Confidentiality or non-disclosure agreements (NDA’s) come in different forms and sizes, from stand-alone NDA’s to just a couple of sentences in a long commercial contract. Unfortunately, at times NDA’s are one-sided, overreaching, and create unrealistic obligations. Complicating matters is that vendors (e.g. supplier, service provider, consultant) often present a franchisor with an NDA which fails to contemplate the dynamics of franchising.

The Lord Voldemort Clause. Some vendor contracts contain a confidentiality clause that start offs by saying something along the lines of, “This Agreement and it’s terms and conditions are confidential.” One more time, “This Agreement and its terms and conditions are confidential.” Construed literally (which is how a contract is supposed to be construed), this statement prohibits each bound party from telling anyone of even the mere existence of the Agreement. Contracts are made to achieve an end result, and in franchising and other commercial contexts, achieving that end result often involves sharing information with third-parties (i.e. anyone not signing the contract). Think twice before signing a contract with a Voldemort clause. Instead take the time to identify specific information which the parties must keep confidential.

I Would Tell You; But Then I Would Need to Kill You. NDA’s and confidentiality clauses generally prohibit disclosure of confidential information to third-parties (i.e. anyone not signing the contract). When it comes to a contract between a vendor and a franchisor, third-parties include franchisees and prospective franchisees. Imagine getting up on a stage in front of a room full of your franchisees, and saying, “we entered into a contract, but I can’t tell you who with; to get you a great deal, but I can’t tell you about.” Most vendor’s form NDA’s were not written with franchising in mind. Before you agree to be bound by an NDA or confidentiality provision, think about the information you will need to share, and to with whom you will need to share it. In particular, will you be permitted to …

  • share enough information with your franchise advisory council to obtain meaningful feedback?

  • tell the franchisees about the fees they will be paying?

  • tell distributors about the prices they will be paying a supplier?

  • include, in Item 8 of your FDD, all of the information required by law?

Depending on the circumstances, you may be able to address this issue by adding appropriate language to carve out confidentiality exceptions.

Don’t Make a Promises a Franchisee Needs to Keep. When explaining to a vendor that you cannot sign an NDA prohibiting you from describing the vendor’s program to your franchisees, the vendor might respond by permitting you to share confidential information with your franchisees, as long as you are responsible for the franchisees’ improper disclosure or use of the confidential information. Even if you have a contractual right (i.e. in the franchise agreement) to swear your franchisees to secrecy, there is always the possibility of inappropriate disclosure by a franchisee, which would render you in breach of the NDA, and responsible for the consequences of that breach. A better alternative is to obtain the vendor’s consent, in the NDA itself, to the specific information that the franchisor will share with its franchisee. Another option, if the vendor feels the need for each of the franchisees to be subject to a confidentiality agreement, is to have the vendor obtain an NDA (in a form vetted by the franchisor) from each franchisee, but this approach can be administratively challenging.

Whose IP Is It Anyway? Some NDA’s address topics going well beyond confidentiality. In particular, an NDA intended to be used in connection with exploratory discussions, which might result in a commercial relationship, may include language regarding the ownership of intellectual property developed during anticipated commercial relationship. As a general proposition, it is more prudent to remove this type of provision from an NDA, and address the issue in a subsequent agreement defining the commercial relationship, if there is one.

One-Way; Do Not Enter. Or at least, slow down, and proceed carefully when considering signing a vendor’s one-way (or “unilateral”) NDA – an NDA which protects the vendor’s confidential information, but not your confidential information. A one-way NDA may be appropriate in some instances, such as where you are buying access to proprietary information. However, most commercial relationships involve an exchange of information, making a two-way (or “mutual”) NDA more appropriate. Because one-way NDA’s are only drafted to protect one of the two parties, they are often overreaching. In contrast, in the case of a mutual NDA – if the provisions truly impose reciprocal obligations on each the Franchisor and vendor – the vendor is not asking anything of the Franchisor that the vendor is not itself willing to do.

Beware of Titles. Just because an NDA is titled “Mutual NDA” does not mean that it is fair, balanced, and contains only reciprocal provisions. As with any other contract or clause, it is important to read and understand your obligations before signing, and, when appropriate, seek legal counsel.

It’s A Two-Way Street. Do you have a form NDA you ask vendors to sign? Is it reasonable? Does it impose the same obligations on you as it does on the vendor? Does it address issues that are more appropriately discussed in a definitive agreement entered into following the initial confidential discussions? Does it contain a litany of provisions that, while potentially helpful and protective, will lead to avoidable protracted negotiations?

If you have any questions, we are here to help .