David and Barbara Abbott and Others v RCI Europe
| Jurisdiction | England & Wales |
| Judge | Mrs Justice Proudman |
| Judgment Date | 20 October 2016 |
| Neutral Citation | [2016] EWHC 2602 (Ch) |
| Date | 20 October 2016 |
| Docket Number | Case No: HC-2013-000370 |
| Court | Chancery Division |
[2016] EWHC 2602 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Rolls Building
Fetter Lane
London, EC4A 1NL
Mrs Justice Proudman
Case No: HC-2013-000370
Robert Deacon and Clive Wolman (instructed by Edwin Coe LLP) for the Claimants
Charles Graham QC and Nicholas Sloboda (instructed by Herbert Smith Freehills LLP) for the Defendant
Hearing dates: 11th, 12th, 13th, 16th, 17th, 20th, 23rd, and 24th May 2016
Judgment Approved
This is a case about timeshare exchanges. The defendant, ("RCIE", founded in 1974) operates a timeshare exchange programme. RCI LLC is organised on a global basis (its membership globally amounts to some 3.8 million members so that the claimants as a whole represent a tiny minority of RCIE's membership) and RCIE is one of seven regional sub-divisions which go to make up RCI LLC (which I will call "RCI" together with RCI LLC's constituent parts). Each regional division is responsible for providing services in that region and for creating and managing business relationships with developers of timeshare resorts in that region, but global standardisation applies in that members can travel across regions and RCI treats all members the same wherever they may be, subject to certain exceptions, irrelevant for present purposes. The retention rate of members in the Weeks programme (as to which see below) amounts to some 86%, but the remaining 14% include those who give up their timeshares on expiry, members who use their timeshare at their home resort and members whose resorts use a different provider, as well as those who leave because they are unhappy with the service.
RCIE does not sell timeshares as such, and receives no payment in relation to the purchase of a timeshare or the annual maintenance fees relating to the timeshare, but allows members to deposit their annual timeshare usage rights into RCIE's system and try to find alternative accommodation (in the form of annual timeshare usage rights) to use for their holidays. RCIE receives the membership fee paid by the customer, or on behalf of the customer by "affiliates", that is to say, those selling timeshares, on the customer signing up to the RCIE exchange programme.
RCIE pleads that it is in its interests to ensure that as many members as possible achieve their desired exchanges. It says that the value of the exchange system is driven by members, not RCIE, because it is the members who drive the demand.
This is a test case. On 28 March 2013 four (counting married couples together as RCIE does) current or former members of RCIE (Mrs Cunningham, Mrs Kravitz, Mr and Mrs Cole and Mr and Mrs Litherland), together with 483 other claimants including Mr and Mrs Abbott who give the case their name, commenced proceedings against RCIE, complaining about the operation of RCIE's exchange programme. The four claimants are "the Claimants" pursuant to the Order of Deputy Master Mark dated 12 November 2013. There is a generic claim with a master statement of case and also individual particulars of claim for the Claimants. The Claimants are or were all members of RCIE's "Weeks" Programme, the largest of the exchange programmes operated by RCIE. RCIE also operated a "Points" programme from about 2000, whereby members could obtain benefits such as cruises rather than an exchange.
I have had the advantage of representation by Mr Deacon and Mr Wolman for the Claimants and by Mr Graham QC and Mr Sloboda for RCIE.
The heart of the complaint is that RCIE has been renting out member-deposited annual timeshare usage rights which is said to be unfair to the members because it is said to reduce the opportunities for members to make exchanges. RCIE operates an "open" exchange system rather than the "closed" system which the Claimants say that it should. The Claimants say that timeshare deposited in the Weeks pool by members should be available only to other members for the purpose of exchanges between members.
It was originally understood by RCIE to be said by the Claimants that RCIE is renting out the best timeshares deposited by members, called "skimming": see [14] of the generic particulars of claim. That does not however seem to be the current complaint which is (see Mr Deacon's opening),
"RCI gets the ability to put into the system a lot of inventory that comes from resorts…and they're selling the members' inventory to pay for it."
