Franchisor loses restraint of trade injunction

Last week, the High Court declined to grant an interim injunction restraining an ex-franchisee from continuing to trade, following the expiry of the franchise agreement.

The case raises some interesting issues, not just in the area of enforcement of restraints of trade, but also in regard to what happens to the customers list or the franchised business itself, at the end of a franchise agreement.

Briefly, the facts were that the defendants signed up to the Greenacres franchise for a ten year term in January 2004. During the operation of their franchise they acquired a customer base, built up through the nationwide marketing of Greenacres, but also in large part due to their own efforts. They claimed that 70% of their customers, at the expiry of the agreement, were not referred from Greenacres.

As January 2014 approached, they toyed with the idea of renewing their term for another ten years, however in the event, decided not to, and instead, when the agreement ended, they re-branded and set about continuing to service their customers under their new brand.

Greenacres sought an injunction to restrain them from competing by trading with the customers on their customer list. Greenacres sought to argue that it owned the customer list.

The starting point was to examine the agreement itself. The agreement contained many of the usual provisions we expect to see in a franchise agreement, including a restraint of trade clause which provided that the franchisee could not compete for two years following termination. The restraint of trade clause immediately followed a provision in the agreement relating to when the franchisor could terminate for cause. One of the first arguments raised by the franchisee therefore was that the restraint of trade clause therefore only applied when the agreement was terminated by the franchisor, and not due to expiry.

The Judge did not comment in detail on this point, but noted that the restraint of trade clause was contained within a more detailed provision relating to what would occur when the agreement came to an end, which included other sub-clauses which one would expect to see whether the agreement was terminated for cause, or came to an end naturally, such as the requirement to hand back all the manuals and IP.

The case came before the Court as an interim injunction. As such, the threshold that a plaintiff needs to demonstrate is that it has an arguable case the restraint should be enforced. The Judge therefore merely noted the arguments for both sides, concluding there was an arguable case in support of the position of both parties.

The second issue which arose was the interesting question of who owned the right to service the customers, following termination of the agreement.

Naturally the franchisor argued it had a proprietary interest in the right to service the customers at the end of the agreement.

The franchise agreement between the parties was silent on who owned the customer list, although there were the usual detailed provisions covering the fact that all IP and know-how would remain the property of the franchisor, following termination. Whilst the franchise agreement was silent on the point, it did provide that in the event of any inconsistency, the terms of the Master franchise agreement would apply. That agreement did have a provision in it which referred to the customer lists and said they belonged to the franchisor.

The Judge therefore found it was arguable that the franchisor owned the customer list, although he expressed the view that this might not be the case for customers who were not introduced to the business through Greenacres.

The case being an interim injunction, the next question was weighing up the balance of convenience. It was on that point that the franchisor failed, which meant it could not get an injunction against the franchisee. The exercise of weighing the balance of convenience involves assessing the adequacy of damage for a plaintiff, as against irreparable injury which might be occasioned to a defendant. This is a delicate balancing exercise and the question of irreparable injury is looked at from both sides.

The Court found that the size and structure of the Greenacres system (where there are multiple franchisees working in the same territory) meant there was no real risk of the defendant harming the integrity of that system. He also thought it was of relevance that the defendant had actually got to the end of their term. He was of the view that Greenacres would have an adequate remedy in damages.

I think the case is of interest on the topic of who owns the customer list on termination, especially where the agreement is silent.

Ordinarily, a customer list would comprise part of the goodwill of a business. It is the source of custom and revenue. To me, a customer list does not fit comfortably into the category of know -how or intellectual property.

Good agreements of course will expressly address the issue of who owns the franchisee’s business, including any customer list, at the end of the term. Frequently, there will be a provision for a franchisor to elect to buy parts of the franchisee’s business on termination. In that scenario, it would be difficult to argue the franchisee’s business was owned by the franchisor on expiry, because, otherwise, why would there be a clause allowing the franchisor to buy it?

As always, it is also ways best to get advice on these things at the outset. The defendant in this recent case have reported to the media they felt unfairly bullied by the franchisor, but clearly they have always proceeded on the basis they owned their customer list at the end of the agreement, in particular those customers they sourced themselves. The franchisor of course has to set a precedent, in the interests of certainty in their system, so the bullying criticism was probably unjust.

The issue could perhaps have been better addressed in their franchise agreement, so at least everyone would know where they stood at the end of the agreement.

30 March 2014