Contract: Franchisee allegedly stole trade secrets

Where a company that prepares tax returns alleged a franchisee disclosed trade secrets to his new business, it plausibly alleged violations of the Defend Trade Secrets Act.

Background

Plaintiff filed a complaint alleging unlawful competition and breach of the franchise agreements. Before the court are three motions to dismiss.

Jurisdiction

Defendants argue that this court lacks subject matter jurisdiction because Liberty’s claims are the property of the bankruptcy estate. The plain language of Bankruptcy Code § 362 prohibits “actions or proceedings against the debtor.” The automatic stay does not apply because plaintiff is the debtor who initiated this proceeding. Now, if defendant plans to assert any counterclaims against plaintiff, then those claims would be subject to the automatic stay. Additionally, staying defendants’ potential counterclaims does not impact this case and does not require dismissal. Thus, this court has subject matter jurisdiction over this proceeding and it would not be a waste of judicial resources to do so.

DTSA

Count Three alleges violations of the Defend Trade Secrets Act, or DTSA. To survive the motion to dismiss, plaintiff must allege: (1) it owns a trade secret; (2) the trade secret was misappropriated and (3) the trade secret implicates interstate or foreign commerce. Here plaintiff pleads facts supporting each element.

Plaintiff’s amended complaint provides factual descriptions of the trade secrets and confidential information, including its customer lists, operational methods, marketing strategies, training materials and its relation to facilitating the tax business that plaintiff spent 27 years developing. Plaintiff alleges that one defendant disclosed this information to other defendants for their own economic benefit. Third, the trade secrets relate to tax information transmitted from each state to the Internal Revenue Service in Washington, D.C.

Breach of contract

To state a claim for breach of contract in Virginia, a plaintiff must show (1) a legally enforceable contract between the plaintiff and the defendant; (2) the defendant’s violation or breach of contract and (3) an injury or harm to the plaintiff caused by the defendant’s breach.

According to the amended complaint, plaintiff alleges that L. Cortorreal agreed to the terms under the franchise agreements and signed the franchise agreements. These facts are sufficient to indicate an offer, acceptance and consideration to support a legally enforceable contract. The court also finds that the other two elements of a breach of contract claim were also sufficiently pleaded.

Unjust enrichment

To plead unjust enrichment, a plaintiff must allege that: (1) he conferred a benefit; (2) defendant knew of the benefit and should reasonably have expected to repay plaintiff and (3) defendant accepted or retained the benefit without paying for its value. Since unjust enrichment is appropriate in the absence of an enforceable contract and plaintiff sufficiently pleaded a breach of contract claim against L. Cortorreal, plaintiff is precluded from claiming unjust enrichment.

Plaintiff also claims unjust enrichment against R. Cortorreal. But there is no factual support to show that plaintiff conferred a benefit on R. Cortorreal or that he knew of the benefit and should have reasonably expected to repay plaintiff. The bare allegation that L. Cortorreal and R. Cortorreal are related is not enough to support that R. Cortorreal knew that he had to repay plaintiff anything, especially since R. Cortorreal did not sign the franchise agreements. However, plaintiff sufficiently pleads unjust enrichment against The Eagles Team.

Conversion

Plaintiff sufficiently pleads a cause of action for conversion against defendants. Plaintiff provided L. Cortorreal with its trade secrets and confidential information to operate as a Liberty franchise. However, upon termination of the franchise agreements, L. Cortorreal took possession of plaintiff’s property and failed to return it. L. Cortorreal instead used plaintiff’s property without plaintiff’s permission to operate The Eagles Team along with R. Cortorreal.

Tortious interference

Plaintiff pleads a cause of action for tortious interference. Plaintiff alleges the existence of a contractual relationship between L. Cortorreal and Liberty. Second, R. Cortorreal and The Eagles Team knew of the relationship between L. Cortorreal and Liberty. And plaintiff suffered economic damages because L. Cortorreal chose to not honor the post-termination contractual obligations.

Injunction

The court construes plaintiff’s request as seeking an ex parte preliminary injunction. However, Rule 65(a)(1) is clear that no preliminary injunction may issue without notice to the adversary party. Even if the court construes plaintiff’s request as seeking an ex parte temporary restraining order, plaintiff still has not comported with the requirements of Rule 65(b)(1).

Plaintiff’s request for injunction denied. Defendants’ motions to dismiss granted in part, denied in part.

JTH Tax LLC v. Cortorreal, Case No. 2:23-cv-0355, Aug. 23, 2024. EDVA at Norfolk (Jackson). VLW 024-3-452. 24 pp.