IP Law Daily, TRADE SECRETS—Del. Ch.: Garbage compacting franchisor secures only declarative relief about competitor misstatements in trade secrets dispute, (Jul 19, 2023)

By Justin Marcus Smith, J.D.

At inception of the matter, the franchisor appeared likely to succeed on the merits for permanent injunctive relief about competitor misstatements, but a fact intensive trial showed there was no fraud or damages, and the misstatements were in good faith.

After trying a fact intensive trade secret dispute, the Delaware Court of Chancery Wilmington, Delaware, entered judgment in favor of a defendant-competitor key person who initially partook in certain franchise training and then launched a competing trash compacting business. The Delaware Uniform Trade Secrets Act (DUTSA) preempted all franchisor common law claims, including common law fraud, applicable to DUTSA. The key person did not commit fraud on the franchisor by continuing with the franchisor’s training after forming a decision not to purchase a franchise, and the plaintiff franchisor’s case had other causality problems with respect to damages. The competing business committed Delaware Uniform Deceptive Trade Practices Act (DUDTPA) violations in connection with two of three alleged misstatements about the franchisor’s business, but the misstatements were made in good faith, and the third statement was true. The absence of damages meant that the franchisor was only entitled, under DUDTPA, to corrective declarations about the two misstatements. The misstatements were only isolated incidents that did not call for permanent extension of the preliminary injunctive relief the court granted at inception of the dispute. No one misbehaved in a way that would have justified an award of attorney fees (Smash Franchise Partners, LLC v. Kanda Holdings, Inc., July 14, 2023, Laster, J.).

Smash Franchise Partners, LLC (Smash), a franchisor of rotating drum trash compaction services, sued defendant Kanda Holdings, Inc., Dumpster Devil LLC (Dumpster Devil), and others, including natural persons (collectively, defendants), seeking preliminary injunctive and other relief. The “scattershot” Smash complaint invoked eight different legal theories: breach of a non-disclosure agreement, unjust enrichment, misappropriation of trade secrets, conversion, unfair competition, fraud, deceptive trade practices, and trademark infringement.

The court denied the Smash request for a “business stopping” injunction against Dumpster Devil because Smash only showed a likelihood of success on the fraud and Delaware Uniform Deceptive Trade Practices Act (DUDTPA) claims based on three service comparisons Dumpster Devil articulated on its website. The court also found that Smash did not show a sufficient threat of irreparable harm to stop Dumpster Devil’s business nor a balance of hardships calling for such drastic relief. The court only granted a limited preliminary injunction enjoining Dumpster Devil from making the three disputed comparisons on its website.

After nearly a year of litigation, Smash dropped all claims other than the fraud and DUDTPA claims. Neither named one of the natural persons, so the court dismissed him from the case. That left Smash trying to prove that the other natural person, Perri, fraudulently induced Smash to reveal trade secret information by feigning interest in a franchise. The training information allegedly saved Perri time in launching a competitor, Dumpster Devil, during which time Smash said it would have sold five more franchises allegedly worth over $3 million in lost profits.

Fraud claim—DUTSA preemption. The court held the Smash fraud claim failed because the Delaware Uniform Trade Secrets Act (DUTSA) preempted all common law claims, including common law fraud, applicable to DUTSA. The court reasoned that Smash had tried to “sidestep” DUTSA by inaccurately characterizing the trade secret information Perri allegedly received as training. The court found Perri listened to telephone sales pitches. That content was information. DUTSA defined trade secret to mean information, and training was a form of information. DUTSA preemption also applied to claims involving the misappropriation of information falling short of a trade secret. Having held that the DUTSA preemption provision barred Smash’s fraud claim, the court entered judgment for Perri on that claim.

Even assuming preemption did not apply, Smash’s fraud claim would have failed anyway. The court said Smash proved that Perri misrepresented his intent to purchase a franchise; however, Smash failed to prove that Perri’s fraudulent representations caused Smash its putative damages.

The first but-for problem with respect to damages was that Perri had already obtained “considerable insight” into Smash’s business before Perri decided not to buy a Smash franchise. The court had preliminarily found that Perri did not violate a non-disclosure agreement (NDA) because none of the information shared on the sales pitches was confidential information protected by the NDA. The court concluded Perri received all information legitimately, before he decided to start his own competing trash-compaction business, and before he began misrepresenting his interest in buying a Smash franchise.

The second but-for problem the court noted was that Smash failed to prove that Perri’s misrepresentations gave Dumpster Devil any sixteen-month head start. Perri never received such training in how to start a Smash franchise.

The court also noted a proximate causation problem insofar as Smash failed to prove that Dumpster Devil’s existence in the market caused the loss of five Smash franchises. There were just too many variables making causality too attenuated. Again, the fraud claim failed because Perri already had the information he needed to start Dumpster Devil at the point Perri decided not to buy a franchise.

Deceptive practices. The court found that Smash proved that Dumpster Devil violated DUDTPA by falsely claiming that the drums on Smash’s trucks lacked guards, but Dumpster Devil proved it had a good faith belief the statement was correct. The court held Smash was entitled to rely on the photos Smash circulated. The court reached a similar holding for Dumpster Devil’s false claim that Smash trucks required daily greasing.

With respect to Dumpster Devil’s third statement about the weight of its trucks not requiring a commercial license, Dumpster Devil demonstrated to Smash satisfaction that Dumpster Devil had trucks in service weighing less than 26,000 pounds. The parties stipulated to an order vacating that portion of the preliminary injunction, and at trial, Smash did not prove otherwise. Smash failed to prove a DUDTPA violation on this claim.

Permanent relief. The court held that Smash failed to demonstrate a reasonable apprehension that Dumpster Devil would ever repeat the three misleading statements. Dumpster Devil already addressed the issue by removing the first two misleading statements from its webpage and stipulating as to the third. At trial, Smash failed to prove any ongoing pattern of deceptive conduct or bad faith. With respect to statements Dumpster Devil added to its website after the court issued the injunction decision about the court proceedings, the court found the statements were not false.

Other relief. Smash failed to prove actual damages and DUDTPA did not provide an independent source of damages. As to attorney fees, Smash was the prevailing party on two DUDTPA violations, but it was not entitled to recover attorney’s fees because it did not prove a willful or knowing violation. As to Perri’s request for attorney fees because Smash dropped its DUTSA claim on the eve of trial, the court held that Perri failed to show that the claim was brought in bad faith.

The Case is No. 2020-0302-JTL.

Attorneys: Neil Peluchette (Taft, Stettinius & Hollister LLP) for Smash Franchise Partners, LLC. Andrew L. Cole (Cole Schotz PC) for Kanda Holdings, Inc., Todd Perri and Dumpster Devil, LLC.

Companies: Smash Franchise Partners, LLC; Kanda Holdings, Inc.; Dumpster Devil, LLC

Cases: TradeSecrets DelawareNews