Franchisee 101: Convenience Store Pays for Inconvenient Ordinance

Lewitt Hackman

A federal court in New Jersey denied a 7-Eleven franchisee’s motion for a temporary restraining order. The franchisee sought an order enjoining 7-Eleven from enforcing various franchise agreement provisions, including charges for each hour the 7-Eleven store was closed, since the franchisee could not operate the store 24-hours a day.

In 2015, the franchisee signed a franchise agreement to operate a 7-Eleven store 24-hours per day in Princeton, New Jersey. At that time, Princeton adopted a local ordinance that prohibited retail food stores, like 7-Eleven, from operating between 2 a.m. and 5 a.m. The ordinance had a sunset provision, ending in 2017, unless readopted by the city.

Pursuant to the franchise agreement, the franchisee was required to pay 7-Eleven a royalty based on the store’s gross profit, plus an additional charge for each hour the store was closed per week. To account for the ordinance, the franchisee and 7-Eleven amended the franchise agreement to temporarily let the franchisee operate the store less than 24-hours per day and not pay additional fees for a period of two years or until the store could operate 24-hours, whichever occurred first. If the store was not permitted to operate 24-hours after two years, the franchisee would be subject to additional fees for the reduced hours of operation.

In 2017, the ordinance was made permanent, and 7-Eleven increased the franchisee’s royalty to account for hours the location was closed. The franchisee sued, arguing that 7-Eleven unilaterally amended the franchise agreement to increase the royalty solely on the basis that the franchisee could not operate 24-hours per day and that requiring the franchisee to operate 24-hours per day defied local law.

The franchisee filed for a temporary restraining order, arguing 7-Eleven breached the covenant of good faith and fair dealing and the New Jersey Fair Practices Act (NJFPA). The franchisee’s request was denied. The court determined that the franchisee was not likely to succeed on the merits because the plain language of the franchise agreement permitted 7-Eleven to increase fees after two years if the franchisee did not operate 24-hours a day. Further, 7-Eleven was acting in accordance with the terms of the franchise agreement by charging the additional fees.

Franchisees should carefully review all amendments to their franchise agreement with franchise counsel prior to signing any document. It is difficult to prepare an amendment that covers every possibility of things that may happen. But situation-specific amendments, like in this case, should be drafted to account for multiple potential scenarios and franchisees should understand what they are agreeing to, including any potential risks, prior to entering into an amendment to their franchise agreement.

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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