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. 

Time to revise your form investment documents - as of February 27, 2012, the Securities and Exchange Commission's new accredited investor rule will take effect.  Affirming accredited investor status is crucial in determining whether an investment falls under the Regulation D safe harbors and qualifies for exemption from some of the more onerous and expensive disclosure obligations otherwise required by the Securities Act. 

Overview of the Changes

The change is substantially consistent with the proposed rules Jason Brady discussed in his blog from February 2011.   As dictated by Dodd-Frank, the calculation as to whether of person's net worth (or joint net worth with spouse) exceeds $1M must exclude the value of that person's primary residence, but indebtedness secured by that residence will not count as a liability (to the extent the debt does not exceed the fair market value of the residence).  In other words, positive equity will not count, but negative equity will. 

The SEC did address two new issues in the final rule as a result of comments received on the proposed rule:

• Indebtedness secured by a primary residence in the 60 days preceding the purchase of securities will reduce net worth, irrespective of the residence's fair market value, unless such debt was incurred in connection with the acquisition of the residence.  This provision was added to reduce any temptations on the part of investors or salespersons to "game" the calculation rules by artificially inflating net worth.
• Cognizant that some current investors would no longer qualify as accredited under the new rule, the SEC also added "grandfathering" provisions.  First, binding investment obligations made prior to Dodd-Frank will be judged using the old rules.  In addition, the old rules will apply to follow-on investments (i.e., exercise of pre-emptive rights) if the investor: (a) acquired a right to purchase prior to July 20, 2010; (b) qualified as an accredited investor at the time the right was acquired; and (c) held securities of the issuer (other than the right in (a)) at that same time. 

With respect to the above, note that the SEC declined to engage in the complexity of defining "primary residence" as that term has "a commonly understood meaning as the home where a person lives most of the time."          

Looking Forward

Dodd-Frank also required the SEC to undertake a review of the definition of "accredited investor" every 4 years from the enactment of Dodd-Frank.  However, the SEC has chosen to delay any action on this obligation until after the Comptroller General completes its related Dodd-Frank obligation - a report on "the appropriate criteria for determining the financial thresholds or other criteria needed to qualify for accredited investor status and eligibility to invest in private funds."  According to the SEC, this study, due before the end of 2013, "will be taken into account in any rulemaking that takes place in this area."    

We previously reported on Whitehead v. Vacation Charters, Ltd., where Vacation Charters, the owner and operator of the Split Rock timeshare resort, was found liable for a class action judgment in excess of $2.2 million for misclassifying sales employees as independent contractors during a three-year period.  We concluded that post by saying: 

This 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.

In late December, the extent of the downside for Vacation Charters came into some focus.  Ed Lewis of the Wilkes-Barre (PA) Times-Reader reported that U.S. District Court Judge A. Richard Caputo appointed ROPA Associates as a Receiver to oversee the Split Rock Resort in response to a petition filed by the resort's lender, Textron Financial Corp.  As receiver, ROPA Associates has assumed exclusive operational rights over the resort. 

Textron's action, and the judge's appointment, was prompted in part by concerns that almost $500,000 had been diverted from the resort's maintenance fee account to fund part of the $2.2 million settlement and Vacation Charters' planned bankruptcy petition.   

On December 12, Florida State Representative Eric Eisnaugle filed House Bill 1001, which would substantially change the regulation of the secondary market for Florida timeshares.  This bill follows up on, and appears consistent with, an announcement by Florida Attorney General Pam Bondi that we covered in a post from last October. 

While the bill has just been introduced, we thought the following elements of House Bill 1001 were worth noting:

1. Compared to the existing Florida law, for-sale-by-owner advertising companies (referred to as "resale advertisers" in the bill) would have to comply with substantially greater obligations than those applicable to licensed real estate brokers.
2. The bill does not create any regulatory obligation aimed specifically at transfer companies.
3. Violations of the law could result in civil penalties of up to $15,000 per violation. 

We also noted that House Bill 1001 introduces this curious requirement - to the extent that a resale advertiser would “state or imply, directly or indirectly, that its resale advertising services are successful in identifying buyers or renters,” it would also have to provides the consumer with the “ratio or percentage of the timeshare interests advertised for sale that have resulted in a sale, or advertised for rental that have resulted in a rental, for each of the previous 2 calendar years.” 

This obligation would become practically mandatory, assuming that the resale advertiser is actually trying to sell its services.  However, the logic behind the requirement contains at least two fatal flaws:

1. It appears to assume that timeshares are fungible, such that the success of any particular resale effort isn't dependent upon the asking price or the attributes of the timeshare (brand, location, season, etc.). 
2. It isn't at all clear how an advertising company, which by definition can't engage in activities requiring a real estate license, would be able to accurately track its success ratio without running afoul of Florida's brokerage laws.

