Restraint of trade & ‘evanescent’ intellectual information

EzyDVD P/L v Lahrs Investments Qld P/L & Ors

 

Their Honours Fraser JA and Fryberg and McMeekin JJ dismissed the appeal by the franchisor, with Fraser JA delivering the leading judgment.

 

The critical question as later appeared on appeal was summarised at paragraph 31 as follows:

 

“…whether it was reasonable to impose the particular restraint on competitive trade in order to protect the applicant’s rights in respect of such of its information as may have remained in the second and third respondents’ heads notwithstanding the contractual regime in the franchise agreement which provided for the return or destruction of the relevant records.”

 

The restraint involved:

 

“5.6.3 Protection of the EzyDVD Intellectual Property

The Franchisee acknowledges that as the Franchisee will have regular and continuing access to and knowledge of the EzyDVD Intellectual Property the Franchisor may reasonably protect itself against competition from the Franchisee for a period of time after the expiration termination assignment or transfer of this Agreement and accordingly for a period of six (6) months following the expiration termination assignment or transfer of this Agreement the Franchisee and its Control Persons will not directly or indirectly in any capacity whatsoever (including without limitation either individually or as a trustee, principal, beneficiary, member, franchisor, franchisee, lender, joint venturer, agent, officer or employee of any business) engage in a or have a Financial Interest in or render consulting or other services to any, Competitive Business:

(i) within a radius of one kilometre (1km) of any ‘EzyDVD Store’ located in Australia; and

(ii) within a radius of five kilometres (5km) of the Store.”

 

This restraint was found to be unreasonable by the Chief Justice in first instance when an injunction was sought based first on the contractual terms of the franchise which extensively dealt with the use and destruction of  intellectual property on expiration of the franchise. Secondly, the Chief Justice considered it was unreasonable in order to protect the franchisor’s interests to impose a restraint with respect to such information as remained in the heads of the franchisee, because the information was of temporary almost ‘evanescent’ nature.  If it were not for this the restraint would have been valid to protect the franchisor in finding a replacement franchisee in sufficient time, subject to the ‘blue pencil’ rule of deleting the reference to a store located in Australia.

 

Fraser JA considered the general position of restraints:

 

[10] The general principles concerning the validity of restraints of trade of the general character in cl 5.6.3 of the franchise agreement were not in issue at the trial or in this appeal. Such a provision interferes with the restrained party’s liberty of action in trading and is therefore contrary to public policy and void unless it is justified by the special circumstances of the particular case, for which purpose it is sufficient justification that the restriction is reasonable having regard to the interests of the parties and the public.[2] (No question about the public interest arises in this case.) A restraint of trade is not enforceable unless the party benefited demonstrates that it affords no more than adequate protection to the interests of that party in respect of which it is entitled to be protected.[3] It is therefore appropriate first to ascertain the legitimate interest which the party benefited was entitled to protect and then to determine whether the restraint was no more than adequate for that protection.[4] The reasonableness of the restraint is to be determined at the time the restraint was agreed upon.[5] The courts take a stricter (less favourable) view of covenants in restraint of trade entered into between employer and employee than of similar covenants bargained at arm’s length and on an equal footing, such as between vendor and purchaser and at least some cases of partnership.[6]

 

His Honour reviewed the Chief Justice’s findings and agreed:

 

First question:

[34] The issue to which this evidence directly related was resolved at the trial by the parties’ agreement upon a regime under which the appellant would be permitted to inspect the respondents’ computer systems, but the appellant relied upon the evidence for a submission that the trial judge was wrong in placing critical significance upon the existence of a contractual regime for the delivery or destruction of the appellant’s confidential information at the end of the franchise agreement. The appellant contended that this evidence demonstrated that the contractual regime was inadequate to protect it from misuse of its confidential information following expiry of the franchise agreement.
[35] In my view the evidence instead tended to exemplify the general proposition that under the extensive contractual provisions the franchisor would likely be able readily to discover and obtain an effective remedy if the franchisee retained records of the franchisor’s intellectual property. In any event, the findings which I discuss in the next section of these reasons suggest that it would not have been anticipated when the franchise agreement was made that such records might provide the franchisee with a material advantage in competing with the appellant for a period nearly as lengthy as the six month duration of the restraint.

 

Second question:
[40] This evidence supported the finding that with rapidly changing titles and prices the information in the database was generally of short term applicability. The titles and prices were also so numerous and varied as to render it very improbable that the franchisee would recall them. And the accepted evidence also cast doubt on the appellant’s case that the information was of such a character as would materially advantage the first respondent in competing with the appellant for any period approaching the period of the restraint. The second respondent’s evidence was to the effect that most of the customers of the franchisee’s store were “passing traffic” and mostly “one-off” (who, I would interpolate, were not shown to be likely also to buy significant numbers of videos from the appellant’s online store), his knowledge of prices and other details of arrangements between the franchisor and distributors would quickly became obsolescent, and the nature of the industry was such that an individual franchisee could not negotiate competitive prices with distributors but instead depended upon the buying power of organisations such as the appellant or buying groups such as Network Video. In the absence of more compelling evidence about the market at the time when the franchise agreement was made, the trial judge was right to infer that those conditions represented what might have been anticipated at that time.
[41] In my opinion the Chief Justice did not err in the findings to the effect that the information likely to be transmitted to the franchisee under the franchise agreement was of such a character as would not likely be retained in memory and would in any event quickly become obsolescent.

 

 

Brisbane Barrister – David Cormack

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