Jth Tax, Inc. v. Lee

• Decision Date: 21 September 2007
• Docket Number: No. 2:06cv486.,2:06cv486.
• Citation: 514 F.Supp.2d 818
• Parties: JTH TAX, INC. d/b/a Liberty Tax, Plaintiff, v. Ronald LEE, Defendant.
• Court: U.S. District Court — Eastern District of Virginia

Page 818

514 F.Supp.2d 818

JTH TAX, INC. d/b/a Liberty Tax, Plaintiff, v. Ronald LEE, Defendant.

No. 2:06cv486.

United States District Court, E.D. Virginia, Norfolk Division.

September 21, 2007.

COPYRIGHT MATERIAL OMITTED

Vanessa Mercurio Szajnoga, Liberty Tax Service, Virginia Beach, VA, for Plaintiff.

Ronald Lee, Rock Island, IL, pro se.

OPINION AND FINAL ORDER

REBECCA BEACH SMITH, District Judge.

This matter comes before the court on plaintiffs motion for summary judgment. For the reasons set forth below, plaintiffs motion for summary judgment is GRANTED on the issue of liability and DENIED as to an amount of damages. However, after an evidentiary hearing, the court AWARDS damages in the amount of $133,957.56 to plaintiff. In addition, the court GRANTS plaintiffs motion for a permanent injunction. Finally, the stay on defendant's counterclaim is lifted and his counterclaim is DISMISSED without prejudice, pending arbitration.

I. Factual and Procedural History

For purposes of this motion, the following facts have been admitted.¹ Plaintiff JTH Tax, Inc. ("JTH") is a corporation which specializes in franchising tax preparation businesses throughout the United States. In July 2002, defendant Ronald Lee ("Lee") purchased the rights to three Iowa territories, known as IA011, IA012, and IA013, from JTH. At that time, JTH and Lee entered into three Franchise Agreements ("the Agreements"), whereby JTH agreed to allow Lee to use its name and registered trademarks, and Lee agreed to pay certain royalty and advertising fees in exchange. In August 2002, Lee purchased a fourth Iowa territory, IA007, and signed another franchise agreement. In July 2005, Lee purchased a fifth territory in Illinois, known as ILL 103, and signed a fifth agreement. The terms of all five agreements are consistent except for the description of the specific territory.

On June 16, 2006, JTH sent Lee a Notice to Cure, informing him that he was in violation of the Agreements because he owed JTH money which was more than thirty days past due. At that time, Lee owed JTH $70,934.07 in past due royalty and advertising fees. Lee did not pay any of the money that was due. As a result, on August 10, 2006, JTH terminated Lee's franchise rights under the Agreements. At the time the Agreements were terminated, Lee owed JTH $72,056.74.

When he signed the Agreements, Lee agreed to perform certain duties in the event that the Agreements were terminated, including: ceasing to associate himself with JTH Tax, transferring all telephone numbers, returning all customer files, returning the JTH Operations Manual and adhering to non-compete and non-solicitation covenants which were part of the Agreements. Lee has refused to abide by his post-termination obligations. Despite signing the non-compete covenant, Lee and his wife have opened a new tax preparation business called U.S. Tax Service ("U.S.Tax"). The offices of U.S. Tax are within the territory covered by the non-compete covenant of the Agreements; in fact, all U.S. Tax offices are located in Lee's former JTH offices. In addition, Lee has admitted to retaining JTH's customer lists and files in violation of the Agreements. Lee also sent out solicitation letters to former JTH customers on behalf of U.S. Tax.

On August 29, 2006, JTH brought suit in this court alleging breach of contract and trademark infringement. On February 14, 2007, Lee filed an answer. On March 12, 2007, Lee filed a counterclaim to which JTH responded. JTH then filed, on March 20, 2007, a motion to stay the counterclaim and to compel arbitration pursuant to the terms of the Agreements. On June 19, 2007, this court adopted the Magistrate's Report and Recommendation, and granted JTH's motion to stay the counterclaim and to compel arbitration. On July 27, 2007, JTH filed a motion for summary judgment that is now before the court,² and Lee responded on August 13, 2007. JTH filed a reply on August 20, 2007. This motion is now ripe for review.

II. Summary Judgment

Summary judgment under Rule 56 is appropriate only when the court, viewing the record as a whole and in the light most favorable to the nonmoving party, determines that there exists no genuine issue of material fact and that the moving party is entitled to judgment as a matter of law. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248-50, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). The burden on the moving party may be discharged by showing that there is an absence of evidence to support the nonmoving party's case. Celotex Corp. v. Catrett, 477 U.S. 317, 325, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). To defeat summary judgment, the nonmoving party must go beyond the pleadings with affidavits, depositions, or other evidence to show that there is in fact a genuine issue for trial. See id. at 324, 106 S.Ct. 2548. Conclusory statements, without specific evidentiary support, are insufficient to oppose summary judgment. Causey v. Balog, 162 F.3d 795, 802 (4th Cir.1998).

