Antitrust Law Daily Wrap Up, STATE UNFAIR TRADE PRACTICES—Haw. Sup. Ct.: Hotel server stated valid unfair competition law claim against hotels over tipping policy, (Feb 26, 2014)

By Peter Reap, J.D., LL.M.

Raymond Gurrobat, a hotel server, individually and on behalf of a class, stated a valid claim that two hotel operators, HTH Corporation and Pacific Beach Corporation (the “defendants”) violated the Hawaii unfair methods of competition “UMOC”) statute based on the defendants’ alleged violations of Hawaii’s hotel or restaurant service charge law, the Hawaii Supreme Court has decided (Gurrobat v. HTH Corporation, February 25, 2014, McKenna, S.). Thus, a ruling by a Hawaii state trial court dismissing the UMOC claim was reversed.

In addition, the Hawaii Supreme Court: (1) affirmed the trial court’s order granting Gurrobat’s motion for class certification; (2) affirmed the trial court’s order granting Gurrobat’s motion for partial summary judgment as to the claims for unpaid wages under HRS Chapter 388; and (3) affirmed in part the grant of Gurrobat’s motion for summary judgment as to damages for his HRS Chapter 388 claim. However, the portion of the circuit court’s order granting Gurrobat’s motion for summary judgment as to damages under HRS Chapter 388 that imposed joint and several liability on the defendants was vacated, and the case remanded for further proceedings.

Background. Gurrobat alleging that Defendants withheld tip income from non-management employees who provided food and beverage services at the Pacific Beach Hotel and the Pagoda Hotel. Defendants HTH Corporation and Pacific Beach Corporation together operate the Pacific Beach Hotel on Oahu, Hawaii; and Defendant HTH Corporation operates the Pagoda Hotel on Oahu, Hawaii. The certified Plaintiff Class consists of all non-management employees of the Hotels who provided services in connection with the sale of food and/or beverages on and after December 8, 2004, for which a service charge or gratuity was imposed by the Hotels, and not distributed one-hundred percent to those service employees.

Gurrobat alleged that, as operators of the Pacific Beach Hotel and the Pagoda Hotel, the defendants charged customers at the Hotels a “service charge” or “gratuity” that was calculated as a percentage of the total cost of food and beverage (typically, between seventeen and twenty percent), failed to distribute the entirety of these service charges to non-managerial employees who served the customers, and failed to clearly disclose to customers that portions of the service charges were not distributed to non-managerial employees. Gurrobat claimed that this practice violated HRS § 481B-14, that any violation of Chapter 481B was deemed to be an UMOC under HRS § 480-2; therefore, members of the proposed class were entitled to treble damages under HRS § 480-13(a). In his Second Amended Complaint, Gurrobat also asserted that based on the defendants’ violation of Hawaii’s wage and hour laws under HRS § 388-6 by virtue of their violations of HRS § 481B-14, he was entitled to double damages under HRS § 388-10.

Class certification. The defendants argued that the trial court erred in granting class certification because Gurrobat never worked at the Pagoda Hotel, he lacked standing to assert claims regarding that hotel, and he failed to establish that he could adequately represent the Plaintiff Class under HRCP Rule 23.

However, as the court had previously explained, the third requirement for class certification (typicality) was designed to be read in conjunction with the fourth requirement (fair representation). Even if Gurrobat never worked at the Pagoda Hotel, the legal and factual bases underlying his claims were coextensive with those of all other class members, the court explained. Further, employment at one but not another of the two hotels would not create a conflict of interest between Gurrobat and other class members. Under the facts of this case, Gurrobat established that he could fairly and adequately protect the interests of class members, and the trial court did not err in certifying the proposed class, the court held.

Unpaid wages claim. The defendants contended that Gurrobat was not entitled to summary judgment on his claim for unpaid wages because “tip income” distributed to employees pursuant to HRS § 481B-14 does not constitute “earned compensation” under HRS § 388-6. The court’s recent decision in Villon v. Marriott Hotel Services, Inc. controlled this issue, the court stated. There, the court held that “the plain language of HRS § 481B-14 and Chapter 388 indicates that a service charge is ‘compensation earned’ as ‘tip income’ or ‘wages and tips of employees.’ Therefore, an alleged violation of HRS § 481B-14 is enforceable through Chapter 388.”

It was undisputed in this case that the defendants imposed a service charge at banquets and other functions held at the Pacific Beach Hotel and the Pagoda Hotel, and retained a portion of the service charge income without disclosing that practice to customers. Based on the decision in Villon, the trial court correctly held that “tip income” retained by the defendants in violation of HRS § 481B-14 constitutes “compensation” earned by service employees for purposes of bringing a claim under HRS §§ 388-6, 388-10, and 388-11, according to the court.

