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JTH Tax, Inc. v. Magnotte

United States District Court, E.D. Michigan, Southern Division

January 10, 2020

JTH TAX, INC. d/b/a LIBERTY TAX SERVICE, Plaintiff,
v.
CLAUDIA MAGNOTTE, PAUL MAGNOTTE, and RELIABLE INCOME TAX, LLC, Defendants.

          ORDER PARTIALLY GRANTING PLAINTIFF'S MOTION FOR TEMPORARY RESTRAINING ORDER AND PRELIMINARY INJUNCTION (ECF NO. 22.)

          PAUL D. BORMAN UNITED STATES DISTRICT JUDGE

         I. Introduction

         Before the Court is Plaintiff JTH Tax, Inc. d/b/a Liberty Tax Service's (Liberty) Motion for Temporary Restraining Order and Preliminary Injunctive Relief. (ECF No. 22.) In it, Liberty requests a temporary restraining order and preliminary injunction enforcing the post-termination obligations contained in its Franchise Agreements with former franchisee Defendant Reliable Income Tax, LLC (Reliable), owned by Defendants Claudia and Paul Magnotte (the Magnottes) and non-party Lubove Cunningham. (ECF No. 22, Motion, PgID 383, 388.) Liberty filed its Motion on December 12, 2019. No. Defendant filed a response, and the time for so doing has expired. E.D. Mich. LR 7.1(e)(1)(B). The Court finds that the facts and legal arguments are adequately presented in the papers and brief, and will therefore resolve the motion without oral argument. E.D. Mich. LR 7.1(f)(2). For the reasons below, the Court grants the motion insofar as it seeks a preliminary injunction against the Magnottes and denies the remainder of the motion.

         The Court has no power to grant relief against Reliable because, though a summons was issued for Defendant Reliable (ECF No. 8), Plaintiff has not filed any proof that Reliable was properly served, as required by Federal Rule of Civil Procedure 4(1)(1). Further, Reliable has not attempted to defend itself. For instance, even though, as a corporate entity, it must be represented by counsel in federal court, no attorney has filed an appearance on its behalf. United States v. 9.19 Acres of Land, 416 F.2d 1244, 1245 (6th Cir. 1969) (“[A] corporation cannot appear otherwise than through an attorney.”) This failure to defend could be the result of lack of proper service. If Reliable was properly served, Liberty is free to seek relief against it through the clearly established “sequence of steps required of one seeking judgment by default.” United Coin Meter Co., Inc. v. Seaboard Coastline R.R., 705 F.2d 839, 844 (6th Cir. 1983). Until then, the Court cannot grant relief against Reliable, so, to the extent the instant motion seeks injunctive relief against Reliable, it is denied.

         II. Facts

         On December 13, 2013, Reliable, an LLC owned by the Magnottes and Lubove Cunningham, entered its first Franchise Agreement with Liberty. (ECF No. 22-4, Exhibit C, PgID 487-513.) The Magnottes and Ms. Cunningham agreed, on behalf of Reliable, to follow Liberty's instructions and pay it royalties in exchange for the exclusive right to use Liberty's trademarks, confidential information, software, and other proprietary information within the territory designated MI304-a portion of Warren, Michigan. (See id) On December 7, 2016, the Magnottes and Ms. Cunningham signed two more Franchise Agreements on behalf of Reliable, this time for territories MI061, also in Warren, and MI112, in Clinton Township. (ECF Nos. 22-2 & 22-3, Exhibits B & C, PgID 425-85.)

         Each of the Franchise Agreements had the following relevant terms: (1) a guaranty that the individuals signing on behalf of an entity as the franchisee agree “jointly and severally to perform all the obligations in and relating to this Agreement;”[1] (2) a choice-of-law provision stating that “Virginia law governs all claims that in any way relate to or arise out of this Agreement;” (3) a two-year post-termination covenant not to compete within a 25-mile radius around the territory; (4) a two-year post-termination covenant not to solicit any person or entity served by the Liberty franchise within a 25-mile radius around the territory for the purpose of offering tax services; and (5) post-termination obligations that include (a) selling back to Liberty equipment, signs, trade-fixtures, and furnishings used in the franchise, (b) ceasing to identify or holding out as a Liberty franchisee or former franchisee or using Liberty Marks in any way, (c) transferring to Liberty all phone numbers, listings, and advertisements used for the franchise, (d) delivering to Liberty “any original and all copies, including electronic copies and media, of lists and other sources of information containing the names, addresses, email addresses, or phone numbers of customers, ” (e) delivering to Liberty “any originals and all copies, including electronic copies and media, containing customer tax returns, files, and records, ” and (f) returning Liberty's Operations Manual and any updates to it. (ECF Nos. 22-2, 22-3, & 22-4, Exhibits A, B, & C, PgID 441-42, 447, 450, 472-73, 478, 481, 499-501, 505, 507.)

