Franchisor successfully enforces restraint provisions

By Marian Ngo, Lawyer,  MST Lawyers

In a recent matter decided in the Western Australian Supreme Court a franchisor, Bedshed Franchising Pty Ltd (“Bedshed”) sought an interlocutory injunction, restraining the directors and guarantors of two of its franchisees (“the defendants”) from having an interest in a competing business.

An interlocutory injunction is a restraining order that can be made by a Court very early in a legal proceeding before a Judge gets to hear all the evidence, tested by cross-examination and full and detailed legal submissions. Bedshed’s application was successful against two out of three defendants.

Background

The first and second defendants, David Battersby and Diane Battersby, a married couple, were directors and shareholders of Bridlewood Adelaide Pty Ltd (“Bridlewood”). Bridlewood was the franchisee operator of a Bedshed store in South Australia, pursuant to a franchise agreement with Bedshed. Mr & Mrs Battersby were also guarantors to the franchise agreement.

The third defendant Geoffrey Cooper was the sole director of GNC Investments Pty Ltd (“GNC”). GNC was the franchisee operator of the Bedshed store located in Hoppers Crossing, Victoria. Mr Cooper and his wife were guarantors to this Franchise Agreement.

Beds n Dreams is a competing retailer of bedroom furniture and products. From a series of events starting from mid-2014, Bedshed discovered that the son of Mr & Mrs Battersby, Craig Battersby and the sister of Mr Cooper, Michelle Cooper, intended to operate Beds n Dreams stores, from premises in Osborne Park in Western Australia and Dandenong in Victoria. The Osborne Park store was operated and leased by Hullavoo Pty Ltd (“Hullavoo”), a company of which Craig Battersby was the sole director and shareholder. The Dandenong store was also leased by Hullavoo however was to be operated by Plan C Investments Pty Ltd (“Plan C”), a company of which Michelle Cooper was the sole director and shareholder.

The Restraint Clause

Clause 6.2 of the respective franchise agreements between the defendants and Bedshed provided:

The Franchisee and the Guarantor further agree that they will not, … during the Term have any interest as an owner (except of publicly traded securities), director, officer, employee, consultant, lender, representative or agent, or in any other capacity whatsoever, in any other business (except other Bedshed Franchises) which in any way competes with the Franchisor or its franchisees, or which is similar to the Business without the prior written consent of the Franchisor.

Bedshed alleged that the defendants had interests in the Beds n Dreams businesses at Osborne Park and Dandenong (“competing businesses”). It sought an injunction restraining the defendants from contravening clause 6.2 of the respective franchise agreements. This case discussion centres around the interlocutory injunction it has also sought.

Justice Beech determined that broadly, an ‘interest’ as described in the Bedshed Franchise Agreement includes an ownership interest, a financial interest, or substantial involvement in the business, as the word ‘interest’ was used in a different and wider sense than the ordinary legal usage.

The Interlocutory Injunction Application

The principles for the grant of an interlocutory injunction focused upon in this case were whether the plaintiff had made out a prima facie case and whether the balance of convenience favoured the grant of an injunction.

The Balance of Convenience

The balance of convenience involves balancing the injustice which might be suffered by the defendant if the injunction is granted should the plaintiff later fail at trial, against the injustice suffered by the plaintiff if the injunction is not granted and the plaintiff later succeeds at trial. The balance of convenience was found to be strongly in favour of Bedshed, for the following reasons:

1. A court will generally grant an injunction to restrain conduct that is in breach of a contractual requirement to refrain from specified conduct;
2. In the event that the defendants held an interest in Beds n Dreams, this would give rise to risks to Bedshed of various kinds of losses;
3. Difficulties in establishing the cause of the losses means that damages are likely to be an inadequate remedy in the event that Bedshed does incur losses;
4. The injunction requires no more of the defendants than complying with their franchise agreements;
5. The defendants stated that they did not have and did not intend to acquire any interest in a Beds n Dreams business, and therefore the injunction restraining them from having such interest would not cause any practical harm to them; and
6. If the defendants did have an interest in a Beds n Dreams business, their conduct in having such an interest must be viewed as a deliberate breach of a contractual requirement.

