COVID-19 In New York – The Unimaginable

By Arnold Hauptman, General Counsel, UFOLI New York

As if 7-Eleven franchisees did not have enough financial problems, along comes the coronavirus (COVID-19), which blanketed our county with New York City and its surrounding suburbs being the U.S. epicenter of the pandemic as of this writing. To put things in perspective, almost 1,000 people died from the virus in New York state on April 10, with total deaths in the state exceeding those lost on 9/11. Unimaginable.

In mid-March, things began to move very rapidly with conflicting reports and advice about the severity of the virus from both federal and state agencies, as well as from 7-Eleven with respect as to how to handle the impending crisis. It soon became obvious that franchisees had to make quick decisions, and some still have to in the immediate future. Do I close my store during the night hours because of short staffing, or do I stay open? Is the health and safety of my employees, my family, and even me more or less important than serving our customers? Should my loyalty to the 7-Eleven brand trump (pardon the pun) the concerns for the very safety and lives of my staff? Finally, do I close my store entirely and worry about the legal ramifications of such closing some other time? All very weighty questions.

At this time, there was absolutely no guidance from SEI with respect to the risk of being served with a material breach if a store were to close or even shorten hours. After all, the store agreements all provide for 24/7 operation and a failure to do so could be interpreted as an abandonment, resulting in a termination. At a time when most franchisees are scratching for every nickel of income, a termination or even the threat of a termination would be a disaster.

Under the leadership of Yousaf Naseer, UFOLINY president, and the UFOLINY Board of Directors, correspondence was initiated with our zone leader, Sembe Cole, asking pointed and direct questions including: what financial assistance could SEI provide to store owners hard hit by a loss of sales and profit? What about the problem of staff shortages and mandatory closings? Will deliveries continue relatively unabated? Mr. Cole, at that early stage of the pandemic, responded in very general and noncommittal terms, stating that franchisees are independent owners, and it is up to them to staff stores through what-ever resources are available. He further stated that the issue of financial re-lief will be determined based upon individual store circumstances and the impact of the virus to a particular store. Not very comforting and not much help. But it is also true that matters were very much in flux at the time of his response, and it is understandable that hard answers to hard questions had not yet been formulated by SEI.

In response to the concerns of a franchisee who felt that he needed to close his store and was concerned about a possible termination if he did so, I advised Yousaf that I did not believe any judge would approve a termination based upon a store closure resulting from the virus. This was an act of God, out of the control of both the franchisee and SEI.

On March 26, when it was becoming clear that several owners wanted to either shorten hours or close their stores entirely, I gave the following general device to Yousaf which was passed on to all UFOLNY members: “I continue to take the position that paragraph 31(c) of the 2004 agreement (and I believe all versions in between) fully provide for the coronavirus pandemic to come within the purview of the language of the section which essentially provides that neither party will be liable in damages to the other for any failure or delay in performance due to any… governmental act or regulation… other disaster or event beyond your or our control provided each notifies the other of such failure or delay, and takes all steps to mitigate the failure or delay. Undoubtedly this is a situation out of the control of both parties. This provision is often called ‘force majeure’ which means unforeseeable circumstances that prevent someone from fulfilling a contract.

“In my view, any franchisee who determines to close his or her store because of safety or staffing concerns can do so without risk of a breach, as long as he/she notifies SEI at least 24 hours before closing (if possible) and takes reasonable steps to secure the store premises.”

Shortly thereafter, on March 27, as conditions worsened and more and more franchisees were either closing stores or closing at night, a rather comforting letter from SEI president, Joe DiPinto, was sent to franchisees. That letter recognized the financial pressure on store owners, announced a preliminary actual dollar support for every store and, very importantly, made clear that no penalties (i.e., material breach or termination notices) would be imposed if the store was to temporarily close or reduce hours. At the very least this was a good start and an indication that perhaps finally SEI had the backs of its franchisees. We shall see.

Several days later, I received an unso-licited email from Michael Coffman, Esq., my SEI counterpart, reiterating that it is the ultimate decision of the individual store owner as to whether or not to close the store or reduce hours, asking only that SEI would like the franchisee to speak to management to discuss the impact of such a decision. For sure, the independent thinking and decision making of franchisees in this situation was coming into focus.

Only a short time ago, SEI announced a commitment of close to $100 million in financial support of its franchisees. That money, as I understand it, will provide direct credits to boost cash flow in March and April and perhaps thereafter, and will enable the waiving of April advertising fees, as well as waiving interest on a store’s inventory. Moreover, SEI has set up a system to provide financial advice and to guide franchisees through the process of obtaining governmental loans via the stimulus package. Another good sign that SEI cares about its fran-chisees during this crisis. But will it be enough to save our franchisees from financial ruin?

At the time this article is being written (around April 11), the virus continues unabated with an unimaginable death toll through the U.S. It is no wonder that scores of our members, as well as owners in other markets, have taken the high road to safety and have closed their stores until it is safe to reopen. New York City stores were particularly hard hit, and I believe most stores have closed.

This pandemic is a disaster of historic proportions, and no one knows how it will end—but it will end. Hopefully, very hopefully, by the time you read this article, the curve will have come down and sooner or later, we can all go back to business as usual. There is often a silver lining when disaster strikes, and there may be one here. Can this silver lining be the resumption of communication and cooperation between 7-Eleven, Inc. and its franchisees? Unimaginable? Perhaps not.

Stay safe everyone.