Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—3d Cir.: Default judgment against tax preparation business franchisor withstands appeal, (Aug 23, 2013)

By Peter Reap, J.D., LL.M.

The federal district court in Newark did not abuse its discretion in granting a default judgment to tax preparation business franchisor Jackson Hewitt, Inc., against Donald and Sheila Godbehere, the guarantors of terminated Jackson Hewitt franchisee DJSG Utah Tax Service, LLC, the U.S. Court of Appeals in Philadelphia has decided (Jackson Hewitt, Inc. v. Barnes Enterprises, Inc., August 22, 2013, per curiam). In addition, the Godbehere’s appeal of the district court’s grant of a preliminary injunction, which was later converted into a permanent injunction by the district court, was dismissed.

In October 2010, Jackson Hewitt filed a complaint against DJSG and the Godbeheres alleging, inter alia, trademark infringement, unfair competition, and breach of contract. The complaint primarily sought damages and injunctive relief, including the enforcement of a two-year non-compete provision that was included in the franchise agreements.

Preliminary injunction. The appellate court began its analysis by determining whether, in light of the district court’s grant of a permanent injunction, the Godbehere’s challenge to the grant of the preliminary injunction was moot. The issuance of a final order on the merits could moot an interlocutory appeal challenging the district court’s disposition of a motion for a preliminary injunction, the court noted.

In this case, however, the district court’s grant of a permanent injunction was not made on the merits; rather, it was merely the product of a default judgment, the court determined. Although one of the Poulis factors, which the district court referred to in determining whether to grant the default judgment, concerned the merits of the case, the district court’s decision to grant a default judgment did not turn on that factor. Thus, the appellate court could not conclude that the Godbehere’s challenge to the grant of the preliminary injunction was moot.

However, three separate issues required the appellate court to dismiss the appeal of the preliminary injunction. First, because DJSG did not file a brief or indicate its intent to rely on the Godbeheres’ briefing, DJSG’s appeal was dismissed for failure to prosecute. Second, because none of the claims set forth in the Godbeheres’ briefing pertained to the district court’s January 11, 2011 decision granting a preliminary injunction or the court’s February 17, 2011 decision denying reconsideration (among other things), the Godbeheres waived any challenge to those decisions. Finally, to the extent the Godbeheres sought to raise claims on behalf of Stephanie Marshall—a former franchisee employee to whom the district court extended the preliminary and permanent injunctions—they could not do so because, among other reasons, they were proceeding pro se, according to the appellate court. Thus, the appeal of the preliminary injunction was dismissed.

Default judgment. The district court referred to the Poulis factors, the six factors set forth in Poulis v. State Farm Fire & Casualty Co., 747 F.2d 863 (3d Cir. 1984), in imposing sanctions in the form of a default judgment against the Godbeheres. The six Poulis factors are:

(1) the extent of the party’s personal responsibility; (2) the prejudice to the adversary caused by the failure to meet scheduling orders and respond to discovery; (3) a history of dilatoriness; (4) whether the conduct of the party or the attorney was willful or in bad faith; (5) the effectiveness of sanctions other than dismissal, which entails an analysis of alternative sanctions; and (6) the meritoriousness of the claim or defense.

Having reviewed the record, and for substantially the reasons provided by the district court, the district court did not abuse its discretion in concluding that a balancing of the Poulis factors weighed in favor of entering a default judgment, the court held. In challenging the district court’s order, the Godbeheres did not argue that the court erred in balancing the Poulis factors, the court noted. Instead, they focused on the start date of the two-year noncompete provision. But that issue had no bearing on whether the district court abused its discretion in granting a default judgment, particularly given that the entry of default did not turn on Poulis’s “merits” factor.

Thus, the judgment of the district court was affirmed.

The case is Nos. 11-1378 and 11-4647.

Attorneys: James S. Coons, Esq. (Ansa Assuncao) for Jackson Hewitt, Inc. Eric P. Blaha, Esq. (LaRocca, Hornik, Rosen Greenberg & Blaha) for DJSG Utah Tax Service, Inc.

Companies: Jackson Hewitt, Inc.; DJSG Utah Tax Service, Inc.

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