FEDERAL COURT OF AUSTRALIA
A & A (Sydney) Pty Ltd v YUM! Restaurants Australia Pty Ltd [2014] FCA 678
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IN THE FEDERAL COURT OF AUSTRALIA |
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A & A (SYDNEY) PTY LTD and others named in the schedule Applicants |
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AND: |
YUM! RESTAURANTS AUSTRALIA PTY LTD Respondent |
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DATE OF ORDER: |
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WHERE MADE: |
THE COURT ORDERS THAT:
1. The applicants' claims for interlocutory relief set out in their originating application be dismissed.
2. The applicants pay the respondent's costs of the interlocutory application as agreed or taxed.
3. The applicants be granted liberty to restore on the question of costs, such liberty to be exercised within 7 days.
4. If liberty is exercised in accordance with order 3, then order 2 be set aside.
5. The parties confer and provide agreed or competing proposed confidentiality orders to the Associate to Jagot J by email within 7 days.
6. The matter be listed for directions before the docket Judge on the docket Judge's next directions date, the date and time to be notified to the parties.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
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NEW SOUTH WALES DISTRICT REGISTRY |
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GENERAL DIVISION |
NSD618/2014 |
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BETWEEN: |
A & A (SYDNEY) PTY LTD and others named in the schedule Applicants |
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AND: |
YUM! RESTAURANTS AUSTRALIA PTY LTD Respondent |
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JUDGE: |
JAGOT J |
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DATE: |
24 JUNE 2014 |
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PLACE: |
SYDNEY |
REASONS FOR JUDGMENT
1 This is an application for an interlocutory injunction seeking to restrain the respondent, YUM! Restaurants Australia Pty Ltd (Yum), from implementing a sales strategy referred to in the statement of claim as the "Reduced Price Strategy", in respect of the Pizza Hut franchise in Australia. The applicants are eighty franchisees of the franchise. The respondent, Yum, is the franchisor in Australia. Yum is a party to a separate franchising agreement with each of its franchisees, which is in a standard form (the franchise agreement). Each of the applicants is a party to an agreement with Yum in this form.
2 The elements of the Reduced Price Strategy are asserted by Yum to be confidential. It is sufficient to identify two components of the strategy which, in general terms, consist of: - (i) restricting the number of pizza products available to be sold by franchisees, and (ii) specifying maximum prices for the products sold by franchisees. The interlocutory application is made on an urgent basis because Yum intends to implement the strategy imminently and has made (at least partly) irreversible arrangements on this basis.
3 The interlocutory injunction is sought on two primary bases:-
(1) Under the franchise agreement, Yum owes each of the applicants the following implied duties, set out in paragraph 6 of the statement of claim:
a. A duty to cooperate with [the applicants] in achieving the objects of the franchise agreement;
b. A duty to act reasonably and/or honestly in the performance of duties and exercise of any rights, powers or discretions under the franchise agreement;
c. A duty to act in good faith towards [the applicants] under and in relation to the franchise agreement and the exercise of any rights, powers or discretions, including a duty to have regard for the legitimate interests of [the applicants] in the enjoyment of the fruits of the franchise agreements, and not to render [the applicants'] interests under those agreements nugatory or worthless or to seriously undermine those interests.
According to the applicants, Yum would breach these implied duties were it to implement the Reduced Price Strategy.
(2) Implementing the Reduced Price Strategy would involve unconscionable conduct by Yum in contravention of s 21 of the Australian Consumer Law (ACL). Section 21 provides:
Unconscionable conduct in connection with goods or services
(1) A person must not, in trade or commerce, in connection with:
(a) the supply or possible supply of goods or services to a person (other than a listed public company); or
(b) the acquisition or possible acquisition of goods or services from a person (other than a listed public company);
engage in conduct that is, in all the circumstances, unconscionable.
(2) This section does not apply to conduct that is engaged in only because the person engaging in the conduct:
(a) institutes legal proceedings in relation to the supply or possible supply, or in relation to the acquisition or possible acquisition; or
(b) refers to arbitration a dispute or claim in relation to the supply or possible supply, or in relation to the acquisition or possible acquisition.
(3) For the purpose of determining whether a person has contravened subsection (1):
(a) the court must not have regard to any circumstances that were not reasonably foreseeable at the time of the alleged contravention; and
(b) the court may have regard to conduct engaged in, or circumstances existing, before the commencement of this section.
(4) It is the intention of the Parliament that:
(a) this section is not limited by the unwritten law relating to unconscionable conduct; and
(b) this section is capable of applying to a system of conduct or pattern of behaviour, whether or not a particular individual is identified as having been disadvantaged by the conduct or behaviour; and
(c) in considering whether conduct to which a contract relates is unconscionable, a court's consideration of the contract may include consideration of:
(i) the terms of the contract; and
(ii) the manner in which and the extent to which the contract is carried out;
and is not limited to consideration of the circumstances relating to formation of the contract.
