The Franchise Memorandum

Judges in the United States District Court for the Western District of Missouri recently issued orders in two separate cases enjoining two terminated franchisees from operating competing tax-service businesses within 25 miles of their former franchise territory for a period of two years. H&R Block Tax Serv., LLC v. Thomas, 2018 WL 910170 (W.D. Mo. Feb. 15, 2018); H&R Block Tax Serv. v. Frias, 2018 WL 934901 (W.D. Mo. Feb. 16, 2018). In both cases, the terminated franchisees were operating competing businesses in violation of their franchise agreements’ post-termination covenants against competition, and the franchisor brought motions for preliminary injunctions. Applying case law from H&R Block’s previous successes in injunction cases, both courts easily found (a) a likelihood of success on the merits of the franchisor’s claims, (b) that the temporal and spatial scope of the non-compete provisions were reasonable, (c) a threat of irreparable harm to the franchisor resulting from lost customers and an inability to re-establish a new franchise in the territory, (d) a lack of countervailing harm to the ex-franchisees, who only suffered self-inflicted harm, and (e) a public interest in enforcing the contractual noncompetition provisions.

But the courts diverged on whether the noncompetition provisions applied to certain relatives who had not signed the franchise agreements. In Thomas, the court summarily enjoined the ex-franchisees’ family members, who were operating a competing taxservice business out of the same location as the former franchise office. The court in Frias, however, refused to enjoin the ex-franchisee’s wife. Although the wife admitted she originally opened her business to send customers to her husband’s H&R Block franchise, the court found she had done so before the franchise was terminated, not as a means to circumvent the post-termination covenant against competition. The court also found that evidence gathered by the franchisor’s investigator failed to demonstrate that the ex-franchisee was participating in the operation of his wife’s competing business. Although the court did not enjoin the ex-franchisee’s wife from operating a competing business, it did find that the ex-franchisee’s referral of customers to his wife’s competing business was a violation of the anti-solicitation provision of his franchise agreement and ordered further briefing on whether the ex-franchisee’s social media activities also violated the anti-solicitation provision of his agreement.