Listen....Do You Want to Know a Secret?

“Three may keep a secret, if two of them are dead.” Benjamin Franklin, Poor Richard’s Almanack

Secrets, especially business secrets, are hard to keep, and companies may take extreme measures to protect their valuable confidential assets. There are times, however, when your confidential information may need to be shared in a limited manner.  When discussing a potential business sale, franchise agreement, collaboration, subcontractor hiring, or other transaction, it’s important to protect yourself from the intentional or accidental spilling of secrets.

Before you begin sensitive business discussions, we recommend that the two parties begin by signing a nondisclosure or confidentiality agreement. A nondisclosure agreement enables you to explore a potential business relationship without fear that your existing business secrets will be compromised. In essence, the parties agree that certain confidential information may only be used to evaluate the potential relationship and may not be disclosed to third parties.

Among the important questions to examine are:

1. What information must be kept confidential?
2. Are there any exceptions in which confidential information may be disclosed? For example, can the information be shared with your attorney or financial advisor? 
3. What efforts are required to prevent disclosure? 
4. How long does the confidentiality agreement last? 
5. If confidential information is disclosed in violation of the agreement, what remedies do you have? 

Because there are at least 45 tips to consider when reviewing a nondisclosure agreement, you may wish to consult an attorney to make sure that your secrets are well-kept.

Non-Compete Agreements: What is Reasonable?

Modern employment or franchise contracts often include a noncompetition clause or agreement which restricts an employee’s ability to compete with the employer after ending his employment. These provisions are designed to prevent a former McDonald’s franchisee from launching a new Burger King franchise down the street or prohibit a paper salesperson from soliciting his former employer’s clients from a competing company in the same building.

For example, a noncompetition clause might include language such as:

• “For a period of one year following the termination of the employment relationship, Employee agrees not to engage in any way in a similar or competing business within fifty miles of the business location.”
• “For a period of two years following the termination of the employment relationship, Employee agrees not to directly or indirectly solicit any person or entity who are or have been customers of the Employer.” 

These clauses are valid to protect the legitimate business interests of the employer. However, the restrictions, particularly the time and geographic restrictions must be reasonable.

In Ohio, this means that the restrictions are 1) no greater than required to protect the employer; 2) do not impose undue hardship on the employee; and 3) do not injure the public. (Raimonde v. Van Vlerah, 42 Ohio St. 2d 21, 26 (Ohio 1975)).

When determining reasonableness, a court can examine a variety of issues such as the duration and distance restraints; whether the employee has confidential information; whether the employer receives a disproportionate benefit from the agreement; and whether the covenant eliminates ordinary competition or unfair competition.  (Raimonde v. Van Vlerah, 42 Ohio St. 2d 21, 26 (Ohio 1975)).

If a court determines that the restrictions are unreasonable, it can modify the employment agreement. For example, a contract prohibiting court reporters from engaging in court reporting or stenography anywhere in Franklin County for two years was reduced by the court to a one year restriction within the city of Columbus. (Rogers v. Runfola & Associates, Inc., 57 Ohio St. 3d 5, 565 N.E.2d 540 (1991)).

Noncompetition clauses are important to include in an employment contract, but employers should ensure that their agreements are narrowly tailored, reasonable in scope, and well-drafted.

Franchise Agreements, Part 2

In addition to carefully reviewing a franchise agreement, a potential franchisee has much more information to examine before purchasing a franchise.

Federal law requires that a franchisor provide detailed written disclosures to a potential franchisee. These disclosures include information on franchise fees, obligations of the franchisee, and more.

Ohio law also governs franchise relationships. In 2013, the Ohio legislature updated the Business Opportunity Purchasers Protection Act, which regulates many franchise agreements in the state. Similar to the federal rule, Ohio also requires detailed disclosures to the franchisee. Ohio also allows franchisees to sue the franchisor for damages or a rescission of the agreement, along with other opportunities for relief.

The Federal Trade Commission, Ohio State Bar Association, and Attorney General Mike Dewine have more answers for potential franchisees.

Franchise Agreements, Part 1

According to the International Franchise Association, more than 700,000 Ohio jobs are directly or indirectly related to franchised businesses.  When our clients consider whether to launch or expand a franchise, our attorneys carefully review these and other provisions in franchise agreements:

1. Does the franchise agreement necessitate revisions to your operating agreement? For example, it may require your limited liability company to have a certain number of officers or restrict the type of name.
2. What initial fees are required? What recurring royalty fees will have to be paid?
3. Typically, the agreement will require that the franchisee carry a minimum level of liability insurance. Does your LLC carry this amount of coverage? 
4. Franchise agreements frequently include noncompete clauses to discourage franchisees from operating a similar business nearby. For example, the contract might prevent a coffee franchisee from operating another coffeehouse within the same city during the term of the agreement and for 2 years thereafter. Are these time and geographic restrictions reasonable? 
5. Which employees are bound by confidentiality or nondisclosure agreements? 
6. When can the agreement be terminated? And if the agreement is breached, what are the required damages? 

Although this list is not exhaustive, it may give you an idea of some important questions to consider before finalizing a franchise agreement.