A Club’s Termination Fee is Held Void

The membership is the lifeblood of any health club. To ensure that clubs remain solvent, their operators must work hard to attract new members and hold onto them. However, since no relationship lasts forever, it is not unusual for clubs to include some type of termination or liquidated damages clause (which spells out what damages a party must pay if he or she breaches a contract) in their membership agreements. The goal of such clauses is to protect the club and ensure a positive cash flow — but as cases such asMau v. L.A. Fitness International [2010 U.S. Dist. LEXIS 119576] show, health clubs must ensure that these clauses are not unfairly punitive.

On Oct. 2, 2009, Jay Mau and his fiancé entered into a fitness services agreement with a Chicago-area L.A. Fitness. The agreement entitled each of them to four personal training sessions per month for a period of 12 months. Mau made an initial payment of $170 and agreed to have 11 additional monthly payments of $120 charged to his credit card. If at any time during the 12 months Mau wanted to terminate the membership, the agreement contained this clause:

Voluntary Termination: Client may voluntarily terminate this Agreement at any time by doing the following: (1) giving LAF 30 days’ written notice of cancellation to be sent by registered mail, return receipt requested, and (2) paying a fee equal to 50% of the remaining balance as of the notice, in addition to any and all fees incurred, including, but not limited to, any late fees, return fees, collection fees, etc.

Mau found his first personal training session unsatisfactory because, he claimed, the trainer did not adequately communicate to him how he should exercise. The trainer who was scheduled to work with Mau at his second session did not show up, and an uncertified personal trainer worked out with Mau instead. Mau experienced physical pain after his third workout with a trainer and, for his fourth scheduled personal training appointment, no trainer appeared.

On Oct. 28, Mau cancelled his agreement as a result of what he viewed as poor performance by L.A. Fitness. In keeping with the club’s termination clause, L.A. Fitness charged $660 to Mau’s credit card account, after which Mau demanded a full refund. When that demand was refused, Mau lodged a complaint with the Better Business Bureau. A few days later, L.A. Fitness offered Mau a refund of $120, which he accepted under protest. In an attempt to recover the rest of his money, Mau sued L.A. Fitness in the United States District Court for the Northern District of Illinois, claiming that the club’s termination clause was void under Illinois law.

In examining L.A. Fitness’ termination clause, the court held that for it to be enforceable, the monetary damages suffered by the club as a result of Mau’s breach of contract would have to have been difficult to measure at the time the contract was made; and the specified amount of damages spelled out in the clause must be reasonable in light of the anticipated or actual loss caused by Mau’s termination.

Using this test, Mau argued that because the membership agreement required that he pay a fee equal to 50 percent of the remaining balance if he terminated the agreement, any damages caused by his termination could be known at the initial contract date. Therefore, Mau argued, the clause was not a valid liquidated damages provision.

The court conceded that the amount of money Mau was obligated to pay had been clearly established. However, the court ruled, Illinois law — which is primarily concerned with whether the contract provision is used as a weapon or monetary threat by the clubs to ensure that members continue paying their dues regardless of the club’s performance — made the second prong of the liquidated damages analysis more useful in determining whether L.A. Fitness’ termination clause was enforceable.

A contract clause is unreasonable, and therefore unenforceable against the member, the court determined, when the amount of the termination fee has no relationship to the injury suffered by the club. Put another way, the court held that the reason most liquidated damages clauses are deemed unenforceable is because they specify the same amount of damages, regardless of the severity of the breach or even who is at fault.

L.A. Fitness argued that the damages Mau was required to pay under the terms of the termination clause varied depending on the time remaining on the contract, and took into account L.A. Fitness’ variable costs in losing Mau’s business for that period of time. However, the court held that L.A. Fitness’ argument completely ignored the level of its own performance. In addition, the court noted that to L.A. Fitness, members who respond to its advertisements and sign its standard contract were totally interchangeable. Nearly one-fifth of personal training members will cancel their agreements early, the court noted, and for each member who cancels early, five new ones are waiting to fill their place. As a result, the court found that Mau only canceled the contract after L.A. Fitness failed to provide the proper services under the fitness services agreement, and thus L.A. Fitness was the first party to breach the contract.

Health clubs should consider Mau in reviewing their own termination clauses. Importantly, the court did not say that all termination or liquidated damage clauses were unenforceable — only those that had no relationship to the cost of replacing the member, failed to take into account the quality of services provided to the member, and were only intended to keep the member paying dues. If club owners want to use such clauses in a membership agreement, especially in Illinois, it is important that they make sure that the specified amount of the termination fee is reasonable when compared to the anticipated or actual loss to the club caused by the member’s termination and subsequent cost to the club of finding a new member.