Restaurant Confidentiality Agreements Explained
Restaurant Confidentiality Agreements are among the most commonly signed and requested of the confidentiality agreement types. Used by restaurant businesses, these types of agreements are designed to protect a restaurants sensitive and proprietary concepts, business practices, and information from being disclosed to competitors, previously unknown parties, or the public at large.
Almost all restaurant businesses want to keep their recipes secret, but reputational damage from food tampering and the corollary lawsuits are also a major concern for restaurants. A restaurant confidentiality agreement is designed to prevent former employees and service providers (like food servers, food prep employees, and kitchen managers) from "leaking" important information to competitors which might hinder a primary restaurant’s ability to execute only its own properly donated food recipes and concepts. Since so much of the business strategy of most successful restaurants hinges on secrecy, a confidentiality agreement can be extremely important.
Since almost all restaurants have their own unique flavors and foods , the restaurant industry benefits from being able to also keep a secret list of select food vendors and purveyors (a list that would be priceless to direct competitors.) For example, a donut shop that has a special recipe might only use one type of flour, and the ability to protect the supplier of that flour would be valuable to maintain a competitive advantage over quick-service donut shops with similar donut tastes.
Restaurant confidentiality agreements are similar to other confidentiality agreements in that the receiving party usually agrees that it will not disclose the sensitive, proprietary information it receives from the disclosing party to a third-party. However, restaurant confidentiality agreements must also cover a wider range of proprietary information, including, but not limited to, flavor combinations, ingredient specifics, and vendor lists (that sometimes include even specific brand names.)
In addition to keeping secrets, a restaurant confidentiality agreement can also restrict an employee’s ability to work for a competitor, open a competing business, and/or entice key employees to jump ship and invest their own human capital into new ventures.
Essential Elements of a Confidentiality Agreement
In order for a restaurant confidentiality agreement to be effective, it must be comprehensive and tailored to the particular needs of the restaurant. Some of the issues that must be addressed include who the parties are, what information will be considered confidential, and for how long the agreement will be in force.
Parties
Typically, a confidentiality agreement will identify the parties. In our context, those parties will either be the restaurant and its potential employee or two businesses. Identifying the parties allows the agreement to be enforced against a particular target where the confidential information has been disclosed.
Types of Confidential Information
The information that is treated as confidential will likely be particular to the business using the confidentiality agreement. For example, if the restaurant has a secret recipe, then the recipe must expressly be included on the list of confidential information. On the other hand, a restaurant chain’s menu will probably be considered confidential, because if every person unequivocally knew the menu, then no one would have a competitive advantage over his or her competition.
Duration
The period for which the confidentiality agreement will protect the information disclosed may also be an important factor. If for some reason it is not set, a standard period may be implied by the courts.
Secrecy of Recipes and Other Trade Secrets
Restaurant confidentiality agreements are a useful and important tool in protecting your business from competitors: They are contracts created with your employees, vendors, suppliers, and others that impose legal obligations to keep information confidential. Among the assets that can be protected through restaurant confidentiality agreements are recipes, unique cooking techniques or preparations, proprietary ingredient ratios and formulas, and other proprietary information that gives you a competitive edge over other restaurants.
This may not be intuitive in a business where more than 600,000 food service establishments compete for your customers. But, it is important. Many brands relied on the same products or general practices yet experienced different results because of trade secrets. A restaurant with a special recipe or a popular and well-known dish can be protected with reasonable measures such as restricting access and monitoring the use of recipes, and requiring employees who have access to sign confidentiality agreements designed for those that have access to those items.
Many new restaurants often overlook this area of importance in developing their brand. If you are a franchisee or planning to become one, even more so, you really should consider how to build and protect your reputation and sales.
Confidentiality Agreement Breach Consequences
If the restaurant decided to pursue litigation in this situation, it would be faced with a few different issues:
First, the restaurant would have to prove that the employee breached the restaurant’s confidentiality agreement. In this case, the confidentiality agreement seemingly covers the customer list and the customer review that the employee shared with the new employer. But what if the employee gave the restaurant’s shopping list to the new employer, or some other secret? If there’s any ambiguity in the employment agreement, a judge may be less likely to agree with the restaurant. Absent contractual ambiguity, the restaurant would have a very good argument that it has been damaged by an employee’s disclosure of its trade secrets. However, to the extent possible, it is important to avoid surprise by making sure that the agreement is clear as to what constitutes a "secret."
Second, the restaurant would potentially be able to prove how the employee damaged the restaurant’s reputation by posting online that the restaurant "ripped off" a guest. Even if the employee didn’t disclose a trade secret, by disclosing to the world that the restaurant rips off its guests, the restaurant’s reputation has potentially been badly damaged and the restaurant may be able to recover damages for that. The restaurant may even be able to prove that the employee was the one who posted such statement online because he has had to post under a user name "Ripped Off". Again, it is important to ensure that if and when a dispute arises, the agreement is worded clearly so that liability can attach to the employee for having violated that agreement. It is not sufficient to just have a one page agreement that states something like "You should keep everything secret", but rather, the parties must have clarity on what constitutes a "secret" or risk dissipating the agreement if and when there’s a dispute between the parties over it.
