IP Law Daily Preliminary injunction warranted to prevent franchisee’s trade secret misappropriation
Wednesday, April 3, 2019

Preliminary injunction warranted to prevent franchisee’s trade secret misappropriation

By Matt Pavich, J.D.

Ice cream shop franchisor showed that franchisee misappropriated a trade secret and that it would suffer irreparable harm absent a preliminary injunction.

An ice cream parlor franchisor showed that information it gave to a franchisee was not known outside the business and was restricted by confidentiality agreements and was therefore likely a trade secret, the Sixth Circuit Court of Appeals has ruled. In an unpublished opinion, the appellate court affirmed a district court’s finding that the franchisor had a likelihood of success at trial and would be irreparably harmed absent a preliminary injunction barring the franchisee from setting up a competing ice cream parlor (Handel’s Enterprises, Inc. v. Schulenburg, April 1, 2019, Cole, R.).

The franchisor, which used products, equipment, methods, and recipes exclusive to itself entered into a five-year franchise agreement with the franchisee in 2016. Pursuant to that agreement, the franchisee agreed not to compete with the franchisor in any way for the initial term of the agreement and during the two years following the expiration or termination of the agreement. The non-compete clauses covered a three-mile radius and an additional neighborhood. The agreement also stated that the franchisor was providing proprietary and confidential trade secret information and that the franchisee would not use that information unless the franchisor approved. The franchisee also received an operations manual containing the specifications, standards, and procedures for operating the franchise and the manual stated that the franchisee would keep its contents confidential.

In 2017, the parties had discussions about developing a second franchise, but the franchisee stated that he did not want to pay a separate fee for the second franchise, did not want to sign another franchise agreement, and declined to provide a final lease for the proposed location. Instead, he opened a competing ice cream parlor and filed suit in state court to rescind the parties’ existing franchise agreement. The franchisor filed this suit, alleging misappropriation of trade secrets in violation of the Ohio Uniform Trade Secrets Act and breach of the noncompete provision in the parties’ franchise agreement. Following the entry of a preliminary injunction against the franchisee by the federal district court in Youngstown, Ohio, prohibiting it from continuing to operate the competing shop that did not operate under the franchisor’s brand, the franchisee appealed.

Likelihood of success. The appellate court affirmed the district court’s ruling that the franchisor was likely to succeed on the merits of its claim for misappropriation of trade secrets and breach of the non-compete clause. Contrary to the franchisee’s argument that the district court merely accepted the franchisor’s assertion that its materials constituted trade secrets, the franchisor satisfactorily alleged the existence of trade secrets, according to the appellate court. The franchisor’s operating manual had standards, and procedures for operating the franchise and the franchise agreement described the confidential information provided to the franchisee as "the total knowledge" of its system and operation. Furthermore, the franchisee received sensitive information during the in-person training. Moreover, the franchisor took steps to ensure the secrecy of its information by requiring the franchisee to sign the franchise agreement and required all employees to sign non-disclosure agreements prior to learning the manual’s contents. Most importantly, this information was not known outside the business and the franchisor had developed it over several decades.

The court also affirmed the district court’s ruling that the franchisee had made unauthorized use of those trade secrets. Under Ohio law, threatened misappropriation of trade secrets may be enjoined and the district court correctly found that the franchisee had taken steps that threatened use of the trade secrets. The franchisee still had access to all trade secrets, including the recipes and unique ingredients for each flavor. Additionally, the franchisee had placed an "unusually large" order for flavors, suggesting it was stocking up on flavors. Thus, the appellate court ruled that the franchisor had shown a strong likelihood of success on the merits of its trade secrets misappropriation claim.

The court also ruled that the franchisor had shown a strong likelihood of success on the merits of its claim for breach of the noncompetition provision in the parties’ agreement. Contrary to the franchisee’s argument, the clause was limited by its own terms and was only applicable during the five-year term of the franchise agreement; a reasonable temporal restriction under Ohio law. Given the franchisor’s business interests, the geographic limitations were also reasonable. Thus, the franchisor presented a strong likelihood of success on its claim for breach of the noncompete clause.

Irreparable harm. The court also affirmed the district court’s ruling that the franchisor would suffer irreparable harm absent an injunction. The franchisee argued that because there were no trade secrets being used, the franchisor could not suffer harm, but the court noted it had already rejected that premise. Additionally, news articles had already appeared linking the franchisee’s new store and the franchisor’s chain, indicating a strong risk of market confusion and suggesting a potential loss of fair competition and customer goodwill.

The franchisee did not contest that any harm to itself was outweighed by harm to the franchisor or that public interest would be served by issuing the injunction. The appellate court therefore affirmed the order issuing the preliminary injunction.

This case is No. 18-3596.

Attorneys: Andrew Gregory Fiorella (Benesch, Friedlander, Coplan & Aronoff LLP) for Handel's Enterprises, Inc. d/b/a Handel's Homemade Ice Cream & Yogurt. Raymond V. Vasvari (Vasvari & Zimmerman) for Kenneth S. Schulenburg and Moonlight101, Inc.

Companies: Handel's Enterprises, Inc.; Moonlight101, Inc.

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