Since 1990, Karioi Pty Ltd (Karioi) has operated a video hire business as a franchisee initially with the Video Ezy and subsequently with the Video Flicks franchise groups from its properties in both Noosaville and Nambour (the Premises). In April 1998, Karioi entered into franchise agreements (Agreements) with Blockbuster Australia Pty Ltd (Blockbuster), a video movie hire franchisor. Under the terms of these Agreements, Karioi was granted the right to operate Blockbuster video movie hire businesses from its Premises for a term of 10 years.
The Agreements contained the following restraints of trade clause:
While it is agreed that by 31 August 2008 the Agreements had been brought to an end, Karioi continued to operate video hire businesses from the Premises and has since entered into an arrangement with Network Video.
Blockbuster brought proceedings in the NSW Supreme Court for relief. In particular, Blockbuster sought an injunction to stop Karioi and its directors from operating a video hire business within 30km of the Noosaville and Nambour stores for two years. Karioi claimed it did not have to do this and could keep operating its business from the Premises.
The issue between the parties was whether the restraint of trade clauses in the Agreements were enforceable.
For a restraint clause to be enforceable, the Court must consider the reasonableness of the restraint in light of the interests of the parties and the public to provide adequate protection to a party while ensuring that"it is in no way injurious to the public". For a restraint to be reasonable it must afford no more than adequate protection to the party's legitimate interests in whose favour it is imposed.
Blockbuster identified its goodwill in the Premises as the legitimate interest that was to be protected by the restraint. Blockbuster considered its interest in the goodwill to include:
- the patronage of the stores as set out in the customer databases
- an interest in the particular location of the Premises
- the industrial property and confidential information preserved for Blockbuster's benefit, including information about Blockbuster's operating systems, marketing strategies and pricing structures.
Karioi disputed Blockbuster's claim to the goodwill and argued that prior to the Agreements:
- it had accrued significant experience in the video retail market
- it had operated the Noosaville store for approximately eight years and the Nambour store for four years, and it had already developed a business with existing databases of members and profitable trading histories
- it had created goodwill of substantial value at the Premises.
Karioi also argued that the main benefit to entering the Agreements was to take advantage of Blockbuster's superior buying power with the movie studios. That interest did not require protection in the form of a restraint of trade clause.
The Court agreed that the growth in patronage at the Premises over the term of the Agreements may be partly attributable to the attraction of the Blockbuster brand to some customers and to the other benefits of a large marketing group. To this extent the Court agreed that Blockbuster had an interest in the store's customers, but the Court also determined that this interest was not substantial enough to necessitate the protection of a restraint of trade clause.
The Court concluded that Blockbuster's interest in the goodwill of the Premises was simply:
- an interest in the growth in patronage of the stores over the life of the Agreements
- the industrial property and confidential information preserved for Blockbuster's benefit under the Agreements.
In assessing the reasonableness of the restraint of trade clause, the Court determined that it offered far greater protection to Blockbuster than could be justified to protect its legitimate interests in the goodwill. If the restraint of trade clause was to be enforceable, the Noosaville and Nambour stores would be closed and its 19 staff members would be dismissed. The Court stressed that such a result would be detrimental to the public interests and unreasonable.
The Court refused to grant injunctive relief requested by Blockbuster. Instead, the Court ordered that Karioi and its directors could not use any part of any database, including the customer database of the Noosaville or Nambour franchise businesses as at 31 August 2008 until further notice and any database developed since 1 September 2008.
Implications for your franchise
Goodwill is a valuable asset to any business and franchisors are encouraged to take active steps to ensure that their interest in their goodwill will be protected. This decision highlights the emphasis the Court places on public detriment when assessing the reasonableness of a restraint of trade clause. Franchisors are advised to review any restraint of trade clauses in their franchise documents and seek legal advice where necessary to ensure that these provisions will be enforceable.
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.