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JTH Tax, Inc. v. Freedom Tax, Inc.

United States District Court, W.D. Kentucky, Louisville Division

May 9, 2019

JTH TAX, INC., d/b/a LIBERTY TAX SERVICE, ET AL. Plaintiffs
v.
FREEDOM TAX, INC., ET AL. Defendants

          MEMORANDUM OPINION AND ORDER

          Rebecca Grady Jennings, District Judge.

         Plaintiffs JTH Tax, Inc., d/b/a Liberty Tax Service (“JTH”), and Siempretax, L.L.C. (“Siempre Tax”) (collectively, “Liberty”) bring this action against Defendants Freedom Tax, Inc. (“Freedom”) and Adisa Selimovic seeking relief for alleged violations of the Lanham Act, 15 U.S.C. §§ 1114, 1125, et seq., and the Defend Trade Secrets Act, 18 U.S.C. § 1836, et seq. [DE 1; DE 33].[1] The Court issued a temporary restraining order (the “TRO”). [DE 18]. Liberty now moves for a preliminary injunction. [DE 13]. Briefing is complete, and the motion is ripe. [See DE 22; DE 26; DE 29; DE 31]. For the reasons below, the Court GRANTS IN PART and DENIES IN PART Liberty's Motion.

         FINDINGS OF FACT

         Liberty is a franchisor of Liberty Tax Service® tax-preparation services throughout the United States. [DE 33 at ¶ 19].[2] Liberty owns various Liberty Tax Service® trademarks, service marks, logos, and derivations thereof (“the Marks”) registered with the United States Patent and Trademark Office (“USPTO”). [Id. at ¶ 20]. Liberty is also a franchisor of the Liberty Tax Service® tax-preparation system, which sells income tax-preparation and filing services and products to the public under the Marks. [Id. at ¶ 20]. With the name “Liberty Tax” and its derivations, the Marks include a logo of Lady Liberty with the words “Liberty Tax” [DE 13-18], a Lady Liberty costume [DE 13-19], and the phrase “Cash in a Flash” [DE 13-16], all used to advertise tax-preparation services.[3] Liberty grants licenses to franchisees to use the Marks and participate in its confidential and proprietary business system through written franchise agreements. [DE 33 at ¶ 23].

         Freedom is a tax-preparation service with eight total locations in Kentucky, Indiana, and California. [DE 31 at 715]. Selimovic incorporated Freedom in 2017 and is president of the company.[4] [Id.]. Selimovic was also an officer of The Franchise Corp., a now-defunct tax-preparation business incorporated, owned, and operated by Marcus Warren. [DE 26, Tr. PI Hearing at 562:1-4]. The Franchise Corp. and Warren, both non-parties, were signatories to franchise agreements with Liberty (the “Franchise Agreements”). [See DE 33-1]. Neither Freedom nor Selimovic was a signatory to the Franchise Agreements or any other agreements with Liberty. [Id.; DE 22-1 at ¶ 3]. Selimovic was Secretary and General Manager of The Franchise Corp. from 2014-2015 and 2016-2018, respectively. [DE 13-4-13-8].

         Under the Franchise Agreements, Warren owned several now-defunct Liberty Tax Service® franchises in Kentucky, Indiana, and California (the “Franchise Locations”). [DE 33 at ¶ 27]. As part of the Franchise Agreements, Liberty provided Warren and The Franchise Corp., among other things, training in franchise operations, marketing, advertising, sales, and business systems, as well as confidential operating, marketing, and advertising materials that are unavailable to the public. [Id. at ¶ 32].

         Under Paragraph 10(e) of the Franchise Agreements, Warren and The Franchise Corp. agreed “that during the term of this Agreement, [they] w[ould] not lease, sub-lease, assign or guaranty a lease in the Territory to or for a person or entity who will offer income tax preparation at such an office.” [DE 32-1 at 816]. Paragraph 15(a) of the Franchise Agreements stipulated that Liberty was entitled to a right of first refusal of any “signed, bona fide offer to purchase or otherwise transfer the Franchise or any interest in the Franchise.” [Id. at 819]. And under Paragraph 10(b) of the Franchise Agreements, Warren and The Franchise Corp. agreed to a post-termination covenant not to compete “[f]or a period of two (2) years following the termination, expiration, transfer or other disposition of the Franchised Business . . . and agree[d] not to directly or indirectly, for a fee or charge, prepare or electronically file income tax returns . . . within the Territory or within twenty-five miles of the boundaries of the Territory.” [Id. at 815].