4 The franchise agreement otherwise expressly provides:
Franchisee will not permit any Approved Products to be sold at the Outlet at any price exceeding the maximum retail prices advised by Franchisor to Franchisee from time to time.
5 It is common ground between the parties that there are approximately 300 Pizza Hut outlets nationally, run by about 209 franchisees including the 80 applicants. According to the applicants, the Reduced Price Strategy, if introduced, will have a detrimental – even catastrophic – impact upon the profitability of their individual businesses.
6 The applicants rely upon the evidence of Mr Kartsounis, who is both the solicitor for the applicants and the President of the Australasian Pizza Association (APA). The APA was formed in 2008 to protect and advance the mutual interest of Pizza Hut franchisees. As a solicitor, Mr Kartsounis has some experience in recent years acting for franchisees, including Pizza Hut franchisees, in a range of matters.
7 Mr Kartsounis' deposes, on information and belief, to the process by which Yum formulated and communicated the proposed Reduced Price Strategy to its franchisees. His opinion is that, while Yum may use the Reduced Price Strategy to increase overall sales of Pizza Hut products across Australia with a corresponding increase in Yum's royalties, this increase would not necessarily translate to an increase in franchisee profitability due to the reduction in sale price and increase in cost of sales. According to Mr Kartsounis it is likely, if not inevitable, that the implementation of the Reduced Price Strategy will substantially reduce the profits franchisees are able to derive from operation of their Pizza Hut outlets, causing serious loss and damage to the franchisees extending, in the most extreme case, to the loss of franchisees' entire businesses. Mr Kartsounis, who is a solicitor not an accountant, predicts that the total loss to the applicants would be in the order of millions of dollars, potentially surpassing $10 million.
8 Mr Kartsounis also expresses the opinion that if an interlocutory injunction were not granted it would be very difficult, if not impossible, for the Pizza Hut brand to revert to the existing position, particularly if a "price war" is triggered by the Reduced Price Strategy.
9 The applicants also rely upon an expert report from Mr Terrence Potter, a chartered accountant and founding director of Axiom Forensics. Mr Potter's report contains an analysis in respect of two Pizza Hut stores, representing a high and low turnover outlet respectively. Based on various assumptions and modelling, the report predicts the impact of the Price Reduction Strategy. Mr Potter concludes that the impact of the strategy:
is such that it could be expected to result both in the inability of the owner-manager to earn a living from the business and ultimately result in the failure of the business. This is all the more likely the case given that the measure of earnings represented by EBITDA does not take into account the capital expenditure required to maintain the business nor does it reflect any obligations held with respect to the repayment of interest or principal on any debt finance that was used to fund the investment in the business.
10 An important point made by Mr Potter is that his analysis does not take account of the impact on sales which might be occasioned by any competitive response by Pizza Hut's competitors. Mr Potter's assessment that a competitive response is likely appears to have been borne out by a document tendered by Yum following this afternoon's luncheon adjournment. The document, a printout of a webpage from "qsrmedia.com.au" states that Domino's, a competitor of Pizza Hut, now proposes to extend to every day of the week a promotional offer, previously only available on Mondays and Tuesdays, by which products within the "Domino's Value Range" can be purchased for $4.95 each.
11 Yum relies upon the affidavit of Mr Kurtis Smith. Mr Smith is the Market Director for Yum, having been employed in that role since January 2014. Prior to this, Mr Smith held a range of positions with Yum or its parent, Yum! Restaurants International, from October 2010, and before that was employed using his skills as an accountant and business administrator, having been awarded a Masters of Business Administration from the University of Chicago.
12 According to Mr Smith:
The [Reduced Price Strategy] was developed in response to a concern about the downward trend in financial performance and the steady loss of customers in the Pizza Hut business in Australia over the last ten years.
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In addition to the downward trend in sales, market share and profitability during the period 2004 to 2014, the indebtedness of franchisees to their marketing fund [which is provided for in the franchise agreement] and to Yum has also increased. …
13 Mr Smith's evidence is that, by December 2013, senior executives of Yum decided that something needed to be done urgently to turn the business around, arrest the decline in value of the Pizza Hut brand in Australia and help franchisees achieve higher sales and profitability. In two overseas markets, United States and New Zealand, similar strategies had been employed with success and, in January 2014, Mr Smith and other senior executives of Yum decided to test the viability of these strategies in the Australian market. Two areas, Western Australia and the Australian Capital Territory, were selected and different pricing and sale strategies were implemented in each market. The WA test was considered by Yum to be unsuccessful and that strategy was withdrawn from the market. The ACT test, however, which took place over a 12 week period from 4 February until 28 April 2014, was considered by Yum to be a success because it resulted in increased sales, transactions and profits. Mr Smith and the other senior executives formed the view that the results observed in the ACT would be stronger were the ACT strategy to be applied nationally due to the marketing options available to Yum on a national basis. In addition, Yum decided to carry out financial modelling on a store by store basis to determine the impact on franchisees.
