2008 Progress Report on 'Fair Franchising' Compliance of Carlson Hotels

Every month, for the past year, I have reviewed each of the Asian American Hotel Owners Association's 12 Points of Fair Franchising and reported on them on Blue MauMau. At the recent AAHOA Convention in San Antonio (March 26-29), AAHOA released its long-awaited Performance Appraisal Report (PAR) which evaluates the franchise agreements of five leading franchise companies including ACCOR, Carlson, Choice, La Quinta and Wyndham. The object of this report is to determine how these companies complied with the 12 Points of Fair Franchising.

Why is this important? Since AAHOA members own approximately 13,500 franchised hotels and have long-term franchise agreements with their franchisors, fair franchising is an essential factor in profitable operations.

In preparing its PARs, AAHOA utilized the Uniform Franchise Offering Circulars (UFOCs), actual franchise agreements and related business policies and procedures.

Following preparation of draft versions of the Performance Appraisal Report, AAHOA provided each franchisor with a copy of the report and an opportunity to comment on it. The comments received by AAHOA were considered and, if pertinent, were integrated into the Performance Appraisal Report.

This long-awaited (and some would say long-overdue) report enables franchisees to better understand the provisions of the franchise agreements so that they can make informed decisions before signing a franchise agreement and committing to a long-term franchise relationship.

Here is a summary of the performance appraisal of Carlson Hotels Worldwide as compared to AAHOAs 12 Points:

AAHOA Point 1: Early Termination and Liquidated Damages. 1(a) Most franchisors assess liquidated damages at unfair and punitive rates often 36 to 60 months of royalty fees. AAHOA states that franchisees should only have to pay 6 months of royalty fees.

CARLSON POSITION: For the Country Inn & Suites (“Country Inn”) brand hotels, LDs equal three (3) times the Royalty and marketing fees paid for the 12 months preceding the date of termination. In explanation of this policy, Carlson cited its need to protect the company against Licensees who are not acting in good faith. However, Carlson expressed recognition that there are circumstances in which it might be unfair to collect the full amount of LDs under the license agreement. This recognition has yet to be expressed as a written term of Carlson’s UFOCs.

AAHOA Point 1(b) Windows Provisions: Most franchise agreements contain “window” or additional termination right provisions which allow the parties to terminate the agreement on specific anniversary dates (e.g. on the fifth, tenth or fifteenth anniversary) without having to pay liquidated damages. Unfortunately, many franchisors have included “gotcha” clauses in their franchise agreements which prevent early termination if the franchisee encountered monetary or operational problems at any time after the opening of the facility.

CARLSON POSITION: Specifically, there are no “windows” provisions in the Carlson license agreements that allow the Licensees to exit on the 5th, 10th, or 15th anniversary dates of the opening of the Facility. One of the reasons for this lack of windows provisions appears to be because Carlson only offers a 15-year license term for Country Inn Licensees, with no right to terminate early, or to renew or extend the 15-year tem. (See, 2006 license agreement for Country Inn, Article 2, p. 2.) .

AAHOA Point 1(c) Underperforming Properties

CARLSON POSITION: In its license agreements, Carlson does not include any provisions for the waiver or reduction of liquidated damages (“LDs”) in situations in which a licensee has experienced low occupancy rates of less than 50% for an extended period of time, or for any other “undue hardship” cases.

AAHOA Point 2. Impact/Encroachment/Cross Brand Protection: All franchisors should grant each of their franchisees (over the term of the agreement) contractual rights to a geographic “area of protection” (AOP) in which the franchisor will not allow another property to operate with the same or similar brand name as the franchisees hotel.

CARLSON POSITION: According to its 2006 and 2007 UFOCs and license agreements, Carlson generally does offer an exclusive Area of Protection (“AOP”) to its Licensees, but does not offer any right to request an impact study.

AAHOA Point 3. Minimum Performance & Quality Guarantees: If a franchisee’s hotel is not able to maintain certain occupancy levels over a designated period and has not received a minimum level of reservations, franchisee should be able to terminate the agreement without penalty.

CARLSON POSITION: Carlson places the responsibility of maintaining the system standards on its Licensees, and does not provide that a Licensee could terminate the agreement if the quality of the hotel brands began to decline. Carlson also did not offer its Licensees an opportunity to exit the system without penalty if both their occupancy rates were low and their reservation system contributions were minimal.

After reviewing the PAR and meeting with AAHOA, Carlson acknowledged that a Licensee should have some form of protection if it purchased a hotel and the overall hotel brand deteriorated in subsequent years, or the franchise company made changes that lowered or diminished the quality of the hotel franchise system. Carlson opined, however, that it can be difficult to measure the quality of a hotel brand to determine if it has deteriorated. With respect to the concept of allowing a Licensee to exit the system if a hotel is underperforming and the franchise company is unable to contribute even a minimum level of reservations. Carlson responded that it had implemented such a policy for a select number of hotels in an attempt to grow the brand in a designated geographic region. Specifically, Carlson reported that it was trying to grow the brand and wanted to create flexibility for the Licensees. Carlson emphasized that this was a unique situation with very low thresholds because of the problems Carlson encountered with tracking the reservation system contributions.

AAHOA Point 4. QA Inspections/ Guest Surveys

 

CARLSON POSITION: Carlson has assigned Brand Business Directors (“BBDs”) to assist the hotels with operational, marketing and sales issues, and to oversee the implementation of its system standards. Carlson also uses Medallia to assist with guest survey scores as part of its QA analysis. If a Licensee fails below a designated score, Carlson sends them a notice of default and gives the Licensee 90 days to make the necessary improvements. Carlson will generally give a Licensee at least six (6) months to comply with system standards and finish all of its required improvements before the Licensee is terminated because Carlson’s goal is to rehabilitate each defaulting hotel. Indeed, Carlson reported that in the past five (5) years, it has terminated only one (1) Licensee for QA failures.

