The Franchise Memorandum

This month the United States District Court for the Western District of Michigan refused to grant a hotel franchisee’s request for a preliminary injunction ordering its franchisor to take reservations for hotel stays occurring after June 30, 2009, the date that the parties agreed the franchise agreement between them would expire. Lake Country Corp. v. Sheraton LLC, 2008 WL 4534419 (W.D. Mich. Oct. 6, 2008).

Relations between the franchisee and Sheraton had begun to deteriorate after the franchisee refused to make required improvements to the hotel property. The franchisee brought suit, and the parties later settled, agreeing that the franchise agreement would expire on June 30, 2009. Thereafter, Sheraton refused to book guest reservations through its reservation system for stays occurring after the June 2009 termination date. The franchisee filed suit again, this time asserting that its rights to the use of the Sheraton reservation system did not expire until June 30, 2009, and that its customers should be allowed to make reservations using the system until June 30, regardless of the dates they would actually be staying at the hotel.

The court disagreed, finding that the franchisee had not made a showing of irreparable harm. First, the court found that the franchisee could use a third-party reservation system and simply pay Sheraton the usual fee for reservations booked for stays up to the termination date, June 30. After the termination date, however, the franchisee would become a Sheraton competitor, and the court held that the franchise agreement did not require Sheraton to assist the operator in such a situation. The court proceeded to rule in favor of Sheraton on the remaining three preliminary injunction prongs—likelihood of success on the merits, balance of harms, and public interest. As to the latter, the court noted that the public has interest in “avoiding the potential confusion and dissatisfaction which may result if guests call Sheraton’s reservation system to book a hotel only to find out later, perhaps even when they arrive, that the hotel is not a Sheraton.” The court also ordered the franchisee to state on its website and confirmation notices that it would not be operating as a Sheraton after June 30, 2009.