Judge Rules Super 8 Breached Contract

SOUIX FALLS, SD – Last Wednesday District Judge Lawrence L. Piersol ruled that Wyndham Worldwide, parent to Super 8 Motels, Inc., breached its contract with 160 franchisees when it set an unauthorized mandatory fee of five percent on gross room sales in 2003.The lawsuit was certified as a class action in October 2007 after Bird Hotel Corp., a Super 8 operator out of Winnipeg, Manitoba, challenged the chain’s TripRewards program, claiming the new fee was not part of their contracts. Although Wyndham had filed an appeal of the 2007 decision in the 8th US Circuit Court of Appeals, its was denied.

Regarding last weeks ruling, Scott Abdallah of Johnson, Heidepriem & Abdallah, one of the attorneys representing the franchisee plaintiffs said, “Our clients are obviously very pleased with the judge’s recent decision. We had argued that this was a straightforward breach of contract and the court agreed.” His partner Ronald Parsons, Jr. presented the arguments at the hearing in favor of their motion for summary judgment and against Super 8’s argument.

The judge ruled that the amount of damages that Wyndham must pay to the franchise owners will be decided by a 12-person jury. Franchise owners are seeking the money they paid into the customer-incentive program which amounts to approximately $3.5 million plus pre-judgment interest. Although a trial date has been set for April 13, 2010, Judge Piersol has ordered the parties to mediation on March 15.

Wyndham touts its TripRewards lodging loyalty program as the world’s largest with 5.2 million active members which drives 26 percent of room sales. Today Wyndham has more than 7,000 hotels in 66 countries. Super 8, one of the largest chains of budget motels in the world, was started in Aberdeen, South Dakota in 1974, and has over 2,000 motels in North America. Super 8 does not have a CEO or board of directors nor does it have any assets. Its president reports directly to the CEO of Wyndham.

Will this decision have any implication on other Wyndham franchisees or other hotel chains franchise owners?

Abdallah explained, “Our class action involves a relatively small class of Super 8 franchisees still governed by an original South Dakota standard franchise agreement that does not allow for some of the changes that are made within the industry today.  As a result, it is hard to say what type of wide-ranging impact this decision will have on other franchisees.”

According to the franchisees’ brief in support of summary judgment filed last October, Bird Hotel Corp. and other plaintiff franchisees had franchise agreements that were executed between 1984 to 1991 and were for a 20-year term. All were required to pay a four percent royalty fee and two percent advertising fee on gross room sales on a monthly basis. The brief states, “The franchise agreements authorize the imposition of no other recurring fees during their term of twenty years.”

A Souix Falls Business Journal article stated that Judge Piersol told the attorneys at the hearing, “You should be able, I’d think, to mediate it out. If not, I’ll see you the 13th of April.”

Wyndham attorneys argued that the company didn’t breach its contract when it instituted the mandatory fee for the customer-rewards program. They stated that franchisees are required to do a number of things, such as provide breakfast, replace carpeting and make improvements. They insist that part of being a franchisee is to pay a fee for a rewards program. They also argued that there should be no award for damages because they have benefited by the TripRewards program through increased numbers of customers.

Lead attorney for Wyndham defendants Edward Spalty of Armstrong Teasdale declined to make comment. Wyndham Worldwide’s media relations did not return telephone calls or emails prior to publishing.

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