Tuesday, August 07, 2012

Little Caesar Not Likely to Prevail on Trade Dress, Trade Secret Claims Against Former Franchisee

This posting was written by John W. Arden.

Pizza shop franchisor Little Caesar Enterprises was denied a preliminary injunction against a former franchisee’s alleged use of its trade dress and trade secrets because it failed to show a likelihood of success on the merits of its trade dress and trade secret claims, according to the federal district court in Sioux Falls, South Dakota.

Sioux Falls Pizza and its sole shareholder, James Fischer, executed three separate franchise agreement, which were to expire on June 4, 2012. Immediately following the expiration of the agreements, Fischer opened a competing pizza franchise, called Pizza Patrol, at the location of one of his former Little Caesar franchises. Like Little Caesar, Pizza Patrol sells ready-to-pick-up pizza, but also sells other items not ready made or sold by Little Caesar.

Little Caesar personnel visited the new Pizza Patrol store and took photographs of claimed similarities to their stores, including the “distinctive” floor and wall tiles, the location of the ordering counter, the configuration of equipment, and the general layout encapsulating Little Caesar’s signature trade dress.

On June 25, 2012, Little Caesar filed a complaint against Sioux Falls Pizza Co. and Fischer for trade dress infringement and trade secret misappropriation. It further moved for a temporary restraining order or preliminary injunction to prevent infringement of its trade dress and misappropriation of its trade secrets.

In determining whether to issue a preliminary injunction, courts consider the following factors: (1) whether the movant is likely to prevail on the merits; (2) the threat of irreparable harm to the movant; (3) the state of balance between this harm and the injury that granting the injunction will inflict on other parties litigant; and (4) the public interest. The most important factor is the likelihood of success on the merits, the court noted.

Trade Secret Misappropriation

Little Caesar alleged that Sioux Falls Pizza Co. and Fischer misappropriated its “Hot-N-Ready” system, as contained in its Hot-N-Ready Implementation Guide that was distributed to all its franchisees in June 2000. This system determined what franchisees must prepare on a daily and hourly basis and how each product had to be prepared in order to facilitate “Hot-N-Ready” promotions.

The most important part of the system was what product had to be prepared on an hour-by-hour basis during the day so that there was enough product available for purchase but not so much that food was wasted, according to Little Caesar. The system had a method for calculating specific preparation requirements for each franchise location.

Little Caesar argued that this system was protected by the South Dakota Trade Secrets Act and that the system was misappropriated. Sioux Falls Pizza claimed that it was not using Little Caesar’s system and that the Hot-N-Ready system did not qualify as a trade secret, since it was the sort of information generally known in the restaurant industry.

The South Dakota Uniform Trade Secrets Act defines a “trade secret” as “information, including a formula, pattern, compilation, program, device, method, technique or process” that (1) derives independent economic value from not being generally known or ascertainable by other persons who can obtain economic value from its disclosure or use and (2) is the subject of reasonable efforts to maintain its secrecy. The burden was on Little Caesar to show that the system was a trade secret.

The district court found that Little Caesar came forward with minimal proof that its system for producing Hot-N-Ready pizza could be the type of information qualifying as a method, technique, process, or program under the broad “trade secret” definition.

“While Little Caesars’ explanation of what the system is could constitute ‘information’ because it is a process, formula, method, or technique, Little Caesars was not specific enough to meet the high burden of likelihood of success on the merits for a preliminary injunction analysis,” the court ruled.

The franchisor did not make a clear showing of which information in the system was not generally known. It never entered any projection charts or graphs of the system into evidence. Its description of what makes up the system was “too generic or general to amount to a trade secret under the evidence presented at this stage of the litigation,” the court found.

Little Caesar’s failed to prove the second factor in a misappropriation analysis—whether it established reasonable efforts to maintain the secrecy of its system. It took some steps to safeguard its proprietary information by forcing all franchisees to sign confidentiality agreements regarding the system and other business practices, but that confidentiality did not extend to all employees with direct exposure to the system.

The court held that Little Caesar had not produced any evidence that its system was any more than a conglomeration of information that was already in the public knowledge and aggregated by Little Caesar. Without more proof, it could not sustain its burden of showing it was likely to succeed on the merits of its claim.

Trade Dress Infringement

Little Caesar claimed that Sioux Falls Pizza failed to alter the trade dress of its former franchise to remove the distinctive features belonging to the franchisor. Sioux Falls Pizza argued that it remodeled the interior and exterior of the store after its franchise agreement expired.

Section 43(a) of the Lanham Act provides a federal cause of action for infringement of trade dress rights, the court said. To obtain relief for trade dress infringement, a plaintiff must show that (1) its trade dress is distinctive or has acquired a secondary meaning; (2) the trade dress is nonfunctional; and (3) the defendant’s imitation of the trade dress creates a likelihood of confusion in the consumers’ minds as to the origin of the services.

Sioux Falls Pizza removed all Little Caesar’s signs, point-of-purchase materials, menu boards, paper goods, and other marks from the location. The exterior and interior of the store was altered to incorporate the signs, menu boards, and other features of a Pizza Patrol franchise.

The court refused to analyze the three factors necessary to prove trade dress infringement because Little Caesar offered no evidence of specific trade dress that was either typical or required in each franchise and company-owned store. Little Caesar submitted no evidence of a written policy, manual, guide, or other direct proof of its standard trade dress. All that was offered was the testimony that the Pizza Patrol store looked similar to the Little Caesar franchise at that location. Evidence that some store features were similar to the look and feel of the franchise was not enough to establish that Little Caesar had a fair chance of succeeding on its trade dress infringement claim, the court found.

Irreparable Harm, Balance of Harms, Public Interest

The court held that the threat of irreparable harm factor favored Little Caesar’s request for a preliminary injunction, but that the balance of harms to Sioux Falls Pizza’s lone business would be greater than the harm to a national business like Little Caesar. The public interest factor weighed in favor of Sioux Falls Pizza. There is a public interest in both protecting a company’s property interest in trade dress and trade secrets, but also in unrestrained competition and a free market, the court observed. The fact that Little Caesar failed to show a likelihood of success on the merits resulted in the public interest favoring Sioux Falls Pizza.

The decision is Little Caesar Enterprises, Inc. v. Sioux Falls Pizza Co., Inc. It will appear in CCH Business Franchise Guide.


This story was reported in IP Law Daily, a new daily email service from Wolters Kluwer Law & Business. For further information about the service, and an opportunity to sign up for 14-day trial subscription, visit http://wolterskluwerlb.com/ip/iplawdaily.

No comments: