Smash Franchise Partners, LLC v. Kanda Holdings, Inc.

SMASH FRANCHISE PARTNERS, LLC,and SMASH MY TRASH, LLC, Plaintiffs, v. KANDA HOLDINGS, INC., TODD PERRI,KEVIN MCLAREN, and DUMPSTER DEVIL, LLC, Defendants.

C.A. No. 2020-0302-JTL

COURT OF CHANCERY OF THE STATE OF DELAWARE

Date Submitted: July 22, 2020

August 13, 2020

MEMORANDUM OPINION

Lauren Neal Bennett, Sarah P. Kaboly, D. McKinley Measley, MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; Tracy N. Betz, Neil Peluchette, TAFT, STETTINIUS & HOLLISTER LLP, Indianapolis, Indiana; Attorneys for Plaintiffs.

Michael F. Bonkowski, Andrew L. Cole, COLE SCHOTZ P.C., Wilmington, Delaware; Steven K. Fedder, FEDDER & JANOFSKY LLC, Baltimore, Maryland; Attorneys for the Defendants.

LASTER, V.C.

Plaintiffs Smash Franchise Partners, LLC, and Smash My Trash, LLC (jointly, "Smash") operate a mobile trash compaction business and sell franchises to entrepreneurs who want to run a Smash-branded franchise in a protected territory. The core business involves using a truck-mounted mobile trash compactor to smash trash in a customer's dumpster. Smashing the trash enables the customer to pack more trash into each dumpster load and save on fees paid to the waste management company that provides the dumpster and hauls away the waste.

Defendant Todd Perri expressed interest in a Smash franchise. He soon concluded that with his engineering background and business experience, he could create his own mobile trash compaction business. Despite deciding to form his own business, Perri continued to feign interest in a Smash franchise and gather information about Smash.

Perri and his college fraternity brother, Kevin McLaren, formed Dumpster Devil LLC as a competing mobile trash compaction business. On their website, they compared Dumpster Devil's equipment and economic returns to Smash's equipment and economic returns. They also purchased the name "Smash My Trash" from Google AdWords, so that when users in certain geographic areas searched for Smash My Trash, the top result was a paid advertisement for Dumpster Devil.

Smash filed this lawsuit and sought a preliminary injunction that would shut down Dumpster Devil's business. Smash's scattershot application invokes eight different legal theories: breach of a non-disclosure agreement (the "NDA"), unjust enrichment, misappropriation of trade secrets, conversion, unfair competition, fraud, deceptive trade practices, and trademark infringement.

The theories that could support broad injunctive relief depend on showing that the defendants obtained and used confidential information from Smash. To obtain a business-stopping injunction as a form of interim relief, the information would need to be highly confidential and valuable.

At this stage of the case, the record does not support a business-stopping injunction. All of the information that the defendants received was publicly available, freely shared by Smash's franchisees, or provided by Smash without taking adequate precautions to protect its confidentiality. The information was primarily designed to convince interested entrepreneurs to purchase a franchise, and it reflected the type of information that one would see in a detailed sales pitch. It was specific enough to attract prospective franchisees, but not specific enough to reveal critical information about Smash.

The fact that Smash is not entitled to a business-stopping injunction does not legitimize Perri and McLaren's conduct. Their actions were disingenuous and underhanded. They did not, however, acquire legally protected information that could support the type of broad preliminary injunction that Smash seeks.

Smash has established a reasonable likelihood of success on the merits of its claim for deceptive trade practices. It is reasonable likely that some of the comparisons between Dumpster Devil's equipment and Smash's equipment are false and misleading. This decision grants a limited preliminary injunction that prohibits the defendants, pending a final decision on the merits after trial, from making statements about (i) Smash's hydraulic drum lacking protective guards, (ii) the slides on Smash truck's needing daily greasing,and (iii) the Dumpster Devil truck weighing less than 26,000 pounds and not requiring a commercial license. Otherwise, Smash's application for a preliminary injunction is denied.

I. FACTUAL BACKGROUND

The facts are drawn from the record developed in connection with the Smash's application for a preliminary injunction. What follows are the facts as they appear likely to be found after trial, based on the current record.

