Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—E.D. Va.: Liberty Tax Service awarded $270K after franchisee ignores suit, (Oct 8, 2014)

By Greg Hammond, J.D.

The operator of three Liberty Tax Service franchises was ordered to pay $267,286 to franchisor JTH Tax, Inc., doing business as Liberty Tax Service (LTS), after ignoring a breach of franchise agreement lawsuit. The federal district court in Norfolk, Virginia consequently granted default judgment in favor of LTS, and permanently enjoined the franchisee from engaging in certain acts (JTH Tax, Inc. v. Geraci, October 2, 2014, Jackson, R.).

Background. LTS entered into three franchise agreements with Alan Geraci and his company, Jonlary Circle Enterprises, LLC, to open LTS franchise office locations in southern California. In order to secure operating capital and to finance the purchase of its franchises, the defendants signed two promissory notes payable to LTS. However, in January 2014, LTS sent a letter of termination to Geraci, citing insolvency and failure to pay amounts owed. The defendants, thereafter, defaulted on the promissory notes, and LTS filed suit.

Specifically, LTS asserted three counts of breach of contract: breach of franchise agreements, breach of promissory notes, and accounts receivable. The company sought (1) judgment in the amount of 19 percent of Geraci’s gross revenues for advertising and royalty fees lost by LTS during the period the defendants breached the post-termination obligations; (2) an injunction prohibiting the defendants from using literature or items bearing the LTS marks and to deliver all customer lists and associated records to LTS; (3) enforcement of a two-year non-compete clause; (4) $238,448 in compensatory damages, consisting of the amount currently due on the unpaid promissory notes and accounts receivable; and (5) costs and attorney’s fees. After the defendants untimely answered the complaint, LTS moved for default judgment.

Jurisdiction. The court first determined that it had subject matter jurisdiction in this case, as there was complete diversity, and the amount of damages in question exceeds $75,000. In addition, the court found that it had personal jurisdiction over Geraci and his company, because: (1) the defendants were contractual franchisees of a Virginia corporation, traveled to Virginia for training, and submitted regular reports to LTS in Virginia, satisfying Virginia’s long-arm statute; and (2) LTS established the required minimum contacts with Virginia to satisfy the Due Process requirements for exercising personal jurisdiction.

Default judgment. Next, the court determined that Geraci and his company were clearly in default, because: (1) their answer was filed 97 days after service; (2) their opposition to the motion for default was filed 62 days after the motion; and (3) neither defendant was present or represented at the motion for default hearing. The court also found that the clerk sent sufficient notice of the intent to schedule the hearing to the defendants more than two weeks in advance. Consequently, the court concluded that default judgment was appropriate, and found that LTS presented sufficient facts to show the defendants materially breached their franchise agreements. LTS was consequently awarded $267,286 in actual damages. However, the court deferred the issue of attorney fees and costs, requiring LTS to file an accounting of those amounts.

Injunctive relief. Finally, the court concluded that permanent injunction would be appropriate in this case, finding that: (1) continued infringement will injure LTS’ goodwill and reputation; (2) failure to enforce the non-compete could send a dangerously damaging signal to other franchisees; (3) the balance of hardships weighs in LTS’ favor because the defendants are in default and LTS has little alternative recourse; and (4) the public interest would be served by enforcing the terms of consensual, legal, and reasonable contracts. Consequently, the defendants are prohibited from continuing to use the “Liberty Tax Service” and any similar marks; divulging or using any customer information; and directly or indirectly soliciting patronage from any former LTS customer. The defendants must also deliver all operations manuals, tax returns, records, and customer information to LTS within 30 days.

The case number is 2:14cv236.

Attorneys: Gary Alvin Bryant (Willcox & Savage PC ) for JTH Tax, Inc.

Companies: JTH Tax, Inc.; Jonlary Circle Enterprises, LLC

Cases: FranchisingDistribution VirginiaNews