The whistle blower explained why!

By William H Harriss [Billy the Brit]. 5/28/2024. [email protected]

“We were told not to engage with you under any circumstances,” so I asked why, “because we may incriminate ourselves or make the situation worse.” Now, I was totally intrigued and asked what situation could be made worse: “The controversy over ripping the franchisees off.” The whistle-blower obviously was frightened of being identified and suddenly, without warning, disconnected.

The phone rang early the next morning it was the whistle-blower again. “They will never entertain buying your sterilization product because it earns them nothing, unlike the 10% they get as a kickback from the cleaning, janitorial and chemical companies.” “If they demand their franchisees buy your bedding sterilization system that uses no chemicals and may save the franchisee 50% on the chemical bills, the Hotel franchisor will suddenly get 10% of nothing.” “Your amazing money and lifesaving innovation scared the pants off them.” “They do not care if a few clients die; profits come before the life value of staff or client.”

This was something I had never considered before. I was somewhat intrigued, so I started my usual in-depth research procedure to determine what may be a rip-off between the Hotel group, i.e., the franchisors, and the hotel property and business owners, the franchisees. It did not take me long to confirm what the whistleblower was talking about, what she was bravely and gallantly informing me about.

Let's get it straight: every hotel and place of lodging in the world actually needs this lifesaving and protection equipment. I have tried selling my money and life-saving sterilization equipment to hotel groups, but they simply refuse to discuss the system with me. I suppose this is mainly because I inform them and can demonstrate how to save up to 50% on cleaning chemicals. The whistle-blower has put me right on that. We now know the hotel franchisors want more chemicals used and higher prices pushed onto their franchisees, not less. The larger the quantity, the greater the cost, to the direct benefit of the Hotel Group, the franchisors.

There is no blame on hotel operators or owners; they are the damaged parties suffering in these matters. They are the ones paying double what they need to pay for cleaning chemicals. They are the ones whose staff and clients are being put at risk of losing their lives due to failure to sterilize certain bedding items.

There is a fairer way, and franchisors can still make their kickback agreements with chemical cleaner suppliers a part of their franchise agreements. But it simply cannot be right that one supplier has the sole and exclusive right of supply, and that the franchisee can only buy from that one supplier. This encourages, and probably guarantees, rip-off pricing, and only the franchiser Hotel Group and the Chemical Company benefit from such an arrangement. If four such chemical supply companies were unrelated to each other offering approved products, it would create at least some competition between the suppliers and create a fairer marketplace for the franchisee to buy from. I doubt that will happen because the Hotel Groups are wreaked with greed; they want more, not less.

Another thing to consider is that franchisors inflict these extra costs to their advantage and the disadvantage of every franchisee because they use the same kickback procedure on everything that the franchisee buys or acquires. This results in the dirty roundabout of everything being overpriced and often of uncontrolled quality control.

Last year, the Chemical cleaning industry supplies for the lodging industry [2023] was $75 billion US dollars. The Hotel Groups and the franchisors have more than a finger in that pie; they are wallowing in it right up to their chins. That is why they are able to pay their top people salaries that can only be described as obscene. There is no way in this world that any of the CEOs can earn the corporation their value in salary. Not one of them can be worth the extravagant salaries they are paid.

Here are the salaries, which I am sure not one of them deserves. It would be better in the bank accounts of the franchisees.

CEO 2021 Pay

Robert Goldstein, Las Vegas Sands Corp. = $31 million

Mark Hoplamazian, Hyatt Hotels & Resorts = $24 million

Christopher Nassetta, Hilton Hotels & Resorts = $23.3 million

Thomas Reeg, Caesars Entertainment Group = $22.5 million

Anthony Capuano, Marriott International = $18.4 million

Geoffrey Ballotti, Wyndham Hotels & Resorts = $18.2 million

William Hornbuckle MGM Resorts International = $13.2 million

Matt Maddox, Wynn Resorts = $12.9 million

Patrick Pacious, Choice Hotels International = $11.2 million

Sébastien Bazin, Accor = $4.9 million

Keith Barr, InterContinental Hotels Group (IHG) = $3.9 million

Alison Brittain, Whitbread = $2.6 million

On average, CEOs made 287 times more money than their workers in 2023.

If you assumed hotel brands directly own and operate the majority of properties flying their flag, think again! Contrary to popular belief, mega-chains predominately utilize franchise and management contracts to expand their empire with minimal capital investment.

A hotel brand essentially acts as an umbrella identity for a chain or collection of hotels, unified by brand standards, amenities, design, and service. The brand creates recognition, shapes guest expectations and differentiates the hotels from competitors.

Most hotel brands don't directly own the hotels but rather engage in management agreements, franchising or licensing arrangements in return for a fee and adherence to brand standards. This asset-light strategy spreads risk and enables rapid growth. Marriott, Hilton and Hyatt are prime examples of brands largely relying on this model.

