Confidentiality and Sharing Information with Advisers Before Joining a Franchise in Japan

When considering a franchise in Japan, you may be asked to sign a non-disclosure agreement before receiving detailed information from the franchisor. Protecting know-how is an important way of maintaining trust across a franchise network. However, signing without understanding the terms could make it difficult to seek legal advice on the contract or discuss borrowing with a lender. Check not only the franchise agreement itself, but also any confidentiality obligations that apply during your initial enquiries.

1. When does confidentiality begin, and what does it cover?

First, establish when your confidentiality obligations begin. Look beyond the clauses in the franchise agreement: check briefing-session application forms, terms accepted when requesting information and any separate non-disclosure agreement. Deciding not to proceed does not automatically release you from confidentiality obligations you have already accepted.

The information covered should be defined clearly, by document name or type of information. Alongside items such as food preparation procedures, operating manuals, purchasing terms and unpublished plans for new outlets, check how information obtained through verbal explanations or site visits will be treated.

A phrase such as ‘all information relating to the franchisor’ makes it difficult to tell whether the restriction includes information already in the public domain or information you have researched yourself. Check whether the draft agreement excludes:

• Information already publicly available when you receive it
• Information that subsequently becomes public through no breach on your part
• Information you lawfully held before receiving it from the franchisor
• Information obtained from an authorised third party without breaching a duty of confidentiality
• Information you develop independently without using the franchisor’s confidential information

Do not assume that all these categories are automatically excluded under the contract. As well as checking the conditions for exclusion, establish whether you need records proving that you already held particular information. For verbal disclosures, suggesting that confidential points be identified in writing afterwards can help prevent misunderstandings.

2. Secure permission to share information with lawyers, tax advisers and lenders

A sound franchise decision requires scrutiny of both the contract and the financial plan. However, a clause prohibiting ‘all disclosure to third parties’ may leave it unclear whether you can consult professional advisers. A lawyer’s or tax adviser’s professional duty of confidentiality is a separate issue from whether your agreement with the franchisor permits you to share documents with them.

Before signing, clarify who may receive information, for what purpose and to what extent. For example, a lawyer may need the draft agreement and explanatory materials, a tax adviser may need financial projections, and a prospective lender may need details of the investment required and payment terms. Do not assume that consultation with co-investors or family members is automatically permitted either.

When agreeing a clause that permits sharing, it is useful to settle the following points:

• Permitted purposes, such as evaluating the franchise, obtaining legal or tax advice, and applying for finance
• The categories of permitted recipients and the minimum information they need
• Whether prior consent is required or notification alone is sufficient
• How recipients must be bound by confidentiality obligations, if required
• The extent of your liability if a recipient leaks information

If consent is needed each time, check how to apply and how long a response is likely to take. Waiting until a lending assessment deadline is approaching could hold up your finance application. Nor does comparing franchise brands entitle you to pass one franchisor’s non-public documents to another. Keep comparison tables for your own assessment, and remove confidential information before showing them to anyone else.

3. Distinguish statutory disclosure from confidentiality obligations

Under Article 11 of Japan’s Small and Medium-sized Retail Business Promotion Act, franchisors falling within the Act’s definition of a ‘specified chain business’ must provide prospective small and medium-sized retail franchisees with a written document containing prescribed information, and explain it, before the contract is signed. This requirement does not apply uniformly to every franchise: its scope depends on the nature of the business and the contractual arrangements.

The main pre-contract disclosure items identified by Japan’s Small and Medium Enterprise Agency include whether franchisees will be subject to confidentiality obligations, as one of their significant obligations. However, knowing that ‘confidentiality obligations apply’ does not reveal how onerous they will be. You need to inspect the actual clauses to establish what information is covered, who may receive it, how long the obligations last and what measures apply in the event of a breach.

Signing a non-disclosure agreement and the franchisor meeting its statutory duties to provide documents and explanations are separate matters. Check that agreeing to confidentiality does not also mean giving up your opportunity to receive the necessary explanations.

The Japan Fair Trade Commission’s guidelines on franchise systems under the Antimonopoly Act also identify conduct that may raise competition-law concerns in franchise recruitment and dealings with franchisees. They cover franchises across various sectors, not just retail and food service, and state that it is desirable to disclose and explain in writing matters important to a prospective franchisee’s decision. This is distinct from the statutory disclosure regime under the Small and Medium-sized Retail Business Promotion Act.

The franchisor and franchisee are legally independent businesses. A broadly worded confidentiality clause is not automatically unlawful. However, if the restrictions are so extensive that they prevent you from obtaining appropriate advice, ask why they are necessary. It is also sensible to ask a lawyer whether the agreement treats consultation with public authorities and legally required submissions separately from ordinary third-party disclosure.

4. Agree how information will be managed if you withdraw or the agreement ends

Confidentiality can remain an issue after you decide not to proceed, or after you stop operating the outlet. Check whether the obligations apply only during the contract, continue for a specified period afterwards, or vary according to the type of information. Some know-how may need long-term protection, so assess the duration in relation to the information covered rather than judging it in isolation.

Requirements to return or delete materials need to address more than paper documents. Check email attachments, cloud storage, copies on devices and copies supplied to advisers. Even if you promise to ‘delete everything immediately’, backups or advisers’ retention policies may make that difficult to carry out.

Take particular care not to delete records needed to deal with a dispute or meet statutory retention requirements. A practical approach is to agree exceptions in advance that allow necessary records to be retained, keep them subject to confidentiality obligations and limit who can access them. Avoid retaining documents on your own initiative where no exception has been agreed.

Check whether the breach provisions include contractual penalties, restrictions on use or recovery of materials, as well as damages. Plan for accidental disclosures, such as misdirected emails or incorrect sharing settings, not just deliberate disclosure. Agreeing whom to contact and what immediate steps to take if a leak is suspected can be helpful. For information you give the franchisor about your own assets or business plans, ask how it will be used and with whom it will be shared. Where necessary, discuss mutual confidentiality arrangements.

Practical takeaway: Before signing, prepare a one-page summary of ‘what is confidential’, ‘whom you may consult’ and ‘what happens after the agreement ends’. Make sure you are allowed to share what advisers need to assess the opportunity, and that workable information-management arrangements are in place, before receiving detailed materials and moving towards a franchise decision.