New Briefs

Jackson Hewitt Franchisees Settle Tax Fraud Complaint

The U.S. Justice Department ('DOJ') announced on Sept. 28 that it has resolved lawsuits against Jackson Hewitt tax-preparation franchises in Atlanta, Chicago, Detroit, and Raleigh-Durham, NC. The corporations that owned the Atlanta, Chicago, and Detroit franchises, as well as seven employees of the franchises, will be permanently barred from preparing federal income tax returns when local courts approve the DOJ settlements. Most prominent is Farrukh Sohail, who had partial ownership of each of the franchises; he has been barred from preparing taxes for five years, and can operate under certain restrictions thereafter.

Sohail and the other owners agreed to sell their interests in the Atlanta, Chicago, and Detroit franchises. In Raleigh-Durham, some of the existing owners will remain affiliated with the business, but they will not be preparing taxes, said DOJ. The approximately 125 franchise offices in those cities prepared more than 105,000 tax returns last year, according to Jackson Hewitt.

The settlements nearly complete litigation launched in April 2007, when DOJ filed lawsuits that accused the franchises of participating in fraudulent tax practices that enabled customers to claim Earned Income Tax Credits for which they were not entitled. Other alleged fraud included filing false returns claiming refunds based on phony W-2 forms, using fabricated businesses and business expenses on returns to claim bogus deductions, and claiming fuel tax credits in absurd amounts for customers clearly not entitled to any credits.

Franchisor Jackson Hewitt Tax Service hired former Internal Revenue Service Commissioner Fred Goldberg, Jr. to conduct an internal review to determine if corporate employees were involved in the alleged fraud. In September, Jackson Hewitt announced that it did not find evidence that its employees engaged in the activities.

However, Jackson Hewitt has since announced it would expand its training programs for franchisees and improve its monitoring of their practices. The company also hired a chief tax compliance officer.

Massachusetts Franchise Relationship Act Remains Stalled

Massachusetts Senate Bill No. 142, which would strengthen franchisees' protections in cases of termination or non-renewal, remains in the Committee on Community Development and Small Business, where it has been since June.

The bill, 'An Act Relative to Franchisee Protection,' would allow franchisees to form their own independent associations and would prohibit franchise termination or non-renewal without 'good cause.' Sixty-day notification of intent to terminate or non-renew would be mandatory, and the franchisor would be required to repurchase inventory and supplies, and to provide compensation for goodwill in most situations.

Also, the bill prohibits termination or non-renewal if the franchisee:

• Refuses to take part in promotional campaigns of the franchisor's products;
• Fails to meet sales quotas suggested by the franchisor;
• Refuses to sell any products at a price suggested by the franchisor or supplier;
• Refuses to keep the premises open and operating during documented unprofitable hours; or
• Refuses to give the franchisor or supplier financial records of the operation of the franchise that are not related or unnecessary to the franchisee's obligations under the franchise agreement.

Quiznos Settles with Franchise Owner, But Class Actions Emerge

Toasted-sub-sandwich giant Quiznos is facing two pending class action lawsuits in the U.S. District Court for the District of Colorado, in Denver: one from angry franchisees and one from franchise prospects who never opened restaurants. Neither lawsuit has been certified.

In Bonanno, et al. v. The Quiznos Franchise Company, LLC, et al., Civil Docket No. 06-02358, prospective franchisees allege that they paid franchise fees to Quiznos ' at an average of $25,000 ' but were defrauded because Quiznos never intended for them to be able to find a suitable location to begin operations. Under their franchise agreements, these prospects have lost their initial investment or are in danger of losing that investment, said Justin Klein (Marks and Klein), who is representing the plaintiffs. Klein said that about 3,000 prospective franchisees are affected.

The lawsuit charges that 'The UFOC presented by Quiznos is inaccurate, intentionally confusing, and fails to properly disclose material information with regard to site selection, including, without limitation: (a) the time it takes to find a location; (b); the likelihood of finding a location in the trade area purchased by the franchisee; (c) the nature and the quality of site selection assistance to be provided by Quiznos; and (d) the time that it ordinarily takes not only to secure a location but to become operational.' Meanwhile, Quiznos 'maintains unilateral discretion over the approval of the franchisee's location and the franchisee's lease.'

In the other lawsuit, Brunet, et al. v. The Quiznos Franchise Company, LLC, et al., the Toasted Sub Franchise Association ('TSFA'), represented by Klein, alleges that Quiznos 'systematically defrauded its franchisees in a scheme designed to build the brand at the expense of its operators in the field.' In particular, franchisees object to the comprehensive requirements that franchisees purchase 'essential goods' through approved suppliers, Klein said. Quiznos earns kickbacks from some suppliers, who inflate the prices they charge to franchisees, he said.

'Quiznos sold franchises to extract as much money as it could from franchisees,' Klein added. 'The system is focused on generating more franchisees, but it's irrelevant to the corporation if a franchisee is successful.'

The lawsuits are the latest challenge for Quiznos, which put one dispute behind it this summer when it settled a lawsuit with former franchisee Chris Bray, who was the president of the independent franchisee association TSFA (see FLBA, June 2007). The lawsuit by current franchisees revisits some of the complaints raised by Bray when he was president of TSFA. Now TSFA is led by Danny Kessels, a Colorado franchisee.

