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7-Eleven, Inc v. Violet Spear and Vianna

June 23, 2011

7-ELEVEN, INC., PLAINTIFF,
v.
VIOLET SPEAR AND VIANNA, INC.,
DEFENDANTS/COUNTER-PLAINTIFFS,
v.
7-ELEVEN, INC., COUNTER-DEFENDANT.



The opinion of the court was delivered by: Judge Robert M. Dow, Jr.

MEMORANDUM OPINION AND ORDER

Plaintiff 7-Eleven, Inc. filed suit against Defendants Violet Spear and Vianna, Inc. (collectively "Defendants") seeking legal and equitable relief from Defendants concerning the termination of a franchise agreement between the parties. In turn, Defendants have filed counterclaims alleging that 7-Eleven's conduct violated § 6 of the Illinois Franchise Disclosure Act ("IFDA"), 815 ILCS 705/6, and § 2 of the Illinois Consumer Fraud and Deceptive Business Practices Act ("ICFA"), 815 ILCS 505/2, and also constituted common law fraud.

On January 31, 2011, Plaintiff filed a motion to dismiss Defendants' counterclaims [41]. Defendants responded, through counsel who has since withdrawn from the case, and Plaintiff has filed its reply. Since that time, on March 3, 2011, the Court granted Plaintiff 7-Eleven's motion for a preliminary injunction and, among other things, ordered Defendants to immediately surrender possession and control of the store. The Court also has found by clear and convincing evidence that Defendants were in contempt of the Court's March 3 preliminary injunction order and has imposed on Defendants a remedial/compensatory sanction. In addition, Plaintiff moved for the entry of default against Defendant Vianna, which the Court granted, and Plaintiff has requested that default judgment be entered. With the entry of default, the Court dismissed the counterclaims asserted by Defendant Vianna. Defendant Spear's counterclaims remain, and the Court now addresses Ms. Spear's allegations that 7-Eleven made various pre-contract misrepresentations three years ago that induced her to enter into the Franchise Agreement.

I. Background

Plaintiff 7-Eleven is the owner of certain federally registered trademarks and service marks, including 7-Eleven®, which are used in connection with the operation of authorized 7-Eleven stores. 7-Eleven grants franchises to own and operate 7-Eleven Stores to qualified persons. Defendant Vianna is a former 7-Eleven franchisee that operated a 7-Eleven store in Evanston, Illinois. Defendant Violet Spear is the owner of Vianna.

Pursuant to written franchise agreements, 7-Eleven licenses franchisees to operate under the 7-Eleven marks, and it leases the store premises to them, together with the fixtures, equipment, and signs needed to operate the store. 7-Eleven also provides financing to its franchisees, including financing for the store's inventory. According to 7-Eleven, and not disputed by Defendants, store inventory and other assets are subject to a perfected security interest in 7-Eleven's favor, which secures all the indebtedness of the franchisees to 7-Eleven. In exchange for the license and lease, and for various other services (e.g., advertising, merchandising assistance, bookkeeping, certain maintenance, payment of utility expenses, indemnification for specified losses), the franchise agreement entitles 7-Eleven to receive a specified percentage of the gross profits of the ongoing operation of the store. 7-Eleven asserts that this percentage of gross profits is its primary benefit under the franchise agreement.

On March 14, 2008, 7-Eleven and Defendant Spear entered into a written franchise agreement, pursuant to which 7-Eleven (i) granted Vianna a franchise, for an initial 15 year term, to operate a 7-Eleven store at 817 Davis Street in Evanston, Illinois (the "Store") and (ii) licensed Spear to use the 7-Eleven Marks in operating the franchise. Spear assigned the franchise agreement to Vianna, a corporation of which she was sole shareholder, but remained liable for all of Vianna's obligations under the franchise agreement pursuant to a written guaranty.

