CHAPTER 395

FORMERLY

HOUSE SUBSTITUTE NO. I

FOR

HOUSE BILL NO.222

AN ACT TO AMEND TITLE 6, DELAWARE CODE TO PROVIDE SAFEGUARDS FOR HEALTH SPA MEMBERS.

BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF DELAWARE (three-fifths of all members elected to each House thereof concurring therein):

Section 1. Amend Title 6, Delaware Code by adding a new Chapter thereto which shall read as follows:

"Chapter 42. Health Spa Regulation. §4201. Statement of Purpose.

The purpose of this Chapter is to safeguard the public Interest against fraud, deceit and financial hardship, and to foster and encourage competition, fair dealing and prosperity in the field of health spa services by prohibiting false and misleading advertising, and dishonest, deceptive and unscrupulous practices by which the public has

been Injured in connection with contracts for health spa services. This chapter shall be liberally construed and applied to promote Its underlying purposes and policies.

§4202. Definitions.

As used in this Chapter:

'Business day' means any day except a Sunday or legal holiday.

'Buyer' means a natural person who enters Into a health spa contract.

'Contract price' means the sum of the Initiation fee, If any, and all fees except Interest required by the health spa contract.

'Director' means the Director of the Division of Consumer Affairs, or a member of his staff to whom the Director may delegate his duties under this Chapter.

'Health spa' includes any person, firm, corporation, organization, club or association engaged in the sale of memberships in a program of physical exercise, physical fitness, weight control, or figure reduction, which offers the use of one or more of the following: a whirlpool, weight lifting room, steam room, exercising room, or exercising or weight loss device. The term 'health spa' shall not include the following:

(I) bona flde nonprofit organizations, including, but not limited to, the Young Men's Christian Association, Young Women's Christian Association, or similar organizations whose functions as health spas are only incidental to their overall functions and purposes;

(2) any private club owned and operated by Its members;

(1) any organization primarily operated for the purpose of teaching a particular form of self-defense such as judo or karate;

(1) any facility owned or operated by the United States;

(1) any facility owned or operated by the State of Delaware or any of Its political subdivisions, and

(1) any nonprofit public or private school, college or university.

'Health spa contract' means a written agreement whereby the buyer of health spa services purchases or becomes obligated to purchase, health spa services to be rendered over a period longer than three months, and the seller of health spa services receives payment to cover a period more than three months.

'Health spa services' means and includes services, privileges, or rights offered For sale or provided by a health spa.

'Initiation fee' means a nonrecurring fee charged at or near the beginning of a

health spa membership, and includes all fees or charges not a part of the monthly fee.

'Pre-opening contract' means a health spa contract for services or the use of facilities made prior to the day on which the service or facilities of the health spa are fully open and available for regular use by the members.

§4203. Registration.

(a) It shall be unlawful for any health spa to offer, advertise, or execute or cause to be executed by the buyer any health spa contract In this State unless the health spa at the time of the offer, advertisement, sale or execution of a health spa contract has been properly registered with the Director.

(b) Prior to advertising or selling pre-opening contracts, every health spa shall register with the Director and shall notify the Director of the proposed location of the health spa for which pre-opening contracts will be solicited.

(I) The registration shall include the address, ownership, directors, corporate officers, and parent corporation, If any, date of first sales and date of first opening of the health spa;

(2) The registration shall be renewed annually; and

(3) Each separate location where health spa services are offered shall be considered a separate health spa and shall file a separate registration even though the separate locations are owned or operated by the same owner, unless the spa offers all members fully interchangeable, comparable services at a separate location within a fifteen mile radius.

(c) A bond or letter of credit In the amount of $50,000 shall be posted by each health spa prior to advertising or selling pre-opening contracts. The bond with corporate surety from a company authorized to transact business In the State of Delaware or the letter of credit from a bank insured by the Federal Deposit Insurance Corporation shall be filed and maintained with the Director. After a health spa has opened its facilities and been In operation for ninety days, the health spa may make application to the Director to cancel or terminate the bond or letter of credit. Unless the health spa has been cited for a violation of this Chapter pursuant to the authority granted to the Director by 29 Delaware Code 8612 or to the Attorney General by Section 4218 of this Chapter, the Director shall give his consent to terminate the bond or letter of credit within thirty days after receiving the health spa's application.

