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Franchise update: Restraints of trade in the age of LinkedIn

By Daniel Shore - August 2016

Restraints of trade and franchise agreements go hand in hand.  Typically, they will try to prevent the franchisee from trading in a similar industry, and for a fixed area and period, after the franchise period comes to an end.  They will also prevent the former franchisee from approaching or “soliciting” the customers/clients that it had over the franchise term.

While soliciting has always been a difficult term to apply, the advent of wider marketing tools such as LinkedIn, add further to the challenge.

The High Court recently delved into the issues in Mike Pero (New Zealand) v Krishna.  Here the mortgage broking franchisor, took urgent action in the form of an injunction, to prevent Mr Krishna from soliciting the franchisor’s (“MPNZ”) customers.

MPNZ took exception to the existence of Mr Krishna’s LinkedIn profile as it referred to mortgage broking.  In fact, MPNZ sought an order that Mr Krishna be arrested for contempt of Court on the basis the profile was in breach of the interim orders the Court had already made.

The Court approached the issue on the basis of whether the LinkedIn page amounted to Mr Krishna “directly or indirectly canvassing, soliciting or attempting to solicit any customer of MPNZ”.

The High Court ultimately determined that the mere existence of the page did not amount to soliciting “as a client would need to be actively searching for Mr Krishna in order to find the information”.  Then, even if they did find the profile, that page did not amount to Mr Krishna urging or entreating a client to do business with him.

This was perhaps a surprising decision for a number of reasons:

• A fundamental function of LinkedIn is to enable engagement with customers/clients;
• Presumably a significant portion of Mr Krishna’s network were connections made during his time as a franchisee of MPNZ;
• LinkedIn proactively pushes information to connections and possible connections.  Therefore, even if Mr Krishna had simply removed any reference to MPNZ (as he was potentially required to do at the end of the franchise term), LinkedIn may well have notified that development to his network.

It should be noted that MPNZ’s lawyers sought to cross-examine Mr Krishna in relation to his LinkedIn profile, however procedurally this was not appropriate.  Cross-examination may well however have resulted in a clearer illustration of how Mr Krishna stood to benefit from his continuing profile.

The reality is that non-solicitation in an age of LinkedIn poses many challenges:

• Geographical boundaries do not really apply;
• Short of a profile being deleted, an individual’s networks are likely to be updated when a franchise relationship ends;
• The proactive approach of LinkedIn can bypass the intent typically required to establish soliciting.

While the above issues can perhaps be addressed by robust and specific restraint of trade clauses, technology will continue to impose challenges on franchisors seeking to restrict former franchisees.

Daniel is a Director in our Dispute Resolution Team, specialising in Franchise Disputes, and can be contacted on 07 958 7477.