Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—D. Del.: 7-Eleven franchisee denied preliminary injunction after failing audit and losing financing, (Jun 4, 2014)

By Greg Hammond, J.D.

A 7-Eleven franchisee claiming constructive termination following its failure of an unannounced audit was not entitled to a preliminary injunction, the federal district court in Wilmington, Delaware, has decided. The court determined that the franchisee did not carry its burden of proof by a preponderance of the evidence that it was more likely than not that 7-Eieven was constructively terminating the franchise in bad faith (Sandhu v 7-Eleven, Inc., June 2, 2014, Robinson, S).

Background. Rosie Sandhu entered into an individual store franchise agreement with 7-Eleven, Inc., to operate a 7-Eleven convenience store in Bear, Delaware. The agreement provided that 7-Eleven would create and maintain financing for Sandhu, but the company would conduct quarterly audits and preserved the right to conduct spontaneous audits at any time and without notice. During an unannounced audit of Sandhu’s store, the auditor found an inventory shortage of over $30,000 at cost, lowering the store’s equity investment below the minimum requirement under the agreement. Consequently, 7-Eleven removed the store’s money order equipment, discontinued financing, and served Sandhu with a curable notice of material breach with a 90-day termination date. Sandhu filed suit against 7-Eleven and refused a regularly scheduled audit with the company. The case was before the district court on Sandhu’s motion for preliminary injunction.

Injunction denied. In support of her motion for preliminary injunction, Sandhu characterized 7-Eleven’s actions as constructive termination of the franchise agreement. She argued that if left unchecked, the company’s constructive termination would cause Sandhu to suffer irreparable harm, as she would lose her business and investment in the store, and be required to terminate all of her employees who need their jobs to support their families. In addition, Sandhu argued that even temporarily closing the store would diminish the good will it has with the community through efforts to cater to customers’ needs. Consequently, she argued that money damages would be insufficient to make her whole.

The court disagreed with Sandhu’s arguments, noting that there was no objective evidence that suggested the unannounced audit was inaccurate or conducted outside the scope of the franchise agreement. In addition, the court concluded that Sandhu failed to meet her burden of showing that it was more probably true than not that 7-Eleven constructively terminated the franchise agreement in bad faith or without a just cause for doing so. Because the record only contained conclusory allegations and no proof, the court denied Sandhu’s motion for preliminary injunctive relief.

The case number is 14-565-SLR.

Attorneys: John G. Harris (Berger Harris, LLP) for Sakattar Singh Sandhu, and YST Inc. Richard L. Renck (Duane Morris LLP) for 7-Eleven Inc.

Companies: YST Inc.; 7-Eleven® Inc.

Cases: FranchisingDistribution DelawareNews