Unfair Terms Regime & Non-Compete/Restraint – How far can you go to protect your business and network?
23 September 2020 by Simone Pentis
Generally, the courts hate non-compete/restraint of trade provisions as they want every person to be able to go out and use their skills and be able to earn a living, but there is an acknowledgement that there is a need to protect businesses' legitimate interests against unfair use by others.
So the issue tends to be how far do the non-complete/restraints go. Are the non-compete/restraint terms what are reasonably necessary to protect the legitimate interests of the employer/franchisor etc, or does it seek to go far beyond this, and consequently may not be enforceable and/or fall foul of the Unfair Term Laws.
(For franchise arrangements there are also Franchising Code of Conduct restrictions that apply in certain limited situations so that restraints/non competes are not enforceable – although confidentiality and intellectual property obligations remain.)
This is an issue that has just come under the spotlight again with the Franchisor for the franchise system, Back in Motion, entering into an ACCC court enforceable undertaking as a result of ACCC allegations around their non-compete/restraint of trade clauses being unfair terms as per the Unfair Term Laws.
There is no court ruling confirming the terms were unfair or agreement by the Franchisor that their terms are unfair, but they did acknowledge that there may be an unfair terms situation here, and as such have agreed to vary certain terms going forward and not enforce certain terms against ex franchisees.
In their specific situation the franchisor had also been charging franchisees a “buy-out fee” equal to 4 x their annual royalties if they wanted to be released from the non-compete/restraint of trade clause, which effectively prevented ex franchisees being involved themselves in nearby physiotherapy competitors within 12 months after leaving the network. (See ACCC Media Release https://www.accc.gov.au/public-registers/undertakings-registers/back-in-motion-physiotherapy-pty-ltd )
Overall, there can be very good reason why a non-compete/restraint term is important to protect the employer/franchisor (especially in franchise situations where other franchisees have paid good value for being a part of the franchise network) but to ensure that the term is not unfair and likely to be enforceable requires consideration of the specific wording of the term and the situation it operates within to ensure that what is being protected is necessary for the protection of the businesses legitimate needs.
If you have any further questions, please do not hesitate to arrange a free initial consult.
Please note that this Update is a general and brief update, it does not purport to be comprehensive legal advice relevant to your circumstances. Consequently, specific legal advice for each of your circumstances should be obtained first before taking or not taking any action in respect to this area.