Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION NEWS: Termination allegedly breached agreement after hotel franchisee’s property renovations, (Apr 29, 2016)

By Linda O’Brien, J.D., LL.M.

Hotel franchisor Best Western’s termination of a Wyoming franchisee’s membership in the chain’s membership association, after the franchisee invested in substantial renovations to the hotel property, was a breach of the membership agreement, according to a complaint filed in the federal district court in Phoenix, Arizona (Regency Midwest Ventures Limited Partnership v. Best Western International, Inc., April 27, 2016).

Headquartered in Phoenix, Best Western International operates over 4,000 Best Western branded hotels worldwide. Instead of offering franchises in a traditional sense, Best Western is organized as a nonprofit membership association, in which each franchisee acts and votes as a member of the association. Regency Midwest Ventures, L. P. owns and/or operates 22 hotels, including eight Best Western hotels.

The complaint states that in 2004 Regency entered into a membership agreement with Best Western to operate a hotel in Casper, Arizona. The hotel is a 230-room, six-story, full-service facility, with a pool, fitness center, full-service restaurant, and convention facility—making it among the largest in the Best Western system. To bring the hotel up to the standards required by Best Western, Regency invested $270,000 in capital improvements. The hotel began operation after Best Western approved Regency’s membership application in 2014. Regency continued to improve the facility, spending $540,000 and $270,000 on capital improvements in 2005 and 2006, respectively.

Best Western generally inspects its member hotels approximately twice a year. Best Western grades each hotel in the number of categories. A passing score for the entire inspection, which includes all scores for each category, is an average of 800 points. In October 2006, Best Western gave Regency’s hotel a failing score for the Guest Room—Public Areas assessment, but an overall average score of all categories of 918. After the hotel failed another inspection in November 2006, Best Western issued a review and action plan to Regency which set forth corrective actions for Regency to take.

In response, Regency replaced the hotel’s general manager and completed a significant property improvement project, which $2.34 million in capital improvements. In March 2008, the hotel passed another inspection with an overall score in excess of 950 points and earned a Director’s Award for the hotel, Regency alleges.

According to the complaint, despite Regency’s efforts and over its objections, Best Western approved another franchisee to build a second Best Western hotel in Casper. Although Regency was concerned that a second Best Western hotel would impair its ability to retain customers in the Casper area—which has a population of only 55,000 people—Regency continued to upgrade its hotel.

In January 2013, Best Western announced a new performance measure for “Overall Service.” In May 2013, Best Western notified Regency that the hotel failed an inspection and that it was considering cancelling Regency’s membership. Best Western, however, deferred the membership cancellation, pending Regency’s completion of a proposed corrective action plan. Regency made concerted efforts to complete the plan’s nearly 200 different items, despite difficulties finding contractors to complete the tasks. By January 2015, Regency had completed most of the tasks in the plan, except exterior painting and landscaping.

The complaint also alleges that in March 2015, Best Western conducted another assessment of the hotel, in which it received a near perfect score of 991. However, after the second Best Western hotel opened for business in Casper, Best Western—without notice—removed Regency’s hotel from its reservation system, cancelled its participation in Best Western’s credit card programs, and terminated its membership agreement.

Best Western’s termination of Regency’s membership was allegedly unlawful and a breach of the membership agreement and membership bylaws and regulations. Regency spent nearly $5 million in renovations and completed 194 of the 197 items outlined in the corrective action plan. As a result of Best Western’s unlawful termination, Regency is entitled to recover damages, the complaint contends.

Regency asserts claims for breach of contract and breach of the implied covenant of good faith and fair dealing. The action seeks declaratory relief, damages, costs of suit, attorney fees, and any other just and proper relief.

The case is No. 2:16-cv-01245-MHB.

Attorneys: Scott E. Korzenowski and Barbara Bagdon (Dady & Gardner, P.A.) for Regency Midwest Ventures Limited Partnership.

Companies: Regency Midwest Ventures Limited Partnership; Best Western International, Inc.

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