Franchise 101: Not at Liberty to Change Venue; and Blurry Choice of Remedies

Franchisor 101: Not at Liberty to Change Venue

A Dallas-based federal district court denied a franchisor’s request to keep its action against former franchisees in Texas and transferred the action to the Eastern District of Virginia.

Plaintiff JTH Tax, LLC dba Liberty Tax Service (“Liberty”) is a nationwide tax preparation service. Liberty filed suit in Northern District of Texas against franchisees, who are all Houston residents located in the Southern District of Texas. Liberty alleged the franchisees violated the Defense Trade Secrets Act and breached their franchise agreements. The franchisees moved to dismiss or alternatively, to transfer to Virginia, based on the location of the franchisees, the absence of ties to the Fort Worth Division of the Northern District of Texas, and the contractual choice of law provisions at issue.

Liberty argued the court should keep the action in the Northern District of Texas. But the court determined that transferring venue to the Eastern District of Virginia heavily favored interests of convenience, efficiency, and justice. The only basis asserted by Liberty for keeping the action in Texas was that the franchisees consented to jurisdiction in Fort Worth under their franchise agreements. The court found the franchise agreements at issue “unequivocally choose” the state law of Virginia as their governing law and the state or federal courts of Virginia as their jurisdiction and venue of choice.

When filing suit against a franchisee, franchisors and their counsel should be wary of choosing a venue not contemplated in written agreements between the parties and not proper venue for at least one defendant. Further, upon a defendant’s motion to transfer venue based upon plain language of an agreement, here—Virginia, franchisors and their counsel should consider whether to oppose such request as the courts are quick to point out meritless arguments when relevant written agreements “unequivocally” identify choice of law and venue.

JTH Tax, LLC v. Cortorreal, No. 4:23-cv-0173-P (N.D. Tex Jul. 20, 2023) 2023 U.S. Dist. LEXIS 124998

Franchisee 101: Blurry Choice of Remedies

A Texas federal court denied a franchisor’s request to enjoin operations of a former franchisee’s competing optical retail stores for failure to establish likelihood of success on a claim of trade dress infringement. The district court nevertheless granted an injunction on the grounds that the former franchisee’s operations violated the parties’ non-compete agreement.

Plaintiff Luxottica of America, Inc. (“Luxottica“) and Defendants Jeffrey and Dawn Gray, and Brave Optical, Inc., (collectively, ”Brave”) were parties to two franchise agreements with Luxottica after Brave purchased two Pearle Vision retail stores from a former franchisee in 2016 and assumed the franchise agreements. The agreements provided that upon termination, Brave and the Grays would not engage or participate in a competing business within a three-mile radius of the stores for one year after the franchise ended.

In 2017, Brave filed a state action against the selling franchisee and later added Luxottica as a defendant, claiming fraudulent misrepresentations in connection with the sale of one of the stores. A jury found in favor of Brave in the state court action in September 2022, finding Luxottica committed fraud by non-disclosure and conspiracy to defraud Brave relating to the franchise agreement, and awarded Brave monetary damages. Thereafter, Brave rebranded the first store as Brave Optical.

After state court proceedings concluded, Luxottica sought a preliminary injunction in the federal action. That court denied the motion in part, finding Luxottica failed to meet its burden as to Brave’s alleged continued use of the Pearle Vision trademarks. Nevertheless, the court granted the injunction, finding Luxottica met its burden that the Grays engaged in or partcipated in a competing business in violation of the parties’ non-compete agreements.

Luxottica established it was likely to succeed on its contract claims because there was a valid contract, performance under the franchise agreements, and breach of the non-compete agreements by the Grays, resulting in damages to Luxottica. The federal court rejected the Grays’ argument that the non-compete agreements were invalid and unenforceable based on the state action’s jury verdict against Luxottica since the Grays elected actual damages as their remedy instead of rescinding the agreements to render them void.

Luxottica established irreparable harm because Luxottica would lose out on trade and its goodwill would diminish if the Grays were allowed to continue operations.

In balancing hardships, Luxottica prevailed because “immediate closure” of the Grays’ business “is not enough to push the balance in their favor,” especially since the one-year non-compete term would end on October 19, 2023, and as of the date of order in July 2023, Brave Optical would be closed only for three months. Finally, the injunction served the public interest because the law favors private parties to enter into and enforce valid agreements without fear that courts will rewrite them.

Franchisees and their counsel must carefully consider available remedies and future impact of remedy selection. In the state action, the franchisees elected to enforce the agreements based on fraudulent misrepresentations and recover monetary damages rather than rescind the agreements based on fraudulent inducement—they can’t have both. The franchisor in the federal action then enforced the non-compete agreements, which the court found consistent with Texas Covenants Not to Compete Act.

Luxottica of Am., Inc. v. Brave Optical, Inc., No. 4:22-cv-244 (E.D. Tex Jul. 18, 2023) 2023 U.S. Dist. LEXIS 123702; 2023 WL 4589222