United States District Court, D. Minnesota
A. Chad McKenney, Esq., Donohue McKenney, Ltd., counsel for Plaintiffs.
Bryan P. Couch, Esq., LeClairRyan, A Professional Corporation; Anthony J. Novak, Esq., Larson King, LLP, counsel for Defendants.
MEMORANDUM OPINION AND ORDER
DONOVAN W. FRANK, District Judge.
This matter is before the Court on Plaintiffs Percy Pooniwala's ("P. Pooniwala") and Dinaz Pooniwala's ("D. Pooniwala") (collectively, "Plaintiffs") Motion for Preliminary Injunction against Defendants Wyndham Worldwide Corp. ("Wyndham"), Super 8 Worldwide, Inc. ("Super 8"), Travelodge Hotels, Inc. ("Travelodge"), and Days Inn Worldwide, Inc. ("Days Inn") (collectively, "Defendants") to enjoin Defendants from taking actions relating to various franchise agreements. (Doc. No. 12.) For the reasons set forth below, the Court denies the motion.
Plaintiffs entered into a number of franchise agreements for various hotels with Defendants. Plaintiffs assert Wyndham Hotel Group LLC ("Wyndham Group") is the operating entity associated with Defendants Super 8, Travelodge, and Days Inn, as well as Ramada Worldwide Inc. (Doc. 1 (Compl.) ¶ 2.) Generally, Plaintiffs allege that as a result of a lawsuit between Plaintiffs and Ramada Worldwide Inc. relating to the Ramada Brooklyn Park, also known as Grand Rios Water Park Resort ("Grand Rios"), Defendants are retaliating against Plaintiffs at a number of other properties franchised by Plaintiffs. ( Id. at ¶¶ 13-53.) The motion before the Court focuses on the agreements for three such facilities: (1) Super 8 Roseville; (2) Travelodge Burnsville; and (3) Days Inn Roseville.
I. Super 8 Roseville
On or about May 16, 1994, Super 8 and Hotel Capital Partners X, LLC entered into an agreement for the operation of a Super 8 hotel facility in Roseville, Minnesota ("Super 8 Roseville"). (Fenimore Aff. ¶ 32, Ex. A.) In August 2007, Plaintiffs purchased Super 8 Roseville for approximately $4.3 million. ( Id. ¶ 33, Ex. B.) On or about August 14, 2007, D. Pooniwala signed an assignment and assumption agreement with Super 8 that acknowledged and assumed all rights, benefits and obligations of Hotel Capital Partners X, LLC with respect to the 1994 Agreement for the Super 8 Roseville. ( Id. )
The franchise agreement ("Super 8 Roseville Agreement") for the Super 8 Roseville includes a section relating to operating the facility in compliance with Super 8's System Standards and also includes quality assurance requirements. ( Id. ¶ 35.) The Super 8 Roseville Agreement includes a provision that gives Super 8 the right to inspect the facility to ensure that it meets quality assurance ("QA") requirements and System Standards. ( Id. ¶ 36.) The Super 8 Roseville Agreement also gives Super 8 the right to terminate the agreement within 60 days after providing written notice that specifies the reasons for the termination, including any failure to remedy defaults on obligations and warranties under the Super 8 Roseville Agreement. ( Id. ¶ 38.)
On September 30, 2013, Plaintiffs received a notice of termination for Super 8 Roseville. (Pooniwala Aff. ¶ 11, Ex. B.) The notice referred to QA failures and stated that the franchise agreement would terminate within 90 days of the notice, on December 29, 2013. ( Id. ) Plaintiffs allege that this was the first time that Defendants sought to terminate a property based on QA problems. ( Id. ¶ 11.)
