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The Franchise Memorandum

Texas Federal Court Declined to Enjoin Terminated Franchisee Under Noncompete Clause

A federal court in Texas reached a different conclusion with regard to enforcement of a noncompete covenant, granting in part and denying in part a franchisor’s motion for preliminary injunction to enforce post-termination obligations against a former franchisee. JTH Tax LLC v. White, 2020 WL 3843691 (W.D. Tex. July 8, 2020). White entered into three franchise agreements with JTH to operate three Liberty Tax franchised businesses, and into another franchise agreement to operate one SiempreTax+ franchised business within a Liberty Tax location. Eventually, White closed the co-branded location and entered into a Mutual Termination Agreement (MTA) with JTH and SiempreTax+ to terminate those respective franchise agreements. The MTA included post-termination obligations from the franchise agreements that required White to (a) cease using the trademarks, (b) stop using literature and forms provided by Liberty or other documents with the trademarks, (c) return the customer list and operations manuals, and (d) not compete in accordance with the post-termination noncompete covenant. The noncompete stated that White could not charge a fee for preparing income tax returns or offer financial products within the prior franchise territory or within 25 miles of the territory. Upon the execution of the MTA, White almost immediately began operating a tax preparation business, Natty’s Tax Service, at the same location as the former Liberty Tax/SiempreTax+ co-branded location. JTH swiftly terminated the remaining franchise agreements due to the violation of the noncompete and failure to pay past due amounts, and filed suit against White seeking a preliminary injunction to require White to comply with the terms of the MTA and franchise agreements.

The court granted the part of the preliminary injunction requiring White to (a) return the operations manuals and any customer files in his possession to both franchisors, and (b) cease using any of the Liberty trademarks or any materials received from Liberty bearing the trademarks for any purpose in connection with any tax preparation business. But the court denied the preliminary injunction with respect to enforcement of the noncompete provisions. While the court found JTH and SiempreTax+ would likely succeed on their claims for breach of contract and trademark infringement and dilution, it found that they did not provide sufficient evidence to show a threat of irreparable harm. The court concluded that a lone declaration of a regional manager claiming harm, without any supporting evidence to show that monetary damages would not be sufficient, amounted to mere speculation and did not create a presumption of irreparable harm. The court also concluded the balance of hardships weighed against enforcing the noncompete. Although JTH and SiempreTax+ had a legitimate, protectable interest in the franchise businesses, and an interest in encouraging franchisees to follow the brand standards and terms of their franchise agreements, White faced greater harm in his inability to find work outside of a tax preparation business. White had no prior employment to which he could return and a recent disability made it difficult to find another occupation. Because the scope of the three noncompete agreements would render White unable to work as a tax preparer, the court concluded enforcement would be a debilitating hardship for White that would outweigh any hardships claimed by the franchisors.

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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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