Mainland Digital Marketing Limited v Willetts
[2019] NZHC 2542
•7 October 2019
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE
CIV-2019-409-000205
[2019] NZHC 2542
BETWEEN MAINLAND DIGITAL MARKETING LIMITED
PlaintiffAND
PAUL WILLETTS
First Defendant
AND
RACHEL ANNE VON NORDECK MYERS
Second Defendant
Hearing: 3 September 2019 Appearances:
P A Cowey and D L Bell for Plaintiff A Keir and J Brown for Defendants
Judgment:
7 October 2019
JUDGMENT OF DUNNINGHAM J
This judgment was delivered by me on 7 October 2019 at 3.00 pm, pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar Date: 7 October 2019
Introduction
[1] Mr Willetts and Ms Von Nordeck Myers, the defendants, are photographers. They both entered photographer franchise agreements with the plaintiff, Mainland Digital Marketing Ltd (MDM). MDM is the area franchisee of the Open2View real estate marketing system. As photographer franchisees of MDM, the
MAINLAND DIGITAL MARKETING LIMITED v WILLETTS [2019] NZHC 2542 [7 October 2019]
defendants supplied real estate photography services to real estate agents selling through differently branded real estate businesses in the Canterbury area.
[2] When the five year term of the photographer franchise came to an end, the defendants did not renew it. Instead, they went to work for Whalan and Partners Ltd, which operates a real estate business in Canterbury and Wanaka under the Bayleys Real Estate brand name (Bayleys).
[3] MDM took exception to the defendants taking up employment with Bayleys. It sought an interim injunction to restrain them from providing real estate photography (and related services) to anyone in a defined area of the South Island, including Bayleys, until 31 March 2021. The application was made on the grounds that there were binding restraints of trade in the photographer franchise agreement which prohibited such activities.
[4] In a decision issued on 30 May 2019, Nation J declined to grant an interim injunction.1 He concluded that there was “a serious question to be tried as to whether MDM’s interest in its goodwill requires the protection of an injunction”. However, he also explained that “in this judgment, I am not determining how the contract is to be interpreted in a way that will be binding on the parties”. He suggested that the interpretation could be determined as a preliminary issue, saying the relief sought by MDM “will be arguable only if the restraint covenants have been drafted so as restrain the defendants from being employed as they are now with Bayleys”.
[5] The parties took up that suggestion and agreed on a preliminary question for determination at this hearing. It is as follows:
(a)Does the defendants’ employment with Bayleys, performing the tasks they are in fact performing, breach cl 38 and Appendix 1 of the photographer franchise agreements?
1 Mainland Digital Marketing Ltd v Willetts [2019] NZHC 1201.
For completeness, if I find the restraints of trade (or either one of them) are drafted in terms that capture the current activities of the defendants, the defendants reserve the right to argue that the restraints are, in any event, unenforceable.
The relevant background
[6] To assist in focussing argument, the parties helpfully prepared an agreed list of facts. The following outline of the background to this hearing relies, in large part, on that summary.
[7] MDM is an area franchisee of the Open2View real estate marketing system. It operates in a defined area of the South Island which includes Kaikoura, Christchurch, South Canterbury and the Mackenzie Country. Through the Open2View system, MDM supplies visual media services to the real estate industry, including photography, videography, floorplans, and internet marketing services. Those services are provided by sub-franchisees such as the defendants.
[8] The defendants were already experienced photographers when they entered the photographer franchise agreement, although they had no particular experience as real estate photographers. MDM said it provided extensive training to the defendants and introduced them to various of its customers. While the defendants did not pay for goodwill in the franchise as they were not taking over an existing business, goodwill is built up by photographer franchises and they are able to on-sell those franchises for a sum that reflects the value of the goodwill developed.2
[9] The defendants were encouraged to develop a base of up to 100 real estate agent contacts. Those real estate agents would contact the defendants and arrange for a vendor’s property to be photographed. MDM would invoice the real estate agency for those services and MDM would then account to the defendants for their share of the fee, being 55 per cent.
[10] As photographer franchisees, the defendants enjoyed the support of Open2View’s business systems, IT, marketing and process support. While their
2 Noting two franchises in the North Island both recently sold for just under $100,000 each on the basis of turnover warranties provided.
commissions were initially low, by their third year working as photographer franchisees, they were both earning approximately $100,000 a year.
