Franchise & Distribution

The coronavirus

CA COVID-19 Protocols Ending Is Welcome News For Franchises

By Al Mohajerian | July 4, 2021

CA’s Mandate Ends

In mid-May 2021, California Governor Gavin Newsom announced that the state’s COVID-19 safety mandates would be extended until June 15. But now, businesses are free to open without capacity restrictions or physical distancing limitations and fully-vaccinated persons are no longer required to wear masks in buildings. Rumors persisted that the state would keep the mask mandate in place even after reopening but this announcement brings the state into alignment with the newest Center for Disease Control guidance. This is welcome news to California franchises, which have faced numerous challenges just keeping the lights on in the wake of the pandemic and subsequent year-long lockdown. Without capacity restrictions and physical distancing requirements, franchises can finally open up and go back to making money once again. California has also brought its statewide travel guidelines into compliance with current CDC guidance, opening up even more avenues for business.

Rebuilding after a Lost Year

After more than a year of forced closures, limited capacity reopenings, and minimal foot traffic, California franchises can start to see a light at the end of the tunnel. It goes without saying that the global and local economies suffered greatly during the pandemic and, sadly, the lack of a steady stream of business caused many longtime franchises to permanently close. However, franchisors of all types can now begin rebuilding with California fully reopening for business. Allowing a return to full capacity means that restaurants finally have their full complement of tables and do not have to worry about vaccinated patrons being turned off by having to wear masks while dining. Storefronts and boutique shops are seeing an increase in foot traffic as the state reopens and people feel safe to venture out of their homes and start spending money again. Car supply and auto parts businesses look forward to increased revenues as more people return to working in offices and thus need to maintain their vehicles for the commutes. Even movie theaters look set to make a comeback with people also ready to pick up old leisure activities after the isolating shutdown. As you can see, the move to full capacity will have a positive effect on franchises of all types and franchisors must be ready.

Ready For Business

With California’s reopening, franchisors have begun to prepare for the huge increase in business. They should ensure that their franchise is fully staffed at this point to handle the uptick and that all workers understand what the changing guidelines mean for customers. Franchisors should also expect changes from customers as some guests may continue to wear masks indoors as a precaution, even though it is no longer mandated by the state. Finally, franchise owners should begin planning for a brighter future.

Sources:

https://www.latimes.com/california/story/2021-05-21/california-june-15-covid-guidelines-masks-vaccines-events

Filed Under: Franchise & Distribution

Lines of light during the night

Big Questions for San Diego Franchise

By Al Mohajerian | July 4, 2021

San Diego and SDG&E Reach Agreement

On May 25, 2021, the San Diego City Council voted 6-3 to approve a franchise agreement between the city and San Diego Gas & Electric. SDG&E, an energy utility that provides gas and electric services, is a subsidiary of Sempra Energy, which is likewise based in San Diego. The agreement means that SDG&E will continue to provide energy services to San Diego residents for the next 10 years and includes an option to extend the agreement an additional 10 years. The franchise agreement was approved after a lengthy debate and public comment by 120 citizens. In exchange for providing energy, SDG&E will be paid $80 million to cover the franchise agreements while an additional $30 million will be allocated to help meet the City’s climate-related goals. In the end, the City Council and SDG&E determined that the deal, which was negotiated by Mayor Todd Gloria, was too good to pass up. The agreement has several out clauses and also allows for the city to purchase SDG&E from Sempra at the going rate and municipalize the utility under public oversight. Though the agreement is new, SDG&E has held exclusive franchise agreements to provide energy services with San Diego for over 100 years.

In Spite of Agreement, Questions Remain

Although the City and SDG&E agreed on an $80 million franchise fee for providing energy services, they are still at odds over other issues and outstanding franchise agreements. In January 2020, the City of San Diego sued SDG&E for more than $35 million after the City had to pay to move the utility company’s equipment during the Pure Water project. Then, after the previous energy services franchise agreement expired in January 2021, the two sides began bickering over SDG&E’s progress in burying power lines across the city. San Diego’s city attorney’s office has claimed that SDG&E was both overcharging for its services in burying the power lines and had engaged in a purposeful slowdown on the project while waiting for the new franchise agreements to be signed. SDG&E, however, claimed that they were not authorized to work on burying the lines after the prior franchise agreement expired, but some in the City saw that as little more than an excuse. Indeed, some members of the City Council expressed concerns that San Diego was agreeing to a massive, new franchise fee with SDG&E while the two parties are engaged in litigation over Pure Water and a contentious standoff over burying the power lines.

