Whether it’s the Hotel Shangri-La Hotel in Santa Monica, CA, the Millennium Broadway Hotel Times Square NYC, NY, the Comfort Suites Mission Valley Hotel, San Diego, CA or the Fontainebleau Miami Beach Hotel, Miami Beach, FL, allegations of discrimination are not new to the hotel industry. Unfortunately, the hospitality industry is subject to discrimination claims from guests and employees based on religion, race and disabilities.  As you can imagine, the term “discrimination” evokes a pantheon of emotions within the general public due to the fact that it has different connotations for different people.  Discrimination for any reason exerts a wide-ranging impact not only on those being discriminated against, but also on the parties responsible for the discrimination.

Discrimination is of particular importance to the hospitality industry because most, if not all, United States federal anti-discriminatory statues prohibit discrimination in places of public accommodation, inclusive of hotels and other business entities that provide lodging to the general public as a whole. Furthermore, the hospitality industry employs a large number of individuals in order to ensure that daily operations within hotels go as planned and thus, the hoteliers’ status as employers’ means that they absolutely have to be cognizant of anti-discriminatory laws and statutes that relate specifically to employees and their civil rights.

Religious Discrimination (Guests): Hotel Shangri-La in Southern California.

As a matter of fact, a recent high-profile legal dustup involving the famed Three Diamond Rated Hotel Shangri-La in Southern California demonstrates the need for hoteliers to understand the anti-discrimination laws in the context of daily hotel operations.  In July 2010, Tehmina Adaya, “the owner of the Hotel Shangri-La in Santa Monica discriminated against Jews during a charity event in July 2010.  The owner reportedly yelled ‘Get the [expletive] Jews out of my pool!’ and forced the party to pack up and leave” (See Miles). Kathleen Miles of the Huffington Post reported that the 18 participants in the Friends of the Israel Defense Forces charity event subsequently sued the hotel due to the fact that they had suffered negligent emotional distress and/or intentionally-inflicted emotional distress.  Miles stated that the lawsuits resulted in $100,000 in general damages to certain plaintiffs and $1.2 million in general damages to the group.  However, total damages increased when “a jury in California Superior Court ordered the hotel and owner to pay approximately $440,000 in additional punitive damages to the plaintiffs” (See Lowenfeld). In total, the Hotel Shangri-La’s discriminatory actions resulted in a damage award of  $1.65 million .

Racial Discrimination (Employee): Millennium Broadway Hotel, Times Square.

Hotel guests are not the only class of plaintiffs filing anti-discrimination lawsuits against hotels across the country. Hotel employees have also utilized the legal system to pursue remedies for their employers’ discriminatory actions.  The Three Diamond Rated Millennium Broadway Hotel in Times Square in Manhattan was hit by a discrimination lawsuit in 2011. In this particular lawsuit, Freddrick MacMillan, “who had been an employee of Millennium for over two decades, sued the hotel in Federal District Court alleging that he was forced to work in a racially hostile work environment” (See Hotel).  Mr. MacMillan asserted that he decided to sue the hotel because his status as the only African-American employee in the engineering department led to co-workers using “inappropriate racial terms in his presence in order to upset and harass him. Mr. MacMillan claimed that co-workers referred to him as ‘boy’ and one of them suspended a lynched voodoo doll hanging from a noose in a supervisor’s office. The doll remained…in the supervisor’s office until an union representative intervened” (Id.). Macmillan allegedly suffered because he had to work in a racially hostile environment and the jury that heard this particular case awarded Mr. MacMillan “$1,000,000 in punitive damages and $125,000 in compensatory damages” (Id.).

ADA Discrimination (Employee): Comfort Suites Mission Valley Hotel, San Diego.

