EzyDVD Pty Ltd v. Lahrs Investments Qld Pty Ltd & Ors
[2009] QSC 227
•13 August 2009
SUPREME COURT OF QUEENSLAND
CITATION:
EzyDVD Pty Ltd v Lahrs Investments Qld Pty Ltd & Ors [2009] QSC 227
PARTIES:
EZYDVD PTY LTD
ABN: 65 123 658 702
(applicant)
v
LAHRS INVESTMENTS QLD PTY LTD
ABN: 62 125 595 468
(first respondent)
JAMIE THOMAS LAHRS
(second respondent)
ANNETTE MARIE LAHRS
(third respondent)
VIEW DVD PTY LTD
ACN: 137 533 450
(fourth respondent)FILE NO/S:
BS 7730 of 2009
DIVISION:
Trial Division
PROCEEDING:
Trial
ORIGINATING COURT:
Supreme Court at Brisbane
DELIVERED ON:
13 August 2009
DELIVERED AT:
Brisbane
HEARING DATE:
5 August 2009
JUDGE:
Chief Justice
ORDER:
The claim for an injunction made in paragraph 9 of the originating application filed on 17 July 2009 is dismissed, with costs, to be assessed on the standard basis.
CATCHWORDS:
TRADE AND COMMERCE – OTHER REGULATION OF TRADE AND COMMERCE – RESTRAINTS OF TRADE – ENFORCEMENT OF AGREEMENT – REMEDIES FOR BREACH OF AGREEMENT – INJUNCTION – injunction to enforce restraint of trade provisions – where franchise agreement expired – franchisor’s IP returned, in accordance with agreement – reasonableness of restraint provision – existence of adequate alternative contractual mechanism to protect franchisor’s IP – whether information remaining in the previous franchisee’s ‘head’ justified the separate restraint provision – nature of that information
Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd (1968) AC 269, cited
Masterclass Enterprises Pty Ltd v Bedshed Franchisors (WA) Pty Ltd [2008] WASC 67, cited
Miles v Genesys Wealth Advisers Ltd (2009) NSW CA 25, cited
Reck v Gilham [1995] 1 Qd R 302, cited
COUNSEL:
K E Downes SC with S B Hooper for the applicant
I R Pike for the respondentsSOLICITORS:
DLA Phillips Fox for the applicant
Marque Lawyers for the respondents
CHIEF JUSTICE:
Introduction
The applicant, EzyDVD, seeks an injunction, of final effect, enforcing a restraint of trade clause in a franchise agreement. On 28 July 2009, Byrne SJA, dealing with an application, at that stage, for an interlocutory injunction, set the matter down for a trial to commence on 5 August 2009. His Honour was no doubt influenced by the circumstances that the period of the restraint was only six months, running from the termination of the franchise agreement on 17 June 2009.
Factual background
The first respondent, Lahrs Investments Qld Pty Ltd, and its directors, the second and third respondents, Mr and Mrs Lahrs, entered into the franchise agreement on 19 November 2007. The applicant subsequently took an assignment from the original franchisor, EzyDVD Pty Ltd. The franchisor granted the first respondent the right to operate an EzyDVD store within the Westfield Garden City Shopping Centre at Mount Gravatt, together with the licence to use the system, know how and trade secrets of the franchisor in connection with the operation of that store. The franchise fee was $20,000. The first respondent obtained exclusive franchise rights within that shopping centre.
The business of EzyDVD stores is the retail sale of DVD recordings, including of movies, television shows, documentaries and music. The business has been operating for approximately 10 years. The Garden City store was one of a network throughout Australia, other than in Western Australia. The franchisor’s profits come from one-off franchisee fees, when a new franchise agreement is concluded, (in this case $20,000); and commissions earned on purchases of DVDs made by franchisees from distributors with whom the applicant has negotiated pricing arrangements.
Under the franchise agreement, the second and third respondents were guarantors of the performance of their company, the first respondent, and they were also designated as “control persons”. That designation appears in the restraint of trade clause, clause 5.6.3 which is as follows:
“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.”
