How to Protect Franchise Intellectual Property

Protecting a franchise’s intellectual property is crucial. It’s what makes the franchise the unique brand that it is and provides any real reason for a prospective franchisee to invest. Without proprietary processes, techniques, recipes or operational playbooks, nothing separates your brand. If franchisors aren’t vigilant, these differentiators can slip through the cracks. When they’re no longer unique to a specific franchise, that represents value leaving the organization.

Protecting your IP starts early on, but just filing some forms and outlining which documents are proprietary can’t be the whole strategy. Smart IP management requires care on an ongoing basis and over the course of each franchisee’s time with the brand.

According to Mark VanderBroek, a franchise attorney and partner at Nelson Mullins, most franchisors actually do quite well in the initial stages of IP protection. They understand that trademarks and clear contracts are important, and they generally align with strong industry standards for setup.

"In my experience, most franchisors do a good job setting up their IP for protection,” VanderBroek said. “They register their trademarks and have appropriate non-compete and non-disclosure of confidential information and trade secret provisions in their franchise agreements. And franchisors usually do a good job in enforcing those rights against terminated franchisees and their owners if they continue to improperly use the marks and the system after termination or otherwise wrongfully compete."

However, a strong foundation doesn't mean the system is impenetrable. Often, the human element of doing business muddies the water. Employees who handle day-to-day operations are intimately familiar with proprietary systems, but these team members aren’t necessarily bound by the same contracts as the franchisee.

According to VanderBroek, one of the most common pitfalls for a franchisor is a lack of protective paperwork for the staff. These people are privy to much of the same information the franchisee is, but without proper documentation, there may not be much recourse if something goes sideways.

"Where it gets more difficult is enforcing non-compete and non-disclosure provisions against officers or employees of the franchisor or of the franchisee who have access to the franchisor’s confidential information and trade secrets, and who may continue to use them after leaving their employment,” VanderBroek said. “A franchisor should require its own employees who have access to confidential information to sign a non-disclosure agreement (NDA). In addition, franchise agreements usually provide that a franchisor can require a franchisee to have certain franchisee employees sign a non-disclosure agreement, but many franchisors do not follow through to require that."

He recommends a more targeted approach to prevent any issues stemming from employees rather than franchisees.

"My recommendation is that the franchisor require the franchisee to have at least its key managerial employees sign an NDA — as those are the types of employees most likely to have access to the franchisor’s operations manual and other confidential information and who are most likely to improperly use that information for a competing purpose after leaving the franchisee’s employment," he said.

With individual agreements, franchisors can create another layer of defense. This is a great start, but again, having the documents created and signed can’t be the only step. To insulate the brand, it’s important that franchisors embrace a more proactive strategy.

Protection isn’t a one-time event. Active management requires creating a culture of security and willingness to step into the courtroom if absolutely necessary.

You can’t just say information is “secret.” You have to actually treat it that way. VanderBroek emphasizes that restricted access is the first step to real protection, and those who do have access need to sign an NDA.

"The first step to protecting franchisor confidential information and trade secrets is for the franchisor to take reasonable steps to preserve the secrecy of the information,” he said. “This includes taking appropriate steps to limit access of franchisor employees to the confidential information and trade secrets, by keeping that information in a secure location (e.g., password-protected with authenticators) and limiting access to those employees with a need to know."

Franchisors must create the documents and do so strategically.

“The franchisor should include non-disclosure and non-compete provisions in its franchise agreements, and make those enforceable against the franchisee owners/guarantors,” VanderBroek said. “And, as mentioned above, best practice also is to have the franchisee’s key managerial employees also sign an NDA.”

Ideally, the aforementioned guardrails will work. But, in the scenario that they don’t, franchisors must take action.

If you don't defend your IP, you risk losing the legal right to it.

"To enforce IP rights, the franchisor needs to take appropriate steps to pursue claims against former franchisees or their owners or employees, and against former franchisor employees who misuse the franchisor’s trademarks, trade dress, confidential information or trade secrets during the course of or after termination of a franchise agreement or employment agreement, or who become involved in a competing business in violation of non-compete provisions,” VanderBroek said. “This includes filing lawsuits when necessary. Failure to enforce IP rights can, in some circumstances, lead to loss of those rights."

Keeping the IP safe with active franchisees and their team members is important, but risk increases when the franchise agreement ends. Whether the departure is amicable or not, franchisors must be intentional about any necessary debranding and the recovery of proprietary materials.

VanderBroek says standard franchise agreements usually contain a "post-termination" checklist, but the paperwork is only as good as the follow-through.

"Franchise agreements generally include a list of a franchisee’s post-termination obligations which require things like discontinuing use of the franchisor’s names, marks and logos; ceasing to represent that they are a franchisee of or associated with the franchise system; and returning to the franchisor operations manuals and other confidential information while deleting electronic versions of that information,” he said. “The franchisor should strictly enforce those obligations, and take active steps to make sure they are complied with when franchise agreements end."

Protecting your franchise’s intellectual property can’t be a set-it-and-forget-it task. While the legal foundation is essential, the real strength of IP protection lies in day-to-day details, practices and protections.

Moving beyond registration and a passive management approach to truly pay attention to things like who has access to digital resources, which team members have signed NDAs and how you follow up when the franchisee-franchisor relationship ends is what will keep your IP safe and within the network.