The Franchise Memorandum

A federal court in Arizona recently denied preliminary relief enforcing franchisees’ noncompete provisions against nonsignatories to the franchise agreement because the franchisor failed to present sufficient evidence that the franchisees were acting in concert with the nonsignatory companies. JTH Tax v. Anderson, 2023 WL 2072496 (D. Ariz. Feb. 17, 2023). A dispute arose between franchisor Liberty Tax Service and a group of Phoenix-area franchisees when Liberty began to suspect the franchisees of using competing businesses to file customers’ tax returns—which was a violation of the noncompete provisions in the franchise agreements. When the franchisees told Liberty they would not renew their franchise agreements, Liberty terminated the agreements and sued the franchisees along with the third-party businesses they used to file returns. Although the franchisees agreed to entry of a TRO against them, the third-party defendants argued that they were not subject to the noncompete provisions they did not sign.

The court rejected Liberty’s argument that it was appropriate to enjoin the third-party companies to the extent they were acting in concert with the franchisees to evade the requirements of the franchise agreements. It concluded that Liberty’s pleadings lacked specificity as to the third-party defendants and that Liberty presented insufficient evidence to warrant a conclusion that the third-party defendants were acting in concert with the franchisees, or even that they had knowledge of the franchise agreements.