United States District Court, N.D. New York
MEMORANDUM-DECISION AND ORDER
Lawrence E. Kahn U.S. District Judge
H&R Block Tax Services, LLC commenced this breach of
contract action against Defendant Judy Strauss. Dkt. Nos. 1
(“Complaint”), 52 (“Amended
Complaint”). Presently before the Court are
Plaintiff's Motion to Dismiss Defendant's
counterclaim, Plaintiff's Motion to Strike
Defendant's first and second affirmative defenses, and
Defendant's Motion to Amend her pleading. Dkt. Nos. 32
(“Motion to Dismiss”), 33 (“Motion to
Strike”), 92 (“Motion to Amend”). Defendant
opposes Plaintiff's Motions, Dkt. Nos. 36
(“Response to Motion to Strike”), 37
(“Response to Motion to Dismiss”), 90
(“Supplemental Response”), and Plaintiff filed
replies, Dkt. Nos. 38 (“Counterclaim Reply”), 39
(“Affirmative Defenses Reply”), 91
(“Supplemental Reply”). Plaintiff also opposes
Defendant's Motion to Amend. Dkt. No. 97 (“Response
to Motion to Amend”). For the following reasons,
Plaintiff's Motions are granted and Defendant's
Motion is denied.
many years, Plaintiff, a “Missouri limited liability
company with its principal place of business [in] Kansas
City, Missouri, ” has engaged “in the business of
licensing others to operate tax return preparation offices
under the H&R Block service mark.” Am. Compl.
¶ 5. In September 1984, Defendant, a citizen and
resident of New York, id. ¶ 6, entered into a
Satellite Franchise Agreement (the “SFA”) with
Plaintiff's predecessor-in-interest to enable
Defendant to operate a tax return preparation office in
Cobleskill, New York under the H&R Block service mark,
id. ¶ 1. The SFA automatically renewed every
five years, and the parties continued their contractual
relationship until 2014. Id. ¶ 2; Dkt. No. 52-1
(“Satellite Franchise Agreement”) ¶ 4.
renewal provision read as follows:
The initial term of this Agreement begins on the date hereof
and ends five years after such date, unless sooner terminated
by Block [for cause]. Unless Franchisee is in default
hereunder or under any agreement with or obligation to Block
or any subsidiary or affiliate of Block, this Agreement shall
be automatically renewed for successive Renewal Terms.
Franchisee may terminate this Agreement effective at the end
of the initial term or any Renewal Term, but only upon at
least 120 days written notice to Block prior to the end of
¶ 4. The SFA also provided that, for one year after the
discontinuance of the agreement, Defendant would be forbidden
from soliciting clients of her former H&R Block office
and could not compete in the tax preparation business with
Plaintiff in or within forty-five miles of Cobleskill, New
York. Am. Compl. ¶ 9; SFA ¶ 12(a). This provision
of the SFA stated that:
for a period of one year after the termination of this
Agreement or the transfer or other disposition of this
franchise, [Franchisee] will not . . . solicit . . . or
divert from Block or Block franchisees any person for whom
Franchisee prepared a tax return or performed Related
Services or Additional Services at any time during the term
of this Agreement; and . . . [Franchisee] will not compete .
. . with Block or Block franchisees in the business of
preparing tax returns or performing Related Services or
Additional Services in or within 45 miles of the Franchise
Territory [Cobleskill, New York].
¶ 12(a). Despite this language, in her Amended Answer,
Defendant asserts that “[t]here is, essentially, no
geographic limitation on the exclusion zone.” Dkt. No.
55 (“Amended Answer”) ¶ 26. Finally, the SFA
contained a choice-of-law clause stating that Missouri law
would govern interpretation of the agreement. SFA ¶ 25.
the expiration of the most recent five-year term, Plaintiff
informed Defendant that it would not be renewing the 1984
version of the SFA; instead, Plaintiff offered Defendant a
“current form” of the franchise agreement. Am.
Compl. ¶ 2. Defendant declined to renew the SFA in its
current form, and the franchise relationship ended on
September 1, 2014. Id. ¶¶ 2, 12. Plaintiff
alleges that Defendant failed to comply with the noncompete
and nonsolicitation agreements contained in the SFA.
Id. ¶ 14. In particular, Plaintiff claims that
Defendant “continued to operate a tax return
preparation business at her formerly franchised location
under the name J. STRAUSS & ASSOCIATES BOOKKEEPING &
TAX SERVICE.” Id. ¶ 14. According to the
Amended Complaint, Defendant also “ran print
advertising directed at clients of her former H&R BLOCK
franchise indicating that she would be continuing to provide
tax return preparation services at her formerly franchised
location.” Id. ¶ 15.
Amended Answer, Defendant asserts four affirmative defenses:
(1) equity forbids granting the relief sought by Plaintiff
because Plaintiff has unclean hands, having “wrongly
and unlawfully terminated the franchise agreement, ”
Am. Answer ¶ 21, (2) the noncompete clause is
unenforceable because of its allegedly unlimited geographical
scope, id. ¶ 27, (3) the noncompete clause
“serves no legitimate interest of the Plaintiff, and is
unduly burdensome to the Defendant, ” id.
¶ 29, and (4) the parties had established a
“course of conduct and dealing” that, combined
with the language in the SFA, forbade Plaintiff from
“unilaterally refusing to renew” the agreement,
id. ¶ 36. Moreover, Defendant brings a
counterclaim against Plaintiff, alleging that Plaintiff's
“refus[al] to honor the automatic renewal provision of
the 1984 contract” constituted a breach of contract.
Id. ¶ 39.
this Court entered a preliminary injunction and temporary
restraining order against Defendant on February 4, 2015, Dkt.