[11]Bayleys became MDM’s biggest client. By 2018, Bayleys was invoiced
$247,029 for real estate marketing services. While Bayleys was serviced by a number of MDM photographer franchisees, and not just the defendants, it seems the defendants did the lion’s share of Bayleys work.
[12] The photographer franchise agreement provides for a fixed term, being five years from the commencement date of the agreement. For both defendants, the commencement date of the agreement was 1 April 2014, and it terminated on 30 March 2019. On 22 March 2019, both defendants advised Mr Perry, one of the directors of MDM, that they would not be renewing the franchise agreements. It seems that during March 2019 discussions were occurring between the defendants and one of the Bayleys owners, Mr Chris Jones, about the possibility of the defendants working for Bayleys exclusively. On 26 March 2019, the defendants signed employment agreements with Bayleys, and their appointment as employees was announced at a Bayleys staff meeting on the same day.
The restraint clauses in the photographer franchise agreement
[13] The photographer franchise agreements are comprehensive documents comprising 60 pages of definitions, terms, schedules and appendices.
[14] The only aspect of the agreement which is in issue in this hearing is the scope of the restraint of trade clauses. There are two. The first is contained at cl 38 of the agreement, although only cl 38.2 is directly relevant.3 That clause provides:
The Photographer Franchisee and the Guarantor agree that on Termination Date they jointly and severally will not from Termination Date conduct on their own or other account or be concerned or interested either directly or indirectly as owners, partners, directors, officers, consultants, representatives, agents, licensees, investors with or as part of any business firm or corporation which could be regarded as a market competitor or an imitation of the Franchise System including without limiting the generality of this clause any
3 Clause 38.1 relates to restraints during the term of the agreement, and cl 38.3 is a clause acknowledging that “the Restraint Period, and the Restraint Area, and the Restraint Business and the terms of each are no greater than reasonably required to protect [various parties’ interests]”.
business identical with or similar to the Franchised Business or the Restraint Business and the Photographer Franchisee and the Guarantor shall contemporaneously with completion of this Agreement, complete the Restraint Agreement and be bound by the terms of that Restraint Agreement.
[15] The second is contained in Appendix I and is described in the heading as a “Restraint Agreement”. It provides:
If this Agreement with the Area Franchisee terminates for any reason, the Photographer Franchisee will not, for a period of two years from the date of termination and within the same geographic areas in which the Area Franchisee operates, solicit any business dealings in the same type of business (Real Estate Photography, Real Estate Videography, Floor Plans, Sign Boards and Real Estate Internet Marketing) unless a specific exemption is granted by the Area Franchisee to the Photographer Franchisee; either directly or indirectly through associates with any person, company or other organization whether a customer or client of the Area Franchisee or its subsidiaries or any person or firm with whom the Photographer Franchisee has made contact in connection with their Contracting activities for the Area Franchisee or unrelated to the Area Franchisee. The Photographer Franchisee will keep the strictest confidence, both during the term of this Agreement and subsequent to termination of this Agreement and will not disclose or divulge to any person or company or other organization, or use directly or indirectly, for his own benefit or the benefit of others, any information which in good faith and good conscience ought to be treated as confidential information including information relating to the software developed by the Area Franchisee, submission and proposal procedures of the Area Franchisee, customer or contact lists or any other confidential information or trade secrets respecting the business or affairs of the Area Franchisee which the Photographer Franchisee may acquire or develop in connection with or as a result of the performance of their services hereunder. In the event of an actual or threatened breach by the Photographer Franchisee of the provisions of this paragraph, the Area Franchisee shall be entitled to injunctive relief restraining the Photographer Franchisee from the breach or threatened breach. Nothing herein shall be construed as prohibiting the Area Franchisee from pursuing any other remedies available to the Area Franchisee for such breach or threatened breach, including the recovery of damages from the Photographer Franchisee.
[16]These clauses use a number of defined terms. Relevantly:
(a)“Restraint Business” is defined to mean:
… collectively, and individually:
(i)that Business specified in Item 42 of the Schedule or;
(ii)a business operating in a Restraint Area that is the same or similar to the Franchised Business; and/or
(iii)each separate business or activity specified in the Schedule.
(b)“Restraint Business” is defined at Item 42 of the Schedule as the “Franchised Business”.
