IP Law Daily, TRADEMARK—D. Ariz.: Fight over franchisee’s alleged competing business moves forward, (May 28, 2026)

By Martin A. Steinberg, J.D.

The franchisee and related defendants allegedly misused confidential information, diverted customers to a competing business, and violated franchise, trade secret, unfair competition, and trademark laws.

The federal district court in Phoenix, Arizona granted in part and denied in part the defendants’ motion to dismiss Valenta Franchise LLC’s claims arising from an allegedly competing medical-billing business formed by Valenta franchisee Innerworks LLC’s owner. Valenta plausibly alleged that Innerworks, its owner Shanmugam Mukundan, and his spouse breached the franchise agreement and guaranty by operating VaQya, diverting clients to that business, and misusing Valenta’s confidential information. The court allowed Valenta’s trade secret and unfair competition claims to proceed. However, the court dismissed the conversion claim because the alleged proprietary materials were not independently valuable tangible property, dismissed the trademark claim because Valenta’s and VaQya’s logos were “obviously dissimilar,” and dismissed all claims against Innerworks except the breach-of-franchise-agreement claim (Valenta Franchise LLC v. Innerworks LLC, No. 2:24-cv-03502-KML (D. Ariz. May 22, 2026)).

Background. Valenta operates a technology and business consulting franchise system that provides franchisees with digital systems centered on artificial intelligence, outsourcing, and digital transformation services. Innerworks became a Valenta franchisee in June 2021, and its owner, Shanmugam Mukundan, signed the franchise agreement; Mukundan and his spouse, Vijayabhanu Mahadevan, also signed a guaranty personally binding them to Innerworks’s obligations. The franchise agreement and guaranty contained restrictive covenants barring competition, diversion of Valenta's business or customers, and misuse of Valenta's confidential information.

The dispute arose after Mukundan formed VaQya, a medical billing company that Valenta alleges was initially presented as a means of generating new Valenta clients but later became a direct competitor. According to Valenta, VaQya stopped using Valenta’s medical billing resources, stopped onboarding customers through Valenta, hired its own employees in India and the Philippines, diverted prospective customers from Valenta, and began advertising competing services at lower prices.

Valenta sued in December 2024 and later filed an amended complaint asserting seven claims, including breach of the franchise agreement, violation of the Defend Trade Secrets Act, conversion, unfair competition, federal trademark infringement, false designation of origin, and breach of guaranty. Defendants moved to dismiss all claims or, in the alternative, for judgment on the pleadings.

Capacity to sue. The court rejected the defendants’ argument that Valenta lacked the capacity to sue in Arizona because it was a foreign LLC not registered to do business in the state. The court explained that the capacity to sue need not exist at the time of filing and that a foreign LLC may cure the registration defect after filing suit. Because Valenta had applied to register with the Arizona Corporation Commission, the court required Valenta to file the registration on the docket once granted, but allowed the case to proceed. The court also rejected the defendants’ related argument that Valenta’s position that it did not conduct business in Arizona meant it had no protectable interest or could not suffer harm there, noting that a corporation may suffer harm in multiple locations.

Claims. The court next analyzed the merits of Valenta’s claims and granted dismissal only in part.

Allegations against Innerworks. The court dismissed all claims against Innerworks except the claim for breach of the franchise agreement. The court separated Innerworks from the conduct allegedly committed by Mukundan, Mahadevan, and VaQya. Although most of Valenta’s allegations concerned VaQya’s activities as an alleged competing business, the amended complaint did not plausibly allege that Innerworks itself partnered with VaQya, misappropriated trade secrets or confidential information, unfairly competed outside its role as a franchisee, or used a competing trademark.

Breach of Franchise Agreement and Guaranty. The court allowed Valenta’s breach-of-franchise-agreement and breach-of-guaranty claims to proceed. Valenta alleged that Innerworks, Mukundan, and Mahadevan violated noncompetition and confidentiality provisions by operating and diverting clients to VaQya and by misusing Valenta’s confidential information to build that business. The court held that Valenta adequately pleaded a contractual obligation, breach, and damages under Delaware law. VaQya plausibly qualified as a “competitive business” because it allegedly sold services identical to Valenta’s, and the alleged misuse of Valenta’s manuals, staffing methods, pricing structures, and customer details plausibly supported a breach of the confidentiality provisions.

The court also rejected the defendants’ attempt to dismiss the contract claims on the ground that the restrictive covenants were overbroad. It distinguished between pre-termination and post-termination restrictions, noting that in-term franchise restrictions may be broader than post-termination noncompetes. Although the court acknowledged that Valenta’s global post-termination noncompete might be overbroad depending on the scope of Valenta’s business, it found that factual questions remained about which provisions applied, whether the franchise agreement had automatically terminated, whether Mukundan prematurely terminated it, or whether it remained in effect until June 9, 2026. Those unresolved issues made dismissal inappropriate at the pleading stage.