Going Forward

In spite of these outstanding issues, the City voted in favor of the new $80 million franchise agreement after it received support from a broad cross-section of individuals and groups, including San Diego residents, politicians, union members, and local business interests. A massive deal of this kind can only mean good things for other businesses and entities looking to sign franchise agreements in the State of California in the future.

Sources:

https://www.kusi.com/san-diego-city-council-agrees-to-franchise-agreements-with-sdge/

https://www.voiceofsandiego.org/topics/government/city-sdge-ready-to-ink-one-deal-while-fighting-over-another/

Filed Under: Franchise & Distribution

A person wearing a mask and face shield

Pandemic Challenges Facing Franchises

By Al Mohajerian | May 13, 2021

Franchises in the fast-food industry are facing many challenges as the economy begins to recover from the massive set-backs caused by the pandemic. One such challenge is finding adequate numbers of qualified workers. Despite a current unemployment rate of around 6% in the U.S., nearly double the pre-pandemic rate, the labor market remains one of the biggest challenges for fast-food franchises.

In March of 2021, the country added some 280,000 jobs in the leisure and hospitality industry, which includes the restaurant industry, but the hiring rate still was not enough to meet the industry’s need. Some franchises have turned to unconventional methods to try to gain much-needed staff.

In November of last year, Taco Bell held a mass-hiring event in the parking lots of 400 of its locations, in an attempt to fill 2,000 positions. With plans to bring on at least 5,000 new employees by the end of April, Taco Bell held another round of these job fairs at more than 2,000 of its stores this month. Through this hiring blitz, the franchise hopes to make up for the slower rate of hiring that its stores have had due to the pandemic. In truth, the staffing challenges pre-date the pandemic, and many fast-food chains are responding by raising starting pay rates to levels above the minimum wage and by implementing other benefits in an effort to bring in and keep top talent.

Tuition Benefits Shown To Help Retain Employees

More and more franchises are using creative means to attract and retain workers, including offering tuition benefits to their employees. These programs allow employees to pursue college degrees with financial assistance from the company. Many of the leading names in the quick service restaurant field, especially, have added or increased tuition assistance programs for their workers as an added perk to attract top talent. Taco Bell, Chipotle, and KFC are among the growing number of restaurant chains turning to these benefits to improve employee retention.

Overall, companies that have used such programs have seen positive results, including higher retention rates among those who have taken advantage of the education assistance through their workplace. Chipotle has reported that the workers who move forward with their education through its program are more likely to move into management positions with the company, thereby strengthening the internal growth of the company by investing in its current employees.

Supply Chain Challenges Lead To Increased Prices

In addition to labor challenges, many franchise restaurants are struggling with issues related to supply-chain limitations. For example, the pandemic has affected the availability and price of ketchup, a key condiment for a major portion of the industry. With the transition to higher rates of takeout over eating in restaurants, and with the attempt to minimize contact that could spread germs, quick service restaurants turned almost exclusively to using ketchup packets. The increased demand and insufficient availability have caused prices to increase by 13%. Long John Silvers, which has about 700 locations nationwide, reportedly spent half a million dollars more on ketchup packets during 2020 than it had in previous years. Even with higher prices, though, supply is limited. As in-person dining facilities reopen, some business owners have even turned to purchasing ketchup from retail stores to meet the demand.

California Franchise Attorneys

The laws affecting franchisors and franchisees might come off to you as complex and overwhelming. Because of this, it is recommended that you consult with an experienced franchise lawyer to ensure that your business succeeds with its endeavors. Mohajerian Law Corporation is dedicated to helping California franchisors and franchisees with various legal services including the negotiation of agreements and the resolution of disputes. To learn more about how we can help you, touch base with Mohajerian Law Corporation by calling (310) 556-3800 or by contacting us online.

Filed Under: Franchise & Distribution

Coin operated binoculars

Strong Franchise Outlook For 2021

By Al Mohajerian | May 13, 2021

While many small, independent businesses struggled to meet the unprecedented challenges of the pandemic in 2020, franchises generally were fortunate to have a support network built into their businesses. Franchises took different approaches to dealing with the pandemic. Businesses in some industries closed completely for many months, while others implemented changes that allowed them to keep providing services while better protecting the health of their customers and employees. These changes may have included going to a fully online presence, increasing home delivery services, or allowing employees to work remotely.

