Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—SDCal: Former Franchisees’ Excise Tax Suit Against Franchisor Barred By Release of Claims , (Mar 25, 2013)

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

A class action brought by former 7-Eleven franchisees to recover federal excise tax refunds from the franchisor was barred by the release of claims executed by the franchisees when they terminated their franchise agreements, according to the federal district court in San Diego (Grayson v. 7-Eleven, Inc., March 21, 2013, Curiel, G.). A California statute invalidating prospective releases of claims did not apply to the franchisees’ claims against the franchisor.

Former franchisees Leroy Grayson and Alvin McKenzie brought a nationwide class action against 7-Eleven, seeking to recover federal excise tax refunds issued to the franchisor. The lawsuit asserted three causes of action: (1) conversion, (2) money had and received, and (3) breach of implied contract. The former franchisees filed a motion to certify the class action, which the franchisor did not oppose.

The class was defined as all former franchisees of 7-Eleven, located within the State of California, who (1) paid a portion of the federal excise tax levied against prepaid long distance telephone cards sold between July 2000 through July 2006; (2) terminated their franchise agreements between July 2000 and July 2006; and (3) have not received their pro-rata portion of the excise tax refund from 7-Eleven. Grayson and McKenzie both were 7-Eleven franchisees for many years, but executed a “Release of Claims and Termination” agreement in November 2004 and September 2005, respectively.

On or before the year 2000, the federal government collected federal excise taxes on all prepaid long distance telephone cards sold to the general public. Thousands of such telephone cards were sold by 7-Eleven franchisees throughout the United States. The excise tax was levied on three per cent of the total purchase price of each phone card sold. The actual entity making the payments to the federal government for the excise taxes was 7-Eleven. In June or July 2006, the federal government stopped collecting the excise tax on the phone cards, and the U.S. Treasury made a one-time refund of the tax collected from March 2003 through July 2006.

7-Eleven filed claims with the U.S. government to obtain refunds for all excise taxes paid during the relevant time period and received the refunds. The franchisor decided to share the refunds with current franchisees, but did not distribute any of the refunds to former franchisees that had sold telephone cards during the relevant time period.

Release of claims. Following the class certification, 7-Eleven made a motion for summary judgment, arguing that the release of claims executed by former franchisees upon termination barred the instant claim for refund of excise taxes. The former franchisees contended that California Civil Code section 1668 prevents the releases from excusing the franchisor’s intentional act of withholding property belonging to them.

In the release, the parties mutually released all claims, obligations, debts, liabilities, suits, or causes of action “of every kind and nature, whether known or unknown, foreseen or unforeseen, direct or indirect, contingent or actual” that have arising or that might arise from any relationship, incident, or transaction under the franchise agreement.

California Civil Code 1668 holds as against public policy all contracts that have for their object, directly or indirectly, to exempt anyone from responsibility “for his own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent … ”

According to the court, this statute invalidates the release of liability for future wrongdoing. “Generally, California Civil Code section 1668 invalidates contracts that purport to exempt an individual or entity from liability for future intentional wrongs, gross negligence, and violations of the law.”

Conversion. The elements of a conversion claim are: (1) the plaintiff’s ownership or right to possession of the property, (2) the defendant’s conversion by wrongful act or disposition of property rights, and (3) damages. Conversion is a strict liability tort.

“Absent a public interest, section 1668 does not invalidate a release from simple negligence or strict liability claims,” the court observed. 7-Eleven argued that there was no public interest factor in a franchisor-franchisee relationship. It cited Keating v. Superior Court, 31 Cal. 3d 584 (1982), where the court stated that the franchisor-franchisee relationship does not involve a “service of great importance to the public.” The franchisees did not assert or address the public interest involved. Accordingly, the court concluded that California Civil Code section 1668 did not invalidate the release as to the conversion claim.

Money had and received. A claim for “money had and received” is stated if the defendant is “indebted to the plaintiff in a certain sum for money had and received by the defendant for the use of the plaintiff.” The elements of money had and received did not require any showing of intentional wrongdoing or gross negligence. Thus, the claim was not barred by the releases executed by the franchisees.

Breach of implied contract. A breach of implied contract is “simply another way of describing the basis for the equitable remedy of restitution when an unjust enrichment has occurred,” the court noted. An implied contract is an obligation created by the law without regard to the intention of the parties. Since breach of implied contract does not involve an intentional tort, the claim did not fall within the coverage of California Civil Code section 1668.

Without providing any legal authority, the franchisees construed section 1668 to include the “intentional act of withholding property belonging to the Plaintiffs” and not an intentional wrong as required by California case law. The court rejected the argument.

Accordingly, California Civil Code 1668 did not apply to the franchisees’ action to invalidate the releases of claims.

The case is No. 09cv1353-GPC(WMC).

Attorneys: Craig P. Kennedy (McNeil Tropp Braun & Kennedy LLP) for Leroy Grayson. James F. Speyer (Arnold and Porter LLP) for 7-Eleven, Inc.

Companies: 7-Eleven, Inc.

Cases: FranchisingDistribution CaliforniaNews