National Fitness Center, Inc et al v. Atlanta Fitness, Inc et al

Filing 49

ORDER granting in part and denying in part 22 Atlanta Fitness, Inc. d/b/a Custom Built Personal Fitness and Stephen Dow's Motion for Summary Judgment and for Partial Summary Judgment as set forth more fully in this Order. Signed by District Judge Tena Campbell on October 9, 2012. (AYB)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF TENNESSEE
AT KNOXVILLE

NATIONAL FITNESS CENTER, INC.,
and COURT SOUTH TOTAL
CONDITIONING CLUBS, LLC,
Plaintiffs,
No. 3:09-cv-133
vs.

(Campbell/Shirley)

ATLANTA FITNESS, INC. d/b/a
CUSTOM BUILT PERSONAL FITNESS
and STEPHEN DOW, individually,
Defendants/CounterClaimants.

ORDER
In 2006, Plaintiff National Fitness,1 an owner of health clubs in eastern Tennessee,
entered into a Facility License Agreement (Agreement) with Defendant Custom Built,2 a personal
training company. The parties agreed that Custom Built would provide personal training services
to health club members at the National Fitness facilities and pay a monthly license fee in
exchange for what Custom Built argues was an exclusive right to sell the personal training
1

Two plaintiffs filed suit: National Fitness Center, Inc., and Court South Total
Conditioning Clubs, LLC. Unless otherwise indicated, the court refers to both Plaintiffs as
National Fitness.
2

National Fitness has named two Defendants: Atlanta Fitness, Inc. d/b/a Custom Built
Personal Fitness and individual Stephen Dow. Unless otherwise indicated, the court refers to
Defendants collectively as “Custom Built.”

sessions. Two years later, Custom Built began withholding payment of the monthly license fees,
claiming that National Fitness had materially breached the Agreement by competing with
Custom Built. National Fitness sued to collect the fees.
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.3 For the reasons set forth below,
Custom Built’s motion is GRANTED IN PART AND DENIED IN PART.
I. FACTUAL BACKGROUND
The Parties
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-accruing4 personal training session
per month; and (3) the Premium Value Lifestyle (Premium) membership for $ 80.00 per month,
which included two non-accruing personal training sessions per month. The Lifestyle and
Premium memberships lasted a fixed 36-month term, after which they were renewed monthly.
Custom Built provides personal training services but it does not own or operate health
3

Custom Built also alleges in its counterclaim that National Fitness violated the
Tennessee Consumer Protection Act and was unjustly enriched. Because Custom Built did not
raise those claims in its Motion for Partial Summary Judgment, the court will not consider them
here.
4

Here, “non-accruing” means that if the one session is not used during that month, it does
not carry over to the next month. It’s a “use it or lose it” system.
2

club facilities. Instead, it contracts with health clubs to sell and provide personal training
sessions to club members at the club facilities.
The Facility License Agreement
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 services5 to club members and pay a monthly license fee
ranging from $42,000 to $46,000. In return, National Fitness agreed to allow Custom Built to
operate its business at the health club facilities and have access to members.
Key Language of the Agreement
The main dispute focuses on Paragraphs 10 and 13 of the Agreement. Paragraph 10
contains an exclusivity clause:

5

The Agreement defines “Personal Training” as “One-on-One or One-on-Two instruction
in the proper usage of exercise equipment and physical exercise techniques[.]” (Agreement at 1.)
3

Exclusive Rights. At all times during the Term, upon all terms, provisions and
conditions set forth herein, Custom Built shall have the exclusive right to sell and
perform Personal Training within the Health Clubs to Health Club Members only,
and Custom Built shall be absolutely prohibited from selling and/or performing
Personal Training services to non-Health Club Members and/or Health Club
Members outside of the Health Clubs. It is understood, agreed and stipulated that
[National Fitness] and all other parties are prohibited from providing
Personal Training or services substantially similar thereto at the Health
Clubs.
(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:
Existing, New and Specialty Memberships. Custom Built shall provide no more
than two (2) Personal Training sessions per month to all current Health Club
Members whose Membership Agreements with [National Fitness] include
personal training provisions without charge to the Health Club Member until all
outstanding sessions due the Health Club Member under the existing Membership
Agreement have been provided. Custom Built shall furthermore honor all existing
contracts to Health Club Members for separate personal training services to have
been provided by personal trainers and/or staff formerly under the employ of
[National Fitness], at no charge to the Health Club Member and/or [National
Fitness].
(Id. ¶ 13 (emphases added).) But in the very next sentence of Paragraph 13, the parties agreed to
the following:
Additionally, Custom Built shall provide up to five (5) Personal Training
sessions to new Health Club Members, who have entered into Membership
Agreements with [National Fitness] during the Term of this Agreement, at no
charge to the Health Club Member and/or [National Fitness].
(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.
The Contract Dispute
In early 2008, a disagreement developed. Custom Built contended that National Fitness
4

