In the franchise context, the ground rules for many of these issues have already been established through the disclosure requirements of the UFOC and the Federal Trade Commission.

In the owner/operator context, however, many of the rules are being written as we go along (or, worse, after the challenged conduct has already taken place).  Our Hospitality Practice Group has prepared a short, discussion-style presentation to help hospitality executives— such as corporate counsel, chief financial officers, corporate controllers, and purchasing directors—identify potential problem areas in light of the Sheraton verdict.  For more information, call Greg Schetina at (213) 683-0622 or John Dent at (213) 683-0608, or send either of them an e-mail at gds@ttlaw.com or jrd@ttlaw.com, respectively.

PURCHASING

JURY FINDS SHERATON LIABLE FOR $50 MILLION OVER PURCHASING PROGRAM Source: Sheraton Must Pay $51.8 Million for Mismanaging Hotel, Delaware Law Weekly (January 4, 2000); miscellaneous court filings in 2660 Woodley Road Joint Venture v. ITT Sheraton Corp., Civil Action No. 97-450-JJF (D.Del.)

A Delaware jury has found Sheraton liable to the owners of the former Sheraton Washington hotel for $50 million, including $37.5 million in punitive damages, based on alleged kickbacks in Sheraton's purchasing program.  According to expert witnesses involved in the case, the owners alleged that Sheraton added 7% to the best prices that it was able to obtain from its bulk-purchase vendors.  Sheraton then retained the 7% add-on in order to cover the administrative costs of running its purchasing program.  Although Sheraton claimed that it did not earn any profit from the add-on, the jury found it liable for a litany of claims including breach of contract, breach of fiduciary duty, breach of the implied covenant of good faith and fair dealing, misrepresentation, and price discrimination under the federal antitrust laws.  The jury did reject the owner's racketeering claims, for which the owners had sought as much as $268 million.

The case is highly significant for several reasons beyond the sheer size of the jury's verdict.  First, it dramatically underscores the legal risks involved any time that an operator derives income—even if not profit—that is paid either directly or indirectly by the hotel owner and that is not disclosed, either in the monthly profit-and-loss statement or otherwise.  For more commentary on this subject, see the margin column on the first page of this issue.

Second, the breakdown of the verdict tells a lot about what the jury were thinking. The jury's damages awards on each claim were: 

• Breach of contract for booking certain expenses in the wrong period: $222,000 
• Breach of contract with respect to its obligations concerning purchasing services: $250,000
• Price discrimination: $750,000 (probably the $250,000 purchasing damages, trebled under the antitrust laws)
• Breach of fiduciary duty, breach of the implied covenant of good faith and fair dealing, and intentional or negligent misrepresentation: $1.1 million (not allocated among those claims)
• Breach of contract 'with respect to its obligations to act as owner's agent': $10.2 million
• Punitive damages: $37.5 million
• Fraud, racketeering, and breach of contract with respect to its obligations concerning the frequent traveler program, reservations systems, useable denials practices, complimentary rooms practices, and any other contractual duty: $0

As this issue goes to press, Sheraton has asked the court to reduce the size of the verdict or order a new trial, based on irregularities in the verdict.  It will now be up to the trial court to figure out whether the verdict is supported by the evidence; if the verdict stands, it will surely be part of Sheraton's appeal.

Third, this is the second time in recent memory that a major operator was unable to recover damages for the early termination of its management contract.  As we reported in our Summer, 1998 issue, Sheraton had originally attempted to prevent the owners from terminating the management agreement; but the court, consistent with a growing line of authority, held that Sheraton could only sue for damages for the early termination.  The trial therefore also included Sheraton's claim that the owners were simply trying to get out of a disadvantageous agreement that would otherwise have run until 2030, and that Sheraton should therefore recover $40 million in lost profits.  Hyatt was similarly left with a damages claim against the owners of the former St. John Hotel in the Virgin Islands when its management agreement was prematurely terminated, but (as noted in our Autumn, 1998 issue) the case settled before Hyatt was able to argue its case to a jury.

Finally, the case is noteworthy because of the unusual way in which it was tried.  Despite the sizeable damages at issue, the federal judge presiding over the case limited the entire trial to one week, before a jury that did not include a single member with any education beyond a high school diploma.  It therefore highlights one of the most significant risks of not settling a case and instead proceeding to trial, a risk that applies equally to plaintiffs and defendants:  when you finally get there, you may not get the opportunity to present your case as effectively as you want to, and your fate may rest in the hands of persons whom you might suspect are not entirely up to the task.

Editor's Note:  Our thanks to Bob Patterson of Paradigm Hospitality, who served as an expert witness for the owners, for providing additional information about the plaintiff's claims.