14 Ultimately, according to Mr Smith:
Based on the market research and other investigations undertaken by Yum, the success of the ACT test and the modelling undertaken by Yum internally, it was determined that the [Reduced Price Strategy] would meet the two key concerns of the business:
(a) brand relevance through increased sales and consumption of products; and
(b) increased franchisee profitability.
15 On 3 June 2014, a meeting of Yum senior managers took place at which various issues were discussed including, apparently, concerns raised by Mr Houston, the general manager of Pizza Hut South Pacific, and others as to the viability of the pricing in the Reduced Price Strategy in the circumstances of certain kinds of franchise. A decision was taken at the conclusion of the meeting, in principle, to proceed with the Reduced Price Strategy which was affirmed as a final decision the following day.
16 An email from Mr Houston to the global CEO of Pizza Hut, Mr Bergren, dated 3 June 2014 raises various concerns about the potential risks of the Reduced Price Strategy, impacts upon "outlier businesses" in particular, and the level of increased sales which some franchisees would require in order to maintain profitability. According to Mr Smith, these were all matters which had been ventilated at the 3 June 2014 meeting and were considered to have been sufficiently addressed by 4 June 2014. Further, Mr Smith said, he has had conversations with Mr Houston since 3 June 2014 during which Mr Houston has said words to the effect that he is fully supportive of implementing the Reduced Price Strategy as has the CEO, Mr Bergren.
17 Mr Smith also gives evidence, in his affidavit, about various interactions between Yum and its franchisees or their representatives. On 11 February 2014, he attended a meeting of directors of Pizza Hut Adco Limited (Adco), a company incorporated to allow marketing decisions to be made with input from Pizza Hut franchisees or their representatives. Yum and its franchisees are eligible to be members of Adco and its directors include both franchisees or their representatives and representatives of Yum. During the 11 February 2014 meeting, a slide show presentation was given by the Head of Marketing at Yum regarding the state of the Pizza Hut business in Australia, a copy of which is in evidence. The presentation dealt with, among other things, a perceived decline in value and the success of overseas strategies including in the United States and New Zealand. The slides also made reference to the market tests in WA and the ACT. A more detailed slide pack for a meeting was sent to the directors of Adco on 17 April 2014 apparently in anticipation of a meeting to be held on 1 May 2014. It is plain that there was a breakdown in the relationship between Yum and the franchisee directors of Adco. The franchisee directors made clear to Yum that they would not attend a board meeting scheduled for 1 May 2014, the agenda for which included a discussion of the WA and ACT tests and the proposed Reduced Price Strategy, given the understandable position of those directors that they were not authorised representatives of the entire community of Yum franchisees. Ultimately, the franchisee directors resigned from Adco.
18 On 14 and 15 May 2014, Yum held meetings with franchisees in Melbourne, Sydney and by teleconference at which Mr Smith was present and, he is informed, other meetings took place in Brisbane and Perth on 14 May 2014 at which a number of Yum senior executives were present. According to Mr Smith, the purpose of the meetings was to update the franchisees and obtain their feedback on the situation facing Adco following the resignation of the franchisee directors, to discuss the outcomes of the WA and ACT market tests and to discuss other matters not relevant to this application. During these meetings, another slide show was presented to Yum's franchisees. A copy of the slide pack is in evidence. Again, the slides referred to the problems that the Pizza Hut business was facing and the responses which had been adopted overseas. They also made detailed reference to the tests in WA and the ACT. At this time, the Reduced Price Strategy was in its earlier stages of development and was, and remains, confidential and commercially sensitive. Accordingly, says Mr Smith, the briefing provided to franchisees on the Reduced Price Strategy was necessarily at a high level because he was concerned that there was a risk that the information would enter the public domain at an early stage, providing Pizza Hut's competitors with an opportunity to respond to the strategy more quickly than otherwise would have been the case. As I have said above, this appears to be a legitimate concern and is borne out by the document regarding the Domino's pricing promotion tendered after the luncheon adjournment today.
19 Of significance are the following matters to which Mr Smith deposes:
(1) Yum believes that the Reduced Price Strategy is likely to be beneficial to franchisees and lead to a general improvement in profitability across the franchise network.
(2) In the short term, Yum's intention is to make significant investments in the strategy in the form of media funding and other financial support. This funding commitment would negatively impact on Yum's short term profitability, but over the longer term Yum expects the Reduced Price Strategy to deliver broader benefits to the whole of the Pizza Hut business in Australia, including to franchisee profitability.
(3) Mr Smith's opinion is that, if no action is taken, performance issues will continue to worsen and there are significant risks to Yum and its franchisees in not implementing the Reduced Price Strategy and instead maintaining the status quo. Mr Smith believes that if the Reduced Price Strategy is not implemented, franchisees will continue to suffer a reduction in overall revenue and profitability.