Predicting A Franchise Boom For 2021

Franchise business experts see a potential boom in franchise growth during 2021. With an unemployment rate of about 6 percent, not only is there a surplus of blue-collar workers looking for jobs, but there also is a large number of skilled professionals who have found themselves unemployed due to the pandemic. Many of these unemployed professionals, as well as other professionals who have simply reassessed their employment situations, may want more control over their future career. Purchasing a franchise may allow them this control without requiring them to start from scratch to open a new business.

The pandemic has made it easier for people to get the capital to do this, removing some penalties for withdrawals from retirement accounts and maintaining low interest rates for loans. The larger pool of potential franchisees has created the potential for a growth spurt for franchise businesses.

Even real estate conditions may be ripe for franchise growth. Unfortunately, small businesses are likely to continue to suffer and close before the restaurant industry can recover from the pandemic’s impacts. Experts anticipate that as many as 100,000 businesses will close this year in the restaurant industry. These predicted closures would create a potential abundance of available locations for new franchisees to set up shop.

Recruiting New Talent

Though the pandemic and its effects on small businesses are not in the past just yet, improving market conditions and widespread vaccinations may contribute to ideal conditions for companies that are prepared to seize the opportunity and try to recruit professionals to open new locations for their franchise. In order to be better prepared for the growth to come, experts recommend that these franchisors focus their efforts in the areas of strategic planning, documentation systems, site assessment, marketing, and franchisee standards. To recruit franchisees, franchisors may benefit from emphasizing the support that the company provided to its franchisees through the tough times of the past year, and highlighting improvements in policies and systems that came about as a result.

Continuing Improvements To Business Operations

Specialists in franchising recommend that franchisors use this time to give new thought to their systems and processes in all areas across their businesses. Other experts in the field believe that it is likely that many of the upheavals of the pandemic-time business model will remain and grow as factors in the franchise’s business model. Adjustments that became widespread in 2020, such as adding delivery or curb-side pickup options and improving online ordering and web presence, have revealed unexpected opportunities for growth and development.

Telling Your Company’s Story

Another way that franchisors can capitalize on the outstanding growth opportunities of the coming year is to invest in marketing and customer experience improvement, so as to lure back consumers who have backed away from active support of businesses in the past year. To reconnect with the community, franchisors may focus on clearly and effectively telling the story of their companies’ efforts during the pandemic. They could highlight how they supported franchisees and continued to serve customers throughout the past year. This approach of relating with the public may facilitate a boom in franchises’ business, as businesses and consumers alike begin to return to a semblance of ‘normal,’ or adapt to the post-pandemic ‘new normal.’

California Franchise Attorney

Mohajerian Law Corporation helps California franchisors and franchisees by offering them a wide range of cost-effective and efficient legal services relating to contracts, regulatory compliance and dispute resolution. Reach out to Mohajerian Law Corporation by calling (310) 556-3800 or by contacting us online to learn more.

Filed Under: Franchise & Distribution

small wooden blocks with letters placed on the board

UNFAIR COMPETITION UNDER LANHAM ACT

By Al Mohajerian | July 3, 2016
  1. Bauer Bros., LLC v. Nike, Inc.. __F.Supp.3d___2016 WL 411065 (SDCA 2016).

The Bauer company, owner registered trademarks for apparel, including t-shirts, filed suit against Nike claiming unfair competition under Lanham Act and California law, and common law trademark infringement in the federal district court in the Southern District of California.   Nike attacking the suit on all fours.

As to consumer confusion, Nike contended that there was no likelihood of confusion among consumers.  Nike also requested that the Court grant summary adjudication as to Bauer’s lack of actual damages resulting from the alleged trademark infringement. Nike contended that “even if Bauer could overcome Nike’s fair use defense, its claims still fail as a matter of law because, based on the undisputed evidence, no reasonable juror could find a likelihood of confusion between Nike and Bauer’s products.”  Specifically, Nike contended that there is no likelihood of consumer confusion because:

[Plaintiff’s] marks are conceptually and commercially weak and are thus entitled to little, if any, protection; (2) [Plaintiff’s]  and Nike’s goods are dissimiliar; (3) [Plaintiff’s] and Nike’s marketplace uses are dissimiliar; (4) after years of purported concurrent use, no evidence of actual confusion exists; (5) the parties’ marketing channels are dissimilar; (6) Nike’s consumers are sophisticated and exercise a high degree of care; (7) Nike acted in good faith in adopting its use of the trademark; and (8) [Plaintiff] had not provided any evidence of an intention to expand any existing product line.

