October 09, 2025|Franchise Frontlines
October 9, 2025 | U.S. District Court for the District of Colorado | Unpublished Recommendation
Executive Summary
In an unpublished recommendation, Chief Magistrate Judge Scott Varholak addressed Liberty Tax Service’s motion for contempt sanctions after the franchisor alleged that former franchisee Michael Merit and his company, International Tax Services, LLC, continued operating a competing tax preparation business in violation of both a preliminary injunction and a permanent injunction issued earlier in the case. According to the opinion, the complaint alleged that Merit misappropriated customer referral funds, failed to return confidential information, retained Liberty customer files, and used Liberty marks and phone numbers after termination. The court found clear and convincing evidence that the defendants violated multiple provisions of the injunctions after being served. Based on these findings, the court recommended civil contempt sanctions, including daily fines, attorneys’ fees, and an equitable extension of the noncompetition period, while declining to recommend disgorgement of profits and deeming a seizure request moot pending Liberty’s ongoing review of recently returned materials.
Relevant Background
The opinion states that Liberty Tax is a national franchisor that licenses its income-tax preparation system, proprietary methods, confidential operating materials, and brand assets to franchisees under written Franchise Agreements. According to the complaint, Merit entered into three Franchise Agreements to operate Liberty offices in Aurora and Arvada, Colorado, and Springdale, Arkansas. Each agreement included confidentiality obligations and a post-termination covenant restricting the preparation or filing of tax returns within the franchise territories or within twenty-five miles of those territories for two years following termination.
The complaint alleged that Merit misused Liberty’s referral program to divert payments to himself and his employees. It further alleged that Merit owed significant outstanding amounts in notes receivable and accounts receivable at the time of termination, failed to return confidential materials, and immediately began operating a competing tax business at the former Aurora franchise location under the name “Mike the Tax Guy.” The complaint stated that Merit used the same phone numbers previously associated with the Liberty office, allegedly causing customer confusion and impairing Liberty’s ability to sell the territory.
The opinion recounts that Liberty filed suit in March 2024. In June 2024, the district judge granted Liberty’s request for a preliminary injunction and ordered Merit to stop offering tax preparation services within the restricted areas, to return confidential materials, and to discontinue use of Liberty phone numbers, advertisements, and customer lists. After Merit failed to respond to the complaint, the court entered default judgment and a permanent injunction mirroring the preliminary injunction. Liberty later moved for contempt sanctions, asserting that Merit continued to operate a competing tax preparation business and continued withholding confidential documents.
At an evidentiary hearing in October 2025, the court heard testimony from Liberty representatives and an investigator. According to the opinion, the evidence included IRS filing data, photographs, business-card materials, customer sign-in sheets, online reviews, and observed signage suggesting ongoing tax preparation activity at the Aurora location. Merit attended and cross-examined Liberty’s witnesses but did not testify or present witnesses.
Decision
The court recommended granting the motion in part and denying it in part.
According to the opinion, civil contempt requires clear and convincing evidence that (1) a valid order existed, (2) the defendants knew of the order, and (3) the defendants disobeyed it. The court found that both injunction orders were clear, that Merit stipulated to service of those orders, and that the evidentiary record demonstrated continued preparation and filing of tax returns, continued customer solicitation, and continued retention of Liberty’s confidential information after service.
The court stated that testimony from Liberty’s representatives and its investigator supported a finding that tax preparation services were offered at the former Liberty location, that Merit’s moniker “Mike the Tax Guy” continued to appear on signage, that customer returns filed months after service listed Merit or his company as the preparer, and that confidential customer documents remained in his possession until the hearing. Based on this evidence, the court found violations of several provisions of the injunctions.
On sanctions, the court declined to recommend disgorgement of profits because Liberty had not demonstrated the amount of any actual loss attributable to the alleged violations, and the available records did not allow for a reliable calculation. The court recommended a coercive daily fine of $250 for future violations, reasoning that a financial sanction was necessary to compel compliance. The court also recommended awarding Liberty its attorneys’ fees and costs incurred in pursuing the contempt motion, as Liberty’s efforts were required to enforce the injunctions and secure the return of confidential materials.
The court deemed Liberty’s seizure request moot because Merit delivered nine boxes of documents immediately after the hearing pursuant to the court’s directive. The court noted that Liberty could renew the request if it later discovered that additional materials remained unreturned. Finally, the court recommended equitably extending the permanent injunction until September 30, 2027—two years from the most recent observed violation—so that Merit would not benefit from delays caused by noncompliance.
Looking Forward
Although highly fact-specific, this recommendation illustrates several recurring themes relevant to franchisors enforcing post-termination obligations. The opinion reflects how courts may respond when a former franchisee continues operating a competing business using the franchisor’s system identifiers, phone numbers, or confidential information. Under different circumstances or evidentiary records, a court may reach different conclusions, but this recommendation demonstrates how a franchisor may enforce covenants and injunctions when the record contains evidence of continued competitive conduct.
The recommendation also highlights the importance of clear contract drafting. The Franchise Agreements’ confidentiality and noncompetition provisions shaped the scope of the injunctive relief and provided a framework the court could enforce. For franchisors, the decision underscores that well-crafted post-termination covenants, combined with contemporaneous documentation of competitive activity, may offer meaningful remedies when a former franchisee disregards contractual and court-ordered obligations.
The court’s willingness to recommend equitable extension of the noncompetition period underscores a key principle: courts may adjust injunctive timelines to prevent a former franchisee from gaining advantage through noncompliance. While this outcome is tied to the specific findings here, it may serve as a reminder to franchisors that documenting post-termination violations can protect the value of bargained-for covenants.
Finally, the opinion reflects the practical significance of brand integrity. According to the record, online reviews and lingering public association between the former location and the Liberty brand potentially affected Liberty’s ability to sell the territory. Under substantially different facts, franchisors may face similar reputational risks when former operators continue using brand identifiers. Monitoring post-termination activity and enforcing system standards through appropriate legal channels may help safeguard brand reputation across the franchise system.
This article is based solely on the opinion of the Court in this matter. The author has not conducted any independent investigation into the facts. For the avoidance of doubt, each statement related to the law and facts in this article is drawn from the Court’s opinion in this case.
Thomas O’Connell is a Shareholder at Buchalter APC and Chair of the firm’s Franchise Practice Group. For questions about this article or media inquiries, you can contact Tom at toconnell@buchalter.com.
This communication is not intended to create, and does not create, an attorney-client relationship or any other legal relationship. No statement herein constitutes legal advice, nor should it be relied upon or interpreted as such. This communication is for general informational purposes only and is not a substitute for legal counsel. Readers should not act or refrain from acting based on any information provided without seeking appropriate legal advice specific to their situation. For more information, visit www.buchalter.com.
