The Franchise Memorandum

A federal court in Texas has denied a franchisor’s motion to enjoin a former franchisee from using confidential information, misappropriating trade secrets, and infringing on trade dress in the post-termination operation of competing buffet restaurants. Stockade Cos., LLC, v. Kelly Rest. Grp., LLC, 2017 WL 4640443 (W.D. Tex. Oct. 16, 2017). Earlier in the case, the court had entered an order requiring the franchisee to de-identify its formerly franchised buffet restaurants. Subsequently, the franchisee rebranded and began operating the restaurants as a competing business. There was no post-termination noncompete provision at issue.

The court denied the motion, finding that Stockade had not demonstrated a likelihood of success on its claims. Regarding the breach of confidentiality claim, the court found that the “specialty nights” promotions used by both Stockade and the former franchisee’s competing restaurants were ubiquitous in the restaurant industry. The court further found that most of the recipes used by the franchisee’s competing restaurants were distinguishable from Stockade’s recipes, and the few identical recipes were too simple to qualify as confidential. Regarding the trade secrets claim, the court held there was no showing that any trade secret was acquired by the franchisee through improper means since its access to Stockade’s proprietary information ended upon termination, and Stockade admitted that the franchisee was not using Stockade’s buffet system in its entirety. The court further criticized Stockade for failing to enforce the franchisee’s contractual requirement to obtain confidentiality and noncompete agreements from the franchisee’s employees, and for disposing of allegedly confidential documents in a public, unlocked dumpster. Finally, regarding the trade dress claim, the court found that a lack of uniformity among Stockade’s restaurants undermined the distinctiveness element of the claim, and that any customer confusion was likely the result of Stockade’s own conduct in sending out marketing emails listing the locations of the competing business as system restaurants despite the termination and in failing to close the former franchisee’s social media accounts.