SEATTLE SHERATON OWNER SUES TO BLOCK STARWOOD FROM OPENING SEATTLE "W" Sources: "Seattle's Seventh Avenue Associates Moves for Injunction to Block Opening of "W" Hotel in Seattle," Business Wire (August 12, 1999): "Injunction to Block Opening of W Hotel in Seattle Rescheduled," Hotel Online (August 31 1999); " Plans for Orlando Hilton Get Ugly," LH Online (August 3, 1999)

In 1980, Sheraton entered into a joint venture to build a hotel in downtown Seattle. As part of the joint venture agreement, Sheraton agreed not to own any other hotels in Seattle, either directly or through an affiliate. Eighteen years (and several intervening transactions) later, Sheraton was bought by Starwood - which was in the process of launching its new flag, ~'W" hotels, and which had plans to open a new "W" in Seattle. Unhappy that this added competition was being introduced by Sheraton's new parent, the joint venture partners sued to enjoin the "W" from opening.

The court initially refused to consider the request in the short time remaining before the hotel actually opened, instead deferring its decision and encouraging the partners to resolve their differences through mediation in the interim. As this issue goes to press, the "W" has opened for business on schedule and no settlement has been reached. The injunction request remains pending before the court, which has not yet held a hearing.

While encroachment and impact issues most commonly arise in the, franchise context, they are just as applicable to management contracts. Tishman, for example, recently sued Hilton over Hilton's plans to open a convention hotel within the territory of a Tishman owned Hilton in Orlando, Florida. (Hilton argues that the territorial restriction in its Tishman management contract excludes convention hotels such as the one proposed.)

The issue has come to the forefront in light of recent mergers (such as the Starwood/ITT Sheraton acquisition and the proposed Hilton /Promus deal) that bring, formerly competing flags under a single corporate parent. These mergers result in at least three different potentially problematic scenarios. First and most obviously existing competition under different flags can be brought under the same corporate parent. Second, the acquiring entity may have new competition in development under a different flag when the merger takes place (this is roughly the situation in the Seattle Sheraton case). Third, the surviving entity will ordinarily want to develop new properties under its other flags going, forward after the merger To the extent that the relevant management agreements address these scenarios, those agreements will ordinarily control; but while many of to day's management agreements contemplate and address such possibilities, many older ones do not - particularly ones written decades ago, when the idea of multiple competing flags held under a single corporate parent was rare or unheard of if the management agreement is silent, the outcome may hinge on the amorphous "covenant of good, faith and, fair dealing" implied in every contract - particularly if any of the competing properties are owned by the management company itself (or one of its affiliates), where a management company arguably could use its access to competitive information to favor owned properties over managed ones.

RESERVATIONS

PRICELINE.COM SUES MICROSOFT, SAYS EXPEDIA INFRINGES ON PATENT Source: Yahoo Daily News, (October 14, 1999)

There's a generalization (true or otherwise) in the world of computers and the internet: if an innovator comes up with a good idea, Microsoft is not far behind - either with an offer to take over the innovator's company or, failing that, to launch its own competing product. The result has been a string of lawsuits against Microsoft for allegedly anti competitive conduct, most notably in the case of the United States Justice Department's on going antitrust suit (in which the federal district court recently found Microsoft to be a monopolist), but with numerous other instances, as well.

The latest example is internet darling Priceline.com. According to the lawsuit, Priceline, which launched its "name your price" service in April 1988 and has been simultaneously delighting consumers and wreaking its own small havoc with airline and hotel revenue management systems ever since, entered into negotiations with Microsoft earlier this year to jointly market and license Priceline's system. When those negotiations collapsed, Microsoft set up its own Hotel Price Matcher service through its Expedia internet site - a service that Priceline alleges infringes on Priceline's patent.

The high-stakes litigation between Priceline and Microsoft merely underlines the significant role that the "name your price" concept has already gained in the marketplace, and the profit potential that major players such as Microsoft see in it. if Priceline can successfully claim patent protection, for the concept, it will be able to capture most or all 9f that market, either directly or through licensing arrangements such as the one that was being negotiated with Microsoft before those talks broke down. Whatever the outcome of this litigation, "name your price" services - whether through Priceline, Expedia, or otherwise - are likely to be a permanent part of the landscape for revenue managers.

