31 July 2015 - A chain of Dunedin video stores which changed its name after its franchise agreements expired has been ordered to change its name back to Video Ezy.

The High Court has ordered that Dunedin franchisee Red Bond Limited must re-rebrand its three DVD rental stores back to being Video Ezy stores. The initial brand change away from Video Ezy was, on a preliminary assessment, found to breach non-compete provisions in an expired franchise agreement between Video Ezy and Red Bond.

The Court ordered the three stores to re-commence trading as Video Ezy on the terms of the expired franchise agreements. The Court also required Red Bond to sever its new agreements with a Video Ezy competitor.

In reaching its decision, the Court found that the "last peaceable state" between the parties was when Red Bond was operating the three stores under the Video Ezy franchise. On that basis Red Bond was forced to "rejoin" the Video Ezy franchise system pending the outcome of trial.

In making these orders, the Court highlighted the important role that restraints of trade have in protecting the goodwill of a franchisor in franchise arrangements. While the default position is that a restraint of trade is unenforceable unless it is shown to be reasonable, this decision, as well as a number of previous decisions referred to by the Court, highlights that restraints of trade have significant teeth in a franchise context. Ignoring restraints, or not taking them seriously, can be at the franchisee's peril.

The restraint applied during the term and for two years after termination of the agreement. The Court held that the context of the particular franchise agreements suggested "termination" includes where the franchise agreement simply "expires" when the term comes to an end.

Red Bond claimed the restraint did not apply to it because the franchisor, Video Ezy New Zealand, had entered voluntary liquidation and transferred its rights to Video Ezy International. This transfer of rights occurred after expiry of the franchise agreements. However, this did not sway the Court from giving effect to the restraint.

Red Bond must now bear the financial consequences of the injunction, at least until the outcome of the full trial is determined. This includes any financial implications of terminating its agreement with the Video Ezy competitor. For Red Bond, breaching the restraint of trade has so far been a costly experience.

What does this mean for franchisees and franchisors?

The judgement shows that in interim injunction applications:

• courts recognise the need for enforceable restraints of trade to protect a franchisor's goodwill;
• the court considered in this case that, where a restraint applied on "termination" of a franchise agreement, "termination" includes where the agreement simply "expires" and comes to an end;
• where the case is a strong one, courts are willing to enforce a restraint of trade even where there will be significant cost and difficulty for the restrained party; and
• the remedies can even include forcing a restrained party to "rejoin" a franchise system that it is in dispute with, pending outcome of trial.

This is a strong statement from the Court in favour of franchisors' rights. Franchisees should consider the risks of those rights being enforced before entering (or breaching) restraints of trade.

Read more on restraint of trade issues in franchising.