Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—E.D. Va.: Dispute over pool and spa franchisor’s misleading disclosures moves forward, (Apr 1, 2025)

By Wendy Biddle, J.D.

Breach of contract insufficient to grant preliminary injunction.

In a franchise dispute between franchisor Pool Scouts Franchising, LLC and its former franchisee Stuart Road Corp. and its owner Brent Berridge, a federal district court in Norfolk, Virginia ruled on several pending motions. The court allowed Berridge to file supplementary evidence the court used to evaluate a motion for preliminary injunction. The court denied the franchisor’s motion for preliminary injunction, finding that the franchisor could not make a clear showing of irreparable harm. The court also denied the franchisee’s motion to dismiss Pool Scouts’ Defend Trade Secrets Act claim, finding that the franchisor failed to establish the existence of trade secrets, but granted leave to amend. The court also declined to dismiss all but one claim of the franchisee’s Texas Deceptive Trade Practices Act counterclaims, finding that the franchisee sufficiently stated claims under the act, with the exception of the claim for misleading discounts as that was deemed to be time-barred. Lastly, the court denied the franchisee’s motion for leave to amend to add a RICO counterclaim, finding that the claim was insufficient (Pool Scouts Franchising, LLC v. Stuart Road Corp., No. 2:24-cv-00239-EWH-LRL (E.D. Va. Mar. 31, 2025)).

Background. Defendant Brent Berridge, on behalf of his company Stuart Road Corp., entered into four franchise agreements with Pool Scouts Franchising, LLC between 2018 and 2020 for territories in Texas. Pool Scouts is a franchisor of residential pool and spa services. The agreements stated that following termination, Berridge would stop using any and all Pool Scouts documents and data and would not compete within fifteen miles of a franchise territory or solicit Pool Scout clients for a period of time post termination.

Pool Scouts alleged Berridge breached the agreements by operating a competing business, "Super Pools Texas," in violation of the franchise agreements and has breached post-termination obligations. Pool Scouts also alleged that Berridge failed to pay the amounts due as well as operating a competing business within fifteen miles of a franchise territory. Additionally, Pool Scouts alleged that Berridge solicited Pool Scouts clients and retained trade secrets.

Berridge countered that he was fraudulently induced to enter the franchise agreements based on misrepresentations in the 2018 and 2020 Franchise Disclosure Documents. Berridge alleged that Pool Scouts misrepresented financial information and also did not receive discounted pricing on supplies as promised. When he contacted Pool Scouts to discuss profitability, he was again assured the accuracy of the disclosures. Due to the high operating costs of the business, despite growing revenue, Berridge continued to lose money. He contacted other franchisees and found them to be in the same situation. Berridge alleged that Pool Scouts should have known that the financial information in its disclosures was misleading and inaccurate.

Pool Scouts alleged breach of contract and violations of the Defend Trade Secrets Act by Defendants Stuart Road Corp. and its owner Brent Berridge. Berridge and Stuart Road have counterclaimed, alleging fraudulent inducement, violations of the Texas Deceptive Trade Practices Act, fraud in the inducement, and constructive fraud. All parties have filed motions to dismiss, as well as other related motions.

Motion to file supplementary evidence. Berridge requested to supplement his opposition to Pool Scouts’ Motion for Preliminary Injunction with two additional declarations—one from a current Pool Scouts franchise owner and another from a former franchise owner. Pool Scouts opposed this request on the grounds that the declarations were not relevant and that one declaration was unsigned and did not contain new admissible information. The court found that there was no evidence of prejudice to Pool Scouts by allowing the supplementary evidence to be filed. Ultimately, the court granted the motion, opting to consider the supplementary materials in its analysis regarding Pool Scouts' Motion for Preliminary Injunction.

Motion for preliminary injunction. Pool Scouts sought injunctive relief to prevent Berridge from violating the covenants not to compete or solicit, and from possessing, using, or disseminating confidential, proprietary trade secret materials. The court considered whether Pool Scouts was likely to succeed on the merits of its claims. While Pool Scouts demonstrated a likelihood of success on at least one claim, specifically the breach of contract claim (Count II), that alone was not sufficient to warrant a preliminary injunction.

A key factor in granting a preliminary injunction is the likelihood of irreparable harm in the absence of such relief. The court found that Pool Scouts failed to demonstrate a likelihood of irreparable harm. Pool Scouts argued that it would suffer from loss of customer goodwill, business opportunities, and competitive advantage, among others, but the court found these claims to be conclusory and not supported by sufficient evidence. Additionally, the court noted that monetary damages could potentially remedy the alleged harms, which undermined the claim of irreparable harm.

Given that Pool Scouts could not make a clear showing of irreparable harm, the court denied the motion for a preliminary injunction. The court emphasized that a preliminary injunction is an extraordinary remedy and not awarded as of right.

