The EU Trade Secrets Directive (2016/244/EU) seeks to harmonise the protection of trade secrets in all EU member states.
To date, the directive has been implemented in several EU member states, including the United Kingdom, Germany, France, Belgium, Italy, Spain and the Netherlands.
This article comments on what this means for franchisors, or indeed any party, that engages third parties to sell their products and services.
A 'trade secret' is defined as any information which:
- is secret, in the sense that it is not generally known among, or readily accessible to, persons within the circles that normally deal with the kind of information in question;
- has commercial value because it is secret; and
- has been subject to reasonable steps under the circumstances, by the person lawfully in control of the information to keep it secret.
This is a reasonably broad definition. Although there are some areas of ambiguity (eg, how much must information be worth to be recognised as having commercial value), this definition is likely to broaden the protection of confidential information – particularly across jurisdictions that previously had limited protections. The directive is also a minimal rule and allows for countries to legislate beyond its provisions.
In general, the implementation of the directive has been positive for franchisors, as the protection of trade secrets and confidential information is key to the success of a franchise system. The level of impact varies from country to country, depending on what previous protections were in place. Although the directive replaces no existing local laws, and various jurisdictions have implemented the directive in different ways, there are some consistencies. The primary example of this is the definition of a 'trade secret'. As discussed above, despite some ambiguity, the definition generally makes it easier to protect trade secrets; however, a key element of the definition is that franchisors will need to demonstrate that they have taken reasonable steps in order to rely on the statutory protection. Therefore, it is prudent for franchisors to consider taking the following steps:
- Internal procedures – consider implementing procedures for separating and securing trade secrets (this could be done through an internal database)and creating an internal policy.
- IT security – install appropriate electronic security measures, such as firewalls, secure passwords and encryption.
- Franchise agreements – review terms and consider revisions in line with the new legislation. As best practice, it is advisable to limit disclosure of confidential information to the franchisee's staff to the extent strictly necessary for the operation of the franchised business and require those key staff to enter into a direct undertaking with the franchisor. For other employees who will encounter confidential information, it is important to place an express obligation on the franchisee to ensure that their employment contracts contain robust confidentiality clauses and that the franchisee accepts liability for any unauthorised use by their employees.
- Employment contracts – review contracts to ensure that confidentiality provisions are up to date, clear and workable.
- Training – provide relevant training for employees and franchisees on the protection of confidential information.
- Disclosure – ensure that disclosure of confidential information is staggered throughout the negotiation process and that it is highlighted adequately as being confidential.
- Audit – build into any existing audit process an audit of a franchisee's security measures, training programmes and procedures for ensuring that confidential information is safe.
- Non-disclosure agreements – ensure that all non-disclosure agreements are effectively drafted (and not too broad) and encompass discussions both before the contract is entered into and post-termination.
Franchisors should continue to take appropriate steps to protect their confidential information. It is important for franchisors to keep evidence of any unauthorised access or use of trade secrets and to act swiftly should this arise (in the United Kingdom this is particularly important should the franchisor wish to take advantage of an injunction).
While the directive provides an additional layer of protection for trade secrets, the statutory definition – and additional provisions and remedies – do not dilute the importance of contractual terms and protections. Nothing in the directive undermines or overrules commercial agreements. Although franchisors may be able to rely on the statutory definition of 'trade secret', they should nonetheless continue to ensure that their confidential information is safeguarded contractually.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.