Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—Ohio App.: Injunction, sanctions upheld against franchisee that violated non-compete provision of franchise agreements, (May 27, 2014)

By Edward L. Puzzo, J.D.

A temporary restraining order, preliminary and permanent injunctions, a contempt order, and sanctions against a former income tax preparation business franchisee, who had operated a competing tax preparation business in violation of the non-compete provisions in his franchise agreements, were upheld by the Ohio Second District Court of Appeals in Dayton (ITS Financial, LLC v. Gebre, May 23, 2014, Fain, M.).

Background. Plaintiff ITS Financial franchised income tax preparation businesses under the name "Instant Tax Service." In 2008, defendant Girmai Gebre purchased eight ITS franchises in Memphis, Tennessee. The franchise agreements contained non-compete provisions, prohibiting Gebre from operating or having an interest in competing businesses.

Soon after the franchises were terminated in September 2011, ITS sought and was granted a temporary restraining order (TRO), and later a preliminary injunction, preventing Gebre from operating a competing tax preparation business in the Memphis area. The TRO entered by the trial court barred Gebre from operating or using signage as an Instant Tax Service office, or diverting any customers to a competing income tax preparation business anywhere within a ten mile radius of Instant Tax Service offices within twelve designated zip codes. Gebre denied competing with ITS or violating the non-compete provisions of the franchise agreements, only admitting to working as a "bookkeeping consultant" for competing income tax preparation business Star Tax, LLC.

In September 2012, the lower court found that Gebre, in fact, owned and operated Star Tax, in violation of the franchise agreements' non-compete provisions. Based on estimated earnings of over $374,000 made by Star Tax during the 2012 tax season, the court awarded ITS $300,000 in sanctions and over $120,000 in damages for breach of contract, and entered a permanent injunction against Gebre. Gebre appealed the contempt and sanctions awards, alleging that the trial court had erred in awarding the TRO and preliminary injunction.

TRO. Gebre alleged that the TRO should not have been entered because there was no evidence that ITS would suffer immediate and irreparable harm, or that it would suffer greater harm without the injunction, or that money damages would not be an adequate remedy.

The appellate court noted that in its December 2011 complaint and motion for the TRO, ITS alleged that Gebre was diverting Instant Tax customers to a side business owned by Gebre and his family members, without the customers' knowledge that they were not utilizing Instant Tax. ITS further alleged that Gebre was availing himself of the benefits of the ITS brand, reputation, trademarks, trade secrets, and confidential and proprietary information to capture nearly all of Instant Tax's prior year customers, using data and signage that would mislead the public into believing that ITS endorsed and supported Gebre's stores. The appellate court found that these allegations made a TRO appropriate.

Gebre also argued that a TRO was inappropriate because money damages existed as an adequate remedy, but the court noted that Gebre was using a software system that allowed him to hide revenue, and thus royalties owed ITS under the franchise agreements. That, and the loss of goodwill, trade secrets, and return customers also made the TRO appropriate, the court ruled.

Preliminary injunction. Gebre maintained that a preliminary injunction should not have been granted because ITS had failed to meet two of the necessary elements: (1) a substantial likelihood that it would prevail on the merits, and (2) irreparable injury if the injunction were not granted.

In support of the first objection, Gebre had made a conclusory statement that ITS had failed to comply with the terms of the franchise agreement. But other than to express dissatisfaction with the fees and royalties he was required to pay ITS, he never presented a claim that ITS had breached the franchise agreements. Thus, the appellate court ruled, the trial court did not abuse its discretion in giving little credit to this argument.

In support of the second objection, Gebre argued that money damages could have been calculated and thus any injury was not irreparable. But the appellate court stated that there was a difference between the ability to calculate payments due under the franchise agreement, and the unquantifiable damages resulting from the loss of customers, goodwill, and trade secrets claimed by ITS. The court noted that it would be difficult for ITS to sell other franchises in that market if Gebre were permitted to breach the franchise agreements without consequence. Thus, the court rejected the argument that ITS would not suffer irreparable harm if injunctive relief were not available to it.

Contempt and sanctions. The trial court had also found Gebre in contempt of court for violating the TRO. Gebre challenged the contempt order, alleging that he had not violated a court order. But the appellate court stated that there was evidence that Gebre worked in one of three Star Tax stores, one of which retained Instant Tax signage. There was additional evidence that Star Tax LLC was incorporated ten days after the TRO was issued, and Gebre's brother was designated as owner of that business. The court concluded that there was competent credible evidence that Gebre knowingly violated the TRO and preliminary injunction, justifying the finding of contempt.

The court also upheld the $300,000 sanctions order. Competent evidence from ITS' Controller indicated that Gebre had a net profit of over $374,000 by operating competing stores in violation of the court order. The sanction requiring Gebre and Star Tax to disgorge $300,000 in profits for violating a non-compete clause that, in essence, had been incorporated into a court's order, was not an abuse of discretion, the appellate court ruled.

The case is Nos. 25416 and 25492 (2014-Ohio-2205).

Attorneys: James G. Abernathy and Todd E. Bryant for ITS Financial, LLC. Thomas M. Green (Green & Green) for Girmai Gebre. Gregory S. Page (Gregory S. Page Co., LPA) for Star Tax, LLC.

Companies: ITS Financial, LLC; Star Tax, LLC.

Cases: FranchisingDistribution OhioNews