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franchise system Archives - Duell | Law

Confidentiality Agreements: Do They Work?

By | Newsletter

To determine the enforceability of Confidentiality Agreements, Franchising companies must be able to answer three questions affirmatively.

First, does your confidentiality agreement contain information which is outside the public domain or does it contain information compiled or combined in a unique way as the result of your business efforts? In the vast majority of business format franchises, information is one of, if not the most valuable asset of a franchise system and it is the compilation and use of that information which forms the foundation of the franchise system. This is what distinguishes your franchise from any other business.

The second area that must be examined is whether the subject matter deemed to be confidential derives value from its secrecy. If the actual loss caused by the violation of confidentiality provisions results in no damage to the party seeking protection, how can liability be imposed on a wrongdoer? It does not matter whether your entire franchise system uses special recipes or, for that matter, anything your franchise company may deem to be confidential in nature, you must be prepared to show it has value and how your company has been damaged.

The final question of our tripartite equation, is probably the most important, did the party seeking protection take reasonable precautions to maintain the secrecy of the material claimed to be confidential? It is not enough for your franchise company to argue that the parties to whom knowledge of the alleged confidential material is imparted to – should have known better. The burden is on your franchise company to show that reasonable precaution to prevent unauthorized disclosure is in place. The determination of whether  “reasonable  precaution”  was taken ultimately rests in the discretion of the trial court. As a result, you must demonstrate that not only is the information deemed to be of substantial value to your franchise system but that your company took the necessary precautions to preserve the integrity of your information, even when that information may have been voluntarily provided to third parties. So how can a Franchisor show its protection of confidential information? One way that trial courts recognize is to show that there is a process in place to protect the information through use of third party confidentiality agreements. This contractual protection is an affirmative step by your company to set out a third party’s acknowledgement that the information or material being divulged is done so under limited parameters and further, it sets out the consequences for misappropriation. Additionally, contractual protections should be supplemental by a proactive strategy to monitor franchisee compliance.

Beyond securing secrecy for your company, there is an indirect benefit of a psychological impact on your franchise system by demonstrating your company’s regard for the confidential information and its commercial sensitivity.

CONCLUSION

Your confidential information is a valuable asset in your franchise tool box for the success of the franchise system. By taking steps to proactively protect and prevent trade secret leaks, you will create positive dollars to your company’s bottom line.

Saving Dollars By Using Intranets

By | Newsletter

Does your staff spend a significant amount of time mailing or faxing new manual updates, newsletters, reports or a variety of other information to your franchise system? Are you apprehensive about sending confidential information over the Internet? If your answer to either question is yes, you should consider implementing a plan to establish an Intranet site. If you think your company is too small for its own Intranet site, then this article is definitely for you.

An Intranet site, as opposed to internet is a company internal site with limited access. By using encryption technology and limiting access to persons with passwords, the site is not available for public view like normal internet sites. With a secure Intranet site a franchise company can feel comfortable in sending franchisees information, such as:

  1. Training documents, manuals, reports and other information normally copied or printed and sent through the mail;
  2. Software upgrades for immediate use;
  3. Newsletters;
  4. Continued updating of approved vendor lists;
  5. Changes in personnel directories, with the latest areas of responsibility;
  6. Last minute vendor close outs;
  7. And the list goes on and on.

It shouldn’t take too long to see that the above list just touches the surface of potential uses for an Intranet. In fact, not only can a Franchisor disseminate information over an Intranet site, but franchisees in the system can share ideas and experiences with other franchisees by using an Intranet bulletin board. Some Franchisors use their Intranet for franchisee reporting. By compiling the reported franchisee information over a period of time, Franchisors can analyze the reports and help franchisees strategically plan for the future or help them correct existing problems.

If a Franchisor’s Intranet site is set up to allow vendors limited access, franchisees can order supplies over the site from approved vendors with password access and guess what – your franchise company now has a new means to monitor franchisee orders and an additional tool to discover under reporting (See Franchisor Alert February 2016 “Do You Have Under Reporting Franchisees?” for other under reporting tools).

The potential uses for an Intranet site are unlimited and as a client with less than forty franchisees told me: “By eliminating many of our costly and inefficient methods of doing business, our site will pay for itself, but more importantly, our relationship with franchisees is at an all-time high. If I was starting my company again, I would have an Intranet site before I sold my first franchise.”

CONCLUSION

In Franchising it is important to never be satisfied with mediocrity. Intranets have proven to be successful in Franchising and can help provide value to your bottom-line.

Exit Strategies for Franchisees Before You Terminate

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There are times when it is more prudent to have an exit strategy in place than to employ the financial and manpower resources of your franchise company necessary for a franchisee termination. This is true from an economical standpoint as well as a legal one. Not only do many states have specific statutes dealing with termination spelling out what can and cannot be done but, believe it or not, some states require a franchisor to compensate the franchisee upon termination.

