Kaufmann Gildin & Robbins Scores a Big Win For Hotel Franchisor Under the New Jersey Franchises Practices Act

October 2024

For 40 years, franchisors have had to renew their franchise agreements in New Jersey whether they wanted to or not – – even if the subject franchise agreement was entirely silent on renewal or provided for only a specified number of renewals – – due to the New Jersey Supreme Court’s 1985 ruling in a case involving Dunkin’ Donuts holding that: “With the advent of the New Jersey Franchise Practices Act, once a franchise relationship begins, all that a franchisee must do is comply substantially with the terms of the agreement, in return for which he receives the benefit of an “infinite” franchise – – he cannot be terminated or refused renewal.” In a case we defended on behalf of Holiday Hospitality Franchising (a subsidiary of IHG Hotels & Resorts and the franchisor of Holiday Inn and Holiday Inn Express guest lodging facilities), the U.S. District Court for the District of New Jersey on September 18, 2024 granted summary judgment to Holiday in a case involving a franchisee which claimed that Holiday violated the New Jersey Franchise Practices Act by not offering franchise renewal notwithstanding the fact that the franchisee’s Holiday franchise agreement specified that there would be no renewal.

In Scion Hotels LLC v. Holiday Hospitality Franchising, LLC, franchisee Scion – – which had already “flipped” another of its Holiday Inn hotels to a Hilton brand – – acquired the existing franchise for the Newark Airport Holiday Inn. But instead of accepting Holiday’s offer of a full ten year franchise, Scion insisted that it only wanted the remaining 22 months left under the selling franchisee’s franchise agreement. This despite repeated warnings that Holiday gave to Scion to the effect that, so critical was the Newark Airport market (the 13th busiest airport in the nation and the 23rd busiest in the world), Holiday would have to look elsewhere to establish a Holiday Inn presence at the airport and that the brand would likely not be available to Scion when its 22 month “remaining term” franchise expired. And this was told to Scion repeatedly before it even closed on its acquisition of the Newark Airport Holiday Inn. Accordingly, Scion’s Holiday Inn Franchise Agreement explicitly stated that it was nonrenewable.

Just as Holiday anticipated, Scion began negotiating with Hilton just two months after signing his Holiday Inn agreement to convert the Newark Airport Holiday Inn to a Hampton Inn, with Scion signing its Hampton Inn franchise agreement five months before its Holiday Inn Franchise Agreement expired.

Nevertheless, after doing so, Scion commenced an action against Holiday claiming wrongful nonrenewal of its franchise agreement; constructive termination of its franchise agreement; and the imposition of unreasonable standards of performance, all in purported violation of the New Jersey Franchise Practices Act.

However, in response to Holiday’s motion for summary judgment, the U.S. District Court for the District of New Jersey would have none of it.

Finding that Holiday had good cause for not renewing Scion’s franchise agreement because it had voluntarily abandoned its Holiday franchise relationship by actively pursuing a rival franchise relationship with Hilton, the court granted summary judgment to Holiday and dismissed Scion’s non-renewal claim with prejudice. “Under these facts, [Holiday] had good cause for not renewing the Franchise Agreement,” held the court.

The court similarly granted summary judgment to Holiday on Scion’s constructive termination claim (“Plaintiff’s own actions are better evidence of constructive termination than those alleged as to Defendants”) and Scion’s claim that Holiday imposed unreasonable standards of performance.

We note that the decision of the federal court in Newark is being appealed to the Third Circuit Court of Appeals.

We are grateful for the opportunity given us by Holiday (and IHG) to litigate this matter, confronting as Holiday did 40 years of “nonrenewal” decisions adverse to franchisors.