TENA CAMPBELL, District Judge.
In 2006, Plaintiff National Fitness,
Now Custom Built moves for summary judgment on National Fitness's contract and damages claims as well as Custom Built's counterclaims of breach of contract, tortious interference with business relationships, and promissory fraud.
National Fitness operates health clubs in the greater Knoxville area. Before the Agreement, National Fitness had a personal training program run by its staff of personal trainers. National Fitness offered three different memberships: (1) the basic membership (Basic) for $ 40.00 per month, which did not include personal training sessions; (2) the Lifestyle membership for $ 60.00 per month, which included one non-accruing
Custom Built provides personal training services but it does not own or operate health club facilities. Instead, it contracts with health clubs to sell and provide personal training sessions to club members at the club facilities.
In January 2006, Stephen Dow, Custom Built's President, approached Lee Sloan, National Fitness's President, and proposed that National Fitness outsource its personal training services to Custom Built. The parties negotiated on and off through September 2006.
What happened during contract negotiations is disputed by the parties. For instance, Custom Built presents evidence that it clearly communicated the nature of its business model and contract expectations to principals of National Fitness, informing them that Custom Built expected to be the exclusive seller and provider of personal training sessions, a practice it followed with other clubs. But National Fitness has submitted evidence that Mr. Dow knew and specifically agreed that National Fitness would continue selling Lifestyle and Premium Memberships even after the Agreement went into effect.
On November 3, 2006, the parties signed the five-year Agreement. Custom Built agreed to offer and provide personal training services
The main dispute focuses on Paragraphs 10 and 13 of the Agreement. Paragraph 10 contains an exclusivity clause:
(Id. ¶ 10 (emphases added) [hereinafter "Exclusivity Provision"].) To address treatment of Lifestyle and Premium members who purchased memberships before the Agreement's effective date, the parties added a "carve-out" clause in Paragraph 13:
(Id. ¶ 13 (emphases added).) But in the very next sentence of Paragraph 13, the parties agreed to the following:
(Id. (emphases added).) The court finds that this language contradicts the apparent intention expressed in Paragraph 10 and the earlier portion of Paragraph 13, as discussed below.
In early 2008, a disagreement developed. Custom Built contended that National Fitness was acting as in-house competition to Custom Built by continuing to sell Lifestyle and Premium memberships in violation of the Exclusivity Provision of the Agreement. National Fitness responded that the Agreement and the parties' course of conduct permitted it to sell the memberships.
In November 2008, after many discussions between the parties,
National Fitness points out that Custom Built paid the monthly license fees for approximately two years before questioning National Fitness's practices. Despite the fact that National Fitness continued operating the same way it always did (i.e., selling the memberships as they had been defined before the Agreement), Custom Built did not express disagreement until almost two years into the Agreement. The parties present different theories about the reason for the delay. National Fitness theorizes that the economic downturn in 2008 caused cash-flow problems for Custom Built, at which time Custom Built began to negotiate a modification of the
On January 5, 2009, National Fitness declared a breach by Custom Built (for failure to pay the license fees) and terminated the Agreement. Custom Built responded that it had a right to withhold the fees because National Fitness had already materially breached the contract's exclusivity provision by continuing to sell Lifestyle and Premium memberships with complimentary personal training sessions.
After the business relationship disintegrated, National Fitness hired Custom Built's entire Knoxville staff, including salespeople, managers, and personal trainers.
Finally, Custom Built contends that, after the business arrangement disintegrated and National Fitness officially declared a breach, National Fitness breached Paragraph 23 of the Agreement by retaining and using Custom Built's computer equipment, proprietary software (Visual Fitness Planner), and confidential information through the spring of 2009. Under Paragraph 23 of the Agreement, each party acknowledged that it "may acquire confidential information that is the exclusive and proprietary property of the other party." After defining "Confidential Information," each party agreed that it "shall not, now or at any time in the future, directly or indirectly, divulge or disclose for any purpose whatsoever any Confidential Information that has been obtained by or disclosed to such party as a result of this Agreement. Upon termination of this Agreement, each party shall return to the other party any and all documents and materials in its possession containing Confidential Information." (Agreement ¶ 23.)