In response, the Plaintiff contended that there was, at a minimum, a triable issue as to likelihood of confusion because both parties’ trademarks are on the exact same products – t-shirts.  Plaintiff  further contended that it “produced evidence that some of its customers purchased Plaintiff’s  products to wear at World Cup Soccer games.  In addition,  Plaintiff contended that its trademarks are arbitrary or fanciful when applied to its products and are, therefore, entitled to a high level of protection.   Plaintiff then argued that the marks used by Nike have perfect similarity in sight and sound to Plaintiff’s  marks.  Plaintiff contends that it presented evidence of actual reverse confusion and submitted a likelihood of confusion survey by a professor.

After applying the Ninth Circuit court’s eight point test (i.e., the Sleekcraft factors) to this case, the court concluded that genuine issues of disputed fact remain with regard to a finding of likelihood of consumer confusion. See Fortune Dynamic Inc., 618 F.3d at 1031 (“We are far from certain that consumers were likely to be confused as to the source… but we are confident that the question is close enough that it should be answered as a matter of fact by a jury, not as a matter of law by a court.”) (quoting Entrepreneur Media, Inc., 279 F.3d at 1140).  Therefore, the summary judgment motion brought by Nike on the issue of likelihood of confusion was denied.

MOHAJERIAN APLC

By Al Mohajerian | Published April 16, 2016 | Posted in Uncategorized  | Tagged Bauer Bros.Bauer companyInc.. __F.Supp.3d___2016likelihood of confusionLLC v. NikemohajerianmohajerianlawNike claiming unfair competition under Lanham Act |

Filed Under: Franchise & DistributionLitigationTrade SecretsUnfair Competition

A woman holding chains and a lock as well as a sign saying contract

NON-COMPETITION PROVISION IN CA

By Al Mohajerian | June 27, 2016

IN-TERM AND POST-TERM NON-COMPETITION CLAUSES

If you are an employee, employer, franchisee, franchisor or simply a party to a contract involving a non-compete clause that restricts your rights to engage in a lawful profession, trade or business of any kind in California either during the term of the contract or for a period of time after the contract expires or is terminated for any reason, you need to understand your rights.

GENERALLY NON-COMPETE CLAUSES IN CALIFORNIA CONTRACTS ARE VOID:

California has a well settled public policy in favor of open competition. [See Hill Medical Corp. v. Wycoff (2001) 86 Cal.App.4th 895, 900] Accordingly, the general rule in California is that covenants not to compete are void. (Id. at p. 901.) This public policy has been codified in California Business and Professions Code §16600 which embodies this prohibition against restraints on trade and states:

B&P Code §16600.  Unauthorized contracts – Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.

Two exceptions exist: B&P Code §16601 (Sale of Business/Goodwill) and §16602 (Partnership Dissolution or Disassociation).  B&P Code §§16601 and 16602 permit businesses to enforce broad covenants not to compete under the following conditions:

  1. Where the individual(s) sell the goodwill of a business to another and as part of the sales agreement, agree not to compete with the buyer;
  2.  Where a business partner agrees not to compete with his other business partner(s) in anticipation of dissolving the partnership. (See Kolani v. Gluska (1998) 64 Cal.App.4th 402, 407.)

In Kelton v. Stavinski, (2006)138 Cal. App. 4th 941, 946, a case involving a covenant not to compete signed by two partners, you would expect the court to enforce the covenant.  The California Court of Appeal affirmed the determination that the covenant was actually unenforceable. You see, although B&P Code §§16601 and 16602, permit covenants not to compete in connection with the sale of the goodwill of a business or the anticipated dissolution of a partnership, the challenged covenant (not to compete) in this agreement was not executed as part of the sale of the goodwill of a business or the dissolution of a partnership. Thus, it is not sufficient for the partners simply to agree not to compete; the partnership must also be dissolving for the exception to exist.  No dissolution, no exception to prevent the application of the general rule in B&P Code §16600, that covenants not to compete are void. The existence of an ongoing business relationship between the parties did not give rise to an exception.

