New England Biz Law Update
A 7-Eleven franchise operator accused of fraud could not continue to use the chain store’s trademarks while contesting the termination of her franchise, a U.S. District Court judge has found.
According to the plaintiff, 7-Eleven, Inc., a preliminary injunction was necessary to prevent irreparable harm by the defendant’s continued use of 7-Eleven’s trademarks following the company’s issuance of a notice of termination of the parties’ franchise agreement.
Judge Mark G. Mastroianni agreed, writing that 7-Eleven would be unable to protect the quality of its brand “in the absence of a consensual and ongoing franchisor-franchisee relationship.”
But the judge denied 7-Eleven’s motion for a preliminary injunction to enforce a non-compete clause in the parties’ franchise agreement that would have prevented the defendant from operating any convenience store at her present location.
While it was likely that 7-Eleven ultimately would establish the enforceability of its non-compete clause, Mastroianni said, “denying this portion of 7-Eleven’s preliminary injunction certainly would not cause it to lose its indisputably competitive position in the market.”
The 19-page decision is 7-Eleven, Inc. v. Grewal, et al., Lawyers Weekly No. 02-586-14. The full text of the ruling can be found by clicking here.
Balancing of harms
The plaintiff was represented by Stephen M. Cowley of Duane Morris in Boston. Cowley referred all questions about the case to 7-Eleven, which did not respond prior to deadline.
John E. Pearson of Springfield represented the defendant franchisee, Mohinder Grewal. Pearson also did not respond to a request for comment.
But franchise attorney L. Seth Stadfeld said when a franchisee holds over after a valid termination and continues to use the trademark without a license, the courts “almost uniformly” will find irreparable harm.
“That’s because you can’t control the use of your trademark by an infringer, so there’s damage to your goodwill,” the Brookline lawyer said.
On the issue of the non-competition agreement, meanwhile, the balance of harms tipped in favor of the franchisee, he said.
“Because 7-Eleven can be compensated in damages for the breach of the non-competition covenant, 7-Eleven hadn’t met the very high test for a preliminary injunction,” Stadfeld said.
Suzanne C. Cummings, a Stoneham franchise attorney, said there was nothing inherently inconsistent with the judge’s decision to grant injunctive relief with regard to 7-Eleven’s trademark claims while denying a preliminary injunction to enforce the company’s non-compete agreement.
“7-Eleven was claiming a monetary harm, and the balance was that the franchisees would have had their business closed down and wouldn’t be able to support their families,” she said.
Cummings, who mostly represents franchisors, found nothing alarming about the ruling.
“The decision doesn’t harm franchisors in any way, shape or form,” she said. “Non-compete agreements are still totally enforceable in Massachusetts as long as they are reasonable.”
While disclosing that he recently had been contacted by the defendant regarding potential representation, Boston’s Rory A. Valas said the decision to protect 7-Eleven’s trademarks made sense to him, particularly given that it was a preliminary ruling in advance of a decision on the merits.
“You want to maintain the status quo and balance the harms, and [the judge] did balance the harms,” Valas said. “7-Eleven had a trademark to protect and a franchisee who could be giving them a bad name, so the judge said take down the [7-Eleven] signs.”
Valas also had no quarrel with the judge’s decision not to enforce 7-Eleven’s non-compete clause against the defendant and her corporation.
“They’ve invested time and money into this business,” Valas said. “You can’t just take it away until there is a trial on the merits because then they would be harmed.”
Holyoke 7-Eleven franchise
Defendant Mohinder Grewal entered into a franchise agreement with 7-Eleven in 2005. Under the agreement, 7-Eleven agreed to sublease a store located on Pleasant Street in Holyoke to the defendant. The store was operated by a corporation that the defendant formed with her husband.
The parties’ contract provided that 7-Eleven would be paid approximately half of the store’s sales profits, calculated by a point-of-sale monitoring system used in 7-Eleven stores that records cash register transactions.
In early 2014, 7-Eleven became suspicious that it was being deprived of a portion of its profits from the defendant’s store. According to 7-Eleven, its investigators later used surveillance cameras and point-of-sale data to determine that, between January and June 2014, approximately 18 percent of all transactions at the store were conducted fraudulently.