         On January 12, 2018, Liberty sent Notices to Cure Default to Warren and The Franchise Corp. notifying them of various alleged breaches of the Franchise Agreements. These breaches included improper usage of third-party tax software and failure to pay hundreds of thousands of dollars owed to Liberty, past due at the time of termination. [DE 33 at ¶ 35]. But on January 13, 2018, Selimovic purchased substantially all of The Franchise Corp.'s assets from Warren, including the leaseholds for the formerly-Liberty, now-Freedom, locations at issue. [DE 22-1 at ¶ 6].[5] After providing an opportunity to cure, Liberty terminated the Franchise Agreements on January 23, 2018. [DE 33 at ¶ 36]. At that time, Liberty also requested that Warren transfer assets and assign the leases for the Franchise Locations to Liberty. [Id. at ¶ 37].

         On January 30, 2018, Liberty filed suit in the United District Court for the Eastern District of Virginia against Warren and The Franchise Corp., alleging breach of the Franchise Agreements and trademark infringement. See JTH Tax, Inc. d/b/a Liberty Tax Service and SiempreTax, L.L.C. v. Marcus Warren and The Franchise Corp., No. 2:18-cv-54. Warren and The Franchise Corp. stipulated to the terms of a preliminary injunction (the “Injunction”), which the Eastern District of Virginia entered on July 2, 2018. [DE 1-3 at 50]. The Injunction, which remains in effect, enjoins Warren and The Franchise Corp. from, among other things, “using and/or displaying the Marks without Liberty's consent; . . . using the Marks or any confusingly similar name, which is likely to cause confusion or mistake or deceive the public; . . . [and] from diverting or attempting to divert any customer or business from Liberty or solicit[ing] or endeavor[ing] to obtain the business of any customer or prospective customer of any of the Franchise Locations.” [Id. at 51-52].

         By at least March 12, 2018, Liberty was aware that Selimovic had purchased substantially all of The Franchise Corp.'s assets, including the leaseholds. [DE 26, Tr. PI Hearing at 529:8-11; DE 31 at 721]. At the same time, Liberty possessed images of Freedom's signage-including the name “Freedom Tax” and a logo featuring Lady Liberty-at The Franchise Corp.'s previous locations. [Id. at ¶ 538:13-17]. Liberty did not dispute the use of the Marks at that time because “tax season [was] about over and [it] had other priorities.” [Id. at 538:23-25].

         During the 2019 income tax season, Selimovic continued to operate Freedom at the former Franchise Locations in and around Louisville.[6] Photographs taken in January 2019 show depictions of Lady Liberty on signage inside and outside the stores, as well as on promotional material, and signs both inside and outside the stores that read “$50 Ca$h in a Flash.” [DE 13-22 at 180-216]. At least one location featured an individual dressed as Lady Liberty outside the store holding a sign with the Freedom Tax insignia. [DE 13-22 at 183, 206-09]. Freedom Tax also maintained at least two Facebook pages, one for Louisville and one for Shelbyville. [DE 13-12 at 138-57; DE 13-13 at 158-60]. The Facebook pages included graphic depictions of Lady Liberty, “CA$H IN A FLASH” graphics, photographs of individuals holding the “CA$H IN A FLASH” sign, and photographs of individuals wearing Lady Liberty costumes and headpieces. [DE 29 at 603]. Freedom's website-www.freedomtaxusa.net-is registered in Warren's name. [DE 31 at 726]. Selimovic asserts that she used Warren's GoDaddy account to purchase Freedom's domain, but that Warren is not involved with Freedom or its operations. [Id.].

         Rosie Trimmer is a receptionist at three Liberty Tax Service® franchised locations in Louisville, working mainly at 3317 Taylor Boulevard. [DE 26, Tr. PI Hearing at 546:11-13]. Trimmer testified that of the approximately 200 calls she answered this tax season, “99 percent of [the] phone calls [we]re thinking that that they did their taxes at Liberty” when they had their taxes done at Freedom. [Id. at 548:7-10]. Trimmer testified that when she receives those calls, “[she] ask[ed] them the location” and whether it “‘[w]as [] down there at the strip mall where the Dollar General is?' And if they sa[id] yes, [she said], ‘I'm sorry. That's Freedom Tax.'” [Id. at 548:15- 18]. Trimmer testified that she did not memorialize these calls in writing. [Id. at 550:16-18].

