Handel's Enterprises, Inc. v. Schulenburg

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF OHIO

EASTERN DIVISION

HANDEL'S ENTERPRISES, INC., CASE NO. 4:18-CV-00508

Plaintiff, (CONSOLIDATED WITH

-vs- CASE NO. 4:18-CV-02094)

JUDGE PAMELA A. BARKER

KENNETH S. SCHULENBURG, et al.,

MEMORANDUM OF OPINION AND

Defendants. ORDER

This matter comes before the Court upon the Emergency Renewed Motion for Preliminary

Injunction (“Motion”) of Plaintiff Handel’s Enterprises, Inc. (“Handel’s”). (Doc. No. 99.)

Defendants Kenneth Schulenburg (“Schulenburg”), Juliana Ortiz (“Ortiz”), and Moonlight101, Inc.

(“Moonlight101”) (collectively, “Defendants”) filed a brief in opposition on January 15, 2020, to

which Handel’s replied on January 20, 2020. (Doc. Nos. 100, 101.) The Court also granted

Defendants leave to file a sur-reply, which Defendants filed on January 21, 2020. (Doc. No. 102.)

For the following reasons, Handel’s Emergency Renewed Motion for Preliminary Injunction

(Doc. No. 99) is GRANTED.

I. Background1

Handel’s is a nationwide franchisor and operator of ice cream parlors, with forty-seven

locations in nine states. (Doc. No. 68 at ¶¶ 1, 5.) In October 2015, Schulenburg met with Handel’s

to discuss the possibility of purchasing a Handel’s franchise in the San Diego, California area. (Id.

1 This case has an extensive factual and procedural history with which the parties are familiar. The Court will describe

that history only to the extent it is relevant to Handel’s Motion.

at ¶ 28.) Several months later, on January 21, 2016, Handel’s and Schulenburg executed a Franchise

Agreement. (Doc. No. 67 at ¶¶ 10-11.) Schulenburg is the President of Moonlight101, which he

specifically incorporated in order to operate the franchised ice cream store that he bought from

Handel’s. (Doc. No. 26-1 at ¶ 3; Doc. No. 69 at ¶ 3.) Handel’s asserts that Ortiz is also a principal

of Moonlight101, while Defendants contend Ortiz is simply an employee of Moonlight101. (Doc.

No. 26-2 at ¶ 3; Doc. No. 68 at ¶ 17.)

The Franchise Agreement assigned Schulenburg a “three-mile radius surrounding the Lofts at

Moonlight Beach” in Encinitas, California. (Doc. No. 67-7 at 113.) It also contemplated the grant

of a second franchise location in the Gaslamp Quarter of downtown San Diego and provided

Schulenburg a right of first refusal in that area for a period of two years after the execution of the

Franchise Agreement. (Id.) The initial term of the agreement was for five years, beginning January

22, 2016 and ending January 22, 2021. (Id. at 82.) As such, Schulenburg is still a Handel’s

franchisee. (Doc. No. 99-2 at 28:3-15.)

With regard to Handel’s trade secrets and confidential information, the Franchise Agreement

provides the following:

You acknowledge and agree that your total knowledge of the System, and

construction, operation and promotion of the Ice Cream Parlor, is derived from

information we disclosed to you under this Agreement, Handel’s Manuals and

otherwise, and that such information is proprietary, confidential and a trade secret of

Handel’s. You, as franchisee and principal, jointly and severally covenant and agree

that you will maintain the absolute confidentiality of all such information during and

after the term of this Agreement, and not use this information in any other business or

manner unless approved in writing by Handel’s.

(Doc. No. 67-7 at 87.) A separate provision also requires Schulenburg to keep confidential the

contents of Handel’s “Confidential Operations Manual,” which contains the “specifications,

standards and procedures” for operating a Handel’s franchise. (Id. at 85.) In addition, this same

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provision requires Schulenburg to have his “employees sign a written nondisclosure covenant . . .

before disclosing any contents of the Manuals to them.” (Id.) Handel’s also had Ortiz sign a written

confidentiality agreement. (See Doc. No. 99-3.)

The Franchise Agreement also includes two non-compete provisions—one that applies during

the term of the agreement and one that applies after termination. Section 5.07 of the Franchise

Agreement contains the in-term covenant not to compete. (Doc. No. 67-7 at 86.) It provides that,

during the initial term of the agreement, Schulenburg would not “directly, indirectly, or in any matter

whatever, be involved with any business which is competitive with, or similar to [Handel’s], in any

way.” (Id.) The post-contract covenant not to compete precludes Schulenburg from being involved

in the sale of ice cream and related products and services for a period of two years after termination

of the agreement in “the Territory” or “within 2 miles of any Handel’s franchised or company-owned

store.” (Id. at 91.)

As part of the operation of a Handel’s franchise, Schulenburg and Ortiz received the following

documentation: (1) Handel’s Recipe Guide, which includes ingredient lists and preparation methods

for Handel’s ice cream (Doc. No. 99-4); (2) Handel’s Confidential Operations Manual (Doc. No. 26-

1 at ¶ 9); and (3) Handel’s Preparation Guide, which includes instructions on the preparation of every

Handel’s menu item, including the correct ice cream scoopers to use to make the “Perfect Cone”

(Doc. Nos. 91-3, 91-4). Schulenburg and Ortiz also attended Handel’s franchise training. (Doc. No.

26-1 at ¶ 8; Doc. No. 26-2 at ¶ 4.) Neither Schulenburg nor Ortiz had any prior experience in the ice

cream industry. (Doc. No. 26-1 at ¶ 15; Doc. No. 26-2 at ¶ 6.)

In mid-2017, about a year and a half after Schulenburg executed the Franchise Agreement

and opened his franchise in Encinitas, California (the “Encinitas Franchise”), Schulenburg began to

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discuss the development of his second Handel’s location in the Gaslamp Quarter of downtown San

Diego, and chose a location at 425 Market Street, San Diego, California. (Doc. No. 68 at ¶ 100.)

