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CENTURY PACIFIC INC. v. HILTON HOTELS CORPORATION

April 20, 2004.

CENTURY PACIFIC, INC., BECKER ENTERPRISES, INC., Plaintiffs; -against- HILTON HOTELS CORPORATION, DOUBLETREE CORPORATION, RED LION HOTELS, INC., Defendants


The opinion of the court was delivered by: SHIRA SCHEINDLIN, District Judge

OPINION AND ORDER

Plaintiffs Century Pacific, Inc. and Becker Enterprises, Inc. filed this action against defendants Hilton Hotels Corporation, Doubletree Corporation, (collectively "Hilton/Doubletree"), and Red Lion, Inc. claiming violations of the New York Franchise Sales Act and common law fraud, negligent misrepresentation, and fraudulent omission. The claims arise from the circumstances surrounding the Red Lion hotel franchise agreements plaintiffs entered into with defendants in 2001. Plaintiffs allege that they were victims of a "bait and switch" strategy through which defendants induced plaintiffs to sign long — term franchise agreements by misrepresenting Hilton/Doubletree's plans to retain the Red Lion hotel chain. Plaintiffs claim that at the time of their franchise negotiations with defendants, defendants had, in fact, already decided to sell Red Lion to a smaller, less — profitable hotel chain. Plaintiffs further allege that defendants pursued the franchise agreements with plaintiffs in order to increase Hilton/Doubletree's profits in the planned resale of Red Lion. Defendants move to dismiss on the grounds that the New York Franchise Sales Act does not apply to the franchise agreements and that plaintiffs cannot state viable claims for fraud, negligent misrepresentation, or fraudulent omission. For the following reasons, defendants' motion to dismiss is granted in part and denied in part.

 I. FACTS

  Plaintiffs allege the following facts, all of which are deemed true for the purposes of this motion.

  A. The Parties

  Plaintiffs Century Pacific, a Texas corporation, and Becker Enterprises, a Nevada corporation, entered into franchise agreements with defendants and converted hotels they operated in Colorado into Red Lion franchises in early 2001. See Complaint ¶¶ 4-5, 22.

  Defendant Hilton Hotels is a Delaware corporation with a principal place of business in Beverly Hills, California. Id. ¶ 6. Hilton develops, owns, manages, or franchises approximately 2,000 hotels and resort and vacation properties around the world. The Hilton family of hotels includes defendant Doubletree Hotels, a Delaware corporation and wholly owned subsidiary of Hilton, as well as Embassy Suites Hotels, Hampton Inn, Homewood Suites, and Hilton Garden Inn. Id. ¶¶ 7, 14.

  Defendant Red Lion is a Delaware corporation with a main office in Spokane, Washington. Id. ¶ 8. Red Lion was acquired by Doubletree in 1996 and by Hilton in 1999. Id. ¶¶ 15-16. Hilton sold Red Lion to WestCoast Hospitality Corporation ("WestCoast") in early 2002. Id. ¶ 36. Jurisdiction is premised on diversity of citizenship. Id. ¶ 13.

  B. The Red Lion Chain

  Red Lion was founded in 1959 and is best known for its hotel operations in the Northwest and Western U.S. Id. ¶ 15. For Hilton/Doubletree, Red Lion represented a less well — known brand name and was acquired only as part of a larger acquisition by Hilton in 1999 of the Promus Hotel Corporation which included more valuable brands like Embassy Suites and Hampton Inn. Id. ¶¶ 15-16. Hilton/Doubletree initially intended to eliminate the Red Lion brand and began closing down and converting Red Lion hotels after the acquisition. Id. ¶¶ 17-18. Sometime in 2000, Hilton/Doubletree secretly decided instead to actively market the Red Lion brand, build up its value, and then sell it within a very short time frame. Id. ¶ 19. Publicly, however, Hilton/Doubletree represented that they were working to reinvigorate and expand the Red Lion brand; Hilton/Doubletree converted several of their hotels to Red Lions and aggressively campaigned to sell Red Lion franchises to other existing hotels. Id. ¶¶ 19-20, 28. Their strategy was apparently to lock in as many long — term franchise agreements as possible in order to increase the purchase price of Red Lion. Id. ¶ 21.

  1. Franchise Negotiations and Agreements

  Plaintiffs were among those existing hotel operators who were targeted by defendants' marketing campaign. Between Fall of 2000 and February 2001, plaintiffs received Uniform Franchise Offering Circulars ("UFOCs") and negotiated with defendants before entering into Red Lion franchise agreements. Id. ¶ 22. Defendants persuaded plaintiffs to become Red Lion franchisees by promoting the value of the "Hilton" name and the benefits of being part of the Hilton family of hotels. Id. ¶ 23. These benefits included: access to Hilton's world — wide reservation and group sales systems, cross — selling with sister brands, participation in Hilton's group purchasing program, and future participation in the Hilton HHonors program. Id.

  Officers and employees of Hilton/Doubletree and Red Lion, including Tom Murray and Manfred Gerling, repeatedly assured plaintiffs that Red Lion was an important and growing part of the Hilton group. Id. ¶ 24. These officers and employees specifically told plaintiffs that Hilton/Doubletree had long — term plans to own and grow Red Lion. Murray represented to plaintiffs that he was given "repeated assurances from his seniors that Red Lion is an important part of the Hilton family." Id. Plaintiffs also received express assurances from Gerling that "we told you before, [Red Lion] is not for sale" and that "Red Lion would have 200 franchises within five years." Id. None of defendants' sales and marketing materials, oral statements, or correspondence conveyed to plaintiffs that Hilton/Doubletree had a current intent or desire to sell the Red Lion brand. Id. ¶ 25. Instead, those statements and materials all indicated that the Hilton connection was the most important attraction to prospective franchisees. Id. ¶ 31.

  Plaintiffs relied on those oral and written statements and entered into franchise agreements with defendants on the basis of Hilton/Doubletree's representations as to their intent to keep and grow Red Lion and the benefits Red Lion franchisees would reap as members of the Hilton family. Id. ¶¶ 27,32-33.

  Plaintiff Becker Enterprises executed a franchise agreement with Red Lion on January 26, 2001 and plaintiff Century Pacific executed an agreement on February 13, 2001. Id. ¶ 22. To meet the terms of those agreements and become Red Lion franchisees, plaintiffs spent considerable time and money on converting their existing hotels into Red Lion hotels and on associated renovations, employee training, and advertising. Id. ¶ 29. Plaintiffs also agreed to pay substantial royalty fees to become part of the Hilton family. Id. ¶ 30. ...


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