When the Patel family opened a hotel in Dickinson, North Dakota in 2007, they agreed that brand recognition offered by a large franchise chain would be a valuable trade-off to operating independently. After careful analysis, they chose to operate their family hotel as a Quality Inn and Suites with Choice Hotel International Inc. (Choice Hotels). This is similar to the decisions being made by thousands of entrepreneurs each year to become franchisees of large brands instead of working as independent small business owners.

Such franchise agreements, common across hotels, fast-food restaurants, and other retail businesses, provide opportunities for small-business owners like Darshan Patel, who purchased the Dickinson Quality Inn and Suites from his father in 2018.

As Patel learned, however, franchise agreements only work when both the franchisor (in this case the hotel chain) and the franchisee (the hotel owner) operate in good faith and treat each other with respect. As a neutral arbitrator recently ruled, Choice Hotels treated Patel not as a partner in running a successful business, but as a mark to be taken advantage of with both widespread misstatements and misallocations of marketing system fee funds.

Patel’s case is all too familiar to us in the hospitality industry. Increasingly, big chains like Choice Hotels (whose CEO Patrick Pacious received $38 million in salary, bonus, and stock options last year) have lost sight of the partnerships needed to sustain and grow our industry as we deal with workforce shortages, continued recovery from the pandemic, and competition from home-based rental apps like Airbnb and Vrbo. While AAHOA, the Asian American Hotel Owners Association, of which I serve as President & CEO, remains committed to dialogue with the hotel chains on uplifting our industry, we are also turning to partners in government like the Federal Trade Commission (FTC) and the New Jersey Legislature to help restore balance in the critical franchising relationship.

Patel’s case is unique in that the arbitration award was actually made public. The arbitration ruling specifically faulted Choice Hotels for violating terms of its own franchise agreements by, among other things, falsely asserting it was obtaining “volume discounts” for the products and services that franchisee hotel owners were required to buy, and purportedly leveraging its size, scale and distribution to reduce franchisees’ costs for such goods and services. None of this was true. Choice failed to perform as promised regarding pricing advantages for its franchisees. Instead of discounts, the arbitration award found that the procurement revenue of Choice Hotels grew significantly, and especially the salaries of those directly involved.

The arbitrator also found Choice Hotels misallocated marketing funds intended for the betterment of current franchisees to instead attract new buyers with key money. This practice highlights a concerning shift in focus from nurturing the existing franchisee relationships that contribute to the brand's success, to prioritizing the acquisition of new franchisee investors.

The award further held that Choice Hotels did not pass along bulk discounts for cybersecurity services, which are vital in an age where hackers are constantly working to penetrate hotels’ defenses. For AAHOA hoteliers, threats like these strike an especially sensitive chord given the lack of assistance from hotel chains in the past. A ransomware attack on IHG Hotels & Resorts last year cost hotel owners between $30,000 and $75,000 each.

Fair Franchising is at the heart of AAHOA’s efforts to ensure fairness in the franchise/franchisee relationship and allow entrepreneurs, including many immigrants and second- and third-generation owners, a fair shot at success. While the hospitality industry has seen many changes over the years, there will always be a need for big chains and small-business owners to come together on franchising principles that sustain their mutual interests.

That is why AAHOA is calling for reforming the franchise model to make it fair for all. This starts with encouraging competitive vendor pricing, full disclosure of the source of tens of millions of dollars in commissions that brands receive from vendors due to mandated purchases by franchisee owners, no new undisclosed fees without approval, and reasonable compensation from the sale of loyalty points.

The case against Choice Hotels brings to light practices that hotel chains work to keep behind closed doors. In fact, there have been several other arbitrations by hotel franchisees against Choice Hotels, and to date, the rulings on those either have been sealed in whole or in part and not made public, or are still pending with awards expected by the end of the year.

The erosion of trust brought about by breaches such as the ones Darshan Patel endured has far-reaching implications. It threatens to undermine the very essence of the franchise model, which is built upon principles of collaboration, shared success, and a commitment to honor contractual agreements. And the franchise model is the bedrock on which much of the hospitality industry rests. AAHOA Member-owned hotels support 4.2 million U.S. jobs and contribute 1.7% to the GDP.

While Darshan Patel experienced a rare public triumph against Choice Hotels, most hoteliers labor under a system that is increasingly one-sided. As owners of hotels that operate under some of the world’s best-known brands, it is crucial that we demand fairness, accountability and transparency from big-name franchisors to ensure a sustainable business model for many generations to come. That is clearly the better choice for all involved.