How Do Firms Protect Competitively Sensitive Information? The Case of Franchising

Abstract

This paper explores the types of contract clauses that franchisors rely on to protect competitively sensitive information. Based on a sample of contracts obtained from franchise disclosure documents (FDDs) for a set of 298 franchisors whose FDDs are available circa both 2010 and 2020, we show that franchisors use several different covenants to protect sensitive information about their business. These include confidentiality clauses, non-competition covenants, non-recruitment clauses, and covenants requiring that the franchisee participate in the operation of the business. Moreover, the contracts impose requirements not only on the franchisee, but also on other individuals, notably the franchisee’s business partners as well as family members, and employees. In fact, a number of franchisors require that such individuals sign additional, separate covenants. We find that the extent to which franchisors use various covenants has not changed much between 2010 and 2020, with the exception of non-recruitment clauses. However, the reliance on these covenants varies across industries. Our results on the extent and application of the restrictions allow us to contribute to the current policy debate regarding many of these types of covenants in both commercial and employment contracts, much of which has focused on their negative effect on labor mobility rather than their potentially important role in protecting valuable information from competitors.