A. Smash's Business

Starting in 2015, non-party Justin Haskin developed a plan to "disrupt the commercial waste industry" by providing trash compaction services at the customer's place of business rather than at a centralized location. Haskin Dep. at 35. By providing mobile trash compaction services, Haskins sought to "help clients realize financial savings as to their trash hauling fees and reduce emissions." Haskin Decl. ¶ 5.

Haskin founded Smash and serves as its president and CEO. The Company started as a local service, then shifted into a franchise model. Smash sold its first franchise in April 2019, and its first franchisee began operating in October 2019.

In YouTube videos, Smash shows how its truck-mounted compactor smashes trash. The unit is mounted on the bed of a truck and consists of a cab and a weighted, serrated drum that is attached to a roller arm. A driver controls the roller arm from the cab and uses it to lower the drum into a dumpster. The driver then moves the drum across and through the trash to compact it. The videos describe how much money a customer can save by contracting with Smash.

B. Perri Asks About A Smash Franchise.

Perri is a serial entrepreneur who holds a Bachelor of Science in Mechanical Engineering from Carnegie Mellon University, a Master of Science in Mechanical and Aerospace Engineering from Princeton University, and a Master of Business Administration from Stanford University. He is the sole shareholder of defendant Kanda Holdings, Inc., a North Carolina company.

Perri learned about Smash when he replied to a blind advertisement on the website bizbuysell.com. The advertisement read, "Commercial Waste Management-patent pending technology." Perri Dep. I 63-64.

Trish Scelfo, the owner of an independent franchise broker called The Franchise Collective, posted the advertisement for Smash. She responded to Perri's inquiry and set up an initial call. During a call on December 4, 2019, Scelfo pitched Perri on buying a Smash franchise. She gave him a broad overview of Smash's business and equipment, including information about where Smash obtained its equipment, where the franchises were located, and where Smash had available territories. She discussed how Smash intended to pursue relationships with businesses that have nationwide operations (so-called national accounts) so that franchisees could benefit from those relationships. She also discussed the level of competition in the industry, the extent of competition for national accounts, and the types of businesses that are Smash's principal customers. She explained to Perri what the start-up and operating costs would be and what software he would use to run a Smash franchise.

Scelfo directed Perri to Smash's website and its YouTube channel where he could learn more and see videos of Smash's equipment in action. Scelfo also sent Perri an introductory presentation, referred to as a pitch deck, that discussed Smash and its business model. The pitch deck described Smash's business strategy of being first to market in the mobile trash compaction business. It also described what Smash views as its principal competitive advantage: structuring its operations as a trucking business rather than a waste management business. As Smash portrays it, a waste management business responds to a customer's request to dispose of trash on an ad hoc basis and charges per call. A trucking company establishes routes that its trucks follow regularly and charges its customers a flat fee. Smash likes to describe its operating model as akin to a FedEx or UPS route but without the boxes. See Haskin Dep. at 26-28; Dkt. 91 Ex. 7.

The pitch deck identified the steps involved in obtaining a franchise. First, a prospective franchisee would participate in an introductory call. Second, a prospective franchisee would participate in a "unit economics call" about the economics of a franchise, including the start-up and operating expenses (the "Unit Economics Call"). After the call, the prospective franchisee would receive an Excel workbook containing the economic data (the "Unit Economics Worksheet").

After these two introductory calls, a prospective franchisee could commit to attending "discovery day," an event where potential franchisees would travel to Smash's home office and learn about Smash's "secret sauce." As proof of the potential franchisee's commitment to attending discovery day, the potential franchisee would need to provideproof of purchase of a plane ticket. Before being permitted to attend discovery day, a prospective franchisee would have to sign an NDA.

During the process, the prospective franchisee would be able to participate in two types of videoconferences. One type, called a "Franchisee Forum Call" or "Validation Call" occurred weekly on Thursdays and was hosted by current franchisees, who described how they ran their franchises and answered questions about their business. No one from Smash participated in the Franchisee Forum Calls. The other type of call, called a "Founder Call," occurred weekly on Wednesdays and was hosted by Haskins, who talked about the Company's history and prospects and answered questions.

At the end of this process, after attending discovery day, a prospective franchisee could apply to purchase a franchisee. If Smash approved the application, then the prospective franchisee and Smash would sign a franchise agreement.

C. Perri Speaks With Franchise...