WHY HOTEL OWNERS AND MANAGERS NEED TO KNOW ABOUT CALIFORNIA PENAL CODE SECTION 396(d)
California Penal Code Section 396 became law in October, 2007 after a state of emergency had been declared as a result of widespread fires in the State. Its announced purpose was to make illegal the exploitation of a state of emergency for personal gain. The code section is extremely broad in scope covering everything from food and other consumer products to gasoline, building materials, supplies and even remediation services. The Code Section applies to any Federal, State or Local Declaration of a State of Emergency resulting from an earthquake, flood, fire, riot, storm, or other natural disaster.
WHAT CONSTIUTES A VIOLATION OF SECTION 379(d)
Section 379(d) is extremely broad in its scope:
“Upon the proclamation of a state of emergency …. for a period of 30 days following that proclamation or declaration, it is unlawful for an owner or operator of a hotel or motel to increase the hotel or motel’s regular rates, as advertised immediately prior to the proclamation or declaration of emergency, by more than 10 percent.”
The only exception to the limitation on increased rates referenced in the Code Section is if such increase “is directly attributable to additional costs imposed on it for goods or labor used in its business, to seasonal adjustments in rates that are regularly scheduled, or to previously contracted rates.”
WHAT IF A HOTEL USES A REVENUE MANAGEMENT SOFTWARE IN SETTING RATES
An increase in rates over 10% resulting from the use of software rate management systems in setting rates within 30 days of a Declared Disaster is not an excuse. Hotel Management is required to comply with the mandates of the Code Section. Therefore, where such software is used, it will either need to be turned off or perhaps reprogrammed and monitored.
WHAT IF HOTEL MANAGEMENT WAS UNAWARE OF THE DECLARATION OF A DISASTER OR DID NOT KNOW OF SECTION 396 (d)
While express intent to “gouge” may not have existed, prosecutors will take the position that as long as room rates were raised above the statutory limit during the 30-day period from the time a State of Emergency was declared, there is a violation of the Code Section. Nevertheless, the author has asserted lack of intent and other mitigating factors in defense of or in seeking a more favorable resolution of the claimed violations of Penal Code Section 396.
WHAT ARE THE POTENTIAL PENALTIES IF THE STATUTE IS VIOLATED?
It should be noted that violations of Penal Code Section 379 (d) can be prosecuted by the California Attorney General’s Office as well as by local enforcement authorities.
Violations of can result in both criminal prosecution and a civil lawsuit being filed under the California Unfair Trade Practice Act commencing at Business and Professions Code Section 17200. Criminally a violation of the Code Section is a misdemeanor and can result in a fine of up to $10,000 or a sentence to one year in jail. Civilly the Court can enjoin the operators and owners of the Hotel from engaging in a wide range of actions and also require disgorgement of the “ill-gotten gain” plus legal interest and the payment of fees and costs incurred by the prosecuting governmental entity.
Beyond the potential legal risks, the stigma of a public record of the Hotel and its ownership and management team having engaged in “price gouging” and being sanctioned is a serious concern in the current highly competitive environment within the Hotel Industry.
MAINTAIN AWARENESS! Even where rates are set by management not at the hotel site, methods must be in place to promptly determine when a disaster has been declared that may impact one or more of the hotels operated by the management team and policies and systems need to be in place to immediately ensure that rates are in compliance within the Code Section in hotels within the area impacted by the Declaration of an Emergency or Disaster.
CONTACT AN ORANGE COUNTY HOSPITALITY LAWYER FOR MORE INFORMATION
QUALITY LAWYERS MAKE A DIFFERENCE – Please feel free to contact Eric Dean at (949) 788-8900 or email him at email@example.com if you would like to confer with him as to the issues addressed in this Article or as to other issues of concern. All such communications will be maintained in the strictest confidence.
About the Author: Eric Dean is an honors graduate of UCLA School of Law. Eric’s practice is focused on providing full service to the Hospitality, Commercial Real Estate and Secured Lending Industries throughout the State of California. Eric was a general counsel for a national hotel developer and operator for seven years and currently acts as outside general counsel for several clients. You can find his profile on LinkedIn. Eric is a partner in the California law firm, FitzGerald Yap Kreditor LLP (FYK). FYK provides full service to the hospitality, telecommunications, lending, construction, business and commercial real estate industries throughout California.
Disclaimer: This article is solely intended to provide information for consideration only. It is not legal advice and is intended solely to raise broad and general possible topics of concern for further consideration, and therefore, should not be relied on. A reader who has concerns related to the topics addressed in this handout should consult his/her own advisors and not otherwise act based on the content of this article.