Immediately upon the expiration of the franchise agreement, another company, View DVD Pty Ltd, commenced operating a DVD retail business from the same premises at Garden City. The store was shortly thereafter designated “View DVD Garden City”. The second respondent Mr Lahrs has always been the company’s sole shareholder and director. On 5 August 2009, View DVD Pty Ltd was, by agreement, added as fourth respondent in this proceeding.
Protection of franchisor’s IP upon expiration of agreement
The franchise agreement made provision to protect the franchisor’s intellectual property upon the termination of the agreement. Clause 9.6.3 relates to the return or destruction of relevant materials. It provides:
“(a)Immediately upon the expiration or termination of this Agreement, the Franchisee will (at the Franchisee’s expense) either return or if so instructed by the Franchisor destroy and in writing confirm to the Franchiser the destruction of any and all materials which are comprised of convey bear display incorporate or refer to the EzyDVD Intellectual Property or the Confidential Information.
(b)If the Franchisee does not comply with Clause 9.6.3(a), the Franchisee authorises the Franchisor or its employees, representatives or agents to (at the Franchisee’s expense):
(i)enter the Store and remove or obliterate all copies of the Manual, EzyDVD Intellectual Property and Confidential Information; or
(ii)carry out other work necessary to ensure the Franchisee’s compliance with this Clause 9.6.3.”
By Schedule D, the term “EzyDVD Intellectual Property” is defined to mean:
“all Intellectual Property in connection with the EzyDVD System including the Trade Marks; the Confidential Information; and all other Intellectual Property disclosed or provided by the Franchisor to the Franchisee and includes but is not limited to any database of customer details created by the Franchisee or used by the Franchisee in the operation of the Store.”
and the term “Intellectual Property” is defined to mean:
“all intellectual property rights, including without limitation: patents, copyright, rights in circuit layouts, registered designs, trade marks and the right to have confidential information kept confidential; and any application or right to apply for registration of any of those rights.”
The term “Confidential Information” is defined as follows:
“Confidential Information” means the following information, regardless of its form and whether the Franchisee becomes aware of it before or after the date of this Agreement:
(a)all information treated by Franchisor as confidential including without limitation the provisions of this Agreement, all information in connection with Franchisor, the Approved Products, and the Manual; and
(b)disclosed by Franchisor to the Franchisee or of which the Franchisee becomes aware, except information;
(c)the Franchisee creates independently of Franchisor; or
(d)that is public knowledge (otherwise than as a result of a breach of confidentiality by the Franchisee or any of the Franchisee’s permitted disclosees);”
The principal source of the franchisor’s intellectual property is computer software provided to the franchisee and regularly updated. There is also a handbook, which was admitted before me as a confidential exhibit, but the focus in the affidavit material and at the hearing rested on that software. It is convenient to adopt, here, the following summary in relation to the software taken from the applicant’s counsels’ outline:
“(a)The franchisor provides each franchisee with a software package called “MYOB Retail Manager”. This is standard, ‘off-the-shelf’ software which the franchisee can use for general account-keeping, ordering and invoice purposes.
(b)Over a period of 8-9 years, the former franchisor developed specific software systems to enable it to provide information to and receive information from a franchisee’s ‘MYOB Retail Manager’ software. Pursuant to the asset sale agreement, the Applicant now owns those systems. At its head office the Applicant runs software called ‘EzyDVD Advances Business Manager’ (‘ABM’). This software contains information which the franchisor can communicate electronically to the franchisee. This is done through software called ‘EzyDVD Store Toolbox’ (the ‘Toolbox’), which acts a portal between the ABM software and the franchisee’s ‘MYOB Retail Manager’ software. The Toolbox populates the franchisee’s software with information contained in ABM. Thus, the interaction between the software allows the franchisor to transfer data to the franchisee’s individual software; and to receive data from each franchisee.
Relevantly, this process means that the franchisee is provided with access to what is known as the ‘EzyDVD Titles Database’. This database contains information that is confidential to the franchisor and which gives it and its franchisees commercial advantage. The information includes:
(a)a listing of all the DVD titles and promotional products sold by the EzyDVD online and retail network;
(b)records of customers of particular franchisees who have placed orders or requested to be put on the store’s mailing list (including details of their names, phone numbers, addresses and email addresses);
(c)all promotional and merchandise items manufactured by EzyDVD for franchisees, such as premium metal DVD cases and movie posters;
(d)information about the prices at which franchisees can place orders through the franchisor for the purchase of DVDs from distributors, including the next scheduled price increases and decreases;
(e)details of historic prices and exclusive deals negotiated between the franchisor and the distributors; and
(f)details and prices of exclusive promotional items manufactured by the franchisor for exclusive distribution through the EzyDVD retail network.”
