NEWS BRIEFS

Media Arts has taken the position that all of its disputes with franchisees are subject to arbitration, said Dana Levitt, an attorney with Alschuler Grossman Stein & Klein LLP, a Los Angeles firm that is representing Media Arts. So far, the court has consistently sided with Media Arts. Cote's attempt to obtain a preliminary injunction to prevent his termination as a franchisor was denied by the court, and Media Arts' claims for unpaid franchise fees from Cote is now in arbitration, according to Levitt. The other two Michigan plaintiffs, David White and Brian Wittman, also were ordered to arbitration. 'These are a group of dealers with difficult fact situations ' and I believe we will continue to prevail,' said Levitt.

Media Arts has struggled in the past two years. In fiscal 2002, Media Arts lost $1.1 million on revenue of $103 million. Revenues were down 50% in the first quarter of 2003 versus a year before, and the company lost $2.6 million in the quarter.

Becoming a 'multi-channel distributor,' which includes selling through mass-market retailers as well as its branded stores, is one of Media Arts' stated strategies for reversing its losses. However, that multi-channel strategy infuriates the Michigan dealers. 'The big retailers [such as Target stores] are selling lithographs for less than the dealers can even buy it wholesale,' said Yatooma. 'And the dealers are prohibited by the terms of their contracts from reducing their prices to compete.'

The dealers also allege that they 'have been duped into opening more stores, more rapidly than is prudent' by the advice of 'independent' business consultants who have told them that they will be highly profitable, said Yatooma. According to Yatooma, the independent consultants are anything but independent. They are contracted for the work through Media Arts, and they have strong incentives to encourage business expansion in order to maintain their contracts. The two consulting firms are J.P. Consulting and Pebble Beach Financial.

'A number of the dealers who dropped out had relationships that were testy. We now have an understanding of the problems ' and we are ready to push forward,' said Tony Thomopoulos, CEO and chairman of the board, in a conference call when the company announced its first-quarter financial results in May 2003. He added that the company has about 12 dealers with whom it has had problems over the course of the past two to three years, and nine of those are in arbitration. 'Those are dealers whose receivables were high, and we had to take action against them,' he said.

How a Health Club Franchisee Changed the Law

Curves International, the franchisor of Curves for Women fitness centers, and its franchisees literally changed Wisconsin law to accommodate the franchise's unique operational structure. The success of Curves illustrates the benefits that can be achieved when franchisors and franchisees work together and, in this case, inspire their customers, too.

On May 19, Wisconsin Gov. Jim Doyle signed a bill that created an exemption in Wisconsin's 'public accommodation' law for health clubs. This exemption enables Curves to stick to its business model of women-only health clubs and sidesteps a legal challenge filed by a male health club owner several years ago.

'In Wisconsin any place that was open to the public had to let everyone in,' said Roger Schmidt, chief legal counsel for Waco, Texas-based Curves. 'For example, the club that held the Masters Golf Tournament could not operate like that in Wisconsin.'

However, the public accommodation requirement was a problem for Curves, which markets itself as a non-threatening place for women to exercise. Its 5,400-plus franchises (approximately 240 in Wisconsin) offer women aerobics workouts and weight-resistance machines, without the testosterone-laden atmosphere of a traditional weight room. So when a competitor to a Wisconsin Curves franchise decided to sue under Wisconsin's public accommodation law, Curves swung into action.

'We went to our franchisees in Wisconsin, recruited a few of them, and helped them get started with this bill,' said Schmidt. 'We funded the initial work on the [legislative] language, and we got them a lobbyist. Then we turned it over to them, and they did an excellent job.'

The franchisees buttonholed legislators and explained their case. Backing the franchisees were the 70,000 to 80,000 women who are Curves customers in Wisconsin. 'Our customers are a potent force, and we were able to target state legislators who won by less than 1,000 votes,' said Schmidt.

Curves customers and franchise operators made it a health issue, rather than a discrimination issue ' and the legislature and governor were very receptive. 'I believe that government should do everything we can to encourage physical fitness, and if this bill can help encourage women to lead healthy lives and to exercise by offering a supportive environment, then it deserves our support,' Gov. Doyle said at the signing ceremony.

Curves modeled the bill that the Wisconsin legislature passed on legislation in Massachusetts, which passed a health club law in 1998. Other states, such as Alaska and Illinois, have passed similar laws. 'Massachusetts has been pretty visionary in how it wrote a statute to prevention discrimination, and it found a way to carve out a place for health clubs,' Schmidt said. 'We worked with the Massachusetts attorney general's office to make sure we understood how to write this bill.'

Schmidt lists the following as lessons that franchisors can apply to their own situations in which a change in state law would be desirable:

• Work with your franchisees right from the start. They are the local entrepreneurs with the most at stake.
• Make it a high-profile effort. Curves International CEO Gary Heavin made several personal appearances in Wisconsin, both with legislators and with franchisees.
• Understand the legislative process. Curves not only hired a well-connected Wisconsin lobbyist, but it contacted the Massachusetts attorney general's office to make sure its bill would be constitutional.
• Involve your customers, if possible. The devoted, enthusiastic members of Curves kept the focus on public health and kept the pressure on local legislators.

Media Arts Franchisees Making Little Headway in Lawsuits

Media Arts, Inc., is successfully fending off lawsuits filed by several of its dealers because the company allegedly flooded the market with low-cost reproductions of paintings that were supposed to be the exclusive domain of its retail-dealer franchise network. Media Arts is the marketing arm for the works of painter Thomas Kinkade, a producer of popular, affordable artwork.

