7-Eleven, Inc. v. Kapoor Bros. Inc.

• Decision Date: 13 September 2013
• Docket Number: Case No. 6:13–cv–953–Orl–36GJK.
• Citation: 977 F.Supp.2d 1211
• Parties: 7–ELEVEN, INC., Plaintiff, v. KAPOOR BROTHERS INC., Pursharth Kapoor, Defendants.
• Court: U.S. District Court — Middle District of Florida

977 F.Supp.2d 1211

7–ELEVEN, INC., Plaintiff,

v.KAPOOR BROTHERS INC., Pursharth Kapoor, Defendants.

Case No. 6:13–cv–953–Orl–36GJK.

United States District Court,

M.D. Florida,

Orlando Division.

Sept. 13, 2013.

Christian C. Burden, John Matthew Guard, Lindsay Saxe, Quarles & Brady, LLP, Tampa, FL, for Plaintiff.

Edward Michael Livingston, The Livingston Firm, PA, Naples, FL, James R. Lavigne, Juan Carlos Real, South Milhausen, PA, Orlando, FL, for Defendants.

PRELIMINARY INJUNCTION

CHARLENE EDWARDS HONEYWELL, District Judge.

This cause is before the Court on Plaintiff 7–Eleven, Inc.'s (“Plaintiff” or “7–Eleven”) Motion for Preliminary Injunction pursuant to Federal Rule of Civil Procedure 65, filed on June 27, 2013 (“Motion”), Doc. 10, and supported by two affidavits, Docs. 10–1 and 10–2. Plaintiff subsequently filed two supplemental affidavits in support of the Motion, one on July 12, 2013, Doc. 19, and the other on July 19, 2013, Doc. 22. Defendants Kapoor Brothers, Inc. (“Kapoor Brothers”) and Pursharth Kapoor (“Kapoor”) filed a joint response in opposition to the Motion on July 17, 2013, Doc. 21, which was supported by an affidavit from Defendant Kapoor, Doc. 21–3. Defendants filed a supplemental affidavit by Defendant Kapoor on July 19, 2013, presumably in response to Plaintiff's supplemental affidavits, Doc. 23. The parties' filings of supplemental affidavits without leave of court were improper. The Court has nevertheless considered them as part of the record.

On July 24 and 31, 2013, the Court held an evidentiary hearing on the Motion. See Docs. 30, 32. Upon due consideration of the evidence, stipulation of facts and the arguments of counsel, the Motion will be granted.

I. FINDINGS¹A. The Parties

Plaintiff 7–Eleven is a Texas-based franchisor of convenience store businesses. Doc. 1 ¶ 5, (“Compl.”); Doc. 29, ¶ 1, Stipulation of Facts (“Stip.”). Defendant Kapoor is an individual residing in Brevard County, Florida and is also the owner and sole officer of Defendant Kapoor Brothers, a Florida corporation whose principal place of business is in Brevard County. Compl. ¶¶ 6–7; Stip. ¶ 6.

In December 2011, 7–Eleven entered into a franchise agreement with Mr. Kapoor for the operation of 7–Eleven convenience store No. 22244A (“Store '44”), located at 1105 Courtenay Parkway, Merritt Island, Florida 32593. Stip. ¶ 4; Jt. Ex. 1. Mr. Kapoor began operating Store '44 in January 2012. Compl. ¶ 46. He intended that Store '44 would be one of multiple stores he would own. After several months of successful operations, 7–Eleven approved a second franchise for Mr. Kapoor. In June 2012, 7–Eleven entered into a franchise agreement with Mr. Kapoor's corporation, Kapoor Brothers, for the operation of 7–Eleven convenience store No. 25737A (“Store '37”), located at 400 W. Merritt Island Causeway, Merritt Island, Florida 32592. Stip. ¶ 5; Jt. Ex. 2. As its owner, Mr. Kapoor guaranteed Kapoor Brothers's obligations to 7–Eleven and is essentially the franchisee for both stores. Stip. ¶ 6; Jt. Ex. 3. Mr. Kapoor first opened this store for business in July of 2012. Compl. ¶ 47.

B. The Franchise Relationship and 7–Eleven's Retail Information System

7–Eleven owns a number of federally-registered trademarks and service marks associated with its business, including 7–Eleven®, Slurpee®, and Big Gulp®. Stip. ¶ 2. It licenses the use of these trademarks, as well as its business “system”—the methods and procedures it has developed to operate its businesses—to its franchisees through the written franchise agreements. ²Id. ¶¶ 1, 3; Jt. Exs. 1, 2 at ¶ 7. These marks are widely known and used by thousands of 7–Eleven stores. 7–Eleven also leases store property and equipment to franchisees through the franchise agreements. Jt. Exs. 1, 2 at ¶ 8. In exchange for this, 7–Eleven receives a defined percentage of “gross profit” (sales less costs of goods sold), called the “7–Eleven Charge.” Id. ¶ 10.