(c)“Franchised Business” is described at Item 13 of the Schedule as:
(i)The right to the Photographer Franchisee within the Territory for the Term and in accordance with this Agreement to carry on the Business, the marketing and supplying to Clients real estate digital photography and the promotion of lead based real estate marketing services and other complimentary (sic) products and services.
(ii)Any other right authorised by that Area Franchisee to the Photographer Franchisee.
(d)“Restraint Area” is defined at Item 41 in the Schedule as “the South Island of New Zealand”.
(e)“Restraint Term” is defined at Item 43 to be two years from termination date.
[17] Although there was some debate as to whether Appendix 1 was the Restraint Agreement referred to in cl 38.2 as it was not separately executed by the parties, I am satisfied it is the Restraint Agreement referred to in this clause. That said, nothing turns on this. It comprises part of the agreement and, unless it is held to be unenforceable, it binds the parties.
[18] The only other provision which appears relevant to the issue for determination is a provision governing the interpretation of the agreement. In cl 50, under the heading “Severability & Reading Down”, the parties have agreed that “the language of all provisions of this agreement shall be construed simply according to its fair meaning and not to prejudice any party”. In my view, this clause means that the parties have agreed that any principles of interpretation which favour one party over the other, such as the contra proferentem rule, should not apply.
The plaintiff’s submissions
[19] Mr Cowey’s submissions for the plaintiff begin by emphasising that the courts have been willing to enforce restraints in the context of franchising, because a
franchisor may “have a legitimate interest in protecting the goodwill developed through use of its business model”.4 The courts have also accepted that a franchisor may legitimately demand a reasonable time for a new franchise holder to enter an area and develop a fledgling business to a viable stage before facing competition from a previous franchise holder.5 For this reason, franchise agreements often include restraint clauses as:6
… franchise benefits … give rise to a reasonable interest on part of the franchisor to protect its investment in its name, its business model and the systems and written materials from exploitation by franchisees immediately following the termination of a franchise agreement.
[20] Mr Cowey goes on to assert that the ordinary principles for contractual interpretation apply in the context of restraints in franchising agreements. That means that the Court’s role is to ascertain:7
… the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.
[21] Mr Cowey describes cl 38.2 as placing an obligation on the defendants to “not be interested indirectly or directly in a business that could be regarded as a market competitor”. He submits that the defendants, as employees, have an interest in a market competitor, as agents or representatives, and are engaging in business transactions with ex-clients. It does not matter that the clause does not include the term “employees”. In his submission, “agent” is an expansive term which is used to describe the relationship where a person acts as the representative of a principal when dealing with third parties.8 Accordingly, when the defendants are carrying out real estate photography and real estate videography services for the employer, they are doing so in the name of their employer and, to the reasonable person, this would suggest that they are acting as “representatives” or “agents” of Bayleys.
4 Health Club Brands Ltd v Colven Botany Ltd [2013] NZHC 428 at [26].
5 Health Club Brands Ltd v Colven Botany Ltd, above n 4, at [26], citing Washworld Corp (Leases) Ltd v Reid (1998) 8 TCLR 372 (HC) at 385.
6 Skids Programme Management Ltd v McNeill [2012] NZCA 314 at [49], [2013] 1 NZLR 1.
7 Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 (HL).
8 John Burrows, Jeremy Finn and Stephen Todd Law of Contract in New Zealand (4th ed, LexisNexis, Wellington, 2012) at 622.
[22] He also points out that the defendants have a clear financial interest in the amount of real estate photography services provided to Bayleys agents. They are paid a minimum wage of around $18,000 for 20 hours work per week which includes the following tasks:
(a)filming training seminars;
(b)advising on audio/visual equipment purchases;
(c)preparing agent profile headshots; and
(d)establishing in-house training seminars for agents.
[23] This base salary does not include the defendants’ remuneration for performing real estate photography services and this accounts for approximately 75 per cent of each defendant’s total income. The defendants are paid a piece rate for each photography job they complete for individual Bayleys agents. This, in the plaintiff’s submission, constitutes “a financial interest in a market competitor”, particularly when the defendants, under their employment agreement, are performing largely the same functions and receiving similar remuneration in their new position as they were as franchisees of Open2View. This has meant that even though they are technically employees, they have been able to establish themselves as a market competitor. Thus, in Mr Cowey’s submission, the wording of cl 38.2 is sufficiently wide to incorporate the circumstances that have arisen and the defendants are in breach of that clause.
