Date: May 7, 2021
By: Thomas O’Connell
Citation:
Bambu Franchising, LLC v. Nguyen, 537 F.Supp.3d 1066 (N.D. Cal. 2021).
Executive Summary:
In this reported decision, Judge Edward J. Davila of the United States District Court for the Northern District of California granted in part a motion for preliminary injunction brought by Bambu Franchising, LLC. The court found that Bambu, a dessert beverage franchisor, was likely to succeed on its trade secret misappropriation claims under the Defend Trade Secrets Act and the California Uniform Trade Secrets Act. The case revolved around allegations of trade secret misappropriation, breach of contract, and unfair competition. Central to the dispute were proprietary recipes and operational methods that define Bambu’s franchise business model. However, while Bambu demonstrated enforceability of its non-compete provisions, the court balanced the equities and limited the injunction’s scope to avoid completely shuttering the defendants’ business operations, given their investments.
Relevant Background:
Bambu Franchising, LLC (“Bambu” or “Plaintiff”) is a franchisor specializing in Vietnamese dessert beverages, which include coconut-based Chè drinks, boba teas, and Vietnamese coffee. These beverages are created using proprietary recipes protected as trade secrets. Defendants Jenny Nguyen, her associates, and the successor entity LyChè (“Defendants”) were alleged to have misappropriated these trade secrets and violated a non-compete provision after the termination of a franchise agreement.
Jenny Nguyen, a co-founder of Bambu Desserts and Drinks, operated the “Hostetter Shoppe,” a Bambu franchise store in San Jose, California, under a franchise agreement (FA) expiring in 2020. Following the expiration, LyChè began operating in the same location using similar recipes and methods. Bambu alleged this breached the FA’s non-compete provision and misused proprietary recipes. Defendants argued they had independently developed their recipes and that the non-compete clause had expired.
Decision:
The court granted Bambu’s motion in part, based on the following rationale:
- The court determined that Bambu’s proprietary recipes qualified as trade secrets under the Defend Trade Secrets Act (18 U.S.C. § 1836) and the California Uniform Trade Secrets Act (Cal. Civ. Code § 3426). The recipes were protected because they were not publicly available, were provided only under confidentiality agreements, and were shared on a need-to-know basis using a single confidential Recipe Guide for each franchise. Therefore, Plaintiff had taken reasonable measures to safeguard these secrets. Thus, the court rejected the defendants’ arguments that the recipes were publicly available or inadequately protected, citing precedent from Whyte v. Schlage Lock Co., 101 Cal. App. 4th 1443 (2002), which established that confidentiality agreements suffice to protect trade secrets from public dissemination.
- The court found strong circumstantial evidence of misappropriation. The defendants’ immediate operation of LyChè using similar recipes and methods at the same location as the former franchise raised a presumption of improper use of Bambu’s protected information.
- The court held that the two-year, 10-mile radius non-compete clause in the franchise agreement between the parties was enforceable under California law. The court also noted that California law (Cal. Bus. & Prof. Code § 16601) permits non-compete clauses where they are necessary to protect the goodwill of a business sold in connection with a franchise. Thus, this provision protect the plaintiff’s business interests from unfair competition.
- To avoid unduly harming the defendants, the court limited the scope of the injunction. While it prohibited the use of Bambu’s proprietary recipes, it did not require the immediate cessation of LyChè’s operations, thereby balancing the interests of both parties.
- The court found that Bambu failed to demonstrate a likelihood of success on its breach of contract claim against the prior operators of the Hostetter Shoppe. The court reasoned that the terms of the agreement did not explicitly hold these individuals directly liable for breaches, a key shortfall in the franchisor’s case.
Looking Forward:
This case offers several lessons for franchisors, and the franchise industry at large:
- For franchisors, while Bambu successfully demonstrated a likelihood of success on its trade secret misappropriation claim, its inability to establish a strong breach of contract case against the previous shop operator highlights the need for more precise and enforceable agreements. Thus, franchisors should ensure that all agreements, including those governing the use of proprietary information, are explicitly drafted to include provisions holding all relevant parties, including non-signatories such as operators or managers, liable for breaches. Franchisors can also strengthen their position by requiring clear documentation of asset transfers and changes in operational control to ensure continued compliance even during transitional periods.
- Equally, franchisees must fully understand the scope of their contractual obligations and ensure that they adhere to confidentiality and non-compete provisions. They should ensure transparency in their dealings with franchisors during business transitions to avoid claims of misappropriation or breach.
By and large, franchisors should consider integrating post-termination obligations into agreements, such as mandatory return of all proprietary materials and audits to verify compliance. By implementing these measures, franchisors can strengthen their contractual claims and reduce the risk of operational disputes during and after the franchise relationship.