Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—D.N.J.: Trademark infringement claims proceed against former Jackson Hewitt franchisees, (Aug 9, 2013)

By Tobias J. Gillett, J.D., LL.M.

Tax preparation franchisor Jackson Hewitt, Inc. may proceed with trademark infringement claims against a former franchisee and its guarantor, and the former franchisees must pay 18.5% interest on money owed to Jackson Hewitt, as specified in the franchise agreement, the federal district court in Newark has ruled (Jackson Hewitt, Inc. v. Barnes Enterprises, Inc., August 5, 2013, Cavanaugh, D.). A decision regarding attorneys’ fees was postponed.

Jackson Hewitt grants franchises to operate income tax preparation businesses under the Jackson Hewitt name. Barnes Enterprises, Inc. entered into nine franchise agreements with Jackson Hewitt to operate franchises in South Carolina, and Richard Barnes signed personal guaranties of the franchises’ performance. Under the agreements, the defendants agreed to pay 18% interest on any amounts owed to Jackson Hewitt for more than five days.

On August 9, 2010, Jackson Hewitt terminated the franchise agreements due to the defendants’ alleged default. However, the defendants allegedly continued to utilize the Jackson Hewitt trademarks following the termination. Jackson Hewitt filed suit, and moved for summary judgment on claims for breach of contract due to unpaid fees, breach of contract due to breach of notes, and breach of guaranties as to Richard Barnes. The defendants moved for partial summary judgment as to six counts in Jackson Hewitt’s complaint.

Defendant’s Motion for Summary Judgment

Secondary infringement. Although the defendants contended that a company owned by Richard Barnes’ wife and her father, Accounting Pros LLC d/b/a Customers First, had committed any alleged infringement by offering income tax services within some of the previous Jackson Hewitt locations, and that those individuals and Customers First were not parties to the action, the court observed that the defendants could still be liable as secondary infringers. A distributor could be liable as a secondary infringer if it “continues to supply its product to one whom it knows or has reason to know is engaging in trademark infringement.” The defendants’ “failure to remove signage from the previous Jackson Hewitt franchise locations compounded by Defendants’ actual knowledge that consumer confusion could exist while Customers First operated its accounting firm demonstrate[d] that there [was] a genuine issue for trial as to whether Defendants [were] secondary infringers,” according to the court.

Evidence of infringement. The court concluded that an issue of material fact remained regarding whether there was evidence that the defendants continued to use the Jackson Hewitt trademarks following termination of the franchise. Although the defendants contended that Jackson Hewitt had not provided any evidence of the defendants’ active use of the Jackson Hewitt trademarks after termination, Jackson Hewitt argued that infringement did not require active use, and that the failure to remove the signs was sufficient. The court was “not convinced this is an appropriate time to make such a fact determination.”

Damages. The court found a disputed issue of fact remained regarding whether Jackson Hewitt had suffered damages as a result of the alleged infringement. Although the defendants argued that Jackson Hewitt had not offered evidence of damages, the defendants had not provided any financial records that would “highlight any measures of revenue.” Moreover, Jackson Hewitt alleged that Richard Barnes had “admitted to preparing tax returns for former Jackson Hewitt customers when he worked for Customers First.”

Customer confusion. A genuine dispute remained regarding whether the failure to remove the Jackson Hewitt signage had confused any customers, according to the court. Although Jackson Hewitt did not provide testimony from any customers who were confused by the signs, Jackson Hewitt contended that “proof of actual confusion is not necessary; likelihood of confusion is all that need to be shown.” The court found resolution of the customer confusion issue would be “premature.”

Trademark dilution. The court also concluded that a genuine dispute existed as to whether Jackson Hewitt suffered trademark dilution as a result of the infringement. Since the court had previously determined that a material issue of fact remained regarding whether Jackson Hewitt suffered damages, the court declined to dismiss the dilution claim on the ground that Jackson Hewitt had not suffered such damages.

Jackson Hewitt’s Motion for Summary Judgment

The defendants only raised issues concerning the correct interest rate to be applied and the calculation of attorneys’ fees, and did not challenge the substantive issues in Jackson Hewitt’s motion.

Interest rate. The court concluded that the correct interest rate was 18%, rather than the 3.5% interest rate specified in New Jersey Court Rule 4:42-11(a). Under New Jersey law, “[w]hen a contract specifies an interest rate to be used in connection with amount due and owing, that rate is to be applied.” Therefore, the applicable interest rate was the 18.5% rate specified in the franchise agreement.

Attorneys’ fees. Although the defendants could not prevail on their motion for summary judgment, because the court denied it, the court concluded that the calculation of attorneys’ fees should be postponed until the end of the matter so the court could ensure the “proportionality” of the fees.

The case is No. 10-cv-05108 (DMC)(JAD).

Attorneys: James Simon Coons (Ansa Assuncao, LLP) for Jackson Hewitt, Inc. Michael Salvatore Zullo (Duane Morris LLP) for Barnes Enterprises, Inc.

Companies: Jackson Hewitt, Inc.; Barnes Enterprises, Inc.

Cases: FranchisingDistribution NewJerseyNews