[24] Turning to Appendix I of the franchise agreement, which prohibits the defendants from soliciting any business dealings in real estate photography, whether directly or indirectly through any person, company or other organisation, Mr Cowey says this clause also prohibits the defendants from offering real estate photography services for Bayleys.
[25] Mr Cowey says the defendants have conceded that they are acting for clients, being Bayleys’ agents, who were previously serviced by them or other franchisees in the Open2View franchise network. He also notes that the defendants have accepted
that the restraint of trade prevents them from carrying out real estate photography for agents from Harcourts and Ray White (two other real estate businesses operating in Canterbury). There is therefore no principled basis why the restraint would not also prevent them from carrying out the same services for another ex-client, Bayleys. This is further reinforced by their attempts to seek a “relaxed restraint”, before finally confirming they would not renew the photographer franchise agreement.
[26] Mr Cowey submits that Appendix I prohibits solicitation in any form and therefore leaves no room for an argument that the defendants’ categorisation as employees limits the coverage of the clause. The evidence shows that they have been soliciting business dealings with vendors listing with Bayleys, to provide them with real estate photography services. He notes that Mr Whalan promoted the use of the defendants’ services in an email sent to Bayleys agents on 26 March 2019, they were promoted to Bayleys’ agents as the dedicated in-house photographers at a meeting in Bayleys Rangiora office on 17 April 2019, and Bayleys advertises the defendants’ services to its agents in its price guide.9 Finally, the first defendant is soliciting vendors directly through his LinkedIn profile page.
The defendants’ submissions
[27] Ms Keir for the defendants submits that provisions in restraint of trade should be interpreted strictly because they are provisions that otherwise limit a person’s economic freedom. Thus, as Nation J noted in his decision on the application for an interim injunction, the Court requires clear language or necessary implication before concluding a contracting party has limited its general freedom.10 Ms Keir also argues that the contra proferentem rule should apply in the event there is any ambiguity in the words used. The contract was drafted by the plaintiff and it had ample opportunity to make its expectations of the defendants plain.
[28] Ms Keir submits that the law relating to contracts in restraint of trade form part of the relevant context when interpreting the agreement. It must be inferred that the
9 A document which sets out prices of a number of services which are available to vendors using Bayleys agents, including home staging, gardening, and photography services.
10 Mainland Digital Marketing Ltd v Willetts, above n 1, at [50], citing Dorchester Finance Ltd v Deloitte [2012] NZCA 226, (2012) 3 NZTR 22-012 at [33].
provisions were intended to be valid and binding restraints. As contracts in restraint of trade are prima facie unenforceable, but are enforceable to the extent reasonable to protect a legitimate proprietary interest, it can be assumed that the drafter would craft a restraint provision with those principles in mind.
[29] The starting point is that the relevant proprietary interest needs to be identified. Frequently in the franchise context, the thing protected is the business systems and processes. A franchisor normally provides a franchisee with a recognisable brand and tested model of delivery which allows the franchisee to simply focus on providing the service.
[30] However, in this case, the plaintiff has advanced the argument that goodwill is the relevant proprietary interest. While that may be a proprietary interest in some cases, Ms Keir submits it cannot be the case here. This is because:
(a)Save for a passing mention in Item 26 of the Schedule, goodwill is not mentioned in the agreement.11
(b)The agreement reflects the position that goodwill in real estate agent referrers belongs to the photographer franchisee:
(i)Both of the defendants’ franchises were “greenfields franchises” at commencement and the defendants had to develop goodwill by their own efforts. With no goodwill in the business initially it would have been unreasonable for the franchisor to protect goodwill by a restraint of trade.
(ii)Having developed such goodwill, the franchise agreement allowed the photographer franchisee to sell or assign it for a price that reflected the goodwill developed.
11 Item 26 defines “Franchise System” to include “the goodwill and business reputation that the area franchisee, its predecessors and its associates have established including, but not limited to the equipment, the Authorised Services, the Specified Services, the Business Name and Marks”.
(iii)There is little goodwill in the Open2View brand for photography by itself, as agents choose to work with a variety of photographers from various suppliers depending on type of work, quality and responsiveness. However, Open2View photographers have a competitive advantage by their connection to Open2View’s broader business network, including its online presence.
[31] In any event, had the plaintiff wanted to protect agent goodwill it could have done so with clear language at the outset. To expand the words used to protect goodwill now goes beyond mere interpretation and into drafting.