It’s that time of year.  Colorado Subdivision Developer Renewals must be filed with the Division of Real Estate by December 31.   Unlike last year, there doesn’t look to be any format change this time around, although the renewal fee did increase to $222 for 2012.  That’s compared to the $136 fee in 2011, but still lower than the $287 charged in 2010.  For those interested in reminding themselves of what changes were implemented last year, see our post from last December.   

You may also consider filing your Colorado HOA Information and Resource Center Renewals before the end of the year - but only if the HOA was formed on or after July 1, 1992, or otherwise elected to be subject to the Colorado Common Intrerest Ownership Act.  This registration, first implemented in 2011, is good for 12 months, so it may not expire until March.  But if you want to simplify your administrative calendar, it may make sense to get this done concurrently with the Subdivision Developer Renewal.     

Remember that there are different filing mechanisms in place for each form.  Subdivision Developer Renewals must be mailed to the address listed on the form or sent in via ARELLO’s ATR System.  The HOA Renewal is completed online, and you access your account via a password.  If you can’t remember your password, there is a “reminder” button to the left under “Choose.”

Finally, please note that there are fairly stiff penalties for failure to timely renew: 

• As stated on the Subdivision Developer Renewal form, failure to file may result in your projects being deemed “unregistered,” with the possibility that subsequent sales could be voidable. 
• As for the HOA Renewal, the legislation inexplicably provides that a failure to file would limit the association’s ability to enforce assessment liens under C.R.S. §§38-33.3-123 and 316.

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.  

As we reported previously, the EB-5 visa program has drawn the interest of hospitality developers looking for alternative financing mechanisms.  While there doesn't appear to have been much activity on SB 642, which would make the EB-5 Regional Center Program permanent, there have been a couple interesting developments in this area over the past few weeks.

USCIS Introduces Consolidated Policy Memorandum

On November 9, USCIS Director Alejandro Mayorkas presented a Draft Policy Memorandum Guiding EB-5 Adjudications.  The stated goal of the memorandum is to combine various EB-5 policy memoranda into a single overarching agency policy memorandum that will “incorporate constructive stakeholder input and reflect the lessons learned since the various memoranda were initially promulgated.” 

While the memorandum is still being developed and is not yet operative, it does provide a fairly good overview of some of the EB-5 Program's core concepts.  It also signals the endorsement of a couple key recent policy positions. Most commentators are focusing on the deference given to states in designating targeted employment areas.  However, in practice, the following statement may prove much more relevant:

Historically, USCIS has required a direct connection between the business plan the investor has provided and the subsequent removal of conditions. USCIS would not approve a Form I-829 petition if the investor had made an investment and created jobs in the United States if the jobs were not created according to the plan presented in the Form I-526. While that position is a permissible construction of the governing statute, USCIS also notes that the statute does not require that direct connection. In order to provide flexibility to meet the realities of the business world, USCIS will permit an alien who has been admitted to the United States on a conditional basis to remove those conditions when circumstances have changed.

Senators Schumer and Lee Introduce VISIT-USA Act

Senate Bill 1746, formally titled the Visa Improvements to Stimulate International Tourism to the United States of America, has won endorsement from the U.S. Travel Association and the American Hotel & Lodging Association as it seeks to increase inbound tourism, especially from China and Canada.  

However, the portion of the bill attracting most attention would provide a 3 year visa for foreigners who invest at least $500,000 in residential real estate, including half for a home in which they live for at least 6 months a year.  Some EB-5 advocates are concerned that this new program would, in effect, result in competition for wealthy foreign investors, and that the EB-5 Program would be at a disadvantage because of its greater qualification hurdles.  Supporters of the "residential visa" counter that the programs are fundamentally different - for example, the residential visa would be temporary and not permit the foreign investor to work in the U.S.  But these arguments haven't stopped the EB-5 advocates from questioning the impact on the residential real estate market and labeling the residential visa a "job-killer."          

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.

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.

The Hospitality Lawg has covered timeshare resales in several posts, my personal favorite being Kurt Gruber's comments from last February on the Model Timeshare Resale Act.  In that post, Kurt itemized the reasons why ARDA adopted a model act addressing regulation of the resale of timeshare interests by non-developer owners:

• Encouraging a safe, transparent secondary market for owners of vacation ownership interests and for legitimate resellers
• Discouraging and penalizing fraudulent resellers
• Supporting the value of the timeshare product
• Educating regulators and legislators on the problems and encouraging appropriate enforcement action
• Providing a clear statement of ARDA’s views on the need for consumer protection in the resale marketplace

Today, the American Resort Development Association’s Resort Owners’ Coalition (ARDA-ROC) followed up on that initiative by launching the Timeshare Resale Resource Center.  According to the press release:

the Resale Resource Center was born to provide objective information on the resale process, tips on selling, and consumer advisories on the various resale scams currently being investigated by state authorities.

