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The Franchise Memorandum

Court Rejects Application of RICO Statute to Franchise System
Posted in RICO

A recent decision by the United States District Court for the Northern District of Illinois in Wooley v. Jackson Hewitt, Inc., 2008 WL 836010 (N.D. Ill. March 25, 2008), granted in part a franchisor’s motion to dismiss a class action suit brought against a tax service franchisor under the Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. § 1961, et seq.

The plaintiff engaged a franchisee of Jackson Hewitt, Inc. to prepare his taxes for 2003. The taxpayer paid an extra fee for Jackson Hewitt’s “Gold Guarantee,” which was supposed to provide the taxpayer with a reimbursement for any additional taxes owed if there was an error on the return. And, indeed, the plaintiff alleged that the tax preparer included false charitable and other deductions on his return that were caught by a subsequent Internal Revenue Service audit. When the franchisor refused to pay on the guarantee, the plaintiff brought a class action suit against Jackson Hewitt and the franchisee, claiming that he and other taxpayers were induced to pay extra for the Gold Guarantee when the franchisor knew that the returns “would not stand up to an audit and for which no guarantee would be paid . . . .” Jackson Hewitt moved to dismiss.

The most important aspect of the opinion for franchisors was the rejection of the plaintiff’s contention that Jackson Hewitt was liable under the RICO statute for engaging in a pattern of racketeering activity involving the wire transmissions of allegedly fraudulently prepared tax returns and processing of credit card charges for the Gold Guarantee. Specifically, the court found broadly that the franchise system was not a RICO “enterprise” as defined by the statute because it is not the typical kind of organization to which the Act was intended to apply, i.e., a criminal organization with an aim toward conducting illegal activities behind the façade of an otherwise legitimate business. Even if a franchisee’s employees engaged in illegal acts, the court held that where a “large, reputable” business entity is involved and the illegal acts are “entirely incidental,” then Jackson Hewitt and its franchisees “cannot constitute a RICO enterprise . . . .”  The court also concluded that even if the franchise system was an “enterprise,” the plaintiff failed to raise an allegation that there was any sort of outside “command structure” that was separate and distinct from the franchisor itself.  

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The Franchise Memorandum is a collection of postings on summaries of recent legal developments of interest to franchisors brought to you by Lathrop GPM LLP. 

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