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Inc. v. Schulenburg

United States District Court, N.D. Ohio, Eastern Division

June 22, 2018

KENNETH S. SCHULENBURG, et al., Defendants.


          Benita Y. Pearson United States District Judge.

         Pending before the Court is Plaintiff Handel's Enterprises, Inc.'s Motion for Preliminary Injunction. ECF No. 3. Defendants Kenneth S. Schulenburg, Juliana Ortiz, and Moonlight101, Inc. have filed a response in opposition. ECF Nos. 25 and 26. Plaintiff replied. ECF No. 27. The Court has been advised, having reviewed the record and heard oral argument. For the reasons that follow, the Court grants Plaintiff's motion (ECF No. 3).[1]

         I. Background

         This action arises out of a franchise relationship between Plaintiff Handel's Enterprises, Inc. (“Handel's”) and Defendants Kenneth S. Schulenburg, Juliana Ortiz, and Moonlight101, Inc. (collectively “Defendants”). ECF No. 1. Handel's was founded in 1945 and is a franchisor in the ice cream industry with forty-one locations in nine states, including company-owned and franchise locations. Id. at PageID#: 6, ¶ 21. Handel's uses products, equipment, methods operating manuals, suppliers, and recipes exclusive to Handel's in furtherance of its tradition of excellence and to distinguish itself from its competitors in the ice cream industry. Id. at ¶ 23.

         On October 14, 2015, Defendant Schulenburg met with Handel's in Ohio to discuss the possibility of purchasing a Handel's franchise in the San Diego, California area. Id. at PageID#: 7, ¶¶ 24-26. During the meeting, Handel's provided Defendant Schulenburg with certain franchise disclosures, including a proposed Franchise Disclosure Document (“FDD”) that was registered with the California Department of Business Oversight with an effective date of April 13, 2015. Id. at ¶ 25. The FDD includes a Unit Franchise Agreement (the “Franchise Agreement”) that governs the terms of the parties' franchisor-franchisee relationship. Id. Defendant Schulenburg signed the FDD at the October 14, 2015 meeting. Id. at ¶ 26.

         Under the Franchise Agreement, Defendant Schulenburg was assigned a three-mile radius surrounding the Lofts at Moonlight Beach in Encintas, California, and was also awarded the option to open a second franchise location in the Gaslamp Quarter of downtown San Diego. Id. at PageID#: 8, ¶ 29. On or about January 22, 2016, Plaintiff and Defendant Schulenburg executed the Franchise Agreement, commenced a five year initial term, and opened the Encinitas Franchise. Id. at PageID#: 8, ¶ 30. In executing the Franchise Agreement, Defendant Schulenburg agreed to “maintain the absolute confidentiality” of Handel's trade secret information, and to not compete with Handel's “both during the time that he is a franchisee and for a period of two years following the termination of the Agreement. ECF No. 3-1 at PageID#: 318-19. Defendant Schulenburg attended a two-week Handel's training in Ohio, at which Handel's provided Defendant with confidential information pertaining to its operations. ECF No. 1 at PageID#: 8, ¶ 32. Similarly, in early 2016, Defendant Ortiz traveled to Ohio to attend Handel's mandatory franchise training. ECF No. 26-2 at PageID#: 884, ¶ 4.

         In mid-2017, Defendant Schulenburg began to discuss the development of his second Handel's location in San Diego, California, and chose a location at 425 Market Street, San Diego, California, which is in an area known as the Gaslamp Quarter (the “Gaslamp location”). ECF No. 3-1 at PageID#: 320. Handel's did not approve the development of a Handel's franchise at this location. Id. In December 2017, Defendant Schulenburg informed Handel's that he did not believe that paying a franchise fee for the Gaslamp location was logical. Id. at PageID#: 323. As such, Defendant Schulenburg refused to provide Handel's with both a copy of the final lease for the Gaslamp location or pay the franchise fee. Id. On December 15, 2017, Handel's sent Defendants a notice of breach, informing Defendants of their failure to provide the executed lease to Handel's and to pay the required franchise fee, as required under the Franchise Agreement. ECF No. 3-2 at PageID#: 387. On December 26, 2017, Defendants informed Handel's that they “agreed to sign off on the locations but want[] to do so in person, ” thus, Defendants would look “at flights to Cleveland in Jan week 1 and 2 [of 2018].” ECF No. 27-4 at PageID#: 972.

         Despite these representations, on January 30, 2018, Defendants filed an action in California state court (the “California action”). ECF No. 3-1 at PageID#: 324. Under the California action, Defendants sought relief from Handel's alleged violation of California franchise law-Handel's allegedly presented and had Defendant Schulenburg sign an unauthorized FDD that was not yet approved by the California Department of Business Oversight.[2] See ECF No. 23-6. The California action was removed to the United States District Court for the Southern District of California, No. 3:18-CV-00513 GPC WVG. Id.

         Handel's initiated the instant action against Defendants on March 5, 2018 and contemporaneously sought a preliminary injunction. ECF Nos. 1 and 3. The Verified Complaint asserts claims for federal trademark infringement, federal trademark dilution, federal false designation of origin, unfair competition, breach of contract, misappropriation of trade secrets, fraud, fraudulent concealment, conversion, declaratory judgment, and tortious interference. ECF No. 1. Handel's seeks a preliminary injunction against Defendants for the misappropriation of trade secrets and breach of the parties' Franchise Agreement, which includes a non-compete covenant. ECF No. 3. Defendants assert that they continue to operate the Encinitas Franchise under the terms of the Franchise Agreement, and intend to operate the Gaslamp location independent of Handel's. ECF No. 26 at PageID#: 860. Defendants also assert that the Gaslamp location will be opened by June 8, 2018.[3] Id. at PageID#: 867.