Mr Lahrs has given evidence of returning or destroying the franchisor’s confidential information and intellectual property, accessible by the first respondent, upon the expiration of the franchise agreement. In his first affidavit, he said this:
“40.All Confidential Information and Intellectual Property was returned to EzyDVD in accordance with the requirements of the Franchise Agreement. In this respect I refer to paragraphs 13 to 18 of the affidavit of Judith Anne Miller dated 21 July 2009.
41.To the best of my knowledge Lahrs Investments has complied with all requests by EzyDVD for the return of Confidential Information and Intellectual Property to EzyDVD in accordance with the Franchise Agreement.
Toolbox Software and Titles Database
42.I refer to paragraphs 14 and 16 of the affidavit of Shannon William Ingrey dated 21 July 2009. The Toolbox software and the EzyDVD Titles Database referred to in paragraphs 14 and 16 of Mr Ingrey’s affidavit have been deleted from the computer system of Lahrs Investments. This occurred over the course of 17 to 19 June 2009. Lahrs Investments no longer has access and has been disconnected from EzyDVD’s ‘Toolbox’ and ‘Titles Database’. Lahrs Investments can no longer ‘Update’ its MYOB Database from EzyDVD’s head office.
43.Prior to deleting the Toolbox software and the EzyDVD Titles Database from the computer systems I made one copy of the MYOB Retail Manager Database (MYOB Database) on a CD for tax purposes. This copy of the MYOB Database is currently being held by my accountant Mr Warner of Ferrari Warner Chartered Accountants. I have not nor has Annette Lahrs accessed the copy of the MYOB Database that is being held with Mr Warner.
44.I understand from discussions with Mr Warner that Lahrs Investments is required to keep all financial data, such as sales, purchasing and profit and loss statements for a period of 7 years for tax purposes. The MYOB Database includes a large amount of financial data relating to sales and purchasing that belongs to Lahrs Investments and which I understand Lahrs Investments is required to retain.
45.At the time of making the copy of the MYOB Database I was not aware of any method in which to obtain extracts of the financial information of Lahrs Investments that Lahrs Investments was required to keep. For this reason and giving the tight timing in which I had to return the Confidential Information and Intellectual Property to EzyDVD I took the most straight forward and quickest operation and made a copy of the MYOB Database.
46.I refer to paragraphs 28 to 33 of the affidavit of Mr Ingrey. After making the copy of the MYOB Database referred to in paragraph 43 above, I clicked on all EzyDVD files, which included the EzyDVD Titles Database, customer lists and MYOB files on the computer and sent them to the ‘Recycle Bin’ on the computer of Lahrs Investments. I received an error message which said that some of the files were too big for the Recycle bin and if I pressed continue the files would be lost and would be permanently deleted. I clicked on the continue icon and all the files were permanently deleted from the computer of Lahrs Investments.”
See also paras 41-44 of his later affidavit. He was not cross-examined on that material. I accept that evidence.
Challenge to restraint of trade clause
Temporal and geographical operation
The respondents challenged the validity of the restraint of trade clause on a number of bases. One was the absence of proof of its reasonableness as to time and territory.
The six months time limitation was reasonable, measured against the time the franchisor would probably have taken to find a replacement franchisee, and for that new franchisee to establish contact with former customers: cf Reck v Gilham [1995] 1 Qd R 302, 308.
As to territory, the five kilometre limitation beyond the Mount Gravatt store was prima facie reasonable, and in relation to other stores around Australia, that limitation could as necessary be deleted by using the so-called “blue pencil” rule.
It is significant that the parties were bargaining on apparently equal terms at arms length. Further, by clause 3.6.3 of the franchise agreement, the first respondent expressly acknowledged that it had obtained independent advice about the agreement from a legal adviser, business adviser and/or accountant; or had been told to obtain such advice but decided not to seek it. As to the significance of such matters, in relation to the question of the reasonableness of such restraints, see Masterclass Enterprises Pty Ltd v Bedshed Franchisors (WA) Pty Ltd [2008] WASC 67 at para 94; Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd (1968) AC 269, 300 and Miles v Genesys Wealth Advisers Ltd (2009) NSW CA 25, para 66.