(4) Mr Smith considers the WA and ACT market test results to be a more reliable predictor of likely outcomes than a theoretical model of the sort prepared by Mr Potter. He also considers Yum's modelling to be more reliable because it utilises more specific and dynamic data relevant to particular outlets which all have different characteristics.
(5) In Mr Smith's view, the longer the implementation of the Reduced Price Strategy is delayed, the more likely it is that competitors will become aware of the strategy and will take pre-emptive competitive action.
(6) If, notwithstanding the confidence Mr Smith and other senior managers within Yum have in the Reduced Price Strategy, it proves to be unsuccessful following the effluxion of a sufficient period of time by which its success may be evaluated then, like any rational business, Yum will review the strategy and, if appropriate, make changes or adjustments to it. Mr Smith says he has given consideration to whether the strategy may need to be changed or discontinued as a result of a competitor response or for some other reason, and he believes that changes can be made without occasioning any major disruption or financial harm to the franchisees. According to Mr Smith, the Reduced Price Strategy does not involve any fundamental change in the businesses of the franchisees and is basically a pricing strategy which, like any pricing strategy, can be adjusted as the circumstances may warrant. In other words, Mr Smith expresses a view quite different from Mr Kartsounis in respect of the capacity for the strategy to be undone or amended if circumstances dictate.
20 A further aspect of Mr Smith's evidence to which consideration must be given is his account of the steps taken by Yum in anticipation of it implementing the Reduced Price Strategy. According to Mr Smith, Yum has already made all media bookings it intended to make in introducing the strategy which included (among other things) a leaflet "mail drop" and television advertising campaign. Today is the last day on which the mail drop may be cancelled without having to recover despatched leaflets. Further, were Yum to cancel today, it would lose 30 to 40 per cent of the delivery price. In respect of the television campaign, Yum would still be required to pay for three weeks' advertising were it to cancel the campaign today. While Yum might instead use that advertising space for some other promotion, there is only one other such promotion currently available and, in the opinion of Mr Smith and other members of the Yum management team, that promotion did not generate a sufficient increase in consumer demand to warrant its continuation. Mr Smith's opinion was that it would be "effectively wasting the airtime".
21 There is little in dispute between the parties as to the essential legal issues. In Australian Broadcasting Corporation v O'Neill (2006) 227 CLR 57; [2006] HCA 46, the relevant tests were identified at [65]:
The relevant principles in Australia are those explained in Beecham Group Ltd v Bristol Laboratories Pty Ltd [(1968) 118 CLR 618 ("Beecham")]. This Court (Kitto, Taylor, Menzies and Owen JJ) said that on such applications the court addresses itself to two main inquiries and continued [at 622-623]:
"The first is whether the plaintiff has made out a prima facie case, in the sense that if the evidence remains as it is there is a probability that at the trial of the action the plaintiff will be held entitled to relief … The second inquiry is … whether the inconvenience or injury which the plaintiff would be likely to suffer if an injunction were refused outweighs or is outweighed by the injury which the defendant would suffer if an injunction were granted."
By using the phrase "prima facie case", their Honours did not mean that the plaintiff must show that it is more probable than not that at trial the plaintiff will succeed; it is sufficient that the plaintiff show a sufficient likelihood of success to justify in the circumstances the preservation of the status quo pending the trial. That this was the sense in which the Court was referring to the notion of a prima facie case is apparent from an observation to that effect made by Kitto J in the course of argument [Beecham at 620]. With reference to the first inquiry, the Court continued, in a statement of central importance for this appeal [at 622] :
"How strong the probability needs to be depends, no doubt, upon the nature of the rights [the plaintiff] asserts and the practical consequences likely to flow from the order he seeks."
22 In addition, emphasis has been placed on the decision in Samsung Electronics Company Ltd v Apple Inc (2011) 217 FCR 238; [2011] FCAFC 156. At [62] to [67] where the Full Court said:
[62] The assessment of harm to the plaintiff, if there is no injunction, and the assessment of prejudice or harm to the defendant, if an injunction is granted, is at the heart of the basket of discretionary considerations which must be addressed and weighed as part of the Court's consideration of the balance of convenience and justice. The question of whether damages will be an adequate remedy for the alleged infringement of the plaintiff's rights will always need to be considered when the Court has an application for interlocutory injunctive relief before it. It may or may not be determinative in any given case. That question involves an assessment by the Court as to whether the plaintiff would, in all material respects, be in as good a position if he were confined to his damages remedy, as he would be in if an injunction were granted (see the discussion of this aspect in Spry, The Principles of Equitable Remedies (8th ed, 2010) at pp 383-389, 397-399 and 457-462).
