For John J. Flatley, a multimillionaire property developer, the eviction of his trusted overseer was more than he could bear.
Flatley, an experienced real estate executive, had hired Marriott International to run his big new hotel in Quincy, Mass., south of Boston, but had installed his own man, Steven Lambert, to keep an eye on the business. The relationship between Flatley's team and Marriott had grown contentious over some disputed invoices, and the breaking point came last March, when Lambert asked Marriott to explain what he said was a vaguely worded bill to the hotel for $3,000 in unspecified sales and marketing services.
"Marriott said, 'You're not privy to that information,' " said Philip A. Baldi, the chief financial officer of the Flatley Co., in Braintree, Mass., which runs a Flatley family trust that owns the hotel. Marriott, Baldi said, then ousted the asset manager from his hotel office.
In September, just 15 months after his Boston Marriott Quincy Hotel opened, Flatley sued Marriott in U.S. District Court in Boston, accusing it of fraud, accounting irregularities, mismanagement and taking kickbacks from suppliers.
At least three other lawsuits by the owners of Marriott-run hotels — including Ritz-Carltons, Marriotts and Renaissances in several cities — make similar complaints, tarnishing the company's reputation and its stock price. At stake is not just Marriott's market value but tens of millions of dollars in fees — and, perhaps, the balance of power in the $80 billion hospitality industry.
Hotel owners now pay Marriott up to 17 percent of their gross revenue in fees, up from about 9 percent in the early 1990s, said Jack Westergom, an asset manager at Manhattan Hospitality Advisors, a consulting firm in Manhattan Beach, Calif.
In some cases, hotel owners say Marriott's fees have unexpectedly doubled or tripled, in part because of what one lawsuit calls self-dealing by Marriott.
"Marriott had always seemed to run great properties," Baldi said. "But then they built a culture of secrecy in their accounting practices. Had we known what we were getting into, we wouldn't have gotten into it." Last year, he said, Marriott billed the hotel about $8 million, but despite repeated requests by Flatley has yet to provide invoices backing up the expenses. Flatley has hired two forensic accountants, Warren M. Schneider and Raymond R. Ciccone, to review Marriott's books in connection with the lawsuit.
Marriott, based in Bethesda, Md., denies the allegations and dismisses the suits as harassment by a tiny fraction of the 500 independent business owners who have hired the company to manage almost 2,500 hotels.
"We are in these lawsuits because we will not submit to extortion by owners who are trying to renegotiate contracts or insist that we rescue them from their bad business investments," said James E. Akers, a senior vice president and associate general counsel at Marriott.
Still, some investors — increasingly concerned about what many say is Marriott's opaque accounting and the specter of lawsuits like Flatley's — smell blood. Short-sellers have been putting pressure on the stock in recent weeks, betting that its price will fall. And it has fallen, from its high of $46.45 in April to less than $30 per share last week.
In addition to accusing Marriott of refusing to explain additional fees that can double or triple the management fees set out in their contracts, the plaintiffs' lawsuits contend that Marriott is reaping hundreds of thousands and possibly millions of dollars in kickbacks from hotel suppliers. They say that it does this by channeling goods and services for hotels through Avendra, a purchasing company that is run by former Marriott executives. (Marriott is half-owner of Avendra; the remainder is owned by Hyatt, ClubCorp, Six Continents Hotels and Fairmont Hotels and Resorts.) The hotels say that the payments originate as rebates on volume purchases and that the money belongs to them.
In addition to Flatley, the other companies suing Marriott include Strategic Hotel Capital of Chicago, which owns 27 luxury Marriott-brand hotels. It sued Marriott last month over the way it has run three resorts in Southern California — the Ritz-Carlton Laguna Niguel, the Rancho Las Palmas Marriott and the Renaissance Beverly Hills. In Town Hotels, the owner of a Marriott in Charleston, W.Va., and CTF Hotel Holdings, one of the biggest owners of Marriott hotels, have also sued. In its suit filed last April, CTF, which is based in Hong Kong and is a unit of the New World Development Co., also asserted that Marriott had violated racketeering laws.
