Franchisors: Protecting Trade Secrets With A Plan

By Debra Hill posted 02-24-2017 10:13

  

Franchisors, image you are the witness stand, and your ex-franchisee’s attorney asks you: “What specifically are your company’s trade secrets?” What’s your answer? How about the question: “How do you protect your trade secrets?” At a trial to protect proprietary information and systems, a franchisor must prove that the information is a trade secret; and, the franchisor has taken steps to actively protect them.  

Franchising relies heavily on the protection of trade secrets. In fact, trade secrets and intellectual property make up the bulk of what a franchisor licenses to its franchisees. A well-crafted franchise agreement is only a start in protecting trade secrets. However, the best franchise agreement in the world cannot protect a franchisor’s trade secrets unless the franchisor is proactive in protecting them.    

 Generally speaking, a trade secret is confidential information that derives independent economic value from not being generally known and in which the owner takes reasonable steps to ensure its secrecy.

Let’s unpack that.   

1.        Identification of Trade Secrets. Franchisors must identify what the trade secrets are with reasonable particularly. Just saying “everything in our operations manual” isn’t enough.  Trade Secrets are what gives you a competitive edge over your competitors. They are something your competitors do not use and do not know. In the franchise arena, trade secrets can be made up of such items as recipes, financial information, pricing information, salary compensation, franchise evaluations, marketing strategies, sales methods, sales forecasts, customer preferences, business format, business plans, operations manual, pricing techniques, proprietary software, distribution techniques and sometimes, customer lists. However, this is not a definitive list. Franchisors should closely examine what makes its franchise different; what gives the franchise a competitive edge.

 2.        Conversely, identification of what is not your Trade Secret. What is it that you are doing that is already used by competitors? Most front of the house activities are “in the public domain”. Why? Because the public can see them. If the public can see them then they are not a trade secret. Letting customers pour their own yogurt into a cup isn’t a trade secret. However, the recipe for the yogurt is. 

3.        Investment in each Trade Secret. How much work have you invested in cultivating your trade secrets? Trade secrets that involve elbow work are more likely to be seen as a trade secret. A customer list isn’t a trade secret if it was derived from a phone book. However, a unique system of developing leads that cannot be easily recreated is a trade secret. What things in your franchise system are not know to the public and are a product of your own development? Take the time to write down the development work in your trade secrets.

3.        Protection of each Trade Secret. Franchisors must actively protect their trade secrets from becoming public. Furthermore, they need to ensure that their franchisees and their employees are actively protecting the trade secrets. If employees or franchisee employees are permitted access to the operations manual, without confidentiality agreements; then, a court may find that the franchisor did not actively protect its trade secrets.   You must insist that your franchisees comply with the protection of your trade secrets. This often involves ensuring that franchisees secure the necessary confidentiality and non-competition agreements from their employees. Make this a priority. Make it routine.

 4.        The Economic Value of each Trade Secret. The franchisor must gain economic value or importance from the trade secret. If your franchisee was an electrician for 10 years prior to joining your franchise, which provides electrician services, then you didn’t train the franchisee as an electrician. You don’t have a legitimate business interest in that area. You may have, however, a developed system of management, customer service and the like that you taught the electrician. So while you might not stop him from continuing in his trade, you can protect your methods of operation from being used. 

 Protecting Your Trade Secrets

 Make protecting trade secrets a top priority and a mandatory regime.

            1.        Write down everything that make up your trade secrets. You must identify each trade secret in order to protect it. Consider, is this something unique to my system, or, is it something that my competitors know and do? Identifying each of your trade secrets is a step often ignored by franchisors.

            2.        Along with that, identify the development processes of each trade secret. What went into development in time, costs and manpower?

            3.        Develop a systematic plan for safeguarding each of your trade secrets. This plan should include comprehensive checklists. Assign plan compliance to one employee or one department. Adequate trade secret protection cannot happen if HR is responsible for this element, legal for that element, and, information technology for another. 

            4.       Use well-crafted non-competition and confidentiality agreements. Then, make sure your franchisees comply with the requirements in your franchise agreement to have employees sign them. Make routine requests of all franchisees for their employee executed documents. During quality assessment visits, note which employees have access to proprietary information but do not have the required restrictions. 

            4.        Education your employees and franchisees on what constitutes a trade secret, the required protection for each trade secrets and why it’s important. Give them a checklist of what they are responsible for completing and then direct them to forward it to your above compliance department. Incorporate into your quality control visits trade secret compliance. Franchisees should be trained in the importance of limiting access to the operation manual. Protecting the brand means protecting their investment, too. Trainers should be instructed on what your trade secrets are, and, told not to train either your employees or franchisee employees in trade secret matters without first examining the restrictive agreements.  

           5.        Communicate that a trade secret must be kept confidential. The easiest way is to mark trade secret correspondence as “confidential.”  

            Franchisors must actively identify and protect their trade secrets. Otherwise, a franchisor can lose trade secret status. 

 Debra Hill is a partner in the Franchise Practice Group at FisherBroyles, LLP. She may be reached at 904-612-3780 or debra.hill@fisherbroyles.com.