The need for a separate restraint of trade provision
The second challenge rested on the existence of an otherwise adequate contractual regime for the protection of the applicant’s intellectual property. This arose from the identification of the interest which fell to be protected by the restraint of trade. That interest was, in this case, the applicant’s intellectual property. That clearly emerges from clause 5.6.3 itself, which opens with this acknowledgement:
“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 … of this agreement …”
Counsel for the applicant made it clear that it was by reference to the protection of intellectual property that the applicant sought to justify the reasonableness of the restraint. As stated in para 13 of their outline of argument in reply:
“The applicant’s case is that, as a Franchisor which had provided confidential information to its Franchisee, it had a legitimate interest in protecting itself against the possibility of use of that information after the Franchise Agreement expired, which interest was capable of protection by a restraint clause reasonable in scope …”
The case was argued on that basis, and not by reference to other considerations, such as the protection of goodwill.
Counsel’s summary of the provisions to protect franchisor’s IP
It is necessary that I now set out the provisions of the franchise agreement which established that regime for the protection of the applicant’s intellectual property. It is convenient to set out first, however, the respondents’ counsel’s summary, taken from his outline:
“(a)clause 5.3 is concerned to see that Confidential Information is only used for the purpose of the store in question, and is kept confidential during the life of the term;
(b) clause 5.4 secures to the franchisor ownership of all intellectual property, as defined, the rights to retain business telephone and facsimile numbers, and the right to retain customer lists by virtue of the definition of intellectual property;
(c)sub-paragraph 5.4.1(c) secures ownership of goodwill to the Applicant;
(d)clause 5.4.3 restricts the use of the Applicant’s intellectual property in connection with the sale of products authorised by it;
(e)clause 5.4.4 effectively assigns ownership to the franchise of all improvements or modifications to existing intellectual property;
(f)clause 5.6.2 protects the Applicant’s goodwill by restricting the franchisee from having any involvement in any competitive business;
(g)clause 6.1.6(e) protects any software provided by the Applicant to its franchisees;
(h)clause 6.4.4 protects the confidentiality of the store manual and the purposes for which it may be used, and guarantees its return upon the expiry of the term;
(i)clause 9.6.2 guarantees a discontinuance of any use of the Applicant’s intellectual property upon expiration of the term; and
(j)clause 9.6.3 requires delivery up of all intellectual property, or removal or obliteration at the direction of the Applicant.”
Those provisions
The provisions in the franchise agreement to which I have referred are as follows, and I am afraid they must be set out notwithstanding their length:
“5.4 Intellectual Property
5.4.1Ownership
The Franchisee acknowledges that:
(a)the Franchisor owns all the EzyDVD Intellectual Property and has the right to retain the business telephone and facsimile numbers used in or in relation to the Store after the termination or expiration of this Agreement;
(b)the Franchisee must provide the Franchisor with such written authorities and must take all other action or steps, as required or requested by the Franchisor, to better effect the Franchisor’s rights and entitlements under this Clause 5.4; and
(c)the EzyDVD Goodwill vests absolutely in the Franchisor and all such rights will at all times and for all purposes remain vested in the Franchisor.
5.4.2Use of the Trade Marks
The Franchisor grants the Franchisee the right to use the Trade Marks and the EzyDVD Intellectual Property but only:
(a)in the Territory in connection with the Store during the Term;
(b)in the manner specified in the Manual;
(c)as required and prescribed in writing from time to time by the Franchisor; and
(d)subject to the condition that the Franchisee may not modify the Trade Marks and the EzyDVD Intellectual Property without the Franchisor’s prior written consent.
5.4.3Prohibited Use
The Franchisee must not use any of the EzyDVD Intellectual Property in connection with the sale of any product or service not authorised by the Franchisor or in any other manner not explicitly authorised by the Franchisor in writing.