An allegation under the American With Disabilities Act resulted in a discrimination lawsuit when “supervisors at the [Three Diamond Rated] Comfort Suites Mission Valley Hotel in San Diego denied a former front desk clerk diagnosed with autism access to a job coach that ‘would have helped the clerk learn to master his job using autism-specific training techniques.’ Supervisors also allegedly  made repeated disparaging remarks about his condition” (Dunning).  The supervisors in this particular case were bound and determined to wash their hands of this disabled employee and “after refusing on several occasions to allow the job coach into the hotel, the supervisors allegedly accused the clerk of mishandling a hotel guest’s packages and fired him” (See Dunning).

The fired clerk and the United States Equal Employment Opportunity Commission (EEOC) subsequently brought a discrimination lawsuit against the Comfort Suites Mission Valley Hotel due to the the company’s failure “to make a reasonable accommodation for the clerk’s disability, discrimination, and wrongful termination” (See Dunning).  The case was settled  and “according to the terms of the settlement, the former clerk will receive $125,000, while San Diego-based Partnership with Industry-the non-profit employment support organization that sent the job coach-will, receive $7,500” (Id.).  Total damages paid by the hotelier in this case amounted to $132,500.00.

Racial Discrimination: Fontainebleau Miami Beach Hotel in Miami, FL.

Finally, a recent incident involving the Four Diamond Rated Fontainebleau Miami Beach Hotel in Miami, Florida could provide a case study on why sensitivity to potential discrimination-related issues is critical to the hospitality industry.  According to the news, the racial discrimination allegations are that “a group of South Florida women claim they were recently turned away from a club inside Miami Beach’s famed Fontainebleau Miami Beach Hotel and they say it’s a case of racial discrimination” (See Shepard).  The alleged victims  claim  they ‘‘‘saw all these other white girls, you know, getting in…One of the security guards saw us and kind of felt bad and approached me.  He said ‘you know what, he’s not going to let you guys in because you’re black, you know that’” (Id.).  The alleged victims also claim that Rodrick Dudley, who was supposedly employed by the Fontainebleau Hotel as a club promoter, sent one member of the group a text message stating “It’s a double standard @ the fountainbleu.  White chics can be ok.  Black chics gotta look twice as good and they only cater to a so-called urban crowd on thursdays and sundays” (Id.).

As of press date, no lawsuit has been filed and Fontainebleau Management disputes the allegations. Although this incident has generated a large amount of publicity in the Miami area as well as nationwide, it is uncertain if the image of the Fontainebleau Hotel will be cast in a negative light.

The Cost of Litigation: $2.9M or Alternatively, $969K Per Each of the Three Hotels.

The dollar amounts paid out to resolve the previously mentioned hotel discrimination cases (Hotel Shangri-La, Millennium Broadway Hotel Times Square and Comfort Suites) totaled $2,907,500. The total settlement amount in these three cases effectively cost each hotel an average of $969,166.67 in damages.  In other words, each hotel averaged about $1M in damages – an enormous hit to the hotel’s bottom line. But in all probability, each hotel saw a significant diminution in its value.

The Lesson for the Hospitality Industry.

Therefore, the question of how hoteliers can protect themselves from financially crippling discrimination lawsuits takes on great importance.  The easiest way for hotels and their owners to prevent discrimination lawsuits from occurring is to familiarize themselves with federal laws against discrimination, how these federal statues work and the standards of evidence that such laws require of the plaintiffs to prove their case.

Title 42 of the Civil Rights Act, Chapter 21 – Civil Rights, Subchapter II – Public Accommodation

One federal anti-discrimination statue that relates to potential discrimination lawsuits against hotels and their proprietors is U.S. Code Title 42, Chapter 21, Subchapter II.[1]  This statue prohibits discrimination or segregation in places of public accommodation based on the equal access principle, which states that “all persons shall be entitled to the full and equal enjoyment of the goods, services, facilities, privileges, advantages, and accommodations of any place of public accommodation, as defined in this section, without discrimination or segregation on the ground of race, color, religion, or national origin”.[2] Hotels clearly fit under the umbrella of “places of public accommodation” and are subject to this statue.  Therefore, the Hotel Shangri-La Santa Monica incident fits under the umbrella of this statute. It remains to be seen if the allegations against the Fontainebleau Hotel Miami Beach also fall within this statute.  However, if hotel management and employees are made more aware of this federal law and the potential damages emanating from violations of this statute, they would have been less likely to expose themselves to damaging discrimination lawsuits.

