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24 Hour Fitness USA, Inc. v. Bally Total Fitness Holding Corp.

October 21, 2008

24 HOUR FITNESS USA, INC., A CALIFORNIA CORPORATION, PLAINTIFF,
v.
BALLY TOTAL FITNESS HOLDING CORP., A DELAWARE CORPORATION, AND MICHAEL SHEEHAN, AN INDIVIDUAL, DEFENDANTS.



The opinion of the court was delivered by: Judge Joan H. Lefkow

MEMORANDUM OPINION AND ORDER

Plaintiff, 24 Hour Fitness USA, Inc. ("24 Hour Fitness" or "24 Hour USA"), has brought this action against defendants, Bally Total Fitness Holding Corp. ("Bally") and Michael Sheehan (collectively, "defendants"), alleging threatened or actual misappropriation of trade secrets pursuant to the Illinois Trade Secrets Act, 765 Ill. Comp. Stat. 1065/1 et seq., and breach of fiduciary duty. These allegations arise out of Sheehan's June 23, 2008 resignation as Chief Operating Officer (COO) of 24 Hour Fitness and Bally's announcement the next day that it was hiring Sheehan to be its new Chief Executive Officer (CEO). Before the court is defendants' motion to dismiss the action for lack of subject matter jurisdiction pursuant to Rule 12(b)(1) of the Federal Rules of Civil Procedure. Bally and Mr. Sheehan contend that 24 Hour Fitness has failed to establish diversity of citizenship as required by 28 U.S.C. § 1332. For the following reasons, defendants' motion [#30] is granted.

LEGAL STANDARD

A court may entertain a motion to dismiss for lack of subject matter jurisdiction under Federal Rule of Civil Procedure 12(b)(1) at any time. Fed. R. Civ. P. 12(h)(3); see also Cook v. Winfrey, 141 F.3d 322, 326 n.3 (7th Cir. 1998). Plaintiff alleges that this court has subject matter jurisdiction pursuant to 28 U.S.C. § 1332, which applies to suits between parties who are citizens of different states. 28 U.S.C. § 1332(a)(1); Nuclear Engineering Co. v. Scott, 660 F.2d 241, 250 (7th Cir. 1981). When suing multiple defendants in a diversity action, a plaintiff "must meet the requirements of the diversity statute for each defendant or face dismissal." Newman-Green. Inc. v. Alfonzo-Larrain, 490 U.S. 826, 829, 109 S.Ct. 2218, 104 L.Ed. 2d 893 (1989) (citing Strawbridge v. Curtiss, 3 Cranch 267, 2 L.Ed. 435 (1806)). This jurisdictional burden rests with the party alleging diversity, which must support its allegations "by competent proof." Thomson v. Gaskill, 315 U.S. 442, 446, 62 S.Ct. 673, 86 L.Ed. 951 (1942); see also Chase v. Shop 'N Save Warehouse Foods, Inc., 110 F.3d 424, 427 (7th Cir. 1997) ("[T]he party seeking to invoke federal diversity jurisdiction . . . bears the burden of demonstrating that the complete diversity . . . requirement[] [is] met."). The Seventh Circuit has interpreted this requirement as a preponderance of the evidence standard. See NLFC, Inc. v. Devcom Mid-America, Inc., 45 F.3d 231, 237 (7th Cir. 1995); Gould v. Artisoft, Inc. 1 F.3d 544, 547 (7th Cir. 1993); Shaw v. Dow Brands, Inc., 994 F.2d 364, 366 n.2 (7th Cir. 1993).

BACKGROUND

Michael Sheehan was an executive at 24 Hour Fitness, a California corporation with its principal place of business in California, for nearly eight years, eventually rising to the title of COO. His tenure with the company came to an end on June 23, 2008, however, after he informed his colleagues that he was resigning, effective immediately, in order to accept the CEO position at Bally. Bally, like 24 Hour Fitness, operates a chain of fitness centers and, according to the amended complaint, is a "direct, head-to-head competitor of 24 Hour Fitness." Am. Compl. ¶ 17. 24 Hour Fitness alleges that in hiring Mr. Sheehan, Bally not only took on a new CEO but also gained access to 24 Hour Fitness's proprietary trade secrets and confidential information.