5.4.4Ownership of Inventions and Improvements
The Franchisee:
(a)assigns to the Franchisor all existing and future Intellectual Property in any improvement of the Manual, the EzyDVD System or any original works created by the Franchisee which modify, improve, further develop or add to the Manual, the EzyDVD System or the Store (whether created alone or jointly with the Franchisor); and
(b)acknowledges that by virtue of this Clause 5.4.4 the Intellectual Property described in Clause 5.4.4(a) is deemed to be EzyDVD Intellectual Property immediately upon its creation.
5.4.5Infringement by other than the Franchisee
The Franchisee must immediately notify the Franchisor in writing and provide full details of any actual, potential or suspected infringement of the EzyDVD Intellectual Property by any third party of which the Franchisee becomes aware.
5.4.6No Action
(a)The Franchisee must not take any action or steps of whatever nature against any third party infringing the EzyDVD Intellectual Property.
(b)The Franchisee must not contest the Franchisor’s exclusive rights to use any of the EzyDVD Intellectual Property.
5.4.7Acknowledgement
The Franchisee acknowledges that the Franchisor is not obliged to take any action against any infringement by a third party of EzyDVD Intellectual Property but has the exclusive right to control any such action or related litigation.
…
5.5.2Documents
The Franchisor must execute and deliver to the Franchisee all documents necessary or as prescribed by the Franchisor, to enable the Franchisee to register the Approved Business Name as a business name.
5.5.3Ceasing to Carry on Business
On execution of this Agreement, the Franchisee must provide the Franchisor with a signed transfer of the Approved Business Name and/or a notice of cessation in blank which may be lodged by the Franchisor on the termination or expiration of this Agreement for whatever reason.
5.5.4No Transfer of Approved Business Name
The Franchisee must not transfer, deal with or transfer the Approved Business Name to any person except by a transfer in accordance with Clause 10.
5.6 Protective Covenants
5.6.1 Acknowledgement
The Franchisee acknowledges that the EzyDVD System is distinct and unique and has been developed by the Franchisor at great effort and expense.
5.6.2Protection of EzyDVD Goodwill
The Franchisee further acknowledges that one of the reasons the Franchisor has signed this Agreement with the Franchisee is the Franchisor’s reasonable expectation that the EzyDVD Goodwill will increase in value by virtue of the Franchisee diligently marketing and selling the Approved Products from the Store and accordingly the Franchisee will devote the Franchisee’s whole time and efforts to the operation of the Store and accordingly:
(a)during the Term, the Franchisee will not and will ensure that its Control Persons do not:
(i)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 or render consultancy or other services to any Competitive Business;
(ii)be a lender to or have a Financial Interest in any Competitive Business;
(iii)let or permit any part of any premises owned or controlled by the Franchisee to be used for the operation of a Competitive Business;
(iv)by any direct or indirect inducement divert or attempt to divert to any Competitive Business any customer or business of the Store; and/or
(v)commit any other act or suffer any omission which could lessen the value of the EzyDVD Goodwill.
(b)The Franchisee represents to the Franchisor that as at the date of execution of this Agreement:
(i)the Franchisee and its Control Persons are neither a party to nor otherwise bound by any one or more other agreements which are inconsistent with or would interfere with the Franchisee’s performance of this Agreement; and
(ii)the Franchisee and its Control Persons do 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 or have a Financial Interest in any Competitive Business.
…
6.1.6
(e)ensure that the Franchisee complies with the terms and conditions of any licences for software it uses in connection with the Store. Where the Franchisor has licensed the Franchisee to use software, those terms and conditions include (without limitation) that the Franchisee must not (and must not permit any of its officers, employees or representatives to, or procure any third party to), without the Franchisor’s prior written permission:
(i)copy or reproduce the software;
(ii)reverse engineer or decompile the software;
(iii)modify the software;
(iv)sell or otherwise transfer ownership of the software to a third party, or purport to do so;
(v)create derivative works based on, or translations of, the software; or
(vi)remove, obscure, or fail to include any copyright, trade mark or confidentiality notices, or any other proprietary marking, on the software;
(f)In a prominent location in the Store, make available for customer use, no less that one (1) computer, upon which the EzyDVD Website must be continuously available to customers; and
(g)not directly or indirectly operate any website relating to the Store;
…
6.4.4Access
The Franchisee acknowledged and agrees that the Manual is confidential and accordingly the Franchisee:
(a)may print a copy of the Manual from the EzyDVD Website provided that it only retains one copy of the Manual at all times; and
(b)must cease accessing the Manual and return its copy of the Manual to the Franchisor immediately upon the expiration or termination of this Agreement or upon any reasonable request by the Franchisor.
