Lessons learnt – a review of 5 English law cases from 2017 and what franchise and distribution businesses can learn from them
2017 was a relatively quiet year for franchise disputes in the English courts. Nevertheless, this article discusses five cases which involved franchise and distribution relationships and suggests some lessons which can be learnt from each.
1. Are your recitals fit for purpose?
J Toomey Motors Ltd and Toomey (Southend) Ltd v Chevrolet UK Ltd
Following its decision to pull out of the UK market in December 2013, the defendant (Chevrolet) gave all of its UK dealers two years' notice of termination of their franchises. The claimant (Toomey) was one such dealer. Whilst other UK dealers agreed terms of settlement with Chevrolet to cease their franchises in 2014 rather than keeping them until December 2015, Toomey chose to continue as a dealer throughout the notice period.
Chevrolet announced in February 2015 that it would shortly be ceasing to supply Chevrolet cars to the UK altogether and any remaining factory orders had to be placed by various dates up to 3 March 2015, with a 3 to 4 month lead time. Toomey argued that through its actions Chevrolet had withdrawn all facilities required to enable Toomey to effect sales of Chevrolet within the notice period and that this amounted to a repudiation of the agreement.
In the proceedings Toomey alleged that Chevrolet had breached a number of express and implied terms in the agreement. Central to Toomey's case was the assertion that a statement which featured as a 'recital' created a binding obligation on Chevrolet. The Judge referred to this as the 'Purpose Clause'.
The Judge commented that as a matter of law, whilst it is possible that a Purpose Clause can contain operative provisions, a Purpose Clause should serve as an 'explanatory preamble' and that its sole function should be to act as an introduction to the detailed terms which come later. The Judge held in this instance that the latter terms of the agreement were sufficiently clear and there could be no reason why the Purpose Clause should be regarded as containing specific operative terms.
Purpose Clauses or recitals can be easily overlooked and this judgment acts as a reminder that they play an important role in setting the scene for the commercial relationship and that drafting should not overreach into inadvertently creating operative terms which could be used to fill a gap in the express terms of the contract.
2. Don't use a hammer to crack a nut
F45 Training Pty v Leo Star Ltd
The defendant (Leo Star Ltd) operated as a franchisee of the Australian gym company, F45 (the claimant). The agreement stated that the licence would be granted in a 'territory' but the term was not defined in the agreement. The agreement also referenced confidential information which included customer lists and a clause on non-competition. On termination of the franchise, Leo Star Ltd sent out a letter to customers stating that it would be setting up a new gym. F45 argued that Leo Star Ltd set up a gym in breach of the non-competition clause and used confidential information from its system. F45 sought an injunction against Leo Star Ltd in relation to the operation of the new gym.
The Judge refused the application on the basis that nothing in the agreement gave F45 exclusive ownership of customer names and addresses. It was also considered whether an injunction was a proportionate remedy for a breach of a restraint of trade clause. The Judge held that damages were an adequate remedy and rejected the argument that irreparable damage would be caused to the business. Such claims were grossly overstated and damages were readily quantifiable.
Applications for injunctive relief should be considered carefully – they are expensive to issue and so a franchisor should be confident that it is the appropriate remedy in the circumstances. The case also highlights the need for clear contractual provisions over ownership of customer data.
3. Assume makes an ass out of you and me
Ilkerler Otomotiv Sanayai ve Ticaret Anonim v Perkins Engines Co Ltd
The claimant (Ilkerler) and defendent (Perkins) entered into a dealership agreement in 2000 which provided that after three years both parties had a right to terminate on at least 6 months' notice. From 2009 onwards the parties agreed business plans of between three and five years which Ilkerler argued had caused them make substantial long term investments. Following agreement on such a business plan Perkins terminated the agreement giving 6 months' notice. Ilkerler argued that the 6 months' notice period was void as it would not have made such long term investments on this basis and that the agreement has been varied accordingly.
Judge held that Perkins was able to terminate the agreement giving 6 months' notice in line with the agreement despite the fact the relationship had changed and Ilkerler was making long term investments based on agreed business plans. The Judge held that it was incumbent on Ilkerler to protect its investment by seeking a formal amendment to the contract, which it did not do.
