Franchisee 101: Trashing the Competition

Lewitt HackmanIn a misappropriation of trade secrets action, a franchisor sued a prospective franchisee, claiming breach of a non-disclosure agreement ("NDA") by operating a competing business. The prospective franchisee signed the NDA before attending the franchisor’s discovery day. The court disagreed, finding all information the prospective franchisee learned and used in the competing business was public knowledge, not subject to an NDA.

Todd Perri, a prospective franchisee of Smash Franchise Partners, franchisor of mobile trash compacting businesses, researched the franchisor’s business model. Perri used information the franchisor posted online, spoke to franchise brokers about the franchise, and participated in calls about the business. These included an introductory call and a call relating to the economics of business and start-up expenses required to begin operations.

After both calls, Perri was required to sign an NDA before he could attend franchisor’s discovery day. Perri signed the NDA and continued to learn about the franchisor’s system from franchisor executives and franchisees. Perri did not sign a franchise agreement. Instead, he began a competing mobile trash compacting business.
The franchisor sued Perri for misappropriating trade secrets and sought a preliminary injunction to bar Perri from using and disclosing the franchisor’s confidential and proprietary information. The franchisor claimed Perri began operating a competing business, despite having signed the NDA. The court denied injunctive relief.
The franchisor claimed the confidential information Perri received included information posted online and information received from franchisees. The court found such information is publicly available and not protected by the NDA. This was because it excluded (1) information that was publicly available at the time of disclosure and (2) information that was provided by a third-party. The court determined that the information received by Perri was not specific enough to reveal critical information about the franchisor’s business.
Prospective franchisees who research a franchise system and receive information from a franchisor, who then decide to open a similar competing business, should consult with counsel to ensure that operating the business will not breach an existing agreement with the franchisor, such as a non-disclosure agreement.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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