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,6 Custom Built
conditioned its payment of the license fee on National Fitness’s compliance with the Agreement.
Ultimately, Custom Built did not pay the facility license fees for November 2008, December
2008, or January 2009.
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
agreement or to develop an “exit plan” by offering to sell the business to National Fitness.
Custom Built asserts that it did not want to “rock the boat” with a new client but after months of
trying to get National Fitness to adhere to the terms of the Agreement as Custom Built interpreted
it, Custom Built refused to pay when it was not getting its benefit of the bargain. According to

6

National Fitness refers to Custom Built’s actions after December 1, 2006 as attempts to
modify or revise the Agreement, which, in turn, indicates Custom Built’s understanding that
National Fitness’s interpretation of the Agreement is correct. Custom Built disputes this.
5

Custom Built, it was under financial duress due National Fitness’s de facto in-house competition
with Custom Built. Custom Built says that it was unable to sell services to members who had
already paid National Fitness for the same services, and, on top of that, National Fitness expected
Custom Built to provide those services at no additional cost to the member of the club.
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.7 Custom Built
characterizes this move as a violation of the “No Hire Policy” in Paragraph 28 of the Agreement,
which dictates that, for one year after the Agreement expires, no contracting party shall “solicit,
contact, call upon or communicate with any employee or independent contractor of the other
party with a view to hire, employ, recruit or engage such employee or independent contractor to

7

Custom Built alleges that National Fitness carried out a pre-meditated plan to poach
Custom Built’s employees, but the admissible evidence before the court does not support that
contention. According to Custom Built, as early as April 2008, National Fitness’s managers
began asking Custom Built’s employees whether they were satisfied with their jobs, and began
making false statements about the stability of the employees’ jobs and Custom Built’s
relationship with National Fitness. Custom Built has offered limited admissible evidence of this,
focusing on one conversation in April 2008 between Lee Sloan and Rebecca Nuestadt, a National
Fitness aerobics instructor at the time and later a personal trainer for Custom Built. Apparently
Mr. Sloan asked Ms. Nuestadt how many aerobics classes she was teaching, whether she was
happy with her job, and whether she was staying busy. Without more admissible evidence,
Custom Built is not entitled to summary judgment on that issue.
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offer, sell, provide or perform Personal Training for or on behalf of [that] party . . . .”
(Agreement ¶ 28.)
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.)
The parties’ competing claims are now before the court on Custom Built’s Motion for
Partial Summary Judgment.
II. ANALYSIS
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 (1986)). The court then
7

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 (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.
A.

Breach of Contract
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. Amany 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.
8

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 fact-finder for resolution.” Bratton v.
Bratton, 136 S.W.3d 595, 601-02 (Tenn. 2004).
1.

Stephen Dow’s Liability as a Personal Guarantor

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:
THIS FACILITY LICENSE AGREEMENT (“Agreement”) is entered into this 3
day of November, 2006 (“Effective Date”) by and between National Fitness
Center, Inc. a Tennessee corporation (“NFC”), Court South Total Conditioning
Clubs, Inc., a Tennessee corporation (“Court South”) and Steve Dow, both
individually and as President of Atlanta Fitness, d/b/a Custom Built Personal
Training, a Nevada corporation (“Custom Built”).

9

(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:
WHEREAS Steve Dow, both Individually and as President of Custom
Built, personally guarantees the performance of Custom Built and stands ready,
willing and able to stand personally in the place of Custom Built to assure the
performance and obligations undertaken by Custom Built[.]
(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.
2.

Ambiguity in the Agreement

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:
Exclusive Rights. At all times during the Term, upon all terms, provisions and
conditions set forth herein, Custom Built shall have the exclusive right to sell
and perform Personal Training within the Health Clubs to Health Club Members
only, and Custom Built shall be absolutely prohibited from selling and/or
10

performing Personal Training services to non-Health Club Members and/or
Health Club Members outside of the Health Clubs. It is understood, agreed and
stipulated that [National Fitness] and all other parties are prohibited from
providing Personal Training or services substantially similar thereto at the Health
Clubs.
(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.
The first two sentences of Paragraph 13 are also clear and unambiguous. They address
outstanding personal training sessions that National Fitness owed to existing health club
members:
Custom Built shall provide no more than two (2) Personal Training sessions per
month to all current Health Club Members whose Membership Agreements with
NFC or Court South include personal training provisions without charge to the
Health Club Member until all outstanding sessions due the Health Club Member
under the existing Membership Agreement have been provided. Custom Built
shall furthermore honor all existing contracts to Health Club Members for
separate personal training services to have been provided by personal trainers
and/or staff formerly under the employ of NFC and/or Court South, at no charge
to the Health Club Member and/or NFC and Court South.
(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
11

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:
Custom Built shall provide up to five (5) Personal Training sessions to new
Health Club Members, who have entered into Membership Agreements with
[National Fitness] during the Term of this Agreement, at no charge to the
Health Club Member and/or [National Fitness].
(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

12

exclusive right to sell personal training sessions.8 And such a practice would be inconsistent
with the clear intent of the Transition Provision, under which Custom Built agreed to service a
finite number of personal training sessions for existing members.
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 preand 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

8

National Fitness attempts to downplay its continued selling of Lifestyle and Premium
memberships by describing its offer of personal training sessions to new members as an
“amenity.” (See Dep. of Lee Sloan (Docket No. 24-5) at 63-65.) Regardless of the word used to
describe the value added to an upgraded membership (in this case, complimentary personal
training sessions), National Fitness sold this “amenity” for a price above that of a general
membership while still requiring Custom Built to service those sessions at no charge (i.e.,
National Fitness kept the money received for the added “amenity”). That is selling personal
training sessions.
13

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.
3.

