Tobacco franchisor smoked in competitor court case

By Sarah Stowe | 15 Jun 2016 View comments

A dispute over a franchise agreement became a legal issue. Image: insuranceadvicenigeria.com

What happened in a dispute between rival tobacco product franchisors recently?

Many franchise disputes between franchisees and franchisors are litigated in the major Australian Courts and it is unusual for a Court to be faced with a dispute between competitor franchisors but that was the case in the recent Federal Court of Australia in TSG Franchise Management Pty Ltd v Cigarette & Gift Warehouse (Franchising) Pty Ltd (No 2) [2016] FCA 674 in which rival tobacco product franchisors lit the fuse of litigation.

Franchisor conduct

At the centre of the dispute was the conduct of a franchisor that operates under the business name of Freechoice Australia in the tobacco product franchise market. 

TSG Franchise Management Pty Ltd (TSG), whose franchisees trade under the name of Tobacco Station, was a competitor of Freechoice Australia.

The conduct of which TSG complained involved Freechoice Australia approaching successful Tobacco Station franchisees and other competitors' franchisees and persuading them to sign franchise agreements with Freechoice Australia. 

The Court found that this was part of an aggressive expansion plan that involved Freechoice Australia offering financial incentives to competitor franchisees to pay out existing franchise agreements.

The franchisee of the Tobacco Station Armidale and Armidale Centro stores in New South Wales accepted Freechoice Australia’s offer to enter into franchise agreements with Freechoice Australia and gave TSG notice that she was terminating her franchise agreements with TSG. 

Freechoice Australia offered to reimburse the franchisee’s costs of exiting early her Tobacco Station franchise agreements.

TSG did not focus on suing its franchisees who terminated their franchise agreements but sued Freechoice Australia for knowingly and intentionally inducing Tobacco Station franchisees to breach their franchise agreements with TSG and for making misleading representations in contravention of the Australian Consumer Law to induce the Tobacco Station franchisees to terminate their contracts with TSG and enter into franchise agreements with Freechoice Australia.

TSG sought an injunction from the Court to prevent Freechoice Australia from inducing or procuring Tobacco Station franchisees to terminate their franchise agreements with TSG in order to enter into franchise agreements with Freechoice Australia.

The evidence before the Court was that the Tobacco Station Armidale franchisee had been dissatisfied with TSG since around mid-2013 and was contemplating changing franchisors. 

However her franchise agreements were still on foot and the franchisor made it clear it would not release the Armidale franchisee, even in return for a payout for future franchisee fees.

Freechoice Australia knew that TSG had not released the Armidale franchisee and that the Armidale franchisee could not terminate her franchisee agreements without breaching them. With this knowledge it entered into franchise agreements with that franchisee.  

After close of business on 3 November 2014, the Tobacco Station Armidale stores were rebadged as Freechoice Australia stores and their fit out was changed to accommodate the Freechoice Australia brand. On 4 November 2014, the Tobacco Station Armidale franchises ceased trading as Tobacco Station stores, reopened as Freechoice branded stores and the Armidale franchisee stopped providing TSG with daily reports.

Breaching the franchise agreements

Accordingly, the Court found that Freechoice Australia intended to procure the Tobacco Station Armidale franchisee to commence with Freechoice Australia regardless of her contractual arrangements with TSG. 

This made Freechoice Australia liable for the tort of intentionally and knowingly inducing the Tobacco Station Armidale franchisee to breach her franchise agreements with TSG. The Court granted TSG a permanent injunction restraining Freechoice Australia from inducing Tobacco franchisees to breach their franchise agreements with TSG.

When the smoke clears from this dispute between tobacco product suppliers there are matters of relevance from the case for both franchisors and franchisees. 

Franchisor conduct

Firstly, franchisors need to be aware of the risks of over-aggressive expansion of their franchise network. Conduct that leads to conflict with competitors is one example.

Other examples the writer has experienced is expanding a young and immature franchise network too quickly resulting in repeated franchisee business failure which potentially tarnishes the franchisor's brand and reputation. 

Franchisees and the full term

Secondly, for franchisees, the experience of the Armidale franchisee again emphasises that franchise agreements for a fixed term oblige franchisees to keep the franchised business operating for the full term. 

Franchisees cannot simply exit a franchise that is unsuccessful, re-brand and transfer to a rival franchisor or de-brand and trade as an independent business. 

Such conduct means abandonment of the franchised business and in most if not all instances will be a breach of the franchise agreement. Such a breach will give the franchisor a right to sue for and recover damages against the franchisee. 

Franchisees should not exit a franchised business before the end of the franchise agreement without seeking advice from an experienced franchise lawyer.