The franchisee was in financial difficulty and ceased trading by virtue of its insolvency. Its franchise agreement was terminated. Immediately thereafter, Vetech Limited (a company set up by the girl friend of the individual who had owned the franchisee) started to trade from the same premises using the same equipment.
Pirtek obtained an injunction against the ex franchisee, the individual guarantor and his girl friend and Vetech preventing them from operating their business in breach of the non compete covenants. By the time the High Court had to consider the case the one year non compete covenants had expired.
There are numerous interesting features of the decision but perhaps the most interesting was that it was the first time that an English High Court had to deal with an argument from a franchisee, against whom enforcement of the post termination non compete covenant in the franchise agreement was being sought, that the covenant did not comply with section 2 of the Competition Act 1998, which is modelled on Article 101 of the Treaty on the Functioning of the European Union without, of course, the need to show an effect on trade between member states. Curiously UK franchisees have not sought to argue that post termination non compete covenants breached competition law, so this case has very considerable significance. The High Court relied on the European Court’s decision in Pronuptia and indicated that whether the post termination non compete covenant falls outside the scope of section 2 of the Competition Act depends on whether it is essential to prevent the risk that know how and assistance provided by the franchisor to the franchisee will, after termination, be used to aid the franchisor’s competitors.
The High Court concluded that this was an assessment that needed to be undertaken on a case by case basis and as part of this analysis the Courts would look into the level of know now and assistance provided by a franchisor to its franchisee. In this case the Court found that the nature of the training and assistance provided by Pirtek was very considerable – ‘it extended to technical assistance (both to principals and staff), business management assistance, including, in particular, the expensive and sophisticated IT system and … the Operating Manual …’
The Court went on to say that once it was established that, taken as a whole, the know how and assistance provided by a franchisor to a franchisee was of an extent and type likely to turn the franchisee into an effective competitor of the franchisor, then it was inappropriate to conduct a minute assessment of the question whether a particular franchisee could somehow devise a similar and competing business after termination, which might minimise the extent of the prior provision of know how and assistance.
This is a useful case for franchisors to rely on should franchisees seek to raise competition law issues but, and this is a big ‘but’, franchisors must pay particular attention to the know how that they provide. Any franchisor which does not provide continuing education, or which provides an inadequate manual or does not constantly update it and provide software and other elements, may find it more difficult to persuade a Court that the provision of their limited know how is sufficient to enable it to impose post termination non compete covenants.
John Pratt, IDI franchising Country Expert for UK.