A franchisor failed to obtain an interim injunction to restrain the activities of a former franchisee after it failed to show to the required standard that post-termination restrictions for a 12-month period were reasonably necessary.
Countrywide Signs Ltd (the franchisor) operates a franchised business involving the maintenance and management of sales and letting boards used by estate agents. The franchisor has developed a proprietary board management system (BMS), which is licensed to franchisees. Blueprometheus (the franchisee) purchased the franchise for a particular territory and entered into a franchise agreement (the agreement) for an initial five-year period. The franchisor and franchisee did not renew the agreement prior to its expiry, but they continued to act in accordance with its terms while discussing a renewal agreement. However, the parties could not reach an agreement so the franchisor gave notice to terminate the agreement.
Franchisor's claim
The franchisor claimed that the franchisee was;
- continuing to trade in the territory in breach of post-termination restrictions in the agreement;
- using the franchisor's confidential information; and
- acting in combination with a competitor of the franchisor, which had its own BMS.
The franchisor sought injunctive relief for the return of its confidential information and to prevent the franchisee from trading in breach of the post-termination restrictions.
The franchisor relied on a clause of the agreement which provided that the franchisee would not be involved in a competing business for 12 months after termination, as well as another clause that restricted the use of the franchisor's confidential information. Both clauses are common protections in English law franchise agreements.
Franchisee's defence
The franchisee asserted that there should be no injunctive relief as the post-termination restrictions were not enforceable since the agreement had expired. Regardless, the franchisee argued that they were unreasonable as they were too wide in scope.
The judgment confirms that the court rejected the franchisee's assertion that the 12-month period for the post-termination restrictions ran from the expiry of the initial five-term. The franchisee's argument was contrary to the proper construction of the agreement and commercial common sense. However, after considering the circumstances and applying ChipsAway International Ltd v Kerr (ChipsAway v Kerr), the court could not infer that the 12-month period was reasonable and enforceable.
So, while the franchisor failed to obtain the injunction to restrain the former franchisee's post-termination activities, the court was satisfied that injunctive relief could properly be granted to protect the franchisor's confidential information.
ChipsAway v Kerr
The court considered ChipsAway v Kerr when examining the question of whether the post-termination restrictions of the agreement went further than necessary.
In ChipsAway v Kerr, the non-compete covenant was upheld, as the purpose of the covenant was to prevent the franchisee for a period from competing in the franchise territory in the same lines of business. This was to enable the franchisor to protect its goodwill by having time to recruit another franchisee for the same territory.
As the post-termination restrictions in the agreement applied not only to the franchisee's territory, but also to the territories of the franchisor's other franchisees, the court decided that:
- the franchisor did not require the restrictions to protect its goodwill as, unlike in ChipsAway v Kerr, the franchisor did not require time to recruit another franchisee in the territory to protect its goodwill in the franchise. They already had established franchisees in the territory; and
- the post-termination restrictions were unreasonable as they went further than necessary.
The court's conclusion that the restrictions went further than necessary may have been avoided if the franchisor had limited the restrictions to the franchisee's territory only.
This case highlights the importance of having reasonable post-termination restrictions. It is also a reminder that such covenants should be carefully tailored to ensure enforceability and to avoid any inadvertent loss of protection.
One way to warrant a minimum level of protection is to ensure that restrictive covenants are drafted in a series of sub-clauses so that they can benefit from the "blue pencil" test, meaning that a judge could cross out overly restrictive clauses but keep any reasonable ones.
For further information on this topic please contact Gordon Drakes at Fieldfisher LLP by telephone (+44 20 7861 4000) or email ([email protected]). The Fieldfisher LLP website can be accessed at www.fieldfisher.com.