Case 5:10-cv-00017-HSP Document 82 Filed 11/29/10 Page 1 of 10
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`IN THE UNITED STATES DISTRICT COURT
`FOR THE EASTERN DISTRICT OF PENNSYLVANIA
`___________________________________________
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`TES FRANCHISING, LLC, et al.,
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`Plaintiffs,
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`vs.
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`J. ERIC DOMBACH, et al.,
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`vs.
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`Defendants,
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`CIVIL ACTION
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`NO. 10-0017
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`TERRY POWELL, et al.,
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` Additional Defendants.
`__________________________________________:
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`HENRY S. PERKIN
`UNITED STATES MAGISTRATE JUDGE
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` NOVEMBER 29 , 2010
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`MEMORANDUM
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`Presently before the Court is the Motion for Leave to File a Third Amended
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`Complaint by the Plaintiffs and the Opposition thereto by Defendants. Plaintiffs seek leave to
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`file a revised complaint adding a claim for misappropriation of trade secrets and violation of the
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`Pennsylvania Uniform Trade Secrets Act, against Defendants J. Eric Dombach (“Dombach”) and
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`Business Action, Inc. (“BAI”). For the following reasons, the Motion for Leave to File a Third
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`Amended Complaint will be granted.
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`I.
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`PROCEDURAL BACKGROUND.
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`On January 4, 2010, Plaintiffs filed their complaint, which included a claim for
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`misappropriation of trade secrets in violation of the Pennsylvania Uniform Trade Secrets Act
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`(“PUTSA”). Also on January 4, 2010, Plaintiffs also filed a Motion for Preliminary Injunction
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`based on their trade secrets claim, alleged breaches of non-disclosure and confidentiality
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`Case 5:10-cv-00017-HSP Document 82 Filed 11/29/10 Page 2 of 10
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`agreements, and Dombach’s alleged breach of his duty of loyalty. On January 25, 2010,
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`Defendants filed a motion to dismiss, contending that the PUTSA claim should be dismissed
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`because Plaintiffs: (1) failed to assert who owned the misappropriated trade secret; and (2) failed
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`to plead sufficient facts that the information allegedly misappropriated constituted trade secrets.
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`On February 8, 2010, Plaintiffs served Defendants with a Request for Documents
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`including Defendants’ “secret vault” of documents referred to on the www.mycoachescoach.com
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`website. Plaintiffs filed an Amended Complaint on February 16, 2010 and did not include a
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`PUTSA claim in the Amended Complaint. Similarly, Plaintiffs did not contend in their
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`Amended Motion for Preliminary Injunction that misappropriation under PUTSA was a basis for
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`Plaintiffs’ injunction. On February 22, 2010, Plaintiffs received Defendants’ responsive
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`documents to the Request for Documents propounded on February 8, 2010, and the responses
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`numbered over 9000 documents, including a copy of an internet security front page to download
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`a “plug-in” to open a document entitled “The Ultimate Business Coaching Bible.”
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`On May 18, 2010, when Plaintiffs’ counsel was preparing for the third day of the
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`preliminary injunction hearing, she requested and received a copy of “The Ultimate Business
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`Coaching Bible” from Defendants’ counsel. Upon review of “The Ultimate Business Coaching
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`Bible,” Plaintiffs found that copyrighted material and confidential and proprietary trade secrets in
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`the form of the AdviCoach® Confidential Operations Manual had been copied into “The
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`Ultimate Business Coaching Bible.” Dombach testified on May 24, 2010 that he had
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`incorporated the entire AdviCoach® Confidential Operations Manual into “The Ultimate
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`Business Coaching Bible.”
