As we reported previously, new ADA accessibility construction standards and reservation requirements took effect last week on Thursday, March 15, 2012.  One of the primary issues of concern with these new regulations is the requirement for all swimming pools, wading pools and spas to have an accessible means of entry and exit.  Due to confusion and misunderstanding regarding these specific requirements, the Department of Justice adopted a Rule extending the compliance date for the pool lift requirements to May 15, 2012.  At the same time, the Department of Justice also published a Notice of Proposed Rule Making concerning a possible six-month extension of the pool lift requirements to allow more time for the lodging industry to clear up its confusion and misconceptions regarding these requirements.  Despite the extension, lodging establishments should continue moving forward with complying with the new pool lift requirements, but can take comfort in knowing that they have a bit more time to complete the required work.

It is important to note that all other requirements scheduled to take effect on March 15, 2012 are unaffected by the extension of the compliance date for pool lift requirements.  If you have specific questions about how these new requirements apply to your place of lodging please contact Rosemary O'Shea or me for additional information.

By now, you likely know that ICANN is accepting applications for new gTLDs through April 12, 2012.  This post is intended to help those in the hospitality industry charged with monitoring the opportunities and risks associated with ICANN’s initiative.    

What’s Going On Now?

After 7 days, ICANN announced that there were “25 successful registrants in the online TLD Application System.”  However, that same press release stated that ICANN would not provide a running total of applicants or reveal the gTLD’s being applied for. 

But this being the Internet, others are trying to provide the information ICANN won’t.  These include .nxt and www.newgtldsite.com.  Both indicate that there has been an application for .hotel, but no specific hospitality brand has applied for a .brand according to these sites. 

What is Going to Happen in the Next Several Months?

ICANN anticipates that some new gTLDs will be ready for delegation in early 2013. Between the close of the application window and the end of the year, ICANN’s schedule looks like this:

• The Big Trickle - In May, ICANN will begin posting the “public portions of all applications considered complete and ready for evaluation within two weeks of the close of the application submission period.”  However, the “big reveal” will actually be a “big trickle” as the posting process may stretch over 8 weeks or more. 

• Comment Period Opens - Once an application is publicly posted, ICANN will open a 60-day comment period.  During this period, comments may be submitted on the posted application for review by the applicable evaluation panel. These comments are generally limited to concerns regarding whether: (a) the applied-for gTLD string may cause security or stability problems, including problems caused by similarity to existing gTLDs or reserved names; and (b) the entity applying for the gTLD has the requisite technical, operational, and financial capabilities to operate a registry. The comment period may be extended “should the volume of applications or other circumstances require.” 

• Formal Objection Period - Separate from the open comment period, a formal objection process will also be available to trademark owners.  Formal objections may be made on the following grounds: String Confusion Objection, Legal Rights Objection, Limited Public Interest Objection, Community Objection. The objection filing period will open after ICANN posts the application “and will last for approximately 7 months.”

What May Change? 

• It is hoped that the Trademark Clearinghouse service provider will be identified before the end of February. This mechanism is intended to provide clear notice to the prospective registrant of the scope of a trademark holder’s rights and could prove to be an effective alternative to a formal objection.
• In January, ICANN appeared confident in proceeding according to its plan despite opposition from various governmental and business groups. However, it could still bow to pressure and revise its procedures to address concerns about cybersquatting and the cost of defensive action.  For example, ICANN may follow the Commerce Department’s reasonable request to phase in new gTLDs after the application window closes.

As we reported previously, the relationship between online travel agencies (“OTA”s) and hotels has been a strained one.  Hotel owner and operators argue that they are at a significant competitive and fiscal disadvantage by exempting OTAs from paying taxes to state and local governments on the total guest room revenues they receive for online bookings.  In fact, the uncertainty involving taxation of OTAs in Florida recently led to Florida State Representative Jason Brodeur and Senate Majority Leader Andy Gardiner filing identical bills (HB 1393 and SB 1888) that would make clear that OTAs do not have to pay a disputed portion of bed taxes.

Earlier this month, Choice Hotels International, Wyndham Hotel Group, Marriott International, Hyatt Hotels, Hilton Worldwide and InterContinental Hotel Group joined together to form the Room Key website.  The stated mission of Room Key is to “offer travelers direct access to a broad network of hotels around the globe, provide accurate and comprehensive information, make it easy for travelers to discover what’s right for them.”  Essentially, Room Key cuts out the OTA middleman and drives consumer traffic to the six partner hotel websites. 

Apparently, the idea isn’t a novel one, as several hotel chains previously looked into forming a similar platform.  The idea was dismissed, however, because of the purported appearance that the hotel participants would be engaged in anti-competitive price-fixing activities.  According to The Room Key model avoids anti-competitive behavior, apparently, by requiring the customer to finalize reservations on each hotel’s website, rather than on the Room Key platform. 

At last week’s ALIS conference, several panelists debated whether or not Room Key will be met with any success.  Amongst the main criticisms was the belief that other OTAs have a significant head start and market penetration and the inability for customers to package other aspects of their travel, including rental car and airline tickets.

The enforceability of class action waivers was one of the bigger stories in 2011.  To illustrate, our sister blog – The Employment Class Action Blog – had at least 10 posts last year on developments involving the application of the Supreme Court’s decision in AT&T Mobility v. Concepcion.  As you may recall, that 5-4 decision held that California’s Discover Bank rule was preempted by the Federal Arbitration Act and, as a consequence:

Courts must place arbitration agreements on an equal footing with other contracts, and enforce them according to their terms.

While encouraging hospitality companies to adopt class action waiver provisions after Concepcion, we also anticipated that the holding would be challenged through various means, including the introduction of legislation, agency rulemaking, and plaintiff lawyers’ arguing for the equivalent of “pre-existing legislative overrides.”  With respect to the latter, we pointed out that the Supreme Court had already granted certiorari in CompuCredit Corp. v. Greenwood.  In that case, the Ninth Circuit held that an arbitration agreement could not be enforced under the FAA because another federal law (the Credit Repair Organization Act) provided that a plaintiffs' right to sue in court could not be waived. 

The importance of the yet-to-be-issued decision in CompuCredit was highlighted by the National Labor Relations Board’s January 6 ruling in D.R. Horton and Michael Cuda, a decision that impacts both union and non-union workforces.  As reported by John Lewis at The Employment Class Action Blog, the NLRB found that Section 8(a)(1) of the National Labor Relations Act was violated because the company required that all employment-related disputes be resolved through individual arbitration.  According to the NLRB, “an individual who files a class or collective action regarding wages, hours, or working conditions, whether in court or before an arbitrator, seeks to initiate or induce group action and is engaged in conduct protected by Section 7" of the National Labor Relations Act. "Such conduct is not peripheral but central to the act's purposes."  “If the [NLRA] makes it unlawful for employers to require employees to waive their right to engage in one form of activity, it is no defense that employees remain able to engage in other concerted activities.” 

We have reported previously on the hospitality industry’s struggles with tip claims and employee classification claims - these would seem to support the protective use of class action waivers and arbitration by employers.  However, the effectiveness of such provisions may ultimately be determined by the Supreme Court’s decision in CompuCredit v. Greenwood.  That decision may favor employers by setting an impossibly high standard for how clearly a federal statute must express an intent to nullify arbitration agreements.  Alternatively, that decision could create an exception loved by the plaintiffs bar. 

The legal battle spanning from 2004 to 2011 involving Midsouth Golf, LLC and the Fairfield Harbour residential community in North Carolina illustrates what can happen to buyers who do not perform the due diligence to justify their optimistic projections. 

Midsouth Golf, LLC purchased the amenities associated with Fairfield Harbour in 1999, which includes two golf courses, with the expectation of making money operating the facilities and selling golf and social memberships to residents and members of the general public. It ended up obligating itself to maintain the two golf courses and associated amenities despite a greatly  diminished ability to collect amenity fees from the Fairfield Harbour property owners.

When Midsouth bought the Fairfield Harbour amenities, it was aware of a set of 1993 covenants which purported to obligate the timeshare owners to pay an amenity fee at a rate over five times that paid by the single family and condominium owners. However, pursuant to a 1998 settlement agreement, the predecessor owner of the amenities agreed that it would not charge timeshare owners amenity fees at a rate above that charged to other owners.

Proper due diligence would have likely uncovered the 1998 settlement, as well as the risk that  the 1993 covenants may not fall within the timeshare owners’ chain of title.  With this knowledge, Midsouth could have structured the acquisition to account for the associated risks, or at least walked away from the deal.  Instead, Midsouth trusted that the Fairfield Harbour amenities, and the crucial legal documents providing for amenity fees from property owners, were in good shape. It bought the amenities and started to make changes with the intent of increasing its profits, effectively doubling down on its bets.