Specifically, the company alleged that the defendant and her husband engaged in a scheme whereby they would manually enter incorrect prices for items at checkout, keeping for themselves the difference between the price entered and the payment received.
Based on the results of its investigation, 7-Eleven issued a notice to the defendant terminating the parties’ franchise agreement. In addition to declaring the defendant’s sublease to be terminated, 7-Eleven demanded that the defendant comply with a non-compete clause in the franchise agreement, which prohibited her from operating a convenience store in that location for one year after termination.
When the defendant refused to vacate the premises and continued to operate her store using 7-Eleven’s marks, 7-Eleven sued the defendant and her corporation in federal court for injunctive relief and damages.
Further, 7-Eleven moved for preliminary injunctions to prevent the defendant from continuing to use the franchisor’s trademarks and to enforce the non-compete clause.
The defendant responded by requesting a preliminary injunction to require 7-Eleven to reinstate her privileges under the franchise agreement.
Trademarks protected
Mastroianni first found that 7-Eleven sustained its burden of showing its entitlement to a preliminary injunction to prevent the defendant from further infringement of the franchisor’s trademarks.
On the preliminary injunction factor concerning the likelihood that 7-Eleven would succeed on the merits of its claim that it was justified in terminating the franchise agreement, the judge said that 7-Eleven “presented many examples of Defendants’ failure to adequately or accurately input sales data, including Defendants’ numerous failures to enter sales into the [point-of-sale] system correctly and, in some cases, failure to enter sales entirely.”
Concerning the issue of irreparable harm, the judge followed a presumption recognized by some courts that a former franchisee’s operation of a “rogue” facility causes irreparable harm to the franchisor’s reputation and goodwill. In balancing the harms, Mastroianni found that they also weighed in favor of 7-Eleven.
The judge said he credited defendant Grewal’s assertion that she spent eight years and a significant amount of money trying to become a successful 7-Eleven franchisee, “but these figures pale in comparison to the amount of time and effort expended by 7-Eleven in promoting and refining its brand.”
Lastly, the judge found that the public’s interest in preventing consumer confusion supported his decision to grant 7-Eleven’s motion with respect to trademark protection.
Non-compete must wait
The judge said it was likely that 7-Eleven ultimately would win on the merits regarding the enforceability of its non-compete agreement, noting that Massachusetts courts had upheld agreements that were more restrictive than the clause in the franchise agreement between 7-Eleven and the defendant.
However, Mastroianni denied 7-Eleven’s motion for a preliminary injunction to enforce its non-compete agreement largely on the basis that the chain could not establish that it would suffer irreparable harm by the defendant’s operation of her store at its current location.
“[W]hen the value of one (or even two) year(s) of lost profit from one of 7-Eleven’s 50,000 worldwide franchise establishments is viewed in proportion to the company’s total annual profit, the losses would likely be miniscule,” Mastroianni wrote. “Additionally, denying this portion of 7-Eleven’s preliminary injunction certainly would not cause it to lose its indisputably competitive position in the market.”
Mastroianni further found that 7-Eleven failed to sustain its burden of showing that the harm it would suffer in the absence of injunctive relief outweighed the harm that granting an injunction would inflict on the defendant.
“When a former franchisor ultimately prevails on the merits in this context, its damages are approximately measurable and therefore compensable,” the judge wrote. “By contrast, if a preliminary injunction is granted which effectively forces a former franchisee out of his business, that franchisee has suffered considerable, if not irreparable, harm.”
Attending to a final matter, the judge had little difficulty denying the defendant’s motion for a preliminary injunction to preserve her franchise rights.
“Since 7-Eleven has demonstrated that it is likely justified in terminating its contract with Defendants, and since the court is granting 7-Eleven’s motion to enjoin use of its trademarks, it follows that the Court will deny Defendants’ motion,” the judge wrote.
CASE: 7-Eleven, Inc. v. Grewal, et al., Lawyers Weekly No. 02-586-14
COURT: U.S. District Court
ISSUE: Could a franchisor enjoin a franchisee from using the franchisor’s trademarks pending the outcome of litigation over the termination of the parties’ franchise agreement?
DECISION: Yes
