7-Eleven, Inc. v. Upadhyaya

• Decision Date: 01 March 2013
• Docket Number: Civil Action No. 12–5541.
• Citation: 926 F.Supp.2d 614
• Parties: 7–ELEVEN, INC., Plaintiff, v. Milind L. UPADHYAYA, Minaxi M. Upadhyaya, Minaxi Enterprises, Inc., Girma Gasisa And Getachew Ayana, Defendants.
• Court: U.S. District Court — Eastern District of Pennsylvania

926 F.Supp.2d 614

7–ELEVEN, INC., Plaintiff,

v.Milind L. UPADHYAYA, Minaxi M. Upadhyaya, Minaxi Enterprises, Inc., Girma Gasisa And Getachew Ayana, Defendants.

Civil Action No. 12–5541.

United States District Court, E.D. Pennsylvania.

March 1, 2013.

Susan V. Metcalfe, for Plaintiff.

David F. McComb, for Defendants.

MEMORANDUM

DUBOIS, District Judge.

I. INTRODUCTION

Plaintiff 7–Eleven, Inc. (“7–Eleven”) seeks a permanent injunction against defendant owners and employees of one of its franchises in Philadelphia, Pennsylvania. 7–Eleven asks the Court to order franchisee-defendants ¹ to surrender the store to 7–Eleven and to eject them from the premises.

Presently before the Court is 7–Eleven's Motion for a Mandatory Preliminary Injunction. By agreement of the parties, the Court treats that Motion as a Motion for Permanent Injunction.

The Court conducted a 4–day hearing on the Motion for Permanent Injunction on December 11–14, 2012.² Based on the evidence presented at the hearing, the Court concludes that franchisee-defendants breached their Franchise Agreement by systematically defrauding 7–Eleven for at least a period of several months. This fraud was accomplished by defendants' actions in concealing sale proceeds from 7–Eleven, either by selling merchandise without recording it on the cash register, or by using certain register keys to mask such sales. 7–Eleven therefore properly terminated the Franchise Agreement without any notice and opportunity to cure as of September 28, 2012. 7–Eleven has demonstrated success on its claims of trademark infringement as defendants continue to engage in unauthorized use of 7–Eleven's trademarks in a manner likely to confuse consumers. Upon consideration of the relevant equitable factors, the Court determines that a permanent injunction should issue for the reasons discussed below, and the Court grants plaintiff's Motion for a Permanent Injunction.

II. FINDINGS OF FACT

Having reviewed the submissions of the parties and conducted a hearing on December 11–14, 2012, the Court makes the following findings of fact:

A. Parties

1. 7–Eleven is a Texas corporation, duly authorized to do business within the Commonwealth of Pennsylvania. 7–Eleven is one of the largest convenience store franchise systems in the United States. 7–Eleven operates, franchises, and licenses approximately 9,200 stores in North America. (Parties' Uncontested Facts, at ¶ 1–2.)

2. Defendant Minaxi Enterprises, Inc. (“Enterprises”) is a Pennsylvania corporation. It is a citizen of the Commonwealth of Pennsylvania. ( Id. at ¶ 3.)

3. Defendant Milind L. Upadhyaya (“Milind”) is a citizen of the Commonwealth of Pennsylvania. He is the President and a shareholder of Enterprises. ( Id. at ¶ 4.)

4. Defendant Minaxi M. Upadhyaya (“Minaxi”) is the wife of Milind and a citizen of the Commonwealth of Pennsylvania. She is the Treasurer and a shareholder of Enterprises. ( Id. at ¶ 5.)

5. On June 1, 2004,³ Milind and Minaxi entered into a Store Franchise Agreement (the “Franchise Agreement”), which superseded a franchise agreement effective May 10, 1993. Pursuant to the Franchise Agreement, among other things, 7–Eleven leased (or subleased) to Milind and Minaxi certain equipment and real property presently described as 7–Eleven Store No. 2408–25065C located at 106 S. 38th Street, Philadelphia, Pennsylvania 19104 (“franchisee-defendants' store”). The Franchise Agreement was immediately assigned to Enterprises, and Minaxi and Milind guaranteed the performance of Enterprises' under the Franchise Agreement. ( Id. at ¶ 32.)

6. Defendants Girma Gasisa and Getachew Ayana are citizens of the Commonwealth of Pennsylvania. They are both employed as sales associates at the Store. ( Id. at ¶¶ 6–7.)

B. Relevant Portions of the Franchise Agreement

7. The Franchise Agreement provides that Milind, Minaxi, and Enterprises were required to, inter alia, use electronic equipment to scan all products which can be scanned, report all sales to 7–Eleven, and otherwise provide 7–Eleven with truthful, accurate and complete information regarding operation of the store. (Franchise Agreement, at ¶¶ 12(c)(3), 19(f), 23(d)(4)).

