Cycling Company Accused of Robbing Customers After Registering For IPO [e222]

Full Podcast Transcript

NASIR: All right. Welcome to our podcast where we cover business in the news and add our legal twist. My name is Nasir Pasha.

MATT: And I’m Matt Staub.

NASIR: And welcome to our Wednesday episode, my second favorite next to Monday’s episode.

MATT: Deuces wild today – 222.

NASIR: Wow! 222nd episode, that’s amazing.

MATT: I wonder if we can make this episode 2:22 or 22:22.

NASIR: Or can we somehow come up with an excuse to make it another clip show, the 222.

MATT: Probably, it makes the most sense.

NASIR: Probably. Let’s do 22:02 or 22.2 minutes, that is difficult.

MATT: Yeah. Still, even if we tried, it probably wouldn’t work out, but we’ll see what happens after we’re done recording and see where it’s at.
We’re going to talk about this company, SoulCycle. I guess it’s in the process of an IPO or registering, right?

NASIR: Yeah, it’s registered. It hasn’t come out yet. Have you heard of this or no?

MATT: You know, I have because it’s pretty popular in LA.

NASIR: I’ve heard of the cycling classes and stuff like that but I’ve never heard of SoulCycle specifically.

MATT: I’ve heard of a couple companies or a couple of businesses, yeah, that are this and it was either this one or something similar to it. It was probably this one if it’s this popular and, you know, about to go public.
There was the class action lawsuit that was filed pretty recently, I believe – August 25th.

NASIR: Yeah, August 25th.

MATT: At least by when we’re recording this. This class action lawsuit that was filed and they took it a little bit vicious basically saying that the company robs customers by requiring them to buy certificates for classes with unreasonably short expiration periods. One example in particular, this customer in California paid $30.00 for a future class which probably is a rip-off but that’s fine. $30.00 for a cycling class that she basically couldn’t end up using because, like she was saying, the expiration time was unreasonably short and I think they give some more details.

NASIR: I think, for one class, it’s like 30 days or something to that effect.

MATT: Single classes expire within 30 days – that’s not unreasonably short by any means, but anyways. A series of five classes expires within 45 days – that’s what? Every nine days. Still, plenty of time to use that. That’s kind of what they’re hanging their hat on and I guess the bigger thing is a couple of other aspects of it, too. One, they’re saying it violates the Credit Card Accountability and Disclosures Act. None of the packages available are longer than a year. They were making the argument that these certificates which are the words of SoulCycle – not even the customer’s – these certificates are gift certificates which we’ve discussed before are not allowed to have expiration dates shorter than five years under the law.

NASIR: And, by the way, it’s funny that this came out because, literally two weeks ago, I was almost about to go with my wife to one of these things but, from what I know, you have to reserve ahead of time and that’s kind of one of the allegations I believe too was that, even if it’s 30 days in theory, what if there’s no space available because it’s so busy and so forth, or it’s so hard for you to plan ahead of time and so reserving last minute may not work for you, and then on top of that you have this possible statutory violation for the Credit Card Accountability Responsibility Act which has specific requirements and how gift certificates work. Of course, the question is: “Is this a gift certificate?” But pretty much it meets the definition. I mean, they can call it whatever they want – a voucher or a ticket or what-have-you – but it seems to fit that definition where you’re buying something in the future. I mean, it has elements – you purchase on a prepaid basis and honored upon presentation by a single merchant or affiliated group, et cetera. But I think it fits, right?

MATT: Yeah. Going back to what you were just saying, I definitely can see situations and I thought about that, too. I mean, I’m sure there’s high demand for the best classes.

NASIR: And these things are usually pretty packed. I mean, like you said, they’re popular – so popular now that they have 60-plus stores around the country. They filed an IPO which, by the way, does beg the question is the timing of all this because it’s not uncommon for a company that is about to go public or even makes its filing to go public because lawsuits can really disrupt that. If, all of a sudden, just like on Monday, we talked about Waze being sued after they were acquired by Google, everyone knows that a liability like this, especially a class action one from customers, it is a liability in the books that they’re going to have to deal with. It really puts the pressure point on the owners of this company and they may be more apt to settle because they don’t want it to disrupt its IPO.

MATT: Yeah, timing is always something with the lawsuits. There’s always purposes behind it. But, you know, looking into the actual suit itself, there’s a few causes of action. They kind of hang their hat on this Credit Card Accountability and Disclosures Act and the basic argument is that, based on what that says, the company must establish fair and transparent practices relating to the extension of credit under an open and consumer credit plan. They’re basically complaining about it’s not allowing customers… I mean, I guess one of the biggest gripes is you can’t just buy a class; you have to buy these certificates. I mean, I could be wrong but I think this is the case. You can’t just go on the site and book a class. You have to buy a certificate first and then go do it through that way – these series certificates.