Motion to dismiss violation of Defend Trade Secrets Act. Pool Scouts claimed that Berridge violated the Defend Trade Secrets Act by misappropriating Pool Scouts’ trade secrets, which include confidential operating, marketing, and business materials. Pool Scouts was required to demonstrate that the alleged trade secrets had independent economic value and were not generally known or readily ascertainable. Pool Scouts claimed ownership of various trade secrets, including client lists, methods of operation, and marketing strategies. However, the court found these allegations to be conclusory and lacking in specific factual detail about the unique nature and development of these materials.

Pool Scouts needed to show how the trade secrets derived economic value from their secrecy. The court noted that Pool Scouts failed to provide detailed information about why the client lists and other materials were not readily ascertainable by competitors. Without demonstrating independent economic value, the court concluded that Pool Scouts failed to establish the existence of a trade secret.

The court found that Pool Scouts did not adequately allege the existence of trade secrets because it did not provide sufficient factual details about the trade secrets’ economic value and the efforts to maintain their secrecy. Consequently, the court did not need to examine whether Pool Scouts had taken reasonable measures to protect the trade secrets.

Pool Scouts requested leave to amend its complaint, and since there was no evidence of bad faith or prejudice, the court granted Pool Scouts the request.

Motion to dismiss TDTPA counterclaim. Pool Scouts moved to dismiss Berridge’s counterclaim that asserted Pool Scouts violated the Texas Deceptive Trade Practices Act (TDTPA) by misleading him into entering into the franchise agreements.

Choice of Law. The court addressed the choice of law provision in the Franchise Agreements, which stated that the agreements would be interpreted under Virginia law. However, the court determined that this provision did not apply to tort claims, including the TDTPA claim, which is governed by Texas law. Virginia courts generally do not apply contractual choice of law provisions to tort claims, and the court followed this principle, allowing the TDTPA claim to proceed under Texas law.

Releases and Exemptions. Pool Scouts contended that releases signed by Berridge barred the TDPTA claim. The court found that the validity of these releases could not be determined at the motion to dismiss stage, as it was not clear whether the releases were executed before or after Berridge was aware of the alleged misrepresentations. Additionally, Pool Scouts argued for a DTPA exemption based on the transaction amount, but the court found that the total consideration was not apparent from the counterclaim.

Statute of Limitations. Pool Scouts argued that the TDTPA counterclaim was barred by the statute of limitations. However, the court found that it could not determine from the face of the Counterclaim whether the claims were time-barred. The court noted that the statute of limitations for DTPA claims is two years from the date the plaintiff discovered or should have discovered the deceptive act, and it was not clear when Berridge should have discovered the misrepresentations. The court granted Pool Scouts’ motion to dismiss the claim regarding the alleged discount misrepresentation because that should have been discovered by April 2019 and the claim would have expired in April 2023, but the complaint was not filed until April 2024.

Alleged misrepresentations and TDTPA requirements. The court examined whether Berridge’s allegations met the requirements for a TDTPA claim. The TDTPA requires proof that the defendant made a material misrepresentation that the plaintiff relied upon, causing injury. Berridge claimed that Pool Scouts made false representations about financial information in its disclosures, which he relied on to his detriment. The court concluded that Berridge had sufficiently alleged fraud with particularity to survive a motion to dismiss. He alleged that Pool Scouts representatives made misrepresentations at specific points in time which satisfies the time, place, contents requirement.

The court granted Pool Scouts’ motion to dismiss the counterclaim in part and denied it in part, allowing the DTPA claim to proceed. The court found that Berridge’s allegations were sufficient to survive the motion to dismiss, as they provided enough detail to potentially establish a DTPA violation under Texas law, and factual determinations regarding the statute of limitations and the validity of releases were not appropriate at this stage.

RICO claim. Berridge also sought leave to add an additional count, a RICO claim. Berridge alleged that Pool Scouts, its parent company, and executives engaged in mail and wire fraud in a scheme to defraud potential franchisees. Pool Scouts countered that granting leave to amend would be futile because any RICO claims would be barred by various releases, is insufficient, and is time barred.

The court concluded that the RICO claim was insufficient. The court found that Berridge failed to adequately allege an association-in-fact enterprise because it failed to sufficiently allege that the enterprise operated with a shared purpose. The allegations lacked specificity and were conclusory. The court denied the motion.

The Case is No. 2:24-cv-00239-EWH-LRL.

Judge: Hanes, E.

Attorneys: Clark James Belote (Kaufman & Canoles, P.C.) for Pool Scouts Franchising, LLC. John Michael Erbach (Spotts Fain PC) for Stuart Road Corp.

Companies: Pool Scouts Franchising, LLC; Stuart Road Corp.

Cases: FranchisingDistribution VirginiaNews