Anderson Holdings LLC v. CycleBar and SGDG - Complaint (Misleading Disclosures)
Anderson Holdings LLC v. CycleBar and SGDG - Complaint (Misleading Disclosures)
VERSUS 1:18-cv-131-HSO-JCG
CIVIL ACTION NO. _________________
COMPLAINT
COMES NOW, the Plaintiffs, and file this Complaint against the above named and
unnamed Defendants, and in support thereof would show unto the Court the following:
PARTIES
corporation with its principal place of business located at 11109 Channelside Drive, Gulfport,
Mississippi 39503.
Harrison County, Mississippi. Anderson Holdings and Ms. Suit are collectively referred to
company organized under the laws of the State of Ohio with its principal place of business
located in Cincinnati, Ohio. Cyclebar may be served with process through its registered agent,
Joseph Roda, located at 7720 Montgomery Road, Suite 200, Cincinnati, Ohio 45236, or
liability company organized under the laws of the State of Ohio with its principal place of
business located in Cincinnati, Ohio. St. Gregory may be served with process through its
registered agent, Jim Jagers, located at 7720 Montgomery Road, Suite 200, Cincinnati, Ohio
5. The true names and capacities of Defendants John Does 1-10 are at this time
unknown to Plaintiffs, who therefore bring this Complaint against such fictitious Defendants.
Plaintiffs reserve the right to seek leave of Court to amend this Complaint when said true names
6. This Honorable Court has jurisdiction over this matter pursuant to 28 U.S.C. §
1332, as complete diversity exists among the parties and the amount in controversy exceeds
Seventy-Five Thousand and 00/100 Dollars ($75,000), exclusive of interests and costs.
7. Venue is proper in this Honorable Court because the acts, omissions and
FACTUAL ALLEGATIONS
8. Cyclebar is a franchisor that offers and sells franchises throughout the United
States for the operation of a studio that offers indoor cycling classes under the CYCLEBAR®
prospective franchisees. St. Gregory and Cyclebar share many of the same officers and
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employees, and St. Gregory was at all material times acting as Cyclebar’s agent and authorized
10. Around July 2015, Defendants began soliciting Anderson for a prospective
Cyclebar franchise in Mississippi. During the course of their solicitations, Defendants had
extensive communications with Anderson in Mississippi, including but not limited to multiple
phone calls, emails and other correspondence sent to and from Anderson in Mississippi.
Mississippi which purportedly would or would not be profitable for a Cyclebar franchise.
12. Pursuant to the Fair Trade Commission Franchise Rule, 16 C.F.R. Parts 436 and
437 et seq. (the “FTC Rules”), franchisors such as Cyclebar are required to provide certain
itemized disclosures to prospective franchisees such as Anderson prior to offering and selling
13. Section 436.5 of the FTC Rules required Cyclebar to make certain disclosures in
its FDD provided to Anderson, including but not limited to requirements that Cyclebar:
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franchise.
regarding the amount of initial investment for a prospective Hattiesburg franchise, its purported
15. Around July 2015, Defendants provided Anderson with a Unit Economics
worksheet (the “Unit Economics”) separate and apart from the FDD. In the Unit Economics,
Defendants made several representations regarding the amount of initial investment for
Anderson’s prospective Mississippi franchise and its purported profitability, many of which were
16. Defendants further informed Anderson that the initial investment estimates should
be reduced for the small-market Hattiesburg location, and that the financial performance of the
franchise would be comparable to those contained in the FDD and Unit Economics.
6, 2015, Anderson and Cyclebar entered into a written franchise and development agreement (the
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18. A copy of the Franchise Agreement executed by Anderson, along with Cyclebar’s
20. The Franchise Agreement required that Cyclebar approve the site location for the
Hattiesburg franchise prior to Anderson entering into a commercial lease. Following Cyclebar’s
site approval, Anderson entered into a commercial lease in approximately June 2016.
21. Cyclebar required Anderson to use certain vendors during the course of
construction and build-out of the Hattiesburg studio location. For example, Cyclebar required
Anderson to utilize the Weitzman Group as a lease broker, Consolidated Development Services
(“CDS”) as a contractor for site improvements, and Platinum Audio Visual (“PAV”) for audio
technology. None of these vendors was disclosed in Cyclebar’s FDD provided to Anderson.
22. Upon information and belief, Cyclebar and/or its agents received kickbacks or
other material consideration from the Weitzman Group, CDS, PAV and/or other required
vendors for their roles in the site selection, build-out and furnishing of Anderson’s franchise.
