HLT Existing Franchise Holding LLC v. Worcester Hospitality Group, LLC

14-593-cv
HLT Existing Franchise Holding LLC v. Worcester Hospitality Group, LLC

UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT

SUMMARY ORDER
RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A SUMMARY
ORDER FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED BY FEDERAL RULE OF
APPELLATE PROCEDURE 32.1 AND THIS COURT’S LOCAL RULE 32.1.1. WHEN CITING A SUMMARY ORDER
IN A DOCUMENT FILED WITH THIS COURT, A PARTY MUST CITE EITHER THE FEDERAL APPENDIX OR
AN ELECTRONIC DATABASE (WITH THE NOTATION “SUMMARY ORDER”). A PARTY CITING TO A
SUMMARY ORDER MUST SERVE A COPY OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL.

At a stated term of the United States Court of Appeals for the Second Circuit, held at the
Thurgood Marshall United States Courthouse, 40 Foley Square, in the City of New York, on the
9th day of April, two thousand fifteen.

PRESENT:
ROBERT A. KATZMANN,
Chief Judge,
JOHN M. WALKER, JR.,
GERARD E. LYNCH,
Circuit Judges.
____________________________________________

HLT EXISTING FRANCHISE HOLDING LLC,

Plaintiff – Counter-Defendant – Appellee,

v. No. 14-593-cv

WORCESTER HOSPITALITY GROUP, LLC,

Defendant – Counter-Claimant – Appellant.
____________________________________________

For Plaintiff – Counter-Defendant – Appellee: BENJAMIN B. REED (James C. Rubinger, on
the brief), Plave Koch PLC, Reston,
Virginia.

For Defendant – Counter-Claimant – Appellant: GARDINER S. BARONE, Blustein, Shapiro,
Rich & Barone, LLP, Goshen, New York.

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 Appeal from the United States District Court for the Southern District of New York
(Engelmayer, J.).

UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED, AND

DECREED that the judgment of the district court is AFFIRMED.

Defendant-Appellant Worcester Hospitality Group, LLC (“WHG”) appeals from a May

20, 2014 amended final judgment of the district court (Engelmayer, J.), granting summary

judgment in favor of Plaintiff-Appellee HLT Existing Franchise Holding LLC (“HLT”) in HLT’s

action for declaratory judgment and money damages arising out of a contractual dispute relating

to a hotel franchising agreement. On appeal, WHG argues that the district court erred in: (1)

considering results from guest-satisfaction surveys when deciding whether HLT properly

terminated the franchising agreement; (2) finding that HLT acted properly in terminating the

franchising agreement because it did not act arbitrarily, irrationally, or in violation of its duties of

good faith and fair dealing; and (3) permitting HLT to recover liquidated damages under the

agreement. We assume the parties’ familiarity with the facts, procedural history, and issues on

appeal.

“We review a district court’s decision to grant summary judgment de novo, resolving all

ambiguities and drawing all permissible factual inferences in favor of the party against whom

summary judgment is sought.” Wright v. Goord, 554 F.3d 255, 266 (2d Cir. 2009) (internal

quotation marks, alterations, and citations omitted). The court “shall grant summary judgment if

the movant shows that there is no genuine dispute as to any material fact and the movant is

entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a).

First, WHG argues that the district court erred in considering results from guest-

satisfaction surveys when deciding whether HLT properly terminated the franchising agreement.

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Specifically, WHG contends that those survey results were improperly considered on HLT’s

motion for summary judgment because they were inadmissible hearsay statements and were not

properly authenticated. On a motion for summary judgment, a district court’s decision about

whether to exclude evidence as hearsay is reviewed for abuse of discretion. See Porter v.

Quarantillo, 722 F.3d 94, 97 (2d Cir. 2013). A district court has broad discretion in choosing

whether to admit evidence on summary judgment and abuses that discretion only “when it bases

its ruling on an erroneous view of the law or on a clearly erroneous assessment of the evidence,

or renders a decision that cannot be located within the range of permissible decisions.” Id.

(internal quotation marks and alterations omitted).

In this case, the district court concluded that the guests’ survey responses were not

hearsay statements, finding that the survey data were admitted not “to prove the truth of the

matter asserted in the statement,” Fed. R. Evid. 801(c)(2), but rather “solely for the purpose of

determining what guests reported they thought about the Hotel,” HLT Existing Franchise

Holding LLC v. Worcester Hospitality Grp. LLC, 994 F. Supp. 2d 520, 535 (S.D.N.Y. 2014). We

agree with the district court that the guests’ survey responses were not hearsay, but reach that

conclusion for slightly different reasons. See, e.g., Bruh v. Bessemer Venture Partners III

L.P., 464 F.3d 202, 205 (2d Cir. 2006) (“[W]e may affirm on any basis for which there is

sufficient support in the record, including grounds not relied on by the district court . . . .”). We

hold that the guests’ survey responses were admissible because those responses were admitted

solely for the purpose of showing their effect on HLT’s decision to terminate the franchising

agreement. See United States v. Dupree, 706 F.3d 131, 136 (2d Cir. 2013) (“[A] statement

offered to show its effect on the listener is not hearsay.”). In determining whether HLT acted

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arbitrarily, irrationally, or in violation of the implied covenant of good faith and fair dealing, the

existence of the guest survey reports that appear to reflect customer dissatisfaction is relevant

because it supports HLT’s contention that it acted on what it reasonably understood to be

evidence of such dissatisfaction. The surveys were thus not admitted for the truth of what the

customers actually thought, still less for the accuracy of their purported reactions; what matters is

that the data existed and that HLT did not act in bad faith or irrationally in relying on it.

