The Second Circuit Court of Appeals affirmed a district court’s order denying a franchisor’s request for preliminary injunction against a terminated franchisee to enforce covenants not to compete or solicit former clients.

JTH Tax LLC, franchisor of the Liberty Tax Service brand, entered into several franchise agreements with a franchisee. Liberty subsequently terminated the franchise agreements, claiming the franchisee committed material violations of federal tax laws and regulations in providing tax preparation services. Liberty demanded that the franchisee comply with its post-termination obligations, including non-compete and non-solicitation covenants.

The franchisee and Liberty sued each other, with Liberty moving for a preliminary injunction to enforce post-termination obligations and to enjoin the franchisee from competing and soliciting former clients. Liberty appealed the district court’s denial.

The Second Circuit affirmed. The district court applied the correct standard for issuing a preliminary injunction, which included a heightened standard for showing likely success on the merits and irreparable harm. The Second Circuit agreed that Liberty failed to meet that standard. Liberty failed to establish likelihood of success, as the franchisee’s evidence that she had consistently reached out to Liberty’s compliance team to correct income tax return errors raised questions of fact on whether Liberty properly terminated the franchisee.

Further, Liberty did not show recovering monetary damages was inadequate. Breach of a non-compete covenant does not automatically constitute irreparable harm, and Liberty failed to offer evidence that the franchisee’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.

Franchise agreements often have non-compete and non-solicitation covenants. Franchisees considering operating a competing business after leaving a franchise system should consult with franchise counsel to assess strength and enforceability of any non-compete and/or non-solicitation clause in the franchise agreement.

JTH Tax, LLC v. Agnant, 62 F.4th 658 (2d Cir. 2023)