During the course of a franchise relationship, a franchisor will have shared a significant amount of its confidential know-how with its franchisee, including in relation to its pricing structures, marketing strategies, and trade secrets. A franchisee’s business will also have benefited from the commercial goodwill and brand recognition already established by the franchisor for its products or services.
However, it is (sadly) not all that uncommon for some franchisees to attempt to take unfair advantage of those benefits by setting up their own competing business, in breach of the Franchise Agreement, and “passing it off” as being associated with or connected to the franchisor’s business.
A recent case in the Intellectual Property Enterprise Court (IPEC) has considered the appropriate method for calculating an award of damages for passing off where the passing off was alleged to have impacted the franchisor’s wider franchise network.
Which is “passing off”?
In very simple terms, “passing off” is when one party attempts to “pass off” their goods or services as being those of another (better known) party.
This will normally involve a defendant making some sort of misrepresentation to the public which is likely to lead members of the public to believe that the source of the goods/services offered by the defendant is the same as the source of the claimant’s goods/services.
If a claimant can establish a valid claim for passing off, the Court will normally order the defendant to pay the claimant damages (i.e. compensation) equal to the losses the claimant has suffered as a result of the defendant’s passing off – but this is not always an easily quantifiable figure.
Duadata Ltd v Tian Cha Le Ltd
In the Duadata case, the claimant was the franchisor of a network of bubble tea stores operating under its “Mooboo” brand name. From around April 2021 until January 2024, Qin Lin was the manager of the “Mooboo” franchise business in Gateshead, but in August 2023 Ms Lin incorporated the defendant company and began selling bubble tea from an outlet in Gateshead.
The defendant’s competing business had adopted the claimant’s menu design, range of product names, signature drinks and recipes, and pricing structure, which resulted in the claimant bringing a claim against the defendant for passing off. The High Court awarded judgment in default against the defendant (which included an injunction preventing the defendant from any further actions which amounted to passing itself off as being connected to the claimant’s business), but the calculation of damages was adjourned to a separate hearing.
The “hypothetical” franchise agreement
The claimant argued that the defendant’s passing off had prevented the claimant from securing a franchisee for a nearby franchise territory, asserting that potential franchisees had been unwilling to sign up to that franchise territory because the defendant had been offering the same drinks, using the same recipes, at the same prices as the franchise model.
The claimant argued, therefore, that the appropriate basis for calculating the losses it has suffered as a result of the defendant’s passing off was by reference to the fees it would otherwise have received from a hypothetical franchisee under a hypothetical franchise agreement for the nearby territory, had it not been for the defendant’s actions.
The defendant raised several arguments objecting to that proposed basis of calculating damages, including arguments relating to the defendant’s financial position and the alleged absence of direct evidence of loss, but (importantly) the defendant did not challenge the claimant’s assertions that potential franchisees had been reluctant to take on the nearby franchise territory, or that their reluctance had been caused by the defendant’s actions.
On that basis, the Court agreed that it was reasonable for the claimant to rely on the hypothetical franchise agreement as the basis for calculating the losses it had suffered as a result of the defendant’s passing off.
A question of reasonableness
As with many cases, the decision in the Duadata case is fact-specific, but there are still useful points of guidance from the Court that can be applied more generally.
For example, the Court commented that when considering an appropriate level of damages for passing off, “…loss is frequently inferred from the facts with necessary assumptions made by the party claiming…”, and that a key issue for the Court “…tends to be whether those assumptions are reasonable…”. In this case, the Court was satisfied that the claimant “…has done its best to assess the loss suffered by reason of the acts of passing off by [the defendant] and that the sum claimed is reasonable…”.
Franchisors should therefore bear in mind that they will need to persuade a Court that any assumptions they make in relation to their losses are reasonable ones to infer from the available facts. On the other hand, parties found liable for passing off (which may include ex-franchisees or related parties) will need to remember that asserting that their business is small and not profitable (as the defendant did in the Duadata case) is not a relevant factor that the Court will take into account on an inquiry as to damages.
For more information on this or any other issue relating to intellectual property disputes and franchise dispute, please contact Michael Axe by emailing Michael or by calling him on +44 (0)1628 502448.
This article is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from taking any action as a result of the contents of this article.