In the direct selling space, independent distributor agreements and the Policies and Procedures that apply to Australians are rarely the subject of litigation. To the extent that disputes between distributors and direct selling organisations (DSOs) with whom they contract exist, they are usually settled without recourse to litigation.
However, recently the New South Wales Supreme Court 1 considered whether the conduct of an independent distributor warranted the DSO being granted an interlocutory injunction to restrain the distributor from breaching the independent distributor agreement and Policies and Procedures.
DSOs can take some comfort from the decision to grant the DSO interlocutory injunctions restraining the distributor from using the DSO's intellectual property and confidential information, including distributor contact lists and the Court's recognition that the DSO's termination of the distributor agreement was valid in the circumstances.
Background
The independent distributor (Demonstrator) entered into a distributor agreement with Stampin' Up! Australia Pty Ltd (Stampin' Up) in 2009 (Agreement). The Agreement, like most in the direct selling or multi-level marketing space, also incorporated Stampin' Up's Policies and Procedures (Policies) which were contained in the Distributor Manual (Manual). The Agreement included standard industry clauses which:
- acknowledged that various intellectual property (IP) was owned by Stampin' Up and was required to be used strictly in accordance with the Policies (clause 10);
- acknowledged Stampin' Up had exclusive proprietary rights in information developed by or for it, including distributor lists which were confidential and only to be used in the distributor's business relationship with the company. Distributors were required to agree expressly to not use the confidential information other than in connection with Stampin' Up and its products and, upon termination, to cease all use of the confidential information (clause 11); and
- enabled the parties to terminate the Agreement at any time on 30 days' notice or, at any time upon written notice for breach or failure to comply with the Agreement or the Manual (clause 19).
On 23 February 2012, Stampin' Up gave written notice to the Demonstrator under clause 19 that the Agreement would terminate on 31 March 2012 (the annual renewal date of the Agreement).
On 30 March 2012, Stampin' Up gave further written notice (under clause 18 of the Agreement) that it did not intend to renew the Agreement so the Agreement would expire the following day on 31 March 2012.
Stampin' Up was also aware that the Demonstrator had been promoting the products of a business which was soon-to-be launched and which sold competing products.
The Proceedings
On 27 March 2012, the Demonstrator commenced proceedings seeking amongst other matters:
- $5 million in damages; and
- an injunction and an interlocutory injunction to stop Stampin' Up from acting on the termination of the Agreement.
Stampin' Up filed a cross claim seeking interlocutory orders that the Demonstrator be restrained from:
- representing she was a demonstrator or otherwise associated with Stampin Up;
- using Stampin Up's IP; and
- using Stampin Up's confidential information contained in, for example, distributor lists.
What is an Interlocutory Injunction?
An injunction is a court order which requires the person to whom it is directed to refrain from doing something.
An interlocutory injunction is an injunction which is granted at any time prior to the final determination of the matter.
Usually an interlocutory injunction is urgently required. Given this urgency, the Court must determine whether to grant an interlocutory injunction on the basis of incomplete evidence and after a relatively brief hearing.
When determining whether to grant an interlocutory injunction, a Court must consider:2
- Has the applicant shown the Court that there is a serious question to be tried in respect of their entitlement to relief? The applicant does not need to show that it is more probable than not that the applicant will succeed at the trial. The applicant need only show a sufficient likelihood of success to justify the awarding of an injunction in the circumstances of the case. There is no requirement to show at least a 50% chance of success. 3
- Where does the balance of convenience lie? The inconvenience likely to be suffered by the plaintiff if an injunction were to be refused is to be weighed against the inconvenience likely to be suffered by the defendant if an injunction were granted.
Factors which may be considered by the Court include:
- the urgency;
- the evidence dealing with the existing state of affairs between the parties; and
- the consequences for the parties if the injunction is not granted.
If an applicant's case is weak, a Court may be willing to grant an interlocutory injunction if the inconvenience to the respondent is small. The Court not only considers the interest of the parties to the dispute, but also the interests of the general public and third parties.4
The Decision
In reaching a decision, the Court needed to consider:
- whether the parties had serious questions to be tried; and
- whether the balance of convenience warranted granting an injunction in either party's favour
In addition, the Court would also need to consider whether the parties were able to provide an undertaking to pay damages (which they would likely need to pay if granted an interlocutory injunction but ultimately unsuccessful at the final hearing).
