L. Michael Hankes  |  ATTORNEY AT LAW
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Franchisee Obtains Concessions from Days Inns

Lodg­ing Devel­op­ment and Man­age­ment, Inc. (Lodg­ing Devel­op­ment) was the owner and oper­a­tor of the 179 unit Days Inn West Memphis/Pyramid located in West Mem­phis, Arkansas, just across the Mis­sis­sippi River from Mem­phis, Ten­nessee near the junc­tions of Inter­state Routes 40 and 55. Lodg­ing Development’s 1991 fran­chise agree­ment con­tained a ter­ri­to­r­ial pro­tec­tion pro­vi­sion which pro­hib­ited the estab­lish­ment of a com­pet­ing Days Inn on the Mem­phis side of the river. This ter­ri­to­r­ial pro­tec­tion was nego­ti­ated at the time Lodg­ing Devel­op­ment pur­chased its Days Inns fran­chise. Lodg­ing Devel­op­ment was also promised that it would be num­ber one on the Days Inns reser­va­tion sys­tem for down­town Mem­phis, Tennessee.

In 1994, Days Inns estab­lished through nego­ti­a­tions with its Fran­chise Advi­sory Com­mit­tee, a non-encroachment agree­ment which required that all fran­chisees within a 15 mile radius of a pro­posed new Days Inn be noti­fied of the appli­ca­tion and be given an oppor­tu­nity to chal­lenge the new Days Inns hotel. Begin­ning in 1996, Days Inns began a national expan­sion pro­gram, increas­ing the num­ber of Days Inns hotels from 635 in 1996 to 1,925 by early 2001.

In Octo­ber of 1997, Days Inns per­mit­ted the open­ing of the 82 unit Riverbluff Days Inn in the area on the Mem­phis side of the Mis­sis­sippi River specif­i­cally addressed in Lodg­ing Development’s con­trac­tual pro­tected ter­ri­tory. Lodg­ing Devel­op­ment never received writ­ten noti­fi­ca­tion of the pend­ing appli­ca­tion under Days Inns’ non-encroachment agree­ment. Lodg­ing Devel­op­ment did how­ever, lodge an oral protest with a Days Inns rep­re­sen­ta­tive that was in the file when Days Inns approved the con­ver­sion of the Riverbluff Days Inn from a Best Western.

Upon the open­ing of the Riverbluff Days Inn just off I-55 on the Mem­phis side of the river, net oper­at­ing income at Lodg­ing Development’s Days Inn West Memphis/Pyramid imme­di­ately dropped. Not long after­ward, Days Inns recon­fig­ured the reser­va­tion sys­tem for the Mem­phis, Ten­nessee mar­ket. Days Inn also moved the global posi­tion­ing sys­tem marker for the reser­va­tion sys­tem to a point fur­ther away from the river and closer to the Mem­phis air­port. Days Inns thus dropped the Days Inn West Memphis/Pyramid from its for­mer num­ber one posi­tion to a point on the rota­tion for tele­phone reser­va­tions that was below that of the Riverbluff Days Inn and other Days Inns in the Mem­phis market.

After repeated com­plaints by Lodg­ing Devel­op­ment, Days Inns agreed to per­form an impact study to deter­mine how badly the Riverbluff Days Inn was hurt­ing the Days Inn West Memphis/Pyramid. The impact study per­formed in the sum­mer of 1998 revealed an impact of at least 10–15% per year, which was expected to con­tinue into the future.

After receiv­ing the impact study, Lodg­ing Devel­op­ment made numer­ous demands for rec­ti­fi­ca­tion. Days Inns’ rep­re­sen­ta­tives admit­ted that the open­ing of the Riverbluff Days Inn had dam­aged Lodg­ing Devel­op­ment. Days Inns ulti­mately issued a ter­mi­na­tion notice to the Riverbluff Days Inn that was effec­tive in Octo­ber 2002, nine months after the Feb­ru­ary 1, 2002 expi­ra­tion date for Lodg­ing Development’s fran­chise. It also agreed to defer Lodg­ing Development’s roy­alty pay­ments pend­ing res­o­lu­tion of the dis­pute. How­ever, Days Inns refused to recon­fig­ure the reser­va­tion sys­tem to restore Lodg­ing Devel­op­ment to its for­mer num­ber one posi­tion or to com­pen­sate Lodg­ing Devel­op­ment for its losses by writ­ing a check.

