The U.S. Court of Appeals for the Third Circuit upheld a New Jersey district court’s decision that 7-Eleven did not violate the New Jersey Franchise Practices Act (NJFPA) after the franchisor terminated a New Jersey multi-unit franchisee for breaching its franchise agreements. This is a win for 7-Eleven as well as any franchise system operating in New Jersey as the case affirms that the implied covenant of good faith and fair dealing cannot override an express term in a contract.
Problems with the multi-unit franchise operator, Karamjeet Sodhi, started in 2011 when 7-Eleven performed an audit of the franchisee’s stores. 7-Eleven uncovered several violations of the franchise agreement, including the failure to report sales, failure to withhold income taxes and using the proceeds from the sales to pay undocumented workers. After providing notices of the default to the franchisee, 7-Eleven brought an action seeking declaratory relief that it properly terminated the franchise agreements for cause. The defendants counterclaimed alleging violations of the NJFPA, breach of the implied covenant of good faith and fair dealing, violations of the Fair Labor Standards Act, and violations of the New Jersey Law Against Discrimination.
The district court granted 7-Eleven’s motion for summary judgment on the franchisee’s counterclaims as well as its claim for declaratory judgment that 7-Eleven properly terminated the franchise agreements. We blogged on that decision last year. The franchisee appealed. On appeal, the franchisee argued that 7-Eleven breached the parties’ implied covenant of good faith and fair dealing by targeting his stores for closure because he was a vocal critic of 7-Eleven’s franchise management methods. However, the franchisee did not dispute he breached the franchise agreement. He also failed to present any evidence that he cured the defaults. Therefore, the Third Circuit held that 7-Eleven had good cause to terminate the franchise agreements regardless of its motivation and affirmed the lower court’s decision.
It is important franchisors always act in good faith when enforcing obligations and duties under agreements with franchisees. This is not only a legal obligation but also just good business. However, this case reassures franchise systems that when a franchise fails to uphold its end of the bargain, the New Jersey courts will enforce default and termination provisions as written.