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AAHOA 2008 Progress Report on Wyndham Hotel Group 'Fair Franchising' Compliance

Columnist Stan Turkel evaluates how AAHOAs 12 Points of Fair Franchising are lining up with policies of a Wyndham Hotel Group.

Thursday, August 07, 2008
Stanley Turkel
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Wyndham Worldwide Corporation

Every month for the past year, I have reviewed each of AAHOAs 12 Points of Fair Franchising and reported on them on the Hotel Interactive® website. At the recent AAHOA Convention in San Antonio (March 26-29), AAHOA released its long-awaited Performance Appraisal Report (PAR) which evaluated the franchise agreements of five leading franchise companies including ACCOR, Carlson, Choice, La Quinta and Wyndham. The object of this report is to determine how these companies comply with the 12 Points of Fair Franchising.

Why is this important? Since AAHOA members own approximately 13,500 franchised hotels and have long-term franchise agreements with their franchisors, fair franchising is an essential factor in achieving profitable operations.

In preparing its PARs, AAHOA utilized the Uniform Franchise Offering Circulars (UFOCs), actual franchise agreements and related business policies and procedures.

Following the preparation of draft versions of the Performance Appraisal Report, AAHOA provided each franchisor with a copy of the report and an opportunity to comment on it. The comments received by AAHOA were considered and, if pertinent, were integrated into the Performance Appraisal Report.

This long-awaited (and some would say long-overdue) report enables franchisees to better understand the provisions of the franchise agreements so that they can make informed decisions before signing a franchise agreement and committing to a long-term franchise relationship.

Here is a summary of the performance appraisal of the Wyndham Hotel Group as compared to AAHOAs 12 Points:

Point 1: Early Termination and Liquidated Damages
1(a) Most franchisors assess liquidated damages at unfair and punitive rates, often 36 to 60 months of royalty fees. AAHOA states that franchisees should only have to pay six months of royalty fees.


In its franchise agreements for eight (8) out of the nine (9) hotel brands, Wyndham includes different provisions concerning the amount of LDs that must be paid in the event of an early termination, which generally amount to $2,000 per guest room, or 24 months of fees. In response to the PAR, Wyndham informed AAHOA that it negotiates the LDs on a case-by-case basis, and sometimes reduces the amount of LDs owed by a Franchisee if circumstances warrant.

In response to the PAR, Wyndham asserted that if the LDs operated as a penalty, they would not be upheld in court. Based on Wyndham’s experiences, courts frequently uphold the LDs provision because the amount of liquidated damages covers Wyndham’s legitimate cost of doing business because, among other things, there is substantial cost to Wyndham to replace a hotel property in the event of an early termination. With respect to negotiating the terms of their franchise agreements, members should be aware that in recent months, several Franchisees have reported to AAHOA that Wyndham agreed to revise the standard franchise agreement language and reduce the LDs to the lesser of 12 months of average monthly fees and/or $1,000 per room.

1(b) Windows Provisions - Most franchise agreements contain “window” or additional termination right provisions which allow the parties to terminate the agreement on specific anniversary dates (e.g., on the fifth, tenth or fifteenth anniversary) without having to pay liquidated damages. Unfortunately, many franchisors have included “gotcha” clauses in their franchise agreements which prevent early termination if the franchisee encountered monetary or operational problems at any time after the opening of the facility.


Wyndham announced that for its 2008 UFOC, Wyndham will be adding mutual windows provisions to all of its franchise agreements. These mutual provisions will allow either Wyndham or its respective Franchisees to exit on the fifth, tenth or fifteenth anniversary dates of the subject Facility’s opening date, without penalty.

1(c) Underperforming Properties

Wyndham has a Franchise Relations Policy (“FRP”) that allows Franchisees to exit if they have less than 50% occupancy rates, but applies stringent conditions to the exercise of this provision. Following its review of the detailed comments contained in the initial draft of the PAR, Wyndham agreed to evaluate several of these conditions, and possibly revise or eliminate them in the interest of fair franchising.