Thus, covenants not to compete in contracts, other than for the sale of a business’ and its goodwill or the dissolution of a partnership, are void. Moreover, when a contract creates an illegal restraint on trade, there is nothing that the parties can do that will in any way add to its validity. If the contract is void, it cannot be ratified either by right or by conduct. [See South Bay Radiology Medical Associates v. Asher (1990) 220 Cal. App. 3d 1074, 1080]

FRANCHISE AGREEMENTS:

Every contract which contains a covenant restraining any person from engaging in a lawful business is to that extent void, including franchise agreements.”  [See Scott v. Snelling & Snelling, Inc., 732 F. Supp. 1034, 1041 (N.D. Cal. 1990)]

In the Scott case, the plaintiffs entered into various franchise agreements with the defendant, but subsequently, during the term of the Franchise Agreement, formed competing businesses. Plaintiffs brought suit upon termination of the agreements and the parties filed cross-motions for partial Summary Judgment on the enforceability of the non-compete provisions. The Scott Court held that the non-compete clauses violated a strong California public policy against enforcement of restrictive covenants and that covenants restricting competition in franchise agreements were barred as a matter of law by B&P Code §16600 The Court further held that although the choice of law provisions were given deference, the non-compete clauses violated a strong California public policy against enforcement of restrictive covenants and that covenants restricting competition in franchise agreements were barred as a matter of law by B&P Code §16600. The Court further found that the plaintiffs were not using trade secrets as the defendant’s customer lists, temporary employee lists and business forms and procedures were not trade secrets under Cal. Civ. Code §3426.1(d) (California’s Uniform Trade Secrets Act, “UTSA”).  Despite the parties covenant not to compete, its enforcement violated a strong California public policy embodied in statute, and did not fall within any exception to the B&P Code §16600.

In Aussie Pet Mobile, Inc. v. Benton, (2010 U.S. Dist. LEXIS 65126, 17 (C.D. Cal. June 28, 2010) involving a pet grooming franchise, the U.S District Court for the Central District of California held that the Exclusive Relationship Clause contained within the Franchise Agreement prohibited the signatory, any affiliate, “any shareholder, member or partner,” and “any member of the immediate family” from having “any direct or indirect interest as a disclosed or beneficial owner in any similar business located anywhere.” The broad language and lack of restrictions on the scope of the Exclusive Relationship Clause showed that the intent was not merely to protect trade secrets, but to restrict competition. [See Applied Latona v. Aetna U.S. Healthcare, Inc., 82 F. Supp. 2d 1089, 1095 (C.D. Cal. 1999) (applying California law, invalidating non-solicitation clause that was “neither narrowly tailored nor limited to protecting trade secrets”]. The Court held that the Exclusive Relationship Clause was too broad and therefore unenforceable under California Law.

Finally, in Comedy Club, Inc. v. Improv West Assocs., (2009) 553 F.3d 1277, the Ninth Circuit held that under B&P code §16600 an in-term covenant not to compete in a franchise-like agreement was found to be void if it foreclosed competition in a substantial share of a business, trade, or market.” In other words, “in-term covenants not to compete cannot prevent a party from engaging in its business or trade in a substantial section of the market.

In Comedy Club, the district court confirmed an arbitrator’s award under which the licensee lost its exclusive right to operate new comedy improv clubs. The arbitrator’s award effectively quarantined plaintiff from engaging in its business in forty-eight states until 2019 and did not follow well-established California law against non-compete clauses. The Ninth Circuit held that the arbitrator’s ruling was not narrowly tailored, was invalidignored B&P Code §16600 and was in manifest disregard of the law.

“However, we do not void the entire in-term covenant not to competeKelton stressed that the franchisor-franchisee context was different from an employment or partnership context. CCI’s relationship with Improv West is in essence a franchise agreement as CCI contracted with Improv West to use Improv West’s trademarks and open comedy clubs modeled on Improv West’s clubs. (See Kelton, 138 Cal. App. 4th at 947-48 (discussing franchising under California law)) Assessing the requirements of California law, we weigh CCI’s right to operate its business against Improv West’s interest” to protect and maintain its trademark, trade name and goodwill.” Id. at 948. This balance tilts in favor of Improv West with regard to counties where CCI is operating an Improv club, but under the restraint of B&P Code§16600.  California law does not permit an arbitrator to foreclose CCI’s competition in opening comedy clubs throughout the United States.” (Emphasis added)

“Therefore, we hold that the district court should vacate the arbitrator’s injunctive relief as to any county where CCI does not currently operate an Improv club, but uphold §9.j. in those counties where CCI currently operates Improv clubs. [See Armendariz v. Found. Health Psychcare Servs., Inc. (2000) 24 Cal. 4th 83, 123 (stating that “overbroad covenants not to compete may be restricted temporally and geographically” (citing Gen. Paint Corp. v. Seymour, (1932) 124 Cal. App. 611, 614-15)]. Nationwide CCI may open and operate non-Improv comedy clubs in all those counties where it does not currently operate an Improv club. However, CCI  may not open or operate any non-Improv clubs in those counties where it currently owns or operates Improv clubs.

