Don't rush to court without critically confronting the weaknesses in your case.
Restraint of trade agreements are not enforceable unless they safeguard a "protectable interest" and do not merely inhibit competition.
Restraint of trade agreements are not automatically enforceable
The recent judgement of the Cape High Court in Mozart Ice Cream Classic Franchises (Pty) Ltd v Davidoff, delivered in December 2008, is a cautionary tale for litigants not to rush to court, filled with fire and passion at a perceived injustice, but to try to envisage how their case will appear to a dispassionate and worldly-wise judge, and what holes the judge may perceive in their case.
In this particular case, Mozart Ice Cream Classic Franchises (Pty) Ltd held the franchise rights to a chain of ice-cream parlours, all of which used the name Mozart in the name of the business.
One such franchise traded as the Bayside Mozart Express in Goodwood, Cape Town.
The franchise agreement between the franchise holder (for brevity, "Franchises") and this particular ice-cream parlour ("the Goodwood ice cream parlour") stated that, upon termination of the franchise, the franchisee promised not to carry on a similar business anywhere in South Africa for 24 months in competition with Franchises.
Restraint of trade agreements are enforceable if they are in respect of a legally protectable interest and do not merely stifle competition
In law, "restraint of trade" agreements of this kind are valid and enforceable, provided that the agreement relates to a legally protectable interest (for example, trade secrets) and provided that it is reasonable in duration and in geographical extent, and that it does not merely prevent competition. The mere prevention of competition is regarded as being against public policy.
In other words, it is not sufficient that a person has signed an agreement not to carry on a competing business. For the agreement to be enforceable, the party seeking to enforce the undertaking must show that the restraint is necessary to protect a legally justifiable interest.
In this case, Goodwood Ice-cream Parlour abruptly gave Franchises thirty days notice that it was terminating the franchise agreement and would no longer operate as a franchise, and that it intended to continue operating an ice-cream parlour as an independent business, at the same premises, but under a new name, namely Lucky Marble. Henceforth, it was going to purchase its stocks of ice-cream from some other producer.
Understandably, Franchises were angry, and believed that what was now going to happen was that customers who had been drawn to the shop by its unique brand of ice-cream whilst it was trading under the franchise as Bayside Mozart Express, would continue to patronise the shop under its new name because they would continue associating it with Franchise's quality product.
Franchises believed that Goodwood Ice-Cream Parlour had used the franchise to establish a customer base, and were now cynically terminating the franchise so that they could continue with the same kind of business, selling a similar product from the same premises, but for their own account and without having to pay the franchise fee.
However, when exposed to the close scrutiny of the court, the apparently strong case of Franchises began to crumble.
After all, what exactly was Franchises complaining of? What particular "protectable interest" did it claim had been infringed by the actions of Goodwood Ice-Cream Parlour? After all, the latter was no longer selling the ice-cream manufactured by Franchises, and all trademarked Mozart signs had been removed from the premises.
As for Franchise's claim that its "customer connections" had been wrongly appropriated by Goodwood Ice-Cream Parlour, what did this mean? Franchises claimed that existing customers would assume that the franchise had simply undergone a name change, but no hard evidence in this regard was placed before the court.
Franchise was not able to claim that Goodwood Ice-Cream Parlour had any knowledge of the secret recipe used to make its unique brand of ice-cream. And in any event, Goodwood Ice-Cream Parlour was now selling ice-cream manufactured by someone else. Hence, Franchises were unable to show that Goodwood Ice-Cream Parlour were making use of its "trade secrets".
As for the serving spoons which were used to funnel the ice-cream into cones to give it a distinctive shape, Goodwood Ice-Cream Parlour denied that such spoons were in any way unique, and Franchises was unable to contradict this.
In the result, the court held that Franchises had failed to show that its customer connections had been abused by Goodwood Ice-Cream Parlour or that the latter were using any of Franchise's trade secrets.
On the evidence placed before the court, Franchise was unable to show that any "protectable interest", recognised by law, was being infringed when Goodwood Ice-Cream Parlour terminated the franchise agreement, and continued to trade in the same premises under a new name and selling ice-cream made by another manufacturer.
The court held that Franchises had not proved a case that would entitle it to a court order upholding the restraint of trade agreement.