It is time to review your standard non-compete and confidentiality agreements, especially if you are a franchise

Many franchises require that all employees sign confidentiality and non-compete agreements. These restrictive covenants are intended to protect the legitimate business interests and intellectual property of the franchisor. A franchisor’s legitimate business interests and trade secrets include its proprietary processes, business plans, pricing, recipes, business processes, operating procedures, customer and vendor lists and other integral parts of the franchise system. The value in a franchise is protection of this proprietary information because it gives the business and its franchisees a competitive advantage against competitors. The franchisor’s magic formula is a valuable system that is sold to independent franchisees who have an off-the shelf solution and system to a profitable business.

However, worker advocates and changing trends in employment law have brought unintended consequences to these standard agreements. All employers should take note of these recent decisions and rethink their employment practices. Let’s look at one case that received a lot of public attention.

The Jimmy John’s franchise has been the subject of Illinois and New York State Attorney General activity. It even resulted in new legislation in Illinois in direct response to a lawsuit by the state against the franchise. Jimmy John’s franchise standard documents required all franchisee employees to sign an agreement that restricted them from working for another company that earned more than 10% of its revenues from sandwiches within 2 miles of any Jimmy John’s store for 2 years after terminating employment with the company. This impeded the ability of these low wage workers to seek employment and did not serve to protect the employer or franchisor from any real threat of economic harm from misappropriation of proprietary information. In the end, the franchise settled because these agreements were unenforceable against these low wage employees and risked joint employer liability for the franchisor.

There are some take-aways from these cases:

  • It is a best practice to separate confidentiality agreements from non-compete agreements rather than use a general agreement that includes both restrictive covenants.
  • These agreements should be used only with management level employees and not low wage employees that pose little risk to the business if they go to work for competitors.
  • Confidentiality of valuable trade secrets relies on protection and restricted access to sensitive information. Practices should include password protection, locked file cabinets/rooms, restricting copying of trade secret information and other traditional ways of maintaining confidentiality information are more important than ever. Keep things on a truly need to know basis.
  • Exit interviews and physical retrieval of sensitive information is necessary. Collect any employee manuals or procedure manuals, keys or electronic devices issued to the employee. Keep in mind that data can be on smart phones, flash drives, mobile devices, laptops and other electronic devices. It can also be saved in the cloud. These physical devices and copies should be returned or erased of all confidential information when an employee leaves.
  • Consider offering a financial incentive for full compliance. Labor and wage laws won’t allow you to withhold earned wages, but you may be able to financially incentivize leaving employees to be compliant. Few employers, it can seem particularly difficult to offer anything more than what is legally required to departing employees. The investment can be well worth it if your business is particularly vulnerable and it saves legal fees and problem situations.
  • Franchisors need to re-think their franchise documents and franchisee employee requirements. Imposing restrictions on franchisee employees can result in joint-employer liability.

If you have confidentiality and non-compete agreements that apply to non-management staff, it is time to review your policies. If you have combined confidentiality and non-compete agreements, you may consider revising your standard documents to sever these restrictive covenants into two separate agreements in case one is deemed unenforceable. And, as always, be certain your employer documents cover more than just trade secrets. When appropriate, include copyright and invention assignment provisions to be sure your business owns the intellectual property it paid to create.