Franchise Trends - Current Legal Cases

FRANCHISE TRENDS

Franchisee Terminated For Failing to Retain Hotel Management Company to Run its Hotel

Ramada Franchise Systems, Inc. v. Jai Shyam, Inc. (2004): The language of a settlement agreement between a hotel franchisor and a franchisee unambiguously required the franchisee to provide an executed copy of a hotel management agreement between the franchisee and a third-party hotel management company as a condition of entering into a new agreement with the franchisor. By failing to secure and present an appropriate management agreement to the franchisor in a timely fashion, the franchisee violated both the terms and intent of the settlement agreement. Although the franchisee argued that it presented two management contracts to the franchisor to demonstrate its compliance, the facts demonstrated that when the franchisor terminated the settlement agreement the franchisee lacked the requisite management agreement and was in breach.

Hotel Franchisee's Claim of Fraud Dismissed

Bakrac, Inc. v. Villager Franchise Sys. (2006): Plaintiffs, a franchisee and its owner, appealed a Florida district court decision granting summary judgment to defendant franchisors as to plaintiffs' mail fraud claim brought under the Racketeer Influenced and Corrupt Organizations Act (RICO). Plaintiffs alleged that the franchisors defrauded them by not providing them with things promised to them orally and in an addendum. However, under the applicable New Jersey law, parol evidence was not admissible for the purpose of varying or contradicting the contract. In this case, plaintiffs' claims of loans, training, and occupancy rates were not promised in the franchise agreement.

Franchisee's Allegation That Quality Assurance Inspections Were Unfair Is Rejected By Court

Travelodge Hotels, Inc. v. Elkins Motel Assocs. (2005): The franchisor filed suit after defendant franchisees stopped paying fees under the license agreement. Defendants contended that they stopped paying fees because the franchisor breached the agreement by administering unfair quality assurance inspections. The court held that the franchisor was entitled to summary judgment on the issue of liability for breach of the agreement because: (1) franchisees failed to show that the franchisor violated the implied covenant of good faith and fair dealing by purposefully arranging for them to receive failing scores so as to deprive them of the benefits of the agreement; and (2) franchisees continued to use the franchisor's marks after they stopped paying fees under the agreement and, thus, any breach by the franchisor would not bar its claim against defendants.

Even though Court Found That Triable Issues of Fact Existed Regarding Alleged Defects in QAR, Court Nevertheless Dismissed Franchisee's Defense

Shashi, Inc. v. Ramada Worldwide, Inc. (2005): In the franchise agreement, the hotel chain retained the right to terminate the agreement with notice in the event that the franchisee received two or more notices of default within any one-year period. After the franchisee received failing marks on three separate quality inspections, the hotel chain terminated the agreement. The franchisee claimed that the validity of one inspection score represented a triable issue of fact; however, even assuming that review of the inspection reports would be the province of the finder of fact, the franchisee's claims of scoring error did not raise an issue of material fact because correction of the scoring errors claimed by the franchisee would still leave the two inspection scores well below passing, consequently having no effect on the hotel chain's right to terminate the license agreement.

Statute of Frauds Bars Buyer/Franchisee's Claim Against Seller of Hotel

Livonia Hospitality Corp v. Boulevard Motel Corp. (2005): The plaintiff franchisee alleged that the defendant franchisee, which operated a nearby Signature Inn in Plymouth, Michigan, agreed not to convert its hotel to a Comfort Inn in 1994. The Court held that the hotel franchisee did not breach that alleged agreement with another franchisee by requesting its franchisor to change its hotel from a Quality Inn to a Comfort Inn in 2003 because the alleged agreement was barred by the Statute of Frauds.

Arbitration Award Against Hotel Franchisee Will Be Accepted and Enforced Even if Mistakes Were Made by Arbitrator

Custom House Hotel, LLP v. Doubletree Hotel Systems, Inc (2005): An arbitration award requiring a hotel franchisee to begin participation in a franchisor's marketing program and bearing the costs of its participation in that program was confirmed because the franchisee failed to show any evidence of fraud, undue means, or failure to consider important and/or material information in the arbitrator's decision. Furthermore, there was no showing of bias or undue influence by the arbitrators.

