Hotel Condominiums: Federal Courts Dismiss Antitrust Claims

CHICAGO—Homeowner associations of hotel condominiums have filed suit against developers and hotel management companies for illegal tying violations under the federal antitrust laws in two important cases. While these suits have been unsuccessful, the courts have chosen not to publish their decisions, making it difficult to find their rulings, and depriving the parties of the precedent which would provide leverage for cutting short such actions in future.

In the most recent case, suit was filed by the board of directors of the homeowners association for the Raffaello, a 175-room hotel condominium in Chicago.[1]  The Raffaello was formed as a hotel condominium where the developer, and later an affiliated management company, owned the Shared Facilities Unit ("SFU"). Under Raffaello's Declaration, the unit owners, their personal guests and hotel guests had access to and benefited from the SFU and its operations, and the unit owners were required to reimburse the SFU owner for its operational expenses. After the condominium was formed, a voluntary rental program was implemented, whereby unit owners could participate in the proceeds from the rental of their units.

The Raffaello's unit owner association board filed two antitrust counts against the developer, management company and hotel operating company based on terms of the Declaration, which had been recorded nine years earlier, in 2006. One count alleged that the defendants committed an illegal tying arrangement in violation of the antitrust laws by forcing unit owners to accept their management services as a condition of purchasing units, and the second count alleged illegal tying by requiring them to utilize the defendants' rental services for their units.

In an unpublished ruling, Judge Leinenweber of the Northern District of Illinois dismissed the two antitrust counts in August 2015.[2] The ruling is significant in the guidance it provides in defining the proper market in a hotel condominium case for establishing market power, and in analyzing whether hotel condominium units and the services sold with them are actually separate products, as they must be to assert a tying claim.

To prove an illegal tying arrangement, the board was required to allege that defendants had sufficient power in the market for the tying market to restrain competition in market for the tied product. Here, the board's only market allegation was that "[a]t the time, there were no similar options in the Chicagoland area for the opportunity to purchase hotel condominium units at the prices being offered."[3] But the court held that this allegation was insufficient, concluding that offering below market prices does not force buyers to accept unwanted conditions. (Tr. at 6.)

More generally, the court looked to current evidence that at least twenty-five hotels in Chicago currently sell condo units. Added to this, the court held that, "the market for hotel condos certainly would include similar types of products such as residential condominiums located at or near the city center." (Id.) Expanding the relevant market to include residential condominiums as a reasonably equivalent product virtually eliminated the board's chances of proving defendants had sufficient market power to restrain competition in the markets for hotel management or rental services.

On the separate products issue, the court observed that, "it certainly appears that the hotel management and rental programs are not separate products."  (Tr. at 6.) Relying in part on the Goldberg[4] decision involving the Trump hotel condominiums, the court found that hotel condominiums are run by hotel managers to prevent mismanagement, while regular condominiums are run by a board of unit owners. (Id. at 6-7) ("Certainly no one would expect the Ritz to cede operational control of the hotel to an organization run by the hotel room unit owners.").

While the court granted the board leave to amend, the court advised its counsel to "bear in mind that you have a long way to go." (Id. at 9.) The board did not reassert its antitrust allegations in its amended complaint, and voluntarily dismissed this pleading shortly thereafter when informed that it had failed to plead subject matter jurisdiction based on diversity of citizenship.

Five years earlier, a similar suit was filed by the unit owners' association of a hotel condominium in Fort Lauderdale, with similar results.[5] The Q Club Hotel was a hotel condominium which operated under an exclusive license with Hilton Hotels Corporation, and sold units under a declaration signed by the purchasers. Like the unit owners of Raffaello, the unit owners of the Q Club Hotel challenged the condominium declaration as an illegal tying arrangement under the federal antitrust laws on the ground that it forced them to select the developer/hotel owner as the sole provider of their hotel management and rental services.

The court in Q Club also granted the developer's motion to dismiss due to the inadequacy of the association's assertions to allege a relevant market. While the Raffaello association stressed location and price to define the market, the Q Club Hotel association relied on location and quality. In Q Club, the plaintiff alleged that the developer "'has substantial power in the market for the tying product, as one of the first premier condo hotel properties on Ft. Lauderdale Beach.'" Id. at 3. The court found that this allegation specified no more than the "type and location of the tying product," and therefore failed to satisfy pleading requirements for a relevant product or geographic market for asserting a valid tying claim.

Passing over the product market issue, the court held that "the plaintiffs' narrow definition of the geographic market to include only a single beach in South Florida is unreasonable and does not correspond to the realities of the real estate industry when there exist numerous other beach locations where 'consumers can practically seek alternative sources of the product.'" Id. at 4.  Plaintiffs were given an opportunity to amend, but chose not to reassert their antitrust count, and instead refiled their state law claims in state court.[6]

While it is encouraging that two federal courts have rejected antitrust challenges to the sales of hotel condominiums linked to hotel management services or rental services, these antitrust claims remain attractive to disgruntled homeowners when the remedies include injunctive relief that would permit them to hire their own hotel management or rental management companies, as well as any actual damages established, treble damages and attorney's fees. By failing to publish their decisions, the judiciary has made it difficult to locate their rulings, and difficult to assert their rulings as precedent. The only federal rule on point is Rule 32.1(a) of the Federal Rules of Appellate Procedure, which provides that unpublished federal judicial opinions or orders may not be prohibited or restricted from citation as precedent. Thus, the judiciary has, in at least the two cases this writer is aware of, inadvertently encouraged the continued filing of these meritless suits.