Economou v. Physicians Weight Loss Centers

• Decision Date: 12 February 1991
• Docket Number: No. 90-CV-1777.,90-CV-1777.
• Parties: Theodore ECONOMOU, et al., Plaintiffs, v. PHYSICIANS WEIGHT LOSS CENTERS OF AMERICA, et al., Defendants.
• Court: U.S. District Court — Northern District of Ohio

756 F. Supp. 1024

Theodore ECONOMOU, et al., Plaintiffs, v. PHYSICIANS WEIGHT LOSS CENTERS OF AMERICA, et al., Defendants.

No. 90-CV-1777.

United States District Court, N.D. Ohio, E.D.

February 12, 1991.

David N. Brown, Brown, Amodio & Warrell, Medina, Ohio, for plaintiffs.

Jeffrey J. Keyes, Briggs & Morgan, Minneapolis, Minn., James J. Long, Briggs & Morgan, St. Paul, Minn., Richard E. Guster, Thompson, Hine & Flory, Akron, Ohio, for defendants.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

SAM H. BELL, District Judge.

Currently before the court are cross-motions for preliminary injunction filed by plaintiffs Theodore Economou, Maureen Economou, Steven Streit, and Nancy Streit (hereinafter plaintiffs) and defendants Physicians Weight Loss Centers of America, Inc. (hereinafter PWLC when referred to individually) and Charles E. Sekeres (hereinafter defendants). In their motion, plaintiffs seek an order enjoining defendants from enforcing certain contractual covenants not to compete. By contrast, defendants in their motion seek an order enforcing the very same covenants. A two-day hearing was held on December 5th and 6th, 1990, during which the parties submitted evidence and testimony in support of their respective positions. On January 11, 1990, the parties submitted proposed Findings of Fact and Conclusions of Law.

I. FINDINGS OF FACT

1. PWLC is a national franchiser of Physicians Weight Loss Centers and commenced operations in 1979. It is an Ohio corporation with its principal place of business in Akron, Ohio.

2. Charles E. Sekeres is an Ohio resident and is the founder, sole shareholder, director, and president of PWLC. Sekeres worked in the health club industry for many years before forming PWLC and garnered most of his knowledge of and experience with the diet industry during these early years.

3. The plaintiffs are all residents of New Jersey and were franchisees of PWLC from 1986 to 1990. They operated four PWLC centers in Freehold, East Brunswick, Princeton, and Wayne, New Jersey.

4. The plaintiffs first investigated the possibility of becoming PWLC franchisees in 1986. Ted Economou had no prior experience in the weight loss business (Economou testimony at 118); Steven Streit is a medical doctor with a specialty in internal medicine who had conducted a general practice (Economou testimony at 177). Plaintiffs contacted PWLC and, after some discussion, decided to become franchisees. PWLC sent plaintiffs a packet of franchise materials which contained the following representations:

Fast, safe and effective weight loss;

Guaranteed weight loss of 3-7 pounds per week;

Medically proven maintenance program to keep weight off forever;

The operating overhead is low, profit margin is high and break even point easily achievable.

The franchisor supports all franchisees with the following:

a dynamic sales and marketing force;

a thorough franchise development team

a. center design

b. site location

c. planning and budgeting

d. effective advertising

e. assistance with lease negotiation

a staff of experienced, professional service representatives

a comprehensive training and education development department

a. two and a half weeks of initial training

b. ongoing owners seminars

c. monthly general training seminars

d. semi-annual sales seminars

e. ongoing management/director seminars

f. sales college to improve sales strategies on a college level

a national advertising coordinator

a planning and budgeting committee

a full-service warehousing and distribution system

a national medical operations director

"How-To" manuals for every phase of operations

Toll Free Hot Line.

Plaintiffs Exhibit 11; Economou testimony at 202-205.

5. In the spring of 1986, plaintiffs were approved as franchisees. On May 8, 1986, plaintiffs signed a franchise agreement for a PWLC center in Freehold, New Jersey, and commenced operation of the center on June 15, 1987. Plaintiffs paid a $12,500 franchise fee for this center. Economou testimony at 125. On September 16, 1986, plaintiffs signed a franchise agreement for a center in East Brunswick, New Jersey, and commenced operation of the center on that day. Plaintiffs purchased this center for $40,000.

6. These first two centers initially met with success. In 1986, based upon three months operation at the East Brunswick center, plaintiffs acquired gross revenues of $63,492 and enrolled 107 clients. Defendants' Exhibit 27. In 1987, based upon a full year of operation at East Brunswick and six months of operation at Freehold, plaintiffs earned gross revenues of $600,396 and enrolled 975 clients. Defendants' Exhibit 28. In addition, Economou testified that Freehold was a successful center in 1987 and that, during first two years of operation, plaintiffs had a "very good relationship" with PWLC and that, financially, plaintiffs were "doing well." Economou testimony at 136, 174-175.

