A bill that would change the hotel franchise model in New Jersey is making its way through the state legislature.

Even though it has potentially wider implications across the hotel industry, it’s not necessarily well-known by all U.S. hoteliers.

“The language of the bill would seem to introduce a series of protections for franchisees and limit the power of franchisors to change or enforce brand standards without the direct consent and involvement of the franchisees,” said Jane Bokunewicz, faculty director of the Lloyd D. Levenson Institute of Gaming, Hospitality and Tourism in Stockton University’s School of Business, in an email interview.

The legislation, Assembly Bill 1958, was introduced into the New Jersey General Assembly in January 2022. The bill worked its way through several committees, stalling for nearly a year before amendments to the bill helped it move through to a General Assembly vote in May 2023. The New Jersey Senate received it in early June, when it was referred to the commerce committee, where it currently sits.

The bill would affect the sourcing of goods and services, brand standards as set in an operations manual and the logistics of brand-wide loyalty programs, among other aspects of the hotel franchise model, Bokunewicz said.

If passed by both houses of the state legislature and signed by the governor, the bill would make it a violation for a hotel franchisor to receive any direct or indirect consideration from a vendor or affiliate unless it is disclosed to the franchisee and then given to the franchisee, she said.

It would also allow a franchisee to purchase goods or services from suppliers besides those designated by the franchisor if those goods and services meet the franchisor’s reasonable specifications and standards, she said. It also requires franchisors to license a third-party supplier to use its trademarks for franchise supplies if those supplies are supposed to use the trademark.

It would not allow the franchisor to compete with the franchisee in an exclusive or protected territory under a different name or market without the franchisee’s approval.

The bill also prohibits the franchisor from unilaterally changing the material terms of the franchise agreement by making changes to the operations manual, Bokunewicz said. There are exceptions, however, for matters concerning the health, safety and welfare of guests and employees.

Franchisors would not be able to impose new fees on franchisees unless they are disclosed in a franchise disclosure document and unless approved by the franchisee advisory committee or franchisee.

They also couldn’t impose a fee or charge on the franchisee for not enrolling a minimum number of guests, she said. They also would not be allowed to sell points in a loyalty program to guests to use at a franchisee’s hotel without compensating the franchisee.

Any violations of these provisions or in section 7 of the Franchise Practices Act would not constitute a good cause for a franchisee’s termination.

“While such protections could be perceived as beneficial to franchisees — especially in industries other than hospitality — the industry fears that these changes would have unintended consequences that would damage brand image and shake consumer confidence,” Bokunewicz said.

The American Hotel & Lodging Association opposes the New Jersey bill for a multitude of reasons, including significant structural problems with the bill and a section that likely violates copyright law, AHLA President and CEO Chip Rogers said. AHLA has long had a principle of not supporting legislation that singles out and targets the hotel industry, he said. The bill would only change the franchise model for hotels in New Jersey, not other franchise businesses.

“If these principles of franchising are good public policy, then they should be good public policy for all franchise models and not go specifically after hotels,” he said.

When Rogers was president of AAHOA in 2015, both AHLA and AAHOA joined together to sue the city of Los Angeles over a law that only applied to hotel wages and work guidelines, he said.

Franchise agreements are contracts, a partnership between hotel brand and an owner, Rogers said. If one side has an issue with it, they should work it out with the partner rather than inviting the government to step in.

“I’m not aware of any time that has worked out in favor of either party in the long term,” he said. “It’s just not a good idea.”

AHLA opposes the changes proposed by the bill, Rogers said. For example, there’s a provision that allows franchisees to purchase products that aren’t officially approved by the brands but are close enough. The bill doesn’t specify what counts as similar and who gets to decide that, he said.

“If that determination is left up to the franchisee, they could determine it could be anything, and then you would actually have thousands of different standards for what similar is,” he said.

Those who support the legislation say it won’t eliminate brand standards, but if the law allows franchisees to pick products they believe are similar to what the brands want, arguably owners could come up with something different, doing away with the standard, he said.

AHLA membership comprises not just hotel brands but tens of thousands of owners as well, Rogers said. The chairman of the AHLA is an owner, and the immediate past chairman is an owner as well.

