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The Franchise Memorandum

New Jersey Federal Court Grants Franchisor Preliminary Injunction to Stop Franchisee's Breach of Post-Termination Covenants

A federal court in New Jersey granted the franchisor Jackson Hewitt a preliminary injunction enjoining a franchisee from violating the franchise agreement’s post-termination covenants. Jackson Hewitt Inc. v. Njoku, 2021 WL 1827277 (D.N.J. May 6, 2021). Njoku was a Jackson Hewitt franchisee, but Jackson Hewitt terminated the franchise agreement after determining that Njoku underreported his revenue. Under the franchise agreement’s post-termination provisions, Njoku was bound by noncompetition and nonsolicitation covenants. When Jackson Hewitt discovered that Njoku had failed to comply with those post-termination covenants, it sued Njoku and sought a preliminary injunction.

In response, Njoku first argued that the franchise agreement was invalid because it contained an illegal resale price maintenance provision, which rendered his subsequent breaches of the post-termination covenants moot. The court disagreed, finding that the average fee provision at issue was only applied to those returns for which Njoku failed to provide sufficient revenue information, which did not constitute illegal resale price maintenance. Because the franchise agreement was enforceable, the court found that Jackson Hewitt was likely to succeed in showing that Njoku had breached the post-termination covenants by operating a competing business within a ten-mile radius of his former Jackson Hewitt office and soliciting his former clients. Despite these breaches, Njoku argued that a preliminary injunction would be improper because Jackson Hewitt’s delay of over one year in seeking an injunction demonstrated a lack of irreparable injury. Again, the court disagreed, holding that Jackson Hewitt only delayed because it believed Njoku was complying with its post-termination covenants and, once the breaches were discovered, Jackson Hewitt immediately brought suit. Irreparable harm did exist, according to the court, because Njoku’s operation would impede Jackson Hewitt’s ability to transition Njoku’s customers to one of its nearby locations. Although the court determined that a preliminary injunction would not cause Njoku to suffer significant harm, it found that many of Njoku’s customers would suffer harm because of the proximity to the extended IRS filing deadline. Accordingly, the court granted the preliminary injunction but allowed Njoku to finish filing on behalf of his customers whose returns had to be filed by the IRS deadline.

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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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