7-Eleven has filed a franchise lawsuit against franchisee Kapoor Brothers, Inc. and Pursharth Kapoor in the United States District Court, Middle District of Florida, Orlando Division.
Pursharth Kapoor signed an individual franchise agreement effective January 16, 2012 for the right to operate and share in the profits of the 7-Eleven store in Merritt Island, FL.
Kapoor was charged a franchise fee of $141,500.
In connection with the franchise fee and franchise agreement, franchisee Kapoor entered into a promissory note agreeing to pay 7-Eleven $79,950 in monthly payments. According to the complaint, the Note would be “immediately due and payable in full upon a breach of the Corporate Franchise Agreement.”
Less than a year into the relationship, 7-Eleven’s Asset Protection Group began investigating Kapoor’s store. They allege they observed Kapoor’s brother (and store manager) “improperly and fraudulently utilizing… voiding keys on the POS register system.”
7-Eleven alleges that an audit of the store revealed “inventory being delivered for which 7-Eleven never received invoices,” indicating that Kapoor’s store was selling merchandise off the books for which it would receive full profit (rather than the 48% it was due).
Additionally, the suit alleges “at least one regularly employed person was working either without the franchisee having properly verified employment eligibility.
On June 20, 2013, just 17 months into the agreement, 7-Eleven declared that Kapoor was guilty of a non-curable breach and terminated the franchise agreement.
7-Eleven demanded immediate payment in full of the $70,000 due on the Promissory Note.
7-Eleven demanded that the franchisee immediately turn over the Leased Premises and all Equipment, that he relinquish the final inventory, that he cease using anything trademarked 7-Eleven, and that he immediately cease doing business at the Merritt Island 7-Eleven.
The lawsuit contains no mention of any kind of a hearing or appeal for which Kapoor could argue on his behalf, and it seems that the termination, the demands for payment, and the filing for the failure to meet the demands were all filed on June 20, 2013.
The 32-page complaint, filed by 7-Eleven law firm Quarles & Brady LLP, includes 11 pages of explanation on how the 7-Eleven franchise business arrangement works (which we’ll explain in a separate post).
It also raises some troubling questions, such as:
- Is this a case if a blatantly dishonest franchisee getting caught red-handed and being dealt with swiftly?
- Or is this a case of franchise churning, of a smoothly polished machine that generates high fees and indebtedness from franchisees, terminates and sues them, then generates high fees and indebtedness from other franchisees for the same store and inventory?
- When was the Merritt Island 7-Eleven store built, and how many franchisees have come and gone in the years since?
- Is there really no hearing or appeal process prior to complete termination?
- Is it standard practice to make demands and simultaneously sue for failure to comply with those demands? (I have a feeling it is.)
- Does 7-Eleven make it clear upfront that its total control of the accounting process, their monitoring of POS system keystrokes, their crack 7-Eleven’s Asset Protection Group, and their non-curable breach termination process, it would be insanely risky to try to cheat them?
- What would lead the Kapoors to risk their investment by cheating almost immediately?
7-Eleven certainly has the right to protect itself from franchisees who enter an agreement then violate it in order to cheat them.
However, there’s something about the icy precision and the speed of this process, as well as the lack of an appeal or opportunity to cure, that makes this lawsuit seem vaguely unsettling.
What do you think?
Read the entire 32-page complaint here: 7-Eleven, Inc. v. Kapoor Brothers Inc. et al
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