FLN FranchiseLAW
By Michael R. Daigle and Samuel G. Wieczorek
Hot-N-Ready for Trade Secret Litigation?
A
recent federal case from South
Dakota provides several important reminders for franchisors
regarding protection of trade
secrets.
In Little Caesar Enterprises, Inc. v.
Sioux Falls Pizza Company, Inc., Little
Caesars sought a temporary restraining order against a former franchisee.
Little Caesars was seeking to stop
the former franchisee from offering
“all day, every day ready-for-pick-up
pizza” in the former franchisee’s new
pizza restaurant, which was located at
the same address as the former franchisee’s Little Caesars franchise, although the former franchisee had deimaged the restaurant. According to
Little Caesars, the system of offering
all day, ready-for-pick-up pizza was a
trade secret, which the former franchisee stole when it started operating
in essentially the same manner it had
operated as a franchisee.
The court in this case applied the
South Dakota Trade Secrets Act, which
(like most other states’ trade secrets
laws) requires that, to qualify for protection, the information sought to be
protected must, first, derive economic
value from not being generally known
or readily ascertainable by other persons
and, second, be subject to reasonable
efforts to maintain its secrecy.
In denying the franchisor’s requested
relief, the court accepted the former
franchisee’s testimony that “hundreds”
of other pizza restaurants employed the
same system for preparing pizzas and for
keeping hot and ready pizzas available
throughout the day and concluded that
Little Caesars presented insufficient
evidence to show that its system was
not generally known in the industry or
was not readily ascertainable. The court
also found Little Caesars’ description
of the system “too generic or general
to amount to a trade secret.”
The court also said that Little Caesars
did not establish that it used reason-
50
Franchiseupdate Issu e I, 2 0 1 3
able efforts to protect its trade secrets.
Under applicable law, efforts to protect
trade secrets only need to be reasonable. In this case, the former franchisee
clearly was under a confidentiality obligation because Little Caesars required
all franchisees to sign confidentiality
agreements to safeguard its system and
business practices. However, that confidentiality obligation did not extend
to the franchisees’ employees, who also
have direct exposure to the system in
their day-to-day jobs working at each
restaurant. In fact, the court found that
those employees arguably had more
detailed knowledge of the system than
the franchisees, and those employees
were not under a direct confidentiality
obligation. For this reason, the court
found that Little Caesars failed to satisfy the “reasonable efforts” element.
Like the tasty toppings on a supreme
pizza, this case offers several tasty tips
for franchisors.
Tip No. 1: Vigorously defend
your noncompetition agreements.
In previous litigation between the
parties, the former franchisee sued
for “declaratory relief.” In a suit for
declaratory relief, parties who have a
dispute ask a court to determine the
parties’ respective rights and other legal relationships without providing for
enforcement of the judgment. In that
case, the former franchisee asked the
court to declare that it could compete
against Little Caesars despite noncompetition language in the franchise
agreement. For reasons not explained
in the court’s opinion, Little Caesars
did not oppose the former franchisee’s
summary judgment motion, and, consequently, the court found the noncompetition language unenforceable.
The lesson here is, absent compelling
reasons (which, in fairness to Little
Caesars, might have existed), do not
let a former franchisee’s declaratory
judgment action go unopposed.
Tip No. 2: Require your franchisees to get confidentiality agreements from their employees and
enforce this requirement. Include in
your franchise agreements the requirement that franchisees get confidentiality
agreements from their employees. And,
while it might be cumbersome, enforce
that obligation. This is especially true
since, as the court noted in the Little
Caesars case, employees are often most
likely to have day-to-day access to the
franchisor’s trade secrets and systems;
requiring them to protect the confidentiality of that information will be
an important factor in the franchisor’s
proof of reasonable efforts.
Tip No. 3: Make an honest assessment as to what portions of
your system are really trade secrets
before spending lots of money on
litigation. In restaurant operations,
there are unlikely to be many true trade
secrets (other than perhaps things like
proprietary recipes and ingredients).
Commonly available information like
how to make pizzas and provide readymade pizzas may constitute nothing
more than “generic knowledge,” which
is not protectable under trade secret
laws. Franchisors should carefully analyze what portions of their systems are,
in fact, trade secrets, and which portions fall under the category of generic
knowledge of restaurant owners.
Like checking the temperature of
your oven so you don’t burn your pizza,
checking your franchise system’s trade
secret processes is a good idea so your
franchise doesn’t get burned. n
Cheng Cohen LLC is a full-service
boutique law firm, providing practical legal
advice to franchise and distribution clients.
For more information, contact Michael
Daigle ([email protected])
or Sam Wieczorek (samuel.wieczorek@
chengcohen.com) or go to www.chengcohen.
com” www.chengcohen.com.