A New Jersey federal district court granted summary judgment in favor of 7-Eleven, Inc. in a dispute with a franchisee.
The franchisee signed a franchise agreement to operate a 7-Eleven store in Princeton, New Jersey, which required the franchisee to keep the store open on a 24-hour basis. If the store could not operate on a 24-hour basis, then 7-Eleven could increase the franchisee’s fees. The franchise agreement also contained a minimum net worth provision. If the store value fell below the minimum net worth threshold and the franchisee did not restore the store’s net worth, then 7-Eleven could terminate the franchise agreement.
At the time the franchise agreement was signed, a local ordinance prohibited operation of retail food establishments from 2 a.m. to 5 a.m., which was expected to expire. To account for the ordinance, the parties signed an amendment to the franchise agreement waiving the increased fees until either the store received a permit to operate 24 hours a day or until two years elapsed from the execution date of the franchise agreement, whichever occurred first.
Two years passed and the ordinance remained in place. 7-Eleven declined to extend the amendment and began imposing the penalty. The net worth of the franchised location began to decline. 7-Eleven notified the franchisee of their failure to comply with the minimum net worth provision. During the cure period, the franchisee was unable to restore the store’s net worth. 7-Eleven terminated the franchise agreement.
The franchisee filed suit against 7-Eleven, alleging, among other claims, violation of the New Jersey Franchise Practices Act (NJFPA) and breach of implied covenant of good faith and fair dealing claim.
The court granted summary judgment for 7-Eleven on the franchisee’s claim of violation of the NJFPA. The NJFPA states that it is a violation for any franchisor to impose unreasonable standards of performance on a franchisee. A franchisor can defend against an NJFPA claim by showing that the franchisee failed to substantially comply with requirements imposed by the franchise agreement. The court found that the franchisee violated the franchise agreement by failing to maintain the required minimum net worth.
The court also granted summary judgment in favor of 7-Eleven on the franchisee’s claim that 7-Eleven breached the implied covenant of good faith and fair dealing.
The franchisee argued that 7-Eleven acted in bad faith by refusing to extend the term of the franchise agreement amendment and requiring the franchisee to pay an increased fee resulting from its inability to operate 24 hours per day. The court noted that a party does not breach the implied covenant of good faith and fair dealing merely because its decisions disadvantages another party. The court found there was no dispute of material fact that 7-Eleven simply adhered to the terms of the franchise agreement by refusing to renew the amendment indefinitely and applying the increased fee.
Franchisors should consult with counsel when negotiating and amending the terms of their form franchise agreement. Experienced franchise counsel can assist franchisors craft specific performance requirements that clearly define the parties’ obligations.
SAT Agiyar, LLC v. 7-Eleven, Inc.,No. 19-19994 (MAS) (JTQ) (D.N.J. July 30, 2024)
