Franchise 101: Convenient Franchise Practices; and Booked for Personal Jurisdiction
Franchisor 101: Convenient Franchise Practices
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)
Franchisee 101: Booked for Personal Jurisdiction
The California Court of Appeals upheld a lower court’s decision finding that a Texas court had personal jurisdiction over a California franchisee.
GlobalCFO, LLC and GlobalCFO Franchise, LLC (collectively, “GlobalCFO”), the franchisor of bookkeeping and accounting, fundraising, and financial modelling and budgeting services businesses, initiated a lawsuit in Texas against a franchisee and its owner and her husband, alleging violations of GlobalCFO’s intellectual property rights and certain non-compete and non-disclosure agreements.
The franchisee made a special appearance and filed a motion to dismiss the Texas action for lack of personal jurisdiction. The Texas court found that it had personal jurisdiction over the franchisee and ordered the franchisee to make a general appearance. After the franchisee failed to make a general appearance, the Texas court entered a monetary judgment and a permanent injunction against the franchisee. GlobalCFO filed an application in California state court to enforce the Texas judgment.
The franchisee asked the California superior court to vacate the judgment, arguing that the Texas court did not have personal jurisdiction because the franchisee had never been to Texas. The court denied the franchisee’s motion to vacate the judgment and the franchisee appealed.
On appeal, the franchisee again argued that Texas lacked personal jurisdiction because the franchisee had never been to Texas. In an unpublished decision, the appellate court agreed with the court’s finding that “specific personal jurisdiction” over the franchisee was established by the franchise agreement, since the franchise agreement designated a Texas venue and stated, “the parties waive all questions of personal jurisdiction or venue for the purposes of carrying out this provision.”
The franchisee also argued that because the franchisee only made a special appearance in Texas and not a general appearance, the Texas judgment could not be enforced against them. The court explained that the franchisee declined to make a general appearance even though the Texas court ordered them to do so, and the California appellate court must give the Texas court full faith and credit and not subject the Texas court to collateral attack on its express ruling.
Lastly, the franchisee argued that because the franchise agreement included a California-specific addenda that mentioned the California Franchise Relations Act, Bus. & Prof. Code, § 20000 et seq., any provision calling for a venue outside California was void.
The court was not persuaded by this argument, finding that the franchisee did not address the California superior court’s conclusion that venue is distinct from jurisdiction and a party may consent to a foreign jurisdiction via contract. The court held that the franchisee failed to establish that Texas lacked personal jurisdiction and affirmed the superior court’s order to deny the motion to vacate.
Prospective franchisees should seek the advice of franchise counsel before entering into a franchise agreement with a franchisor located in another state to determine where they may be subject to personal jurisdiction. A franchisee may be subject to personal jurisdiction in a state other than the one in which the franchisee resides, which will increase the franchisee’s litigation costs.
GlobalCFO LLC v. Venkataramanappa, No. A168800 (Sep. 18, 2024) (Unpub.)