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Stopping competitor misconduct

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By Alicia Hill, Principal, MST Lawyers

In the case of TSG Franchise Management Pty Ltd v Cigarette & Gift Warehouse (Franchising) Pty Ltd (No. 2) [2016] FCA 674, Cigarette & Gift Warehouse (Franchising) Pty Ltd (“Freechoice”), developed and implemented an aggressive expansion plan aimed at encouraging its competitors’ franchisees to enter into franchise agreements with it. The plan targeted high-performing competitor franchisees offering them financial incentives to terminate existing contracts and enter into agreements with Freechoice. Freechoice also had an incentive plan for staff and existing members to sign on competitor franchisees.

Freechoice approached a number of Tobacco station Franchise Management Pty Ltd (“TSG”) franchisees; some of whom agreed to terminate and enter into new agreements with Freechoice. Tobacco station received notifications from some of these franchisees announcing their intention to terminate their franchise agreements and asked for pay out figures. The franchise agreements gave no right to the franchisees to terminate by notice.

The Court found after hearing witness evidence that:

  1. Freechoice knew that without Tobacco Station’s consent, the franchisees could not terminate their contracts.
  2. Freechoice and the relevant terminating franchisees had been placed on notice by the solicitors acting for Tobacco Station officially conveying that Tobacco Station did not consent to the franchisee’s purported attempts at early termination.
  3. Freechoice persisted with signing up terminating franchisees; arranging fit out of shops with the new branding and other interfering conduct until interlocutory injunctions were sought from a court.
  4. Freechoice had calculated the net benefit of inducing these franchisees to move to Freechoice and factored in the costs of doing so to its model and was not deterred from its strategy by the threat of legal proceedings.

The Court accordingly ordered that Freechoice be permanently injuncted from inducing Tobacco Station franchisees to terminate their contract. It was also ordered that in making representations to the franchisees, Freechoice had engaged in misleading and deceptive conduct. The court made a declaration to this effect which enables other actions to be taken against Freechoice if parties wish to do so.

For more information relating to trade mark protection, contact  contact our Franchising team at franchise@mst.com.au or contact Alicia Hill on  +61 3 8540 0200.