Originally published June 7, 2004
Since December of 1999, when the jury in 2660 Woodley Joint Venture v. ITT Sheraton Corporation shook the foundations of the most important relationship in the hospitality industry, that of owner and operator, the industry knew that two things were certain. One was that the rules of the game had changed, and the second was that an appeal would surely follow. The appeal was delayed until Sheraton's request for a new trial or amendment of the judgment was heard. That didn't happen until January of 2002. At that time, the jury's award of punitive damages was reduced from $37.5 million to $17.415 million, but the $14.082 million (including the trebling of the $750,000 anti-trust damages) award of compensatory damages was not modified. The total amount of the judgment on appeal then amounted to $31.497 million.
On May 25, 2004, the U.S. Court of Appeals for the Third Circuit issued its long-anticipated decision and opinion. The question now for the hospitality industry is "is this another bombshell or merely a firecracker?"
With the owners’ success before the jury in Woodley Road, the complaint in the case became a model for subsequent litigation brought by owners against operators, managers and purchasing entities. The essence of each of these later complaints is that the operator is the fiduciary of the owner in all respects. This means that a breach of that fiduciary obligation by the operator in turn gives rise to a number of damage claims by the owner, ranging from breach of contract to violation of the Racketeer Influenced Corrupt Organization Act and the Robinson-Patman Act. RICO claims were not successful in Woodley Road and have not been successful in any other case to date. The Robinson-Patman Act is part of the web of federal anti-trust legislation. What makes Robinson-Patman Act claims particularly attractive to claimants in owner versus operator cases is the availability of a tripling of the actual, proven damages.
The opinion of the Third Circuit quotes a number of prior anti-trust cases to make the point that this area of the law is "more than a little confusing and certainly beyond our powers of reconciliation." Having established that point, the court then proceeds to spend most of the opinion discussing whether or not the jury's award of trebled anti-trust damages was appropriate under anti-trust law. The conclusion of the Court on this appeal was that the jury award was not appropriate, so the $750,000 award (which had been trebled to $2,250,000) was vacated.
The Court's lengthy discourse on the nuances of various elements of the Robinson-Patman Act and its "cousin," the Clayton Act, appears to indicate that owner/operator claims based on group purchasing programs are more appropriately made as breach of contract and breach of fiduciary duty claims, rather than as claims under the complex body of federal anti-trust laws. Nevertheless, the court did say that ". . . in an appropriate case, a breach of contract or a breach of fiduciary duty could result in the kind of injury 'the anti-trust laws were intended to prevent.'" So it appears that what the court has said, in essence, is "No" to the plaintiff in this case on the facts of this case, but the door is open for the next case, if the facts of that case can meet the stringent and restrictive tests of existing anti-trust laws, or if Congress acted to change existing anti-trust laws to permit claims to be made based on the kind of allegations in Woodley Road. It seems unlikely that owner/operator management agreement litigation will result in a successful Robinson-Patman Act claim without action by Congress.
The second portion of the Court’s opinion addressed the jury's award of $10,260,000 for breach of the agency provisions of the Sheraton management agreement, and separate awards of $250,000 for purchasing services, and $222,000 for the workers' compensation program. The jury also had listed an award of $1.1 million as damages for Sheraton's breach of its fiduciary obligations. Based on its conclusion that these awards were redundant, the Court eliminated the $10.26 million award for breach of the agency created by the management agreement and the $250,000 awarded based on the claims related to Sheraton’s purchasing services. It did, however, leave in place the $220,000 worker's compensation award and the $1.1 million award for breach of fiduciary duty, breach of the implied duty of good faith and fair dealing, and intentional or negligent misrepresentation.
In the third section of the opinion, the Court concluded that the trial court was correct in determining that the punitive damage award should be 1-1/2 times the amount of the appropriate compensatory damage award. On that basis, the punitive damage award was reduced to $2.025 million.
So after waiting all this time for a decision, what guidance does the Woodley Road appellate opinion provide to the hospitality industry? The answer is, probably not much. Certainly it is not the great template for future conduct that many had hoped for. The conduct of the trial itself resulted in a malpractice verdict against Sheraton's trial counsel. In its decision, the appellate court eliminated the large anti-trust damages, while leaving open the possibility of anti-trust damages in certain future cases within a narrow spectrum of factual claims. The damages for specific wrongdoing in Woodley Road, including, most importantly, the breach of fiduciary obligation, remained essentially intact from the trial through the appeal. Other than for the lawyers, the lessons for the hospitality industry learned from the original Woodley Road jury verdict in 1999 remain the same today. This appeal and this written opinion have added very little to the continuing dialogue between owners and operators about how to best describe, disclose, understand and execute their multi-faceted relationship and business dealings with each other.
It appears that courts now view much, but not necessarily all, of the relationship between owners and operators is that of agent and fiduciary. While fiduciaries, who are considered trustees, legally owe their highest duty of candor, care and scrupulous good faith in acting for the benefit of another, operators acting in that capacity are not necessarily forbidden or legally precluded, as a matter of current law, from the purchasing-related business practices at the core of Woodley Road and the cases that have followed. Rather, it is essential that these specific practices and the fees that may be earned by the operator be disclosed, carefully monitored and documented, both in the management agreement and as a function of ongoing operator and owner periodic communications and financial reports. It is important to note that the obligations of fiduciaries and whether these fiduciary obligations can be waived by contract do vary from state to state, except with respect to the handling of money, which is by its very nature, a fiduciary obligation.
Perhaps the most important lesson from the Woodley Road trial and the Woodley Road appeal is simply that an ounce of prevention (disclosure) is still better than a pound of cure (litigation and termination). It's also a lot less expensive.
The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.
