A Pennsylvania federal court refused to enforce non-competition and non-solicitation covenants in a franchise agreement of a nationwide tax preparation service franchisor. The court dismissed the franchisor’s request for injunctive relief to enforce those covenants.
In 2015, Liberty Tax Service (Liberty) entered into a franchise agreement for the operation of a tax preparation business in Pennsylvania. Liberty terminated the franchise agreement in June 2020, claiming the franchisee breached the franchise agreement by failing to pay monies owed, failing to timely open the franchise for business, and failing to actively operate the Liberty office.
The franchise agreement contained non-compete and confidentiality provisions stating that for two years following termination, the franchisee would not be involved in a competing tax business within her franchise territory or within 25 miles of her territory. The franchise agreement also restricted the franchisee from soliciting Liberty’s customers for the same time period.
Liberty filed a complaint against the former franchisee in January 2023, alleging breach of contract and promissory notes, violations of the Defend Trade Secrets Act (DTSA), conversion, and unjust enrichment. Liberty alleged it “recently discovered” the former franchisee began operating a competing tax service and openly solicited Liberty’s clients while she was still a Liberty franchisee. Liberty also asserted that, post-termination, the former franchisee operated the competing tax service out of the same location as the franchised business, with the same telephone number, advertising on its website that it has serviced customers “for nearly five years” and “offers the same friendly and accurate service” despite its name change. Liberty sought injunctive relief to enforce the non-competition and non-solicitation covenants.
The court denied Liberty’s request for enforcement of the non-competition and non-solicitation covenants because Liberty was trying to enforce the covenants beyond their contractual expiration date of June 9, 2022. The court determined no factor outside of Liberty’s control caused the delay in filing the action, finding Liberty’s “recent discovery” of the covenant violations did not constitute a factor beyond its control.
Franchisors should monitor their former franchisees to determine if they are operating a competing business in violation of the franchise agreement’s non-compete covenants. A franchisor’s delay in discovering such violations may be viewed as a lack of due diligence in monitoring and enforcing its contractual rights and may be used against a franchisor if it later tries to enforce the non-compete or non-solicitation provisions of the franchise agreement.
JTH Tax LLC v. Foster, 2023 U.S. Dist. LEXIS 161631 (W.D. Pa. Sept 12, 2023)