         On February 1, 2019, Liberty sued Freedom and Selimovic in this Court, seeking injunctive relief for alleged violations the Franchise Agreements' covenant not to compete and infringement of the Marks. [DE 1; DE 33]. On March 12, 2019, Liberty moved for the TRO and a preliminary injunction to enjoin Freedom and Selimovic from competing with Liberty and from infringing the Marks. [DE 13]. The Court entered the TRO and enjoined Freedom and Selimovic from using or displaying the Marks and from using any confidential information from manuals or systems provided by Liberty to its franchisees. [DE 18 at 240-41]. The Court held a preliminary injunction hearing on March 21, 2019. [DE 25]. The parties filed post-hearing proposed findings of fact and conclusions of law. [DE 29; DE 31]. The Court then extended the TRO for good cause. [DE 32].

         CONCLUSIONS OF LAW

         A preliminary injunction is an extraordinary measure that is “one of the most drastic tools in the arsenal of judicial remedies.” Bonnell v. Lorenzo, 241 F.3d 800, 808 (6th Cir. 2001) (citation and internal quotation marks omitted). Courts should thus apply this remedy “only in the limited circumstances which clearly demand it.” Leary v. Daeschner, 228 F.3d 729, 739 (6th Cir. 2000) (citation and internal quotation marks omitted).

         When considering a motion for a preliminary injunction, a district court must balance four factors: (1) whether the movant has a strong likelihood of success on the merits; (2) whether the movant would suffer irreparable injury without the injunction; (3) whether issuance of the injunction would substantially harm others; and (4) whether issuance of the injunction would serve the public interest. Certified Restoration Dry Cleaning Network, L.L.C. v. Tenke Corp., 511 F.3d 535, 542 (6th Cir. 2007) (citing Tumblebus Inc. v. Cranmer, 399 F.3d 754, 760 (6th Cir. 2005)). A district court need not make specific findings on each factor if fewer factors resolve the issue. Id. But “it is generally useful for the district court to analyze all four of the preliminary injunction factors” because the Sixth Circuit's analysis of one of the factors may differ. Leary, 228 F.3d at 739 n.3. Although a court must balance the relevant preliminary injunction factors, “a finding that there is no likelihood of irreparable harm . . . or no likelihood of success on the merits . . . is usually fatal.” CLT Logistics v. River W. Brands, 777 F.Supp.2d 1052, 1064 (E.D. Mich. 2011) (citing Winter v. Natural Res. Def. Council, 555 U.S. 7, 22 (2008); Gonzales v. Nat'l Bd. of Med. Exam'rs, 225 F.3d 620, 625 (6th Cir. 2000)). “The party seeking the preliminary injunction bears the burden of justifying such relief, including showing irreparable harm and likelihood of success.” McNeilly v. Land, 684 F.3d 611, 615 (6th Cir. 2012) (citing Granny Goose Foods, Inc. v. Teamsters, 415 U.S. 423, 441 (1974)).

         A. Likelihood of Success on the Merits

         In its Complaint, Liberty outlines seven separate claims against Freedom and Selimovic: trademark infringement (Count I), false designation and misrepresentation (Count II), trademark dilution (Count III), violation of the Defend Trade Secrets Act (Count IV), tortious interference with contract (Count V), unjust enrichment (Count VI), and unfair competition (Count VII). [DE 33 at ¶¶ 60-103]. Liberty's Motion for Preliminary Injunction and Proposed Findings of Fact and Conclusions of Law do not address Liberty's claims for tortious interference with contract (Count V) or unjust enrichment (Count VI). [DE 13-1; DE 29]. Instead, Liberty's filings focus exclusively on the intellectual property claims.

