron sug 714541 8182 25. A declaratory judgment is further necessary regarding the enforceability of the post-termination non-competition provisions in Article 14. Article 14 provides in pertinent part: You ... covenant that, for twenty-four (24) months after the tennination of this Agreement due to your default, for twenty-four (24) months after the expiration and non-renewal of this Agreement, or for twenty-four (24) months after you transfer your LA Boxing Franchise, except as we otherwise approve in writing, you will not, directly or indirectly: .. As owner, officer, director, employee, agent, lender, broker, consultant, franchisee or in any other capacity be connected with the ownership, management, operation, control or conduct of a Competitive Business within the Exclusive Territory twenty-five (25) miles of the Premises or within twenty-five (25) miles of any LA Boxing Franchise or Company Owned Unit then in operation; or ... Interfere with, disturb, disrupt, decrease or otherwise jeopardize our business or the business of any of our Franchisees. As such, Article 14 of the Franchise Agreement violates Plaintiff's statutory rights under Section 16600 of California’s Business & Professions Code. Plaintiff therefore requires a declaratory judgment concerning the parties’ rights and obligations with respect to Article 4. SECOND CAUSE OF ACTION (Violation of California Franchise Investment Law) 26. Plaintiff realleges and incorporates by reference paragraphs J through 25 above as though fully set forth herein. 27. California Corporations Code Section 31201 of the CFIL provides in pertinent part: is state by means of any It is unlawful for any person to offer or sell a franchise in written or oral communication ... which includes an untrue statement of a material 9 (COMPLAINT FOR: (1) DECLARATORYRELIEF; @) VIOLATION OF ‘CALIFORNIA FRANCHISE INVESTMENT LAW, (2) VIOLATION OF UNFAIR COMPETITION LAW10 W 2 13 4 15 16 7 18 19 20 24 22 23 24 25 26 27 28 ~; oss FIRST LEGAL: 7 714541 9182 fact or omits to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading. 28. The representations in LAB’s UFOC, as identified in paragraphs 11 through 14, were false and misleading within the meaning of the CFIL, for the reasons set forth in paragraphs 10, 11, and 16 through 18 above. 29. Plaintiff is informed and believes and on that basis alleges that LAB, in making the foregoing representations and nondisclosures, knew or recklessly disregarded the falsity of the information provided and the concealment of material information, with ‘the intention of inducing Plaintiff to enter into the Franchise Agreement, and to invest further sums in the operation of the San Jose gym. 30. Plaintiff was unaware of the falsity of the foregoing misrepresentations, concealments, and nondisclosures and justifiably and reasonably relied on the truth of the information provided to it in deciding to purchase its franchise, to pay substantial fees, and 10 invest its resources of time and money in the San Jose gym. Had Plaintiff known of the falsity of the LAB’s representations, concealments, and nondisclosures, Plaintiff would not ‘have entered into the Franchise Agreement or expended such time and money thereafter. 31 Despite Plaintiff's exercise of reasonable diligence, Plaintiff did not discover the facts forming the basis for the claim under the CFIL until less than one year of the filing of this Complaint. 32. _ Plaintiff is informed and believes and on that basis alleges that LAB acted willfully within the meaning of the CFIL when it committed the wrongful acts that constitute this cause of action. 33. Asa direct and proximate result of LAB’s violation of the CFIL set forth above, Plaintiff is entitled to compensatory damages in an amount to be determined at trial but in no event less than $25,000 or, in the alternative, rescission and recovery of consequential damages, or other equitable relief, 10 ‘COMPLAINT FOR: (1) DECLARATORY RELIEF; 2) VIOLATION OF ‘CALIFORNIA FRANCHISE INVESTMENT LAW; (3) VIOLATION OF UNFAIR COMPETITION LAW10 ul 12 13 14 15 16 7 18 19 20 2 2 24 25 26 21 28 “~ oas7 oe 74541 8102 THIRD CAUSE OF ACTIC (Violation of Unfair Competition Law against All Defendants) 34. Plaintiff realleges and incorporates by reference paragraphs 1 through 33 above as though fully set forth herein. 35. California’s Unfair Competition Law (“UCL”), set forth in Business & Professions Code Section 17200 et seq., prohibits persons from engaging in unfair, fraudulent, and unlawful trade practices. 36. The misrepresentations, nondisclosures, and concealments set forth in Paragraphs 11 through 14 above, along with LAB’s unlawful compensation of Geisler through the misappropriation of Marketing Fund proceeds and the attempt to enforce the liquidated damages provision of the Franchise Agreement, in violation of applicable law, constitute unfair, fraudulent, and/or unlawful practices in violation of the UCL. 37. The aforementioned acts and omissions of LAB entitle Plaintiff to declaratory and injunctive relief and the disgorgement of the profits LAB obtained through its unfair and unlawful practices PRAYER FOR RELIEF WHEREFORE Plaintiff prays for judgment against LAB as follows: ON THE FIRST CAUSE OF ACTION 1, Foradeclaratory judgment; 2. For preliminary and permanent injunction; 3. For other equitable relief as the Court deems appropriate; ‘ON THE SECOND CAUSE OF ACTION 1, For compensatory damages; 2. Inthe alternative, for rescission of contract; 3. Forattomey fees; u (COMPLAMVT FOR: (1} DECLARATORYRELIEF. (2) VIOLATION OF (CALIFORNIA FRANCHISE INVESTMENT LAW, (3) VIOLATION OF UNFAIR COMPETITION LAWa 0837 FIRST LEGAL. i 714 541 8182 4. For other equitable relief as the Court deems appropriate, including, as appropriate, consequential damages available on an equitable rescission claim after return of profits on the contract; ON THE THIRD CAUSE OF ACTION 1, Forrescission, disgorgement, and injunctive relief; 2. Forattomey fees; 3. For other equitable relief as the Court deems appropriates ON ALL CAUSES OF ACTION 1. Forcosts of suit; 2. For such other and further relief as the Court deems just and equitable. Dated: August 7}, 2009 Respectfully submitted, JAMES W. DENISON Attorney for Plaintiff XTREME FITNESS CENTERS, LLC 12 ‘COMPLAINT FOR (1) DECLARATORYRELIEF. (2) VIOLATION OF (CALIFORNIA FRANCHISE INVESTMENT LAW, (3) VIOLATION OF UNFAIR COMPETITION LAW