Liquidated Damages Provision Held Fully Enforceable Regardless How Many Years Remained On Franchise Agreement At Time Of Termination

Ramada Franchise Systems, Inc. v. Jacobcart, Inc., Joy M. Cart, and Chacko Jacob (2003): The liquidated damages provision in a hotel license agreement that required the licensee to pay the licensor $ 200,000 ($ 2,000 multiplied by the number of rooms in the facility), if the licensee breached or prematurely terminated the agreement was valid and enforceable under New Jersey law. Under New Jersey law, liquidated damages provisions were upheld when the set amount of damages was a reasonable forecast of just compensation for the harm caused by the breach and when that harm was very difficult to measure. The provision at issue was reasonable and enforceable for several reasons. First, damages from breach or early termination of a hotel license agreement were difficult to estimate when the agreement was drafted because of fluctuations in the travel industry. It was virtually impossible to predict a hotel's occupancy over time due to changing seasons, special events, and increased competition. Second, because the agreement covered a 15-year period, it was difficult to predict the franchisee's income that far into the future. Third, New Jersey law assumed that liquidated damages provisions were enforceable, and the franchisee did not meet its burden as a challenger that the provision was unreasonable and should not be enforced. The licensee missed the deadline to contest the enforceability of the provision by pleading it as an affirmative defense.

Rare Case In Which Court Strikes Hotel Liquidated Damages Provision As Unfair Penalty

Shree Ganesh, Inc. v. Days Inns Worldwide, Inc. (2002): The two franchisee guarantors, shareholders of the franchise, each signed a personal guaranty. The hotel was unsuccessful and the franchisor terminated the agreement. The franchisee alleged, among other things, fraud, negligent misrepresentation, breach of the implied covenant of good faith and fair dealing, and unjust enrichment; it sought equitable reformation. The franchisor sought liquidated damages and enforcement of the guaranties. The district court held (1) the parol evidence rule barred introduction of any prior agreement between the parties and therefore defeated the fraud claim; (2) the evidence did not show that the franchisor failed to exercise reasonable care in its communications, so there was no negligent misrepresentation; (3) equitable reformation was not warranted; (4) there was evidence that the franchisor may not have acted in good faith in terminating the agreement; (5) there was no showing of unjust enrichment; and (6) the liquidated damages clause, which called for damages approximately five times the amount of the fees under the agreement, was an unenforceable penalty.

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Franchisee's Claim That Franchisor Had Engaged in Commercial Bribery With Third Party Vendors Rejected

Blue Tree Hotels Investment (Canada), Ltd., v. Starwood Hotels & Resorts Worldwide, Inc. (2004): A group of related hotel management companies did not engage in commercial bribery in violation of Robinson-Patman Act by entering into purchase agreements with vendors of hotel services and supplies pursuant to which the vendors would pay various rebates and discounts. Because the owners of the hotels failed to allege any improper intent or conduct on the part of the vendors who made the payments, dismissal of their claims was proper. Commercial bribery could not be committed unilaterally by an alleged bribe receiver. In other words, a party could not be guilty of receiving a commercial bribe unless someone else was guilty of paying it. In the absence of any assertion that the vendors made the payments with the intent to improperly influence or corrupt the management companies' conduct on behalf of the hotel owners, the management companies' failure to turn the vendor payments over to the owners constituted, at most, a breach of fiduciary duty.

Jury Found that Hotel Franchisor Had Breached Franchise Agreement By Negotiating Third-Party Discounts And Accepting Rebates

2660 Woodley Rd. Joint Venture v. ITT Sheraton Corp. (2004): Appellee hotel franchisee sued appellant hotel franchisor for commercial bribery under the Robinson-Patman Act, for breach of contract and related state and federal claims. After a jury trial, the United States District Court for the District of Delaware entered judgment in favor of the franchisee, including punitive damages. Pursuant to a purchasing program, the franchisor negotiated vendor discounts, which it received directly as a rebate. On appeal, the court vacated part of the damage award, asserting that the franchisee lacked antitrust standing to bring the commercial bribery claim. The payment of inflated purchase prices to vendors did not constitute the type of injury that the antitrust laws were intended to prevent. The breaches of contract and agency caused these injuries.

Hotel Franchisor's Secret Signing of Franchise Agreement With Encroaching Hotel Signed On Day That Injured Franchisee's Agreement Was Also Signed Held Lawful

Lakeworth Lodging Partners, Ltd. and Viran Nana v. Best Western International, Inc (2003): A hotel franchisee failed to adequately allege that its franchisor breached their contract by failing to provide it with notice of a third party's application for a new franchise within the franchisee's market area. The third party's franchise application was approved by the franchisor on the same day as the complaining franchisee's application. By its unambiguous terms, the agreement required the franchisor to provide the franchisee at least 60 days notice prior to approval of a new application for a franchise within the franchisee's relevant market area. Because the plaintiff franchisee's application was approved on the same day as the third party's, the franchisor was not required to provide the plaintiff with notice of the other application.

