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HLT Existing Franchise Holding LLC v. Worcester Hospitality Group LLC

United States District Court, S.D. New York

January 28, 2014

HLT EXISTING FRANCHISE HOLDING LLC, Plaintiff,
v.
WORCESTER HOSPITALITY GROUP LLC, Defendant

Page 521

For HLT Existing Franchise Holding LLC, Plaintiff, Counter Defendant: Benjamin B. Reed, James C. Rubinger/Plave Koch PLC, Reston, VA; James C. Rubinger, Plave Koch PlC, Reston, VA.

For Worcester Hospitality Group, LLC, Defendant, Counter Claimant: Raymond Peter Raiche, Larkin, Axelrod, Ingrassia & Tetenbaum, LLP(Meadow), Newburgh, NY.

OPINION

Page 522

OPINION & ORDER

Paul A. Engelmayer, United States District Judge.

HLT Existing Franchise Holding LLC (" HLT" ), a subsidiary of Hilton Worldwide, Inc. (" HWI" ) (collectively, " Hilton" ),[1] a franchisor of Hampton Inn hotels, brings suit against its former franchisee, Worcester Hospitality Group LLC (" WHG" ) for contract damages arising from Hilton's decision to terminate the franchise for failing to meet its contractual obligations. Hilton now moves for summary judgment. For the reasons that follow, that motion is granted.

I. Background[2]

WHG owns a hotel in Worcester, Massachusetts (the " Hotel" ). Between 2004 and 2012, pursuant to a Franchise Licensing Agreement (" FLA" ) with Hilton, see

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Krewson Decl. Ex. A, WHG operated the Hotel as a Hampton Inn. Consistent with that agreement, Hilton evaluated the Hotel twice a year, using both in-person inspections and guest surveys. In 2012, Hilton terminated the FLA on the grounds that the Hotel had repeatedly failed its evaluations. Hilton then brought this suit for past fees due and liquidated damages under the FLA.

The major dispute between the parties concerns whether Hilton was within its contractual rights in terminating the FLA. The core of WHG's argument is that Hilton terminated the FLA either based on a flawed evaluation process or in bad faith. Accordingly, to decide Hilton's motion for summary judgment, the Court has reviewed in detail, and recounts here before addressing the parties' legal arguments, the Hampton Inn evaluation process and the events leading up to the termination of the FLA.

A. The Hampton Inn Franchise

Hilton owns, operates, manages, and franchises hotel systems under various brands, including the Hampton Inn brand. Pl. 56.1 ¶ 1. There are approximately 1,800 Hampton Inn hotels in the United States. Id. ¶ 9. Hilton seeks to " create uniformity throughout the chain and provide guests of Hampton Inn hotels with an experience that is consistent, regardless of the individual hotel," by setting standards and specifications in its brand manual, requiring compliance, and retaining the contractual right to inspect every Hampton Inn hotel. Id. ¶ ¶ 9-12. The features that Hilton promotes as distinguishing characteristics of Hampton Inns include:

(a) the " 100% Hampton Guarantee," which promises friendly service, clean rooms, and comfortable surroundings, or the guest stay is free; (b) a clean and fresh HAMPTON bed, with a premium pillow-top mattress, a plush comforter, a crisp white duvet washed fresh for every guest, and comfortable pillows; (c) a free, hot breakfast, including fresh-baked waffles, cereals, yogurt, fruit and more; (d) free high-speed Internet access in all guest rooms, the lobby, and meeting rooms; (e) a fully-equipped fitness room; (f) a lap desk to work from the bed or sofa; (g) a simple alarm clock with preprogrammed radio buttons for different music genres; (h) a curved shower curtain rod; and (i) a business center with computers and printers.

Id. ¶ 5.

B. The Quality Assurance Process

Hilton regularly inspects every Hampton Inn hotel by conducting unannounced " Quality Assurance Evaluations" on a semi-annual basis. Id. ¶ 14. The inspector " audits all aspects of the hotel operation," reviewing hotel paperwork, walking through the entire property, and inspecting 12 guest rooms, nine of which have been cleaned since check-out and three of which have not. Id. ¶ ¶ 15, 17-19. The inspector takes photographs to document problems, records his or her findings, and immediately discusses his or her findings with hotel management. Id. ¶ ¶ 16, 21.