Summary judgment is appropriate "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a). The court "must view the factual evidence and draw reasonable inferences in favor of the non-moving party." National Enters., Inc. v. Smith, 114 F.3d 561, 563 (6th Cir.1997) (citing Matsushita Elec. Ind. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986)). The court then decides "whether the evidence presents sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251-52, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). "The mere existence of a scintilla of evidence in support of the plaintiff's position will be insufficient; there must be evidence on which the jury could reasonably find for the plaintiff." Id. at 252, 106 S.Ct. 2505.
Both parties have alleged breach of the Agreement. Under Tennessee state law, the essential elements of a breach of contract claim are: (1) the existence of an enforceable contract; (2) nonperformance amounting to breach; and (3) damages resulting from breach. ARC LifeMed, Inc. v. AMC-Tennessee, Inc., 183 S.W.3d 1, 26 (Tenn.Ct.App.2005).
Interpretation of a contract is typically a question of law for the court. Planters Gin Co. v. Federal Compress & Warehouse Co., Inc., 78 S.W.3d 885, 890 (Tenn.2002). The court must ascertain the intent of the parties and give effect to that intention "based upon the usual, natural, and ordinary meaning of the contractual language." Id. at 889-90. The court must give "reasonable meaning to all of the provisions of the agreement, without rendering portions of it neutralized or without effect." Maggart v. Almany Realtors, Inc., 259 S.W.3d 700, 704 (Tenn.2008). In other words, "[t]he entire written agreement must be considered" from beginning to end. Id.
If the language at issue is clear and unambiguous, "the literal meaning controls the outcome of the dispute." Id. at 703-04; also Hafeman v. Protein Discovery, Inc., 344 S.W.3d 889, 900 (Tenn.Ct.App. 2011) (same). If a contract is ambiguous, the "court applies established rules of construction to determine the parties' intent." Id.
A contract is ambiguous if the disputed language is susceptible to more than one reasonable interpretation. Maggart, 259 S.W.3d at 704. "`Ambiguity, however, does not arise in a contract merely because the parties may differ as to interpretations of certain of its provisions. A contract is ambiguous only when it is of uncertain meaning and may fairly be understood in more ways than one.'" Id. (quoting Johnson v. Johnson, 37 S.W.3d 892, 896 (Tenn. 2001)).
Interpretation of an ambiguous contract is a question of law "if the ambiguity exists because of the language used in the agreement and not because of extrinsic facts." Allen v. Cedar Real Estate Group, LLP, 236 F.3d 374, 381 (7th Cir. 2001). But if the ambiguity remains even after the court applies the rules of construction, the legal meaning of the contract becomes a question of fact for the jury. Planters Gin, 78 S.W.3d at 890. "[W]here the writing is not plain and unambiguous... and the parol evidence is conflicting or may lead to more than one conclusion, the doubtful parts may be submitted to the
The parties dispute whether Defendant Stephen Dow signed the Agreement not only on behalf of Custom Built, but also as an individual. Upon reviewing the Agreement's plain language, the court finds that he did sign as a personal guarantor. At the very beginning of the document, the parties agreed that:
(Agreement at 1 (emphasis added).) The last page of the Agreement indicates that it was signed and executed "by the parties by their duly authorized agents," which, for Custom Built, was "Stephen Dow, Individually & as President of Atlanta Fitness, Inc., d/b/a/ Custom Built Personal Training." (Id. at 8 (emphasis added).) And in the Agreement Recitals, the parties included the following language:
(Id. at 1 (emphasis added).) This straightforward recital, along with the clear description of Stephen Dow signing "Individually and as President," could result in no other reasonable conclusion than that Stephen Dow personally guaranteed performance by Custom Built.
Custom Built says that National Fitness breached Paragraphs 10 and 13 of the Agreement by competing with Custom Built when it sold personal training services with Lifestyle and Premium memberships after December 1, 2006. (See Mem. Supp. at 12.) National Fitness disputes this claim. Each party argues that the plain language of the Agreement clearly supports its position. But the court finds that the Agreement is ambiguous because Paragraphs 10 and 13 contain contradictory language.