Considering the legal and economical consequences which flow from termination, it seems only logical to develop exit strategies to wean out the dissident franchisees and make room for those franchisees that are helping you build a successful franchise system.

So what should franchisors look for when determining potentially dissident franchisees? Without question the first clue is whether a franchisee is communicating with you. If a franchisee is not communicating with you, it doesn’t matter what kind of wonderful programs you have in place. Your franchise system will not work unilaterally.

There are several ways to keep the lines of communication open with franchisees. One method is to make sure your field personnel are aware of potential problems and have them meet face-to-face with the franchisee to discuss the problem(s). Only when you know what the problem is can you attempt to effect a practical solution through your exit strategies for franchisees.

If your field personnel cannot open the lines of communication, it may be prudent to have an executive pick up the phone and make contact. If you perceive a serious problem you may want to invite the franchisee for a visit. You may have to buy a plane ticket but it’s certainly less expensive than spending valuable executive time and money defending a lawsuit.

Occasionally a franchisor and franchisee need a third party to open the line of communication. Mediation sometimes works to get a franchisor and franchisee together and vent whatever animosity there may be while at the same time causing each side to get back to the problem.

A sometimes better method of encouraging communication is by using your franchise counsel. Recently, a franchise client forwarded a rather threatening letter from a franchisee’s counsel. Based upon the attorney’s letter, I realized he could not have reviewed his client’s franchise agreement. After picking up the phone and going over several key provisions of the franchise agreement, franchisee’s counsel realized his client’s vulnerable position and the expense his client would incur. Based upon our phone conversation, the line of communication opened and we were able to work out an exit strategy for the franchisee. But before an exit strategy could even be discussed, we had to communicate.

There are many great exit strategies for franchisees that work extremely well once you have found the root of a franchisee’s problem. Next month we will continue to build our arsenal of additional exit strategies for franchisees before termination.

Franchise Associations: The Good, The Bad and The Ugly

By | Newsletter

In determining whether franchise associations will benefit or undermine a franchise system one must first determine the manner in which the association is to be organized and secondly, the purpose behind the proposed formation. Generally, franchisee associations are either formed by franchisees themselves, primarily for their own interest, or they are formed by the franchisor, primarily for the franchisor’s interest first and secondarily that of the franchisees.

The Good

If a franchise association is being formed by the franchisor rather than franchisees, the association is customarily denoted a Franchise Advisory Council (“FAC”). As the name connotes, FAC’s are purely advisory. Organizational, communication, travel and other expenses are normally paid by the franchisor. Franchisors considering whether to form a FAC usually look for the best and most loyal franchisees to be on one or more committees to advise the franchisor on topics such as marketing, new product development, reporting and operations. FAC’s are a good mechanism for franchisors to obtain valuable input from prime franchisees. Because franchisees feel that they are a team member and their contribution is meaningful (which it should be), the FAC members normally give the franchisor their endorsement which in turn draws the support of the entire franchise system.

The Bad

When an association is formed by franchisees rather than the franchisor, the franchisee association usually involves a conflicting economic interest with that of the franchisor. Franchisees sometimes find that by pooling together their resources they jointly have a much louder and stronger voice. As a result, a franchisor is much more apt to listen and address complaints of franchisees. Unfortunately, for many franchise systems, franchisee associations formed to address a single issue common to the system expands to include a wide range of issues, including issues that might have otherwise been addressed by a FAC. An example of this change of direction occurs in the franchise system discussed in an article appearing in the magazine, Franchise Times. The story is about a franchisee association initially formed for the sole purpose of helping franchisees survive a number of lean financial years. After the franchisees were again profitable, the franchisee association changed its purpose and became primarily concerned with decoupling the franchise brand from that of the franchisor’s parent company. Neither franchisor nor franchisee could ever have foreseen the total change of direction.

The Ugly

The ugly referenced in our title occurs when politicians and academia get involved. Today there is growing sentiment that franchisee associations should be treated like labor unions and be granted an antitrust exemption. With this type of protection franchisee associations could engage in collective bargaining and be free to negotiate royalties, advertising fees, operational issues, termination rights and many other facets of the franchise system.

Like so many aspects of franchising, the decision of whether associations should be allowed in your system depends upon the intent of formation. Before agreeing to an association contact our firm. Together we can look at the legal ramifications pertaining to an association. Perhaps it may be more important to be proactive and form a franchisee advisory council yourself, or address the specific issues without even having to address the formation of an association. The choices you make can mean a win-win for all parties or the ultimate demise of your entire franchise system.