Title VII of the Civil Rights Act of 1964, Volume 42.

Another federal anti-discrimination law that hoteliers absolutely have to be aware of is Title VII of the Civil Rights Act of 1964.  Volume 42 of the United States Code states that “Title VII prohibits employment discrimination based on race, color, religion, sex, and national origin”[3].  Furthermore, the United States Code makes it clear that Title VII is intended to grant US District Courts jurisdiction to grant injunctive relief against discrimination in public accommodations and provides the US Attorney General with the power to institute suits to protect Constitutional rights in public facilities.

Scope of Title VII of the Civil Rights Act of 1964,  Volume 42.

The three categories of discrimination covered by Title VII are disparate treatment, disparate impact, and failure to reasonably accommodate religious or disability needs.  If an individual wishes to bring a Title VII disparate treatment, disparate impact, or failure to reasonably accommodate discrimination claim, he or she has to file an complaint with the US Equal Employment Opportunity Commission.  The EEOC will usually perform a quick inspection regarding the individual’s allegations.  The EEOC will then issue the plaintiffs a “right to sue” letter authorizing them to bring a discrimination lawsuit under that particular statue.

Furthermore, if a plaintiff wishes to bring a Title VII claim, their suit must pass the three-step evidentiary analysis mandated by the Supreme Court in McDonnell Douglas Corp. v. Green.[4]  In order to pass the McDonnell Douglas test, the plaintiffs must first prove a prima facie case against the defendant[5].  Once a prima facie case is proven, the defendant has to provide a plausible, non-discriminatory reason for their actions. After the defendant has articulated their reason for acting in the manner in which they did, the plaintiffs have to demonstrate that the defendant’s stated reason for the behavior in question is merely pretext for discrimination.  Title VII covers the discrimination present in the Millennium Broadway Hotel in Times Square and Comfort Suites Mission Valley Hotel discrimination cases. Therefore, it would be prudent for hotel owners to familiarize themselves with this statue in order to avoid potential lawsuits.

Americans with Disabilities Act (ADA) and Americans with Disabilities Act Amendments Act (ADAAA). 

Other federal statues prohibiting hotels and other related business entities from engaging in discriminatory actions are the Americans with Disabilities Act (ADA) and the Americans with Disabilities Act Amendments Act (ADAAA).  These two laws prohibit discrimination against persons with all kinds of disabilities, inclusive of their activities as business patrons and employees.  The ADA mandates that public buildings facilitate equivalent access for people with disabilities and able-bodied persons.  Since all hotels are “places of public accommodation”, they fall under the umbrella of “public buildings” and thus are required to provide equal access to disabled persons.  The ADA also prohibits employment discrimination against disabled persons in the event that reasonable accommodations can be made for the person’s disability.  The level of expenses required for the reasonable accommodation threshold varies by company size and revenue.  Some small companies may not be required to make any reasonable accommodations at all, but most companies are required to provide at least some dollar amount of accommodation.

Let’s use the Comfort Suites Mission Valley Hotel case to examine the reasonable accommodation doctrine.  The autistic employee requested access to a job coach for brief sessions of job training.  It’s clear that the hotel in question did not have to pay for the job coach’s services, therefore this service can be classified as a reasonable accommodation since it obviously fell well below the company’s reasonable accommodation expense threshold (said service was free).  Since the Comfort Suites Mission Valley Hotel refused to allow their employee reasonable accommodations, they were in violation of the ADA and thus exposed to discriminatory lawsuits. The ADAAA was passed in 2008 and widens the scope of the ADA, and it is imperative that hotels and their owners/staff familiarize themselves with these two laws in order to avoid discriminatory lawsuits from disabled persons.  Furthermore, it’s imperative that lawyers who are retained by hotels obtain a working understanding of the ADA and ADAAA as well as US Code Title 42, Chapter 21, Subchapter II and Title VII of the Civil Rights Act of 1964 because by doing so, they will have a better understanding of how to handle discrimination cases against their clients.