According to Handel’s, Schulenburg refused to provide Handel’s with a copy of the final lease for

the Gaslamp Quarter location or pay the franchise fee. (Id. at ¶¶ 107-08.) Despite negotiations

regarding terminating or restructuring the franchise relationship, the parties could not resolve their

disagreements and litigation ensued.

On March 5, 2018, Handel’s filed suit against Schulenburg, Ortiz, and Moonlight101 in this

Court, asserting claims for trademark infringement, trademark dilution, false designation of origin,

unfair competition, breach of contract, misappropriation of trade secrets, fraud, fraudulent

concealment, conversion, declaratory judgment, and tortious interference. (Doc. No. 1.) Handel’s

also contemporaneously sought a preliminary injunction to prevent Schulenburg from operating an

ice cream parlor at 425 Market Street, San Diego, California, which Handel’s claimed would be in

breach of the Franchise Agreement’s covenants not to compete and would improperly use Handel’s

proprietary, confidential, and trade secret information. (Doc. No. 3.)

The previous judge assigned to this case, Judge Benita Pearson, held a hearing on Handel’s

Motion for Preliminary Injunction on May 9, 2018. At the hearing, Schulenburg’s counsel informed

Judge Pearson that Schulenburg had opened an independent ice cream store in the Gaslamp Quarter

at 425 Market Street—Cali Cream Homemade Ice Cream (“Cali Cream”)—and that it had opened

after the filing of Handel’s lawsuit and Motion for Preliminary Injunction. (Doc. No. 48 at 43.) On

June 22, 2018, Judge Pearson granted Handel’s Motion for Preliminary Injunction, finding that

Handel’s had a strong likelihood of success on both its trade secret and non-compete claims. (Doc.

No. 42.) Consequently, Judge Pearson enjoined Schulenburg from operating any business

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competitive with or similar to Handel’s, specifically including Cali Cream, until Schulenburg’s status

as a Handel’s franchisee had been resolved, but no longer than January 22, 2020. (Doc. No. 43 at 3-

4.) Handel’s had proposed that the injunction remain in effect “no longer than the term of the parties’

franchise relationship, which expires January 22, 2021.” (Doc. No. 37 at 4.) But Judge Pearson

limited it to January 22, 2020, noting that Handel’s “suggested that the Order remain in effect until

January 22, 2021 without adequate explanation.” (Doc. No. 43 at 4 n.1.) The Sixth Circuit affirmed

Judge Pearson’s decision on appeal. Handel’s Enterprises, Inc. v. Schulenburg, 765 F. App’x 117

(6th Cir. 2019).

During the short time it was in operation, Cali Cream offered many flavors similar to those

offered by Handel’s. (See Guizar Dep. at 54:1-65:4; Guizar Dep. Exs. JJ and SSS.)2 For example,

Cali Cream flavors included Blueberry Cheesecake (compared to Handel’s Blueberry Cheesecake

Chunk), Cookie Monster (compared to Handel’s Blue Monster), Dat Brownie Dough (compared to

Handel’s Brownie Dough), and Matcha Green Tea (compared to Handel’s Green Tea). (Guizar Dep.

Exs. JJ and SSS.) The methods of preparation for many of these flavors are also very similar. (See

Guizar Dep. at 54:1-65:4; Guizar Dep. Exs. JJ and SSS.) Cali Cream also used some of the same

suppliers, many of the same ingredients, the same dipping cabinets, and employed Alan Guizar

(“Guizar”)—who is also the ice cream maker for the Encinitas Franchise—to make ice cream. (Doc.

No. 99-2 at 228:24-229:4, 244:10-14, 248:19-258:11; Doc. No. 99-5 at 309:1-22; Doc. No. 99-6 at

12:21-13:23, 22:21-23:5.) Handel’s additionally points to the fact that Cali Cream used the same

cocoa powder as Handel’s despite numerous varieties on the market. (Doc. No. 99-2 at 255:17-

2 The referenced portion of Guizar’s deposition testimony and corresponding exhibits were marked “attorneys’ eyes only”

and submitted to the Court for in-camera review on January 17, 2020.

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257:6.) Several news articles and websites also noted similarities between Handel’s and Cali Cream.

(See Doc. No. 101 at 4 n.1.)

However, there is also evidence that Cali Cream used many different suppliers, different ice-

cream making equipment, a different ice cream base mix, different recipes, and many different

ingredients. (Doc. No. 100-3 at ¶¶ 6-13.) Schulenburg has indicated that he developed Cali Cream’s

recipes by searching online, experimenting with ingredients at Cali Cream, and getting suggestions

from others in the industry, and that neither he nor anyone else at Cali Cream used or relied in any

way on any Handel’s manuals, recipes, or guides. (Id. at ¶¶ 12, 14.)

On November 6, 2019, Defendants moved to dissolve the preliminary injunction issued by

Judge Pearson, claiming that evidence developed during discovery demonstrated the preliminary

injunction had been improvidently granted. (Doc. No. 85.) Shortly thereafter, on November 12,

2019, Handel’s moved to correct the expiration date of the preliminary injunction. (Doc. No. 87.)

Handel’s argued that the preliminary injunction—which was set to expire on January 22, 2020—

should be extended to January 22, 2021 in order to align the injunction with the expiration of the

initial term of the Franchise Agreement. On January 6, 2020, the Court denied both parties’ motions.

(Doc. No. 97.) The Court found that Defendants had failed to establish any changes in the facts, the

law, or circumstances that warranted dissolving the preliminary injunction. (Id. at 16-20.) The Court

also found that Handel’s request to extend the preliminary injunction failed to adequately address the

four factors courts not only consider when issuing a preliminary injunction, but when extending one.

However, the Court noted that the denial was without prejudice to Handel’s bringing a properly

supported motion. (Id. at 20-24.)