And in Mr Deacon and Mr Wolman's closing skeleton,
"that RCI rented out their timeshares (i.e. member deposited timeshares) without permission and made a profit from this activity."
See also [24] below.
There was crucially an operation called "segmentation" which the Claimants did not know about and which applied from about 2000 until 2009. Under segmentation, a maximum of 20% of the members' deposited time share never went into the Weeks pool but was allocated for rental purposes. Accordingly, up to a maximum of 20%, members could not take out of the pool that which other members deposited since RCIE took it for rental before it even went into the pool.
Certain members (both Weeks members and Points members) also sued RCI in the United States, alleging that RCI was "skimming" exchange inventory in order to rent it out for RCI's benefit. That action was settled in 2008 (Weeks) and 2011 (Points) on terms on a no-admissions basis. Gordon Gurnik, the President of RCI, says that only very small payments were made, although he does also say that RCI had agreed to provide balancing reports under the terms of the settlement, which included a requirement to produce balancing reports (reports for the years 2008–2013 have been disclosed but Mr Deacon and Mr Wolman say that the defects are likely to have been most egregious before 2008) dividing inventory into three segments based on trading power, as to which see below.
It was an important term of the settlement that their trading power had to be disclosed to members, with a high degree of transparency. The three categories were created by assessing the trading power for all inventory added or removed more than 60 days before their start date and dividing them into three groups, high, medium and low.
This was done to address concerns that RCI was skimming by taking out high demand inventory and replacing it with low demand inventory. The balancing reports for the Weeks members (at any rate those disclosed) show that RCI consistently added more inventory in each group than it took out. The Points settlement was monitored by Dr Thomas Maronick, a court-appointed independent expert, who was asked to review inter alia the balancing reports. He concluded that the settlement agreement was fair and reasonable and that in the US proceedings there was adequate disclosure of the amount of inventory added and removed by RCI.
RCIE, while denying skimming in its technical sense (see [2] of the generic defence), accepts that it has been renting out rights but says that it is crucial to its success and is to the advantage of members. RCIE says that its complex and confidential algorithms allow it to balance timeshares across the system, increasing the opportunities for members to make a fair exchange.
The Weeks programme, RCIE says, is balanced in the sense that RCIE sources and adds more inventory into it, in terms of quantity and quality, than it removes by rental of inventory deposited by members.
Background
The Weeks programme works as follows. A member deposits one piece of inventory, that is to say a week that the member purchased from his, her or their home resort, into the Weeks pool. The member is offered the opportunity (subject to segmentation) to take out another piece of inventory from the pool, comparable to the value of the inventory put in (comparable in terms of level of demand, supply, usage, size and quality), so that the member can exchange a deposited timeshare for a different week in a comparable inventory. More value cannot be removed from the system than that deposited.
There are three constraints in the exchange system. First, that of supply, namely that if members merely relied on exchanges, it would be difficult to keep members happy (see Mr Lowe's evidence at Transcript Day 4 p.79) as the members would be fatigued with mass tourist resorts. RCIE therefore, says RCIE, goes out into the market to buy other inventory to add to the pool. Secondly, the fact that a member might own a popular inventory for a school holiday week while another member might own inventory for a less popular resort for a less popular week so that if the two deposits were treated comparably the system would fail. Thirdly, "spoiling", that is to say, inventory which is unused. First, RCIE rewards those who deposit early and secondly, RCIE says it tries to rent out properties before they spoil.
For the first few years, RCIE's system was not computerised but was operated on a card index system. However, there was, says RCIE, a problem in that members with the best timeshares had no incentive to deposit. In about 1980 a simple means was introduced of ensuring that members received comparable timeshares on their exchanges, namely (i) the concept of red, white and blue weeks (being the most to least popular weeks), (ii) rating accommodation according to the configuration of and number of bedrooms in the deposited unit and (iii) allowing inventory available 45 days or less before its start date (at risk of spoiling) to be available to all members. By 1989, when computers became more sophisticated, RCIE introduced the system of "trading power", calculating trading power for each deposit according to supply, demand, usage, unit configuration and resort quality as well as the red, white and blue weeks system. Members could exchange into a week with...
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