Summary

It is rather obvious that hotels are extremely vulnerable to discrimination lawsuits of all kinds and that such lawsuits can be brought by patrons and employees alike.  As places of public accommodation and employers, hotels have a civic responsibility to ensure that they do not partake in discriminatory actions of any kind.  After all, no hotel owner wants to find his or her name associated with the negative publicity that discrimination brings and above all else, many hotel owners cannot afford a $1 million hit to their bottom line.  Take action!  Protect yourself by educating your employees about various forms of discrimination and how to avoid them.  Your wallet will thank you in the long run.

Table of Authorities

“Case Elements for Use in Reality Checking.  Air Force Alternative Dispute Resolution Program.  The United States Air Force.  n.d.  Web.  28 June 2013.

Dunning, Matt.  “EEOC settles discrimination lawsuit against hotel chain for firing autistic clerk.”  Business Insurance.  Business Insurance.  8 November 2011.  Web.  28 June 2013.

“Hotel Employee Wins Substantial Discrimination Verdict.”  New Jersey Employment Lawyer Blog.  Siegler & Traub, L.L.C.  20 December 2011.  Web.  28 June 2013.

Lowenfeld, Jonah.  “Jewish plaintiffs win Hotel Shangri-La discrimination lawsuit.”  The Jewish Journal.  The Jewish Journal.  15 August 2012.  Web.  28 June 2013.

Miles, Kathleen.  “Hotel Shangri-LA Discriminated Against Jews, Jury Finds.”  Huffington Post.  Huffington Post.  16 August 2012.  Web.  28 June 2013.

Shepard, William.  “Group Of South Florida Women Claim Racial Discrimination at Club Inside Fontainebleau.”  NBC Miami.  National Broadcasting Corporation.  21 May 2012.  Web.  28 June 2013.

Title VII of thttp://www.hlconvergeblog.com/wp-admin/post-new.phphe Civil Rights Act of 1964.  U.S. Equal Employment Opportunity Commission.  U.S. Equal Employment Opportunity Commission.  n.d.  Web.  28 June 2013.

42 U.S.C 2000a: US Code-Section 2000A: Prohibition against discrimination or segregation in places of public accommodation.  FindLaw.  FindLaw.  n.d.  Web.  28 June 2013.

[1]See 42 U.S.C. § 2000a et seq., Chapter 21 – Civil Rights, Subchapter II – Public Accommodation;  see also URL: codes.lp.findlaw.com/uscode/42/21/II/2000a. [2]See 42 U.S.C. § 2000a et seq., Chapter 21 – Civil Rights, Subchapter II – Public Accommodation. [3]See 42 U.S.C. 2000, Title VII et seq. [4] Seehttp://caselaw.lp.findlaw.com/cgi-bin/getcase.pl?court=us&vol=411&invol=792 [5] See “Case Elements for Use in Reality Checking” for more information regarding Title VII and prima facie case requirements under this statue.  URL: http://www.adr.af.mil/shared/media/document/AFD-070212-063.pdf   Originally published on Wednesday, October 30, 2013
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In the hotel industry, the myriad of complex business relationships also creates legal land-mines for the unwary. In that regard, hotel asset managers, hotel operators and franchisors should be extremely mindful of their legal obligations to their client, the owner of the hotel. Even if the hotel is a single asset, there are potentially four groups that, for a better term, have their fingers in the pie – the owner, hotel asset manager, hotel operator and franchisor. But at the end of the day, each of these relationships confer legal rights for the benefit of the owner and potentially, to the detriment of the asset manager, hotel operator and franchisor.

Hotel Asset Managers

In this day and age, it is very common for an owner of multiple hotels (whether it be individual owners, investors, and lenders) to hire an asset management company to oversee the hotel operator’s day-to-day management of the hotel. For instance, the hotel asset manager will have oversight of operations and the physical asset (the hotel), which includes monitoring ongoing financial performance, the competitive set, the hotel asset, provide support and review of the budgeting process and advise ownership as to management issues.