         After notice to the parties, the Court held a hearing on the motion for preliminary injunction on May 9, 2018. ECF No. 19. Having been advised by a review of the record, applicable law, and oral advocacy, including the presentation of evidence, the Court grants Handel's motion for preliminary injunction (ECF No. 3).

         II. Law and Analysis

         Fed. R. Civ. P. 65 requires the Court to balance four factors when determining whether a preliminary injunction should issue. The factors are: (1) likelihood of success on the merits; (2) irreparable harm absent injunctive relief; (3) substantial harm to others from the proposed injunction; and (4) the broader public interest. Nat'l Credit Union Admin. Bd. v. Jurcevic, 867 F.3d 616, 622 (6th Cir. 2017). These four considerations are “factors to be balanced, not prerequisites that must be met.” Certified Restoration Dry Cleaning Network, L.L.C. v. Tenke Corp., 511 F.3d 535, 542 (6th Cir. 2007) (quoting Jones v. City of Monroe, 341 F.3d 474, 476 (6th Cir. 2003), abrogated on other grounds by Anderson v. City of Blue Ash, 798 F.3d 338 (6th Cir. 2015)). “The district judge ‘is not required to make specific findings concerning each of the four factors used in determining a motion for preliminary injunction if fewer factors are dispositive of the issue.'” Id. “Although no one factor is controlling, a finding that there is simply no likelihood of success on the merits is usually fatal.” Gonzales v. Nat'l Bd. of Med. Exam'rs, 225 F.3d 620, 625 (6th Cir. 2000).

         In balancing the four considerations applicable to preliminary injunctions, the Court finds that equitable relief is appropriate.

         A. Likelihood of Success on the Merits

         Handel's maintains that it is likely to succeed on the merits of the action against Defendants for the breach of the Franchise Agreement because Defendants misappropriated Handel's trade secrets and violated the terms of the Agreement, which included a non-compete covenant. ECF No. 3-1 at PageID#: 325-327. The Franchise Agreement is governed by Ohio law. ECF No. 1-3 at PageID#: 266 (“This Agreement will be construed in accordance with and governed by the laws of the state of Ohio.”). Therefore, the evaluation of the Franchise Agreement is guided by Ohio law.[4]

         1. Misappropriation of Trade Secrets

         Under the Ohio Uniform Trade Secrets Act, Ohio Revised Code §§ 1333.61-.69 (“UTSA”), “[a]ctual or threatened misappropriation may be enjoined.” O.R.C. § 1333.62(A). To maintain its misappropriation claim, Handel's must establish by a preponderance of the evidence: (1) the existence of a trade secret; (2) the acquisition of a trade secret as a result of a confidential relationship; and (3) the unauthorized use of a trade secret. Heartland Home Fin., Inc. v. Allied Home Mortg. Capital Corp., 258 Fed.Appx. 860, 861 (6th Cir. Jan. 7, 2008) (citing Hoover Transp. Serv., Inc. v. Frye, 77 Fed.Appx. 776, 782 (6th Cir. Sept. 12, 2003) (per curiam)). A trade secret is “information” that “derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use” and is the subject of reasonable efforts to maintain its secrecy. O.R.C. § 1333.61(D).

         Defendants assert that Handel's has failed to adequately plead this claim. In particular, Defendants argue that “Plaintiff failed to identify with specificity the documents or specific material it alleges contains confidential information that was misappropriated.” ECF No. 26 at PageID#: 864. Defendants also contend that “even if the Agreement is enforceable, and the parties identified specific information as ‘trade secrets, '” Plaintiff's allegations are insufficient “to prove that its alleged trade secrets fall within the definition set forth in Ohio Rev. Code Ann. § 1333.61(D).” Id.

         Defendants' arguments are unavailing. Contrary to Defendants' assertions, Handel's Verified Complaint alleges significant information concerning its trade secrets. The Complaint identifies Handel's “Confidential Operations Manual.” ECF Nos. 1 at PageID#: 8-9, ¶¶ 32-33; 1-3 at PageID#: 254. The Confidential Operations Manual “contains the ‘specifications, standards, and procedures' for operating a Handel's franchise.” ECF Nos. 1 at PageID#: 8-9, ¶¶ 32-33; 1-3 at PageID#: 254. The Franchise Agreement, attached to the Complaint, further describes Handel's confidential information as including the “total knowledge of [Handel's] System, and construction, operation, and promotion” of the Handel's franchise, something Defendants only became aware of through their interactions with Handel's. ECF No. 1 at PageID#: 8-9, ¶¶ 32-33. That interaction included in-person training at Handel's headquarters in Ohio. Id.; ECF No. 26-2 at PageID#: 884, ¶ 4. The “System” that Handel's seeks to protect is its system for the establishment and operation of its business-information in the Confidential Operations Manual, and information of its “formulas, compilations, methods, techniques, and processes, ” all exclusive to Handel's. ECF No. 1 at PageID#: 10, ¶ 37. The Franchise Agreement requires that franchisees take steps to protect Handel's ...

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