The court agrees that the plain language of Paragraph 10 gives Custom Built the "exclusive right to sell" personal training sessions:
(Agreement ¶ 10 (emphases added).) The court refers to this as the "Exclusivity Provision." The plain meaning of the first sentence of Paragraph 10 is bolstered by the plain language at the end of the paragraph clearly stating that National Fitness is "prohibited from providing Personal Training" to health club members.
(Id. ¶ 13 (emphases added).) The court refers to this as the "Transition Provision."
Despite the parties' dispute over the meaning of "current" in the Transition Provision, the court finds no ambiguity. Custom Built interprets "current" to mean "then-in-existence" or "present." (Reply (Docket No. 32) at 7.) National Fitness says it understood "current" "to describe the [Premium and Lifestyle] Members whose dues were currently paid and were not in arrears." (Opp'n Mem. (Docket No. 31) at 15.) The court agrees with Custom Built, whose interpretation is supported by the plain language of the Agreement, especially the phrase "until all outstanding sessions due the Health Club Member under the existing Membership Agreement have been provided." (Agreement ¶ 13 (emphasis added).) That interpretation is also consistent with one of the main purposes of the Agreement: to completely transfer National Fitness's personal training program to Custom Built. Logically, the first two sentences were intended to address the interim Lifestyle and Premium memberships that were issued before the personal training program was transferred to a third party. After the effective date of the Agreement, National Fitness would no longer have the ability to provide outstanding personal training sessions it had already sold to its members. To avoid breaching its agreements with Lifestyle and Premium members existing at the time of the transfer, National Fitness created a mechanism to ensure the availability of previously-sold personal training sessions. That mechanism, the Transition Provision, allowed a seamless transfer of personal training obligations to Custom Built without interrupting existing members' contracts.
The plain language of Paragraph 10 and the first two sentences of Paragraph 13, when read together, are clear and make sense. But the court cannot reconcile the last sentence of Paragraph 13 with the Exclusivity and Transition Provisions. See Maggart, 259 S.W.3d at 704 (contract must be viewed as a whole). That sentence requires that:
(Id. (emphases added).) The last sentence of Paragraph 13 suggests that National Fitness will continue to sell health club memberships which include personal training sessions even after the effective date of the Agreement. Such a right would be inconsistent with Custom Built's exclusive right to sell personal training sessions.
Essentially, the last sentence of Paragraph 13 contradicts the first two sentences of Paragraph 13. If Custom Built is required to provide complimentary personal training sessions to new members, the Exclusivity and Transition Provisions make little sense.
Faced with irreconcilable language, the court finds that the Agreement is ambiguous and must review parol evidence to determine the intent of the parties, "including the contracting parties' conduct and statements regarding the disputed provision, to guide the court in construing and enforcing the contract." Allstate Ins. Co. v. Watson, 195 S.W.3d 609, 612 (Tenn. 2006).
Based on a review of the extrinsic evidence in the record, the court concludes that the issue of breach must go to the jury. The evidence of the parties' intent and what occurred pre-and post-Agreement is conflicting. For instance, the Transition Provision has little value unless National Fitness intended to change its pre-Agreement business model (which provided up to 36 sessions for Lifestyle members and up to 72 sessions for Premium members) to a business model offering "up to five" personal training sessions to new health club members (essentially creating a new type of membership or modifying the existing membership options). Yet National Fitness says it intended to continue, and did continue, its pre-Agreement business model, arguing that its practice was consistent with the Agreement's language and the parties' intent.
It is not at all clear from the record what the parties intended when they entered into the Agreement and when they performed under the Agreement. Accordingly, the question of breach (which depends on the disputed meaning of the Agreement) must be sorted out by a jury.
In its complaint, National Fitness demands $282,340.00 in liquidated damages in addition to payment of three monthly license fees, late fees, and attorneys' fees and costs. Although the court cannot resolve the contract dispute at the summary judgment stage, the parties' dispute about National Fitness's claim for liquidated damages is ripe because Custom Built has moved the court to dismiss the claim on the basis that the liquidated damages clause is unenforceable as a matter of law.