[63] The interaction between the Court's assessment of the likely harm to the plaintiff, if no injunction is granted, and its assessment of the adequacy of damages as a remedy, will always be an important factor in the Court's determination of where the balance of convenience and justice lies. To elevate these matters into a separate and antecedent inquiry as part of a requirement in every case that the plaintiff establish "irreparable injury" is, in our judgment, to adopt too rigid an approach. These matters are best left to be considered as part of the Court's assessment of the balance of convenience and justice even though they will inevitably fall to be considered in most cases and will almost always be important considerations to be taken into account.
[64] Gleeson CJ also observed in [Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 208 CLR 199] (at [18]), that, where there is little or no room for argument about the legal basis of the applicant's claimed private right, the court will be more easily persuaded at an interlocutory stage that a prima facie case has been established. The court will then move on to consider discretionary considerations, including the balance of convenience and justice. But, as his Honour also observed at [18]:
"The extent to which it is necessary, or appropriate, to examine the legal merits of a plaintiff's claim for final relief, in determining whether to grant an interlocutory injunction, will depend upon the circumstances of the case. There is no inflexible rule."
[65] The resolution of the question of where the balance of convenience and justice lies requires the Court to exercise a discretion.
[66] In exercising that discretion, the Court is required to assess and compare the prejudice and hardship likely to be suffered by the defendant, third persons and the public generally if an injunction is granted, with that which is likely to be suffered by the plaintiff if no injunction is granted. In determining this question, the Court must make an assessment of the likelihood that the final relief (if granted) will adequately compensate the plaintiff for the continuing breaches which will have occurred between the date of the interlocutory hearing and the date when final relief might be expected to be granted.
[67] As Sundberg J observed in Sigma Pharmaceuticals (Australia) Pty Ltd v Wyeth (2009) 81 IPR 339 at [15], when considering whether to grant an interlocutory injunction, the issue of whether the plaintiff has made out a prima facie case and whether the balance of convenience and justice favours the grant of an injunction are related inquiries. The question of whether there is a serious question or a prima facie case should not be considered in isolation from the balance of convenience. The apparent strength of the parties' substantive cases will often be an important consideration to be weighed in the balance: Tidy Tea Ltd v Unilever Australia Ltd (1995) 32 IPR 405 at [416] per Burchett J; Aktiebolaget Hassle v Biochemie Australia Pty Ltd (2003) 57 IPR 1 at [31] per Sackville J; Hexal Australia Pty Ltd v Roche Therapeutics Inc (2005) 66 IPR 325 at [18] per Stone J; and [Castlemaine Tooheys Ltd v South Australia (1986) 161 CLR 148] at 154 per Mason ACJ.
23 At [196], the Court said:
Finally, in the present case, the most compelling features are the assessments of the strengths and weaknesses of the respective cases and the equality of likely detriment. Other considerations pale into insignificance beside those matters.
24 The other relevant principle, given the nature of the evidence in this matter, is that expressed in Shercliff v Engadine Acceptance Corporation Pty Ltd [1978] 1 NSWLR 729 at 734, where it was said that:
But there are limitations upon the extent to which a judge is to take into account such evidence as the defendant may tender upon an interlocutory application. It is not his function to conduct a preliminary trial of the action, nor is it, in general, to resolve the conflict between the parties' evidence, and grant or refuse the application upon the basis of such findings. Where there is conflict of evidence, the use which may be made of the defendant's evidence in determining whether the plaintiff has made out a prima facie case is a limited one. For example, the plaintiff's evidence, considered alone, may be such a prima facie case as would be acceptable if submitted to a jury in a trial. But, when considered in the light of the defendant's evidence, it may be explained away so as no longer to be such. Or the defendant's evidence, when juxtaposed to that of the plaintiff may show that there is in reality no such case, no real question between the parties, appropriate to warrant preserving the status quo until the hearing.
25 This is of some significance to the present application. One of the underlying issues of principle said by the applicant to arise in this proceeding is:
[w]hether the Respondent, as franchisor of the Pizza Hut franchise system, can act solely in its own financial interests to increase its royalty revenue, at the expense of, and without any proper or reasonable regard for the interests of, the franchisees in maintaining the profitability and asset values of their franchised businesses[.]
26 However, what the respondent's evidence on the interlocutory application shows, such use as may be made of it consistent with the principles in Shercliff, is that insofar as the applicant's case relies on a breach of the implied terms there cannot be any question, at least at this stage in the proceeding, about whether the respondent Yum acted honestly and in good faith, at least insofar as those matters are to be considered on a subjective basis. The same must be said of the applicant's case insofar as it relies upon unconscionability. There is no evidence whatsoever to suggest that Yum believed it was acting solely in its own financial interest at the expense of and without any proper or reasonable regard for the interests of the franchisees in maintaining the profitability and asset values of their franchise businesses. To the contrary, the evidence adduced by the respondent consistently discloses that Yum believed, and continues to believe, that it is acting in the financial interests of all parties to the franchise agreement and with a proper view to maintaining the profitability of the franchisees' businesses as a whole.