Our analysis on the admissibility of the survey data does not end there, however. The

survey data were transmitted to HLT via a third-party survey administrator, Medallia, Inc. WHG

therefore objects on both hearsay and authentication grounds to the admissibility of Medallia’s

transmission of the survey results to HLT. The district court failed to consider these issues

below. Nevertheless, on the record before us, we can conclude that the survey data were properly

admitted. First, assuming arguendo that Medallia’s reports to HLT contained assertions, we find

that those reports were properly considered as records of a regularly conducted activity. See Fed.

R. Evid. 803(6). HLT established that Medallia regularly compiled guest survey scores at the

time guests submitted those responses to the surveys. Because Medallia’s reports recorded guest

impressions in the course of regularly conducted activity and neither party disputes the

trustworthiness of Medallia’s records, it is immaterial that Medallia, and not HLT, compiled

those reports. See Saks Int’l, Inc. v. M/V “Export Champion,” 817 F.2d 1011, 1013 (2d Cir.

1987). Second, on the record before us, WHG has failed to draw into material dispute the

authenticity of the survey results or their transmission from Medallia to HLT. HLT has offered

evidence to establish the authenticity of the survey data, but WHG has not produced any

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contradictory evidence. We therefore find that the district court did not err in considering the

guest survey data.

Second, WHG contends that the district court erred in concluding that HLT acted

properly in terminating the franchising agreement. WHG alleged that HLT acted arbitrarily,

irrationally, or in violation of its duties of good faith and fair dealing when it exercised its

discretion in conducting on-site inspections of WHG’s hotel. Under New York law, a party to a

contract who has discretion to review the acts of another is limited by the implied covenant of

good faith and fair dealing. See State St. Bank & Trust Co. v. Inversiones Errazuriz Limitada,

374 F.3d 158, 169 (2d Cir. 2004). HLT’s implied promise included “any promises which a

reasonable person” in WHG’s position “would be justified in understanding were included.”

Dalton v. Educ. Testing Serv., 87 N.Y.2d 384, 389 (1995) (internal quotation marks omitted).

“Where the contract contemplates the exercise of discretion, this pledge includes a promise not

to act arbitrarily or irrationally in exercising that discretion.” Id. WHG bears the burden of

showing a breach of this implied covenant. See Tractebel Energy Mktg., Inc. v. AEP Power

Mktg., Inc., 487 F.3d 89, 98 (2d Cir. 2007).

We need not determine whether the district court erred in concluding that there was no

genuine factual dispute about the arbitrariness or irrationality of the evaluations. That is because

any dispute as to the arbitrariness or irrationality of the on-site inspections was rendered

irrelevant because of HLT’s independent basis for terminating the franchising agreement.

Specifically, WHG failed the two evaluations that prompted HLT’s termination decision because

of failing scores on the guest surveys, and not because of failing scores on the on-site inspection.

As such, even if HLT conducted portions of its on-site evaluations in an arbitrary or irrational

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manner, those arbitrary or irrational actions did not cause the termination of the franchising

agreement. Because HLT terminated the franchising agreement based on a contractually

permitted, rational, and non-arbitrary factor—the poor guest survey scores—it did not breach the

implied covenant of good faith and fair dealing or act arbitrarily or irrationally. See Murphy v.

Am. Home Prods. Corp., 58 N.Y.2d 293, 304 (1983) (“No obligation can be implied . . . which

would be inconsistent with other terms of the contractual relationship.”).

Third, WHG argues that the district court erred in permitting HLT to recover liquidated

damages under the agreement. The agreement permitted HLT to recover three years’ worth of

estimated future royalties if HLT terminated the agreement due to WHG’s breach. Under New

York law, “[a] contractual provision fixing damages in the event of breach will be sustained if

the amount liquidated bears a reasonable proportion to the probable loss and the amount of actual

loss is incapable or difficult of precise estimation.” Truck Rent-A-Ctr., Inc. v. Puritan Farms

2nd, Inc., 41 N.Y.2d 420, 425 (1977). The burden rests with the party seeking to avoid the

payment of damages. See JMD Holding Corp. v. Cong. Fin. Corp., 4 N.Y.3d 373, 380 (2005).

The question of whether the fee is enforceable “is a question of law, giving due consideration to

the nature of the contract and the circumstances.” Id. at 379. Additionally, the New York Court

of Appeals has “cautioned generally against interfering with parties’ agreements,” id. at 380, and

has noted that “the trend favors freedom of contract through the enforcement of stipulated

damage provisions as long as they do not clearly disregard the principle of compensation,” id. at

380–81 (internal quotation marks omitted).

Here, WHG argues that the district court erred in finding that the liquidated damages

clause was permissible as a matter of law. Specifically, WHG contends that the district court

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overlooked a declaration provided by Sunil Nayak, who claims, based on over twenty years of

experience in the hotel industry, that a prototype Hampton Inn hotel can be constructed in less

than a year. We find that the district court did not err in disregarding this declaration because the

declaration does not address the question central to the liquidated damages inquiry in this case—

that is, at the time of contract formation, how long did the parties reasonably anticipate that HLT

would need to replace WHG as franchisee and to reopen a Hampton Inn hotel in the event that

HLT terminated the contract? Nayak’s declaration speaks only to how long it would take to

construct a new Hampton Inn once a franchisee was already in place, which is a distinct issue.

We therefore find that no reasonable juror could have inferred from Nayak’s declaration how

long the parties anticipated that it would take for HLT to replace WHG as franchisee and to

reopen a Hampton Inn hotel. Accordingly, the district court did not err in granting summary

judgment in HLT’s favor on the issue of liquidated damages.

We have considered WHG’s remaining arguments and find them to be without merit. For

the reasons stated herein, the district court’s judgment is AFFIRMED.

FOR THE COURT:
Catherine O’Hagan Wolfe, Clerk

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