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`Following Dombach’s testimony on May 24, 2010, Plaintiffs’ counsel verbally
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`Case 5:10-cv-00017-HSP Document 82 Filed 11/29/10 Page 3 of 10
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`notified Defendants’ counsel of her intention to amend the complaint to include a claim for
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`Dombach’s misappropriation. On May 28, 2010, Plaintiffs’ counsel contacted Defendants’
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`counsel seeking consent to amend the Amended Complaint to add claims for misappropriation of
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`trade secrets under the PUTSA and copyright infringement. Defendants denied consent on June
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`2, 2010. Plaintiffs filed a motion for leave to file a Second Amended Complaint on June 2, 2010,
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`seeking injunctive relief including a preliminary and permanent injunction on Plaintiffs’ trade
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`secrets claim. Defendants filed a memorandum of law in opposition on June 21, 2010, arguing
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`that both of Plaintiffs’ proposed claims were futile and Defendants would be unduly prejudiced
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`by permitting Plaintiffs to file their Second Amended Complaint. Following review of
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`Defendants’ opposition, Plaintiffs’ counsel realized that she erred in inclusion of a copyright
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`infringement claim in the Second Amended Complaint, and filed a Notice of Withdrawal of the
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`Motion to File the Second Amended Complaint on June 28, 2010. Also on June 28, 2010,
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`Plaintiffs’ counsel filed the instant Motion seeking leave of Court to file a Third Amended
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`Complaint including a claim for misappropriation of trade secrets and violation of the PUTSA.
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`Defendants oppose this Amendment because they contend that the proposed new trade secrets
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`claim is futile and they will be unduly prejudiced if Plaintiffs are granted leave to file their Third
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`Amended Complaint.
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`II.
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`STANDARD OF REVIEW.
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`“[A] party may amend its pleading only with the opposing party’s written consent
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`or the court’s leave. The court should freely give leave when justice so requires.” Fed. R. Civ.
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`P. 15(a)(2). “Amendments, although liberally granted, rest within the sound discretion of the
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`trial court under Fed. R. Civ. P. 15.” Kolar v. Preferred Real Estate Investments, Inc., 361 Fed.
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`Case 5:10-cv-00017-HSP Document 82 Filed 11/29/10 Page 4 of 10
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`Appx. 354, 367 (3d Cir. 2010)(quoting Massarsky v. Gen. Motors. Corp., 706 F.2d 111, 125 (3d
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`Cir.1983)). Courts “have shown a strong liberality . . . in allowing amendments under Rule
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`15(a).” ScanSource, Inc. v. Datavision-Prologix, Inc., CIV.A. No. 04-4271, 2009 WL 973497,
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`*1 (E.D. Pa. Apr. 8, 2009)(quoting Bechtel v. Robinson, 886 F.2d 644, 652 (3d Cir. 1989) (citing
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`Heyl & Patterson Int'l, Inc. v. F.D. Rich Housing, 663 F.2d 419, 425 (3d Cir. 1981), cert. denied,
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`455 U.S. 1018, 102 S. Ct. 1714, 72 L. Ed.2d 136 (1982)). However, “the policy favoring liberal
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`amendment of pleadings is not . . . unbounded.” Id. (quoting Dole v. Arco Chem. Co., 921 F.2d
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`484, 486-87 (3d Cir. 1990)). In applying Rule 15(a), the Third Circuit has held that “[a] district
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`court may deny leave to amend a complaint if a plaintiff’s delay in seeking amendment is undue,
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`motivated by bad faith, or prejudicial to the opposing party.” Id. (quoting Cureton v. Nat’l
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`Collegiate Athletic Ass’n, 252 F.3d 267, 272-73 (3d Cir. 2001)(citing Foman v. Davis, 371 U.S.
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`178, 182, 83 S. Ct. 227, 9 L. Ed.2d 222 (1962))).