…
9.6.3Return of Materials
(a)Immediately upon the expiration or termination of this Agreement, the Franchisee will (at the Franchisee’s expense) either return or if so instructed by the Franchisor destroy and in writing confirm to the Franchisor the destruction of any and all materials which are comprised of convey bear display incorporate or refer to the EzyDVD Intellectual Property or the Confidential Information.
(b)If the Franchisee does not comply with Clause 9.6.3(a), the Franchisee authorises the Franchisor or its employees, representatives or agents to (at the Franchisee’s expense):
(i)enter the Store and remove or obliterate all copies of the Manual, EzyDVD Intellectual Property and Confidential Information; or
(ii)carry out other work necessary to ensure the Franchisee’s compliance with this Clause 9.6.3.”
Analysis
The respondents submit that “the restraint [of trade] must necessarily be unreasonable in circumstances where there is a comprehensive contractual regime in place, enforceable at the election of the franchisor, to protect that information by way of its delivery up or destruction”.
I would accept that submission, but only if the contractual regime should be regarded as providing that comprehensive level of protection. Counsel for the applicant submitted that it did not. They referred to the possibility that notwithstanding the return or destruction of the confidential information, the respondents might retain at least parts of it in their memory, available for subsequent use even if subconsciously. They referred to Miles v Genesys Wealth Advisers Ltd [2009] NSWCA 25 at para 63, expressing their submission as follows:
“When considering restraints for the protection of confidential information, it must be borne in mind that the recipient of the confidential information does not divest himself or herself of the knowledge of that information simply by returning or destroying the documents or other medium which recorded that information. At least to some extent, information, once imparted to a person, is inevitably retained by them, whether consciously or subconsciously.”
In his affidavit, Mr Lahrs explained how he established a new database for the fourth respondent, following the termination of the franchise agreement. He said as follows:
“51.As the director of View DVD I caused the following to occur in order for View DVD to commence operating a video retail store.
(a)I contacted MYOB, a company that develops software packages for businesses, in relation to the availability of a software package to suit View DVD’s business and in particular to enquire whether the customers and stock file on Lahrs Investments’ existing database could be deleted. I was informed by a customer service representative of MYOB whose name I now cannot recall that I needed to delete all files on the existing database (which I did as referred to above in paragraph 46 above). I was informed by that person that a completely new database would have to be established for View DVD. I requested that View DVD be registered with new registration numbers and View DVD was provided with a new and blank database by MYOB.
(b)From my experience as an operator of the video retail store in my view, it would be very difficult for a stand-alone video retail store to be established without a pre established database of titles because of the large turnaround of product. View DVD, which was a newly established company that had not operated a video retail store, did not have access to any titles database. For this Network Video provided to View DVD a complete titles database from which stock could be ordered.
(c)I, on behalf of View DVD entered into an agreement with Network Video. The agreement with Network Video included the provision of a database of titles which could be adopted by View DVD.
(d)Through Network Video, View DVD adopted the 40,000 titles or so provided by Network Video into its database (View DVD Database). The titles provided by Network Video were uploaded onto the View DVD Database and I was not required to enter the title descriptions into the database as the title details and descriptions were automatically loaded into the View DVD Database.
(e)Titles that were not included on the Network Video database had to be manually entered into the View DVD Database. These titles were usually discontinued stock. This took me only about 2 days to complete. I used the descriptions of titles that I had used previously when I was operating the Garden City Store. For example, Network Video does not have in this system the titles ‘Slackers’ and ‘Little Odessa’ (see exhibit DC-2 and DC-3 of the affidavit of Mr Cook). In order to enter those titles into the View DVD Database, I manually entered in these titles. When entering these titles manually into the database I used the descriptions and terminology that I was accustomed to using when I was operating the Garden City Store through Lahrs Investments. The term that I understood to describe a discontinued title was ‘(Superbuy)’ ‘(discount)’ and this was used when the title descriptions were manually entered in the View DVD Database.