The liquidated damages clause is found in the Agreement's Paragraph 19, titled "Remedies":
(Agreement ¶ 19 (emphasis added).) Tennessee case law defines "liquidated damages" as "a sum stipulated and agreed upon by the parties at the time they enter their contract, to be paid to compensate for injuries should a breach occur." Guiliano v. Cleo, Inc., 995 S.W.2d 88, 96-97 (Tenn.1999) (internal quotation marks and citations omitted). "The fundamental purpose of liquidated damages is to provide a means of compensation in the event of a breach where damages would be indeterminable or otherwise difficult to prove." Id. at 98. Courts will generally enforce the provision "[i]f the liquidated sum is a reasonable prediction of potential damages and the damages are indeterminable or difficult to ascertain at the time of contract formation." Id. at 99.
But liquidated damages provisions are disfavored "when the provision serves only to penalize the defaulting party for a breach of contract." Id. at 98.
Id. at 100 (emphasis added). Here, Custom Built contends that the liquidated damages clause in the Agreement is unenforceable as a matter of public policy because it operates as a penalty. The court agrees.
A penalty is "`a sum inserted in a contract, not as the measure of compensation for its breach, but rather as a punishment for default, or by way of security for actual damages which may be sustained by reason of nonperformance, and it involves the idea of punishment.'" Id. at 98 n. 9 (quoting 22 Am.Jur.2d Damages § 684 (1988)). The language in the provision singles out Custom Built in the event of a default. And although the liquidated damages clause purports to measure the damage National Fitness would suffer if Custom Built defaulted on the contract, the calculation is simple: the amount equals approximately six months of license fees, all of which were clearly set out in the Agreement. This is not a situation where "damages would be indeterminable or otherwise difficult to prove." Id. at 98. Indeed, the actual damages to National Fitness are quite measurable, as National Fitness demonstrates by requesting not only liquidated damages but also actual damages measured by the very same monthly license fees that form the basis for the liquidated damages amount. Moreover, the $282,340.00 does not supplant other available remedies. For these reasons, the court finds that the clause acts as a penalty imposed only on Custom Built. Accordingly, National Fitness may not recover the liquidated damages amount even if a jury finds that Custom Built breached the Agreement.
Custom Built alleges that National Fitness never intended to perform the Agreement and so is liable for promissory fraud. Promissory fraud is "a type of fraud perpetuated by means of a false promise of future action." Shahrdar v. Global Housing, Inc., 983 S.W.2d 230, 237 (Tenn.Ct.App.1998). To establish promissory fraud under Tennessee law, Custom Built must show: (1) an intentional misrepresentation of a material fact; (2) knowledge of the falsity (the representation
Because there are questions of fact regarding the scope of the parties' rights and obligations under the Agreement, the question of present intention not to carry out the promise cannot be resolved at this point. Accordingly, the claim of promissory fraud must go to the jury.
Custom Built contends that National Fitness intentionally interfered with business relations by acting as a "de facto, in-house competitor to Custom Built" and implementing a scheme to steal away Custom Built's potential clients. (See Mem. Supp. at 20-21.) In particular, Custom Built contends that National Fitness's management
(Id. (emphasis in original).)
To succeed on its intentional interference claim, Custom Built must establish:
Trau-Med of Amer., Inc. v. Allstate Ins. Co., 71 S.W.3d 691, 701 (Tenn.2002) (emphasis in original; internal footnotes and citations omitted). Custom Built has not presented evidence of an "improper motive." And a question of fact exists regarding "improper means." Accordingly, Custom Built is not entitled to summary judgment on this claim.
Although the "improper motive or means" element depends on the facts of the particular case, the Tennessee Supreme Court has established some parameters. A finding of "improper motive" requires "that the plaintiff demonstrate that the defendant's predominant purpose was
Id. (internal citations omitted; emphasis added). "Improper motive" and "improper means" are alternative theories, and Custom Built only needs to establish one or the other to satisfy the fourth element of the tort.
