The Franchise Memorandum

A federal court in Virginia recently ruled that it had federal question subject matter jurisdiction over a Defend Trade Secrets Act (DTSA) claim, rejecting Defendants’ argument that a foreign bankruptcy proceeding stayed the DTSA claim and deprived the court of jurisdiction. JTH Tax LLC, d/b/a Liberty Tax Service v. Lowensky Cortorreal, 2024 WL 3928884 (E.D. Va. Aug. 23, 2024). JTH Tax LLC, a franchisor of tax preparation service franchises, filed a complaint against multiple former franchisee defendants alleging unlawful competition, including under the DTSA, and claims for breach of franchise agreements, unjust enrichment, conversion, and tortious interference. Defendants moved to dismiss for failure to state a claim and for lack of subject matter jurisdiction under the DTSA on the grounds that actions against JTH Tax were stayed by a Canadian court order in a bankruptcy proceeding involving JTH Tax.

The court applied U.S. federal bankruptcy statutes regarding foreign proceedings and concluded that the stay in the Canadian bankruptcy proceeding unambiguously applied only to actions against JTH Tax as debtor and did not prevent it from asserting claims against other parties, including the defendants. The court added that the stay did prevent any counterclaims by the defendants against JTH Tax. The court dismissed a claim for unjust enrichment against two defendants and otherwise denied the defendants’ motion to dismiss as to all other claims on the grounds that JTH Tax had sufficiently and plausibly stated claims. The court also denied a motion for preliminary injunction on the grounds that JTH Tax failed to provide proper notice of the motion to the defendants.