Omni Hotels duck RICO claims from private villa owners

SAN DIEGO (CN) — Owners of private villas at one of San Diego County’s luxury hotels are not the victims of a nefarious self-dealing racketeering scheme designed to deprive them of rental revenue by steering customers to rent hotel rooms instead of their more expensive villas, a San Diego federal judge said on Monday.

U.S. District Judge Anthony J. Battaglia concluded in his 12-page ruling that the villa owners’ contract with their property broker explicitly allowed them to dictate how the villas on the grounds of the Omni La Costa Resort and Spa in Carlsbad, California are rented out.

The text of the rental management agreement plainly “permits LC Brokerage to … administer the rental program, set villa rates based on its business judgment, use the villas for overflow, and … does not require Omni to prioritize the villas over hotel rooms,” the Barack Obama appointee wrote, granting Omni summary judgment and dismissing the villa owners’ class action.

The plaintiffs had claimed in 2020 that LC Brokerage — through which a majority of the class of villa owners rent their properties out — funneled more business to the resort’s own hotel rooms rather than their swankier and more expensive villas. In their Racketeer Influenced and Corrupt Organizations Act suit, they also claimed the brokerage firm was an alter ego of Omni Hotels.

The villa owners’ claim that the villas were overpriced to undersell them and drive customers to the resort’s own hotel rooms, causing them to earn less money, is not something that the rental agreement prevents Omni from doing, Battaglia said.

The only way the villa owners could move forward with their claims was if they could show Omni did not exercise sound business judgement when they set rates for the villas and hotel rooms or if they weren’t comparable or competitive with similar resorts in Carlsbad. But the plaintiffs did not do that, Battaglia wrote.

The plaintiffs argued Omni’s decision to discount rates for their hotel rooms while rates for their villas were not was an example of their bad business judgement.

But according to multiple industry experts, the villas and the hotels were priced differently because the villas are “higher quality” and have better amenities than the hotel rooms, Battaglia wrote.

“They rely merely on relative pricing and price fluctuations between the villas and suites — although all agree that the two are different and command different pricing. And, critically, neither plaintiffs nor their experts have identified what they believe would have been the appropriate rates for the villas in this case," Battaglia wrote.

137 of the Omni La Costa Resort and Spa in Carlsbad’s 600 rooms are what they refer to as “villas" — fully furnished, one-to-three-bedroom units that are advertised for longer-term guests or multigenerational families. The villas are not owned by Omni Hotels, but by outside parties like the plaintiffs.

LC Brokerage — in exchange for managing the properties, setting rental rates, collecting rent and doing other bureaucratic work — got 50% of the cut of the revenue from rentals of the villas. The other 50% went to the villa owners.

When people rent a hotel room directly from Omni Hotels though, the hotel gets all of the revenue — which the villa owners claimed was a clear violation of the brokerage firm’s fiduciary duties for not maximizing their returns and rentals for their property. Because of Omni Hotel’s actions, villa owners said they have been deprived of tens of millions of dollars in revenue.

The plaintiffs also claimed the small number of villa owners who rent their properties outside of a rental management agreement with the brokerage firm are also affected because Omni’s control over the villa’s homeowner’s association essentially forces villa owners to participate in the rental management agreement.

Neither attorneys for the plaintiffs nor Omni Hotels immediately responded to requests for comment.