I spent some time reviewing the Resource Center and found it offers consumers pretty solid advice.  I was especially pleased to see that the Resource Center didn't demonize advertising companies that require an up-front fee.  Several regulators, including the FTC, warn consumers to avoid up-front fees at all costs, without apparently understanding the basics of the timeshare resale market.  As I wrote in the Resort Trades last January:

. . . there are [some] who argue that once the advance fee is collected, the incentive to actively pursue the resale is necessarily lessened. That may turn out to be the case, anecdotally or generally. It may also be the case that the commission structure suffers from its own imperfections, the most obvious being that commission-based resellers usually choose to focus their marketing dollars and time on only a select number of timeshare projects. As a result, many timeshare owners may not have effective access to commission-based resellers.

The point is not that one compensation method is superior to another. It is that, in the real world, not all timeshare product is fungible, so it is likely that both methods must co-exist so that both the timeshare owner and the reseller are satisfied with the transaction economics in any particular instance. However, this balance should be left to the market to determine, without interference from well-meaning but misguided public officials.

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.  

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.

With the conclusion of the 2011 Florida legislative session, we wanted to provide an update on the status of several bills that were introduced in the 2011 legislative session that would have the most significant impact on the hospitality industry. For businesses in the hospitality space, the session may have been more notable for the bills introduced but not passed.

HB 5005--Deregulation and Seller of Travel

As we discussed in a previous post, HB 5005 was a 281-page cost-cutting effort that would have, among other things, eliminated nearly all of the Florida licensing and registration requirements relating to the sale of timeshare and fractional interests, as well the sale of vacation certificates under Florida's Seller of Travel law. After our post summarizing HB 5005, the bill was amended to remove the elimination of the licensing and registration requirements related to the sale of timeshare and fractional interests. Despite these amendments to HB 5005, the bill still faced significant opposition and ultimately failed to pass in the Florida Senate.

SB 376--Online Travel Companies

SB 376 provided that online travel companies such as Expedia and Priceline would only be required to pay transient rentals tax based on the wholesale rate such companies negotiated for the rental of hotel rooms, rather than higher retail rate that customers are ultimately charged. Although SB 376 was strongly supported by the online travel companies, many traditional hoteliers opposed the bill and argued that, if passed, SB 376 would provide online travel companies with an unfair competitive advantage over traditional hoteliers. SB 376 ultimately did not pass the Florida Senate and consequently did not become law.

HB 1195--Condominium Bill

HB 1195 was signed into law by Governor Scott on June 21, 2011 and became effective on July 1, 2011. HB 1195 updates several of the provisions from condominium bills that were passed in the 2010 legislative session. In particular, HB 1195 includes the following revisions to the Condominium Act:

• clarifies the required qualifications of condominium board members
• allows condominium boards to hold closed meetings for the purpose of discussing personnel matters
• allows condominium associations to acquire leaseholds, memberships, and other possessory or use interests in golf courses, country clubs, marinas and other recreational facilities
• clarifies a condominium association's liability for outstanding assessments to a master association for units that the condominium association acquires through foreclosure
• provides that a condominium association may install impact glass or other code compliant windows that comply with the local building code
• updates the Fires Safety provisions of the Condominium Act
• clarifies what records constitute official records of a condominium association
• revises Part VII of the Condominium Act regarding distressed condominiums, bulk assignees and bulk buyers
• updates the procedures regarding how and in what amount a condominium association can fine a unit owner
• revises the situations and procedures for how a condominium may be terminated

HB 883--Pizza Flyer Bill

HB 883 was signed into law and became effective on June 2, 2011. Of particular note to the hospitality industry, HB 883 includes provisions known as the "Tourist Safety Act of 2011." The Tourist Safety Act of 2011 was drafted primarily to stop the practice of individuals entering hotel lobbies without the permission of hotel management or a hotel's owner and passing out unsolicited advertisements. The Tourist Safety Act of 2011 provides that any person who, without permission, delivers, distributes, or places, or attempts to deliver, distribute, or place, a handbill at or in a public lodging establishment commits a misdemeanor of the first degree and can be fined a minimum of $2,000 for a second violation, or $3,000 for a third or subsequent violation.

