ALLENTOWN – The Choice Hotels organization is seeking to compel arbitration and stay all proceedings in a lawsuit brought by the company’s franchisees, who claimed they have been overcharged inflated fees to increase the group’s revenue and have been subjected to discriminatory treatment based on race.
The group of more than 90 franchisees of various locales around the United States first filed suit in the U.S. District Court for the Eastern District of Pennsylvania on June 12 versus Choice Hotels International, Inc. of Rockville, Md., and Choice Hotels Owners Council, of Fayetteville, N.C. What was initially a group of 46 franchisees more than doubled by the time an amended filing was submitted on July 15.
The franchisees operated hotels nationwide under brands like Sleep Inn and Comfort Suites and allege the defendants have established a qualified-vendor program, which provides necessary hotel items, in order to extract payments from its suppliers.
According to the lawsuit, vendors cannot be considered for inclusion in the program unless they pay an up-front fee of $25,000. Subsequently, the vendors then pass that cost onto the hotel operators.
For example, the suit stated that Choice Hotel operators pay $34.50 for 10 pounds of frozen sausage links, while non-Choice Hotel operators pay $22.37 for the same amount of meat.
“Choice Hotels knows that qualified vendors cannot sell goods and services to its franchisees at competitive prices,” per the lawsuit.
The plaintiffs further alleged that Choice Hotels devises methods of imposing additional fees on them in order to increase its share of the revenue created through the lodging properties they operate.
To this end, franchisees are mandated to pay royalties to Choice Hotels and a “system fee”, totaling at least seven percent of their monthly earnings, with the additional fees and penalties, this amount can total on average more than 20 percent of monthly revenue to the company.
Furthermore, the suit stated Choice Hotels have discriminated against Indian-Americans and other individuals of South Asian background, in being stricter to enforce these rules against them versus white hotel operators.
As an example of this allegation, Choice Hotels stated it would no longer permit two-story properties to use the Comfort Inn brand and were aggressive in its enforcement of that policy with Indian-American and South Asian hoteliers, though not with white franchisees.
Choice Hotels owns and operates about 6,000 hotels in the U.S., and a spokesperson for the group said the company “will address the unfounded allegations at the appropriate time.”
UPDATE
On July 28, counsel for Choice Hotels filed a motion to compel arbitration and stay all proceedings in the case, decrying the allegations of the franchisee plaintiffs as “baseless.”
“Plaintiffs’ sprawling 98-page complaint consists of a litany of baseless allegations against defendants, with 21 claims ranging from RICO violations to breach of fiduciary duty to violations of several state franchise laws,” the motion stated.
“The Court need not reach the merits of plaintiffs’ claims, however, because all 21 claims are subject to a broad arbitration provision contained within each plaintiff’s agreement. Specifically, these arbitration provisions provide that ‘any controversy or claim arising out of or relating to this agreement…will be sent to final and binding arbitration.”
The crux of the defense’s argument is that the arbitration provision in each plaintiff’s agreement falls within the scope of the Federal Arbitration Act. Under the FAA, a court “must grant a motion to compel arbitration and must grant a request to stay the litigation where there is a valid agreement to arbitrate and where a plaintiff’s claims fall within the scope of that agreement.”
Supporting that argument is the defense’s citation of Maryland law, which applies to all the company’s agreements and which contains a manifestation of mutual assent and consideration – thereby solidifying agreement to arbitrate between all parties concerned.
Second, all of plaintiffs’ claims “arise out of or relate to” the agreements. The Third Circuit has held that phrases such as ‘arising out of’ are given broad construction in arbitration provisions and are generally construed to encompass claims going to the formation of the agreements,” the motion read.
“All of plaintiffs’ claims fit within this characterization. Moreover, courts have consistently found that the various claims asserted by plaintiffs are exactly those that are encompassed within broad arbitration provisions. The claims against CHOC, a non-signatory to the agreements, are likewise arbitrable based on the principle of equitable estoppel.”
The hotel group argued that arbitration should proceed on an individual basis and there was no contractual basis for concluding that it ever agreed to collective arbitration – and in fact with respect to the latter, the franchisee agreements contain clauses that preclude such a course of action.
For counts of violation of the RICO Statute, breach of contract and the implied covenant of good faith and fair dealing, common law fraud, declaratory judgment, violation of the Sherman Act, breach of fiduciary duty, civil rights violations, accounting and violation several state statutes relating to franchises, the plaintiffs are seeking various compensatory damages, punitive damages, treble damages, attorney’s fees, costs, orders that the defendants’ conduct violates those state statutes and others, plus a trial by jury.
The plaintiffs are represented by Justin E. Proper and William Hollender Fedullo of White & Williams, in Philadelphia.
The defendants are represented by Stephen A. Loney Jr., Virginia A. Gibson and Jessica Jacobs of Hogan Lovells, also in Philadelphia.
U.S. District Court for the Eastern District of Pennsylvania case 5:20-cv-02823
From the Pennsylvania Record: Reach Courts Reporter Nicholas Malfitano at nick.malfitano@therecordinc.com