27 Insofar as whether there is a serious question to be tried, it seems to me that the nub of the applicants' case is the contention that Yum has not cooperated in good faith with the applicants to achieve the contractual objectives of the franchise agreement because it did not consult with them about the modelling that it undertook. Further, when regard is had to the objective standard requiring a franchisor to act reasonably and honestly and not for an ulterior motive in the exercise of its rights, powers or discretions under the franchise agreement and to recognise and have regard to the legitimate interests of the franchisees in the enjoyment of the fruits of the franchise agreements (AMC Commercial Cleaning (NSW) Pty Ltd v Coade [2010] NSWSC 832), the modelling undertaken by Yum was not objectively reasonable. This is because, inter alia, Yum did not factor in a rate of return to franchisees on their capital investment.
28 In my opinion, if there is a serious question to be tried on either of these bases, which is not conceded by the respondent, it is an extremely weak one. The dispute between the parties, for present purposes, is not as to the existence of the implied duties referred to above or that unconscionability under the provisions of the ACL pleaded by the applicants is broader than the equitable doctrine from which it derives. Rather, the dispute is whether Yum breached any of those duties or provisions. As Yum submitted, the duty of cooperation is a duty concerned with the advancement of the interests of the business. This does not grant to the franchisees a right of veto over a pricing strategy in the face of a franchise agreement which expressly provides that franchisees "will not permit any Approved Products to be sold at the Outlet at any price exceeding the maximum retail prices advised by Franchisor to Franchisee from time to time".
29 Moreover, as Yum submitted, the process that was adopted in this case shows great care by Yum in developing the Reduced Price Strategy. It was not one which was invented capriciously or arbitrarily. Rather, it was based on overseas experience, market testing in WA and the ACT, modelling and two days of consideration by senior management. The Reduced Price Strategy, moreover, was decided upon in circumstances where all of the evidence, far from suggesting any lack of good faith, points unequivocally to Yum having acted, and continuing to act, in good faith with the intention of advancing the interests of all parties and not merely its own interests at the expense of its franchisees.
30 Further, the process did involve Yum's franchisees from February 2014. Franchisees were given notice of the perceived need for change in the brand's business strategy, the existence of the overseas, WA and ACT market tests and what those tests involved and, ultimately, the general details of the Reduced Price Strategy itself. That Yum did not wish to disclose all of the details of the strategy is understandable, given that there was and remains high level of confidentiality in respect of the strategy, particularly at such an early stage. With respect to whether Yum's modelling was objectively reasonable, as I have said above, I accept Yum's submission that, even if the modelling is wrong, it does not necessarily mean that Yum breached of any of the implied terms or engaged in unconscionable conduct. The question is whether Yum failed to act reasonably and honestly in the performance of duties and exercise of any rights, powers or discretions under the franchise agreement, or failed to act in good faith towards the franchisees under and in relation to the franchise agreement, not whether it adopted modelling with which the franchisees agreed.
31 For these reasons, although I am satisfied there are serious questions to be tried, the serious questions seem to me to be extremely weak, which is relevant to whether the balance of convenience favours the granting of an interlocutory injunction. In terms of the balance of convenience, there are a number of factors which I consider critical. They are as follows:
(1) There is evidence that there has been a continuing deterioration in the overall profitability and brand recognition of the Pizza Hut business, which suggests that it is rational that something at least be done.
(2) Regard must be had to the fact that there are about 130 other franchisees who are not parties to these proceedings and who, on Yum's evidence, would be adversely impacted by Yum not being able to introduce the Reduced Price Strategy, particularly given the change in the competitive landscape which appears to have recently occurred based on the announced extension of the "Domino's Value Range" pricing promotion. The impact on third parties is an important consideration.
(3) Although I accept, for the purposes of this application, that Mr Potter's evidence indicates that if the strategy is introduced there will be material detrimental impact on the applicant franchisees, including impact that might extend towards making some businesses entirely unprofitable leading to their closure, much of this depends upon how long the strategy remains in place, assuming it to be as unsuccessful as Mr Potter forecast. On that basis, I am entitled to take into account the evidence of Mr Smith that Yum would act rationally in responding to how the strategy works in practice.
(4) I am satisfied that damages will be an adequate remedy for any franchisee who suffers loss as a result of the introduction of the Reduced Price Strategy if it is established at trial that the strategy was implemented in breach of any obligation of Yum under the franchise agreement or the unconscionable conduct provisions of the ACL. While the applicants refer to some notorious or well-known difficulty in assessing damages in a dynamic competitive environment, it seems to me that in a case such as this, where there is evidence that the profit and loss of all franchisees has been documented and is available, I could not reasonably conclude otherwise than that damages would be adequate. This factor deserves significant weight.
