Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—W.D. Mo.: Former H&R Block franchisee enjoined from operating competing tax service, (Mar 29, 2016)

A preliminary injunction to enjoin a former H&R Block franchisee from operating a competing tax service, in violation of post-termination covenants against competition and solicitation, was granted by the federal district court in Kansas City, Missouri (H&R Block Tax Services LLC v. Clayton, March 24, 2016, Bough, S.).

H&R Block Tax Services LLC terminated its franchise license agreement (FLA) with Taxserv Computerized Tax Services, LLC after the franchisee failed to pay royalties and other sums owed under the FLA. Upon termination of the FLA, Taxserv was obligated to deliver its client list and records to Block, discontinue the use of Block’s trademarks, return all the Block franchise materials that it had been furnished, and execute documents to assign its business phone numbers to Block. The FLA also contained a covenant against competition within a 25-mile radius of the formerly franchised territory and a covenant against solicitation for a period of two years.

In addition to failing to comply with its post-termination obligations, Taxserve violated the FLA’s covenants against competition and solicitation by opening up a competing tax service within the restricted radius of the formerly franchised territory and using Block’s records to solicit clients. Block responded by filing breach of contract claims against Taxserv, Marshall Clayton, and the competing tax service TaxServ Inc. Block then filed a motion for a preliminary injunction to enjoin the defendants from violating the terms of the FLA and the conversion agreement.

The court granted the motion after determining that all of the relevant factors supported the entry of a preliminary injunction to preserve the status quo and to protect Block from ongoing irreparable injury. First, Block was likely to succeed on the merits of its claim because: (1) Taxserve’s failure to pay fees owed to Block, and its failure to timely cure its defaults, constituted good cause for termination of the FLA; (2) the defendants breached their post-termination obligations by not delivering its client list and records to Block, not discontinuing it use of Block’s trademarks, not returning all the Block franchise materials that it had been furnished, and not executing documents to assign its business phone numbers to Block; and (3) the defendants breached the post-termination covenants against competition and solicitation by operating a competing business within the restricted radius and using Block records to solicit clients.

Furthermore, Block would suffer irreparable harm if a preliminary injunction was not granted because the operation of the competing tax service would drastically inhibit Block’s ability to re-establish its business in the formerly franchised territory. The balancing of harms weighed in favor of Block because the injury threatened to Block by denying the preliminary injunction would be irreparable while the injury to the defendants, if injunctive relief was granted, was entirely self-inflicted and could be remedied by an award of damages. The public interest was furthered because of the recognized benefits of reasonably enforced noncompetition covenants and the preservation of the enforceability of contractual relationships.

The case is No. 4:16-cv-00185-SRB.

Attorneys: Anthony J. Durone (Berkowitz Oliver LLP) for H&R Block Tax Services LLC.

Companies: H&R Block Tax Services LLC; Taxserv Computerized Tax Services, LLC; TaxServ Inc.

Cases: FranchisingDistribution MissouriNews