The basics:

• A new bill aims to change hotel franchise laws, affecting aspects such as sourcing, loyalty programs and operations manual standards.
• Supporters argue it will balance the franchisor-franchisee relationship, while opponents fear it will lead to costly litigation and weaken brand standards.
• The move stems from concerns about unfair franchising practices, especially amid the pandemic, and is seen as a move toward equity by some industry groups.

As New Jersey gears up to welcome visitors for two high-profile events in 2026 – the World Cup and the 250th anniversary of our nation’s founding – a bill that proposes changes to the hotel franchise model is drawing mixed feedback from the hospitality industry.

Introduced Feb. 5 by Assembly members Robert Karabinchak, D-18th District; Sterley Stanley, D-18th District; and William Spearman, D-5th District, Assembly Bill 3495 would affect several areas in the relationship between hotel brands and hotel owners flying those brand flags, such as the sourcing of goods and services, loyalty program logistics and operations manual standards. After being approved by the Financial Institutions and Insurance Committee in an 8-5 vote Feb. 22, the bill was referred to the economic development and agriculture committee. Companion legislation, S2336, sponsored by state Sens. Raj Mukherji, D-37th District, and Nellie Pou, D-35th District, was referred to the commerce committee following its Jan. 29 introduction.

Supporters of the measure believe it would put the franchisor-franchisee relationship on more equal footing by ensuring greater fairness in the system and strengthening protections for franchise businesses.

But some industry groups, like the American Hotel & Lodging Association and the International Franchise Association, oppose the bill, arguing it would insert government into private franchise contracts, promote expensive litigation and weaken brand standards — the foundation of the franchise model.

As introduced, A3495/S2336 would supplement New Jersey’s existing franchise-related legislation with several hotel-specific regulations that restrict franchisors from:

• Mandating franchisees purchase goods and services solely from designated vendors;
• Changing brand practices or standards, as well as charging new fees without a franchisee’s consent;
• Pocketing savings from a vendor (including all fees, rebates and commissions) unless disclosed and paid to the franchisee instead;
• Selling points in a loyalty program directly to guests to use at a franchisee’s hotel without compensating the franchisee for lost revenue;
• Competing with the franchisee in an exclusive or protected territory under a different name or market without consent.

This isn’t the first time New Jersey has considered changes to the hotel franchise model.

After hearing from “hundreds of victims of unfair franchising” who expressed “the challenges of surviving in the midst of the global pandemic and their recovery therefrom,” Mukherji said lawmakers decided to draft a bill.

Mukherji first introduced the measure in 2020 when he was an assemblyman, but it never advanced. During the 2022-23 legislative term, the proposal was passed by the Assembly but then stalled in the Senate.

Following committee approval of the bill in February, American Hotel & Lodging Association President and CEO Chip Rogers issued a statement saying such a law “would severely limit hotels’ ability to enforce the quality, service and safety guidelines guests know and trust.”

“In doing so, the legislation would destroy the hotel industry’s franchise model – a beacon of success that has created millions of jobs and helped thousands of Americans realize the dream of owning their own business,” said Rogers, whose organization is considered the largest hotel association in the U.S. Its 32,000 membership properties represent about 80% of all franchised hotels across the country.

Rogers went on describe the measure as an “extremely damaging proposal” that will have “an immense impact on hoteliers, travelers visiting the state and the entire tourism economy.”

“With major sporting events heading to the Garden State, we look forward to working with lawmakers to defeat this dangerous and ill-advised legislation, which could drive well-known and respected hotels out of New Jersey and cost the state thousands of jobs,” he added.

If passed by the state Legislature and signed by Gov. Phil Murphy, AHLA believes the law would diminish brand standards by requiring amenities like Wi-Fi, mobile check-in and breakfast to be negotiated property by property.

Allowing hotel owners to use “comparable” products instead of those required by brands could also lead to increased litigation as both parties try to determine what is comparable, AHLA said.

Additionally, forcing hotels to allow their federally registered trademarks to be used on “comparable” products could undermine the value and destroy trust in these trademarks, AHLA said.

