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.

The ARDA International Foundation has recently released an interesting study focused exclusively on resorts controlled by home owner associations.  The three academics behind this first-of-its-kind report were looking to "identify those factors that effectively contribute to success or failure in HOA controlled resorts."   

The survey focused on the following broad topics for this important timeshare subgroup:

• Identification of basic resort characteristics
• Governing Board structures and characteristics
• Financial metrics (including reserve funds)
• Rental, resale and exchange

A couple of the more interesting findings:

1. Financial metrics suggest that, on the whole, resort operations are in fairly good shape. Notably, recent maintenance fee increases were not reported as "significant," a position which seems to be supported on a historical basis.  However, readers of this section of the report should probably also check out this article in the January edition of Developments:  Benchmarking Study Shows Tough Times Ahead for HOAs.   
2. Confirming something we touched on previously, owners are generally not getting much assistance with rentals or resales.  Only 54% of participating resorts had a rental program for owners, and the average nightly rate was $90, or less than 60% of the rate reported for the timeshare industry as a whole.  Worse, only 28% had a resale program to help owners sell their timeshares.    

Our last blog post pointed to the importance of an upcoming decision by the U.S. Supreme Court in CompuCredit Corp. v. Greenwood.  Specifically, we wondered whether the Court would extend the reasoning in AT&T Mobility v. Concepcion so that the Federal Arbitration Act would apply to federal statutes as well as state law?  Or would the decision in effect create a class of nonarbitrable federal claims? 

We got the answer (sooner than this blogger expected).  The Court ruled, in an 8-1 decision, that if federal statute provides for a private right of action and even for class actions, but is silent as to whether these claims can proceed in arbitration, the FAA is not trumped.   

In so ruling, the Court was not persuaded by plaintiffs’ arguments that the federal statute at issue - the Credit Repair Organizations Act, 15 U.S.C. § 1679 et seq.

• Required defendant’s to specifically disclose to consumers “You have a right to sue a credit repair organization that violates the Credit Repair Organization Act.” 
• Stated that “Any waiver by any consumer of any protection provided by or any right of the consumer under this subchapter—(1) shall be treated as void; and (2) may not be enforced by any Federal or State court or any other person.”

Writing for the majority, Justice Scalia stated that the notice language fell short of giving the plaintiffs’ a specific right to be in court, and, in any event, noted that “we have repeatedly recognized that contractually required arbitration of claims satisfies the statutory prescription of civil liability in court.”  Justice Scalia then wrote:

Because the CROA is silent on whether claims under the Act can proceed in an arbitrable forum, the FAA requires the arbitration agreement to be enforced according to its terms.

This holding is a significant companion to the decision in AT&T Mobility v. Concepcion.  The most immediate impact may be on the NLRB’s decision in D.R. Horton and Michael Cuda, as the NLRA does not contain any provision that expressly bars the use of arbitration agreements.

With the CompuCredit decision on the books, hospitality companies should strongly consider the broader use of arbitration clauses in their contracts with both consumers and employees.  Failure to make such changes could prove to have a significant downside, as demonstrated by our post on the result in Jock v. Sterling Jewelers. 

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.

The legislative process is constant, as indicated by our recent posts on timeshare/fractional legislation in Florida and Wisconsin.  However, the end of the year is always a good time for both looking back and making educated guesses as to what lies ahead. 

The ARDA Government Affairs team put on an hour-long webinar to do just that on December 15, which you can currently access at https://www2.gotomeeting.com/register/790568186.  Based on comments during that webinar, 2012 looks to be a busy year for shared ownership legislation.  And that's before efforts get complicated by the emergence of unexpected surprises (e.g., bills focused on homeowner associations) and unexpected alliances (e.g., those built around the dynamics of redistricting), as well as a presidential election that may be preceded by a long primary cycle.

Here is the order of jurisdictions in the U.S. and Caribbean discussed during the webinar, organized by presenter:

• Stephany Madsen
  • Arizona
  • Arkansas
  • Nevada
  • New York
  • Texas
  • Wisconsin
• Chris Stewart
  • California
  • Colorado
  • Missouri
  • Utah
• Keith Stephenson
  • Maine
  • Massachusetts
  • New Hampshire
  • Tennessee
  • Virginia
  • Bahamas
  • St. Maarten
  • U.S. Virgin Islands
  • Aruba 
  • Dominican Republic
• Jason Gamel
  • Florida
  • Hawaii
  • South Carolina    

The Hospitality Lawg would like to thank Holli Hartman for submitting this post.  Holli works in our Denver Office and her practice focuses on employment counseling and litigation, with an emphasis on providing guidance to employers to avoid litigation.  Holli is also a contributor to our sister blog, the Employment Class Action Blog.

Accommodating disabilities in the workplace can be a confusing enough process for employers.  But if you have employees in one of 16 states or Washington, D.C. where state and local laws have legalized marijuana for medical purposes, you could be both dazed and confused about what to do.  Courts in some states are starting to provide a little guidance, but many employers are struggling with questions about whether to modify workplace policies, such as drug testing.  Some sticky legal issues, including federal preemption of state laws, whether medical marijuana patients must be accommodated under state anti-discrimination acts, and whether a patient has a legal off-duty right to use medical marijuana, remain unresolved in many jurisdictions.

