Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—S.D. N.Y.: Claims of presale revenue and earnings misrepresentations proceed against 7-Eleven, (Jan 31, 2014)

By John W. Arden, J.D., LL.M.

A terminated convenience store franchisee who testified that he had decided to purchase a 7-Eleven franchisor prior to receiving a Franchise Disclosure Document could nevertheless proceed with claims that the franchisor made false presale revenue and earnings claims in violation of the New York Franchise Sales Act, according to the federal district court in New York City (Solanki v. 7-Eleven, Inc., January 29, 2014, Schofield, L.). The franchisor’s motion for summary judgment was denied.

Jimmy Solanki had purchased his first 7-Eleven franchise in 2003 and his second in 2005. Shortly after selling the first one in 2009, he became interested in purchasing a franchise in Brooklyn. In late May or early June 2009, he met with a franchise sales manager to discuss this possibility. At that meeting, he received a copy of the July 2009 version of the 7-Eleven Franchise Disclosure Document for New York. It contained unaudited financial statements showing the annual averages of actual sales, earnings, and other financial performance measures of franchised 7-Eleven stores. It also cautioned prospective franchisees that many factors could affect the actual sales and earnings “of a store you franchise.”

Solanki testified in a deposition that he had made up his mind that he wanted to purchase the Brooklyn store prior to receiving the Franchise Disclosure Document and that 7-Eleven would provide a document only after a potential franchisee had expressed an interest in acquiring a particular store. He filed a declaration in opposition to 7-Eleven’s motion for summary judgment, clarifying that while he expressed an interest in the Brooklyn franchise prior to viewing the disclosure document, he did not decide or commit to acquire the store until after he had seen the document.

He later received a business plan outline from the franchisor and signed a disclaimer that his acceptance as a franchisee by the franchisor “was not to be construed as 7-Eleven’s representation that the sales and earnings calculations … in the sample financial statement for the store will be achieved.” Without receiving any counsel or assistance, Solanki prepared a business plan using the outline, projecting sales of $1.5 million for the first year of operation. He submitted the plan to 7-Eleven. The franchisor later approved the business plan and told Solanki that he was a qualified candidate.

Solanki executed a franchise agreement on August 24, 2009 that contained an integration clause. During the first year of operation, the store never achieved the sales that Solanki had projected in his business plan. Instead, it generated total sales of $310,000. Solanki asked the franchisor to reassign him to a store in Manhattan, but was denied. In June 2011, he notified 7-Eleven that he wished to return the store because he could not make payroll. His franchise was terminated effective June 20, 2011.

In his lawsuit, Solanki alleged that the franchisor’s employee represented that the revenue projections in his business plan “were consistent with and in line with 7-Eleven estimates” and that he relied on this representation in deciding to enter into the franchise agreement. The complaint claimed violations of the Franchise Sales Act because (1) the revenue estimates of 7-Eleven were not included in the Franchise Disclosure Document, as required by the statute and (2) the earnings estimates of 7-Eleven were false, misleading, and lacked reasonable basis.

On its motion for summary judgment, 7-Eleven argued that the record did not contain any support for the claims or create any disputes of material fact. This argument failed, as the court found evidence upon which a reasonable jury could base a verdict for Solanki and that would raise several issues of material fact to be decided by a jury.

The franchisor pointed to deposition testimony from Solanki that neither of the franchisor’s employees had represented that 7-Eleven had done its own revenue projections for the store. Solanki countered that an employee stated that his business plan was “consistent with and in line with 7-Eleven estimates.” Solanki understood this to imply that 7-Eleven had made its own projections.

The testimony about 7-Eleven making its own revenue projections for the store was ambiguous, the court found. The court was required to construe deposition testimony in the light most favorable to Solanki and draw all reasonable inferences in his favor. Solanki’s declaration that a 7-Eleven employee said the franchisor had made its own projections that were consistent with Solanki’s projections raised a disputed issue of material fact.

Solanki’s testimony that he had made up his mind to purchase the franchise even before he received the Franchise Disclosure Document did not preclude him from relying on alleged representations by 7-Eleven, as the franchisor argued. Making one’s mind up that he wants to buy a particular store and committing to actually go through with the purchase based on information are two different things, according to the court. Solanki did not make a commitment to purchase until after he received the alleged representations. Thus, whether he relied on the employee’s alleged representation was a disputed issue of material fact, the court concluded.

The franchisor’s argument that reliance on the alleged representation would not have been reasonable, in view of the disclaimers in the franchise agreement, was rejected. The Franchise Sales Act prohibits waivers of any duty or liability imposed by the Act, the court held. Thus, any disclaimers reviewed, acknowledged, or signed by Solanki could not bar his claims under the franchise statute.

The case is 12 Civ. 00027 (LGS).

Attorneys: Devindra Ramesh Tiwari Kissoon (Cozen O’Connor) for 7-Eleven, Inc.

Companies: 7-Eleven, Inc.

Cases: FranchisingDistribution NewYorkNews