Damages. Next, the defendants argued that the court erred in failing to take into account the portion of service charge income that the defendants distributed to managerial employees when it awarded damages in favor of Gurrobat and other non-managerial service members, and there was a question of fact as to whether the defendants were equitably justified in failing to comply with HRS § 481B-14.

However, the plain language of HRS § 481B-14 required the defendants to either distribute one-hundred percent of the service charge to employees as “tip income” or disclose their retention of a portion of the service charge to customers. Here, the defendants failed to comply with either of these provisions or to provide equitable justification for its violation of the statute. For this reason, the class members were entitled to an award of double damages under HRS § 388-10, the court ruled.

Joint and several liability. While the defendants’ liability arose from the same conduct (i.e., their practice of retaining service charge income from non-managerial service employees), the claims against HTH Corporation stemmed from its operation of both the Pacific Beach Hotel and the Pagoda Hotel, whereas the claims against Pacific Beach Corporation stemmed from its operation of only the Pacific Beach Hotel. In this regard, HTH Corporation could be held liable for injuries to employees at both hotels; however, there was no basis for holding Pacific Beach Corporation liable for injuries to employees at the Pagoda Hotel.

Therefore, the circuit court erred in failing to apportion damages when it held Pacific Beach Corporation jointly and severally liable for wages unlawfully withheld at the Pagoda Hotel, the court reasoned. Further, the trial court abused its discretion in concluding that the defendants were estopped from contesting joint and several liability. The case was remanded for a determination of the respective liability of each defendant.

The unfair methods of competition claim. The trial court granted summary judgment on Gurrobat’s UMOC claim based on an alleged lack of requisite evidence to prove the “anticompetitive injury” aspect of his case. The trial court concluded that although two experts who had opined that law-compliant hotels would be at a competitive disadvantage, the two experts had to have at least a foundation in fact or evidence of one or the other of the following to overcome the defendants’ motion for summary judgment: (1) another hotel that either did not require service charges or required service charges and then distributed one-hundred percent of them to its service employees or (2) disclosed the withholding to its customers. The trial court found that the “two experts had no knowledge of an existent market at all or the existence of any hotel that could provide either one of those two,” and granted the defendants’ motion for summary judgment.

In Davis v. Four Seasons Hotel Ltd., 122 Hawai’i 423, 228 P.3d 303 (2010), the court held that a claim under HRS § 480-13 has three elements essential to recovery: (1) a violation of HRS chapter 480; (2) which causes an injury to the plaintiff’s business or property; and (3) proof of the amount of damages. In the instant case, the first and third elements were not at issue, the court noted.

With respect to the second element, this element includes two parts. First, a plaintiff is required to allege an injury in fact to his or her “business or property.” Second, a plaintiff is required to allege the “nature of the competition.”

Here, Gurrobat alleged in his second amended complaint and offered evidence on summary judgment that the defendants’ practice of withholding a portion of the service charge without disclosure to customers allowed them to charge lower base prices than law-compliant competitors, thereby reducing “fair competition” in the market for hotels, restaurants, and banquet service providers, the court held. Moreover, Gurrobat produced declarations from two experts who opined that any hotel that complies with the law by distributing the entire service charge has higher labor costs and pricing structure and is therefore, at a competitive disadvantage than a hotel that does not comply. Gurrobat plainly satisfied the test set forth in Davis, according to the court.

Gurrobat provided sufficient evidence of how the defendants’ conduct negatively affected competition, i.e., harmed fair competition, because the defendants’ unlawful conduct allowed the defendants to lower their overall costs through retaining the tip income, attract customers by being able to offer seemingly lower base prices, and mislead customers into believing that the service charge will be paid as tip income. The defendants’ unlawful conduct, therefore, enables the defendants to obtain the business of customers through an unfair and illegal business advantage over law-compliant hotels, restaurants and banquet service providers. Therefore, Gurrobat sufficiently proved that the defendants’ conduct negatively affects fair competition. Thus, the trial court erred in granting the defendants’ motion for summary judgment on this claim, the court ruled.

The case is No. SCAP-12-0000764.

Attorneys: James J. Bickerton (Bickerton Lee Dang & Sullivan ) for Raymond Gurrobat. Paul Alston (Alston Hunt Floyd & Ing) for HTH Corp. and Pacific Beach Corp.

Companies: HTH Corp.; Pacific Beach Corp.

Cases: StateUnfairTradePractices HawaiiNews