Courts' Rulings on Medical Marijuana in the Workplace

Only a handful of cases have resulted in decisions that provide some guidance to employers regarding their potential liability in these situations.  Almost all have sided with employers who have attempted to keep marijuana out of the workplace.  Employees' attempts to rely upon the medical marijuana acts themselves, the ADA or state anti-discrimination statutes requiring an employer to accommodate a disability, or common law wrongful discharge causes of action have failed.  For example:

• In June 2011, the Supreme Court of Washington held that the Washington Medical Use of Marijuana Act does not create a private cause of action for discharge of an employee who used medical marijuana and noted that the act had been amended to state that "Nothing in this chapter requires any accommodation of any on-site medical use of marijuana in any place of employment..."
• In February 2011, the U.S. District Court for the Western District of Michigan, applying Michigan law, ruled that the Michigan Medical Marihuana Act does not provide a private right of action against employers who terminate medical marijuana users.  It also held that the discharged employee could not recover under a wrongful discharge theory.
• In 2010, the Oregon Supreme Court held that an employee terminated for medical marijuana use had no claim for relief under Oregon's anti-discrimination statutes, which for disability cases tracked and relied upon federal ADA law.  The ADA states that an employer need not accommodate an employee's use of illegal drugs.  Although the court found that medical marijuana is an "authorized substance" under state law, the state law was preempted by the Controlled Substances Act, which makes marijuana illegal for medicinal use.
• In 2009, the Supreme Court in Montana determined that an employee terminated for testing positive for marijuana use could not state a claim under either the ADA or Montana's Human Rights Act for an employer's failure to accommodate his medical marijuana use.

• In 2008, the Supreme Court of California similarly held that medical marijuana patients cannot recover for discrimination under the state's Fair Employment and Housing Act because the California Compassionate Use Act's narrow purpose is to exempt medical users and their primary caregivers from criminal liability under state criminal statutes.

Statutory Protections for Employees

Some states, however, have written protections for medical marijuana users directly into their statutes.  Here are two exemplary provisions:

• Arizona's statute states that "Unless failure to do so would cause an employer to lose a monetary or licensing related benefit under federal law or regulations, an employer may not discriminate against a person in hiring, termination or imposing any term or condition of employment or otherwise penalize a person based upon either: (1) the person's status as a cardholder [or] (2) a registered qualifying patient's positive test for marijuana components or metabolites, unless the patient used, possessed or was impaired by marijuana on the premises of the place of employment during the hours of employment."
• Rhode Island's statute states that "No school, employer or landlord may refuse to enroll, employ or lease to or otherwise penalize a person solely for his or her status as a cardholder."  However, the chapter shall not permit "any person to undertake any task under the influence of marijuana, when doing so would constitute negligence or professional malpractice" or require "an employer to accommodate the medical use of marijuana in the workplace."

Whether state courts determine that these types of provisions provide a private right of action for employees or require employers to make accommodations remains to be seen.  Courts have yet to address the issues.

What's an Employer to Do?

Because this area of law is still in its relative infancy, employers and those who advise them should keep their eye on court and legislative developments in their respective states.  Employers, for now, appear to have plenty of defenses for maintaining the status quo in their drug testing programs or drug-free workplace policies.

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.       

This is our fourth installment on the new XXX domain, otherwise known as the internet's red light district.  We discussed pre-registration in first post and the launch process in the second.  In the third post, we discussed how hospitality brands could protect themselves through Sunrise B.  This mechanism, which closes Friday, October 28, allows hospitality companies to block their qualifying trademarks from registration by others as XXX domain names.

If you haven't already gone through the Sunrise B process, here is some information to consider:

• Since September 7, the ICM Registry has received over 42,000 sunrise applications. As of the beginning of August, there had been only 1500 applications.  ICM is expecting that, as of the deadline, applications will exceed 50,000 for both Sunrise A and Sunrise B. 
• XXX domain names are commanding high prices.  According to ICM, XXX domain names are selling at a premium of up to 40% of the .com equivalent.  The highest price so far, $500,000, went for gay.xxx.
• The sale of XXX domain names is proving incredibly profitable.  Domain Incite reports that the ICM Registry's breakeven point was 10,000 applications.  You can do the math, or just check out the announcement that ICM Registry is entering world class powerboat racing with world champion driver Mike Seebold.   

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.”

The practical impact of AT&T Mobility v. Concepcion is already starting to become apparent.  As reported by Robin Sidel in the Wall Street Journal, large and small financial institutions are beefing up the arbitration language in their consumer agreements.  The article even gives details on how Regions Financial implemented changes to its existing mandatory arbitration provision.

In a prior post, we examined the U.S. Supreme Court’s decision and took a look at some of the possible legislative and regulatory reactions.  However, John Lewis' report on Jock v. Sterling Jewelers over at Baker Hostetler's Employment Class Action Blog discusses a possible downside of the post-Concepcion environment.  Specifically, what if a hospitality company fails to make changes to its employee/customer agreements in reaction to the U.S. Supreme Court's decision?

Well, in the event the arbitration provision is silent as to class proceedings (as it was in Jock), you could end up with an arbitrator making a conclusion along the following lines:  

Because this contract was drafted by [employer] and was not the product of negotiation, it was incumbent on [employer] to ensure that all material terms, especially those adverse to the employee were clearly expressed.  . . . [Employer] acknowledges . . .  that it has deliberately not revised the . . . arbitration agreement to include an express prohibition [of class proceedings].  [C]onstruing the Agreement to contain a waiver of a significant procedural right would . . . insert a term for the benefit of one of the parties that it has chosen to omit . . . .

