Franchising Lessons in the Age of Incivility: Operations Manuals and Trade Secrets

Abstract

The framework for a successful franchise relationship governs procedures, performance, and standards. The franchisor agrees to lend, in effect, its intellectual property and guidance, among other things, in exchange for the franchisee’s royalties and other payments. Before entering into an agreement, franchisors disclose a large bundle of information to the prospective franchisee. The data may include operational insights necessary for a franchise’s success. In practice, though, franchise operations manuals only become available to franchisees once they pay for and are bound to the franchise system. This timing, and the centrality of the manual, is the key to many
franchise disputes. For example, franchisees may allege they were harmed by vague, precontractual representations about the contents of operations manuals, and in turn
franchisors would justify the terminology they use as a way to provide the required disclosures while protecting trade secrets.
When operations manuals are leaked—whether negligently, maliciously, or recklessly—or when the franchisee (or ex-franchisee) uses the manual’s processes and information without permission, then trade secret or antitrust law may impute liability. In Civility Experts Worldwide v. Molly Manners, LLC, a franchisor claimed its franchisee infringed the franchisor’s copyright by promoting a service that competed against the franchise network; while the franchisee allegedly used the franchisor’s trade secrets in spite of the two parties’ preexisting relationship barring such conduct, Molly Manners illustrates how the franchisor could have proactively amended the franchise agreement to delineate franchisee duties and prohibitions. A franchisor could file claims against its franchisee under the law of trademarks, trade secrets (e.g., the Uniform Trade Secrets Act or the Defend Trade Secrets Act), and antitrust. Lessons that emerge from this Article’s survey of franchise law and practice can serve as guiding principles for franchisors and franchisees alike.

Keywords: franchising, franchise, franchisee, franchisor, operations manuals, trade secrets, discretion, agency, Lanham Act, copyright, agency, independent contractor, UTSA, DTSA, misappropriation, registry, economic efficiency, commercial value, antitrust, FTCA, Civility Experts, Molly Manners

JEL Classification: K00, K12, K19, K20, K22, K29, K40, K49, K33