As all over the world, also in Italy most franchise systems are based on trade secrets and confidential know-how, rather than patents or registered designs According to Italian Franchise Law, all franchising contracts must contain and describe in detail the specific know-how provided by the franchisor to the franchisee, and must have specific requirements. It is, therefore, important to check if and how the franchisor’s confidential know-how can be protected in Italy.
1.Know-how in franchise agreements
According to Italian Franchise Law all franchise contracts must contain and describe in detail the specific know how provided by the franchisor to the franchisee. Moreover, know-how must have specific requirements to be valid and enforceable.
Know how is of fundamental importance in all franchising contracts, in Italy as well as all over the world. In fact, Know how is the main element that allows (or should allow) franchisees to enjoy a competitive advantage on a stable basis.
Know-how is one of the main components of the franchise package, that is, of the complex of rights that the franchisor grants to the franchisee and which allows the latter to present itself in the eyes of consumers substantially as the alter ego of the franchisor.
Most franchise systems are based on trade secrets and confidential know-how, rather than patents or registered designs. Examples of confidential know how include:
• customer lists
• business methods
• operating procedures,
The importance of know-how in the franchise is confirmed by the Italian Law on franchising, Law n. 129/2004. View the official Italian version of the Italian Franchise Law. To receive an unofficial English translation of the Italian Franchise Law, please contact us.
Know-how is defined by Italian Franchise Law as “an ensemble of unpatented practical knowledge deriving from experiences and tests performed by the franchisor“. It is therefore a complex of experiences, information, knowledge, operational skills necessary to carry out certain activities, which are not under patent protection, because they are not patentable or because the owner has chosen not to place them under this type of protection.
2.The characteristics of Know-how according to Italian Franchise Law
According to art. 3 of Law n. 129/2004, all franchising contracts must contain and describe in detail the specific know-how provided by the franchisor to the franchisee.
Moreover, know-how in franchising agreements must have specific requirements. In fact, according to art. 1, of Law n. 129/2004, know-how must be:
- substantial, and
These characteristics are functional to ensure that the franchisee is transferred a wealth of knowledge that can allow him to effectively carry out his activity within the network – and therefore such as to justify the payment of royalties to the franchisor – and not just a mere “empty box”, without real content.
First of all, know-how must be secret, that is “not generally known or easily accessible“.
This means that the notions transferred by the franchisor to the franchisee can be qualified as know-how if they are not freely available elsewhere, that is, they have not been disclosed, or at least that their acquisition by third parties would be considerably more expensive for the affiliate.
However, what must be “secret” is not the individual experiences and information that make up the know-how, but the complex of notions in which it is articulated; therefore, a know-how is still considered as secret if the single parts that compose it are known, but their combination in a whole is not.
Secondly, know-how must be substantial, that is, it must include the “knowledge essential to the franchisee for the use, sale or resale, management or organization of the contractual goods or services“.
The information transmitted by the franchisor must therefore be such as to constitute an effective economic utility for the franchisee, from which he cannot disregard for the exercise of his activity in the franchising network. However, the “indispensability” of know-how is referred to the formula as a whole; the concepts transferred by the franchisor to the franchisee need not necessarily be absolute but rather to identify the characteristics of the network with reference to the choice or quality of the goods, to the selection of suppliers that ensure this quality, to the composition of the assortment, to the presentation of goods, to relations with customers, to administration, to financial management, etc.
Finally, the know-how must be identifiable, that is “described in a sufficiently comprehensive manner, such as to verify whether the criteria of secrecy and substantiality are met“.
This characteristic meets the aim of allowing the franchisee to know in detail the commercial formula transferred to him and to verify compliance with the requirements of secrecy and substantiality. However, this is a formal charge that also responds to an interest of the franchisor, who in this way is able to check whether the franchisee eventually uses the know-how beyond the contractual purpose, or, once the contract has ended, he uses it for his or others’ own purposes.
3.Consequences of an invalid or inexistent Know-how
If a franchising agreement does not contain any know-how, or in case know how is lacking of the legal requirements, the franchise agreement is considered void, and therefore the franchisee has the right to return all sums he has paid to the franchisor, and in addition to be compensated for the damage suffered.
However, it is very difficult for a judge to ascertain whether in a given franchise the know-how is existing and valid, according to mentioned requirements. This explains why there have been very few decisions in Italy that have considered a franchise void for lack of the know-how. On the contrary, some courts believe that know-how must not be always present in a franchise contract, and it can be evaluated as such only if the parties have mentioned it in that contract.
On a different level, the lack or insufficient consistency of know-how can integrate an hypothesis of misleading advertising, allowing the Italian Competition Authority (AGCM) to issue a pecuniary sanction – either automatically or upon notification by the franchisee – against the franchisor.
Unlike courts, the Italian AGCM has often committed sanctions to franchisors for misleading advertising related to the lack or false know-how, and such decisions have created a lot of damage to franchisors’ brand or image in the market.
Given the importance of know-how for franchisors, it is important that know how is:
- not disclosed to franchisees before the agreement is signed;
- not used to franchisees’ own advantage, both during the contract and (above all) once the franchise contract is terminated.
To protect the economic value of their know-how, franchisors usually include a well-articulated and detailed secrecy clause in their preliminary agreements, letters of intent and franchise agreements, which obliges franchisees (as well as their employees and collaborators) not to disclose the confidential information and not to use them outside the franchise relationship or for activities other than those carried out within the franchising network.
Consequences of non compliance with the Italian Franchise Law, or for non adequately protecting the know-how, might be quite severe for foreign franchisors. Therefore, careful planning and adequate legal counseling from a local law firm is highly recommended.
To receive any information about the Know-how and franchising in Italy, or explanations on the above, please contact us.
Avv. Valerio Pandolfini
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The information contained in this article is of a general nature and is not to be considered an exhaustive examination of the various issues, nor is it intended to express an opinion or provide legal advice. Specific legal advice must be provided with regard to individual cases.