Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—D.N.J.: 7-Eleven wins summary judgment against New Jersey franchisee, (Jul 31, 2024)

By Martin A. Steinberg, J.D.

Uncontested facts justified cancellation of the franchise agreement and seizure of the store.

In a franchise agreement dispute between 7-Eleven, Inc. and one of its franchisees, the federal district court in Trenton, New Jersey granted summary judgment in favor of 7-Eleven. The franchisee signed an agreement with 7-Eleven, Inc., that imposed the penalty and on the same day, executed an amendment that provided the penalty would not be imposed based on the store’s reduced hours of operation until either the store received a permit to operate 24 hours a day or until two years elapsed from the execution date of the franchise agreement, whichever occurred first. Two years went by and the ordinance prohibiting 24-hour operation of the store remained in place. 7-Eleven declined to extend the amendment and began imposing the penalty. Following termination, the franchisee filed suit against 7-Eleven, including a claim for violation of the New Jersey Franchise Practices Act (NJFPA) by imposing unreasonable standards of performance on the franchisee. However, because there was no dispute that the franchisee failed to materially comply with the franchise agreement, 7-Eleven could not be held liable under the NJFPA because it showed that the franchisee failed to substantially comply with the franchise requirements. Thus, the NJFPA claim, along with the rest of the franchisee’s suit, was dismissed (SAT Agiyar, LLC v. 7-Eleven, Inc., No. 3:19-cv-19994-MAS-JTQ (D.N.J. July 30, 2024)).

7-Eleven is a convenience store chain incorporated in Texas and authorized to do business in New Jersey. SAT is a New Jersey limited liability company. On September 14, 2015, SAT and 7-Eleven entered into a franchise agreement in which SAT agreed to operate the 7-Eleven franchise located in Princeton, New Jersey.

The Franchise Agreement, among other terms, required (1) a profit distribution scheme and a 24-hour provision in the Franchise Agreement; and (2) an open account between SAT and 7-Eleven and a minimum net worth provision contained in the Franchise Agreement. The profit distribution scheme was based on the gross profit of the location (the "7-Eleven Charge") and represented what 7-Eleven received for its services. Payment by SAT of the 7-Eleven Charge was in exchange for: (1) a license to operate a 7-Eleven store; (2) use of the lease of the Princeton store location and equipment; and (3) the continuing services of the 7-Eleven brand. The Franchise Agreement further stipulated that the franchisee must keep the store open on a 24-hour basis, provided that such condition complies with local laws. If the store could not operate on a 24-hour basis, the 7-Eleven Charge would be increased in proportion to how many hours the franchise location was closed.

At the time of the agreement was signed, both parties were aware of a local ordinance in Princeton that prohibited stores from operating between 2 AM and 5 AM. Thus, the Franchise Agreement was amended to waive the 24-hour requirement and the increased 7-Eleven Charge until the store was either permitted to operate on a 24-hour basis or had been operating for two years, whichever occurred first (the "Temporary Waiver Agreement").

The Franchise Agreement also contained provisions establishing a minimum net worth SAT's store must maintain. First, the Franchise Agreement established an open account where all store-related payments to SAT by 7-Eleven were deposited and from which any amounts owed to 7-Eleven would be withdrawn (the "Open Account"). The Open Account was the forum through which money was exchanged between franchisor and franchisee.

Second, the Agreement provided that SAT must also maintain a minimum net worth of at least $15,000. If the store value fell below the minimum net worth threshold and SAT did not fix the issue within three business days of being given notice, 7-Eleven could terminate the Franchise Agreement. Upon termination, SAT would then be required to repay any unpaid balance on the Open Account immediately upon 7-Eleven's demand.

Third, SAT’s owner signed a guaranty which provided that any obligations due under several specified paragraphs of the Franchise Agreement, including the paragraph providing that SAT must repay any unpaid balance on the Open Account upon termination, would be paid by SAT’s owner should SAT fail to perform under the Franchise Agreement.

Breaches. In January 2018, after the Temporary Waiver Agreement expired, an escalated 7-Eleven Charge was imposed on SAT. In response to SAT's request for a permanent waiver, 7-Eleven offered to extend the Temporary Waiver Agreement an additional two years and to reimburse SAT for the increased charges in the interim period (the "Amended Waiver"). SAT rejected the Amended Waiver.

In 2020, the net worth of the franchise location began to decrease. On November 9, 2020, 7-Eleven notified SAT and its owner of their failure to comply with the minimum net worth provision of the Franchise Agreement. The store's net worth was negative $59,099.87. SAT was given until November 18, 2020, to restore the store's net worth, which was not done. On January 25, 2021, 7-Eleven terminated the Franchise Agreement and took the store back from SAT. 7-Eleven calculated and reported the net worth as negative $94,756.68. This balance was never paid.