Since the timeshare owners were using the amenities more than other owners, and because it had the 1993 covenants in hand, Midsouth determined it wanted to increase the assessments against the timeshare owners to reflect this heavier use. To accomplish this, Midsouth filed suit against the timeshare owners seeking to increase the assessments against them to the amount contemplated by the 1993 covenants.

The court, however, did not increase the fees. Instead, it held that the amenity fees were unenforceable against the timeshare owners because of flaws in the 1993 covenants.

Not surprisingly, many Fairfield Harbour owners stopped paying amenity fees after this decision. Midsouth closed the two golf courses due to insufficient funds.  Following a another trial, a North Carolina court determined that, despite the fact that property owners were not obligated to pay fees, Midsouth was obligated by the real property covenants to maintain the amenities. Midsouth had to pay damages to the property owners and reopen the golf courses and other amenities.

Hospitality developers making plans for compliance with with new ADA accessibility requirements may now have something else to consider.  Last month, the International Code Council released the Synopsis of the International Green Construction Code, with the full version of the model building code expected to be released in March 2012.  The IGCC has a goal of establishing a baseline standard of green building design and performance for all new and renovated commercial buildings and residential structures larger than three stories.   

Unlike LEED, the IGCC is not a rating system.  Rather it would establish specific "green" standards for construction that are to be adopted by local governments, integrated into existing building codes, and administered by local code officials.  The "floor" established by the IGCC may be varied in two ways:

• Each local jurisdiction may decide to accommodate issues relative to that area, such as sprawl, heat island effects, stormwater runoff and water and energy minimum performance thresholds.
• Each jurisdiction may require the project developer to choose and implement one or more "electives," which are intended to encourage "the construction of higher performance buildings than would be produced by conformance with the minimum requirements of the code, just like rating systems do."  Examples of electives include whole-building life-cycle assessement, enhanced site restroration, and more stringent recycled content options.    

While the approach advocated by the ICC may answer some concerns put forth by critics of the LEED ratings system, that doesn't mean the process will be painless for developers.  Among other things, the IGCC requires:

1. Significant restrictions on greenfield development and construction in flood hazard areas.
2. That at least 50% of construction-phase waste materials be diverted from landfills.
3. That at least 55% of building materials are salvaged, recycled content, recyclable, biobased or indigenous.
4. For all buildings and tenant spaces greater than 5,000 sq. ft., development of a greenhouse gas inventory to calculate the applicable carbon footprint.
5. Capabilities for energy measuring, monitoring and reporting, or to incorporate features that readily facilitate those capabilities in the future.  

At first glance, the growing trend in transit oriented real estate development may appear to apply only to developers of multi-family, multi-use properties in urban core areas. However, the concept of designing real estate developments to both utilize and compliment existing and planned transit can be beneficial to hotel, fractional, timeshare, and resort developers as well.

Hotel developers have a clear role in transit oriented development. For example, the plan submitted by Union Station Alliance for the redevelopment of downtown Denver’s historic Union Station involves a 130 room hotel in the center of the new downtown transit hub.  

Yet hotels are not the only means by which the hospitality industry can engage in transit oriented development. There is evidence that timeshare and fractional developments in urban cores, such as Palazzo Tornabuoni in Florence, Italy or the St. Regis Residence Club in New York can attract customers who want to experience an urban lifestyle in a luxurious residence.  And just like hotels, shared ownership projects can beneft from the proximity to frequent and reliable public transit.

Developers of resort properties, including timeshare, hotel, whole ownership, or any combination can make their properties even more desirable by considering future transit in their siting and design. Rail transportation from airports is expanding in cities across the United States. In Colorado, rail links from Denver International Airport to major ski destinations are already in the planning stage, while the 190-mile LA to Las Vegas bullet train proposal recently won an important approval from the federal Surface Transportation Board.  Looking further out, the Sun Rail commuter line could be the first step to a rail network between Florida’s cities and its world class beaches.  Click here for a map of what a high speed rail network could look like within the next 20 years.  

Developers of resort properties who plan new and renovated properties near transit stops in resort towns—whether in the mountains or at the beach—will have a competitive edge as more consumers make vacation plans involving automobile-free travel. 

Back in March, the Hospitality Lawg took its first look at the securities litigation surrounding the Trump SoHo, a New York condominium hotel.  The plaintiffs' primary beef was that they had bought under the impression that 60% of the units were sold, when at the time the developers had closed on just 16% of the units.

You may have noticed that it was our only post on this litigation - there hadn't been a single new filing in the court's record since the plaintiffs and defendants had traded memorandums of law on the defendant's motion to dimiss back in March.

That is, until November 8, when the parties' stipulation of dismissal was filed.  As reported by Steve Cuozzo of the New York Post:

They cried 'fraud' - an now, a bunch of well-heeled apartment hunters will get a staggering 90% of their deposits back on posh pads they intended to buy at the troubled Trump SoHo condo-hotel because they relied on the developers 'deceptive' sales figures.

While the result is presumably good news for the parties involved, we were hoping to see the judge analyze the plaintiffs' contention that the developers structured the rental program to “virtually ensure that all unit owners will use Trump Hotels to rent and manage their units,” thereby coverting the unit purchase agreements into investment contracts (a/k/a securities) required to be registered with the SEC and the New York securities commission.  

For those fans of condotel securities litigation, Tarsadia is still working its way through the appeals process.  

Baker Hostetler Data Breach Emergency Response Team

24-Hour Hotline

855.217.5204

As we pointed out in a prior post, hackers target hospitality companies of all sizes.  Our Privacy, Security and Social Media Team is prepared to help clients understand the relevant breach notification requirements, plan a cost-effective response, and minimize the potential for lawsuits and regulatory enforcement actions.  In doing so, Baker Hostetler attorneys can call on their experience in responding to over 200 data breaches, some of which are among the largest reported incidents to date.

You can access the Data Breach Emergency Response Hotline launch announcement here.  This hotline supplements Baker's already existing emergency response and crisis management capabilities, which are outlined here.    

If you want to do more research on data security issues, we invite you to visit our sister blog - The Data Privacy Monitor.  Of course, you can also search this blog for relevant data security terms.  The Hospitality Lawg has, for example, previously posted on the hospitality industry's exposure to hackers and the joint statement on data security issued by the American Hotel & Lodging Association, Hotel Technology Next Generation, and Hospitality Financial and Technology Professionals.   

Back in September, we worked with our sister blog The Employment Class Action Blog to report that a hotelier was found liable by a Hawaii federal court for not distributing 100% of "service charges" to wait staff as tips.  That result was predicated on reading the following two laws in tandem:

• Hawaiian statute, §481B-14, which requires service charges applied by hotels or restaurants to be distributed as “tip income” unless it is clearly disclosed that the service charge will be used to pay something other than wages or tips of employees.
• Hawaii Revised Statutes, §388-6 concerning “Withholding of Wages.” This statute prohibits employers from deducting, retaining or otherwise causing not to be paid “wages” to an employee. 

In the earlier case, the defendant hotelier was unsuccessful in arguing that that the above statutes were ambiguous.  But if you watched the World Series, you know that different umpires have different strike zones.  So if we extend Chief Justice Robert's famous metaphor, we shouldn't be surprised that a different court had a different call.

In Villon, District Court Judge Leslie Kobayashi undertook a detailed review of both statutes and concluded that the plaintiffs may have chased a bad pitch.  Here's a short play-by-play:

• Judge Kobayashi first noted that §481B-14 used the phrase "tip income," while §388-6 referred to "tips."  From this she noted that the Hawaii Legislature had elected to use different terminology, but that it wasn't "readily apparent" what the distinction was.
• This ambiguity allowed Judge Kobayashi to delve into the legislative history, which proved to be illuminating.  Turns out §481B-14 was originally proposed as an amendment to the Hawaii wage and hour laws, including §388-6.  But, based on concerns raised by the international Longshore and Warehouse Union and the Hawaii Department of Labor and Industrial Relations, the bill was converted to a new section in the consumer protection law with the purpose of enhancing "consumer protection with respect to service charges imposed by hotels and restaurants on the sale of food and beverages." 
• From this, Judge Kobayashi determined that the laws were not of the same subject matter, and thus could not be construed with reference to each other.  

