September 28, 2022
By: Thomas O’Connell
Citation:
Patel v. 7-Eleven, Inc., 618 F. Supp. 3d 42 (D. Mass. 2022)
Executive Summary:
In this reported decision, the United States District Court for the District of Massachusetts, presided by Judge Nathaniel Gorton, granted summary judgment in favor of 7-Eleven, Inc., and denied the plaintiffs’ motion for class certification. Following prior rulings from the First Circuit Court of Appeals and the Massachusetts Supreme Judicial Court (SJC), the district court evaluated the threshold inquiry under the Massachusetts Independent Contractor Law (ICL). The court held that the franchisees did not provide “services” to 7-Eleven, thus failing the foundational requirement for the ICL to apply. This decision reinforces the legal framework distinguishing legitimate franchise relationships from employment misclassification claims.
Relevant Background:
The Patel v. 7-Eleven, Inc. litigation began in 2017 when several Massachusetts franchisees of 7-Eleven, including Dhananjay Patel and others, filed a putative class action alleging that they were misclassified as independent contractors under the Massachusetts Independent Contractor Law (ICL), G.L. c. 149, § 148B. The plaintiffs also brought claims under the Massachusetts Wage Act, G.L. c. 149, § 148, arguing that the level of control 7-Eleven exerted over their operations rendered them employees entitled to statutory protections.
In 2020, the United States District Court for the District of Massachusetts ruled in favor of 7-Eleven, granting summary judgment on the grounds that the ICL conflicted with the Federal Trade Commission (FTC) Franchise Rule, which governs franchisor disclosure obligations (Patel v. 7-Eleven, Inc., 485 F. Supp. 3d 299 (D. Mass. 2020)). The plaintiffs appealed this decision to the First Circuit Court of Appeals, which certified a question to the Massachusetts Supreme Judicial Court (SJC) regarding the applicability of the ICL to franchisor-franchisee relationships.
In March 2022, the SJC clarified that the ICL applies to franchisor-franchisee relationships and does not conflict with the FTC Franchise Rule (Patel v. 7-Eleven, Inc., 489 Mass. 356, 183 N.E.3d 398 (2022)). The SJC further explained that, to apply the ICL’s “ABC Test,” a franchisee must demonstrate that they perform “services” for the franchisor. The court emphasized that mutual economic interests or compliance with regulatory obligations are insufficient to meet this threshold requirement. Following this guidance, the First Circuit vacated the district court’s decision and remanded the case for further proceedings (Patel v. 7-Eleven, Inc., 8 F.4th 26 (1st Cir. 2021)).
The current proceedings on remand focused on whether the plaintiffs could meet the threshold inquiry of performing “services” for 7-Eleven, a prerequisite for the ICL’s application. The plaintiffs argued that their obligations under the franchise agreements, such as maintaining operational standards, reporting inventory and cash receipts, and managing store operations, constituted services performed for 7-Eleven. They also asserted that their shared economic interests with 7-Eleven supported an employment relationship. Conversely, 7-Eleven maintained that the franchisees operated independent businesses using 7-Eleven’s services, which were explicitly outlined in the franchise agreements. The agreements classified the franchisees as independent contractors and required payment of fees for licensing, operational support, and other services.
The district court’s September 2022 decision addressed these arguments and resolved the motions for summary judgment and class certification in light of the SJC’s guidance.
Decision:
The district court relied on guidance from the SJC and prior proceedings to resolve the motions for summary judgment and class certification.
- The court examined whether the plaintiffs performed “services” for 7-Eleven under G.L. c. 149, § 148B(a). The SJC had previously clarified that the mere existence of mutual economic benefits between parties or compliance with regulatory obligations is insufficient to meet this threshold. The district court found that:
- The plaintiffs did not perform services “for” 7-Eleven. Instead, the relationship reflected a legitimate franchise agreement in which 7-Eleven provided services to the franchisees in exchange for fees.
- The plaintiffs’ obligations under the franchise agreements, such as maintaining operational hours and inventory, using 7-Eleven’s systems, and paying franchise fees, constituted contractual duties rather than services rendered to an employer.
- The court rejected the plaintiffs’ argument that their role in generating revenue for 7-Eleven constituted a service. It referenced SJC precedents, including Sebago v. Bos. Cab Dispatch, Inc., 471 Mass. 321, 28 N.E.3d 1139 (2015), and Jinks v. Credico (USA) LLC, 488 Mass. 691, 177 N.E.3d 509 (2021), which emphasize that mutual economic interests inherent in a business relationship do not create an employment relationship.
- Based on the failure to satisfy the threshold inquiry, the court granted summary judgment in favor of 7-Eleven. Additionally, it denied class certification, holding that the plaintiffs did not establish commonality in their claims sufficient to warrant class treatment under Rule 23.
Looking Forward:
This ruling, alongside prior decisions in the Patel case, provides key lessons for franchisors and franchisees:
- Franchisors must carefully structure franchise agreements to emphasize the independence of franchisees while ensuring that operational controls are limited to what is necessary for brand consistency. Overly prescriptive requirements that extend beyond legitimate franchising practices may increase the risk of misclassification claims under state laws like the Massachusetts Independent Contractor Law (ICL).
- The case underscores the need to reconcile state-specific worker classification laws, such as the Massachusetts ICL, with the federal regulatory framework under the FTC Franchise Rule.
- For franchisors operating in states with similar worker protection statutes, such as California’s ABC Test under Labor Code § 2775(b), this case highlights the need for tailored compliance strategies. Franchisors should evaluate their operational structures and agreements to address state-specific standards while maintaining the flexibility to operate across jurisdictions.
- The denial of class certification reflects the importance of individual differences in franchisee relationships, which can preclude uniform claims in employment litigation.