(5) The nature of the interlocutory order which the applicants seek, which is an order restraining Yum from implementing the Reduced Price Strategy is inherently impractical and inconvenient. As I have said, the strategy involves two key elements, being (i) a restriction on the number of products available to be sold and (ii) specifying the maximum prices for the products. In oral submissions, counsel for the applicants made clear that they sought to restrain the implementation of these elements not only together but also individually. Yum submits, and I accept, that the effect of an injunction in this form would be to prevent Yum, as a market participant, from competing effectively on price with significant potential adverse impacts. Given the nature of the retail industry, it is likely that the difficulties to which the injunction would give rise would be ongoing. Further, as I have said above, this would affect not only Yum itself but also third parties, being the other franchisees who have not chosen to join in these proceedings. Having regard to these matters I am not satisfied that it would be appropriate to grant an injunction in the form sought.
32 For the foregoing reasons I consider that, notwithstanding the evidence of Mr Potter and the concerns of Mr Kartsounis, the balance of convenience favours the respondent. Accordingly, I am not satisfied that the interlocutory injunction should be granted.
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I certify that the preceding thirty-two (32) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jagot. |
Associate:
Schedule
No: (P)NSD618/2014
Federal Court of Australia
District Registry: New South Wales
Division: General
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Second Applicant: |
A & A Moond Pty Ltd |
ACN 160 881 149 |
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Third Applicant: |
AAI Corporations Pty Ltd |
ACN 100 460 964 |
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Fourth Applicant: |
ABH Corporation Pty Ltd |
ACN 155 422 094 |
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Fifth Applicant: |
Ahuja Enterprises Pty Ltd |
ACN 098 964 464 |
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Sixth Applicant: |
AKD Investments Pty Ltd |
ACN 107 664 362 |
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Seventh Applicant: |
Alice Sachin Pty Ltd |
ACN 166 216 486 |
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Eighth Applicant: |
Alpha Bravo Pty Ltd |
ACN 127 935 175 |
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Ninth Applicant: |
Anwar Services Pty Ltd |
ACN 111 158 831 |
|
Tenth Applicant : |
ARKK Enterprises Pty Ltd |
ACN 149 585 946 |
|
Eleventh Applicant: |
AVP Enterprises Pty Ltd |
ACN 159 984 166 |
|
Twelfth Applicant: |
Baile Family Pty Ltd |
ACN 164 002 439 |
|
Thirteenth Applicant: |
Bloms Pty Ltd |
ACN 123 389 837 |
|
Fourteenth Applicant: |
CafÉ Coffeeday Pty Ltd |
ACN 148 910 301 |
|
Fifteenth Applicant: |
Charbhujar Pty Ltd |
ACN 125 933 360 |
|
Sixteenth Applicant: |
Chauhan & Khamar Pty Ltd |
ACN 142 766 210 |
|
Seventeenth Applicant: |
Cougar Communications Pty Ltd |
ACN 083 311 728 |
|
Eighteenth Applicant: |
CV Industries Pty Ltd |
ACN 163 725 291 |
|
Nineteenth Applicant: |
Dazmak Pty Ltd |
ACN 122 079 654 |
|
Twentieth Applicant: |
Diab Pty Ltd |
ACN 003 168 812 |
|
Twenty-first Applicant: |
Easy Pizzy Pty Ltd |
ACN 150 258 343 |
|
Twenty-second Applicant: |
Excellence Business Investments Pty Ltd |
ACN 147 369 775 |
|
Twenty-third Applicant: |
Food Ventures Australia Pty Ltd |
ACN 154 944 215 |
|
Twenty-fourth Applicant: |
GED NSW Pty Ltd |
ACN 123 240 817 |
|
Twenty-fifth Applicant: |
GSS Bless Pty Ltd |
ACN 123 327 088 |
|
Twenty-sixth Applicant: |