The plaintiffs contend that Marriott refuses to provide invoices detailing what it or Avendra pay for goods and services bought on behalf of its client hotels, and whether those hotels could have procured them elsewhere for less.
The lawsuits, which seek unspecified damages, challenge a significant part of the $236 million in profit that Marriott reported last year on revenue of $10.15 billion. Marriott's profit last year was already down 51 percent from a year earlier, and its earnings could fall further if it loses the lawsuits or decides to renegotiate its management agreements on terms more favorable to owners.
A handful of owners have already renegotiated their contracts, gaining more influence over Marriott's management of their affairs and a greater cut of profits. Host Marriott, a real estate management company that is the biggest owner of Marriott-managed hotels, won new terms last July, having made claims similar to those in the lawsuits. (Marriott, which is run by J.W. Marriott Jr., and Host Marriott, whose chairman is his younger brother, Richard E. Marriott, were created in 1993 by the breakup of the Marriott Corp.)
CTF reached a similar agreement, in 1999, but its lawsuit complains that Marriott has violated the terms of that deal.
Other owners are also considering legal action, according to several lawyers and owners, most of whom spoke on condition of anonymity.
"We're following all of these litigations very closely and are trying to get an understanding of what they mean for our hotels," said Michael D. Barnello, the chief operating officer of LaSalle Hotel Properties, a real estate investment trust in Bethesda that owns four Marriotts.
Marriott, which owned scores of hotels before selling them in the early 1990s, manages several chains, including the midpriced Courtyard and Residence Inn names.
A brand that promotes its origins in a 1927 root-beer stand owned by the parents of J.W. and Richard Marriott, Marriott has long been considered a leading example of solid leisure service. The company is not the only hotel manager to be criticized by the actual owners of its various hotel properties. Hyatt and Starwood Hotels and Resorts Worldwide have also been hit with lawsuits making similar claims in recent years. Rebates, extra fees and an unwillingness to share documentation with owners are industrywide practices, said Donald Winter, an independent hotel consultant based in San Francisco.
Management contracts have been an industry fixture for two decades. And for most of that time hotel owners operated with almost blind trust in their operators.
Owners typically pay a hotel management company like Marriott management fees of around 3 percent to 4 percent of a hotel's gross revenue, incentive fees of around 20 percent of cash flow, marketing fees of around 2 percent of gross revenue and centralized service fees of around 5 percent of gross revenue. In return, the management company handles all of a hotel's operations, from hiring staff and booking guests to buying food, linens and furnishings to running marketing programs for frequent guests. The owners send revenues directly to Marriott-controlled bank accounts, and Marriott pays their bills, often providing no more than general invoices.
Such arrangements have let real-estate developers focus on what they do best — building hotels — while leaving the details of operating the hotels to professional managers. Those managers, in turn, get the benefits of steady fees and access to owners' capital — all without risks like mortgages and pressing loans.
This relationship began to unravel in the economic downturn of the late 1980s, and the process accelerated through the past decade. Some owners, desperate to shore up profits, began questioning charges. Managers, eager for new sources of revenue, began levying new fees for an expanding list of services like guest loyalty programs and audio-visual equipment rentals.
Now, with the economy again weak, the stock market floundering and occupancy rates down, the owners are stepping up their campaign.
Even some Marriott clients who have not sued the company say they don't like the way it accounts for its charges. "We've had issue with their disclosure for years," said Barnello. "When our hotel is charged something, we want to know what it's for and how does it benefit my property."
Not even the head accountant for the Boston Marriott Quincy, who was hired by Marriott and works at the hotel, has access to detailed invoices and charges, said Baldi, the financial officer for Flatley. Through a program called Project Mercury, Marriott now runs all of its accounting from Knoxville, Tenn.
Akers, the Marriott lawyer, said the company could be "hard to understand" because it has a centralized business model that spreads costs among its clients. Last month, Marriott representatives began meeting with hotel owners to explain its methods and fees.
Marriott said it is also preparing a Web site on which it will detail invoices and charges for each owner. The site should be running early next year, the company said.