Fit Tech, Inc. v. Bally Total Fitness Holding

• Decision Date: 01 July 2004
• Docket Number: No. 03-2622.,03-2622.
• Citation: 374 F.3d 1
• Parties: FIT TECH, INC.; Planet Fitness Center of Maine, Inc.; Planet Fitness Center, Inc.; Planet Fitness Center of Dartmouth, Inc.; Planet Fitness Center of Salem, Inc.; Planet Fitness Center of Brighton, Inc.; Stratford Fitness Center, Inc.; David B. Laird; Scott G. Baker, Plaintiffs, Appellees, v. BALLY TOTAL FITNESS HOLDING CORPORATION; Holiday Universal, Inc., Defendants, Appellants. John H. Wildman, Defendant.
• Court: U.S. Court of Appeals — First Circuit

Page 1

374 F.3d 1

FIT TECH, INC.; Planet Fitness Center of Maine, Inc.; Planet Fitness Center, Inc.; Planet Fitness Center of Dartmouth, Inc.; Planet Fitness Center of Salem, Inc.; Planet Fitness Center of Brighton, Inc.; Stratford Fitness Center, Inc.; David B. Laird; Scott G. Baker, Plaintiffs, Appellees, v. BALLY TOTAL FITNESS HOLDING CORPORATION; Holiday Universal, Inc., Defendants, Appellants John H. Wildman, Defendant.

No. 03-2622.

United States Court of Appeals, First Circuit.

Heard May 4, 2004.

Decided July 1, 2004.

Juliet A. Davison with whom Howard M. Cooper and Todd & Weld LLP were on brief for appellants.

Deborah L. Thaxter, P.C. with whom Jonathan Sablone, Stephen M. LaRose and Nixon Peabody LLP were on brief for appellees.

Before BOUDIN, Chief Judge, TORRUELLA and HOWARD, Circuit Judges.

BOUDIN, Chief Judge.

This appeal, presenting issues of contract law and appellate jurisdiction, arises out of the sale of a business. The principal plaintiffs in the district court, David Laird and Scott Baker, previously owned and operated eight health and fitness centers in New England doing business under several names (e.g., "Planet Fitness"; "Fit Tech"). On April 19, 2002, Laird and Baker executed an "Asset Purchase Agreement" effective as of March 14, 2002, by which defendant Bally — a major owner of such fitness facilities — acquired plaintiffs' centers.¹

The purchase agreement fixed the purchase price at $14.7 million payable at closing but provided that the total amount could be increased by a maximum of $12 million depending on earnings of the eight centers in the two years following the closing. The formula for computing the extra payment depended primarily on earnings of the centers before corporate overhead, interest, taxes, depreciation and amortization; this figure is defined in the purchase agreement and called "EBITDA." The purchase agreement sets out both procedures for calculating the amount and a time table.

Specifically, Bally was required to provide Laird and Baker quarterly reports setting forth Bally's calculation of the EBITDA. An initial (75 percent) payment by Bally, based on the "advance earn-out schedule," was to be determined within 90 days after the first anniversary of the closing date (i.e., by mid-July, 2003). The final calculation of the full supplemental amount, designated the "earn-out schedule," was due on the second anniversary of the closing. Section 3.5 of the purchase agreement then set out a process for dealing with disputes as to the schedules:

(e) Protest Notice. Within sixty (60) days after delivery to the Sellers of the Advance Earn-Out Schedule or the Earn-Out Schedule, as applicable, the Sellers may deliver written notice (each, a "Protest Notice") to the Buyer of any objections, and the basis therefor, which the Sellers may have to the Advance Earn-Out Schedule or the Earn-Out Schedule, as applicable. Any such Protest Notice shall specify the basis for the objection, as well as the amount in dispute. The failure of the Sellers to deliver a protest notice within the prescribed time period will constitute the Sellers' acceptance of the Advance Earn-Out Schedule and the Earn-Out Schedule set forth therein, as applicable.

(f) Resolution of the Sellers' Protest. If the Buyer and the Sellers are unable to resolve any disagreement with respect to the Advance Earn-Out Schedule or the Earn-Out Schedule within twenty (20) days following the Buyer's receipt of any Protest Notice, then the items in dispute will be referred to the Accountants for final determination within forty-five (45) days, which determination shall be final and binding on all of the parties hereto. The Accountants shall be engaged by the Sellers and the Buyer regarding the Advance Earn-Out Schedule or the Earn-Out Schedule, as applicable, based upon the written submissions of the Sellers and the Buyer, and the Accountants may, but shall not be required to, audit the Advance Earn-Out Schedule or the Earn-Out Schedule or any portion thereof. The Advance Earn-Out Schedule and the Earn-Out Schedule as ultimately prepared and finalized in accordance with this Section 3.5(f) shall thereafter be deemed to be and constitute the "Advance Earn-Out Schedule" and the "Earn-Out Schedule" respectively, for all purposes.