Wingate Franchisee's Claims of Fraud Should Not Be Dismissed

Harold K. Miller v. Wingate Inns International, In. (2003): A prospective hotel franchisee adequately alleged that a franchisor committed fraud and violated the California Franchise Investment Law and "little FTC Act" for purposes of surviving a motion to dismiss. The gravamen of the potential franchisee's allegations was that the franchisor tricked him into signing a franchise agreement and paying $ 9000 toward an initiation fee when instead the plaintiff believed he was signing a franchise application and making a $ 9000 deposit so that the franchisor would begin the approval process. The court could not determine beyond doubt that the prospective franchisee could prove no set of facts in support of its claims and its complaint satisfied the liberal federal notice pleading standards. Moreover, the plaintiff's fraud allegations were sufficiently specific.

Hotel Franchisor Prohibited From Unilaterally Adding New Obligations In The Franchise Agreements Of Existing Franchisees Subsequent To Franchisor's Purchase Of New Hotel Franchise System

Promus Hotels, Inc. v. Inn on Robinwood, Inc. (2003): The franchisees of two hotels were not contractually bound to comply with the "100% Satisfaction Guarantee " program that was implemented by the company that acquired the rights to their franchise agreements from their former franchisor. The plain language of the franchise agreements prohibited the franchisor from interceding with the franchisee's customers and subsequently, as a result, recovering money back from the franchisee because of customer complaints. The acquiring company instituted its "100% Satisfaction Guarantee " program in all of its franchised hotels belonging to the nationwide chain of which the two franchisees were members. Under the program, if the franchisor was contacted by a complaining guest, it would refer the matter to the franchisee who was then required to resolve the matter to the guest's satisfaction within two days. If the matter was not resolved in the allotted timeframe, the franchisor would intervene and resolve the complaint to the guest's satisfaction. The franchisor would then charge the franchisee an intervention fee and any cash refunds or credits that the franchisor provided to the guest. Both of the franchise agreements at issue contained the following language: "Licensee is an independent contractor. Neither party is a legal representative or has the power to obligate (or has the right to direct or supervise the daily affairs of) the other for any purpose whatsoever." The plain meaning of that provision was that the franchisor was placing a legal buffer between itself and the franchisee so that it could not be held liable for any acts of the franchisee toward third parties. Part of the daily affairs of the franchisees were their relationships with their customers. To enable the franchisor to intervene with the franchisee's customers according to its 100% Satisfaction Guarantee program would give the agreements a strained construction the franchisees never would have contemplated when they entered into them.

Court Refuses To Dismiss Franchisee's Claim That Franchisor Engaged In Unfair Franchising

Kajal Props., L.L.C. v. Ramada Franchise Sys. (2000): Plaintiff entered into a purchase of a hotel that was a participant in a franchise agreement with defendant. Plaintiff alleged that defendant represented that plaintiff would be tendered an extension of the franchise agreement with substantially similar terms. Plaintiff alleged that it purchased the hotel, but that the franchise agreement tendered by defendant was not substantially similar to the prior agreement. Plaintiff also alleged that the tendered agreement did not comply with certain guidelines for fair franchising. In reviewing plaintiff's complaint, the magistrate judge found that defendant had been put on fair notice, adequate under the notice-pleading requirements, of the plaintiff's claim for a declaratory judgment.

Personal Guarantors Of Hotel Franchise Agreement Are Not Entitled to Timely Notice of Franchisee's Default or Termination

Nobel Lodging, Inc. v. Holiday Hospitality Franchising, Inc (2001): The guaranty agreement by which the shareholders of a hotel franchise personally guaranteed its obligations of payment and performance under its license agreement with a hotel franchisor was not conditioned on the provision of timely notice to the guarantors of the franchise's default with an opportunity to cure that default. The plain language of the guaranty was unambiguous and unconditional. The guarantors expressly waived any notice of demand for payment or performance by the franchisor.