[32] Turning to the two restraint clauses in question, Ms Keir describes cl 38.2 as a “post-termination restraint”, albeit it does not contain a geographic and time limit. She identifies the key phrases in interpreting cl 38.2 as follows:
(a) conduct on their own account or be concerned or interested either directly or indirectly as owners, partners, directors, officers,
consultants, representatives, agents, licensees, investors with or as
part of any business firm or corporation;
(b)which could be regarded as a market competitor or an imitation of the
Franchise System including without limiting the generality of this clause any business identical with or similar to the Franchised
Business or the Restraint Business.
[33] Ms Keir submits that this clause does not restrain all activity whatsoever, nor does it restrain the defendants from working as employees. It can be contrasted with other restraints, including one that was imposed on a former shareholder Mr Armstrong, when he sold his interests in MDM to the defendants in 2016. That restraint clause expressly restrained Mr Armstrong from competing as an employee and prohibited him, or any entity he was associated with, from carrying on or being:
… interested in either alone, in partnership or as a manager, agent, director, shareholder, financier or employee, … a market competitor or an imitation of the Franchise system “Open2View” … (emphasis added)
[34] Similarly, she points to examples cited in Nation J’s decision which are drafted to specifically restrain employment and which also contain a catch-all provision in any list of activity, so it is not a closed list of prohibited relationships with a competitor as
in this case.12 In contrast, the type of activity restrained by the words of cl 38.2 is any activity driving a business in some way. In short, it restrains the defendants from leading a business venture.
[35] She also rejects the suggestion that the term “agency” could be read broadly enough to cover an employment situation. The key feature of an agency relationship is that the agent has the authority to bind the principal. Here, there is nothing to suggest the defendants have such authority in their employment and it is difficult to conceive of how they might have apparent agency.
[36] Finally, the terms of cl 38.2 are specific about what sort of business venture the defendants may not be involved in. It is a business which is a market competitor or imitation of the franchise system. In other words, the type of business restrained is any business that looks and feels like Open2View; a business that organises and centralises real estate visual marketing. The text is directed at protecting the plaintiff’s business systems and modes of operation and preventing the proliferation of advantaged competitors copying the plaintiff’s model. In Ms Keir’s submission it is clear this provision does not cover the activities of the defendants in their employment with Bayleys.
[37] Turning, then, to Appendix 1, she describes it as a “non-solicitation” clause. The relevant key terms are:
(a)The Photographer Franchisee will not solicit;
(b)Any business dealings;
(c)In the same type of business (Real Estate Photography, Real Estate Videography, Floor Plans, Sign Boards and Real Estate Internet Marketing);
(d)Either directly or indirectly through associates with any person, company or other organisation.
[38] In her submission, the restraint focuses on “business dealings”, which is a specific term denoting a commercial relationship between businesses rather than the
12 Mainland Digital Marketing Ltd v Willetts, above n 1, at [46].
work of an employee. Again, as for cl 38.2, the restraint is limited to the “same type of business”.
[39] She rejects the plaintiff’s argument that, by employing the defendants, Bayleys has established itself as a competitor in the real estate photography market so that the defendants are in breach of Appendix I, because:
(a)the Appendix I restraint is not on mere competition but on solicitation on behalf of “the same type of business”. To be in breach, Bayleys would have to be a business like the plaintiff’s, not merely a different business offering a similar service;
(b)Bayleys is a real estate marketing business making its money from the commission of the sale of real estate. It provides photography in-house in what Mr Whalan describes as a “cost neutral” exercise. Thus, it is not in the same type of business as the plaintiff; and
(c)Bayleys provides vendors access to a suite of services which complement its core service of selling real estate, including photography, house staging and gardening. It now offers photography from both in-house as well as external providers, but it has not changed the nature of its business. Bayleys does not provide photography services to the market generally, nor does it intend to be a photography/visual marketing business.
[40] In summary, the defendants are not, through Bayleys, soliciting a business relationship with Bayleys sales agents or their vendor clients. Those business relationships are the same as they were before 1 April 2019 and are for the provision and delivery of real estate marketing services. In any event, the relationship with Bayleys is not a business relationship but an employment one.
[41] In response to the suggestion that the defendants are actually operating a competing business model but “disguising it through their employment relationship”, that is rejected both in form and in substance. Ms Keir submits that the defendants’
roles at Bayleys are traditional employment relationships governed by individual employment agreements. They have all the usual employee entitlements including sick leave, annual leave and KiwiSaver contributions. The fact that they are paid an incentive rate for some of their work does not alter the nature of the relationship or give the defendants a financial interest in Bayleys’ business.
