Sign This, Or Do This—Or Else!

Eric H. Karp, Esq., General Counsel TO NCASEF

As 2020 comes to a close, it is appropriate for us to look back and try to come up with a way to accurately describe the way SEI treats its franchisee community. In a prior Avanti column, I analogized that treatment to what was once a popular (but long since discredited) conception that children should be seen and not heard. Others have suggested that SEI’s approach can be captured by the phrase, “Take it or leave it.” But this too is imprecise, because in many situations franchisees do not perceive that they have the option of leaving it, meaning not signing a particular document presented to them or carrying out a directive during the franchise relationship. In the end, what SEI does over and over again is offer franchisees a Hobson’s Choice, defined by Merriam-Webster Dictionary as follows:

“In the late 16th and early 17th centuries, Thomas Hobson worked as a licensed carrier of passengers, letters, and parcels between Cambridge and London, England. He kept horses for this purpose and rented them to university students when he wasn’t using them. Of course, the students always wanted their favorite mounts, and consequently a few of Hobson’s horses became overworked. To correct the situation, Hobson began a strict rotation system, giving each customer the choice of taking the horse nearest the stable door or none at all. This rule became known as Hobson’s Choice, and soon people were using that term to mean ‘no choice at all’ in all kinds of situations.”

Here are multiple specific examples of that kind of behavior.

Payroll Protection Program

The terms and conditions of the Payroll Protection Program allowed forgiveness of loans based on how the proceeds were used. As amended, the program guidelines allowed up to 40 percent of the proceeds to be used for rent and related expenses. We contacted SEI in May of 2020 to gain information regarding store level rent and occupancy expenses so that franchisees could use that information in their applications for loan forgiveness.

In doing so, we noted that there are multiple places in both the franchise disclosure document and in the Individual Store franchise agreement that reflect the existence of a landlord-tenant relationship between SEI and its franchisees. These include provisions stating that SEI has all the rights and remedies available to any landlord and that the gross profit split in favor of SEI covers the franchisee’s required lease of the land, building and equipment. We also pointed out that SEI had for some time used a document entitled “Acknowledgment of 7-Eleven Charge Allocation” in Florida and in other states. This document provides a specific formula for determining what portion of the gross profit split is allocated to the actual rental of the store, based on SEI’s books and records.

Our ask was very simple: that any franchisee that requested the actual rental and occupancy cost of the store would be provided with that information, which would necessarily be subject to the confidentiality provisions in the franchise agreement.

SEI’s response was to concede that a landlord-tenant relationship exists between SEI and its franchisees, but to decline to provide any of the information requested, suggesting that a great deal of effort would be required to conduct a store-by-store analysis. Of course, we had not asked for rent-related information on every store, just that those franchisees that sought the information would receive it. The SEI response suggested that franchisees speak with their accountant and/or tax professional and determine “what they think is properly allocated to lease payments.”

In response to SEI’s suggestion that what was requested could not be done, we provided examples of budget and profit and loss reports generated by SEI’s accounting system that included a heading entitled “Occupancy and Related Expenses” which included 10 separate line items, including rent, utilities, communication and telephone lines, and property taxes. We pointed out that such a document exists for every single store in the United States, and thus the information we requested is readily and easily available.

Finally, we compared SEI’s stance on this issue to the so-called Think Method, which was the central theme of the 1950s musical “The Music Man,” where a con artist convinces the unsuspecting populace of a small town to buy musical instruments and form a band. Even though they have no prior musical training or experience, he tells them that if you think of a song, you’ll be instantly able to play it on your chosen musical instrument.

There was no rational explanation for SEI refusing to cooperate with franchisees who are seeking forgiveness of their PPP Loans; that lack of cooperation, which included treating SEI’s rent expense as a closely guarded secret equivalent to the military’s nuclear launch codes, undermines the Congressional mandate to provide as complete assistance as possible to small business owners such as SEI franchisees.