ADA

CENDANT SETTLES ADA LITIGATION WITH JUSTICE DEPARTMENT Source:  Consent Order and Final Judgment in United States v. Days Inns of America, Inc., Case No. 96-26 (E.D.Ky.), available at www.usdoj.gov/crt/ada/daysinn.htm; "America's Athletes with Disabilities Files ADA Lawsuit Against Chicago - Days Inn Downtown for Failure to Accommodate," Hotel Online (October 29, 1998)

In our Summer, 1998 and Autumn, 1998 issues, we discussed the five test cases brought by the United States Department of Justice under the Americans With Disabilities Act, seeking to impose liability on Days Inns and its parent, Cendant, for the failure of Days Inn franchisees to comply with the ADA.  The test cases led to three published court opinions, each of which came to different conclusions as to whether and under what circumstances a franchisor could be held liable.

The cases have now settled with a compromise:  while Cendant will not knowingly allow a non-compliant new franchise to open, and will provide substantial assistance to help its existing Days Inn franchisees comply with the ADA, it will not be liable if those franchisees fail to comply.  The agreement provides two procedures, one for new franchisees and one for existing facilities.  For new franchisees, Cendant will require a "Certificate of ADA Compliance," signed by the architect of record, the building contractor, or a consulting architect, confirming that the new facility complies with the ADA.  So long as the form is properly completed and Cendant does not actually know that it is inaccurate, Cendant will not be liable if the facility is non-compliant.

For existing facilities subject to the ADA, Cendant will allow its franchisees to participate in a survey designed to identify non-compliant properties.  The results of the survey will not be shared with the Justice Department and cannot be used by the Justice Department as a basis for prosecution under the ADA.  Cendant will then establish a $4.75 million 'revolving remediation fund' from which non-compliant franchisees identified in the survey will be able to borrow funds to bring their properties into compliance.  As the 3-year, interest-free loans are repaid, the funds will be placed back into the remediation fund to be loaned again.  The loan program will stay in place for five years; the other terms of the agreement will remain in place for a decade.

The settlement is both good news and bad news for franchisors.  The good news is that the agreement provides a road map for franchisors worried about the prospect of a Justice Department lawsuit.  By implementing programs similar to Cendant's, franchisors can be more confident that the Justice Department will be satisfied. Moreover, franchisees and other property owners will be able to use the checklist developed by Cendant and the Justice Department to help determine whether their properties are ADA-compliant.  The bad news, however, is that there are other potential ADA plaintiffs, such as private individuals and public interest groups; in October, for example, a group called Equip for Equality brought an ADA lawsuit against the Days Inn in downtown Chicago for allegedly failing to accommodate a group of disabled athletes during a wheelchair basketball tournament.  The Justice Department's positions do not control these private lawsuits, and the courts still face a split of authority concerning when a franchisor will be liable for a franchisee's  violation of the ADA.  The Supreme Court had the opportunity to resolve the issue when Cendant asked it to review one of the test case decisions, but the Court declined to do so.  With the Cendant test cases now resolved, the chance that the courts will arrive at a uniform interpretation of the ADA is greatly reduced.

DISCRIMINATION

DEPARTMENT OF JUSTICE SUES ADAM'S MARK FOR PATTERN OF DISCRIMINATION Source: "Justice Department Files Lawsuit Against Adam's Mark Hotel Chain," United States Department of Justice Press Release No. 99-601, available at www.usdoj.gov/opa/pr/1999/December/601cr.htm; "Statement from Fred S. Kummer, Fact Sheets and Supporting Statements in Response to U.S. Dept. of Justice Investigation of Adam's Mark/HBE Corp.," PR Newswire (December 16, 1999); "Bias Charges Against St. Louis Hotel Cause Groups to Rethink Meeting Plans," Hotel Online (February 4, 2000)

The Department of Justice is busy in the hotel world these days:  no sooner did it announce its settlement of the Cendant litigation than it filed a lawsuit against Adam's Mark, for allegedly 'engaging in a pattern of discrimination against minorities in their hotels and their hotels' restaurants, bars, lounges, and clubs.'  The lawsuit claims that Adam's Mark hotels placed minorities in less desirable rooms than white guests, segregated minorities to the least desirable areas of the hotel, 'charged minorities higher room rates
and different prices for goods and services,' and applied 'stricter security, reservation, and identification requirements.'  The lawsuit is part of an ongoing investigation launched after a group of African Americans filed a class action claiming discrimination at the Adam's Mark Hotel in Daytona Beach during Black College Reunion in April, 1999.  Adam's Mark issued a press release vigorously denying the charges and promising to cooperate fully with the Justice Department in every phase of its investigation.

