Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—D.N.J.: Judgment entered in favor of Travelodge in breach of franchise agreement case, (Oct 1, 2024)

By Sara Cracau, J.D.

Franchisee that breached franchise agreement with Travelodge was not excused from performance based on alleged fraudulent inducement and was liable for damages.

The federal district court in New Jersey has granted judgment in favor of Travelodge in action alleging breach of franchise agreement finding that the franchisee’s breach was not excused based on Travelodge’s alleged fraudulent inducement into the contract. The parties generally did not dispute the current obligations under the guaranty, providing no basis for not enforcing it. Accordingly, the court found that Travelodge was entitled to judgment on its claim for breach of the guaranty and one of the individuals who provided a personal guaranty in the amounts awarded against the franchisee. The court found that Travelodge was entitled to liquidated damages in the amount of $129,000, representing a rate of $1,000 per guest room at the facility and prejudgment interest on the principal amount of liquidated damages at the rate of 1.5 percent per month from December 4, 2014 through the date of judgment. The court directed Travelodge to file a separate application for attorney fees and costs (Travelodge Hotels, Inc. v. Durga, LLC, No. 2:15-cv-08412-CCC-SDA (D.N.J. Sept. 30, 2024)).

Travelodge, a Delaware corporation and member of the Wyndham Hotel Group, entered into a franchise agreement with a franchisee, Durga, LLC, to operate Travelodge, a 129-room guest lodging facility in Sharonville, Ohio. In November 2014, the franchisor notified the franchisee that it was terminating the agreement because the franchisee had breached the agreement and was no longer operating the hotel as a Travelodge facility. This culminated in a dispute between the parties relating to Travelodge’s entitlement to recover damages. The franchise agreement required the franchisee to pay liquidated damages to Travelodge if the franchisee ceased operating the facility as a Travelodge or if the franchisee lost possession or its right to possession of the facility. Depending on the circumstances, the franchisee was required to pay up to $1,000 per guest room that it was authorized to operate. The franchise agreement stipulated that liquidated damages were in place of Travelodge’s claims for lost future recurring fees and, that, if litigation was initiated to enforce the agreement, the non-prevailing party was required to pay the prevailing party’s attorney’s fees and costs.

The parties’ performance and termination. After execution of their agreement, the parties disputed the time period in which the franchisee was given access to Travelodge’s reservation system. The parties also disputed the extent to which the franchisee was reporting revenues and paying recurring fees during the agreement’s active term. The franchisee did not apply to convert the facility to another brand. It notified Travelodge that it ceased operation of the facility as a Travelodge and had contracted to operate the facility as a competitor brand, Magnuson Hotel. Travelodge then demanded that the franchisee pay $129,000 in liquidated damages and the outstanding balance of recurring fees. Travelodge was required to remove its signage from the facility because the franchisee failed to de-identify the facility.

Earlier in the case, the court denied Travelodge’s motion for summary judgment on the defaulted franchise agreement, finding there to be genuine issues of fact relating to the franchisor’s recovery. A two-day bench trial followed in which the court evaluated the evidence and credibility of all the witnesses and made findings of fact and law.

Liability under the franchise agreement. There was no dispute that the franchisee terminated the agreement. However, the franchisee contended that its termination did not constitute a breach because Travelodge fraudulently induced it into executing the agreement and that Travelodge first breached the agreement by failing to provide the franchisee with the appropriate reservation software. The court rejected the franchisee’s various arguments. It found that the franchisee failed to establish any material misrepresentation of fact regarding a more desirable Wyndham flag.

Even if the court accepted the franchisee’s assertions, the alleged assurances of a new Wyndham flag would constitute nothing more than a promise of future performance. Under New Jersey law, fraudulent inducement requires a showing of a material misrepresentation of a presently existing or past fact. Furthermore, Travelodge failed to establish any evidence that Travelodge knew of the falsity of the alleged statements made to the franchisee. Furthermore, the court noted that the franchisee was not entitled to rely on an oral promise that directly contradicted the terms of a written agreement which the franchisee signed and failed to comply with. Because the franchisee failed to establish reasonable reliance, it also failed to prove resulting damages.

The franchisee also failed to establish any material breach by Travelodge, as it relied on a single email which indicated to a Travelodge employee that the franchisee did not get its reservation open until January 2014. The franchisee could not show that Travelodge did not provide the franchisee with needed technological support. Even if it was established that Travelodge committed a material breach, the franchisee continued to benefit from the agreement. The court found that the franchisee’s unilateral termination constituted a breach, entitling Travelodge to damages.

The parties generally did not dispute the current obligations under the guaranty, providing no basis for not enforcing it. Accordingly, the court found that Travelodge was entitled to judgment on its claim for breach of the guaranty and one of the individuals who provided a personal guaranty in the amounts awarded against the franchisee.

Liquidated damages. The court found that Travelodge was entitled to liquidated damages in the amount of $129,000, representing a rate of $1,000 per guest room at the facility and prejudgment interest on the principal amount of liquidated damages at the rate of 1.5 percent er month from December 4, 2014 through the date of judgment. The court began with the presumption that the parties’ negotiated liquidated damage clause is valid. The agreement clearly provided that the stipulated damage calculation stands in place of Travelodge’s claims for lost recurring fees. It further provided that the franchisee had to pay liquidated damages in the amount of $1,000 for its guest room at the facility that it was authorized to operate if the

Attorney fees and costs. The court directed Travelodge to submit a separate application for fees and costs in accordance with the franchise agreement which entitled it to such recovery, noting that state contract law permits it.

The Case is No. 2:15-cv-08412-CCC-SDA.

Judge: Cecchi, C.

Attorneys: Joseph C. Megariotis (Connell Foley LLP) for Travelodge Hotels, Inc. Jordan Patrick Brewster (Law Office of Jordan P. Brewster) for Durga, LLC

Companies: Travelodge Hotels, Inc.; Durga, LLC

Cases: FranchisingDistribution NewJerseyNews