Franchisors: Protect Those Trade Secrets

Here’s the scenario: one of your company’s franchisees is served with a subpoena issued by a regulatory authority in their home state. The subpoena, which is very broadly written, requires the franchisee to provide its business records to the state agency. To comply, your franchisee will have to produce confidential information that is owned by you, the franchisor (for example, a portion of your Operations Manual). How should you react?

First, read your franchise agreement. The agreement should have well-defined terms relating to the company’s ownership of information that has been deemed “confidential” and your franchisee’s right to use that information. Most importantly, the agreement should clearly state that your franchisee has no right to disclose confidential information to anyone except for its employees and agents, and require your franchisee to use reasonable efforts to protect the privacy and secrecy of that information.

That being said, simply having well-defined rights in your franchise agreement does not resolve the governmental inquiry issue – your franchisee will probably not be able to resist disclosure simply by relying on the terms in its contract. But, if it’s written correctly, your franchise agreement should at a minimum require your franchisee to alert you of the subpoena and give you the opportunity to respond before your confidential information is disclosed.

Under the Uniform Trade Secrets Act (which the vast majority of states have adopted), protection against misuse is extended only to information that both: (i) derives economic value, from not being generally known or readily ascertainable; and (ii) is the subject of reasonable efforts to maintain its secrecy. Unif. Trade Secrets Act § 1. Doing nothing in the face of a governmental inquiry could be construed as not taking “reasonable efforts” to maintain the secrecy of your information – particularly since the documents that are produced could become a matter of public record.

So what are “reasonable efforts” to keep your information confidential? Broadly speaking, the goal is to be responsive to the governmental authority while at the same time ensuring that your trade secrets do not become public. Keeping that in mind, your counsel should reach out to the franchisee’s attorney and establish a game plan. Depending on local laws and practice, a motion for a protective order or to quash the subpoena may be appropriate.

In any scenario involving your company’s valuable trade secrets, the greatest risk comes from doing nothing.

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