Franchise 101: Nothing Personal in Claims Against Hotel Franchisor; and Successor Slips Out of Non-Compete

FRANCHISOR 101: Nothing Personal in Claims Against Hotel Franchisor

A guest sued the Hampton Inn and Suites franchisee in Nashville, Tennessee and the franchisor’s parent company, Hilton Domestic Operating Co., Inc. (“Hilton”), claiming race discrimination by a hotel employee. The plaintiff sought to hold Hilton liable as the alleged franchisor. A Tennessee federal court dismissed the complaint against Hilton for lack of jurisdiction.

Hilton is a Delaware corporation. It argued it was not the franchisor of Hampton Inn and Suites. The court accepted as true (for analysis) the allegation that Hilton is the franchisor. But the court found the guest did not establish that the alleged franchise relationship provided personal jurisdiction over Hilton.

The guest claimed jurisdiction based on Hilton’s supposed status as franchisor and Hilton’s operation of the website used by the guest to book the hotel stay. The court applied a three-part test to decide personal jurisdiction. The court asked if: (1) the defendant purposefully availed itself of the privilege of acting in the state or causing a consequence in the state; (2) the cause of action arose from the defendant’s activities or contacts in the state; and (3) the defendant’s acts or consequences caused by the defendant were substantial enough connection with the state.

Regarding the first factor, the court noted that entering into a franchise agreement may support “purposeful availment” for claims arising directly out of the franchise agreement. Operation of a website likewise can be purposeful availment. But, a defendant’s purposeful availment, alone, is not a basis for jurisdiction absent a “nexus” or sufficient link between that purposeful availment and the underlying lawsuit.

Hilton argued that any contacts in the state were too attenuated from the employee’s alleged discrimination against the guest. The court agreed and rejected the guest’s argument that by allowing the hotel to operate under a Hilton brand and be booked through the Hilton Honors website, Hilton held the other defendants out as agents. The court explained that the guest’s argument would make every franchisor-franchisee relationship an agency relationship, but that “is not how franchising works.”

In dismissing Hilton, the court concluded that the “mere existence of a franchise relationship is insufficient to establish actual or apparent agency.” The guest failed to allege facts that suggest an agency relationship. The guest did not allege Hilton had enough control over franchisees or that Hilton did anything that would give the guest that impression. Franchisors can be liable for a franchisee’s conduct if an agency relationship exists. A franchise relationship should be structured to make sure it does not give rise to an agency relationship. To prevent actual or apparent agency, franchisors must be aware of the level of control exerted over their franchisees to avoid actual agency and not take action that would give others the “impression” of an apparent agency relationship.

FRANCHISEE 101: Successor Slips Out of Non-Compete

A Florida federal court granted a preliminary injunction against a terminated franchisee. The court enjoined the ex-franchisee from using the franchisor’s trademarks and trade dress. The court enforced the franchisor’s post-termination “step-in rights” to place franchisor employees and designees at the business. But the court denied enforcement of the non-compete provision. This was because the franchisee, a successor-in-interest, was not a signatory to the franchisee agreements.

The franchisee was successor-in-interest to a former franchisee under two franchise agreements. The franchised businesses provided nursing, non-medical home care, hospice and healthcare staffing. The franchisee failed to make payments under the agreements. After failure to cure the defaults, the franchise agreements were terminated. The franchisor demanded compliance with post-termination obligations to not compete and to place the franchisor’s employees and designees at the business. The franchisee refused and continued to use the franchisor’s marks.

The franchisor sued the franchisee for breach of the agreements and trademark infringement. The franchisor moved for a preliminary injunction to bar the franchisee from continuing to use the franchisor’s marks without consent and to enforce post-termination obligations.

The court granted the preliminary injunction with respect to trademark infringement, holding the franchisor likely to succeed. This was because the franchisee’s continued use of the trademarks after termination was likely to cause customer confusion and the franchisor was likely to suffer immediate and irreparable harm since the franchisor lost the ability to control its trademarks.

The court also granted the franchisor a preliminary injunction with respect to the contractual right to place employees and designees at the business after termination. The court found that the franchisor was likely to suffer irreparable harm because the franchisee poorly managed the hospice business and the potential threat to the safety and health of the hospice patients.

The court denied an injunction with respect to post-termination non-compete obligations. A restrictive covenant will not be enforced in Florida unless it is in writing, signed by the person against whom enforcement is sought. The franchisee was a successor who did not sign the original franchise agreements or any other agreement not to compete after termination. Franchisees and prospective franchisees should seek advice from franchise counsel before, during and after assignment or transfer of a franchise to understand what contractual rights and obligations under the franchise agreement are enforceable.