France: The intangible elements of the franchise

  

Also, in order to properly qualify and consolidate this general framework, the acts constituting the network, and in particular the franchise agreement, must properly organize the rules relating to the protection and exploitation of the trademark and of the know-how.

As the most intangible element of the intangibles, know-how is not an “intellectual property” right, but a simple legal fact of “possession of information”, protected essentially by the secrecy that its holders will arrange around it.

In practice, these are the confidential commercial methods^[2] or technical methods of a company which, having contributed to its success, are communicated to its network of franchisees in return for payment, in particular through the commercial and technical assistance due to the latter.

Beyond the jurisprudential and empirical definitions of know-how, the latter is now one of the components of “trade secret”, a concept that is broader and more economic than technical, regulated at the European level, but whose three criteria are quite similar to those of know-how. Thus, the French Law No. 2018-670 of 30 July 2018, transposing Directive No. 2016/943 on Trade Secrets, defines it as any information:

• which is not, in itself or in the exact configuration and assembly of its elements, generally known or easily accessible to persons familiar with this type of information because of their sector of activity (more conventionally referred to as “secret” information)
  
• has actual or potential commercial value because of its secret nature
  
• is the subject of protective measures by its lawful holder that are reasonable, having regard to the circumstances, in order to preserve its secrecy.
  

On the franchisor's side, it is rarely identified with the necessary rigor, in other words rarely formulated, described and documented in a complete and operational manner. This difficulty is also found in litigation or during contractual negotiation, when it is a question of establishing the existence, extent and communication of an alleged know-how. It is too often confused with the mere existence of the trademark, which is not enough.

On the franchisor's side again, the effective transfer of know-how to franchisees is a fundamental obligation, so as to allow its operational implementation within the network. In particular, the franchisor must prepare and keep detailed proof of this communication.

As an “obligation of result”, the lack of communication or incomplete communication can obviously generate disputes between the two parties, and threaten the validity of the franchise agreement. 

This obligation is not only one-off, when a franchisee enters the network, but continues, in particular through the parallel obligation of training. In particular, the franchisor is free to develop its know-how (along with its trademark), provided that this does not cause inappropriate disruption to the very concept of the network, as franchisees are naturally reluctant to change a method or modify a trademark that has contributed to the success of a franchise. In this case, the franchisor must not only be concerned with the objective justification of such a choice, but also anticipate and organize the transition to a new version of its know-how, both through internal information and training, and through appropriate public communication, with the objective of not threatening the fundamentals and sustainability of the franchise.

On both the franchisor and franchisee side, its secrecy is not always taken seriously and organized enough.

On the one hand, it is not enough to call a piece of information “know-how” for it to really fit into the criteria for defining this legal notion. Too much of the information so qualified is actually already described in various public sources, or is so obvious that franchisees could discover it on their own without much effort. As a result, the validity of such know-how would be fragile in a court of law, and by extension the network.

On the other hand, both franchisors and franchisees do not always take the necessary protective measures to sustain their concept. However, the consequences of leaking know-how can be serious, since once it has been made public it can no longer be “caught up” and the franchisor can only seek financial compensation, which is not his primary objective. So, the owner must genuinely organize this protection, both internally and with regard to the franchisees. It is therefore a question of taking strong technical and organizational measures, but also of correctly specifying these obligations in the contract, including a right to regular auditing. In particular, raising awareness among employees and managers is a key factor in the solidity of the secrecy of a know-how.

Finally, the know-how must have a genuinely substantial value on the relevant market. The know-how must include a set of elements that make up a real competitive advantage, for the franchisor and the franchisees, compared to the information available to competitors in the sector of activity in question.

This is often the most difficult element to establish, and therefore to prove, even if its characterization may result from a set of weak but converging indices, such as its actual experimentation by the franchisor^[4] or the success of the network, and in general proof of the causal link between the actual use of the know-how and the results of the franchise.

The licensee must therefore identify and supervise its know-how, protect it by appropriate measures, communicate it to franchisees with strict and controlled protection requirements and above all ensure its application and compliance within the network.

A breach of this confidentiality will not only result in the immediate termination of the contract by the franchisee, but also to an order to compensate the franchisor for the damage caused. This loss is often substantial, given that it is generally impossible to make up for the disclosure of secret information, and secrecy is a fundamental element of the franchise.^[5]

Failing this, the absence of know-how or its effective and continuous communication to franchisees may lead to the nullity of the franchise contract or even the disappearance of the network^[7], with an obligation to return the sums paid by the franchisee under this agreement. However, the courts are still very cautious in this respect, particularly if the dispute arises extremely late.^[8] Instead, some courts reclassify the contract as a contract for work and services, thereby excluding the obligation to make financial restitution.

Unfortunately, these good practices are not always known or implemented, thus undermining the validity and success of the network.