Antitrust Law Daily Wrap Up, ANTITRUST—2d Cir.: Conspiracy, RICO claims based on Marriott’s union negotiations properly dismissed, (Sep 16, 2015)

By Greg Hammond, J.D.

The federal district court in New York City properly dismissed a hotel developer’s antitrust claims against a hotel management company for allegedly conspiring with a labor union to allow union representation of hotel employees and misrepresenting its position against unionization during negotiations of the parties’ hotel management agreement, the U.S. Court of Appeals in New York has decided. The developer’s Racketeer Influenced and Corrupt Organizations Act (RICO) claims were also properly dismissed as time barred (Madison 92nd Street Associates, LLC v. Courtyard Management Corp., September 15, 2015, Per Curiam).

Madison 92nd Street Associates was formed in 2001 for the purpose of developing a hotel on the upper east side of Manhattan. Madison entered into negotiations with hotel management company Marriott International to manage the hotel under the “Courtyard by Marriott” brand. During the negotiations, Madison stated that it considered low labor costs to be critically important, since they represented the largest expense for a hotel and union hotel labor could significantly increase a hotel’s operating costs. Marriott and Courtyard allegedly represented they were anti-union companies and would resist unionization at the hotel. Madison subsequently executed a management contract with Courtyard, providing that Courtyard had discretion and control in all matters regarding the management of the hotel and would manage the hotel under standards comparable to those in other hotels.

After the execution of the management agreement, Marriott purportedly entered into an agreement with the AFL-CIO, a union representing non-managerial hotel employees, under which Marriott hotels would grant the union access to hotel property and not attempt to influence their employees’ decision whether to unionize. Following the 2006 opening of the hotel, the union was certified to represent certain hotel employees and Marriott negotiated a work rules agreement which granted the union major concessions. After the hotel’s gross revenue decreased significantly without a corresponding downward adjustment of labor expenses by Courtyard, Madison filed a bankruptcy petition and the hotel was ultimately sold without the management agreement. Madison filed suit against Marriott, Courtyard, the union, and other hotels, alleging violations of the Sherman Act and RICO, among other claims. The lower court granted dismissal of the claims, and Madison appealed.

Antitrust claim. The appellate court determined that the antitrust claim—which alleged a conspiracy in restraint of trade—failed under both the per se rule and the rule of reason. First, the court determined that the alleged agreement between the defendants was at most a vertical agreement between buyers and sellers at different levels of the market, rather than a horizontal agreement, and that vertical agreements are usually inappropriate for per se treatment. In particular, the vertical agreement in the instant case was inappropriate for per se treatment because the scheme alleged by Madison was not a “garden-variety” price fixing conspiracy, but was an unusual agreement to manipulate a portion of the New York City hotel labor market.

The antitrust claim also failed under the rule of reason. Specifically, the court noted that the complaint defined the relevant markets as “labor services provided by non-managerial Hotel employees working or seeking work in Marriott-managed hotels…in New York City.” However, the alleged market could not plausibly be said to “encompass all interchangeable substitute products” because it was limited to labor at Marriott-managed hotels. The artificially small “Marriott-only” submarket was implausible, according to the court, rendering dismissal appropriate.

RICO claims. Madison’s RICO claims also were properly dismissed as untimely under the relevant four-year statute of limitations. The lower court found that Madison’s claim accrued at the latest in 2007, when Courtyard admitted that the hotel had secretly been made a union shop. However, Madison brought its RICO claim in January 2013. Madison first argued on appeal that the claim should be equitably tolled because the defendants concealed the alleged conspiracy. The appellate court rejected this argument, however, agreeing with the lower court that Madison failed to exercise due diligence in uncovering the alleged racketeering when it repeatedly learned information that conflicted with its alleged understanding about how Courtyard and Marriott were going to operate the hotel. The court concluded that Madison never seriously investigated its potential claims beyond simply admonishing Courtyard and Marriott to keep headcount down and labor costs low.

Madison also claimed that it suffered multiple injuries as a result of the defendants’ scheme, and that each injury resulted in a separate actionable RICO claim. The court, however, determined that foreclosure on the hotel by GE Capital and its subsequent sale at auction were not “new and independent injuries,” but were direct consequences for the hotel’s high labor costs. The other asserted injury—alerting the hotel workers in advance of layoffs so that they could claim benefits—was not an actionable injury because Madison never alleged that the workers’ disability claims were fraudulent or otherwise illegitimate.

Lastly, Madison argued that its RICO claims related back to the original state court complaint, filed on September 4, 2009. This claim was forfeited, however, because it was not raised until Madison’s reply brief. Even if the court considered the issue, Madison’s later amendment of the complaint added new parties who did not know that they were the proper defendants in the initial state court action, which asserted garden-variety claims for hotel mismanagement and fraud. The RICO claims therefore could not relate back.

The case is Nos. 14-2947-cv and 14-2954-cv.

Attorneys: Sean F. O’Shea (O’Shea Partners LLP) for Madison 92nd Street Associates, LLC. Christopher P. Hall (DLA Piper LLP) for Courtyard Management Corp. and Marriott International, Inc. Richard M. Goldstein (Proskauer Rose LLP) for Host Hotels & Resorts, Inc. James P. Ulwick (Kramon & Graham, P.A.) for DiamondRock Hospitality Co. Barry N. Saltzman (Pitta & Giblin LLP) for The New York Hotel and Motel Trade Council and AFL-CIO.

Companies: Madison 92nd Street Associates, LLC; Courtyard Management Corp.; Marriott International, Inc.; Host Hotels & Resorts, Inc.; DiamondRock Hospitality Co.; The New York Hotel and Motel Trade Council; AFL-CIO

Cases: Antitrust RICO DelawareNews NewJerseyNews PennsylvaniaNews