The Franchise Memorandum

A federal court in Pennsylvania granted in part and denied in part a former franchisee’s motion to dismiss a franchisor’s allegation that she misappropriated trade secrets and breached the franchise agreement. JTH Tax, LLC v. Foster, 2023 WL 5938983 (W.D. Pa. Sept. 12, 2023). In 2015, Liberty Tax Services and Melissa Foster entered into a franchise agreement to operate a Liberty franchise location in Grove City, Pennsylvania. Liberty terminated the franchise agreement in June 2020 after it determined Foster had breached the agreement by failing to pay royalties and failing to operate the Liberty business. Liberty later learned that Foster, while still operating the Liberty business, had opened her own tax business in the same location. Liberty sued Foster in January 2023 in federal district court, alleging that Foster breached four promissory notes, violated the Defend Trade Secrets Act, breached her franchise agreement, converted franchise property, and unjustly enriched herself. Liberty sought to enjoin Foster from operating her tax business and using Liberty’s confidential information. Foster moved to dismiss Liberty’s claims, asserting that the court lacked subject matter jurisdiction and further asserting that Liberty’s claims were time barred or, alternatively, legally insufficient.

The court determined it had federal question jurisdiction because Liberty’s claim under the Defend Trade Secrets Act sufficiently alleged a direct nexus between its tax service offerings and interstate commerce. The court reasoned that, although Foster operated only in Pennsylvania, Liberty’s trade secrets are used by franchisees throughout the United States, and any misappropriation of said trade secrets necessarily relates to interstate commerce. As for Foster’s other claims, the court found that a question remained as to whether Foster’s alleged breach of promissory notes were time barred because it was unclear what type of financial instrument the parties intended to create and what statute of limitations to apply. The court, however, found that Liberty’s conversion claim was time barred because it started tolling in June 2020, when Liberty first demanded that Foster return Liberty’s property, and expired in June 2022. Liberty alternatively claimed a theory of equitable relief for the return of property, which Foster asserted was barred by the doctrine of laches. The court recognized that Foster was entitled a presumption of prejudice under the doctrine because of Liberty’s untimely claims but found there remained a question as to whether Liberty rebutted the presumption. The court finally found that Liberty’s noncompete and nonsolicitation claims were time barred because the applicable provisions were only effective for two years after the termination of the franchise agreement.