Liberty Tax Loses Preliminary Injunction to Former Liberty Franchisee Regarding Enforcement of Post-Term Restriction Liberty Tax Franchisee Represented by GLF Wins in Post-Term Covenant Case in Federal Court ——————————————————— UNITED STATES DISTRICT COURT WESTERN DISTRICT OF WASHINGTON AT TACOMA JTH TAX LLP, doing business as Liberty Tax Service , Plaintiff, v. MARK KELLY, Defendant. CASE NO. C20-5484RJB ORDER ON MOTION FOR TEMPORARY RESTRAINING ORDER AND PRELIMINARY INJUNCTION JULY 6, 2020 THIS MATTER comes before the Court on the Plaintiff’s Motion for Temporary Restraining Order and Preliminary Injunction (Dkt. 14). The Court is familiar with the file and all documents filed in support of and in opposition to the motion. DISCUSSION This is a business dispute. The facts are sharply in dispute. It is inappropriate, and not justified by the record, for the Court to preliminarily takes a side now for the following reasons: The Court is unable to determine that Plaintiff is likely to succeed on the merits; It does not appear that Plaintiff is likely to suffer irreparable harm in the absence of preliminary relief. If Plaintiff’s position ultimately prevails, monetary damages should adequately recompense Plaintiff. Nothing in the parties’ contract trumps this conclusion; The balance of equities is as hazy as is Plaintiff’s likelihood of success; A preliminary injunction or restraining order is not shown to be in the public interest. Particularly, third party taxpayers’ interests have not been successfully shown to be at risk under the status quo. For these reasons, Plaintiff’s Motion for Temporary Restraining Order […]

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Virtual Healthcare Franchsiee’s Fraud Claims Based on Franchisor’s Financials Must be Reasserted  A virtual healthcare franchisee’s common law fraud claim that the franchisor of a cloud-based marketplace for telehealth services fraudulently induced the franchisee to invest in the franchise and in so doing also violated the anti-fraud provision of the New York Franchise Sales Act (NYFSA) based on statements allegedly made at a Franchise Expo regarding future performance were mere puffery under Missouri law, and to the extent other similar claims were based on the franchisor’s misrepresentations made during the negotiations and execution of the parties’ franchise agreement (including specific representations about future revenue and expense ‘projections’), the allegations were insufficient to sufficiently identify which individual defendants made which statements; further, issues of fact remained as to whether the franchisee’s alleged reliance on the representations made by the defendants was reasonable.  CHARLES FABIUS, ET AL., PLAINTIFFS V. MEDINEXO USA, LLC, ET AL., DEFENDANTS, U.S. District Court, E.D. Missouri, Eastern Division. No. 4:19CV2526 JCH. Dated April 3, 2020  ———————————————–  Excerpts from case:   DISCUSSION  Fraud In The Inducement  As noted above, in Count III of their Complaint Plaintiffs assert a claim for fraud in the inducement. (Compl., ¶¶ 86-92). Specifically, Plaintiffs allege as follows: In the initial meeting between Mr. Fabius and defendants Toro and Adelman, the defendants made several false, misleading and fraudulent statements and representations of material facts to him, including unsupported statements about the potential earning capacity as a [] Medinexo franchisee. Subsequently during the negotiation of the […]

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Connecticut Federal Court Rules for Franchisee and Strikes Unfair Floating Forum Selection Clause The United States District Court for the District of Connecticut has ruled that a franchisee of Doctors Express who purchased the exclusive rights to develop and manage Doctors Express Urgent Care franchises in two counties in New York and Connecticut was permitted to sue the franchisor in a court in Connecticut despite a forum selection clause in the agreement requiring that the litigation be filed in Alabama since the forum selection clause could not be presumed enforceable, because it was not reasonably communicated to the franchisee that he agreed to file suit in the jurisdiction where a future assignee of Doctors Express was based and because enforcement by that assignee, AFC Franchising, LLC, was not sufficiently foreseeable to him; accordingly, it would be “unfair, unjust, and unreasonable” to hold the franchisee to a clause that did not provide sufficient notice as to the forum being selected. DANILO PURUGGANAN, PLAINTIFF V. AFC FRANCHISING, LLC, DEFENDANT, Bus. Franchise Guide (CCH) P 16657 (C.C.H.), 2020 WL 3274207 (May 13, 2020)   —————————————————– Excerpt of Court’s Decision:   Because the Defendant’s motion turns on the interpretation and enforceability of the MDA’s forum selection clause, as indicated above, the Court’s assessment of the four inquiries set forth by the Second Circuit supplants the traditional inquiry undertaken in a forum non conveniens analysis. Federal common law governs the fourth inquiry, and the Second Circuit has assumed without deciding that federal common law likewise applies to the first inquiry. Starkey […]

