It was an application by the franchisor of an up market estate agency chain to prevent a franchisee, whose agreement had been terminated from operating a competing business in breach of the post termination non compete covenants in his franchise agreement. Franchisor’s frequently apply for these injunctions at an interim stage – in other words before the main trial because to wait until the main trial could be too late – by then the period of the non compete, which is usually 12 months, would have expired.
The Judge in this case set out the requirements for an injunction which are that the franchisor has to have a good case – “a serious issue to be tried” – and that damages would not be an adequate remedy for the franchisor.
Franchisees, of course, always argue that damages would be an adequate remedy and in a number of cases, those arguments had been accepted by the court, but in this case the Judge firmly rejected that argument. There were two reasons for this. First, because franchisees, in operating a competing business would be damaging the franchisor’s reputation and goodwill, which should always be protected, and secondly, there was a difficulty of demonstrating the financial consequences of the breach of the non compete covenants. The Judge accepted that whilst looking at the franchisee’s turnover, was a good starting point in calculating the financial consequences, it was only a starting point because undoubtedly the franchisor may not have achieved the same level of turnover had it operated itself following termination of the franchise agreement and indeed some customers would cease to use the ex franchisee’s business, in this case, an independent estate agency instead of the upmarket franchise brand.
It is likely, going forward, that franchisors will refer to this decision to persuade other judges that damages, in relation to an application to enforce post termination non compete covenants in franchise agreements, would not be an adequate remedy thus making it easier for franchisors to obtain injunctions against their franchisees.
John Pratt, IDI Country Expert for franchising in UK