Franchisors – are your non-compete restrictions in your franchise agreement unenforceable?

A decision of the High Court has shown the importance of considered drafting of restrictive covenants in franchise agreements.

Countrywide Signs Ltd v (1) Blueprometheus Ltd (2) Paul Edward Green and (3) Riverpoint Enterprises Ltd is an example where the franchisor, Countrywide Signs Ltd, failed to convince the court that an injunction was required to limit the activities of a former franchisee.

Background

The franchisor franchised its business of the erection, maintenance and management of sales and letting boards used by estate agents. As is typical, the franchisor provided specific territories in which its franchisees can operate and also licenced software to its franchisees known as a proprietary board management system.

The franchisee, who was the Defendant in the claim, purchased a franchise for the franchisor’s Cannock territory. The sole director and owner of the franchisee was a party to the franchise agreement in order to guarantee the performance and (on the face of it) be bound by the post-termination restrictions.

When the franchise agreement was terminated, the franchisee set up in competition with the franchise in the Cannock territory.

The Claim

The franchisor considered the former franchisee to be in breach of the post-termination restrictions and pursued an interim injunction from the Court to stop the former franchisee from trading in competition.

The Defence

The former franchisee argued that the restrictive covenants should not be enforceable because (1) they had expired; or alternatively (2) the restrictions were too wide to be enforceable. The Defendants argued that the restrictive covenants started to run at the end of the five-year term even though both parties continued to operate on the same terms until termination. This argument was quickly dismissed by the Judge who understandably said it lacked “commercial common-sense” to read the franchise agreement in that way. That left the Defendants relying on their argument that a restrictive period of 12 months was too long.

Too Wide?

The Courts are often required to consider enforceability of post-termination restrictions and the Judge considered the case law. There are no hard and fast rules on duration and what is too long.

The Judge focussed on the fact that the franchisor did not provide any evidence as to why it was reasonable for a 12 month restriction to be imposed.

The Judge found that the franchisor’s lack of evidence as to the reasonableness of the restrictive covenants lasting for 12 months was fatal to its application for an injunction. The former franchisee was able to argue successfully that six months was suitable due to the evidence put before the Court. Further, as the post-termination restrictions applied further than simply the Cannock territory, in this case, the restrictions went further than necessary.

Lessons learned

This case shows the dangers of standard wording for post-termination restrictions particularly when it comes to obtaining an all-important injunction. “Off-the-shelf” clauses with no thought given to the extent of the restrictions are at risk of failing if tested at Court. Thought should be given at the drafting stage as to the extent of restriction needed which should be based on factors impacting the business or the industry. Under no circumstances should you go to Court without good evidence establishing why the restrictions are reasonable. That of course is easier (particularly given the time pressures involved in seeking urgent injunctions) if it has been thought about when the restrictions are drafted.

For more information on this article, please contact Liam Tolen or Chris Fotheringham.