Facts: 

Skids operated a franchise business relating to after school care.  Benefits provided by Skids to franchisees included provision of documentation relevant to obtaining regulatory accreditation.   The majority of the respondents were involved in starting an after school care business which Skids alleged wrongly took over a Skids franchise, and operated in competition with Skids. 

Mrs McNeill had been a master franchisor of the appellant under an agreement which came to an end in 2009.  A restraint of trade clause in that agreement provided that franchisees were prohibited from:

(a)  Operating or being concerned or interested in any business conducted in competition with the business of Skids within a 15km radius of each Skids operation;

(b)  Approaching or soliciting or endeavouring to obtain the custom of any existing customer of Skids.

The agreement also contained a confidentiality clause.  A sub franchise under the agreement operated a Skids programme at Murray’s Bay School

In 2010, a new after school care programme commenced at Murrays Bay School in the name of Kids Choice. Mrs McNeill was a director and 50% shareholder.   The trial judge found that Mrs McNeill had copied large sections of Skids’ documentation for use by Kids Choice, but had repeatedly denied this until late in the trial, and attempted to cover the matter up.

The issues on appeal were:

(1)  Whether Mrs McNeill, as a 50% shareholder in Kids Choice and involved in setting up the new business, was in breach of the restraint of trade clause in her master franchise agreement.

(2)  Whether the respondents committed a breach of confidence with respect to:

(a)  Misuse of the Skids documentation;

(b)  Certain enrolment information used for the Kids Choice programme.

(3)  Whether additional damages of $1,000 awarded at trial in respect of copyright infringement were too low.

(4)  Whether exemplary damages should be awarded.

Held, allowing the appeal and finding that:

(a)  Mrs McNeill was liable for breach of the restraint of trade clause;

(b)  Mrs McNeill and Kids Choice were liable for breach of the equitable duty of confidence;

(c)  The sums awarded at trial for additional copyright damages were too low;

(d)  There should have been an award of exemplary damages on the breach of confidence cause of action.

Restraint of trade claim against Mrs McNeill

(1)  Contractual provisions that constitute a restraint of trade are prima facie void and unenforceable but may be enforced when shown to be reasonable.

Blackler v New Zealand Rugby Football League (Inc) [1968] NZLR 547 (CA); Brown v Brown [1980] 1 NZLR 484 (CA) and Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC 535 (HL) followed.

Protectable interest

(2)   A franchisor may, depending on the circumstances of the case, have a protectable interest in a franchise by way of a restraint of trade provision. 

Mike Pero (New Zealand) Ltd v Exact Solutions Ltd HC Wellington CIV-2007-442-66, 1 April 2007; Video Ezy International (NZ) Ltd v Cameron (2004) 8 NZBLC 101,550 (HC); Dymocks Franchise Systems (NSW) Pty Ltd v Bilgola Enterprises Ltd (1999) 8 TCLR 612 (HC); and Washworld Corporation (Leases) Ltd v Reid(1998) 8 TCLR 372 (HC) referred to.

(3)  The provision of franchise benefits gave rise to a reasonable interest on the part of Skids to protect its investment in its name, business model, systems and documentation from exploitation by franchisees immediately following the termination of a franchise agreement.  The fact that franchise benefits were paid for was not an answer, as the payment was for the use of the franchise benefits for the duration of the franchise, not thereafter. [45] The Court did not agree with the trial judge’s assumption that because the Skids franchise was not sophisticated and did not involve particular technical knowhow, it could not give rise to a protectable interest.  Restraint of trade clauses had previously been held to be enforceable in areas which did not involve a high degree of expertise.

Video Ezy International (NZ) Ltd v Cameron (2004) 8 NZBLC 101,550 (HC); Washworld Corporation (Leases) Ltd v Reid (1998) 8 TCLR 372 (HC); Dymocks Franchise Systems (NSW) Pty Ltd v Bilgola Enterprises Ltd (1999) 8 TCLR 612 (HC); Mike Pero (New Zealand) Ltd v Exact Solutions Ltd HC Wellington CIV-2007-442-66, 1 April 2007; Safety Step (New Zealand) Ltd v Safety Step Auckland Ltd HC Auckland CP466-01, 14 September 2001 referred to.

Public interest

(4)  Detriment to the public interest was not a reason for refusal to enforce the restraint of trade clause.  There had been little sympathy shown to sweeping public interest claims in recent decisions. In this case the low threshold of entry and the evidence that the area of service was competitive indicated that the public was unlikely to be greatly deprived by having a franchisee off the market for a limited period following termination.

Edwards v Warboys [1984] AC 724 (CA); Kerr v Morris [1987] Ch 90 (CA); Angel-Honnibal v Idameneo (No. 123) Pty Ltd [2003] NSWCA 263, (2003) 59 IPR 184;Raukura Hauora o Tainui Trust v Arroll [2006] ERNZ 799 (HC); and Home Counties Dairies Ltd v Skilton [1970] 1 WLR 526 (CA) referred to.

 Was there a breach of the restraint of trade clause?

(5)  Although the restraint of trade of clause was enforceable and if amended (i.e. in terms of duration) could be reasonable, no breach was established.  There was no evidence that Kids Choice was concerned or interested in a business conducted “in competition” with the business of Skids. The Court was not prepared to construe the wording “in competition” (in the restraint clause) as meaning “in potential competition” given the limited nature of the clause.  The parties had chosen a restraint of trade clause of narrower ambit than that frequently adopted.  There was no prohibition on working in the area of business (after school care).  A clause such as the one in question will not be construed as meaning any more than they actually say. 

