Considerations For Health Club Owners Defending COVID-19 Related Consumer Class Actions

23 July 2020 Club Industry Publication
Authors: Jaikaran Singh

This article originally appeared in Club Industry, and is republished here with permission.

Plaintiff’s lawyers trying to capitalize on the chaos created by the COVID-19 pandemic have filed class action lawsuits against companies who own and/or operate fitness and health clubs. The lawsuits seek refunds of assessed monthly membership fees and dues based on alleged lack of access or use of club facilities and amenities caused by a club’s compliance with state and local operations restrictions and agency guidelines.

Most of the cases filed to date have focused on breach of contract, tort and statutory consumer protection law theories of liability and recovery. Health clubs, which are typically authorized by a membership agreement to charge members monthly dues or fees, should be prepared to respond quickly, decisively and strategically if their business becomes a target for a COVID-19 related class action.

This article offers a litigation checklist with a high-level look at some important procedural and strategy considerations that may apply on a case by case basis for defending against these types of class claims.

Procedural and Venue Considerations

Removal to Federal Court: If the plaintiff filed the case in state court, consider removal to federal court under the Class Action Fairness Act (CAFA), or possibly traditional diversity jurisdiction or federal question jurisdiction. Because COVID-19 related claims are typically being asserted on behalf of all members, the CAFA requirements that at least one plaintiff and one defendant are citizens of different states, at least 100 proposed class members are involved, and a claimed amount of greater than $5 million is in controversy for federal jurisdiction are often satisfied. To the extent an arbitration agreement exists, a federal court venue is preferable for seeking to compel arbitration under the Federal Arbitration Act.

Arbitration Provision with Class Action Waiver: Is there an agreement to arbitrate that can serve as a basis to compel arbitration (i.e., membership agreement, online enrollment form)? Most asserted COVID-19 related claims targeting health and fitness clubs arise from or involve providing services or other performance pursuant to a consumer contract, which often contain an arbitration provision with class action waiver. Arbitration agreements with class action waivers are enforceable under the Federal Arbitration Act.

Choice of Venue: If arbitration is not available, is there a consumer contract with a choice of venue provision or forum selection clause that governs where any litigation is to proceed? Consider whether a motion to change or transfer venue to a more favorable forum exists based on contract or some other ground, like the common law doctrine of forum non conveniens, which seeks to have lawsuits decided in a sensible geographical location based on factors like where the controversy arose, where are the party’s located, where are the witnesses located, and where are the key documents maintained.

Choice of Law: A related contract consideration is whether a choice of law provision exists that dictates what law applies. If so, does that choice of law provision cover contract-based claims and non-contract-based claims? Depending on the wording of the choice of law provision, there may be a question of what law applies to non-contract-based claims, such as tort or statutory consumer protection law claims. Note also that the law of the state where a class action is filed does not necessarily govern the claims of all putative class members, some of whom could be citizens of other states.

Specific Jurisdiction Challenge: Under Bristol-Meyers Squibb v. Superior Court, 137 S. Ct. 1773 (2017), federal courts do not have jurisdiction over the claims of plaintiffs from outside states in mass tort actions unless those plaintiffs can show sufficient contacts with the state where the lawsuit was filed and involvement in the case facts at issue. Although courts in different jurisdictions are split on the application of the Bristol-Myers case to nationwide class actions, depending on the venue, a challenge to jurisdiction for out-of-state plaintiffs is worth consideration at the early litigation stage.

Lack of Standing: Did the named plaintiff suffer an injury in fact or harm sufficient to confer Article III standing?  Under Article III of the U.S. Constitution, to bring a lawsuit in federal court, a plaintiff must personally have suffered an actual injury caused by the defendant that can be addressed by a court. Depending on the service or performance at issue, the named plaintiff (and other consumers) may not have sustained cognizable injury or harm because of actions taken by the defendant to mitigate damages (like offer credits), provide reasonable alternatives (such as online fitness classes or training) or substitutions for performance, make reparation, or postpone performance (as opposed to cancelation) for a later time when not prohibited or restricted, or when otherwise more feasible to do. 

No Breach of Contract: Depending on the language of the membership agreement, an argument may exist to support a showing of no breach if the contract allows for reasonable modifications, substitute performance or the ability to make reparations during the contract term, which was done or offered by the non-performing party.

Class Certification: The details of a defense plan to defeat class certification will depend on the case-specific facts. However, with COVID-19 related class claims, it is likely that the most effective certification defense will focus on differences within the proposed club member class concerning contract terms, performance, derived benefits, causation and injury, harm or damage, and the existence of state and local orders or directives or other circumstances affecting the club defendant’s ability to perform. Variation among putative class members will shape arguments related to Rule 23 of the Federal Rules of Civil Procedure, which sets forth the requirements that have to be met in federal court for a case to be certified as a class action.

Force Majeure: Does the membership agreement contain an applicable force majeure provision? A force majeure clause provides some reprieve to a party from performing its obligations under a contract upon occurrence of unforeseeable circumstances that prevent performance. The use by a nonperforming party of a force majeure provision is language specific and turns on the particular facts at issue. Accordingly, the first step is to determine whether a COVID-19 related event qualifies as force majeure under the membership agreement. If so, was nonperformance by the club defendant foreseeable and able to be mitigated by the member plaintiff, and is performance by the club defendant actually impossible, such that it is excused? State and local government imposition of prohibitions and restrictions on business operations, travel, venue capacity, gatherings and movement in general should be considered to assess whether the circumstances in a particular case give rise to a qualifying event for force majeure.

Frustration of Purpose: Where force majeure defense is not available, club operators may be able to use the common law defense of frustration of purpose. This defense may apply when an event occurs that could not have been anticipated to occur when the contract was signed and prevents either party from performing the main purpose of the contract. One consideration when asserting this defense is that if successful, the contract is terminated, which, depending on the situation, may not be a desirable outcome. 

Impossibility or Impracticability of Performance: A related, but different, common law defense to frustration of purpose is the doctrine of contract impossibility or impracticability. Contract impossibility occurs where performance of a contract duty is excused based on a change in circumstances, which the parties did not anticipate at the time of contracting, that makes performance of the contract literally impossible. Given the difficulty of proving actual impossibility, many courts have shifted to an impracticability standard where contemplated performance of a duty is excused on a showing that it is unreasonably difficult or excessively costly to perform, although possible, because of an unforeseen change in circumstances.

Change of Law: A change in the law may render a valid contract unenforceable as illegal if it is not possible to achieve the object of the contract without violating a law. Recent state and local orders, guidelines or directives in effect in some jurisdictions to address the COVID-19 pandemic may, in certain instances, require compliance that is inconsistent with the contract objective or performance under the membership agreement. Because these types of public policy laws apply immediately based on overriding public-interest considerations, many businesses are not able to comply while at the same time providing contracted-for services or other performance that was contemplated by the membership agreement at the onset.

Depending on the specific facts at issue, the options presented in this checklist, where available, may factor into an approach for fitness and health club industry companies to use in working with counsel to effectively manage and address a class action related to COVID-19.

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