ALLENTOWN – A federal judge has confirmed a $779,000 arbitration award decided in favor of a plaintiff franchisee in a wide-ranging lawsuit brought by such franchisees against the Choice Hotels organization, 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, 2020.
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.
On July 28, 2020, 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.”
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, 2021 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 Hotels 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.”
UPDATE
On July 28, 2023, plaintiff Highmark Lodging, LLC filed a motion to confirm an arbitration award on three breach of contract claims declared two months prior, in proceedings before the American Arbitration Association.
“Arbitrator Steven Petrikis [initially] found in favor of plaintiff (Highmark Lodging, LLC) and against Choice Hotels in the amount of $16,361 for the volume discount breach of contract claim; $1,589.01 for the Key Money breach of contract claim; and $1,439.64 for the Crowdstrike breach of contract claim. All other claims brought by plaintiff were denied. Arbitrator Petrikis did not decide the issue of attorneys’ fees,” the motion stated, in part.
“On July 27, 2023, Arbitrator Petrikis issued his final award, in which he found that plaintiff was the prevailing party. The final award incorporated the partial final award by reference. Arbitrator Petrikis awarded plaintiff the sum of $760,008.75, representing (a) $649,240.50 for attorneys’ fees, (b) $71,581.75 for expenses and (c) $39,186.50 for arbitration fees and costs. The final award is in all respects proper, and there are no legitimate grounds under 9 U.S.C. Section 10 for Choice Hotels to contest or seek to vacate the final award. Accordingly, the Court should issue an order and separate judgment confirming the final award.”
Choice Hotels then filed a motion to vacate and/or modify the arbitration award on Oct. 25, 2023.
“When it is evident from the record that the arbitrator knew the applicable law, and yet chose to ignore it, a court will find manifest disregard warranting vacation of an arbitration award under 9 U.S.C. Section 10. With regard to claims arising from a contract, courts must ‘begin with the obvious: An arbitrator ‘may not ignore the plain language of the contract,” a portion of their motion to vacate stated.
“The plain language of the Franchise Agreement’s integration clause at issue in this case unambiguously did not incorporate the Franchise Disclosure Document (FDD) into the Franchise Agreement. These essential facts and legal conclusions, which are well-supported by bedrock principles of contract construction recognized in this District and the [U.S. Court of Appeals for the] Third Circuit, were presented to the Arbitrator, who chose to ignore them. Accordingly, Choice Hotels has demonstrated that the Arbitrator exhibited manifest disregard for the law, entitling Choice Hotels to an order vacating or modifying the award as it relates to findings that the FDD is incorporated into the Franchise Agreement and Choice Hotels is liable for breach of contract arising exclusively out of statements contained in the FDD.”
U.S. District Court for the Eastern District of Pennsylvania Judge John M. Gallagher issued an order on March 4 to grant the plaintiff’s motion to confirm the arbitration award in favor of Highmark Lodging, LLC and to deny the defense’s motion to vacate that same award.
“Plaintiff moves the Court to vacate the arbitrator’s legal determinations as to certain claims and asserts the arbitrator manifestly disregarded the law by interpreting the plain language of the integration clause. The Court disagrees. Arbitrator Petrikis was interpreting the language of the agreement when he found that the FDD was incorporated. He specifically relied upon the fact that the FDD was ‘precisely and conspicuously identified’ in the integration clause of the agreement, which states, ‘No…agreement…not contained in this agreement or in our franchise disclosure document will be of any force or effect.’ The arbitrator interpreted this line, in conjunction with the preceding sentences, to mean that the FDD was integrated by specifically being made a part of the agreement. The Court does not find that Arbitrator Petrikis failed to interpret the parties’ contract altogether or disregarded clear and unequivocal language. Instead, he interpreted the contract as written and came to a conclusion regarding whether the FDD was integrated. Plaintiff attempted to limit the arbitrator, and then this Court, to focusing on the first sentence of the integration clause. However, the arbitrator was reasonable in his review of the entire clause, and the language was not so unambiguous to render his interpretation invalid,” Gallagher said.
“Further, plaintiff relies on evidence that does not conclusively establish that the FDD was not incorporated, and therefore, the correct legal standard was not so obvious that a typical arbitrator would have come to a different conclusion. Plaintiff cites the cover page of the disclosure document stating, ‘The terms of your contract will govern your franchise relationship. Don’t rely on the disclosure document alone to understand your contract. Read all of your contract carefully. Show your contract and this disclosure document to an advisor, like a lawyer or an accountant.’ This language merely shows that the FDD alone does not establish the agreement. However, reasonable minds may differ on whether it can be incorporated into the contract. Further, plaintiff cites the Franchise Rule that states that an FDD must be provided at least 14 days before a binding agreement is signed. Again, this just shows that the FDD itself does not establish a binding contract, and a binding contract will govern the later agreement. However, this language does not conclusively state that an FDD cannot be incorporated into the later agreement. Further, plaintiff cites Park 80 Hotels, LLC v. Holiday Hospitality Franchising, LLC, where the court found the FDD was not incorporated, to support its contention here. However, the integration clause in that case merely stated the FDD was not disclaimed. The language differs from this integration clause, and that case is not controlling precedent for the arbitrator to disregard. Plaintiff additionally points to areas of the agreement where other documents were integrated with more specific language. However, this does not show that other, less clear language, could not reasonably establish integration at another part of the agreement. The Court offers no opinion regarding whether it agrees or disagrees with Arbitrator Petrikis’ interpretation of the integration clause. It merely finds that he did not stray from his delegated task of interpreting a contract, disregard clear language in the contract, or manifestly disregard the law. Lastly, of note, defendant argues this Court lacks subject matter jurisdiction over this motion, because there is no case or controversy since plaintiff does not seek to alter the monetary award. The Court rejects this argument, as plaintiff is seeking to vacate legal determinations.”
Gallagher then outlined the final part of his order.
“Judgment shall be entered against Choice Hotels International, Inc. in the amount of $779,398.40. Choice Hotels International, Inc. shall pay post-judgment interest in accordance with 28 U.S.C. Section 1961 from the date that the Court enters judgment confirming the final award until the date judgment is satisfied and the Court shall retain jurisdiction for the purposes of further proceedings necessary to enforce this Court’s judgment,” Gallagher concluded.
The plaintiffs are represented by Justin E. Proper of White & Williams, in Philadelphia.
The defendants are represented by Eric L. Yaffe and Maisa Jean Frank of Gray Plant Mooty Mooty & Bennett in Washington, D.C., Kristin M. Stock of Lathrop GPM in Minneapolis, Minn., plus Virginia A. Gibson and Alexander Ervin 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