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Free Speech Wins! Butterfly Fitness Ex-CEO Mark Golob, Lawyer Nikolaus Reed Lose Defamation Suit against Unhappy Franchisee

Judge cites the First Amendment of the U.S. Constitution in judgment. photo/bmm

UKIAH, Calif. – A writer and Web publisher of news that concerns franchise investors and owners has scored a substantial win for bloggers' rights of free speech and a free press. In Golob vs. Kelly, the former Butterfly Life CEO Mark Golob lost his $35 million lawsuit for damage to his reputation against Unhappy Franchisee publisher Sean Kelly. Golob must now pay the legal expenses incurred by UnhappyFranchisee.com for its own defense.

Golob, founder of franchising firm Butterfly Fitness, sued publisher Kelly for posts on Unhappy Franchisee that he was downright unhappy about. In February personal injury attorney Nikolaus Reed of San Francisco served Mr. Kelly of Pennsylvania with a $35 million lawsuit for defamation. Reed specifically objected to Kelly's blogging that Golob had a "checkered" past and a history of litigation.

"Mr. Kelly has made negligent misrepresentations about me," objected Golob to the court.

Butterfly Fitness' history of franchisee problems

Describing Golob as having a checkered past is quite mild when it comes to online public discourse on public tweets, blogs and forums, where comments often can be peppered with expletives that describe individuals, companies or brands. In his opinion, Judge Henderson stated the obvious for Americans: opinions are protected under the First Amendment. "The characterization on Golob's past as 'checkered' is clearly an opinion; statements of opinion are constitutionally protected," reminded the judge. For example, someone might publicly opine that the Butterfly companies are the worst investments in the world, or that Mr. Golob has been a terrible CEO.

Mark Golob had an issue with a statement of fact on Unhappy Franchisee that said he had a history of litigation. In America truth cannot be defamation. Purported fact, such as Mr. Bernie Madoff is a convicted felon and is spending time in jail, can only be grounds for defamation if it is provably false and written with malice.

In a court filing by attorney Nikolaus Reed, Mr. Golob wrote a mea culpa. He listed six litigations that he was involved in, but excused away these lawsuits because either he had not been convicted or had not known about the case. Golob declared to the court the statement of a "history of litigation" was factually in error. "I have never been found liable in any civil lawsuit in my entire life," explained Mr. Golob on why saying he had a history of litigation was false.

But the judge cited the fact that Mr. Golob had indeed been involved with litigations—class actions, bankruptcy petitions, a celebrity lawsuit.

Mark Golob has been concerned that the negative comments on the Web about his former franchising activities are interfering with his franchising career. In counterbalancing negative publicity on the Internet, he has shown himself adroit in its use. He has set up MarkGolob.com, which describes him as "the past CEO and Founder of Butterfly Life Franchise, Linda Evans Fitness" and past owner of Bodyworks Healthclubs. Mr. Golob has a Facebook page, a blog on Blogspot, and participates in other social media sites.

Actress Linda Evans sued Golob to get her name off his gyms. Many accusations of franchise owner abuse were made against his franchising firm Butterfly Life, a few of which were made public through lawsuits.

"Butterfly Life made material misrepresentations respecting the number and success of their franchisees over the course of several years, and long before 2009," says Bob Purvin, chairman of the California-based American Association of Franchisees and Dealers (AAFD). His organization looks after the interests of franchisees and helps organize franchise owners into a trade association by brand. Purvin had contacted California's regulators over Butterfly's abuses, troubles that he had reams of papers on.

In 2004 California slapped on a requirement that Butterfly collect franchisee fees not at the time of sale, but only after the new franchisee had gone through training. The problem was the state was concerned about insufficient capitalization by the franchisor and the ease with which it could become insolvent. "The commissioner has the authority to require franchisors to meet certain conditions prior to the collection of franchise fees if there is concern about the financial wherewithal of the franchisor," states Mark Leyes, director of communications for California's Department of Business Oversight, where the state's franchise regulators are based. "That was the case with Butterfly Fitness."

