Property owners began taking a closer look at the purchasing practices of hotel chains following a landmark 1997 ruling against the Sheraton Washington Hotel over secret vendor rebates. Sheraton faced a $52 million judgment, most of it in punitive damages. Though an appeals court reduced the judgment to about $3.5 million, the case heightened the scrutiny of hotel chains.
The verdict also prompted measures by Marriott and other hotel chains to protect the flow of vendor rebates. Marriott joined forces with Hyatt to form a new firm, Avendra, that would act as a buying agent for the chains. The hotel chains insisted that Avendra was an independent entity, and thus had no obligations to property owners.
But here, too, behind-the-scenes ties raised questions about Avendra’s claims of independence from Marriott. Avendra opened in a Marriott building in 2001, and was staffed by employees from Marriott’s purchasing group; it eventually relocated off the Marriott campus. Dennis M. Baker, Avendra’s President and CEO, had worked for Marriott for thirteen years, and Joseph Ryan, Chairman of Avendra’s board, was Marriott’s Executive Vice President and General Counsel. Avendra acquired a large share of the business of the Marriott Distribution Services operation and began with Marriott holding a majority share of the ownership.
The hotel management companies set up Avendra as a buying club. They shared overhead costs, while Avendra funneled rebates to each member based on its purchases.
John C. Coffee Jr., a Columbia Law School professor and Director of the Columbia Center on Corporate Governance, said Marriott’s board would have been involved in approving the establishment of Avendra. He said, “I would have thought use of Avendra had to go to the board, because it is self-dealing. You’ve got your general counsel sitting there, with ownership interest. The board had to be advised of that. You were setting up an intermediary to give an appearance of greater legitimacy to these transactions.”
Avendra declined to comment for this article, but CEO Baker acknowledged to the Wall Street Journal in 2002 that rebates in excess of fees were returned to the founders. He said, “How the managers then deal with the owners depends on their individual contracts.” He told the Journal, “There are cases where some get [the rebates] back and some don’t.”