According to John's post, metaphysics still reigns when it comes to divining the parties' intent to permit class proceedings in arbitration.  As such, it is probably better to make an affirmative policy decision than to rely on an arbitrator's uncertain logic. 

Medical marijuana has been legal in Colorado since voters passed Amendment 20 in 2000.  As of June 2011, the Colorado Department of Public Health and Environment ("CDPHE") had issued over 125,000 ID cards under the the Medical Marijuana Registry program.  CDPHE statistics indicate that those holding ID cards are primarily male, have an average age of 40, and are far more likely to suffer from muscle spasms (20%) or severare pain (94%) than from cancer (2%) or glaucoma (1%).  

CDPHE statistics do not discuss the travel habits of those holding ID cards.  But presuming that the muscle spasms subside enough to allow for some rest and relaxation, a person holding a medical marijuana ID card may presume that he can smoke on hotel/timeshare resort property.  If the hotel or timeshare resort is in Colorado, here are a couple things for the operator to consider when faced with this scenario.  

It Is Unlikely that the DOJ Would Pursue an Americans With Disabilities Claim if a Hotel/Timeshare Resort Prohibited a Guest from Smoking Medical Marijuana

Many hotels and timeshare resorts are concerned that they could be subject to ADA liability for prohibiting a guest from smoking medical marijuana.  Although this issue is not entirely free from doubt, the Department of Justice ("DOJ") (the agency that enforces the ADA) has issued two memos (one in October 2009 and the other in June 2011) generally addressing medical marijuana laws.  In the 2009 memo, the DOJ took the position that although medically prescribed marijuana is still an illegal drug under federal law, it is not going to waste resources chasing small-time legitimate medical users in states where such use is permitted.  In the 2011 memo (issued only one month ago), the DOJ reiterates that it won't pursue small-time legitimate users, but warns that it will prosecute large scale, commercial medical marijuana growers.  Based on these memos, we think it unlikely that the DOJ would pursue a course of action that would require hotels and timeshare resorts to accommodate this activity, absent special circumstances.

Under Colorado Law, Hotels & Timeshare Resorts Are Not Required to Accommodate a Guest's Use of Medical Marijuana

The Colorado Clean Indoor Air Act, which prohibits smoking in certain public places and gives owners/managers the right to prohibit smoking in their facilities, does not distinguish the smoking of medical marijuana from the smoking of cigarettes, cigars, pipes or other tobacco products.  Accordingly, managers of hotels and timeshare properties should be free to prohibit the smoking of medical marijuana in the same way that they prohibit the smoking of tobacco products. 

In addition, FAQs published on CDPHE's website provide that a patient is only legally permitted to smoke medical marijuana in his or her home; it is illegal to smoke medical marijuana in plain view of, or in a place open to, the general public.  Presuming that the resort does maintain a public designated smoking area, the CDPHE policy would not permit guests to smoke medical marijuana in that area.

Given its scope of authority, we have been providing hospitality companies with a semi-regular update on the Consumer Financial Protection Bureau.

Today, the CFPB goes live with a nominated, but far from confirmed, director.  President Obama named Richard Cordray as his choice to lead the Consumer Financial Protection Bureau last Sunday evening.  Although we provided some brief insights on the former Ohio attorney general in our January and March CFPB posts, we are fairly certain that more detailed information on the nominee's positions will be forthcoming.  Senate Minority Leader Mitch McConnell (R-KY) made that much clear when he delivered this message to the president from the Senate floor the next day:

I would remind him that Senate Republicans still aren't interested in approving anyone to the position until the president agrees to make this massive new government bureaucracy more accountable and transparent to the American people.

The concern?  It’s not so much how the CFPB has handled revising mortgage disclosure forms, which the financial services industry says it backs.  It is what happens next.  As stated by Jaret Seiberg, a policy analyst at MF Global's Washington Research Group:  

There's no foregone conclusion. The agency doesn't have to fulfill the nightmares that the banks have, but until we start to see concrete actions, those nightmares are still going to keep bankers up at night.

For the hospitality industry, the “nightmares” could involve a whole host of rules, including (but in no way limited to) the Telemarketing Sales Rule, the Rule Concerning Cooling-Off Period for Sales Made at Homes or at Certain Other Locations, and the Real Estate Settlement Procedures Act (RESPA).

Take, for example, the Interstate Land Sales Full Disclosure Act.  On July 14, Peggy Twohig hosted a teleconference discussing the transition issues related to the CFPB’s assumption of enforcement responsibility for that law.  As part of the transition, Ms. Twohig said the CFPB will take a "fresh look" at the ILSFDA with an eye toward modernizing processes.  At the end of the call, Ms. Twohig was asked how the "fresh look" would apply to the Guidelines for Exemptions Available Under the Interstate Land Sales Full Disclosure Act.  The answer - the Guidelines will go dormant.

We reported on the tax disputes between online travel companies (OTCs) and various state and municipal tax agencies back in February and April.  We thought it was time to catch up on what was going on when we saw this headline from HotelNewsNow:

Ruling Could Spell End of OTC Merchant Model   

HNN was reporting on the Findings of Fact and Conclusions of Law just issued by the judge presiding over a class action brought by the City of San Antonio and 172 “similarly situated” Texas cities.  Back in November of 2009, a federal jury found that, for purposes of the tax statutes under examination, Expedia, Priceline, Orbitz and Travelocity “control hotels” and, as a consequence, were responsible for $20.6M in unpaid hotel occupancy taxes. 

