It wasn't long, moreover, before financial injuries were added to the insults. Katz announced that Nutri/System would introduce a new line of freeze-dried entrees that, on average, would cost consumers $1 more than the canned items they replaced. When the product line was introduced in May, the franchisees -- and their customers -- howled. "Many of us are not able to afford the $8.75 extra per week," wrote one customer. "Bring back the cans!!!" "It smacks of gouging -- price-wise," groused another." James Heeren, a franchisee with four centers in Illinois, noted that the higher prices were "causing a higher percentage of program drops than we have seen before."
That same month, a group of franchisees with 78 centers brought suit against Nutri/System, claiming that it violated antitrust laws by requiring them to buy food from the company; they sought $50 million in damages. In subsequent months, the number of plaintiffs grew rapidly. By the following January, there were 69 owners with 130 centers; by the time the suit was settled, the court's list of angry litigants represented 280 of the 550 franchised centers.
Katz, the man who had chosen "We Are Family" as the theme song for company get-togethers, portrayed himself as a beneficent father with ungrateful and head-strong children. "We thought they were jumping the gun, not looking at the total picture," he says. "They worried too much about our food margins, and didn't spend enough time running their businesses." But he was a father with his back against the wall. The use of an alternative source for food, he admits, "would have cut at the heart of Nutri/System." Heinig agrees that there wasn't much give. "We were talking about reducing food costs, which was a significant part of the company's income," he concedes, "so I guess you couldn't expect Harold to sit down and say, 'Great, guys, let's do it."
As the lawsuit began to unfold, NSF's search for an alternative food source continued. Its request for food specifications had gone unanswered, but it managed to reverse-engineer 45 new products from Nutri/System samples. Purchased elsewhere, NSF figured, the items would cost anywhere from 26% to 54% less. In December 1983 and January 1984, NSF submitted product samples to headquarters for the necessary approval; that route, the franchisees soon discovered, amounted to "an unreasonable and never-ending . . . process." Katz contends that the company was acting in good faith and with reasonable caution; his brother Robert argued in a deposition of his own that the quality of its foods was critical to Nutri/System's success, and warned that tampering with formulations might cause "serious and irreparable harm." Disgruntled franchisees felt that the company was doggedly dragging its heels.
In January, with NSF encouragement, nine "test" centers -- centers without restrictive food clauses in their franchise agreements -- began offering the alternative products side by side with the Nutri/System entrees. Customers liked the choice: The heavier but less expensive packages quickly outdistanced the freeze-dried ones by factors of from two-to-one to four-to-one. Nutri/System wasn't so happy. In early February, the company sent terse letters to the offenders: "We have learned that your . . . center is currently selling food products of unauthorized suppliers. . . . You are requested to cease immediately the sale of all unapproved food products."
January 1984 must have seemed to Katz like a doomed month. The alternative food had made its debut, and, on January 18, Nutri/System announced a $4-million out-of-court settlement of the class-action stockholders' suit filed the previous March. As the franchisees' lawsuit made its own way through the courts, the company's condition continued to worsen; its acquisitions were still a cash drain, its stock was sliding, and traffic at the weight-loss centers continued to drop. Katz, who had once been a publicist's dream, became more reclusive. One journalist with The Philadelphia Inquirer complained that Katz changed his home phone number every week. At one point, Katz refused to talk with the Inquirer's business reporters; the newspaper fielded its sports desk, which still enjoyed access thanks to Katz's ownership of the 76ers.
The period had its lighter moments. In one exchange, the plaintiff' attorney complained that "The defendant has noticed as many as 53 persons for 53 deposition dates, starting with January 2, 1984, a national holiday, and including February 30, 1984, a nonexisting day." But the humor was lost on Katz. When he talks about the lawsuit, Katz periodically slips into the third person, as though to distance himself from the unpleasantness. "It took a tremendous amount of Harold Katz's personal time," he observes. "I'm a doer, I hate wasted motion. . . . I got to the point where I believed that some individuals simply weren't grateful for the things we'd done for them." Katz's unattended Veracruz has grown cold, and he takes it up and relights it; there are at least four prime inches left. "There was a day when I asked myself, 'Is it worth it?" he says.
The litigation was also incapacitating the plaintiffs, who were hamstrung by a lack of direction and a loss of momentum. And it generated monumental legal fees. The plaintiffs' bill would eventually total some $750,000, while Nutri/System's soared to an estimated $2.5 million.