The court likewise refused to dismiss the guaranty claim against Mukundan and Mahadevan. The guaranty contained restrictive covenants similar to those in the franchise agreement, and Valenta also alleged that the individual defendants breached the guaranty by failing to cause Innerworks to perform its obligations under the franchise agreement. The court therefore rejected the argument that Mahadevan was not bound.

Finally, the court rejected the defendants’ acquiescence defense at the pleading stage. Defendants argued that Valenta knew about and assisted VaQya’s formation; however, the court found that the complaint alleged a gradual change in VaQya’s conduct: VaQya allegedly began as a business intended to support Valenta but later stopped using Valenta's employees and services, diverted customers, and reneged on the parties’ initial understanding. Because Valenta also alleged that it objected to VaQya’s conduct, the fact-intensive doctrine of acquiescence could not support dismissal.

Misappropriation of trade secrets. The court denied dismissal of Valenta’s Defend Trade Secrets Act claim. Defendants argued that Valenta failed to identify its alleged trade secrets with sufficient particularity. The court disagreed, holding that Valenta had identified proprietary information contained in specific materials, including its operating manual. Although broad references to “knowhow” or “confidential information” are often too general, the court found that Valenta’s allegations were sufficiently particular because they tied the alleged secrets to specific documents and materials.

The court also rejected, at this stage, the defendants’ argument that Valenta made the information readily ascertainable by sharing it with VaQya without safeguards. Valenta alleged that the information was shared only for purposes of operating the franchise and that it took confidentiality measures, including requiring Mukundan and Mahadevan to sign confidentiality agreements. Taking those allegations as true, the court held that the information could plausibly qualify as protected trade secrets.

Conversion. The court dismissed Valenta’s conversion claim. Valenta argued that its operations manual and proprietary materials were tangible property capable of supporting a conversion claim. The court held, however, that those materials were not independently valuable as tangible property; their value came from the competitive advantage they provided. The court also found that Valenta did not plausibly allege that defendants exercised control over the documents in a way inconsistent with Valenta’s rights, because Valenta appeared still able to access and use the materials. Having dismissed the claim on that basis, the court did not reach the defendants’ argument that the Arizona Uniform Trade Secrets Act preempted the claim.

Unfair competition. The court denied dismissal of the unfair competition claim. Defendants argued that the Arizona Uniform Trade Secrets Act preempted the claim because it was based on alleged misuse of trade secrets. The court rejected that argument as premature, explaining that preemption generally depends on whether the information at issue qualifies as a trade secret. Because that determination had not yet been made and because claims based on information that does not, or may not, qualify as trade secrets are not necessarily preempted, the unfair competition claim survived.

Trademark infringement. The court dismissed Valenta’s trademark infringement claim. The court noted a mismatch between the amended complaint, which alleged that the defendants were using Valenta’s trademark for VaQya-related purposes, and the parties’ briefing, which focused on whether Valenta’s and VaQya’s marks were confusingly similar. The court addressed the confusion theory because that was the theory the parties briefed.

Applying the Ninth Circuit’s likelihood-of-confusion framework, the court acknowledged that some factors could not be evaluated fully at the pleading stage, such as actual confusion and intent. It also accepted Valenta's allegation of overlapping services and similar marketing channels. But the court found those points insufficient because the logos themselves were “obviously dissimilar.” Each logo essentially consisted of the company name, but the names had different syllable and letter counts, different capitalization, and different shades of blue. VaQya’s logo also included a parrot and the phrase “Medical Billing Solution,” while Valenta’s logo included only its name. Given those differences and the sophistication of likely customers seeking AI solutions or a franchise/business relationship, the court held that reasonable customers were not likely to be confused. The trademark claim was dismissed, with leave to amend only if Valenta could rely on allegations other than the same logo-similarity allegations.

Conclusion. The court found that Valenta adequately pleaded most of its claims and that its registration issue did not preclude the case from going forward. The court therefore denied the motion to dismiss except as to certain claims against Innerworks, the conversion claim, and the trademark claim. If Valenta elects to amend the dismissed claims, it may not plead facts inconsistent with the challenged complaint.

The Case is No. 2:24-cv-03502-KML.

Judge: Lanham, K.

Attorneys: Anthony John Davis (OGC Solutions LLP) for Valenta Franchise LLC. Justin R. Vanderveer (Christian Dichter & Sluga PC) for Innerworks LLC.

Companies: Valenta Franchise LLC; Innerworks LLC

Cases: TradeSecrets Trademark ArizonaNews