Harsh Varma Pty Ltd |
ACN 152 098 505 |
|
Twenty-seventh Applicant |
Hermes Retail Holdings Pty Ltd |
ACN 165 259 432 |
|
Twenty-eighth Applicant: |
Hideki Rising Pty Ltd |
ACN 150 860 852 |
|
Twenty-ninth Applicant: |
HRN Pty Ltd |
ACN 165 197 991 |
|
Thirtieth Applicant: |
Jai Arbuda Pty Ltd |
ACN 160 359 268 |
|
Thirty-first Applicant: |
Jaingill Pty Ltd |
ACN 146 333 084 |
|
Thirty-second Applicant: |
Jay Shri Pty Ltd |
ACN 153 207 311 |
|
Thirty-third Applicant: |
Jay Trading & Consulting Pty Ltd |
ACN 116 935 936 |
|
Thirty-fourth Applicant: |
Jijam Pty Ltd |
ACN 130 965 767 |
|
Thirty-fifth Applicant: |
Kailash & Sons Pty Ltd |
ACN 154 686 101 |
|
Thirty-sixth Applicant: |
Kaival Pty Ltd |
ACN 156 019 135 |
|
Thirty-seventh Applicant: |
Kalbro Pty Ltd |
ACN 159 770 751 |
|
Thirty-eighth Applicant: |
Kelam J. Pty Ltd |
ACN 155 602 565 |
|
Thirty-ninth Applicant: |
Leeds Consultants Pty Ltd |
ACN 116 670 494 |
|
Fortieth Applicant: |
Luvkins Corporation Pty Ltd |
ACN 113 630 078 |
|
Forty-first Applicant: |
MAA Operations Pty Ltd |
ACN 164 066 040 |
|
Forty-second Applicant: |
Macedo Holding Pty Ltd |
ACN 143 377 771 |
|
Forty-third Applicant: |
Marutinandan Pty Ltd |
ACN 158 642 007 |
|
Forty-fourth Applicant: |
Multi Orange Pty Ltd |
ACN 168 562 365 |
|
Forty-fifth Applicant: |
Muniraj Pty Ltd |
ACN 161 973 557 |
|
Forty-sixth Applicant: |
Neha Investments Pty Ltd |
ACN 155 669 079 |
|
Forty-seventh Applicant: |
Om Ventures Pty Ltd |
ACN 159 275 966 |
|
Forty-eighth Applicant: |
Oscar Enterprise (Aus) Pty Ltd |
ACN 153 559 614 |
|
Forty-ninth Applicant: |
Patels Food Pty Ltd |
ACN 156 563 790 |
|
Fiftieth Applicant: |
Pizzaussie Pty Ltd |
ACN 117 441 497 |
|
Fifty-first Applicant: |
PMKC Pty Ltd |
ACN 156 080 607 |
|
Fifty-second Applicant: |
Praz Invest Pty Ltd |
ACN 126 252 042 |
|
Fifty-third Applicant: |
Prisha Pty Ltd |
ACN 146 440 860 |
|
Fifty-fourth Applicant: |
Q & J Group Ply Ltd |
ACN 140 300 974 |
|
Fifty-fifth Applicant: |
Rao Royals Pty Ltd |
ACN 154 706 920 |
|
Fifty-sixth Applicant: |
Reddy Holdings Pty Ltd |
ACN 154 845 262 |
|
Fifty-seventh Applicant: |
Romaro Holdings Pty Ltd |
ACN 003 717 495 |
|
Fifty-eighth Applicant: |
Rossi Foods Pty Ltd |
ACN 117 455 348 |
|
Fifty-ninth Applicant: |
Royal Liquor Pty Ltd |
ACN 138 591 232 |
|
Sixtieth Applicant: |
S & S Patel Pty Ltd |
ACN 135 895 788 |
|
Sixty-first Applicant: |
Sandokan Pty Ltd |
ACN 147 275 358 |
|
Sixty-second Applicant: |
Sciaccas Pizza Place Pty Ltd |
ACN 127 098 640 |
|
Sixty-third Applicant: |
Shiv & Shiv Pty Ltd |
ACN 124 389 671 |
|
Sixty-fourth Applicant: |
Shreeji Trade & Services Pty Ltd |
ACN 124 696 304 |
|
Sixty-fifth Applicant: |
Shri Maruti 1 Pty Ltd |
ACN 159 733 874 |
|
Sixty-sixth Applicant: |
Skyter Trade Pty Ltd |
ACN 165 324 489 |
|
Sixty-seventh Applicant: |
SLSR Enterprises Pty Ltd |
ACN 134 162 164 |
|
Sixty-eighth Applicant: |
Sohil Enterprise Pty Ltd |
ACN 165 909 777 |
|
Sixty-ninth Applicant: |
Subhas Pty Ltd |
ACN 002 861 967 |
|
Seventieth Applicant: |
Sunshine Management Services Pty Ltd |
ACN 152 004 718 |
|
Seventy-first Applicant: |
Swami Corporation Pty Ltd |
ACN 165 068 262 |
|
Seventy-second Applicant: |
Talsman Enterprises Pty Ltd |
ACN 124 520 878 |
|
Seventy-third Applicant: |
Umiya Capital Holding Pty Ltd |
ACN 160 994 310 |
|
Seventy-fourth Applicant: |
Vinayak Pty Ltd |
ACN 142 719 902 |
|
Seventy-fifth Applicant: |
Xin Wu |
|
|
Seventy-sixth Applicant: |
Ymaxis Enterprises Pty Ltd |
ACN 136 854 030 |
|
Seventy-seventh Applicant: |
Yogeshwar Pty Ltd |
ACN 135 372 726 |
|
Seventy-eighth Applicant: |
Z & Z Partner Pty Ltd |
ACN 168 312 230 |
|
Seventy-ninth Applicant: |
Zamnon Pty Ltd |
ACN 117 956 091 |
|
Eightieth Applicant: |
911 Enterprises Pty Ltd |
ACN 059 423 362 |
