Appellate court examines franchising arrangement

In Fearns (trading as Autopaint International) v Anglo-Dutch Paint & Chemical Co ([2008] EWCA Civ 99, February 19 2008), the Court of Appeal of England and Wales has partly allowed an appeal against a High Court decision. The case involved the relationship between a franchisor and his franchisee's suppliers.

Gary Fearns, trading as Autopaint International, sold paint and associated products for use on cars. Fearns owned UK trademark registrations for AUTOPAINT INTERNATIONAL and a device mark which included these words. Fearns owned his own paint shops and conducted business through his franchisees, sourcing his paint from various defendants for which Anglo-Dutch Paint & Chemical Co was the distributor in the United Kingdom. In 2004 Anglo-Dutch started to sell paint under the AUTOPAINT brand directly to Fearns's Autopaint franchisees. Fearns sued for trademark infringement, passing off, malicious falsehood, copyright infringement and breach of contract relating to a 'paint tin agreement'. He further alleged that the defendants had acted together or individually intentionally to inflict economic harm on him by unlawful means. Anglo-Dutch stated that it was entitled to sell the products directly to the franchisees and that Fearns had agreed to this as a means of reducing his indebtedness to them.

Deputy Judge Christopher Floyd considered that, on the evidence, Fearns had consented to Anglo-Dutch selling products directly to franchisees if Fearns could not supply them himself. However, the judge found that Anglo-Dutch could not sell any products that the franchisees could obtain from the defendants. Accordingly, the judge found that infringement had occurred. However, there was no infringement of copyright in Fearns's design and logo: these were not printed matter of a "primarily literary or artistic character" and thus had only a limited period of copyright protection under Section 52 of the Copyright, Designs and Patents Act 1988. On the facts, the judge also found that the defendants were guilty of passing off and breach of contract (for further details please see "Distributor painted into corner following use of AUTOPAINT mark").

Fearns appealed both regarding the judge's decision on the consent agreement and on the question of causation arising from Anglo-Dutch's alleged wrongful acts. The Court of Appeal allowed the appeal in part. The main points of the decision were as follows:

• The deputy judge had to decide whether to prefer the evidence of Anglo-Dutch to that of Fearns. He recognized the points that could be taken on behalf of Fearns but, having weighed up the competing points, found in favour of Anglo-Dutch.
  
  
• Fearns's position at the time was difficult: he had ordered products which he needed for his franchisees, but could not obtain unless he paid. Fearns offered to make payments in order to obtain more deliveries. If that did not enable him to satisfy his franchisees, he had the choice between losing their goodwill (and possibly his business) or keeping their goodwill by letting Anglo-Dutch deliver the paint and retain the proceeds in part to pay off the debt. It was understandable for Fearns to have taken the option which the judge found he did.
  
  
• Until the extent of any infringements of the trademarks and the extent of any breaches of the consent agreement were known, the court could not rule on their effect.
  
  
• It appeared unlikely that Fearns would be able to establish that, had Anglo-Dutch respected the consent agreement, he would have been able to maintain his franchise business. However, until the extent of the breaches was clear, he should not be prevented from seeking to establish that, had the consent agreement been respected, he would have been able to survive with his network of franchisees intact.

Accordingly, the appeal was allowed to the extent that Fearns was not to be prevented from establishing - if he could - loss of his business flowing from breaches of the consent agreement. The court noted that "Fearns should not feel too encouraged by that decision".

Jeremy Phillips, IP consultant to Olswang, London