Franchise case law update: Exclusivity – is the feeling mutual?

Introduction:

The English High Court recently considered the concept of exclusivity in the case of London Business House Limited, Faisal Rehman v Pitman Training Limited, Pitman Training Group Limited. The judgement also considered whether there was a case for fraudulent misrepresentation in relation the franchisee's alleged reliance on pre-contractual statements.

Background

Pitman Training Limited (“Pitman”) provides career focussed training courses and qualifications for individuals looking to develop their professional skills. London Business House Limited (“LBH”) was attracted by the opportunity to sell Pitman courses under Pitman’s franchise model. Following discussions, LBH entered into a written franchise agreement (the "Agreement") with Pitman in March 2015 in respect of the Nottingham area.

The business venture was unsuccessful and the Agreement was terminated by LBH in June 2017. LBH blamed such failings on Pitman’s supply of course materials to another course provider, Derby Business College Limited ("Derby"), which had been selling the materials within the Nottingham area. For information, Derby offered only government-funded training courses for generic, basic level employment skills through Pitman.

By supplying course materials to Derby, LBH claimed that Pitman had:

1. breached the terms of the franchise agreement and, in particular, Pitman’s entitlement to enjoy exclusivity to “trade the Pitman brand” within the Nottingham area; and
2. misrepresented to LBH in pre-contractual negotiations that LBH would enjoy an exclusive territory from which to trade the Pitman brand.

At the core of the dispute was the question of whether Pitman's supply of materials to Derby breached a grant of exclusivity which LBH argued was conferred under the franchise agreement (even if not expressly stated), namely:

'an exclusive right for [LBH] to operate the System (as defined in the agreement) and provide the services (as defined in the agreement) for the purpose of operating its business in the Territory (as defined in the agreement) for at least a five year period, or in summary to exclusively operate the "Pitman" brand and associated trade marks in the Territory'.

The High Court Decision

The High Court rejected the claim advanced by LBH on the basis that LBH failed to prove that:
 

• it had suffered loss as a consequence of Pitman's breach of the alleged exclusivity granted to LBH; and
• that such loss was caused by Pitman.

Although Judge Worster, who gave the leading judgement, concluded that there must have been an element of exclusivity offered by the franchise agreement, the franchise agreement did not explicitly reference LBH being entitled to the exclusive right to trade the Pitman brand throughout the Nottingham area.

In respect of the issue of causation, Pitman’s sale of “white labelled” course materials to Derby, sold only following receipt of government funding and which did not carry the Pitman brand, did not constitute a breach of LBH’s limited right to exclusivity under the franchise agreement. Moreover, the government-funded courses and their target market were very different to the core business of Pitman, which was to up-skill primarily career developers, career changers and parents re-entering the job market after a career break, or to change careers.

In addition, the court was not satisfied that there was sufficient evidence to prove that Pitman had fraudulently misrepresented Pitman’s position with regard to exclusivity. Whilst there was much evidence to consider about what was said by Pitman employees to LBH in the pre-contractual period, which had led LBH to an understanding on the scope of exclusivity which exceeded the contractual position, the nature of that evidence was largely recollections of conversations and as such, it was unreliable and effectively excluded by entire agreement and non-reliance clauses in the franchise agreement.

Key takeaways

Perhaps an obvious point, but the case underscores the importance of ensuring that an agreement reflects accurately the intentions of the parties, and the risks of allowing key concepts such as exclusivity or the lack thereof to go undefined. The case also highlights the risks of misunderstandings that can arise during pre-contractual discussions, and the desirability of ensuring that:
 

• The franchise agreement has robust entire agreement and non-reliance clauses;
• The franchisor staff are trained adequately in identifying and mitigating these risks when dealing with prospective franchisees; and
• The franchisor develops and uses a robust disclosure document, which the franchisees signs before entering the franchise agreement (this is a legal requirement in many jurisdictions, but not the UK).

However, the most interesting aspect of this case relates to the discussion on exclusivity. The court was persuaded by the argument put forward by LBH that there was an exclusive aspect to the grant of the Pitman franchise. Notwithstanding the lack of an express provision in the grant of rights or otherwise in the body of the agreement to the effect that the rights granted are exclusive, there was a reference in a schedule to the provision of a Franchise Package, which includes a "dedicated and exclusive use of the Pitman Training brand and logo within the agreed Territory" and a "dedicated Territory for the Franchisee to develop and grow".

However, the judgement seems to go further by suggesting that all franchise relationships should include an element of exclusivity: "exclusivity lies at the heart of a franchise agreement. Without it, the idea doesn't work. If the franchisee had to face competition from the franchisor itself, or from some other party who was supplied by the franchisor, what would be the benefit of having a franchise?"

This comment does not sit well with the reality that certain franchise systems do not grant any geographical exclusivity, and even for those systems that do, geographical exclusivity cannot be easily mapped onto the realm of digital commerce.

The judgement clarifies that exclusivity is rarely absolute and is limited commonly to the brand and the system, so the corollary is that a franchisor may engage in supplying similar goods or services to third parties in the same territory which do not involve the trading of that brand without breaching the agreement.

Franchisors should review the grant of rights clauses in their franchise agreements to ensure that their agreements accurately reflect the way the brand and system is intended to be licensed, and ensure that this position flows down into pre-contractual processes and documents.

This case highlights the importance of undertaking this exercise where a franchisor may be providing similar or identical goods or services for a different purpose, or indeed where a franchisor is operating a multi-channel business that may mean that it is competing with the franchisee for the same customer, albeit in a different sales environment (for example a customer who purchases a product or service in a physical franchised store, and then goes online and buys the same product or service, but this time from the franchisor).

If you require any further information in relation to this area, please do not hesitate to contact Gordon Drakes.