Because of the COVID-19 pandemic, nearly all entertainment and recreational facilities across the country have closed. These businesses often face a tough choice: (1) allow customers to cancel their accounts and risk losing customers to competitors once businesses reopen or (2) offer remote services and provide other credits, but risk an accusation (baseless or otherwise) that the business has breached its contracts with customers.

Regulation and Litigation for Subscription-Based Businesses Spurred by COVID-19

Attorneys general of Arizona, Maryland, Massachusetts, New Jersey, New York, Pennsylvania, Washington, D.C., and Washington state have issued demand letters insisting gyms stop charging customers and allow the cancellation of accounts without fees. Businesses in other states that continued to charge their customers received numerous consumer complaints and demand letters threatening litigation. Most concerning is that plaintiffs lawyers from coast to coast have already launched federal class action lawsuits against gyms, educational institutions, event promoters and ticket resellers.

These lawsuits allege that businesses that continued to collect membership fees despite the business being closed are liable under a wide variety of legal theories including: breach of contract, breach of express warranties, conversion, fraud, money had and received, negligence, negligent misrepresentation, and unjust enrichment. Furthermore, the California-specific lawsuits are also alleging breaches of California's Consumers Legal Remedies Act, California's Unfair Competition Law, California's False Advertising Law, and California's Health Studio Services Contract Law. California's Health Studio Services Contract Law specifically notes that a customer can cancel their membership when "the health studio eliminates or substantially reduces the scope of the facilities."

How to Protect Your Business   

To help mitigate these legal challenges, some potential business solutions to consider include:

• Giving patrons a "credit" on their account for fees charged while the business was closed.
• Allowing patrons to cancel membership without a cancellation fee.
• Allowing patrons to put membership or subscriptions on hold.
• Offering online fitness classes at a discounted rate.
• Offering patrons additional perks or discounts to use once businesses reopen.
• Asking patrons to donate to a nonprofit organization rather than refunds to canceled performances or events.

When setting a particular policy, businesses should consider the following key legal issues:

• What state law will apply? For example, New York, Virginia and Maryland prohibit health clubs from charging membership fees while the clubs remain closed for more than 30 days. Moreover, the California Health Studio Services Contract Law governs disclosure requirements, cancellation procedures, and other aspects of health studio services operating in California.
• Does the membership agreement include an arbitration or class action waiver provision?
• Does the membership agreement include a force majeure provision?
• Does the membership agreement determine whether the business is able to make a unilateral change to the contract—such as choosing to extend the customer membership period rather than refunding membership fees?

What's Next

Because of the unprecedented nature of the COVID-19 pandemic and the fact there are multiple ticket or subscription models there is no one way businesses should be addressing the situation. But it is certain that litigation against entertainment and recreational businesses will likely increase over the coming months.

If a business receives a demand letter from a consumer or plaintiffs counsel or is served with a complaint it should immediately contact counsel and review any applicable insurance policies. Unfortunately, most business interruption insurance policies do not cover COVID-19, but some claims may trigger other policies such as directors and officers coverage.

Kim Matthews serves as the vice president, general counsel and corporate secretary of Hot Topic. She has more than two decades of in-house legal experience in telecommunications, retail, franchise, compliance and regulatory matters for well-known domestic and international brands.

Joshua Briones is managing member of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo's Los Angeles office. Briones has served as lead defense counsel on over 500 alleged nationwide class actions in state and federal courts across the country.

Crystal Lopez is an associate in the firm's Los Angeles office whose practice focuses on class action defense, with an emphasis on consumer fraud, data privacy, marketing, accessibility, cybersecurity and compliance issues.

Adam B. Korn is an associate in the firm's Los Angeles office. His practice encompasses a wide range of business litigation and class action defense, with an emphasis on consumer fraud and products liability defense.