A federal court in Michigan recently allowed well-known franchisor 7-Eleven to terminate a franchise relationship when the franchisee serially breached their franchise agreement. 7-Eleven’s procedures leading up to termination are what is significant in this case. 7-Eleven demonstrated several best practices for handling an underperforming channel partner.
Issue / Case Summary
7-Eleven was facing a number of problems with a Detroit-area franchisee who breached their franchise agreement ten times in two years.1 The franchisee failed, for example, to submit timely cash reports, service its 7-Eleven-issued video recording system, meet cleanliness and inventory requirements, and maintain a minimum net worth.2
Fortunately for 7-Eleven, its franchise agreement spelled out its performance standards for the franchisee in detail including addressing each of the above-mentioned breaches.3 The agreement also included a four-strikes termination policy, allowing 7-Eleven to end the relationship after four material breaches of the agreement within two years.4 Going above and beyond its contract terms, 7-Eleven sent the franchisee a formal notice to the franchisee after each breach of the agreement.5 Then, 7-Eleven sent senior managers to meet with the franchisee about curing the breaches.
When the franchisee persisted in breaching the agreement, 7-Eleven initiated a declaratory action asking the court to confirm whether it had good cause to terminate the franchisee under the Michigan Franchise Investment Law.6 Relying on 7-Eleven’s established standards, four-strikes policy, and documentation of breaches, the court granted summary judgment for 7-Eleven concluding that the franchisee’s repeated breaches constituted good cause for termination.
- Spell Out Standards: Consider adding detailed performance standards in your franchise agreement. Doing so will not only create clear-cut expectations during your relationship but also justify good cause for ending the relationship if the franchisee fails to measure up.
- Consider Breach Notices: Often state law requires franchisors to provide notice before terminating the franchisee. Giving formal notice of each breach builds a record for termination.
- Touch Base: 7-Eleven also met with the franchisee several times to convey its concern. Such meetings can, in the event of a later termination, show that the franchisor was acting in good faith.
1 7-Eleven, Inc. v. CJ-Grand, LLC, No. 19-12624, 2021 WL 429332 (E.D. Mich. Feb. 8, 2021).
2 Id. at *4.
3 Id. at *1.
5 Id. at *2.
6 Id; see also Mich. Comp. Laws § 445.1527.