Finally, while Carlson does not have an appeals process per se for disputed QA issues or scores, it has an independent inspection service that will visit the site and prepare a very detailed report for the benefit of both Carlson and the Licensee, so that they can work together to address any problems or concerns.

AAHOA Point 5. Vendor Exclusivity

CARLSON POSITION: To the extent a Licensee’s vendor of choice is not on the Carlson list of approved vendors, Carlson permits a Licensee to request a waiver so that it can purchase the designated products and services from such vendor. For this waiver option, Carlson charges a fee for the time it spends reviewing the vendor’s designated products and services to determine if they satisfy Carlson’s specifications. This fee can range from $100 to $2,500, depending on the circumstances.

AAHOA Point 6. Disclosure and Accountability

CARLSON Position: Carlson does not provide its Franchise Advisory Councils (“FACs”) with audited financial statements concerning Carlson’s expenditure of marketing and reservation fees and Carlson appears to use the fees to defray any general operating expenses. Following its review of the PAR, Carlson explained that audited financial statements are prepared for Carlson Hotels Worldwide, but not for the individual hotel brands such as Country Inn.

AAHOA Point 7. Maintaining Relationships with Franchisees

 

CARLSON POSITION: The members of the FACs are appointed by Carlson. The FACs address a wide variety of issues that are important to the franchise system, including amenity creep, and plans for marketing and advertising the hotel brands. While Carlson seeks feedback on such issues from its FACs, it does not always follow the recommendations given by the FACs or the Licensees themselves. Carlson further stated that it is very interested in learning more about the AAHOA University, and the Certified Hotel Owners (“CHO”) programs. Carlson said it currently provides the Licensees with an opportunity to participate in the CHA program offered by American Hotel & Lodging Association (“AH&LA”).

AAHOA Point 8. Dispute Resolution

CARLSON POSITION: Carlson spends a lot of time meeting with its Licensees on an informal basis to resolve disputes, and discussing ways to handle problems and concerns. Carlson further said that it will agree to participate in a non-binding mediation proceeding before a mediator who is neutral and mutually acceptable to the parties, including a mediator associated with the National Franchise Mediation Program.

Unfortunately, aside from these concessions, Carlson has cautioned that it will not agree to proceed to mediation if a Licensee owes it money, or uses mediation as a delay tactic. Carlson also firmly stated that it will continue to insist on a Licensee’s waiver of its right to a jury trial, and a shortened time period of one (1) year or less for Licensees to file a lawsuit. These provisions not only require Licensees to give up important legal rights but also preclude Licensees from obtaining the best legal counsel available to them. Indeed, many franchise attorneys will not accept a case on a contingency fee basis if the Licensee is unable to assert its right to a jury trial.

AAHOA Point 9. Venue and Choice of Law Clauses

CARLSON POSITION: In its license agreements, Carlson provides that, except for injunctive relief claims filed and sought by Carlson, all other claims arising out of or related to a franchise agreement must be commenced, filed and litigated before a court of competent jurisdiction located in Hennepin County, Minnesota (ie., the County and State in which Carlson’s corporate headquarters is located). This provision effectively allows Carlson to file suit against any Licensee in the state of Minnesota and requires all Licensees to file suit against Carlson in Minnesota, regardless of the location of the subject hotel.

AAHOA Point 10. Franchise Sales Ethics and Practices

CARLSON POSITION: Following its review of the PAR, Carlson reported that it provides multiple training sessions for its sales force on an annual basis to ensure that they are complying with the applicable laws, and are using fair and ethical sales practices. Specifically, Carlson engages a team of outside lawyers, including former litigators and franchise attorneys, who discuss the specific laws concerning sales of franchises with the Carlson sales associates and personnel and who emphasize the need for fair and ethical conduct in such business dealings.

AAHOA Point 11. Transferability

CARLSON POSITION: Carlson frequently provides special consideration for transfers to family members and business partners. Specifically, for transfers to family members. Carlson offers reduced transfer fees so long as the new family members do not assume control of the hotel. Carlson also charges an administrative fee of only $1,000 for inheritance transfers.

AAHOA Point 12. Sale of the Franchise System Hotel Brand: The new franchisor should maintain the same or higher level of quality as the prior franchisor owners and offer assurances that the transition is an smooth as possible.

CARLSON POSITION: Carlson provides that it has the right to transfer the license agreements without a Licensee’s consent, and it does not offer any assurances that it will attempt to work with the new Licensor owner to ensure that the transition is as smooth as possible, or to protect the rights of its Licensees.

Stanley is available as a featured speaker on the following subjects:

  • Fair Franchising is Not an Oxymoron
  • Great American Hotels and Hoteliers
  • Are Exterior Corridor Hotels Obsolete?
  • Impertinent Questions in Search of Pertinent Answers
  • AAHOAs 12 Points of Fair Franchising

Stanley Turkel, MHS, ISHC operates his hotel consulting office as a sole practitioner specializing in franchising issues, asset management and litigation support services. Turkel’s clients are hotel owners and franchisees, investors and lending institutions. Turkel serves on the Board of Advisors and lectures at the NYU Tisch Center for Hospitality, Tourism and Sports Management. He is a member of the prestigious International Society of Hospitality Consultants. His provocative articles on various hotels subjects have been published in the Cornell Quarterly, Lodging Hospitality, Hotel Interactive, Hotel Online, AAHOA Lodging Business, etc. If you need help in negotiating a franchise agreement or with a problem such as encroachment/impact, termination/liquidated damages or litigation support, call Stanley at 917-628-8549 or email [email protected].

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