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Tuesday, June 17, 2014

Hardball Tactics by 7-Eleven or Franchisee Fraud?

Over the past few years, more than a dozen 7-Eleven franchisees have sued the company claiming that it operated in bad faith by untruthfully accusing the franchisees of fraud and by strong-arming them to “voluntarily” surrender their franchise contracts based on such false accusations.  The franchisees claim that the tactic, which is known in the franchise community as “churning,” is aimed at retaking stores in up-and-coming areas where the franchise can now be sold at a higher contractual value or from franchisees who are too outspoken against the company.

Franchisees split their gross profits evenly with 7-Eleven.  The chain claims that it has hours of in-store covert footage showing franchisees voiding legitimate sales and not registering others to keep gross sales lower than the true numbers in order to pay smaller profits to 7-Eleven.  Similarly, the chain uses undercover shoppers to spot-check the recording of transactions.  This level of surveillance is uncommon among similar companies, says franchise attorney Barry Kurtz.  A former corporate investigations supervisor for 7-Eleven calls the practice “predatory.”

Japanese-owned 7-Eleven asserts that a few of their franchisees are stealing and falsifying the sales records, thus depriving the company of its full share of the store profits.  It maintains in court records that its investigations are thorough and lawful.  It also complains that groups of franchisees often group together to create a “domino of lawsuits, pressuring the company to settle.”

It seems that a company installing hidden cameras to monitor not customers for safety reasons, but one’s own franchisees raises questions of whether or not these people had a reasonable expectation of privacy in their work-related efforts under these circumstances.  If not, the issue certainly raises an ethical issue: once one has paid not insignificant franchise fees and continue to share profits with the franchisor at no less than 50-50%, should one really also expect to be monitored in hidden ways by one’s business partner, as the case is here?  That has an inappropriate Big-Brother-is-Watching-You feel to it. 

In the 1982 hit Dire Straits song Industrial Disease, Mark Knopfler sings that “Two men say they're, Jesus one of them must be wrong.”  When it comes to this case, the accusations of “bogus” reasons asserted by the franchisees and returned fire in the form of theft accusations by 7-Eleven, somebody must not follow the contractual duty of good faith and fair dealings. 

This case seems thus to be one that could appropriately be settled… oh, wait, the company apparently perceives that to be inappropriate pressure.  Perhaps a fact finder will, then, have to resolve this case of mutual mud-slinging.  In the meantime, 7-Eleven prides its “good, hardworking, independent franchisees” of being the “backbone of the 7-Eleven brand.”  That is, until the company itself deems that not to be the case anymore, at which point in time it imposes a $100,000 “penalty” on those of its franchisees who do not volunteer to sign away their stores.  The company does not reveal how it imagines that its hardworking, but probably not highly profitable, franchisees will be able to hand over $100,000 to a company to avoid further trouble.

 

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