Know-how as the backbone of the franchise agreement

Franchising is one of the most widely used legal instruments worldwide as a way to expand a business used by companies of all sizes to integrate into national and foreign markets. This consists of proven methods, correct training processes and a contract that foresees any circumstance that may arise in the development of the relationship between franchisor and franchisee.

The know-how is one of the backbone elements of the franchise contract and its transmission is a basic requirement.

However, precisely defining and delimiting the scope of this know-how is at times difficult, and this is not helped by the wide-ranging case law and regulatory definitions which often do not coincide thereby making this a diffuse concept.

To assist in this process, we turn to our judicial body of reference to establish the governing criterion, with the most recent case law from the Supreme Court. In its judgment 254/2020 of June 4, 2020, the Supreme Court summarises the definition of know-how as

"a set of non-patented knowledge, derived from the franchisor's experience and verified by the franchisor, which can be protected as a substantial and identified business secret with financial value, and able to be considered as a real intangible asset able to be the object of legal business."

This judgment is, in particular, highly interesting because it takes up a prior judgment, No. 754/2005, of October 21, which sets out an initial evolution of the concept:

"The precedents highlight the evolution of its scope, which was originally limited to the "secret knowledge of an industrial nature", and was later extended to that of a "commercial nature", and as such it became associated with secret knowledge referring indistinctly to the industrial or commercial fields, including the organizational aspects of the company, -business secret-. It also highlights the trend towards a more generic concept, in the sense of connecting know-how with experience - empirical knowledge (progressive acquisition, the result of experience in the performance of an industrial or commercial activity or the result of research and experimentation), which is classified as specialist and with a lesser degree of confidentiality".

In addition, this 2005 ruling indicated the characteristic elements:

"Secrecy, understood as difficult accessibility (it is not generally known or easily accessible so that part of its value lies in the temporary advantage that its communication confers to the franchisee or licensee), and overall or global valuation, i.e., not in relation to isolated elements, but rather articulated; substantiality, understood as utility (competitive advantage); proper identification and financial value (although, in reality, it is embedded in the utility)."

This characteristic service must be executed at the beginning of the term of the franchise contract, and once it is performed (usually through a user manual), it does not need to be repeated, mainly because the transmission of knowledge is satisfied with the initial execution, without prejudice to other complementary services such as technical and commercial assistance in its implementation.

As such, we are dealing with a single-tract service, which is considered to be sufficiently remunerated with the entry fee, with reciprocity between both services. This, however, within the franchise contract coexists with other successive services (for example, assignment of the right to use the trademark or commercial and technical assistance), all of which make up the franchisor's own services and that cannot be dissociated without affecting the cause of the contract.

When carrying out the legal and strategic analysis on the possibility of expanding a business through the franchise system, the above will be particularly relevant in the sense of determining the existence of know-how with its own substantive financial value and which can therefore be sold for consideration.

The know-how must be solid and have the proper transmission techniques and an adequate training process, all of which must be protected by the necessary confidentiality and non-competition clauses.

Thus, in order to protect such know-how, it is essential that each and every one of the persons who have access to the knowledge are bound by an obligation of non-communication to third parties. This is achieved by means of confidentiality agreements or clauses. In addition, they must be bound by the ban on using the know-how acquired to engage in any commercial activity competing with that of the owner of the secrets.

The exact definition of the know-how and the contractual configuration of the know-how must be drafted with precision for the success of the franchise contract.