Accordingly, on June 27, four days after Mr. Sheehan's departure from 24 Hour Fitness and three days after Bally issued a press release announcing his hire, 24 Hour Fitness filed a lawsuit and an ex parte application for a temporary restraining order in the Contra Costa County, California Superior Court. Those proceedings had a markedly similar, though not identical, character to the present action. To begin with, the complaint in the California case named an additional plaintiff, 24 Hour Fitness Worldwide, Inc. ("24 Hour Worldwide"), the corporate parent of 24 Hour USA, the sole plaintiff (at present) in this case. Also, the California complaint named as defendants "Michael Sheehan and Does 1-100, inclusive," but not Bally. In addition, the complaint alleged five counts, two of which (misappropriation of trade secrets and unfair business practices) were premised on California statutes, and two of which (breach of employment agreement and breach of shareholder agreement) arose exclusively from Sheehan's contractual arrangements with 24 Hour USA and 24 Hour Worldwide; the fifth count merely asserted a general claim for injunctive relief, incorporating by reference the previous allegations in the complaint. Finally, and most apparently, 24 Hour USA and 24 Hour Worldwide filed the previous action in a California forum, premised it on California statutory and common law causes of action, and did not reference or rely on either Illinois law or 28 U.S.C. § 1332.

The suit's presence in California, however, was fleeting. On June 30, the California court denied the plaintiffs' application for a temporary restraining order and set a July 15 hearing date for their preliminary injunction request. A week later, on July 7, the plaintiffs voluntarily dismissed the California case without prejudice. On the same day, 24 Hour Fitness USA and 24 Hour Fitness Worldwide filed the present two-count action against both Mr. Sheehan and Bally in this court-apparently overlooking the lack of diversity (though it was apparent on the face of their complaint) in that both 24 Hour Fitness Worldwide and Bally were incorporated in the state of Delaware. A day later, 24 Hour Fitness USA filed an amended complaint in which 24 Hour Fitness Worldwide was not named as a plaintiff and, consistent with the plaintiff's now more-plausible reliance on 28 U.S.C. § 1332, Mr. Sheehan was, for the first time, alleged to be a citizen of Illinois.*fn1

In the meantime, Mr. Sheehan prepared to take the helm at Bally. On June 20, three days prior to notifying 24 Hour Fitness that he was leaving the company, Mr. Sheehan signed an employment agreement with Bally in which he agreed to move his "permanent residence" to the Chicago area by July 30, 2008.*fn2 Pl.'s Resp., Ex. B, at 3. The contract also rendered him "eligible for . . . relocation benefits," including paid trips for himself and his wife "for home visits and/or house hunting trips in the Chicago area" and 90 days of corporate housing during the time period before he "relocated [his] household to a local residence." Id. Shortly after announcing his resignation from 24 Hour Fitness, Sheehan began flying to Chicago-traveling alone on each trip-to commence employment with Bally and stayed at a local hotel for three nights before returning to California and his family. He continued this practice, traveling alone to Chicago during the week (staying at the same hotel during each trip) and returning to his family and his unsold California home on weekends, at least through his July 22 deposition. Also, on July 23, Sheehan and his wife put their San Ramon, California house up for sale.*fn3

On July 24, defendants filed this motion to dismiss for lack of subject matter jurisdiction. They argue that Sheehan is, like 24 Hour Fitness USA, a California citizen for diversity purposes. Defendants also argue, alternatively, that 24 Hour Fitness Worldwide is, pursuant to Rule 19 of the Federal Rules of Civil Procedure, a necessary party to this litigation and that the suit must therefore be dismissed due to the shared Delaware citizenship of 24 Hour Fitness Worldwide and Bally.