Steps for Drafting an Effective Restaurant Confidentiality Agreement
Your restaurant must protect its confidential information with a well-written confidentiality agreement that complies with the law. It’s the best first step in deterring a former employee from using your intellectual property to compete against you, either directly or indirectly. As mentioned above, a confidentiality agreement can be a stand-alone contract, or may be included within a contract of employment or other agreement. It can also be incorporated into a nondisclosure agreement (NDA). It is important for a restaurant to recognize that any confidentiality agreement must be in writing. Specifically, the agreement needs to include its terms, including the consideration to be paid for the nondisclosure, in order to be legally binding. It is always recommended that you consult an experienced attorney before you draft or sign a confidentiality agreement. You want to ensure that it does not restrict lawful competitive activity by the former employee. You want an attorney’s assistance in making sure that the confidentiality agreement does not compel an employee to nondisclosure of all information , including things that are common knowledge or readily known to the public, such as tax return information about the restaurant. And there should be a clause that states how the confidentiality agreement may be enforced, possibly with a provision for post-employment noncompetitive behavior. If the restaurant owner intends to draft a confidentiality agreement on his or her own, knowing what rights may be set out in the agreement and how to enforce those rights is necessary. It is important not to prescribe terms that are unlawful or precluded under other federal, state or local laws, such as antitrust laws. When drafting this agreement, the business owner needs to ascertain the type of information he or she wants to keep confidential, and set out a plan for enforcing the terms of the agreement, such as assigning the agreement to a successor company in the event of a sale or merger of the restaurant.
Common Pitfalls and How to Avoid Them
One common challenge restaurant owners face when implementing confidentiality agreements is employee pushback. Some employees might view these agreements as an infringement on their personal rights or see them as company overreach. When we start working with a client and request that all of the owners and managers sign confidentiality agreements, we sometimes hear them say, "well you know, Sue just left and we don’t want to let her take all our recipes. You know how employees are sometimes." In theory, that makes a lot of sense, but if Sue was a valuable employee who needed to go out and shop for produce or pick up meat at the slaughterhouse to feed the restaurant on a day-to-day basis, she probably didn’t have access to the recipes in the back of the restaurant. If Sue has access to all your confidential information and recipes, will she really take the recipe with her when she has only worked for you for a few months? It’s almost never a good idea to share confidential information (including recipes) with an employee during the first 90 days of employment, so your employees shouldn’t be sharing that information with Sue in the first place.
Be sure to address this issue in your employment application and your offer letter, and in a separate section of your employee handbook. If you have concerns that your employees are giving information to Sue, you can also include nondisparagement clauses or require them to sign noncompete or no-solicitation provisions in the separation agreements when they leave your employment. Nondisparagement clauses often help deter employees from badmouthing your company or encouraging other employees to leave.
Another challenge restaurant owners may encounter are state laws that really limit enforcement of confidentiality agreements. California is a good example of this issue. The California Business and Professions Code Section 16600 sets out that "Any contract which imposes any restraint on anyone from engaging in a lawful profession, trade, or business of any kind is to that extent void." Certain confidentiality provisions in California (including in the restaurant industry) may technically be void without any practical remedy. Colorado and Kansas have similar statutes saying that a contract cannot prevent someone from practicing a trade or profession after termination from an employer. These statutes are more restrictive than what is allowable under common law in most states.
Because these statutes are quite restrictive, you’ll want to carefully evaluate your confidentiality agreement to determine if you need a substitute for the more restrictive language, and if you decide to go with more restrictive language, you’ll need to make sure your indemnification provisions against third parties include your indemnification against any judgments or penalties incurred as a result of the more restrictive language.
Practical Tips to Maintain Confidentiality at Your Restaurant
To protect intellectual property and other sensitive information, it is important to create a workplace culture that encourages employees to respect its potential value. You should consider the following:
- Educate your employees on the contents and importance of the various kinds of confidentiality agreements you use in your restaurant.
- Review your restaurant agreements and policies related to confidentiality every year to ensure they remain current. For example, if you adopt new technologies , be sure your agreements are updated accordingly to reflect any changes to data security measures.
- Include confidentiality provisions in your Employee Handbooks and communicate them to all staff members.
- Have a clear disciplinary policy for confidentiality violations that may lead to termination.
- Set up security measures to protect confidential information. For example, designate areas of the restaurant where certain equipment, data or processes are off-limits to certain staff members. For example, access to your POS system may be limited to managers or administrators.
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