Editor's Note: Our thanks to Mark Haley at High Touch Technologies for alerting us to this lawsuit. As Mark  notes, the interesting thing about both Priceline and Expedia is that they both pay substantial subsidies to their travel partners to get inventory - in effect, actually paying travelers to use the system! 

FRAUD

JOINT VENTURERS LIABLE FOR FRAUD, EVEN WHERE BAD ECONOMY DOOMED HOTEL TO FAILURE Source: Ambassador Hotel Company, Ltd v. Wei-Chuan Investment, 189E3d 1017 (9th Cir. August 31, 1999)

A federal appellate court has upheld a trial court's finding that two developers and their development company defrauded the Ambassador Hotel Company and various related parties in connection with the development of a hotel in Carson, California. After obtaining and exhausting a $10 million construction loan, the developers sought out Ambassador (a Taiwanese company) to provide additional capital, representing that the total cost of the building shell would be $16 million. The resulting partnership assumed the $10 million construction loan, to which Ambassador contributed an additional $6.6 million. When those funds were exhausted, the unfinished project still suffered from severe structural defects that would have required an additional $6.5 million to cure. In the meantime, the developers misappropriated the funds contributed by Ambassador to other uses. The construction lender ultimately foreclosed and the project was lost.

The trial court awarded Ambassador $8.9 million in damages, plus $10 million in punitive damages;  it also awarded the partnership an additional $14 million in damages against the developer partners. The appellate court affirmed the liability judgment, but found that some of the damages were duplicative and therefore sent the case back to the trial court to determine the correct sum. Even with those corrections, the revised verdict is still likely to run well into eight figures.

Aside from the size of the verdict, this case is notable because of an argument that the developers made and that the appellate court rejected. The project commenced in April, 1986; it was, foreclosed upon in October, 1990, as the hotel market in Southern California (as in much of the country) was plunging into deep recession. Experts for both parties agreed that if the hotel project had been completed, it would have failed. The defendants therefore argued that Ambassador did not suffer any damages, since it would have lost its investment in any event. The court rejected that argument. If the hotel had actually, failed due to a poor economy, the court reasoned, the developers' argument would be correct; the economy, not the developers fraud, would have caused the loss. Here, however the hotel never made it to operation, and the economy therefore had no role in causing the projects failure. Thus, Ambassador is likely to receive an eight-figure damage award in a situation where, absent any wrongdoing, it probably would have lost most if not all of its investment.

VALUATION

CHOOSING BETWEEN CONFLICTING EXPERTS: COURT PICKS AND CHOOSES ASSUMPTIONS, ARRIVES AT OWN VALUE Source: Camino, Inc v. Wilson, 39 Esupp. 962 (D.Neb. August 11, 1999)

It's a common problem for a trial judge. A closely-held corporation decides to sell its primary asset. Dissenting shareholders tender their stock for "fair value," which depends upon the valuation of the corporation's primary asset. Each side presents a valuation expert, both of whom are equally qualified. Both experts employ the same methodologies, but with different underlying assumptions that lead to widely divergent results. What is the judge to do?

That's the situation that a federal judge faced in a case involving the former Holiday Inn in North Platte, Nebraska. Four different experts valued the hotel at $2.6 million, $2.7 million, $4 million, and $5.3 million. Starting from the premise that an income capitalization approach is the most accurate method of valuing an operating business, the judge then picked and chose item's from the competing appraisals to reach his own valuation. After choosing a capitalization rate, deciding to use historical NOI rather than EBITDA or stabilized income as the appropriate estimate of operating income, and selecting which years to include in calculating the income stream, the court performed its own calculations and arrived at a value of $3.5 million - coincidentally or not, a value relatively close to the $3.7 million average of the four expert valuations.

How to choose between conflicting opinions of equally qualified experts is one of the most difficult problems faced by any judge or jury - particularly where the judge or jury has little or no background in the subject matter (as is often the case with many judges who are former criminal law prosecutors). One option is simply to pick the opinion of one expert and reject the other opinions out of hand. Another tempting option is to "split the difference," though few judges would admit to doing so (and jurors, who do not have to justify their reasoning, have no occasion to). Still other judges appoint their own, independent experts to resolve the conflict. Here, the judge took a different approach, parsing each opinion and, effectively, coming to his own valuation. Other than in the case of a court-appointed expert, of course, a party will ordinarily have little or no way of knowing in advance which method a given court or jury will choose.

