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Jackson Hewitt Inc. v. Childress

2008 WL 199539 (U.S. Dist. Ct. D. N.J. 2008) (Unpublished)

FRANCHISES; NON-COMPETITION — The non-competition covenant in a franchise agreement is similar to a covenant not to compete ancillary to the sale of a business, which is legal and freely enforceable in New Jersey.

A pair of franchise agreements permitted a franchisee to operate tax return preparation businesses in various territories in the State of Alabama using the franchisor’s trade names, trademarks, and proprietary business methods and software. The agreements called for application of New Jersey law. Their terms ranged from ten to fifteen years. After just four years, the franchisee unilaterally terminated the agreements by ceasing to operate the tax return preparation businesses that he was required to operate. Upon termination of the agreements, the franchisee was obligated to comply with various covenants, including a covenant not to compete and covenants related to the franchisor’s confidential and proprietary information. The franchisee breached the covenant not to compete by engaging in the operation of a competing tax return preparation business in the same building in which he formerly operated his franchise. In addition, the franchisee failed to return the franchisor’s trade secrets and confidential and proprietary information, and in the meantime had utilized these trade secrets and confidential and proprietary information for his own gain.

The franchiser sued seeking damages and to prevent the franchisee from utilizing its trade secrets and confidential and proprietary information. The franchisee counterclaimed, alleging that the franchiser fraudulently induced him to enter into the agreements through pre-contractual misrepresentations. The Court noted that the franchisee agreed not to compete for a period of two years after the agreement’s effective termination date, and that the franchisee’s failure to operate the two franchises resulted in a unilateral termination of the agreements, thereby triggering the franchisee’s post-termination obligations, with which he refused to comply. Therefore, the Court granted summary judgment to the franchisor in finding the post-termination obligations as valid and enforceable as a matter of law. It held that, under New Jersey law, the covenant at hand was similar to a covenant not to compete ancillary to the sale of a business, which is legal and freely enforceable. Such a covenant has been recognized by New Jersey as a measure to safeguard legitimate interests including the protection of trade secrets, confidential information, and customer relationships. The Court found that the covenant at hand imposed no undue hardship on the franchisee, and was not injurious to the public. Therefore, the Court found that the franchisor was entitled to a permanent injunction enjoining the franchisee from violating all covenants. Additionally, the court noted that this was a sole remedy, because the franchisor’s claims for damages had previously been discharged in the ex-franchisee’s bankruptcy. It also found no merit in the franchisee’s counterclaim based on fraudulent misrepresentations because any alleged reliance by it based upon representations not contained in the franchise agreement could not survive the agreement’s integration clause and disclaimers.

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