23. Cyclebar required many extravagant and unnecessary site improvements during
the build-out of Anderson’s franchise. The total leasehold improvements for Anderson’s
franchise ended up far exceeding the amounts represented by Defendants that would be
necessary to open the Hattiesburg franchise in such a small market. In fact, Anderson’s total
leasehold improvements far exceeded even the “high” estimated amount of $225,000 for
leasehold improvements represented by Defendants in the FDD and Unit Economics and which
Defendants stated was only applicable to much larger markets than Hattiesburg.
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24. Numerous other initial expenditures represented by Defendants in the FDD and in
Anderson’s total initial investment was significantly greater than even the “high” estimate of
$599,300 represented by Cyclebar in its FDD provided to Anderson. This is despite Defendants
informing Anderson that the Hattiesburg franchise location would be on the “low” end relative to
25. Anderson opened the Hattiesburg Cyclebar franchise on or about October 10,
the Hattiesburg franchise, Anderson has suffered significant net losses each month of operation
26. At the time its FDD was provided to Anderson in July 2015, Cyclebar had been
offering franchises for a mere six (6) months, and only a few Cyclebar studios were even in
prospective franchisee to truthfully and accurately disclose financial projections and cost
beginning stages, Defendants represented several material facts to Anderson regarding the
amount of initial investment for a prospective Hattiesburg franchise, its purported profitability
and Cyclebar’s revenue from required suppliers. Many of these representations turned out to be
misleading and false, and were made with no reasonable basis or substantiation.
28. In the 2015 FDD and Unit Economics provided to Anderson, Defendants
misrepresented the total initial investment to be $257,150 to $599,300 for the Hattiesburg
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franchise. As stated in the FDD, this figure includes an estimated $75,000 to $225,000 for
leasehold improvements and is based entirely on one (1) Cyclebar studio in Cincinnati, Ohio that
had only been open for a few months prior to the issuance of the 2015 FDD.
29. Upon information and belief, Defendants also intentionally omitted initial
investment figures for the other existing Cyclebar studios in the 2015 FDD and Unit Economics
30. Defendants had no reasonable basis or substantiation for the initial investment
representations contained in the 2015 FDD and Unit Economics, which were also false and
misleading. In communications with Anderson independent from the FDD, Defendants further
misrepresented that the initial investment figures should be reduced and that Anderson’s
Hattiesburg franchise location would be on the “low” end of the initial investment figure.
31. In the 2015 FDD and Unit Economics provided to Anderson, Defendants
communications to Anderson separate from the FDD and Unit Economics, Defendants continued
32. Upon information and belief, Defendants also misrepresented and/or concealed
financial performance information of existing Cyclebar studios in the FDD and Unit Economics
33. In the 2015 FDD, Defendants misrepresented and/or concealed the compensation
that Cyclebar would receive from certain required vendors and suppliers for Anderson’s
franchise, including the Weitzman Group, CDS and PAV, among others. Defendants continued
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34. Cyclebar’s financial disclosures in FDD’s issued since Anderson executed the
Franchise Agreement are telling. In Cyclebar’s 2016 FDD, the estimated total initial investment
improvement increasing to between $139,400 and $434,000. These figures again increase in
Cyclebar’s 2017 FDD. Unlike the 2015 FDD, Cyclebar states that the updated figures are based
35. Since Anderson opened the Hattiesburg franchise, Cyclebar has come under new
ownership and management. Upon information and belief, many of the extravagant leasehold
improvements and build-outs required of Anderson are no longer required of new franchises, and
franchisees are no longer required to use certain vendors such as the Weitzman Group and CDS.
36. On April 17, 2018, the parties mediated this matter in Gulfport, Mississippi,
37. Anderson adopts and incorporates the allegations contained in each of the above
material facts regarding the amount of initial investment for Anderson’s prospective Hattiesburg
franchise, its purported profitability and Cyclebar’s revenue from required suppliers.
39. Defendants knew their representations and/or omissions were false, and intended
for Anderson to rely on such representations and/or omissions in entering the Franchise
Cyclebar franchise.
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and was not aware that Defendants’ representations and/or concealments were false. In relying
Franchise Agreement, perform site improvements and continue to do business with Defendants
concealments, Anderson would not have entered into the Franchise Agreement.
