SAT Agiyar, LLC operated a 7-Eleven franchise in Princeton, New Jersey, under an agreement that required the store to operate 24 hours a day and maintain a minimum net worth of $15,000. Although local law initially prohibited operations between 2 a.m. and 5 a.m., the parties agreed to a temporary waiver of the 24-hour requirement and associated penalty fees for two years or until the law changed. When the waiver expired in 2018, 7-Eleven began assessing penalty fees for the store's closure during those hours. In 2020, 7-Eleven terminated the franchise after SAT failed to meet the net worth requirement and refused to pay the accrued penalties. SAT sued, alleging violations of the New Jersey Franchise Practices Act and breach of the implied covenant of good faith, while 7-Eleven counterclaimed for breach of contract and breach of guaranty. The District Court granted summary judgment for 7-Eleven on all claims, and SAT appealed.
The Third Circuit addressed the New Jersey Franchise Practices Act (NJFPA) claim first, noting that the Act prohibits franchisors from imposing unreasonable performance standards but provides a defense if the franchisee has failed to substantially comply with the agreement. The court found that SAT admitted to breaching the minimum net worth condition and the operating hour requirements. SAT argued that the standard was unreasonable because local law prevented 24-hour operation, creating a 'Hobson's choice' to operate at a loss or not at all. The court rejected this, observing that 7-Eleven had offered to extend the penalty waiver for two years, and SAT's refusal to accept this extension was a strategic choice for a permanent waiver, not a result of arbitrary or bad-faith conduct by the franchisor. Regarding the implied covenant of good faith and fair dealing, the court noted that SAT forfeited arguments not raised in the District Court. Even considering the merits, the court found no evidence that 7-Eleven acted with ill motive or misled SAT. The parties were aware of the operating restrictions and the temporary nature of the waiver when they signed the agreement. 7-Eleven's decision to enforce the penalty fees after the waiver expired was consistent with the contract's express terms and did not constitute bad faith.
The decision reinforces that franchise agreements are enforceable according to their terms, even when external factors like local ordinances complicate performance. Franchisors may rely on statutory defenses under the NJFPA when a franchisee fails to meet material conditions like net worth or operating hours. The ruling clarifies that a franchisor's refusal to grant a permanent waiver of penalties, after offering a temporary extension, does not constitute bad faith or an unreasonable standard of performance. The case is remanded to the District Court to enforce the judgment, which includes the collection of unpaid damages from the franchisee and its guarantor.