[42] Furthermore, the defendants’ role as in-house photographers is not confined to photographing and videoing real estate listings. They also provide other photography services to Bayleys, such as photography for marketing purposes. They do not perform any work related to printing, producing or installing signboards, copywriting or internet marketing, as those are provided to Bayleys by other providers, including in-house providers, contractors and the plaintiff. Because they are in a relationship where they are subsumed into another broader business system, the defendants’ familiarity with the Open2View model offers no relative advantage.
[43] Thus, they are not illegitimately taking advantage of something the plaintiff has expended its effort to develop. They are not, therefore, in breach of Appendix I.
Discussion
[44] My task in this decision is simply to identify whether the restraint of trade provisions, as drafted, capture the current activities of the defendants. I am not determining whether those provisions are enforceable having regard to the principles that:
(a)such provisions are prima facie unenforceable unless they protect a legitimate proprietary interest; and then
(b)are enforceable only to the extent reasonable to protect that proprietary interest.
As agreed, those are considerations for a subsequent hearing should I find the restraint provisions cover the activities the defendants are currently engaged in. Thus, I put to one side whether there is a legitimate proprietary interest to be protected warranting
enforcement of the conditions, and instead focus only on whether the wording of the provisions captures the defendants’ current activities.
[45] The two clauses are connected because cl 38.2 envisages the execution of the further restraint agreement found in Appendix I. Furthermore, the acknowledgement set out at 38.3 that the Restraint Period, the Restraint Area, and the Restraint Business “are no greater than reasonably required to protect the Area Franchisee’s interests”, can only be a reference to Appendix I, as it is the only restraint clause that refers to a Restraint Period or a Restraint Area. However, the two clauses are not co-extensive. They are drafted in different terms, and only Appendix I defines the extent and duration of the restraint.
[46]Given the clauses are not co-extensive, I consider each independently.
Is there a breach of the restraint in cl 38.2?
[47] Clause 38.2 is, as the defendants submit, limited to a restraint in relation to leading a business venture that is a market competitor to MDM.
[48] I accept that the wording in this restraint provision contrasts with that in the agreement between MDM and Mr Armstrong, a former shareholder, and with the comparable provisions discussed in other franchise cases, where it is clear that what is restrained is any connection with a market competitor, including as an employee.13 For example, in Health Club Brands Ltd v Colven Botany Ltd, the restraint prevented the franchisee from:14
… [conducting] on their own account a business similar to the [franchise] Business or be concerned or interested in, directly or indirectly, as agent, representative, consultant, employee, shareholder or director of any firm or corporation conducting a business similar to the [franchise] Business.
13 Mike Pero (New Zealand) Ltd v Krishna [2016] NZHC 1255, (2016) 14 NZELR 244 at [40]; Mike Pero (New Zealand) Ltd v Exact Solutions Ltd HC Wellington CIV-2007-442-66, 17 April 2007 at [1]; Mad Butcher Holdings Ltd v Standard 730 Ltd [2019] NZHC 589 at [7]; Health Club Brands Ltd v Colven Botany Ltd, above n 4, at [13]; Skids Programme Management Ltd v McNeill, above n 6.
14 Health Club Brands Ltd v Colven Botany Ltd, above n 4, at [13].
[49] I do not consider the use of the words “agents” or “representatives” is sufficient to cover a connection as an “employee” when that term appears to have been deliberately omitted from the list of prohibited roles, and where I do not consider the evidence establishes that in the defendants’ employment, they are agents or representatives of Bayleys in any legal sense.
[50] That is sufficient to preclude the clause applying to the defendants. However, I also acknowledge that there is force in the defendants’ argument that Bayleys is not engaged in “an imitation of the Franchise System”. There is no evidence to suggest Bayleys is seeking to copy the Franchise System which is defined holistically to include all components of the Open2View systems.
[51] However, I do consider that Bayleys can be said to be carrying on a business which is “identical with or similar to the Franchised Business” or the “Restraint Business”.15 This is because “Restraint Business” includes “each separate business or activity specified in the Schedule” and so can mean just the provision of real estate photography as the defendants are doing. “Franchised Business” also includes the specific business being undertaken by the photographer franchisees. Bayleys is providing real estate photography services (albeit just to its own agents), and so is carrying on a business which is similar to the Franchised Business. There is no requirement that the entity carrying out the similar business do that exclusively to any other business activities.