Jackson Hewitt Franchisees Settle Tax Fraud Complaint

The U.S. Justice Department ('DOJ') announced on Sept. 28 that it has resolved lawsuits against Jackson Hewitt tax-preparation franchises in Atlanta, Chicago, Detroit, and Raleigh-Durham, NC. The corporations that owned the Atlanta, Chicago, and Detroit franchises, as well as seven employees of the franchises, will be permanently barred from preparing federal income tax returns when local courts approve the DOJ settlements. Most prominent is Farrukh Sohail, who had partial ownership of each of the franchises; he has been barred from preparing taxes for five years, and can operate under certain restrictions thereafter.

Sohail and the other owners agreed to sell their interests in the Atlanta, Chicago, and Detroit franchises. In Raleigh-Durham, some of the existing owners will remain affiliated with the business, but they will not be preparing taxes, said DOJ. The approximately 125 franchise offices in those cities prepared more than 105,000 tax returns last year, according to Jackson Hewitt.

The settlements nearly complete litigation launched in April 2007, when DOJ filed lawsuits that accused the franchises of participating in fraudulent tax practices that enabled customers to claim Earned Income Tax Credits for which they were not entitled. Other alleged fraud included filing false returns claiming refunds based on phony W-2 forms, using fabricated businesses and business expenses on returns to claim bogus deductions, and claiming fuel tax credits in absurd amounts for customers clearly not entitled to any credits.

Franchisor Jackson Hewitt Tax Service hired former Internal Revenue Service Commissioner Fred Goldberg, Jr. to conduct an internal review to determine if corporate employees were involved in the alleged fraud. In September, Jackson Hewitt announced that it did not find evidence that its employees engaged in the activities.

However, Jackson Hewitt has since announced it would expand its training programs for franchisees and improve its monitoring of their practices. The company also hired a chief tax compliance officer.

Massachusetts Franchise Relationship Act Remains Stalled

Massachusetts Senate Bill No. 142, which would strengthen franchisees' protections in cases of termination or non-renewal, remains in the Committee on Community Development and Small Business, where it has been since June.

The bill, 'An Act Relative to Franchisee Protection,' would allow franchisees to form their own independent associations and would prohibit franchise termination or non-renewal without 'good cause.' Sixty-day notification of intent to terminate or non-renew would be mandatory, and the franchisor would be required to repurchase inventory and supplies, and to provide compensation for goodwill in most situations.

Also, the bill prohibits termination or non-renewal if the franchisee:

• Refuses to take part in promotional campaigns of the franchisor's products;
• Fails to meet sales quotas suggested by the franchisor;
• Refuses to sell any products at a price suggested by the franchisor or supplier;
• Refuses to keep the premises open and operating during documented unprofitable hours; or
• Refuses to give the franchisor or supplier financial records of the operation of the franchise that are not related or unnecessary to the franchisee's obligations under the franchise agreement.

Quiznos Settles with Franchise Owner, But Class Actions Emerge

Toasted-sub-sandwich giant Quiznos is facing two pending class action lawsuits in the U.S. District Court for the District of Colorado, in Denver: one from angry franchisees and one from franchise prospects who never opened restaurants. Neither lawsuit has been certified.

In Bonanno, et al. v. The Quiznos Franchise Company, LLC, et al., Civil Docket No. 06-02358, prospective franchisees allege that they paid franchise fees to Quiznos ' at an average of $25,000 ' but were defrauded because Quiznos never intended for them to be able to find a suitable location to begin operations. Under their franchise agreements, these prospects have lost their initial investment or are in danger of losing that investment, said Justin Klein (Marks and Klein), who is representing the plaintiffs. Klein said that about 3,000 prospective franchisees are affected.

The lawsuit charges that 'The UFOC presented by Quiznos is inaccurate, intentionally confusing, and fails to properly disclose material information with regard to site selection, including, without limitation: (a) the time it takes to find a location; (b); the likelihood of finding a location in the trade area purchased by the franchisee; (c) the nature and the quality of site selection assistance to be provided by Quiznos; and (d) the time that it ordinarily takes not only to secure a location but to become operational.' Meanwhile, Quiznos 'maintains unilateral discretion over the approval of the franchisee's location and the franchisee's lease.'

In the other lawsuit, Brunet, et al. v. The Quiznos Franchise Company, LLC, et al., the Toasted Sub Franchise Association ('TSFA'), represented by Klein, alleges that Quiznos 'systematically defrauded its franchisees in a scheme designed to build the brand at the expense of its operators in the field.' In particular, franchisees object to the comprehensive requirements that franchisees purchase 'essential goods' through approved suppliers, Klein said. Quiznos earns kickbacks from some suppliers, who inflate the prices they charge to franchisees, he said.

'Quiznos sold franchises to extract as much money as it could from franchisees,' Klein added. 'The system is focused on generating more franchisees, but it's irrelevant to the corporation if a franchisee is successful.'

The lawsuits are the latest challenge for Quiznos, which put one dispute behind it this summer when it settled a lawsuit with former franchisee Chris Bray, who was the president of the independent franchisee association TSFA (see FLBA, June 2007). The lawsuit by current franchisees revisits some of the complaints raised by Bray when he was president of TSFA. Now TSFA is led by Danny Kessels, a Colorado franchisee.