Corporate Lawyer, Emma-Jane Clark, analyses the recent Supreme Court of Queensland decision of EzyDVD Pty Ltd v Lahrs Investments Qld Pty Ltd and the difficulties that may present for a franchisor in seeking to obtain an injunction to enforce restraint of trade provisions. On 13 August 2009, the Chief Justice of the Supreme Court of Queensland dismissed a franchisor’s application for an injunction to enforce restraint of trade provisions pursuant to a franchise agreement. The franchisor sought an injunction, as immediately following termination of the franchise agreement, the franchisee established a similar business as the business conducted pursuant to the franchise agreement, from the same premises. This case demonstrates the difficulties a franchisor may contend with in seeking to enforce restraint of trade provisions and also the importance of ensuring it is clear what the franchisor is seeking to protect in enforcing the restraint.
The respondent, Lahrs Investment Pty Ltd (Franchisee) signed a franchise agreement with the applicant, EzyDVD Pty Ltd (Franchisor). The agreement granted the Franchisee a right to operate an EzyDVD store together with a licence to use the Franchisor’s confidential information and intellectual property in connection with the operation of a retail DVD business from a shopping centre store.
Restraint of trade provisions
The franchise agreement contained provisions which provided for acknowledgment from the Franchisee, that as it was going to be obtaining confidential information and intellectual property of the Franchisor for the purpose of conducting the business, that it was reasonable they be bound by restraint of trade provisions. Such provisions provided that on termination or expiration of the franchise agreement, the Franchisee be restrained from operating a similar business for a period of 6 months from termination or expiry of the agreement, within a 5km radius from the store the Franchisee was licensed to operate from, and within a 1km radius from any other EzyDVD store across Australia.
The Franchisor’s confidential information and intellectual property
The franchise agreement made provision to protect the Franchisor’s confidential information and intellectual property upon the termination of the agreement. The confidential information and intellectual property it sought to protect included a handbook and particular computer software and database material provided to the Franchisee. Evidence was provided that in conducting its business, the Franchisor would arrange for the Franchisee to be set up with “MYOB Retail Manager” software and a tailored software application of the Franchisors. The tailored package integrated with the MYOB software and would allow the Franchisor and Franchisee to communicate electronically to update database information and provide the Franchisee access to what was known as the “EzyDVD Titles Database” which contained information that was confidential to the Franchisor.
The contractual regime to protect the Franchisor’s information and property
The franchise agreement contained provisions which provided that on termination or expiration of the franchise agreement, at the election of the Franchisor, the Franchisor’s confidential information and intellectual property had to be destroyed or returned to the Franchisor. Other provisions included that the information and property is only to be used for the purpose of running the business pursuant to the agreement.
Alleged breach of the restraint
After a year and a half, the franchise agreement was terminated. Immediately after the termination, View DVD Pty Ltd (View DVD), the fourth respondent in the matter, began conducting a similar business from the same store that the Franchisee had conducted the EzyDVD business. The sole director and shareholder of View DVD was Mr Lahrs, a director and shareholder of the Franchisee.
Were the restraint of trade provisions reasonable in the circumstances?
Evidence was given by the respondents that when the franchise agreement was terminated, the Franchisor’s confidential information and intellectual property were returned to the Franchisor. Accordingly, the respondents argued that the restraint was not reasonable in the circumstances given there was a contractual regime in place to protect the Franchisor’s confidential information and intellectual property and it had been complied with.
Furthermore, Mr Lahrs gave evidence that in establishing the new business, View DVD entered into a contract with Network Video for a complete DVD titles database, and where the database from Network Video was deficient, he would manually insert the additional DVD titles using descriptors he had used when he operated the former EzyDVD business. Additional evidence provided that he also contacted MYOB for an accounting package to suit the new business.
The Franchisor argued that Mr Lahr’s conduct, as set out above, exemplified that it was reasonable to enforce the restraint provisions given the confidential information that was retained in his head and subsequently used by Mr Lahrs, although the contractual obligations were discharged by the first respondent.
Court’s analysis and decision
The Court concluded that because the Franchisor’s case was argued on the basis that the restraint was reasonable to protect the Franchisor’s confidential information and intellectual property and not by reference to other considerations such as protection of goodwill, that it was not reasonable for the Franchisor to rely on the restraint provisions in addition to the contractual regime.
In coming to such conclusion, the Court gave particular regard to evidence that the customers of the Franchisee’s store were passing traffic and mostly one-off customers and that the information on the data base was constantly being updated. Accordingly, the Court said that such information had short term applicability and given the nature of the customers it was unreasonable to add this particular restraint.
This case highlights the difficulties a franchisor may face in attempting to enforce restraint of trade provisions against a franchisee. As demonstrated in this case, if there are alternate contractual provisions that can be relied on to protect the franchisor’s confidential information and intellectual property then it may be unwise to justify a restraint of trade provision on the grounds set out above. The court’s finding of fact that customers were passers by who did not return for repeat business seems at odds with common sense and may have limited application in other cases.