The Franchise Memorandum

The Second Circuit affirmed a grant of summary judgment in favor of hotel franchisor HLT Existing Franchise Holding LLC, dismissing a former franchisee's claim that HLT improperly terminated the franchise agreement and permitting HLT to recover liquidated damages. HLT Existing Franchise Holding LLC v. Worcester Hospitality Grp., LLC, 2015 U.S. App. LEXIS (2d Cir. Apr. 9, 2015). The terminated Hampton Inn franchisee, Worcester Hospitality Group, LLC (WHG), argued that the district court erred in three respects, contending that: (1) HLT had violated the covenant of good faith and fair dealing by conducting on-site inspections of the hotel in an arbitrary or irrational manner; (2) the district court should have excluded guest surveys that reflected customer dissatisfaction as inadmissible hearsay; and (3) the contractual liquidated damages term—which awarded HLT three years' worth of estimated future royalties if HLT terminated the agreement due to WHG's breach—was unreasonable based on record evidence that HLT could construct a new Hampton Inn in less than one year.

The Second Circuit affirmed. It held that the application of the covenant of good faith and fair dealing was inapposite because the allegedly arbitrary or irrational inspections were not HLT's sole basis for terminating the agreement. Because WHG also received failing scores on guest surveys, HLT had an independent, contractually-permitted reason for termination. The guest surveys were not hearsay because they were not admitted to show the truth of the matter asserted. Rather, they were admissible evidence that HLT reasonably believed that guests were dissatisfied. The surveys were also exempted from hearsay as records of a regularly conducted business activity. Finally, the court found that evidence regarding the timeframe for constructing a new Hampton Inn was irrelevant to the reasonableness of the liquidated damages. Instead, the parties' assessment of how quickly HLT could replace WHG as a franchisee and reopen the existing Hampton Inn was the appropriate measure for calculating liquidated damages. Thus, HLT was entitled to contractual liquidated damages.