Norman Yatooma & Associates PC (Birmingham, MI) has filed lawsuits in Wayne County Circuit Court on behalf of three Michigan dealers against Media Arts and is seeking class action certification. 'Jim Cote, the elected chairman of the Media Arts Signature Dealers Council is the named plaintiff in the class action lawsuit. He is the elected chairman of the dealers nationwide but was removed from his position by Media Arts when he filed a lawsuit,' said Norman Yatooma. 'I think that what he does will influence many of the other dealers across the country.'

Media Arts has taken the position that all of its disputes with franchisees are subject to arbitration, said Dana Levitt, an attorney with Alschuler Grossman Stein & Klein LLP, a Los Angeles firm that is representing Media Arts. So far, the court has consistently sided with Media Arts. Cote's attempt to obtain a preliminary injunction to prevent his termination as a franchisor was denied by the court, and Media Arts' claims for unpaid franchise fees from Cote is now in arbitration, according to Levitt. The other two Michigan plaintiffs, David White and Brian Wittman, also were ordered to arbitration. 'These are a group of dealers with difficult fact situations ' and I believe we will continue to prevail,' said Levitt.

Media Arts has struggled in the past two years. In fiscal 2002, Media Arts lost $1.1 million on revenue of $103 million. Revenues were down 50% in the first quarter of 2003 versus a year before, and the company lost $2.6 million in the quarter.

Becoming a 'multi-channel distributor,' which includes selling through mass-market retailers as well as its branded stores, is one of Media Arts' stated strategies for reversing its losses. However, that multi-channel strategy infuriates the Michigan dealers. 'The big retailers [such as Target stores] are selling lithographs for less than the dealers can even buy it wholesale,' said Yatooma. 'And the dealers are prohibited by the terms of their contracts from reducing their prices to compete.'

The dealers also allege that they 'have been duped into opening more stores, more rapidly than is prudent' by the advice of 'independent' business consultants who have told them that they will be highly profitable, said Yatooma. According to Yatooma, the independent consultants are anything but independent. They are contracted for the work through Media Arts, and they have strong incentives to encourage business expansion in order to maintain their contracts. The two consulting firms are J.P. Consulting and Pebble Beach Financial.

'A number of the dealers who dropped out had relationships that were testy. We now have an understanding of the problems ' and we are ready to push forward,' said Tony Thomopoulos, CEO and chairman of the board, in a conference call when the company announced its first-quarter financial results in May 2003. He added that the company has about 12 dealers with whom it has had problems over the course of the past two to three years, and nine of those are in arbitration. 'Those are dealers whose receivables were high, and we had to take action against them,' he said.

How a Health Club Franchisee Changed the Law

Curves International, the franchisor of Curves for Women fitness centers, and its franchisees literally changed Wisconsin law to accommodate the franchise's unique operational structure. The success of Curves illustrates the benefits that can be achieved when franchisors and franchisees work together and, in this case, inspire their customers, too.

On May 19, Wisconsin Gov. Jim Doyle signed a bill that created an exemption in Wisconsin's 'public accommodation' law for health clubs. This exemption enables Curves to stick to its business model of women-only health clubs and sidesteps a legal challenge filed by a male health club owner several years ago.

'In Wisconsin any place that was open to the public had to let everyone in,' said Roger Schmidt, chief legal counsel for Waco, Texas-based Curves. 'For example, the club that held the Masters Golf Tournament could not operate like that in Wisconsin.'

However, the public accommodation requirement was a problem for Curves, which markets itself as a non-threatening place for women to exercise. Its 5,400-plus franchises (approximately 240 in Wisconsin) offer women aerobics workouts and weight-resistance machines, without the testosterone-laden atmosphere of a traditional weight room. So when a competitor to a Wisconsin Curves franchise decided to sue under Wisconsin's public accommodation law, Curves swung into action.

'We went to our franchisees in Wisconsin, recruited a few of them, and helped them get started with this bill,' said Schmidt. 'We funded the initial work on the [legislative] language, and we got them a lobbyist. Then we turned it over to them, and they did an excellent job.'

The franchisees buttonholed legislators and explained their case. Backing the franchisees were the 70,000 to 80,000 women who are Curves customers in Wisconsin. 'Our customers are a potent force, and we were able to target state legislators who won by less than 1,000 votes,' said Schmidt.

Curves customers and franchise operators made it a health issue, rather than a discrimination issue ' and the legislature and governor were very receptive. 'I believe that government should do everything we can to encourage physical fitness, and if this bill can help encourage women to lead healthy lives and to exercise by offering a supportive environment, then it deserves our support,' Gov. Doyle said at the signing ceremony.

Curves modeled the bill that the Wisconsin legislature passed on legislation in Massachusetts, which passed a health club law in 1998. Other states, such as Alaska and Illinois, have passed similar laws. 'Massachusetts has been pretty visionary in how it wrote a statute to prevention discrimination, and it found a way to carve out a place for health clubs,' Schmidt said. 'We worked with the Massachusetts attorney general's office to make sure we understood how to write this bill.'

Schmidt lists the following as lessons that franchisors can apply to their own situations in which a change in state law would be desirable:

• Work with your franchisees right from the start. They are the local entrepreneurs with the most at stake.
• Make it a high-profile effort. Curves International CEO Gary Heavin made several personal appearances in Wisconsin, both with legislators and with franchisees.
• Understand the legislative process. Curves not only hired a well-connected Wisconsin lobbyist, but it contacted the Massachusetts attorney general's office to make sure its bill would be constitutional.
• Involve your customers, if possible. The devoted, enthusiastic members of Curves kept the focus on public health and kept the pressure on local legislators.