Trade Secrets
Every franchise claims to have trade secrets. Every franchisee believes they are gaining access to trade secrets. Whether you are a franchisor or a franchisee, it is important to understand just what a trade secret is and what it is not.
The Legal Definition Of Trade Secrets.
Most states have adopted a version of the Uniform Trade Secrets Act. The Washington version is typical:
"Trade secret" means information, including a formula, pattern, compilation, program, device, method, technique, or process that:
(a) Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and
(b) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.
Many states provide that their Trade Secrets Act displaces any other law pertaining to civil liability for misappropriation of a trade secret.
What Does The Statute Mean In Practice?
Courts often interpret part a of the definition as requiring some uniqueness to the information. A compilation of otherwise publicly available information may not meet the standard. If it is unique, not available by proper means, and people who would naturally be interested do not know about it, then it meets the first element. Part b of the definition adds the requirement that the claimed trade secret be kept secret, employing reasonable means. If the claimed trade secret is open to anyone to see (think the layout of a retail store or a particular software whose name is printed on every receipt), it is not a trade secret. At the other extreme is the cola company that reportedly has its recipe locked in a safe and no living person knows the entire recipe. Generally, when a recipe or other secret item is made available to customers to view (and analyze), it is not a trade secret. If a claimed secret is told to every new employee and none of the employees has been required to sign a confidentiality and trade secrets agreement, it probably is not a trade secret.
The Value Of Trade Secrets.
Trade secrets add value to a business if they are truly secrets and if they are in demand by customers and prospective customers. Having a secret process or device might help its owner to earn a much higher profit margin than their competitors. In the right scenario, the owner of the trade secret might be able to reduce their costs while simultaneously increasing their prices to customers, because of the high demand. Amazon’s algorithm that tells them exactly when I will run out of toilet paper is a great example. They would never share the algorithm with me, their employees and vendors are all prohibited from sharing it, and I am willing to pay a bit above market because of the convenience of being reminded.
Protecting Trade Secrets.
Franchisors promise access to trade secrets. Franchisees desire access to trade secrets, believing they will give them a competitive advantage. Franchise agreements generally prohibit the franchisee from publishing, sharing, or otherwise monetizing the franchisor’s claimed trade secrets. However, it may not be that simple. A recitation in a contract that there are trade secrets or that a thing is a trade secret does not make it a trade secret. A franchisee may discover that the claimed trade secret is common knowledge in the industry, shared with customers, vendors, and published in books and magazines. That probably is not a trade secret. A franchisee may learn that the claimed secret is not so secret or unique, and that it is widely used in the industry by competitors. It probably is not a trade secret. If it is widely distributed, by the franchisor and others, to vendors, customers, consultants, and others without anyone signing a confidentiality agreement, it probably is not a trade secret.
How Bundy & Fichter PLLC Can Help.
Whether you are a franchisor, considering becoming a franchisor, or just operating an independent business, and you have information or a “thing” that you believe is unique and deserving of trade secret status, you should consult with an experienced lawyer before sharing the potential secret information, process, or device with anyone for any reason. The lawyers at Bundy & Fichter PLLC understand the law in this area and can help you achieve and maintain maximum protection for your valuable secrets.
Remedies For Franchisees.
If you are a franchisee and were told you would have access to trade secrets, you are entitled to receive the promised access. If there truly were no trade secrets, you may have a claim for fraud or misrepresentation or breach of contract against the franchisor. You may have just discovered that the purported trade secret was available to anyone and is widely used in the industry. We had one case where the franchisor claimed its muffin pans were trade secrets. We were able to determine that they were manufactured by a major cooking equipment company that sold them to anyone, for a fraction of what the franchisor charged. Needless to say, the case did not go to trial, and our client was happy with he result. If you are concerned about the lack of trade secrets, which were supposed to give you a competitive advantage, you should consult with experienced franchise counsel. Bundy & Fichter can help you determine whether the items claimed as trade secrets are trade secrets and what remedies you might have available. Please contact us promptly, always keeping in mind that statutes of limitations cut off claims if you wait too long to act.