OWNER OF EMPIRE HOTEL NEW YORK SUES RADISSON, CLAIMS RESERVATIONS WERE OVERSTATED Source: “Empire Holdings LLC Sues Radisson Hotels Over Allegedly Inflating Reservation Bookings,” PR Newswire (February 26, 1999); “Radisson Hotels Claims Empire Holdings Lawsuit Is Groundless,” Hotel Online (March 3, 1999). 

Ian Schrager’s Empire Holdings LLC, owner of the Radisson Empire Hotel New York, has sued its licensor, Radisson, claiming that Radisson “overstated its role in booking room reservations,” according to a press release issued by Empire. The overstatement is so great, according to the press release, that Empire is exercising its contractual right to terminate the license agreement without penalty, thereby avoiding more than $1 million in outstanding fees and assessments. Radisson vigorously denied Empire’s claims, denouncing the lawsuit as “defamatory and false” and claiming that the lawsuit is simply a “ploy” to avoid paying the outstanding fees. 

This is not the typical case of a franchisee trying to get out from a long-term franchise contract on a poorly performing property without having to make an onerous liquidated damages payment. Empire bought the hotel in May 1998. It filed this lawsuit on February 26, 1999 — only two days before the franchise agreement was already set to expire by its own terms. Meanwhile, Radisson claims that the hotel was so busy that Radisson’s corporate reservations system had to deny 1,000 to 4,000 requests for room nights each month. 
It looks like the real fight, therefore, is not over termination and liquidated damages but over back fees and charges, and whether Empire should be able to avoid them if Radisson overstated the number of reservations it delivered to the property. The lawsuit will therefore likely turn on a fight over the proper method for calculating “gross room sales” — particularly where the franchisor is prevented from delivering additional reservations because the hotel is already full. The two sides obviously have radically different methods of making that calculation: Radisson claims that it delivered more than 63% of occupancy and 67.5% of hotel sales last year, while Empire claims that the actual figures are well below half those amounts. Assuming that both sides have a good faith basis for their respective positions, the ultimate result will undoubtedly leave the loser quoting Benjamin Disraeli’s maxim that “there are three kinds of lies: lies, damned lies, and statistics.” 

MANAGEMENT AGREEMENT IS A “LEASE” FOR PURPOSES OF PROPERTY TAX EXEMPTION Source: Crotty v. Greater Orlando Aviation Authority, Case No. CI93-8391 (9th Judicial Circuit, Orange County, Florida, September 24, 1998) 

When is a management agreement really a lease? When a county’s ability to collect property taxes depends upon it, that’s when. Hyatt operates a hotel at the Orlando International Airport, under a management agreement with the Greater Orlando Aviation Authority and on land owned by the Aviation Authority and the City of Orlando. Profits from the hotel are used, among other things, to offset airline user fees and to pay general airport expenses.  Under a Florida statute, land owned by a municipality or authority is exempt from ad valorem property taxes unless the land is “leased” to a nongovernmental entity or the entity otherwise has a “possessory interest” in the land. 

Pointing to this statute, the Orange County tax collector argued that the property was subject to ad valorem taxes because Hyatt “leased” the land from the Aviation Authority and the City — even though Hyatt had only a management agreement for the property. The court agreed with the tax collector, noting that Hyatt has “actual physical control and possession” of the property. Moreover, even if that control and possession did not make Hyatt a lessee, the court reasoned that Hyatt would still have a “possessory interest” in the land, and the exemption still would not apply. The Court therefore ordered the Aviation Authority and the City, as the property owners, to pay over $764,000 in back taxes. 

Obviously, Hyatt’s management contract was not a “lease” as that term is ordinarily used either in the hotel industry or in real property transactions generally. Hyatt earned a flat base fee and a variable incentive fee, with the landowners taking the residual profit (or loss) -precisely the opposite risk allocation as in an ordinary lease. 

Indeed, the management agreement specifically disavowed any landlord/tenant relationship. While courts will ordinarily allow parties to characterize a contract as they see fit when it comes to their own relationship, the rules can change when a third party is affected.  Then, the court is likely to ask whether the parties’ characterization compromises the rights of the third party. That’s precisely what happened here; while the courts would almost certainly treat the contract between Hyatt and the Aviation Authority as a management agreement for purposes of any disputes between the parties to the agreement, it was not bound to follow that characterization when doing to would have deprived the county of tax revenues. 

Editor’s note: Many thanks to Anne Lloyd-Jones at HVS International for bringing this case to our attention and sending along a copy of the decision. The editor gratefully accepts such submissions, which allow him to spend less time doing research and more time practicing law. 

