The Franchise Memorandum

In a case we have been tracking in The GPMemorandum, income tax preparation franchisor Liberty Tax Service achieved a victory in a dispute concerning whether it properly terminated a former franchisee under Connecticut law on non-payment grounds. The court in Sherman St. Assocs., LLC v. JTH Tax, Inc., 2011 U.S. Dist. LEXIS 97073 (D. Conn. Aug. 30, 2011), found in Liberty’s favor on its counterclaims against franchisee Sherman Street Associates for breach of the parties’ franchise agreements, a promissory note, and a personal guaranty. The court held that Sherman Street’s failure to pay amounts owed to Liberty constituted “good cause” under the Connecticut Franchise Act (CFA) for terminating the franchise agreements even though the decision to terminate was motivated in part by negative comments about Liberty made by one of Sherman Street’s principals to a franchise prospect. The court commented that regardless of the franchisor’s motive for terminating, its only task was to “decide whether Liberty’s stated reasons objectively satisfy the ‘good cause’ standard” and held that Sherman Street’s failure to make payments easily met that standard. The court also rejected the franchisee’s contention that it was confused about the precise amounts that it owed, holding that “whatever confusion Sherman Street may have had . . . did not excuse [it] from its obligations to pay.”

The court did find, however, that Liberty violated the CFA by issuing a termination notice that was effective “immediately,” instead of giving the franchisee 60 days notice of the termination as required under the statute. The court noted, though, that the only remedy provided by the CFA for this violation was the recovery of lost profits for the period in which the termination was in effect without the requisite notice. No such recovery was possible in this case because Sherman Street had failed to show that it would have made any profit during this period, which was not during the tax season. Indeed, the evidence showed that Sherman Street lost money. Finally, the court rejected the franchisee’s claim for tortious interference with business expectancy based on a failed attempt to assign one of its franchised locations to a third party. The court found that Liberty would have been a party to the contract and, as a matter of law, a defendant cannot tortiously interfere with a business relationship to which it is a party.