The opinion of the court was delivered by: SHIRA SCHEINDLIN, District Judge
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.
Plaintiffs allege the following facts, all of which are deemed true for
the purposes of this motion.
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,
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.
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. ...