Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—3d Cir.: Hotel franchisee’s claims of insufficient notice of termination were properly dismissed, (Apr 30, 2014)

By Linda O’Brien, J.D., LL.M.

In an action by a hotel chain franchisor against a former franchisee for breach of contract, the franchisor was entitled to summary judgment on the franchisee’s counterclaims for insufficient notice of termination, the U.S. Court of Appeals in Philadelphia has ruled (Red Roof Franchising, LLC v. Patel, April 29, 2014, Per Curiam).

In 2002, Asvin and Aruna Patel entered into a 15-year franchise agreement with budget hotel chain franchisor, Red Roof Franchising, LLC (RRF), under which they opened and operated a Red Roof Inn hotel. In 2007, the Patels entered into a franchise agreement to operate a second Red Roof Inn. Under the agreements, the franchisees were required to pay monthly royalty fees to RRF or face monetary penalties. RRF was permitted to terminate the agreement after providing notice of default and an opportunity to cure. The Patels assigned their interests to their closely held corporation, AA Hospitality (AAH), and executed a personal guarantee as to AAH’s obligations under the franchise agreements.

In 2009 and 2010, AAH fell into arrears with regarding the monthly royalty fees at their two locations. In 2010, RRF sent a written notice of default to AAH, which included an opportunity to cure the default with full payment by a specified date. When no payments were received, RRF sent notices of its intent to terminate the franchise agreements. Subsequently, RRF filed two suits against AAH, addressing each location and asserted breach of contract, among other claims. AAH filed counterclaims, alleging violations of the New Jersey Franchise Practices Act (NJFPA). The district court granted RRF’s motions for summary judgment on all claims and counterclaims. AAH appealed.

The district court properly found that there were no genuine issues of material fact regarding the sufficiency of the notice of termination provided by RRF. The NJFPA provides that a franchisor may not unilaterally terminate a franchise without first giving written notice setting forth the reasons for termination to the franchisee at least 60 days prior to such termination.

RRF presented evidence that a letter was sent to AAH and the Patels in January 2010, describing its intent to terminate the franchise agreement and the reasons for doing so. In April 2010, RRF sent a second letter to AAH and the Patels, which formally terminated the agreement. According to the court, RRF signaled an unambiguous intent to terminate the franchise agreement in the January 2010 letter and the inclusion of an opportunity to cure in the letter did not invalidate the notice for purposes of the NJFPA. By the time RRF formally terminated the agreement in its April 2010 letter, the notice requirements were satisfied, the court concluded.

The case is No. 13-2563.

Attorneys: Peter J. Boyer (Hyland Levin) for Red Roof Franchising, LLC. Frank C. Fusco (Frank C. Fusco, Attorney at Law) for Asvin Patel and Aruna Patel.

Companies: Red Roof Franchising, LLC.

Cases: FranchisingDistribution DelawareNews NewJerseyNews PennsylvaniaNews