DISCUSSION

In determining citizenship for purposes of diversity jurisdiction, courts look to the operative facts at the time the action was filed. See Smith v. Sperling, 354 U.S. 91, 93 n.1, 77 S.Ct. 1112, 1 L.Ed. 2d 1205 (1957) ("It is quite clear, that the jurisdiction of the Court depends upon the state of things at the time of the action brought . . . .") (internal quotation marks and citations omitted); Johnson v. Wattenbarger, 361 F.3d 991, 993 (7th Cir. 2004) ("Whether § 1332 supplies subject-matter jurisdiction must be ascertained at the outset; events after the suit begins do not affect the diversity jurisdiction."). "[W]here evidence pertinent to subject matter jurisdiction has been submitted . . . 'the district court may properly look beyond the jurisdictional allegations of the complaint . . . to determine whether in fact subject matter jurisdiction exists.'" Sapperstein v. Hager, 188 F.3d 852, 855 (7th Cir. 1999) (quoting United Transp. Union v. Gateway W. Ry. Co., 78 F.3d 1208, 1210 (7th Cir. 1996)). Once a defendant proffers evidence that casts doubt on a court's subject matter jurisdiction, "the presumption of correctness that we accord to a complaint's allegations falls away." Id. at 856; see also Commodity Trend Serv., Inc. v. Commodity Futures Trading Comm'n, 149 F.3d 679, 685 (7th Cir. 1998) ("On a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(1), the court is not bound to accept the truth of the allegations in the complaint.").

The Seventh Circuit has established that "[i]n federal law citizenship means domicile, not residence," America's Best Inns, Inc. v. Best Inns of Abilene, L.P., 980 F.2d 1072, 1074 (7th Cir. 1992) (per curiam), and "domicile is the place one intends to remain," Dakuras v. Edwards, 312 F.3d 256, 258 (7th Cir. 2002). In determining an individual's domicile, courts looks both to her physical presence in a state and her intent to remain there. Texas v. Florida, 306 U.S. 398, 424, 59 S.Ct. 563, 83 L.Ed. 817 (1939); Denlinger v. Brennan, 87 F.3d 214, 216 (7th Cir. 1996). Intent for diversity purposes has been described as "a state of mind which must be evaluated through the circumstantial evidence of a person's manifested conduct." Sadat v. Mertes, 615 F.2d 1176, 1181 (7th Cir. 1980) (internal quotation marks omitted). "[S]tatements of intent are entitled to little weight when in conflict with the facts." Id. (internal quotation marks and citations omitted). While no individual factor is dispositive in determining domicile, courts rely on a variety of factors in their analyses, including current residence, location of belongings and personal property, voter registration, driver's license and vehicle registrations, place of employment, presence of family members, and extent of social involvement in the surrounding community, among others. See, e.g., Sadat, 615 F.2d at 1181 & n.5 ("A party's voting practice . . . is only one of the factors considered in determining that person's domicile. No single factor is conclusive."); Gravdahl v. Conwell, No. 00 C 0579, 2002 WL 398599, at *1 (N.D. Ill. Mar. 14, 2002). Furthermore, "it is well-established that in ascertaining intent to remain for purposes of establishing domicile a party's entire course of conduct may be taken into account. It is not enough to simply establish physical presence, but in order to turn residence in fact into a domicile in law the party must show, by some objective act, his intention to maintain the residency indefinitely." Perry v. Pogemiller, 16 F.3d 138, 140 (7th Cir. 1993) (internal citations omitted).

Courts have created a presumption that favors an individual's old, established domicile over a newly-acquired one. See, e.g., Lew v. Moss, 797 F.2d 747, 751 (9th Cir. 1986) (citing Holmes v. Sopuch, 639 F.2d 431, 434 (8th Cir.1981); Hawes v. Club Ecuestre El Comandante, 598 F.2d 698, 701 (1st Cir. 1979); Janzen v. Goos, 302 F.2d 421, 425 (8th Cir. 1962); Stine v. Moore, 213 F.2d 446, 447 (5th Cir. 1954)); Zafar v. Matlock, No. 92 C 5807, 1992 WL 370171, ...


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