Antitrust Law Daily Wrap Up, FRANCHISING & DISTRUTION—EDPa: Venue Was Proper in Pennsylvania District for Franchisor’s Suit Because of Forum Selection Clause, Trade Secrets Situs, (Jan 16, 2013)

By Peter Reap, J.D., LLM

Venue for Pennsylvania franchisor Goddard Systems, Inc.’s (“GSI’s”) lawsuit against a former Florida franchisee for misappropriation of trade secrets, tortious interference, and other claims was proper in the federal district court in Philadelphia because the forum selection clause in the parties’ agreement was broad enough to cover the suit and also because a substantial part of the events or omissions giving rise to the action occurred in that district, the federal district court in Philadelphia has decided (Goddard Systems, Inc. v. Lisa Leigh Overman, January 14, 2013, Shapiro, N.). Thus, a motion by the former franchisee, Lisa Leigh Overman, to dismiss for improper venue was denied.

Background

GSI is the franchisor of The Goddard School businesses, which offer preschool early education programs for children. Through years of experience, GSI has developed a proprietary system, trade secrets, and unique methods of early childhood education and has a unique and uniform system relating to the operation of franchised Goddard Schools.

On January 25, 2010, Overman, her brother (William Register, Jr.), his wife, and Overman’s parents, entered into a Franchise Agreement with GSI under which Overman and the Registers were to operate a Goddard School in Jacksonville, Florida. The franchisees agreed in the Franchise Agreement that they would not divulge or use for the benefit of any other person any material in which GSI claims copyright protection, trade secrets, or confidential information. Overman and William Register, Jr. attended GSI’s two-week training at GSI’s headquarters in King of Prussia, Pennsylvania in January 2010.

In early 2010, Overman and William Register, Jr. informed GSI that Overman would fill the position of Educational Director of the Jacksonville Goddard School. Under the Goddard System, the Educational Director cannot also be a franchisee. Accordingly, the franchisees requested that Overman be removed as a franchisee from the Jacksonville Franchise Agreement. At the same time, they requested that Overman’s parents be removed from the Jacksonville Franchise Agreement because they would not be participating in the operation of the school.

On February 1, 2010, the franchisees and GSI executed an Addendum to Franchise Agreement and Release (“Addendum and Release”) removing Overman and her parents from the Franchise Agreement as franchisees. The Addendum and Release terminated “all rights and obligations between Lisa Overman…and GSI arising from or related to the Franchise Agreement.”

Shortly after the closure of another GSI franchise, the Fleming Island Goddard School, Overman, acting in her capacity as Educational Director of the Jacksonville Goddard School, and William Register, Jr. expressed an interest in acquiring the franchise to operate the Fleming Island Goddard School. On September 5, 2012, William Register, Jr. advised GSI that Overman was considering opening an independent preschool at the location of the Fleming Island Goddard School. On September 7, 2012, Overman confirmed to her brother that this was her plan and gave notice that she would be leaving her position at the Jacksonville Goddard School.

GSI filed suit, alleging that Overman engaged in a scheme to usurp a business opportunity owned by her franchisee-employer. GSI claims that Overman’s conduct tortiously interfered with and breached her obligations under the Franchise Agreement not to divulge or use GSI’s trade secrets for the benefit of any other person .

Venue

The Eastern District of Pennsylvania was a proper venue for this action if either an enforceable forum selection clause applied to this action or venue was appropriate under 28 U.S.C. § 1391(b). Venue was proper for both reasons, the court determined.

Overman argued that the Addendum and Release terminated her obligations under the Franchise Agreement. She argued that the forum selection clause in the Addendum and Release did not apply because this action was unrelated to that contract.

However, the forum selection clause in the Addendum and Release was broad and covered any action “arising out of or relating to this Addendum.” The contract stated that “[t]he Registers and Overman agree that these courts represent the most convenient forum for the parties to litigate any disputes between them. Accordingly, the Registers and Overman…irrevocably waive any objection they may have to either the jurisdiction or venue of such courts.” (emphasis added).

Although the scope of a forum-selection clause depended on the language of the clause, courts had generally held that a forum-selection clause applied to tort and other non-contract claims that required interpretation of the contract or otherwise implicated the contract's terms, the court noted.

GSI’s suit would require inquiry into the effect of the Addendum and Release. The court might have to decide whether the contract released all of Overman’s confidentiality obligations. Moreover, Overman did not contend that the forum selection clause was unenforceable due to fraud, public policy, or unreasonable inconvenience. Thus, the forum selection clause was broad enough in scope to cover this action and Overman waived any objection to venue.

Venue was also proper if “a substantial part of the events or omissions giving rise to the claim occurred” in the Eastern District of Pennsylvania, under 28 U.S.C. § 1391(b)(2). It was not necessary that the central or most important events giving rise to the claim occurred in this district, only that “a substantial part” of the events occurred here, the court observed.

In Paul Green School of Rock Music Franchising, No. 08-cv-4503, 2009 WL 129740, (E.D. Pa. 2009), the plaintiff alleged unfair competition, unjust enrichment, and misappropriation of trade secret claims. The plaintiff, a Pennsylvania company, alleged that the defendant, a California company, had conspired with plaintiff’s franchisees to take confidential and proprietary information and give it to the defendant. The defendants moved to dismiss the action for improper venue.

The court found in Paul Green that venue was proper in the Eastern District of Pennsylvania because at least some of the trade secrets at issue had a situs in Pennsylvania. When the trade secret was allegedly used by the defendant in California, “the secret was, in effect, misappropriated from Eastern District of Pennsylvania.” The court held that venue was proper because of this important contact.

The events underlying this action had more connection to this district than did the events giving rise to the Paul Green action, the court determined. Overman received two weeks of training in Pennsylvania and, according to the plaintiff, received GSI’s Confidential Operating Manual here. Any further support that GSI provided to the Jacksonville Goddard School would have originated from GSI’s headquarters in Pennsylvania.

Further, in August 2011 and again in June 2012, Overman requested demographic and market information regarding Fleming Island from the GSI offices in Pennsylvania and they were sent to Overman from that office. The trade secrets that Overman has allegedly misappropriated had their situs in Pennsylvania, according to the court.

Even though Overman allegedly intended to use the misappropriated trade secrets in Florida, she learned those secrets in, and allegedly misappropriated them from, Pennsylvania. Venue would be proper in the Eastern District of Pennsylvania under the statute, even if the forum selection clause in the parties’ contract were not applicable, the court reasoned.

The case is No. 12-5368.

Attorneys: Constantine Thomas Fournaris (Wiggin and Dana LLP) for Goddard Systems, Inc. Lisa Leigh Overman pro se.

Companies: Goddard Systems, Inc

Cases: FranchisingDistribution PennsylvaniaNews