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On January 9, 2020, Handel’s filed its Emergency Renewed Motion for Preliminary

Injunction, seeking to address the deficiency in its earlier motion by addressing all four of the

preliminary injunction factors. (Doc. No. 99.) Handel’s once again requests that the Court issue a

preliminary injunction that extends to January 22, 2021. In response, Defendants assert that Handel’s

has failed to present sufficient evidence to warrant extending the preliminary injunction such that its

Motion should be denied outright, or, in the alternative, that the Court should hold an evidentiary

hearing to address disputed issues of fact before ruling on Handel’s Motion. (Doc. No. 100.)

The preliminary injunction entered by Judge Pearson expired on January 22, 2020. Having

reviewed the evidence and briefs submitted by the parties, the Court concludes that the issuance of a

new preliminary injunction is warranted.

II. Evidentiary Hearing

Initially, the Court notes that an evidentiary hearing is unnecessary. When considering

whether to grant a preliminary injunction, “a hearing is only required when there are disputed factual

issues, and not when the issues are primarily questions of law.” Certified Restoration Dry Cleaning

Network, L.L.C. v. Tenke Corp., 511 F.3d 535, 552 (6th Cir. 2007). The Sixth Circuit summarized

the rule as follows: “[W]here facts are bitterly contested and credibility determinations must be made

to decide whether injunctive relief should issue, an evidentiary hearing must be held. [However,]

where material facts are not in dispute, or where facts in dispute are not material to the preliminary

injunction sought, district courts generally need not hold an evidentiary hearing.” Id. at 553 (quoting

McDonald’s Corp. v. Robertson, 147 F.3d 1301, 1312-13 (11th Cir. 1998)). The Court finds that

while certain facts may be in dispute, those facts are not material to the preliminary injunction sought.

Moreover, Judge Pearson previously conducted a hearing, the parties have had ample opportunity to

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conduct discovery since then, and the relevant issues have been briefed numerous times. As such,

the Court finds a hearing unnecessary.

III. Standard of Review

“In general, courts must examine four factors in deciding whether to grant a preliminary

injunction: (1) whether the movant has demonstrated a substantial likelihood of success on the merits,

(2) whether the movant will suffer irreparable injury absent injunction, (3) whether a preliminary

injunction would cause substantial harm to others, and (4) whether the public interest will be served

by an injunction.” Flight Options, LLC v. Int’l Bhd. of Teamsters, Local 1108, 863 F.3d 529, 539-40

(6th Cir. 2017). “These factors are not prerequisites, but are factors that are to be balanced against

each other.” Overstreet v. Lexington-Fayette Urban Cty. Gov’t, 305 F.3d 566, 573 (6th Cir. 2002).

However, “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 addition, “[a]

preliminary injunction is an extraordinary remedy which should be granted only if the movant carries

his or her burden of proving that the circumstances clearly demand it.” Overstreet, 305 F.3d at 573.

“The party seeking the injunction must establish its case by clear and convincing evidence.” Draudt

v. Wooster City Sch. Dist. Bd. of Educ., 246 F. Supp. 2d 820, 825 (N.D. Ohio 2003).

IV. Analysis

a. Likelihood of Success on the Merits

First, the Court considers whether Handel’s “has demonstrated ‘a strong likelihood of success

on the merits.’” Certified Restoration, 511 F.3d at 543 (quoting Tumblebus Inc. v. Cranmer, 399

F.3d 754, 760 (6th Cir. 2005)). “In order to establish a likelihood of success on the merits of a claim,

a plaintiff must show more than a mere possibility of success.” Six Clinics Holding Corp., II v.

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Cafcomp Systems, Inc., 119 F.3d 393, 402 (6th Cir. 1997). Nonetheless, “it is ordinarily sufficient if

the plaintiff has raised questions going to the merits so serious, substantial, difficult, and doubtful as

to make them a fair ground for litigation and thus for more deliberate investigation.” Id. Handel’s

asserts it has shown a strong likelihood of success with regard to both its trade secret and non-compete

claims. (Doc. No. 99-1 at 9-12.)

i. Misappropriation of Trade Secrets

In Ohio, to prevail on a misappropriation of trade secrets claim, a plaintiff must show “(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 F. App’x 860, 861 (6th Cir. 2008).3 Defendants contend that Handel’s has failed

to establish the first and third elements—the existence of a trade secret and unauthorized use. (Doc.

No. 100 at 3-7.) The third element—Defendants’ acquisition of any alleged trade secrets as a result

of a confidential relationship with Handel’s—is not disputed.

Based on the law-of-the-case doctrine, Handel’s asserts this Court should not reconsider Judge

Pearson and the Sixth Circuit’s previous holdings with regard to Handel’s trade secrets. (Doc. No.

101 at 8-10.) However, those findings are not necessarily binding in subsequent proceedings because

holdings related to preliminary injunctions typically are based “on incomplete evidence and a

relatively hurried consideration of the issues.” Vittitow v. City of Upper Arlington, 43 F.3d 1100,

3 With regard to Handel’s trade secrets claim, Defendants urge this Court to reject application of the inevitable disclosure

doctrine since California law does not recognize it. (Doc. No. 100 at 6.) However, in all other aspects of their analysis

of Handel’s trade secrets claim, Defendants themselves apply Ohio law. (See id. at 3-7.) In addition, Defendants fail to

present any argument as to why California law should apply to Handel’s trade secrets claim. All of their analysis on the

choice of law issue relates solely to the application of California law to the covenants not to compete in the Franchise

Agreement. (Id. at 7-8.) Accordingly, the Court will apply Ohio law to Handel’s trade secrets claim, which is consistent

with the treatment of Handel’s trade secrets claim throughout this case.