The Comedy Club court in essence acknowledges that in-term covenants not to compete may be necessary in the franchise context” to protect and maintain the franchisor’s trademark, trade name and goodwill.” As a result, the Court would not void the entire in-term covenant not to compete. Since the Court considered the agreement between CCI and Improv West to be a Franchise Agreement, it weighed CCI’s right to operate its business against Improv West’s interest in protecting and maintaining its trademark, trade name and goodwill, and concluded that the covenant not to compete could be enforced only in those areas where CCI was operating Improv comedy clubs under the Agreement. In all other areas, CCI could operate non-Improv comedy clubs.

TRADE SECRETS AND CONFIDENTIAL INFORMATION PROTECTIONS:

A non-competition clause designed to protect the businesses’ trade secrets and confidential information is more likely to be enforced by the Courts.  However, broad non-compete clauses that seek to limit competition are less likely to be enforced based on the public policy prohibiting non-compete clauses in California Business and Professions Code§16600. Trade secrets are defined by the common law trade secrets and the statutory Uniform Trade Secrets Act.

VIOLATIONS OF THE NON-COMPETE CLAUSE THROUGH BACKDOOR ALLEGATIONS OF UNFAIR COMPETITION AND ILLEGAL USE OF TRADE SECRET(S) AND CONFIDENTIAL BUSINESS INFORMATION:

Even though your former employer franchisor or other contracting party may not be able to enforce the post term non-compete clauses and may be limited in their ability to enforce in-term non-compete clauses you must anticipate that they will most likely seek to keep you from competing with them by alleging that you are using their trade secrets and confidential business information to compete which the California Court’s consider to be an exception to B&P 16600 and is seen as Unfair Competition.

In order for an employer or franchisor or other party to succeed with an unfair competition allegation, they must show that they own a trade secret(s) like client lists, proprietary software, pricing formulas, product formulas, etc., that the information is not generally known to the public and that the information is maintained in secrecy.  Moreover, they will have to show that because of your prior working relationship, you had access to this information and that you are using the information to help you compete and take away business from your former employer, Franchisor or other party.  The first step in analyzing your potential exposure to a claim of unfair competition is to determine if your former employer, Franchisor and/or other party has any trade secret(s).  If so, you cannot be using them in your competing business.

THE UNIFORM TRADE SECRETS ACT:

Under the Uniform Trade Secret Act, a trade secret is any information that derives independent economic value from not being generally known, either to the public or to other persons who can obtain economic value from its disclosure or use. [See C.C. §3426.1(d)(1)] The independent economic value may be either actual or potential. [C.C. §3426.1(d)(1)]

The existence of economic value can be established by evidence that a trade secret owner expended effort and money in developing the information. A trade secret owner proved that his information had economic value when he showed that he spent over $500,000 to develop the information. [See Cybertek Computer Prods., Inc. v. Whitfield (1977) 203 USPQ 1020, 1977 Cal App LEXIS 2140]  A software company failed to meet its burden of showing that allegedly misappropriated source code met the definition of a trade secret because the evidence did not establish that the code had significant economic value, inter alia, because it did not play a pervasive role in competing program. [See Yield Dynamics, Inc. v. TEA Systems Corp. (2007)154 CA 4th 547]

The information must also be a secret and must not be generally known to the public or a matter of general knowledge in the trade or business. [See CC §3426.1(d)(1)]  Widespread, anonymous publication over the Internet can destroy the existence of a trade secret unless the Internet publication is sufficiently obscure or transient so as not to become generally known to those who would derive economic value from obtaining the information.  [See DVD Copy Control Assn., Inc. v. Bunner (2004) 116 CA4th 241, 251]  The information disclosed by a product available in the open market, as well as any other information that its owner does not keep secret, does not qualify as a trade secret.  [See Vacco Indus., Inc. v. Van Den Berg (1992) 5 CA4th 34, 50]

