Know-how franchise formula now also legally protected

Know-how is one of the most essential parts of a franchise formula. This often includes specifically developed working methods or, for example, secret recipes. It is therefore very important to franchisors to properly protect this information in order to prevent third parties from making off with their concept. The recently entered into force Trade Secrets Protection Act can help with this.

Most franchise agreements already contain various confidentiality and non-compete clauses. Although its enforceability is regularly discussed in case law, that seems to be a thing of the past if the recently published draft bill ‘Franchise Act’ ever enters into force. This includes that a non-compete clause in the franchise agreement is (only) valid if:

“a. it does not exceed one year after the end of the franchise agreement, and

 b. the geographic scope is not wider than the area within which the franchisee operates the franchise formula under the     franchise agreement.”

With the codification of this criterion inspired by competition law, it seems that infringement of a non-compete clause will become less easy. After all, unlike before, a judge will have to ignore a law instead of just a provision in an agreement.

However, it is not that far yet. The question is whether the draft of the law will enter into force in its current form. However, franchisors can now also invoke the Trade Secrets Protection Act in this context. This law entered into force on October 23, 2018 and offers the franchisor legal tools to act against the unlawful use of know-how, or at least of a trade secret as referred to in this law.

Pursuant to this Act, there is a trade secret if the following conditions are met:

1. it must concern information that is not generally known;
2. the information must have commercial value, and
3. measures must already have been taken to keep the information secret (for example, a confidentiality clause in an agreement).

A franchisor’s know-how will soon meet the above condition, making an appeal to the law possible. After all, the know-how is often secret, has commercial value and is almost always already protected by various confidentiality and non-competition clauses.

Pursuant to the law, a franchisor can file various claims in both proceedings on the merits and summary proceedings. Consider, for example, a cessation of the infringing acts, but also the destruction of the products, the seizure of evidence and the claiming of compensation are possible under this law.

Unlike claims under the franchise agreement, an agreement with the trade secret infringer is not necessary for enforcement. This makes it easier for a franchisor to take action against, for example, fraudulent constructions in which the former franchisee uses the know-how of the franchisor to set up a competitive branch or even a formula. In that case, of course, a franchisor will also have to prove that his know-how is being used by that third party.

Should a franchisor succeed in demonstrating bad faith in a legal proceeding, the franchisor is entitled to full litigation costs, which until now have been reserved exclusively for intellectual property proceedings.

In short, a franchisor can now also act on legal grounds against the unlawful use of its know-how by former franchisees and third parties. In addition, it may become more difficult in the future for franchisees to have a post-contractual non-compete clause declared inoperative by a court. After all, if the Franchise Act in its current form can withstand the test of criticism, then such a clause, provided it meets the conditions of the law, will become virtually unassailable.

mr. RCWL Albers – franchise lawyer Ludwig & Van Dam Advocaten, franchise legal advice. Do you want to respond?

Go to albers@ludwigvandam.nl