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1108 (6th Cir. 1995) (quoting Brown v. Int’l Bhd. of Elec. Workers, Local Union No. 58 AFL–CIO,

936 F.2d 251, 256 (6th Cir. 1991)); see also Burks v. O'Connor, Kenny Partners, Inc., 77 F. App’x

351, 355 n.3 (6th Cir. 2003) (“Factual determinations in an interlocutory appeal will generally not

establish the law of the case.”) (citation omitted). A significant amount of discovery has occurred

since the original preliminary injunction in this case was issued. Thus, the Court finds it appropriate

to examine these issues anew.

1. Existence of a Trade Secret

Under the Ohio Uniform Trade Secrets Act (“OUTSA”), “[a] trade secret is information that

derives independent economic value, actual or potential, from not being generally known to or

ascertainable by proper means by other persons who can obtain economic value from its disclosure

or use and is the subject of efforts reasonable under the circumstances to maintain its secrecy.” MP

TotalCare Services, Inc. v. Mattimoe, 648 F. Supp. 2d 956, 965 (N.D. Ohio 2009) (citing O.R.C. §

1333.61(D)). Courts consider six factors to determine whether an item constitutes a trade secret:

(1) The extent to which the information is known outside the business; (2) the extent

to which it is known to those inside the business, i.e., by the employees; (3) the

precautions taken by the holder of the trade secret to guard the secrecy of the

information; (4) the savings effected and the value to the holder in having the

information as against competitors; (5) the amount of effort or money expended in

obtaining and developing the information; and (6) the amount of time and expense it

would take for others to acquire and duplicate the information.

State ex rel. Plain Dealer v. Ohio Dept. of Ins., 80 Ohio St.3d 513, 524-25 (1997). Although the

Supreme Court of Ohio “has never found one factor dispositive, it has emphasized that ‘[a] business

or possessor of a potential trade secret must take some active steps to maintain its secrecy in order to

enjoy presumptive trade secret status.’” Heartland, 258 F. App’x at 862 (quoting State ex rel. Plain

Dealer, 80 Ohio St.3d at 525).

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As part of the franchise relationship, Handel’s asserts it provided Schulenburg and Ortiz with

detailed documentation of Handel’s trade secrets, including: (1) Handel’s Recipe Guide, which

includes ingredient lists and preparation methods for Handel’s ice cream (Doc. No. 99-4); (2)

Handel’s Confidential Operations Manual, which includes “specifications, standards, and

procedures” for operating a Handel’s franchise (Doc. No. 68 at ¶ 41); and (3) Handel’s Preparation

Guide, which includes instructions on the preparation of every Handel’s menu item (Doc. Nos. 91-3,

91-4).

With regard to Handel’s Operations Manual, Defendants assert that discovery has

demonstrated that the information contained therein does not qualify as a trade secret. (Doc. No. 100

at 4.) Defendants contend the Operations Manual is filled with boilerplate sections that are generic

in nature. For example, at his deposition, Handel’s Chief Operating Officer, Jim Brown (“Brown”),

admitted that the Operations Manual contains sections on sanitation and emergency evacuation that

are not exclusive to Handel’s. (Doc. No. 100-1 at 110:10-16, 111:12-17.) Handel’s asserts the

Operations Manual contains the specifications, standards, and procedures for operating a Handel’s

franchise, but has not submitted any evidence to support this claim, to identify any of the specific

information contained in the Operations Manual, or to explain why such information qualifies as a

trade secret. As such, the Court finds Handel’s has not met its burden at this stage to demonstrate

that the information in its Operations Manual qualifies as a trade secret under the OUTSA.

However, the Court finds Handel’s has shown that, with one exception discussed below, the

information contained in Handel’s Recipe and Preparation Guides qualifies as a trade secret. The

information contained in these manuals is not known outside the business, was heavily restricted with

confidentiality agreements, and developed over years of Handel’s operating. Defendants cite MP

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TotalCare Services for their argument that since Handel’s executives disclosed some of Handel’s

recipes to Guizar during training without having him sign a confidentiality agreement, even though

he was not yet an employee and had no obligation to protect its confidentiality, Handel’s Recipe and

Preparation Guides do not qualify as trade secrets. (Doc. No. 100 at 4.) However, the Court finds

that case distinguishable from the instant matter. In MP TotalCare Services, the plaintiff publicly

disclosed the alleged trade secret at an industry conference. 648 F. Supp. 2d at 966-67. Here, at

most, Handel’s made a single disclosure to a prospective employee of Defendants while Handel’s

executives were helping Defendants with the opening of the Encinitas Franchise. (Doc. No. 100-2 at

83:12-84:11, 94:9-25.) In addition, Guizar subsequently became an employee and should have been

restricted from disclosing any confidential information, but Defendants themselves failed to have

Guizar sign the required confidentiality agreement. (See Doc. No. 101-3 at 14:9-12; Doc. No. 67-7

at 85 (“You agree to have your employees sign a written non-disclosure covenant . . . before

disclosing any contents of the Manuals to them.”).) Moreover, there is no evidence that Handel’s

executives disclosed to Guizar all of Handel’s recipes or preparation methods set forth in the Recipe

and Preparation Guides such that the entirety of the information in the guides would lose its status as

a trade secret. Thus, despite this minimal disclosure, there is still a substantial likelihood that

Handel’s will be able to establish the existence of a trade secret.

Defendants also argue that Handel’s scooping methods and the shape of the scooped ice cream

can be seen by any member of the public and cannot constitute trade secrets. (Doc. No. 100 at 4.)

The Court agrees, and to the extent that such information is contained in Handel’s Recipe Guide or

Preparation Guide, it is not protectable as a trade secret.

