franchising aspects Aug, 20 2010

Watch Your Trade Secrets

In franchising, trade secrets are an indispensable part of Intellectual Property Rights. These are generally referred to as secret information that needs to be kept undisclosed for the success of the franchise. Explore below to know more about trade secre

By Abha Garyali
Sub Editor
Watch Your Trade Secrets

Franchise business is impossible without Intellectual Property Rights, as they are inborn to a franchise. These Intellectual Property Rights constitute trademarks, designs, patents, copyright and trade secret. Trade secrets imply confidential information with a commercial value by virtue of being kept secret.

Violation of Trade Secrets

Any information or formula related to finance, technology, marketing, engineering, distribution, documents, business formats, plans, operation manuals, and pricing techniques needs to be protected against trade secret violators for the success and efficiency of the franchise business. To understand it in a better manner, let us take an example. An ex-franchisee violated the trade secret law by using his ex franchisor’s carefully guarded customer lists, and used the specially designed computer software. Such act is extremely dangerous for any business. Let us find out the reasons for increasing violation of trade secrets.

Reasons for Violation of Trade Secrets

During the past few years, there has been a continuous increase of trade secret violations especially in case of franchising. The reasons responsible for this are:

Transfer of information to franchisees: The franchisor has to transfer all the relevant information to the franchisee in franchise businesses. Disclosure of detail information can lead to violation.

Carelessness of franchisor: The careless attitude of the franchisor may lead to the copying of products and methods of doing business; employees or franchisees can use the information for his own venture or can supply it to the competitors.

Technological advances: The swiftness and effortlessness with which secrets can be moved has made business information more susceptible to loss.

Employees’ mobility and shifting allegiance: Continuous and rapid shifting of employees from one company to other has also led to the transfer of secret information.

Solution Ahead

For the protection and success of any franchise business and to protect against the transfer of any trade secret, franchisors need to take two essential steps: 

  • Identify possible trade secrets by trade secret audit
  • Take steps to guard them

Identify Trade Secrets

It is advisable to prepare a list of information that is required to be kept secret based on technical and scientific information like composition, data, and design of the product. In case of financial, law and human resources information, things like salary, compensation policy, etc and commercial information like marketing strategy, consumer preferences, sales strategy etc. It is also required to note the date of creation, place of storage/use and other key information.

Safeguarding Franchise Secrets

A franchisor can easily lose his uniqueness if the secrets of his trade are disclosed to his customers or competitors. It is mainly the owners’ responsibility to protect such secrets from being disclosed by his franchisees or their employees. Here are a few recommended ways for maintaining the confidentiality of the franchise secrets to get the best out of a franchise opportunity:

  • Include clause in franchise agreement: As mentioned in the beginning most of the franchisors do not consider it important to add the clause of protecting the trade secrets in the agreement. Franchisors should essentially inform the franchisees about the various secrets and their secrecy.
  • Warn the franchisees: Emphasis should be laid on the secrecy of all the USP’s of the business. Franchisor from the beginning should alert franchisees about the repercussions they would face if they reveal the trade secrets to any third party.
  • Maintaining other franchisor’s trade secrets: It is often seen that franchisees make a shift from one business to another. It is the franchisors duty not to extract any information regarding his prior business and its secrets. Franchisors should never let franchisees disclose or use any secrets of former employers in his present franchise.
  • Create awareness among franchisee: Franchisors need to make the franchisees realise the importance of maintaining secrecy in certain business aspects. Franchisees should understand that the success of the business would ultimately lead to his prosperity as well.
  • Make trade secrets inaccessible: All the employees of the franchisees need not be made aware of the trade secrets. Employees who have to work in that section should have limited access and they should also be prohibited to discuss everything openly.
  • Hire trust worthy and efficient employees: The franchisor should guide the franchisee in selecting his employees also. Moreover, a bond of at least a year or two should be signed with employees chosen for important positions.

In a few cases, it is possible that a franchisee might leave the franchise due to some reason. Therefore, it is important to add a clause in the agreement regarding the time duration for a franchisee to own the franchise outlet.

To conclude, it can be said the franchisor should under all circumstances grow and maintain his business. Trade secrets are an important aspect of the success of the business and need to be kept undisclosed under all circumstances for attaining success.

Related: Pilot Franchise: Stepping Stone To Success

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