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Rights Watch

Protecting trade secrets while franchising a business
Maruf Hasan Tamal
Franchising can be a good model to expand a business of the franchisor by granting license to franchisees. Generally, this gives a franchisee an access to use the knowledge, processes, ‘know-hows’ and trademarks of the franchisor and sell a branded product or service under their goodwill and name. Elaborating the number of franchisees ensures the expansion of geographical reach and business of the franchisor. To avail the license of the franchisor, the franchisees may need to pay initial fees and time bound royalties to the said franchisor.
One of the concerns for individuals who want to franchise their businesses in Bangladesh could be the protection of their trade secrets due to the lack of any concrete safeguarding mechanism. The aversion may stem from the fear of trade secrets getting disclosed by franchisees. In Bangladesh there is no separate law for the protection of either trade secrets or franchising as a whole. The entire sphere of this sector is operated through separate contractual arrangements between the parties. As a result, there is often a regulatory vacuum in the field.
In our country franchise business is a contractual relationship based upon the Contract Act, 1872 between the franchisor and the franchisee. In these contracts, a franchisor can assign their trademark and goodwill using the provisions of chapter 5 of the Trademarks Act, 2009. An inference can be drawn that the main driving force of the franchise would be the agreement, which needs to be comprehensive if certain aspects of intellectual property of the franchisor are to be protected. In practice, it is often seen that the private contracts between franchisors and franchisees do not contain (or often contain poorly drafted) clauses on intellectual properties, e.g., trade secrets. The non-disclosure agreements are often not sufficient to ensure the protection of trade secrets because they provide post-breach remedies failing to ensure breach in the first place.
Singapore’s case laws depict that for information to be protectable as confidential information or a trade secret, it must be ‘at first place’ not be something which is ‘already available to the public at large.’ Drawings, specifications, technical information etc. have been considered a trade secret and confidential information by the Indian courts and the restraints can be put upon these elements. However, the Bangladeshi courts are yet to face any similar legal challenge.
A franchisor’s main negativity may arise from the concern of their trade secrets getting found out. The World Trade Organization (WTO) has propounded on the definitions of trade secrets and ways to protect them. It calls for effective sanctioning against misappropriation of confidential information. This practice can be implemented through an agreement containing effective and detailed non-disclosure clauses. If such was not present already, the clauses should be altered. Efficient lawyers can point out the loopholes in existing contracts and find out avenues for amending the contract. For a brand like KFC it could be their Colonel’s secret spice mix, for Coca-Cola their secret formula of the syrup, for some others it could be the client database that amounts to their trade secret. From these facts it can be inferred that a potential disclosure or leak of trade secrets without the company’s control or consent can lead to the fall of their business.
The business owners are not comfortable with the idea of post-breach court sanctioned remedies since the trade secret is getting out anyway and the remedy from the court takes a long time to be realised. Thus, an alternative way to protect trade secrets is to have an elaborate plan of control which is required to be comprehensively laid down on the contract with the franchisee, if breached creating legal liabilities. The confidential information should be defined (for instance, the recipes of a dish, ingredients of a product etc.), and then clauses of exclusion from access must be provided. It is completely upon the franchisor’s shoulder on how they want to control the information as against the franchisees, which can be done through the well-drafted legal agreements. There are no limitations on the restrictions a franchisor can put to protect their trade secret, which can also entail direct control over franchisee’s outlets. A franchisor may need to protect their customer/client list. This aspect must be included in a contract with a franchisor. This notion must be normalised in contractual clauses, in the context of Bangladesh.
It is imperative that people thinking about stepping into franchising must think about adding these aspects into the contractual clauses. For example, the framework of a contract for a restaurant business looking to go into franchise business must pay due attention to protect its recipes and its components. For this, the restaurant may choose to control the kitchen of the franchisee’s outlets in the contractual clause. A clause may be put with elaborate directions about how the franchisee will handle the recipe, who are the personnel to have access, and how to process the dry ingredients to a final dish and so on. It is established that the extreme precautionary measures regarding Coca-Cola’s secret formula makes it an example of protection of trade secrets even after having so many franchisees globally, which has resulted in no exact replication of its taste. Apart from protecting recipes, some businesses may need to protect their business model, or the strategy revolving around their services to protect integrity.
To ensure interest of the businesses, it is always a better model to ensure that the trade secret is not jeopardised in the first place rather than avenues for post-breach remedies. For that purpose, the concern of protecting trade secrets must come from the initial stage of drafting the agreements, where a perceptive legal mind has to be applied from the side of the franchisors to fully benefit from the existing laws of Bangladesh.
THE WRITER IS AN INTERN RESEARCHER, A.S. & ASSOCIATES.
The business owners are not comfortable with the idea of post-breach court sanctioned remedies since the trade secret is getting out anyway and the remedy from the court takes a long time to be realised.