A recent decision from a federal court in California addresses the enforceability of a general release of claims signed by former franchisees. Quick tutorial: a "general release" is a document where the signing party (releasor) agrees to relinquish the right to enforce or pursue any and all legal claims against the non-signing party (releasee). While general releases in the franchise context are usually unilateral (given by the franchisee, or former franchisee, to the franchisor), they can be and sometimes are mutual.
The court decision deals with Grayson and McKenzie, who are former franchisees of 7-Eleven, Inc. Grayson and McKenzie are also the name plaintiffs in a class action lawsuit they filed against 7-Eleven relating to 7-Eleven’s collection of a federal excise tax on pre-paid telephone cards they and other franchisees sold at their respective stores. When those cards were sold, 7-Eleven collected excise taxes from the plaintiffs, and paid those taxes to the federal government.
In 2006, the federal government stopped collecting excise taxes on pre-paid phone cards. The government authorized a one-time refund of the tax for payments made between March 2003 and July 2006. The federal government made refund payments to 7-Eleven for millions of dollars, but the franchisees in the lawsuit alleged that 7-Eleven did not return any portion of the payments to them, even though those franchisees believed they were entitled to a 50% share of the refunded money.
The reason the franchisees believed they were entitled to a portion of the tax refunds was because of the way the 7-Eleven system is structured. While most franchise systems are designed so that the franchisee will pay the franchisor a royalty fee (as well as other fees) based on the franchisee's gross sales, 7-Eleven’s system is built differently. In the 7-Eleven system, 7-Eleven and the franchisee will split the store’s gross profit as well as the operating expenses.
Based on the "share and share alike" operating structure, the plaintiffs in the lawsuit alleged that they were entitled to a 50% pro rata share of the excise tax refunds received by 7-Eleven. The franchisees sued 7-Eleven for: (1) conversion; (2) money had and received; and (3) breach of implied contract.
7-Eleven moved for summary judgment on Grayson and McKenzie’s claims, asking the court to dispose of the franchisees' claims. 7-Eleven based its request on general releases that the franchisees had each signed in 2004 and 2005, respectively, when they terminated their franchise agreements with the company.
In response, Plaintiffs argued that California Civil Code Sec. 1668 prevents the releases from excusing 7-Eleven from liability. That section states:
All contracts which have for their object, directly or indirectly, to exempt any one from responsibility for his own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of the law.
In essence, the franchisees argued that their general releases could not be used to dispose of their legal claims because 7-Eleven had engaged in intentional wrongdoing, and that California law does not permit 7-Eleven to obtain a release of those types of claims from the franchisees.