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As a former federal prosecutor, Steven Gerber knows that incriminating evidence can disappear down the toilet unless agents approach the target of an investigation without warning. But until March 13, 2000, he didn’t know you could spring such surprises in commercial litigation. That morning, lawyers for the 7-Eleven Corp. showed up without notice at his firm, Gerber & Samson in Wayne, with a search warrant requiring immediate production of documents 7-Eleven wanted in a case involving members of a trade group Gerber represented, the New Jersey Wholesale Marketers Association. 7-Eleven, which was alleging in a suit that franchisees and members of the trade group were defrauding the company by taking and paying unreported cash rebates on merchandise, was looking for evidence to prove its case. And Gerber’s firm couldn’t say no. That’s because 7-Eleven’s lawyers at Red Bank’s Lebensfeld Borker & Sussman had approached Monmouth County Superior Court Judge Alexander Lehrer ex parte to express concern that documents would disappear if traditional discovery rules were used. He agreed, and signed an order permitting the no-warning procedure. “It was more like a drug raid than a simple request for documents,” complained Louis Dell’Ermo, a former Drug Enforcement Agency officer who is president of Gateway Security Inc., the marketing association’s security consultant. His office in Newark and the trade group’s lobby firm in Trenton, Princeton Public Affairs Group, also were hit with the ex parte orders that morning. Those orders and ensuing disqualification motions against Lehrer and Lebensfeld Borker that have delayed the case for months are among the developments in litigation that has received little attention from the general media despite the millions of dollars and public policy issues at stake. 7-Eleven and up to 30 of its New Jersey store owners have been fighting off and on for years over whether the cash rebates exist and, if so, whether they have deprived 7-Eleven of profits due under the franchise agreement. Ironically, a few of the mom-and-pop stores and small tobacco distributors sucked into the fracas have turned to some of New Jersey’s largest law firms. 7-Eleven, with $36 billion in sales last year, meanwhile, is using nine-lawyer Lebensfeld Borker, not one of the mega firms on its list of outside counsel, like Vinson & Elkins in Dallas and Arnold & Porter in Washington. Name partner Stephen Sussman says that when he began representing the company 20 years ago, in-house lawyers at the company, then known as Southland Corp., liked small-firm partners because they tended to give 7-Eleven business their undivided attention. Sussman has had an opportunity to prove the point in the New Jersey case, Southland Corp. v. Plainfield Tobacco and Candy Co., Inc., MON-L-2191-96. The complaint is relatively simple. If store owners are taking cash payments, 7-Eleven is being deprived of profits. Much of it has to do with 7-Eleven’s relatively unique way of splitting revenues with franchisees. Other franchisers, like McDonald’s, receive royalties based on sales, multiplied by a fixed percentage. At 7-Eleven, franchisees deposit revenues in a corporate bank account each day, 7-Eleven pays all costs and expenses and what’s left after that is split, 52 percent to 7-Eleven and 48 percent to the franchisee. The corporation has contractual rebate deals with many suppliers and is obligated to share with franchisees whatever gains flow from those deals. But if money that should have been put in the daily account goes into the owner’s pocket, 7-Eleven is the loser. Early in the litigation, 7-Eleven’s suspicions focused on payments by dairy product distributors. Though the owners denied the allegations, most stores in New Jersey settled by promising to eschew unreported cash rebates for those products. Now the focus is on rebates from cigarette wholesalers and, according to Sussman, about a dozen franchisees remain defendants. Almost 20 tobacco distributors and their trade association, New Jersey Wholesale Marketers Association, are defendants, too, making the list of parties so big the service list contains 27 firms. The franchisees and tobacco company defendants take the position that 7-Eleven’s true goal isn’t to recoup money paid under the table, but to use litigation to hammer franchisees to stop buying cigarettes from small distributors and use 7-Eleven’s preferred vendor, McLane Company Inc. of Temple, Texas, a subsidiary of Wal-Mart Corp. The defense pleadings point to public financial filings that say 7-Eleven has pledged to give McLane $2 billion worth of business each year and that it is in 7-Eleven’s interest to cut out the smaller distributors from business with the state’s 152 stores in the chain, the defendants say. Pat Carter, a San Francisco solo practitioner who represents the National Coalition of 7-Eleven Franchise Owners’ Associations, says there is evidence in the case that 7-Eleven executives in the East knew about the rebates for years and that “it was almost an accepted practice to make these stores economically viable.” “We don’t condone franchisees getting rebates that they are supposed to report by contract to 7-Eleven,” Carter says. “On the other hand, we’re waiting for the trial to see the evidence that 7-Eleven knew about this and condoned it.” Sleuthing for Evidence In 2000, for evidence to bolster its case, 7-Eleven focused on investigative work on the same subject by the NJWMA. That tobacco distributors trade group has an interest in full compliance with the New Jersey Unfair Cigarette Sales Act, which bars the sale of highly taxed cigarettes below minimum prices established by the state. In 1999, NJWMA hired Gateway Security Inc. to set up an undercover sting at a convenience store in Totowa. Wholesalers were secretly videotaped offering rebates and a judge enjoined such payments and awarded fees to NJWMA’s lawyers. By 7-Eleven’s reckoning, information about the sting was just the kind of discovery evidence it needed to prove that defendant storeowners were taking such cash payoffs and Lebensfeld Borker