The hotel asset manager will also manage the hotel by advising the ownership as to optimum investment strategies, the investment community, select and oversee operators, franchise affiliations and consultants, negotiate and administer contracts and approve/monitor capital expenditures. In addition, the hotel asset manager should oversee the actions of the franchisor as well. Regardless of what role the hotel asset manager has undertaken, it will review and analyze daily-reports, financial statements, and other hotel reports prepared by the hotel operator. Even though the hotel asset manager is one step-removed from the hotel operator, the owner is relying on the hotel asset manager to be its “eyes and ears” for the hotel owner. Simply said, the hotel asset manager is the agent for the hotel owner.

Hotel Asset Managers Bound by Agency Law Principles

Historically, the Bible of Liability in the hospitality industry has been the RESTATEMENT (SECOND) OF AGENCY. It has served as the basis for seminal legal changes in the hospitality industry that now generally govern the conduct of hotel operators, and is relied upon extensively in hotel management disputes and is equally applicable to hotel asset managers. Under agency law principles, the hotel asset manager is the agent for the owner, its principal and is legally bound to disclose anything and everything to the owner, its principal. Generally speaking, the failure to disclose such information would constitute a breach of fiduciary duties. The elements of a claim for breach of fiduciary duty are: (1) existence of a fiduciary duty; (2) breach of that duty; and (3) damage caused by the breach.

As an agent of the owner, the hotel asset manager owes certain fiduciary duties to the owner and those duties include but are not limited to, the following: (a) a duty to act in the owner’s best interests; (b) a duty of loyalty; (c) a duty to disclose all information relevant to the owner affairs (candor); (d) a duty to keep and render accounts; (e) a duty not to accept secret payments or other amounts not authorized by the owner; (f) a duty to ensure that the principal’s profits are maximized; (g) a duty of care and skill; (h) a duty of good conduct; (i) a duty to act only as authorized; (j) a duty to obey; and (k) a duty not to act for an adverse party without the principal’s consent.

A hotel asset manager’s intentional breach of a fiduciary duty is a tort for which the plaintiff may recover punitive damages. While it is a general rule in many jurisdictions that courts allow the recovery of punitive damages where the defendant, in committing a tort, acted willfully, maliciously, or fraudulently, where punitive damages are awarded for breach of fiduciary duty, the actual motives of the defendant and whether the defendant acted with malice are immaterial. But something more than a simple breach is required for the recovery of punitive damages; the acts constituting the breach must have been fraudulent, or at least intentional. An intentional breach may be found where the fiduciary intends to gain an additional benefit for himself.

The hotel asset manager can get into trouble real quick if it fails to monitor reports prepared by the hotel operator, fails to review third-party contracts or avoids “drilling-down” in the financial data, agreements, and contracts to understand the operational side of the hotel. And sometimes, the big hotel asset management companies might have a cozy relationship with national hotel operators and/or hotel franchisors and on occasion, look the other way, because the hotel asset manager is more concerned with cementing future hotel asset management assignments.

Hotel Operators

In 1925, the Hotel Association of New York City designed a hotel account system to provide uniform classification of revenues, expenses, assets, liabilities and equities for hotels to attain and provide comparable financial statements. The system has since then been adopted by the American Hotel & Lodging Association (“AH&LA”) and is now referred to as the ”Uniform System of Accounts for the Lodging Industry.” In addition, the American Hotel & Lodging Educational Institute provides industry leadership in certifications necessary to operate hotels pursuant to the “Uniform System of Accounts for Hotels.”

i) Violations of the “Ten Commandments”

Notwithstanding these operational “Ten Commandments”, the landscape is replete with litigation against hotel operators. For example, there have been cases where the operator has “cooked the books” to obtain incentive fees. Specifically, the hotel operator allegedly ordered items in the last quarter of the calendar year and told the hotel’s vendors to bill the hotel in the first quarter of the next year, in order to obtain an incentive bonus. It’s a simple equation – the hotel operator fraudulently understated the hotel’s expenses to increase net operating income to achieve its performance bonus. That could be called theft, conversion, fraud or any number of things that would serve as the basis for a lawsuit.

