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29 September 2015
Passing on know-how is key to any franchising agreement. Franchise systems work based on the handover of know-how – particularly in the form of a franchise handbook or training sessions – from the franchisor to franchisees, who then use it to implement the franchise concept.
The term 'know-how' is widely understood to be a franchisor's practical knowledge which is not protected by IP rights and which has commercial value because it is secret, significant, specific and based on experience. Know-how in franchise law covers both technical and business know-how required for franchise operation in accordance with the prescribed franchise concept.
Special know-how and the maintenance of the reputation and uniformity of the franchise system are the condition and basis for certain antitrust law privileges of franchise agreements (eg, prohibition on competition for five years).
To protect know-how, the franchisor can impose comprehensive contractual confidentiality obligations on the franchisee, even after the franchise agreement has ended. In addition, restrictions on post-contractual use of know-how follow from Section 90 of the Commercial Code, which can usually be applied analogously to franchise agreements. According to Section 90V of the Commercial Code, a franchisee must not exploit or pass on to others any business or operational secrets that are entrusted to or become known to him or her, even after the agreement has ended, if it conflicts with the professional understanding of a proper businessperson. However, the confidentiality obligation does not apply if the know-how disclosed is no longer secret because it has become generally known or is easily accessible.
If the franchisee breaches the confidentiality obligation, the franchisor can claim damages under Section 280(1) of the Civil Code. The franchise agreement often includes a contractual penalty undertaking for franchisees in the event of breach of the confidentiality obligation. Breach of the confidentiality agreement may also violate competition law and be qualified as the criminal betrayal of secrets, according to Sections 3 and 17 of the Act Against Unfair Competition. Finally, the franchisor may have a claim for damages in tort under Section 823(1) of the Civil Code because of intervention in the established business of the franchisor, or under Section 823(2) of the Civil Code together with Section 17 of the Act Against Unfair Competition. In addition, breach of the confidentiality obligation is good cause for termination of the franchise agreement without notice.
Although a number of protective mechanisms are available, the protection of know-how is difficult in practice. First, the extent and limits of the franchisor's protected know-how are often not clearly defined. Second, breach of the confidentiality obligation is often difficult to prove, particularly where the franchisee continues to operate a business with a similar concept after the franchise agreement has ended (which can be prohibited for up to one year according to cartel law, subject to payment of compensation) and passes on acquired know-how to third parties.
According to the draft EU Directive on the Protection of Confidential Know-How and Confidential Business Information, information which is secret, is of commercial value and has been subject to reasonable steps to keep it secret constitutes know-how that is eligible for protection. In particular, increased requirements on know-how protection are likely to arise from the requirement of reasonable steps to keep it secret. Both the subjective intention of the franchisor to maintain secrecy and objective compliance with reasonable measures to maintain secrecy will be decisive.
The measures which must be taken to maintain secrecy must be clarified judicially. The circumstances of the particular case will be decisive for whether a measure can be regarded as reasonable to maintain secrecy. It is anticipated that both contractual protection measures and physical restrictions regarding access and precautions will have to be considered.
Franchisors should be aware that improvements to know-how protection are proposed for elements of licensed know-how that corresponds to the definition of 'know-how' in the draft directive. Franchisors must consider what know-how is – particularly know-how that needs protection (eg, special recipes for certain contract products in system restaurants) – and subject it to specific secrecy measures. For this purpose, both franchisees and their employees should be made subject to confidentiality agreements with criminal penalties. In addition, real limitations on access should be established which can be graded in accordance with the requisite level of protection. Encoded transmission of particularly relevant know-how may be considered so that only authorised access to know-how that is worthy of protection is possible. The retention, duplication and deletion of relevant documents and other material should be clearly regulated. Methods of know-how protection should be expressly dealt with in franchisee training in order to create awareness throughout the entire franchise system.
The draft directive requires franchisors to identify know-how which needs particular protection and to check whether it is subject to reasonable measures to keep it secret within the franchise system. Depending on the outcome of the revision, the secrecy measures may have to be extended and improved to safeguard know-how protection.
For further information on this topic please contact Karsten Metzlaff at Noerr LLP's Berlin office by telephone (+49 30 20 94 20 00) or email (firstname.lastname@example.org). Alternatively, contact Karl Rauser at Noerr's Munich office by telephone (+49 89 28 62 80) or email (email@example.com).The Noerr LLP website can be accessed at www.noerr.com.
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