The evidence in the record does not establish an improper motive. Under Tennessee law, to establish improper motive, Custom Built is required to demonstrate that National Fitness's "predominant purpose was to injure" Custom Built. Trau-Med, 71 S.W.3d at 701 n. 5. According to Custom Built, National Fitness's improper motive is shown by the following facts: (1) continuing to sell higher-priced memberships that included personal training sessions, (2) keeping the money from those higher-priced memberships, (3) taking the license fees from Custom Built, and (4) requiring Custom Built to provide the sessions for free. All this shows, however, is that National Fitness was motivated by a desire to benefit itself financially, with the indirect effect of damaging Custom Built financially.
As for improper means, showing breach of the Agreement by itself is not enough. "A deliberate breach of contract, even where employed to secure economic advantage, is not, by itself, an `improper means.'" Leigh Furniture & Carpet Co. v. Isom, 657 P.2d 293, 309 (Utah 1982), cited in Trau-Med, 71 S.W.3d at 701 n. 5 (discussing examples of improper means). However, a breach of contract committed for the immediate purpose of injuring the other party — that is, "to achieve a larger advantage by injuring the plaintiff in a manner not compensable merely by contract damages" — does satisfy that element of the tort. Id. Nevertheless, even assuming that National Fitness breached the Agreement, there is no evidence here that it did so to gain anything other than an economic advantage.
The only evidence in the record that potentially falls into the "improper means" category is evidence of promissory fraud. See Trau-Med, 71 S.W.3d at 701 n. 5 (noting that "fraud, misrepresentation or deceit" could qualify as an improper means). Accordingly, Custom Built's intentional interference claim depends on proof of intent to commit fraud. As noted above, there is a question of fact about whether National Fitness entered into the Agreement with the intention never to perform its contractual obligations. With unresolved questions of material fact remaining on the promissory fraud claim, Custom Built is not entitled to summary judgment on its claim of intentional interference with business relations.
Custom Built asserts that National Fitness is liable for punitive damages based on the following sets of acts:
(Mem. Supp. at 23-24.) Although the court is sending the issue of liability to a jury for resolution, the validity of Custom Built's punitive damages claim is ripe for decision.
In general, punitive damages may be awarded if the party shows "fraud, malice, gross negligence, oppression, evil motives, conscious indifference, and reckless conduct implying `disregard of social obligations.'" Hodges v. S.C. Toof & Co., 833 S.W.2d 896, 900-01 (Tenn.1992) (quoting Inland Container Corp. v. March, 529 S.W.2d 43, 45 (Tenn.1975)).
The first basis for Custom Built's claim of punitive damages amounts to a claim that National Fitness breached the Agreement. That is not a proper basis for award of punitive damages. Punitive damages are not generally available in breach of contract cases. B.F. Myers & Son of Goodlettsville, Inc. v. Evans, 612 S.W.2d 912, 916 (Tenn.Ct.App.1980).
The second basis for Custom Built's punitive damages claim mirrors its promissory fraud claim, on which Custom Built is not entitled to summary judgment. More importantly, National Fitness's actions does not rise to the level of behavior that would warrant an award of punitive damages in the event a jury finds in favor of Custom Built.
The third basis for Custom Built's claim is either outside the scope of Custom Built's counterclaim or relates to litigation stances taken by National Fitness. If Custom Built seeks a sanction from National Fitness for litigation stances, such a claim must be addressed under the Federal Rules of Civil Procedure and is not before the court.
Overall, Custom Built does not point to any behavior that is so extreme that it falls within the category of actions that warrant punitive damages. For the foregoing reasons, the court declines to submit the issue of punitive damages to the jury.
For the reasons set forth, the Motion for Summary Judgment and Partial Summary Judgment filed by Atlanta Fitness, Inc. d/b/a Custom Built Personal Fitness and Stephen Dow is GRANTED IN PART AND DENIED IN PART, as follows:
1. The liquidated damages provision in the Agreement is not enforceable because it operates as a penalty;
2. Stephen Dow signed the Agreement not only on behalf of Custom Built but as a personal guarantor;
3. Genuine disputes of material fact exist concerning National Fitness's contract claim and Custom Built's contract, intentional interference, and promissory fraud claims. Accordingly, Custom Built is not entitled to summary judgment; and
4. Custom Built will not be allowed to submit a punitive damages claim to the jury.
