The Franchise Memorandum

A federal court in New Jersey has become the latest to deny a franchisor’s motion to dismiss a putative class action complaint based upon a no-poach provision in a franchise agreement. Robinson v. Jackson Hewitt, Inc., 2019 WL 5617512 (D.N.J. Oct. 31, 2019). Jackson Hewitt operates a tax preparation business with franchised and company-owned locations throughout the United States. Its largest franchisee, which owns approximately 20% of all Jackson Hewitt locations, is a co-defendant in the suit. The plaintiffs worked as seasonal tax preparers for franchised and company-owned Jackson Hewitt locations over periods stretching back as far as 2002. They alleged that the no-poach clause in Jackson Hewitt’s franchise agreements constitutes a violation of Sections 1 and 3 of the Sherman Act, and sought damages and injunctive relief. Jackson Hewitt agreed to remove the no-poach clause from its franchise agreements and to cease enforcement of it in an Assurance of Discontinuance (AOD) entered into with Washington State on December 20, 2018. In their motion to dismiss, the defendants argued that the tax preparers lacked standing and failed to state a Sherman Act claim. Alternatively, the defendants argued that the statute of limitations should not be tolled due to alleged fraudulent concealment of the no-poach provisions.

The court found that the tax preparers’ allegations of reduced employment mobility and below-average pay were sufficient to plead injury in fact and establish standing. The court also found that the existence of the Washington State AOD was not enough to make it “absolutely clear” that Jackson Hewitt would not use or enforce no-poach clauses in its franchise agreements, so the AOD did not preclude the claim for injunctive relief. Next, the court found that the tax preparers had stated a Sherman Act claim because the independence of Jackson Hewitt franchisees was sufficient “in the employment context” to make them separate economic actors capable of forming a conspiracy. The court declined to rule on the appropriate standard of review for that conspiracy, holding that more factual information was required to make such a determination. Rather than addressing the appropriate standard, the court summarily concluded that the tax preparers had alleged sufficient facts to show an unreasonable restraint of trade.

Unlike other courts that have considered the question, the New Jersey court did find that the plaintiffs had not sufficiently alleged fraudulent concealment of the no-poach provision and, as a result, there was no basis for tolling the Sherman Act’s four-year statute of limitations. Thus, the court dismissed any claims related to conduct that occurred more than four years prior to date of the AOD.