Hilton is one of the world's best-known hotel companies. One of its more popular brands is Hampton Inn, which has about 1,800 locations in the United States. Hilton does not own many of its hotels, but rather signs franchise agreements with local owner-operators. Recently a federal appeals court decided a contract dispute arising from Hilton's decision to terminate one of its franchises in Worcester, Massachusetts. (The franchise agreement itself was subject to and tried under New York law.)
Hilton signed the franchise agreement with the Worcester hotel's previous owner in 2004. The deal was to run until 2020, unless either side terminated for cause. The franchise agreement required the hotel to meet certain standards of cleanliness, customer service and overall conditions. Hilton conducted routine inspections to ensure compliance. Unfortunately, the hotel repeatedly failed these inspections.
One factor used by Hilton in these inspections was a survey given to guests who stayed at the hotel. These are typical customer satisfaction surveys asking guests to rank the hotel's condition and performance in a number of areas. Hilton used the prior six months worth of aggregated survey data as part of its formal inspection process.
By 2011, Hilton officials determined the Worcester hotel was simply not living up to the terms of the franchise agreement and sent a notice of default. Under the franchise agreement, this means Hilton would be entitled to collect all franchise fees up to that point plus “liquidated damages” for early termination. The hotel asked for one more chance to pass inspection, which Hilton granted, but the hotel still failed.
Hilton eventually sued the hotel in Manhattan federal court to collect its back fees and liquidated damages under the franchise agreement. Before U.S. District Judge Paul A. Engelmayer, the hotel argued the court should not consider the customer surveys used by Hilton as admissible evidence. The hotel claimed these surveys constituted inadmissible hearsay. The judge disagreed and ultimately granted summary judgment to Hilton, ordering the hotel to pay about $700,000 in damages.
On appeal, the U.S. Second Circuit Court of Appeals in New York affirmed Judge Engelmayer's decision. Regarding the customer surveys, the appeals court agreed they were admissible evidence, albeit for “slightly different reasons” than those offered by Judge Engelmayer. In an unsigned opinion, the appeals court explained, “We hold that the guests’ survey responses were admissible because those responses were admitted solely for the purpose of showing their effect on [Hilton's] decision to terminate the franchising agreement.” In other words, it would be inadmissible hearsay if the surveys were offered as proof customers were dissatisfied with the condition of the hotel; but here, the surveys only provided data which Hilton used in making its own determination about whether the hotel passed or failed its inspection.
The appeals court then went a step further than the trial judge and addressed whether the survey data was properly authenticated. Like many companies, Hilton hired an outside firm to actually conduct the surveys and collect the data. The hotel argued it was therefore impossible to prove the data accurately reflected guest responses. But the appeals court was satisfied Hilton presented adequate evidence demonstrating the survey data's reliability.
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In the end, the poor customer surveys allowed Hilton to terminate the franchise agreement and receive damages. The contract said as much. That is why in any business contract it is important to understand all of the terms and how they might adversely affect your position. If you need the assistance of a qualified New York business attorney to assist you with a contract matter, contact our offices today.