Clause prohibiting lessee from using lessor's mark held to be unenforceable

In Kosciuszko Thredbo Pty Limited v ThredboNet Marketing Pty Limited ([2013] FCA 563), the Federal Court of Australia has ruled that a clause in a lease agreement that prohibited the lessee from using the lessor’s trademark was unenforceable because, given the nature of the mark in question, the prohibition was an unreasonable restraint of trade.

Kosciuszko Thredbo Pty Limited is the operator of a well-known ski resort in the town of Thredbo in south-east Australia. The dispute arose after Kosciuszko granted a lease to ThredboNet in respect of certain parts of the resort and, relevantly, the lease included a provision that ThredboNet was not to use the word 'Thredbo' in its business (the so-called ‘No Thredbo’ clause), notwithstanding that Thredbo is the name of the town where the resort is located and has been the name used since about 1840.

Despite the 'No Thredbo' clause, ThredboNet started using the word 'Thredbo' in connection with its business of managing and leasing rental accommodation in Thredbo. Kosciuszko commenced proceedings alleging passing off, misleading and deceptive conduct and breach of the lease.

The allegations of passing off and misleading and deceptive conduct were dismissed because Kosciuszko could not establish that the name Thredbo had acquired a secondary meaning (apart from its primary meaning as the name of the town), despite the fact that the Thredbo ski resort had been operating continuously since 1957. His Honour Cowdroy J followed (not unpredictably) the reasoning expressed in a long line of cases that “significant hurdles” exist for those who seek to establish a secondary meaning in a geographic name that is an apt description of the origin of the goods or services in question (see Clark Equipment Company v Registrar of Trademarks ((1964) 111 CLR 511) – the well-known MICHIGAN case).

However, the allegation of breach of the 'No Thredbo' clause involved an interesting analysis as to whether the clause was invalid under the restraint of trade doctrine. After reviewing English and Australian case law, Cowdroy J noted that two tests have been applied in the past. First, there is the ‘pre-existing freedom’ test formulated by Reid LJ in Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd ([1968] AC 269), which was stated as follows:

“Restraint of trade appears to me to imply that a man contracts to give up some freedom which otherwise he would have had. A person buying or leasing land had no previous right to be there at all, let alone to trade there, and when he takes possession of that land subject to a negative restrictive covenant he gives up no right or freedom which he previously had.”

Second, Wilberforce LJ in the same case stated what is known as the ‘trading society’ test to explain why certain restrictions fall outside the scope of the restraint of trade doctrine. His Lordship took the view that some restraints have become “part of the accepted machinery of a type of transaction which is generally found acceptable and necessary, so that instead of being regarded as restrictive they are accepted as part of the structure of a trading society”.

Cowdroy J noted that, in Australia, there has been considerable debate concerning the appropriate test for determining a restraint of trade but went on to express the view that “the preponderance of judicial support is for the ‘trading society’ test. Put another way, the ‘trading society’ test is the test which has had the fewest aspersions cast upon it by the High Court [of Australia]”.

Applying his analysis of the relevant principles to the 'No Thredbo' clause, his Honour took into account the following matters:

• the clause was not imposed to protect the amenity of the leased land - ie, it was not designed to, for example, prevent ThredboNet from operating a noxious business which would interfere with Kosciuszko’s ability to operate its ski resort;
• the clause was not restricted to the land in question - ie, it applied in connection with any business carried on by ThredboNet anywhere in the world;
• the absence of any limitations as to time or place in terms of its application; and
• the absence of any evidence to suggest that the clause was of a type that a ‘trading society’ would consider necessary as part of doing business.

Cowdroy J accordingly held that the clause was an unreasonable (and therefore an invalid) restraint of trade because it afforded more than the necessary protection to Kosciuszko. His Honour went on to express his view that, in substance, the clause in fact “deviates from accepted standards”, involved “a greater than usual restriction” of ThredboNet’s right to trade, and that the “elimination of competition” was the true focus of the clause.

Julian Gyngell, Kepdowrie Chambers, Wahroonga