Judge Kobayashi then cleared the bases as far as those fans of the dispassionate umpire approach are concerned:

This Court is sympathetic to Plaintiffs' position.  There is an unjust and gaping hole in the statute: if Defendant ultimately prevails on Plaintiffs' Chapter 480 claim and Plaintiffs' cannot enforce the alleged §481B-14 violation through any other means, arguably no one will enforce the violation. . . . Unfortunately, it is not this Court's place to sit as the Legislature does and try to create a new enforcement mechanism to replace or supplement an old one, no matter how inadequate and unfair the original statutory scheme may be.

In the end, Judge Kobayashi elected to defer to a closer, the Hawaii Supreme Court, as to the question of whether food and beverage employees can enforce alleged violations of §481B-14 through Hawaii's wage and hour laws.  We can bet that the plaintiffs bar will be looking to pitch its way out of a jam when it comes to the precise language of the questions to be certified.       

Marriott International, Inc. (NYSE:MAR) announced the approval of the spin-off of Marriott Vacations Worldwide Corporation through the distribution of shares to holders of Marriott International common stock.  As discussed in our prior posts, Marriott Vacations Worldwide will become the market’s largest pure-play timeshare company.  Details from the press release include the following: 

• Marriott Vacations Worldwide will be the exclusive developer and manager of vacation ownership and related products under the Marriott brand and the exclusive developer of vacation ownership and related products under the Ritz-Carlton brand. 
• The spin-off will be completed through a pro rata dividend of Marriott Vacations Worldwide common stock on Monday, November 21, 2011 to Marriott International shareholders of record as of the close of business of the New York Stock Exchange on Thursday, November 10, 2011.
• Each Marriott International shareholder will receive one share of Marriott Vacations Worldwide common stock for every ten shares of Marriott International Class A common stock held.
• Following the spin-off, Marriott Vacations Worldwide intends to have its common stock listed on the NYSE under the symbol “VAC.” 

When I first visited Jericoacoara in 2002, hotel development and international tourism were just starting to boom. The Brazilian government had recently designated the surrounding landscape as a national park, protected from development and limited in use.

Located about 200 miles from the city of Fortaleza on the northeast coast of Brazil, Jericoacoara was originally a tiny village of fishermen and their families living in a small cluster of simple brick buildings situated in a breathtaking natural setting. The Atlantic Ocean embraces the town on two sides, with a sandy half moon beach soaring from town for over ten miles. Behind the beach and the town lie gigantic sand dunes interspersed with lagoons and mangroves, filled with birds, fish, and crustaceans, plus the occasional roaming donkey or dune buggy packed with visitors. All of the ways into town involve driving several miles over sand.

I concluded back in 2002 that the natural environment would be sufficiently protected by the status as a national park, but that the original inhabitants of the fishing village would be driven out by high land prices, since the national park boundary limits the area of land in the town that can be developed. I believed that in the not-too-distant future, the only residents of Jericoacoara would be North Americans and Europeans, both as owners of, workers in, and visitors to the new hotels and restaurants.

I recently returned to Jericoacoara and discovered, happily, that my conclusions of ten years ago were wrong. The original residents of Jericoacoara and the surrounding fishing villages, as well as Brazilians from around the country, have found ample opportunity to work in and own businesses, capitalizing on the influx of foreign and domestic visitors. In addition to the hotels and guest houses that line the beach and fill the center of town, there is a new neighborhood full of Brazilian families, who all appear to have a quality of life that would be the envy of millions of residents of Brazil’s biggest cities.

The resort development and environmental preservation in Jericoacoara over the past fifteen years have created pareto optimal results. The unique landscape is protected as a national park, so development cannot destroy the scenic beauty that fuels the town’s tourist industry; the economy of the town has expanded exponentially, creating economic opportunity for locals that were unimaginable a generation ago; international hotel developers have the opportunity to build state-of-the-art hotels in a fantastic location; and tourists can visit a majestic place, stay in comfort, and support a vibrant part of the local, national, and international economy.

The Hospitality Lawg would like to thank Pam Nieto and Matt Hoyt for helping out with this post.  If you have any questions about the new Wage Rule, H-2B visas, or any other immigration-related matter, feel free to contact Pam at 713.646.1372 or Matt at 614.462.2650.

To the delight of the hospitality industry, the Department of Labor published on September 28 a formal notice in the Federal Register announcing its decision to postpone the effective date of its new "Wage Methodology for the Temporary non-Agricultural Employment H-2B Program" until November 30, 2011, from the current effective date of September 30, 2011 (i.e., TODAY).

Why the delay?  Funny you should ask . . .

The new Wage Rule, significantly revising the methodology for calculating the prevailing wages to be paid to H-2B foreign seasonal workers, as well as to U.S. workers recruited in connection with the H-2B workers, was published by DOL on January 19, 2011. The new methodology would have the effect of causing dramatic increases in wages. In recognition of the commitments that employers had made in reliance on the current methodology and to provide employers sufficient time to plan for their labor needs, as well as to minimize the disruption to their operations, DOL delayed implementation of the final rule so that the new prevailing wage methodology would only apply to wages paid for work performed on or after January 1, 2012.

Thereafter, on June 15, 2011, the U.S. District Court for the Eastern District of Pennsylvania, in Comité de Apoyo a Los Trabajadores Agrícolas (CATA), et al., v. Hilda Solis, et al., Civil Action No. 09-240, vacated the January 2012 effective date and ordered DOL to announce a new effective date within 45 days.  After publishing a Notice of Proposed Rulemaking (NPRM) on June 28, 2011 and reviewing comments to the NPRM, DOL published a final rule on August 1, 2011, amending the effective date of the new Wage Rule to all work performed on or after September 30, 2011.

Greatly concerned about the harsh and potentially devastating impact the rule would have on businesses and jobs, on September 7, 2011, the American Hotel & Lodging Association, the Louisiana Forestry Association, Inc., and others filed suit against DOL in the United States District Court for the Western District of Louisiana, Alexandria Division.  The associations argued that the Wage Rule, and the subsequent rule amending the Wage Rule’s original effective date, violate the Takings Clause of the Fifth Amendment to the United States Constitution, the Administrative Procedure Act, the Regulatory Flexibility Act, and the Immigration and Nationality Act.   A similar suit was then filed by another group of trade associations and employers on September 21, 2011, in the United States District Court for the Northern District of Florida, Pensacola Division.

Decision Applauded

In Wednesday’s federal register notice, DOL explains that it is delaying the effective date to November 30, 2011, because of the two pending lawsuits, as well as the possibility that the CATA lawsuit may be transferred to another court. DOL also commented that the delay will allow “time to mount an appropriate defense of the rule,” “for the orderly resolution of the various claims pending in two Federal courts” (including determining the appropriate venue), and for DOL “to avoid the possibility of administering the H-2B program under potentially conflicting court orders.”

Dr. Winslow Sargeant, Chief Counsel for Advocacy for the U.S. Small Business Administration, who has been working with small businesses to address the new Wage Rule, applauded DOL’s decision to delay implementation of the rule and also noted that:

[t]he potential wage increases under the current H-2B structure would price many small businesses out of the marketplace.

The Hospitality Lawg would like to thank Leah Williams for contributing to this post.  Ms. Williams focuses her practice on practice on the defense of employers against claims of wrongful termination and discrimination. Click here to read her full Client Alert - NLRB Provides Guidance Regarding Social Media Sities

The dawn of Social Media presents several issues for the hospitality industry to grapple with.  One that has received significant media attention lately is whether an employer can terminate an employee based upon the employee’s tweets or Facebook posts. But as with other “new” scenarios presented by the Internet, the answer appears to rely on the application of  “old” principles. 

Last month, the NLRB’s Acting General Counsel issued a report on when it is lawful and unlawful to discipline employees for social media activities.  The report focused on a number of advice memorandums.  In the four instances where the employee speech was found to be protected under Section 7 of the National Labor Relations Act, the General Counsel noted that:

• the communications concerned the terms and conditions of employment;
• the subject of the communication was brought to management’s attention or the employee had reason to believe the communication would result in a discussion with management;
• the communications addressed the shared concerns of employees; and
• the communications were directed at coworkers and/or discussed with coworkers.

In the other advice memorandums where it was determined that the employee’s use of social media was not protected activity, the facts demonstrated that the communication was not aimed toward the employee’s coworkers, that the communications did not concern the terms and conditions of employment, and/or that the employee did not try to raise the issue with management or expect that a dialogue with management would result. 

