Mainland Digital Marketing Ltd v Paul Willetts
| Jurisdiction | New Zealand |
| Judgment Date | 30 May 2019 |
| Neutral Citation | [2019] NZHC 1201 |
| Date | 30 May 2019 |
| Docket Number | CIV-2019-409-000205 |
| Court | High Court |
And
[2019] NZHC 1201
CIV-2019-409-000205
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE
Civil Procedure, Employment, Intellectual Property — interim injunction application — restraint of trade — franchise agreement
P A Cowey and D L Bell for the Applicant
A L Keir and J Brown for the First and Second Respondents
The applicant (MDM) is the area franchisee of a business that provides photography services to real estate agents and people selling property to assist in the marketing of properties. The business model they use is the Open2view system. The respondents were sub-franchisees authorised by MDM to use the Open2view system within MDM's franchise area.
While operating their sub-franchise, the respondents provided real estate photography services to a number of agents associated with real estate business in Canterbury, including Whalan and Partners Ltd (Whalans). Whalans is in business in Canterbury and Wanaka as Bayleys.
The sub-franchise agreement between MDM and the respondents ended on 31 March 2019. There was some discussion between the respondents and other directors and shareholders of MDM as to an exit strategy but no agreement was reached.
On 26 March 2019, the respondents signed employment contracts with Whalans for them to be employed from 1 April 2019 as in-house photographers, available to provide marketing photographic support for Bayleys sales people and their vendor clients.
MDM says the respondents' employment with Whalans is in breach of restraint of trade covenants by which the respondents agreed not to compete with MDM for a period of two years following termination of the sub-franchise agreement. MDM seeks an interim injunction restraining the respondents from being involved in the business of providing real estate photography, real estate videography or real estate internet marketing within the franchise area to anyone, including Bayleys, until 31 March 2021.
Although this is an interlocutory application for only an interim injunction and there was no cross-examination on the affidavits, certain aspects of the background are reasonably clear. I set them out.
MDM filed full proceedings, including an interlocutory application for interim injunction, against the respondents on 1 May 2019. The application for an interim injunction was made on a without notice but Pickwick basis. 1 On 2 May 2019, after a telephone conference with counsel, Osborne J directed that the matter proceed on an on notice basis but as a matter of urgency.
The respondents filed notices of opposition and affidavits in opposition on 13 May 2019.
Tim and Janetta Perry own 75 per cent of the shares in MDM. MDM engages photography sub-franchisees to supply services to the real estate industry. These include real estate photography, real estate videography, floor plans, real estate internet marketing services and other complimentary products and services.
On 1 April 2014, MDM entered into a sub-franchise/photographer franchise agreement with each of the respondents. The agreements entitled each of the respondents to act as independent franchise photographers using the name “Open2view”. Sub-franchise agreements granted each of the respondents the right to operate the franchised business for the specified term and within the specified area, and to use the franchise system, signage, intellectual property and confidential information in the operation of the franchise business. The franchise system included administrative and marketing systems, equipment, training programmes and the goodwill and business reputation of MDM and Open2view.
The sub-franchise agreement authorised the respondents to provide authorised services to a maximum of 100 agents from real estate businesses named in an appendix to the agreement, all but one of which were located within Canterbury. The agreement however contemplated this schedule of firms could change but the respondents were limited to each providing the authorised service to 100 agents from real estate businesses within the specified area. The original list included Bayleys Rural. During the term of the sub-franchise agreement, the list came to include Bayleys offices in Christchurch.
As photographers under the sub-franchise, the respondents were entitled to 55 per cent of all payments made for the photographic services they provided.
Through various sub-franchises, Bayleys became MDM's biggest client. Bayleys were invoiced $85,000 in the calendar year 2014, increasing to $247,029 in 2018. Bayleys was serviced by MDM sub-franchisees other than the respondents. In the 2017 year, the combined invoicing to Bayleys' rural and commercial offices from other sub-franchisees was $42,344. In the 2018 year, it was $36,004.
The respondents received some training. They did not have to pay for goodwill because they were not taking over any existing business. It took several years for the respondents to build up their business with work from various agents. The first respondent (Mr Willetts) said in March 2019 he was working regularly with about 50 agents from a number of real estate brands across Christchurch. In his last month of that work he did work for nearly 35 non-Bayleys agents. The second respondent (Ms von Nordeck Meyers) says in her last month she did work for almost 40 agents; five were from Bayleys.
In 2016, another sub-franchisee, Mr Armstrong, decided to leave the business. After lengthy negotiations, the respondents, through a family trust and their own company, purchased Mr Armstrong's shares in MDM and an associated company. The respondents were appointed directors of MDM.
In October 2017, when the respondents were directors, MDM pursued a claim against Mr Armstrong to enforce a restraint of trade he had agreed to when selling his shares.
The sub-franchise agreements between MDM and each of the respondents included these restraint provisions:
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38.1 The Photographer Franchisee and the Guarantor agree that during the Term and any renewal they will neither jointly nor severally 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 business identical with or similar to the Franchised Business or the Restraint Business.
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38.2 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 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.
Under a separate clause, each of the respondents agreed as follows:
37.4 The Photographer Franchisee agrees that on and after Termination Date it will not directly or indirectly in any manner identify itself or any business as the Franchised Business or as an agency of or for the Area Franchisee which may suggest a continuing association with the Franchise System, the Franchise Image, or the Franchised Business.
An appendix to the sub-franchise agreement began:
Appendix I —Restraint Agreement
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.
In the sub-franchise agreement, the “franchised business” which the respondents had the right to operate was described as:
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 products and services.
Issues arose between the respondents and Mr Perry. In February 2019, the respondents began discussing with Mr and Mrs Perry the possibility of the respondents not renewing their finance agreements. They were aware of the restraint provisions but sought some relaxation of them. This did not eventuate. There was some negotiation between the parties and their lawyers. From 25 February 2019, the respondents had only limited access to aspects of MDM business.
On 22 March 2019, both...
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Mainland Digital Marketing Ltd v Willetts
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