Santa Monica to Consider Health Club Refund Law

The Santa Monica City Council next month will consider a law that would force health club operators to return members’ fees if the businesses close.

The ordinance would be the first of its kind in California, said Jeffrey W. Holtzman, consumer affairs attorney for the city.

The city attorney’s office last week completed a draft of the ordinance, proposed by the council last year to deal with a rash of fitness club closures that left hundreds of members seeking refunds for the unused portions of their annual fees. Typical claims range from $70 to $150.

During the last three years, the city has received 1,500 such complaints, Holtzman said.

“Basically what we’re looking at is the business’ capability to provide the services that they promise to provide,” he said.

Unrealistic Rates

According to a report prepared by the city attorney’s office, most of the failed clubs were under-financed and offered unrealistic bargain rates to attract members.

The ordinance would require health club owners to obtain a bond for $75,000 or 5% of their gross income for the preceding year, whichever is greater, to pay back members’ fees if the businesses fail.

Exemptions would be granted if the club is a tax-exempt organization, if it charges monthly instead of annual membership fees or if it has been in business for five years before passage of the ordinance.

Applicants for health club permits can also avoid the bond requirement by proving that they have been in business continuously for three years and have assets exceeding $1 million. New owners will be required to honor existing memberships if they take over a failed operation.

Owners would have 30 days after closing to reimburse their members before the city uses proceeds from the bonds.

City officials received 601 complaints after the December, 1985, closure of the Beverly Hills Workout club. The following month, the city filed a lawsuit charging that the 14th Street club used fraud, false advertising and unfair business practices to attract members.

City Awarded $70,000

The club’s owners filed for bankruptcy shortly after the city filed its lawsuit seeking $350,000 in civil penalties and restitution for membership fees. A federal bankruptcy court has awarded the city $70,000, Holtzman said. The city plans to use whatever money it receives to help reimburse the former members of the club.

In an earlier case, the city received $10,500 in restitution from owners of Shirle’s fitness club, which closed in July, 1984. The owners also paid $13,900 in civil penalties and legal costs.

The Santa Monica cases reflect a growing problem facing the increasingly competitive fitness industry, said Richard A. Elbrecht, supervising attorney for legal services at the California Department of Consumer Affairs. He said many clubs try to enter the lucrative market by offering low annual membership fees and spending the money on intensive advertising efforts.

“They get a lot of money up front,” he said. “Then they spend it to get even more money up front. There’s a tendency for it to fizzle out.”

Elbrecht advised consumers to join clubs that require monthly rather than annual payments to avoid losing large amounts of money if the business goes under. “Consumers should be encouraged to use the pay-as-you-go programs if they can afford them,” he said. “It turns out that those clubs don’t close.”