The General Counsel’s report, as well as the September 2 social media-focused post-hearing decision in Hispanics United of Buffalo Inc., send a clear message.  Hospitality employers must tread very carefully in seeking to promulgate policies that regulate the activities of employees on social media sites:

• Certainly, any social media policy which seeks to regulate discussion among employees concerning the workplace or their terms of employment will be deemed unlawful and overbroad by the NLRB to the extent that it regulates protected concerted activity under Section 7 of the NLRA.
• Defenses for disciplining an employee who engages in concerted activity are very limited.  Swear words, insults and even defamation are in most cases insufficient to render the communication unprotected.

These principles are consistent with long-term NLRA precedent that holds that employee conduct must be significantly outside the realm of normal workplace conduct to lose protection.  Accordingly, hospitality companies are advised to consult with legal counsel before implementing employee social media policies.

Last week, the Guardian reported that the UK Advertising Standards Authority had initiated an investigation of TripAdvisor over false online reviews.  The investigation was initiated by an official complaint filed by KwikChex.com, an online reputation management company.  KwikChex reportedly backed up its complaints with months of research on allegedly derogatory and false hotel reviews posted on TripAdvisor websites.  According to the ASA statement:

KwikChex has challenged whether the claims “Reviews you can trust”, “...read reviews from real travellers”, “TripAdvisor offers trusted advice from real travellers” and “More than 50 million honest travel reviews and opinions from real travellers around the world” are misleading and cannot be substantiated, because they believe that TripAdvisor does not verify the reviews on their website and therefore cannot prove that the reviews are genuine or from real travellers. 

So What Is the Advertising Standards Authority?

The ASA is charged with overseeing compliance with the UK’s CAP Code, a set of rules for advertisements created by the Committee of Advertising Practice, a self-regulatory body.  If someone believes an ad is misleading, offensive or makes an unsubstantiated claim, he/she can complain to the ASA. If the ASA believes the complaint is credible, the ASA can alert media organizations so that advertising space is denied or, if laws have been broken, refer the complaint to the Office of Fair Trading.

Until recently, the CAP Code was limited in application to ads in print, posters and emails, text messages and marketing communications in “paid-for-space” (i.e., banner ads and pay-per-click ads).  But in March of this year, the scope of the code was expanded to include ads and other marketing communications by companies on their own websites or on social networking websites “that are directly connected with the supply or transfer of” goods and services.  Not surprisingly, the extension resulted in a “significant” increase in workload.      

For a (possibly) humorous example on the extent of the ASA’s authority, check out this story.     

Right Idea, But Wrong Question? 

The quality of information at user-review websites such as TripAdvisor has been questioned for some time.  Just last month, Cornell announced that it had created a software program that could sniff out bogus positive hotel reviews – or what the researchers termed “opinion spam.”  Ten days later, David Streitfeld of the the New York Times wrote a mini-expose on “review factories” – companies that hire people to write positive reviews for $10 each.  As a consequence, Mr. Streitfeld reported that “the average of the 50 million reviews [on TripAdvisor] is 3.7 stars out of 5, bordering on exceptional but typical of review sites.”         

That apparent positive bias notwithstanding, KwikChex appears solely focused on proving that TripAdvisor posts false negative reviews.  A year ago, KwikChex announced that it was attempting to rally hoteliers behind a class action against TripAdvisor to fight reviews it termed “untrue and damaging to their business, or legally unsubstantiated.”   And now, in addition to the ASA, Kwikchex is trying to get both the FBI and FTC to investigate TripAdvisor’s “misrepresentation, misleading statements and unlawful practices of advertising using reviews where no substantiation is available and from a source where fraudulent reviews are known to be posted.”

We first blogged about the EB-5 Program (a/k/a "The Million Dollar Green Card") back in February.  Since then, we have noticed that law firms are producing an abundance of EB-5 primers and articles.  A quick search of Lexology shows that there have been 6 new articles in just the first 15 days of August.

After reviewing some, there seems to be one central fact that doesn't get discussed.  We included only a passing reference in our blog post.

The program sunsets in September 30, 2012.

We don't mention this with the intent of discouraging a hospitality developer from looking into the EB-5 program. It has always been subject to a sunset date since its inception in 1993.  As is obvious, that sunset has been continually extended, the last time by President Obama in 2009.  

However, we do think the current sunset date is relevant from a planning perspective.  Luckily, the program has a champion in Senator Leahy (D-VT).  He authored SB 642 with the intent of eliminating the sunset provision and making the program permanent.  In introducing the bill, Sen. Leahy made a good case as to why the sunset provision should be eliminated:

Mr. President, today I am introducing the Creating American Jobs Through Foreign Capital Investment Act. This bill does one simple thing: It makes the EB-5 regional center program permanent. The EB-5 Regional Center Program has been highly successful since its inception in 1992, but it has always lacked the security of assured continuity. Extending the program by a few years at a time hampers the growth of the program and creates a disincentive for immigrant investors to bring their capital investments to the United States.  

The Hospitality Lawg would like to thank Matt Hoyt and Pam Nieto for helping out with this post.  If you have any questions about E-Verify, the I-9 form, or any other immigration-related matter, feel free to contact Matt at 614.462.2650 or Pam at 713.646.1372.

First there was the Immigration Reform and Control Act of 1986 (“IRCA”), which mandated that all U.S. employers complete a Form I-9 and review documents provided by the employee within three days of hire.  Eleven years later, the system now known as “E-Verify” was created to allow participating employers to confirm an individual’s employment eligibility electronically – and often instantaneously - by entering data gathered during the I-9 process.

Up until recently, participation in E-Verify was almost universally voluntary.  However, that began to change when the Arizona legislature passed its controversial law that in part required all employers in that state to screen new hires through E-Verify.  After the Arizona statute was upheld by the United States Supreme Court earlier this summer, several states and even some municipalities have considered, and in some cases passed, similar requirements that would mandate the use of E-verify and significantly penalize the employment of unauthorized workers.

Now comes the Legal Workforce Act (H.R. 2164), a bill sponsored by House Judiciary Committee Chairman Lamar Smith.  This bill would (among other things):

• Mandate the universal use of a new Employment Eligibility Verification System ("EEVS") for new hires through a “gradual phase-in.”  Businesses having more than 10,000 employees would be required to use EEVS within six months of the bill’s enactment.  After that, a new group of employers would be required to use EEVS every six months, with businesses having 1 to 19 employees coming under the obligation at the second anniversary of the enactment.
• Generally preempt state laws mandating EEVS use for employment eligibility purposes.  However, states and localities could continue to condition business licenses on the requirement that the employer use EEVS. 
• Create a safe harbor for employers.  Generally, employers would be protected from prosecution if they use EEVS in good faith, and through no fault of their own, receive an incorrect eligibility confirmation.
• Increase (between 2 and 10 times) fine amounts, with a possible waiver or reduction for violators who establish that they acted in good faith.
• Create a rebuttable presumption of having knowingly hired (or recruited or referred for a fee) an unauthorized alien if the alien remains employed after a final non-verification is issued by EEVS.    

As would probably be expected, while the bill has its supporters, there are some who argue that the bill isn’t tough enough, and others who strongly oppose the legislation arguing, in part, that it would materially harm the U.S. economy.

While the hospitality industry has previously been concerned with the labor cost implications of mandatory E-Verify participation, that position may be changing with the emergence of patchwork regulation.  As stated by a National Restaurant Association representative during his testimony before a House Judiciary Subcommittee:   

The National Restaurant Association believes that designing an employment authorization verification system is a federal role. Actions by 50 different states and numerous local governments in passing employment verification laws create an untenable system for employers and their prospective employees. . . .  [N]otwithstanding the few clarifications and minor changes needed, the Legal Workforce Act reaches the right balance with a system that is both fast and workable for businesses of every size under practical real world working conditions.

While it is completely understandable that employers who operate in more than one state would prefer one uniform national verification system over the incredible burden of complying with differing state requirements, bringing all employers and job seekers into the fold within two years will be an enormous and expensive undertaking for the federal government and for businesses.  Also, implementing a nationwide program without first addressing the underlying flaws in our immigration system that allowed the number of unauthorized workers to climb into the millions will only serve to exacerbate the predicament.

We would like to thank our friends and clients who responded to the most recent Chambers survey.  For those not familiar with Chambers, its intensive and unbiased survey methods make it the most respected legal directory available.   

