JACKSON HEWITT INC. v. CLINE
Filing
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OPINION fld. Signed by Judge Madeline C. Arleo on 10/29/15. (sr, )
NOT FOR PUBLICATION
UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY
___________________________________
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JACKSON HEWITT INC.,
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Plaintiff,
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v.
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DAVID G. CLINE,
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Defendant.
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___________________________________ :
Civil Action No. 14-6931
OPINION
ARLEO, UNITED STATES DISTRICT JUDGE.
THIS MATTER comes before the Court upon the Motion of Plaintiff Jackson Hewitt, Inc.
(“Plaintiff”) for a preliminary injunction enjoining Defendant David G. Cline (“Defendant” or
“Cline”) from activities in violation of the post-termination obligations imposed by several
franchise agreements between the parties. Pursuant to Fed. R. Civ. P. 78, no oral argument was
heard. After reviewing the submissions of the parties, and for the reasons set forth below,
Plaintiff’s application for preliminary injunction is GRANTED.
I.
BACKGROUND
Plaintiff Jackson Hewitt is a Virginia corporation with its principal place of business
located in Parsippany, New Jersey. Dkt. No. 1, Compl. ¶ 1. Defendant David Cline is a citizen
and resident of the State of Arizona, and former Jackson Hewitt franchisee and guarantor of his
obligations under the franchise agreements between himself and Jackson Hewitt. Id. ¶ 2. Jackson
Hewitt and Cline entered into four franchise agreements for the license and operation of income
tax preparation businesses within defined geographic territories in Arizona and California. Id. ¶¶
1
19-40; Dkt. No. 9-2, Declaration of James S. Coons, dated March 6, 2015 (“Coons Decl.”) at Exs.
1-4)). By letter dated June 10, 2014, Jackson Hewitt sent Cline a letter informing him that he was
in default of the franchise agreements for failing to pay his financial obligations in accordance
with the terms of the agreement. Dkt. No. 1, Compl. ¶ 48. The Notice of Default also informed
Cline that he must cure any defaults by June 20, 2014 or Jackson Hewitt may terminate the
agreements. Id. ¶ 49. By letter dated August 25, 2014, Jackson Hewitt sent Cline a letter informing
him that he was still in default, and advised Cline that Jackson Hewitt was terminating the franchise
agreements effective immediately. Id. ¶ 50.
On November 5, 2014, Jackson Hewitt filed a Complaint in this Court for various breaches
of the franchise agreements. Dkt. No. 1. On March 6, 2015, Jackson Hewitt filed an Order to
Show Cause against Cline. Dkt. No. 9. On March 12, 2015, the Court denied Jackson Hewitt’s
request for expedited treatment of its Order to Show Cause. Dkt. No. 11. On March 26, 2015,
Jackson Hewitt filed the instant Motion seeking a preliminary injunction compelling Defendant to
adhere to their post-termination obligations pursuant to the parties’ franchise agreements. Dkt.
No. 17. Jackson Hewitt seeks: (1) adherence to the two year non-compete provision of the
franchise agreements, (2) return to Jackson Hewitt of all client files, (3) return of all trade secret,
confidential, and proprietary information, and (4) transfer of all Jackson Hewitt telephone numbers
owned by Defendants to Jackson Hewitt, and notification by Defendant to the telephone company
that Defendant no longer has the right to use such telephone numbers.
Jackson Hewitt alleges that, despite Cline’s contractual obligations, Cline is engaged in
operation of competing income tax return preparation businesses under the names “Classic
Accounting” and “Abacus Accounting” in at least three of his former franchise territories in
Arizona and California, in the same exact locations as his former Jackson Hewitt franchises
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locations and using the same employees he used while a Jackson Hewitt franchisee. Dkt. No. 99, Declaration of Brandon Chanley, dated March 6, 2015 (“Chanley Dec.”) ¶¶ 3-8. In addition,
Plaintiff claims that a recent marketing “flyer” obtained by Jackson Hewitt indicated that Cline is
currently running advertising directed at clients of Jackson Hewitt, promoting tax preparation
services at one of his locations under the “Classic Accounting” name. Id. ¶ 10. 1 Jackson Hewitt
also alleges that on March 3, 2015 and March 5, 2015, telephone calls placed to four numbers
associated with Cline’s former Jackson Hewitt franchised business confirmed that Cline, and/or
those acting in concert or participation with him, are operating competing tax preparation
businesses at the same addresses that Cline operated as a Jackson Hewitt franchisee, using Jackson
Hewitt’s client files and telephone numbers, and retaining at least some of the same employees
and tax preparers that Cline used while a franchisee. Id. ¶¶ 6-8.
