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Whether you are an existing franchise or a business owner planning to expand as a franchise, you likely have a specific manner of operations or information to which you can attribute some of your success. Based on this, it is very important to protect such information and keep it confidential. However, when you franchise your business and give third parties access to operate your business model, you might be hesitant to share certain trade secrets. This article explains how your ‘trade secrets’ can be protected when franchising.
What is a Trade Secret?
A trade secret is any practice, process or piece of information in a company that is unknown to the public. It usually gives you a specific edge in the operation of your business ahead of your competitors. You do not need to write down a trade secret or manifest it into a product or prototype for it to exist. Examples of trade secrets can include:
- processes;
- formula;
- device;
- method;
- recipes;
- customer preferences;
- pricing techniques; or
- proprietary software.
Some specific examples of trade secrets you may have heard of include:
- McDonalds Special Sauce recipe;
- Google’s search engine algorithm;
- Recipe for Coca Cola;
- KFC’s 11 Secret Herbs and Spices; or
- Process for creating the New York Times Best Sellers List.
Often, trade secrets take years to develop and are a key priority for the success of your business. As such, it is important to ensure that you protect your trade secrets while franchising.
How to Protect Your Trade Secret?
The key difference between trade secrets and other forms of intellectual property, such as patents or trademarks, is that you do not normally register trade secrets. Indeed, registration would remove the ‘secretive’ aspect of the trade secret.
You can also consider taking some practical steps (further to contractual protections) to protect your trade secrets.
NDAs & Franchise Agreements
In the franchising context, a well-drafted franchise agreement will contain provisions to protect your trade secrets, including confidentiality provisions.
Alternatively, you may require your potential franchisee to enter into a NDA. NDAs are common when discussing or disclosing information that could potentially or does include trade secrets. Notably, when you are still discussing the opportunity with a potential franchisee, they typically still need to sign your franchise agreement. This means they would not be legally bound to any confidentiality provisions prior to joining the franchise network. To protect any trade secrets during the negotiation stage, you might have the potential franchisee sign a NDA.
Before entering into any discussions with a potential franchisee, consider what obligations they have to keep such information a secret. If the answer is nothing, you should speak to a lawyer about getting some contracts drawn up and signed before proceeding with your discussions.
Employment Agreements
You might also be wondering what happens after your franchisee is part of your franchise system, uses your trade secrets in their day-to-day operations and employs individuals to operate the business.
If the latter, you can simply require (within the NDA or franchise agreement) that such information is not to be disclosed to any third party (including employees of the franchisee). If, for some reason, employees require the trade secret to complete their tasks, it would be pivotal to require the employees to enter into employment agreements with provisions that address the protection of trade secrets.
Continue reading this article below the formPractical Steps
Some practical steps you can take to protect your trade secrets include:
- only disclosing your trade secrets to those it is necessary to disclose to;
- storing it in a safe place (if applicable);
- having the correct legal documentation in place; or
- ensuring that you correctly identify your trade secrets.
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Key Takeaways
Franchising your business takes a lot of trust. By allowing other parties to use and follow your systems and processes under the franchise network, you inevitably let them in on the secrets to your business’ success. Such information might include trade secrets. To protect trade secrets when franchising, you might draft the following contracts:
- a non-disclosure agreement (NDA);
- an employment agreement; or
- confidentiality clauses within a franchise agreement.
For more information, our experienced franchising 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.
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