ii) Control of Hotel Operations Equates to Potential Liability

In another case, the hotel operator (also the franchisor) threw an expensive party at the owner’s hotel but the hotel received no benefit at all – – the party was for the sole benefit of the hotel operator (and franchisor), yet the owner’s hotel was charged the costs for throwing the party. Despite uniform financial controls that are essentially mandated by the “Ten Commandments”, hotel operators still manage to open themselves up for litigation by doing bad acts.

In the context of hospitality litigation, it is much easier to find negligence, malfeasance and/or willful misconduct against the hotel operator because their scope of involvement is “more-hands-on”, more “real-time” and covers a “24/7” cycle with day-to-day operations of the hotel, as opposed to the asset manager that reviews reports after the fact. From an operational stand-point, the hotel guests, the restaurant guests, the bar and lounge patrons and banquet guests all “trigger” immediate responses, needs and crisis’s, whether someone falls, is too drunk, gets food poisoning or the invitee of the guests causes a problem. For the hotel operator, the potential for liability is exponential vis-à-vis the hotel asset manager, due to guest check-ins and check-outs, safety issues, food & beverage operations, convention/meeting room banquets, and failing to implement competent financial controls at the hotel property level so the owner can make money.

iii) Hotel Operators Are Bound by Agency Law Principles

In the past two decades or so, there has been a plethora of hotel management contract decisions that held “hotel owners had the power to terminate a hotel management contract based on agency law principles.” For a long time, the legal rationale for terminating hotel management agreements was based on the RESTATEMENT (SECOND) OF AGENCY. That is true, because the RESTATEMENT (SECOND) OF AGENCY sets forth the common law concept that a principal (hotel owner) has the power to terminate an agent (hotel operator) at any time unless the agency is coupled with an interest (which means an economic interest by the hotel operator in the hotel). But despite these adverse rulings, national hotel operators have attempted to disclaim that hotel management agreements constituted an agency relationship – – but the courts looked to the actual relationship of the parties and held that the “common law of agency trumps explicit contract language.”

In 2011, the Court in the Turnberry decision re-affirmed with crystal-clear clarity, that the hotel owner, based upon agency law principles, can terminate a hotel management agreement:
The notion of requiring a property owner to be forcibly partnered with an operator he does not want to manage its property is inherently problematic and provides support for the general rule that a principal usually has the unrestricted power to revoke the agency.

iv) Agency Coupled With an Interest

With regard to an economic interest, the courts have further held that for an agency to be coupled with an interest, the hotel operator must have a specific, present, economic interest in the hotel i.e., an equity interest or key money in the deal to create an agency coupled with an interest. But recent decisions seem to suggest that hotel operators have an uphill battle to argue their hotel management contract is an agency coupled with an interest and therefore, the hotel owner cannot terminate the hotel management contract.

v) Personal Services Contracts

In Marriott International v. Eden Roc and RC/PB, Inc. v. The Ritz Carlton Hotel Company, the RESTATEMENT (SECOND) OF AGENCY was not the basis for terminating the hotel management contracts. Instead, in the Eden Roc and Ritz Carlton cases, which applied New York and Florida law, respectively, the courts held that because the hotel operator had a broad delegation of power of discretionary authority that required the operator to exercise special skill and judgment, that the hotel management agreements were personal services contracts and could not be enforced by injunction or specific performance.