Despite the jury verdict, several discreet legal issues remained for resolution by the court.  After reviewing the evidence in detail, the court made several findings.  The most notable are described below:

What Is Taxed?

After considering the facts and arguments presented, the court concluded that:

• Each of the 173 taxing ordinances “impose a hotel occupancy tax on the consideration paid by the occupant for the cost of occupancy of a sleeping room furnished by a hotel.” 
• “Because the OTC’s are not occupants, they never have the right of occupancy, and the wholesale rate they pay for the right to sell a hotel room is not consideration paid for the right of occupancy, there is absolutely no reason for hotel occupancy taxes to be imposed on wholesale rates paid by the OTC to the hotel.”
• “While the OTC’s may provide a service in handling the transaction with the consumer/occupant, the OTC’s markup and service fees are part of the total retail amount paid by the consumer to the OTC for the right of occupancy.  If the consumer refused to pay any part of the retail amount charged by the OTC, he would not have a prepaid reservation and he would not have the right to occupy the hotel room."        

Based on these conclusions, the court held that “the total retail price is the amount that must be paid by the consumer for the right to occupy a hotel room, and that is the amount that is taxed under the ordinances.” 

How Should Breakage Revenue and Cancellation Fees Be Treated?

The court concluded that, notwithstanding a “no-show,” the consumer “clearly pays [the OTC] for the right to occupy a hotel room at the time he books and pre-pays for that room.”  Further, the amount of payment includes a portion allocable to hotel occupancy taxes.  As a consequence, irrespective of any breakage, “upon payment by the consumer, the OTC as tax collector has a duty to remit those tax monies to the City.”    

However, the court determined that the payment of cancellation fees are a “completely separate transaction that a consumer pays to the OTC to avoid the cost of occupying a room.”  As such, cancellation fees are not subject to hotel occupancy taxes.  

Must the Amount Allocable to Taxes Be Separately Stated?

The court noted that, typically, the fees charged to a consumer by an OTC are bundled rather than separately itemized.  However, the court found that the consumer would benefit from unbundling and that there is “no reason” for the OTC’s to “keep the amount of hotel occupancy taxes hidden” if the tax is assessed against the total retail rate charged by the OTC.  As a consequence:

The OTC’s must be fully transparent about the amount of taxes being assessed in every consumer transaction.  The OTC’s must clearly state the amount of the hotel occupancy taxes being assessed on the retail price that the consumer/occupant/taxpayer is being charged for the right to occupy a hotel room. 

What Does it Mean?

While the Texas judge's findings are full of eye-catching details, it doesn't mean we are backing off our statement back in February that the court decisions are a mixed bag.  Another Texas city, Houston, had its tax claims dismissed on summary judgment back in early 2010.  In Anaheim, the OTCs were successful in reversing another $20+M decision.  And as demonstrated by an unanimous Missouri Supreme Court decision issued on June 28, OTC lobbying efforts could prove to have retrospective benefits.  

What we do know is that the litigation isn't going away anytime soon.  For proof, check out this statement in Expedia's most recent 10Q:

Seventy-two lawsuits have been filed by cities and counties involving hotel occupancy taxes. . . . To date, twenty-four of the municipality lawsuits have been dismissed. Most of these dismissals have been without prejudice and, generally, allow the municipality to seek administrative remedies prior to pursuing further litigation. Twelve dismissals were based on a finding that we and the other defendants were not subject to the local hotel occupancy tax ordinance or that the local government lacked standing to pursue their claims.               

I have been tracking Colorado legislation for the shared ownership industry for a few years now.  Lessons learned include the following:

• The legislature has no problem with tinkering with the Colorado Common Interest Ownership Act (CCIOA) for the sake of tinkering
• The legislative community (legislators, lobbbyists and lawyers) rarely, if ever, considers the incremental costs of the CCIOA bills under consideration
• Most CCIOA legislation, at the time it's introduced, is just plain bad

Case in point - HB 1124, which has been signed into law and codified at CCIOA §209.5(1)(b)(II).  The bill requires timeshare and fractional owner associations to adopt, and periodically review, a conflicts of interest policy that describes "the circumstances under which a conflict of interests exists" and that "sets forth procedures to follow when a conflict of interest exists, incluing how, and to whom, the conflict of interest must be disclosed and whether a board member must recuse himself or herself from discussing or voting on the issue."

So here is my rant:

Unnecessary Tinkering

At the time HB 1124 was introduced, a conflicts of interest policy was one of nine "responsible governance policies" that timeshare and fractional HOAs were required to have in place under CCIOA §209.5(1).  Moreover, CCIOA §310.5 specifically subjects the HOA board of directors to the conflict of interest provisions of the Colorado Nonprofit Corporations Act.  That law already broadly defines a "conflicting interest transaction" and when such a transaction can be voided or result in liability to the conflicted director.  That said, what benefit comes from adopting a separate policy?

Ignoring Costs

Apologists say that there is no harm in codifying good governance practices.  But as made plain above, those good governance practices were already codified.  Without benefit, the costs incurred by the legislature in considering HB 1124, and the costs to the HOA in reviewing and maintaining the required policy, can not be justified.  