Below are the Hotel Groups that are, in fact, franchise operations:

Choice Hotels, Brands: Ascend Collection, Cambria Hotels, Comfort Inn & Suites, Clarion Hotels, Clarion Pointe, EconoLodge, MainStay Suites, Quality Inn, Rodeway Inn, Sleep Inn, Suburban Extended Stay Hotels, WoodSpring Suites.

Hilton Worldwide, Brands: Canopy, Curio Collection, Conrad Hotels and Resorts, Doubletree, Embassy Suites, Hampton Inn, Hampton Inn & Suites, Hilton Garden Inn, Hilton Grand Vacations Company, Hilton Hotels & Resorts, Homewood Suites, Home2 Suites, LXR Hotels and Resorts, Motto, Signia Hilton, Tapestry Collection by Hilton, Tempo, Tru, Waldorf Astoria Hotels and Resorts.

Hyatt Corporation, Brands: Alila, Alua Hotels & Resorts, Andaz, Breathless Resorts & Spas, By Dream Hotel Group*, Caption by Hyatt, Destination by Hyatt, Dream Hotels*, Dreams Resorts & Spas, Grand Hyatt, Hyatt, Hyatt Centric, Hyatt House, Hyatt Place, Hyatt Regency, Hyatt Residence Club, Hyatt Vivid Hotels & Resorts, Hyatt Zilara, Hyatt ZivaJdV by Hyatt, Miraval, Park Hyatt, Secrets Resorts & Spas, Sunscape Resorts & Spas, The Chatwal*, The Unbound Collection by Hyatt, Thompson Hotels, Time Hotels*, Unscripted*, UrCove, Zoëtry Wellness & Spa Resorts. Brands and names marked with an asterisk (*) were acquired in Hyatt's January 2023 Dream Hotel Group acquisition.

InterContinental Hotels Group, Brands: Atwell Suites, Avid Hotels, Candlewood Suites, Crowne Plaza Hotels and Resorts, Even Hotels, Holiday Inn Hotels and Resorts, Holiday Inn Express, Holiday Inn Club Vacations, Hotel Indigo, HuaLuxe Hotels and Resorts, InterContinental Hotels and Resorts, Kimpton Hotels & Restaurants, Regent Hotels & Resorts, Six Senses Resorts, Residences and Spas, Staybridge Suites, Vignette Collection, Voco Hotels.

Marriott International, Brands: AC Hotels, Aloft Hotels*, Autograph Collection Hotels, Bulgari, Courtyard Hotels, Delta Hotels, Design Hotels*, EDITION, Element*, Fairfield Inn & Suites, Four Points by Sheraton*, Gaylord Hotels, Homes & Villas by Marriott International, JW Marriott, Le Méridien*, Marriott Executive Apartments, Marriott Hotels, Marriott Vacation Club, Moxy Hotels, Protea Hotels, Renaissance Hotels, Residence Inn, Sheraton*, SpringHill Suites, St. Regis Hotels & Resorts*, StudioRes, The Luxury Collection*, The Ritz-Carlton and Ritz-Carlton Reserve, TownePlace Suites, Tribute Portfolio*, W Hotels*, Westin*. *=Acquired in the 2015 Starwood Hotels and Resorts acquisition.

Wyndham Hotels and Resorts, Brands: AmericInn**, Baymont Inn & Suites**, Days Inn**, Dazzler Hotels, Dolce Hotels and Resorts, Esplendor Boutique Hotels, Hawthorn Suites**, Howard Johnson**, La Quinta, Microtel Inn & Suites, Ramada & Ramada Encore**, Super 8**, The Registry Collection Hotels, The Trademark Hotel Collection, Travelodge**, TRYP by Wyndham, Vienna House***, Wingate by Wyndham**, Wyndham Alltra, Wyndham Hotels and Resorts**, Wyndham Garden, Wyndham Grand. *= Wyndham acquired the Vienna House brand from a Berlin-based HR Group in September 2022.

I noticed that some brave individuals and owners decided enough was enough in these obvious rip-offs and tried to correct the anomalies. Some influential hotel owners sought to use the legislative process to address the perceived imbalance of power between a hotel franchisor and a franchisee.

Led by the largest hotel owner's association in the United States, these hotel franchisees advocated for a bill in New Jersey that sought to codify certain protections for hotel franchisees and, in effect, reconfigure the relationship between hotel owners and franchisors.

While these legislative efforts continue, hotel franchisees also continue to petition courts for relief from onerous hotel franchise agreements. As we noted in our prior article, a pending case of particular note is a multi-district litigation brought by a class of hotel franchisees in the U.S. District Court for the Northern of Georgia, Park 80 Hotels, LLC et al. v. Holiday Hospitality Franchising LLC et al., (21-cv-4650) (N.D. Ga. filed May 19, 2021).

