Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—N.D.N.Y.: Contempt order enforces post-termination restrictions against former H&R Block franchisee, (Jul 10, 2015)

By Edward L. Puzzo, J.D.

A former H&R Block franchisee who had violated the franchise agreement’s post-termination non-compete and geographic restrictions, after a court order affirmed those restrictions in a preliminary injunction, was in contempt of the court order and consequently liable for monetary damages, attorneys’ fees, and an equitable one year extension of the non-compete provision, the federal district court in Albany, New York has ruled (H&R Block Tax Services, LLC v. Strauss, July 7, 2015, Kahn, L.).

In 1984, Judy Strauss signed a Satellite Franchise Agreement (SFA) with the predecessor of H&R Block Tax Services, enabling her to operate an income tax preparation office in Cobleskill, New York using the H&R Block service mark. The SFA automatically renewed every 5 years. Prior to the expiration of the most recent 5-year agreement, H&R Block informed Strauss that it would not renew the 1984 version of the SFA but instead offered its current SFA version. Strauss declined to sign the newer SFA, and the 30-year franchise relationship between the parties ended in 2014.

The SFA that Strauss had signed had certain provisions that took effect upon termination, providing that: (1) Strauss would neither solicit clients to whom her franchise provided tax return preparation services, nor compete with H&R Block in the business of preparing tax returns, for a period of one year and within forty-five miles of Cobleskill, New York; (2) that Strauss would assign H&R Block the telephone numbers used in connection with her franchised business; and (3) that Strauss would not lease the premises used for her franchised business to a party (other than H&R Block or an approved transferee) for the purpose of preparing tax returns.

In January 2015, H&R Block sought a temporary restraining order and preliminary injunction against Strauss, alleging that she had violated all three of the above-listed post-termination provisions. On February 4, 2015, the court agreed and granted the TRO and preliminary injunction against Strauss, ordering her to immediately: (1) refrain from directly or indirectly offering tax return preparation and related services in or within forty-five miles of Cobleskill, New York; (2) refrain from solicitation of clients of the former H&R Block office in Cobleskill; and (3) discontinue using, and assign to H&R Block the telephone numbers associated with her former H&R Block business.

On March 3, 2015, H&R Block returned to the court arguing that Strauss was in contempt of the February 4, 2015 restraining order because (1) she was preparing income taxes at a new location in Freehold, New York, which was less than forty-five miles from Cobleskill, New York; and (2) continuing to solicit clients in Cobleskill by advertising “tax services” on the sign outside of her Cobleskill office, running a newspaper advertisement indicating her services, and by receiving clients’ materials in Cobleskill and then transporting them to Freehold to conduct the actual tax preparation.

Before addressing the issue of damages, the court stated, it must first determine whether Strauss was in contempt of the court’s February 4, 2015 order.

Clean and convincing proof of noncompliance. At the hearing, Strauss conceded that she had established a new office in Freehold, which was less than 45 miles from Cobleskill, where she performed income tax services; that clients were dropping off income tax information at her Cobleskill office for transfer to Freehold; that the sign at her Cobleskill continued to advertise “tax services”; and that she participated in a newspaper article about her tax business that ran after the February order. Strauss’ undisputed admissions were sufficient to support a finding of clear and convincing evidence of her noncompliance.

Diligence. Despite the clear and convincing evidence of noncompliance, the court also considered whether Strauss diligently attempted to comply with the February order and therefore should not be held in contempt.

Strauss admitted that she had obtained reliable first-hand evidence from her own car odometer that Freehold was 42.5 miles from Cobleskill, less than the 45 mile restriction, and yet did not cease preparing income taxes in Freehold. The court found that this was not diligent compliance with the geographic restriction of the February order.

Strauss maintained that the newspaper article in question was arranged several weeks prior to the issuance of the February order and that she believed she was unable to cancel the article. However, the court noted, there is no evidence that she actually attempted to cancel the article by contacting the newspaper. The court found that this was not diligent compliance with the February order with respect to the newspaper article.

Based on these factors, the court ruled that H&R Block had met its burden that Strauss was in contempt of the February order. Having found Strauss in contempt of the February order, the next question was the appropriateness of the relief sought by H&R Block.

Goodwill. H&R Block argued that it had suffered irreparable harm to its goodwill because Strauss’ violation of the court order during a significant portion of tax season had prevented it from transitioning past and future clients to its new franchise location in Cobleskill. It therefore sought an equitable extension of the non-compete provision of the SFA for one year, through the 2016 income tax season. Strauss did not object to this requested relief, and the court found it appropriate.

Monetary damages. H&R Block argued that a reasonable proxy of its damages was the amount it would have earned in royalties had the SFA still been in place during the contempt period. Strauss earned approximately $43,000 in revenue preparing income taxes during the contempt period. Based upon the 40% royalty rate of the SFA, the court found that H&R Block was entitled to $17,200 in damages.

Attorneys’ fees. H&R Block sought attorney’s fees related to the contempt proceedings, whereas Strauss argued that attorneys’ fees were inappropriate without a showing the order violations were willful.

In the Second Circuit, the court stated, willfulness was not strictly required, only a showing that the person found in contempt was not reasonably diligent in attempting to comply. But, the court found, Strauss’ conduct was willful: she had actual notice of the order, could have complied, did not seek modification, and did not make a good-faith effort to comply. Thus an award of attorneys’ fees was appropriate.

Using a lodestar approach, the product of a reasonable hourly rate and reasonable number of hours required by the case, and based upon contemporaneous time records provided by plaintiff’s attorneys, the court determined that plaintiffs were entitled to an award of $15,616.40 in attorneys’ fees and costs.

The case is Civil Action No. 1:15-cv-00085-LEK-CFH.

Attorneys: Julia C. Colarusso (Gray Plant Mooty, PA), and Matthew J. Griesemer (Freeman, Howard Law Firm) for H&R Block Tax Services, LLC. Gregory E. Schaaf (Englert, Coffey Law Firm) for Judy Strauss.

Companies: H&R Block Tax Services, LLC

Cases: FranchisingDistribution NewYorkNews