Complete Misunderstanding of Existing Law     

Perhaps the best thing to say about HB 1124 is that it was substantially revised.  The original bill would have wrecked havoc on board governance by subjecting HOA boards to an entirely new standard regarding conflicts:

• A "conflict" would have existed if there was any "financial benefit."  While that appears fine at first blush, consider the potential breadth - every board member, as an owner obligated to pay assessments, would benefit financially by reducing HOA expenses by any amount, no matter how small. 
• Conflicts were required to be identified "prior to discussion or action on that issue."  No allowance was contemplated for when the conflict was identified after board consideration was underway.
• Directors with a conflict, however minimal, were not allowed to vote, irrespective of the impact on quorum or voting contingencies (i.e., potential for tie vote).  

We reported on developments with the Consumer Financial Protection Bureau (CFPB) back in January and March.  The hospitality industry has an interest in the development of the CFPB because the agency has broad authority to prevent acts or practices which are "unfair," "abusive" or "deceptive."  In connection with that mission, the CFPB may revisit or invent definitions for "deceptive," "unreasonable advantage of consumers' . . . reasonable reliance" and "covered persons."    

Staking Out Its Turf . . . 

While the rumored recess appointment of the CFPB director did not come to pass, the Federal Register did publish on May 31 a list of rules and orders that the CFPB would have authority to enforce.  While that list isn't final, it does provide some insight as to the scope of the CFPB's broad regulatory power.  Here are some the listed rules and orders that may be of particular interest to the hospitality industry:   

• The Federal Trade Commission’s Telemarketing Sales Rule (16 CFR Part 310) and Rule Concerning Cooling-Off Period for Sales Made at Homes or at Certain Other Locations (16 CFR Part 429), as well as rules pertaining to the Preservation of Consumers’ Claims and Defenses (16 CFR Part 433), Mail or Telephone Order Merchandise (16 CFR 435), and Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunities (16 CFR Parts 436 and 437).
• The Department of Housing and Urban Development rules regarding Land Registration (24 CFR Part 1710) and Purchasers’ Revocation Rights, Sales Practices, and Standards (24 CFR Part 1715).
• Real Estate Settlement Procedures Act (RESPA), 24 CFR Part 3500. 
• The rules regarding the privacy of consumer financial information currently enforced by the Fed, the FDIC, the OCC and the OTS.

. . . With Some Caveats

Not surprisingly, we found some interesting nuggets when reviewing the release: 

• This list was published by the Secretary of the Treasury, which has interim authority to perform certain CFPB functions (see footnote 6 in the notice).  Even so, as of June 12, the CFPB’s website had no mention of either the May 31 notice or the list of rules proposed to be enforced by the CFPB.
• As to the FTC’s Telemarketing Sales Rule, the CFPB will only “have authority to enforce in some circumstances” that rule.  While specific exceptions to CFPB enforcement authority were spelled out elsewhere (i.e., Fair Credit Reporting), the notice does not detail what was meant by “in some circumstances” with respect to the Telemarketing Sales Rule.
• The notice states very clearly that it does not in any way limit the CFPB’s enforcement authority as defined by Dodd-Frank:

[T]he inclusion or exclusion of any rule or order would not alter the CFPB’s authority.  In addition, section 1063(i) does not require the CFPB to update, correct, or otherwise maintain the final list.  Because the list under section 1063(i) reflects the CFPB’s interpretation of its authority under [Dodd-Frank] and relates to agency organization, procedure and practice, the list is not subject to the notice-and-comment requirements of the Administrative Procedure Act.  Nevertheless, the Bureau invites public comment during a thirty-day period.

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.

Back in December 2010, we issued a Client Alert detailing Colorado’s new HOA registration requirements.  In that alert, we noted three issues in particular with the new law:

1. Our analysis indicated that the registration requirements were subject to some unintended exemptions, most notably applicable to those HOAs formed before July 1, 1992.
2. Considering that the Colorado Common Interest Ownership Act was intended in part to promote solvent home owner associations, the penalty for failing to register – the loss of assessment enforcement rights – seemed a bit excessive.
3. The information required to make the registration, which included the reception number or book and page for the declaration creating the common interest community, appeared somewhat unnecessary for this type of information filing.

After going through one filing period, it appears that our concerns were shared by others:

Pre-1992 HOAs ARE Exempt

After consulting its legal counsel, the Colorado Division of Real Estate issued a Position Statement on the HOA registration requirement on March 1 (notably after the revised 2011 filing deadline set by emergency rule).  The Position Statement provides that home owner associations:

not formed prior to [July 1, 1992] are exempt from the jurisdiction of the Colorado Common Interest Ownership Act (the “CCIOA-Exempt”) . . .  Therefore, it is the position of the Director of the Division of Real Estate that homeowners’ associations formed prior to July 1, 1992, that have not elected treatment under CCIOA, are not required to comply with the [HOA registration requirement].

Clean Up Bill Fails

Without referencing the Policy Statement, SB 253 was introduced in the final days of this Colorado legislative session.  This clean-up bill would have: (i) clarified that the failure-to-file penalty operated as a “suspension,” not invalidation, of HOA assessment rights; (ii) eliminated the unintentional pre-1992 exemption; and (iii) rationalized the information required to make the registration. 

Although the bill passed the Colorado Senate and was unanimously referred out of the House committee with a favorable recommendation, SB 253 was killed in a procedural move, reportedly based upon a single constituent concern. 

As the next HOA registration filing period concludes before the 2012 Colorado legislative sessions begins, HOAs should follow the same filing procedures as they did in 2011.  Unless special circumstances apply, outside legal assistance is most likely unnecessary in making the 2012 filing.  For more information on the filing requirements, see these FAQs published by the Colorado Division of Real Estate.          

