Your Trade Secrets: What Are The Questions?

How many franchisors have ever taken the time to actually define the trade secrets of their company? In many franchising companies, the general consensus is that trade secrets are those mystical items comprising their “system.” They then throw it in the attorney’s lap and say “I am not sure what they are, but I want them protected.”

It is not uncommon to find franchise marketing materials and franchise agreements which recite the uniqueness of the “system” and then claim the overall make-up of the franchise system constitutes a trade secret. Such broad recitals certainly attest to the misperception of what is legally protectable. Much of what a franchisor provides its franchisees are operating methods commonly known in the trade or industry and are not protectable. In fact, an agreement which seeks to restrict the use of an alleged trade secret and which fails to qualify as such is unenforceable against public policy. Some courts have even held allegations that clearly mistake trade secret status may constitute predatory practices under antitrust laws.

While various courts in the past have used numerous definitions of what was protectable as a trade secret, most states have now passed trade secret legislation. Generally state trade secret legislation is based upon either the Restatement of Torts format or the Uniform Trade Secrets Act. The majority of states have adopted, with some state variations, the Uniform Trade Secrets Act format. This act defines “trade secrets” as:

“[I]nformation, including a formula, pattern, compilation, program, device, method, technique or process that:

  1. Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through appropriate means by other persons who can obtain economic value from its disclosure or use; and
  2. Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”

Obviously not all information provided to franchisees can be protected. But where a franchising company has customized information and taken measures to ensure it is inaccessible to others, such information is protectable. An example of customized information might include, specially arranged recipes and formulas, special software programs, pricing lists, cost data, list of sources of raw materials and technology sensitive research.

Franchisors should work with legal counsel to ascertain what part of their system is a trade secret and therefore, protectable. Secondly, franchisees should acknowledge either in the franchisor’s confidential manuals or elsewhere, those items in the system which are classified as a trade secret. Finally, Franchisors must take active steps to protect their trade secrets. Our next post discusses many of the steps a franchisor should use to protect its trade secrets.