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`The Third Circuit has further instructed that “prejudice to the non-moving party is
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`the touchstone for the denial of the amendment.” Id. at *2(quoting Bechtel, 886 F.2d at 652
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`(citing Cornell & Co. v. Occupational Safety and Health Rev. Comm’n, 573 F.2d 820, 823 (3d
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`Cir. 1978))). “A mere claim of prejudice is not sufficient; there must be some showing that [the
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`non-moving party] was unfairly disadvantaged or deprived of the opportunity to present facts or
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`evidence which it would have offered had the amendments been timely.” Id. (quoting Dole, 921
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`F.2d at 488 (internal citations omitted)).
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`III.
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`DISCUSSION.
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`Plaintiffs contend that justice requires granting leave to file a Third Amended
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`Complaint because failure to grant leave to amend to include a claim for the misappropriation of
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`Case 5:10-cv-00017-HSP Document 82 Filed 11/29/10 Page 5 of 10
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`confidential and proprietary trade secrets will result in Defendants’ continuing misuse of the
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`Franchisor Plaintiffs’ property and Plaintiffs’ confidential trade secrets and Dombach’s continued
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`publication of the AdviCoach® Confidential Operations Manual.
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`Plaintiffs also argue that failure to grant leave would require that Plaintiffs file a
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`second lawsuit against Dombach to prevent the continued misappropriation of copyrighted
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`property and confidential trade secrets, thereby unnecessarily increasing costs to the Franchisor
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`Plaintiffs to simultaneously prosecute two matters.
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`Defendants contend, in response, that Plaintiffs’ assertion that they did not learn
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`of Defendants’ alleged misappropriation of trade secrets until May 18, 2010 is belied by
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`Plaintiffs’ misappropriation claim in their January, 2010 complaint and Defendants’ February 22,
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`2010 production of the document on which Plaintiffs’ new trade secrets claim is purportedly
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`based. Defendants also argue that Plaintiffs’ misappropriation of trade secrets claim cannot
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`withstand a motion to dismiss because Plaintiffs fail to plead sufficient facts to adequately
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`identify the alleged trade secrets or establish a plausible claim that the allegedly misappropriated
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`information constitutes trade secrets. Thus, Defendants contend that Plaintiffs’ Third Amended
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`Complaint would be futile and this Court should deny the requested leave to file the Complaint.
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`A trade secret is defined under the PUTSA as:
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`“Trade secret.” Information, including a formula, drawing, pattern, compilation
`including a customer list, program, device, method, technique or process that:
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`(1) 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.
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`(2) Is the subject of efforts that are reasonable under the
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`Case 5:10-cv-00017-HSP Document 82 Filed 11/29/10 Page 6 of 10
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`circumstances to maintain its secrecy.
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`12 Pa. C.S.A. § 5302; see also Bimbo Bakeries USA, Inc. v. Botticella, 613 F.3d 102, 109 (3d
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`Cir. 2010)(citing Rohm and Haas Co. v. Lin, 992 A.2d 132, 143 n.4 (Pa. Super. 2010) (“A trade
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`secret may consist of any formula, pattern, device or compilation of information which is used in
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`one’s business, and which gives him an opportunity to obtain an advantage over competitors who
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`do not know or use it.”) (internal citation omitted)). Misappropriation includes:
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`(1) acquisition of a trade secret of another by a person who knows or has reason to
`know that the trade secret was acquired by improper means; or
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`(2) disclosure or use of a trade secret of another without express or implied
`consent by a person who:
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`(i) used improper means to acquire knowledge of the trade secret;
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`(ii) at the time of disclosure or use, knew or had reason to know
`that his knowledge of the trade secret was:
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`(A) derived from or through a person who had
`utilized improper means to acquire it;
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`(B) acquired under circumstances giving rise to a
`duty to maintain its secrecy or limit its use; or
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`(C) derived from or through a person who owed a
`duty to the person seeking relief to maintain its
`secrecy or limit its use; or
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`(iii) before a material change of his position, knew or had reason to
`know that it was a trade secret and that knowledge of it had been
`acquired by accident or mistake.
