In a recent case out of the Federal Court, A&A (Sydney) Pty Ltd v YUM! Restaurants Australia Pty Ltd [2014] FCA 678, Pizza Hut franchisees were denied an interlocutory injunction restraining the franchisor from reducing the product range and effectively setting maximum prices.

Yum! Restaurants Australia Pty Ltd (Yum) is the Australian franchisor of Pizza Hut, with the various applicants being 80 of approximately 210 Australian franchisees. As a result of falling profitability, Yum developed, tested and planned to implement a ’Reduced Price Strategy’ consisting of:

  • restricting the range of pizza products to be sold by the franchisees; and
  • setting maximum prices for the products.

Yum had entered into a number of non-reversible transactions in respect of the marketing of this strategy, which were aimed at responding to similar promotions by competing pizza restaurants.

Further, the franchise agreement of Yum allowed it to set a maximum price for products sold by franchisees.

The franchisees took issue with the proposed strategy and sought an interlocutory injunction on the bases of Yum breaching:

  • its duties to:
    • cooperate in achieving the objects of the franchise agreement;
    • act honestly and reasonably; and
    • act in good faith; and
  • section 21 of the Australian Consumer Law, which prohibits unconscionable conduct.

The Court defined Yum’s duty to cooperate as being one that was essentially related to advancing the interests of the business as a whole, taking into account all franchisees. The Court observed that Yum had undertaken significant research – including market testing in WA and the ACT – throughout the formulation of the strategy. Yum had consulted widely with franchisees, disclosing significant (but not complete) details of the proposed strategy. The strategy also received more than two days of consideration from senior management, which included representatives from several franchisees.

Notwithstanding these observations, the proceedings were not an opportunity to finally decide Yum’s liability. Rather, Jagot J had to determine whether an interlocutory injunction should be awarded restraining the implementation of the strategy.

According to ordinary principles, this involved a consideration of:

  • whether there was a significant probability that the franchisees would succeed in their action; and
  • which party would be most injured or inconvenienced by the ordering or refusal of an injunction.

The Court concluded that an interlocutory injunction would be inappropriate in light of these factors, noting the following critical points:

  • There had been a clear continuing deterioration in the profitability and brand recognition of the Pizza Hut business.
  • There were approximately 130 other franchisees who were not parties to the proceedings but would be disadvantaged if Yum could not implement the strategy, particularly in light of a recently launched Domino’s campaign.
  • Financial modelling evidence tendered by the franchisees criticised the strategy, but was outweighed by the actual success of ACT and WA trials.
  • Any franchisee who suffers loss could be adequately compensated by monetary damages.
  • The interlocutory injunction would effectively restrict Yum from competing on price in the pizza market.

As noted above, this does not mean that the legal questions have been finally determined. A Directions Hearing is scheduled for 5 August.