Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—C.D. Cal: Franchisees’ Unfair Competition Law claims proceed against 7-Eleven, (Jun 12, 2015)

By Michael Menzhuber, J.D., LL.M.

Former convenience store franchisees alleged sufficient facts to pursue fraud, breach of oral contract, and breach of the covenant of good faith and fair dealing claims against 7-Eleven under the California Unfair Competition Law (UCL), according to the federal district court in Los Angeles. However, the couple’s racial discrimination claim and conversion and negligent interference claims under the UCL were dismissed (Dallas and Lashmi, Inc. v. 7-Eleven, Inc., June 10, 2015, Otero, S.).

Background. Mohiuddin and Shamima Chowdry formerly operated a 7-Eleven franchise. When they fell behind on their payments and the bank foreclosed, Jeff Kern purchased the property. According to the Chowdrys, while they were negotiating new lease terms with Kern, 7-Eleven began negotiating with Kern for a new franchisee in the same location.

After the Chowdrys were evicted from the property, the franchisor’s Director of Real Estate, Michael Austen, instructed the Chowdrys to stop attempting to negotiate a new lease. He initially told them that they would be allowed to operate the store as a 50 percent partner, but later informed them that the franchisor would not approve the 50/50 operation and that another individual, Sean John, had been approved as a franchisee.

The Chowdrys were then informed by Austin and the franchisor’s marketing manager that they could be paid $300,000 for the store’s “goodwill” and alcoholic beverage license. In reliance on this promise, the Chowdrys stopped attempting to negotiate a new lease with Kern and transferred their “goodwill” and alcoholic beverage license to 7-Eleven without going through an escrow.

After the transfer was completed, the franchisor asserted that the Chowdrys owed $218,000 and refused to pay them the transfer fee. The Chowdrys eventually signed a promissory note, agreeing to repay $17,000, with interest, on unpaid back rents that the franchisor had paid Kern. After paying a substantial portion of the note, they received an Abstract of Judgment from Kern for unpaid back rents.

Following numerous attempts to collect the $300,000 transfer fee from the franchisor, the Chowdrys brought claims against the franchisor for: (1) fraud, conversion, breach of oral contract, negligent interference and breach of covenant of good faith and fair dealing under the UCL; and (2) racial discrimination under 42 U.S.C. §1981 and Cal. Civ. Code §§51 et seq. In response, the franchisor filed a motion to dismiss all of the Chowdrys’ causes of action.

Fraud. The court denied the franchisor’s motion to dismiss because it found that the Chowdrys’ complaint identified the “who,” “what.” “when,” “where,” and “how” of the franchisor’s alleged fraud. Specifically, the Chowdrys alleged: (1) the participants in the alleged fraud; (2) the details of the franchisor’s alleged fraud; (3) the dates and time period when the alleged misrepresentations occurred; (4) the location of where the alleged fraudulent activities took place; and (5) the manner in which the franchisor made the alleged misrepresentations.

Breach of oral contract. The court denied the franchisor’s motion to dismiss because the Chowdrys sufficiently stated their claim for breach of contract under the UCL. Specifically, the Chowdrys alleged: (1) the existence of the contract between them and the franchisor; (2) their performance with respect to the contract; (3) the franchisor’s breach of the contract; and (4) damages in the form of the loss of payment under the contract.

Conversion. The Chowdrys alleged that the franchisor’s conduct caused them to lose, not only their store’s good will, but the entire franchise and related assets. However, the franchisor argued that the Chowdrys’ claim should be dismissed because the tort of conversion cannot be predicated on a breach of contract. The court agreed because “a mere contractual right to payment, without more, does not entitle the obligee to the immediate possession necessary to establish a cause of action for the tort of conversion.”

Negligent interference. The franchisor argued that the Chowdrys’ negligent interference claim should be dismissed because they failed to allege that they had a specific economic relationship with Kern. The court agreed because it found that, not only did the Chowdrys’ complaint lack this allegation, the nature of such a relationship, if it existed, was unclear in light of their eviction from the property.

Implied covenant of good faith. The court denied the franchisor’s motion to dismiss because: (1) the express terms of the parties’ oral contract required that the franchisor pay the Chowdrys $300,000 in exchange for the transfer of their store’s “goodwill” and alcoholic beverage license; and (2) the Chowdrys alleged that the franchisor breached the implied duty of good faith and fair dealing by making false promises to compensate them for their store’s “goodwill” and alcoholic beverage license.

Racial discrimination claims. The court dismissed the Chowdrys’ racial discrimination claims because they rested entirely on conclusory allegations, without providing necessary details and supporting facts.

The case is No. CV-15-02044 SJO (ASx)

Attorneys: Frank Phillip Agello (Roy Legal Group APC) for Dallas and Lashmi, Inc. James F. Speyer (Arnold and Porter LLP) for 7-Eleven, Inc.

Companies: Dallas and Lashmi, Inc.; 7-Eleven, Inc.

Cases: FranchisingDistribution StateUnfairTradePractices CaliforniaNews