ChipsAway regains its appeal

In August 2008 subscription service Lawtel picked a curious little post-franchising case, ChipsAway International Ltd v Errol Kerr [2008] EWHC 1887 (Ch), a decision of the Chancery Division for England and Wales by Sir Andrew Park (see IPKat note here). In a further decision picked up today by Lawtel but not yet on BAILII, the Court of Appeal reversed this decision.

To recap, ChipsAway held the rights to a body of knowhow relating to a system for filling and restoring damage to the bodywork of cars, also supplying products for use in its SMART system (SMART = Small to Medium Area Repair Technology). The company didn't repair the damage itself but instead granted franchises to businessmen. Each franchisee was given a locality in which it was authorised to use the ChipsAway name, paints and other products.

Kerr, an ex-franchisee, previously agreed with ChipsAway that he would not, for a period of 12 months following the termination of the agreement, Kerr would not be engaged in any capacity in any business "which competes" with ChipsAway's own business within his area, without ChipsAway's prior written consent. When the agreement ended, Kerr decided not to renew it but instead carried on a vehicle repair business at the same premises. ChipsAway sued for injunctive relief, alleging that, by continuing in business in the same area and providing the service he did, Kerr was in breach of the restrictive covenant. Kerr resisted, on the basis that ChipsAway did not have a franchisee in Kerr's area, nor did it appear that the company was specifically seeking to obtain one.

Sir Andrew Park dismissed ChipsAway's claim, holding that (i) Kerr's business did not compete with any of ChipsAway's car care businesses, since the latter had no such business in the area, (ii) the position would have been different if ChipsAway had enfranchised a new operator in the same area, and would indeed change if ChipsAway granted such a franchise to a new operator while the 12 months' term of the restrictive covenant was still running; (iii) the key words in the covenant were the term "which competes", which referred to competing on the facts as they were, not to the possibility that competition might begin to happen in the future if the facts changed and (iv) since the covenant was not infringed by what Kerr had been doing since his franchise terminated, there was no basis on which to grant ChipsAway any relief.

The Court of Appeal (Lords Justices Dyson, Thomas and Richards) yesterday took quite a different view, reversing the trial judge's decision:

* While the judge rightly recognised that the restrictive covenant made no sense, his construction of it was wrong: according to his reckoning Kerr was restrained from engaging in any business only when a new franchisee was in the territory, while the purpose of the covenant was to allow ChipsWaay "breathing space" for 12 months in order to enable it to find a new franchisee.

* The fact that ChipsAway did not look for a new franchisee was irrelevant, as the meaning of the covenant did not depend on there being a new franchisee in the territory. According to Sir Andrew, Kerr was only prevented from competing if there was a successor in the territory. However, the covenant was also in place to protect goodwill and there was no commercial purpose in denying protection during the period it was really needed.

* During the franchise, goodwill was built up and, once the franchise came to an end, the franchisor's interest was vulnerable to the former franchisee. Accordingly the commercial purpose of the restrictive covenant was to stop Kerr carrying on business which would allow ChipsAway time to find a new franchisee.

The IPKat can't really comment till the full judgment becomes available, but he's not feeling very happy about the decision as noted by Lawtel. He could understand the proposition that goodwill in the name ChipsAway would be eroded if Kerr traded as ChipsAway or under some similar name; however, the goodwill protected against Kerr trading under a quite different name is not an IP-based goodwill and is presumably also eroded by any other competitor trading in the same neighbourhood under a different name -- in which case Kerr is under something of an anticompetitive disadvantage. Merpel says, stop trying to analyse this as an IP issue: it's just a regular business proposition, though franchisors might be well advised in future to add to their restraints something along the lines of "in order to enable the franchisor breathing space in order to secure a replacement franchisee for the area in which the restraint operates".

Breathing space here
Cats with asthma here