National Fitness’s Demand For Liquidated Damages

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”:
Except as otherwise provided for herein, no remedy conferred by any of the
specific provisions of this Agreement is intended to be exclusive of any other
remedy. Each and every remedy shall be cumulative and shall be in addition to
every other remedy given hereunder, now or hereafter existing at law or in equity,
by statute or otherwise. In the event of Default by Custom Built, [National
Fitness’s] remedies shall include, but not be limited to, recovery of liquidated
damages in the amount of $282,340.00, based upon six (6) months’ minimum
License Fee Amount averaged over the Initial Term from January 1, 2007, to
December 31, 2011. . . .
(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
14

(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.
Generally, the parties to a contract are free to agree upon liquidated damages and
upon other terms that may not seem desirable or pleasant to outside observers. In
that respect, courts should not interfere in that contract, but should carry out the
intentions of the parties and the terms bargained for in the contract, unless those
terms violate public policy.
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
15

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.
B.

Promissory Fraud
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 may be made knowingly, without belief in its truth, or recklessly without regard to
its truth or falsity); (3) Custom Built reasonably relied on the misrepresentation to its detriment;
and (4) the misrepresentation embodied “a promise of future action without the present intention
to carry out the promise.” Stacks v. Saunders, 812 S.W.2d 587, 592 (Tenn. Ct. App. 1990).9
Because there are questions of fact regarding the scope of the parties’ rights and

9

“Tennessee law does not require ambiguity when certain defects in the formation of the
agreement are demonstrated; parol evidence can be admitted to contradict or vary the terms or
enlarge or diminish the obligation of a written instrument upon a showing of fraud.” Shah v.
Racetrac Petroleum Co., 338 F.3d 557, 567 (6th Cir. 2003) (internal quotation marks and
citations omitted).
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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.
Tortious Interference With Business Relations
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
[made a] conscious decision . . . to incentivize the sale of personal training with
[Lifestyle and Premium] memberships. . . . [F]or at least two (2) months,
[National Fitness] misled customers into believing that Custom Built’s personal
training services (at $60 per session) were 141% more expensive than personal
training sold with [Lifestyle and Premium] members (at approximately $20 per
session). When viewed together with the fact that [National Fitness] expected
Custom Built to pay the License Fee and bear the cost of servicing all of these
“free” personal training sessions sold with [National Fitness’s] memberships after
December 1, 2006, [National Fitness’s] actions were more than improper, its
actions were calculated to injure Custom Built financially.
(Id. (emphasis in original).)
To succeed on its intentional interference claim, Custom Built must establish:
(1) an existing business relationship with specific third parties or a prospective
relationship with an identifiable class of third persons; (2) the defendant’s
knowledge of that relationship and not a mere awareness of the plaintiff’s
business dealings with others in general; (3) the defendant’s intent to cause the
breach or termination of the business relationship; (4) the defendant’s improper
motive or improper means; and finally, (5) damages resulting from the tortious
interference.
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,

17

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 to
injure the plaintiff.” Id. at 701 n.5. “Improper means” includes the following:
means that are illegal or independently tortious, such as violations of statutes,
regulations, or recognized common-law rules; violence, threats of intimidation,
bribery, unfounded litigation, fraud, misrepresentation or deceit, defamation,
duress, undue influence, misuse of inside or confidential information, or breach of
a fiduciary relationship; and those methods that violate an established standard of
a trade or profession, or otherwise involve unethical conduct, such as sharp
dealing, overreaching, or unfair competition.
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
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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.
D.

Custom Built’s Request for Punitive Damages
Custom Built asserts that National Fitness is liable for punitive damages based on the

following sets of acts:
[First, National Fitness] acted intentionally by unlawfully poaching Custom
Built’s workforce; impermissibly keeping and using Custom Built’s confidential
and proprietary information to Custom Built’s detriment; and knowingly acting as
a de facto, in-house competitor to Custom Built in violation of the Agreement’s
plain terms. [Second, National Fitness] acted fraudulently by entering into the
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Agreement with Custom Built with the foreknowledge that [National Fitness] had
no intention of honoring the Agreement at the time of the Agreement’s signing.
[Third, National Fitness] acted maliciously by (a) entering into a Partial
Settlement with Custom Built, then suing Custom Built even after [Custom Built]
had turned over its entire Knoxville draft [list of clients] worth $266,000; and (b)
maintaining its claim for punitive damages against Custom Built even after being
provided Tennessee case law describing why punitive damages in this case were
prohibited, and despite being given an opportunity to retract its claim for punitive
damages from its Complaint.
(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
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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.
III. CONCLUSION
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.

SO ORDERED this 9th day of October, 2012.
BY THE COURT:

TENA CAMPBELL
U.S. District Court Judge

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