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Are Adjustments in Room Rates During a Declaration of Emergency a Violation of Law? (Hotels and California Penal Code Section 396)

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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.

CONCLUSION

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 edean@fyklaw.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.

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Key Considerations in Dispute Resolution Provisions: The Difference Between A Mediation, Arbitration and Civil Lawsuit

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MEDIATION is a nonbinding, confidential and informal process through which parties to a dispute submit the matter to a third party who assists in attempting to resolve the dispute. Mediation can be conducted before or after the commencement of a lawsuit or arbitration. Many contracts require that the parties to the agreement submit a dispute to mediation before the filing of a lawsuit or commencement of an arbitration. Such provisions are enforceable if properly drafted. Since a mediation is confidential, neither party is bound to any position asserted in the mediation. If a compromise is reached in the mediation, once properly documented and signed by the mediating parties, the settlement is binding and enforceable. Exceptions to the pre-litigation timing of mediation may be included in the agreement (such as seeking a restraining order or other equitable relief). If a mediation provision is included in an agreement, the parties to the dispute will, in most instances, be required to mediate before commencing an arbitration or lawsuit unless all parties agree to waive the mediation.

ARBITRATION is a proceeding through which two or more parties to a dispute agree to submit the matter to an impartial third party, whose decision the contending parties agree to be bound by. As with a mediation, where the arbitration provision is included in a commercial or business agreement, it will generally be enforced by a court. In consumer and labor agreements, Courts may, if challenged, review the arbitration provision with substantial scrutiny.

CIVIL LITIGATION is the more traditional form of dispute resolution conducted within the established governmental court system.

WHY SHOULD I CARE IF AN AGREEMENT REQUIRES A MEDIATION OR ARBITRATION INSTEAD OF A LAWSUIT?
COST: Mediation and Arbitration can be significantly more expensive than a court proceeding. This is because a judge in a civil proceeding is paid by taxpayers, but the parties to the mediation or arbitration must advance the fees of the arbitrator or mediator and associated administrative fees. Such costs can easily range from $450 to $1000/hour or more. Of course, if the parties in dispute can compromise the dispute in a mediation and avoid further proceedings, the cost savings can be significant. Moreover, some governmental agencies and courts have free or low cost mediation and arbitration programs available to parties in litigation who wish to attempt to resolve the litigation before trial.

TIME: The court system can be extremely slow. This is often because of limitations in the number of available judges, and because certain types of cases, including criminal cases, have priority over most civil cases. In many instances, an arbitration can be decided in less than half the time required to complete a civil trial.

JURY TRIALS: One or both parties to most disputes can select to have the dispute decided by a jury in a civil lawsuit. However, in matters in which the right to a jury is available by law, that right can be waived in an agreement before the lawsuit commences. The most common form of pre-litigation jury waiver is an agreement to submit certain disputes to arbitration. There is no jury in a mediation or arbitration. Consumers and employees generally want to reserve the right to a jury trial because damage awards by juries can sometimes be far greater than arbitration awards. Employers and large companies, generally will favor an arbitration to avoid the risk of potential jury prejudice.

SELECTION OF A JUDGE/ARBITRATOR: In Court actions, the parties have very limited, if any, right to select the Judge to be assigned to the dispute. The Judge in most instances is assigned on a random basis to a lawsuit. However, in mediations and arbitrations, the parties have far broader rights as to the selection of the mediator/arbitrator, and therefore, can look to the prospective mediator/arbitrator’s experience, temperament, affiliations and background in making a selection. An arbitration provision in a contract often defines the qualifications that must be met by an arbitrator if a dispute arises.

DISCOVERY: Discovery consists of written inquires and demands to the opponent, third party subpoenas and depositions. The right to conduct discovery in a civil lawsuit is generally far broader and more inclusive than in an arbitration. An arbitration provision agreement often defines what discovery will be allowed in an arbitration should a dispute arise.

APPEAL RIGHTS: A party who views the results of a civil lawsuit as being in error, has a broad array of motions and appeal rights under which a jury verdict or court judgment can be contested. However, in an arbitration, the right to challenge the decision of an arbitrator is extremely limited. The scope of appellate rights is generally set forth in the rules of the arbitration forum selected by the parties. For example, under the rules of American Arbitration Association, the sole grounds for an appeal are that the underlying award is based upon (1) an error of law that is material and prejudicial, or (2) determinations of fact that are clearly erroneous. In addition, applicable law provides that an arbitration award is subjected to appeal where the arbitration was corrupt, evidently partial, engaged in misconduct regarding evidence or scheduling, or exceeded his or her powers. Mistakes made by the arbitrator in the arbitration or in the award are not basis to challenge an arbitration.

THE BOTTOM LINE

Dispute Resolution Provisions are almost always at the end of a contract. These provisions are often not carefully considered by the parties when negotiating the agreement. This is because they often do not expect a dispute to arise, and view the terms of the proposed agreement to be advantageous. Often the Dispute Resolution Provisions are not even reviewed or discussed until a dispute actually arises between the parties. Once a dispute arises, more often than not, the Dispute Resolution Provisions in the Agreement will have dramatic impact on the outcome of the dispute and the expenses in resolving the dispute. It is, therefore, critical that when entering into an agreement, the Dispute Resolution Provisions of the Agreement is both carefully reviewed and crafted.

QUESTIONS? SPEAK TO AN ORANGE COUNTY LITIGATION ATTORNEY TODAY

If you have questions about mediation or arbitration, contact Fitzgerald Yap Kreditor LLP today at (949) 788-8900 to speak to Eric Dean. You may also contact Dean via email at edean@fyklaw.com.

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 article should consult his/her own advisors and not act based on the content of this article.

About by Author: Eric Dean is an honor graduate of UCLA School of Law. He has over 30 years’ experience representing clients in all facets of commercial real estate, hospitality and secured lending. Eric served as an in-house counsel for 7 years with a national developer and operator of office buildings and branded hotels; he also acted as chair of real estate departments in both regional and national law firms. He regularly publishes articles and participates in panel discussions as a presenter on commercial real estate, hospitality and secured lending topics.