Two recent cases have highlighted the need for care when entering into a licensing arrangement.
Online sales contrary to exclusive territory
In Video Ezy International Pty Ltd v Sedema Pty Ltd  NSWSC 143 (27 February 2014), the Supreme Court has dismissed an appeal by Video Ezy and upheld a Magistrate’s decision finding that Video Ezy acted contrary to a franchise agreement by selling DVDs online through a related company.
This case shows that a franchisor may breach a franchise agreement by conducting, directly or indirectly, a competing online business. It also suggests that courts are willing to take a broad view of implied good faith obligations in a franchise agreement. This is particularly relevant given the changes to the Franchising Code of Conduct due to take effect on 1 January 2015 – see the ACCC’s website here.
Video Ezy had entered into a business sale and franchise agreement granting Sedema the exclusive right to use the Video Ezy business name, system and certain trade marks for a business in the territory of Hazelbrook, NSW. The franchise agreement provided for Sedema to have the exclusive right to operate a Video Ezy business within the territory and for Video Ezy to not carry on “the trade or business involving the rental and/or sale of video products or any other business of a similar nature within the territory of the franchise”.
EzyDVD operated a business, through a website, which allowed customers to order DVDs online. Some of these customers resided in the franchise territory. EzyDVD (as well as Blockbuster and Video Ezy International) are subsidiaries of Video Ezy Australia which is controlled by a holding company of which Mr Paul Uniacke is the sole director and shareholder. These related companies were treated by the court as a single group.
The court considered the words “within the territory” should be given their natural and ordinary meaning. Consequently, there was no reasonable distinction between a traditional bricks and mortar business and an online business which, although not located in the franchise territory, still competed with the franchisee by online sales of DVDs into the franchise territory. Accordingly, these online sales breached the exclusivity provision of the franchise agreement.
Implied obligation of good faith
The Court relied on earlier authority and proceeded on the basis that “there is to be implied in the franchise agreements a term of good faith and fair dealing which obliges each party to exercise the powers conferred upon it by the agreements in good faith and reasonably, and not capriciously or for some extraneous purpose”. Video Ezy had also breached its ”obligation to act in good faith in relation to Sedema, in relation to its contractual obligations to remain loyal to, comply with honest standards of conduct and act reasonably in relation to the promise of exclusivity in the territories by not competing against Sedema for rental or retail business”.
The Court also found that Video Ezy’s conduct was unconscionable under the Australian Consumer Law. There was evidence that Mr Uniacke knew the related EzyDVD business competed in the franchise territory and he had access to customer’s names and addresses in that territory. He could have stopped those transactions, but did not do so. After reviewing the authorities, the Court considered it is not necessary for the factors of unreasonable, unfair, bullying and thuggish behaviour to be present. Nor is it necessary to find motive, intent, bad faith and intent to injure before making a finding of unconscionable conduct. Rather, the Court accepted the Magistrate’s determination that Video Ezy’s conduct was “inconsistent with a proper relationship between franchisor and franchisee, and demonstrated a lack of good faith”.
Further, the other related companies were also liable as accessories because they were all effectively controlled by Mr Uniacke and imbued with the same knowledge.
Licensee’s liability after licence ends
In Austral Masonry (NSW) Pty Ltd v Cementech Pty Limited  FCAFC 72 (17 June 2014, the Full Federal Court dismissed an appeal by Austral and upheld the Supreme Court decision finding that Austral is obliged to pay half of the expenses incurred by Cementech in patent infringement proceedings commenced during the term of a patent licence agreement, even after that agreement had ended.
This case highlights the need to make sure these types of licence terms are clearly drafted and reflect the intentions of the parties. Terms which may survive termination or expiry of the agreement should be addressed so that the parties know where they stand.
Clause 9 of the licence agreement required the licensee, Austral to immediately give written notice to the licensor, Cementech if it became aware of any actual or threatened infringement of the patent being licensed. Cementech was given the sole discretion to take steps reasonably required to protect the patent from infringement and, if it did initiate proceedings, all expenses incurred were to be borne by the parties equally.
Cementech commenced patent infringement proceedings against Adbri Masonry Pty Ltd without receiving any notification of infringement from Austral. These proceedings were commencing before the licence agreement with Austral expired and were ongoing at the time this agreement had expired.
The Full Court construed the agreement and considered it was solely up to Cementech to decide what steps were required to protect the licensed property and Austral was bound by that decision. Cementech’s decision was not dependent on Austral giving notice. Significantly, the relevant clause survived expiration of the licence agreement if it was engaged during the term of the agreement.