Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—NDCal: Franchisee Fails to State Claims Against 7-Eleven over Termination of Franchise Agreement, Removal of Merchandise, (May 10, 2013)

By Tobias J. Gillett, J.D., LL.M.

A franchisee failed to state claims for breach of contract, breach of the implied covenant of good faith and fair dealing, negligent interference with prospective economic advantage, and intentional interference with prospective economic advantage against 7-Eleven, Inc. based on its termination of the franchise following damage to the store and its removal of merchandise from the store without the franchisee’s knowledge, the federal district court in San Jose, California has ruled (Damabeh v. 7-Eleven, Inc., May 8, 2013, Koh, L.).

Gholam R. Damabeh had a franchise agreement with 7-Eleven, Inc. to operate a 7-Eleven store. According to Damabeh’s complaint, on July 6, 2008, a fire occurred in a building in the same strip mall as Damabeh’s store. The fire did not directly damage the store, but the firefighters cut a hole in the store’s ceiling to permit smoke to escape.

The next day, a 7-Eleven employee inspected the store and allegedly orally informed Damabeh that the store could reopen within one week because it had minimal damage. Under the franchise agreement, 7-Eleven could terminate the agreement "if there is casualty damage to the store or 7-Eleven equipment which we determine cannot reasonably be repaired or replaced within thirty (30) days or less."

On July 20, 2008, 7-Eleven allegedly requested Damabeh’s presence at a meeting, during which 7-Eleven employees removed all merchandise from the store and changed the locks. At the meeting, 7-Eleven’s Market Manager gave Damabeh a letter of termination stating that the agreement had been terminated because the store could not be repaired in 30 days.

Damabeh filed suit against 7-Eleven and related individuals, asserting claims for breach of contract, breach of the implied covenant of good faith and fair dealing, negligent interference with prospective economic advantage, and intentional interference with prospective economic advantage. 7-Eleven filed a motion to dismiss.

Breach of contract. The court first determined that 7-Eleven had not breached its contract with Damabeh. The court noted that the franchise agreement, through its use of the phrase "we determine," implied that 7-Eleven had the discretion to decide whether repairs could be made within 30 days. Whether or not 7-Eleven’s decision was wrong or unsupported, the court observed, "it strains credibility to argue that [7-Eleven] made no determination at all."

The court rejected Damabeh’s argument that the court should infer that 7-Eleven made no decision from the alleged facts that the damage to the store was minor and that a 7-Eleven employee had stated that the store could be reopened within one week. The court noted that the parties had stated that the store was without electricity for approximately two weeks, and thus it was not clear that the damage was minor or that 7-Eleven "could not have determined that it could not be repaired within 30 days."

Moreover, the statement from the 7-Eleven employee did not foreclose 7-Eleven from making a different decision later. No franchise agreement provisions would transform the employee’s statement into a binding decision, and later consideration by 7-Eleven could cause it to reverse its decision. Even combined with the other alleged facts, a claim that 7-Eleven had previously attempted to terminate the franchise agreement did not "provide a sufficient basis to conclude that [7-Eleven] made no determination regarding the length of time it would take to complete the repairs."

Implied covenant of good faith and fair dealing. The court also rejected Damabeh’s contention that 7-Eleven violated the implied covenant of good faith and fair dealing by requesting a meeting with Damabeh and then removing the merchandise from his store and changing its locks while he was in the meeting. Damabeh’s claim that 7-Eleven violated the covenant by simply taking the merchandise failed. The court noted that the franchise agreement permitted 7-Eleven to reclaim its merchandise on termination of a franchise and that the removal of the merchandise would have had to frustrate Damabeh’s right to a benefit of the franchise agreement to constitute a violation of the covenant. Since the court had already concluded that Damabeh had not shown that his termination violated the franchise agreement, and since 7-Eleven had the authority to reclaim its merchandise on termination, 7-Eleven did not breach the covenant by removing the merchandise.

Moreover, 7-Eleven’s removal of the merchandise "without [Damabeh’s] knowledge" also did not violate the covenant. Damabeh did not identify any language in the contract stating that 7-Eleven would not take the merchandise "without Damabeh’s knowledge." Nor did Damabeh demonstrate that his knowledge of the removal of the merchandise was "indispensable to the intention of the parties," or that taking the merchandise without his knowledge frustrated his right to a benefit of the franchise agreement.

Interference with economic advantage. Finally, the court rejected Damabeh’s claims for intentional interference with prospective economic advantage and negligent interference with prospective economic advantage. The court observed that, in order to state a claim for intentional interference, Damabeh had to show that 7-Eleven’s "conduct was wrongful for reasons other than that it interfered with a prospective economic advantage belonging to [Damabeh]," but that the court had already concluded that 7-Eleven had a contractual right to terminate the franchise agreement. In addition, his negligent interference claim failed because he merely alleged that 7-Eleven had a duty of care due to the franchisor-franchisee relationship, but the Ninth Circuit had held "that a fiduciary relationship is not created by a franchisor-franchisee relationship."

Both the intentional and negligent interference claims failed because Damabeh did not specify the relationship with which 7-Eleven was alleged to have interfered, the court found. The court determined that the requirement that a plaintiff must "identify a particular relationship or opportunity with which the defendant’s conduct is alleged to have interfered" applied to claims for both negligent and intentional interference with prospective economic advantage. Here, Damabeh only alleged that 7-Eleven interfered with his relationship with his "employees and customers," but did not "specifically identify any of these employees and customers."

The case is No. 5:12-CV-1739-LHK.

Attorneys: Ali Kamarei for Gholam R. Damabeh. Gabriel Nathan White (Arnold & Porter LLP) for 7-Eleven, Inc.

Companies: 7-Eleven, Inc.

Cases: FranchisingDistribution CaliforniaNews