         On October 4, 2017 and January 9, 2018, Liberty sent two Notices to Cure Default to Reliable, the first based on its failure to “pass IRS EFIN suitability” and the second based on a monies-past-due balance of $218, 027.84. (ECF Nos. 22-6 & 22-7, Exhibits E &F, PgID 522-23, 525.) On January 16, 2018 Liberty terminated all three Franchise Agreements. (ECF No. 22-8, Exhibit G, PgID 527-28.) The letter notifying the Magnottes and Ms. Cunningham of the termination also reminded them of their post-termination obligations. (Id.)

         Despite the post-termination obligations, including the covenants not to compete or solicit, in January of 2019 Ms. Magnotte launched a Facebook page for “Phoenix Tax.” (ECF No. 22-9, Exhibit 22-9, PgID 530-39.) On the page, Phoenix Tax identifies itself as a “Tax Preparation Service” and lists its principal place of business as 26815 Kaiser, Roseville MI. (Id. at PgID 530.) That address is the registered office of Reliable. (ECF No. 22-5, Exhibit D, PgID 520.) It is also within 25 miles of all three subject-territories of the Franchise Agreements. (See ECF Nos. 22-2, 22-3, & 22-4, Exhibits A, B, & C, PgID 453, 484, 509.) After the launch of the Facebook page, the Magnottes, under the name Phoenix Tax, sent letters to former Liberty customers saying, “[w]e've done your taxes in the Past and we would really love to do you [sic] taxes this year.” (ECF No. 22-11, Exhibit J, PgID 545-46.) The letters also contained information on how to find Phoenix Tax on Facebook. (Id. at PgID 546.)

         The Magnottes did not perform several other post-termination obligations. As of December 10, 2019, the Magnottes have not returned client files containing customer lists, past tax returns, files, and other customer information, nor have they returned Liberty's confidential Operations Manual. (ECF No. 22, Declaration of Anthony Cali, PgID 420, ¶¶ 22-23.) Mr. Magnotte has not, as of that same date, updated his LinkedIn profile to reflect that his is no longer a Liberty Franchisee- he still lists himself as “Owner at Liberty Tax Service” (Id. at PgID 419, ¶ 18; ECF No. 22-10, Exhibit I, PgID 541.)

         Liberty's Regional Director Anthony Cali states that the Magnottes' actions have caused Liberty to suffer, and continue to cause Liberty to suffer “the loss of customer goodwill and loyalty; loss of business opportunities and relationships to provide tax preparation services and related services; loss of customers; loss of profits; loss of franchisee stability, loss of ability to sell other franchise; loss of competitive advantage in Warren and Roseville, Michigan and the MI061, MI112, and MI304 Territories; attorneys' fees; and cost of this action.” (ECF No. 22, Declaration of Anthony Cali, PgID 421.)

         III. Standard of Review

         A preliminary injunction is “an extraordinary remedy that may only be awarded upon a clear showing that the plaintiff is entitled to such relief.” Winter v. Natural Resources Defense Council, Inc., 555 U.S. 7, 22 (2008) (citation omitted). Plaintiff bears the burden of demonstrating entitlement to preliminary injunctive relief. Leary v. Daeschner, 228 F.3d 729, 739 (6th Cir. 2000). Such relief will only be granted where “the movant carries his or her burden of proving that the circumstances clearly demand it.” Overstreet v. Lexington-Fayette Urban County Gov't, 305 F.3d 566, 573 (6th Cir. 2002).

         When considering a motion for injunctive relief, the Court must balance the following factors: (1) whether the movant has a strong likelihood of success on the merits, (2) whether the movant would suffer irreparable injury absent preliminary injunctive relief, (3) whether granting the preliminary injunctive relief would cause substantial harm to others, and (4) whether the public interest would be served by granting the preliminary injunctive relief. Id. “These factors are not prerequisites, but are factors that are to be balanced against each other.” Id. “Although no one factor is controlling, a finding ...


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