Dibbs Abbott Stillman: stopping former franchisees competing with you

According to Dibbs Abbott Stillman , you can restrain former franchisees from operating a competing business after their franchise ends, in an area and for a period that is not "too wide to reasonably protect your legitimate business interests".

Real estate franchise chain Raine & Horne commenced proceedings against two franchisees who abandoned their franchises in order to swap brands to Ray White .

One of the franchisees had operated under the Raine & Horne banner since 1982, and the other since 2002. Both had renewed their franchise agreements only months before attempting to "switch" brands. Raine & Horne didn't actually realise that its franchisees changed systems until it came across an article in a local newspaper with the franchisees wearing Ray White uniforms. The franchisees had in fact taken down the Raine & Horne fit-out at their franchised premises and replaced it with Ray White insignia.

Raine & Horne argued that, as provided under their franchise agreements, the franchisees should:

· be prevented from being employed or any other way interested in a real estate business within 5km of their franchise premises (which would include their new Ray White branded stores) for 12 months.

· transfer their business' telephone numbers and facsimile numbers to Raine & Horne.

· remove all Ray White insignia from the franchise premises.

· cancel existing advertising under the Ray White name in the franchise territories.

This hearing was a preliminary one, to determine whether the franchisees should be immediately ordered to do these things, until a full trial could be heard to hear the evidence.

A restraint on the ability of an ex-franchisee to trade in a competing business after termination will be invalid unless the Franchisor can prove it is no wider than reasonably necessary to protect the Franchisor's legitimate business interests.

In support of Raine & Horne's case, it was put forward that:

· the restraint was reasonable since they were not stopping the franchisees from carrying on their business at all, or with people who had been customers of the Raine & Horne.

· the restraint merely prevented the franchisees from establishing a new business in the same area for a limited period.

· a franchisor has a legitimate business interest in the goodwill it has "lent" to a franchisee to operate and grow its business, and in protecting the confidential information of its system.

· even though Raine & Horne could set up a new business from a nearby outlet, this would be significantly different from effectively taking over the existing premises without competition in the area from the former franchisees.

The former franchisees argued that members of the public would be significantly disadvantaged if they could not operate their Ray White businesses from the same premises. However, although the franchisees would be required to move premises to more than 5km away if the restraint were enforced, the court felt this would only be inconvenient for some members of the public, it could not really be said to be a significant disadvantage to them. On this basis, the court felt that Raine & Horne had a serious question to be tried (and indeed a strong case) on the enforceability of the restraint, and has prevented the ex-franchisees from operating from the premises, and within 5km of them, until the matter can be fully heard at trial. The court also agreed to the removal of Ray White fit-out and advertising and the transfer of the business telephone numbers and facsimile numbers to the Franchisor, provided that it undertook to answer telephone and facsimile messages to the satisfaction of the franchisees.

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