Know-how in a franchise: what you are paying for

Franchise buyers are often offered not just a brand, but a ‘unique business system’. Behind that phrase may lie proven recipes and production processes — or a collection of publicly available tips. When considering a franchise in Russia, it is important to distinguish useful operating materials from legally protected know-how. Before paying, establish exactly what you will receive, why it is valuable and how you will be allowed to use it.

1. Understand what the law recognises as know-how

Russia has no standalone franchising law, but commercial concession agreements — the legal framework used for franchising — are specifically governed by Chapter 54 of the Russian Civil Code. Such an agreement grants the right to use a package of exclusive rights, which must include rights to a trade mark or service mark. Know-how may form part of that package, but it cannot replace the mandatory right to use the mark.

The rules on production secrets, or know-how, are set out in Chapter 75 of the Russian Civil Code. Under Article 1465, know-how is information of a specified nature that has actual or potential commercial value because it is unknown to third parties. Third parties must not have free, lawful access to it, and its holder must take reasonable measures to maintain confidentiality.

Calling a file ‘Secret Technology’ therefore proves nothing in itself. A publicly available guide to registering a business does not become know-how simply because it is placed in a restricted-access folder. By contrast, a collection of non-public technical parameters or production methods may meet the statutory criteria.

Material can still be useful even if it does not qualify as know-how. An operating manual may save time, and its text may be protected by copyright. But what you are buying and the legal protection it enjoys should be described accurately, without conflating different concepts.

2. Ask for a description without disclosure of the secret itself

Russia has no general requirement for a pre-contractual franchise disclosure document containing a statutory list of information. Buyers therefore need to formulate their own requests to check what the know-how package includes. The rights holder’s duty to provide the necessary documentation and information under Article 1031 of the Russian Civil Code does not replace this preliminary due diligence.

The seller does not have to disclose a secret recipe to every prospective partner. For an initial assessment, a list of materials describing their purpose, scope of application and delivery format should be sufficient.

For each item, ask the seller to specify:

• which particular operation or task it helps you perform;
• how it differs from publicly available guidance;
• the format in which it will be supplied: a document, spreadsheet, process specification or database;
• what equipment and expertise are needed to use it;
• what restrictions apply to its use and copying.

For example, rather than a promise to ‘share our kitchen secrets’, you need a list of recipe and process specifications, processing parameters and quality control procedures. Exact values can remain confidential until an agreed stage of the transaction. The structure of the list alone should help you judge whether you are being sold a repeatable process or merely a broad description of a concept.

3. Check its value and lawful origin

Assess the usefulness of the know-how in relation to your planned outlet. A process that works only with equipment you cannot obtain may not deliver the expected advantage. Ask which materials have been used in practice and whether you can see the process demonstrated without receiving confidential information.

Ask the seller to explain which results depend on the process itself and which depend on staff experience, raw material quality or operating volumes. A demonstration of one successful operation does not establish that the entire model can be replicated. It may help to involve a specialist in the relevant production process or another independent expert, having first agreed lawful access to confidential information.

Check the origin of the materials separately. If employees or contractors created them, establish the basis on which the franchisor is entitled to grant the relevant rights. Know-how is not subject to state registration, so there will be no certificate equivalent to a trade mark registration certificate.

Also ask the seller to describe the measures taken to maintain secrecy: access restrictions, employee and contractor obligations, and records of documents supplied. The absence of a formal trade secret regime does not, in itself, rule out legal protection for know-how, but reasonable confidentiality measures are essential. If the seller has freely published information it claims is secret, its legal status needs separate assessment.

4. Specify the package and transfer procedure in the agreement

A schedule to the agreement should contain a list of clearly identifiable items, rather than a phrase such as ‘all necessary knowledge’. For electronic materials, specify file names, versions or revision dates. Both the schedule itself and any documents containing secrets should be supplied in accordance with the agreed access restrictions.

Set out delivery deadlines, the method of delivery, authorised users and the procedure for checking that the package is complete. Separately, establish whether you may make working copies and give employees the extracts they need to perform their duties. Otherwise, a blanket ban on copying could obstruct the outlet’s day-to-day operations.

The handover and acceptance record should confirm that the listed materials have actually been received. Do not sign a statement in advance declaring that you have received the entire package and have no complaints. Agree a period for checking the files, a procedure for reporting deficiencies and a deadline for remedying them. Whether the process can be put into practice should be assessed against agreed criteria, not promised profits.

Under Article 1028 of the Russian Civil Code, a commercial concession agreement must be in writing, and the grant of the right to use the package of exclusive rights must be registered with Rospatent, Russia’s intellectual property office. However, that registration does not certify the value or secrecy of the know-how supplied.

Practical takeaway: before buying, map out ‘item — task — evidence of value — terms of use — acceptance procedure’. If the seller cannot describe what will be supplied even without revealing the secret, you cannot yet assess whether the know-how fee is justified.