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H&R Block Tax Services, LLC v. Strauss

United States District Court, N.D. New York

January 27, 2017

JUDY STRAUSS, Defendant.


          Lawrence E. Kahn U.S. District Judge


         Plaintiff 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.


         For 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[1] 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.

         This 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 such term.

         SFA ¶ 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].

         SFA ¶ 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.

         Before 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.

         In her 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.

         After 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.

         On 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.

         Finally, 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.


         A. Motion to Dismiss a Counterclaim

         “A 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.

         B. Motion to Strike

         Under 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) ...

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