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

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

December 17, 2019

JTH TAX, INC., d/b/a LIBERTY TAX SERVICE, ET AL. Plaintiffs
v.
FREEDOM TAX, INC., ET AL. Defendants/Third-Party Plaintiffs
v.
REPUBLIC BANK & TRUST COMPANY Third-Party Defendant

          MEMORANDUM OPINION AND ORDER

          REBECCA GRADY JENNINGS, DISTRICT JUDGE

         Plaintiffs JTH Tax, Inc., d/b/a Liberty Tax Service (“JTH”), and Siempretax, LLC (“Siempre Tax”) (collectively, “Liberty”) filed a complaint against Defendants Freedom Tax, Inc. (“Freedom”) and Adisa Selimovic (“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]. Freedom and Selimovic (collectively, “Third-Party Plaintiffs”) filed an Answer and Affirmative Defenses [DE 42], and brought counterclaims against Liberty and a third-party complaint against Republic Bank & Trust Company (“Republic”). In the third-party complaint, Third-Party Plaintiffs allege tortious interference in prospective economic advantage and breach of contract. Id. at 914-915. Republic now moves to dismiss the third-party complaint. [DE 55]. Briefing is complete, and the motion is ripe. [DE 59; DE 62]. For the reasons below, the Court GRANTS Republic's Motion.

         I. BACKGROUND

         Liberty is a franchisor of Liberty Tax Service®. [DE 33 at ¶ 19]. Liberty owns various Liberty Tax Service® trademarks, service marks, logos, and derivations (“the Marks”), which are registered with the United States Patent and Trademark Office. 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. Liberty grants licenses to franchisees to use the Marks and participate in its confidential and proprietary business system through written franchise agreements. Id. at ¶ 23.

         Freedom is a tax-preparation service with eight locations in Kentucky, Indiana, and California. [DE 31 at 716]. Selimovic incorporated Freedom in 2017 and is president of the company. Id. at 715. 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].

         Under the Franchise Agreements, Warren owned several now-defunct Liberty Tax Service® franchises in Kentucky, Indiana, and California. [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 unavailable to the public. Id. at ¶ 32.

         In January, 2018, Freedom entered into a Republic Bank Tax Refund Solutions ERO Agreement (the “Agreement”), which “governed the participation of [Freedom], as an electronic return originator . . . in Republic Bank's ‘Electronic Bank Product Program' (the ‘Program') for the 2018-2019 tax season.” [DE 62-1 at 1071]. The Program allowed “a taxpayer, acting with [Freedom] as his or her agent” to “apply for certain banking products offered by Republic Bank, such as tax-refund.” Id.

         Because of several violations of the Franchise Agreements, Liberty sent Notices to Cure Default to all Franchise Locations notifying Warren and The Franchise Corp. of various breaches of the Franchise Agreements. [DE 33 at ¶ 35]. After providing the requisite notice and opportunity to cure, Liberty terminated the Franchise Agreements. Id. at ¶ 36.

         On January 30, 2018, Liberty sued Warren and The Franchise Corp. in the United District Court for the Eastern District of Virginia, alleging breach of the Franchise Agreements and trademark infringement.

         On February 1, 2019, Liberty sued Freedom and Selimovic in this Court, alleging that:

Defendants Selimovic and Freedom Tax have collectively conspired with a former Liberty franchisee, Marcus Warren, to secretly and improperly transfer the Franchise Business and assets from Warren to Defendants without Liberty's knowledge or contractually required consent. Further, Defendants have misappropriated Liberty's marks, manual and system, in an effort to operate a competing tax preparation business under the name “Freedom Tax” to circumvent and avoid the non-competition, post-termination, and non-solicitation provisions set forth in Warren's Liberty Tax Service® Franchise Agreements with Liberty.

Id. at 775-776.

         On June 6, 2019, Freedom and Selimovic (“Third-Party Plaintiffs”) sued Republic in this Court, alleging that:

On or about February 20, 2019, [Semilovic] received a phone call from a representative of Republic Bank advising that Liberty Tax directed Republic Bank to terminate all of ...

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