The protection of know-how in franchising networks

1. The protection of know-how in franchising networks Pietro Tamburrini, Attorney at law

2. Agenda • Introductory aspects • The concept of Know-how • Contractual protection • Franchising under Italian law • Know-how protection in Italian law

3. Introductory aspects • The transfer of know-how is a basic aspect in franchising agreements, and one that differentiates them from other similar contractual forms. • Moreover, the disclosure of know-how allows the accomplishment of the business framework that is at the basis of the creation and expansion of franchising networks, i.e. the circulation of knowledge (e.g. commercial techniques) within the network in order to facilitate the access of new enterprises to the market. • Obviously, to maintain their advantage over competitors, franchisors need to protect the confidentiality and prevent any misuse of the know-how they transfer to franchisees • It is therefore necessary, in the first place, to provide a definition of know-how according to applicable national and EU provisions, so as to outline the scope of this presentation.

4. The concept of Know-how • In general, on the basis of interpretations provided by legal doctrine and jurisprudence, it is customary to distinguish between technical and commercial know-how. • A definition of technical know-how is found, for example, in EU Commission Regulation no. 772 dated April 27, 2004 (on the different categories of technology transfer agreements). • According to this Regulation, Know-how is “a package of non-patented practical information, resulting from experience and testing, which is: • secret, that is to say, not generally known or easily accessible; • substantial, that is to say, significant and useful for the production of the contract products; • identified, that is to say, described in a sufficiently comprehensive manner so as to make it possible to verify whether it fulfils the criteria of secrecy and substantiality;

5. The concept of Know-how • In very similar terms, commercial know-how is defined in the Commission’s Regulation no. 2790 dated December 22, 1999 as “a package of non-patented practical information, resulting from experience and testing by the supplier, which is secret, substantial and identified; • "secret" means that the know-how, considered as a body or in the precise configuration and assembly of its components, is not generally known or easily accessible; • "substantial" means that the know-how includes information which is indispensable to the buyer for the use, sale or resale of the contract goods or services; • “identified” means that the know-how must be described in a sufficiently comprehensive manner so as to make it possible to verify whether it fulfils the criteria of secrecy and substantiality;

6. Contractual protection • Having defined know-how on the basis of applicable regulatory provisions, we can proceed to determine which tools are available for its protection. • The main form of protection in international franchising networks is of a contractual type, through the introduction within the franchising agreement of specific non-disclosure obligations for the franchisee. • Firstly, attention should be given to the definition of which legislation is applicable to the franchising agreement, considering that the different legal systems may contain specific binding provisions.

7. Contractual protection • Under European Parliament and Council Regulation no. 593/2008, dated June 17, 2008, on the law applicable to contractual obligations (for contracts entered into after December 17, 2009): • A contract shall be governed by the law chosen by the parties (Article 3). The choice shall be: • made expressly, or • clearly demonstrated by the terms of the contract, or • shown by the circumstances of the case. • The parties can select the law applicable to the whole contract or just to a portion of it (Article 3). • In the absence of a choice made in accordance with Article 3, a franchise contract shall be governed by the law of the country where the franchisee has his habitual residence (Article 4).

8. Contractual protection • The legal validity of contractual provisions specifically prohibiting franchisees from using and disclosing the know-how has been expressly recognized by EC regulations. • Article 5, paragraph (b) of Regulation no. 2790/1999 quoted above acknowledges “the possibility of imposing a restriction which is unlimited in time on the use and disclosure of know-how which has not entered the public domain”. • Subject to this acknowledgement, the contract must be drawn up so as to state clearly what know-how is being transferred and to specify in detail what obligations and prohibitions are being imposed on the franchisee.

9. Franchising under Italian law • In Italian law, franchising is directly governed by Law no. 129/2004, issued with the intent to fill the preexisting regulatory gap. • In particular, pursuant to this law: • The franchising contract must be in writing or else is considered null and void. • The contract must also expressly state: • The specific know-how provided by the franchisor to the franchisee • The manner in which any know-how contributed by the franchisee will be recognized by the parties. • The franchisee shall commitand have its employees and contractors commit to keeping the content of the activity regulated under the contract strictly confidential during and also after contract termination (Article 5, paragraph 2). • Therefore, under Italian law any disclosure by the franchisee of the franchisor’s know-how is to be considered unlawful, even in the absence of a specific contractual clause prohibiting such disclosure.

10. Franchising under Italian law • Conversely, the provision quoted above provides no guidance as to the use by the franchisee of franchisor know-how for activities collateral to those governed under the franchising contract; such use is to be considered prohibited if specific contractual clauses regulate this aspect. • It may also be concluded that the franchisee’s non-disclosure obligation arises as early as the pre-contractual phase, considering that, according to the law, in this phase the franchisor is required to indicate to the potential franchisee “the description of the know-how [to be] provided”. • The franchisee’s non-disclosure obligation in the pre-contractual phase may be formalized in a specific “confidentiality agreement” • Even if no such agreement is stipulated, a non-disclosure obligation may be deemed to exist on the basis of Article 6, paragraph 3 of said law which, in accordance with the general principles of the Italian Civil Code, requires the prospective franchisee to “behave at all times according to principles of loyalty, fairness and good faith towards the franchisor” during the pre-contractual phase.

11. Know-how protection in Italian law • In the civil law domain, know-how is now protected under Articles 98 and 99 of the Industrial Property Code (Legislative Decree no. 390/2005) which provide that: • All corporate information and technical-industrial expertise, including commercial information, subject to the legitimate control of the owneris protected if such information (Article 98): • Is secret, in that, as a body or in the precise configuration and assembly of its components, it is not generally known or easily accessible to experts and people who work in the field; • Has monetary value because of its being secret; • Is subject, by the parties who have legitimate control over such information, to measures considered reasonably suitable to keep it secret. • Subject to unfair competition regulations, it is prohibited to disclose to third parties, acquire or use the corporate information and expertise referred to in Article 98 (Article 99).

12. Know-how protection in Italian law • As noted, no change is introduced by Article 99 of the Industrial Property Code to the existing Civil Code provisions with respect to acts of unfair competition. • In particular, under Article 2598, paragraph 3 of the Civil Code, whoever “uses, directly or indirectly, means not compliant with the principles of professional fairness and potentially harmful to other parties’ business“ commits an act of unfair competition.

13. Know-how protection in Italian law • In the criminal law domain, according to part of the legal doctrine a form of know-how protection could be found in Article 623 of the Criminal Code, which punishes the conduct of whoever, having had access for reasons related to his state, office, profession or art to information intended to remain secret, regarding scientific discoveries or inventions or industrial applications, discloses such information or uses it to his own or others’ advantage. • Given that interpretation of criminal law provisions using the principle of analogy is disallowed, it is unlikely that this regulation may be applied to commercial know-how.