Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—N.D.N.Y.: Franchise agreement prohibiting former H&R Block franchisee from competing is valid and not overbroad, (Feb 6, 2015)

By Dan Selcke, J.D.

The federal district court in Albany, New York granted H&R Block’s motion to preliminarily enjoin one of its former franchisees from competing with it, since the terms of the franchise agreement clearly demanded that outcome, and because H&R Block would suffer irreparable harm if it did not come to pass (H&R Block Tax Services, LLC v. Strauss, February 4, 2015, Kahn, L).

H&R Block licenses others to operate tax return preparation offices under the H&R Block service mark. Decades ago, Strauss received such a license when she entered into a Satellite Franchise Agreement (SFA) with H&R Block. Things went smoothly for years until H&R Block told Strauss that it would only renew their relationship under the terms of a new franchise agreement. Strauss declined to renew the relationship under the new terms, and it expired.

The original SFA provided, among other things, that Strauss would not solicit clients to whom her franchise formerly provided tax return preparation services, nor compete with H&R Block to provide those services, for a period of one year and within 45 miles of her office in Cobleskill, New York. It also provided that she would assign H&R Block the telephone number used in connection with her franchised business.

H&R Block alleged that Strauss continued to operate a tax return preparation business at her formerly franchised location, continued to solicit clients of her former franchise, and that the telephone number listed to H&R Block continued to ring in her non-H&R Block office. H&R Block brought suit and filed a motion to preliminarily enjoin Strauss from engaging in these activities.

Likelihood of success on the merits. H&R Block was likely to succeed on the merits of its breach of contract claim, according to the court. Applying Missouri law per a choice-of-law provision in the SFA (the court noted that it would reach the same results under New York law), the court looked at whether the company was likely to succeed on the merits of its underlying breach of contract claim. Success did seem likely, since Strauss did not contest that she continued to conduct tax preparation services at her former franchise location after the SFA expired. First, the court shot down Strauss’ argument that H&R Block itself had breached the terms of the original SFA, which only allowed the company to decline renewal of the SFA “for cause,” by declining to renew it without showing cause. The U.S. Court of Appeals for the Eighth Circuit recently rejected this same argument challenging an identical provision in an H&R Block franchise agreement, H&R Block Tax Servs. LLC v. Franklin, 691 F.3d 941, 945 (8th Cir. 2012)

The court also held that, despite Strauss’ arguments, the non-compete provision was not overbroad. That provision prohibited Strauss from competing with H&R Block for one year and within 45 miles of her former franchise location in Cobleskill, NY. This did not, as Strauss argued, prohibit her from engaging in her profession “anywhere.” Strauss did not object to the one-year restriction, and she would be able to practice somewhere over 45 miles away from her old office. As that office was located in a rural area, many of her former customers were spread out around the region anyway. In any case, courts applying Missouri law had consistently upheld even more restrictive non-competition provisions in the past.

Irreparable harm. H&R Block would suffer irreparable harm if Strauss were not enjoined, according to the court. The tax preparation business was characterized by the development of long-term relationship between clients and their tax preparers. Under the benefit of her relationship with H&R Block, Strauss had built relationships with many individuals over the years, and H&R Block stood to lose those relationships if Strauss was not enjoined from directing those individuals to her current operation. Moreover, tax season was already underway, so time was of the essence. Allowing Strauss to continue using a telephone number associated for many years with H&R Block and to solicit and prepare tax returns for former clients would cause H&R Block irreparable harm.

Balance of equities, public interest. The court held that the equities in this case tipped in H&R Block’s favor, since Strauss had received great benefit from her use of the H&R Block mark over the years. Moreover, the relevant provisions of the SFA were unambiguous and enforceable, and Strauss did not dispute that she was not complying with them. Finally, the public had an interest in enforcing covenants not to compete contained within valid contracts as long as they, like the one at issue here, were reasonably limited in scope, duration, and geographic region.

Because all of the factors were in its favor, the court granted H&R Block’s motion for a preliminary injunction and a temporary restraining order. Pursuant to the terms of the SFA, the tax preparers who had worked for Straus during her relationship with H&R Block were also bound by all of its terms.

The case is No. 1:15-CV-0085 (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 MissouriNews NewYorkNews