Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—2d Cir.: Hilton subsidiary properly terminated Hampton Inn franchise agreement, (Apr 9, 2015)

By Greg Hammond, J.D.

A Hampton Inn hotel franchisee could not overturn a declaratory judgment and money damages arising out of a contractual dispute concerning a Hampton Inn hotel franchising agreement. The U.S. Court of Appeals in New York City affirmed the decision of the federal district court in New York, finding that the lower court did not err in considering guest-satisfaction surveys, holding that the franchisor acted properly in terminating the agreement, and permitting the franchisor to recover liquidated damages under the agreement (HLT Existing Franchise Holding LLC v. Worcester Hospitality Group, LLC, April 9, 2015, per curiam).

Background. Between 2004 and 2012, pursuant to a franchise agreement with HLT Existing Franchise Holding LLC—a subsidiary of Hilton Worldwide, Inc.—Worcester Hospitality Group, LLC operated its Worcester hotel as a Hampton Inn. Consistent with that agreement, Hilton evaluated the Hotel twice a year, using both in-person inspections and guest surveys. In 2012, Hilton terminated the agreement on the grounds that the hotel had repeatedly failed its evaluations.

Hilton subsequently filed suit against Worcester for past-due fees and liquidated damages under the agreement. The district court granted summary judgment in favor of Hilton, and Worcester appealed, arguing the district court erred in: (1) considering guest-satisfaction survey results when determining whether Hilton properly terminated the franchising agreement; (2) finding that Hilton properly terminated the franchising agreement because it did not act arbitrarily, irrationally, or in violation of its duties of good faith and fair dealing; and (3) allowing Hilton to recover liquidated damages under the agreement.

Surveys. In support of its appeal, Worcester argued that the guest-satisfaction survey results were improperly considered on Hilton’s motion for summary judgment because they were inadmissible hearsay statements and were improperly authenticated. The appellate court disagreed, finding that the lower court was correct in ultimately concluding that the survey responses were not hearsay. Specifically, the court found that the surveys were not admitted for the truth of what the customers actually thought and that Hilton did not act in bad faith or irrationally in relying on the results. The reports were properly considered as “records of a regularly conducted activity” and Worcester failed to draw into material dispute the authenticity of the survey results or their transmission to Hilton. Further, while Hilton set forth evidence to establish the authenticity of the survey data, Worcester failed to present any contradictory evidence.

Termination. Worcester also argued on appeal that Hilton acted arbitrarily, irrationally, or in violation of its duties of good faith and fair dealing when it exercised its discretion in conducting on-site inspections of Worcester’s hotel. The appellate court, however, determined that any dispute concerning the arbitrariness or irrationality of the on-site inspections was irrelevant because of Hilton’s independent basis for terminating the franchise agreement—that Worcester failed the two evaluations due to failing scores on guest surveys, not because of failing scores on the on-site inspection. Consequently, even if Hilton acted in an arbitrary or irrational manner in conduction portions of its on-site evaluations, they did not cause the termination of the franchising agreement.

Liquidated damages. Lastly, Worcester claimed that the district court erred in finding that the liquidated damages clause was permissible as a matter of law because the court purportedly overlooked an individual’s declaration, based on more than 20 years of experience in the hotel industry, that a prototype Hampton Inn hotel can be constructed in less than a year. The district court did not err, however—according to the appellate court—because the central question concerning liquidated damages is how long did the parties reasonably anticipate that Hilton would need to replace Worcester as franchisee and to reopen a Hampton Inn hotel in the event that Hilton terminated the contract? No reasonable juror could have inferred from the declaration how long the parties anticipated that it would take for Hilton to replace Worcester as franchisee and to reopen a Hampton Inn hotel. The lower court consequently did not err in granting summary judgment in Hilton’s favor.

The case number is 14-593-cv.

Attorneys: Benjamin B. Reed (Plave Koch PLC) for HLT Existing Franchise Holding LLC. Gardiner S. Barone (Blustein, Shapiro, Rich & Barone, LLP) for Worcester Hospitality Group, LLC.

Companies: HLT Existing Franchise Holding LLC; Worcester Hospitality Group, LLC

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