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LEADS CLUB, INC. v. PETERSON

September 14, 2005.

LEADS CLUB, INC., a California corporation, Plaintiff,
v.
LINDA PETERSON and VICTORIA TAUS, LEADS PACE and DOES 1-100, inclusive, Defendants.



The opinion of the court was delivered by: NAPOLEON JONES, District Judge

DEFENDANTS' MEMORANDUM OF POINTS AND AUTHORITIES IN OPPOSITION TO PLAINTIFF'S APPLICATION FOR TEMPORARY RESTRAINING ORDER
I. INTRODUCTION
The Motion before this Court is an application for a temporary restraining order brought by Leads Club, Inc., (hereinafter "Plaintiff") a "business networking" company. Defendants Linda Peterson and Victoria Taus are former executive directors of Plaintiff's organization. Since leaving her position Ms. Peterson has not yet begun a new business venture or employment. Ms. Taus has begun to organize a business called PACE (Partnership Alliance Consortium Exchange)*fn1 that will involve various small business networking activities. PACE is in the formation stages and no business has, thus far, been transacted.

  By its Application, Plaintiff seeks to have this Court enforce a patently illegal covenant not to compete by enjoining Ms. Taus and Ms. Peterson from starting up and/or engaging in a networking business. Plaintiff falsely asserts that its employment contract with Ms. Taus and Ms. Peterson prevents them from being associated with any business that is the same or similar to Plaintiff's business for a period of five years.

  Plaintiff also misleads with its claim that Defendants infringed upon its "Leads Club" trademark. Plaintiff does not own "Leads Club" as its trademark. Indeed, Plaintiff has expressly disclaimed its rights to the generic name "Leads Club" with the U.S. Patent and Trademark Office: The trademark registration by Plaintiff, on its face, states: "Disclaimer: . . . . . No claim is made to the exclusive right to use `Leads Club' apart from the mark as shown." [See Exhibit A to Complaint]

  As more fully set forth in Section D, infra, even though Defendants are entitled to use the (not trademarked) term Leads Club, Defendants have not used it. Instead Ms. Taus has called her business PACE. Plaintiff further overreaches seeking a Court order to expand their asserted rights by preventing Defendants from employing a website with the title "leadsca.com"*fn2 a domain name owned by Defendants and entirely beyond any rights of Plaintiff.

  Finally, Plaintiff seeks to enjoin Defendants' use of "Plaintiff's competitive method of doing business" and other undisclosed but alleged "trade secrets." Even assuming that Defendants have "stolen confidential member rosters," or have employed "trade ideas, concepts, procedures" as alleged by Plaintiff,*fn3 none of the items identified by Plaintiff in its complaint and/or moving papers can be considered trade secrets. In fact, the member rosters for various chapters are posted on websites, as are manuals, promotional and marketing materials, chapter schedules, forms for monitoring chapters, resources and "how to" documents. (See Exhibits B through 1 to Taus Decl.) The public dissemination of materials is fatal to any trade secrets claim by Plaintiff.

  Plaintiff is not entitled to prevent Defendants from working in their chosen professions, or to prevent Defendants from fair competition with Plaintiff. Nor is it entitled to enjoin the use of Defendants' business name, PACE, or its domain name www.leadsca.com. Nor is it entitled to an injunction for conduct that is not ongoing. Even assuming Plaintiff's allegations that Defendants used its logo on Defendant's PACE website were true, prior to the filing of this action, Ms. Taus dismantled her website for redesign. It was in operation a mere fifteen days.

  Boiled down to its essence, Plaintiff's Application seeks to enjoin future and lawful competition by Defendants. Plaintiff's Motion should be denied in its entirety.

  II. FACTUAL STATEMENT

  A. Plaintiff's Business Model

  Plaintiff was founded in the 1970's by Ali Lassen, the mother of Defendant's current President, Lisa Bentson. Plaintiff is a "business networking" business whose mission is to facilitate the exchange of business referrals among its membership, all of whom are business owners. Plaintiff's business model consists of local chapters whose weekly meetings are led by a local management team, with input and supervision by a "Chapter Consultant" who in turn reports to a regional Executive Director. Plaintiff charges a monthly membership fee for "members" who attend local chapter meetings, and pays a portion of that fee in the form of a "commission" to the Executive Directors. In addition to its local chapter meeting component, Plaintiff makes available to its members online and via U.S. Mail a variety of written tools which purport to enhance business development practices, including manuals and forms. Plaintiff maintains chapters throughout the United States and Australia. (Taus Decl, page 1; Peterson Decl., page 1.)

  The average duration of a Plaintiff membership is approximately six months. (Peterson Decl., page 3, line 6.) As such, on an annual basis each Plaintiff membership has 150%-200% turnover in every calendar year.

  B. Plaintiff's Business Difficulties

  1. 2005 — A Pivotal Year

  In the late 1990s, the then nacent networking industry seemingly exploded out of nowhere into a thriving multi-billion dollar industry. From its early origins in the 1970's as a marketing tool for unsophisticated small local service businesses, the industry morphed into an international business whose customers included both its historical clientele and sophisticated professionals with increasingly complex business networking needs. In response to that change, Plaintiff dug its heals into the sand. As if willing itself back to the pre-internet days of its formation in the late 1970's, Plaintiff ignored the opportunities presented by the internet and appeared intent on preserving the limited weekly meeting model as its sole business model. In short, Plaintiff failed to take stock of the changes in its industry, and refused to take any efforts to remain competitive and viable. Its Executive Directors, whose salaries were dependent on Plaintiff's ability to attract new members, did however take stock. A change appeared unavoidable. Apparently, Lisa Bentson was the only one who was and remains willing to deny the obvious: the business networking industry is a in state of rapid evolution, and in order to survive Plaintiff must change to reflect the needs of its customers. (Taus Decl., page 3, lines 1-17.)

