MOC Issues New Rule for Trade Secret Protection in Commercial Franchise

Recently, the Ministry of Commerce released the revised “Measures for information disclosure of commercial franchising” (the “Measures”) which will come into effect from 1st April. Compared with the past regulation, the most attractive part is the confidentiality responsibility of the franchisee, and the new regulation consists two main parts as follows(the image today is the logo of McDonald’s and Subway, the major franchisors in China):

1, The franchisee shall not disclose or improper use any trade secret accessed to him/her when negotiating on the agreement, no matter whether the agreement is concluded or not;

2, After the termination of the franchise operation contract, even without the non-disclosure agreement then, the franchisee shall also bear the obligation of confidentiality to the trade secret known during the contract.

The provisions cover the conclusion, performance and matters after the termination of the commercial franchise contract, and the obligations are mainly subject to the legal terms, which mean the confidentiality is obligatory rather than being agreed, with the strengthened confidentiality obligation, it could effectively prevent the elicitation of the trade secret in the name of franchise.

According to Western business practices, a confidentiality agreement shall first be concluded before the negotiation, while in a society of human feelings like China, the prior confidentiality agreement is rare. Of course, there are legal provisions concerning the Culpa in Contrahendo, which may be established for disclosure of the trade secret during the agreement conclusion. The amended clauses is profitable to the protection of the trade secret.

Notably, the object of the protection is “trade secrets” only, which by law is narrow definition and demands practicability, security and franchiser’s protection measures In practice, lots of information could not be protected unless agreed in the confidentiality agreement. Therefore, it is very important for both franchisor and franchisee to sign a written confidentiality agreement to set the scope of confidential information.

The other main amendments in the new Measures:

1, The regulatory disclosure bankruptcy information is amended from the original 5 years to the current 2 years, which will no doubt activate the commercial franchise operation market and could help the franchise rise again as soon as possible, while on the other hand the franchisee may also face the risk of incomplete understanding of the franchisor’s history.

2, A more specific technological support content need to be disclosed, with the amendment of disclosure method, implementation plan, the name of the operation source, sorts and product, equipment kinds. All these may help to reduce the risk between the franchisor and franchisee’s service and extension.

3. The liability division between the franchisor and franchisee on the information disclosure, and that may contribute to the undertaken obligation between the parties and could bet the legal reference when the conflict emerges.

4. The information to disclose is longer limited to major ones, with currently all information concerning the lawsuit in the near five years shall be disclosed for the protection of the franchisee’s interests.

Other recommended posts on our website:
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2. How to Apply for the Trademark Record in China Custom
3. How to improve the success rate of trademark registration in China?
4. Matters for Attention in Trademark Refusal Review in China
5. Introduction of China’s Legal System of Trademark Renewal
6. Introduction on the Regulations concerning the Capital Contribution in IPR or Domain Name in China
7. The Copyright Registration in China Could Be FREE?
8. China Copyright Protection Term Longer than EU’s?
9. Matters for Attention in the Patent Preliminary Injunction Application in China(I)

Author: Mr. Luo Yanjie
Attorney-at-law of DeBund Law Offices
Co-author: Mr. You Yunting
Founder & Editor-in-Chief of Bridge IP Law Commentary
Partner & Attorney-at-law of Shanghai DeBund Law Offices
Email: Bridge@chinaiplawyer.com, Tel: 8621-5213-4900,
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