The Franchise Memorandum

A federal court in Illinois denied a franchise developer’s motion for partial summary judgment seeking to dismiss a franchisor’s allegations that he misappropriated trade secrets. JTH Tax LLC v. Grabowski, 2021 WL 3857794 (N.D. Ill. Aug. 30, 2021). In 2008, Liberty Tax Service and David Rocci executed a ten-year area development agreement. Rocci had a right of renewal, so long as he was in compliance with the agreement’s terms and conditions, including the agreement’s development benchmarks. Rocci failed to meet the benchmarks but nevertheless requested renewal. Liberty did not respond, and the agreement expired. After expiration, Liberty discovered that Rocci had formed a competing business during the agreement’s term and continued to operate that business after his agreement with Liberty ended. Liberty alleged that Rocci had also used Liberty’s trade secrets in the process and accordingly sued Rocci for breach of the Defend Trade Secrets Act, unlawful competition, and breach of the agreement’s in-term and post-term covenants not to compete. Rocci counterclaimed for breach of contract based on Liberty’s failure to renew the agreement. After discovery, Liberty moved for summary judgment on Rocci’s counterclaim, and Rocci filed a counter-motion for summary judgment on both his claim and Liberty’s claims.

The court agreed with Liberty that there existed sufficient circumstantial evidence of Rocci’s misappropriation of Liberty’s trade secrets to permit a reasonable jury to find for Liberty on its trade secrets claim. During the term of the agreement, Liberty identified an electronic filing identification number associated with Rocci that was used to file tax returns outside of the Liberty system. Rocci’s business partner also testified that he tried to train her on a new software to file tax returns for customers without having to pay royalties. Finally, when the agreement expired, Rocci failed to return the franchise customer list. This circumstantial evidence warranted denying Rocci’s summary judgment as to the trade secret claim, as well as Liberty’s two other claims. The court did conclude, however, that Rocci’s failure to satisfy any of the agreement’s development benchmarks precluded him from enforcing the agreement’s renewal provision, and therefore dismissed his counterclaim.