A federal court recently denied a motion to dismiss a franchisor’s claims in Valenta Franchise LLC v. Innerworks LLC, 2026 WL 1453649 (D. Ariz. May 22, 2026).
Valenta Franchise LLC, a technology and business consulting franchise system, sued its former franchisee, Innerworks LLC, and its owner and guarantors. Valenta alleged that Innerworks breached its franchise obligations by developing and operating a competing business, VaQya. The owners of Innerworks formed VaQya, a separate medical billing company that Valenta and the owners agreed would use Valenta services and would be staffed by Valenta-sourced employees. Valenta alleged that VaQya gradually became a direct competitor because it stopped using Valenta’s billing resources, diverted customers, provided similar services, undercut Valenta’s pricing structure, and used a similar trademark. Valenta brought claims for breach of the noncompete and confidentiality provisions of the franchise agreement and guaranty, violation of the Defend Trade Secrets Act (“DTSA”), conversion, unfair competition, and trademark infringement. Innerworks and its owners moved to dismiss all claims.
First, the court dismissed all claims against Innerworks, except for the breach of contract claims, because most of the misconduct Valenta complained of resulted from the activities of VaQya and its owners. Next, the court found that Valenta sufficiently stated a claim against the owners for breaches of the franchise agreement and guaranty’s non-compete and confidentiality provisions. Although the owners argued that the noncompete was overly broad in scope, the court deemed the issue procedurally inappropriate at the motion to dismiss stage. The court also found that Valenta stated a claim for misappropriation of trade secrets because Valenta identified trade secrets contained within its operations manual that were allegedly misappropriated and alleged that it shared such secrets for the sole purpose of the owners’ operation of their franchised business. However, the court dismissed Valenta’s claim for conversion because the operations manual and proprietary materials were not property sufficiently tangible to support the claim—they are not independently valuable as tangible property, but rather, their value is derived from competitive advantage. The court also dismissed the trademark infringement claim because the parties’ marks were “obviously dissimilar” and unlikely to cause consumer confusion. Accordingly, the court granted in part and denied in part defendants’ motion to dismiss and afforded Valenta an opportunity to amend.