(6)  Further, there had been no “soliciting” or endeavouring to obtain custom of Skids’ customers.  The evidence showed only neutral actions.

Breach of the equitable duty of confidence: Did the documents have a requisite quality of confidence?

(7)  In considering whether information has the requisite quality of confidence, it is necessary to look at the nature of the information that the appellants seek to protect.

Hunt v A [2007] NZCA 332, [2008] 1 NZLR 368; A B Consolidated Ltd v Europe Strength Food Co Pty Ltd [1978] 2 NZLR 515 (CA) and Coco v A N Clark (Engineers) Ltd followed.

(8)  It is not necessary for there to have been misuse of a trade secret for the information to have the requisite quality of confidence.  Information will have the requisite characteristic of confidence if it is the product of thought and work.  Indications include whether the information is unique or a trade secret, or has commercial value. The fact that the person who has used the material would otherwise need to have done a lot of work to create it, or themselves considered the material confidential and took steps to guard its secrecy can be relevant.

A B Consolidated Limited v Europe Strength Food Co Pty Limited [1978] 2 NZLR 515 followed.

(9)  The Skids’ documentation had the necessary characteristic of confidence.  It would have taken a considerable amount of thought and effort to compose, and would be valuable as a model for any person starting an after school childcare business, as indicated by the fact that Mrs McNeill, in a clandestine way, had used the material while denying she was doing so.  Confidentiality was also indicated by the “confidential” tag and $2,000 payment.

(10)  The Skids’ enrolment information did not have the necessary characteristic of confidence.  A list of enrolees was readily discernible and in the circumstances not a work involving a necessary degree of thought and work. 

(11)  Mrs McNeill had made an unauthorised use of the confidential information.  The copying was to a considerable extent word for word.  A breach was therefore established.  Kids Choice, a company in which Mrs McNeill had a 50% shareholding, and which obtained the benefit of the breach, was a willing and knowing participant and also in breach.

Damages for breach of confidence

(12)  The full range of equitable and common law remedies is available for a breach of confidence. [87] However the appellants had not proven profits to the respondents or losses to themselves capable of supporting a compensatory damages award. 

Aquaculture Corporation v New Zealand Green Mussel Co Ltd [1990] 3 NZLR 288 (CA) followed.

Breach of the contractual requirement of confidence and breach of copyright

(13)  There was a blatant and word for word copying in breach of the relevant confidentiality clause and breach of copyright.

Approach to assessment of additional damages for breach of copyright under Copyright Act 1994 s121

(14)  S121(2) of the Copyright Act 1994 gives the Court the power to award damages that are not linked to a compensation award, which power is to be exercised applying principles that correspond to those which govern awards of exemplary damages at common law.

Wellington Newspapers Limited v Dealers Guide Limited [1984] 2 NZLR 66 (CA); Seager v Copydex Limited [1967] 2 All ER 415 (CA); Tiny Intelligence Limited v Resport Limited [2009] 2 NZLR 581; Aristocrat Technologies Australia Pty Limited v DAP Services (Kempsey) Pty Limited (In Liq) [2007] FCAFC 40 referred to.

(15)  In assessing whether additional damages are warranted under s121(2), the flagrancy of the actual act of infringement is only one relevant factor, and all the conduct of the parties up to the time of judgement can be considered. 

Sony Computer Entertainment v Edmonds (t/as Channel Technology) (2002) 55 IPR 429 (Ch) followed.

(16)  When applying s121 it must be shown that the claimant was a victim of “punishable behaviour.”  There was a need for moderation and to consider the means of the parties.

Rookes v Barnard [1964] AC 1194 (HL) referred to.

(17)  Deliberateness and repeated denials through interim injunction to trial, were aggravating factors.

(18)  $20,000 in additional damages was awarded against Kids Choice as appropriate as a moderate but distinct award which marked outrageous behaviour taking into account the nature of the infringement, the means of Kids Choice, the conduct of the parties up to the date of judgment, the absence of availability of other penalties, and the amount of awards in other cases.

Exemplary damages for breach of confidence

(19)  Exemplary damages are available in New Zealand for breach of confidence.

Paper Reclaim v Aotearoa International Limited [2006] NZLR 188 (CA); Harris v Digital Pulse Pty Limited [2003] NSWCA 10; Mosley v News Group Newspapers[2008] EWHC 1777 (QB); M(K) v M(H) [1992] 3 SCR 6; Aquaculture Corporation v New Zealand Green Mussel Co Limited [1990] 3 NZLR 299 (CA); Bottrill v A[2001] 3 NZLR 622 (CA); Collier v Creighton HC Christchurch CP 13/89, 7 May 1991; Cook v Evatt (No 2) [1992] 1 NZLR 676 (HC); Sojourner v Robb [2006] 3 NZLR 808 (HC); Cash Handling Systems Ltd v Augustus Terrace Developments Ltd (1996) 3 NZ ConvC 192,398 (HC); Bryenton v Toon HC Rotorua CP 83/87, 6 December 1990; Embryotech Pty Ltd v Moodie Agricultural Contractors Ltd HC Wellington CP10/95, 4 February 1998; and X v Attorney-General [1997] 2 NZLR 623 (HC); and Stevens v Premium Real Estate Ltd 2 NZLR 384 at [33] referred to.

(20)  Compensatory damages and indeed restitution and account could not adequately punish Mrs McNeill and Kids Choice for the outrageous conduct of Mrs McNeill.   The same sum of $20,000 was also awarded against Mrs McNeill as exemplary damages for breach of confidence.