How the Sausage is Made: Confidential Information and Your Franchise

by | Aug 7, 2023 | Blog, For Franchisees

News about classified documents have dominated headlines this year. It reminds me of a key provision in a franchise agreement, specifically pertaining to confidential information.

Franchisees should not reveal their franchisors’ private information. As direct as that may seem, there are many ways in which information can be shared or accessed – intentionally or unwittingly. Let’s establish some definitions and explore how to avoid violating this term of a franchise agreement.

Types of Confidential Information

Every company or franchise has some product or service or offering that makes it unique. The brand wants customers to know of its special product or service – but not how it is created. The details a franchisor or company wishes to keep private may be considered “proprietary,” “trade secrets,” and/or “confidential information.”

These are common terms in business and franchising and they are often used interchangeably on “Shark Tank.” Some baseline definitions can help guide NY franchisees:

Proprietary Information. The word “proprietary” implies one-of-a-kind knowledge, information, or insight. The Securities and Exchange Commission (SEC) defines it as information:

developed, created, or discovered by the Company, or which became known by, or was conveyed to the Company, which has commercial value in the Company’s business.”

According to the SEC, proprietary information includes: 

  • trade secrets
  • domain names
  • ideas
  • techniques
  • inventions (whether patentable or not)
  • and/or any other information of any type relating to designs, configurations, toolings, documentation, and more.

In its definition, the SEC also includes “…the Company’s actual or anticipated business, research or development, or which is received in confidence by or for the Company from any other person.”

Trade secrets can literally be the “special sauce” that makes the company stand out from the competition. This might include recipes, formulas, techniques or frameworks used in production or that make the company or brand particularly successful or recognizable. And since so much in franchising depends on brand recognition, franchisors take their trade secrets very seriously.

For example, if you were a long time Carvel franchisee who leaves the system and opens an ice cream shop under a different name (putting aside whether that would violate any non-competition provisions in your franchise agreement), you are likely prohibited from using Carvel’s recipes for ice cream and your products should look and taste different than what you had been serving in your franchise. If you nonetheless use Carvel’s trade secrets, the franchisor may have claims against you for, inter alia, improper use of its trade secrets as well as breach of the provisions in your franchise agreement relating to confidential information.

Confidential Information. Franchise agreements typically prohibit franchisees from disclosing sensitive or private information to third parties. While this includes trade secrets and other proprietary information, there may be additional details that the franchisor deems “confidential,” such as information relating to operations and the financial performance of the system.

Consulting a NY Franchise lawyer to review these provisions of the franchise agreement can help ensure that you do not inadvertently breach your obligations with respect to the franchisor’s confidential information.

A Note On Public Appearances

Franchise agreements may also address media outreach, with a particular focus on messaging. For example, a franchisor may reserve the right to speak with the media and to respond to requests for comments, particularly if there is a newsworthy event like an accident or even a milestone.  

Franchisees should not be discouraged in this sort of scenario. This can be one of the many benefits of being in a franchise system – in the event of a crisis, you are not alone and the franchisor can provide additional support during stressful situations.

Consult with your NY franchise lawyer to establish how media engagement is addressed in your franchise agreement.

Contact Lusthaus Law

Lusthaus Law has deep experience helping franchisors and franchisees understand and honor franchise agreements. Contact us today for a consultation.


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