Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—DMd: Arbitration Award Against Hotel Franchisee That Failed to Construct, Operate Franchise Confirmed, (Oct 25, 2012)

By John W. Arden, J.D., LLM.

An arbitration order, awarding franchisor Choice Hotels International $180,000 in contractual damages against a franchisee that failed to construct and operate a hotel in the Virgin Islands, was confirmed by the federal district court in Greenbelt, Maryland (Choice Hotels International, Inc. v. Special Spaces, Inc., October 24, 2012, Messitte, P.). The court granted summary dismissal of the franchisee’s claim that Choice Hotels violated its duty of good faith and fair dealing in terminating the franchise.

In 2005, Special Spaces, Inc. entered into a franchise agreement with Choice Hotels to construct and operate a Comfort Inn & Suites in St, Croix, Virgin Islands. The agreement contained a clause obligating the franchisee to pay the franchisor liquidated damages if the agreement were prematurely terminated based on the franchisee’s default. The damages were to equal the number of rentable rooms, multiplied by $50, multiplied by the remaining months of the franchise agreement, not to exceed 36 months.

The franchise agreement also contained an arbitration clause, requiring that “any claim or controversy arising out of or relating to” the agreement be subject to arbitration.

Special Spaces never constructed the franchised hotel. After notifying the franchisee of its default—and after an initial extension of the construction deadline—Choice Hotels terminated the franchise agreement and filed a demand for arbitration with the American Arbitration Association. The franchisee did not participate in the arbitration hearing, and the arbitrator issued an award in favor of Choice Hotels in the amount of $180,000 in contractual damages and $3,375 in arbitration fees and expenses.

On March 8, 2012, Choice Hotels filed an Application to Confirm the Arbitration Award, and Special Spaces filed an answer and counterclaim for breach of the implied duty of good faith and fair dealing. Choice Hotels filed a motion for summary judgment on the counterclaim.

Viewing the record in the light most favorable to Special Spaces, the federal district court granted the motion for summary judgment, holding that there was no genuine issue of material fact. Federal courts must give great deference to an arbitration award, the court observed, and may vacate an arbitrator’s judgment only in limited circumstances, such as when the arbitrator intentionally disregards the applicable law.

Choice Hotels contended that there was no dispute that (1) the franchise agreement was valid and binding, (2) Special Spaces breached the agreement by failing to construct the hotel within the prescribed period of time, (3) the parties properly arbitrated the dispute, and (4) the arbitration award was valid and was not properly challenged by Special Spaces.

Special Spaces did not respond to the motion for summary judgment. In its answer, however, the franchisee had contended that the arbitration award should be dismissed because (1) it did not participate in the arbitration hearing, (2) the franchisor did not act in good faith, and (3) the arbitrator’s damage award was “totally without basis.” It claimed that Choice Hotels executed the franchise agreement, knowing that Special Spaces would not be able to secure financing to construct the hotel, thus entering the agreement only to take the franchisee’s initial investment of $30,000.

The court disagreed, finding that the breach of good faith and fair dealing claim was unsupported by the record; that the $180,000 damage award tracked the calculation provided in the agreement; and that the franchisee was not excluded from participating in the arbitration hearing. The arbitrator’s refusal to allow the franchisee to participate telephonically did not justify vacating or modifying the arbitrator’s award.

The case is Civil No. PJM 12-733.

Kristen Kwiatkowski Bugel (Choice Hotels International, Inc.).

Cases: FranchisingDistribution MarylandNews