Defendants’ representations, but was unable to do so due to Defendants’ superior knowledge and
fraudulent conduct and concealment, as well as the lack of information independently available
to Anderson as a result of the Cyclebar franchise brand being in its early stages.
concealments, Anderson has suffered and will continue to suffer damages including, but not
limited to, all monetary amounts paid to Defendants pursuant to the Franchise Agreement and
43. Anderson adopts and incorporates the allegations contained in each of the above
material facts regarding the amount of initial investment for Anderson’s prospective Hattiesburg
franchise, its purported profitability and Cyclebar’s revenue from required suppliers.
45. In making such representations, Defendants failed to exercise the degree of care
and diligence that Anderson was entitled to expect of a reasonably competent franchisor in
Defendants’ position.
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and was not aware that Defendants’ representations and/or concealments were false. In relying
Franchise Agreement, perform site improvements and continue to do business with Defendants
concealments, Anderson would not have entered into the Franchise Agreement.
concealment, Anderson has suffered and will continue to suffer damages including, but not
limited to, all monetary amounts paid to Defendants pursuant to the Franchise Agreement and
48. Plaintiffs adopt and incorporate the allegations contained in each of the above
49. The Defendants were under a duty to exercise reasonable care and ordinary
50. The Defendants did breach their duty of care to Anderson through their
inaccurate, incomplete and/or misleading representations to Anderson, including but not limited
Cyclebar as a franchise;
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f. Other acts of negligence that will be shown during discovery in this case.
51. As a proximate cause of Defendants’ negligence, Anderson has suffered and will
continue to suffer damages including, but not limited to, all monetary amounts paid to
Defendants pursuant to the Franchise Agreement and Anderson’s continued net operating loss of
52. Anderson adopts and incorporates the allegations contained in each of the above
53. Anderson and Cyclebar did enter into a binding and lawful contract in executing
the Franchise Agreement included in Exhibit “A” to this Complaint, and all conditions precedent
54. Cyclebar did breach the Franchise Agreement through its inaccurate, incomplete
and/or misleading representations to Anderson, including but not limited to the following
particulars: (i) misrepresenting and/or concealing to Anderson the initial investment and
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financial projection of the Hattiesburg franchise; (ii) failing to disclose Cyclebar’s financial
arrangements with certain required vendors and suppliers which Cyclebar would benefit from;
and (iii) requiring extravagant and unnecessary leasehold improvements and site build-outs for
Anderson’s Cyclebar franchise which Cyclebar would gain pecuniary benefit from.
55. Cyclebar’s actions described herein further breached its implied duty of good
faith and fair dealing owed to Anderson under the Franchise Agreement.
56. As a proximate cause of Defendants’ breaches, Anderson has suffered and will
continue to suffer damages including, but not limited to, all monetary amounts paid to
Defendants pursuant to the Franchise Agreement and Anderson’s continued net operating loss of
57. Anderson adopts and incorporates the allegations contained in each of the above
58. Miss. Code Ann. § 75-24-55 makes it unlawful for Defendants to “represent
directly or by implication that prospective participants may or will earn any stated gross or net
amount, or represent in any manner, the past earnings of participants unless in fact the past
earnings or predicted gross or net amount represented are those of a substantial number of
participants in the community or geographical area in which the representations are made and
accurately reflect the earnings of those participants under circumstances similar to those of the
to whom this statute and Mississippi’s franchise laws are designed to protect.
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60. Defendants did violate this statute by making numerous representations and
Hattiesburg franchise, despite Defendants having never owned, operated or opened a Cyclebar or
other similar franchise in Mississippi. Specifically, Defendants made several false and
misleading financial performance representations in the FDD and Unit Economics provided to
Anderson, as well as during numerous other oral and written communications to Anderson prior
Anderson has suffered and will continue to suffer damages including, but not limited to, all
monetary amounts paid to Defendants pursuant to the Franchise Agreement and Anderson’s
62. Anderson adopts and incorporates the allegations contained in each of the above
conceal the true initial investment figures for Anderson’s franchise, its profitability and
Cyclebar’s financial arrangements with required vendors and suppliers. The purpose and
objective of the agreement to conspire was to ensure Anderson’s execution of the Franchise
Agreement and opening of a Hattiesburg franchise, which Defendants would profit from.