Point 2. Impact/Encroachment/Cross Brand Protection

All franchisors should grant each of their franchisees (over the term of the agreement) contractual rights to a geographic “area of protection” (AOP) in which the franchisor will not allow another property to operate with the same or similar brand name as the franchisee’s hotel.

Wyndham grants a “protected territory” to its Franchisees for certain hotel brands, but does not allow them to request an impact study if the applicant hotel is outside of the protected territory and does not grant cross-brand protection.

In response to the initial draft of the PAR, Wyndham reported that it had very few issues or complaints from Franchisees concerning their protected territories, or that Wyndham was encroaching on their territorial rights. In fact, the opposite was often true, with applicants seeking an opportunity to build a Wyndham brand name hotel, and then complaining when they could not do so because of the territorial protection offered by Wyndham to an existing Franchisee. Wyndham further commented that it had conducted impact studies in the past, but they were very subjective and did not provide much, if any, protection. Finally, Wyndham stated that by offering exclusive protective territories to its Franchisees, and now affording them an opportunity to exit the system without penalty under the new five-, ten- and fifteen-year windows provisions that will be implemented into all Wyndham franchise agreements in 2008, Wyndham is offering reasonable terms to its Franchisees and allowing them to terminate early if they are unhappy.

Point 3. Minimum Performance & Quality Guarantees

If a franchisee’s hotel is not able to maintain certain occupancy levels over a designated period and has not received a minimum level of reservations, franchisee should be able to terminate the agreement without penalty.

In response to the initial draft of the PAR, Wyndham stated that it has no control over how a hotel is operated, or whether it is receiving adequate reservation system contributions. Wyndham further commented that, as indicated above, it publicly discloses its reservation system contributions for the various hotel brands in the UFOCs. However, Wyndham allows the Franchisees to exit the system without penalty pursuant to certain conditions if their occupancy rates are less than 50%.

Point 4. QA Inspections/ Guest Surveys


Wyndham uses an independent company, Medalia, to conduct its QA inspections, and the most important aspect of the QA score is the guest surveys. Further, for any re-inspection of a hotel following a poor QA score, Wyndham only issues a score for items which were identified in the prior inspection. Wyndham also promotes the use of self-evaluation forms that Franchisees can use to conduct their own QA inspections for training and educational purposes. Finally, Wyndham has an electronically activated appeal process, which allows the Franchisees to request “grade reconsiderations” based on the overall brand standards for the hotel, and “time extensions” if they need additional time to complete the punch list of items on the QA report.

Further, as explained in a letter dated January 7, 2008 from John Valletta, President of Super 8, to all Super 8 owners and operators, the guest complaint resolution policy for Super 8 owners is very generous. On another positive note, Wyndham offers options if a facility is terminated for taking its QA inspections. For example, in its UFOCs for the Days Inn and Travelodge brand hotels, Wyndham includes a footnote 5 under the section entitled “Renewal, Termination. Transfer and Dispute Resolution,” which states, “If termination is due to your failure to maintain adequate quality assurance scores, we may, in our sole discretion, offer to reduce or eliminate your liquidated damages and fees if you convert the Facility to operate under a license from one of the lodging Affiliates,” (See, e.g., 2006 UFOC for Days Inn, p. 69, ln. 5, and for Travelodge, p. 51, ln. 4.)

Point 5. Vendor Exclusivity


For those mandatory items that the Franchisees can only purchase from Wyndham, Wyndham does not make a profit and only charges an administration fee. Wyndham also allows its Franchisees to seek approval for a supplier that is not on the preferred list and does not charge a fee for such services.