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

Rosemary O'Shea and I often work together on helping our hospitality clients understand and resolve issues involving the Americans with Disabilities Act ("ADA") accessibility requirements.  While the deadline has already passed for complying with those provisions of the new ADA regulations relating to accommodating service animals and a variety of power-driven mobility devices, another key deadline is quickly approaching.  As discussed by Rosemary in an article published in the July 2011 issue of ARDA's Developments Magazine, March 15, 2012 is the deadline for complying with the new ADA accessibility construction standards ("2010 Standards") and reservation requirements.  Here is some key information to consider as this deadline approaches.

2010 Standards

• The 2010 Standards contain a limited exception for existing facilities that comply with the 1991 Standards.  Those elements that comply with the 1991 Standards will be "grandfathered" under the new regulations and will not need to meet the 2010 Standards until such time as renovations or alterations are made.  It is, however, still necessary to comply with those portions of the 2010 Standards that address elements not covered by the 1991 Standards (i.e., pools, amusement rides, fishing piers, boating ramps, spas, golf courses, children's play areas, and other amenities).  If your facility is not in compliance with either standard, you should take this time to make modifications (to the extent readily achievable) to comply with either the 1991 or 2010 standard before March 15, 2012.
• The 2010 Standards specifically exempt guest rooms in timeshares and condo hotels when such rooms are not owned or substantially controlled by the entity that owns, leases, or operates the overall facility.
• Any new construction or alterations occurring on or after March 15, 2012 must comply with the 2010 Standards.  This means that if you are in the design process now, but construction is not expected to start until on or after March 15, 2012, your project must be designed to comply with the 2010 Standards (or the local building code to the extent it is more restrictive than the 2010 Standards).  The construction start date is determined by the date of certification of plans for a building permit, or if a jurisdiction does not issue building permits, the "start of physical construction."

 Reservation Systems

• By March 15, 2012, reservation systems must be modified to enable disabled customers to make reservations in the same manner as non-disabled customers.  This requires a detailed disclosure of the accessible features of each accessible room, as well as the accessible features of the amenities.  Commentary from the Department of Justice indicates that facilities complying with either the 1991 Standards or the 2010 Standards must, at a minimum, provide information on: (i) the size and number of beds, (ii) the existence of a tub or roll in shower, and (iii) the available communications features.  Facilities that do not meet the 1991 Standards must disclose variations from the 1991 Standards, such as: (i) issues with accessible entries, (ii) issues with paths of travel to check-in desks or restaurants, (iii) door widths, and (iv) the turning radius in the restroom.

• Accessible units must be held back as the last rented unit to guarantee the availability of an accessible unit to a disabled customer.  This requirement does not apply to units or rooms in timeshares and condo hotels, when such units or rooms are not owned or substantially controlled by the entity that operates the overall facility. 

Implementation

It is advisable to hire consultants who understand these new ADA requirements to confirm that not only the physical aspects of your facility are compliant, but also that your website and reservation system satisfy these new requirements.  Taking such steps in advance of the March 15, 2012 deadline will help to avoid litigation.

The deadline for EU Member States to enact legislation implementing the new EU Timeshare Directive was February 23, 2011. As we reported back in a February post, not all countries were expected to act prior to the formal deadline. 

Catching Up

In the interim between the February deadline and this post, Italy, Portugal, Cyprus, Finland, Slovakia, Luxembourg and Malta have implemented and begun enforcement of the EU Timeshare Directive.  Sweden has also adopted the necessary legislation, but enforcement does not begin until August 1, 2011. 

Still Waiting

As we understand it, while the following countries may be considering legislation, the EU Timeshare Directive is still not in force in: Belgium, Hungary, Lithuania, Poland, Slovenia and Spain. 

Of course, Spain's absence causes the most concern for EU regulators.  As stated just today in a HotelNewsNow article on Accor’s expansion plans for Spain, the country is the third-largest tourist destination in the world and, with a world-wide tourism rebound underway, had an 8.5% increase in foreign visitors for the first quarter of 2011.  Underlining this, STR Global reports that Spain’s occupancy rates for 2011 have increased 6.9% to 60.9%, with ADR up 1.8% and RevPAR up 8.9%. 

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. 

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.

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.

I was honored when American Resort Development Association CEO Howard Nusbaum asked me to represent ARDA at the 2011 Jamaican Tourism Outlook Seminar, which was held in Montego Bay, Jamaica on April 19-20.  I attended the seminar with Keith Stephenson, ARDA’s Director of Legislative and Regulatory Affairs with responsibility for ARDA activities in the Caribbean.  Keith and I were the guests of Jamaican Minister of Tourism Edmund Bartlett, Director General of Tourism Carrole Guntley, and Jamaica Tourist Board Chairman John Lynch.  Representatives of both RCI and Interval International also joined us at the conference.