NASIR: Maybe you’re right. Maybe that’s the only way that you can actually get it. If that’s the case, then I kind of understand from a justice point of view that that really kind of manipulates and it kind of exploits their popularity in a way that’s banking on people not being able to go because, I’m sure, why else would they have such a short expiration date? Because they are banking on people not going.

MATT: Yeah.

NASIR: And these gym memberships are the same thing, right? We covered… I think it was one of our very early episodes, right? It was this New York gym that basically had lifetime membership, something ridiculous like that, and that didn’t end up holding up water, of course, for multiple reasons. But, in the same way here, there is a reason why there are protections for gift certificates. If you purchase it and it has a very short time fuse, then, of course, companies are going to exploit that aspect of people not actually using them. It’s the same thing if you get it for gifts or it’s the same thing of rebates. You know, people don’t actually follow through with those rebates so there’s regulations surrounding that, and gift certificates are a whole thing. I mean, even from when you sell your business, how those gift certificates are redeemed later. I mean, there’s a lot of rules for that so it seems pretty straightforward to me. I mean, I don’t know if we’re missing something but…

MATT: Yeah, and what I was saying, that’s what’s alleged in the complaint. You know, if there is another way to go about it then at least it wasn’t stated there but I think that’s the whole point behind it and some are calling it. The ones that are against it obviously are part of the lawsuit but some other pundits are calling it a clever way to basically maximize profits. One person was saying that the classic spires of how advanced notice. I don’t think that’s true. I mean, regardless of whether it’s fair or not, if it says you have to use this within 30 days, I mean, that’s advanced notice. I don’t really know… I don’t get that argument.

NASIR: That seems strange, yeah.

MATT: It boils down to whether these certificates that you have to buy in order to get the classes, whether the time period on it is fair I think is pretty much what this amounts to. It’s kind of like, if you go to like a food festival, go into one of those things and you can’t go up and actually buy the food there. They’re like, “Oh, yeah, you can’t pay with money. You have to go buy these tokens and then X number of tokens gets you…” It’s like, “This doesn’t make any sense. I just want to buy the thing there.” It’s kind of like that but, you know, it’s a little bit different.

NASIR: But, with all that, there may have been notice and so forth but I don’t have a high level of trust with SoulCycle too and I’ll tell you why. In doing so little research on this company – which it was the first time I heard about – they were founded in 2006 but, in 2013, a couple of years ago, a class action suit was filed again – or I should say “prior to this one” – but this was based upon basically not paying its instructors or workers for overtime pay. Interesting enough, in that lawsuit, they alleged that first it talks about how, at that time, I think they had about 14 locations across the country and they planned to open addition 60 studios around the world by 2015. It is 2015 and they’re at 47 locations nationwide it looks like, but plan to hitting 50 to 60 worldwide by 2016 so they haven’t hit their benchmarks but, in the complaint – this was back in 2013 – they alleged that “the company’s unlawful wage practices are consistent with its mistreatment of customers as it does not provide any reimbursement to customers who are unable to attend classes they sign up for unless they cancel the class by 5:00 pm the night before.” First of all, that policy, you know, if someone signs up for a class and doesn’t show up, I think they should pay for it because it might be taking a spot from someone else.

MATT: Right.

NASIR: But, even at that time, there was allegations regarding how they treated their customers. But get this. This class action lawsuit was settled but then, some time in November 2014 of last year, an attorney – I think one of the class action attorneys that represented the workers in that case – sued SoulCycle because he received a letter actually after he made a reservation to take a class basically saying that he was banned. “SoulCycle in-house lawyer,” actually not a letter, “called him and informed him on May 6, 2013 that he had been banned for representing someone who sued SoulCycle,” but later tried to distance herself from the statement by saying in an email that Wigdor was merely being asked to stay away and that’s what was asserted. It’s kind of a funny situation that happened there. I thought that was kind of funny. Why would you do that? But, at the same time, why would that attorney go to the place that he sued. That’s kind of awkward in itself too but who knows what’s going on there?

MATT: It is an interesting wrinkle, and I’m wondering how this is going to end up getting resolved. I think that probably what’s going to have to happen is SoulCycle is going to have to adjust their policy a little bit in terms of when things expire. But, I mean, this is what I keep thinking about – and I don’t know if we’ve discussed this or not but – airlines intentionally overbook flights because they know people aren’t going to show up or I guess maybe they might cancel too. But, you know, they do that and then people get stuck with showing up to the airport and not getting a flight or they have something bad happen.

NASIR: I don’t want to say that they hide behind but they are protected someway with their policies like you have to arrive at a certain time and, if you do end up getting bumped, then you are entitled to XYZ on all these rights. I mean, both here in the States and the EU has a tremendous amount of protections – I think even stronger in the EU than it is in the States – with being bumped and having issues with delayed flights and so forth so that may be a little bit different but, case in point, there are statutory protections for that. Without that, who knows what these airlines would do because no one reads the contracts. People just buy the ticket and go and they don’t contemplate all these other issues.