During the term of the Franchise Agreement and following the expiry of the Franchise Agreement I never understood the term ‘Superbuy’ to be a trademark of EzyDVD or part of its Intellectual Property or Confidential Information. In any event, I have arranged with the assistance of Network Video for the word ‘Superbuy’ to be deleted out of our system in the descriptions on the View DVD Database as at 27 July 2009;
At no time did I or View DVD access the Ezy DVD Titles Database in order to create the View DVD Database.”
Counsel for the applicant instanced Mr Lahrs’ conduct referred to in paragraph 51(e) above as exemplifying the retention and use of confidential information notwithstanding his apparent discharge of the first respondent’s contractual obligation upon the termination of the franchise agreement.
Focusing on the question of the reasonableness of supplementing a contractual regime specifically designed to protect the intellectual property, with a restraint of trade provision, it is necessary to consider the nature of the information in issue. It substantially concerns customers, titles, prices and promotional matters. Mr Ingrey offered the following somewhat more comprehensive summary in his affidavit:
“17.1A listing of all the DVD titles and promotional products sold throughout the EzyDVD online and retail network;
17.2Records of customers of that particular EzyDVD franchisee who have placed individual orders or asked to be put on that store’s mailing list, including those customers’ names, telephone numbers, addresses and email addresses;
17.3All promotional and merchandise items manufactured by EzyDVD for franchisees, such as premium metal DVD cases and movie posters.
17.4All information about the prices at which franchisees can place orders through EzyDVD for the purchase of DVDs from DVD distributors, including the next scheduled price increases and decreases, as determined by confidential agreements negotiated between the Applicant and the various DVD distributors containing advantageous terms not available to DVD retailers generally;
17.5Details of historical prices and exclusive deals negotiated between the Applicant and the various DVD distributors; and
17.6Details and prices of exclusive promotional items manufactured by the Applicant for exclusive distribution through the EzyDVD retail network.
Was it reasonable, in order to protect the applicant’s rights in respect of such of that information as may have remained in the second and third respondents’ heads notwithstanding the return or destruction of the relevant records, to impose this restraint on competitive trade?
To answer that, I have had regard to some particular parts of the evidence especially – that most of the customers of the store could have been expected (as at the execution of the franchise agreement) to be “passing traffic”, and mostly “one-off”, (para 63 Lahrs); that every month, there would be great variation in the content of the software, with hundreds of changes to titles and prices (para 11 Lahrs); that use for marketing campaigns was minimal (para 10 Lahrs); and from the oral evidence of Mr Ingrey, that DVD prices change regularly, because of regular negotiations between retailers, wholesalers, and distributors, with regular updating of the “EzyDVD Toolbox” to reflect price changes and the addition of a “constant stream” of new products (transcript p 1-43).
Notwithstanding Mr Lahrs’ confirmation that he drew upon his memory in the manner described in para 51(e) of his affidavit set out above, I am not satisfied that it was reasonable to supplement the contractual regime set up to protect the applicant’s intellectual property by this general restraint of trade provision, effectively to guard against the risk of a former franchisee’s retaining and subsequently using confidential information notwithstanding its having returned or destroyed the relevant records in accordance with its contractual obligation. I reach that conclusion having regard to the nature of the confidential information. With rapidly changing titles and prices, the information in the database was generally of short term applicability, even if the description “evanescent” might be going somewhat too far. But adding in the circumstance that most of the customers were passers by, and there being no substantial use of the software for broader marketing purposes (as to which I accepted the evidence of Mr Lahrs), it was, I conclude, unreasonable to add this particular restraint.
The parties bound by any (valid) restraint
The other challenge mounted by the respondents dwelt upon the parties bound by the restraint of trade clause. The first respondent no longer runs the business; the second and third respondents were, it was submitted, bound as guarantors only; and the fourth respondent was not party to the agreement.