Jamaica Considering New Legislation

Like many other jurisdictions where travel and tourism is a large part of the economy, Jamaica has been considering the adoption of landmark timeshare legislation that will, for the first time, spell out the terms and circumstances under which timeshare plans can legally be offered, developed or managed in Jamaica.  Although ARDA has not yet been favored with a draft of the proposed legislation, both Minister Bartlett and Director General Guntley indicated to us that the Jamaican Cabinet is about to take the issue of timeshare regulation up for consideration.  It was in the context of that consideration that we were invited to speak to this large gathering of island hoteliers and media about the many incremental benefits that a vibrant timeshare industry, properly constituted and regulated, could bring to Jamaica.

The Benefit of Perspective

My focus for my part of our presentation was to give the audience a brief primer on timesharing in general, its origins in Europe and history in the U.S., and the role that ARDA and its many volunteer members have played over the years in shaping effective product regulation and in enhancing the industry’s reputation and platform effectiveness around the globe.  I explained that Jamaica has a rare opportunity to fashion a timeshare law that is not merely a reaction to consumer complaints against an immature business model, as were so many U.S. state timeshare laws, but that is instead a legislative endorsement of a mature segment of an international industry and an encouragement to developers, hoteliers and brand managers to incorporate Jamaican timesharing into their hospitality portfolios.

Keith’s portion of our presentation included an explanation of the various ways that timesharing benefits the economies of major resort destinations.  He focused in particular on the significant success that the U.S. Virgin Islands—a serious competitor for Jamaica’s tourists—has experienced in recent years from timesharing.  Keith also detailed the many ways that timesharing is compatible with and supportive of the local hotel industry, including the housing of marketing stays; providing important economies of scale for hotel management, amenities and infrastructure in mixed-use projects; and broadening the hospitality tax base, rather than necessarily being directly competitive or parasitic to hotels as many believe.

I cited Puerto Rico’s adoption of its comprehensive timeshare law revision in 1995 as an example of how creative a tourist destination can be that really wants to encourage timeshare development.  In negotiating that new law with the Puerto Rican government on behalf of ARDA and Hyatt, we encountered some conflicts relating to Puerto Rico’s very strong public policies (and politics) underlying its long-established condominium, mortgage and notary laws.  The fact that Puerto Rico’s laws are based on Spanish Civil Law instead of English Common Law also presented us with some challenges.  Rather than undertaking the difficult (if not impossible) task of trying to amend all of those laws so that Hyatt and others could do business in Puerto Rico the way they were used to doing it on the mainland, we persuaded the government to create a whole new kind of real property interest for timeshare—a vacation ownership regime—that had its own rules and policies affecting those sensitive areas.  The legislation passed, and Hyatt proceeded with construction of its beautiful Hacienda del Mar resort.

In closing, Keith and I both stated that ARDA would be willing to work hard to assist the Jamaican government in finding solutions to any of their issues regarding timesharing so that Jamaica could join the international timeshare community soon, and in a big way.

As the 2011 Colorado legislative session progresses into its final stage, we wanted to update you on the status of the bills we previously identified as having a potential impact on hotels, fractionals, and timeshares.

Conflicts of Interest - HB 1124 (Awaiting Governor's Signature)

We flagged HB 1124 as originally introduced because, if read conservatively, it would have inadvertantly gutted CRS 38-33.3-310.5 by limiting the concept of a "conflict of interest" to situations in which a director or his/her family received a direct financial benefit.  At the same time, HB 1124 would have mandated the director's recusal with the result that the director could not vote irrespective of whether the material facts of the conflict were disclosed or the conflicting interest transaction was fair to the home owners association.  Finally, HB 1124 would have inadvertantly eliminated the necessary procedural guidance provided by the existing law's cross-reference to CRS 7-128-501.  In all, the bill as originally proposed was a trainwreck.      

Thankfully, the sponsor, when informed of these problems, significantly amended HB 1124 so that it simply provides basic guidelines as to what constitutes an adequate conflict of interest policy under CRS 38-33.3-209.5(1)(b)(II):

• A means of determing when a conflict of interest exists.
• A set of procedures to follow when a conflict of interest does exist, including triggers for both mandatory disclosure of a conflict and recusal from related decisions.
• A requirement for periodic review of the HOA’s conflicts of interest policy.

That's the good news.  The bad news is that Colorado legislators continue to tinker with Colorado's Common Interest Ownership Act without understanding the consequences of their proposals, and continue to bulk up §209.5 with frivolous and practically unnecessary provisions.  After HB 1124 becomes law, don't be surprised when your HOA legal counsel offers to provide you, for a price, with a conflicts of interest policy that meets the new law's laughably generic requirements.      