Franchisee Certifications

In March of 2020, we communicated with SEI regarding the company’s demand that certain franchisees who signed the so-called 2019 franchise agreement execute and deliver a Franchisee Certification as to wage, hour and immigration law compliance. Each demand was accompanied by a deadline for the franchisee to submit the Franchisee Certification. The form of that Franchisee Certification was not subject to any prior discussion or review with any franchisee community representatives or lawyers.

 Our concern was that the form of the Franchisee Certification was not consistent with the 2019 franchise agreement, and in particular required franchisees to provide certifications beyond those that are specifically required by that agreement. These issues included the fact that (a) the Franchisee Certification at least implied that franchisees are required to use E-Verify for current employees, which is illegal under federal law, and (b) it required franchisees to certify that they have always been using E-Verify, not just that they are currently doing so, which is what the 2019 franchise agreement requires. In order to assist SEI in creating a form of Franchisee Certification that actually conformed to the requirements of the franchise agreement, we submitted a revised form of Franchisee Certification to SEI on April 24, 2020. SEI neither responded nor acknowledged our submission. Instead, SEI informed franchisees that they were required to sign its form of Franchisee Certification by June 30, 2020, or they would be in default of their franchise agreements.

SEI’s approach was based on whatever conduct they could engage in for which they perceived franchisees did not have an effective remedy. They ignored valid criticism of their document, and simply demanded compliance.

California Gasoline Tank Law Amendments

California laws regarding the regulation of gasoline tanks were amended to require the Owner of a gasoline tank (in this case, SEI) to enter into an agreement with the Operator of the tank (in this case, the franchisee) to maintain records, monitor the tank, and report adverse events. The information required to be in those records is extensive.

In November, SEI created—on its own—a form of Gas Tank Law Amendment that was presented to California franchisees on a take it or leave it basis, with a request the franchisee sign “immediately.” We were asked to review this document.

Here is a summary of some of our issues and problems with the document:

  • Conspicuously missing is any serious undertaking by SEI to carry out its extensive obligations under the law. The Owner of the tank has seven separate and distinct responsibilities under California law. Only one of these, to properly close the underground tank at the outlet, is mentioned in paragraph 6 of the Amendment.
  • While SEI is promising training to franchisees on these rather complex responsibilities, it doesn’t say when, where or how the training will be delivered, or even to whom (The franchisee? The managers? Other employees?).
  • The indemnification undertaking in paragraph 7 is also quite limited because it carves out franchisee negligence. It would be very easy for a franchisee to overlook any one of these very complex requirements and thus be deemed negligent.

In the end, what SEI’s legal responsibility as a tank Owner is can be very extensive, can be very expensive and carry a high degree of risk. Violation of any of those responsibilities could put the franchisee’s business at a serious disadvantage. Yet, while they are demanding that franchisees immediately sign the document pledging to carry out their limited obligations under the law, which will involve creating yet more obligations for the franchisee to carry out an already complex operation, SEI will make no reciprocal commitment.

The California regulations do not prescribe the form of that agreement, and once again SEI is presenting this document without any prior discussion or input. Any other franchisor in the country would realize that they need the signature of the franchisee and would thus engage in some dialogue, and perhaps even bargaining. In the end, what SEI is demanding is an amendment to the Consigned Gasoline Amendment and the Gasoline Operations Amendment without really offering anything in return.

The French have a saying, “Plus ça change, plus c’est la même chose.” Translated it means “The more things change, the more they stay the same.” SEI’s treatment of California franchisees in this instance is all-too familiar, but no less problematical.

7NOW Program Agreements

Among the many revisions of the 2019 Agreement that we characterized as SEI’s attempt to require franchisees to execute a blank check in its favor, are those related to loyalty programs and digital commerce. SEI inserted provisions within the franchise agreement that it would no doubt argue amount to stating that the terms, conditions and economics of these programs will be whatever SEI says they will be from time to time based on SEI’s sole determination. It is our position that these provisions are substantively unconscionable.

As of June 2020, SEI had issued five successive different versions of a 7NOW Program Agreement, all of which were presented to franchisees on a take it or leave it basis. In addition, none of these different versions were submitted for prior review or comment to any franchisee representative or counsel. Further, no redlined versions were provided to help franchisees determine how the latest agreement differed from the one they had most recently signed.

