On 21 September 2020, the ACCC accepted a court-enforceable undertaking by franchisor Back In Motion Physiotherapy to remove some unfair restraint of trade terms from its franchise agreements.
As there have been so few cases on these matters, the enforceability of restraint of trade clauses and unfair contract terms is often difficult to assess.
The ACCC’s decision therefore provides us in the franchising community a very useful case study.
Before we get to our commentary, you’re welcome to first read the following ‘crash courses’ on restraint of trade clauses and unfair contract terms to get you up to speed.
Restraint of Trade
What are restraint of trade clauses?
Simply put, ‘restraint of trade’ clauses prevent one party from – you guessed it – trading within certain constraints.
These clauses are very common in franchise agreements.
For example, there are usually restraints on the franchisee operating a competing business at the same time they operate the franchise business. The franchisor’s objective here is to prevent a conflict of interest during the franchise term.
Franchisees are also often prevented from operating similar businesses for while after the franchise agreement ends.
The general idea of these ‘post-termination restraints’ is that the franchisee shouldn’t be able to unfairly benefit from the franchisor’s know-how and goodwill, especially if this prevents the franchisor from re-establishing itself in the territory.
When can you rely on restraint of trade clauses?
Restraint of trade obligations hurt legitimate business competition. They can sometimes also prevent individuals from earning a living in their field of expertise.
That’s why the legal starting point is that restraint of trade clauses are not enforceable.
However, a court will enforce a restraint of trade clause where that clause does no more than protect the franchisor’s legitimate interests, and is otherwise reasonable.
In considering whether a restraint is enforceable, some good starting questions are:
A. What’s the objective the clause is trying to achieve? e.g. preventing a conflict of interest
B. Is there a fair or legitimate reason why the franchisor would want to achieve this objective?
C. Does the clause not go too far in achieving the objective?
D. Are there are clauses in the franchise agreement that might achieve the same objective (eg confidentiality clauses and intellectual property clauses)?
E. Is the clause otherwise reasonable?
If your answers to B-E are ‘yes’, this indicates that a restraint may be enforceable.
Well, that’s the theory anyway. We have little guidance from Australian courts on these issues, so it’s harder in practice to predict whether a court will decide to uphold a franchisor’s ‘legitimate interests’ – or instead take an approach which favours legitimate competition.
That’s why the ACCC’s recent movement against Back In Motion Physiotherapy is so useful.
Unfair contract terms
What are unfair contract terms?
Unfair contract term legislation was expanded to apply to businesses since 2016.
This legislation prevents parties from including terms in ‘take it or leave it’-type contracts which:
A. cause a significant imbalance in the rights of the parties;
B. cause harm or damage to one of the parties; and
C. go beyond what is ‘reasonably necessary’ to protect the ‘legitimate interests’ of the other party.
If a clause meets the above criteria, that clause is ‘struck out’ and declared unenforceable.
The criteria for unfair contract terms and restraint of trade clauses are similar.
For example, for both types of clauses, you need to first look at the objective of the clause, and then decide whether the clause goes too far in achieving that objective.
BACK IN MOTION Physiotherapy
What went wrong for Back In Motion?
Back In Motion Physiotherapy have been required by the ACCC to remove an unfair contract term from their franchise agreements.
Under most of their franchise agreements, Back In Motion Physiotherapy franchisees were not allowed to be involved in any competing business located within 10 kilometres of any other franchise location, in the 12 months after termination.
The franchise agreement also contained a restraint ‘buy out’ arrangement. This allowed franchisees to ‘opt out’ of the restraint, if they first paid a substantial fee to this franchisor.
The effect of all this was to prevent ex-franchisees from earning a living in physiotherapy across many parts of metropolitan Australia, unless they first paid a substantial fee to the franchisor.
The ACCC’s concern was that this restraint caused a significant imbalance between the parties, resulting in unjustifiable damage towards franchisees exiting the franchise system.
After being contacted by the ACCC, Back In Motion Physiotherapy made a public declaration that:
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- they will not enforce such restraint of trade and buy-out fee terms in future;
- they will notify all franchisees who have left the group in the past 12 months about the change in enforcement; and
- they will not include these clauses in future agreements.
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A copy of the declaration can be found here.
What can franchisors learn from this?
Franchisors should review their agreements for unfair contract terms.
If franchisors do not remove these clauses proactively, and if the ACCC discover their existence, the franchisor may be forced to make a public announcement regarding their conduct.
Whilst fines are not currently payable for use of unfair contract terms, these announcements can result in serious damage to a franchisor’s reputation.
In the meantime, franchisors should also bear in mind that their existing restraint of trade clauses may be void.
We highly recommend that franchisors review their franchise agreements for unfair contract terms, especially the restraint clauses, to avoid finding themselves in a similar position. Please get in touch with us to assist.