Published on November 7, 2011
Posted in: Blog
Customer loyalty programs have become ubiquitous across franchise systems for obvious reasons: they provide a valuable incentive for customers to consistently patronize one brand. To capitalize on these benefits, franchisors are keen to implement loyalty programs, but they do so with varying levels of input from franchise operators.
Last year, a group of franchisees received a favourable judgment from a US District Court in a class action against Super 8 Motels Inc.
The parent company of Super 8, Wyndham Worldwide, which operates hotel and motel chains, created a loyalty program across its various systems called TripRewards. According to the class members, the loyalty program was implemented unilaterally by Super 8 and resulted in a mandatory fee of five per cent on gross room sales. The class members’ franchise agreements specified four types of fees that could be charged by the franchisor, but the fees stemming from the TripRewards program appeared to be outside these categories.
In its defence, Super 8 argued that the implementation of the TripRewards system did not constitute a new fee category. The program merely updated the franchise system’s rules of operation, which the franchisor was permitted to occasionally revise.
In the judge’s decision, Super 8’s implementation is referred to as a simple and straightforward breach of contract, as no franchise agreement provision allowed for any additional and recurring fees for franchisees.
While this class action was decided by a US court, the representative class member was actually a franchisee based in Winnipeg, Manitoba whose franchise agreement was subject to the laws of South Dakota. The implications of this case are not limited to US law. Regardless of whether their loyalty program is successful in enhancing brand recognition and bringing customers back to the system, franchisors must look at the impact of the loyalty program on franchisee revenue and ascertain whether it results in an additional fee. If so, and in the absence of any provision allowing such a fee, franchisors may find themselves in a breach of contract. Classifying the loyalty program as a revision to system operations is probably insufficient to grant the franchisor a right to implement the system without the consent of franchisees, especially where it results in an increased fee to franchisees.
Prudent solicitors should also take note of this decision and consider incorporating provisions for a future customer loyalty program into franchise agreements, even if the franchisor has not yet developed a program.