[52] I consider, too, that Bayleys could be regarded as a “market competitor” to the Franchised Business in the sense that Bayleys is offering identical services to its agents to those which are offered to its agents by photographer franchisees for Open2View. For example, in the price list prepared by Bayleys to its agents for various services they can provide their vendors, Bayleys offers a very similar suite of photography services to those offered by the Open2View franchisees (who still offer such services to Bayleys in the Rangiora/Hanmer Springs areas). Both Bayleys and Open2View offer what is described as a “mini photo tour” and a “classic tour” to vendors listing with Bayleys. Clearly Bayleys agents who would have used Open2View photography
15 I ignore the term “Restraint Business” as it is defined to be synonymous with the Franchised Business at Item 42.
services can now use Bayleys services instead. To that extent I consider Bayleys is a market competitor to Open2View, even though it is not an imitation of the Open2View franchise system.
[53] I do not consider that the term “market competitor” needs to be coloured by the subsequent phrase “imitation of the franchise system” given the use of the word “or” between them. If Bayleys has the ability to compete with Open2View, albeit for a limited suite of services and to a discrete category of real estate agents (Bayleys’), it is a market competitor.
[54] However, notwithstanding my conclusion that Bayleys is a “market competitor” to Open2View, in that limited sense, and conducts a business that is similar to the Restraint Business, I do not consider cl 38.2 is breached by the defendants’ employment with Bayleys, because the clause does not exclude them working in that capacity.
Is there a breach of the restraint in Appendix 1?
[55] Appendix 1 of the franchise agreement prohibits the defendants from soliciting any business dealings in real estate photography through “associates (sic) with any personal company”.16
[56] I do not think, as the plaintiff submits, the clause simply means that the defendants are prohibited from offering real estate photography services. The clause is worded more specifically than that. I accept the defendants’ analysis that the key relevant terms are the prohibition on soliciting any business dealings in the same type of business (defined to include real estate photography), either directly or indirectly through association with any person, company or other organisation.
[57] The defendants point out that “solicit” means to “ask repeatedly or earnestly for or seek or invite (business etc)”.17 However, the courts have acknowledged that proof of “earnest entreaty” is not required; it is sufficient to indicate a willingness to
16 It seems to me that the word “associates” was most likely intended to be “association”.
17 The Concise Oxford Dictionary (8th ed, Oxford University Press, 1990).
do business and presence for the purpose of doing business can be enough.18 The first issue is whether the defendants are soliciting business as real estate photographers whether directly or indirectly. Mr Cowey relies on four pieces of evidence to say they are, although the first three must count as being indirect soliciting as they rely on actions of Bayleys.
[58] The first piece of evidence relied on is that Mr Whalan, in an emailed letter to Bayleys agents, says:
We are delighted to advise … effective 1st April Paul Willetts and Rachel von Nordeck ex Open2View will join Bayleys Canterbury based at Deans Ave and be our dedicated in house photography Team.
Many of you will be well aware of the professional standards of Paul and Rachels work having used them in their past business, for those that haven’t used them we can assure you they are the best in the business and that having them now 100% focused on working for our licensees will be of great benefit for yourself and your vendors.
[59] The letter goes on to say that Bayleys will amend the photography section of its marketing media guide but “in the meantime all costs remain the same so just carry on quoting per Open2View as now”. Clearly the defendants are being promoted as offering the same services as Open2View (and at the same price) by Bayleys, and the Bayleys agents are being encouraged to engage them.
[60] The second action relied on as indirect solicitation is that the same information as was given in the emailed letter was provided to Bayleys agents at a staff meeting at Bayleys Rangiora office on 17 April 2019.
[61] The third piece of evidence relied on is that the Bayleys price guide was amended in April to provide the prices for real estate photography services provided in-house by the defendants. In my view, such actions are captured by the broad definition of solicit, which requires a presence and a willingness to do business.19 Their willingness to do business was promoted directly to Bayleys agents, along with details about the quality and price of their services. This constitutes the defendants indirectly soliciting business from Bayleys agents.
