Non-compete restriction considered too wide in franchise dispute

A franchisor failed to obtain an interim injunction to restrain the activities of a former franchisee where it had failed to show to the required standard that post-termination restrictions for a 12-month period were reasonably necessary.

Background 

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 the parties discussed a renewal agreement. The parties could not reach an agreement so the Franchisor gave notice to terminate the Agreement. 

The 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 and using the Franchisor's confidential information, and was acting in combination with a competitor of the Franchisor, which had its own BMS. The Franchisor sought injunctive relief to prevent the Franchisee trading in breach of the post-termination restrictions and for the return of its confidential information. 

The Franchisor relied on a clause of the Agreement that provided that the Franchisee would not be involved in a competing business for 12 months after termination, as well as another clause which restricted the use of the Franchisor's confidential information. Both of which are common protections in English law franchise agreements.

The Franchisee's defence 

The Franchisee asserted that there should be no injunctive relief as the post-termination restrictions were not enforceable as the Agreement had expired and, regardless, they were unreasonable as they were too wide in scope. 

The judgment 

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, as this 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 protected the Franchisor's confidential information. 

Considering ChipsAway v Kerr

ChipsAway v Kerr was considered when the court examined 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 of time 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:  

1. the Franchisor did not require the restrictions to protect his goodwill, as, unlike in ChipsAway v Kerr, here the Franchisor did not require time to recruit another franchisee in the territory to protect its goodwill in the franchise as they already had established franchisees in the territory; and, consequently,
2. 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. 

Comment 

This case highlights the importance of having reasonable post-termination restrictions and is a reminder that these covenants should be carefully tailored to ensure enforceability and to avoid any inadvertent loss of protection. 

One way to ensure 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 ones but keep any reasonable ones.  

If you would like to discuss any of these issues please do not hesitate to contact Gordon Drakes, co-head of the Franchising team. This article was co-authored by Kristina Holm.