Red Lion Franchisee Case Dismissed, Hilton Protected by Agreement

Lawsuit States Hilton Allegedly Shopping for a Buyer of Red Lion Hotel Chain While Reassuring Prospective Franchisees That It Was Not

WHITE PLAINS, NY (Blue MauMau) - A long-standing lawsuit against Red Lion, Doubletree Corporation and Hilton hotels has been dismissed in federal court (judge's opinion and order attached, 52 page pdf file). Two franchisees, Century Pacific Inc. and Becker Enterprises Inc., claim that business was hurt by an inferior reservation service system after Hilton Hotels sold the chain. They claim that Hilton falsely reassured the two buyers in 2001 that it had no intention of selling the Red Lion chain while they were actually preparing to sell the chain.

So concerned was Century Pacific with the prospect of a new unknown company managing the Red Lion brand that it even managed to negotiate an escape clause in its franchise agreement in the event of a take-over. Hilton sold Red Lion a few months later to WestCoast Hospitality Corporation, a hotel chain with less than ten hotels in ten states.

On October 17 of 2007, Judge Ken Karas, U.S. District Judge in White Plains, New York ruled against the franchisees in summary judgment that the reservation services, no matter how good or bad the system, had been provided and therefore did not violate the agreement.

A summary judgement is granted when a court makes a determination that a full trial is not necessary, often because of a lack of material fact.

The judge ruled that the franchisees could not prove fraud in Hilton shopping around when it reassured the two it was not. In a burst of literary creativity, Judge Ken Karas quotes a Dusty Springfield song to reason that, “wishing and hoping and thinking and praying, planning and dreaming, each night of [Hilton’s] charms” was different than actually selling the chain.

In describing what is at the heart of this case, Jonathan Solish of law firm Bryan Cave LLP, the lawyer for the franchisor, observes, "the court dismissed on summary judgment claims of franchisees following the sale of their system--in this case, the Red Lion hotel franchise. Franchisors generally retain a contractual right to sell or assign, which means that they have the express right to bring in someone else to take their place. A court, in interpreting that right, has little choice but to enforce it, just as the court did in the Century Pacific decision."

Franchisors generally have the right according to most franchise agreements to change trademarks and franchisees must support the burdens put on them by such changes. 

Sometimes It Is Better To Use Arbitrators

Paul Steinberg, a franchise attorney practicing in New York, observes that this case may actually show that seeking litigation as opposed to arbitration has its pitfalls. "Here you have a situation in which Century and Becker never got in front of a jury from the looks of things," he says. "The case was stopped on summary judgment." 

“Franchisees often think that all they have to do is get in front of the jury and that a good lawyer will have the jury eating out of their hand. The jury will understand how horrible things are. The fact of the matter is that over 90%, depending on jurisdiction, don’t go to trial.”

Mr. Steinberg continues, “If these franchisees had a chance to deal with an arbitrator, they may have had a shot. An arbitrator has more discretion, while a judge must deal with more narrow legal arguments. Summary judgment is mainly done on submission – on paper – where case law and statute are clear.”

The Agreement Is The Problem. What Is In the Best Interest of the Franchisee?

But even getting a favorable ruling through arbitration may not be enough because the franchise agreement itself may give the franchisor tremendous leverage.

Stanley Turkel, a well-known consultant and expert in the hospitality industry, reminds hotel owners of the problems with franchise agreements and that “a more equitable position for franchise owners to seek is in Point 12 of the Asian American Hotel Operators Association's (AAHOA's) 12 Points of Fair Franchising, specifically, the sale of the franchise system hotel brand." Mr. Turkel declares that AAHOA's position is that "If a franchisor sells one or more of its various hotel brands to another entity, the franchisor should promptly give notice of the sale to its existing franchisees and pledge to work with them and the new franchisor owner to insure the transition is as smooth as possible. It goes on to make reference to guest loyalty programs, involvement of the existing FACs (Franchisee Advisory Council) and levels of quality and performance."

But even AAHOA's position may not be fair enough for some. Mr. Turkel again observes, "There are always problems associated with the sale of a franchise system to a new owner. I think that AAHOAs recommendations are too modest and soft on franchisors who should be restricted by the same transferability restraints they impose on franchisees."