Reported / Citable
Background
JTH Tax LLC, doing business as Liberty Tax Service, sued former franchisee Patrick Perez, Christopher Perez, and Perez & Associates, Inc., alleging that they retained and used Liberty’s trade secrets and customer information after the franchise relationship ended. Liberty asserted a federal Defend Trade Secrets Act claim and Virginia-law claims for breach of contract, conversion, unjust enrichment, and tortious interference.
The defendants did not answer or otherwise appear after service, and the clerk entered default against each of them. District Judge Ed Kinkeade referred Liberty’s motion for default judgment to Magistrate Judge David L. Horan for findings and a recommendation.
The Court’s Holding
The magistrate judge recommended granting the motion in part. He concluded that federal-question jurisdiction existed because Liberty plausibly alleged a DTSA violation, although Liberty had not adequately alleged diversity jurisdiction because it identified its state of organization and principal place of business rather than the citizenship of every LLC member. The court could exercise supplemental jurisdiction over the related state-law claims, and the pleadings also supported personal jurisdiction and satisfaction of the procedural prerequisites for default judgment.
Accepting the well-pleaded facts as admitted, the magistrate judge found sufficient allegations supporting the DTSA claim, the breach-of-contract claim against Patrick Perez, and the conversion and unjust-enrichment claims. He recommended denying default judgment on the tortious-interference claim against Christopher Perez because Liberty alleged only conclusions, not facts showing that Christopher induced or caused Patrick’s breach.
The recommendation did not fix damages or the terms of an injunction. Liberty sought $275,666.84 in compensatory and liquidated damages, interest, attorneys’ fees, and permanent injunctive relief, but the magistrate judge recommended further proceedings to determine the recoverable amounts and the proper scope of any injunction.
Key Takeaways
- A defendant’s default admits well-pleaded facts, but it does not cure a claim that lacks sufficient factual allegations.
- Liberty plausibly pleaded trade-secret misappropriation and several Virginia-law claims, but its conclusory allegation that Christopher Perez caused another defendant’s breach did not support tortious-interference liability.
- The recommendation left damages, attorneys’ fees, costs, and the scope of permanent injunctive relief for later determination.
Why It Matters
The recommendation illustrates that courts must independently examine jurisdiction and the legal sufficiency of each claim before entering default judgment. Even when defendants fail to appear, plaintiffs must plead facts supporting every element of liability and provide competent evidence for damages.
It also highlights the distinct citizenship rules for LLCs: identifying an LLC’s formation state and principal place of business does not establish diversity citizenship because the citizenship of every member controls.