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`Id. Pennsylvania courts look to the following factors to determine whether information is
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`protected as a trade secret: (1) the extent to which the information is known outside of the
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`company’s business; (2) the extent to which the information is known by employees and others
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`involved in the company’s business; (3) the extent of the measures taken by the company to
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`guard the secrecy of the information; (4) the value of the information to the company and its
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`competitors; (5) the amount of effort or money the company spent in developing the information;
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`and (6) the ease or difficulty with which the information could be acquired or duplicated
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`legitimately by others. Bimbo Bakeries USA, Inc., 613 F.3d at 109 (citing Crum v.
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`Bridgestone/Firestone North Am. Tire, LLC, 907 A.2d 578, 585 (Pa. Super. 2006)). “The
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`PUTSA displaced Pennsylvania’s common law tort for misappropriation of trade secrets, but
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`there is no indication that the statute effected a substantive shift in the definition of ‘trade
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`secret.’” Id. at 109 n.7 (quoting Youtie v. Macy’s Retail Holding, Inc., 626 F. Supp.2d 511, 522
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`n.10 (E.D. Pa. 2009)).
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`In Plaintiffs’ proposed Third Amended Complaint, they aver:
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`28. Franchisor Plaintiffs are the owners of franchise systems offering various
`business coaching franchise opportunities and have created proprietary franchise
`systems using formulas, programs, lists, devises, methods, techniques and
`processes for the operation of those franchised businesses (the “Systems”).
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`29. Each Franchisor Plaintiff memorializes its Systems in Confidential
`Operations Manuals for the brand Systems.
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`30. All Franchisor Plaintiffs utilize Confidential Operations Manuals
`substantially similar, and in many respects, identical, to the AdviCoach®
`Confidential Operations Manuals. Exhibit 34.
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`31. The confidential operations manuals contain the entire methodology use [sic]
`by franchisees within the systems [sic] for the operation of their franchised
`businesses.
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`32. TES Franchising, LLC and AdviCoach® Franchising, LLC are the co-owners
`of the AdviCoach Confidential Operations Manual.
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`33. Franchisor Plaintiffs, and the Diverse Sub Class and PA Class Plaintiffs
`derive independent economic value from the information and trade secrets
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`contained in the Confidential Operations Manuals owned by Franchisor Plaintiffs;
`Franchisor Plaintiffs through the offer and award of franchises to individuals
`interested in obtaining the right to use the System [sic] and the Diverse Sub Class
`and PA Class through the application of the trade secrets contained in the
`Confidential Operations Manuals in their independently owned franchised
`businesses.
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`34. Franchisor Plaintiffs provide the Confidential Operations Manuals to those
`individuals who enter into franchise agreements with the Franchisor Plaintiffs, all
`of which contain confidentiality covenants.
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`35. Franchisor Plaintiffs do not publish the Confidential Operations Manuals to
`individuals outside their Systems.
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`36. Franchisor Plaintiffs restrict access to their Confidential Operations Manuals
`to employees and individuals subject to confidentiality and/or non-disclosure
`agreements.
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`37. Franchisor Plaintiffs identify the Confidential Operations Manuals as
`confidential by marking Confidential Operations Manuals as “Confidential” and
`requiring that franchisees who receive the Confidential Operations Manuals sign a
`receipt stating that the Operations Manual is Confidential.
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`38. Defendant Dombach assisted in the writing of the AdviCoach® Confidential
`Operations Manual, which contains substantially similar, and in many respects
`identical information, to the other Franchisor Plaintiffs’ Operations Manuals,
`while he was a paid employee of TES Franchising, LLC and as part of his work-
`related job duties.
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`39. Defendant Dombach had access to the Confidential Operations Manuals of
`Franchisor Plaintiffs solely in his capacity as an employee of TES Franchising,
`LLC.
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`40. Defendant Dombach was advised of his duty to protect confidential and
`proprietary information and trade secrets of the Franchisor Plaintiffs in the
`Employee Handbook he received upon employment.
