Holiday Inn Franchisees Allege Kickback Scheme in Remodeling Work

A class says the global hotel chain had ulterior motives in selecting vendors to perform costly upgrades.

Aaron Hotel Group runs this Holiday Inn franchise in Windsor Locks, Conn. (Image courtesy of Intercontinental Hotel Group via Courthouse News)

(CN) — Holiday Inn franchisees hit the world’s biggest hotel company with a federal class action Thursday, accusing Intercontinental Hotel Group of ripping off business owners by requiring them to use specific vendors for hotel upgrades, then taking kickbacks for the construction projects. 

Intercontinental operates some 5,600 hotels across more than a dozen brands. Holiday Inn, which includes spinoffs Holiday Inn Express and Holiday Inn Resorts, is its mainstay chain, accounting for 70% of its total hotel count. 

Thursday’s lawsuit is led by the operator of a Holiday Inn Express & Suites in Windsor Locks, Connecticut. Represented by the firms White and Williams in Philadelphia, and by Marks & Klein, Aaron Hotel Group says in a 49-page complaint that Intercontinental’s purported “brand standards” require franchisees to buy construction supplies at an inflated while undertaking expensive renovations like implementing high-speed internet and a new keycard system. 

Aaron Hotel Group contends that the purpose of the mandatory hotel updates is to maximize Intercontinental profits.

Inflated renovation and construction prices yield rebates that go to Intercontinental and the limited liability company through which it runs its franchises, Holiday Hospitality Franchising. Those two entities receive approximately 1% to 5% of the amount of the invoice price for goods and services purchased by franchisees, according to the complaint.

“These kickbacks to IHG and HHF are the primary — if not the sole — reason HHF franchisees are forced to use expensive vendors and suppliers not of their own choosing at supracompetitive pricing,” the complaint says, abbreviating the names of Intercontinental and its franchising subsidiary. 

Aaron Hotel Group calls such practices “unlawful, abusive, fraudulent, anticompetitive and unconscionable.” 

Intercontinental has maintained that it uses the collective bargaining power of its franchisees to ensure high-quality products and service while securing a group discount, calling its procurement programs the “IHG Marketplace.” 

But franchisees say that claim is a sham, and that the marketplace has only cost them money. 

“IHG/HHF’s primary goal in negotiating with vendors has little to nothing to do with the best interests of franchisees,” the complaint states.

Mandatory remodeling projects have included a required computerized credit card processing system; high-speed internet service for guests; a company-approved keycard system; televisions and in-room entertainment upgrades; equipment to run a gift card program; food and beverage programs; and furniture, furnishings, linens and food for guests. 

All of those upgrades were purchased at above-market rates, according to the complaint, which is filed in Connecticut. Had the franchisees been able to choose their own vendors, they say, they would have been better off financially. 

The complaint goes on to accuse Intercontinental of other bad-faith business practices, like reimbursing franchisees for only a fraction of the value awarded to customers who redeem travel points for a hotel discount. 

If a customer earns a free night at Holiday Inn hotels run by its franchisees, the Aaron group says Intercontinental not reimburse the cost unless said franchisee is at 96% occupancy. If not, the company will pay only $30, meaning the franchisee makes “only a small fraction of such things as nightly room rates,” according to the complaint. 

Aaron Hotel Group cites the Covid-19 pandemic as another instance where Intercontinental duped franchisees out of money. The hotel owners have halted marketing efforts during the pandemic, while requiring franchisees to continue paying significant marketing fees “for which they receive nothing in return,” according to the complaint.

Franchisees say Intercontinental also routinely requires them to pay multiple fees for the same product or service, and has also discriminated against hotel owners who are Indian American and South Asian American, applying overly harsh “brand standards” to those businesses. 

“HHF’s actions are unconscionable and outrageous, and have pushed franchisees to the financial breaking point,” the complaint states. 

Class counsel Justin Proper with White and Williams did not respond to a request for comment on Thursday afternoon, nor did representatives for Intercontinental.

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