Executive Summary: Key Legal and Evidentiary Issues

• Liberty Tax alleged breach of post-termination non-compete and non-solicitation clauses in franchise agreements.

• A strong prima facie case was made regarding competition but not for solicitation, which relied on inadmissible anonymous hearsay.

• The court declined to grant an interlocutory injunction due to Liberty’s delay and potential harm to third-party clients during tax season.

• The defendants were ordered to index and deliver all remaining client records and related materials to Liberty Tax.

• The court expressed concern over the breadth of the non-compete clause and its impact on the defendant’s livelihood.

• The result was a split decision: Liberty won on document return but lost the injunction motion related to non-compete enforcement.

Franchise termination and the basis of the dispute
Liberty Tax Service, Inc., a franchisor of tax preparation businesses, had ten franchise agreements in Ontario with entities controlled by Samantha Pinto. On January 5, 2024, Liberty terminated all franchise agreements due to non-payment of royalties, claiming over $1 million in outstanding amounts. Ms. Pinto had operated the franchises through 1000025109 Ontario Inc., which later began operating under the name Fernhill Tax & Advisory.

Following termination, Liberty brought a motion for interlocutory relief, alleging that Ms. Pinto and Fernhill were continuing to operate tax preparation services at former franchise locations in breach of post-termination non-compete and non-solicitation clauses. Liberty also sought the return of customer tax records and client lists.

Terms of the franchise agreements
The franchise agreements included provisions that prohibited the franchisee from operating or soliciting tax preparation services within 40 kilometers of any former franchise location for two years post-termination. They also required the return of all client records, both physical and electronic.

Allegations and defendant’s response
Liberty alleged that Ms. Pinto or individuals acting on her behalf continued to prepare taxes under the Fernhill name at former Liberty locations, in direct breach of the non-compete clause. They also alleged that former Liberty phone numbers were being rerouted to Fernhill and that Liberty clients were being solicited. Ms. Pinto denied these claims, stating she had sold the corporation, had no financial interest in Fernhill, and was only serving 20 clients she had originally brought into the Liberty system.

Ms. Pinto further claimed that Liberty had already seized all electronic records by remotely accessing the systems after termination and that she had boxed physical records for pickup. However, by the time of the hearing, only 97 of 357 boxes could be located, and others had either been picked up by clients or possibly shredded.

Court’s analysis and findings
Justice Charney found that Liberty had established a strong prima facie case that the defendants were likely engaged in continuing competition. However, the court held that the non-solicitation allegations were unsupported by admissible evidence because they were based entirely on anonymous hearsay from unidentified clients.

On the issue of the interlocutory injunction, the court applied the RJR-MacDonald test. While there was a serious issue to be tried, the court found that the request came too late in the tax season to prevent irreparable harm. Imposing the injunction at that point could risk prejudice to innocent clients who had already entrusted Fernhill with their tax filings. The balance of convenience did not favor Liberty, particularly with the April 30 tax filing deadline imminent.

Order regarding records and split outcome
The court declined to issue the requested injunction prohibiting competition or solicitation but did grant an order compelling the defendants to index and deliver any remaining customer records. The judge criticized both parties for their inability to resolve the logistics of record return earlier and dismissed the remainder of the motion.

Conclusion
This was a split decision. Liberty Tax succeeded in securing the return of customer files but failed to obtain a time-sensitive injunction enforcing the non-compete clause. The court reserved the issue of costs, pending submissions. The case underscores the importance of acting promptly in enforcing post-termination restrictions and the difficulty of doing so when delays overlap with peak business periods.