Based on the strength of comments Chambers received, Baker Hostetler was, for the 4th year in a row, recognized as having one of the country’s strongest hospitality law practices.  Most impressively, we were one of only three firms recognized for excellent client service and keen commercial awareness.  As stated by some survey respondents:       

They have our interests at heart

Their focus is bringing all the parts together

We would also like to congratulate Rob Webb and John Melicharek as Chambers made special note of their exceptional skills.  Rob was highly recommended by peers as an acknowledged expert in timeshare-related matters.  As for John, Chambers quoted one survey respondent as follows:

He understands that it's not just about the fundamentals, there's business implications as well. He finds ways to get a deal done, and he also has a very good sense as to which issues are important and which aren't, and that saves us time.

Overall, Chambers recognized Baker Hostetler in 14 different practice areas:

• Bankruptcy/Restructuring
• Construction
• Corporate/M&A
• Corporate/M&A & Private Equity
• Employee Benefits & Executive Compensation
• Healthcare
• Intellectual Property
• Labor & Employment
• Leisure & Hospitality
• Litigation: General Commercial
• Natural Resources & Environment
• Real Estate
• Tax
• Zoning & Land Use

The Hospitality Lawg would like to thank Deborah Wilcox for submitting this post.  Deborah coordinates our Cleveland IP/Tech/Media practice and manages legal issues associated with online advertising for Baker Hostetler's clients.

The Internet Corporation for Assigned Names and Numbers (ICANN) recently approved the launch of the new top level domain (gTLD) program.  Existing organizations can apply to own and run registries for new top level extensions.  These new “dotcoms” may be based on a brand (“.bakerhostetler”), a generic term (“.law”) or a  geographic term (“.miami”).   ICANN expects to release hundreds of gTLDs in the near term and likely thousands in future roll-outs not yet specifically scheduled.

Application Window

The three-month application window is scheduled to open on January 12, 2012, and will close on April 12, 2012.

If you are interested in potentially applying for ownership of a new gTLD, you should review the ICANN Applicant Guidebook now and consult with your strategists, including marketing personnel, IT specialists and legal counsel to plan accordingly.

Community-Based gTLD

Hospitality companies could collaborate and create an industry-specific domain name registry.  In addition to a “.brand” or “.generic”  gTLD application, organizations can apply for a Community-based gTLD, which must be operated for the benefit of a clearly defined community. The Community-based gTLDs are subject to additional application requirements, but will have the benefit of priority over other applications for the same or similar strings.  Cooperation by hospitality companies on a Community-based gTLD could benefit the companies who collaborate by reducing the costs of dispute resolution or string contention at later stages of the application process.

Applying for a gTLD

The application will require you to provide general information about your company or organization, as well as information regarding its financial, technical, and operational capacity to run a domain registry.  Applications for community status must include a community endorsement.  Applications for a geographic gTLD string must include a statement of government support or non-objection.

The application fee for a single gTLD is $185,000. Prior to accessing the full application, applicants must register with the TLD Application System and pay a $5,000 deposit. Partial refunds of the application fee are available at various stages of the application process. These fees do not include the internal costs of preparing and submitting the application materials, the potential costs of a successful auction bid in the event that there are multiple applications for the same string, or the cost of establishing and operating the registry if the application is approved.

The Hospitality Lawg thanks Daniel Kavouras for his help in putting this post together. 

Earlier this month, we worked with Deb Wilcox to alert hospitality companies about their ability to “prerequest” specific .xxx domain names so they could get a jump on the defensive registration process.

If you took our advice, you likely already know that the ICM Registry has recently published its final .XXX Launch Overview.  If you didn’t preregister, or you just haven’t had time to review the launch process, we have summarized some of the highlights below.  For more detailed information, take a look at the FAQs published by ICM.

• Both Sunrise A and Sunrise B will run concurrently for 30 days beginning on September 7^th.  Previously, the ICM Registry planned on opening Sunrise B after Sunrise A concluded.
• Sunrise B is aimed at “non-members of the Sponsored Community,” or most hospitality companies.  Sunrise A is aimed at those who provide sexually-orientated content. 
• During Sunrise B, owners of nationally registered trademarks will be able to apply for a .xxx domain name and secure the right to prevent others (i.e., a porn operator) from operating a site with a domain name that corresponds to the protected trademark.
• To be eligible for the Sunrise registration, the registered trademark (i) must have been issued prior to the submission of the Sunrise application, (ii) in a jurisdiction where the applicant conducts “substantial bona fide commerce” in connection with the mark, and (iii) must be an exact match to the .xxx domain.  If a trademark holder wishes to reserve more than one .xxx domain name, a separate application must be submitted for each.    
• Hospitality companies that participated in the pre-registration process still must file a Sunrise application, but will receive priority over subsequent applicants.
• If a Sunrise B application is successful, the registered domain name will be designated “reserved – trademark” and will not be available for registration during the subsequent “Landmark” or “General Availability” periods. The domain name will simply redirect to a standard informational page indicating that the domain is not available.
• In the event of a conflict between Sunrise A and Sunrise B applicants, both parties will be notified of the conflict and the Sunrise A applicant will have the opportunity to withdraw its application.  If both parties elect to proceed with their applications, the registration of the domain name to the Sunrise A applicant will continue but the Sunrise A applicant will not be able to claim lack of notice in any subsequent dispute proceeding.

Failure to follow the Sunrise process won’t block trademark owners from recovering .XXX domain names through existing anti-cybersquatting mechanisms, such as UDRP complaints.  But that process is likely to be much more expensive than the Sunrise B protocol.  It could also prove to be highly embarrassing given the content the cybersquatter may chose to associate with your brand. 

Salameh v. Tarsadia Hotels documents yet another instance of buyers' remorse.  Like most “condo-hotel units are securities" litigation, the plaintiffs in this case were looking to discredit the developer's sales practices and operational model as a means of rescinding their unit purchases.  And like many other similar claims, the plaintiffs’ claims didn’t survive a motion to dismiss. 

Strike One

In Tarsadia Hotels, the U.S. District Court for the Southern District of California in August 2010 dismissed (without prejudice) plaintiffs’ federal securities law claims as articulated in their first amended complaint.  Focusing on the second and third elements of the Howey Test, the court stated that:

Plaintiffs have failed to allege a common enterprise, and their allegations as to their expectation of profits produced by the efforts of others are conclusory.

Strike Two

After reviewing plaintiffs’ second amended complaint, the court made special note of the 8 to 10 month gap between the plaintiffs’ execution of the purchase agreements and the rental management agreements, as well as the plaintiffs’ representations in the purchase agreement that there was no investment intent.   In light of these facts, the court determined that plaintiffs could not credibly allege the existence of a single “investment contract” or the necessary expectation of profit from their “investment” in the condo-hotel units.  As a consequence, the court dismissed the second amended complaint with prejudice and denied leave to amend. 

Is A Third Strike Really Necessary? 

With the bat taken out of their hands, plaintiffs are appealing the court’s order to dismiss.  Reportedly, plaintiffs are also attempting to enlist the support of the SEC in their appeal.

You would have to wonder why plaintiffs are bothering.  As mentioned above, plaintiffs were on notice that the second amended complaint would have to substitute conclusory allegations with facts that credibly supported a securities claim.  However, this single paragraph is about the best plaintiffs could do:

[The declaration] provided that plaintiffs could only rent their unit under a program operated by the Hotel Owner or “any third party approved by the Hotel Owner.” The plaintiff unit owner is required to provide written notice to the Master Association of the unit owner’s intention to permit occupancy of the owner’s unit room.  [The maintenance agreement] provide that the unit owner was required to pay the Hotel Owner a service fee at initial rates of $90 per day for a studio, $125 per day for a one-bed-room suite and $150 per day for a Rock Star Suite. . . . The imposition of service charges by defendants, together with the other provisions in the applicable agreement, rendered the option of owners renting out their own units financially infeasible. 

For reasons not immediately evident, plaintiffs do not discuss what qualifications were required of rental managers, or even mention whether there were any other approved third-party rental managers.  Likewise, there is no explanation as to why a $90-$150 housekeeping charge would make independent rental untenable. 

Compare this to the securities claims in Trump SoHo, another condo-hotel project with owner occupancy limited by zoning provisions.  There plaintiffs spend nine paragraphs building the argument that the relevant economics render illusory the choice between Trump Hotels and the one other rental manager approved at Trump SoHo.   While we are still waiting for the Trump SoHo court to rule on the developers’ motion to dismiss, that judge at least may have something to chew on.     

Back in January, we wrote a post about Henry Gifford and his $100M lawsuit against the U.S. Green Building Council.  Gifford claimed that the USGBC was using the results of a National Building Institute study to mislead the public about the benefits of LEED certification.  Some support for Gifford’s claims can be found in a National Research Council Canada reanalysis of the NBI study, which found that 28-35% of LEED certified buildings were actually less energy efficient, and that the measured energy performance of LEED buildings had little correlation with the LEED certification level.