Called the Department of Corporations prior to July 2013, state franchisor regulators there found other problems with Butterfly Fitness. The regulators declared in March of 2009 that Golob and Butterfly Fitness "willfully made an untrue statement of material fact" in its franchise registration.

Blue MauMau threatened

Although Unhappy Franchisee was hit with the lawsuit, attorney Reed also wrote to this journal that he did not take kindly to his client being mentioned by visitor postings in an unflattering way. "My client considers your inaccurate posting to be portraying him in a false light," he wrote to Blue MauMau in March of this year. "I highly recommend that you remove all references to Mark Golob from your website immediately."

Golob's attorney Nikolaus Reed stated that his client objected that visitors mentioned the cease and desist order by the state, but they didn't write about the later withdrawal of the order. "I am surprised that you declined to mention in your statements on your website about my client that the State of California withdrew its order and finding soon after it was issued," wrote Reed to Blue MauMau.

But in reality, the state did not withdraw its finding of untruthful statements by Butterfly Fitness, only its cease and desist order for selling franchises. Director of communications Mark Leyes of California's Department of Business Oversight explains why. The complaint was from out of state. The regulators felt they were funded by California taxpayers to take care of their own, not Idaho franchise owners. "The offer and sale did not occur in California, so the Department had no jurisdiction and the order was withdrawn," stated Mark Leyes to Blue MauMau last month.

Although franchisor Butterfly Fitness and Mr. Mark Golob were both from California, the franchisee was not. The department had limited resources. "It should not have to matter that a complaint came from a franchisee or potential franchisee, but as a matter of our allocation of efforts and resources we concentrate on protecting California franchisees/consumers," explained Leyes. "That is why we may choose not to pursue a complaint from an out-of-state complainant."

The comments about Mark Golob were not removed.

The free speech ruling is good for franchising

Judge Richard J. Henderson ruled in favor of Unhappy Franchisee publisher Sean Kelly. "Defendant Kelly had prevailed on his motion and is entitled to the recovery of his attorney fees incurred in this motion," stated the judge. The judge also pointed out that "consumer watchdog" news sites such as Unhappy Franchisee receive particular protection under the law because of its public interest.

Attorney Peter Lagarias, who represented Kelly, comments, "What is refreshing to me and important is to be involved in a case that has constitutional issues and the great breadth and importance of the First Amendment to our country and what it means.  … As lawyers in franchise cases, we are often dealing with breaches of contract, trademark law and fraud. It is seldom that we get involved with First Amendment issues. They are very important to society as a whole."

"I've been representing franchisees for over 30 years and the problems with franchising are greatly underreported," states the Bay Area attorney. "Online news sites and bloggers such as Blue MauMau and Unhappy Franchisee are doing a great service in telling the story."

New York-based franchise attorney Paul Steinberg thinks this is a good win. The author and blogger has had to learn about free speech under the law the hard way since he writes candidly about misbehaving franchisors. He's even received threats of defamation lawsuits from franchisors. "Franchisor industry advocates constantly repeat the 'due diligence' mantra and say that information is out there which is sufficient to enable prospective purchasers to decide," says Steinberg. "But then franchisors sic their attorneys on people who write factually correct articles."

Regarding his victory, publisher Kelly explains: "If bad franchisors and their supporters try to bully and intimidate bloggers, Internet publishers, the press, and franchisee commenters into relinquishing their First Amendment rights, they risk not only an award of fees, costs, and potentially damages, but they will earn about a hundred times the negative press that they had in the first place."

Mr. Golob is expected to pay tens of thousands of dollars in attorney fees. This journal has asked over the past week for Golob's attorney Nikolaus Reed to respond on the ruling, but has yet to receive a reply.

Read Part 2: Freedom of the Press Includes Bloggers

Butterfly Fitness' Timetable of Trouble with California's Regulators


Related reading:

AttachmentSize
02.21.14 Golob v Kelly Summons.pdf3.02 MB
03.24.14 Golob Declaration.pdf592.03 KB
05.21.14 Judge Hendersons Ruling.pdf929.99 KB
04.02.14 Kelly Reply to Evidentiary Objections.pdf180.91 KB
03.26.14 Golob Objection.pdf235.5 KB
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