Hilton Franchisee Gets Iced: The Impact of Controversy on the Franchise Relationship
A productive franchise relationship encompasses various elements that both the franchisor and franchisee must consider and balance.
This intricate connection of contractual obligations, financial commitments, and operational responsibilities, becomes more complex when a controversy places one party under scrutiny.
When Franchisee Conduct Conflicts with Brand Standards
Hilton Worldwide Holdings owns the Hampton Inn brand and franchises many locations to independent operators throughout the United States.
Recently, an independently owned and operated Hampton Inn in Lakeville, Minnesota refused to honor Immigration and Customs Enforcement (ICE) agent reservations.
After a social media post highlighted the Lakeville Hampton Inn’s actions, both Hilton and the franchisee issued public apologies. However, after the apologies, another social media post announced that the independently operated franchise continued to cancel reservations and refused to book rooms for ICE officers using official government emails and rates.
Following this, Hilton terminated the Lakeville Hampton Inn from its system. In reference to the Lakeville location, a Hilton spokeswoman stated that the “…video clearly raises concerns that they are not meeting our standards and values.”
The incident shows the potential conflicts franchisors face with independently owned and operated franchises.
What is an Independently Owned and Operated Franchise?
Franchisees independently own and operate their businesses. Under this model, the franchisee:
- Provides their own resources to own and operate the business location.
- Manages day-to-day operations, including staffing, management, and local decision-making.
- Pays franchise fees and royalties to their franchisor.
- Has limited control due to compliance requirements with strict brand standards and systems.
What rights does Hilton have as a franchisor?
The rights and obligations of a franchisor differ depending on the content of the franchise agreement and Franchise Disclosure Document (FDD). Hilton’s FDD and franchise agreement gives the franchisor the ability to take swift and dramatic action when franchisees violate the contract.
If a franchisee does not comply with the franchise agreement, Hilton can:
- Remove the hotel’s listing from Hilton’s advertising channels.
- Suspend the hotel from the Reservation Service.
- Disable the software and systems provided to the hotel.
- Charge additional fees.
- Terminate the franchisee’s franchise agreement.
Item 17 of Hilton’s FDD details the circumstances, policies, and consequences related to termination, renewal, and transfer of the franchise relationship.
When can a franchisor terminate a franchise?
Like franchisor rights and obligations, franchise agreements and certain states’ laws typically outline specific conditions that constitute grounds for termination. Franchisors need a legally valid reason, a “cause” to terminate the contract.
Some general reasons franchisors may choose to end the franchise relationship include:
- Breach of contract – This includes non-compliance with brand standards and policies, violating laws, changing the product or service without authorization, among other things.
- Failure to pay – Whether payments come due for royalty fees, inventory, or rent, a franchisor can terminate franchise agreements when franchisees continuously fail to pay.
- Conflicts of interest – Includes situations such as a franchisee operating a competing business or operating outside their territory.
- Performance issues – A franchise fails to meet sales goals, revenue targets, or any other performance metrics listed in the franchise agreement.
If a franchisor intends to terminate a franchisee, the franchisor must provide a formal notice stating the reasons behind the termination.
Depending on the agreement and state, franchisors must allow for a “cure period,” a timeframe during which the franchisee can rectify the issue. State laws vary on the length of the cure period, but California’s generally runs 60-90 days.
Significant defaults may enable a franchisor to terminate the agreement immediately. Once the franchisor terminates the agreement, the franchisee must stop using all brand materials.
Proactive Franchisors
Airtight termination clauses and provisions in the franchise agreement give the franchisor the ability to quickly and legally end the franchise relationship if a franchisee’s behavior damages the brand or risks legal exposure.
Franchisees carry a brand’s reputation through every interaction with customers, so it is important for franchisors to clearly define corporate values, dispute resolution tactics, and scenarios where immediate action is necessary.
Without carefully drafted agreements and proactive enforcement procedures, franchisors may be unable to act decisively when a franchisee jeopardizes the brand. Consulting experienced franchise counsel is essential to preventing conflicts and ensuring an effective franchise relationship.
Barry Kurtz is the Chair of our Franchise and Distribution Practice Group, a Certified Specialist in Franchise & Distribution Law by the State Bar of California Board of Legal Specialization. He has been recognized by his peers as among the top 5% of attorneys nationwide for his work in franchise law in The Best Lawyers in America®.