Franchisors, image you are the witness stand, and your ex-franchisee’s attorney asks you: “What specifically are your company’s trade secrets?” What’s your answer? How about the question: “How do you protect your trade secrets?” At a trial to protect proprietary information and systems, a franchisor must prove that the information is a trade secret; and, the franchisor has taken steps to actively protect them.  

Franchising relies heavily on the protection of trade secrets. In fact, trade secrets and intellectual property make up the bulk of what a franchisor licenses to its franchisees. A well-crafted franchise agreement is only a start in protecting trade secrets. However, the best franchise agreement in the world cannot protect a franchisor’s trade secrets unless the franchisor is proactive in protecting them.    

 Generally speaking, a trade secret is confidential information that derives independent economic value from not being generally known and in which the owner takes reasonable steps to ensure its secrecy.

Let’s unpack that.   

1.        Identification of Trade Secrets. Franchisors must identify what the trade secrets are with reasonable particularly. Just saying “everything in our operations manual” isn’t enough.  Trade Secrets are what gives you a competitive edge over your competitors. They are something your competitors do not use and do not know. In the franchise arena, trade secrets can be made up of such items as recipes, financial information, pricing information, salary compensation, franchise evaluations, marketing strategies, sales methods, sales forecasts, customer preferences, business format, business plans, operations manual, pricing techniques, proprietary software, distribution techniques and sometimes, customer lists. However, this is not a definitive list. Franchisors should closely examine what makes its franchise different; what gives the franchise a competitive edge.

 2.        Conversely, identification of what is not your Trade Secret. What is it that you are doing that is already used by competitors? Most front of the house activities are “in the public domain”. Why? Because the public can see them. If the public can see them then they are not a trade secret. Letting customers pour their own yogurt into a cup isn’t a trade secret. However, the recipe for the yogurt is. 

3.        Investment in each Trade Secret. How much work have you invested in cultivating your trade secrets? Trade secrets that involve elbow work are more likely to be seen as a trade secret. A customer list isn’t a trade secret if it was derived from a phone book. However, a unique system of developing leads that cannot be easily recreated is a trade secret. What things in your franchise system are not know to the public and are a product of your own development? Take the time to write down the development work in your trade secrets.

3.        Protection of each Trade Secret. Franchisors must actively protect their trade secrets from becoming public. Furthermore, they need to ensure that their franchisees and their employees are actively protecting the trade secrets. If employees or franchisee employees are permitted access to the operations manual, without confidentiality agreements; then, a court may find that the franchisor did not actively protect its trade secrets.   You must insist that your franchisees comply with the protection of your trade secrets. This often involves ensuring that franchisees secure the necessary confidentiality and non-competition agreements from their employees. Make this a priority. Make it routine.

 4.        The Economic Value of each Trade Secret. The franchisor must gain economic value or importance from the trade secret. If your franchisee was an electrician for 10 years prior to joining your franchise, which provides electrician services, then you didn’t train the franchisee as an electrician. You don’t have a legitimate business interest in that area. You may have, however, a developed system of management, customer service and the like that you taught the electrician. So while you might not stop him from continuing in his trade, you can protect your methods of operation from being used. 

 Protecting Your Trade Secrets

 Make protecting trade secrets a top priority and a mandatory regime.

            1.        Write down everything that make up your trade secrets. You must identify each trade secret in order to protect it. Consider, is this something unique to my system, or, is it something that my competitors know and do? Identifying each of your trade secrets is a step often ignored by franchisors.

            2.        Along with that, identify the development processes of each trade secret. What went into development in time, costs and manpower?

            3.        Develop a systematic plan for safeguarding each of your trade secrets. This plan should include comprehensive checklists. Assign plan compliance to one employee or one department. Adequate trade secret protection cannot happen if HR is responsible for this element, legal for that element, and, information technology for another. 

            4.       Use well-crafted non-competition and confidentiality agreements. Then, make sure your franchisees comply with the requirements in your franchise agreement to have employees sign them. Make routine requests of all franchisees for their employee executed documents. During quality assessment visits, note which employees have access to proprietary information but do not have the required restrictions. 

            4.        Education your employees and franchisees on what constitutes a trade secret, the required protection for each trade secrets and why it’s important. Give them a checklist of what they are responsible for completing and then direct them to forward it to your above compliance department. Incorporate into your quality control visits trade secret compliance. Franchisees should be trained in the importance of limiting access to the operation manual. Protecting the brand means protecting their investment, too. Trainers should be instructed on what your trade secrets are, and, told not to train either your employees or franchisee employees in trade secret matters without first examining the restrictive agreements.  

           5.        Communicate that a trade secret must be kept confidential. The easiest way is to mark trade secret correspondence as “confidential.”  

            Franchisors must actively identify and protect their trade secrets. Otherwise, a franchisor can lose trade secret status. 

 Debra Hill is a partner in the Franchise Practice Group at FisherBroyles, LLP. She may be reached at 904-612-3780 or debra.hill@fisherbroyles.com.

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