After obtaining a temporary restraining order, Freedom Franchise Systems (“Freedom”), the franchisor of a boat-club business, was denied a preliminary injunction to stop a former franchisee prospect from using claimed trade secrets. The court ruled Freedom did not show it was likely to win as the claimed secret—membership/customer contracts—likely were not trade secrets.
Freedom entered into a franchise agreement with a franchisee to operate a Freedom boat club at a marina. The marina was sold to Choto Marina. Freedom was made aware that the franchisee intended to sell its assets to Choto and Freedom had discussions for Choto to become its franchisee.
Freedom let Choto manage the franchise prior to purchase, but then Choto did not buy the franchise. The franchisee and Choto allegedly sent Freedom a notice terminating the relationship. However, Freedom later sent its own termination notice to Choto; sued Choto and others; and obtained a restraining order.
A hearing was held on whether to make the restraining order a preliminary injunction. Freedom testified it became aware the franchisee provided membership agreements to Choto, which were to be executed between Choto and the members. Freedom claimed these contract relationships, not just the written agreements, belonged to Freedom. Freedom based this claim on the franchise agreement, which said Freedom owned all the franchisee’s confidential information, including customer lists and data and information obtained by the franchisee. Freedom argued this made the franchisee’s customer relationships Freedom’s property. Freedom argued these relationships were trade secrets necessitating injunctive relief against Choto from maintaining membership relationships with the franchisee’s customers.
The court found the membership contracts between the franchisee (or Choto) and members were unlikely to be trade secrets because the membership contracts, by their nature, were shared with an outside party: the member. The court was not persuaded that Freedom possessed ownership rights in the membership agreements. This was because the franchise agreement said nothing about membership agreements or relations, and the membership agreements did not designate Freedom as a third-party beneficiary. Nor was Freedom a contracting party. Since Freedom was not a party to the membership agreements, its claim for contractual interference also likely failed.
Freedom’s failure to demonstrate a sufficient likelihood of success on the merits warranted denial of preliminary injunctive relief. This outcome favored Choto, given the terms of the franchise agreement and membership agreements.
The result could have been different had the language in the franchise agreement and membership agreements said that Freedom owned the membership agreements and client relationships. Existing franchisees and potential buyers should consult with franchise counsel to understand their rights to a franchisor’s “confidential information” prior to cutting ties with a franchisor to operate the same or a similar business.
Refer to: Freedom Franchise Sys., LLC v. Choto Boat Club, LLC, No. 3:22-CV-135, 2022 WL 1126388 (E.D. Tenn. Apr. 15, 2022), and Freedom Franchise Sys., LLC v. Choto Boat Club, LLC, No. 3:22-CV-135, 2022 WL 1206569 (E.D. Tenn. Apr. 21, 2022).