approached Judge Lehrer, who had presided over the case from the start. During an ex parte hearing at which no record was made, the firm said secrecy was needed to “preserve documentation,” and Lehrer issued the requested warrants. “We believe, frankly, that NJWMA gave inadequate thought to the body of evidence it was developing, unwittingly on Southland’s behalf,” Sussman wrote in his application. “To NJWMA, we say: thank you!” He added, “We urge the court to enter an immediate order directing NJWMA, its agents and attorneys to fully preserve, protect and maintain the documents described in the order to show cause.” On the day the warrants were served, it looked to Lebensfeld Borker that it was right to worry about “preservation.” The lawyer sent to Princeton Public Affairs Group noticed an employee walking out a back door with boxes, and the firm complained to the judge. The boxes, it turned out, were full of party favors for a benefit the group was running for another client, the New Jersey Firemen’s Mutual Benevolent Association, the NJWMA countered. Arthur Goldstein, a partner in West Orange’s Wolff & Samson who represents store owners, reacted by filing disqualification motions to get Lehrer and Lebensfeld Borker out of the case on the theory that the ex parte discovery order was illegal and was further evidence of a cozy relationship between the judge and 7-Eleven’s firm. He also said there was more to it. Goldstein declines to comment for this article, but according to his pleadings, he found out that after a hearing earlier in the case, Lehrer had been given toy trucks with the 7-Eleven logo as gifts. And Goldstein argued that lawyers at Lebensfeld Borker needed to be disqualified because they were certain to become witnesses in the case. That’s because the firm had knowledge of a 7-Eleven sting operation much like the one run by NJWMA. Undercover agent Shaheen Qanoongo posed as a cigarette salesman seeking new customers among Indian immigrants owning 7-Elevens in Bayonne, Camden, Atlantic City, Green Brook and West Long Branch. According to the record of the case, he taped owners agreeing to accept cash ranging from 75 cents to $1.50 for every carton they bought. The defendants take the position that the ex parte warrants were obtained on the premise that records of NJWMA’s investigation constituted one-of-a kind evidence that needed to be preserved. Yet it wasn’t that critical because 7-Eleven apparently had comparable evidence from its own sting, the defense argues. As additional grounds for disqualification, Goldstein said the firm initiated settlement discussions with represented franchisees without consulting the owners’ lawyers. Case Administratively Transferred The ouster efforts have had mixed results. Lehrer acknowledged that he accepted the toys, but pointed out that he had given them to court employees, and concluded that there were insufficient grounds for his recusal. But he obviated the need for Goldstein to appeal by transferring the case to another judge in Monmouth County, Joseph Quinn, for unspecified administrative reasons. Lebensfeld Borker has brushed aside the disqualification effort as a mischief-making delaying tactic, and the courts have taken its side so far. Quinn rejected the disqualification motion and an appeals court declined to hear the interlocutory appeal. That decision is on appeal to the state Supreme Court. Defense counsel have said in their pleadings that they have never heard of an ex parte discovery order in such litigation, and Edwin Stier, a lawyer outside the case who specializes in corporate investigations, says it’s clearly out of the ordinary. “In my experience, it’s extremely rare in civil cases,” says Stier, a former director of the state Division of Criminal Justice, now with Stier & Anderson in Skillman. “In civil investigations there is very little reliance on the element of surprise in the investigative stage.” If there is fear the documents will disappear, he says, “I guess this is what you have to do, but it is in basic conflict with the rules that apply to discovery in civil litigation.” “This represents a crossover and for that reason it is very unusual,” he says. He adds, though that he can’t imagine how the use of such a tactic by a law firm would, in itself, trigger disqualification. “They presumably presented evidence that convinced a judge that there was danger of destruction. They’re behaving like lawyers.” With allegations flying about under-the-table cash payments for sales of a heavily taxed and regulated commodity like tobacco, the state has been monitoring the litigation from afar, but isn’t active. There are no allegations that the state lost money in cigarette taxes. The state collects all the taxes from the distributor before the cigarettes go on sale in stores. The franchisees sought a ruling that cash payments were illegal and could not, therefore, be the subject of recovery by 7-Eleven. But the state filed a memorandum that said rebates were illegal only if they had an anticompetitive effect. With the disqualification motion pending, discovery is at a standstill, Sussman says, and he declines to discuss the possibility of settlements similar to the ones with owners accused of taking cash from dairy distributors. Nor would he comment on allegations that 7-Eleven is using the litigation to lift some owners’ franchises. Besides representing 7-Eleven, the firm has been involved in high-profile corporate litigation on behalf of Herbert Axelrod, the wealthy central New Jersey businessman known for his donation of millions of dollars worth of Stradivarius violins to symphony orchestras. The firm also represents one of the squabbling children of the late Edward Cantor, an investor who left an estate worth about $100 million in a will being contested in Morris County Superior Court. On the other side of the 7-Eleven case, the large firms include Wolff & Samson, Newark’s Gibbons, Del Deo, Dolan, Griffinger & Vecchione, West Orange’s Mandelbaum Salsburg Gold Lazris Discenza & Steinberg, Short Hills’ Budd Larner and Cherry Hill’s Flaster/Greenberg.

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