February 14, 2017
Almost every franchise agreement states that the franchisor has “proprietary”, “confidential” or “trade secret” information. In fact, many franchises are built upon the idea that it is the franchisor’s secret “special sauce” that is the key to franchisees’ success.
Many franchisees, however, discover that after they buy the franchise, there is nothing particularly special about the way that the franchisor does business.
We will consider three types of information here: “proprietary,” “confidential” and “trade secrets.”
What, exactly, is “proprietary” information, and is it special?
The term “proprietary” connotes knowledge, information, or know-how that someone has, but no one else has. Legally, however, the word “proprietary” alone only means that it is “property.” It does not have to be special, it does not have to be secret, nor does it have to be a trade secret. A franchisor may, in the course of selling a franchise, tell you other things that give greater meaning to this term, but, standing alone, it does not mean anything significant. Thus, if a franchisor uses the word “proprietary,” in the course of selling a franchise, you should ask exactly what is proprietary and why. Often, there is nothing special or unique about it at all.
“Confidential” Information
Similarly, the term “confidential” means only that there is a promise between two people not to disclose information to outsiders. Franchisors typically claim that their operations manual is “confidential” and that their methods of operation are “confidential”. As a matter of law, however, information cannot be confidential if it is generally known or easily accessible. This point was illustrated in a recent case involving Little Caesars Pizza. In that case, Little Caesars claimed that its methods for making pizzas were confidential and proprietary. However, the franchisee showed that for decades, thousands of employees in Little Caesars restaurants had been making pizzas using these methods, and that Little Caesars had not obtained confidentiality agreements with them or otherwise taken steps to keep its pizza-making methods secret. Therefore, it was found that they so-called “confidential” information was actually in the public domain. Franchisors also frequently consider information “confidential” that an outside person would not consider unique or valuable – e.g., sales and marketing techniques. If one of the things you are paying for when buying a franchise is “confidential” information that supposedly sets the system apart, you should find out what the “confidential” information covers and how its confidentiality is protected in day-to-day operations, even if you cannot access the information itself prior to purchase.
Trade Secrets
“Trade secrets” fall into a different category. A trade secret, legally defined, is knowledge or know-how that: (a) preforms a specific, useful function; and (b) has been kept secret diligently by the party owning the secret. Both of these factors need to be satisfied in order for information to qualify as a trade secret. A trade secret is different from “proprietary” or “confidential” information in that it actually must be useful, and must actually not be known to the general public. A good example of a trade secret is the combination of 11 herbs and spices used to make Kentucky Fried Chicken. In fact, for years, KFC used two separate spice-mixing companies, one that mixed five of the spices, the other which mixed six, in order to protect the secrecy of the blend.
As a franchisee, you need to understand whether your franchisor in fact has confidential or trade secret information, or whether the franchisor is simply calling it that. If you are considering buying a franchise, this is one of the questions that you need to know. If you have already purchased a franchise and the promised “confidential and proprietary” information is common knowledge, then you may want to consider leaving the franchise or taking other action. Your franchise lawyer should be able to help you in this regard. For help with everything regarding franchise law, contact Garner, Ginsburg & Johnsen today!