How Franchisors Can Protect Confidentiality

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Table of Contents

• Intellectual Property Protection
• Protecting Trade Secrets During the Franchise Agreement
• Protecting Confidential Information at the End of the Franchise Term
• Key Takeaways

A franchise is ultimately built and centred around its brand. As a franchisor, you have probably spent years prioritising and building the brand and want to protect it during the franchise expansion process. However, the challenge lies in striking the balance between preserving the brand’s essence while granting franchisees the ability to capitalise on its recognition and loyal customers. This article discusses strategies through which you, as a franchisor, can effectively protect your brand and ensure confidentiality.

Intellectual Property Protection

As a franchisor, you should be aware of how to best protect your intellectual property, which serves as the cornerstone of brand recognition, be it a name, a trade mark, a recipe or a product. 

While registering your intellectual property, such as trade marks, is a clear and relatively straightforward process, protecting a franchise’s secret recipe (such as a closely guarded family recipe or signature sauce) may be more difficult. Most franchisors do not provide franchisees access to these trade secrets until after entering the franchise agreement and providing access to the operations manual, and almost always after a confidentiality agreement is in place.

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Protecting Trade Secrets During the Franchise Agreement

During the term of a franchise agreement, a franchisee is privy to trade secrets that could include secret formulas and recipes and also the way in which the franchisor runs the business.

To ensure this information remains confidential to you, you may choose to implement the following clauses into your franchise agreements:

• Confidentiality Clause: This ensures that the franchisee agrees to keep all information relating to the franchise confidential. 
• Confidentiality Deed: This is a supplementary agreement wherein the franchisor prohibits the franchisee from disclosing any of the franchisor’s confidential information. This typically includes trade secrets, know-how, business models and designs as well as other relevant details. The deed also prevents the franchisee from using any confidential information to establish a rival business and can extend to the employees of the franchisee.
• Restraints (during and after the agreement): Typically, a franchise agreement will contain restraints against the franchisee, both during the term of the franchise agreement and at the termination. These usually prevent the franchisee from setting up a business to compete with the franchisor using the know-how obtained in the franchise relationship. Such clauses must be reasonable and necessary to protect a legitimate business interest; otherwise, a court may refuse to enforce the restraint. 
• Intellectual Property Licence Agreement: Many franchise agreements contain a royalty-free licence to use certain intellectual property that terminates simultaneously with the agreement.

Protecting Confidential Information at the End of the Franchise Term

Once a franchise agreement has been ended, through termination or non-renewal, your confidential information remains confidential.

A franchisor is entitled to prevent the franchisee from breaching any post-term restraints and expired intellectual property licences. Post-restraint clauses are provisions within the franchise agreement to prevent franchisees from engaging in specific activities after the end of the franchise agreement. These clauses typically aim to protect your interests by restricting the franchisee’s ability to compete in the same market or to utilise confidential information they have learned throughout the franchise relationship. In Australia, post-restraint clauses may include: 

• Non-compete clauses, preventing franchisees from establishing or operating a competing business within a specified region for a certain period following the end of the franchise agreement; 
• Non-solicitation clauses, prohibiting franchisees from soliciting customers, employees or suppliers of the franchisor for a designated period following the end of the franchise agreement; and
• Non-disclosure clauses, requiring franchisees to keep confidential information of the franchisor confidential.

While still a last resort, legal action is possible pursuant to the misleading and deceptive conduct provisions of the Franchise Code and, depending on inclusions, the franchise agreement itself.

To establish a cause of action, a franchisor must demonstrate that:

• the franchisor and their brand is well known and is easily identified;
• the franchisee has engaged in conduct that is misleading and/or deceptive or might convince third parties to believe that the franchisee represents the franchisor; and
• the franchisee’s conduct has damaged the franchisor’s reputation.

Key Takeaways

As a franchisor, it is crucial that you protect your confidentiality, intellectual property and trade secrets. In your franchise agreements, you should include confidentiality clauses and reasonable restraint clauses to prevent franchisees from competing with you during and after the agreement. Restraint clauses include non-compete, non-disclosure and non-solicitation clauses. However, as a last resort, legal action is possible under the misleading and deceptive conduct provisions of the Franchise Code.

If you need help protecting your trade secrets, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.