Both court’s analyzed the hotel management contracts under “the concepts of involuntary servitudes and assessed the difficulties courts would encounter in supervising the performance of special skills and judgment,” and ruled hotel management contracts may not be enforced by injunction or specific performance. Both holdings resulted in the hotel owners having the power to terminate hotel management agreements under the theory the contract was a personal services contract and not an agency law concept.

vi) Summary

In summary, California, New York and Florida courts have held that hotel owners can terminate hotel management contracts under agency law principles (unless an agency is coupled with an interest) or as personal services contracts. It appears the law is now settled.

vii) Wrongful Termination and Damages

But it is extremely important for the hotel owner to understand, that although it has the power to terminate a hotel management contract under either theory, the hotel owner may not have the contractual right to terminate the hotel management agreement. Therefore, the hotel owner may be liable for wrongful termination and the hotel operator may seek damages for the remainder of the hotel management contract term. So, the moral of the story is simple – – the power or right of termination can be expensive.

Franchisors

Although agency law principles have been applied in the context of terminating hotel management contracts (and should be applicable to asset managers), franchise agreements have been generally immune from these legal challenges. The reason is simple – the franchisor doesn’t really exercise control over the franchisee, unlike hotel operators that control the entire hotel operation for the hotel owner.

Historically, franchisees’ have filed lawsuits against franchisors for claims such as wrongful termination and nonrenewal, breach of contract (failing to provide support, training, advertising, territorial protection and the like), claims for market withdrawal by franchisor, the ability to transfer a franchise, misrepresentation claims (earnings, revenue, success/failure rates, etc.), encroachment claims (area of protection clauses), failure to provide certain disclosures pursuant to Federal Trade Commission mandates, antitrust claims and breach of fiduciary duty claims (advertising fund expenditures). However, filing lawsuits based on agency law principles and breach of fiduciary duty are far and few between.

In 1998, a little known lawsuit was filed that could serve as the guide post for future lawsuits that could find an agency law relationship between the franchisor and franchisee. In the Empire Holdings LLC v. Radisson Hotels Int’l case, the New York Supreme Court (trial court) came dangerously close to ruling that an agency relationship existed between the franchisor (Radisson) and its franchisee (Empire Holdings). In the Radisson case, the dispute dealt with the franchisee’s right to terminate the franchise agreement if Radisson failed to produce a fixed number of gross room reservation nights through Radisson’s national reservation system in a fiscal year. One of the claims against Radisson was based on agency law and an alleged breach of fiduciary duty. In the franchise agreement, there was a clause stating that Radisson was the “agent” for Empire Holdings as it related to booking hotel reservations, etc. In denying Radisson’s motion to dismiss, the court stated in dicta that Radisson’s role as an “agent” for Empire Holdings in booking hotel reservations could result in a fiduciary relationship between the franchisor (Radisson) and franchisee (Empire Holdings). Although the Supreme Court in New York is a trial court, the door was opened, albeit very little, to finding a franchise agreement constituted a fiduciary duty relationship between the franchisor and franchisee.

Agency law principles and fiduciary duties are found in the context of control – the hotel operator controls the operation, management, and pursue strings of the hotel. In other words, the more control the party has, the more likelihood there will be an agency relationship between the two parties. In the context of a franchise agreement, there is generally no control by the franchisor over the operation, management, and pursue strings of the hotel. But as illustrated in the Radisson case, if the agreement remotely states or implies the franchisor is the agent for hotel reservations, or the agent for collecting marketing fees, etc., or requires the franchisor to be in charge of funds paid by the franchisee to the franchisor, then the traditional agency law principles and fiduciary duties might be applicable to franchise agreements. Arguably, if the franchisor is controlling funds paid to it by the franchisee and misuses those funds, then the franchisee could bring a claim for conversion, which could be the catalyst to trigger agency law and fiduciary duty obligations and related claims against the franchisor.

The evolution of case law can take years. But I suspect there is a franchise agreement that effectively vests more than “nominal control” in the franchisor over the franchisee’s operation. That test case could be the one that finds a franchise relationship can be terminated like a hotel management agreement under agency law principles. If that time comes, then the franchisee’s power to terminate a franchise relationship versus its legal right to terminate, must be balanced against a wrongful termination claim by the franchisor and subsequent damage claims. When that ruling is decided, it will send shock-waves through the entire hotel industry and immediately create a “new” legal relationship between the franchisor and franchisee.

Originally published on Sunday, January 4, 2015
1186 views at time of republishing