The Franchise Memorandum

In H&R Block Tax Services LLC v. Acevedo-López, 2014 U.S. App. LEXIS 2602 (8th Cir. Feb. 12, 2014), the United States Court of Appeals for the Eighth Circuit vacated the order of a district court in Missouri, which had denied a motion by H&R Block for a preliminary injunction prohibiting breach by a former franchisee of his covenants against competition. Shortly thereafter, the district court granted summary judgment to H&R Block on all of the claims and counterclaims in the case, awarding H&R Block approximately $1.5 million in damages, entering a final injunction enforcing the franchisee’s post-termination obligations, and holding that H&R Block was entitled to its attorneys’ fees. H&R Block Tax Servs. LLC v. Acevedo-López, No. 4:12-cv-01320-SOW (W.D. Mo. Mar. 5, 2014). Gray Plant Mooty represents H&R Block in the action.

In 2007, H&R Block purchased the client records of the franchisee’s tax return preparation firm and contemporaneously entered into a franchise agreement providing for his continued operation of the business. In 2012, the franchisee, who was operating franchised locations in eleven cities in Puerto Rico, failed to pay over $530,000 in royalties, claiming that Block’s executives had orally agreed that he did not have to pay royalties until various offsets were applied. When the franchisee failed to cure his default, H&R Block terminated his franchise agreement and sued him for amounts owed and for enforcement of his post-termination obligations. H&R Block moved for a preliminary injunction requiring delivery to it of its client records and prohibiting the franchisee from operating a tax business for a period of time in his former territory. The district court denied the motion in a brief order, summarily stating that H&R Block had failed to establish that it would be irreparably harmed in the absence of an injunction, and H&R Block filed an interlocutory appeal. On February 12, 2014, the Eighth Circuit vacated the district court’s order, agreeing with H&R Block that the district court failed to properly state the findings and conclusions that supported its denial of H&R Block’s motion. The court of appeals then remanded the case for further proceedings.

While H&R Block’s interlocutory appeal was pending, the parties completed discovery and briefed cross-motions for summary judgment. On March 5, 2014, shortly after receiving the mandate of the court of appeals, the district court issued its decision on the parties’ cross-motions. First, the court held that although the franchisee had asserted a lack of personal jurisdiction as an affirmative defense, he had nonetheless waived that issue by failing to challenge the court’s jurisdiction by motion for eleven months. Second, the court held that although Puerto Rico Law 75 provided that forum selection provisions obligating a franchisee to litigate outside of Puerto Rico were not enforceable, the statute did not say that a claim filed outside of Puerto Rico by a franchisor could not be litigated where it was filed. Finally, the court held that the franchisee’s claim that his agreement had been orally modified to provide for a setoff was barred by a provision of the franchise agreement stating that the agreement could not be modified except in writing. The franchisee’s argument that Missouri law did not enforce such clauses where there was a valid oral agreement was unavailing because the alleged oral agreement lacked consideration.