MATT: That’s the thing. Even for the people that get bumped, they get to fly somehow.

NASIR: Yeah.

MATT: I mean, it might not be the time they want but that’s not the case here with SoulCycle. It’s: “Well, once your certificate’s expired, you’ve got to buy some more. Sorry.”

NASIR: Yeah, that just seems inherently unfair and just the nature of people, I mean, even planning to work out. Unfortunately, most people can’t treat working out the same as a business meeting or meeting with family or anything like that so there’s going to be things that are going to prevent them from attending such sessions. You know, having that commitment, maybe it’s just $30.00 but multiply that by however many people miss those sessions, it adds up.

MATT: Well, I think I saw in the complaint, the 2014 customers purchased $93 million of these certificates. Forfeiture of certificates due to illegal expiration provisions contributed to $25 million in net income.

NASIR: I don’t know how they figured that out but that’ crazy.

MATT: That’s net income, too.

NASIR: Yeah, minus the cost of printing those certificates. They might be electronic.

MATT: Yeah. I mean, that’s a lot of money. That’s a significant amount of money they’re making on people. But that’s the thing with gym. I mean, they say the same thing about gyms – at least on the broader scale of the money they’re making. What percent of the money is actually people that aren’t going? But, obviously, this is different, but I’m just saying it’s not an end all, be all argument but it’s pretty interesting. That’s a lot of people.

NASIR: It is applicable analogy and a comparison. The question isn’t different because, on one hand, you have a gym membership contract for a year-long and you may not go once, but you have the ability to go at any time whereas, okay, you have a ticket that is good for 30 days and, if you don’t go in those 30 days, you lose it. You’re correct that it’s not dissimilar to that and that probably might be where they argue. They may try to argue, “No, this isn’t a gift certificate. This is a contract or a subscription for which they have access to these certain sessions.” But, based upon how they’re marketing it, it might be difficult for them to sell it that way.

MATT: Unless they’re being misquoted. In the complaint, they’re called series certificates.

NASIR: Yeah.

MATT: It doesn’t work too well in their favor. Based on that, are you going to go to one of these? Do they have them in Texas?

NASIR: No, like I said, I think it was either last Saturday or the Saturday before, my wife went and I almost went myself but, just to be honest, I did tell her, “Don’t sign up for it,” because I know, you know, it always sounds pretty good at the time and they always say that there’s all these deals that are only available now. Of course, they’re available 24/7.

MATT: This wasn’t SoulCycle though. This was something else.

NASIR: I don’t know. I’m going to go home and ask and find out then I’ll come back to the office and finish the podcast episode so just give me one second.

MATT: Well, I’m looking right now – at least on their site – it doesn’t look like there’s any in Texas.

NASIR: Probably something else. I mean, frankly, that also seems strange to me – why they’re going public. It is very easily duplicated, there may be some things proprietary as to how they do it and so forth, but I think the one that she went to, they have basically a screen that is the size of the wall and you can actually see yourself as some kind of avatar racing amongst everyone else. Of course, you have an instructor, something to that effect. I don’t know if these guys even do that because that seems unique in itself, too.

MATT: You know, they claim to have the best instructors that you can find.

NASIR: Yeah, SoulCycle, I really think we should try it and report back.

MATT: We should record a podcast while at a class.

NASIR: Totally out of breath. By the way, speaking of class actions, did you hear about the Uber class action where they certified the class of the Uber drivers for independent contractor classification? You saw that, right?

MATT: Yeah, I actually sent that to a couple of people. I told them this was pretty applicable to your business. Well, I think Uber is going to try to appeal it or something, I believe, right?

NASIR: Yeah, I think so. I’m surprised they got to the certification point. Usually, once you get to that point, that’s a very bad sign for any kind of class action defendant. You know my take on it. I’m just shocked that it would get that far and I think it’s incorrect. I think it’s just a little too aggressive. Just in the last couple of years, we’ve seen that independent contractor classification is just getting more and more conservative – both in the federal level and the state level. California is one thing but, even on the federal level now, it’s becoming a lot more aggressive.

MATT: Yeah.

NASIR: Anyway, I’m looking at a set of instructors, trying to pick. I have a choice of Thomas, Joey, Connor, Sarah, this guy named Ross D. This guy named DJ – that’s a good one.

MATT: How do you choose? I don’t know.

NASIR: I don’t know. I’m not sure how to choose. This Anna says, “Easy doesn’t change you.” Melanie says, “Trust that where you are is where you need to be.” That’s a quote!

MATT: Ah. Well, let’s just see how this works out for you.

NASIR: Yeah. Well, I’ll let you know.

MATT: All right. Keep it sound, keep it smart.