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Court Prohibits Tax Franchisee from Operating by Enforcing Post-Term Restrictive Covenant By: Jeffrey M. Goldstein A federal judge in Washington recently issued a preliminary injunction enjoining a former Liberty Tax franchisee from operating as an independent tax preparer for two years following the termination of the franchise agreements. JTH Tax LLC v. McHugh, No. C20-329RSM, 2020 U.S. Dist. LEXIS 61139 (W.D. Wash. Apr. 7, 2020)  As discussed below, the court agreed with the franchisor’s argument that McHugh knowingly and intentionally breached her Franchise Agreements with Plaintiffs by operating KVC, a competing tax preparation business, after Plaintiffs terminated her franchise. BACKGROUND In 2015, Defendant Lorraine McHugh entered into Franchise Agreements with Liberty Tax and she was given a territory of areas near and including Federal Way, Washington, in which to operate her franchise. The Franchise Agreements included a non-compete clause, which stated that: “[f]or a period of two (2) years following the . . . termination . . . of the Franchised Business . . . you agree not to directly or indirectly, for a fee or charge, prepare or electronically file income tax returns . . . within the Territory or within twenty-five miles of the boundaries of the Territory.” The Franchise Agreements also included non-solicit and non-disclosure clauses. Further, in the Franchise Agreements, McHugh agreed that Liberty Tax is “entitled to a temporary restraining order, preliminary and permanent injunction for any breach of duties under any of the non-monetary obligations of paragraph 9 [post-term obligations] above or of this […]

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Franchisee Lawyer’s Failure to Oppose Preliminary Injunction Motion Results in Imposition of Post-Termination Restrictive Covenant By: Jeffrey M. Goldstein As if the plight of franchisees and dealers in contested litigation were not challenging enough, a recent case from the United States District Court for the Western District of North Carolina arguably makes that predicament more formidable. Maaco Franchisor SPV, LLC v. Sadwick, No. 3:20-CV-147, 2020 U.S. Dist. LEXIS 81391 (W.D.N.C. May 7, 2020). Most damaging to franchisees and dealers is that because the franchisee in Maaco failed to file an opposition to the franchisor’s motion for a preliminary injunction to shut down the franchisee’s business after a challenged termination, the federal court judge decided the injunction request without any opposition evidence or argument from the franchisee. Specifically, the ruling in this case, rather than being based on the rigorous argument and evidence from both sides, ultimately relied upon several quasi-theoretical factoids prepared by the franchisor’s counsel that normally are found in the pro-franchisor ether of restrictive covenant jurisprudence. These types of mutated factual myths, each time they are raised by litigants and then incorporated as ‘valid’ in a court order, further erode the economic realities underlying both the formation of franchise and dealership agreements as well as the restrictions on competition and competitors following the termination or expiration of such agreements. In this regard, the perpetuation by litigants and courts that “the franchisee deserves to be restrained by the preliminary injunction because the franchisee ‘brought it upon himself by acting […]

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Rent-to-own operators Aaron’s Inc., Buddy’s Newco, LLC, and Rent-A-Center, Inc. agreed to settle FTC charges that they negotiated and executed reciprocal purchase agreements in violation of federal antitrust law. Rent-to-own operators Aaron’s Inc., Buddy’s Newco, LLC, and Rent-A-Center, Inc. agreed to settle FTC charges that they negotiated and executed reciprocal purchase agreements in violation of federal antitrust law. The complaints allege that from June 2015 to May 2018, Aaron’s, Buddy’s, and Rent-A-Center each entered into anticompetitive reciprocal agreements with each other and other competitors. The three proposed consent agreements prohibited the rent-to-own companies and their franchisees from entering into any reciprocal purchase agreement or inviting others to do so, and from enforcing the non-compete clauses still in effect from the past reciprocal purchase agreements. After a public comment period, the Commission announced the final consent agreements. DISSENTING STATEMENT OF COMMISSIONER ROHIT CHOPRA Office of Commissioner Rohit Chopra UNITED STATES OF AMERICA Federal Trade Commission WASHINGTON, D.C. 20580     In the Matter of Rent-to-Own Market Allocation Scheme Commission File No. 1910074 February 21, 2020   Summary   The FTC uncovered evidence that three major rent-to-own players engaged in a market allocation scheme to close down stores that suppressed competition, but the agency is not asserting that this conduct was per se The proposed settlement deprives affected families of direct notification by the companies of their wrongdoing. This goes against a core element of competitive markets: the dissemination of truthful There is clear evidence that a senior executive served on the board […]

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FRANCHISES, COVID-19, WWI, IMPOSSIBILITY AND FRUSTRATION By: Jeffrey M. Goldstein Like many other small businesses, countless franchisees have been devastated by the COVID-19 pandemic. The financial and logistical disruptions of the coronavirus have caused numerous franchisees and small businesses to ponder the effects of the pandemic on contracts in general, including, for instance, their franchise agreements, supply contracts and leases. Although many of these agreements contain force majeure agreements, some of them may be determined to be specifically inapplicable to the COVID-19 situation based on the language in the clause. In such cases, the non-performing business or franchisee must avail himself of one of the common law defenses that could excuse his performance, including impossibility, impracticability, frustration of purpose and mutual excuse. Unlike many obligations imposed by law, the obligation to meet contractual obligations is generally considered absolute. In almost all cases, a person who fails to perform under a valid contract will not be heard to justify the breach or non-performance by a supervening event, no matter how devastating. This is true even though the party seeking an excuse was not negligent in failing to perform. If strict liability were not the rule, breaches of contract would be rampant where the non-performing parties found themselves in a worse financial situation after signing their contracts when it came time to perform. The four major exceptions to the absolute duty to perform under a contract (other than where the specific language in a contract explicitly excuses performance in the face of […]