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2. Unauthorized Use of a Trade Secret

Under the OUTSA, “[a]ctual or threatened misappropriation may be enjoined.” O.R.C. §

1333.62(A). “[A] threat of harm warranting injunctive relief can be shown by facts establishing that

an employee with detailed and comprehensive knowledge of an employer’s trade secrets and

confidential information has begun employment with a competitor of the former employer in a

position that is substantially similar to the position held during the former employment.” Procter &

Gamble Co. v. Stoneham, 747 N.E.2d 268, 279 (Ohio Ct. App. 1st Dist. 2000). Known as the

inevitable disclosure doctrine, “[t]his rule has been justified because the courts have recognized that

it is very difficult for the human mind to compartmentalize and selectively suppress information once

learned, no matter how well intentioned the effort may be to do so.” FirstEnergy Solutions Corp. v.

Flerick, No. 5:12–CV–2948, 2012 WL 6649201, at *5 (N.D. Ohio Dec. 20, 2012) (citations and

internal quotations omitted). The doctrine is typically applied “when a former employee begins work

with a competitor while the noncompetition clause has not expired.” Id. (quoting Hydrofarm v.

Orendorff, 905 N.E.2d 658, 663 (Ohio Ct. App. 10th Dist. 2008)).

Here, the parties dispute whether there is any evidence of actual misappropriation of Handel’s

trade secrets by Defendants. Handel’s points to a variety of circumstantial evidence of

misappropriation, including the fact that Cali Cream offered many of the same flavors offered by

Schulenburg’s Encinitas Franchise under the exact same or similar names. For example, Cali Cream

flavors included Blueberry Cheesecake (compared to Handel’s Blueberry Cheesecake Chunk),

Cookie Monster (compared to Handel’s Blue Monster), Dat Brownie Dough (compared to Handel’s

Brownie Dough), and Matcha Green Tea (compared to Handel’s Green Tea). (Guizar Dep. at 54:1-

65:4; Guizar Dep. Exs. JJ and SSS.) The methods of preparation for many of these flavors also appear

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to be very similar. (See id.) In addition, Cali Cream used several of the same ingredients as Handel’s

despite numerous varieties in the market. (Doc. No. 99-2 at 255:17-257:6.) While the individual

ingredients may not be proprietary, Handel’s argues this is further evidence of Defendants’ use of

Handel’s trade secrets in the operation of Cali Cream, as Defendants only knew of such ingredients

because of their operation of the Encinitas Franchise. Moreover, Cali Cream employed Guizar—who

is also the ice cream maker for the Encinitas Franchise—to make ice cream. (Id. at 228:24-229:4;

Doc. No. 99-6 at 12:21-13:23, 22:21-23:5.)

In contrast, Defendants assert that Cali Cream used many different suppliers, different ice-

cream making equipment, a different ice cream base mix, different recipes, and many different

ingredients. (Doc. No. 100-3 at ¶¶ 6-13.) In addition, Schulenburg contends he developed Cali

Cream’s recipes by searching online, experimenting with ingredients at Cali Cream, and getting

suggestions from other companies in the industry, and that neither he nor anyone else at Cali Cream

used or relied in any way on any Handel’s manuals, recipes, or guides. (Id. at ¶¶ 12, 14.)

The Court finds that a threatened misappropriation of trade secrets is still present in this case.

It is undisputed that Defendants still have access to Handel’s trade secrets in Handel’s Recipe and

Preparation Guides and now seek to operate a competing ice cream store in which they would have

substantially the same positions they still hold at the Encinitas Franchise. Under the inevitable

disclosure doctrine, this is sufficient to establish a threat of misappropriation warranting injunctive

relief. The Court agrees with Handel’s that it is unlikely that Defendants can disentangle the

knowledge of Handel’s trade secrets from their operation of Cali Cream, “no matter how well

intentioned the effort may be to do so.” Flerick, 2012 WL 6649201, at *5 (citation omitted). This is

especially true given that Schulenburg and Ortiz had no previous experience in the ice cream industry

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prior to becoming Handel’s franchisees. (Doc. No. 26-1 at ¶ 15; Doc. No. 26-2 at ¶ 6.) Moreover,

Handel’s has produced a variety of circumstantial evidence that further supports a threat of

misappropriation were Cali Cream to reopen.

Defendants cite several Ohio cases for the proposition that Handel’s cannot rely on

speculation and the inevitable disclosure doctrine to establish a threat of misappropriation, but they

are distinguishable from the present situation. See Hydrofarm, Inc., 905 N.E.2d at 665 (finding

defendant did not “possess[] timely, sensitive, strategic, and/or technical information that, if it was

proved, posed a serious threat to his former employer’s business or a specific segment thereof”); A&P

Technology, Inc. v. Lariviere, No. 1:17-cv-534, 2017 WL 6606961, at *6 (S.D. Ohio Dec. 27, 2017)

(finding inevitable disclosure doctrine inapplicable where employee “waited out his two year

noncompete before moving to another employer in the industry”). Accordingly, the Court finds

Handel’s has shown a substantial likelihood of success on the merits of its trade secrets claim.

ii. Breach of the Franchise Agreement’s Non-Compete Provisions

With respect to Handel’s claim that Defendants have breached the Franchise Agreement’s

covenants not to compete, the parties initially dispute whether Ohio or California law governs and

whether those provisions are enforceable. Based on a California State Addendum in the Franchise

Agreement and certain statements by Brown at his deposition, Defendants assert that California law

applies even though the Franchise Agreement contains a choice of law provision calling for the

application of Ohio law. (Doc. No. 100 at 7-8.) Defendants assert the non-compete provisions are

unenforceable under California law. (Id.) In the alternative, even if Ohio law is applicable,

Defendants contend the non-compete provisions are unenforceable under Ohio law. (Id. at 8-9.) In

response, Handel’s asserts that this Court has already determined that Ohio law applies and that

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regardless of which state’s law applies, the non-compete provisions are enforceable. (Doc. No. 101

at 11.) Neither party conducted a choice of law analysis under Ohio’s choice of law rules. See In re

Commercial Money Ctr., Inc., Equip. Lease Litig., 627 F. Supp. 2d 786, 793 (N.D. Ohio 2009) (“In

deciding conflict of law questions in diversity of citizenship cases, a federal court generally follows

the choice of law rules of the state in which it sits.”). Nonetheless, the Court finds this analysis

unnecessary because the Court agrees with Handel’s that the Franchise Agreement’s non-compete

provisions are enforceable under either Ohio or California law.

