Keeping Private Matters Private

co-authored by

Allen P. Pegg & Gabriella Morello

Keeping Soiled Laundry Out of Public View: How Arbitration Provisions Can Help Preserve Image and Value

For any company, brand image is king.  After all, image reflects on all aspects of the business, from reputation to service to attitude to culture. For one industry in particular, however, image is inherently linked to the business’s core identity and ability to attract repeat clientele – in other words, to survive.   That industry is hospitality.  For those operating in that segment, public brand image can directly and significantly influence the business’s relationship with its customers, vendors, and management groups. While prevalent across the industry, this is perhaps most apparent for owners and operators of boutique hotels, whose livelihood as competitors in the hospitality market is inextricably tied with their reputation and word-of-mouth among consumers and the media.

Image Is King

Given the impact of social media, marketing, and press attention, conflicts that arise from any one of the variety of business relationships that hospitality owners and operators necessarily have are publicly scrutinized and painstakingly explored, influencing future business and customer relations – one way or another.  For example, Miami Beach boutique hotel Eden Roc LLP was recently involved in a highly publicized lawsuit adverse to Marriot International, alleging claims for mismanagement and trespassing.  Eden Roc claimed that Marriot breached the parties’ Management Agreement and that Marriott’s “failure to meet [its] own brand and operational standards” caused Eden Roc “to suffer with the stigma and reputational injury of an abandoned, drifting and dying hotel brand.”  In response, Marriot counterclaimed for breach of contract, alleging that Eden Roc failed to effectively market the hotel and thereby caused its own cascade of money damages.  This public round of unsavory allegations made headlines in Law360, Bloomberg, and The Real Deal, to name just a few.  This was certainly not the most inviting press for customers and vendors, who as a group expect stable and reliable management during their stay (in the case of hospitality customers) or contract term (in the case of hospitality vendors).

Litigation:   An Event in the Public’s Eye

To be sure, hotel and management companies should be equally concerned about maintaining privacy and upholding confidentiality issues during all aspects of business negotiations and dealings.  Ultimately, disclosure of confidential information during the dissolution of these relationships is just as undesirable and hurtful to the business, if not more so, than when they commence.

Nevertheless, the kind of disputes described here, and their related counterparts, are not infrequent.  And for better or for worse, lawsuits often paint an image far removed from reality, leaving customers, vendors, management companies, and hotel owners alike with the incomplete impression of a business.  For this reason, among others, savvy hotel owners and management companies should seriously consider incorporating mandatory arbitration provisions in their service contracts (such as management and vendor agreements), and employment contracts, where litigation is prevalent.

Arbitration:  A Private Affair

Due to the hospitality industry’s acute reliance on brand image and reputation to lure new and bring back repeat guests, a primary benefit of arbitration is its confidentiality.  Through privately managed non-public filing and non-public proceedings, as well as non-public decisions, arbitration provides an additional back-end layer of confidentiality protection that hotels and management companies seek (or should seek) during the front-end negotiations of these business agreements. See generally Am. Bar Ass’n Section of Dispute Resolution, Benefits of Arbitration for Commercial Disputes, at 5 (“Confidentiality [of arbitration] is an important feature for many corporations, particularly when . . . there are concerns about or damage to reputation or position in the marketplace.”).

Arbitration can also address employment issues, which if aired in a public arena can significantly damage any hospitality brand’s image—and in particular a fledging or boutique brand’s image.  Although the hospitality industry has had a global presence for decades, its labor force has become increasingly diverse over the last decade. See Camille Kapoor & Nicole Solomon, Understanding and managing generational differences in the workplace, Worldwide Hospitality and Tourism Themes, Vol. 3, Iss. 4, at 308-18 (2011).  The benefits of such a diverse workforce are plentiful, though this diversity can also lead to a brand’s increased exposure to employment discrimination lawsuits, which can be particularly attractive to employees due to their jury trials and punitive and compensatory damages.  Arbitration provides a fairer and level playing field, sifting out the unsubstantiated complaints that often owners and management companies dread (so much so they often settle without considering the merits out of concern for their brand and image).  See generally David Sherwyn & J. Bruce Tracey, Mandatory arbitration of employment disputes: Implications for policy and practice, Cornell Hotel and Restaurant Administration Quarterly, 42(5), 60-71 (2001).

So What Should Industry Players Do?

All things considered, the inclusion of mandatory arbitration clauses in a hospitality owner’s or provider’s contracts can help protect brand image—and hence, the success of the business—by keeping disputes, which can unreasonably cloud customers’ and partners’ view of the business, confidential and out of the public view.

Allen P. Pegg, Counsel at Hogan Lovells’ Miami office, concentrates his practice in state and federal complex commercial litigation, arbitration, and appellate work. His broad experience includes, among other areas, matters involving contract disputes, business torts, shareholder derivative actions, shareholder and partnership disputes, professional liability claims, corporate governance and financial disputes, and commercial real estate and development issues.

Gabriella Morello is a member of the Litigation, Arbitration, and Employment practice group in the Miami office of Hogan Lovells. She focuses her practice on commercial litigation and international arbitration representing multinational entities from various countries in Latin America and the Caribbean, Guatemala, México, and Venezuela.