General
Currently, the economy is becoming developed, as to the appearance of franchise form and Franchise Contract. It is no longer a matter of hiding asset but technical processes, commercial methods, financial information. Exclusive information has economic value that is often substantial for the people holding it. In many circumstances, however, it has to be shared[1].
The Commercial Law and Civil Code does not define trade secret and trade secret infringement, but under the Intellectual Property Law, trade secret means information obtained from activities of financial or intellectual investment, which has not yet been disclosed and which is able to be used in business[2]. According to the clause 1, Article 45 of the Competitive Law 2018, trade secret infringement in the following forms:
- assessing and acquiring trade secrets by going against security measures of the owner of such trade secrets; and
- disclosing or using trade secrets without consent of the owner.
In Franchise Contracts, confidential clauses are agreed by the parties to protect trade value and the consistency of the franchise system, to insure the benefits of franchisors – the party who supplies the information about trade secrets and transfers technology to franchisees[3].
This article covers 5 matters as follows:
- Structure of information confidentiality clause in Franchise Contract;
- Information confidentiality obligations in Franchise Contract;
- Handling of violations of information confidentiality obligations;
- Restrictions of information confidentiality clauses; and
- Solutions to protection of information disclosure.
Structure of information confidentiality clause in Franchise Contract
Based on the type of information to be non-disclosed and the purpose, information security requirements of the franchisor, the security content and the level of security which bind between the parties will be different. However, in keep with the spirit and purpose of the confidentiality clause, the information confidentiality clause in the franchise contract normally includes the following contents:
- the information that needs to be kept confidential: business secrets, trade secret, customer information, sales, …;
- rights and obligations of the parties for non-disclosing; and
- liability to the party violating the obligation.
Information confidentiality obligations in Franchise Contract
Trade value depends on the confidentiality of technical processes, commercial methods, and financial information. Thus, to ensure that the entire franchise system is protected, avoiding the risk and dissolution, the parties must keep that information secret without the third party. That’s why, information confidentiality obligations need to be enforced during three stages such as: pre-contract, contract performance and contract termination.
After entering into the franchise contract, the franchisor is obliged to provide information related to the franchise system such as: customers, consumption, business methods, … so on[4]. This information is very important for the franchisee to analyze and consider to make a decision whether to join the system or not. This will be detrimental to the franchisor if the franchisee wants to illegally benefit from that information without entering into the contract. Therefore, in the pre-contract stage, the franchisor can request the franchisee to keep the information confidentially, not to exploit, use, or provide it to a third party whether the parties enter into a contract or not. This agreement can be made in writing (Confidential Agreement) or stated in pre-contract agreements (Confidential Clause). Currently, the law also stipulates in Clause 2, Article 387 of the Civil Code 2015: “When a party receives any secret information from the other party during the process of entering into the contract, it must protect that information and may not use it for its own purposes or other illegal purposes”.
According to Dr. Hoang Thi Thanh Thuy[5], the information confidentiality clause usually refers to 3 basic groups of obligations of the franchisee:
- commit to admit the franchisor’s sole ownership of confidential information;
- commit not to exploit and use the confidential information for any other business or profitable activity, including disclosure of it to third parties but providing goods and services which are franchised; and
- maintain confidentiality, including not unauthorized copying or excerpting of any part of the confidential information in written or in any tangible form, performing tasks and procedures to prevent their subordinates from unauthorized use or disclosure.
Based on admitting and claiming ownership of franchisor to the confidential information of the system, the franchisee may only possess and use such confidential information with the consent of the franchisor (based on the franchise contract). After the termination of commercial franchise contracts, the franchisor may require the franchisee to transfer, return documents and information related to the system’s know-how in order to ensure confidentiality of information[6]. According to Clause 4, Article 289 of the Commercial Law 2005, amended and supplemented in 2019, the franchisee is obligated to keep the business secret, even after the expiration or termination of commercial franchise contracts. If the franchisee continues to use the above information and know-how without the consent of the franchisor, it will be seen as possessing or benefiting illegally and will be handled under civil law.
In contract construction techniques, the parties often agree that the confidentiality clause will continue to be effective after the expiration or termination of contracts for whatever reason (survival clause)[7].