64. The over acts indicating the existence of a conspiracy by and among Defendants
are set forth herein, and include, but are not limited to, Defendants’ material misrepresentations,
concealments, violations of franchise law, and breaches with respect to the amount of initial
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investment for Anderson’s prospective Hattiesburg franchise, its purported profitability and
and will continue to suffer damages including, but not limited to, all monetary amounts paid to
Defendants pursuant to the Franchise Agreement and Anderson’s continued net operating loss of
66. Anderson adopts and incorporates the allegations contained in each of the above
67. Defendants, as sellers and brokers of a franchise under the laws of the State of
Ohio, are “sellers” and/or “brokers” of a “business opportunity plan” within the meaning of the
Ohio Business Opportunity Plans Act, Ohio R.C. §§ 1334.01 et seq. (the “Ohio Act”).
conduct described herein, Defendants did violate numerous provisions of the Ohio Act in their
and gross and nets profits without possessing sufficient data to substantiate
Defendants’ representations;
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disclosures required of Defendants in the Ohio Act and the FTC Rules;
e. Other provisions of the Ohio Act which will be shown during discovery in
this case.
69. Pursuant to R.C. § 1334.09(A), due to Defendants violations of the Ohio Act and
other conduct herein, Anderson is entitled to rescind the Franchise Agreement and recover all
sums paid to Defendants, including, but not limited to, all franchise fees, development fees, and
other sums paid pursuant to the Franchise Agreement, and Anderson is entitled to three (3) times
70. As a proximate cause of Defendants’ violations of the Ohio Act, Anderson has
suffered and will continue to suffer damages including, but not limited to, all monetary amounts
paid to Defendants pursuant to the Franchise Agreement and Anderson’s continued net operating
71. Anderson adopts and incorporates the allegations contained in each of the above
72. The FTC Rules required Cylcebar to make certain disclosures in the FDD
provided to Anderson, including, but not limited to: (a) truthfully and accurately represent the
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estimated amount of initial investment required for Anderson to open a Mississippi franchise; (b)
having a reasonable basis and written substantiation for any representations made with respect to
the prospective initial investment and financial performance of Anderson’s Mississippi franchise;
and (c) fully disclosing whether Cyclebar would receive revenue or other material consideration
for required purchases, supplies, leases, construction or other items during the course of
73. Miss. Code Ann. § 75-24-55 prohibits franchisors such as Defendants from
such as Anderson unless such representations or implications are based on a substantial number
74. Anderson is among the class of persons whom the FTC Rules and Miss. Code
Ann. § 75-24-55 are designed to protect and is entitled to be afforded their protections.
conduct described herein, Defendants did violate numerous provisions of Parts 436 and 437 of
the FTC Rules, including the financial disclosure requirements of 16 C.F.R. § 436.5, the
prohibitions on disseminating certain financial information in 16. C.F.R. § 436.9, and other
provisions of the FTC Rules which will be shown in discovery of this case. Through such
76. As a proximate cause of Defendants’ violations of the FTC Rules and Miss. Code
Ann. § 75-24-55, Anderson has suffered and will continue to suffer damages including, but not
limited to, all monetary amounts paid to Defendants pursuant to the Franchise Agreement and
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77. Anderson adopts and incorporates the allegations contained in each of the above
78. In addition to the other remedies for Defendants’ conduct set forth herein,
Anderson respectfully requests a declaratory judgment which rescinds the Franchise Agreement
and any ancillary contracts thereto between Anderson and Defendants, and which orders that
Defendants repay all sums paid by Anderson to Defendants pursuant to the Franchise Agreement
and ancillary contracts thereto, together with attorneys’ fees incurred by Anderson bringing this
79. Anderson adopts and incorporates the allegations contained in each of the above
conduct described herein, Defendants did violate numerous provisions of the Franchise
Agreement, the Ohio Act and various other statutory and common laws. Accordingly, Anderson
is entitled to recover its reasonable attorneys’ fees and costs incurred bringing this action
pursuant to Section 16.9 of the Franchise Agreement, R.C. § 1334.09(B) and/or other applicable
81. Anderson hereby demands the right to a trial by jury on all applicable counts
stated herein and to determine the amount of damages owed Anderson by Defendants.
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Leslie Anderson Suit respectfully requests that a judgment be entered against Defendants, jointly
and/or severally, for compensatory, incidental and consequential damages, and treble damages
fees and costs of this action, and pre-judgment and post-judgment interest on such amounts as
provided by law. Plaintiffs further request this Honorable Court enter a declaratory judgment in
favor of Plaintiffs as stated herein, in addition to any further relief this Honorable Court deems
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