Antitrust Law Daily Preliminary injunction granted against former tax preparation franchisee that started a competing business
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Tuesday, January 14, 2020

Preliminary injunction granted against former tax preparation franchisee that started a competing business

By Nicole D. Prysby, J.D.

The franchisor was likely to succeed on its breach of contract claims for operating a competing business and using confidential information in violation of the parties’ agreements.

A tax preparation business franchisor was likely to succeed on its breach of contract claims against the owners of a former franchise, therefore, a preliminary injunction was granted against the owners to prohibit them from operating a competing business and using confidential information, the federal district court in Detroit has decided. Despite the noncompete and nonsolicitation provisions in the franchise agreements, after the franchisor terminated the agreements, the franchise owners continued to operate a tax preparation business (under a new name) from the same location. They also continued to use franchise property such as client lists and the confidential operating manual. The franchisor was likely to succeed on the breach of contract claim and the damage caused by the breach to the franchisor’s customer goodwill was potentially irreparable. Immediate injunctive relief was required because the two-year noncompete period was about to end. The franchise owners were ordered to transfer phone numbers, return all confidential materials, and were enjoined from using any confidential information obtained from the franchisor in any future tax preparation business they might operate (JTH Tax, Inc. v. Magnotte, January 10, 2020, Borman, P.).

Plaintiff JTH Tax, Inc. d/b/a Liberty Tax Service (Liberty) entered into three franchise agreements with Defendant Reliable Income Tax, LLC (Reliable), owned by Defendants Claudia and Paul Magnotte (the Magnottes). The Magnottes agreed to pay royalties to Liberty in exchange for the exclusive right to use Liberty’s trademarks, confidential information, software, and other proprietary information within the territory designated. The franchise agreements had a two-year post-termination covenant not to compete or solicit within a 25-mile radius. In 2018, Liberty terminated the franchise agreement after Reliable failed to respond a cure notice and failed to pay royalties. Despite the post-termination obligations, the Magnottes launched a Facebook page for "Phoenix Tax," located at the same address as Reliable. The Magnottes also failed to perform other post-termination obligations such as the return of client files and the return of Liberty’s operations manual. Liberty requested a temporary restraining order and preliminary injunction enforcing the post-termination obligations.

Preliminary injunction granted. The court held that it had no power to grant relief against the franchisee business, Reliable, because Liberty failed to demonstrate that it was properly served. However, the court went on to grant the preliminary injunction against the Magnottes, finding that all four injunction factors leaned in Liberty’s favor.

Liberty was very likely to succeed on the merits on the breach of contract claim against the Magnottes, because the contracts were valid and the Magnottes have not: returned confidential materials, stopped holding themselves out as Liberty franchisees, or avoided competing with Liberty or soliciting Liberty customers, according to the court. Their violations caused damages to Liberty in the form of lost customer goodwill, lost profits, and loss of competitive advantage. Liberty was suffering an actual harm, and the injuries were irreparable because loss of customer goodwill is difficult to quantify and not fully compensable with money damages. Liberty’s injuries were also likely to worsen in the absence of immediate injunctive relief, because the two-year noncompete period will end on January 16, 2020, and the Magnottes would at that time be free to solicit Liberty customers.

The final two injunctive relief factors—the harm to others and the public interest—both favored granting a preliminary injunction, the court held. The injunction would require the Magnottes to honor their freely entered contractual commitments, which was not a significant hardship to them. Additionally, enforcing these contractual commitments vindicates the public interest.

Specifically, the Magnottes were enjoined from using any telephone number of any former Liberty franchise and must transfer those numbers to Liberty, they may not hold themselves out as a Liberty franchise, they must return all printed materials, customer lists, and files to Liberty, they were enjoined from violating the covenants not to compete or solicit until the covenants expired on January 16, 2020, and they were enjoined from using any confidential information obtained from Liberty’s manual or system in any future tax preparation business they might operate.

This case is No. 2:19-cv-11607-PDB-DRG.

Attorneys: Ashley F. Eckerly (Gordon & Rees, LLP) for JTH Tax, Inc. d/b/a Liberty Tax Service. Kimberly M. Lubinski (Bieber & Lubinski, PLLC) for Claudia Magnotte and Paul Magnotte.

Companies: JTH Tax, Inc. d/b/a Liberty Tax Service; Reliable Income Tax, LLC

MainStory: TopStory FranchisingDistribution MichiganNews

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