No. 20 (“February Decision”), Plaintiff moved to
dismiss Defendant's counterclaim and to strike two of
Defendant's affirmative defenses, Mot. to Dismiss, Mot.
to Strike. Plaintiff argues that the counterclaim
“fails as a matter of law because Block was legally
entitled to decline to renew [Defendant's]
agreement.” Dkt. No. 32-1 (“Plaintiff's
Motion to Dismiss Memorandum”) at 1. For the same
reason, Plaintiff asks the Court to strike Defendant's
“unclean hands” defense. Dkt. No. 33-1
(Plaintiff's Motion to Strike Memorandum”) at 1.
Plaintiff also asks the Court to strike Defendant's
affirmative defense relating to the covenants against
competition on the ground that those covenants are reasonable
and enforceable. Id. at 5. Defendant responded to
these motions. Resp. to MTS, Resp. to MTD.
September 20, 2016, the Court denied Plaintiff's Motion
to Enforce a settlement agreement purportedly reached between
the parties. Dkt. Nos. 64 (“Motion to Enforce
Settlement”), 83 (“September Order”).
Later, after receiving permission from the Court, Dkt. Nos.
88, 89, Defendant filed supplemental briefing in support of
her opposition to Plaintiff's motions to dismiss and
strike her counterclaim and affirmative defenses. Suppl.
Resp. In this supplemental filing, Defendant withdraws her
second affirmative defense relating to the geographical scope
of the covenants, id. at 13, in addition to arguing
that the choice-of-law provision in the SFA is unenforceable
because New York law governs construction of the agreement,
id. at 8-9. Moreover, for the first time, Defendant
asserts that the covenants in the SFA are unenforceable
because they are triggered only after termination of the
agreement, and what happened here is that the agreement
expired rather than terminated. Id. at 2. Plaintiff
filed a response to this supplemental briefing. Suppl. Reply.
Defendant moved to amend her Amended Answer by adding a
counterclaim and affirmative defense. Mot. to Amend; Dkt. No.
92-1 (“Amendment Memorandum”). The proposed
counterclaim is that Plaintiff is liable for breach of
contract and breach of the implied covenant of good faith and
fair dealing for attempting to enforce the covenants against
solicitation and competition in the SFA even though Plaintiff
knew that they were not triggered by the expiration of the
agreement. Amendment Mem. at 15-17. Defendant's proposed
affirmative defense is that Plaintiff has unclean hands
because it is liable for the conduct complained of in the
proposed counterclaim. Id. at 17-20. Plaintiff
responded to the Motion to Amend. Resp. to MTA.
Motion to Dismiss a Counterclaim
motion to dismiss a counterclaim is evaluated under the same
standard as a motion to dismiss a complaint [under Federal
Rule of Civil Procedure 12(b)(6)].” Revonate Mfg.,
LLC v. Acer Am. Corp., No. 12-CV-6017, 2013 WL 342922,
at *2 (S.D.N.Y. Jan. 18, 2013) (quoting Netrix Leasing,
LLC v. K.S. Telecom, Inc., No. 00-CV-3375, 2001 WL
228362, at *8 (S.D.N.Y. Mar. 7, 2011)). To survive a motion
to dismiss for failure to state a claim pursuant to Rule
12(b)(6) of the Federal Rules of Civil Procedure, a
“complaint must contain sufficient factual matter,
accepted as true, to ‘state a claim to relief that is
plausible on its face.'” Ashcroft v.
Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl.
Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A court
must accept as true the factual allegations contained in an
answer and counterclaim and draw all inferences in favor of
the defendant. Allaire Corp. v. Okumus, 433 F.3d
248, 249-50 (2d Cir. 2006). Plausibility, however, requires
“enough fact[s] to raise a reasonable expectation that
discovery will reveal evidence of [the alleged
misconduct].” Twombly, 550 U.S. at 556. The
plausibility standard “asks for more than a sheer
possibility that a [plaintiff] has acted unlawfully.”
Iqbal, 556 U.S. at 678 (citing Twombly, 550
U.S. at 556). Where a court is unable to infer more than the
mere possibility of the alleged misconduct based on the
pleaded facts, the pleader has not demonstrated that she is
entitled to relief and the action is subject to dismissal.
Id. at 678-79.
Motion to Strike
Federal Rule of Civil Procedure 12(f), a court “may
strike from a pleading an insufficient defense or any
redundant, immaterial, impertinent, or scandalous
matter.” Fed.R.Civ.P. 12(f). A “motion to strike
an affirmative defense . . . for legal insufficiency is not
favored and will not be granted ‘unless it appears to a
certainty that plaintiff would succeed despite any state of
the facts which could be proved in support of the
defense.'” William Z. Salcer, Panfeld, Edelman
v. Envicon Equities Corp., 744 F.2d 935, 939 (2d Cir.
1984) (quoting Durham Indus., Inc. v. N. River Ins.
Co., 482 F.Supp. 910, 913 (S.D.N.Y. 1979)), vacated
on other grounds, 478 U.S. 1015 (1986). Thus, a court
will strike an affirmative defense when the plaintiff shows
that “(1) there is no question of fact which might
allow the defense to succeed; (2) there is no question of law
which might allow the defense to succeed; and (3) the
plaintiff would be prejudiced by inclusion of the
defense.” SEC v. McCaskey, 56 F.Supp.2d 323,
326 (S.D.N.Y. 1999). With respect to the prejudice prong of
the test, “[w]hen ‘the defense is insufficient as
a matter of law, the defense should be stricken to eliminate
the delay and unnecessary expense from litigating the invalid
claim.'” Estee Lauder, Inc. v. Fragrance
Counter, Inc., 189 F.R.D. 269, 272 (S.D.N.Y. 1999)