  In early 2005, it became grossly apparent to senior employees of Plaintiff and others that Plaintiff's failure to remain current with business trends was taking a serious toll on their business and attendant ability to generate an income. Plaintiff had failed to keep current with the proliferation of online activities and had not yet transitioned to accomodate the increasing popular blog type of communication. (Taus Decl., page 3, lines 1-3.)

  Other organizations that catered to younger and more internet savvy business owners were capturing a greater portion of the business networking market, and many of Plaintiff's members had begun to reject the obvious limitations of the weekly meeting format and expressed a preference for more random and unstructured real-time networking events. Executive Directors, including Ms. Taus, had begun to propose other events in their territories, which Lisa Bentson rejected. As a result, membership declined and Plaintiff faced financial problems. (Taus Decl., page 3, lines 1-17.)

  2. Plaintiff's Erroneous Solution: Change the Fee Schedule

  Plaintiff's sole solution to shoring up its organization and increasing cash flow problems was to change to its longstanding membership payment plan. Lisa Bentson provided little advance warning of the change to the Executive Directors, many of whom later objected to the proposal and warned that members would resign with the new plan, and they would see reduced revenues. The new structure obligated members to pay by automatic debit. They could only pay by credit card or check if they made non-refundable payments six months or one year in advance. (Taus Decl., page 3, lines 20-27, page 4, lines 1-19.)

  C. Members' Reactions: Complaints and Resignations

  Almost immediately members complained that they did not have confidence in Plaintiff ability to safeguard the security of online banking operations necessary for the "automatic" debit option for fee payment, could not afford to pay by automatic debit and did not want to commit in advance to a lengthy membership. Many members complained in writing to Plaintiff and the Executive Directors, threatened to resign and/or resigned (including three chapters which unilaterally resigned), and Ms. Taus and Ms. Peterson both resigned. The new fee structure remains in place. (Taus Decl., page 3, lines 4-19; Peterson Decl., page 4, lines 1-25.)

  D. Ms. Taus' and Ms. Peterson's Relationships With Plaintiff

  Ms. Taus and Ms. Peterson were Executive Directors for Plaintiff for approximately three years. Their positions gave them exclusive rights to their territories, and their compensation was a commission equal to a percentage of monthly membership fees paid by members in their territories. (Taus Decl., page 2, lines 12-19; Peterson Decl., page 2, lines 5-25.)

  E. Ms. Taus' and Ms. Peterson's Resignations in the Wake of the New Fee Structure Change

  After Plaintiff unilaterally changed its fee structure in the face of intense opposition, Ms. Taus and Ms. Peterson individually decided that it was not in their their best interests to continue their employment with Plaintiff. They foresaw a substantial decline in membership in their territories due to the fee structure change, and an attendant reduction in their commissions. They both concluded that in the immediate future their employment with Plaintiff would not enable them, respectively, to earn sufficient levels of income to sustain a living.

  After Ms. Peterson's resignation she contacted the webmaster who had worked on the northern California leads website (northerncaleadsclub.com) and asked her to shut it down, and had no subsequent involvement in the operation, maintenance or use of that cite. (Taus Decl., page 4, lines 21-28, page 5, lines 1-5; Peterson Decl., page 5, lines 5-13

  F. Ms. Taus' and Ms. Peterson's Subsequent Lawful Business Activities

  1. Ms. Taus' Pace Organization

  After resigning from her position with Plaintiff, Ms. Taus began to explore other opportunities in the business networking field, and decided to form a networking business that would focus primarily on the internet. Her business, Pace, has never used the name "Leads Pace." Ms. Taus' Pace operation maintained a website for fifteen days, after which time she shut it down for reconstruction and to regroup in order to develop a more comprehensive business plan. Pace does not currently operate a website or have an email or telephone numbers/addresses and is not currently doing business. During its brief operational tenure, Pace did not conduct any business, enter into any contractual relationships, earn any revenues, solicit or gain any customers, provide any services, or sell any products or services. (Taus Decl., page 5, lines 7-24.)

  2. Ms. Peterson's Lack of Involvement with Pace

  Ms. Peterson has never been involved in the Pace organization briefly operated by Ms. Taus. That entity was and is owned and operated exclusively by Ms. Taus. Ms. Peterson has not yet launched a new business operation. (Peterson Decl., page 5, lines 15018.)

  3. "Leads Pace": No Such Entity Exists

  Defendants are not aware of nor have they had any affiliation with any business by the name of "Leads Pace", whether formal, informal or otherwise. (Taus Decl., page 5, lines 13-14; Peterson Decl., page 5, line 17.)

  4. Defendants Have Not Misused Any Protected Trade Secrets

  (a). Plaintiff Has Not Maintained the Confidentiality of its Alleged Trade Secrets: The Websites

  Many of Plaintiff's Chapters and/or territories maintain a website accessible to members and non-members alike. Those websites are not maintained in a confidential manner and require no password or other screening device. The websites serve two separate purposes: they are a marketing tool used to attract new members and a convenient method of intra-chapter communications. Most websites include the contact information of their members, announce upcoming activities, and enable users to download, free of charge, Plaintiff's materials. Many of Plaintiff's ...


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