The Hospitality Lawg would like to thank Holli Hartman for submitting this post.  Holli works in our Denver Office and her practice focuses on employment counseling and litigation, with an emphasis on providing guidance to employers to avoid litigation.  Holli is also a contributor to our sister blog, the Employment Class Action Blog.

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In Whitehead v. Vacation Charters, Ltd., a class action judgment in excess of $2.2 million was entered against the owner/operator of a Poconos timeshare resort for misclassifying sales employees as independent contractors during a three-year period.

The Court of Common Pleas of Philadelphia County held that Vacation Charters and its owners were jointly and severally liable for depriving 259 class plaintiffs of their lawful wages and benefits under Pennsylvania’s Wage Payment and Collection Law.  The court found that the defendants required their timeshare salespersons to sign non-negotiable independent contractor agreements in mid-2005.  According to the court’s findings of fact and conclusions of law, while the form contracts stated that the salespersons were not “employees” for federal, state or local state purposes, the defendants continued to control all aspects of the sales staff’s work schedules, dress codes, marketing protocols and day-to-day services. 

As to commissions/wages, the contracts allowed the defendants to hold back from each salesperson’s wages and commissions up to 10% for any sale financed on a deferred payment basis.  The hold back was "charged back when a customer defaulted on his account by having made less than four monthly payments."  Operationally, the hold back funds were not segregated, but held, without interest, in a general account where they could be spent on resort expenses.  In addition, the hold back would be increased to 50% when the purchaser had a low credit score and no wages/commissions would be earned until the purchaser paid 10% of the contract price - policies that were not disclosed in the independent contractor agreement. 

The class action was filed after the Internal Revenue Service and Pennsylvania’s Department of Labor and Industry investigated a former salesperson’s claims that he had not received holdback funds.  These agencies found that the salesperson was an employee entitled to unemployment compensation.  As the court pointed out, defendants “likely owe FICA, Medicare and FUTA to the Internal Revenue Service on behalf of the class members.” 

All of this means that the defendants are likely still on shifting ground when it comes to assessing the total liability it may be facing.  Its case illustrates that attempts to limit expenses by re-classifying employees as independent contractors can often backfire in a big way when even one former employee attempts to recover unemployment benefits.

Bottom line:  Misclassifying sales employees as independent contractors can put employers between a proverbial rock and a hard place.

When vacationing with young children, there are obvious advantages to staying at a timeshare resort.  Based on my personal experience, two examples spring to mind:

• having a real refrigerator (no more cramming baby bottles into a minibar); and
• having separate bedrooms (no more going to bed with the kids at 7:30pm). 

When my husband and I decided to become timeshare owners, we took some developer tours and checked out some resale websites.  But after reviewing the resale options, I had a question - why can't timeshare resales work like AutoTrader?

The Experience Problem

AutoTrader lets you use specific and understandable search criteria such as make/model, color, year, and mileage so you can easily hone in on the types of automobiles that meet your requirements.  It creates a "store" made up of only the automobiles that meet your purchase criteria, saving time and effort.      

On the other hand, purchasing a timeshare on the secondary market is not so easy.  I imagine that a lot of potential first-time buyers are intimidated and frustrated by search criteria based on industry terms like "Red Week," "Points," "Floating Week," "Fixed Week," "Floating Unit," "Fixed Unit" and "Lockout."  And even those purchasers who understand these terms (me, for instance) get frustrated by having to scroll through for-sale ads where its fairly obvious that key components of the purchase decision (i.e., use plan, unit type, exchange program) aren't accurately described. 

The First Step 

We spend a lot of time trying to pin the blame for a troubled timeshare resale market on some person or business practice.  Why not focus on working toward the creation of a more buyer-friendly experience? 

Where do you start?  I think it's with the owner associations.  The timeshare resellers certainly have the incentive to build a more buyer-friendly platform, but it seems unreasonable to expect them to be able to identify correctly every material detail of every for-sale timeshare product.  Selling timeshare owners also have the incentive, but experience clearly demonstrates that what is "points" to one seller is a "floating week" to another.      

Owner associations are the "middle men" that have the incentive and knowledge to help buyers.  By creating a simple summary of the reservation system and units they are ultimately responsible for operating, owner associations could provide their members with a resource for accurately describing the timeshare interest offered for sale.  From the buyer's perspective, that uniformity and consistency would create a more efficient purchasing experience free from seller-generated uncertainty and, as a consequence, can instill a buyer with the confidence needed to complete a purchase.  After all, owner associations would benefit from a timeshare interest being resold to someone like me - a person who sees the value proposition in owning a timeshare, plans on using the timeshare, and will pay the maintenance fees on time. 

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.  

At the Ragatz Fractional Conference earlier in March, I moderated a panel called “What is Needed to Stimulate a Return to the Glory Days (or Close To)?” The panel’s premise was that the “glory days” of the fractional segment of the shared ownership industry was the period from 2006 through mid-2008, and the panelists were asked to speculate whether and how that segment could return to its best times.

