Choice franchisees in lawsuit accuse company of racial bias

The plaintiffs also accuse the company of fraud and violating the RICO Act

A lawsuit filed Friday by about 60 Choice Hotels International franchisees in the United States District Court for the Eastern District of Pennsylvania accuses the company of racial bias against Indian American hotel owners, fraud, charging excessive fees and taking kickbacks from vendors.

A GROUP OF at least 60 Choice Hotels International franchisees have filed a lawsuit leveling serious accusations against the company. They include an allegation that the company exercises racial bias against Indian American owners.

The group that filed the lawsuit Friday in the United States District Court for the Eastern District of Pennsylvania, formerly known as “Terminate Choice” and is now “Reform Choice,” formed after the onset of the COVID-19 pandemic to protest Choice’s treatment of franchisees during the resulting economic downturn. The suit, however, lists a series of complaints that predate the outbreak, and all of which Choice calls “unfounded.”

Along with the allegation of racial prejudice, they include:

  • Violations of the Racketeer Influenced and Corrupt Organizations Act by colluding with the Choice Hotels Owners’ Council to defraud and take advantage of franchisees.
  • Forcing franchisees to buy from specific vendors from which the company receives kickbacks.
  • Charging fees that are not included in the original franchise agreement for services it either does not provide or provides at inferior quality.
  • Providing benefits to board members of CHOC to encourage then to “support Choice’s oppressive agenda.”
  • Blocking franchisees from exiting the system by imposing onerous liquidated damages provisions and excessive penalties on those trying to depart.

“This is an action to put an end to Choice’s abusive, fraudulent and unconscionable practices, which are designed with one purpose in mind—namely, to line the pockets of its shareholders at the expense of the rights of its franchisees, including the franchisees,” the lawsuit said. “Despite—or perhaps partially due to—the fact that franchisees inherently assume considerably more risk than Choice in the operation of each hotel franchise, Choice uses its superior bargaining power to coerce the franchisees into accepting onerous, unequal, and unconscionable terms in its franchise agreements. These onerous terms put immense financial stress on franchisees, threatening their economic viability.”

The argument for racial bias

Evidence supporting the accusation is mainly anecdotal, but it is prevalent among most of the plaintiffs in the case, most of whom are Indian American. Darshan Patel, owner of a Quality Inn in Dickinson, North Dakota, and founding member of Reform Choice, said the most common example is how Choice distributes franchises in its upper midscale brand Comfort Inn. Currently two-story hotels are not supposed to be allowed in the brand, but the rule is applied unevenly.

“There are numerous two-story Comfort Inns left across the U.S. including one in my hometown and they are all owned by white owners,” he said. “We all own three-story, four-star quality inns that are newer built and we’re still not allowed to enter that system, they’re still not removing those (two-story) Comfort Inns so let us have a spot.”

Patel had his own personal example stemming from his experience applying for a Comfort Inn franchise.

“I’ve applied two separate times [through] my management company,” he said. “My management company has 25 years of experience to operate in hotels. So, in that particular case, we did feel that there was racial discrimination where we were not allowed to enter the Comfort Inn system within that certain town.”

Patel said about 99 percent of the plaintiffs in the lawsuit said they feel as if they have been racially profiled since entering the Choice system.

No way out

The original complaint made by the group prior to filing the lawsuit was that Choice was not willing to waive enough of its franchise fees to help owners stay in business during the economic downturn. Patel said, as the lawsuit alleges, that many of those fees are not included in actual franchise agreements with the company. He said there are hidden fees, such as different types of marketing fees and education fees, that they never signed and agreed upon.

“When we’re going through our contracts, the franchise fees we agreed upon in the contract and then what we’re being charged is completely a whole different story,” he said. “We’re being charged a lot more than we signed up to be charged.”

Most of the hoteliers in the group would like to exit the Choice system, Patel said, but cannot because the company would charge them hefty liquidated damages fees exceding $100,000.

“My Choice hotel currently is doing probably 10 percent occupancy and the revenue coming in is far less than the fees Choice is trying to charge every month is,” he said “It’s gotten to the point where we are no longer profiting from our own property and we feel like this is just modern-day slavery.”

The number of owners willing to join the group and the lawsuit has been climbing since the suit was filed, Patel said.

“We do have a list of another 500 properties that would like to join, but everyone is in fear of retaliation from Choice so everyone’s kind of standing still until the first batch of people go through,” he said.

New plaintiffs still have 14 days to join the lawsuit, Patel said, and there is a countdown clock for joining on the group’s website.

Choice defends its position

In response to the lawsuit, Choice said it could not comment on pending litigation but pointed out that the plaintiffs in the suit represent only a small portion of the company’s 6,000 U.S. franchises.

“We look forward to addressing the unfounded allegations at the appropriate time,” the company statement said.

The statement also said the company wanted to point out that over its 80-year history it has supported its franchisees and maintains a voluntary franchisee retention rate of 98 percent.

“During the unprecedented challenges facing the hotel sector and across the broader economy over the last three months, Choice has been working closely with franchisees to help mitigate the impact of the current crisis on their businesses,” the statement said.

Another long-time Choice franchisee, Ash Sangani, owner of Giri Hotel Management in Quincy, Massachusetts, defended the company’s performance during the pandemic in the May issue of Asian Hospitality.

“I think this storm, nobody has ever seen,” he said. “I’ve spoken to a lot of veterans and people with 40 or 50 years in the industry who have never seen anything like this.”

Tim Shuy, Choice’s vice president of owner and portfolio strategy, said the company maintains strong relationships with most of its franchisees, though there are always going to be unhappy owners no matter what is done.

“We’re very engaged with our franchisees and they’re very engaged with us,” Shuy said.

Other brands have faced requests from franchisees to forgive fees during the crisis. In May, Wyndham Hotels & Resorts extended its waivers on fees to September.