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Gambling, a Panamanian Government Takeover, and Liquidated Damages By: Jeffrey M. Goldstein Although “force majeure” or “act of god” cases do not arise frequently in the franchise litigation world, a relatively recent case in the United States District Court for the Southern District of New York turned in part on this doctrine. Wyndham Hotel Grp. Int’l, Inc. v. Silver Entm’t LLC, No. 15-CV-7996 (JPO), 2018 U.S. Dist. LEXIS 52144 (S.D.N.Y. Mar. 28, 2018). In this regard, in 2015, the Veneto Hotel & Casino, a Wyndham franchise hotel, was seized by the Panamanian government for failure to pay gaming taxes, leading Wyndham to terminate its franchise agreement. Wyndham then sued for damages, and the hotel franchisee counterclaimed for Wyndham’s alleged breaches of the franchise agreement. The Veneto Hotel & Casino in Panama City, Panama, was owned by Alexander and Andrew Silverman (“the Franchisee” or “Veneto”), who bought the hotel through one of their corporate entities for $85 million in 2006. In March 2007, Silver Entertainment LLC (“Silver” or “the Franchisee”) signed a franchise agreement with Plaintiff Wyndham Hotel Group International, Inc. (the “Franchisor” or “Wyndham”). The hotel operated under the franchise agreement (“the Franchise Agreement”) as the “Veneto — A Wyndham Grand Hotel.” Under the Franchise Agreement, Silver was required to pay Wyndham recurring fees during the ten-year franchise term, including royalties, a marketing fee, reservation system fees, and an international sales fee.  Also under the Franchise Agreement Wyndham was permitted to terminate the agreement for myriad identified reasons, including but […]

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Another Franchise Decision in One Sentence: Former Franchisee Manager Not Liable for ‘Violating’ Post-term Restrictive Covenant Pillar to Post, Inc. v. Md. Home Inspectors, Inc., Civil Action No. DKC 18-3761, 2020 U.S. Dist. LEXIS 41327 (D. Md. Mar. 10, 2020) Where Pillar to Post, Inc. (“Pillar to Post”) a franchisor of home inspection businesses, sued its former franchisee, James Williams (“J. Williams”) and his daughter (Rachel Oslund) for violation of the post-term restrictive covenant, and where the franchisee’s daughter (who had a management role in the franchise before it went out of business) had not herself signed the franchise agreement, and even though the franchise agreement stated that all officers of the franchisee were bound by the franchise agreement, the Court refused to hold the daughter liable for operating an independent business either under the franchise agreement or the “closely related doctrine.” EXCERPTS OF CASE Pillar to Post, Inc. v. Md. Home Inspectors, Inc. United States District Court for the District of Maryland March 10, 2020, Filed Civil Action No. DKC 18-3761 Reporter 2020 U.S. Dist. LEXIS 41327 *; 2020 U.S.P.Q.2D (BNA) 10151; 2020 WL 1158583 Background Unless otherwise noted, the facts outlined here are set forth in the amended complaint, (ECF No. 23), and construed in the light most favorable to Plaintiff. Pillar to Post, Inc. (“Pillar to Post”) is a Delaware corporation and franchisor of home inspection businesses.2 In 2006, James Williams (“J. Williams”) began operating a Pillar to Post franchise in Maryland called Maryland Home Inspectors (“MHI”). MHI […]

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Legal Life after the Coronavirus Death for Small Businesses, Franchisees and Dealers By: Jeffrey M. Goldstein  www.goldlawgroup.com Second in a Series: COVID-19 HAS KILLED MY BUSINESS – MAY I LEGALLY TERMINATE MY CONTRACTS? Those who hope or believe that the consequences, effects, and sources of COVID-19 will soon be arrested and contained might be wondering whether their inability to have complied with their contracts, leases, and mortgages during this waiting period can lead to a subsequent termination of or suit under their agreements for failure to have fully complied with all of the contractual obligations in these contracts. Although I don’t anticipate that ‘other parties to your contracts’ individually or as a group are preparing or conspiring to terminate, default, or cancel anyone’s agreements, this does not rule out the high probability that when things return to normal (when market forces begin to work again unimpeded by the myriad current external shocks), every firm will naturally begin to focus again on ‘maximizing profits’ – the legitimate and necessary goal of individual suppliers in a free market economy. In general, whether you’re able to use COVID-19 as a legal ‘excuse’ for your inability to pay or otherwise perform during the coronavirus downtime is subject to whether the agreement in issue contains a provision or language that excuses your performance for unanticipated or unforeseen events. While many agreements contain such clauses, referred to as ‘force majeure’ clauses (clauses that excuse performance based on unexpected events such as floods, epidemics, riots, wars, etc.), […]

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