COURT DISMISSES SECURITIES FRAUD ACTION AGAINST SUBURBAN LODGES 
Source: Rudd v. Suburban Lodges of America, et al., Civil Action 1:97-CV-3758-ODE (N.D.Ga. March 31, 1999) 

In October 1997, Suburban Lodges of America made a secondary offering of common stock. Two months later, on December 15, 1997, it issued a press release announcing expected earnings that were lower than what analysts had projected on the basis of the earlier prospectus. The stock price immediately dipped. Three days later, a class action lawsuit was filed in federal court on behalf of the secondary offering purchasers, claiming that Suburban Lodges’ prospectus had contained false and misleading statements and omissions. 

Suburban Lodges cried foul, claiming that the lawsuit had all the earmarks of a “strike suit” (that is, a suit based on little more than a drop in a company’s stock price and brought in the hope of obtaining a quick cash settlement). Suburban Lodges therefore asked the court to dismiss the suit, which the court did after finding that the prospectus did not contain any material misstatements or omissions. 

A prospectus is sort of like a witness: generally, it needs to tell the truth, the whole truth, and nothing but the truth. As the federal securities laws (and most state securities laws) put it, a prospectus cannot misstate “material” facts (that is, facts that an ordinary investor would take into account in deciding whether or not to purchase the security), or omit required facts, or present a misleading picture by including some material facts but omitting others. 20/20 hindsight, though, doesn’t count — whether a prospectus is misleading has to be judged from the time it is issued, not in light of later developments. Here, the plaintiffs argued that various documents issued both before and after the prospectus (such as an earlier annual report, the company’s SEC Form 10-K, and the later press release) were inconsistent with certain statements in the prospectus, and that the prospectus was therefore inaccurate. On closer examination, however, the court found that these various alleged inconsistencies were either illusory or did not concern “material” facts. Moreover, the court did not give the plaintiffs the usual chance to try again by amending their complaint; instead, the court found the claim so lacking that it dismissed the case altogether. 

Editors Note: Many thanks to Suburban Lodges of America for sending us a copy of the court’s opinion in this case after we learned of it from Suburban Lodges’ press release. 

COVERAGE FOR “ADVERTISING INJURY” DOES NOT ENCOMPASS CLAIM FOR SERVICE MARK INFRINGEMENT Source: ShoLodge, Inc. v. Travelers Indem. Co. of Illinois, 168 F.3d 256 (6th Cir. February 8, 1999). 

ShoLodge owns and operates the “Sumner Suites” chain of all-suite hotels. In August 1995, it received a letter from the then-owner of “Summerfield Suites” (since acquired by Patriot American), claiming that ShoLodge’s use of the “Sumner Suites” name infringed on the “Summerfield Suites” service mark. ShoLodge eventually defeated the claim in a jury trial. 

In the meantime, ShoLodge tendered a claim to its general liability insurance carriers. A standard coverage available in commercial general liability insurance policies is for protection against “advertising injury,” which typically insures against (among other things) “misappropriation of advertising ideas or style of doing business” and “infringement of copyright, title, or slogan.” Citing this coverage in its general liability insurance policies, ShoLodge claimed that its insurers were required to pay for the defense of the Summerfield Suites lawsuit. When the insurers denied the claim, ShoLodge sued. 

A federal trial court, however, rejected ShoLodge’s claim, and the court of appeals agreed. Although ambiguous terms in an insurance policy are ordinarily construed in favor of coverage, the court found that the phrase “misappropriation of advertising ideas or style of doing business” cannot reasonably be read to include service mark infringement. 

Likewise, the court believed that the phrase “infringement of copyright or title” could not be read to encompass trade-mark infringement, because (i) trademarks are not copy-rightable, so that “copyright” could not reasonably be read to include “trademark,” (ii) “title” generally refers to the non-copyrightable title of a book, film, or other work, not the name of a hotel, and (iii) trademark infringement is a common claim that could easily have been specifically identified in the policy if the insurers meant to cover it.  Thus, while ShoLodge prevailed on its defense of the service mark infringement case, it was forced to pay for that defense without the help of its insurers. 

Most people think of insurance in the traditional, consumer-oriented sense of providing protection against casualty losses, such as personal injuries and property damage. A whole host of business disputes, however, are also covered by insurance, whether under comprehensive general liability policies or under specific policies for particular risks (such as directors’ and officers’ liability insurance, or employment practices liability insurance). One of the critical first steps in defending any lawsuit, therefore, is to evaluate whether the claim is potentially covered and, if so, to notify the insurance company immediately. Because an insurer often needs timely notice in order to provide an adequate defense, the failure to notify the insurer at the outset can sometimes result in coverage being lost entirely.  Indeed, under some policies coverage can be lost even if the insurer was not prejudiced at all, or if the insured became aware of some occurrence that made a later claim likely but waited until a claim was actually made before notifying the insurer. The potential consequences are so severe that under some circumstances, an attorney might even commit malpractice by failing to investigate whether potential insurance coverage exists. If there is any potential for coverage, therefore, the safe route is almost always to err on the side of notifying the carrier — and although ShoLodge ultimately lost its dispute with its insurers, its actions reflected good business judgment. 