The panelists – including Gregg Anderson of The Registry Collection; Carl Berry from Star Resorts; Mark Harmon of Auberge Resorts; and Howard Nusbaum, CEO of the American Resort Development Association (ARDA) – had several excellent insights on the challenges facing the fractional industry. Interestingly, there was not unanimity on whether those “glory days” were actually good times at all.  The panelist pointed out that much of the overall U.S. real estate boom that ebbed and ultimately collapsed during that period was fed by rampant speculation and mortgage fraud, and given that a significant number of the fractional interest purchases during that time were made by so-called destination clubs, which were unregistered high-end timeshare plans that in turn sold memberships and (in many cases) ended up in bankruptcy.

There was a great deal of panel discussion about the fundamental value proposition presented by the fractional product, which we posited could be trifurcated into three aspects: (i) real estate value, (ii) service value, and (iii) use value:

• Real estate value is commonly viewed as the comparison of the price of fractional real estate to that of whole ownership in the same leisure market. Given that most leisure real estate values are severely depressed, and that they will be for the foreseeable future, our conclusion was that fractional regimes may be employed in certain circumstances to help sell leisure real estate at its pre-crash value, but certainly not at 2x or 2.5x multiples as was the case in the “glory days.” 
• Service value is the perceived value of the ancillary services provided by a fractional product in the context of its price; in today’s market, this aspect of value is increasingly important to the successful fractional sale since the real estate value proposition is largely lacking. 
• Use value—or the convenience and lifestyle enjoyment value of the product to the purchaser—is actualized by the creation and management of a use plan that provides the purchaser with flexible, year-round access to fractional accommodations while also monetizing unused time for the benefit of all fractional owners.

Everyone on the panel agreed that the fractional industry offers a lifestyle product primarily focused on service and convenience. But not everyone agreed that fractional products should or must be real-estate-based. Although fractional products have traditionally been deeded, some observers believe that the current decrease in importance of real estate value as a purchase driver may provide an opportunity for the employment of alternate structures for fractional products such as associations, trusts or clubs. However, most panelists believe that tax, regulatory and financing issues continue to dictate a real-estate-based fractional product structure, and that fractional interests should really be real-estate-based anyway in order to help differentiate them from points-focused timeshare products.

Notwithstanding the beginnings of a national movement towards some level of de-regulation of real estate offers in general (largely because of state government revenue deficits), the panel evidenced no real appetite for de-regulation of any kind of shared ownership, even by setting a regulatory exemption for high-end fractions based on product price or purchaser net worth. The panel did feel strongly that there is a great need for increased transparency in fractional product offerings: we should tell the customer the truth about what it will really cost to maintain and refurbish the product and to continue to provide the promised services at the expected quality level over the long haul. Howard Nusbaum also noted that many “fractional” offerings are decreasing the size of the fraction to respond to the marketplace and becoming much closer to high-end, multi-week timeshare products. He believes that this is a good thing, and he committed ARDA, the national shared ownership association, to continue to work with fractional developers to make the application of state timeshare laws to fractional products more palatable.

Ultimately, the panel looked into its collective crystal ball and predicted that the fractional industry is going to have to step up its game and emphasize the service, convenience and use value propositions associated with fractional products in order to weather the storm of decreased real estate values and return to its glory days.

Newly introduced legislation in the Florida House of Representatives, currently known as “HB 5005,” proposes to significantly deregulate various industries, professions and occupations.  The 281-page cost-cutting effort would, among other things, eliminate nearly all of the Florida licensing and registration requirements relating to the sale of timeshare and fractional interests. 

Sweeping Regulatory Change

Under HB 5005, existing condominium, cooperative and timeshare filing requirements (including component site and multisite timeshare plans), exchange company offerings, reservation programs, incidental benefit filings, and gift and promotional offerings are eliminated.   The bill also proposes to eliminate the requirement for the managing entity of a condominium or timeshare association be a licensed Community Association Manager under Chapter 468, Florida Statutes.  Perhaps most dramatic, the bill would eliminate the Division of Florida Condominiums, Timeshares, and Mobile Homes, the arm of the Florida Department of Business and Professional Regulation responsible for reviewing registrations and enforcing of Florida’s condominium and timeshare laws.

It appears that HB 5005 haphazardly slashes provisions of Florida law in an effort to reduce costs and to effectuate sweeping deregulation.  A close reading of the bill leads the reader to the conclusion that the drafting is not precise and that mistakes, omissions and the failure to understand the nuances of the affected laws would create uncertainty and difficulty for those seeking to comply.  For example, the complete deletion of §721.07, Florida Statutes, not only removes the requirement to file public offering statements with the Division, but also removes the detailed list of items that are required to be included in the public offering statement that developers are still required to provide to all prospective purchasers of timeshare and fractional interests.  Confusingly, the companion provisions for multisite public offering statements continue to include an itemization of the specific disclosures and content required to be included in a multisite public offering statement.

In addition to the significant revisions to Florida’s condominium, cooperative and timeshare acts, HB 5005 also repeals Florida’s Seller of Travel Act.  Under the existing Seller of Travel Act, sellers of travel (such as vacation certificates and travel services) are required to provide for a cancellation period and disclosures, as well as post a surety bond of up to $50,000.  If HB 5005 were to be adopted, consumers of short-term vacation products would lose these specific protections and the number of incidents of fraud and complaints would potentially expand significantly.  According to Jason Garcia at the Orlando Sentinel, Florida has received more than 13,000 complaints about sellers of travel during the past five years. To the extent Florida does repeal its Seller of Travel Act, it would be following in the footsteps of Nevada, which on July 1, 2009, disbanded the Consumer Affairs Division of the Nevada Department of Business and Industry. 

Help or Harm?   

