Bambu Franchising, LLC v. Nguyen

Background

Bambu Franchising, LLC brought claims involving alleged trade-secret misappropriation, breach of contract, unfair competition, conspiracy, and intentional misrepresentation. The dispute concerned confidential recipes and preparation methods for Vietnamese dessert drinks, teas, and coffee.

Jenny Nguyen was one of four sisters who founded the Bambu business. The business had operated through several entities, including Bambu Hostetter. In 2015, Bambu Franchising purchased the business’s assets, including the recipes, intellectual property, and goodwill, and received assignments of existing franchise agreements. The franchise agreement defined the recipes as trade secrets, restricted their disclosure and use, and included a two-year, 10-mile non-compete provision after termination or expiration.

The case concerned the Hostetter location. After Bambu Franchising declined to renew the franchise agreement, Lyche, Inc. began operating a non-franchise store called “LyChè” at the same location. The opinion states that LyChè used the same employees and sold the same type of products. James Vu was the sole owner and director of Lyche, Inc. and was also CEO of Bambu Hostetter. The Nguyen defendants argued that they had sold the location and no longer operated it. The Vu defendants argued that they had not received or accessed Bambu’s confidential information and had developed their own recipes.

Bambu Franchising sought a preliminary injunction, meaning temporary court-ordered restrictions while the case continued. It also requested limited expedited discovery, including information about disclosures of the recipes and documents concerning the transfer of the store’s operation.

Trade-Secret Claim

The court applied the elements of trade-secret misappropriation under federal and California law: ownership of a trade secret, misappropriation by the defendant, and resulting damage.

The court found that Bambu Franchising was likely to succeed on this claim. The franchise agreement and asset purchase agreement strongly supported treating the recipes as trade secrets. The court also found that Bambu Franchising had taken reasonable steps to protect them, including requiring confidentiality agreements, marking the recipe guide confidential, limiting each shop to one physical copy, and restricting access to a need-to-know basis.

The court found strong circumstantial evidence of misappropriation. It considered the $100,000 payment connected to the Vus’ right to operate the business, changes in Bambu Hostetter’s public records, the Vus’ management of the Hostetter location, the parties’ agreements, and LyChè’s immediate operation at the same location after the franchise ended. The court also considered evidence that the same employees continued working there and were not retrained to use new recipes. Although the defendants disputed access to or use of Bambu’s recipes, the court concluded that the evidence suggested, more likely than not, that misappropriation had occurred at the preliminary-injunction stage.

Non-Compete Claim

The court also found that Bambu Franchising was likely to succeed on its claim that the non-compete provision had been breached by all defendants except Jenny Nguyen.

The court rejected the argument that the franchise agreement ended in 2017 and that the non-compete period therefore expired in 2019. It found evidence that the parties continued operating under the franchise agreement’s terms, including continued use of Bambu signs and materials and Jenny Nguyen’s discussion of franchise-agreement arrangements with the Vus. The court concluded that an implied contract with the same terms continued beyond the original three-year period.

The court found that Katerina Nguyen and Bambu Hostetter were bound by the agreement. It also found that Lyche, Inc. had contractually assumed Bambu Hostetter’s obligations and was bound as its successor in interest. Under the agreement’s provision concerning the activities of other persons, James Vu’s activities were treated as activities of Bambu Hostetter, and Bambu Hostetter and Katerina Nguyen were responsible for his violation. But the court held that this provision did not make Jenny Nguyen directly liable for breach of contract, so Bambu Franchising could not show likely success on that claim against her.

Irreparable Harm and Other Injunction Factors

The court found that Bambu Franchising would suffer irreparable harm without an injunction. It relied on the intangible and difficult-to-quantify harm associated with violating a non-compete provision, as well as evidence of threatened loss of customers and goodwill from operating LyChè at the former Hostetter location. The court also considered the purchase agreement’s allocation of $45,000 of the purchase price to goodwill.

The balance of hardships favored Bambu Franchising for most of the requested relief, but the court found that prohibiting all defendants from selling products containing individual ingredients would be too broad and burdensome. The court therefore imposed a narrower restriction prohibiting the sale of Chè. It concluded that protecting trade secrets served the public interest.

Order

The court granted in part Bambu Franchising’s motion for a preliminary injunction. The order:

- prohibited the defendants from disclosing or using Bambu Franchising’s confidential recipes and related trade-secret information; - prohibited the defendants from selling Chè within 10 miles of 1688 Hostetter Road, Suite D, San Jose, California; - prohibited the defendants from copying, photographing, duplicating, or disclosing the recipes to third parties; - separately prohibited Katerina Nguyen and Bambu Delight Hostetter, Inc. from selling products containing the listed ingredients within 10 miles of any operating or developing Bambu franchise business, including the former Hostetter business; - granted Bambu Franchising’s request for limited expedited discovery, requiring disclosures and documents by May 20, 2021; and - denied all defendants’ requests for a bond.

The court also took the pending motions to dismiss off calendar. The opinion does not separately label each item of requested relief that was not included in the order as “denied.”