8. The Franchise Agreement provides that in the first event of certain material breaches, franchisees are entitled to a period of notice and opportunity to cure prior to termination of the Agreement. The only exception is for a violation of “any of the Anti–Terrorism Laws,” which the Agreement states will result in an immediate termination with no right to cure. ( Id. at ¶ 26(a)(7).)C. 7–Eleven Franchise System

9. Under the current and prior forms of the franchise agreement, a franchisee leases the store and equipment, and is licensed to use the 7–Eleven® Service Mark, related trademarks, trade dress, and system of operations. A franchisee does not acquire ownership of the store, its premises, or any of the physical plant, all of which remain the property of 7–Eleven. Rather, the franchisee's primary ongoing financial interest is in the net income derived from the store's operations, which the franchisee draws against on a weekly basis. (Parties' Undisputed Facts, at ¶ 11.)

10. 7–Eleven's essential financial interest is in receiving a percentage of the “gross profit” (net sales less cost of goods sold) derived from operation of the Store, which percentage is designated in the franchise agreement as the “7–Eleven Charge.” ( Id. at ¶ 12.)

11. Under 7–Eleven's franchise system the 7–Eleven charge is 52 percent of gross profit if less than 85 percent of the product in the store is purchased from vendors designated as recommended by 7–Eleven. If over 85 percent of store product is purchased from recommended vendors, the charge is 50 percent. Pursuant to these requirements, 7–Eleven's share of the Store's gross profit was 52 percent until approximately April, 2012, when it was reduced to 50 percent. (Hearing Transcript, December 11, 2012, at 46) (“H1.”)

12. The net income in which franchisee-defendants have an interest is the amount remaining after deducting both “operating expenses” (such as payroll and similar expenses) and the 7–Eleven Charge from the gross profit. (Parties' Undisputed Facts, at ¶ 12.)

13. 7–Eleven utilizes a Point–of–Sale (“POS”) register system that simultaneously records all transactions on what is commonly referred to as an electronic journal which is accessible by 7–Eleven. Using the POS register system, merchandise purchased by a customer is electronically scanned, its price appears on the register, the cash tendered by the customer is recorded, a register drawer opens, and the customer is given the change from his or her purchase, following which the register drawer is closed. ( Id. at ¶ 31.)

14. The cash registers—there are usually two in each store—track sales by product and time of day and feed that data to an in-store processor. Store managers know when they are selling what, and can tailor the product mix to their clientele. The in-store processor is shared with 7–Eleven over a dedicated network. ( Id. at ¶ 29.)

15. With respect to sales and receipts of the store, franchisees are obligated to submit a Daily Cash Report each day and make daily deposits of receipts into a designated 7–Eleven bank account. The franchisee is required by the franchise agreement to deposit each day's cash receipts into a designated bank account no later than the following day. The Daily Cash Report states the amount of sales for the day as recorded or rung up on the cash register, sales made by credit card, and sales of money orders. The Daily Cash Report also accounts for and records any deductions to or from cash that affects the daily deposit. ( Id. at ¶ 18.)

16. The Daily Cash Report is prepared and electronically submitted to 7–Eleven by the franchisee (or the franchisee's employee) and is the only means used to report daily sales and account for all receipts. Information in the Daily Cash Report is entered into 7–Eleven's computerized accounting records upon receipt of the report by the accounting department. ( Id. at ¶ 19.)

D. Inaccurate Reporting of Sales/Purchases

17. Inaccurate or false reporting harms 7–Eleven by, inter alia, depriving it of its full share of gross profit, causing franchises to look less attractive for potential franchisees, and imposing potential liability for understatement of taxes. (Plaintiff's Proposed Findings of Fact, at ¶ 27.)

18. It is possible for franchisees and employees to make false entries in the POS cash register to mask actual sales transactions. For example, they can use a number of POS keys to open the register drawer, enabling them to accept cash and make change without recording the sale. As a consequence, 7–Eleven's Asset Protection Department tracks the use of certain “high risk transactions” in stores. The high risk transactions include the use of the following POS keys: Price Lookup (“PLU”), Void Item, Refund, Cancel Age Verification (“CAV”), Penny Sale, Change Makers, and No Sale. ( Id. at ¶ 35.)

19. Each of these POS keys has a legitimate usage. For instance, the PLU key is used to inquire about the price of a product. When the key is pressed and the product is scanned, the price is displayed on the monitor. ( Id. at ¶ 38.)

20. However, it is possible to use each of the “high risk” POS keys to commit fraud. For instance, regarding the PLU key, in a multi-item transaction, a franchisee may scan one or two items legitimately (usually lower priced items), and then use the PLU Inquiry key to scan other items without recording their sale. Because a part of the sale is being recorded, the register drawer opens and change can be given to the customer from the open register drawer. ( Id.)

E. Investigation into Franchisee–Defendants' Store

21. In April 2012, James Pasarella, 7–Eleven's Senior Manager, Asset Protection, began investigating franchisee-defendants' store for possible fraudulent activity. The investigation was initiated because Pasarella noted in a POS...