Unusual Verdict: Jackson Hewitt Liable for Franchisee's Actions

Posted by: Nick Leiber on February 16, 2010

This is a post by guest blogger Janet Sparks. It is cross-posted on Blue MauMau.

janet_sparks.jpgLast Wednesday a jury found that franchisor Jackson Hewitt Tax Services (JTX) must pay a Sarasota dentist $575,000 for his losses in being duped in a broad investment scheme by franchisee Daniel Prewett, a convicted felon.

Prewett had been in prison for a tax fraud conviction prior to running his tax preparation franchises for over ten years.

And yet the brand appointed him as a franchise owner. Attorneys for the investor testified that Jackson Hewitt never conducted criminal background checks to find his fraud conviction. They instead gave him a lifetime achievement award.

Prewett is currently serving an 18-year prison term in laundering cash for undercover agents and financing a sale of cocaine. He had been arrested by undercover federal agents in 2006, while working in his tax preparation office. After he posted bail, he conducted business as usual, although he was barred from doing so. In 2007, he fled the country and was later captured in Italy. Prewett was extradited to the United States for sentencing.

This week's verdict strengthens the claims of another 130 investors who say they lost $18 million to Prewett's "Ponzi scheme."

According to Robert Zarco of law firm Zarco, Einhorn, Salkowski & Brito, an expert witness for the consumer plaintiff, this is a very rare verdict. "This is the second time I've testified as an expert in a case in which a franchisor was held vicariously liable for the negligence and actions of its franchisee. It's an unusual verdict because a franchisee is considered an independent contractor," he explained. Zarco felt he was able to pierce that theory through the analysis of how the franchisee misrepresented his relationship with Jackson Hewitt to his customers, and with the franchisor's full knowledge of what Prewett was doing. "The franchisor in essence put his head in the sand," Zarco asserted.

Zarco argued at trial that the franchisor can be vicariously liable because of the degree of control that he has over the franchisee, and that is under "actual agency" theory. In this case he felt he was successful in arguing under an "apparent agency" theory, which is different. He explained, "It was not based on control, it is based on the representation that the franchisor makes publicly by setting forth the franchisee to be franchisor-endorsed by the franchisor’s trademarks or an event, when it should not be." He continued, "In this case the consumer relied on the apparent fact that the franchisor’s trademarks were being used on a business, and took no action. The franchisee was actually an affiliate [company] of that business [Jackson Hewitt]."

As a franchisee, Prewett set up a side business in which he managed to sell bogus money market and real estate investments under Jackson Hewitt’s national reputation. The jury decided that Jackson Hewitt wasn’t in the dark. They say that the tax preparation chain knew that Prewett's investment firm JH Investment Services was creating confusion for customers as early as 2002, but took no action to stop it. Prewett told customers that the franchisor was behind his investment offerings. Using the same phone number for both businesses, he answered calls to JH Investment Services as "Jackson Hewitt Services," and wore Jackson Hewitt polo shirts while working. Investors allege that the tax preparation franchise company ignored red flags and complaints pointing to Prewett's scheme and allowed him to prey on their Jackson Hewitt customers.

After his prison sentence in 2007, Prewett and his company filed for bankruptcy, and investors were informed that they would have to get in line behind other creditors and banks to get any chance for repayment. They then proceeded with lawsuits going after the deep pockets of Jackson Hewitt. In an interview with the Herald Tribune, attorney Robert Turffs, representing dentist Frank Kaman and other investors, stated, "We think this validates our cases, and these people have valid claims against Jackson Hewitt."

Other investors, including a Sarasota police officer, a circuit judge, and medical professionals testified during the civil trial about how the reputation of Jackson Hewitt led them to trust Prewett with their money. "Jackson Hewitt knowingly put him in a position where he could say, 'I am Jackson Hewitt,'" one of Kaman's attorneys stated during closing statements.

A HeraldTribune.com report said that Jackson Hewitt attorney Ron Holliday said Prewett hid his investment schemes and the national company was also victimized by him. "We believe who is really at fault here is Dan Prewett," Holliday said. "We believe it would be compounding an error if you said Jackson Hewitt needed to be punished for what Dan Prewett did."

Attorney Zarco said because Jackson Hewitt allowed Prewett to proceed using its trademarks without restriction it shows a violation of the Lanham Act, which defines the statutory and common law boundaries to trademarks and service marks. "The consumer has the right to rely on the trademark as representing quality, value and authenticity. Jackson Hewitt failed to take action to protect the trademark and any damage the consumer sustained as a result can be tied to the trademark owner. This was an extraordinary case," Zarco exclaimed.

Federal prosecutors stated that it was doubtful Prewett will ever face criminal charges related to the millions of dollars his former clients say he stole. Extradition laws prohibit them from bringing new charges against him.

Janet Sparks is a reporter and blogger for Blue MauMau, a daily business news site for franchise buyers and owner-operators, and a columnist/reporter for Franchise Times magazine. Previously, she was the owner/publisher of the Continental Franchise Review, an industry trade journal first published in 1967.

Reader Comments

Carol Cross

February 16, 2010 06:08 PM

This IS an unusual verdict and will alert other franchisors that they have a responsibility to investigate who buys their franchises and to prevent the brand's reputation from being used to promote other ventures.

Apparently, Jackson Hewitt, the franchisor, felt too comfortable and protected because of the standard adhesory contracts that protect franchisors from vicarious liability -- and they goofed!

Hopefully, this jury verdict will stand and will not be appealed to the higher court. Good for the jury and Attorney Zarco who appeared for the plaintiffs. Looks like justice to me!

http://thegreatfranchisingrobbery.blogspot.com/

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What's it like to run your own company today? Entrepreneurs face multiple hurdles new and old, from raising capital and managing employees to keeping up with technology and competing in a global marketplace. In this blog, the Small Business channel's John Tozzi and Nick Leiber discuss the news, trends, and ideas that matter to small business owners. Follow them on Twitter @newentrepreneur.

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