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Wiley Rein & Fielding Franchise Attorneys Score Major Victories for H&R Block

January 17, 2003

Washington, DC—Litigation teams from WRF’s Franchise Practice have successfully defended H&R Block in two significant cases: Franklin v. H&R Block and Armstrong v. H&R Block. Thesetwo cases have been watched closely by the franchising community because of their far-reaching impact on the ability of franchisors to remain competitive in rapidly changing, technology-driven markets. Both cases involve challenges by Block franchisees to the sale of Block’s TAXCUT software and Block’s delivery of online tax services.

WRF Franchise and Litigation partner Peter J. Klarfeld, who led the litigation and arbitration efforts, said, "These are significant decisions, not only for H&R Block, but also for other franchise systems seeking to use Internet distribution and other technology-driven distribution channels in the context of franchisee territorial exclusivity under older contracts."

In Franklin, anarbitration panel upheld Block’s offering of Internet services and computer tax preparation software against a franchisee’s claims of encroachment. Mr. Klarfeld and partner Michael Sturm prevailed on all claims in the Franklin case after a full evidentiary hearing in December 2002 before a three-member American Arbitration Association Panel of Arbitrators. In its Opinion, written by former Minnesota Supreme Court Justice John E. Simonett, the panel found that H&R Block’s Internet program did not "unreasonably intrude on Franklin’s [bricks-and-mortar] operations" and that H&R Block’s Internet sales to customers residing in Franklin’s territory did not breach the exclusivity granted in Franklin’s agreements. In October 2002, the panel had decided that the sale of TAXCUT did not violate any of the franchisee’s contract rights.

In Armstrong, Mr. Klarfeld and partners Arthur Cantor and Michael Sturm and associate Benjamin B. Reed argued that 1973-form franchise agreements, which the parties had renewed every five years, should be allowed to expire at the end of their current terms. The Missouri Court of Appeals unanimously sustained Block’s position. The court held that the renewal provision contained in those agreements, providing for successive automatic renewals in the same form, did not create enforceable perpetual contracts and would expire at the end of their current terms unless renewed by mutual consent. Four franchisee associations and the International Franchise Association all submitted amicus briefs in the Court of Appeals.

The franchisees’ Internet and software claims in Armstrong were stayed pending resolution of the duration of the franchise agreements. Although the Court of Appeals decision in Armstrong remains open while the franchisees seek review in the Supreme Court of Missouri, the lengthy, reasoned and unanimous Court of Appeals opinion represents a significant step for Block in its modernization of its system.

Both opinions may be viewed on the Wiley Rein & Fielding website at: and www.wrf.com/award.pdf.