March 26, 2018 Articles

Threat of Sanctions on Counsel Who Employed “Scorched Earth” Tactics

By P. Jean Baker

Round One: Arbitration of the Dispute
In September 2012 Hyatt and Shen Zhen New World I entered into a franchise agreement providing that Shen Zhen would renovate a hotel in Los Angeles and operate it using Hyatt's business methods and trademarks. In 2014 Hyatt declared that Shen Zhen had not kept its promises. In accordance with a provision in the franchise agreement Hyatt filed a demand for arbitration with the American Arbitration Association (AAA).

An AAA arbitrator was appointed by mutual agreement of the parties. The parties participated in 9 days of in-person evidentiary hearings. The arbitrator issued a 51-page interim award consisting of reasoned findings of fact with extensive cites to controlling statutory and case law authority. The district court found that after a "vigorous" review of the franchise agreement the AAA Arbitrator found that Hyatt was entitled to terminate the contract because Shen Zhen had breached its financial obligations by refusing multiple times to pay chain fees and marketing fees. Shen Zhen was ordered to pay $7,727,646 in damages.

Because the franchise agreement provided that the non-prevailing party must reimburse the prevailing party for all reasonable accounting, attorneys', arbitrators' and related fees, the interim award directed Hyatt to submit a request. In the final award Shen Zhen was ordered to pay an additional $1,324,546.36 in attorneys' fees and costs.

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