ALLENTOWN – The Choice Hotels organization has had granted its motion 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, 2020 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.”
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.”
The crux of the defense’s argument is that the arbitration provision in each plaintiff’s franchisee 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.”
UPDATE
After nearly eight months of consideration, U.S. District Court for the Eastern District of Pennsylvania Judge Joseph F. Leeson Jr. ruled on March 19 to grant the defense motion to compel and stay proceedings, finding, among other things, that the plaintiffs’ claim they couldn’t afford to arbitrate was “speculative.”
“Plaintiffs assert that depending on the arbitration forum, they must likely expend between $20,000 and $42,000 to arbitrate their claims. However, these fees are speculative. Plaintiffs do not account for the fact that the administrative fees may be reduced,” Leeson said.
“Plaintiffs’ numbers are based on a two-week arbitration and two days of hearings due to the ‘complexity’ of the matter, but this estimated length has no further explanation or support. Further, because the arbitrations must proceed individually, as discussed below, the arbitration proceedings are unlikely to last as long for the smaller claims, which correlate to the plaintiffs with less financial resources. Consequently, plaintiffs have failed to present evidence to show that the projected fees would apply to their specific arbitrations.”
The plaintiffs had argued they could not pay the arbitration costs, due to decreased revenue earned during the COVID-19 pandemic.
Leeson added that the arbitration clauses were not unconscionable, and the plaintiffs failed to show that they were.
“Substantively unconscionable terms are unreasonably favorable to the more powerful party, impair the integrity of the bargaining process or otherwise contravene the public interest or public policy, attempt to alter in an impermissible manner fundamental duties otherwise imposed by the law, or are otherwise unreasonably and unexpectedly harsh.’ Plaintiffs have not made this showing,” Leeson said.
“Plaintiffs entered into valid, enforceable arbitration agreements with Choice that they admit apply to the claims in the instant action. Because these claims, as they relate to CHOC, also arise from the Franchise Agreements, both defendants may enforce the agreements to arbitrate. Defendants’ motion to compel arbitration and stay proceedings is granted. Plaintiffs must proceed to arbitration on an individual basis and the above-captioned action is stayed pending the resolution of these proceedings.”
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