The termination notice was issued pursuant to a property inspection. ( Id. ) The inspections were conducted by a Wyndham Group employee. ( Id. ) Plaintiffs claim the Super 8 Roseville was inspected every 2-3 months, but other properties are only inspected a single time every 18-24 months. ( Id. ) Wyndham Group charges $1, 700 per inspection. ( Id. ) Plaintiffs claim that Defendants use QA reports to leverage extra charges. ( Id. ) Plaintiffs allege that inspections often focus on issues such as the use of promotional materials and the failure to use specific breakfast-related brands. ( Id. ) Plaintiffs assert that Defendants receive kickbacks for these breakfast items, and customers are overcharged as a result. ( Id. )
Defendants claim that, beginning in January 2012, Plaintiffs repeatedly failed to operate the facility in accordance with the System Standards and QA requirements of the Super 8 Roseville Agreement. (Fenimore Aff. ¶ 40.) According to Defendants, beginning in January 2012, Plaintiffs failed six consecutive QA inspections. ( Id. ¶ 41, Ex. C.) Defendants followed each inspection with a letter that indicated Plaintiffs' failing score, gave notice of 60 days to cure prior to default, and informed Plaintiffs that if they failed to cure the defaults, termination could follow. ( Id. ¶ 42, Ex. D.)
Plaintiffs repeatedly disputed the QA inspection results, including the following issues: the contents of the results, the methodology for the inspection and scoring process, their final score, the adequacy of the notice associated with the termination notice, and they also addressed a number of specific items in the report relating to housekeeping. ( See Pooniwala Aff. ¶¶ 12-16 & Exs. C, D, F.) Plaintiffs also allege that they cured all deficiencies and received a passing score of 74.55%, but that Defendants told Plaintiffs that due to the Guest Housekeeping section of the inspection, their final score was in fact 63.16%, which constitutes a failing score (70% is required to pass). ( Id. ¶ 14.)
On December 5, 2013, Defendants sent a letter to Plaintiffs setting an additional inspection to determine whether the QA concerns had been cured. ( Id. ¶ 14, Ex. E.) Defendants allege that Plaintiffs never cured their defaults. (Fenimore Aff. ¶ 43.) On December 27, 2013, Wyndham Group informed Plaintiffs that the termination was to be effective as previously scheduled-for December 29, 2013. (Pooniwala Aff. ¶ 17, Ex. G.)
Plaintiffs allege that Defendants' employees receive commissions and bonuses when they initiate new contracts or new franchises for a property. ( See id. ¶ 17, Ex. H.) Plaintiffs also claim that certain franchisors contract with travel websites, travel search engines and GPS maps and prohibit individual owners of hotels from signing up with those websites and services, and charge a $4, 000 fee to allow hotel owners to turn on the reservation systems once they have been shut off. ( Id. ¶ 7.) Plaintiffs assert that Defendants also maintain a practice whereby they cause customers to be diverted to other franchisees when they contact a "blocked" franchisee via website or 1-800 reservation telephone number. ( Id. ¶ 9.) These practices result in lost and diverted reservations. ( Id. ) Plaintiffs allege that Defendants use these practices to damage hotel owners when they choose. ( Id. ) Since December 29, 2013, Super 8 Roseville has been off of the franchisee reservation system, and Plaintiffs allege they have lost business as a result, including that of large, longtime clients. ( Id. ¶ 23.) Plaintiffs also allege that certain Wyndham Group employees have told Plaintiffs in confidence that these issues will not be resolved until the money related to Rios Grande is paid off. ( Id. ¶ 19.)
II. Travelodge Burnsville
Plaintiffs purchased a Travelodge in Burnsville, Minnesota ("Travelodge Burnsville") for approximately $2.7 million in or around August 2008. (Pooniwala Aff. ¶ 25.) Plaintiffs and Travelodge entered into a franchise agreement for Travelodge Burnsville at that same time ("Travelodge Burnsville Agreement"). (Fenimore Aff. ¶ 47, Ex. H.)
The Travelodge Burnsville Agreement includes a section relating to operation of the facility in compliance with Travelodge's System Standards and also includes quality assurance requirements. ( Id. ¶ 49.) The Travelodge Burnsville Agreement includes a provision that gives Travelodge the right to perform unlimited inspections and reinspections of the facility to ensure QA requirements are met. ( Id. ¶ 50.) The Travelodge Burnsville Agreement also gives Travelodge the right to terminate the agreement by written notice from ...