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Franchising Law News, July/August 2010
The courts have recently considered the role of restraint of trade clauses in franchising agreements
EzyDVD Pty. Ltd v Lahrs Investments Qld Pty Ltd & Ors[2009] QCA 389
This case involved a restraint of trade clause in a franchise agreement. Courts are generally more inclined to uphold restraints of trade in purely commercial settings or relationships than in cases involving an employment relationship but only where the clause is necessary to protect a legitimate interest of a party [in this case a franchisor] which extends beyond the life of the commercial agreement [in this case the franchise agreement].
Lahrs was an EzyDVD franchisee. The franchise agreement expired, and a company related to Lahrs, the fourth defendant, began operating a similar DVD business from the same premises. The restraint of trade clause in question was contained in the franchise agreements and purported to restrain the franchisee and its directors for a period of six months from competing with EzyDVD within 1km of anyEzyDVD store in Australia and within 5km of the franchisee's store.
At the initial trial, the restraint of trade clause in the EzyDVD franchise agreement was held to be unreasonable because other provisions in the agreement covered the protection of the franchisor’s intellectual property and the restraint of trade clause was therefore held to be void as it was not reasonably necessary to protect the legitimate interests of EzyDVD.
The Court of Appeal upheld the trial judge’s findings, holding that the information that the clause purportedly protected was of limited utility and stood to become obsolete very quickly.
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