Lastly, the proposal would undercut loyalty points systems that many brands use to reward customers, which could force many brands to terminate their loyalty programs in New Jersey, the association said.

IFA Vice President of State Government Relations Jeff Hanscom described the bill as a “fundamental dismantling of the franchise business model.”

He went on to say he believes it “undermines franchised businesses in the hospitality sector, making it more difficult to do business and serve their guests at a time when they are still trying to recover from the worst effects of the pandemic.”

Hanscom noted that while the legislation under review only pertains to existing hospitality franchises, he believes it could eventually expand “to impact the entire franchise model in New Jersey.” Currently, the state is home to 19,000 franchise establishments employing more than 203,000 people and generating $20 billion in economic output, according to IFA.

New Jersey’s lodging industry is made up of about 1,180 hotel properties and employs more than 45,000 workers – about 3.1% of all jobs statewide, the AHLA said. In 2022, hotel guests spent $13.4 billion in New Jersey and the industry paid $1.7 billion in local, state and federal taxes.

A push for equity

Meanwhile, the Asian American Hotel Owners Association believes the legislation will help create “a more equitable relationship between franchisors and franchisees.” As the largest hotel owners association in the world, AAHOA says it advocates for fair franchising standards that protect hotel owners’ investments, safeguard a mutually beneficial relationship with hotel brands and promote the hospitality industry. Within New Jersey, AAHOA members own 45.4% of hotels, about 46,124 rooms, according to a 2021 Oxford Economics study.

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Laura Lee Blake, the organization’s president and chief executive officer, believes the bill will ensure equitable treatment for hotel owners, protecting them from arbitrary and undisclosed fees as well as freeing them from one-sided terms & conditions and anti-competitive procurement rules.

During a hearing on the bill last spring before the Assembly’s Commerce, Economic Development and Agriculture Committee, Blake said, “As a state that is home to thousands of hard-working entrepreneurs, including immigrants from around the world, New Jersey can be an example to the rest of the country in supporting franchising practices that allow hotel owners to achieve the American dream.”

Blake – who worked with Mukherji on the bill – has said the goal is to “add some fairness back in, especially with some of the things that have developed since COVID-19.”

After the measure stalled last year in Trenton, Blake blamed it on an “ongoing propagation of misleading information by the opposition,” such as “untrue allegations that the bill poses a threat to the franchise model, limits the enforcement of brand standards, will lead to a discontinuation of loyalty points programs and conflicts with federal trademark law.”

During a January interview with industry magazine Asian Hospitality, Blake said, “The owners are heavily asset loaded, and seeking to secure laws that safeguard their NOI against the franchisers’ sometimes unscrupulous and overreaching practices. AAHOA’s engagement has been to ensure meaningful laws are passed that are mutually beneficial for both franchisees and franchisers so the industry is protected for the long term. AAHOA remains committed to truthful and accurate discussions for the best legislative outcomes.”

A question of quality

Steven Reed, a partner at Norris McLaughlin PA, a multi-practice, mid-sized regional law firm, said the advantage of the bill is that it would give franchisees more flexibility and affordability in many areas. “The cons are whether franchisors, with the discretion to establish a franchised facility in any state they wish, will view such New Jersey laws as so disruptive to the traditional franchise model that franchisors will choose another state,” Reed said.

“Given New Jersey’s current tremendous business and entertainment environment and favorable future projections – including the World Cup final in 2026 – it is hard to imagine that substantial franchisors in the hotel industry will stay on the sidelines,” he added. “Rather, franchisors will continue to aggressively fight the changes and then cope with the laws that are passed by rewriting their franchise agreements to minimize the impact of the changes and to increase other revenue sources for franchisors.”

Sal Anderton, vice president and general counsel of Porzio Governmental Affairs – the lobbying subsidiary of New Jersey-based law firm Porzio, Bromberg & Newman – believes the bill could bring about some “protections of sorts, from the perspective of franchisee against certain actions of a franchisor.”

He cited the ability to purchase supplies, goods and inventory “of comparable quality” from vendors of their choosing, rather than ones selected by the franchisor.” He also pointed to an end of franchisors’ power to make “unilateral decisions impacting the evolution of its business, including decisions relating to fees and other developments” relating to its relationship with a franchisee.