Mandatory Foreclosure Bill - HB 1139 (Stalled in Committee)

We flagged HB 1139, which directs lenders to foreclose on the collateral for a loan before reaching other assets of a debtor, because it had the potential for putting an inadvertant chill on lending in Colorado.  Taking the conservative approach, the Colorado House of Representatives has not voted HB 1139 out of committee.  Weighing the bill's potential downside as hotel development begins its inevitable comeback against its very limited upside for those developers already struggling with personal guarantees, we think discretion may have been the best approach. 

Residential Nonprofit Corporations - HB 1110 (Signed by Governor)

The original HB 1110 simply confused us, as we had no idea of what may be encompassed in the term “Residential Nonprofit Corporations” (RNCs).  Fortunately, the sponsor amended HB 1110 to instruct us what RNCs aren't - and the exclusion provisions include HOAs (whether formed "before, on or after" the enactment of the Colorado Common Interest Ownership Act).  We are hopeful that this exclusion will be sufficient enough to protect Colorado HOAs from being harassed with this law.     

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.

The Hospitality Lawg would like to thank Emma Riach for submitting this post.  Baker Hostetler has had the pleasure of advising Emma and her team as they work to implement this new law.  Emma is based in the Turks & Caicos and can be reached at emmariach@karammissick.com.

The Turks and Caicos Advisory Council recently approved the introduction of Fractional legislation in the Turks & Caicos Islands and it is expected that the draft Ordinance will be enacted in the coming months.

The Turks and Caicos Islands are a high-end tourist destination and a British Overseas Territory located at the bottom of the Bahamian chain.  Its world famous Grace Bay is home to a number of condominium resort developments, marketed primarily to investors from North America.  Nearly all these properties have sold through whole ownership as access to deeded shared ownership has been limited in the islands.  This is largely due to the complicated approval process under the 30-year old Time Sharing Ordinance.  To date, only one development has successfully navigated the approval process, leaving others to instead offer a percentage of shares in a company owning the underlying real estate.

The new draft legislation should radically change the way that investors can purchase real estate in the Turks and Caicos Islands.  The proposed draft legislation is simple and will allow owners or developers of condos or villas to divide their properties into increments of up to a minimum of 1/12^th interests.  Such interests will be separate registered proprietary rights, with an individual register created for each proprietary interest at the Land Registry; and the name of the owner will be registered on each individual Register for the designated fraction (and hence akin to what North Americans refer to as deeded interests).  The Turks and Caicos Land Register is certified by the Crown and hence gives secure protection to investors.

The application to create fractional interests in the property will require, by the anticipated statute, the lodging of fractional By Laws that will inscribe the usage rights, cost sharing rules and rights to attend and vote at condominium or homeowners’ association meetings.  The attorneys who prepared the draft Fractional Ordinance recommended the registration of such By Laws at the Land Registry in the same manner that Condominium Strata By Laws must be registered at the Registry, in order to mandate a public record of such rules and to ensure that all subsequent owners are fully bound by the By Laws.

In contrast to the Time Sharing Ordinance, the proposed system under the draft Ordinance is intended both to facilitate the registration of new fractional properties and to provide an efficient means of administration thereafter.  It is hoped, by the attorneys involved in the initiative and by the Turks and Caicos Government, that such a system will be considered by investors and lenders as a highly secure and simple means of obtaining registered rights in Turks and Caicos that reflect the time and monetary investment that owners would like to make in our islands.  The proposed legislation should, for the first time, allow luxury Grace Bay condos to be available to persons wishing to invest $500,000 or less in our real estate market.  The timing of the new laws is much welcomed as we see new airlines such as JetBlue and Continental flying into Providenciales and the airport extension, which is hoped to increase the transatlantic flight options.

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.

Why does the Consumer Financial Protection Bureau Matter?

The Dodd-Frank Wall Street Reform and Consumer Protection Act created the Consumer Financial Protection Bureau, a new and powerful federal bureaucracy with a mandate to enhance consumer financial protection under a host of new and existing consumer protection laws.  According to the current schedule, the CFPB will absorb a significant portion the consumer protection functions (research, rulemaking, guidance, supervision, examination and enforcement) of the Federal Reserve, the FDIC, the FTC, the NCUA, the OCC, the OTS and HUD as of July 21, 2011.   

Depending on how the mandate is implemented, it could result in a shift from a disclosure regime towards a rules-based regime - a change that would invite both federal and state regulators to take a fresh look at some long-standing interpretations of separate but related consumer protection laws.  As such, the methods by which fractionals, timeshares and travel club memberships are sold and financed are potentially subject to some significant changes.   

Hospitality Lawg Updates

Given this potential, the Hospitality Lawg will be tracking CFPB developments and report on them as appropriate.  In early January, we reported on some initial organization and staffing developments at the CFPB.  This post focuses on developments from February.