Under Ohio law, “reasonable non-competition agreements are enforceable and those that are

unreasonable are enforceable to the extent necessary to protect the employer’s legitimate business

interests.” Convergys Corp. v. Wellman, No. 1:07-CV-509, 2007 WL 4248202, at *6 (S.D. Ohio

Nov. 30, 2007). A non-competition agreement “is reasonable if it is no greater than required for the

protection of the employer, does not impose an undue hardship on the employee, and is not injurious

to the public.” Id.

Applying these principles, both Judge Pearson and the Sixth Circuit, on appeal, found that the

non-compete provisions in the Franchise Agreement were enforceable under Ohio law. As noted

above, Defendants argue that these findings are not binding as the law of the case because they were

based on an incomplete evidentiary record. (See Doc. No. 100 at 12.) However, Defendants do not

present any new legal arguments or evidence not considered in the earlier preliminary injunction

decisions. Indeed, Defendants repeat the same argument presented to Judge Pearson and the Sixth

Circuit that Section 5.07 of the Franchise Agreement is unenforceable because it contains no

geographic limitation. (Id. at 8-9.) Judge Pearson and the Sixth Circuit explicitly considered the

geographic scope of this provision and found it reasonable under Ohio law. Handel’s, 765 F. Appx.

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at 124 (“As for the spatial prohibition in Section 5.07, we agree with the district court that the

geographic restrictions are reasonable.”). Thus, even if these rulings are not binding as the law of the

case, the Court finds their reasoning persuasive and likewise concludes that Section 5.07 is

enforceable under Ohio law.

With respect to California law, California Business and Professions Code § 16600 provides

that “[e]xcept as provided in this chapter, every contract by which anyone is restrained from engaging

in a lawful profession, trade, or business of any kind is to that extent void.” In the franchise context,

“post-termination covenants not to compete are voided by Section 16600.” Sonoma Tires, Inc. v. Big

O Tires, LLC, No. C 11-0818 RS, 2013 WL 12173748, at *7 (N.D. Cal. Jan. 22, 2013) (emphasis

added). However, “California courts support the position ‘that preventing defendants from

competing only during the term of [an] existing franchise agreement, would not be void’” under §

16600. Comedy Club, Inc. v. Improv West Associates, 553 F.3d 1277, 1291 n.15 (9th Cir. 2009)

(quoting Great Frame Up Systems, Inc. v. Jazayeri Enterprises, 789 F. Supp. 253, 255 (N.D. Ill.

1992)). “Such an in-term covenant will be upheld, as long as it does not ‘foreclose competition in a

substantial share of the affected line of commerce’ or ‘prevent a party from engaging in an entire

profession, business or trade.’” Sonoma Tires, 2013 WL 12173748, at *8 (quoting Comedy Club,

553 F.3d at 1291).

For example, in Sonoma Tires, the court upheld a covenant not to “engage in or open any

business, at any location, other than as a Franchisee of the Big O System, which offers or sells tires,

wheels, automotive services, or other products or services which compete with Big O Products and

Services” during the term of the franchise agreement. 2013 WL 12173748, at *2, *8. There, the

franchisor brought suit against its franchisee for breaching the covenant by operating two independent

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stores—Sonoma Tires and Mission Tires—while the franchise agreement was in place. Id. at *5.

First, the Court found that the in-term covenant “would not ‘foreclose competition in a substantial

share of the affected line of commerce’ because, as neither party disputes, there is ample competition

in the retail tire industry and [the franchisee’s] Sonoma Tires and Mission Tires stores do not

comprise a ‘substantial share’ of that industry.” Id. at *8. Second, the court reasoned that “given that

the in-term covenant allowed [the franchisee] to operate a Big O franchise and open additional Big

O franchises, it cannot be said that the practical effect of the covenant as written would be to prevent

[the franchisee] ‘from engaging in an entire profession, business or trade’ during the duration of the

franchise agreement.” Id. at *8. Thus, the Court found that the in-term covenant not to compete was

valid and enforceable under § 16600. Id.; see also Great Frame Up, 789 F. Supp. at 256 (“D.J. is not

prevented from engaging in his entire profession because, even without his interest in Express

Framing, he has the Irvine franchise as a profession.”); Keating v. Baskin-Robbins USA Co., No.

5:99–CV–148–BR(3), 2001 WL 407017, at *13 (E.D.N.C. Mar. 27, 2001) (interpreting § 16600;

holding “[i]t is beyond cavil that an ice cream franchise may reasonably require a franchisee not to

operate a competing ice cream store during the term of its franchise agreement”).

As in Sonoma Tires, even though there is no geographic limitation on the Franchise

Agreement’s in-term non-compete provision, there is no evidence that the covenant would foreclose

competition in a substantial share of the affected line of commerce, as there is no evidence that Cali

Cream comprises a substantial share of the ice cream store industry. Moreover, because the in-term

covenant allowed Schulenburg to operate a Handel’s franchise and open additional Handel’s

franchises, it cannot be said that the practical effect of the covenant as written would be to prevent

Schulenburg from engaging in an entire profession, business, or trade during the duration of the

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Franchise Agreement. Consequently, the in-term covenant not to compete contained in the Franchise

Agreement is valid under California law.4

Although the Court has found the provision is enforceable, this does not end the Court’s

inquiry, as Defendants contend it does not apply to their operation of Cali Cream regardless of

whether it is enforceable. The Court disagrees. The in-term covenant not to compete prohibits

Defendants from being “involved with any business which is competitive with, or similar to

[Handel’s], in any way.” (Doc. No. 67-7 at 86 (emphasis added).) Handel’s has submitted substantial

evidence that Handel’s and Cali Cream are similar and that the operation of Cali Cream would thus

breach the Franchise Agreement. Most fundamentally, both Handel’s and Cali Cream are homemade

ice cream businesses. Cali Cream also offered similar flavors (Guizar Dep. at 54:1-65:4; Guizar Dep.