As part of the franchise relationship, 7–Eleven provides instruction, ongoing advice, and a number of operational services, including training, merchandising consultation, periodic financial summaries, and vendor ordering and management. Jt. Exs. 1, 2 at ¶¶ 1(a)(5), 4, 12(e) & 15. 7–Eleven also provides computer software to its franchisees. The “Retail Information System” used by 7–Eleven franchisees consists of integrated software modules handling register transactions and back-office functions such as inventory tracking and ordering. Jt. Exs. 1, 2 at ¶ 12(f).

The register portion of the Retail Information System is also called a “POS” or “Point of Sale” system. The operator of the POS system controls its functioning from a touch screen interface. Pl.'s Ex. 3 at 1. In a typical sale transaction, the POS system is used to scan and total merchandise. The operator will then collect payment from the customer and the register drawer will open to deposit the payment and make change. The POS system also adjusts (reduces) the store's book inventory by the merchandise sold. This is part of the inventory tracking function of the Retail Information System, which calculates book inventory for the store based on reported inventory acquisitions (merchandise coming into the store) and sales from the POS system (merchandise leaving the store).

C. The Requirement to Accurately Report Sales and Inventory Transactions

The proper reporting of sales and inventory transactions in the Retail Information System is required by the franchise agreement. Jt. Exs. 1, 2 at ¶¶ 12(c)(1), 12(c)(3), 12(f) & 19(f). 7–Eleven's franchisees acknowledge,pursuant to their franchise agreement, that 7–Eleven relies on the accuracy of information the franchisee provides them:

You acknowledge that we are relying on the accuracy of all information you and your employees provide, including all payroll information. You agree that all information that you and your employees provide will be truthful, accurate, complete and in compliance with all applicable laws and with all policies or requirements we implement from time to time....

Id. ¶ 12(c)(3). 7–Eleven maintains that a franchisee's adherence to this provision is essential to the intended functioning of the franchise relationship. According to 7–Eleven, the validity and meaningfulness of the advice it provides, the financial summaries it prepares and the vendor services it performs are all dependent on the accuracy of the information provided by the franchisee.

One way that 7–Eleven can detect if the reporting of sales and inventory transactions for a franchised store is improper is through their Asset Protection Department. For example, the POS system has “no sale” and “safe drop” functions that open the register drawer. See Pl.'s Ex. 3 at 1. These keys can be used, improperly, to open the register drawer and collect payment for sale transactions that the POS system will not record as such. As explained in more detail below, the Asset Protection Department can observe when a POS system operator has used these register-opening keys, which often occurs in conjunction with the use of other otherwise legitimate register functions, that make it appear to the casual observer (the customer) that a normal sale has occurred, when in fact the sale transaction was not recorded by the POS system because the “no sale” or “safe drop” keys were used.

For example, the “Cancel Age Verification” register function can be used in conjunction with these register-opening keys to misrepresent a sales transaction. If a customer attempts to buy an age-restricted item, such as tobacco or alcohol, the POS system will display a dialog box with a yellow background to the register operator. Pl.'s Ex. 3 at 2. The register operator must then confirm that the customer's age has been verified, in which case the sales transaction of the age-restricted product will proceed, or the operator can exit the age verification dialog and thereby cancel the sale of the age-restricted item. See id. This function can be used to mask the appearance of a normal sale by scanning the age-restricted merchandise and then exiting the age verification dialog followed by the “no sale” or “safe drop” key, which will open the register drawer, allowing payment to be collected and change made. In this fashion, although the customer and POS system operator have completed a sale and merchandise leaves the store, no actual sale has been recorded by the POS system. Such underreporting of actual sales, in addition to damaging the functioning of the franchise relationship, also deprives 7–Eleven of its full share of the franchised store's gross profit.

D. Investigation of Store '44 and Store '37

7–Eleven's Asset Protection Department monitors excessive use of certain “high-risk” register transactions, including the Cancel Age Verification function and the “no sale” key as they are indicative of employee theft. Where alerted by excessive use, 7–Eleven will review the available records, including video, to confirm whether improper activity is occurring and, if confirmed, the information and identification of the involved employee is provided to the franchisee. According to 7–Eleven, it is rare that the person committing the theft turns out to be the franchisee.

In December of 2012, 7–Eleven was alerted to excessive use of the Cancel Age Verification and other transaction voiding functions at the Defendants' stores and undertook its normal review. Upon determining that Mr. Kapoor was involved, 7–Eleven commenced a broader investigation of the stores. 7–Eleven's Asset Protection Department reviewed sales and inventory data from the Retail Information System and commissioned an out-of-cycle audit to review whether there were inventory category variances.³ It also retrieved the security camera digital video recorders (“DVR”) and expended about 200 hours reviewing store video of several weeks of questioned transactions.

7–Eleven's investigation found that Mr. Kapoor and his brother, Sidharth Kapoor, who...