7-Eleven’s Recent Federal Court Victory Illustrates Best Practices When Terminating Franchisees

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Foley & Lardner LLPA 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.

Key Takeaways:

  • 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.

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7-Eleven, Inc. v. CJ-Grand, LLC, No. 19-12624, 2021 WL 429332 (E.D. Mich. Feb. 8, 2021).

Id. at *4.

Id. at *1.

Id.

Id. at *2.

6 Id; see also Mich. Comp. Laws § 445.1527.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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