However, the downside is that “such decisions may impair the uniformity of quality goods and services which consumers have come to expect from hospitality franchises,” Anderton said.

“For example, what constitutes ‘comparable quality’ may vary in the eyes of franchisees resulting in disparities between similarly branded hospitality properties. The brands, and potentially consumers, may view this negatively if the discretion impairs quality at some properties,” he explained.

Donald Pepe, a partner at Scarinci Hollenbeck in Little Falls, believes the legislation may not be necessary. “At franchises, customers rely on the notion that when they go to a certain hotel, they’re going to be greeted with a certain level of quality. So, when you talk about goods and services, that can be things like mattresses, for example,” he said. “I think hotel franchisors do a lot of research into finding the best materials, particularly high-end hotels – even right down to the soaps and types of towels. I’d be disappointed if I went into a four-star Hilton Hotel and it was operated by somebody who had lesser quality goods.”

He continued: “I hate any kind of law that uses word like ‘comparable.’ That’s just something that’s going to be fought over. Are we really going to go to court and spend $75,000 to fight over whether something’s comparable? Particularly when this is all going to be on a case-by-case basis?”

Pepe – who chairs the firm’s commercial real estate group – believes the bill will ultimately “hurt consumers” because “every hotel operator is going to go for the cheapest product that they can get and that they can pass off as comparable.

“This is about wanting franchisees to have their cake and eat it, too,” Pepe said. “It’s just kind of odd because you have sophisticated parties on both sides of negotiated agreements and then the Legislature comes along and says, ‘Yeah, you can ignore these provisions of the agreement you just negotiated.’

“All the franchise agreements for … hotels in particular do have requirements that you purchase their merchandise, like the shampoo and soap, and you have obligations to remodel every so often … there are pages and pages that are dedicated to ensuring the quality of the operation,” Pepe said. “And I think this is just chipping away at it.

“These are issues that I negotiate in a franchise agreement … The Legislature is viewing hospitality franchisors as bullies that are pushing this stuff on poor franchisees and I just don’t see it that way,” he stated.

“If this is your first hotel, you’re going to have a lot less of an ability to negotiate and change these terms in your franchising group,” Pepe said. “And I think that’s for good reason … But, if you’ve got 18 Hiltons, you will be able to negotiate a lot of these things out of your franchise agreement because they know and trust that you are a valued member of that franchise family.”

Helping or hurting?

Anderton believes it’s “difficult to say whether this would be an improvement or not.”

“It would certainly help the bottom line of local operators.  However, the impact of the newly founded autonomy of a franchisee may result in unintended consequences such as negative consumer reactions to specific local properties or to the ‘brand’ more generally,” said Anderton.

Reed believes the law “would help local operators by providing them with important rights” in the short run. But, he said, “Over time, franchisors will rewrite their franchise agreements to limit the impact of the changes as much as possible and to ensure that their net revenues remain in target ranges.”

Commenting on the mixed response among stakeholders, Reed said, “Local operators, like franchisees in any other industry, seek some discretion on operations and other streams of income, while franchisors seek to maintain their brand with their mostly one-sided franchise agreements that control virtually every aspect of the operations and income. “

Anderton said that while the change grants franchisees “more autonomy over certain business decisions and practices,” it “upends contracts and business relationships that were bargained for and agreed to” under the current laws.

“Moreover, if quality is impacted consumers would start to notice differences between identical branded properties that have different ownership, things as simple as the quality of food, towels, bedding and other services provided at these properties. Such consequences are contrary to one of the consumer benefits of having franchises – the expectation of a certain experience.  And while this bill only applies to hospitality industry it may set a precedent that could find itself expanding into other franchise categories such as restaurants, child care facilities and others,” he explained.

Pepe remarked, “I honestly think it’s a silly waste of legislative resources because, again, we’re not protecting anybody who needs protection here … why is the Legislature negotiating contract clauses when nobody’s in a weak position?”

“The franchisees have every option to go to this flag or that flag,” he said. “You want to be a Hilton but provide amenities from a Hotel Eight, then you’re not a Hilton.”