Tax franchisor’s former in-house counsel can represent plaintiffs

Where Liberty Tax, the tax preparation franchisor, failed to show that the confidential information its former in-house counsel obtained during his six-year tenure was substantially related to the issues in the case, its motion to disqualify him was denied.

Background

Liberty Tax sells franchises engaged in the preparation of tax returns as well as area development, or AD, territories that support the franchises within their prescribed geographic boundaries. Plaintiffs are parties to two separate AD agreements with defendant whereby plaintiffs obtained the exclusive right to sell and support tax preparation franchises for Liberty in counties in Texas.

On Feb. 25, 2021, plaintiffs filed a four-count amended complaint against defendant. Plaintiffs are represented by Christopher Davis, who had worked for Liberty Tax. Defendant has moved to disqualify Davis.

Analysis

To bring a motion to disqualify counsel for violating Rule 1.9 of the Virginia Rules of Professional Conduct, the moving party bears the high burden of satisfying four criteria: (1) the moving party and opposing counsel had a prior attorney-client relationship; (2) the interests of the opposing counsel’s present client are adverse to the movant; (3) the matters involved in the present underlying lawsuit are substantially related to the matters for which the opposing counsel previously represented the moving party and (4) the moving party does not consent.

In this case, the first, second and fourth elements are undisputed. Accordingly, the key question is whether the matters involved in the present underlying lawsuit is substantially related to the matters for which the opposing counsel previously represented the moving party. The court finds that defendant has not satisfied its high burden of showing a patently clear and substantial relationship between the issues in the instant litigation and those that Davis represented Liberty on as in-house counsel.

The court finds defendant did not provide sufficient evidence showing a patently clear connection between the confidential information Davis obtained during his tenure as in-house counsel for Liberty and the issues at bar. First, the evidence shows that the disputes of the instant case occurred seven years after Davis left as Liberty’s counsel. Critically, plaintiffs were neither an opposing party nor a franchisee at the time that Davis worked as Liberty’s in-house counsel and the specific agreements at  issue were neither entered nor drafted at the time. Although Davis may have been privy to specific AD agreements, their termination and Liberty’s general litigation strategy regarding AD terminations, these issues are not substantially related to the specific agreements at bar.

Second, as defendant acknowledged, the issues involved in the instant litigation including termination within 180 days and e-file fees and royalty calculations are not involved in the instant dispute. Thus, the only issues that may be substantially related is Davis’ knowledge about Liberty’s AD agreements, their termination and Liberty’s general litigation strategy regarding AD terminations or nonrenewal as it relates to application of state law.

However, the court finds that an attorney’s ability to determine how state law and case precedent will apply to a dispute over AD agreements does not impute privileged communication, secret information and information the lawyer gained during his representation of his former client. Moreover, although Davis may have knowledge of Liberty’s litigation approach to disputes over AD agreements and termination, any such knowledge would be of little help because the instant matter is strictly a dispute of contractual interpretation governed by state law.

The court acknowledges that although the legal memorandum that Davis drafted on behalf of Liberty, about the application of state law to specific contractual disputes with AD and franchisees, is confidential and privileged client information, the skills of legal research and applying relevant state law to a particular dispute regarding AD termination agreement is not confidential. Third, plaintiffs submitted declarations showing that Davis was siloed from the kind of disputes at bar and, thus, not privy to confidential information particularly on point in this case.

Overall, the court finds that the confidential information Davis obtained during his six-year tenure at Liberty, regarding AD agreements and Liberty’s approach to termination, is not sufficient to merit disqualification because it is not substantially related to the disputes in the instant litigation. Unlike other cases where counsel has used such confidential information directly against a previous client, the court here does not find that Davis is using such confidential information against Liberty.

Defendant’s motion to disqualify counsel denied.

Road King Development Inc. v. JTH Tax LLC d/b/a/ Liberty Tax, Case No. 2:21-cv-00055, May 19, 2021. EDVA at Norfolk (Jackson). VLW 021-3-259. 18 pp.