(d) Upon Its application to terminate the bond or letter of credit, the health spa shall pay all fees in accordance with the schedule set forth by Section 4204 of the Chapter.

(e) The bond or letter of credit required by this Section shall be In favor of the State for the benefit of:

(I) any buyer injured by having paid money for a health spa contract In a facIllty which falls to open within nine months after the date upon which the buyer and the health spa entered Into a contract or which substantially fails to provide the services described In the health spa contract;

(2) any buyer Injured as a result of a violation of this Chapter. §4204. Health Spa Guaranty Fund.

(a) The Director of the Division of Consumer Affairs shall establish and maintain the Health Spa Guaranty Fund In accordance with the Provisions of this section.

(b) Upon registering with the Director pursuant to Section 4203 and upon renewing Its registration annually, each health spa shall pay to the State a fee In the amount indicated below:

Number of unexpired contracts Amount of annual fee

exceeding three months

199 or less $1000

200 to 499 $2000

500 to 999 $4000

1000 or more $8000

The number of unexpired contracts exceeding three months shall be calculated separately for each location where health spa services are offered, unless the spa offers all members fully Interchangeable, comparable services at a separate location within a fifteen mile radius.

The amount of the fee shall be reviewed annually by the Director, and the health spa shall provide such information as the Director may request In order to ascertain the number of unexpired contracts exceeding three months.

(c) Payments received under subsection (b) of this section shall be credited by the State Treasurer to the Health Spa Guaranty Fund and money in the fund may be Invested or reinvested In the same manner as funds of the State employees' retirement system, and the interest arising from such investments shall be credited to the Guaranty Fund.

(d) Any buyer having a claim against a health spa may apply to the Director for payment of such claim from the Guaranty Fund, If the claim arises from a failure of the health spa to:

(1) comply with Its contract obligations; or

(2) comply with any provision of this Chapter; or

(3) remain open for the duration of Its contracts or provide alternative facilities within fifteen miles of the location designated In the health spa contract, if the health spa goes out of business or relocates.

(e) The Director shall provide forms for applications by buyers for payment from the Guaranty Fund. The application shall include the name and address of the health spa, the beginning and ending date of the contract, the price of the contract, the date of the closing of the health spa, the amount and the basis of the claim and a copy of the contract. No application for a payment from the Guaranty Fund shall be accepted by the Director more than six months after the date of the closing of the location of the health spa where the buyer entered Into the contract.

(f) The Director shall proceed upon such application and if necessary hold a hearing to decide the merits of an application. The Director shall notify the health spa that a claim has been filed by a buyer and the health spa may request a hearing on the merits of the claim. The Director shall hold a hearing If one Is requested by the

health spa. The decision of the Director shall be final with respect to the

application. The Director may hear applications of all buyers submitting claims against

a single health spa In one proceeding.

(g) The Director shall issue an order requiring payment from the Guaranty Fund of any sum he finds to be payable upon such application. The total compensation payable from the Guaranty Fund on the closing of any one health spa location shall not exceed one hundred thousand dollars.

(h) If the Director pays any amount as a result of a claim against a health spa pursuant to an order under subsection (g) of this section, the health spa's registration shall be suspended and It shall not be eligible to register until It has repaid such amount In full, plus Interest at a rate to be determined by the Director.

(I) If the Director pays any amount as a result of a claim against a health spa pursuant to an order under subsection (g) of this section, the Director shall determine if the health spa is possessed of real or personal property or other assets, liable to be sold or applied in satisfaction of the claim on such fund. If the Director discovers any such assets, he may request that the Attorney General take any action necessary for the reafization thereof for the reimbursement of the Guaranty Fund.

(j) If the money deposited In the Guaranty Fund is insufficient to satisfy any duly authorized claim or portion thereof, the Director shall, when sufficient money has been deposited In the fund, satisfy such unpaid claims or portions thereof, in the order that such claims or portions thereof were originally filed.

(k) When the Director has caused any sum to be paid from the Guaranty Fund to a buyer who has entered into a health spa contract, the Director shall be subrogated to all of the rights of the buyer up to the amount paid, and the buyer shall assign all of his right, title, and interest in the claim up to such amount to the Director, and any amount and interest recovered by the Director on the claim shall be deposited to the Guaranty Fund, except as provided in subsection (c) of this section.

