Non-Disclosure Agreements

Non-Disclosure covenants and agreements are an essential element of all franchise systems. Non-disclosure covenants are contained in most, if not all, franchise agreements, and most, if not all franchise systems require the owners and employees of the franchisee to execute separate non-disclosure agreements. Many franchise systems provide their franchisees with a form to use for this purpose.

However, in my experience, many franchisors do not have a system or procedure to track or audit the franchisee's compliance with the non-disclosure obligations and the obligation to have each owner and employee execute a separate non-disclosure agreement. I would argue that making the form available to the franchisee, and including a section in the operations manual on hiring practices is insufficient and could result in a material adverse consequences to the franchisor. The franchisor should have a system to require the franchisee to deliver to the franchisor a copy of each non-disclosure agreement signed by each employee of the franchisee. In many cases, the form made available by the franchisor includes a provision that the franchisor is a third party beneficiary of the non-disclosure agreement with the independent right to enforce its terms. If a franchisee fails to require its employees to execute non-disclosure agreements, the franchisor may be without a remedy to prevent the unauthorized use or disclosure of confidential and proprietary information belonging to the franchisor.

Furthermore, the failure of the franchisor to adequately protect its confidential and proprietary information may result in such information losing its status as a "trade secret" thereby seriously eroding one of the franchisor's most valuable assets - its intellectual property rights. Most state trade secrets protection laws require the owner of a trade secret to take "reasonable steps" to prevent the unauthorized access to and disclosure of trade secrets. The lack of adequate systems and safeguards may compromise the franchisor's rights with respect to its proprietary information and trade secrets.

In the non-franchise context, non-disclosure covenants and agreements are also very important. I received a phone call this week from a (non-franchise) client that has been in business for over 30 years asking me for a form of employee non-disclosure agreement. Now, how could a company be in business for over 30 years and not have a standard form of non-disclosure agreement and require all of its employees to sign the non-disclosure agreement as part of the hiring process? This is a very successful company, but this is a sloppy business practice. All companies, large and small, franchised and independent, should have a standard form of non-disclosure agreement to be signed by each employee as part of the hiring process. Whether or not the form includes some sort of non-solicitation provision, non-competition covenants, or invention or patent assignments will vary with the nature of the business. But not having a system in place to monitor the execution of non-disclosure agreements is not acceptable.

Do you have a good form of employee non-disclosure agreement? Do you have a system to ensure it is timely and properly executed? Do you maintain a file of all non-disclosure agreements? If you are a franchisor, do you audit the franchisee's business to confirm that they maintain safeguards to protect confidential information (i.e. password protected files on computers) and that they have all of their employees sign non-disclosure agreements?

Later posts will address this issue in more detail. Stay tuned!