The other case, recently decided, concerns the Safe Kids in Daily Supervision (“SKIDS”) franchise system. In this case, a master`s franchisor simply decided not to renew her franchise agreement and to compete with the SKIDS franchise system. She had spent a considerable amount of time in the system and, contrary to what she had learned, she had put on the market what she had learned. Not surprisingly, SKIDS was not particularly happy about it and is going to court to clear customs. Initially, the judge stated in the High Court that the limitation of the commercial provisions in the franchise agreement was not applicable because the franchise activity was not particularly complex. This decision caused some consternation within the franchise community, as it may have opened the door to the misuse of confidential franchisee information and systems. As you can see, restrictions on commercial clauses are complex. Just because a franchise agreement contains a trade restriction clause does not mean that the clause is applicable or enforceable. However, in recent times there have been a few high-level trials in New Zealand that have addressed precisely this issue. It would be fair to say that both did not end very well for the franchisee. Separate clauses in the agreement limited Karioi`s use of confidential information; the provision of confidential equipment and the option to purchase assets (including leased shares) used in the operation of the franchise. When concluding an agreement, the parties should determine the restriction of commercial clauses and check, before the conclusion of the contract, whether they are problematic.
As the case in question shows, the courts will not necessarily agree that the restriction is inappropriate. The first case involved a gym franchise in Auckland. It was the fact that a franchisee of the Club Physical Franchise-Systems chose to leave the system and rename its fitness clubs and operate them under a new brand name, Jolt Fitness. When the franchisee took steps to prevent this, the franchisee made all sorts of complaints against the franchisee, including that he had not received adequate support from the franchisee and therefore had no choice but to leave the system to maintain his viable business. The courts found this difficult to understand, since the franchisee had actually started a franchise and then over time purchased two other franchised outlets, given that they were offered for sale on the open market. The judge said it was illogical for someone to continue buying something they thought was being mismanaged. Therefore, if other appropriate contractual mechanisms exist under the franchise agreement, with the exception of the commercial restriction clause which protects the franchisor`s interests of goodwill or the confidentiality of information, the commercial restriction clause may be considered inappropriate. Given the large and growing number of franchised businesses in New Zealand (and thus the increasing number of franchised businesses that fail) and the likely withholding of commercial disputes, it is more important than ever that the existence of a “legitimate interest” in franchise cases is never accepted, but will be considered on a case-by-case basis. . . .