N.D. Ga.

National Tax Preparation Service Denied Preliminary Injunction Against Former Franchisee

JTH Tax LLC d/b/a Liberty Tax Service v. Leslie N. Pierce et al., Civil Action No. 1:22-CV-1237-SEG (N.D. Ga. July 1, 2022)

Plaintiff JTH Tax LLC filed suit against Defendants Leslie Pierce, James Axley, LNPA Services LLC, AX Holdings Inc., and Nest Financial Services LLC on March 29, 2022 for breach of franchise agreement, trade secret misappropriation under the federal Defend Trade Secrets Act, and common law conversion and tortious interference with a contract. Defendants Pierce and Axley are former franchisees of Plaintiff who operates a national tax preparation service. Defendants owned and operated a Liberty Tax Service franchise in Georgia from 2012 to around 2019 first as individuals and later through LNPA Services LLC, also a named Defendant. Today, Defendants Pierce and Axley operate an independent tax preparation business called Nest Financial, whose sole member is Ax Holdings, Inc. and its sole shareholders are Pierce and Axley. On the same day the Complaint was filed, Plaintiff filed a motion for preliminary injunction seeking an order precluding Defendants from competing with Plaintiff’s tax preparation business and using any customer lists and/or confidential information obtained while franchisees for Plaintiff. It is undisputed that the franchise agreement between Plaintiff and Defendants include a non-compete provision prohibiting Defendants from “prepar[ing] or electronically fil[ing] income tax returns . . . within twenty-five (25) miles” both during the term of the agreement and for two years after. It is also undisputed that the franchise agreement expired on October 31, 2017, five years after it was entered, although the parties continued to deal with one another on at “at will” basis for approximately two years following the expiration of the agreement. The parties attempted to negotiate a new franchise agreement in 2019 but those attempts failed, at which point Defendants stopped operating the franchise but “retained at least some paper documents belonging to Liberty, including a binder.” Defendants began to operate their independent tax preparation service, Nest Financial, beginning in late 2019 or early 2020. Plaintiff sent Defendants a number of notices in early 2020 alleging that Defendants failed to make payments owed to Plaintiff under the franchise agreement without resolution.

Plaintiff sought a preliminary injunction as to each of its causes of action. Regarding Plaintiff’s cause of action for breach of the franchise agreement and post-termination obligations, the Court denied Plaintiff’s motion on two grounds. First, while there was significant dispute between the parties regarding when the non-compete provision expired, i.e., whether it expired when the franchise agreement terminated automatically five years after entry (in October 2017) or two years later in the fall 2019, the Court found that regardless, Plaintiff unreasonably delayed in seeking a preliminary injunction for nearly two years despite evidence that Plaintiff “knew about or at least had reason to suspect the substance of Nest Financial’s operations in early 2020.” As a result, Plaintiff was unlikely to be able to demonstrate than any harm it suffered was, in fact, irreparable and an injunction was disfavored. Second, the Court cited Georgia courts’ reluctance to issue “an injunction based on a noncompete agreement where the agreement’s original term has expired” and considered whether such enforcement efforts are consistent with Georgia public policy. The Court found that such an order would be inconsistent, as granting an injunction under such circumstances would “extend the life of the post-termination covenant beyond its two-year term” and effectively rewrite the restrictive covenant “so as to enjoin parties from competing after the covenant has expired,” which is highly disfavored under Georgia law and public policy. Because there was no likelihood of success, the Court did not need to reach any of the other preliminary injunction factors on this first cause of action.

On Plaintiff’s conversion and federal trade secrets claims, the Court again found that Plaintiff’s significant delay in moving for a preliminary injunction to enjoin Defendants from using Plaintiff’s confidential information and to return any confidential information in its possession militated against a finding of irreparable harm. For Plaintiff’s tortious interference with a contract claim, the Court again cited Plaintiff’s delay as sufficient to warrant denying Plaintiff’s request for an injunction. Additionally, the Court found that Plaintiff’s tortious interference claim was effectively duplicative of its breach of contract claim, as “the practical effect of any injunctive relief on these points would be identical: the Court would be ordering Nest Financial to stop doing business because of the noncompete covenant, and it would run into the same problems regarding Georgia law’s refusal to countenance post-termination enforcement of such covenants.” For at least these reasons, Plaintiff’s motion for preliminary injunction was denied.

Categories: N.D. Ga., PI/TRO, Trade Secrets

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