Among the many highly problematical provisions of these program agreements are the following:

  • Orders must be processed in a prompt and timely manner, and be available for immediate pick up; none of these terms are defined;
  • SEI alone decides which store fulfills a given order;
  • SEI can change the price of the order from the store’s actual retail selling price;
  • Franchisees must participate in all promotional pricing and other offers;
  • Franchisees must shoulder additional expenses, including packaging, additional labor required for timely fulfillment, maintenance of additional equipment, additional licenses, and payment of higher credit card processing fees;
  • Partial or total refunds to a customer are at SEI’s sole discretion—the franchisee has no input;
  • Complete absence of transparency regarding store level economics of the relationship with third party delivery services; and
  • The Program Agreement is terminable by SEI at will.

2019 Franchise Agreement

On June 15, 2018, SEI issued a new franchise disclosure document containing an early renewal franchise agreement. From the moment it was issued, franchisee representatives properly concluded that it was a transparent attempt to force franchisees to figuratively tear up their existing franchise agreements and replace them with new agreements that imposed many new fees and charges and threatened even higher fees, even if their franchise agreements are not due to renew until many years down the road.

SEI convened a Franchisee Advisory Committee (FAC) comprised of approximately a dozen franchisees who met several times with SEI executives in 2017, allegedly to solicit input and feedback, but not to negotiate any terms. The FAC was mere window-dressing, designed to create the false and misleading appearance of a process that would create a fair and balanced agreement. On several occasions, SEI executives demanded acknowledgments from participants in the FAC that their role was not to negotiate, only to listen.

When SEI actually rolled out early renewal of the franchise agreement in June 2018, franchisee representatives were shocked to discover that it included strong-arm tactics designed to compel franchisees to discard their current franchise agreements in favor of this new agreement, which threatened higher fees. This is and was a bludgeon, pure and simple. No franchisees would or should agree to such substantively unconscionable terms unless they were subjected to strong-armed tactics, which is what SEI has employed.

I presented a detailed analysis of the 2019 franchise agreement provisions at the 2018 National Coalition convention and at two California town halls attended by hundreds of franchisees. As the details of this hideously one-sided and misleadingly presented franchise agreement began to unfold, the reaction of my audience was a combination of outrage and sadness, with many visibly shedding tears.

SEI imposed a December 31, 2018 deadline for franchisees whose agreements were not then expiring to sign and deliver the 2019 Agreement, or else. If franchisees did not knuckle under and accept the 2019 Agreement by the end of that year, then they would be subject to a gross profit split even more regressive than the current GGPS instituted in 2006 when their current agreements expire, no matter when their agreements expire. Some franchisees took to calling this even more oppressive form of graduated gross profit split, GGPS-OS, or graduated gross profit split on steroids. This is the very definition of take-it-or-leave-it tactics that courts have many times deemed to be procedurally unconscionable.

Franchisees faced immediate, unpalatable choices: (1) accept the 2019 Agreement with a rate lock for a defined period of time that maintained their current gross profit split, but under which they face new and higher fees and expenses, as well as other unfavorable terms; (2) continue operating under their current agreements until they expire, but then be forced to renew under GGPS-OS and the same higher fees, expenses, and unfavorable terms; or (3) continue operating under their current agreements until they expire, refuse to accept the 2019 Agreement, and relinquish (i.e., walk away from) their stores, with no compensation for years of effort and investment. Insofar as franchisees decided to choose the first and potentially least-bad option, their choice does not prove that they were satisfied or that the terms are conscionable. Instead, it demonstrates the effectiveness of SEI’s coercive tactics.

Conclusion

For years, I have opined in these pages that what is fundamentally wrong with this franchise system is the culture created and fostered by SEI and fully supported by its publicly held parent company. This has included treating the concepts of collaboration, transparency, consensus building and negotiation as if they were a poison pill. In my four decades of representing franchisee associations, I have never seen a more toxic and counterproductive relationship.

Here’s hoping that 2021 brings meaningful change.