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Law360 (October 28, 2020, 10:07 PM EDT) -- Franchisees of an Indian hotel start-up hit the company with a proposed class action alleging it used the COVID-19 pandemic to escape its obligation to ensure franchises make a certain amount in monthly revenue, according to a suit removed to Texas federal court Wednesday.
Shree Veer Corp. and Chief Hospitality LLC filed the suit against the Dallas-based arm of OYO Hotels & Homes, OYO Hotel Inc. The franchisees allege OYO used health regulations aimed at combating the coronavirus pandemic as an excuse to suspend a provision of its contracts with franchisees that promises a minimum revenue for the hotel owners.
The franchisees allege the guarantee was hurting OYO's bottom line pre-pandemic and the company saw an opportunity to escape its obligations by declaring the hotel rooms qualified as unavailable under the terms of the agreement during the health crisis. Declaring rooms unavailable suspended the minimum revenue guarantee under the contract despite the fact that the franchises continued to operate, according to the suit.
Shree Veer and Chief Hospitality told the court the minimum revenue guarantee was a huge motivator for hotel property owners to change their affiliation from well-known brands in the U.S, such as Motel 6, to the lesser-known OYO brand that was just entering the market. The "Herculean task" of convincing owners to make the switch was made possible by OYO promising converts they could count on making a set minimum of revenue each month because OYO would make up for any shortfall.
But the suit alleges that OYO's business model didn't thrive in the U.S. market and, in an effort to attract guests, it was operating rooms at too steep a discount. Its business problems were leading to the franchisees frequently being owed money under the minimum revenue guarantee that the company would fail to pay.
Then, the pandemic provided "a convenient cover for OYO's business failures," the suit alleges. In response to the pandemic, OYO told franchisees that state and federal public health ordinances essentially prevented hotel rooms from being booked, which means the rooms qualify as unavailable under the management agreement, the suit says.
"OYO has quietly and fraudulently sought to force their franchisees to bear the financial losses and the associated risks that were contractually allocated to OYO in the entirely foreseeable scenario of reduced travel and tourism," the franchisees said in their complaint.
Meagan Martin Powers of Martin Powers & Counsel PLLC, an attorney for OYO, told Law360 in an email Wednesday that the suit is "replete with gross factual misstatements." OYO has over 200 partner properties in the United States and it did not use the pandemic to escape its contractual obligations to them, she said.
"My client is proud of its strong relationship with these partners and has worked hand-in-hand with them to weather the unfathomable impact of COVID-19 on the hospitality industry," Powers said.
Powers additionally noted that the temporary suspension of the minimum revenue guarantee has already expired.
Shree Veer and Chief Hospitality are seeking to represent a class of 50-70 franchise owners who they allege were similarly defrauded by OYO's arbitrary suspension of the minimum revenue guarantee. The suit lodges fraud and breach of contract claims.
The suit was filed in state court Tuesday and removed to federal court the following day by OYO. OYO additionally filed crossclaims alleging that the franchises collectively owe over $360,000 in contractual termination fees that they have not paid in the months following their decision to end their agreements with the startup.
Shree Veer operates a hotel in Oklahoma and Chief Hospitality LLC operates a hotel in Nebraska. The managing member of both companies is Dr. Chandrakant Shah, according to the suit.
According to its website, OYO is the sixth-largest chain of hotels, homes, managed living and workspaces in the world, with over 23,000 hotels operated in 18 countries. According to company statements, the company invested $300 million last year to grow its presence in the United States.
"As the matter is currently under active litigation, we are not at liberty to comment on the specifics or divulge any further information at this point in time," a spokesperson for OYO told Law360 in an email Thursday. "However, we would like to unequivocally state that these allegations are baseless and hold no ground. We will be vigorously defending these in the court and have full faith in the judicial system."
Representatives for the franchisees didn't immediately respond to requests for comment Wednesday.
The franchises are represented by Evan Lane Shaw, Jeremy B. Powell and David J. Welch of the Law Offices Of Van Shaw.
OYO is represented by Meagan Martin Powers and M. Angelita Delgadillo of Martin Powers & Counsel PLLC.
The suit is Shree Veer Corporation et al v. OYO Hotels Inc., case number 3:20-cv-03268, in the U.S. District Court for the Northern District of Texas.
--Editing by Emily Kokoll.
Update: This story has been updated to include comment from a spokesperson for OYO.
For a reprint of this article, please contact reprints@law360.com.
