Hospitality attorneys explain some of the legal challenges that arise in making and breaking hotel management agreements, enforcing non-compete agreements and holding sweepstakes.
HOUSTON—While there are a number of major legal challenges affecting the United States hotel industry that attract much of the attention, there are plenty of smaller, but still important, issues that hoteliers face.
Hospitality attorneys shared their insights into a few of these topics at the recent Hospitality Law Conference.
In management agreements, the balance of a hotel’s revenue belongs to the owner, said Cliff Risman, partner at Gardere Wynne Sewell. In lease agreements, the balance of the operating revenue belongs to the tenant after paying the owner or landlord the rent, he said. In the U.S., management agreements are more prevalent, he said, while lease agreements are used more internationally.
For an operator to successfully negotiate a management agreement, the owner nowadays will want the operator to have some “skin in the game,” he said. Sometimes that’s equity investment, he said, and it could be using the operator’s budget in a different way.
“The moral of the story is, there’s no such thing as a free lunch,” he said. “The more risk (the operator) takes, the more concerned they will be about the long-term strength of the contract and non-terminability of the contract.”
Terminating agreements are “hotly negotiated,” Risman said, and the accompanying issues include whether it was for cause, if there’s a fee to pay, is there a lockout and if there was a performance test.
A performance test is a way for the owner to terminate an agreement, he said. The test is oftentimes calculated over multiple years and could have two different parts to it. He said there is typically a test of cash performance versus budget performance as well as looking at market penetration compared to a competitive set. If those tests are failed for two years, which is typical, the owner might have a termination right without any payment of fee or penalty, he said.
In the hospitality industry, it’s become common for employees who have sensitive company information to sign a non-compete contract, said Ehsan Tabesh, associate at Fisher Phillips. These agreements usually apply to executives, sales and marketing employees, franchisor-franchisee agreements and hotel management agreements, he said.
In 2016, U.S. companies lost about $300 billion to trade secret theft by departing employees sharing information with competitors and foreign governments, he said.
“When it comes to the trade secret threat, there are two companies out there: Those that are compromised and those who don’t know it yet,” he said.
One issue to keep in mind with non-compete agreements is enforceability, Tabesh said. In the state of Texas, where he practices, a key factor in enforceability is whether the agreement is reasonably tailored. That means it can only last for about two to five years, its geographic scope should only cover the territory where the company operates or the employee operated and should seek to prevent the departing employee from seeking a job similar to one he or she had at their previous company.
The company must also provide a tangible benefit in exchange for the departing employee not to compete, he said, which typically isn’t a problem for new employees. For existing employees, the company must provide new and additional confidential information or highly specialized training on top of what they have already received on the job, he said. For that reason, a non-compete agreement signed by an employee as he or she departs is generally unenforceable, he said.
“Monetary payment is not enough,” he said. “There’s no new tangible benefit the company can provide to an employee on the way out.”
When an employee signs the agreement, the hope is the employee will comply, he said, but that’s not always the case. If the employee violates the agreement, there are a number of considerations, he said. Litigation can be expensive, he said, and the costs are usually at the front-end of the litigation because of the extensive discovery in the form of exchanging documents and business interruption.
In these cases, time is of the essence, Tabesh said. One of the most valuable remedies is an injunction, he said, and to obtain one, the company has to demonstrate it is at risk of suffering immediate harm from the employee violating the agreement.
“The longer you wait to seek one, the less likely the court will see immediate harm,” he said.
Texas has an anti-SLAPP statute that stops plaintiffs from filing frivolous lawsuits that would infringe on someone’s right to free speech, he said. The Texas Supreme Court has ruled that applies to non-compete agreements, he said, so if the statute is found to apply, discovery is suspended absent extenuating circumstances. In other words, it compels the plaintiffs to prove their case from the outset by clear and specific evidence, he said.
The case would then be dismissed, he said, and there is a mandatory attorney’s fee provision and sometimes punitive damages as well.
“On one hand, companies have to act quickly to demonstrate immediate harm,” he said. “On the other, you have to be diligent gathering as much information as possible to meet the threshold.”
Sweepstakes and contests
Holding sweepstakes and contests are a popular way to engage with guests, said Elizabeth Brunins, member at Eckert Seamans, and they’re also popular to hold internally for employees as a way to boost performance. However, all 50 states, federal law, the District of Columbia and social media platform policies regulate how to run sweepstakes and contests, she said. These apply to external and internal ones, she said.
Any promotion that includes prize, chance and consideration is illegal in all 50 states and Washington, D.C.
Sweepstakes by definition are promotions when people enter for a chance to win through a random drawing, she said, eliminating consideration and only having prize and chance.
“That’s why you all see on the cereal box there’s no purchase necessary to win,” she said.
There needs to be alternative methods of entry, she said, such as being able to write an entry on a postcard and requiring one entry per envelope. The issue is an alternative method has to follow the principle of equal dignity, she said, which means alternative methods must have the exact same opportunity to win the prize and have the same number of chances to win the prize.
It wasn’t long ago that for someone to participate online, there would need to be an alternative way to win because not everyone was online, she said. The law is evolving, she said.
In New York and Florida, sweepstakes with total values over $5,000 must be registered and bonded, she said.
The official rules for sweepstakes are a contract with the participants, she said. They must include information on where to obtain the winners list and what the odds are of winning, she said.
Contests allow consideration, which means random chance is eliminated when choosing the winner, Brunins said, so the rules must state the criteria through which the winner will be selected. In Arizona, any contest that requires money to participate must register with the state.