         1. Infringement

         To show that an infringement claim under the Lanham Act is likely to succeed on the merits, a plaintiff must establish (1) its ownership and continuous use of its specific mark in connection with specific services, (2) that the defendant used the mark in commerce, and (3) a likelihood of confusion among consumers resulting from the defendant's use of the mark. Hensley Mfg. v. ProPride, Inc., 579 F.3d 603, 609 (6th Cir. 2009) (citing 15 U.S.C. §§ 1127, 1114(1)).[7]

         There is no dispute that Liberty owns the federally-registered Marks at issue or that Liberty uses the Marks in commerce. [See DE 13-14-13-19; DE 31 at 736]. Accordingly, Liberty must only establish that confusion is likely. Hensley Mfg., 579 F.3d at 609.

         “The touchstone of liability [for infringement] is whether the defendant's use of the disputed mark is likely to cause confusion among consumers regarding the origin of the goods offered by the parties.” Daddy's Junky Music Stores, Inc. v. Big Daddy's Family Music Ctr., 109 F.3d 275, 280 (6th Cir. 1997). To determine whether confusion is likely, a court will typically weigh eight factors: (1) strength of the senior mark; (2) relatedness of the goods or services; (3) similarity of the marks; (4) evidence of actual confusion; (5) marketing channels used; (6) likely degree of purchaser care; (7) the intent of the defendant in selecting the mark; and (8) likelihood of expansion of the product lines. Id.; see also Hensley Mfg., 579 F.3d at 610. Courts assess each factor for the relevant consumer market, and potential buyers of the “junior” product are the relevant consumers. Maker's Mark Distillery, Inc. v. Diageo N. Am., Inc., 679 F.3d 410, 419 (6th Cir. 2012) (citing Leelanau Wine Cellars, Ltd. v. Black & Red, Inc., 502 F.3d 504, 518 (6th Cir. 2007)).

         i. Strength of the Senior Mark

         “The strength of a mark is a determination of the mark's distinctiveness and degree of recognition in the marketplace.” Homeowners Grp., Inc. v. Home Mktg. Specialists, Inc., 931 F.2d 1100, 1107 (6th Cir. 1991). This evaluation encompasses two components: (1) the mark's place on the spectrum of distinctiveness, and (2) “the marketplace recognition value of the mark.” Maker's Mark, 679 F.3d at 419 (citation omitted). A “mark is strong if it is highly distinctive, i.e., if the public readily accepts it as the hallmark of a particular source; it can become so because it is unique, because it has been the subject of wide and intensive advertisement, or because of a combination of both.” Frisch's Rest., Inc. v. Shoney's Inc., 759 F.2d 1261, 1264 (6th Cir. 1985) (quoting A R. Callmann, Unfair Competition, Trademarks & Monopolies, § 20.43, at 345 (4th ed. 1983)). The stronger the mark, the greater the likelihood of confusion. Homeowners Grp., Inc., 931 F.2d at 1107.

         As for the first component, “once a mark has been registered for five years, the mark must be considered strong and worthy of full protection.” Wynn Oil Co. v. Am. Way Serv. Corp., 943 F.2d 595, 600 (6th Cir. 1991) (citation omitted). The Marks here have been on the USPTO's principal register for more than five years. [See DE 13-16; DE 13-18; DE 13-19]. The Marks are therefore strong. Wynn Oil Co., 943 F.2d at 600.

         As to the second component, the Court measures a mark's commercial strength by whether it has been subject to “wide and intensive advertisement[.]” Homeowners Grp., Inc., 931 F.2d at 1107 (citing Frisch's Rest., Inc., 759 F.2d at 1264). However, “[t]he use of the mark [by third parties] throughout the state, country, and on the internet weakens the strength of the mark.” Citizens Banking Corp. v. Citizens Fin. Grp., Inc., 320 Fed.Appx. 341, 346-47 (6th Cir. 2009) (internal citations omitted) (finding that Citizens Bank's mark was commercially weak because “three hundred banks nationwide use a Citizens mark, including five other banks and a credit union in Michigan, ” and “the record made clear that many of those marks are in use-particularly in Michigan”); see also CareFirst of Maryland, Inc. v. First Care, P.C., 434 F.3d 263, 269-270 (4th Cir. 2006) (concluding “extensive third-party use also demonstrates that CareFirst's mark lacks commercial strength in many parts of the country”). “Indeed, courts have found extensive third-party uses of a trademark to substantially weaken the strength of a mark.” Homeowners Grp., Inc., 931 F.2d at 1108 (collecting cases).