Procedural history. SAT filed suit against 7-Eleven in the Superior Court of New Jersey on October 3, 2019, for (1) breach of contract; (2) declaratory judgment; (3) injunctive relief; (4) fraudulent misrepresentation; (5) negligent misrepresentation; (6) unjust enrichment; and (7) conversion. 7-Eleven then removed the case to federal court.

7-Eleven's motion to dismiss was granted in part and denied in part, whereupon SAT filed an amended complaint. This complaint raised claims for (1) breach of contract; (2) fraudulent misrepresentation; (3) negligent misrepresentation; (4) violation of the New Jersey Franchise Practices Act (NJFPA), N.J. Stat. Ann. § 56:10-4(a); (5) breach of implied covenant of good faith and fair dealing; (6) interference with prospective economic advantage; and (7) conversion claims.

On August 11, 2020, 7-Eleven moved to dismiss the amended complaint, which was also granted in part and denied in part, leaving only the NJFPA claim and the breach of implied covenant of good faith and fair dealing claim. SAT also moved for a temporary restraining order and preliminary injunction, which was denied without prejudice. 7-Eleven’s answer to the amended complaint impleaded SAT’s owner as a third-party defendant for breach of the guaranty and raised one counterclaim against SAT for breach of the Franchise Agreement.

7-Eleven and SAT cross-moved for summary judgment on SAT's FPA claim (Count IV), and 7-Eleven moved for summary judgment against SAT's breach of implied covenant of good faith and fair dealing claim (Count V). 7-Eleven also moved for summary judgment on its breach of franchise agreement counterclaim against SAT (Counterclaim Count I) and its breach of guaranty third-party complaint against Patel (Third-Party Complaint Count II).

NJFPA claim. The court granted summary judgment for 7-Eleven and denied it for SAT on Count IV. Plaintiff argued that 7-Eleven intentionally and unreasonably placed Plaintiff in the position of operating the store at a loss. The franchisor, however, responded that SAT could not bring a claim for a NJFPA violation because it failed to substantially comply with the Franchise Agreement.

The NJFPA states that it is a violation for any franchisor, directly or indirectly, to impose unreasonable standards of performance on a franchisee. A franchisor can defend against an NJFPA claim by showing that the franchisee failed to substantially comply with requirements imposed by the franchise agreement.

The court found that SAT violated the franchise agreement based on the following undisputed facts: (1) The Franchise Agreement was a valid contract. (2) 7-Eleven reclaimed the store from SAT on January 25, 2021. (3) 7-Eleven calculated and requested the $94,756.68 due to it on the Open Account from SAT. (4) SAT failed to pay this sum. When evaluated together, the terms and SAT’s conduct constituted a breach of contract by SAT. Moreover, this breach was material because 7-Eleven was deprived of funds to which it was contractually entitled.

Breach of implied covenant of good faith and fair dealing claim. Summary judgment was granted in 7-Eleven's favor as to Count V. In terminating the Franchise Agreement, 7-Eleven did nothing more than follow the terms of the agreement. The duty of good faith and fair dealing cannot alter the clear terms of an agreement and may not be invoked to preclude a party from exercising its express rights under such agreement.

SAT argued that 7-Eleven acted in bad faith by refusing to extend the term of the Temporary Waiver Agreement and applying the enhanced 7-Eleven Charge resulting from the inability to operate 24 hours per day was in had faith. A party does not breach the implied covenant of good faith and fair dealing merely because its decisions disadvantaged another party. Even construing the evidence in a light most favorable to the non-moving party, there was no dispute of material fact that 7-Eleven simply adhered to the terms of the Franchise Agreement by refusing to renew the Temporary Waiver Agreement indefinitely and applying the increased 7-Eleven Charge.

Breach of guaranty third-party claim. 7-Eleven was entitled to summary judgment on its breach of guaranty claim because SAT did not fulfill its obligation to pay under the Agreement, and it was undisputed that its owner did not cover the payment as contractually required. A breach of guaranty is established when the first contract is breached, and the guarantor fails to pay.

Under the Guaranty Agreement, signed at the same time as the underlying Franchise Agreement, SAT’s owner agreed to "resolve disputes under this Guaranty in accordance with the terms and conditions of Paragraph 28," which specified that SAT would repay any negative balance on the Open Account upon termination. The evidence established that the owner became obligated to pay the debit balance on the Open Account when SAT failed to do so. Importantly, it is undisputed that Patel failed to pay this balance and therefore breached the Guaranty Agreement.

The Case is No. 3:19-cv-19994-MAS-JTQ.

Judge: Shipp, M.

Attorneys: David M. Shafkowitz (Shafkowitz Law Group PC) for SAT Agiyar LLC. Amy L. Hansell (Freeman Mathis & Gary LLP) for 7-Eleven Inc.

Companies: SAT Agiyar LLC; 7-Eleven, Inc.

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