18 Mike Pero (New Zealand) Ltd v Krishna, above n 13, at [68]-[70].
19 Mike Pero (New Zealand) Ltd v Krishna, above n 13, at [81].
[62] The fourth piece of evidence relied on is that Mr Willetts solicited vendors directly through his LinkedIn profile page. On it, he outlines his experience as a professional photographer and concludes with the statement:
By being employed with Bayleys I can assist with any aspect of your marketing imagery. The first impression of a property and making your listing stand out are so important.
The options are endless for both your listings and your own individual profile. If you want to stand out from the crowd, let’s talk.
[63] I accept that this, too, is a form of solicitation in the broadest sense. It differs from the example discussed in Mike Pero (New Zealand) Ltd v Krishna where it said that “even if a client found Mr Krishna’s LinkedIn page its contents do not amount to Mr Krishna urging or entreating a client to do business with him”, and so was held not to be solicitation.20 Mr Willetts’ page does urge people to use his services via Bayleys.
[64] The next requirement of the restraint clause is that what is being solicited is a “business dealing”. Ms Keir sought to define this as a “commercial relationship between businesses, rather than the work of an employee”. However, the term “business dealings” is a broad term and implies transactions where there will be monetary gain or potential monetary gain. Each time the defendants are asked to provide real estate photography services for a vendor of a Bayleys agent, there is a “dealing” or “transaction” in the business of real estate photography. Bayleys will receive a payment as a result of that business dealing, and the defendants will receive a commission payment based on the value of the transaction. I do not consider there is a reason to confine the term “business dealings” in the way argued for by the defendants. Each time they engage in real estate photography for a Bayleys agent, they are indirectly facilitating a business dealing.
[65] The third requirement of the restraint clause is that the soliciting be in the “same type of business”. The defendants argue that for the clause to apply, Bayleys would have to be transformed to a business like the plaintiff’s, and not merely be a different business, but offering a similar service. As I have already outlined, I accept that Bayleys is not the same type of business as Open2View, nor is it providing
20 Mike Pero (New Zealand) Ltd v Krishna, above n 13, at [77].
photography services to the market generally. The issue is whether it is enough to focus on any one service provided by Open2View from the list given in brackets in this clause (in this case real estate photography) and, if the defendants are soliciting business dealings in that service alone, they are in breach of the contract.
[66] In my view, looking at the agreement as a whole, it is intended that the restraints would apply not just to engaging in an imitation or similar business to Open2View but also to engaging in the individual components of that business. Thus, because the photographer franchise was engaged in real estate photography only, that is covered by the term Restraint Business and is captured by this provision. As I have already discussed at [51] above, the term Restraint Business includes the individual components of the Open2View system and includes the actual business that the photographer franchisees were carrying out. Although the term Restraint Business is not used in Appendix 1, I think it clear that soliciting business dealings in the same type as any one of the business activities set out in the brackets, is sufficient to breach the Appendix 1 restraint agreement. That also makes commercial sense as photographer franchisees will only be engaging in one or two of the listed activities (for example, real estate photography and videography). It must be intended that they would be restrained from soliciting any business dealings in the type of business they were undertaking as franchisees.
[67] Thus, I accept that if, directly, or indirectly through another entity, they are soliciting business dealings in real estate photography, they are technically in breach of the Appendix 1 restraint agreement.
[68] Finally, there is the requirement that the defendants are soliciting such business “directly or indirectly” through “associates (sic) with any person, company or other organisation”. While the only evidence of direct solicitation is Mr Willetts’ LinkedIn page, the evidence does support such solicitation occurring indirectly, through the vehicle of Bayleys, to Bayleys agents.
Result
[69] My analysis above means the answer to the preliminary question for determination is as follows:
(a)The defendants’ employment with Bayleys, performing the task they are in fact performing, does not breach cl 38 of the photographer franchise agreement but it does breach Appendix 1.
[70] That finding only addresses a technical reading of the contract. It does not address the issues which were raised in submissions as to whether the provisions protect a legitimate proprietary interest (the defendants argue they do not), nor whether they go no further than is reasonable to protect that proprietary interest.
[71]Both issues are clearly arguable but must be determined in another hearing.
Costs
[72]The question of costs is reserved.
[73] Given that costs have also been reserved on the interlocutory application for an interim injunction, and there is likely to be at least one further stage in this proceeding, it may be preferable to leave the costs to be determined when the proceedings are finally disposed of in the High Court.
Solicitors:
Parry Field Lawyers, Christchurch Hill Lee and Scott, Christchurch
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