Are Non-Compete Agreements Necessary in the Fitness Industry?

Attorneys say that noncompete agreements need to be worded specifically and they may not be necessary altogether if alternatives are used Photo by Thinkstock
<p>Attorneys say that non-compete agreements need to be worded specifically, and they may not be necessary altogether if alternatives are used. (Photo by Thinkstock.)</p>

The growth of boutique studios in the health club industry creates the possibility that health club employees can and will leave to start their own fitness facility. And the fear for many health club owners is that those employees will take business with them.

Equinox filed a $40 million lawsuit in 2013 against three of its former trainers in New York. Albert Matheny, Andrew Speer and Ryan Hopkins allegedly used Equinox's trade secrets and personal relationships they established while working for Equinox to open SoHo Strength Lab Inc. in New York City. The men, who allegedly signed non-compete agreements with Equinox, filed a countersuit against Equinox for unpaid wages and both cases were discontinued in 2015, according to court records.

Also in 2013, Equinox sued a former fitness instructor at one of its California gyms for allegedly breaching his employment contract and establishing a rival personal training business. Equinox claimed Yaw Ousu used the company’s trade secrets to lure customers to his new gym, PeakFit Academy, less than 10 miles from the Equinox location where he worked.

In January, Club Industry reported that Life Time Fitness, Chanhassen, Minnesota, sued one of its former regional vice presidents, Kyle Bauer, and his wife, who it alleged had both signed a three-year non-compete, for opening rival gym RenewYou in Houston. That case in U.S. District Court was settled on September 20, according to court records.

These examples and others have caused some club operators to consider putting non-compete agreements in place for employees, although no documentation exists to substantiate whether more non-compete agreements are being required today than in the past.

"It's a free country, a free economy and a free society," said Peter Steinmeyer, co-chair of the non-competes group at Epstein Becker Green, based in the law firm’s Chicago office. "To restrict someone from going to work, you have to have a really good reason."

However, attorneys who specialize in non-compete agreements, which are signed documents that can prevent an employee from going to work for a competitor, say club owners should take a hard look at whether the risk of deterring employees outweighs that of protecting perceived or actual exposure the club could face without one.

Pros of a Non-Compete Agreement

Non-compete agreements can help protect a company's most sensitive information, such as business practices, intellectual property and monetary investment in staff, Steinmeyer said.

"A club may have invested a substantial amount to build up a customer base and goodwill with its employees," he said. "A properly drafted restrictive covenant is a tool that can help do that."

A restrictive covenant is a legal document that, for club industry purposes, would require a gym employee to adhere to or abstain from certain actions or be subject to penalty.

Kristin M. Healey, fitness and training director at Northwest Personal Training, Vancouver, Washington, said her company's non-compete agreement allows her and her staff to invest its resources into team development, so time and energy can be invested into the facility and its clients.

If a club owner is going to ask for a non-compete from its employees, the employer should provide attractive opportunities for staff to reach its full potential, Healey said.

The trainers at Northwest Personal Training have a diverse set of daily duties. Those tasks can include everything from private training and group training, to helping with marketing initiatives and lecturing to members and peers.

Drawbacks and Burdens of Proof

Non-compete agreements are legal in 49 states, but caveats exist, and those caveats vary by state, according to Boston-based law firm Beck Reed Riden LLP. The lone exception is California, where all non-compete agreements are banned except in possible trade secret litigation.

Even if your club isn't in California, a non-compete may still be tough to enforce if not narrowly tailored to meet the club's legitimate business interests, Steinmeyer said.

"For example, if you're a club in Florida with a single location and your non-compete bars an employee [from] working outside of Florida—or holding a job with any club anywhere—that would be overbroad," he said. "A judge will be inherently skeptical about restricting that individual's ability to work."

Steinmeyer encouraged every club owner considering a non-compete to consider the day their lawyer will stand up in court and defend the document.

"Their attorney must prove that non-compete protected a legitimate business interest," he said, adding that club operators should tread cautiously when spending money to draft a non-compete that won't hold up in court.

What could be upheld? Perhaps the employee had access to trade secrets, then went to work for a direct competitor in the same or similar position, in the same marketplace.

"If the employee took with him or her customer lists, internal information about business strategy, information about sales incentives or pricing information that would be of tremendous use to their competitor, a court would be sympathetic to that," Steinmeyer said.

Kara Maciel, partner at Conn Maciel Carey PLLC, Washington, DC, said she has spoken to many people looking for health club jobs who expressed dismay about non-compete agreements.

"If clubs want to attract new trainers, they may lose out by asking for a non-compete," she said. "That's the biggest resistance I've heard from employees."

Typical Inclusions

Northwest Personal Training's non-compete agreement includes provisions about conflicts of interest, solicitation of clients/staff and intellectual property. Its geographic direct competition territory bars employees from working within a five-mile radius for one year after leaving Northwest.

"We feel this is a reasonable amount of time to require past employees to not solicit or encourage any employee, client or alliance partner to terminate or alter a relationship with Northwest Personal Training," Healey said.

She advises other club owners to carefully explain each bullet point so the prospective employee understands expectations.

"Often times, it is more about how you present the information to new team members than the way it is written in your contracts," Healey said.

Steinmeyer usually recommends a six-month restriction, and Maciel recommends specifying a radius (five miles, for example) in the ban. Both agree the non-compete agreement's language should focus on the work an employee does for a club and restrict that employee from doing the same job for a competitor.

However, it may be unwise to prevent trainers from working in a different area of the industry, Maciel said. Examples include restricting trainers who move into member sales at another club or restricting trainers who go to work at an in-house wellness program instead of a gym.

Non-compete agreements could ban employees from going to work for specific competitors or similar types of facilities that would compete, Steinmeyer said. If the gym was a CrossFit, then the non-compete agreement could ban employees from working for another CrossFit but not for a yoga studio, for example.

"Ask yourself how long you need protecting, and what activity do you need restricted and in what market," Steinmeyer said.

Club owners who are nervous about deterring quality employees because of a non-compete requirement may want to consider having employees sign confidentiality and non-solicitation agreements, which offer similar protection to non-compete agreements.

A non-solicitation clause allows an employee to be a personal trainer somewhere else but prevents that employee from soliciting or poaching their former employer's members or proprietary information to grow their new employer's business.

Confidentiality clauses typically forbid accessing employee lists, member contact information and club marketing materials.

"There are a lot of provisions you can include that are less onerous than an outright ban on employment," Maciel said.

She added that if a trainer has developed a particular class while working at a facility, then the employment agreement should be clear that they can take that class with them, but the agreement should specify that if they used club resources to develop something while there, that class belongs to the club, Maciel said. 

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