Establishing a Prima Facie Case

Bedshed’s case involves the drawing of an inference from evidence it submitted, that each defendant has an interest in the competing businesses, in breach of the respective Franchise Agreements. The evidence which Bedshed submitted against each defendant was considered separately.

The bulk of the evidence submitted against Mr Battersby did not support an inference that the he had an interest in a competing business. For example, the following evidence was not accepted:

• Surveillance records of Mr Battersby’s presence at the Osborne Park premises during three days over the space of several months, including surveillance records from 9 December 2014 of Mr Battersby looking at a computer screen behind the sales counter, whilst Mr Cooper was in his presence, reviewing some documents in a purple Beds n Dreams folder; and
• Evidence that both Beds n Dreams stores are part of a joint enterprise between Mr & Mrs Battersby’s son and Mr Cooper’s sister.

The only evidence accepted was evidence from Bedshed’s National Merchandise Manager that he overheard Mr Battersby saying to another Bedshed Franchisee, in reference to Beds n Dreams, ‘we’ve looked at sites in Joondalup’ and ‘we’re looking at a location in Osborne Park‘. Though Mr Battersby denied saying these words, Justice Beech remarked that an application for an interlocutory injunction was not the occasion to resolve conflicts in evidence or to determine whether evidence would be accepted at trial. As such, Justice Beech resolved that a prima facie case had been established.

A prima facie case against Mrs Battersby was not established. Most of the evidence against her consisted of a few minutes’ interaction with a potential customer and the making of some telephone calls using the telephone at the Osborne Park premises.

Lastly, it was determined that Mr Cooper could have some form of ownership interest or substantial involvement in the competing businesses. The evidence considered included:

• Surveillance records taken on 9 December 2014 of Mr Battersby looking at a computer screen behind the sales counter at the Osborne Park Beds n Dreams store, whilst Mr Cooper was in his presence, reviewing some documents in a purple Beds n Dreams folder. In this respect, it was noted that unlike the other defendants, Mr Cooper was not a parent of or otherwise related to Craig Battersby, although he was friends with the Battersbys;
• A mattress bearing a Bedshed Chadstone delivery label and a mattress bearing a Dreamsense label (Dreamsense being a registered trade mark of Bedshed) being present at the Dandenong Beds n Dreams store; and
• That from its incorporation on 9 April 2015 until 1 May 2015, the registered address for Plan C (the operator of the Dandenong Beds n Dreams store) was Mr Cooper’s home address.

In reaching the decision in support of an interlocutory injunction against Mr Battersby and Mr Cooper, Justice Beech also considered that:

• Beds n Dreams are a direct competitor of Bedshed stores.
• Clause 6.2 in the Bedshed Franchise Agreement prohibits franchisees and guarantors from holding an interest in Bedshed’s competitors.
• The holding of such an interest could lead to:
  • a “less than wholehearted” commitment to the Bedshed business;
  • risk of leakage of confidential information relating to Bedshed to a rival; and
  • constrained communications between Bedshed franchisees and Bedshed.

Conclusion

Bedshed’s successful application for an interlocutory injunction is a positive decision for franchisors looking to enforce restraint provisions with current franchisees in order to maintain the status quo until final judgement can be made at trial.

The review of the evidence in this application alludes to the difficulty in establishing that a franchisee or guarantor has an interest in a competing business, particularly where their relatives have valid ownership interests in the competing business. With any matter to go before a Court it is the evidence which is the key. Nothing can be achieved based on suspicion or hunch. It will remain to be seen whether Bedshed will be granted injunctive relief in the final determination of its case.

How can we help?

MST’s franchising lawyers can assist franchisors in drafting restraint provisions that will be enforced by Courts and MST’s litigation lawyers can advise in relation to evidence gathering and represent parties in litigation pertaining to the enforcement of restraints in franchise agreements.

For more information, please contact our Franchise Law team by email franchise@mst.com.au or our Dispute Resolution & Litigation team by email litigation@mst.com.au or by telephone +613 8540 0200.