UK franchising: Are your secrets safe?

UK franchising: Are your secrets safe?

How can you prevent unscrupulous rivals from stealing your UK brand’s know-how and more? 

Franchisors often recognise trade secrets and confidential know-how as key assets of their business. Not least, the operating processes, methods and procedures which form the franchisor’s business system are vital to the success of the franchise.

Other confidential information such as: secret recipes or formulae; compilations of data; or details of a supplier network, also help certain franchisors to keep competition at bay.

The law of confidential information is often the only or main form of protection for such commercially sensitive materials and information, which cannot generally be protected in the UK by intellectual property rights such as patents or copyright (although new UK laws may recognise trade secrets as a potential proprietary right).

Maintaining secrecy can be crucial to the protection of trade secrets and know how. As soon as they are made public, whether with or without the franchisor’s permission, they can be used by competitors and their value is lost.

Keeping your trade secrets and confidential know-how close to your chest is the most foolproof way to protect the information. However, it is generally accepted that you will need to include in your operations manual sufficient details of your business system (and other trade secrets and know how) in order for your franchisees to operate effectively.

This somewhat paradoxical situation does open any franchisor up to risk, including theft, disclosure or unauthorised use of its valuable system and trade secrets, which could ultimately fall into the hands of competitors.

Steps You Can Take

There are some practical steps that you can take to protect your trade secrets and confidential information from theft or unauthorised use:

1. Make sure a robust confidentiality agreement is in place before you share any confidential information during initial discussions.

2. Only share with your franchisees any trade secrets or confidential know how to the extent this is strictly necessary for them to operate the franchised business. The more you keep secret, the lower the risk of any unauthorised use or disclosure.

3. Ensure your franchise agreement includes provisions that: limit use of the information by the franchisee to the extent strictly necessary for the operation of the franchised business, (which will help prevent your franchisee from using any confidential information to set up in competition with you); limit disclosure of confidential information, only to staff of the franchisee to the extent strictly necessary for the operation of the franchised business; put an obligation on the franchisee to place its staff and sub-contractors under the same strict obligations of confidentiality as set out in the franchise agreement; oblige your franchisee to accept liability (whether under an indemnity or otherwise) for any disclosure or misuse of your confidential information by its staff.

4. Ensure your franchisees receive instruction and training with regard to the protection of your trade secrets and confidential know how. Place them under an obligation to apply appropriate security measures, and train their own employees appropriately.

5. Audit your franchisees from time to time to confirm they have in place the necessary agreements with their staff, and apply appropriate technology and procedures to keep your confidential information safe.

If you do suffer a breach of confidence or misuse of your trade secrets or confidential know-how, there are certain steps that you can take.

1. Action for breach of contract

Provided your franchise agreement or confidentiality agreement contains appropriate provisions to prevent disclosure or misuse of the information, you may be able to claim under the agreement for breach and recover your losses under an indemnity (if applicable) or damages claim.

You will only be able to take action against your franchisee or any guarantor, who may not be the actual wrongdoer. However, provided your agreement requires your franchisee to accept liability for the actions of its staff, you may still be able to take necessary action.

2. Common law action for breach of confidence

Even if there is no confidentiality agreement in place, you may be able to take action for breach of confidence against any recipient of your trade secrets or confidential information (such as your franchisee, or one of its staff) who intends to misuse or disclose it.

You may also be able to take action against any third party who subsequently receives that information and uses or intends to use it for their own purpose.

The underlying principle relating to breach of confidence is that a person who has received information in confidence cannot take unfair advantage of it, and must not make use of it to the detriment of the owner of the information without obtaining his consent.

An action for breach of confidence is based ultimately on conscience of the recipient, who must have agreed, or must know, that the information is confidential.

3. Action under Trade Secrets (Enforcement etc.) Regulations 2018

The UK recently introduced new laws to protect trade secrets as a proprietary right. Under the new regulation, a trade secret must: be secret in the sense it is not generally known; have commercial value because it is a secret; and have been subject to reasonable steps under the circumstances to keep it secret. 

Action under the Trade Secrets (Enforcement etc.) Regulations can be taken alongside any action for breach of confidence.

Various remedies are available where it is proven that trade secrets have been misappropriated, including: injunctive action; withdrawal from the market of any infringing articles; and damages.

4. Injunction

It is generally accepted that once trade secrets or confidential information are made public, it is difficult to contain or repair the damage. However, if you become aware of a franchisee’s intention to misuse or disclose confidential information, you may be able to prevent this through an injunction. Similarly, you may be able to contain the damage by preventing any further disclosure or misuse.

If you suffer a breach of confidence with regard to your trade secrets or confidential know how, it will be important to act very quickly to prevent further damage to your business or reputation.

Nichola Jenkins is a Legal Director in Shoosmiths’ business advisory division. She is a specialist intellectual property lawyer and works with clients on a wide range of matters concerning the protection, enforcement and exploitation of intellectual property.

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