Territorial Restraints: The Legal Landscape for Today and Tomorrow
By William A. Brewer III Managing Partner, Brewer, Attorneys & Counselors | March 31, 2009
Question 1: What Is The Parties' Legal Relationship?
The first question that hotel owners and operators should ask is, "What is the parties' legal relationship under the management agreement?" Since the seminal decision in Woolley v. Embassy Suites, Inc., 278 Cal. Rptr. 719 (Cal Ct. App. 1991), courts have routinely agreed that the hotel operator is an agent of the hotel owner. As an agent, the operator has common law fiduciary duties, including a duty of loyalty that bars it from competing with the owner. It is no surprise, therefore, that courts frequently view a contractual territorial restriction as imposing a fiduciary duty of loyalty on the management company.
Because the relationship between the owner and operator is defined by their contract, the parties are free to bargain away some or all fiduciary duties that the operator may normally owe the owner, including the duty of loyalty. It can be expected, therefore, that management and hotel companies will continue to seek contracts with owners that contain "no-agency" and "no-fiduciary" disclaimers. However, it is not enough to simply purport to waive or disclaim all agency obligations, or to put another label on the operator (e.g., "independent contractor"). Disclaimers will not be effective unless they specifically and clearly state that the manager owes no duties to the hotel owner apart from those specifically enumerated in the contract. Courts have also routinely dismissed language in management contracts disclaiming agency when the facts of the actual relationship between the parties establish that that operator is - despite the disclaimer - acting as the owner's agent.
In addition to the agency issue, the parties to the management contract need to be clear about which particular entities are subject to the territorial restriction. Take the common situation where the operator is an international company whose portfolio includes a number of different recognized brands. The operator may intend that the territorial restriction be limited to its involvement with only those hotels that operate under the same brand name as that of the owner. The owner, on the other hand, may view the provision as barring competition not just from similarly flagged hotels managed by the operator, but also from hotels that are affiliated in any way with the operator, be it through a parent company, subsidiaries, other brands within the operator's corporate umbrella, or even joint venture partners.
Consider another situation, wherein a worldwide hotel company uses a form territorial restriction in all of its management agreements that prohibits both the company and its "subsidiaries" from competing with the owner of a hotel that the company manages. What if the company is later wholly acquired by another operator? It should be anticipated that, in such an instance, hotel owners will argue that the territorial restriction bars not only competition from hotels managed by the original company and its subsidiaries, but also any existing hotels that the acquiring operator and its subsidiaries are already managing within the owner's "territory." That could impose unanticipated and steep costs on any planned acquisition.
Question 2: What is the Intended Scope of the Territorial Restriction?