         The terms and images comprising Liberty's Marks-“Liberty, ” “Tax, ” and Lady Liberty- are widely used in the tax and financial services industries throughout the country. [See DE 22-2; DE 31 at 728-29]. Several entities in Kentucky use the name “Liberty, ” including organizations involved in accounting, payroll, banking, financial services, benefits administration, and billing. [DE 22-2 at ¶ 5]. But unlike in Citizens Banking, there is no evidence of other tax-preparation services in Kentucky using Liberty's Marks. While in Citizens Banking there were over 300 banks nationwide using the “Citizens” mark, the use of the Marks in the tax-preparation business is not so widespread. Given this and that Liberty “advertises and promotes the Marks throughout the United States, ” [DE 33 at ¶ 22], this factor either favors Liberty or is neutral.

         ii. Relatedness of the Goods or Services

         Courts employ three criteria to test the relatedness of goods or services. “First, if the parties compete directly, confusion is likely if the marks are sufficiently similar; second, if the goods and services are somewhat related, but not competitive, then the likelihood of confusion will turn on other factors; finally, if the products are unrelated, confusion is unlikely.” AutoZone, Inc. v. Tandy Corp., 373 F.3d 786, 797 (6th Cir. 2004) (citing Kellogg Co. v. Toucan Golf, Inc., 337 F.3d 616, 624 (6th Cir. 2003)). “The relatedness inquiry therefore focuses on whether goods or services with comparable marks that are similarly marketed and appeal to common customers are likely to lead consumers to believe that they come from the same source, or are somehow connected with or sponsored by a common company.” Therma-Scan, Inc. v. Thermoscan, Inc., 295 F.3d 623, 633 (6th Cir. 2002) (citation and internal quotation marks omitted).

         Liberty and Freedom are both in the tax-preparation business and thus direct competitors. [See DE 33 at ¶¶ 19, 43]. And as noted below, the marks are similar. This factor favors Liberty.

         iii. Similarity of the Marks

         “Similarity of marks is a factor of considerable weight.” Daddy's Junky Music Stores, Inc., 109 F.3d at 283. In assessing similarity, a court should consider the “pronunciation, appearance, and verbal translation of conflicting marks.” Id.; see also AutoZone, Inc., 373 F.3d at 795. A side-by-side comparison of the marks is not appropriate, although the commonalities of the respective marks must be the point of emphasis. AutoZone, Inc., 373 F.3d at 795. And “courts must determine whether a given mark would confuse the public when viewed alone, in order to account for the possibility that sufficiently similar marks may confuse consumers who do not have both marks before them but who may have a general, vague, or even hazy, impression or recollection of the other party's mark.” Id. (citing Daddy's Junky Music Stores, Inc., 109 F.3d at 283). As a result, courts must view the “marks in their entirety and focus on their overall impressions, not individual features.” Id. (citations omitted).

         Here, the relevant marks are “Liberty Tax” and “Freedom Tax” and their respective logos. The marks share several commonalities. First, each prominently features the head of Lady Liberty. Second, each mark is composed of red, white, and blue colors. Third, both “Liberty Tax” and “Freedom Tax” are styled in all capital letters. And the words “liberty” and “freedom, ” while not linguistically similar, share the same connotation. “Liberty” and “freedom” share the definition of “The state of not being imprisoned or enslaved.” Compare Freedom, Oxford English Dictionary with Liberty, Oxford English Dictionary. In fact, the terms are synonyms. See Id. Because the relevant inquiry is “whether a given mark would confuse the public when viewed alone” to account for “consumers who do not have both marks before them but who may have a general, vague, or even hazy, impression or recollection of the other party's mark, ” the marks' commonalities make it likely that their overall impression would lead an average consumer to assume they are related. The marks are thus sufficiently similar that this factor favors Liberty.

         Freedom uses the relevant marks-“Cash in a Flash” for advertising tax-preparation services [DE 13-16] and Lady Liberty costumes for advertising tax-preparation services [DE 13-19]- in identical ways to Liberty to advertise the companies' respective tax-preparation services. [See DE 13-12, Ex. L]. In both cases, the companies use the phrase “Cash in a Flash”-or, in Freedom's case, “CA$H IN A FLASH”-on advertising materials and ...


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