(1) If on December 31 of any year the balance of money in the Health Spa Guaranty Fund exceeds $250,000, the Director shall waive fee payments to the fund for the following year for each health spa which has registered and paid fees for three or more consecutive years. If at the end of any fiscal year the balance of money in the Health Spa Guaranty Fund exceeds $350,000, the excess shall be withdrawn and deposited into the General Fund.

§4205. Right of cancellation.

(a) Every health spa contract for the sale of future health spa services which are paid for in advance or for which the buyer agrees to pay in future installments shall be In writing and shall contain the following contractual provisions:

(1) A provision for the penalty-free cancellation of the contract within three business days of Its making and a provision for a refund following such cancellation of all moneys paid under the contract upon written notice by the buyer.

(2) A provision for the cancellation of the contract if the health spa relocates or goes out of business and falls to provide alternative facilities within fifteen miles of the location designated In the health spa contract, obligating the health spa to refund to the buyer funds paid or accepted in payment of the contract in an amount computed by dividing the contract price by the number of weeks In the contract term and multiplying the result by the number of weeks remaining In the contract term.

(3) A provision that to cancel a contract In accordance with subsection (2) of this Section, the buyer shall notify the health spa of cancellation In writing, by certified mall, return receipt requested, to the address specified in the health spa contract; that all moneys to be refunded upon cancellation of the health spa contract shall be paid within thirty days of receipt of the notice of cancellation; and that if the customer has executed any credit or lien agreement with the health spa to pay for all or part of health spa services, any such negotiable instrument executed by the buyer shall also be returned within thirty days after such cancellation.

§4206. Notice to buyer.

(a) A copy of the signed health spa contract shall be delivered to the buyer at the time the contract Is executed. All health spa contracts must:

(1) be in writing, be signed by the buyer, must designate the date on which the buyer actually signed the contract, must describe the services to be provided to the buyer, and shall contain the following written notice In at least ten point boldface type:

"YOU, THE BUYER, MAY CANCEL THIS CONTRACT AT ANY TIME PRIOR TO MIDNIGHT OF THE THIRD BUSINESS DAY AFTER THE DATE OF THIS CONTRACT.

IF YOU WISH TO CANCEL THIS CONTRACT, YOU MAY DO SO WITHOUT ANY PENALTY OR OBLIGATION TO CANCEL THIS CONTRACT MAIL BY CERTIFIED OR REGISTERED MAIL OR DELIVER A SIGNED AND DATED COPY OF THIS CONTRACT OR ANY OTHER WRITTEN NOTICE TO

AT NOT LATER THAN MIDNIGHT OF

YOU MAY ALSO CANCEL THIS CONTRACT IF THIS SPA MOVES OR GOES OUT OF BUSINESS AND

FAILS TO PROVIDE EQUAL FACILITIES WITHIN FIFTEEN MILES OF THE LOCATION DESIGNATED IN THIS CONTRACT. IF YOU CANCEL, THE HEALTH SPA MAY RETAIN OR COLLECT A PORTION OF THE CONTRACT PRICE EQUAL TO THE PROPORTIONATE VALUE OF THE SERVICES OR USE OF FACILITIES YOU HAVE ALREADY RECEIVED."

§4207. Duration of contract.

No health spa contract shall have a duration for a period longer than thirty-six months. However, the computation of the maximum duration permissible shall exclude any period of time (not to exceed six months) offered by a health spa as a bonus Incentive

at a price which, by comparison with comparable contracts offered by the same health spa, clearly demonstrates that the bonus incentive is not being paid for by the purchaser.

§4208. Renewals.

If the original health spa contract complies with this Chapter, or was entered Into prior to the effective date of this Chapter, the exercise of options to renew health spa contracts at a prorate price less than the original contract price may be accomplished by a separate written agreement devised by the health spa without regard to the provisions of Sections 4205 and 4206; provided however, that all regulatory provisions of this Act Including, without limitation, refund and fee provisions, shall continue to apply. Notwithstanding the foregoing, any member of a health spa may demand to execute a renewal contract In compliance with the proviSions of this Act.

§4209. Initiation fees limited.