Jackson Hewitt is currently operating in Walmart locations in each of the territories where
Cline is allegedly operating competing tax preparation businesses in order to provide services to
former Jackson Hewitt customers in those areas and retain the goodwill that had been developed
under the brand in those areas. Id. ¶ 11. Jackson Hewitt contends that marketing efforts, including
media advertising, local promotional activities, and calls to former customers have already taken
place in those territories. Id. Jackson Hewitt alleges that Cline’s operations as an “independent”
or other competitor in the territories will severely undercut the efforts of Jackson Hewitt to secure
business. Plaintiff alleges that its business is being irreparably harmed by Cline’s activities in his
former franchise territories.
1
The “flyer” says: “ATTENTION WAL-MART CLIENTS the Jackson Hewitt Tax Service in the
Walmart is NOT the same Jackson Hewitt that did your taxes last year.” The flyer directs
customers to visit one of the Classic Accounting locations. Chanley Decl. ¶10.
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Defendant filed an opposition on April 23, 2015. Defendant claims that on October 23,
2014, at the termination inspection, he turned over all original Jackson Hewitt client files to
Brandon Chanley, Jackson Hewitt Senior Operations Director. Dkt. No. 20, at 1. He further claims
that all items with any Jackson Hewitt marks or trade secrets have been destroyed, with the
exception of exterior signs which was waiting a permit for removal. Id. Defendant contends that
Classic Accounting, Inc., ceased operations on January 1, 2014, and all assets, including phone
numbers were sold at that time. Id. Cline claims that he does not own, manage or otherwise direct
the tax preparation firms operating in his former locations. Id. Defendant does admit, however,
that he prepares individual tax returns for people to earn a living, and because Arizona is a Right
to Work State, the non-compete provisions are therefore “grievous and an undue hardship.” Id.
Cline also claims that he does not solicit any clients or do any advertising. Id.
In response, Plaintiff contends that, despite Defendant’s claims, Classic Accounting, Inc.,
remains an active corporation. According to Plaintiff, a search of the Arizona Corporation
Commission website indicates that Classic Accounting, Inc. filed an Annual Report on November
28, 2014 and is an active corporation in Arizona. Dkt. No. 22-1, Ex. A., 2014 Annual Report. In
that report, Defendant Cline is listed as the Statutory Agent of Classic Accounting, Inc. with
Tamara Cline, who Plaintiff’s claim is Defendant’s wife, listed as President/CEO of Classic
Accounting, Inc. Id. Plaintiff explains that in an Annual Report filed in 2013 by Classic
Accounting, Inc., Cline was listed as the Statutory Agent, President, and CEO. Dkt. No. 22-3, Ex.
C, 2013 Annual Report. Plaintiff claims that, to the extent Defendant’s wife is now running the
day-to-day operations of Classic Accounting, the non-compete is broad and encompasses
competition by Tamara Cline and all those acting in concert or participation with Defendant.
Moreover, Plaintiff explains that the address listed for Classic Accounting in the 2013 and 2014
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Annual Reports is the same address as one of Defendant’s former Jackson Hewitt franchise
locations. Plaintiff contends that this is the same address as contained on the marketing “flyer”
directed at clients of Defendant’s former Jackson Hewitt franchises, promoting tax preparation
services under the Classic Accounting name.
The termination obligations are set forth in Paragraph 20.3 of the franchise agreements.
Coons Decl., Exs. 1-4, Dkt. Nos. 9-3 to 9-6. Pursuant to Paragraph 20.3(h) of the Franchise
Agreement, Defendant was obligated to comply with certain post-termination covenants found in
Paragraph 18 therein. Paragraph 18.2 of the Franchise Agreement, in turn, provides that “[f]or a
period of two (2) years after the earlier of (1) the effective date of termination for any reason, or
(2) expiration of this Agreement, or (3) the date of the sale of the Franchised Business or a majority
of its assets, you may not directly or indirectly prepare or electronically file individual income tax
returns, teach tax courses, offer Bank Products or own, engage in. operate, manage, purchase,
invest in . . . franchise, lend money to, lease or sublease to, or agree to sell or sell all or a majority
of the assets of the Franchised Business to any Competing Tax Business as defined herein within
the Territory or within an area ten (10) miles outside the boundaries of the Territory.” See, e.g.,
Coons Decl., Exs. 1-4, Dkt. Nos. 9-3 to 9-6, ¶ 18.2. 2 A “Competing Tax Business” is defined as
“any business that offers tax return preparation, electronic filing, Bank Products or other services
offered by the Jackson Hewitt Tax Service Operating System.” Id., Definitions.
