News Briefs

This news brief first appeared in The Legal Intelligencer, a sister publication of this newsletter. Author Shannon P. Duffy is a U.S. Courthouse Correspondent.

Hotel Attorneys Struggle to Devise Alternative Billing Arrangements

A survey and Q&A session at a recent hospitality industry conference revealed that alternative fee arrangements (“AFA”) have yet to make substantial inroads in the hospitality and lodging industry, despite the desire by in-house counsel at those companies to find ways to better align fees paid to outside counsel with performance.

At the 2011 Hospitality Law Conference, held in Houston in February, conference organizer Stephen Barth asked attorneys to participate in a live, confidential survey about best practices, and the session quickly turned to fees. “Alternative fee arrangements became a big issue when the economy crashed,” said Barth, in an interview with FBLA. “But we're still seeing major questions about how to create effective AFAs. At least in the hospitality industry, we walked away from the discussion with the idea that it's very difficult to define an AFA in which both sides feel that it is fair and content.”

In the wake of the recession, all hotel brands engaged in severe cost-cutting measures and increased expectations that every department's costs would be identified, said Barth. “The idea is that each department is being told to justify its existence. The companies know they need a legal department, but they look at it just as a cost,” he said. “And then outside counsel is seen as yet another expense.”

Thus, in-house attorneys face even greater needs than previously to demonstrate that avoiding costly lawsuits can more than cover their expenditures (and the costs of implementing the suggestions that they make). “Hotels can look at a lawsuit over an injury as the equivalent of X number of hotel nights ' and that's something that everyone down to the manager of a franchised hotel understands,” Barth said. “Finding the right metrics is difficult, and it's not pervasive yet, but conference attendees said that they feel it's just a matter of time.”

Barth suggested that hotel franchisors, as well as other franchisors, might test an alternative fee arrangement in a specific situation. For example, a franchisor that terminated a non-performing franchisee might be in a position to seek liquidated damages. “That could be turned over to outside counsel for an hourly fee, but that might feel to the [franchise] as if it's throwing good money after bad,” said Barth. “What if there's a firm that is particularly effective at collecting damages and would take the job for a lower hourly fee and a contingency if it is successful? In this way, the in-house counsel has reduced his firm's risk on runaway hourly billing, and the firm has an incentive to collect in as few hours as possible.”

Domino's Ordered to Reinstate Franchisee

In a case that illustrates the trickiness of e-mail communication, a federal judge has slapped Domino's Pizza with an injunction that orders the pizza giant to reinstate a Pennsylvania franchise because the company's e-mail notices of franchise requirements and violations weren't properly addressed.

Domino's argued that franchise owner Gregory T. Grosso had committed a series of franchise violations that justified termination of the agreement, including failing to follow Domino's policy on conducting criminal background checks of all employees and failing to attend a franchisee training class. But Grosso testified that he never received the e-mails Domino's claims it sent. Instead, Grosso said he first learned of the requirements when he received notices informing him that he was in default for failing to comply.

Now Senior U.S. District Judge Jan E. DuBois concluded that Domino's original e-mail notices to Grosso didn't comply with the franchise agreement because they weren't properly addressed. In a 14-page opinion in Grosso Enterprises Inc. v. Domino's Pizza, DuBois found that the agreement specifically required that all written communications be addressed to “Grosso Enterprises Inc.” and contain, in the body of the e-mail, Grosso Enterprises' current principal business address or Grosso's home address. The reason for such a requirement “is obvious,” DuBois wrote, because the provision was clearly “designed to avoid the very situation presented in this case and to focus attention on e-mails sent by Domino's to notify franchisees” about franchise requirements, “as distinguished from mass e-mails covering less important subjects.” Since the notices were faulty, DuBois concluded that Grosso is likely to succeed on his claim that Domino's breached the agreement by terminating his franchise for violations he was never properly notified about.

DuBois also found that Grosso would suffer irreparable harm without an injunction while Domino's will suffer only minimal harm if ordered to reinstate the franchise while the case is litigated.

Grosso testified at the injunction hearing that he has operated the franchise since 1996, and that he first began working for Domino's in 1991 at age 17, first as a driver and later as store manager. “Grosso has invested his entire adult life into operating a Domino's franchise through Grosso Enterprises. The loss of a 14-year franchise to Grosso Enterprises and to Grosso cannot be measured solely in monetary terms,” DuBois wrote.

DuBois also found that a temporary restraining order would be in the public interest because the court is simply “enforcing valid contracts and remedying wrongful breaches.”

This news brief first appeared in The Legal Intelligencer, a sister publication of this newsletter. Author Shannon P. Duffy is a U.S. Courthouse Correspondent.