The Franchise Memorandum

A federal court in New York denied a franchisor’s preliminary injunction motion where it did not establish a likelihood of success on the merits or irreparable harm. JTH Tax LLC v. Agnant, 2022 WL 1556656 (E.D.N.Y. May 17, 2022). JTH Tax, franchisor of the Liberty Tax Service brand, entered into three franchise agreements with Agnant and her corporation, and she ultimately purchased and began operating four existing locations. When Liberty terminated the franchise agreements for failure to adhere to certain compliance requirements, Agnant sued alleging breach of the New York Franchise Sales Act, unjust enrichment, and fraudulent inducement. The fraudulent inducement count was based on Liberty’s alleged failure to disclose to Agnant that the DOJ and IRS were investigating possible preparation of fraudulent tax returns by its franchisees—a disclosure required by a consent order entered by a Virginia federal court. One day later, Liberty filed suit against Agnant for breach of the franchise agreements by, among other things, violating the post-termination noncompete by continuing to operate tax preparation businesses. Liberty obtained a temporary restraining order requiring Agnant to comply with the noncompete and other post-term obligations; the court then scheduled a show-cause hearing to determine whether to convert the temporary restraining order into a preliminary injunction.

Following the hearing, the court decided not to issue a preliminary injunction. It held that Liberty failed to establish its likelihood of success on the merits, as Agnant’s evidence that she had consistently reached out to Liberty’s compliance team to correct income tax return errors cast doubt on whether the franchise agreements were properly terminated. The court also held that any harm Liberty would face in the absence of an injunction would be compensable with monetary damages, as there was no evidence that Agnant continued to operate as Liberty Tax or use its name, brand, systems, or forms. Liberty also failed to offer evidence that Agnant’s competing tax preparation businesses would result in lost customers or profit, or that Liberty intended to maintain its presence in the market through a new corporate-owned or franchised store.

*Libbi Wilson is a Summer Associate for Lathrop GPM who contributed to the writing of this post.