Last month’s post highlighted the requirements for defining trade secrets.
Conceptually, the trade secret grant in a Franchise Agreement is a license, which confers rights and duties on a franchisee very similar to a trademark license. Those rights and duties should be specified in your Franchise Agreement and other ancillary agreements to protect your trade secrets. I suggest, at a minimum, that you address the following specific areas:
- All your agreements should protect against unauthorized disclosure of trade secret information;
- The Franchise Agreement should identify the trade secret information to be disclosed in separate documents, such as your confidential operations manual;
- The franchisee must acknowledge a Franchisor’s ownership of trade secrets and that the trade secret information is only disclosed because of his/her relationship as a franchisee;
- The franchisee must further acknowledge that the trade secret information is not generally known to the public or trade, and the franchisee had no previous knowledge of the trade secrets;
- The Franchise Agreement should contain language that is flexible enough to include future developments to be included in your ancillary documents;
- A franchisee should further acknowledge that the trade secret information is only loaned to the franchisee during the term of the franchise and is to be used in conjunction with the franchise;
- Your Franchise Agreement should also limit the franchisee’s right to disclose trade secret information to key employees on a need-to-know basis, and require that key employees sign confidentiality agreements;
- The franchisee should agree to observe and implement all reasonable precautions against disclosure which you may implement from time to time;
- The franchisee should be required to report unauthorized disclosures or uses of trade secrets; and
- The trade secret provisions in your Franchise Agreement should be tied to both in-term and post-term covenants not to compete and non-use.
Contractual provisions are not enough without a pro-active strategy on the part of Franchisors to monitor franchisee compliance. Because of employee mobility, franchisee turnover, and uncertainty of courts, it is imperative that your company implement a checks and balance system to ensure strict confidentiality. Your trade secrets are the heart of the franchise system. Make sure you devote the resources to protect your investment and to protect your trade secrets.