Hilton uses the evaluation to score the hotel at issue on compliance with brand standards, cleanliness, and the physical condition of the hotel. Id. ¶ 22. Hilton's complex scoring process, best described as baroque, appears to work as follows.[3] There are three main categories: brand standards, commercial facilities, and guest rooms. See generally Curtis Decl. Exs. A-G;

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Bragg Decl. Exs. A-E. Each category has a number of subcategories, as follows:

Brand Standards:

1. Approved Products (250 points)2. Breakfast Bar/Beverage Service (1,000)3. Front Desk and Related Services (250)4. Major Rules (1,000)5. Support Rules (250)6. Training Documentation (250)

Commercial Facilities:

1. Back-of-the-House (250)2. Breakfast Bar/Lobby Area (500)3. Corridors/Elevators/Stairwells (250)4. Entrance/Registration Area/Front Desk (250)5. Exterior Components (500)6. Meeting Rooms and Boardroom (250)7. Public Restrooms (250)8. Recreation Facilities (250

Guest Rooms

1. Bathrooms (500)2. Bedrooms (500)3. Individual Room Failures (500)

Each category begins with a value of 1,000 points. The point value for each main category is calculated by subtracting from 1,000 the number of points lost in each of its subcategories. For example, if a hotel received a score of 450 (out of 500) in each of the bathrooms, bedrooms, and individual room subcategories, then its score on the guest room category would be 850. The points for each of the three main categories are then added together to yield a " Quality Assurance Index Score" ; the maximum such score is thus 3,000 points. This score is then converted into a percentage ( e.g., a score of 2,700 points would translate to a 90% score). That percentage score is then multiplied by a specific " multiplier" to yield a " Final Score." A hotel receives an " Unacceptable" rating and fails the evaluation if its Final Score is below 75%. Pl. 56.1 ¶ 25.

As for the multiplier that Hilton applies to a hotel's Final Score, it can be 100%, 89.99%, or 74.99%. If the multiplier is 74.99%, the hotel necessarily fails the evaluation, because even if the hotel had received 100% of the points possible on the Quality Assurance Index Score, once that 100% is multiplied by 74.99%, its Final Score will be below the 75% required to pass. If the multiplier is 89.99%, then a Quality Assurance Index Score of 83 percent or lower, which would otherwise be a passing score, will, when multiplied by 89.99% become a failing Final Score of below 75%. If the multiplier is 100%, then the Quality Assurance Index Score is unchanged.

A hotel receives a multiplier of 74.99%, and therefore automatically fails the overall evaluation, if it (1) fails a main area[4] ( i.e., receives less than 75% of the available points), see, e.g., Curtis Decl. Ex. C; Blagg Decl. Exs. A, D; (2) fails two or more sub-areas

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( i.e., receives less than 75% of the available points), see, e.g., Blagg Decl. Ex. D; (3) receives a score in the Unacceptable range on the " overall service" question on the guest survey, see, e.g., Curtis Decl. Exs. D, E; Blagg Decl. Exs. A, C, E, G; or (4) receives a score in the Unacceptable range on the " overall guest room cleanliness" question on the guest survey, see, e.g., Blagg Decl. Exs. E, G. A hotel (assuming it is not required to receive a multiplier of 74.99%) receives a multiplier of 89.99%, and therefore will fail the overall evaluation if its Quality Assurance Index Score is below 83%, if it has: (1) performed below a certain minimum threshold on " overall graded issues," see, e.g., Curtis Decl. Ex. C, Blagg Decl. Ex. D, the meaning of which is unclear; (2) receives a score in the Acceptable range on the " overall service" question on the guest survey, see, e.g., Curtis Decl. Exs. A, B, C; Blagg Decl. Ex. B, D; (3) has a " guest room / suite deficiency or room failure," see, e.g., Curtis Decl. Exs. A, E; Blagg Decl. Exs. A, C, D, E, G, (4) failed a sub-area ( i.e., receives less than 75% of the available points), see, e.g., Curtis Decl. Exs. A, C; Blagg Decl. Exs. A, C, D, E, G, or (5) receives a score in the Acceptable range on the " overall guest room cleanliness" question on the guest survey, see, e.g., Blagg Decl. Ex. D. A hotel receives a 100% multiplier if nothing would cause it to receive a 74.99% or 89.99% multiplier.

The guest surveys, which Hilton refers to as Service and Loyalty Tracking (" SALT" ) surveys, are sent to guests after their stay at the hotel. Pl. 56.1 ¶ ¶ 29-30. Hilton has used the SALT survey for its entire family of hotels for the past 11 years. McManus Decl. ¶ 3. The SALT questionnaires ask the guest to rate the hotel on a scale from one to 10 on items such as lobby appearance, helpfulness of the staff, cleanliness of their room, and their overall experience. Pl. 56.1 ¶ 31. To compute SALT scores, Hilton uses the Top 2 Box Methodology, which it states is a " generally accepted methodology for consumer satisfaction and customer loyalty surveys." McManus Decl. ¶ 11. The SALT score for a question is calculated by taking the number of guests who gave a rating of 9 or 10 and dividing it by the number of responses to that question. Id. For example, if 30% of responses to the overall experience question were a " 10" and 40% of responses were a " 9," the SALT score for overall experience would be 70%. Hilton aims to receive 40 to 50 SALT responses per month for each Hampton Inn hotel, id. ¶ 8, and uses approximately the past six months' worth of data in aggregating SALT scores for the semi-annual evaluations, id. ¶ 17.