Elsewhere in the agreement, PriceWaterhouseCoopers ("Price Waterhouse") was designated as the accountants. A choice of law provision specified that the purchase agreement was to be governed by Illinois law.

The purchase agreement also provided that Laird and Baker would each sign an "Employment Agreement," making them area directors to manage and operate Bally's New England fitness centers. The employment agreement, unlike the purchase agreement, contained a standard arbitration clause providing that "[a]ny controversy or claim arising out of or relating to this employment agreement, or the breach thereof, shall be settled by arbitration" pursuant to the rules of the American Arbitration Association or a similar organization selected by Bally.

Laird and Baker began to serve pursuant to the employment agreements, but disagreements soon developed between them and Bally. In February 2003, Laird and Baker brought this diversity action against Bally in the federal district court in Massachusetts, charging Bally primarily with breach of contract and of an implied covenant of good faith and fair dealing. Claims were also made under the Massachusetts statute governing unfair and deceptive trade practices, Mass. Gen. Laws ch. 93A, and a counterpart Illinois statute, 815 Ill. Comp. Stat. 505/2.

The complaint included extensive factual allegations of improper conduct by Bally. The district court essentially grouped these alleged wrongful acts in two categories. The first, comprising what we will call "accounting violations," alleged that Bally in its initial EBITDA calculations had improperly calculated earnings contrary to applicable accounting principles so as to reduce the extra purchase price that would be due. For example, Bally was alleged to have spread revenues from new memberships over the projected 22-month expected life while accruing the entire commission expense of the agent in the month that the membership was sold.

The second category consisted of numerous alleged actions taken by Bally that Laird and Baker said were wrongfully designed to reduce the extra earnings that would boost the purchase price. For instance, the complaint charged that Bally had used its computer system to direct phone inquiries away from the former Laird-Baker centers and toward Bally's pre-existing New England facilities and that Bally had provided the centers products unfit for sale. These and acts like them we will call "operating violations."

On March 21, 2003, Bally moved to dismiss the complaint, relying inter alia on the purchase agreement's requirement that claims be submitted to "binding alternative dispute resolution" by the accountant under the purchase agreement. Bally did not mention the employment agreement's arbitration clause. On August 21, 2003, the district court concluded that certain of the factual allegations raised matters within the purview of the accountants under section 3.5(f) but that the majority — concerning Bally's allegedly improper operation of the businesses — did not and that those latter claims were properly reserved for disposition by the district court.

Bally then filed a motion to reconsider or clarify, asking the court to identify more clearly which claims were to be submitted to the accountant and also arguing that new events warranted reconsideration of the district court's decision to retain any of the claims for its own consideration. The new events concerned a traditional arbitration proceeding that Bally had begun against Laird in Chicago on June 30, 2003, under the arbitration clause in Laird's employment agreement.

In the Chicago proceeding, Bally sought a ruling that it was entitled to terminate Laird's employment for cause; later it asked for a declaration that both Laird and Baker were subject to restrictive non-compete covenants in their respective employment agreements. Laird and Baker then counterclaimed in the arbitration to seek monetary compensation for Bally's own alleged breaches of the employment agreement, including four alleged episodes that had also been listed in Laird and Baker's federal complaint.

Bally argued that these overlapping claims should be dismissed because Laird and Baker "have elected to submit these claims to arbitration" in Chicago. More broadly, Bally contended that all of the issues retained by the district court for its own resolution were properly subject to arbitration under the employment agreement. By order entered on November 6, 2003, the district court clarified its apportionment of issues as between the court and the accountant, but it declined to refer any of the claims (overlapping or not) to the Chicago arbitration.

Bally has now filed an interlocutory appeal. It argues that the district court should not have retained any of the plaintiffs' claims; Bally says that all must be submitted to Price Waterhouse or, in the alternative, subject to the Chicago arbitration. At the very least (says Bally), the district court should not proceed to address the overlapping claims that are being presented both in the federal complaint and in Laird's and Baker's answer and counterclaim in the Chicago arbitration.

Jurisdiction. At the outset Laird and Baker say that we lack jurisdiction over Bally's appeal. The challenge to our jurisdiction arises because the district court's refusal either to dismiss the case or to leave all of the issues to Price Waterhouse or the Chicago arbitration is not a "final order" disposing of all claims against all parties. Thus, it is not appealable as a final judgment under 28 U.S.C. § 1291 (2000), and our jurisdiction must be based on one of the several statutory or case law exceptions to...