Handling of violations of information confidentiality obligations
Violation of information confidentiality obligations can be known as a cornerstone for claiming damages[8]. The franchisor can request the franchisee to return the income arising from the breach of the obligation to keep information confidential under the Civil Code 2015 on the obligation to return due to the possession and use of the asset, illegal benefiting[9].
If the franchisee intentionally discloses the business secret or operation secret of the system to a third party, the franchisor can unilaterally terminate the contract without prior notice, and may take civil or criminal proceedings to protect proprietary rights to information and business secret or technological know-how, depending on the severity, essence and consequences of the infringement.[10]
Restrictions of information confidentiality clauses
Limitations on independence
Theoretically, when a contract is void, its terms are also void. At this time, the parties no longer have any rights and obligations arising from the franchise contract, including obligations of confidentiality, they are only obligated to do which arising from invalidation of the contract as compensation for damages[11]. Otherwise, the franchisee is not obligated to non-disclose the information during performing the contract with the franchisor. This will be a large risk for enterprises if the disclosed information has high trade value.
In fact, the confidential clause in the franchise contract is also agreed and committed by the parties in order to maintain in effect even if the expiration or termination of the contracts. However, the law does not always admit the maintaining of clauses of the contract. Nowaday, the law only maintains the effect of the clause such as: agreements on fines for violations, compensation for damage, settlement of disputes in case , …. except this agreement is avoid itself. Example, the independence of arbitration agreement[12]. Therefore, it is a restriction of the law since it does not maintain the effect of confidential clauses. Under Clause 2, Article 387 of the Civil Code 2015: “When a party receives any secret information from the other party during the process of entering into the contract, it must protect that information and may not use it for its own purposes or other illegal purposes”. Nevertheless, the Civil Code does not define clearly what confidential information is, so the application of this regulation is still very difficult and ineffective.
Restrictions of information confidentiality clauses
The confidential information is restricted to applying the penalties in practice. The party requesting to apply the penalties is obligated to prove the violation of the party who infringes their committed obligations. This is almost impossible for businesses in the current. Even when the violation is proved, the application of penalties is very difficult because it is not easy to determine the extent of the actual damage exactly and the confidentiality clause in the contract often does not mention the remedy, this is a matter when entering into contracts of businesses.
Solutions to information disclosure
That is why, the parties should separate the confidentiality clause from the franchise agreement. Instead, the parties may enter into a non-disclosure agreement (NDA) before negotiating and performing the contract. It will help to remove restrictions on independence and maintain the confidentiality agreement even if the franchise agreement is void. In some cases, the confidentiality agreement and the franchise contract may even be governed by two different laws, which will usually apply under the laws of the country in which the information provider is located in order to facilitate enforcement and dispute resolution for information providers.[13]
[1] Drafting international contracts, An Analysis of Contract Clauses – Marcel Fontaine Filip De Ly, page 231.
[2] Clause 23, Article 4 of The Intellectual Property Law 2005, amended and supplemented in 2019.
[3] “Điều khoản bảo mật thông tin và điều khoản cấm cạnh tranh trong hợp đồng nhượng quyền thương mại” của TS. Hoàng Thị Thanh Thủy – Tạp chí Luật học số 2/2011, trang 43.
[4] Article 287 of the Commercial Law 2005, amended and supplemented in 2019.
[5] Lecturer of Law Faculty of Hanoi National Economics University.
[6] Article 289 of the Commercial Law 2005, amended and supplemented in 2019.
[7] “Điều khoản bảo mật thông tin và điều khoản cấm cạnh tranh trong hợp đồng nhượng quyền thương mại” của TS. Hoàng Thị Thanh Thủy – Tạp chí Luật học số 2/2011, trang 46.
[8] Clause 3, Article 387 of Civil Code 2015.
[9] Clause 579 – Clause 583 of Civil Code 2015.
[10] “Điều khoản bảo mật thông tin và điều khoản cấm cạnh tranh trong hợp đồng nhượng quyền thương mại” của TS. Hoàng Thị Thanh Thủy – Tạp chí Luật học số 2/2011, trang 49.
[11] Bình luận khoa học những điểm mới của Bộ luật dân sự năm 2015 của PGS.TS. Đỗ Văn Đại, Nxb Hồng Đức, trang 183.
[12] Article 19 of the Law on Commercial Arbitration.
[13] https://apolatlegal.com/vi/dieu-khoan-bao-mat-trong-hop-dong-nhung-han-che-can-luu-y/