Front desk of a West Memphis, Arkansas Holiday Inn. photo/ihl

MARION, Ark.-- Kemmons Wilson must be spinning in his grave. The founder of the Holiday Inn chain was friends with J.O. "Buddy" House. Back in the 1950's the two worked on several construction projects together.

Times change.

In a blistering decision issued February 23, a three-judge panel of the Arkansas Court of Appeal reversed a trial court's reduction of punitive damages and held:

Holiday Inn, a multinational corporation, failed to disclose valuable information to a businessman who had worked with and trusted the company for over half a century. In doing so, Holiday Inn caused the businessman, over a period of more than a year, to expend significant sums of money on a hotel that he believed would be relicensed but whose relicensure certain Holiday Inn personnel were determined to thwart. Further, the nondisclosure of Holiday Inn's business plan, which Holiday Inn knew that [the franchisee] was entitled to have, combined with providing the plan to [the franchisee's] competitor, indicates, at the very least, outright disregard of [the franchisee's] interest as a franchisee, and, at most, a deliberate attempt by certain Holiday Inn employees to reap their own economic benefits by keeping [the franchisee] in the dark. On these facts, notwithstanding the trial court's finding that Holiday Inn's nondisclosure appeared to be "more of an accident" we conclude that Holiday Inn's degree of reprehensibility supports a significant punitive damages award.

June 12, 1972: Holiday Inn's Kemmons Wilson

Franchisee Buddy House had been asked by Holiday Inn to consider taking over a decrepit property in Wichita Falls, Texas to convert it into a Holiday Inn hotel. The renovation cost was substantial. House told Holiday Inn that he would need a 15 or 20-year license to recoup the investment. Holiday Inn was unwilling to grant anything except a 10 year license. But VP of franchising Steve Romanella told House that if the hotel was run well, there was no reason to believe that the franchisor would deny an extension.

The renovation was a great success. House received offers to buy the hotel for $15 million. He turned them down and applied for early relicensure with Holiday Inn. After some analysis and suggestions by the franchisor, House spent $3M on further renovations.

Holiday Inn's director of franchise development Greg Aden would not get a commission if House's request was granted, but if Aden persuaded Holiday Inn to deny House and instead approve the conversion of a Radisson property, then Greg Aden would get a $13,000 commission. Aden wrote a report that recommended the Radisson conversion.

After all, he had plans for his commission.

After stringing along Buddy House, the franchisor ultimately went with Aden's plan and so Buddy House was forced to  reflag before ultimately selling the hotel at a loss for $5 million.

After House sued Holiday Inn, a jury found that Holiday Inn had defrauded Buddy. On appeal, the three-judge court discussed (pdf) just how badly Holiday Inn had cheated him and the failure of Holiday Inn to disclose Aden's plan. The judge reasoned:

Buddy House had a long-term relationship with Holiday Inn characterized by honesty, trust, and the free flow of pertinent information. He testified that [Holiday Inn's] assurances at the onset of licensure in 1995 led him to believe that he would be relicensed after ten years if the hotel was operated appropriately. Yet, despite Holiday Inn's having provided such an assurance to House, it failed to appraise House of an internal business plan, developed only four years into his licensing period, that advocated licensure of another facility instead of renewal of his license. A duty of disclosure may exist where information is peculiarly within the knowledge of one party and is of such a nature that the other party is justified in assuming its nonexistence.

The trial court jury found that Holiday Inn had committed fraud, to which the appellate court added, "the jury's verdict on fraud was supported by substantial evidence."

Stan Turkel, one of the hotel industry's top consultants and author of Great American Hoteliers, which reverently devotes a full chapter to Holiday Inn's founder Kemmons Wilson, observes: "This sequence of events does not surprise me. Holiday Inn's director of franchise development behaved like most franchisors—in his own self interest. Sentiment and historic memory count for naught when cold hard cash is involved. If the courts would acknowledge the existence of a fiduciary duty owed by franchisors to franchisees, such 'reprehensible' behavior could not occur."