No health spa shall charge any initiation fee in connection with a health spa contract of less than twelve months' duration. For all health spa contracts of three months or less duration, all rights of renewal which extend the membership beyond the first three months shall be offered and sold at a contract price per month for each renewal period not greater than the contract price per month for the initial membership period.

§4210. Provisions not exclusive.

The provisions of this Chapter are not exclusive and do not relieve the parties or the contracts subject thereto from compliance with all other applicable provisions of law.

§4211. Fraud rendering contract void.

Any health spa contract entered Into by the buyer upon any false or misleading Information, representation, notice or advertisement of the health spa or the health spa's agents shall be void and unenforceable.

§4212. Noncomplying contract voidable.

Any health spa contract which does not comply with the applicable provisions of this Chapter shall be voidable at the option of the buyer.

§4213. Waiver of provisions void and unenforceable.

Any waiver by the buyer of the provisions of this Chapter shall be deemed contrary to public policy and shall be void and unenforceable.

§4214. Notice of preservation of buyer's rights.

All health spa contract• and any promissory note executed by the buyer in connection therewith shall contain the following provision on the face thereof In at least ten-point, boldface type:

NOTICE

ANY HOLDER OF THIS CONTRACT OR NOTE IS SUBJECT TO ALL CLAIMS AND DEFENSES WHICH THE DEBTOR COULD ASSERT AGAINST THE SELLER OF GOODS OR SERVICES OBTAINED WITH THE PROCEEDS HEREOF. RECOVERY HEREUNDER BY THE DEBTOR SHALL NOT EXCEED AMOUNTS PAID BY THE DEBTOR HEREUNDER.

§4215. Prohibition against assignment of health spa contract cutting off buyer's right of action or defense against seller; conditions.

Whether or not the health spa has complied with the notice requirements of Section 4206, any right of action or defense arising out of a health spa contract which the buyer has against the health spa, and which would be cut off by assignment, shall not be cut off by assignment of the contract to any third party holder, whether or not the holder acquires the contract In good faith and for value.

§4216. Change In ownership of health spa.

For purposes of this Chapter, a health spa shall be considered a new health spa and subject to the requirements of Sections 4203 and 4204 at the time the health spa changes ownership.

§4217. Deceptive acts prohibited.

(a) It is hereby declared to be an unfair and deceptive trade practice and unlawful for a health spa to:

(1) Misrepresent directly or indirectly in its advertising, promotional materials, or in any manner the size, location, facilities or equipment of Its studio, or place of business or the number of qualifications of its personnel;

(2) Make any representation calculated to mislead or deceive buyers as to the health spa's affiliation with other health related industries.

(3) Misrepresent the location or locations at which Its services will be offered; §4218. Production of records.

Every health spa, upon the written request of the Director, shall make available to the Director Its pre-opening bank account records and all membership contracts for inspection and copying, to enable the Director reasonably to determine compliance with this Chapter.

§4219. Private right of action.

(a) Any buyer damaged by a violation of this Chapter may bring an action for recovery of damages. If damages are awarded to the aggrieved party, such damages shall be triple the amount of the actual damages proved plus reasonable attorney fees.

(b) Nothing in this Chapter shall be construed so as to nullify or impair any right or rights which a buyer may have at common law, by statute, or otherwise.

§4220. Violations.

In addition to the remedies herein before provided, the Attorney General may bring

an action to restrain violations of this Chapter in the Court of Chancery and for such other relief as may be appropriate. The provisions of this Chapter are not exclusive and do not relieve the health spa or its assignees or the contracts subject to this Chapter from conpliance with all other applicable provisions of law.

§4221. limitations.

Contracts executed prior to January 1, 1986 and whose original terms are still enforceable as of the effective date of this Chapter are excluded from all cancellation, refund and fee provisions of this Chapter.

§4222. Enforcement.

A violation of this Chapter shall be within the scope of the enforcement duties and

Powers of the Division of Consumer Affairs, as described in 29 Delaware Code, Section 8612.

Section 2. If any provision of this Act or the application thereof to any person or circumstance is held Invalid, such invalidity shall not affect other provisions or applications of the Act which can be given affect without the invalid provision or application, and to that end the provisions of this Act are declared to be severable.

Section 3. This Act shall take effect on January I, 1989.

Approved July 14, 1988.