Top 10 Ways to Help Protect Your Franchise's Trade Secrets

Most franchise agreements include detailed provisions to ensure the protection of the franchise system’s trademarks, copyrights and patents. However, many of these same agreements fail to adequately address protection for what may be the franchisor’s most valuable asset – its trade secrets. In the context of a franchise, it is vital for both franchisors and franchisees to understand what a trade secret is, why trade secret protection is important, how that protection may be lost, and the efforts necessary to help ensure the protection of the franchise’s trade secrets in order to maintain the system’s competitive advantage.

What is a trade secret?

A trade secret is generally defined as any type of information that provides the owner of that information with a competitive advantage as a result of the information not being generally know and readily ascertainable by others, and is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

Why is trade secret protection important?

Trade secrets can provide a competitive advantage to a business as long as they remain unknown to competitors. Thus, unlike a patent, which has a term of 20 years, after which the information becomes public domain, a trade secret can continue to provide a competitive advantage long after a patent would have expired. For example, if the formula for Coca-Cola had been patented instead of being maintained as a trade secret, the patent would have expired long ago, and with it, the competitive advantage that Coca-Cola Co. and its bottling franchises have otherwise enjoyed for over 100 years.

How can trade secret protection be lost?

Trade secret protection may be lost if the owner does not exercise reasonable precautions to prevent its disclosure or if the information is independently created or “reverse engineered” by another person who then disclosed that information.

Recommendations

Given the importance of trade secrets to a franchise system, and the potential for loss as a result of a single person associated with the franchise not exercising reasonable precautions to maintain their secrecy, it is critical that franchisors and franchisees take actions to protect the franchise system’s trade secrets. The following are 10 recommendations to help ensure trade secret protection of the franchise’s confidential and proprietary information:

No. 1:

Define the franchisor’s trade secrets broadly in the franchise agreement, for

example—“As used herein, the term Trade Secrets mean, any information,

including, but not limited to, any manuals, contracts, customer date,

supplier data, financial data, price lists, know-how, methods, techniques,

processes, compilations, formulas, programs or patterns relating to the

operation of the franchise and the products or services thereof.”

No. 2:

Specifically state in the franchise agreement that any items embodying the

franchisor’s trade secrets are being licensed to the franchisee as opposed to

being sold.

No 3:

Specifically state in the franchise agreement that the franchisee is prohibited

from “reverse engineering”, decompiling or disassembling any items

embodying the licensed trade secrets.

No. 4:

Require the franchisee to acknowledge that he or she is not violating any

restrictions of former employees or other previously-owned franchises and

that he or she will not disclose or use any trade secrets of any former

employers or other previously-owned franchises in the operation of the

present franchise.

No. 5:

Stress the importance of maintaining secrecy of the system’s trade secrets

and specifically include a statement in the franchise agreement wherein the

franchisee acknowledges that he or she may have access to the

franchisor’s trade secrets and that these trade secrets have substantial

value that provide the franchisee with a competitive advantage.

No. 6:

Include specific provisions in the franchise agreement that restrict

unauthorized use and disclosure of the system’s trade secrets and prohibit

the franchisee from delivering any papers, or publishing any articles

pertaining to the franchise or its activities until they are first reviewed and

approved for publication by the franchisor.

No. 7:

Include specific provisions in the franchise agreement in the event of the franchisee’s severance, including: requiring the immediate return of any of the franchisor’s trade secret information and any items embodying those trade secrets; requiring acknowledgment that he or she has no ownership interest in the trade secrets or any items embodying the trade secrets.

No. 8:

Include specific guidelines in the operating manuals for protecting the secrecy of the franchisor’s trade secrets, including: limiting access to the trade secrets to only those franchise employees that have a need-to-know for the performance of their duties; requiring locking of all offices, file cabinets or storage rooms in which confidential information may be found; providing appropriate legending and treatment of all trade secrets; limiting access to copying and scanning equipment and computers; and) password-protecting all computers and encrypting all electronic communications containing references to the trade secrets.

No. 9:

Require the franchisee to have every employee who may have access to

the franchisor’s trade secrets execute an employment agreement having

non-disclosure provisions, restrictive covenants, and notice requirements of

subsequent employment.

No. 10:

Require the franchisee to conduct periodic meetings with the franchise employees to instruct them as to their responsibilities to maintain secrecy of the franchisor’s trade secrets. The franchisee should also conduct severance interviews with any terminating employees in which they acknowledge in writing their post employment obligations to the franchise.

As technology and intellectual property becomes more important in our world, franchisors need to look again at their franchise agreements, and franchisees need to review the way they operate their franchise to assure they are adequately protecting the franchise system’s trade secrets.

This article was published in the January 1, 2003 issue of the Franchising World magazine.