The procedures for terminating a franchise relationship are part of the franchise agreement, including the guidelines for franchisees who plan to exit the franchise business. Some agreements also include a confidentiality clause. This nondisclosure clause prevents current and former businesses from disclosing specific information regarding the franchisor’s protected intellectual property.
The franchise agreement establishes the franchisor’s rules and guidelines for a franchise owner’s exit from the business. A franchisee is generally required to provide notice within a specific time frame before terminating the contract and pay a franchise exit fee. If a franchise owner leaves the franchise before the end of the contract term, payment of liquidated damages may be required.
The franchisee has the right to utilize the franchisor’s business model as well as market products and services developed by the franchisor. The franchisor retains the intellectual property rights relating to the operations of all of the franchise businesses. Trademarks, trade secrets, patents and designs are included in the franchisor’s intellectual property rights. Any property that is developed by the franchisor or by the franchisee during the franchise relationship is considered part of the intellectual property rights.
The franchisor may reserve the right to protect exclusive information that has commercial value from third parties. This information is included in a confidentiality clause designed to protect the company who owns the products or services of the business. By signing the confidentiality clause, any business who exits the franchise may not disclose the franchisor’s confidential information to third parties or infringe upon the owner’s trademark or patent rights.
Trade secrets involve several facets of confidential information concerning designs, business procedures, formulas, financial data, business plans, customer lists and other information that may harm the company’s value if disclosed to competitor businesses. The confidentiality clause does not include information about the company that is in the public domain or that is already known outside the business.
As part of a confidentiality clause in a franchise agreement, the franchisor may prevent a franchisee from using trade secrets to operate a competitor business in the same territory or business market.
Subsequent Nondisclosure Agreement
Subsequent nondisclosure agreements are also binding on the franchisee. This type of agreement may be put into effect during the franchise relationship. It generally covers additional confidential information disclosed to the franchise owner after the signing of the original franchise agreement. Thus, the franchisee would be required to not disclose any additional pertinent information covered under the agreement to third parties.