• Big Bureau, But Leader Still Undetermined

President Obama's budget contemplates over 1200 hires at the CFPB.  But with only a little more than 5 months before the July 21 launch date, President Obama has not nominated a director for the CFPB.  Without a director, Sheryl Harris at the Plain Dealer reports that the authority of the CFPB may be significantly limited.  And Brady Denis at the Washington Post reports that the US Chamber of Commerce is taking steps to confirm that limit on the CFPB’s authority.

• Consumer Outreach 

The CFPB launched its website in early February.  The site's focus on social media backs up Elizabeth Warren's stated goal of hearing from consumers as the agency is under development.   On the not-so-welcoming side, the site features a very large badge and the phrase "Welcome to the Bureau."   The site states that:

The central mission of the Consumer Financial Protection Bureau (CFPB) is to make markets for consumer financial products and services work for Americans—whether they are applying for a mortgage, choosing among credit cards, or using any number of other consumer financial products.

• Warning Shots

The site also refers to the CFPB as a "neighborhood cop on a beat."  Peggy Twohig, the "Non-Bank Supervision Team Lead," described her unit's focus as follows:

Many companies other than banks provide consumer financial products and services. These nonbank companies include mortgage lenders, mortgage servicers, student lenders, payday lenders, credit bureaus, and debt collectors. Nonbank financial companies can have a huge impact on consumers, but, unlike banks, they have not been subject to regular Federal reviews to make sure they play by the rules. My team is planning a new Federal supervision program to oversee these companies. When banks and nonbank companies are subject to similar Federal oversight, consumers across the entire marketplace will be better protected

In Richard Cordray's first interview since arriving to set up the CFPB's enforcement operations, Jean Eaglesham of the Wall Street Journal reports that Cordray suggested he will use the same aggressive approach that he was known for in his previous job as Ohio's attorney general. Last year, the 51-year-old Mr. Cordray described the foreclosure practices used by companies now under a nationwide investigation as "a business model built on fraud."

If you haven't booked your reservation already, there is still time.  The 11^th Annual Ragatz Associates Fractional Interest Conference will take place on March 14, 15 and 16 in San Francisco at the landmark Fairmont Hotel. 

For those unfamiliar with the Ragatz Conference, we think it has been the best place to gain an understanding of what's going on with private residence club (PRC) and fractional products from any perspective, whether development, marketing or operations.  And while the prior 10 conferences have been great, version 11 promises to be the best yet.  Dick will still be presenting the results of his annual state-of-the-industry survey, but a look at the schedule indicates that Ragatz Associates has tweaked its formula with:

• Over 30 new speakers
• A redesigned "Fractionals 101" - Michael Burns of Private Residence Resorts will lead a six-hour workshop (with Q&A) for those looking to become familiar with the PRC and Fractional Ownership industry
• Special sessions on social media marketing, supply and demand trends and the future of the shared ownership marketplace
• Enhanced interactive sessions and opportunities

 As an extra bonus, there will be two speakers from the Hospitality Lawg:

• Rob Webb will moderate a Q&A session titled "What is Needed to Stimulate a Return to the Glory Days"
• Dave Waller will be part of the Fractionals 101 team.

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.   

Do timeshare developers have too much inventory to sell?

It probably goes without saying (so I will) that one of the consequences of the “Great Recession” will be a shift in the way the vacation ownership industry does business going forward.  The days of unbridled spending on any marketing channel no matter how half-brained is long gone.  Selling to consumers who can demonstrate the ability to purchase the product by simply fogging a mirror is at an end.  As a consequence of reduced marketing efforts, increased qualification standards, and limitations of available end loan financing, timeshare developers have greatly reduced their marketing efforts and cut their sales line.  When added to projects where the timeshare developer built far in advance of sales, the result is that timeshare developers are sitting on a lot of unsold inventory.

So what if timeshare developers have a glut of timeshare weeks to sell?

The problem is that with developers struggling to move their own inventory, they have limited resources to take on and move other inventory, such as reclaimed owner interests.  That is, a breakdown in the normal channel that recycles inventory couldn’t come at a worst time given the other fall-out of the recession – the spike in mortgage loan defaults and unpaid assessments by consumers struggling to make ends meet.  The timeshare interests given up by owners walking away from the obligation to make payments on their loans or pay their maintenance fees has added to the ever expanding pool of developer unsold inventory.

Is the vacation ownership industry experiencing an unsold timeshare interest "perfect storm?"

The other element compounding the problem and potentially creating a timeshare inventory "perfect storm" may be aging owner base of timeshare interests at many vacation ownership resorts.  Long time owners who enjoyed the product for many years and would otherwise continue to pay their maintenance fees, are no longer able to travel and can’t convince their children to use their timeshare interests.  The result?  An even larger amount of timeshare interests in the marketplace.