In addition to the obligations outlined above, Defendants agreed to operate their 7-Eleven store in compliance with all laws, and in conformity with 7-Eleven's standards and specifications. Vianna agreed to maintain a minimum net worth of $15,000 in the Store at all times and further agreed that failure to maintain the required net worth was a material breach of the Franchise Agreement. Vianna also agreed that in the event that 7-Eleven terminated the Franchise Agreement for cause, Vianna would, among other things, (i) immediately surrender the Store premises and all 7-Eleven equipment, (ii) transfer final inventory of the Store, (iii) deliver to 7-Eleven its operations guides and all trade secrets and confidential information, and (iv) comply with the franchise agreement's post-termination obligations. Vianna also agreed that, upon termination, it would immediately cease using the 7-Eleven Marks.

Although Vianna agreed in the Franchise Agreement to maintain a minimum net worth of $15,000 at all times, at the end of March, 2010, Vianna's net worth in the Store was about $6,500, a shortfall of nearly $8,500. According to Defendant Spear, when she and her daughter questioned 7-Eleven's field consultant regarding why the shortfall had occurred, he responded that it could be due to several factors, but that this Store always ran $20,000.00 short each month. See Spear Affidavit at ¶ 13.

By letter dated April 28, 2010, 7-Eleven notified Vianna that it had three business days to increase the net worth to the required level, as well as to cure another monetary default under the Franchise Agreement. Vianna cured the material breaches which were the subject of the April 28, 2010 notice of material breach, but soon thereafter again failed to meet the minimum net worth requirement under the Franchise Agreement. Vianna's May 2010 financial statements indicated that the Store's net worth was only $6,775.34, instead of the required $15,000. In June, the shortfall from the minimum net worth requirement was $27,000, and in July, it was more than $40,000. As a result of Vianna's failure to maintain the required minimum net worth, 7-Eleven sent a notice of material breach to Vianna dated August 27, 2010, advising Vianna that it had three business days to increase its net worth to the required level or 7-Eleven would terminate the Franchise Agreement. Defendants did not cure the minimum net worth material breach. At the end of August, the Store had a negative net worth of $43,962.09, which was approximately $59,000 under the minimum net worth required under the Franchise Agreement. 7-Eleven extended the termination date in order to allow Vianna more time to cure the net worth deficiency and preserve its franchise rights, but as of the end of September 2010, Vianna was still nearly $40,000 under the required minimum net worth. 7-Eleven terminated the Franchise Agreement effective September 27, 2010; however, Defendants refused to surrender possession of the Store, equipment, and inventory and continued to use the 7-Eleven marks in connection with the operation of the Store.

On March 3, 2011, the Court granted Plaintiff 7-Eleven's motion for a preliminary injunction [8] and, among other things, ordered Defendants to immediately surrender possession and control of the store, the inventory and proceeds of the store, and all signs, marketing materials, or other materials containing any of the 7-Eleven Marks and enjoined Defendants from using the 7-Eleven Marks or passing off any of their products or services as those of 7-Eleven's. When Defendants did not comply with the Court's March 3 order, the Court found them in contempt and imposed a remedial/compensatory sanction. The Court also entered default against Defendant Vianna and dismissed the counterclaims asserted by Defendant Vianna. Thus, all that remains of Defendants' counterclaims are those asserted by Defendant Spears.

II. Legal Standard

A motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6) tests the sufficiency of the complaint, not the merits of the case.See Gibson v. City of Chicago, 910 F.2d 1510, 1520 (7th Cir. 1990). To survive a Rule 12(b)(6) motion to dismiss, the complaint first must comply with Rule 8(a) by providing "a short and plain statement of the claim showing that the pleader is entitled to relief" (Fed. R. Civ. P. 8(a)(2)), such that the defendant is given "fair notice of what the * * * claim is and the grounds upon which it rests." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007) (quoting Conley v. Gibson, 355 U.S. 41, 47 (1957)). Second, the factual allegations in the complaint must be sufficient to raise the possibility of relief above the "speculative level," assuming that all of the allegations in the complaint are true. E.E.O.C. v. Concentra Health Servs., Inc., 496 F.3d 773, 776 (7th Cir. 2007) (quoting Twombly, 550 U.S. at 555). "[O]nce a claim has been stated adequately, it may be supported by showing any set of facts ...


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