Franchising and trade secrets: protect your concept’s know-how

When you expand your existing business into a franchise network, you have to share the very know-how that makes it competitive. Yet it is unwise to reveal everything at the first meeting. At the same time, prospective franchisees need enough information to assess the opportunity. The answer is a planned approach to sharing information: identify the know-how that needs protecting, agree how it may be used and make sure practical safeguards work day to day.

1. Distinguish trade secrets from a general description of the concept

Start by listing the know-how your business has that an outsider cannot discover through a customer visit or your website. This might include a service delivery method, an internal costing model, production instructions or a workflow developed through experience. A business name, published price list or general service promise is not usually a trade secret.

Under Finland’s Trade Secrets Act, information must meet certain conditions to qualify for protection. It must not be generally known or readily accessible to people who normally deal with that type of information. It must have commercial value because it is secret, and its lawful holder must have taken reasonable steps to protect it. Simply marking something ‘confidential’ is therefore not enough on its own to establish protection.

In practice, divide your materials into three groups:

• Public information: a general description of the concept, the customer promise and publicly visible services.
• Confidential information for assessment: the financial basis of the franchise arrangement and detailed descriptions of how it operates.
• Restricted operational know-how: precise methods, instructions and other information essential to your competitive advantage.

For each item, record who is responsible for it, who may receive it and at what stage it may be shared. This avoids the founder having to decide afresh in every negotiation what can be sent.

2. Share information in stages without unjustified withholding

Building a franchise network depends on trust, but trust does not mean opening up every file immediately. In an initial discussion, you can explain the customer need, how the concept works and the franchisee’s role without revealing the operational detail.

As discussions progress, agree confidentiality terms before handing over sensitive materials. Then give the candidate a genuine opportunity to assess the arrangement as a whole. Confidentiality should not be used as a reason to conceal material costs, obligations or business risks before the franchise agreement is signed.

You can schedule the disclosure of detailed operational know-how for training and the start of the relationship, provided the candidate has a sufficient understanding of what they are buying before committing. If a particular feature of the method affects the skills or investment required, for example, it cannot reasonably be left as a surprise for later.

Prepare a list of materials and record when each version was provided. Also agree how the candidate may discuss the information with their own solicitor, accountant or finance provider. Put appropriate confidentiality arrangements in place for these recipients rather than preventing access to independent advice altogether.

3. Include terms governing the use of information

A good confidentiality agreement does more than prohibit disclosure. It should define what the information may be used for. During negotiations, the permitted purpose might be assessing the proposed franchise relationship. Once the relationship begins, use should be tied to running the agreed business.

Discuss at least the following points with the person drafting the agreement:

• Which materials and orally disclosed information are covered?
• Who may receive the information, and on what conditions?
• How is information that is public or already lawfully known to the recipient excluded?
• How long does the obligation last, including after negotiations end?
• How must materials be returned or deleted, and what must be retained by law?
• How should a suspected leak be reported and any harm limited?

If you include a contractual penalty, define clearly when it applies and assess whether the term is reasonable. Confidentiality is not the same as a non-compete obligation. Do not try to prohibit all of a franchisee’s subsequent work by labelling the restriction as information protection. Have any separate restrictions on competition reviewed by a specialist.

4. Understand Finland’s legal framework

Finland has no dedicated franchising act, statutory franchise register or pre-contractual disclosure procedure specifically prescribed for franchising. This does not mean that agreements or information sharing can be arranged without legal constraints.

The Trade Secrets Act protects information that meets its requirements against unlawful acquisition, use and disclosure. The validity and fairness of contractual terms are governed in part by the Finnish Contracts Act, under which an unreasonable term may be adjusted. The Competition Act and applicable EU competition rules must also be considered, particularly where information protection is combined with obligations that restrict competition.

The Finnish Franchising Association’s Code of Ethics is a form of self-regulation, not legislation or official approval. It provides a useful starting point for building a responsible franchise relationship, but does not replace a legal assessment of the individual agreement. Nor can a confidentiality agreement override mandatory statutory rights or duties to disclose information or make reports.

5. Make protection part of everyday operations

An agreement offers insufficient protection if all materials sit in an open folder accessed through a shared password. Use individual user accounts, role-based access permissions and controlled document distribution. Remove unnecessary permissions when someone’s role or business relationship changes.

Also make sure your business has the right to share the materials included in the concept. Buying training materials, software or a description of a method from an external supplier does not necessarily give you the right to pass them on to franchisees. Check employee and subcontractor agreements, and the scope of any licences, before sharing.

Instruct franchisees on protecting information within their own businesses too. Staff need adequate instructions to do their jobs, but not every employee needs access to all commercial materials. Also establish a procedure for dealing with a file sent to the wrong address or a lost device.

Practical summary: Before your first discussions with prospective franchisees, put an information classification system, a confidentiality agreement and a sharing plan in place. Protect your competitive advantage with clearly targeted safeguards, while giving prospective network members enough information to make an informed decision.