Counsel for the respondents made these points in support of his submission that notwithstanding their being designated as “control persons”, the second and third respondents could not be the subject of any injunction under the restraint of trade clause:
“The Second and Third Respondents have contracted solely in the capacity of guarantor, the fact of which is demonstrated by the following:
(a)on the front page of the franchise agreement they are named as guarantors;
(b)the licence in clause 3.1 records that consideration moved to the franchisee in the form of ‘an EzyDVD franchise to operate the store as well as a licence to use the EzyDVD system and the trademarks solely in connection with the operation of the store’;
(c)there is no consideration expressed anywhere in the agreement to move to the Second and Third Respondents in their capacity as Control Persons;
(d)there is no obligation of confidentiality imposed upon Control Persons in clause 5.3 – only the franchisee suffers this burden;
(e)clause 5.6.2 imposes an obligation on the franchisee, during the term, to ensure that its Control Persons do not do certain things. This is not an undertaking by the Control Person in that capacity;
(f)in the restraint clause it is the franchisee making the acknowledgement, and not the named Control persons;
(g)clause 8, dealing with the obligations of the guarantor, not only uses the defined term ‘guarantor’ but is written in the customary language of a surety’s obligations;
(h)clause 8.1.1(b) guarantees prompt compliance and performance of all the franchisee’s obligations under this agreement – it fails to guarantee performance of the Control Persons’ obligations under the agreement;
(i)the attestation clauses clearly contemplated the Second and Third Respondents signed in their personal capacity as guarantors and not as Control Persons. The text box under the signature section makes this clear.
Counsel submitted that in order to bind the second and third respondents effectively to the restraint of trade clause, the franchisor should have required them to enter into separate, personal, deeds of covenant.
The response of counsel for the applicants may be taken from this part of their outline of submissions:
“The Applicant rejects any suggestion that the clause is ineffective as against Mr and Mrs Lahrs because they did not contract in any individual capacity or because they did not receive any consideration under the Franchise Agreement.
The relevant matters are these:
(a)Mr and Mrs Lahrs were, at the time the Franchise Agreement was executed, the directors and shareholders of the First Respondent, and the only directors and shareholders. Together they controlled the First Respondent.
(b)Both Mr and Mrs Lahrs executed the Franchise Agreement on behalf of the First Respondent.
(c)Both Mr and Mrs Lahrs executed the Franchise Agreement personally.
(d)The obligations of Mr and Mrs Lahrs as Guarantors included an obligation to guarantee the performance of all of the First Respondent’s obligations under the agreement.
(e)Mr and Mrs Lahrs were both identified by Schedule A as the ‘Control Persons’.
(f)By the restraint clause, the First Respondent acknowledged that, for the specified 6 month period, it and its Control Persons would not engage in the specified activities. Mr and Mrs Lahrs were, of course, aware of that acknowledgement, given that each of them executed the agreement.
(g)Thus both Mr and Mrs Lahrs knew that their responsibility was to ensure that the company they controlled made sure that they, as individuals, did not engage in the specified activities.
(h)As the only directors and shareholders of the First Respondent, Mr and Mrs Lahrs obtained the benefits derived by the First Respondent under the Franchise Agreement.
In these premises, it cannot be the case that the Second and Third Respondents are not bound by the restraint clause. That would defy the objective intention of the parties, as is apparent from the face of the clause. It would undermine the entire purpose and utility of the restraint clause and also the other clauses by which, as noted above, the franchisor sought to protect its confidential information and goodwill. A corporate entity can only act through its directors and officers and it would be an absurd result if those very directors and officers are permitted to do precisely that which the First Respondent is not permitted to do, particularly were there is no doubt that those individuals were aware of the terms of the Franchise Agreement and where they executed it personally.”
Because of my conclusion that the restraint of trade clause cannot be upheld, because it is unreasonable, it is not necessary that I express any concluded view on this additional basis for the challenge. But I will express my tentative view. While a strict reading of clause 5.6.3 imposes the contractual obligation on the franchisee, embracing an obligation on the franchisee to ensure that “its” control persons do not offend against the provision (as if they were personally bound by it), so that any injunction would be available against the first respondent, I would consider that the reach of equity would nevertheless extend to the second and third respondents, were the clause otherwise valid and the subject of actual or apprehended breach. Because it is not necessary for me to express a conclusion on that aspect, I do not propose to elaborate upon my reasons for the preliminary view just expressed.
Orders
The orders I made are that the claim for an injunction made in paragraph 9 of the originating application filed on 17 July 2009 be dismissed, with costs to be assessed on the standard basis.
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