No one with development experience in Florida would argue that the existing timeshare/fractional regulatory regime couldn’t be amended to improve oversight and eliminate cost inefficiencies. However, does a sledge-hammer approach actually improve the situation for developers? Should HB 5005 become law, there is serious concern that it would lead to confusion and uncertainty among developers of condominium, cooperative and timeshare products, management companies and those selling legitimate travel products. Publicly-traded development companies would be particularly affected since they would no longer be able to rely on Division approval letters to show compliance with the applicable laws.      

In addition, the removal of regulation and an agency with specifically designated enforcement powers will potentially provide unscrupulous groups with a greater ability to evade compliance, leaving consumers to struggle for redress through uneven enforcement, presumably available by private rights of action or by an already overwhelmed attorneys general office. The resulting damage to the reputation of the  vacation ownership  and travel industries could set those industries back to the position that they were in during the 1970’s and early 1980’s, before newly-adopted regulation provided a healthy environment for growth and respectability.  One developer representative was quoted in the Orlando Sentinel as saying: 

Florida has what some people would call a colorful history of land fraud that goes back 100 years. Others would call it a lurid history of land fraud.  The division [of condominiums, time shares and mobile homes] was put together to force the bad actors out of these areas of activity. We think it'd be a terrible mistake for you all to deregulate those areas of the division. We strongly oppose it.

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.

HOAs can't address their concerns about relief/rescue companies by reacting to a "suspected transfer" that has already occurred.  To be successful, HOAs need to actively, clearly and continuously educate their owners as to why working with a relief company may not be in an owner's best interests.   

I recently was asked to speak to some owner-directors at their timeshare HOA board meeting.  The directors had read my article on relief/rescue companies in The Resort Trades and they agreed that attempting to thwart relief company transactions by relying on the Uniform Fraudulent Transfer Act was fruitless.  Putting aside the obvious legal shortcomings of this strategy, the directors immediately understood two very practical points:

• Accusing an owner (who had just paid $5000 or more to be "relieved" of his/her timeshare interest) of engaging in fraud, and then using this accusation as a basis for invoicing that owner for assessments, is surely an usual strategy for an HOA.  If anything, it will likely be used in a future relief company sales presentation.  
• HOAs don't have the authority to "undo" real estate transactions.  At best, HOAs can only withhold some of the benefits of timeshare ownership.  But if you presume that relief companies only intend to dump the timeshare into some sort of shell entity and not utilize the ownership benefits, what is the purpose of using administrative procedures to withhold them?            

Of course, these directors naturally wanted to know what they could do to protect their owners, both those who would be tempted by pitches from relief companies and those who enjoyed their timeshare but, if relief companies proved successful, were at risk of rising HOA bad debt.  While I suggested some legal options, I concluded by saying that no legal approach would be as effective as actually engaging in some fairly pointed owner education.       

Let's review the outline of a basic relief company pitch:

1. The reason why the owner doesn't fully enjoy the benefits of his/her timeshare anymore is identified.
2. The risk of future increased assessment obligations is stressed, often to the point of exaggeration.
3. The timeshare resale market is characterized as an option that won't work, limiting the owner's exit possibilities.

4. After penciling out the relief fee against the estimated long-term assessment liabilities, paying the relief company appears to be the best choice for the owner.        

To respond effectively, HOAs need to play offense.  

HOAs should start by attacking the relief company's financial conclusion in meetings or correspondence.  I have a copy of a relief company invoice in which the owner wanted to be "relieved" of a $600 annual assessment obligation.  For this, that owner agreed to pay just over $5,000.  It's easy to look at this now and conclude that the owner was financially foolish.  However, we also know that even a mediocre salesman can be trained to overcome this type of closing table objection.  HOAs should educate their owners to understand that the relief companies may be offering a bad financial deal - paying $5,000 today is almost always worse than paying that same $5,000 over 5 or more years.        

To be most effective in driving this point home, the HOA must also offer hope that the timeshare can be sold in the resale market and that the interim assessment risk isn't as great as the owner fears.  

While there are a number of ways HOAs could help owners with resales, I have listed three for consideration:

• At a minimum commitment level, HOAs could provide their owners with a general description of their timeshare for use in resale advertising.  Take a look at some of the user generated content describing timeshares for sale on a resale website and, more often than not, you will wonder how any purchaser can make sense of what exactly is being offered for sale.       
• At the other end of the spectrum, HOAs could actively engage in resales and take steps to encourage their owners to be referral sources.  When considering this option, keep in mind that ARDA's 2010 Resale Study found that a majority of recent buyers felt more comfortable purchasing timeshares when they believed the purchase was endorsed by an objective third party (i.e., the HOA).     
• An HOA could also serve its owners by screening companies and selecting two or three to be the HOA's "approved" resale providers.  Be realistic about the resale providers' fee structures when selecting for screening.  Many people argue that advance fee resale providers lose all incentive to actually perform upon receiving the fee.  Others say commission-based resellers with a minimum fee have no incentive to maximize sales prices.  Ignore these arguments and prioritize documented performance. 

Constant communication is the only way to address the relief companies' "liability" argument.   If an HOA reasonably believes it is in sound financial condition and has adequate reserves, let the owners know as often as appropriate.  If there is a financial weakness, tell the owners how big the problem is and how it will be resolved.  Then let them know if the solutions are working.  The more the HOA communicates its financial condition to its owners, the less likely a relief company will be able to exaggerate an owner's risk of exposure to increased future assessments.