However, Wyndham reports that this option is seldom used by its Franchisees because they receive discounted prices from Wyndham’s suppliers. Wyndham further indicated that it has very few products and services that must be purchased from mandated vendors, and it usually provides a list of several vendors from which to choose. For example, for the mandatory signs, computer systems and software, Wyndham provides a list of three vendors from which Franchisees can purchase the products. Finally, in its UFOCs, Wyndham states that it contributes a portion of the commissions from the mandated vendors to the marketing funds.

Point 6. Disclosure and Accountability


Although, in its UFOCs, Wyndham discloses that it uses a large percentage of its marketing funds for “other expenses” and “administration,” Wyndham does not provide its Franchise Advisory Councils (“FAC”) with audited financial statements concerning the expenditure of marketing and reservation fees. Following the review of the PAR, Wyndham stated that the concept of advertising and marketing has changed in recent years, and there is now an enormous amount of alternative entertainment, known as “advertisement”, that is used to reach target audiences. Consequently the traditional expenditure of money on television and print advertisements has now expanded to include activities and personnel that are not generally associated with marketing campaigns.

Point 7. Maintaining Relationships with Franchisees

Wyndham believe this Point No. 7 concerning maintaining relationships with its Franchisees to be one of its strengths. Specifically, Wyndham reported that it is one of the first companies to appoint Directors of Business Development (“DBD”), who are responsible for working with the individual hotels to improve their business opportunities and address any issues or concerns they might have. Wyndham is also in the process of hiring a new Senior Vice President of Owner Relations, who will be dedicated to working with the Franchisees and will be part of the Senior Leadership Team. Further, Wyndham reported that almost all of its FACs have elected members. Some of the FACs (i.e., Howard Johnsons) have 100% of their members elected by the Franchisees. Five (5) of the FACs have members that are both elected and appointed. Three (3) of the FACs have only appointed members. Wyndham indicated that all of its FAC members are independent and outspoken, and that Wyndham seeks their counsel and advice on many issues. On a related point, AAHOA is pleased to report that in 2007 and early 2008, Wyndham has been much more responsive to the individual concerns of AAHOA’s members. Among other things, Wyndham has a variety of members’ disputes and has participated in meetings with AAHOA leaders to address issues involving various hotel brands and complaints from AAHOA member franchisees.

Point 8. Dispute Resolution

Following Wyndham’s review of the PAR, it announced that it would work closely with AAHOA to improve its handling of Franchisee disputes, and was in the process of hiring a Senior Vice President of Owners Relations, in the latter half of 2007. AAHOA noticed a marked improvement in how quickly Wyndham responded to Franchisee issues, and its willingness to engage in informal discussions and meetings with the individual Franchisees. On another positive note, AAHOA is very pleased to report that on several occasions in 2006-08, when there were major issues involving the Baymont, AmeriHost and Super 8 Franchisees, respectively, the top executives of Wyndham - including Chairman and CEO Steve Rudnitsky, COO Tony Berger, Group President of Super 8 John Valletta, and Hotel Group Counsel Sarah Woodfin Wynn - personally attended meetings with AAHOA in an attempt to resolve disputes and maintain a good working relationship.

With respect to the resolution of Franchisee disputes, Wyndham allows its Franchisees to proceed to litigation and does not mandate that they go to arbitration. However, Wyndham does require its Franchisees to waive their rights to a jury trail in any action involving their franchise agreements, or the relationship between the Franchisees and Wyndham itself. (See, e.g., 2006 Days Inn franchise agreement, Section 17.6.4, pg. 20.). While jury waivers are more likely to be enforced when combined with provisions authorizing mediation of disputes, an increasing number of courts have held that jury waiver provisions are unenforceable. For example, state courts in California, Georgia, Virginia and Tennessee have issued opinions that have either found such provisions to be unenforceable under state laws or have questioned their enforceability.

