A federal court in Virginia denied tax franchisor, Liberty Tax’s, motion to dismiss complaints by two of its area developers (“ADs”). The ADs claimed Liberty Tax breached their contract for wrongfully terminating, failing to pay royalties for franchisees in their territory and failing to renew on the same terms as prior area development agreements (“ADAs”). Liberty Tax argued that the ADs were not terminated, but rather, that they were not renewed. Liberty Tax argued that e-filing payments were not part of the royalty fees owed under the ADAs.
Both ADs sent renewal notices to Liberty Tax. Liberty Tax acknowledged receipt of the notices but did not provide a renewal agreement. One AD sent a follow up notice and received a message from Liberty Tax that because it failed to meet development obligations under the ADA during the COVID pandemic, the ADA would not be renewed and all the AD’s rights were terminated. Then Liberty Tax revised its standard ADA to be materially different from the ADAs signed by the ADs when they tried to exercise their renewal rights.
The court analyzed whether the ADAs were terminated or not renewed. Liberty Tax claimed the ADs had not alleged termination, but non-renewal. The court disagreed, viewing the claim as being for wrongful termination. One of the ADAs had an addendum that changed the term from six years to ten years. The court held that if the ADA had not expired, it was plausibly terminated, instead of not renewed, and let the claim proceed.
The court considered whether e-filing fees were included in the definition of royalties under the ADAs. The ADs asserted that e-filing fees were part of the fees for tax preparation services and should be included in royalty payments owed to them. Liberty Tax responded that this interpretation of royalties was not supported by the ADAs, but failed to point to language in the ADAs defining “royalties” that would preclude e-filing fees as revenue for purposes of royalties. The court held this ambiguity should be construed against the drafter, Liberty Tax, and ruled in favor of the ADs.
As to renewal requirements, the ADs claimed the only requirement to renew was to give proper notice, which ADs did. Liberty Tax stated it was under no obligation to renew the ADAs under the same terms. The court found that neither party identified contractual provisions in support of their positions. Nevertheless, the court determined no word or clause will be treated as meaningless if a reasonable meaning can be attributed. The court let the claim proceed because the renewal provision was plausibly ambiguous and would be construed against the drafter.
Franchise agreements and area development agreements outline renewal conditions and termination requirements. Franchisors should work with franchise counsel to ensure renewal conditions are drafted to give the franchisor adequate discretion and determine if the franchisor has good cause for non-renewal or termination prior to taking any action.