Is there a solution?

It will be an interesting ride to say the least.  What we do know is that the vacation ownership industry is resilient, and that excess timeshare interests in the marketplace means opportunity.  My prediction is that the industry will thrive because of new and unexpected entrants into the business, because of the growth of a viable and trustworthy resale market, because of the slow but steady return of available credit, and because of the development of new products, including new types of timeshare products.  There may not be a tremendous amount of brand new timeshare projects to come online in the next year or so, but there won't a shortage of ways to use and re-use existing timeshare interests.

The initial rush of bill filings is over at the Colorado Legislature, with three in particular having the potential for negatively impacting future development of hotel, fractional and timeshare projects in Colorado:

HB 1139 - Foreclosure

This bill directs lenders to foreclose on the collateral for a loan before reaching other assets of a debtor.  While this has immediate appeal for those developers now trying to negotiate their way out of personal guarantees, it ultimately could be a detriment for future development, especially during lean times when financing for complicated hotel and/or shared ownership development may be scarce.     

HB 1110 - Residential Nonprofit Corporations

This bill creates meeting and refund requirements for "Residential Nonprofit Corporations."  Given that we have never heard this term before, we contacted the bill's sponsor to find out what she was trying to accomplish.  We were told that the term "residential nonprofit corporation" was intended to include only a retirement community structured to avoid providing residents with participation rights.  This limited purpose became more evident after an amendment tacked on by the House Economic and Business Development Committee created some exceptions, including one applicable to Colorado fractional and timeshare owner associations.  Nonetheless, because the potential scope of HB 1110 could be very broad, its worth keeping an eye on.   

HB 1124 - Conflicts of Interest

This bill would change the conflict of interest rules for homeowners' associations to include a broad mandatory recusal requirements.  While the bill's summary states that this is a return to the statutory language as it existed prior to 2006, the drafters eliminated the fractional/timeshare carveout in the pre-2006 statute.  Although not included in the bill, this carveout is important given the developer's (and management company's) continuing interest in the management of the shared ownership property.  While you may want to track this bill, it probably isn't going to go anywhere until it attracts a Senate sponsor.   

At the moment, each of these bills face a long road before becoming law.  While the rationale for each bill may be commendable, they could, if passed, be characterized as blunt instruments with several unintedned consequences.  As always, we encourage you to reach out to your representative and senator and let them know that they may be missing the mark. 

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.         

Developers who have made “subdivision developer” filings with the Colorado Division of Real Estate must renew their filing annually prior to December 31 each year.  This is a hard deadline with penalties being automatically incurred for any late filing.  

Those familiar with the renewal process will note some significant changes in the renewal form.     

First, the good news.  The renewal fee has been reduced from $287 to $136.  This represents a decrease of over 50% from the 2010 renewal fee.  

However, the renewal form has been revised to both ask additional questions and limit the variance in responses.  We generally believe these changes are positive as they will provide the Division with more project data at what we assume to be little administrative cost on the part of the registrant.  The more significant changes are described below: 

• Registrants are being asked to provide the "common advertising name of subdivision" and to specify whether the project is a condominium, timeshare or raw ground. 
• Registrants are also being asked to indicate how many subdivisions "are currently registered.” 
• Finally, with respect to inventory, the Division has substituted the blanks in the old form with a “check the box” approach, with choices being units, points, intervals, weeks, lots and "other." 

For shared ownership developments, we anticipated that there might be confusion between the categories of “interval” and “weeks.”  So we checked with the Division and found out that they do not find any qualitative difference between "interval" and "week" for purposes of the renewal form.  It seems that the old forms were completed using both terms, and the Division simply wanted people to be able to complete the 2011 form consistently with past years.  

20 years and still going.  As we detailed in a November Developments article, timeshare resale broker Stroman Realty received its initial cease and desist order from the California Department of Real Estate in 1990.  Since then, the California DRE has continued to insist that Stroman needs to hold a California real estate broker license if Stroman wants to broker the sale of California timeshares.  And Stroman has continued to press its case that California's rules would, if enforced against Stroman, violate the Commerce Clause of the US Constitution.

This week, the parties agreed to formally mediate their dispute after “discussing a possible resolution of this matter” for several months.  The mediation is to take place on December 20.  If no resolution is reached following the mediation, the parties will continue to work toward a trial slated for March 26, 2012. 

But while there is officially no deal to settle the dispute, we have taken note of a change in Stroman Realty's website - a little statement in what looks to be 8 point font at the very bottom of this page:  "California residents will not be charged an advertising fee by Stroman Realty, Inc." 

We don't know when this was added, but we are pretty certain that it is in response to the California law that equates charging an advance fee with brokerage activity.