C. The Hotel Before 2004

The Hotel was built in 1984. Shah Decl. ¶ 15. It is a five-story building, with two elevators, situated on a small commercial lot in Worcester, Massachusetts. Id. It is located across the street from an arena called the DCU Center, which is a major local attraction, and the Worcester Medical Center. Id. It was initially operated as a Best Western hotel. Id. ¶ 17. According to WHG, the initial construction of the hotel " provided affordable accommodations in a lackluster and monotonous building" with " sparse amenities." Id. ¶ 18. The original owner of the hotel was Meyers/Jabara, a substantial owner and operator of hotels. Id. ¶ 31; Barone Decl. Ex. A at 7.

In 1990, HLT's predecessor, Promus Hotels, Inc.,[5] accepted the Hotel into the

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Hampton Inn network as one of Hampton Inn's first " conversions." Shah Decl. ¶ 19; Krewson Decl. ¶ 15; Barone Decl. Ex. A at 7. The agreement required Meyers/Jabara to implement a Product Improvement Plan by which it would make certain renovations in order to meet Hampton Inn's standards. Shah Decl. ¶ ¶ 20-21. Promus also granted Meyers/Jabara a number of waivers from the Hampton Inn standards, including the requirement of a swimming pool, because the Hotel was not initially built as a Hampton Inn and had certain design and layout limitations. Id. ¶ 21; Barone Decl. Ex. A at 7.

D. The 2004 Franchise Licensing Agreement

In 2004, WHG purchased the Hotel from Meyers/Jabara. Shah Decl. ¶ 29. Promus consented to the purchase. Id.

In connection with WHG's purchase of the Hotel, WHG and Promus entered into the FLA, effective August 13, 2004. See FLA Ex. A; see also Pl. 56.1 ¶ 38; Shah Decl. ¶ 29. The FLA grants WHG a non-exclusive license to operate the Hotel according to the " System," i.e., as a Hampton Inn, for a 16-year period unless earlier terminated pursuant to the terms of the FLA. FLA § 2, Attachment B-1. The FLA, which defines " we" to mean the licensor (Hilton) and " you" to mean the licensee (WHG), id. p. 1, defines the " System" as follows:

The " System" is the elements we designate from time to time to identify hotels operating under the Licensed Brand that provides to the consuming public a similar, distinctive, high quality hotel service. . . . The System currently includes the Licensed Brand and the Marks; access to a reservation system; advertising, publicity and other marketing programs and materials; training programs and materials, standards, specifications and policies for construction, furnishing, operation, appearance and service of the Hotel, we refer to in this Agreement or in the Manual and programs for our inspecting the Hotel and consulting with you. We may add elements to the System or modify, alter or delete elements of the System at our sole discretion.

Id. § 1(c). The FLA also defines the term " Manual," as follows:

References to the " Manual" will include all written standards and requirement we adopt from time for constructing, equipping, furnishing, supplying, operating, maintaining and marketing System hotels. Changes made in the Manual will apply to System hotels as specified and may not apply to all System hotels. We may set forth these standards and requirements in one or more documents or guides. All of these items, as we modify them from time to time, will be considered the Manual. We will change the Manual from time to time. We will notify you at least thirty (30) days before any change becomes effective. You will be responsible for the costs of complying with the Manual, including any changes.

Id. § 1(d).

The FLA places certain responsibilities on the licensor, id. § 3, and the licensee, id. § 6. Relevant here, the obligations on the licensee include that it will:

▪ " [O]perate, furnish, maintain and equip the Hotel in a clean, safe and orderly manner and in first-class conditions in accordance with the provisions of this Agreement and the Manual." Id. § 6(a)(3).
▪ " [P]rovide efficient, courteous and high-quality service to the public." Id. § 6(a)(4).

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▪ " [A]dopt, use and comply with the standards, requirements, services, products, programs, materials, specifications, policies, methods, procedures, and techniques set forth in the Manual, as it may be amended by us from time to time, and keep your Manual current at all times." Id. § 6(a)(5).
▪ " [C]omply with System standards, specifications and requirements as to the types and levels of services, amenities and products that either must or may be used, promoted or offered at or in connection with the Hotel." Id. § 6(a)(7).
▪ " [P]articipate in . . . all required System quality assurance programs . . . and maintain minimum performance standards and scores for such quality assurance programs that we may establish from time to time in the Manual." Id. § 6(a)(12).
▪ " [C]omply with System standards, specifications and requirements as to maintenance, appearance and condition of the Hotel, and adopt in your business all changes or additions to the System as we may periodically designate." Id. § 6(a)(13).
▪ " [P]ermit inspections of the Hotel by our representatives at any time to ensure compliance with System standards, cooperate fully with our representatives during these inspections and take all steps necessary to correct any deficiencies detected within the time periods we specify." Id. § 6(a)(17).
▪ Pay a Monthly Royalty Fee and a Monthly Program Fee, each in the amount of 4% of the Hotel's Gross Rooms Revenue for the preceding calendar month. Id. § 7(a), Attachment B-1.
▪ Complete certain renovations over a two year period. Id. Ex. A.

The FLA also states, in a paragraph entitled ...


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