Lodg­ing Devel­op­ment brought suit in May 2000 alleg­ing breach of con­tract, fraud, con­struc­tive fraud, promis­sory estop­pel, vio­la­tions of the Arkansas Fran­chise Prac­tices Act and other claims. Com­pen­satory and puni­tive dam­ages were sought. Lodg­ing Devel­op­ment was in the unique posi­tion of hav­ing a pro­tected ter­ri­tory in its fran­chise con­tract and the ben­e­fit of the Days Inns non-encroachment agree­ment. How­ever, Lodg­ing Development’s con­trac­tual pro­tected ter­ri­tory was tied to the main­te­nance of cer­tain qual­ity assur­ance scores. One of the alle­ga­tions of Lodg­ing Development’s com­plaint was that on two sep­a­rate occa­sions, in 1997 and in 1998 respec­tively, Days Inns had used phony qual­ity assur­ance scores to claim a for­fei­ture of Lodg­ing Development’s con­trac­tual pro­tected territory.

After sig­nif­i­cant dis­cov­ery, Days Inns moved for sum­mary judg­ment on most of Lodg­ing Development’s claims includ­ing the claims for puni­tive dam­ages and for vio­la­tions of the Arkansas Fran­chise Prac­tices Act. By order dated Octo­ber 17, 2001?, the Court denied Days Inns’ motion for sum­mary judg­ment in its entirety, hold­ing that Lodg­ing Devel­op­ment had made out a prima facie case for puni­tive dam­ages. The Court also refused to apply to Days Inns, an exemp­tion to the Arkansas Fran­chise Prac­tices Act. A 1991 amend­ment to the statute had exempted from the pro­vi­sions of the Act, all fran­chises sub­ject to the Fed­eral Trade Commission’s so called Fran­chise Pre-Sale Dis­clo­sure Rule. The Court found the 1991 amend­ment to the act to be illog­i­cal, par­tic­u­larly in regard to con­duct occur­ring after the pur­chase of a fran­chise and allowed the claims brought under the Arkansas Fran­chise Prac­tices Act to pro­ceed to trial.

The trial began on Jan­u­ary 15, 2002 and the par­ties agreed to set­tle the case on Jan­u­ary 16, 2002. The Court ordered the par­ties to sub­mit a Con­sent Order, embody­ing the set­tle­ment terms, which ulti­mately was approved by the Court and filed with the Clerks’ office on April 29, 2002.

The fol­low­ing terms of the set­tle­ment were con­tained in the Con­sent Order:

    a. The Octo­ber 2002 ter­mi­na­tion of the Riverbluff Days Inn was affirmed;
    b. Lodging Development’s fran­chise for the Days Inn West Memphis/Pyramid, was renewed for a ten (10) year term with­out the exe­cu­tion of any doc­u­ment other than the Con­sent Order or the pay­ment of a renewal fee;
    c. Lodging Devel­op­ment would pay no roy­al­ties for the entire ten year term and would pay no liq­ui­dated dam­ages upon any early ter­mi­na­tion of the franchise;
    d. Lodging Devel­op­ment received a pro­tected ter­ri­tory roughly equiv­a­lent to a ten (10) mile radius, sub­ject to cer­tain defined exceptions;
    e. The entire agree­ment and all of its terms were assign­a­ble to a third party;
    f. Lodging Devel­op­ment was not required to do any sig­nif­i­cant remod­el­ing under the punch list asso­ci­ated with the renewal; and,
    g. Lodging Devel­op­ment agreed to pay $50,000 to Days Inn over two years as the res­o­lu­tion of out­stand­ing unpaid roy­al­ties of over $155,000 that had been deferred for a period of time.

In this case, Lodg­ing Devel­op­ment? was able to obtain sig­nif­i­cant con­ces­sions from Days Inns to com­pen­sate it for the dam­age done by the encroach­ment, which were out­lined in the Con­sent Order. The dam­ages caused to Lodg­ing Devel­op­ment could eas­ily have been avoided, had Days Inns been more care­ful in the imple­men­ta­tion of its expan­sion program.

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This article is intended for informational purposes only and is not to be relied upon as legal advice, as individual facts and circumstances may vary.