Exs. JJ and SSS) and used many of the same ingredients (Doc. No. 99-2 at 247:18-258:11; Doc. No.

99-6 at 52:10-53:9). Moreover, news articles from the period in which Cali Cream was open

demonstrate the apparent similarities between the two ice cream stores. Consequently, Handel’s has

shown a strong likelihood of success on the merits of its claim with respect to Defendants’ breach of

the Franchise Agreement’s non-compete provisions. Accordingly, the first factor favors issuance of

a renewed preliminary injunction.

b. Irreparable Injury

“[T]he second factor that a court must consider when deciding whether to issue a preliminary

injunction is whether the plaintiff will suffer irreparable injury without the injunction.” Certified

Restoration, 511 F.3d at 550. A plaintiff’s injury is considered “irreparable if it is not fully

4 Defendants’ reliance on Aussie Pet Mobile, Inc. v. Benton, No. SACV 09-1407 AG (RNBx), 2010 WL 2629556 (C.D.

Cal. June 28, 2010) is also misplaced, as the court in that case did not address the distinction between in-term and post-

termination covenants not to compete.

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compensable by monetary damages.” Overstreet, 305 F.3d at 578. “[A]n injury is not fully

compensable by money damages if the nature of the plaintiff’s loss would make damages difficult to

calculate.” Basicomputer Corp. v. Scott, 973 F.2d 507, 511 (6th Cir. 1992).

The Court finds that Handel’s has made a strong showing that it will suffer irreparable injury

if an injunction is not issued. As the Sixth Circuit found in affirming the original preliminary

injunction entered in this case, based on evidence of the similarities between Handel’s and Cali

Cream, “the opening of Cali Cream created a strong risk of market confusion, along with the loss of

fair competition and customer goodwill from existing and prospective customers.” Handel’s, 765 F.

App’x at 125. Judge Pearson likewise found a strong risk of each of these harms. (See Doc. No. 42

at 12-13.) These types of harms are generally considered irreparable because the damages caused by

them are difficult to calculate. E.g., Basicomputer, 973 F.2d at 512 (“The loss of customer goodwill

often amounts to irreparable injury because the damages flowing from such losses are difficult to

compute. . . . Similarly, the loss of fair competition that results from the breach of a non-competition

covenant is likely to irreparably harm an employer.”). Defendants have not presented any evidence

to indicate that the risk of these harms has diminished since the Sixth Circuit and Judge Pearson’s

earlier decisions. Moreover, Handel’s failure to enforce its non-competition covenant would

undermine its credibility with both its existing and future franchisees, further contributing to the risk

that Handel’s would suffer irreparable injury if the injunction is not extended. See Petland, Inc. v.

Hendrix, No. 204CV224, 2004 WL 3406089, at *7 (S.D. Ohio Sept. 14, 2004) (“[F]ranchise

relationships are put at risk by sending a message that restrictive covenants and non-compete

agreements are of no effect.”). Consequently, this factor weighs in favor of issuing a renewed

preliminary injunction.

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c. Harm to Others

Next, the Court must consider “whether a preliminary injunction would cause substantial

harm to others.” Flight Options, 863 F.3d at 540. In this case, neither party has presented any

evidence that enforcing the Franchise Agreement’s non-compete provisions would cause any harm

to third parties. To the extent that an extended injunction would continue to harm Defendants, that

harm is self-inflicted and outweighed by the harm to Handel’s discussed above. See Dealer

Specialties, Inc. v. Car Data 24/7, Inc., No. 1:15-cv-170, 2016 WL 5341797, at *8 (S.D. Ohio Sept.

23, 2016) (“While Defendants may argue that granting this relief would harm their business,

Defendants may not benefit from their breach of contract.”). Indeed, as Judge Pearson noted,

“Defendants were well aware of the risks associated with opening a competing store, had prior notice

of Handel’s motion for preliminary injunction—seeking to enjoin Defendants from operating the

competing business, yet, did so any way.” (Doc. No. 42 at 14.) Thus, the third factor weighs in favor

of granting the preliminary injunction as well.

d. Public Interest

The fourth and final factor courts must consider when granting a preliminary injunction is

“whether the public interest will be served by an injunction.” Flight Options, 863 F.3d at 540. The

Sixth Circuit has held that “[t]he public interest is always served in the enforcement of valid restrictive

covenants contained in lawful contracts.” FirstEnergy Solutions Corp. v. Flerick, 521 F. App’x 521,

529 (6th Cir. 2013) (quoting Nat’l Interstate Ins. Co. v. Perro, 934 F. Supp. 883, 891 (N.D. Ohio

1996)); see also Certified Restoration, 511 F.3d. at 551 (“Enforcement of contractual duties is in the

public interest.”). As such, the public interest will be served by an injunction, and this factor supports

the grant of a renewed preliminary injunction.

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e. Unclean Hands

Finally, Defendants assert that Handel’s unclean hands bars the grant of equitable relief.

(Doc. No. 100 at 14-15.) “The concept of unclean hands may be employed by a court to deny

injunctive relief where the party applying for such relief is guilty of conduct involving fraud, deceit,

unconscionability, or bad faith related to the matter at issue to the detriment of the other party.”