This case demonstrates the importance of checking what the underlying contract says in relation to renewal and termination when making decisions about long term investments. It also highlights that where the relationship between the parties changes, the parties should ensure that the agreement is varied accordingly to include or amend clauses which reflect the new arrangement where the current contract no longer provides the desired protection.
4. There is such a thing as bad publicity
Pirtek (UK) Ltd v Robert Jackson
A former franchisee (Robert Jackson) of the franchisor (Pirtek), carried out a campaign on a website and on social media platforms featuring the franchisor's trade name, where allegations were made against the franchisor and its products.
The allegations included that the claimant had knowingly or recklessly caused a grave risk to public safety by supplying unsuitable hoses to the aviation industry and had possibly caused fatal crashes by spitfires. The other accusations included the company being 'shady' and practising tax avoidance.
In response, the claimant brought a claim for libel and malicious falsehood. The defendant failed to officially respond to the claim, instead posting responses to the letter of claim on social media and did not participate in the proceedings.
The Judge found that the claimant was entitled to default judgment for damages for libel and malicious falsehood and a final injunction, restraining further publication of the statements complained of, or statements to the same or similar effect. The Judge awarded the maximum damages permissible, explaining that the high damages awarded were due to the gravity of allegations which called for a "substantial vindicatory award".
This case demonstrates the potential for damage to reputation that is posed by the misuse of social media. This is not peculiar to franchising, but the case should serve as a warning to franchisees that disparaging comments made online are still subject to the laws of defamation and libel. For franchisors, whilst not every situation can be controlled, the case highlights the importance of having robust online policies and training for franchisees and a careful programme of dispute resolution in order to minimise the risk of these types of issues arising in the first place.
5. Don't build your house on the sandy land
Caspian Pizza Ltd and Others v Shah and Another
In 1991, the claimant (Caspian Pizza) started a pizza business in Birmingham trading under the name “Caspian Pizza”, and opened number subsequent outlets in that area. In 2002, the defendant opened a pizza restaurant in Worcester also using the Caspian name, and it too opened further sites in that area. The claimant alleged that in 2008 it entered into an oral franchise agreement with the defendant. This oral agreement permitted the defendant to operate the Worcester restaurants under the “Caspian Pizza” name in consideration for paying a royalty. Any goodwill generated by the use of the mark would vest in or be assigned to the claimant. However, in 2013 the claimant claimed that the defendant had failed to pay the royalties due and refused to enter into a written franchise agreement to formalise the arrangement.
The claimant filed a claim in the IP Enterprise Court, contending that once the oral franchise agreement had ended, the defendant’s use of the claimant's two registered trade marks constituted trade mark infringement. The defendants counterclaimed that the marks were invalid by virtue of the earlier right used at the Worcester business.
The Judge held that the word mark was invalid because at the date of registration in 2005, the defendant had established enough localised goodwill in the name “Caspian”. Localised goodwill was held to be enough to invalidate a national trade mark as no geographical restriction had been put on the mark during the application stage. However, the Judge held that the device mark was valid as the defendant had not used a similar logo and therefore had no earlier right on which they could rely. The claimants appealed the decision of invalidity in respect of the word mark and the defendants cross-appealed the validity of the device mark.
The Court of Appeal held that the ruling at first instance was wrong to separate the word and device marks when considering the question of earlier rights. This is because the primary element of the device mark was the word “Caspian”. It therefore found both marks to be invalid, dismissing the appeal and allowing the cross appeal.
This case highlights the importance of businesses checking if there are prior rights when seeking to register their mark. Prudent applicants can protect their position by restricting a trade mark’s geographical applicability or reaching an agreement with the earlier right holder. Failure to do so could leave a trade mark at risk of being challenged for invalidity. The case also serves as a reminder of the risks involved in oral agreements and the need to have clear rules regarding a licence to use a trade mark.
The case provides some comfort and clarity for businesses accused of trade mark infringement, as demonstrating pre-existing goodwill in a locality could be enough to provide a defence to a claim and also establish grounds for an application of invalidity.