PERSONAL INJURY SUIT BROUGHT IN ILLINOIS GOVERNED BY MEXICAN LAW WHERE ACCIDENT OCCURRED AT HOTEL IN MEXICO Source: Spinozzi v. ITT Sheraton Corp., 1999 U.S. App. LEXIS 5904 (7th Cir. April 1, 1999) 

In our last two issues, we discussed the issue of “jurisdiction” — that is, where a lawsuit can be brought when the parties are from different states or different countries. Once a court decides that it has jurisdiction to hear a lawsuit, though, it has to answer another question: whose law should it follow? It’s not necessarily the law of the court’s home state, as an Illinois dentist recently discovered. After falling into a maintenance pit at a Sheraton hotel in Acapulco, the dentist sued Sheraton in an Illinois federal court. The case then turned on whether the court would follow Mexican law or Illinois law: under Mexican law, the dentist’s action would be barred because of his own negligence (he fell into the pit while straying from a path at night during a blackout), while under Illinois law the amount of his claim would only be reduced by the amount due to his own negligence (a rule followed by most American jurisdictions). 

The trial court decided that Mexican law applied and dismissed the case. Affirming that decision, the appellate court reasoned that if the law in any given case depended upon the place where a plaintiff lived, a hotel would be constantly governed by a multitude of different (and possibly conflicting) laws, limited only by the number of states and countries from which its guests came. The better rule, the court reasoned, is to allow a hotel’s local community to set a single legal standard — “for that is the place that has the greatest interest in striking a reasonable balance among safety, cost, and other factors pertinent to the design and administration of a system of tort law.” 

Lawyers call this a “conflict of laws,” or “choice of law,” question — and it’s much more serious than even many lawyers realize.  Although most American states follow many of the same basic legal principles, there are significant differences. In our last issue, for example, we noted that Minnesota and Iowa courts came to opposite answers on the question of whether an operator accused of fraud must be given the chance to cure its default before the owner can terminate the management agreement — even though both cases involved virtually identical facts and virtually identical contracts.  There are myriad other examples: the enforceability of arbitration clauses, limits on punitive damages, the right to a jury trial, etc., etc., etc. Even where states have adopted so-called “uniform” laws (such as the Uniform Commercial Code, the Uniform Franchise Act, or the Uniform Trade Secrets Act), many do so with minor changes and variations; and even where the same uniform laws are adopted verbatim, different state courts interpret those laws in different ways.  Thus, for example, what constitutes a trade secret in California may not be protected in, say, New York — and vice versa. Making matters worse, the rules for determining which law to apply in a given case are not only complex and difficult to predict, but themselves vary from state to state. 
The most common way to achieve certainty is therefore to agree in advance that a certain state’s law will apply to any dispute between the parties (whether the dispute involves the contract, an accident involving the parties, or otherwise). So long as the chosen law has some connection to the parties or the transaction, courts will usually enforce such clauses. That’s particularly important for companies with multiple, standard form contracts (such as franchisors and management companies), who want their contracts to be governed by the same legal standards and to be interpreted consistently. The lesson here, though, is not to enter into such an agreement blindly; given the potentially significant differences between the laws of various states, you should be careful not to give up valuable legal rights unwittingly. 

WYNDHAM SETTLES SHAREHOLDER LAWSUIT, ALLOWING PATRIOT AMERICAN RECAPITALIZATION PLAN TO PROCEED Source: “Wyndham International Agrees to Make $300 Million Rights Offering; Reaches Memorandum of Understanding to Settle Class Action Lawsuit,” Business Wire (April 28, 1999) 

In our last issue, we wrote about a shareholder lawsuit that had been filed against Patriot American over a proposed $1 billion recapitalization from an investment group headed by Apollo Real Estate Advisors. At the time our issue went to press, Patriot American was considering both that recapitalization offer and a competing offer from Hilton. 

Patriot American subsequently chose to proceed with the Apollo offer, and has now reached a memorandum of understanding to settle the shareholder suit. Under the settlement, Patriot American’s management company, Wyndham International (whose shares are paired and trade with Patriot American’s), will offer the holders of its common shares the right to purchase up to $300 million of convertible preferred stock. The proceeds of the offering will be used to redeem up to $300 million of the Apollo equity investment. The settlement is contingent upon the successful completion of the Apollo investment, which itself is subject to shareholder approval, antitrust clearance and other conditions and consents. 

This is good news for Patriot American. Assuming that the Apollo deal goes through, Patriot American will receive the cash infusion it so badly needs. While the eventual allocation of shares among the Apollo group and the existing shareholders will depend upon the extent to which current shareholders participate in the rights offering, the bottom line for Patriot is the same: $1 billion in new cash and no more shareholder suit. 

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