Since then, the lawsuit has undergone the procedural slow dance typical in litigation:

• Gifford amended his claim, naming 3 new individual plaintiffs and refining the focus on federal and state false advertising claims.  The original complaint was attempting to proceed as a class action and included claims based on the Sherman Antitrust Act and RICO.  However, Gifford continues to seek injunctive relief that would compel the USGBC to “disclose the actual energy use of LEED properties.”    
• The USGBC filed a motion to dismiss, claiming that: (a) Gifford lacks standing to bring the lawsuit; and (b) the USGBC was entitled to accurately report the conclusions of the NBI Study.
• Gifford filed an opposition to the motion to dismiss, arguing that he has standing as a competitor in the “market for energy efficient building expertise.”  Gifford also argued that, to be anything but misleading, the USGBC would have to qualify the results of the NBI Study with something along the following lines (which we bet the USGBC opposes):     

By comparing new LEED buildings to older non-LEED buildings, and by comparing the median average of one dataset to the mean average of another dataset, and by carving out a sample of only 22 percent of all the LEED-certified buildings, we arrived at the conclusion that LEED-certified buildings perform better than non-LEED buildings in terms of energy use.

While this back-and-forth is interesting, a much more practical “green” event took place in mid-February when ASTM International released its Building Energy Performance Assessment (BEPA) Standard – E2797-11.  According to ATSM, this standard provides a “methodology . . . for the collection, compilation, analysis and reporting of building energy performance information.”   Further, it can “enhance the integrity of the benchmarking process for all transactional stakeholders in a standardized, uniform and consistent manner.” You can purchase this new standard from ASTM here.   

Bottom Line – Hospitality developers and those looking to purchase hospitality assets should familiarize themselves with the energy use and cost data being produced under the new BEPA standard.  To borrow from a favorite phrase of both Lenin and Reagan, while you can trust the LEED credentials, you should verify.

Hospitality companies rely on their employees to deliver on a “brand promise” in servicing their customers.  Disputes with customers or employees can seriously undermine the integrity of that promise.  Fortunately, the U.S. Supreme Court’s decision in AT&T Mobility LLC v. Concepcion appears to enhance the value of arbitration as a means of efficiently and cost-effectively bringing such disputes to resolution.   

Brief Overview of Decision

The Concepcions, customers of AT&T Mobility LLC, brought suit after they were charged sales tax on a phone that had been advertised as “free” with the purchase of an AT&T service plan. The service contract included an arbitration agreement requiring that claims be brought in the parties’ “individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding.”  When AT&T moved to compel arbitration, the Concepcions successfully had the class waiver provision declared invalid under the “Discover Bank Rule,” a California rule holding that class action waiver provisions were unconscionable and in violation of the state’s public policy against exculpation. AT&T appealed, and the Ninth Circuit affirmed.

In a 5-4 decision, the Supreme Court reversed. Justice Scalia, writing for the majority, held that the Discover Bank Rule conflicted with, and therefore was preempted by, the Federal Arbitration Act (“FAA”).  The FAA states that an agreement to settle disputes through arbitration “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”  Because it is a “fundamental principle that arbitration is a matter of contract,” then “courts must place arbitration agreements on an equal footing with other contracts, and enforce them according to their terms.”  The Discover Bank Rule “interferes with fundamental attributes of arbitration and thus creates a scheme inconsistent with the FAA.”

Those interested in a more complete discussion of the facts of this case should see the Client Alert published by Baker Hostetler’s Employment Team.   

What’s Next?

Concepcion is one of those decisions that is certain to cause legal reverberations for months if not years.   As reported at the Employment Class Action Blog, Senator Al Franken (D-Minn) has already re-introduced the “Arbitration Fairness Act of 2011”, which would forbid pre-dispute mandatory arbitration agreements in employment, consumer and civil rights disputes.  In addition, the Consumer Financial Protection Bureau (CFPB) has the authority to impose limitations on the use of mandatory arbitration agreements and prohibit the use of certain types of provisions entirely if it finds that it is “in the public interest and for the protection of consumers” to do so. 

State and federal courts will also have ample opportunity to shape the impact of Concepcion.  In fact, the Supreme Court has already granted certiorari in Compucredit Corp. v. Greenwood, in which the Ninth Circuit held that an arbitration agreement could not be enforced because plaintiffs' right to sue in court could not be waived under the federal Credit Repair Organization Act.  In fleshing out the contours of Concepcion, we would not be surprised if courts consider one or more of the following: 

• As pointed out by my partner Paul Karlsgodt at the Class Action Blawg, Justice Scalia’s majority opinion goes beyond the question originally presented for review, which was whether the FAA pre-empts state law “when [class action] procedures are not necessary to ensure that the parties to the arbitration agreement are able to vindicate their claims.” 
• In casting what turned out to be the deciding vote, Justice Thomas wrote in his concurrence that he “reluctantly join[ed] the Court’s opinion,” because his reading of the FAA would require that “an agreement to arbitrate be enforced unless a party successfully challenges the formation of the arbitration agreement, such as by proving fraud or duress.”
• Justice Breyer’s dissenting opinion asserted that the Court’s decision violated principles of federalism.  Specifically, California law set forth certain circumstances under which class action waivers in any contract, not just arbitration agreements, were unenforceable. As a consequence, Justice Breyer argued that California’s policy against class action waivers was expressly permitted by the FAA. 

What To Do Now?

Arbitration can benefit hospitality companies because consumer/employee disputes typically are heard more quickly, involve less discovery, and are more likely to provide privacy and confidentiality.  However, real world experience clearly demonstrates that arbitration is not a risk-free proposition.  Class arbitration in particular eliminates many of the advantages that are supposed to be inherent in arbitration.  

As the holding in Concepcion significantly alters the playing field, hospitality companies should reevaluate their arbitration provisions or, as applicable, their reasons for not incorporating arbitration provisions in both their customer and employee agreements.  Before adopting any change, however, hospitality companies should understand that the Supreme Court’s decision rested to some degree on its finding that the AT&T arbitration contract was extremely fair to the consumer.  Among other terms cited by the Supreme Court:

• AT&T was required to pay all costs for non-frivolous claims;
• The arbitration was to take place in the county in which the customer is billed;
• For claims of $10,000 or less, the customer was allowed to choose whether the arbitration proceeded in person or by telephone, or was based only on submissions;
• Either party was permitted to bring a claim in small claims court in lieu of arbitration;
• The arbitrator was permitted to award any form of individual relief, including injunctions and presumably punitive damages;
• AT&T could not recover any attorney’s fees; and
• If the customer received an award greater than AT&T’s last written settlement offer, AT&T would be required to pay a $7,500 minimum recovery and twice the amount of the customer’s attorney’s fees.

Last week, the business news was dominated by the results of the Galleon hedge fund insider trading case. But the federal government had another big win during that same news cycle.  On May 10, Lindsey Manufacturing became the first company to be tried and convicted on Foreign Corrupt Practices Act violations.  Notably, the District Court adopted the DOJ's broad definition of the term "foreign official" and concluded that a bribe paid to a state-owned enterprise or its employees could violate the FCPA.  Full details of the Lindsey Manufacturing case can be found here.  

Ominously, the Department of Justice press release declared that Lindsey Manufacturing "will not be the last" company convicted under the FCPA.  That declaration follows on from comments by Assistant Attorney General Lanny Breuer that:

From now on, would-be violators of the Foreign Corrupt Practices Act should stop and ponder whether the person they are trying to bribe might really be a federal agent.

Those comments followed a successful “first of its kind” undercover sting operation wherein FBI agents posed as representatives of an African Minister of Defense who were willing to take bribes to divert lucrative military and law enforcement contracts.  The investigation netted 16 indictments against officers and employees of U.S. and international companies and the arrest of 21 individuals at a convention in Las Vegas.  In connection with the indictments, approximately 150 FBI agents executed 14 search warrants in locations across the United States.  

Hotel and other hospitality companies should take notice of these FCPA enforcement actions as they rapidly expand their footprints into Asia, Brazil and other foreign business and leisure destinations.  As reported in the Wall Street Journal, at least one hospitality company - the Las Vegas Sands Corp. - is being investigated by the SEC and the DOJ based upon complaints made by a former executive.