Pursuant to Paragraph 20.2 of the Franchise Agreements, Jackson Hewitt could terminate
the Franchise Agreement for good cause for various reasons including, Defendant’s failure to pay
any sums due under the Franchise Agreement or any other collateral agreement within five days
2
The territories are defined by postal code. The number of postal codes differed by agreement,
ranging from one postal code to seven. Compare Coons Decl., Ex. 1, Schedule A with Coons
Decl., Ex. 2, Schedule A.
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after delivery of the notice to cure. Id. ¶ 20.2. In the event of termination of the Franchise
Agreements, Paragraph 20.3(a)-(j) require Defendant to comply with the following posttermination obligations, among others: immediately pay all amounts owed under the Franchise
Agreement and all Collateral Agreements; return to Jackson Hewitt all originals and copies of all
trade secret, confidential and proprietary materials as defined in paragraph 12.3; delete all
confidential materials and client files from computers and hard drives; comply with the posttermination covenant not to compete contained in paragraph 18 of the Franchise Agreements;
notify the telephone company and all listing agencies and advertising directories for the Territories
that Defendant no longer has the ruse to use such telephone numbers and listings, and authorizing
the transfer of same to Jackson Hewitt. Id. ¶ 20.3.
Paragraph 12.3, in turn, identifies “trade secret, confidential and proprietary materials” as
the identities of the customers served by Defendant (including their names, addresses, phone
numbers, social security numbers and financial and tax information), tax return copies, customer
lists, mailing labels, W–2s, 1099s, 8453s, work in progress, all “books” and “archives” program
disks, book keeping files and any other documents related to services performed on behalf of
customers.
Id. ¶ 12.3.
Pursuant to Paragraph 12.3.2, Defendant acknowledged that “the
unauthorized use or disclosure” of such “trade secrets, confidential and proprietary information
will cause irreparable injury” and that “damages are not an adequate remedy.” Id. ¶ 12.3.2.
II.
DISCUSSION
A party seeking a preliminary injunction must show: “(1) a likelihood of success on the
merits; (2) that it will suffer irreparable harm if the injunction is denied; (3) that granting
preliminary relief will not result in even greater harm to the nonmoving party; and (4) that the
public interest favors such relief.” Kos Pharm., Inc. v. Andrx Corp., 369 F.3d 700, 708 (3d Cir.
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2004). 3
Having considering Plaintiff’s arguments raised in support of the application and
Defendant’s opposition thereto, the Court finds that Jackson Hewitt has made a sufficient showing
to impose the preliminary injunction.
A. Likelihood of Success
The party seeking a preliminary injunction must demonstrate a “reasonable probability of
eventual success in the litigation.” Bennington Foods LLC v. St. Croix Renaissance, Group, LLP,
528 F.3d 176, 179 (3d Cir. 2008). In evaluating whether a movant has satisfied this first part of
the preliminary injunction standard, “[i]t is not necessary that the moving party’s right to a final
decision after trial be wholly without doubt; rather, the burden is on the party seeking relief to
make a prima facie case showing a reasonable probability that it will prevail on the merits.” Oburn
v. Shapp, 521 F.2d 142, 148 (3d Cir. 1975).
Jackson Hewitt has shown a likelihood of success on the merits. It has made a prima facie
showing that Defendant is in breach of the Franchise Agreements by operating a competing tax
business within at least three of his former Jackson Hewitt franchise territories, in the exact same
locations he operated his former Jackson Hewitt franchises businesses, in violation of the
covenants not to compete in Paragraph 18 of the Franchise Agreements. Jackson Hewitt has also
shown Defendant has also failed to comply fully with his post-termination obligations pursuant to
Paragraph 20 of the Franchise Agreements. To the extent Cline is soliciting, or assisting in
solicitation of customers, or otherwise using client files and telephone numbers associated with
Cline’s former Jackson Hewitt franchised businesses, he is violating Paragraphs 12.3, 18, and 20
of the Franchise Agreements.