In respect of the Demonstrator's case, his Honour White J determined that there was no serious question to be tried.
- Stampin Up was entitled to give notice of its intention to not renew the Agreement and on 30 March 2012 the Company gave that notice. Therefore, the Agreement would expire on 31 March 2012.5
- (n) Expiry of the Agreement under clause 18 arose independently of the Company's 30 day notice dated 23 February 2012, which was given under clause 19.6
Even if there had been a serious question to be tried, the balance of convenience would not have favoured granting an injunction against Stampin Up on the basis that:
- As a bankrupt, the Demonstrator could not give an undertaking as to damages, which a party seeking an interlocutory order is usually required to provide7; and
- Stampin Up was entitled to terminate the Agreement because the Demonstrator was in breach of the Policies in the Manual, which included a requirement that a Demonstrator not represent another retail or wholesale business which has products in the scrapbooking or stamping industries.8
Furthermore and, in any event, the Court noted that it would not grant an interlocutory injunction in the Demonstrator's favour if Stampin Up was entitled to terminate the Agreement in a short time (which it was).9
Demonstrator's Conduct
His Honour considered that the Distributor's breaches of the Agreement would "be a powerful reason for refusing a final injunction on the grounds that she does not come to equity with clean hands. That is a further reason as to why there is not a serious question to be tried".10 In other words, the Demonstrator had acted in bad faith or unethically by commencing the promotion of a competitor's business. Further, the Demonstrator had admitted having Stampin' Up's IP in her possession.
Given the Demonstrator was becoming a consultant of a competitor, the Court considered that there was a real risk of the Demonstrator using Stampin' Up's IP and/or confidential information unless restrained by an injunction.
Therefore, the Court issued an interlocutory injunction restraining the Demonstrator from:
- representing herself as a Demonstrator or otherwise associated with Stampin' Up;
- using Stampin' Up's IP, including trade marks, trade secrets and copyright material; and
- using Stampin' Up's confidential information, including, but not limited to, Demonstrator lists, customer lists created by Stampin' Up, dowline and upline lists and marketing materials.
Conclusion
The Policies and Procedures of DSOs are rarely considered by a Court.
Importantly, this decision shows that, if a distributor breaches a distributor agreement and/or policies by promoting the business opportunities/ products of competitors, the Court may consider that any proceedings commenced by the distributor to enforce their agreement with the DSO, if the DSO takes steps to terminate, is not likely to succeed on the basis that the distributor does not have "clean hands".
Furthermore, the DSO may be entitled to seek an injunction to protect their IP and confidential information from any misuse by the distributor.
Footnotes
1 Hanshaw v Stampin' Up Australia Pty
Ltd [2012] NSWSC 396.
2 Australian Broadcasting Corporation v O
'Neil! (2006) 227 CLR 57, 68 [19] (Glesson CJ and Crennan
J), 81-84[65] [72] (Gummow and Hayne JJ).
3 Australian Broadcasting Corporation v O
'Neill (2006) 227 CLR 57, 81-84 [65] - [72].
4Patrick Stevedores Operations No 2 Pty Ltd v
Maritime Union of Australia [1998] HCA 30, [65] - [66];
Corporate Transport Services v Toll (2005) NSWSC 166, [42].
5 Hanshaw v Stampin' Up Australia Pty Ltd
[2012] NSWSC 396 at 25.
6 Hanshaw v Stampin' Up Australia Pty Ltd
[2012] NSWSC 396 at 27.
7 Hanshaw v Stampin' Up Australia Pty Ltd
[2012] NSWSC 396 at 29.
8 Hanshaw v Stampin' Up Australia Pty Ltd
[2012] NSWSC 396 at 30.
9 Hanshaw v Stampin' Up Australia Pty Ltd
[2012] NSWSC 396 at 33
10 Hanshaw v Stampin' Up Australia Pty Ltd
[2012] NSWSC 396 at 34.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