Given the DOJ's obvious interest in FCPA enforcement, John Carney and George Stamboulidis of the Baker Hostetler FCPA Practice Team encourage hospitality companies to implement meaningful and effective FCPA compliance protocols that will allow for the prevention and detection of FCPA violations:

• Internally, companies should establish FCPA reporting mechanisms, anti-bribery standards for employees at all levels, annual training, record retention policies with periodic vetting, accounting procedures that ensure accurate record keeping, and, at larger companies, FCPA compliance chiefs or committees that report directly to the board.
• As Lindsey Manufacturing highlights, the actions of agents and third parties can have dire consequences, whether those actions are known or unknown by the company.  Companies should accordingly maintain internal controls over agents and third parties, including checking references, identifying all owners or partners of an agent's business, carefully reviewing contract terms and reserving audit and termination rights, requiring agents to certify that they understand the FCPA and will abide by its terms, and requiring well-connected agents to disavow in writing any attempt to use their connections in a corrupt fashion.
• If a company discovers a possible FCPA violation, it should commission an internal investigation conducted by experienced FCPA outside counsel, terminate the employees or agents who committed the violation, and consider reporting the violation to the DOJ.   

A number of developments have occurred in the battle between online travel companies (OTCs) and state and local taxing authorities over liability for sales and accommodation taxes since our prior post from back in February.

Court Developments

As we reported previously, the results of litigation present a mixed bag.  On March 4^th, a Maryland District Court judge denied the OTCs’ motion to dismiss in a matter involving the hotel occupancy tax ordinance of Baltimore County, Maryland which was amended in 2003 as the ordinance was found to cover the OTCs. This matter is still pending trial.  Washington, DC filed suit against the OTCs on March 22nd seeking to recoup sales taxes that the city believes are owed from the sale of rooms located there.  An Oklahoma District Court ruled in favor of the OTCs on March 11^th when it found that the applicable tax statute did not cover the internet-based services of the OTCs.  On March 16^th, a California Superior Court judge held that the City of Santa Monica's transient occupancy tax ordinance was not applicable to OTCs given the language in the ordinance, and therefore the OTCs were not liable for the $3.5 million in back taxes and penalties assessed by the city.  Finally, on March 24^th, an Alabama Circuit Court granted the OTCs motion for summary judgment finding that the OTCs are not engaged in the business of renting rooms or lodgings or furnish accommodations to transients and are therefore not subject to payment of lodgings tax.

Legislative Developments

In a surprising move given the current condition of Florida’s economy, two bills (SB 376 and HB 493) currently under consideration by the Florida Legislature would specifically limit the amount subject to Florida’s transient occupancy taxes to the "wholesale amount" paid by the OTCs to the hotels for the rooms that they resell and not subject the entire amount received by the OTCs from the end consumers for the rooms to these taxes.

Thank you to Beatrice Larkin for her assistance with this posting.

There has been significant publicity surrounding the security breach at an email marketing company.  This is rightfully so, given the scope of the breach and the hospitality brands impacted.  However, those looking to avoid security breaches may gain more from reviewing the details of the security breach at the Briar Group restaurants.  As detailed in the March 28 settlement with the State of Massachusetts, the breach (which apparently had a duration of almost 8 months) occured due to mundane management errors, such as the failure to change default user names and passwords and otherwise secure remote access utilities and wireless networks.  You can read more about the Briar Group's experience at the Data Privacy Monitor.     

Back in February, we worked with The Data Privacy Monitor on a post explaining that there is more to data security than just compliance with the Payment Card Industry Data Security Standards (PCI-DSS).  In mid-March, the three major hotel industry associations - the American Hotel & Lodging Association, Hotel Technology Next Generation, and Hospitality Financial and Technology Professionals - issued a joint statement to hotels sending the same message:

Many hoteliers believe they are not vulnerable because they use Point-of-Sale and Property Management Systems that have been validated as conforming to the latest PCI security standards.  Unfortunately this is far from the case.  Even such validated systems can be vulnerable if the hotel operates them in an unsecured manner.  Leading forensics firms agree that the most important security measures are those that keep cyber criminals from getting inside the hotel network in the first place.  Once inside, there are many ways for them to steal the data, even if the PMS or POS system itself is secure.

Those who read our post would be familiar with the statement's recommendations.  However, they bear repeating as the  Verizon-Secret Service 2010 Data Breach Investigations Report indicates that 96% of data security breaches would have been stopped by taking these essential steps.

1. Have your IT Manager or network consultant map out your network electronically, and then eliminate all default passwords from all devices.  This should be done at all access points, even the PC in the parking garage attendant’s office.  Amazingly, Verizon Business reported that, in 53% of newsworthy attacks investigated in 2009, data thieves gained entry into the network by guessing, correctly, that the network's default password was - wait for it - "password."
2. Eliminate holes in remote access to systems inside your network.  Remote access by vendors is an essential part of support for many hotel systems.  The data thieves know this, and they know how to use it to get inside your network.  They know all the default passwords, and they have even been known to steal master customer lists, complete with current passwords, from vendors.
3. Use an Internet firewall.  If you are connected to the Internet without a firewall, then people you don’t know are probably reaching into your network. A 2007 University of Maryland study counted more than 2,200 attacks on an average Internet-connected computer every day – equating to one every 39 seconds.  

Back in November, Craig Karmin of the Wall Street Journal reported that the developers of Trump SoHo were offering disgruntled condo buyers up to half their deposits back, on the condition that they not join the lawsuit alleging, among other things, that the Trump SoHo developers violated securities laws in the marketing of the project.  Not much since then has been reported about the Trump SoHo litigation.  That isn't unusual, as the case is still in its early stages and the parties are trading legal briefs over the developers’ motion to dismiss some, if not all, of the condo buyers' claims.

But that doesn’t mean that the legal arguments aren’t shaping up to be interesting . . .

The Plaintiffs’ Securities Law Claims

Conforming to the condo-tel litigation playbook, Plaintiffs allege that the Trump SoHo was marketed to purchasers with an emphasis on financial return.  But Plaintiffs also cite to the provisions in the Trump SoHo Declaration limiting owner occupancy of the Trump SoHo units to a maximum of 120 days per year.  When not owner-occupied, the declaration requires the unit to be made available for rental as a hotel room at rates established by Trump International Hotels Management LLC (“Trump Hotels”).  In addition, the unit can only be rented by Trump Hotels or one of five rental agents approved by the developer-controlled Condominium Board.  At the time the lawsuit was filed, the developers had only approved a single rental agent other than Trump Hotels, and the Plaintiffs allege that there are “strong” financial disincentives for choosing that alternate rental agent. 

Back in 1973, the SEC published its “Guidelines as to the Applicability of the Federal Securities Laws to Offers and Sales of Condominiums or Units in a Real Estate Development.”  That guidance relied heavily on the 1946 case SEC v. W.J. Howey, in which the U.S. Supreme Court defined an “investment contract” as a “contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or third party.”   Based on that decision, the SEC advised that: 

[C]ondominium units may be offered with a contract or agreement that places restrictions, such as required use of an exclusive rental agent or limitations on the period of time the owner may occupy the unit, on the purchaser’s occupancy or rental of the property purchased.  Such restrictions suggest that the purchaser is in fact investing in a business enterprise, the return of which will be substantially dependent on the success of the managerial efforts of other persons.  In such cases, securities registration of the resulting investment contract would be required.

Arguing that the developers have structured the rental program to “virtually ensure that all unit owners will use Trump Hotels to rent and manage their units,” Plaintiffs allege that the Trump SoHo unit purchase agreements are investment contracts – and thus securities – required to be registered with the SEC. 

The Developers' Response

In their motion to dismiss, the developers have seized on what they argue to be a conflict between the law of the Second Circuit and the SEC Condominium Guidelines regarding the meaning of “common enterprise.”  In short, the developers allege that the SEC’s position incorporates a “broad vertical commonality” test in which a plaintiff can prove a "common enterprise" by simply showing a “link between the fortunes of the purchasers and the efforts of the promoter.”  But in 1994 the Second Circuit explicitly rejected that reasoning in Revak v. SEC Realty Corp., holding that such an approach essentially eliminates the need to demonstrate a common enterprise under Howey.  As the SEC guidelines “lack the force of law and do not warrant deference,” the developers are urging the trial court to abide by Revak and dismiss the Plaintiffs’ securities law claims.

The Outcome?

We would be surprised if the trial court dismissed the Plaintiffs’ fact intensive allegations at this point in the litigation.  But two points bear mentioning:

• New York state courts have endorsed the broad vertical commonality test.  As such, even if the federal court dismissed the Plaintiffs’ federal securities law claims, the Plaintiffs may still have a securities law claim under New York’s Martin Act.
• The Revak court analyzed the facts of that case under the SEC guidelines, but wasn’t compelled to opine as to the SEC’s construction of “common enterprise” as the plaintiffs in Revak did not argue that the purchase of real estate was in any way conditioned upon participation in a rental arrangement. 

