Leveling The Playing Field For Hospitality Franchisees In New Jersey

Just prior to Memorial Day, the New Jersey Assembly passed legislation intending to bring more balance between hotel franchisors and franchisees.

As a supplement to the New Jersey Franchise Practices Act, the new legislation – which now classifies a “hospitality franchise” as “merchandise” under the New Jersey Consumer Fraud Act – refers to a written arrangement for a definite or indefinite period, in which a person grants to another person a license to use a trade name, trademark, service mark, or related characteristic, and in which there is a community of interest in the marketing of goods or services at wholesale, retail, by lease, agreement, or otherwise, where the goods include hotels, motels, inns, and similar establishments where sleeping accommodations are provided for pay to guests.

What this means and what you need to know

The legislation provides new rules to purposefully help hotels, motels and other lodging facilities in New Jersey that operate under an agreement with a franchise company. Several actions that may have been permitted under a franchise agreement are now prohibited under the Franchise Practices Act, including:

1. Receiving Consideration. A hospitality franchisor cannot receive consideration (definition below), directly or indirectly, from a vendor or the vendor’s affiliate unless the consideration is previously disclosed to the franchisee and unless the benefit is passed on to the hospitality franchisee. “Consideration” is broadly defined as a rebate, commission, licensing fee, marketing fee, transaction fee, system fee, system activation fee, services or any other thing of value.
2. Purchasing Goods & Services from Suppliers. A hospitality franchisee cannot be required to purchase goods or services from suppliers designated by a hospitality franchisor if goods and services of comparable quality are available from other sources. However, a franchisor is permitted to publish a list of approved suppliers, and may prescribe that goods, supplies, inventories or services comply with specifications and standards. For goods, supplies or inventories that carry a trademark, trade name or other identifying characteristic of a hospitality franchisor, such franchisor cannot unreasonably refuse to license the identifying characteristics to a vendor or supplier who meets the franchisor’s reasonable specifications and standards for quality of goods, financial soundness and capacity to meet the business requirements of the franchise.
3. Protected Territory. A hospitality franchisor cannot compete with a hospitality franchisee in an exclusive or protected territory (if the franchise agreement provides for either) under a different name or mark without the hospitality franchisee’s consent. “Exclusive or protected territory” refers to an area in which the hospitality franchisor cannot place a company-owned outlet or other franchisee without the hospitality franchisee’s written consent.
4. Amendments to the Operations Manual. The operations manual provided by a hospitality franchisor cannot be amended with the effect of unilaterally changing the material terms of the franchise agreement unless the amendment concerns the health, safety or welfare of guests or employees.
5. New Fees. New fees cannot be imposed on a hospitality franchisee unless the fees are disclosed in a franchise disclosure document and unless the fees are approved by the franchisee or the franchisee advisory committee that covers the franchise system as a whole.
6. Loyalty Programs. No fee or charge can be imposed on a franchisee if it fails to enroll a minimum number of guests required by the franchisor in a franchisor’s loyalty program.
7. Compensating for Lost Revenue. A hospitality franchisor must compensate a franchisee for lost revenue if the franchisor sells points in a guest loyalty program to use at the franchisee’s facility at no less than the franchisee’s lowest publicly advertised rate for that stay or the value of the points sold, whichever is less.

The legislation was referred to the Senate Commerce Committee of the New Jersey Senate on June 1, 2023. As presently drafted, this new legislation would have immediate effect when signed into law and will apply to franchise agreements that are entered into, modified, amended, or renewed after the new legislation’s effective date. Stay tuned.