Franchisor, Little Caesar Enterprises, Inc., recently lost a motion for a temporary restraining order/ preliminary injunction against a former franchisee after the District Court of South Dakota found that it was unlikely to succeed on its claim that the system for producing "Hot-N-Ready" Pizzas was a "trade secret" under the South Dakota Trade Secrets Act.

According to the Motion, the defendant operated 3 Little Caesar carry-out pizza franchises in Sioux Falls, South Dakota.  When the franchise agreements expired in June 2012, the defendant immediately opened a competing restaurant called Pizza Patrol at one of its former Little Caesar locations.

Little Caesar argued that the defendant misappropriated its proprietary "Hot-N-Ready" system stating that the process, techniques, and methods on how to prepare "Hot-N-Ready" pizzas in a competitive and profitable way was a trade secret.   

The court disagreed holding that the processes were simply a "conglomeration of information" already in the public knowledge and the franchisor did not adequately establish how its system brought them specific economic value beyond the generic knowledge of how to run a restaurant providing ready made pizzas.  Under South Dakota law, a trade secret is information which:

  1. Derives independent economic value from generally unknown means; and
  2. Is subject to efforts by its own to maintain its secrecy. 

According to the court, general references to preparation, timing, and amounts of food per hour to minimize waste was NOT sufficient to classify its system as "not generally known".  Significantly undermining the franchisor's case was the court's finding that Little Caesar did not go far enough to safeguard the information it deemed "trade secrets". 

This case shows that franchisors cannot assume that simply labeling their methods as "confidential," "proprietary" or "trade secrets" is sufficient to protect its system under state trade secret laws.   Franchisors desiring the protection of state trade secret statutes should take steps to establish that the methods and processes comprising their system are unique.  For example, the court in this case examined whether the franchisor used special software, complex manufacturing processes, or unique and complicated systems for prepping, making or selling ready made pizzas.   At least in South Dakota, a franchisor will not prevail on a trade secret claim without such unique methods and processes