Franchising: 7-Eleven’s Bitter Legal Battle With Store Owners

From left: Gerald A. Marks, Esq., and Louis D. Tambaro, Esq., outside of 7-Eleven franchise location in Red Bank, N.J., in July 2013Courtesy of Marks & Klein, LLPFrom left: Gerald A. Marks, Esq., and Louis D. Tambaro, Esq., outside of 7-Eleven franchise location in Red Bank, N.J., in July 2013

Gerald Marks has spent the past year suing 7-Eleven. The New Jersey lawyer is representing plaintiffs in a dozen lawsuits against the Dallas-based chain, including allegations that 7-Eleven violated labor laws and an antistalking statute and discriminated against immigrant business owners. Marks’s latest action, filed last week in federal district court in New Jersey, seeks back pay for a group of 7-Eleven corporate employees and paints the chain as a bully that uses its heft to push franchisees out of their stores. The company disputes the allegations.

In his most extreme accusations, Marks says that 7-Eleven targets South Asian immigrant store owners in profitable markets, looking for contractual breaches to give the 53,000-store chain leverage over its franchisees. If a franchiser can persuade a store owner to walk away from his franchise license, the company can resell the store to another buyer. In legal filings, Marks has alleged that 7-Eleven has made more than $10 million off the strategy.

The plaintiffs in Marks’s most recent lawsuit amplify those claims. In an affidavit that Marks filed last week, a plaintiff and former 7-Eleven corporate employee named John Spavlik says his supervisors implemented a plan, called Operation Philadelphia, to conduct “highly aggressive and targeted ‘investigations’” aimed at persuading franchisees to hand over their businesses. “The job of a [field consultant] became an intimidation game,” says a second plaintiff, Deborah Kish, in her affidavit. “It appeared to me that 7-Eleven’s ultimate goal was to terminate these franchisees’ agreements and ‘take-back’ these stores.”

Owned by the Japanese conglomerate Seven & I Holdings (3382:JP), 7-Eleven hasn’t been found responsible for wrongdoing in any of Marks’s lawsuits. The company notes that less than 4 percent of 7-Eleven’s 7,800 U.S. stores changed hands in 2013, and the chain has been named a top franchise opportunity for minority entrepreneurs by USA Today and other publications. “There is a plaintiff’s lawyer that thinks 7-Eleven will be his ticket to winning the litigation lottery,” a statement e-mailed by 7-Eleven spokeswoman Jennifer Pascal says. “This lawyer doesn’t have the facts or the law on his side.”

Both sides are lobbing bitter allegations, offering a view into the fraught relationship at the heart of the franchising model. Store owners are ostensibly entrepreneurs who invest their own cash and sweat in businesses they own. But their contracts with franchisers leave them largely beholden to corporate chains that can dictate everything from how franchisees stock their shelves to how often they clean their bathrooms. And if the chain wants to terminate a store owner, franchisees have little recourse to resist or recover the money they’ve invested. “You’re often your own boss for purposes of paying all the bills,” says Peter Lagarias, a lawyer in San Rafael, Calif., who has lobbied state lawmakers to give franchisees more rights. “The franchiser reserves control over just about every other part of the business.”

That dynamic isn’t new, and it isn’t unique to 7-Eleven. Tensions typically run highest when business is tough, but even thriving chains are prone to complaints from franchisees. Jas Dhillon, a vice chairman of the National Coalition of Associations of 7-Eleven Franchises and a plaintiff in one of Marks’s lawsuits, says that the convenience chain has implemented a number of policies in recent years that enrich the chain at the expense of store owners. He has lobbied for changes to the way the company shares profits from gasoline sales and says the corporation is watering down store owners’ equity by increasing the cut it takes when a new franchisee buys an existing store. “The brand is still a great brand,” he says, but store owners are troubled. “The mood is very somber in the [franchisee] community.”

Marks is no stranger to franchise conflicts. His firm, Marks & Klein in Red Bank, N.J., got a $125 million settlement for franchisees in a class action with tool maker Snap-on (SNA), a franchiser, in 2006 and a $206 million settlement for Quiznos franchisees in 2010. Those cases centered on charges that the franchisers used deceptive marketing practices to sell stores to new franchisees.

Marks has a trial lawyer’s penchant for theatrics. Sometimes he sounds as if he’s rehearsing a courtroom soliloquy: ”This policy of oppression that 7-Eleven has instituted has, by their own hand, created their own misery,” he says in an interview. The most heated parts of Marks’s campaign against 7-Eleven center on accusations that the company tried to push store owners out of the franchise system.

To help make that case, Marks has relied on a statement from Kurt McCord, a former worker in 7-Eleven’s asset protection department with plenty of bad things to say about his ex-employer. In a document filed in federal court in New Jersey, McCord alleged that 7-Eleven kept a “hit list” of franchisees it wanted to oust, focusing on store owners in such profitable markets as Los Angeles and New York as well as those who were outspoken critics of the corporate office.

McCord described a negotiation between 7-Eleven and a Riverside (Calif.) store owner whom the chain accused of what amounted to Slurpee fraud: 7-Eleven said the franchisee collected cash for the sugary drinks but entered the transactions as coupon sales, depriving the chain of its share of revenue. Executives of 7-Eleven threatened to sue the store owners in federal court if they left the meeting without signing over their franchise, according to McCord. It was “an almost textbook case of false imprisonment,” McCord said in the statement.

The company sued McCord, calling him a disgruntled employee with an axe to grind. In the statement from Pascal, 7-Eleven says McCord sought more than $100,000 cash from the corporation before he “joined forces with the plaintiff’s lawyer.” The company also points to court decisions in Texas, New Jersey, and California it says limit the ways the statement can be used.

McCord’s statement has drawn attention to franchisee complaints. The story was covered in the Los Angeles Times. The website Unhappy Franchisee used the statement as the basis for a parody of the folk song Sixteen Tons substituting lyrics to describe the plight of store owners instead of coal miners. (Sample lyric: “I bought a 7-Eleven, and what did I get, stalked and bullied and deep in debt.”)

Marks has kept up a torrent of litigation. In one suit, he alleged that 7-Eleven’s corporate employees are using in-store surveillance tools intended to prevent theft to spy on franchisees. In another lawsuit citing antistalking laws, he said 7-Eleven tailed a store owner named Adnan Khan.

In response to allegations, 7-Eleven says the lawsuits amount to sour grapes among a small number of franchisees. “7-Eleven, Inc. has a thorough and lawful process in place to end its relationship with Franchisees on the rare occasions when they violate the law or the franchise agreement,” reads the statement sent by Pascal. “Franchisees who have challenged their terminations have always lost in court.”

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25 September 2014 | 4:23 pm – Source:


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