3
Since this Court presently exercises its diversity jurisdiction over this action, the law to be
applied is that of the forum state—New Jersey. See American Cyanamid Co. v. Fermenta
Animal Health Co., 54 F.3d 177, 180 (3d Cir.1995).
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Although Defendant denies certain of Jackson Hewitt’s factual allegations, he supplies no
evidence in support. Moreover, to prevail on this motion, Jackson Hewitt is not required to prove
its case; it need only snow a likelihood, or “reasonable probability,” that it will prevail based on
its allegations. It has done so here.
B. Irreparable Harm
The Court likewise finds that Jackson Hewitt has met its burden of demonstrating
irreparable harm that will result if restraints are not imposed at this time. Where a party is in
possession of another party’s confidential information and is poised to use or disclose such
information, there is a likelihood of irreparable harm. See, e.g., National Starch and Chem. Corp.
v. Parker Chem. Corp., 219 N.J. Super. 158, 162, 530 A.2d 31 (App. Div. 1987) (“Lauria knew
trade secrets of National, and . . . under the circumstances there was sufficient likelihood of
‘inevitable disclosure,’ with consequent immediate and irreparable harm to National, to warrant
interlocutory relief preserving the status quo pending trial.”) (internal citations omitted); Ace Am.
Ins. Co. v. Wachovia Ins. Agency Inc., 306 F. App’x. 727, 732 (3d Cir. 2009) (noting that
“disclosure of confidential information or trade secrets may constitute irreparable harm”) (citing
Campbell Soup Co. v. ConAgra, Inc., 977 F.2d 86, 92 (3d Cir. 1992)). This type of irreparable
harm flows both from Defendant’s failure to return all client files and from Defendant’s potential
use-or inevitable disclosure-of information contained therein. That such circumstances may
constitute irreparable harm is not only recognized by New Jersey law, but was expressly
recognized by both parties in agreeing to the terms of the Franchise Agreement. See, e.g., Coons
Decl., Exhs 1-4, ¶ 12.3.2. Thus, Jackson Hewitt has succeeded in demonstrating the existence of
immediate irreparable harm.
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C. Balance of Hardships & Public Interest
The Court also finds that Jackson Hewitt has satisfied the remaining two factors—the
balancing of hardships and the public interest. The Court “must ‘balance the hardships’ to ensure
that the injunction does not harm the defendants more than denial of the injunction would harm
the plaintiff.” Nat’l Reprographics, Inc. v. Strom, 621 F. Supp. 2d 204, 230 (D.N.J. 2009). Here,
the Court finds that the hardship Jackson Hewitt will suffer outweighs any hardship to Defendant.
The franchise agreement’s two-year time restriction and ten-mile geographic restriction with
respect to the bounded territories are reasonable. See Jackson Hewitt Inc. v. Childress, No. 06909, 2008 WL 199539, at *7 (D.N.J. Jan. 22, 2008) (finding no undue hardship where agreement
imposed two-year and ten-mile restrictions) (internal citations omitted). These limitations do not
impose any restrictions on Defendant’s ability to engage in his livelihood outside of the geographic
area; nor do they prevent him from competing against Jackson Hewitt so long as he does not rely
on the benefits derived from his time as a Jackson Hewitt franchisee. See Nat’l Reprographics,
Inc. v. Strom, 621 F. Supp. 2d at 228, 230. Moreover, Defendant expressly accepted these terms
and does not claim that he was somehow unaware of them. On the other hand, the hardship faced
by Jackson Hewitt should Defendant be permitted to retain the client files and potentially utilize
such information in competing against Jackson Hewitt is significant.
Lastly, the public interest is not at risk in the instant case. The public would not be
impacted by the inability of the community members in the protected area to have their taxes
prepared by Defendant. Nor does Defendant contend that he is the only tax preparation business
in the area. See Childress, 2008 WL 199539, at *8 (finding no harm to public interest where
“[t]here are undoubtedly ample tax return preparation businesses in the area”). Moreover, “the
public has an interest in upholding freely negotiated and reasonable business contracts.” Nat’l
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Reprographics, Inc. v. Strom, 621 F. Supp. 2d at 229. As such, the public interest is best served
by holding Defendant to the reasonable terms of the Franchise Agreement.
III.
CONCLUSION
For the reasons contained herein, Plaintiff’s application for a preliminary injunction is
GRANTED. An appropriate order follows this opinion.
Dated: October 29, 2015
/s Madeline Cox Arleo
HON. MADELINE COX ARLEO
UNITED STATES DISTRICT JUDGE
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