The information is only a trade secret if it is “the subject of efforts that are reasonable under the circumstances to maintain its secrecy“. [See CC § 3426.1(d)(2)]  Reasonable efforts are sufficient if physical access to a plant is controlled through use of security guards, employee identification badges, visitor escorts, and special sign-in procedures. [See People v. Gopal(1985) 171 CA3d 524, 538]  Use of locked cabinets, safes, logging and identification of materials, availability of materials at only a few sites worldwide, electronic sensors attached to documents, locked briefcases for transporting works, alarms, photo identifications, security personnel, and confidentiality agreements for all those given access to the materials were all reasonable steps under the circumstances to protect trade secrets as well.  [See Religious Tech. Ctr. v. Netcom On-Line Communication Servs. (ND Cal 1995) 923 F Supp 1231, 1250]

THE COMMON LAW TRADE SECRET:

Under the common law, California Courts apply the Restatement of Torts definition of trade secret, which provides that a trade secret must be used in one’s business and may consist of a formula, pattern, device, or compilation of information. The information must give an economic advantage to the business over its competitors who do not know or use it.  [See Uribe v. Howie (1971) 19 CA3d 194, 208]  One consideration in making this determination is the amount of money or effort expended by the business to develop the information. [See Futurecraft Corp. v. Clary Corp. (1962) 205 CA2d 279, 289]

Moreover, the business must have a need for the continued use of the information to maintain a competitive advantage over others. If the information is only useful for a single transaction, for example, the information does not constitute a trade secret under common law. [See Cal Francisco Inv. Corp. v. Vrionis (1971) 14 CA3d 318, 322,] the information must also be adequately kept secret.  Courts determine whether information was adequately kept secret by considering the following factors:

  1.         The extent to which the information is known outside the business;
  2.         The extent to which the information is known to employees and others involved in the owner’s business;
  3.         The extent of measures taken by the owner to guard the secrecy of the information; and
  4.         The ease or difficulty with which others could properly acquire or  duplicate the information. [See Futurecraft Corp. v. Clary Corp. (1962) 205 CA2d   279, 289]

Information cannot be a trade secret unless it is capable of being kept secret by its creator.   Information is not deemed a trade secret if a casual inspection of an item reveals the information. However, if it would take time and expense to examine the item to figure out how it was made, the information may be considered a trade secret.  [See Sinclair v. Aquarius Elecs., Inc. (1974) 42 CA3d 216, 226]

Regardless of whether the plaintiff or the defendant developed the information during the course of the employment relationship, the Court generally protects information that is so special and integral to the business that it may be deemed confidential or secret information.  If information was supplied by a plaintiff employer to a defendant former employee, the Court is more likely to regard the information as a trade secret if the plaintiff can show that the information was highly refined and that the plaintiff took great time and expense to develop it. [See California Intelligence Bureau v. Cunningham (1948) 83 CA2d 197, 203]

CUSTOMER LISTS:

Under the UTSA, a customer list may be a trade secret.  California courts recognize that a customer list satisfies the requirement that a trade secret be “information”. [See, e.g.,   American Paper & Packaging Prods., Inc. v. Kirgan (1986) 183 CA3d 1318, 1324] A former employee who contacts trade secret customers to announce new employment does not misappropriate the trade secret information. [See American Credit Indem. Co. v. Sacks (1989) 213 CA3d 622, 636-637]

This article has focused on issues related to an employer, Franchisor or other contractual party’s ability to enforce the non-compete clauses against your present or future competing business. This article provides detailed information regarding the available defenses under California’s Business and Professions Code §16600 to claims of violations of non-compete clauses in employment, Franchise or other contractual agreements.  In summary, an employer or Franchisor could attempt to enforce these clauses, by seeking an injunction and damages, against your future business by claiming that you are operating a “Competitive Business” in violation of the non-compete clauses in the agreement or that you have violated California’s Unfair Competition law by stealing trade secrets and/or confidential business information to give yourself a unfair advantage.  However, as set forth above, California Courts are extremely skeptical and cautious about enforcing overly broad non-compete provisions and there are considerable defenses available to you under California law for claims of Unfair Competition and illegal use of trade secrets and/or confidential business information.

AL MOHAJERIAN/MOHAJERIAN LAW CORP

Filed Under: Franchise & DistributionLabor & EmploymentLitigationTrade SecretsUnfair Competition

Tagged With: MOHAJERIAN REVIEWNON-COMPETITION CLAUSES