This Thanksgiving, Trade Secrets Watch is serving a delicious tale about protecting trade secrets in a franchising relationship.

In 1994, Quizno’s entered into a franchise agreement with Robert Kampendahl, an enterprising fellow who wanted to open up a Quizno’s sandwich shop in St. Charles, Illinois.  Unfortunately, Kampendahl didn’t keep his food equipment clean, used unapproved foods, and had safety and sanitation problems, so Quizno’s terminated the franchise agreement. Upon termination, Kampendahl was subject to a covenant not to compete that prohibited him from opening a competing sandwich shop within five miles.

Not one to quibble over contracts, Kampendahl opened Bob’s Deli, a competing sandwich shop located in the same building as his previous Quizno’s shop.  Coincidentally, Bob’s Deli’s menu looked remarkably similar to the Quizno’s menu.  Bob’s Deli served the “Turkey Bacon Guac” which was made of the exact same ingredients as Quizno’s “Turkey Bacon Guacamole” except that Bob’s Deli used provolone cheese rather than mozzarella.  And if you liked to gobble up the “Turkey Lite” at Quizno’s, you could find a sandwich with the same name and ingredients offered at Bob’s Deli.

Quizno’s filed for a preliminary injunction, seeking to enforce the covenant not to compete and shut Bob’s Deli down. Colorado law generally disfavors covenants not to compete, but courts will enforce them in two situations: (a) when they are part of a “contract for the purchase and sale of a business or the assets of a business,” or (b) when they are part of a “contract for the protection of trade secrets.”  The court found that both of these situations applied, and enforced the covenant.

In rejecting Kampendahl’s argument that making a sandwich was not a trade secret because anyone could walk into the store and observe the process, the court found that “Kampendahl is not merely making sandwiches; it appears he is using recipes, menus, signs, and ovens initially approved as part of a Quizno’s business strategy.”  While we have our doubts that menus, signs, and ovens can constitute trade secrets, the court found it significant that Kampendahl acknowledged in the franchise agreement that the entire Quizno’s system and production of Quizno’s sandwiches were trade secrets.  The court granted the preliminary injunction and enjoined Kampendahl from continuing to operate Bob’s Deli in the same location.  The parties settled shortly thereafter.

Savvy franchisors should consider revisiting their agreements with an eye toward gaining admissions from franchisees that certain materials constitute trade secrets.  If things take a turn for the worse, trade secrets owners who have taken the extra steps to protect themselves will have a reason to give thanks.

The case is Quizno’s Corp. v. Kampendahl, Case No. 1:01-cv-06433 (N.D. Ill. May 20, 2002).