Performance Unlimited, Inc. v. Questar Publishers, Inc., 52 F.3d 1373, 1383 (6th Cir. 1995) (quoting

Novus Franchising, Inc. v. Taylor, 795 F. Supp. 122, 126 (M.D. Pa. 1992)). However, “the doctrine

is to be applied ‘only where some unconscionable act of one coming for relief has immediate and

necessary relation to the equity that he seeks in respect of the matter in litigation.’” Id. (quoting

Northeast Women's Center, Inc. v. McMonagle, 868 F.2d 1342, 1354 (3d Cir. 1989)). In other words,

“the doctrine is not to be used as a loose cannon, depriving a plaintiff of an equitable remedy to which

he is otherwise entitled merely because he is guilty of unrelated misconduct.” Id. (quoting American

Hosp. Supply Corp. v. Hosp. Products, Ltd., 780 F.2d 589, 601 (7th Cir.1986)). Further, “[t]he

unclean-hands defense is not an automatic or absolute bar to relief; it is only one of the factors the

court must consider when deciding whether to exercise its discretion and grant an injunction.” CJPS

Healthcare Supplies & Equip. v. Ansar Med. Technologies, Inc., No. 12–CV–14885, 2013 WL

4502176, at *8 (E.D. Mich. Aug. 22, 2013) (citation omitted).

Defendants assert Handel’s has unclean hands because it has been racing to beat them to the

punch by opening Handel’s franchises near the Encinitas Franchise in an effort to box them in

economically and undermine the viability of the Encinitas Franchise. (Doc. No. 100 at 14.)

According to Defendants, Handel’s has used business plans and information that Schulenburg

provided to Handel’s in confidence based on Handel’s representations to him that he would be the

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only franchisee in San Diego County. (Id.) Defendants allege that Handel’s representations to him

were false and that at the same time Handel’s was making these representations to Schulenburg, it

was actively negotiating with another group of investors to open franchises in San Diego County.

(Id.) Defendants contend it was this bad faith conduct that played a material role in creating the

soured relations between the parties and led Mr. Schulenburg to seek rescission of the Franchise

Agreement. (Id. at 14-15.) Defendants assert Handel’s conduct is a plain breach of the duty of good

faith and fair dealing inherent in each contract and constitutes bad faith conduct sufficient to deny

Handel’s request for injunctive relief. (Id. at 15.)

Even accepting Defendants’ allegations as true, the Court finds it unlikely that they will be

able to establish that Handel’s breached its duty of good faith and fair dealing. Ohio common law

“imposes an implied duty of good faith in the performance of contracts.” Jacobs v. Dye Oil, LLC,

No. 18 MO 0020, 2019 WL 4898488, at *9 (Ohio Ct. App. 7th Dist. Sept. 30, 2019). The Ohio

Supreme Court has described this duty as “an implied undertaking not to take opportunistic advantage

in a way that could not have been contemplated at the time of drafting, and which therefore was not

resolved explicitly by the parties.” Ed Schory & Sons, Inc. v. Soc. Natl. Bank, 75 Ohio St.3d 433,

443-44 (1996) (quoting Kham & Nate’s Shoes No. 2, Inc. v. First Bank of Whiting, 908 F.2d 1351,

1357 (7th Cir. 1990)). As such, “the duty is not imposed when a matter is specifically covered by the

written terms of a contract.” Jacobs, 2019 WL 4898488, at *9. “Instead, this duty is implied only

under limited circumstances, such as when the contract is silent as to an issue.” Id. Moreover, “Ohio

law is crystal clear that an actor does not act in ‘bad faith’ when it decides to enforce its contractual

rights.” Oak Rubber Co. v. Bank One, N.A., 214 F. Supp. 2d 820, 833 (N.D. Ohio 2002). Indeed,

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“[a] party may even enforce its contractual rights to the ‘great discomfort’ of the other party without

violating its duty of good faith.” Id.

Here, the Franchise Agreement specifically delineated the territory provided to Schulenburg.

The Franchise Agreement assigned Schulenburg a “three-mile radius surrounding the Lofts at

Moonlight Beach” in Encinitas, California. (Doc. No. 67-7 at 113.) It also provided Schulenburg a

right of first refusal for a franchise in the Gaslamp Quarter of downtown San Diego for a period of

two years after the execution of the Franchise Agreement. (Id.) Thus, regardless of whether Handel’s

represented to Schulenburg that he would be the only franchisee in San Diego County, Handel’s

opening of additional franchises in San Diego County does not breach its duty of good faith because

Schulenburg’s territory was specifically covered by the written terms of the Franchise Agreement.

See McGrath v. Nationwide Mut. Ins. Co., 295 F. Supp. 3d 796, 808 (S.D. Ohio 2018) (“McGrath

claims Nationwide lured her into participating in its agent programs through false promises regarding

her ability to purchase the servicing rights to an existing book of policies. But her written agreements

with Nationwide specifically spoke to her obligations to earn commissions through her generation of

new policies, not through servicing existing policies. Therefore, there could be no implied covenants

on this point for Nationwide to breach.”) As a result, even assuming that Handel’s made these false

representations and used certain confidential information provided by Schulenburg in the opening of

additional franchises, the fact remains that Schulenburg’s right to be the exclusive franchisee in San

Diego County was never a part of the Franchise Agreement. To the contrary, the Franchise

Agreement specifically limited his territory to certain areas. Handel’s opening of additional

franchises in San Diego County does not intrude on Schulenburg’s territory under the Franchise

Agreement, and Handel’s is entitled to enforce its rights even to the discomfort of Defendants. As

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such, Handel’s actions do not constitute a breach of the duty of good faith. Nor do they rise to the

level of such unconscionable conduct as to preclude Handel’s from obtaining injunctive relief to

enforce the covenant not to compete contained in the Franchise Agreement, especially given that all

four preliminary injunction factors weigh in favor of granting Handel’s Motion.

V. Conclusion

For the reasons set forth above, Handel’s Emergency Renewed Motion for Preliminary

Injunction (Doc. No. 99) is GRANTED. The Court will issue a separate order contemporaneous with

this opinion providing for the terms of the preliminary injunction and requiring Handel’s to post a

bond.

IT IS SO ORDERED.

s/Pamela A. Barker

PAMELA A. BARKER

Date: January 27, 2020 U. S. DISTRICT JUDGE

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