A. Breach of Contract-Liability

A plaintiff asserting breach of contract³ under Virginia law must prove: "(1) a legally enforceable obligation of a defendant to a plaintiff; (2) the defendant's violation or breach of that obligation; and (3) injury or damage to the plaintiff caused by the breach of obligation." Filak v. George, 267 Va. 612, 594 S.E.2d 610, 614 (2004).

In this case, JTH has clearly shown that Lee had a legally enforceable obligation. Lee signed five separate franchise Agreements with JTH, one for each of the territories in which he operated a JTH franchise. (Compl. Ex. 1; Decl. June Montalbano, Ex. 1-5 (Mar. 20, 2007).) By signing these agreements, Lee received the right to operate JTH Tax Service franchises and to use JTH's proprietary trademarks and operating methods. (Compl. Ex. 1 ¶ 1.) In return, Lee promised to pay certain advertising and royalty fees, to comply with the terms of the Agreements, and to abide by certain post-termination obligations in the event that the Agreements were terminated. (Id. ¶¶ 1, 4(d), 4(e), 5, 9.) Lee does not dispute that he signed the Agreements with JTH.

JTH has also shown that Lee breached his obligations with JTH. Pursuant to the terms of the Agreements, JTH had the right to terminate the Agreements, after providing a notice to cure, if Lee owed money that was more than thirty days past due. (Compl. Ex. 1 ¶ 8(c)(ii)). JTH sent Lee a notice to cure on June 16, 2006, informing him that he owed money which was more than thirty days past due. When Lee failed to pay, JTH properly terminated the Agreements on August 10, 2006.

Pursuant to the Agreements, Lee then had certain post-termination obligations to JTH, including: to remove all JTH signs from premises (id. ¶ 9(a)); to stop identification as a JTH franchisee, never hold out as a former JTH franchisee, cease use of any JTH marks or any marks which are likely to be confused with the JTH marks (id. ¶ 9(b)); to stop using all items bearing the JTH marks (id. ¶ 9(c)); to pay all amounts owed (id. ¶ 9(d)); to transfer all telephone numbers, listings, and advertisements used in connection with the franchise (id. ¶ 9(e)); to deliver all copies of customer lists (id. ¶ 9(f)); to deliver all customer tax returns, files, and records (id. ¶ 9(g)); to deliver the copy of the Operations Manual (id. ¶ 9(h)); and to adhere to the post-termination covenant not to compete (id. ¶ 9(j)). By signing the Agreements, Lee agreed to abide by the post-termination non-compete and non-solicitation covenants. The non-compete covenant provides, in part, that for two years following the termination of the Agreements, Lee will not, either directly or indirectly, "be employed by, work with, be engaged in, be interested in or advise, invest or contribute money to, lend money to or guarantee the debts or obligations of, any person or entity engaged in tax return preparation, electronic filing, or Bank Products within the Territory or within twenty-five miles of the boundaries of the Territory." (Decl. June Montalbano, Ex. 4 ¶ 10(b)(Mar. 20, 2007).)⁴ Lee also agreed that for a period of two years following the termination of his Agreements he would not "directly or indirectly, solicit the patronage of any person or entity served by any of [his] prior [JTH] offices in the last twelve months." (Id. at ¶ 10(d)).

JTH has provided voluminous evidence of Lee's breach. In violation of the covenant not to compete, Lee and his wife have opened a new tax preparation business, U.S. Tax, in Davenport, Iowa.⁵ The three U.S. Tax offices are in the same location as three of Lee's former JTH offices and continue to use the same phone numbers. Moreover, Lee has used the client files that he retained after his termination to solicit business for U.S. Tax from former JTH customers. U.S. Tax sent out a letter to former JTH clients inviting them to come to U.S. Tax to have their taxes prepared, and advising them that "all records have been retained."⁶ (Pl.'s Mem. Supp. Mot. Summ. J., Decl. Amy Andrews, Ex. 2 (July 27, 2007).) Lee failed to stop using all JTH marks. JTH has a valid trademark in its Statute of Liberty logo. Lee continues to use Statute of Liberty posters and cut-outs to promote U.S. Tax. Lee also has promoted U.S. Tax by having a man dressed in an Uncle Sam costume solicit customers by standing outside and waving them into the office. This marketing technique is used by JTH and was originally divulged to Lee in the JTH Operations Manual. Lee has failed to pay the money that he owes to JTH or to return the Operations Manual. Lee again offers only general denials of his actions and has failed to provide any relevant evidence to the court that creates an issue of material fact.

B. Breach of Contract-Damages

JTH has also shown that it has suffered damages due to Lee's breach of the Agreements and asks for summary judgment as to the amount of damages that it is owed. However, JTH did not provide sufficient information for the court to determine the amount...