Red Lion Hotels Franchising, Inc. v. MAK, LLC

663 F.3d 1080, 2011 U.S. App. LEXIS 24152, 2011 WL 6061516
CourtCourt of Appeals for the Ninth Circuit
DecidedDecember 7, 2011
Docket10-35465
StatusPublished
Cited by33 cases

This text of 663 F.3d 1080 (Red Lion Hotels Franchising, Inc. v. MAK, LLC) is published on Counsel Stack Legal Research, covering Court of Appeals for the Ninth Circuit primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Red Lion Hotels Franchising, Inc. v. MAK, LLC, 663 F.3d 1080, 2011 U.S. App. LEXIS 24152, 2011 WL 6061516 (9th Cir. 2011).

Opinions

OPINION

W. FLETCHER, Circuit Judge:

This litigation arises out of a franchise agreement between West Coast Hotels, Inc., and Mahmoud (“Mike”) Karimi. The successor in interest to West Coast Hotels is Red Lion Hotels Franchising, Inc. (“Red Lion”). West Coast Hotels was, and Red [1083]*1083Lion is, incorporated in Washington State with their headquarters in Spokane. Kari-mi and his hotel management company MAK, LLC (collectively, “Karimi”) operated a Red Lion franchise in Modesto, California. Red Lion terminated the franchise and sued Karimi for breach of contract. Karimi counterclaimed, asserting state-law claims, including a claim based on the “franchisee bill of rights” of the Washington Franchise Investment Protection Act (“FIPA”).

The district court granted summary judgment to Red Lion on Karimi’s counterclaim under FIPA’s bill of rights on the ground that FIPA does not apply extraterritorially. After a bench trial, the court held for Red Lion on its contract claim.

The primary question before us is whether a non-Washington franchisee may assert a claim against a Washington franchisor under FIPA’s bill of rights. For the reasons explained in this opinion, we conclude that an out-of-state franchisee may assert such a claim against an in-state franchisor.

I. Background

Mike Karimi has worked in the hotel industry since the 1980s. He owns a hotel management company, MAK, LLC, and operates several hotels through MAK.

In 2004, the Khatri brothers, friends of Karimi’s, asked him to take over the operation of a hotel they owned in Modesto, California. Karimi was concerned about doing so because the hotel was in poor condition — only 40 out of 186 guest rooms were usable — and needed significant renovations. Nonetheless, Karimi assumed the former operator’s 99-year lease on December 1, 2004. Shortly thereafter, Karimi negotiated a franchise agreement with West Coast Hotels. For convenience, we will refer to West Coast Hotels, and to its successor in interest Red Lion, simply as Red Lion. Karimi asked for and received certain non-standard concessions in the franchise agreement. The franchise term was shortened to five years; the royalty fee for the first year of operations was reduced; and Karimi was given the option to terminate the agreement in the first year without having to pay liquidated damages.

The franchise agreement contained several sections relating to hotel quality and improvements. One section provided that

[Red Lion] may from time to time require you to modernize, rehabilitate and/or upgrade the Hotel’s fixtures, equipment, furnishings, furniture, signs, computer hardware and software and related equipment, supplies and other items to meet the then current standards and specifications specified in the Manual.... [Y]ou will make all these changes at your sole cost and expense. ... We may make limited exceptions to some of those standards based on local conditions or special circumstances but we are not required to do so.

Red Lion reserved the right to change its Manual, a written collection of standards and requirements for franchises, at any time. The agreement required Karimi to bear the costs of complying with any new standards. The agreement also gave Red Lion the right to inspect the hotel at any time to determine whether it complied with standards set forth in the agreement and the Manual.

The franchise agreement also contained provisions relating to termination of the franchise. Section 14(a) gave Red Lion the power to terminate the agreement if the franchisee failed to cure an “Event of Default” within thirty days after notice. That section provided:

An “Event of Default” will occur if you fail to satisfy or comply with any of the [1084]*1084obligations, requirements, conditions, or terms set forth in ... this Agreement, the Manual ..., or any attachment to this Agreement.... An “Event of Default” will also occur if you make any misrepresentations to us, whether in entering into this Agreement, or in the performance of your obligations to us.

Section 14(c) provided that if Red Lion terminated the agreement under Section 14(a), Red Lion would receive liquidated damages.

Finally, the agreement contained a choice-of-law provision in the event of litigation. Section 16(b) provided:

[T]his Agreement, all relations between us, and any and all disputes between us, whether sounding in contract, tort, or otherwise, are to be exclusively construed in accordance with and/or governed by (as applicable) the laws of the State of Washington without recourse to Washington (or any other) choice of law or conflicts of law principles.... Nothing in this section is intended to invoke the application of any franchise, business opportunity, antitrust, “implied covenant,” unfair competition, fiduciary or any other doctrine of law of the State of Washington or any other state which would not otherwise apply absent this Paragraph 16.b.

After the franchise agreement became effective on February 1, 2005, Karimi began renovating the hotel. Among other things, he purchased new bedding, furniture, wallpaper, pedestal sinks, and air-conditioning units, and replaced the exteri- or brick face with stucco. Karimi testified at trial that he spent around $1.5 million on the renovations.

In early 2005, Red Lion began a concerted effort to improve the quality of its hotels. A central part of the effort was the creation of new “brand standards,” which were to apply to all hotels in the chain. The new brand standards were based on AAA’s rating system, which awards hotels between one and five diamonds. Red Lion’s standards were based on AAA’s three-diamond standard. The new standards were announced to franchise owners at a meeting in January 2007. Franchise owners were told that they would receive a Property Improvement Plan, or PIP, that contained individualized lists of required improvements for each hotel.

Karimi was unable to attend the January 2007 meeting because he was hospitalized, but he was told in a February 20, 2007 letter from Red Lion that he would be given a PIP that would have to be completed by December 31, 2007. At some point in early 2007, Michael Castro, then the Director of Brand Services at Red Lion, met with Karimi at the Red Lion Modesto to prepare the PIP for 'the hotel. Castro sent the completed PIP to Karimi on May 15, 2007. The PIP contained more than 100 required improvements. Karimi refused to sign the PIP because of one requirement. He had installed pedestal sinks as part of his improvements to the hotel; the PIP required, instead, granite vanities with undermounted sinks. Karimi testified at trial that he had discussed the sink issue with Castro, and that Castro had granted him a waiver for pedestal sinks. Castro testified that he could not recall granting such a waiver. Kari-mi testified that he asked for a revised PIP, but that none was ever sent.

Under the original PIP sent by Castro, MAK was required to receive written confirmation from Red Lion that all furniture, fixtures, and equipment met or exceeded brand standards. The PIP also required written approval from Red Lion of any “changes or revisions to [the] scope of work or design elements.” Finally, any [1085]*1085extensions of more than 90 days after the December 31, 2007 deadline required written approval from Red Lion.

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Cite This Page — Counsel Stack

Bluebook (online)
663 F.3d 1080, 2011 U.S. App. LEXIS 24152, 2011 WL 6061516, Counsel Stack Legal Research, https://law.counselstack.com/opinion/red-lion-hotels-franchising-inc-v-mak-llc-ca9-2011.