We teamed up with Craig Hoffman at our sister blog, The Data Privacy Monitor, on this entry to help demonstrate Baker Hostetler's depth of expertise on all things hospitality.  If you want more information on PCI-DSS compliance, developments in online privacy, or an overview of recent data protection developments, please make sure to visit The Data Privacy Monitor.   

It should no longer come as a surprise that the hotel and food and beverage industries are favorite targets of hackers.  Indeed, some commentators have suggested that hackers view the hospitality industry as low-hanging fruit.  The 2011 Global Security Report released by Trustwave’s SpiderLabs shows that 67% of the data breach incidents Trustwave investigated in 2010 were from the food and beverage (57%) and hotel (10%) industries.  According to the Verizon-Secret Service 2010 Data Breach Investigations Report, the hospitality industry joined financial services and retail as part of the “Big Three” of industries affected by data breaches.

While a reduction of breaches within the hospitality industry was observed from the prior year, hospitality businesses should remain on high alert. At this time, it appears that the organized crime group responsible for the majority of hospitality breaches in 2009 expanded their target list. Instead of focusing exclusively on the hospitality industry, this group became active within the food and beverage and retail markets as well.”  2011 Trustwave Global Security Report

The factors that make the hospitality industry particularly vulnerable to hackers include: 

1. the use of vulnerable point-of-sale devices (“POS”) and wireless networks
2. the difficulty of enforcing compliance with the Payment Card Industry Data Security Standard (“PCI DSS”) in a franchise network where franchisees all use a centralized payment processing network
3. the volume of card transactions
4. the retention of card data for reservations and other personal information for use in loyalty programs 

Complying with PCI DSS is the right initial step toward protecting credit card data.    But compliance alone is not a guarantee against a breach.  Passing a PCI assessment only means your company was PCI DSS compliant on that date.  Indeed, 21% of the breached entities investigated by Verizon in 2010 had been validated as PCI DSS compliant during their last assessment.  Rather, companies must be committed to actively maintaining the security of their system on an ongoing basis.  Common best practice recommendations for the unique challenges facing the hospitality industry include:

• Restrict physical access to confidential information and adopt new encryption and/or tokenization technologies designed to render data useless to unauthorized persons, in addition to only storing encrypted payment card data in a centralized vault;
• Use complex passwords (not vendor-supplied default passwords) for all access to payment applications, including POS and wireless access; install and update anti-virus and anti-spyware software; regularly scan for malicious software; and set appropriate firewall rules; and
• Educate employees and franchisees on the company’s data security practices, and require franchisees to comply.

The PCI Security Standards Council published version 3.0 of the PIN Transaction Security (PTS) Point of Interaction (POI) security requirements in May 2010.  The updated standard and detailed listing of approved devices are available on the Council’s website.  The Council’s website also contains a list of Validated Payment Applications.

The Spinoff

Under a plan announced Monday, Marriott International will spin off its timeshare business to its existing shareholders.  The deal, which is expected to happen by the end of the year, has the potential to create one of the world's largest standalone timeshare businesses, with around 71 properties, 33,000 rooms, 400,000 owners and $1.5 billion in unsold assets.  On Monday, Marriott reported that its timeshare business had $1.2 billion in revenue in 2010, roughly 10 percent of the company's total revenue.

In a YouTube post, Bill Marriott called the deal a "win-win" that would:

• allow faster growth in the timeshare operations under both the Marriott and Ritz-Carlton names;
• result in no changes in the branding or quality of the properties, services, usage options, use of Marriott Rewards points, or access to Marriott International’s hotels;
• be led by Stephen Weisz and William Shaw as CEO and Chairman, respectively.  Weisz has been president of Marriott’s timeshare business since 1997 and is a 39-year Marriott veteran.  Shaw had been vice chairman of the company.   

The Marriott family will maintain a 21 percent ownership in both companies.  The deal will reportedly not require shareholder approval, but is subject to some basic conditions, including the receipt of normal and customary regulatory approvals, the execution of inter-company agreements, receipt of a favorable ruling from the Internal Revenue Service, arrangement of adequate financing facilities, and final approval by Marriott International’s board of directors.

The Consequences

Analysts are already considering how Marriott's action will play out.  Wall Street Journal reporters Alexander Berzon and Kris Hudson quoted Robert LaFleur of Hudson Securities as saying:

Once you have this [spinoff] on a standalone basis, the world will tell us what a timeshare company is worth.  We don't have a pure timeshare company of this scale.

Rob Webb of Baker Hostetler had this to say:

This is a shrewd move by Marriott to jump-start the recovery of a major business unit that is temporarily diminished.  I have no doubt that it will succeed and that [Marriott's timeshare division] will hold its leadership role in the greater hospitality industry.    

In general, the shared ownership industry has been in transition as a result of the current economic climate.  The transition includes the high profile acquisition of ILX Resorts to be combined with Diamond Resorts International and the acqusition of Silverleaf Resorts by Cerberus Capital Management.   

I was at the Americas Lodging Investment Summit in San Diego a couple weeks ago. ALIS is the lodging industry’s first major investment conference of the year and is typically a good indicator of the mood and concerns of many owners, operators and lenders.

Two years ago, the feeling at ALIS was gloomy, perhaps bordering on panic. Last year, many attendees and panelists cautiously expressed opinions that the worst of the industry depression was over, but were unwilling to go so far as to say an upswing was in motion. This year, many top industry executives and consultants were boldly predicting that 2011 is going to be known as a year of strong recovery.

The overall vibe I felt from most attendees was that while occupancy and rate performance should continue to improve, questions remain on how robust the transactions market will be and when new development will begin to return. While the last two years were obviously difficult for the hospitality industry, most owners and operators with whom I spoke finally feel optimistic about the year ahead. While none are predicting the type of prosperity and deal activity of 2005-2007, many believe that 2011 will be an interesting year filled with opportunity in nearly every segment and every market that has seen gradual but consistent upturns in the past six to nine months.

Many at the conference expect that most of the activity will be forced sales as owners give up or fail in their attempts to keep trouble properties afloat. There is also expected to be an uptick in sales as the result of REITs, institutional investors and investment funds needing to place the cash that they have raised over the past year or two. Jones Lang LaSalle Hotels, for example, has predicted that hotel transaction volume will reach up to $13 billion in the Americas region in 2011 and the United States will be one of the most active hotel transaction markets globally in 2011.

Hotel developers are increasingly being encouraged, and in some cases required, to comply with the LEED rating system, a creation of U.S. Green Building Council (USGBC).  The General Services Administration and the New York City Council provide just two recent examples of LEED-endorsement.  

But what if LEED compliance didn’t actually yield any energy savings?

That’s the contention in a $100M lawsuit brought by Henry Gifford, owner of Gifford Fuel Saving.  The claims include monopolization through fraud, unfair competition, deceptive trade practices and false advertising.  Gifford’s class action may have a difficult time proceeding in court, but that may not be his ultimate purpose.  Instead, Gifford may be content with publicizing his critique of the New Building Institute’s study, which concluded that LEED certified buildings are, on average, 25-30% more energy efficient. 

Gifford’s lawsuit alleges that the NBI study compared 121 cherry-picked LEED certified buildings against a control set made up of 5,215 buildings included in a 2003 energy consumption survey performed by the US Energy Information Administration.  While all the LEED buildings were constructed after 2000, 70% of the buildings in the government survey were built before 1990.  To put that into some perspective, Gifford's complaint states that the:

Bias in the NBI study sample is so obvious, it is about as useful as studying blood alcohol levels of drivers who volunteer to be tested. 

But even with that selection bias, Gifford claims that an apples to apples comparison would show that LEED certified buildings were, on average, significantly less energy efficient.  On this point, it looks as though Gifford may have some independent support:

• The National Research Council Canada conducted a re-analysis of the NBI study and found that LEED certified buildings, on average, used 18-39% less energy per floor area.  But the NRCC also found that 28-35% of LEED certified buildings actually were less energy efficient, and that the measured energy performance of LEED buildings had little correlation with the LEED certification level.   

• When asked about Gifford's lawsuit, Roderic Bunn, the principal consultant at Britain's Building Service Research and Information Association, opined that:

  We are piling in often unmanageable complexity into these buildings, so the consequence is unmanageable complexity. It's the enemy of good performance.

• And who would question the unbiased opinions of anonymous architects?