Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—E.D. Pa.: Terminated franchisee’s non-contract claims failed, (Feb 20, 2014)

By Peter Reap, J.D., LL.M.

The non-contract claims for negligent and intentional misrepresentation, rescission, and promissory estoppel brought by terminated franchisee Baher Al-Barqawi against his franchisor 7-Eleven, Inc., failed, the federal district court in Philadelphia has decided (Al-Barqawi v. 7-Eleven, Inc., February 13, 2014, McLaughlin, M.). Thus, summary judgment was granted to 7-Eleven on those claims, and the case would proceed on the franchisee’s remaining claim for breach of contract.

Background. On June 12, 2008, a 7-Eleven Franchise Sales Manager contacted Al-Barqawi about a newly available franchise opportunity located in Southwest Philadelphia. Al-Barqawi and his wife were unfamiliar with the location. They visited the Store and asked 7-Eleven representatives about the neighborhood. They were told that the neighborhood and Store were safe and that there was no problem with crime. Al-Barqawi submitted a franchise application and was approved. He signed a franchise agreement on August 22, 2008.

Al-Barqawi began operating the Store on October 8, 2008. On Al-Barqawi’s first day as franchisee, $50,000 worth of money orders was stolen by employees of the former franchisee of the Store. Two days later, Al-Barqawi was robbed at gunpoint in the Store. A day or two after that, a police officer who was visiting the Store informed Al-Barqawi that the Store had been robbed several times, and that the former franchisee kept a baseball bat under the counter to chase away potential robbers and shoplifters.

On April 18, 2011, 7-Eleven terminated the franchise agreement with Al-Barqawi, purportedly due to his failure to meet 7-Eleven’s minimum net worth requirement and because of cleanliness violations. After the franchise agreement was terminated, Al-Barqawi learned from the former franchisee that the Store had previously encountered frequent criminal activity that was not disclosed to Al-Barqawi before he purchased the franchise. Al-Barqawi brought this suit, alleging claims for breach of contract, negligent and intentional misrepresentation, rescission, and promissory estoppel.

Promissory estoppel. 7-Eleven argued that it was entitled to summary judgment on the franchisee’s claim for promissory estoppel because a promissory estoppel claim “can only exist in the absence of a contract.” The franchisee did not oppose summary judgment for 7-Eleven on the promissory estoppel claim, the court observed.

Rescission. 7-Eleven argued that it was entitled to summary judgment on the franchisee’s equitable rescission claim because he waived any claim for equitable rescission by failing to act promptly.

The remedy of rescission was not available to the franchisee because he failed to act promptly on his potential claim for rescission, the court ruled. Prompt action is a prerequisite to the remedy of rescission.

Al-Barqawi’s rescission claim was based on 7-Eleven’s alleged misrepresentation that the store was safe and had no problems with crime. The franchisee entered into the franchise agreement with 7-Eleven on August 22, 2008, relying on the company’s misrepresentations, the court noted.

The franchisee was on notice during his first week as franchisee that the franchisor could have misrepresented the safety of the store. Upon learning that the store had problems with crime, the franchisee had a duty to pursue his rescission claim within a reasonable time, according to the court. The franchisee instead waited over two years before pursuing a rescission. After operating and profiting from the Store for so long, it would be difficult to return both parties to their original positions, the court explained.

Negligent and intentional misrepresentation. 7-Eleven argued that the franchisee’s claims for damages based on negligent and intentional misrepresentation were barred by the statute of limitations. These claims were also based on the allegations that the defendants misrepresented to Al-Barqawi and his wife that the store was safe and had no problems with crime.

In Pennsylvania, the statute of limitations for fraud and negligent misrepresentation is two years. The statute of limitations begins to run as soon as the right to bring suit arises.

The franchisee was injured by 7-Eleven’s alleged misrepresentations when he signed the franchise agreement on August 22, 2008. Moreover, the franchisee should have known of his injury during the first week that he operated the franchise, in October 2008, the court noted. Thus, the statute of limitations would have expired at the latest, by November 2010. The franchisee did not file his complaint until July 26, 2011.

The franchisee argued that the statute of limitations should be tolled under the doctrine of fraudulent concealment or equitable tolling. However, the franchisee failed to make any showing that 7-Eleven attempted to cause the franchisee to delay bringing this action, the court held.

The fraud or concealment that the franchisee argued entitled him to equitable tolling was 7-Eleven’s concealment of the nature of criminal activity at the store, and the former franchisee’s statements about criminal activity at the store. These statements were made before Al-Barqawi signed the franchise agreement. Although these may have been fraudulent statements, they were not statements that would have induced Al-Barqawi to delay bringing this action, the court explained.

The case is No. 12-3506.

Attorneys: David F. McComb (Zarwin Baum DeVito Kaplan Schaer Toddy P.C.) for Baher Al-Barqawi. Ryan L. Leonard (Obermayer Rebmann Maxwell & Hippel LLP) for 7-Eleven, Inc.

Companies: 7-Eleven, Inc.

Cases: FranchisingDistribution PennsylvaniaNews