LABOR AND EMPLOYMENT

FORMER GM GOING TO TRIAL ON DISCRIMINATION CLAIM AGAINST OWNER OF CHICAGO CONGRESS HOTEL Source: Riad v. 520 S. Michigan Ave. Assoc's Ltd., 1999 U.S. Dist. LEXIS 14851 (N.D.Ill. September 9, 1999)

The Congress Hotel in Chicago is owned by a limited partnership whose majority owner is an individual. The partnership employs an owner's representative who resides on-site and who serves as the liaison between ownership and the property management. Both the individual majority owner and the on-site owner's representative are Jewish and were born in Israel. In 1994, the owner hired Hostmark to manage the hotel. The management contract provided that the staff and managers would be employees of the hotel, not of Hostmark.

To serve as the general manager, Hostmark transferred Nady Riad, an American of Egyptian origin, from one of its other properties. Although the hotel's net profits allegedly increased by 446% over the next two years, Riad was terminated by the owner on December 5, 1996. After taking a new position as regional vice-president of operations for Hostmark's then-new Middle East operation, Riad sued the Congress hotel's ownership, claiming that he was subjected to a hostile work environment, deprived of bonuses and other compensation and benefits, and ultimately terminated because of his race.

The federal court hearing the case has now determined that there is sufficient evidence supporting Riad's claims that the case should go to trial. Among other things, the court pointed to testimony from Ramada CEO Steve Belmonte, who testified that while meeting with ownership to discuss several failed quality inspections (the hotel was then a Ramada franchisee), the owner's representative complained that "ownership was Israeli Jews and they put in an Arab manager... how stupid can you be[?]" Likewise, there was evidence that despite good performance reviews, Riad was deprived of incentive bonuses to which he was entitled under Hostmark's standard formulae, did not receive raises even though other hotel employees (and the owners representative) did, and was ultimately terminated despite the dramatic improvement in the hotel's bottom line, with no indication that the termination was related to his performance.

Given the constant interaction between property management and on-site owner's representatives, conflicts between them have the potential of being particularly volatile. That volatility, and the resulting legal consequences, become significantly greater when race is introduced into the picture. Where, as here, there is significant evidence that the conflict is driven by racial animus, the decision to terminate an at-will employee turns from a business decision into a possible violation of federal civil rights laws.

AND FINALLY…

NEW YORK STOCK EXCHANGE UNABLE TO PREVENT CASINO FROM USING PUNS ON TRADEMARKS Source: New York Stock Exchange, Inc. v. New York, New York Hotel, LLC 1999 U.S. Dist. LEXIS 15208 (S.D.N.Y. September 30, 1999)

The New York Stock Exchange does its best to promote the notion that investing in stocks is a rational, informed process that rewards investment decisions based on sound analysis. (Owners of certain hotel stocks might disagree.) Imagine the NYSE's horror, therefore, when the New York - New York Hotel & Casino in Las Vegas erected a model of the NYSE's famed building facade behind the cashier's window on its casino floor, put "NEW YORK NEW YORK SLOT EXCHANGE" across the facade, and opened a players' club called the "New York lot Exchange." Concerned with the implication that investing in securities is akin to gambling, the NYSE brought a trademark infringement suit.

The federal court hearing the case, however, was not impressed. Most trademark law is based on the danger of consumer confusion; if there is no likelihood that consumers will be confused, the law generally will not protect a trademark holder against a possibly infringing use. Here, the court saw little danger that consumers might mistakenly think that the NYSE was the source of the casino's services; likening the casino's "obvious pun" to a parody, the court stated that the "purchasing public must be credited with at least a modicum of intelligence." For a variety of similar reasons, the court likewise held that the casino's use did not dilute or tarnish the NYSE's trademarks.

As the court repeatedly pointed out, in a case such as this "context is critical." The same illegitimate use of a mark might constitute infringement in one context (where consumer confusion might result, or where the use might detract from the mark holder's ability to use the mark to sell its product or service), but be perfectly legal in another. Here the court essentially rebuffed the NYSE for not being able to take a joke.

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