I’ve been concentrating on intellectual property issues for small and medium-sized businesses in recent columns to provide a better understanding of if, and when, patent, copyright, or trademark problems affect operations.
Now let’s discuss one of your company’s most valuable assets: its confidential information and trade secrets. For the sake of simplicity, the terms “confidential information” and “trade secrets” will be used interchangeably, even though they can mean different things.
Unlike the Copyright Act, the Trademarks Act or the Patent Act, there is no statute that directly legislates or regulates the law of confidentiality and trade secrets in a commercial environment. This means the law that governs confidentiality and trade secrets is the common law; the law that has evolved over time as determined by judges deciding similar cases before them.
What is confidential information, and why do you need to protect it?
Although you might think only software developers, biotech companies and the Coca-Cola Co. have valuable trade secrets that need legal protection, all businesses have information they have bought, created, developed, improved, enhanced, and hopefully benefited from. And this information is worth something, particularly if you are licensing it to third parties or selling your business outright. So in the “information age,” ensuring the confidentiality of your own information isn’t something that’s limited to big companies with magic formulas locked up in vaults.
For example, if you’re a franchisor (or you own and operate a chain of retail outlets), you’ll have an “operations manual,” which is normally a collection of written or electronic documents that sets out the policies and day-to-day procedures for running the business.
All franchisors have, or should have, operations manuals that, in the franchised fast-food context, might explain how long the fries should be cooked and when they’re stale and must be thrown out, forms for sales and other financial reporting to the franchisor, policies and procedures for cleanliness in the kitchen, and dozens of other topics that have to be “taught” by the franchisor to the franchisee and its managers. That franchisee will in turn have to educate its own staff on how to “run the business.” And “how to run the business” should be in the manual. How else will franchisees or their employees know to do their jobs?
The fact all this information might be protected by copyright is a bonus, legally, but the real issue is this: it took a long time for the franchisor to develop its business system and its manual. Not everyone in the world has access to the manual, you have to be a franchisee first, and at some expense. So it’s a trade secret. And it’s confidential. You don’t want someone selling it or running away to start another business using your intellectual property. So there has to be a covenant to that effect in your franchise agreement that all the information disclosed to the franchisee about the operation of the business is confidential and not to be published or disclosed to others unless specifically authorized.
Here are other good examples of your confidential information:
• Your customer list: It will cause you immense damage if used by a former employee who’s left you to start a new venture with it.
• Your supplier contact list and the pricing and rebates you receive from those suppliers: They need to be protected legally.
• Your financial statements, the terms of your other contracts, and perhaps an option-to-purchase on some very valuable land: They also constitute confidential trade secrets you don’t want others knowing about or stealing.
Always have confidentiality clauses as part of any employment agreement or independent contractor agreement you have with the people who work for you. Whether you like it or not, they may be the ones copying your e-mails, secret formulas, customer lists, pricing policies and other trade secrets from your hard drive onto the tiny jump drives attached to their key chains.
In some businesses, you might want to limit certain sensitive information to those who need to know. And you may be bound to obligations of confidentiality under agreements you’ve signed with others, such as suppliers. So you have to ensure you have similar covenants in place with your managers and employees, otherwise you could be in breach of contract third parties.
You should also put confidentiality covenants in letters of intent you are entering with parties you’re doing business with, whether it be a company wanting to “buy you outright” or one that wants to partner or joint venture with you for a particular project. If not, all the information you’ve given them in your negotiations might be used by them if negotiations break down (and even if they succeed) and they’re suddenly blessed with a windfall of new, useable and valuable information they otherwise wouldn’t have been able to obtain.
I like to put “trust language” in my confidentiality covenants to the effect that “you agree that any information disclosed by us to you in the course of negotiations is our confidential intellectual property disclosed to you on conditions of trust” so that if the other side makes surreptitious use of it, my litigation department will be able to add “breach of trust” to the pleadings. In employment and independent contractor agreements, I might also add non-solicitation clauses as well, precluding a departed employee or contractor from contacting your company’s clients to “divert their business” from you to them.
Although you might be inclined to label all information disclosed to an employee, contractor franchisee or an entity you want to do business with as confidential trade secrets, not everything will be truly confidential. Some of your information will be in the public domain anyway. Some will impart skills that cannot be unlearned (once you know how long to cook the fries, you can’t really unlearn that). So you have to be realistic about what you can legally protect and what you can’t.
Your lawyer will be able to draft these agreements up for you, and the confidentiality covenants can be incorporated within a informal looking “letter” agreement to make it less intimidating if a “legal looking agreement” would scare the willies out of the other side.
But because your confidential information is among your company’s most valuable assets, you have to take steps in your agreements to protect it.
Special to the Globe and Mail
Vancouver franchise lawyer Tony Wilson is the author of Buying A Franchise In Canada – Understanding and Negotiating Your Franchise Agreement and he is ranked as a leading Canadian franchise lawyer by LEXPERT. He is head of the Franchise Law Group at Boughton Law Corp. in Vancouver and acts for both franchisors and franchisees across Canada, many of whom are in the food services and hospitality industry. He is a registered Trademark Agent, an Adjunct Professor at Simon Fraser University and he also writes for Bartalk and Canadian Lawyer magazines.