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`Third Am. Compl., pp. , ¶¶ 28-40. In the Third Amended Complaint at Count IX, Plaintiffs
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`allege:
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`279. As a paid employee of TES, Defendant Dombach had access to Franchisor
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`Plaintiff’s [sic] trade secrets.
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`281. Defendant Dombach’s work-related activities while a paid employee were
`work product and work for hire owned by the Franchisor Plaintiffs for which work
`was conducted.
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`282. Since on or about November 2008, Defendants Dombach and BAI have
`misappropriated and transmitted, communicated, disclosed and/or utilized
`Franchisor Plaintiffs’ trade secrets and confidential information for their own
`benefit through improper means and without the consent of Franchisor Plaintiffs.
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`283. By virtue of the misappropriation of Franchisor Plaintiff’s [sic] trade secrets
`(including without limitation confidential and proprietary information, formulas,
`patterns, systems, programs, methods and technologies) Defendant Dombach and
`BAI have violated the Pennsylvania Uniform Trade Secrets Act, 12 Pa. C.S.A. §
`5302.
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`Third Am. Compl., p 58.
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`Plaintiffs contend that Defendants will not be prejudiced by allowance of the
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`proposed Third Amended Complaint because discovery has not commenced and Defendants will
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`have a full opportunity to investigate the amended claims against them. Plaintiffs also argue that
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`Defendants have not suffered any undue delay or been the victims of bad faith because Plaintiffs
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`were unaware of the misappropriation of their copyrights and trade secrets until May 18, 2010
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`and Plaintiffs provided notice of their expectation to request leave to file the Second Amended
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`Complaint on May 28, 2010. Plaintiffs contend that their promptness in moving to amend has
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`not delayed any process or prejudiced Defendants. Plaintiffs also contend that the proposed
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`Amendment is not futile and the validity of the PUTSA claim is supported by Dombach’s
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`admission during the Preliminary Injunction Hearing that he copied the AdviCoach®
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`Confidential Operations Manual which was labeled confidential and the copyrighted property of
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`AdviCoach Franchising, LLC.
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`Defendants respond that Plaintiffs’ proposed Third Amended Complaint, if
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`permitted by this Court, will result in undue prejudice to Defendants because it appears that
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`Plaintiffs are asking the Court to grant them injunctive relief under a trade secrets theory based
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`on evidence from the three day long preliminary injunction hearing. They note that the Amended
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`Complaint and the Amended Motion for Preliminary Injunction were the operative pleadings
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`during the preliminary injunction hearing and Plaintiffs did not assert a claim for
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`misappropriation of trade secrets in either of those pleadings. Defendants note that Plaintiffs
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`alternatively appear to ask the Court to commence a new preliminary injunction hearing. If
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`Plaintiffs are asking the Court to rely on the current record to award injunctive relief on their
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`proposed new trade secrets claim, Defendants contend that they have been prevented by the
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`Plaintiffs’ delay in submitting evidence and offering testimony to refute that new claim and are
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`therefore prejudiced.
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`On November 17, 2010, I held a telephone conference with counsel and discussed,
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`in part, a meet and confer between counsel for Plaintiffs and Defendants regarding the issues
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`surrounding Plaintiffs’ Motion for Leave to File the Third Amended Complaint. Counsel agreed
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`to confer and report back to this Court on their progress. Thus, leave will be granted to Plaintiffs
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`to file a Third Amended Complaint within twenty-one (21) days. This Court expects that counsel
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`for the parties shall confer in an attempt to resolve the issues and it is anticipated that Plaintiffs’
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`counsel will remove any objectionable portions of the proposed Third Amended Complaint
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`which may trigger a motion by the Defendants to dismiss pursuant to Ashcroft v. Iqbal, 129 S.Ct.
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`1927 (2009) and Bell Atlantic v. Twombly, 550 U.S. 544 (2007).
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`An appropriate Order follows.
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