Point 9. Venue and Choice of Law Clauses

Wyndham states that any claim or controversy will be subject to “non-exclusive” personal jurisdiction in Morris County, New Jersey, and that New Jersey law will apply. This means that if there is a dispute and Wyndham is the first party to go to court and file a lawsuit against a Franchisee, Wyndham can file the suit in New Jersey, near its corporate headquarters, and the Franchisee cannot object to jurisdiction in this location. If a Franchisee is the first to file a lawsuit against Wyndham, however, the Franchisee has the right to file the claims in an appropriate county and state, which might include the county and state in which the hotel is located, and the Franchisee is not limited to filing only in Morris County, New Jersey.

Point 10. Franchise Sales Ethics and Practices

Following review of the PAR, Wyndham stated the following:

(1) Since Wyndham is a publicly traded company that is subject to the Sarbanes-Oxley Act (“SOX”), each quarter Wyndham senior management is required to certify for SOX purposes that they are not aware of any fraud, including sales fraud, in the organization.

(2) Wyndham’s legal department conducts training sessions for the sales force twice a year on the legal requirements of selling franchisees, to ensure that they conduct themselves in a legal and ethical manner.

(3) Wyndham’s corporate compliance and ethics officer trains the sales force on the Wyndham “Business Principles”, which is Wyndham’s code of conduct for employees representing its core business philosophy of acting with integrity and respect for others. The Business Principles state, in pertinent part, “Employees should deal properly and legally with Wyndham Worldwide customers, suppliers, competitors and employees. You should not engage in manipulation, concealment, abuse of privileged information, misrepresentation of material facts or any other unfair-dealing practice.” Each employee is required to sign a form acknowledging that they have read and agree to uphold these principles.

(4) Wyndham requires all Franchisees to review and initial a special Section 18 in their respective franchise agreements entitled “Special Stipulators,” describing all the stipulations or agreements reached by the parties as the result of their arms’ length negotiations, which may include provisions regarding special signage credits, reduced liquidated damages, additional termination rights or window provisions, and/or reduced re-licensing fees.

(5) Finally, on August 7, 2007, Steven A. Rudnitsky, President & Chief Executive Officer of Wyndham, stated as follows: “As the leader of this organization I am here to tell you that the (above) noted principles and processes that this organization lives by its non-negotiable.”

Point 11. Transferability

Although Wyndham’s transfer fees are excessive, special consideration is given for transfers to family members or business partners. Specifically, the transferee must complete and submit an application, qualify as a Franchisee, provide the same supporting documents as a new license application, and pay the application and re-license fees, then in effect, sign the conversion transaction franchise agreement form, agree to renovate the Facility as if it were an existing Facility converting to the System, and satisfy other conditions identified by Wyndham. (See, e.g., 2006 franchise agreement for Days Inn brands, para.9.3, p.12). On a positive note, Wyndham authorizes “Permitted Transferee Transactions” of an equity interest to, among others, (a) an entity or person upon the death of the owner if no consideration is paid, or (b) a spouse or adult issue of the transferor if no consideration or payment is made. For such transactions, the Franchisee may transfer the Facility without obtaining Wyndham’s consent, renovating the facility, or paying a re-license or application fee, but certain other restrictions apply. (See, id.. at para. 9.4, pp. 12-13).

Point 12. Sale of the Franchise System Hotel Brand

The new franchisor should maintain the same or higher level of quality as the prior franchisor owners and offer assurances that the transition is as smooth as possible.

In its UFOC and license agreements, Wyndham provides that it can sell the franchise system to any person or legal entity, and that it does not offer any assurances that it will attempt to work with the new Franchisor owner to ensure the transition is as smooth as possible, or to protect the rights of its Franchisees.

Stanley Turkel
Hotel Interactive® Editorial Division

Bio: Stanley Turkel, MHS, ISHC operates his hotel consulting office as a sole practitioner specializing in franchising issues, asset management and litigation support services. Turkel’s clients are hotel owners and franchisees, investors and lending institutions. Turkel serves on the Board of Advisors and lectures at the NYU Tisch Center for Hospitality, Tourism and Sports Management. He is a member of the prestigious International Society of Hospitality Consultants. His ...
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