While the District Court issued a decision earlier this year which was favorable to the franchisor’s (IHG) position that its wide authority under its franchise agreements precludes challenges to its discretionary decisions over brand standards, marketing, property improvement plans and vendors, the District Court permitted some contractual and statutory claims to proceed to discovery, which is now underway. In this article, we discuss this effort by hotel franchisees to seek redress in court, and key takeaways for hotel industry stakeholders.

The Class Actions Against IHG and Consolidation

In Park 80 Hotels, originally filed in the Federal District Court for the Eastern District of Louisiana on behalf of all similarly situated franchisees in the state of Louisiana, the plaintiffs are a number of hotel owners who have entered franchise agreements with defendants Holiday Hospitality Franchising LLC and Six Continents Hotels, Inc. d/b/ a Intercontinental Hotels Group (collectively, “IHG”) under which plaintiffs were granted licenses to operate hotels within the IHG family of brands, such as Holiday Inn, Crowne Plaza, and Staybridge Suites.

IHG successfully moved to transfer the case to the Northern District of Georgia in accordance with a forum selection clause in the Franchise Agreements.

Park 80 Hotels was the first of several cases filed over the last few years alleging common facts and legal issues related to hotel franchise agreements.

Subsequently filed putative class actions were commenced in the District of Connecticut (Aaron Hotel Group, LLC v. Holiday Hospitality Franchising, LLC et al.(filed May 27, 2021)), the Southern District of Texas (PH Lodging Tomball, LLC v. Holiday Hospitality Franchising, LLC, et al. (filed June 3, 2021)), the Southern District of Ohio (Synergy Hotels, LLC v. Holiday Hospitality Franchising, LLC, et al.(filed June 7, 2021)), the Eastern District of Pennsylvania (Bensalem Lodging Associates, LLC v. Holiday Hospitality Franchising, LLC, et al.(filed June 29, 2021)), and the District of New Mexico (110 SUNPORT LLC v. Holiday Hospitality Franchising, LLC et al (filed Aug. 27, 2021)).

After Park 80 Hotels was transferred to the Northern District of Georgia, the parties to that case and four of the others moved to consolidate and transfer the cases to the N.D. Ga. Those five cases are jointly proceeding to trial.

Allegations in the Class Action Complaint

Once consolidated, plaintiffs filed a class action complaint alleging seven causes of action under federal and Georgia state law, including claims for breach of contract (and by extension, breach of the covenant of good faith and fair dealing); violations of the Sherman Antitrust Act and a state law corollary, the Georgia Uniform Deceptive Trade Practices Act; and a declaratory judgment that the form franchise agreement entered by each of the plaintiffs was unconscionable, illusory or unenforceable.

The “unconscionable” conduct alleged in the complaint focuses on the process by which hotel owner applicants enter franchise agreements with IHG and the strictures of the form franchise agreement itself.

The plaintiffs alleged that the application process is inherently unconscionable. It requires a five-figure initial application cost, which is forfeited if an applicant fails to execute a form agreement with IHG. The form cannot be negotiated and is not disclosed to applicants until after they pay the fee.

Plaintiffs also allege that the terms of the franchise agreement are unconscionable, as the franchise agreement reserves to IHG vast authority to alter the requirements for complying with IHG “Brand Standards” and to assess a multitude of fees, costs, fines and other penalties against hotel franchisees deemed to be out of compliance. One such requirement is that franchisees must procure supplies and services through an “IHG Marketplace,” which the plaintiffs allege harms the franchisees in two principal ways: (i) the goods and services are overpriced and of poor quality, requiring constant replacement; and (ii) the inflated pricing is due to “kickbacks” being paid by the vendors to IHG.

According to plaintiffs, the only apparent check to IHG’s power is the franchisees’ option to join the “IHG Owners Association,” which purports to operate “consistent with the best interests” of the franchisees. Yet plaintiffs allege that IHG controls the Owners Association and manipulates its operations to the detriment of franchisees.

My Advice: I am not a lawyer and have no legal training, so get some advice from an expert on the subject. Franchise attorney Jeffrey M. Goldstein has more than 30 years of experience representing franchisees in disputes with their franchisors. He has particular experience in the hotel industry. If you are facing a dispute with your franchisor and would like to speak with Mr. Goldstein confidently, please call 202-293-3947 or contact online to arrange a free initial consultation.

The information in this article may not be completely factual or up-to-date, and the reader should research whatever they read online or through a competent and knowledgeable attorney. Look online. There are lots of them but choose wisely based on past results.

Regards and good luck in your endeavor's.

William