July 24, 2014 8 min read

The world's largest convenience-store franchisor is facing a Big Gulp-sized lawsuit from within.

A group of 7-Eleven in California filed a lawsuit in federal court on July 11 claiming the company violated their rights as franchisees and individuals under federal and state laws. They argue 7-Eleven discriminates against South Asian immigrant franchisees and unjustly forced a number of former store owners to terminate their franchise agreements as part of a profit scheme.

"In one of the most tragic business stories in recent years, a foreign corporation has been allowed to transform the American Dream into an American Nightmare for countless individuals and families," the plaintiffs state in the complaint.

7-Eleven, which is headquartered in Dallas, has been owned by Japan-based Seven & I Holdings since 2005.

The plaintiffs include the Franchise Owner's Association of Greater Los Angeles (FOAGLA) -- an association that represents over 1,200 members -- and five individual 7-Eleven franchisees in California. They are not seeking any monetary gain, but a court declaration that 7-Eleven has violated state and federal laws in relation to its treatment of franchisees.

7-Eleven has thus far emphatically denied any truth in the complaints.

Churning franchisor or fraudulent franchisees?

A central argument in the complaint is that 7-Eleven is engaging in "churning." Churning is a ploy in which terminate franchise agreements in order to resell locations and get a fresh influx in franchise fees. The plaintiffs further believe that South Asian franchisees have been churning targets through harassment, false accusations and disenfranchisement.

"I think [churning] is becoming a more common claim," says Raymond Areaux, a franchise lawyer at Carver, Darden, Koretzky, Tessier, Finn, Blossman & Areaux. Areaux says that the influx in churning complaints stems from ex-franchisees' convictions that franchisors are attempting to turn a profit without concern for franchisees. "The other side is, representing franchisors, they are very concerned with their brand and they want to make sure their reputation and their brand is kept in the way that they view it." Areaux does not represent any of the parties involved in the 7-Eleven case.

At the center of the churning complaints is a family of former 7-Eleven franchisees. In December 2013, Dilip and Saroj Patel surrendered their store to 7-Eleven following a complaint by the company that they had violated their franchise agreement. The Patels argue that they were unfairly pressured to sign over their shop, with aggressive interrogation techniques and threats of lawsuit.

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While 7-Eleven refrained from speaking with Entrepreneur.com about specific cases, a spokesperson stated that any franchisees who terminate their franchise agreements with the company have been fully investigated and found to have broken their agreement or federal laws. According to the recently filed complaint, 7-Eleven accused the Patels of coupon fraud. As 7-Eleven corporate and franchisees split the profit from sales in stores, coupon fraud is a way for franchisees to add money to their own bank account without having to give a cut of the profit to 7-Eleven.

"The unfortunate fact is a few franchisees have been caught violating the law or the franchise agreement," says a 7-Eleven spokesperson. "7-Eleven is determined to protect our guests, employees and other franchisees by ending the relationship with franchisees that violate the law or the franchise agreement, where appropriate."

For FOAGLA and other franchisees' accusation of churning to hold up in court, the jury must not only find that the Patels were wrongly defranchised, but also that they and other franchisees have been systematically targeted by 7-Eleven as a wider churning effort.

"The core aspect of the claim is that in recent times, in recent years, 7-Eleven has become far more litigious in targeting, defaulting and later terminating franchisees who have been seeing as violating policies or procedures of 7-Eleven, or violating labor laws," says Louis Tambaro, the lead lawyer for the plaintiffs in the case. "In other words, 7-Eleven has, in recent times, ramped up their efforts, which we believe are disproportionately targeting franchisees of a certain ethnic descent."

Tambaro is no stranger to these sorts of complaints; his firm, Marks & Klein, has filed similar lawsuits on behalf of franchisees from 7-Eleven, Pizza Hut and Edible Arrangements.

In this case, 7-Eleven argues the plaintiffs will not be able to find evidence of any systematic move to force franchisees to sign over their businesses.