Even Though Liquidated Damages Provisions Are Unlawful Under State Law, The Franchisor Would Be Permitted To Claim and Prove Actual Termination Damages At Trial

Holiday Hospitality Franchising, Inc. v. H-5, Inc., (2001): The liquidated damages provision in a hotel franchise agreement was rendered unenforceable by the Minnesota Franchise Act's prohibition on liquidated damages provisions for premature termination of franchise agreements, however, the franchisor was not precluded from using the calculation formula in the provision at trial as a reasonable method for calculating lost profits. The franchisor could argue that the calculation was a legitimate and reasonable method for calculating expected actual damages. The franchisor had terminated its agreement with a franchisee for its alleged failure to maintain the hotel in accordance with required system standards and then brought an action against it for damages caused by the early termination.

Hotel Franchisor Will Not Be Required To Follow Its Own Impact Policy For Encroachment

Pueblo Center Partners, L.L.P v. Bass Hotels & Resorts, Inc. (2000): A hotel franchisor did not breach its contract with a franchisee by granting seven additional franchises in the same metropolitan area as the franchisee's hotel over the course of several years. The franchise agreement expressly stated that the franchise license was nonexclusive, applied only to the specified location; and did not limit the franchisor from licensing any business activity in any other location. The franchisor's institution of a policy allowing franchisees to request an impact study regarding the placement of additional franchises near their locations did not orally modify the agreement to add an exception of exclusivity. The agreement expressly stated that it could be modified only in writing. Moreover, the impact study policy did not represent a deviation from the express terms of the agreement. In addition, the franchisor's unilateral institution of an impact study policy did not meet the traditional definition of a contract modification. A policy of notifying a nearby franchisee of a proposed new facility and giving the franchisee the opportunity to comment on the franchise application did not constitute a promise that the franchisee could prevent the development of any additional franchise it deemed detrimental to its business.

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Hotel Franchisee Is Permitted To Ignore Pre-Opening Punch List And Demand That the Franchisee Achieve Additional Unlimited Renovations

Ramada Franchise Systems, Inc. v. Cusack Development, (1999): A hotel franchisee breached the terms of its franchise agreement by repeatedly failing random quality assurance inspections of the franchise premises. Although the franchisee argued that it should have passed the inspections, there was no evidence that the franchisor had graded the franchise unreasonably. The grades given the previous licensee did not meet the franchisor's current minimum standards, and the franchise agreement gave the franchisor the right to change its standards at any time. The franchisor's creation of a punch list of capital improvements that the franchise should complete did not constitute an enforceable representation that the franchisee would receive passing grades if it completed the punch list. The agreement specifically stated that the punch list was based only on a random sample inspection and that the franchisee was still responsible for improvements of areas that were not inspected. The franchisee had not completed all the items on the punch list or performed all of the renovations required under workout agreement between the parties. Contrary to arguments by the franchisee, the punch list was not misleading regarding the costs of the required repairs. The list did not purport to recite all the required renovations and specifically stated that the franchisor did not warrant the accuracy of the cost estimates and that actual costs could vary materially from the estimates. .

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Franchisee Would Be Permitted To Go To Trial On Its Claims That The Hotel Franchisor Lacked Good Faith In Revoking Franchisee's Airport Designation Name

Camp Creek Hospitality Inns v. Sheraton Franchise Corp. (1998): Plaintiff franchisee owned an inn near an airport, and entered into a franchise agreement with defendant franchisor. As part of agreement, defendant franchisor agreed to allow plaintiff to use franchisor's name together with the airport name. However, defendant franchisor reserved the right to revoke the name. Defendants acquired hotel property near plaintiff and revoked plaintiff's right in the name plaintiff held. Plaintiff claimed defendants violated duties they owed to plaintiff under contract and tort law. The court held the decision was fact dependent as to whether defendants' actions in connection with new property violated an implied covenant of good faith and fair dealing. Thus, summary judgment was inappropriate, allowing Plaintiff to proceed with his case.

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Liquidated Damages Found To Be Reasonable Forecast of Damages For Early Termination

Days Inns of Am., Inc. v. P&N Enters. (2001): The franchisee and the guarantor argued that the liquidated damages clause in the parties' contract was an unenforceable penalty because actual damages were capable of being calculated and the amount of stipulated damages was disproportionate to the lodging facility franchise system's actual loss. The court found that the liquidated damages clause was enforceable because it was a reasonable forecast of just compensation for the harm caused by the early termination at the time of contract formation and at the time of the breach and actual harm was very difficult to accurately estimate given the variables in the hotel business.

Thanks for your interest in our Newsletter, and we look forward to answering any questions you might have either on the cases discussed in this issue of Franchise Trends, or on general trends in franchise law.

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