Hotel franchisees turn to state lawmakers

MORE THAN 300 Asian American hotel owners attended the March 5 kickoff of a new business organization that will focus on franchising in the hospitality industry.

Fair Franchising Initiative has its roots in New Jersey with plans to expand nationwide as it gains momentum by crafting and promoting legislation the organization says will balance the playing field in the franchiser-franchisee relationship.

Fair Franchising Initiative held the conference in a ballroom at Royal Albert’s Palace in Edison, New Jersey. During the three-hour event leaders of the initiative, hotel owners, lawyers and consultants spoke about the impact current franchising practices are having on their businesses as well as the industry overall.

President of the organization is Prakash Shah, a hotelier and owner of First Group Mortgage and Realty Group, an investment bank in New Jersey that specializes in commercial loans.

Chairman is Anil Patel, owner of Northstar Hotels in New Jersey.

The first steps

Fair Franchising Initiative’s flagship effort is A-2682, a hospitality-focused fair franchising proposal introduced in February in the New Jersey General Assembly. The group’s hope is the measure becomes law and sets off a nationwide revolution in the hotel franchising industry.

The proposed New Jersey measure would prohibit franchisers from certain acts, including:

• Forcing an owner to spend more than $25,000 more than once every five years on property improvements unless the franchiser can demonstrate the franchisee would recover the value of investment during the contract term.
• Receiving rebates or bonuses from brand-certified vendors that sell goods or services to the franchisee unless the deal is transparent in the franchise agreement.
• Requiring franchisees to buy from specific vendors or service providers.
• Making any unilateral changes to the original franchise agreement during the term of the licensing contract.
• Financially penalizing owners for negative guest reviews.
• Charging franchisees to resolve guest complaints via calls or emails to the franchiser’s corporate office.
• Requiring owners to pay a fee for failing to enroll a specified number of loyalty members.

“This is a problem for all hoteliers over the country,” Shah said. “It’s a problem that we need a solution [for]. People are hurting and it’s not an easy situation they are in. Franchisers are taking advantage of the situation.”

One of the major concerns, Shah said, is the rising cost of guest acquisitions coming from various channels but mostly third-party agents.

“Ten years ago, an average franchiser was charging 7 or 8 percent and they would give you a lot of business in return,” he said. “Today, the business they give you has dwindled because a lot of the business is coming from third-party booking engines like Expedia, and they charge separately for providing that business. So, we’re paying double now for the same business.”

Shah said franchisers have increased their fees to 15 to 17 percent.

Taking it local

The Federal Trade Commission regulates franchising, but many, such as members of Fair Franchising Initiative who say there’s an imbalance in the system, are turning to states to produce laws that create more fairness in the industry.

Shah said New Jersey’s A-2682 is an attempt to lighten the financial burden on hotel owners/operators piled on by franchisers through various fees and penalties.

Along with lobbying New Jersey lawmakers, Fair Franchising Initiative members and hoteliers have launched efforts in other states such as California, Vermont and New York. Shah said the New Jersey bill, if it passes, would have a nationwide impact.

“These things have a cumulative effect,” he said. “We want to take the momentum from this bill in New Jersey and carry it to other states.”

‘We are part of AAHOA’

Anil Patel said as the initiative was organizing charter members asked if he could recruit supporters from past chairmen of AAHOA. Currently, Fair Franchising Initiative board members include past chairmen Mike Patel (1998-99); CK Patel (2010-11); and Hemant Patel (2011-12).

“The issues are clear,” Anil said, noting the initiative wanted experienced leaders to guide the initiative on its quest.

“We are not anti-AAHOA; we are part of AAHOA,” he said, adding he joined the association in the early 1990s.

The topic of fair franchising “has been around as long as we’ve been going to AAHOA meetings.” He sees the current board of directors easing up on the 12 Points of Fair Franchising as the association shifts its efforts to government affairs. He also attributes the shift in focus to new and younger board members who do not relate to the “sweat and blood” shed by charter AAHOA members to build their family businesses.

“Today, franchising is really getting out of control,” Anil said. “It’s a network of who you know and franchise contracts are not equal for all.”

Hoteliers are cutting their own deals with franchisers resulting in licensing agreements that are not uniform with contracts that most other hoteliers sign. The various agreements make it difficult to make sure franchisers adhere to the principals of fair franchising.

“The focus has been a little bit derailed,” he said.

Though most of the Fair Franchising Initiative conference attendees do business in New Jersey, many others have hotels throughout New England, the Mid-Atlantic, Southwest and Southern regions of the U.S.

A few hoteliers at the conference have properties in California, where the state Legislature in 2016 passed amendments to its Franchise Relations Act that places restrictions on franchisers’ decisions to terminate or not renew licenses. It also gives franchisees more freedom to sell their franchised business assets or add investors.

A newer act, AB-5, paves the way for a franchisee to hold a franchiser financially responsible under the state’s wage and hour laws if the franchisee’s business fails and the franchisee loses income as a result.

The International Franchise Association opposed the law, which was passed and signed by Gov. Gavin Newsom in September.

New Jersey Sen. Joseph Cryan, Democrat, District 20, spoke at Fair Franchising Initiative’s conference and vowed to support A-2682.

The bill’s primary sponsor is Assemblyman Raj Mukherji, Democrat, District 33, who introduced it to New Jersey’s General Assembly on Feb. 13.

Mukerji also spoke at the event and promised to move the bill to the House’s Judiciary Committee, which he chairs. He talked about the “lopsided” relationship between hotel franchisers and franchisees.

He said while there are federal laws that address franchising, “there are no laws that protect franchisees.”

“As policy makers, we have a responsibility to level the playing field.”

In February, Red Lion Hotels Corp. launched its “back to basics” plan as part of the company’s efforts to address franchisee concerns and stop a rising number of exits.