“They, along with many other owners, are steadfastly against this legislation,” he said.

If there are disagreements among between AHLA members, whoever they are, the AHLA does not get in the middle of it, he said. That’s not the organization’s role. When there’s a threat to the franchise model that benefits everyone, then it will step in to try to protect the industry by protecting the model.

Rogers said he and his team have spoken with the bill’s author on a number of occasions, offering specific changes that the author agreed to. However, some of the more recent changes aren’t reflected in the newest version of the bill.

When asked about AHLA’s relationship with the Asian American Hotel Owners Association, which supports the bill, Rogers said the AHLA is ready, willing and able to work with any organization that wants to help it protect and promote the industry. The relationship between the two organizations remains the same if AAHOA wants to join AHLA in doing that, and it will be AAHOA’s strongest partner, he said.

It’s important to point out that thousands of AAHOA members do not support the legislation, he said. There are a lot of hotel owners, AAHOA members and not, who are against the bill.

“That’s one of the things that we’ve tried to impress upon New Jersey lawmakers is that this is not a bill of owners against brands,” he said. “There are owners against owners, and that’s not something that the legislature should be refereeing.

“If you have a set of owners who are against this, which there are, and you have brands that are universally against this, which is true, maybe it’s just not a good piece of legislation.”

The Asian American Hotel Owners Association supports the New Jersey hotel franchising bill, said Laura Lee Blake, president and CEO of AAHOA. The organization was involved in helping rewrite some provisions of the legislation when it was stalled in a committee, removing portions that had opposition despite the benefit they would provide franchisees in AAHOA.

“As a board, we went through and carefully reviewed every provision and proposed redlined amendments to the bill,” she said.

Some members were against making changes when they couldn’t get franchisors to discuss the bill with them, but the board members decided it was in the best interest of everyone to have a stronger bill that would gain support and not affect brand standards or diminish the guest experience, as some critics argued, she said.

One of the sections removed from the original bill would not allow the franchisor to require or attempt to require the franchisee to make any capital investment over $25,000 more than once every five years without demonstrating a return on that investment over the life of the agreement.

“Our members would have loved it because that would have put some additional responsibility on the franchisors to show that the changes they were requiring would have a return on investment, at least over the life of the franchise agreement,” she said. “But we have heard that this might impact brand standards and might impact the guest experience. We deleted that one.”

As a state bill, it would only apply to hotel franchise agreements in New Jersey, but it could have a wider effect outside the state, Blake said. One of the provisions that’s still in the bill would require full disclosure of franchisors of any fees, rebates, commissions or other considerations from a vendor when a franchisee buys goods or services from the vendor. It would also require any such consideration to be turned over to the franchisee.

“If you're disclosing in New Jersey, presumably, franchisees or hotel owners in other states could read and be informed about these fees that were getting paid,” she said.

As for the argument that having individual states set new rules for hotel franchise agreements could create a patchwork of different laws, Blake said that already exists. The Federal Trade Commission mandates a franchise disclosure document before any franchise agreement is signed that would include any disclosures about litigation and fees to be paid.

Beyond that, states have the ability to create their own laws regarding the relationship between the franchisor and franchisee, she said. There already different laws about franchising in different states, including Hawaii, Maryland, Minnesota and Minnesota.

While this law specifically targets hotel franchise agreements, it’s similar to what car dealers did years ago to craft franchise laws specific to their industry, she said.

“They have probably by far the fairest franchise terms because they got together and advocated that just for automobile dealers,” she said.

AAHOA and the AHLA have different positions on the bill, Blake said, adding the two organizations are otherwise in agreement on 99% of everything else.

“We were somewhat surprised that the AHLA stepped in and opposed this so strongly because a lot of our members or hotels technically are part of AHLA,” she said.

Blake said she remains hopeful the two associations can continue to discuss the bill and determine the best move forward, perhaps reaching some agreement that would address the practices AAHOA members feel have become unfair for them.

While bigger franchisees can often negotiate some of the franchise agreement terms, many smaller franchisees don’t have the same ability to leverage their position, she said.

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