"The company has a very high retention rate for franchisees," says a 7-Eleven spokesperson. "In 2013, 7-Eleven, Inc. had a less than 4 percent franchisee turnover rate nationwide, less than 3 percent in California."

7-Eleven has more than 53,500 stores across the globe. Of the more than 7,800 stores operating in the U.S., about 6,200 are franchised.

A question of control

In addition to accusations of churning, FOAGLA claims that 7-Eleven overstepped its boundaries as franchisor, an accusation that could force the franchisor to overhaul its franchise model.

The overstepping is twofold. First, franchisees claim 7-Eleven violated franchisees' privacy, to the point of stalking. Second, franchisees argue that 7-Eleven's excessive control rendered them employees, not franchisees, of the company.

FOAGLA claims that in addition to in-store cameras, certain franchisees were followed outside of work by 7-Eleven. Franchisees suggest 7-Eleven was searching for reasons to terminate franchise agreements, such as incorrectly splitting the profits with 7-Eleven or employment of undocumented immigrants (the federal government arrested 7-Eleven franchisees in 2013 for "employing" unpaid, undocumented immigrants). 7-Eleven denies the allegations, which would potentially violate state and federal stalking laws.

Franchisees also claim that 7-Eleven's excessive control is embedded into the company's franchise model, leading them to be treated as employees as opposed to business owners.

"That is a claim that is not uncommon," says Areaux. One of the most influential instances was in 2010, when a group of janitorial franchisees successfully argued that their franchisor, Coverall, had improperly classified them as independent franchisees, denying them employment benefits such as minimum wage, overtime pay and eligibility for unemployment and workers' compensation. Coverall had to pay up $3 million and change its franchising structure.

Tambaro, whose firm is currently representing other 7-Eleven franchisees in New York and New Jersey in similar cases, calls the franchisor/employee dispute a "hot issue in franchising." He believes that if the court rules in favor of franchisees, the lawsuit could force 7-Eleven to overhaul its franchise model, affecting how 7-Eleven franchisees are paid, as well as their benefits and tax considerations.

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7-Eleven and South Asian franchisees' long history

At the heart of FOAGLA's case against 7-Eleven is the claim that the franchise's values have crumbled over the last decade. While franchising once offered opportunity for South Asian franchisees, plaintiffs claim the company now tries to force them out of the system and reduce their ability to succeed as entrepreneurs.

Both FOAGLA and 7-Eleven acknowledge the role that South Asian and other immigrant franchisees played in helping build up the company over the 20th century.

"7-Eleven found that the South Indian cultural traits of hard work, family unity, respect for authority, and community-mindedness made South Asians ideal owner/operators for 7-Eleven stores," reads the complaint. "The same franchisee cultural attributes that were highly prized by 7-Eleven management would later be regarded as weaknesses to be exploited for profit by the current management."

The plaintiffs argue that when 7-Eleven was acquired by Seven & I Holdings nine years ago, the company changed its approach from a symbiotic relationship to an antagonistic and profit-driven connection. The complaint claims that Seven & I Holdings "staffed many of the top management position of the company with West Point graduates… with a cold, predatory and militaristic approach to business."

The company denies that it has changed its relationship with franchisees, and that its commitment to diversity is stronger than ever. Officially, the closest thing to a "militaristic approach to business" the company offers are incentives for veteran franchisees.

"7-Eleven is proud of its very diverse, independent franchisee population," says a company spokesperson. "In fact, USA Today named 7-Eleven one of the Top 50 for Minorities in 2013, and has received recognition as one of the top franchisee opportunities by Professional Woman’s Magazine, Hispanic Network Magazine and BLACK EOE Journal."

The apparently opposite views -- that 7-Eleven is a powerful vehicle for its franchisees' success and that 7-Eleven's racist policies are forcing out franchisees to turn a profit -- will play out over the next several months in court. Tambaro predicts the case will be a long haul, with both sides being forced to address a complex and extensive array of evidence.

"When franchisees are successful, theoretically franchisors are successful," says Tambaro. "Unfortunately, at certain times, their interests become diametrically opposed."

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