A federal district court in Trenton, New Jersey, has ruled that franchisor 7-Eleven was entitled to summary judgment on a franchisee's claims that it violated the New Jersey Franchise Practices Act (NJFPA) by imposing unreasonable performance standards and attempting to terminate the franchise agreement without good cause.
7-Eleven brought suit against a New Jersey multi-unit franchisee requesting that the court enjoin the franchisee from operations and compel the franchise owner to vacate and surrender five 7-Eleven locations. The franchisor alleged the franchisee committed incurable breaches of the franchise agreement which included a failure to maintain a minimum required net worth at each location. The franchisee brought counterclaims including alleged violations of the NJFPA, federal Fair Labor Standards Act (FLSA) and the New Jersey Law Against Discrimination (NJLAD). 7-Eleven then moved for summary judgment on the counterclaims.
In granting summary judgment to 7-Eleven the court rejected the franchisee's claim that it violated the NJFPA by imposing unreasonable standards. The court found there was no evidence that the compulsory standards were unreasonable. Further, the franchisee admitted that he failed to pay payroll taxes, provide workers' compensation insurance, or withhold and pay Social Security taxes for employees of his stores, all of which constituted material breaches of the franchise agreements. 7-Eleven was entitled to summary judgment on this claim because no reasonable juror could find that 7-Eleven did not have good cause to terminate the franchise agreements under the NJFPA.
In addition, the court found that the franchisee could not be considered a 7-Eleven employee because the franchisee failed to demonstrate he was an employee in support of his FLSA claim. The court outlined five factors in support of its decision to grant summary judgment on this claim including the fact that: (1) 7-Eleven did not control the manner in which the franchisee performed his 7-Eleven business; (2) it was undisputed that the franchisee shared in the gross profits of the store; (3) the franchisee alleged that he spent millions of dollars on franchise fees, licenses, approvals, and related goods and services in operating his stores; (4) the franchisee demonstrated entrepreneurial skills in the operation of the six stores; and (5) the franchisee could terminate the franchise agreements at any time and 7-Eleven could terminate the agreements for good cause. 7-Eleven was therefore entitled to summary judgment on the terminated franchisee's counterclaims brought under the FLSA and NJLAD.
The court specifically details the voluminous records offered by the franchisor showing that (1) the franchisee clearly and unambiguously breached the franchise agreement, (2) notice was provided to the franchisee and (3) the franchisee had an opportunity to cure the default. This should be a lesson to all systems that (A) clear and fair system requirements along with (B) internal processes which are followed at all times in the event of a franchisee breach, can help a franchisor prevail at the summary judgment stage. This is true even in states with laws considered "franchisee-friendly."
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