The Franchise Memorandum

A federal court in Florida overruled a former franchisee’s objections to a magistrate judge’s report and recommendation, granting in full a franchisor’s request for preliminary relief enforcing the covenant not to compete contained in the franchise agreements. JTH Tax, LLC v. Gilbert, 2022 WL 3098407 (M.D. Fla. Aug. 4, 2022). Franchisor JTH Tax terminated its franchise agreements with G-QTS after its principal, Stephen A. Gilbert, allowed an employee to submit federal tax returns using Gilbert’s own Preparer Tax Identification Number. JTH based the termination on a franchise agreement provision requiring the franchisee to obey all laws and another requiring that all tax preparers at the franchised business have their own, active Preparer Tax Identification Numbers. Federal law also requires that the tax preparer signing the return be the one with primary responsibility for its preparation. JTH sued to enforce the termination and sought preliminary relief enforcing the franchise agreement covenant not to compete at G-QTS’s current locations or within 25 miles of any JTH franchisee’s territory. G-QTS opposed the motion by arguing that the alleged conduct did not constitute a material breach of the franchise agreements or a violation of the law.

The court adopted in full, over G-QTS’s objections, the recommendation of the magistrate judge that the court find in JTH’s favor and grant all requested relief. The court held that the franchisee’s alleged conduct did violate federal law and constituted a material breach of the franchise agreements, in part because of franchise agreement language acknowledging that all obligations are “material and essential.” The court further held the covenant not to compete was narrowly tailored in its restriction on activities, geographic scope, and two-year duration. Finally, the court held that the restriction was reasonably necessary to protect JTH’s legitimate business interests. As a result, the court granted the preliminary injunction.