A franchise is all about brand.
The franchisor has usually spent years building up the brand and wants to protect it during the franchise process. How can this be done while still allowing franchisees to leverage the brand name and intellectual property?
Below we set out how franchisors can protect their brand and ensure confidentiality.
A franchisor should understand how to protect their intellectual property that makes their brand readily identifiable – a name, a trade mark, a recipe or a product.
While it is possible to register intellectual property such as trade marks, a franchise’s secret recipe (such as a passed down family cake recipe or sandwich sauce) may be harder to protect.
Most franchisors do not provide franchisees access to these trade secrets until after signing the franchise agreement and providing access to the operations manual.
Protecting Trade Secrets During the Franchise Agreement
During the franchise agreement, a franchisee is privy to many trade secrets, including secret formulas and recipes and the way in which the franchisor runs the business.
All of this information remains confidential to the franchisor who typically includes clauses in the franchise agreement to protect it in the following ways:
- Confidentiality Clause: The franchisee agrees to keep all information relating to the franchise confidential;
- Confidentiality Deed: The franchisor asks the franchisee to enter into a separate confidentiality deed which prohibits the franchisee from disclosing any of the franchisor’s confidential information. This includes trade secrets, know-how, business models and designs as well as other relevant details. The Deed also restricts the franchisee using any of the confidential information to establish a rival business and extends to the employees of the franchisee;
- Restraints (during and after the agreement): A franchise agreement will generally contain restraints against the franchisee, both during the franchise agreement and at the termination of the franchise agreement – noting these 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 otherwise, the franchisor may be unable to have a court enforce the restraint.
- Intellectual Property Licence Agreement: Many franchise agreements contain a royalty-free licence to use certain intellectual property that terminates with the agreement.
Protecting Confidential Information at the End of the Franchise Agreement
A franchisor is entitled to take action to prevent the franchisee from breaching the post restraints and lapsed intellectual property licence (see above).
Legal action is possible both under the terms of the franchise agreement and under the Competition and Consumer Act 2010 pursuant to the misleading and deceptive conduct provisions.
To establish a cause of action, a franchisor must show that:
- The franchisor has a good reputation that is easily identified;
- The franchisee has engaged in conduct that is misleading and deceptive or might trick third parties into thinking the franchisee represents the franchisor; and
- The franchisor’s reputation has been damaged by the franchisee’s misleading and deceptive conduct.
LegalVision regularly assists franchisors to protect their brand. If you need assistance in drafting your franchise agreement, confidentiality deeds or enforcing your rights against a franchisee, get in touch with our franchise team on 1300 544 755.
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