In a recent decision, the Delaware Court of Chancery noted that a plaintiff-franchisor did not take adequate protections to safeguard the confidentiality of its purported trade secrets while using a remote audiovisual conferencing platform, Zoom, making it clear that litigants will be expected, when necessary, to understand and utilize the various security features included with such platforms.

In Smash Franchise Partners, LLC v. Kanda Holdings, Inc., the plaintiffs accused the defendants of misappropriating trade secrets and sought a preliminary injunction barring the defendants from using and/or disclosing Smash’s confidential and proprietary information. The court ruled that Smash was not reasonably likely to succeed on the merits of its misappropriation claim because it likely could not establish that a protectable trade secret existed, or that, as a result of Smash’s failure to use the appropriate security features and procedures available on Zoom, adequate steps had been taken to protect the trade secrets.

Background and Analysis

Smash, a mobile trash compaction business, sells franchises to entrepreneurs interested in owning and operating a Smash My Trash franchise in a protected territory. The defendants initially were interested in purchasing a franchise and engaged in the beginning stages of the franchising process with Smash. Smash’s program for recruiting prospective franchisees included numerous virtual meetings with current Smash franchisees as well as Smash’s founder, which, as a result of the pandemic, were all held on Zoom. Due to the nature of the information disclosed during these meetings, all prospective franchisees, including the defendants, were asked to sign a non-disclosure agreement. The defendants signed the NDA and participated in multiple meetings where company information was discussed. After engaging in the initial stages of the franchising process, the defendants decided to open a mobile trash compacting business of their own, in direct competition with Smash.

In response, Smash filed suit for various claims, including misappropriation of trade secrets, one of the grounds on which it also sought a preliminary injunction. To obtain the preliminary injunction, Smash had to demonstrate a reasonable probability of success on the merits of the misappropriation claim. To do so, Smash had to show both that a trade secret existed and that it had been misappropriated. Despite finding that Smash had not established a reasonable likelihood of success that it had a protectable trade secret, which automatically defeated Smash’s request for the preliminary injunction, Vice Chancellor Laster considered whether Smash had taken reasonable steps to protect its alleged trade secrets.

The claimed trade secrets allegedly were disclosed during Zoom meetings between Smash and prospective franchisees. Zoom offers certain security features to help ensure that confidentiality is maintained, if necessary. Smash did not, however, take advantage of those features. All of the meetings were held using the same Zoom link, and participants were under no obligation to keep the link confidential, meaning that the link, and access to all of the meetings, could easily have been shared with anyone. Meeting access also was not password protected. Finally, while Smash’s internal procedures provided that a company representative would take roll at the beginning of each meeting and remove anyone who did not have permission to be there, that procedure was not followed. In fact, the evidence showed that numerous individuals who could not be identified by Smash attended the Zoom meetings, so the company could not know whether all meeting participants had signed the required NDA, a fact crucial to the court’s finding. Had Smash monitored the meeting participants to ensure that all individuals attending had signed an NDA, the company would have had a stronger argument that it safeguarded its trade secrets. However, in light of these shortcomings, Vice Chancellor Laster found that Smash had not taken reasonable steps to protect its trade secrets, further damning its claim for misappropriation of trade secrets and request for preliminary injunction.

Takeaway

Despite the sudden transition to a remote world, the Delaware Court of Chancery underscored the importance of maintaining security and confidentiality in the face of new, or at least more widely used, technologies, especially remote audiovisual conferencing platforms such as Zoom. When using Zoom and the like to hold meetings where sensitive information is disclosed, companies and individuals must utilize security features such as password-protected meeting links, and implement other procedures such as taking roll and removing participants whose attendance is not authorized or who have not signed required NDAs to ensure that security and confidentiality is maintained.