For Adam's Mark, this lawsuit is a particularly bitter pill to swallow.  According to Adam's Mark, the Daytona Beach hotel has been closely involved in organizing and promoting the Black College Reunion; indeed, according to its press release, the hotel has been the Reunion's single, largest corporate supporter.  Among other things, the hotel lent its managers to assist in event planning, granted access to its meeting facilities for planning meetings, and provided its facilities for event entertainment and other activities.  Despite these efforts, Adam's Mark now faces a class action lawsuit by its guests, followed by a federal government investigation and lawsuit against not only the hotel itself but the entire chain and its parent company, HBE Corp.  Meanwhile, groups such as the Episcopal Church, the Evangelical Lutheran Church, and the Organization of American Historians have threatened to cancel contracts at Adam's Mark hotels in Denver and St. Louis because of the lawsuit allegations.

LABOR AND EMPLOYMENT

EEOC:  ILLEGAL IMMIGRANTS ENTITLED TO DAMAGES FOR LABOR VIOLATIONS Source: Hotel Settles Illegal Aliens Case, FindLaw Legal News (January 10, 2000)

Suppose you're a hotel general manager.  Your employees start a union organizing drive.  You discover that some of the employees are undocumented workers, which means you can be subject to substantial penalties under federal law for employing them.  The undocumented employees, however, are actively involved in the union organizing drive.  Do you report them to the INS?

That was the situation faced by a Holiday Inn Express general manager in Minneapolis, who fired nine illegal immigrants while the hotel was involved in a union organizing drive.  The employees sued, claiming that the firings were in retaliation for the union organizing activities, and therefore constituted both an unfair labor practice and a violation of the employees' civil rights.  Siding with the employees, the Equal Employment Opportunity Commission took the position that if the firings were retaliatory, the employees would be entitled to damages - even if, as here, the employees are illegal immigrants who are then deported.  (According to a union spokesperson, the EEOC's position was unprecedented.)  The case settled without an admission of liability but with the hotel paying a total of $72,000 in back pay and damages.

Particularly in today's tight labor market, the pressure to find candidates to fill empty positions can be intense.  This case, however, demonstrates one of the many dangers that an employer faces by cutting corners or looking the other way when it comes to an applicant's residency or citizenship status.  Once the undocumented workers were hired and the union organization drive began, the hotel was stuck between the proverbial rock and a hard place:  it could continue to employ undocumented workers, and risk severe penalties from the INS, or it could fire the employees, report them to the INS, and face an unfair labor practices charge - as happened, ultimately resulting in a $72,000 settlement payment (not to mention its own attorneys' fees, various costs, and the attendant disruption it incurred).  The lesson:  comply with the necessary residency check before hiring any employee.  For more information, contact Tuttle & Taylor labor and employment principal Kate Gold at (213) 683-0611 or at ksg@ttlaw.com

AND FINALLY . . .

YOU CAN RUN BUT YOU CAN'T HIDE:  PRINCE OF BRUNEI FACING $21 MILLION LAWSUIT
DESPITE ATTEMPTS TO EVADE SERVICE OF PROCESS  Source: Bolkiah v. Superior Court, 74 Cal.App.4th 984, 88 Cal.Rptr.2d 540 (September 8, 1999)

Haji Jefri Bolkiah is the brother of the Sultan of Brunei Darussalam and a prince of the monarchy.  In October 1997, Prince Jefri entered into a contract with Bijan Fragrances and its principal, Bijan Pakzad, to design and manufacture exclusive fragrances and amenities for a luxury hotel that Prince Jefri was developing in Brunei Darussalam.  Prince Jefri paid a 50% advance deposit on a $48,314,500 contract, along with $2.5 million for design and development costs and $10 million for personal fragrances for Prince Jefri and his three children.  Alas, in April 1998, Prince Jefri cancelled the order for the hotel project.  Bijan sued, seeking $21,526,795 in damages.

Serving the complaint on Prince Jefri, however, proved difficult.  Bijan learned that Prince Jefri might be staying at the Plaza in New York; however, process servers were thwarted by hotel personnel and security guards.  The process server eventually left a copy of complaint with hotel security and mailed copies to Prince Jefri care of the hotel.  In addition, Bijan sent copies by certified mail to Prince Jefri's addresses in Brunei Darussalam, England, and Beverly Hills.  After ordering Bijan to publish the summons and complaint in the Los Angeles Times and the New York Post, the trial court ruled that Prince Jefri had been duly served and that the case could proceed.  The appellate court affirmed that ruling.

While evading service of process is a time-honored practice, it rarely succeeds.  For obvious reasons, courts are generally unsympathetic to a defendant who is obviously attempting to frustrate the judicial process, and while evasion may force a plaintiff to resort to more time-consuming and expensive methods, more often than not it simply postpones the inevitable.  In many jurisdictions, an evasive defendant may also be held liable for the increased service costs, and may face increased attorneys' fees and costs of his own, but in this case we suspect that Prince Haji Jefri Bolkiah can afford it.

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