7. On November 10, 1987, plaintiffs and PWLC executed a third franchise agreement for a center in Princeton, New Jersey. Plaintiffs purchased a condominium site for this center for $300,000. For the year 1988, based upon a full year of operations at East Brunswick and Freehold and four months' operation at Princeton, plaintiffs had gross sales of $1,206,366 and enrolled 1591 clients. Defendants' Exhibit 29. The East Brunswick, Princeton, and Freehold centers all won numerous awards. Economou testimony at 163.

8. The plaintiffs signed a fourth franchise agreement for a center in Wayne, New Jersey on March 3, 1989, and commenced operation of the center on that day. For 1989, based upon a full year's operation at East Brunswick, Freehold, and Princeton, and nine months at Wayne, plaintiffs' gross revenues were $1,313,619, and client enrollment reached 1443. Defendants' exhibit 30.

9. A case flow analysis of plaintiffs' business from 1986-1989 presented by Clifford Kocien, Executive Vice President of PWLC and certified public accountant, shows that the cash flow profit for 1986 was $9,488; for 1987, $93,786; for 1988, $152,099; and for 1989, $111,484. Defendants' Exhibits 27-30; Kocien testimony at 344-349.

10. In September of 1989, plaintiffs renewed their expired East Brunswick franchise agreement for an additional six months. Economou testimony at 186-187. In December of 1989, Ted Economou noticed a "drastic" decrease in sales volume for his centers. Economou testimony at 151.

11. Sometime in 1990, due to financial distress, plaintiffs closed the Princeton and Wayne centers. PWLC had a contractual right of assignment under these centers, but declined to exercise this right. Economou testimony at 157. Subsequently and also in 1990, plaintiffs closed the Freehold and East Brunswick sites. The Freehold agreement was terminated by PWLC after plaintiffs failed to make royalty payments.

12. Plaintiffs attribute their financial problems to a "Dieter's Information Sheet," to PWLC's change in its diet program in 1989, and to PWLC's failure to provide support during the troubled economic times in late 1989 and 1990. With regard to the first contention, the diet utilized by PWLC franchisees from 1980 to November, 1989, was a 700 calorie diet known as a "very low caloric diet." In response to a report which questioned the medical safety of the very low caloric diet, PWLC in January of 1989 produced and distributed a Dieter's Information sheet to be presented to clients upon enrollment. The information sheet warned about certain risks associated with the PWLC diet: lower body temperatures, mild temporary hair loss, irregular menstrual cycles, the possibility of bruising more easily, and lightheadedness or fainting while running or swimming. Plaintiffs' Exhibit 10. Prior to 1989, franchisees had been warned about these very same risks in education programs. Kocien testimony at 362-64.

13. The motion hearing produced no evidence that the very low caloric diet actually produced complaints from or injuries to any clients. Further, while the testimony of Robert Ligon¹ indicated that the information sheet caused a decrease in sales and client volume for 1989, (Ligon testimony at 32-34), there was little if any evidence that it caused the decrease in plaintiffs' business. In other words, while plaintiffs' cash flow profit decreased approximately $40,000 in 1989 from that in 1988, and client enrollment decreased from 1591 to 1443, there is no evidence of a causal connection between these decreases and the information sheet.

14. Plaintiffs' primary contention is that PWLC's September, 1989 diet change caused their financial difficulties. In September, 1989, at its annual convention, PWLC announced that it would introduce a new 900 caloric diet which has been termed a "low caloric diet." The diet was introduced in November of 1989 and was described to franchisees as a low-fat, high-fiber, low-caloric diet. Ligon testimony at 36, Sekeres testimony at 257. Plaintiffs' franchise agreements permits PWLC to make changes in diets and provide in part as follows:

Franchisor reserves the right to modify or change the System, Marks, the various training programs offered to Franchisees and their employees, and the Manuals at any time, and from time-to-time by the addition, deletion or other modification to the provisions thereof, and such modification shall be made in the sole judgment of Franchisor to protect Franchisor Marks and goodwill, to comply with any applicable law, statutes or judicial or administrative decision, or to improve the quality of services, training or products offered.

Defendants' Exhibits 20-22.

15. The new diet did, however, decrease PWLC's weight loss guarantee. Originally, under the very low caloric diet, PWLC advertised a five to seven pound weekly loss. This guarantee was gradually reduced to a low of two pounds per week on July 2, 1990. Sekeres testimony at 264-65. The new diet also modified certain medical components (i.e., potassium supplements and use of ketosticks to measure ketosis level were no longer...