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Delaware Court Held Information Provided to Prospective Franchisee During the Franchise Sales Process Was Not Covered by Franchisor’s NDA

A state court in Delaware denied a franchisor’s motion for a preliminary injunction based upon claims that a prospective franchisee misappropriated confidential information and started a competing business despite having signed a non-disclosure agreement. Smash Franchise Partners, LLC v. Kanda Holdings, Inc., 2020 WL 4692287 (Del. Ch. Aug. 13, 2020). Todd Perri was initially interested in potentially becoming a Smash Franchisee. Perri researched information that Smash published online about the company, spoke with franchise brokers about Smash, and participated in a pitch deck call and a call where he learned about the unit economics of being a Smash franchise. Smash then required all prospective franchisees to sign an NDA. Although Perri had decided that he wanted to establish a competing business, he signed the NDA in order to continue learning about the Smash franchise system. He also continued to learn about the system from franchisees and corporate executives. Perri never entered into a franchise agreement and proceeded to establish a competing business. Smash sought a preliminary injunction to shut down Perri’s business, claiming that Perri had misappropriated confidential information.

The court held that Smash was not entitled to the requested “business-stopping injunction.” The NDA excluded any information that was publicly available at the time of disclosure or was disclosed by a thirdparty that was not prohibited from doing so. The court reasoned that the information received by Perri was publicly available, freely shared by Smash’s franchisees who were not parties to the NDA, or provided by Smash without having taken adequate precautions to protect its confidentiality. The court described the information as being designed to attract prospective franchisees and akin to a detailed sales pitch, but not specific enough to reveal critical information about Smash.

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