What then are Blockbusters legitimate interests that it is entitled to protect?
146 Blockbuster bears the onus of establishing its legitimate interests on the balance of probabilities.
147 Mr Uniacke in his affidavit sworn on 29 October 2008 stated at [30] that
" in [his] experience in the industry, the primary factor in determining which video store a person will choose to belong to is the convenience of the location ". He stated at [31] that " customers tend to have strong brand loyalty and, as a general rule, in [his] experience, customers tend not to change video stores" .
148 In cross-examination by Mr Pike, Mr Uniacke on this issue gave the following evidence (T 7 18/2/09 L 26 -34):
` "Q. I take you to paragraph 31 of your affidavit, I suggest the phenomena that you have described as brand loyalty is not brand loyalty, is borne out by the location of the store?
A. The location of the store is certainly a factor and I believe brand loyalty is another factor. In isolation I would not say one is stronger or weaker than the other, brand loyalty can come back to some of the features, the ambience of the store, the operator of the store, the location of the store."
149 It appears that Mr Uniacke equated the locality of the store and brand loyalty as factors in attracting clients.
150 Mr Fife estimated that between 2 April 1998 and 31 August 2008 the number of members of the Nambour store grew by approximately 18,942 and the Noosaville store by approximately 26,494. He calculated that the percentage of customers who were members of the Nambour store before entry into the Blockbuster franchise agreements was 37.13 per cent and the Noosaville store 29.92 per cent. He founded his calculations upon the data derived from Michael Gillett's affidavit sworn 10 October 2008. Mr Fife did not accept that brand recognition would make much difference in Nambour but it would have some significance in Noosaville. It seems that the reason for this was that Noosaville was a holiday area and 10 to 15 per cent of the Noosaville customers were estimated to be holiday visitors. Mr Fife agreed that brand recognition could be an important factor to some of these visitors on their first visit to the store. He did not concede that Blockbuster's advertising campaign increased their share of the total market in the Noosa, Noosaville and Nambour areas as Karioi was already the market leader in the Noosaville area and was operating a very successful business in Noosa. The advantage he saw in 1998 in joining Blockbuster was that Karioi obtained a substantial return from the franchise fees it paid by being within a bigger group for "buying power". The buying power increased video copy depth. It gave Karioi a competitive advantage. Mr Fife agreed that the growth in membership was partly attributable to being a Blockbuster franchisee. He observed that since 1 September 2008, there had not been any decline in the businesses.
151 Mr Smith considered that a significant benefit of converting the Video Flicks stores to Blockbuster stores would be improved product buying power and being part of a large international marketing group. In re-examination by Mr Kunc, Mr Smith testified that he felt that Blockbuster "would be the best partner for us as well as the opportunity to [buy] products at the right price moving forward": T27 L45-47.
152 I conclude that the growth in the patronage of the Noosaville and Nambour stores in the decade of trading as Blockbuster franchises may be attributed in part to the attraction of the Blockbuster brand to some customers and to the benefits provided by being part of a large marketing group. To this extent Blockbuster has an interest in the stores' customers which is a legitimate interest to protect.
153 I am not persuaded, however, that Blockbuster's contribution to the growth in patronage was substantial. Mr Fife has had much experience in the video retail market in the Noosaville and Nambour areas. I do not consider his evidence to be self-serving. I prefer his testimony on this issue to that of Mr Uniacke whose evidence was not founded upon knowledge of the local market in which Karioi operated.
154 As to Blockbuster's contention that it had purchased goodwill in the Noosaville and Nambour stores by the payment of $800,000 to Sailoak Pty Ltd, Karioi did not receive any part of the monies paid by Blockbuster. In fact, money was paid by Karioi to convert the stores to the Blockbuster brand. There is no evidence from which the court can determine the interest, if any, that Video Flicks had in the goodwill of the businesses at the time that Blockbuster entered into the agreement with Sailoak Pty Ltd.
155 Blockbuster contends that the first aspect of Blockbuster's goodwill is "the patronage of the store as set out in the customer database." The opening words to cl 14 refer to Karioi's acknowledgement that it "will have regular and continuing access to and knowledge of the Trade Marks and the Industrial Property".
156 Industrial Property is defined in cl 1 to mean:
" The marks, patents, designs, trade secrets, Confidential Information, Know-How, copyrighted works and other intellectual and industrial property of all kinds used or acquired by COMPANY or its affiliates."
157 The definition of Confidential Information in cl 1 relevantly includes:
"(g) membership lists of the STORE, historical data relating to the sale and rental of Video Products from the STORE, knowledge of membership profiles …"
158 It is Blockbuster's case that it had a legitimate interest in the customer base (identifiable in April 1998) because the customer base was to be built up and maintained over the course of 10 or 15 years on the basis of the support provided by Blockbuster. This means, Blockbuster argued, all of the customers on the database when the franchise agreements came to an end.
159 There is, in my opinion, an element of double counting in this submission as the third aspect of Blockbuster's claim to goodwill is the "Confidential Information" preserved for its benefit. Blockbuster's entitlement to confidential information which includes the customer database does not augment, in my view, Blockbuster's legitimate interest in the stores' customers which I have found at [152] above.
160 I am not persuaded that the second aspect of Blockbuster's goodwill was, as Blockbuster contended, an interest in the precise location of the Noosaville and Nambour stores. Karioi undoubtedly had good sites for video stores (particularly in Noosaville) and good sites were in short supply in 1998. I accept that the location of the franchise operation was of importance to Blockbuster but this does not mean that the bargain struck between the parties (recorded in cl 14 and cl 18.9) was that Blockbuster's support over the life of the franchise agreement would, in effect, purchase Blockbuster's right to keep a store in that particular location. As I have previously stated, the leasehold interests that Karioi had were assets of value and, it seems to me, if what was contended by Blockbuster was the intention of the parties, the franchise agreement would have plainly made provision for it. Contrary to Blockbuster's argument, cl 32.1 includes the leasehold interest in the premises as one of Karioi's assets which Blockbuster had the option to purchase upon the expiration of the franchise agreement. In my view, Blockbuster has no legitimate interest to protect by cl 14 in the location of a store when the franchise agreement had expired.
161 I accept that Blockbuster's goodwill includes industrial property and confidential information which is preserved under the franchise agreements for Blockbuster's benefit. There is, however, an argument between the parties as to the material provided by Blockbuster and as to what amounts to confidential information. As it is necessary to identify Blockbuster's legitimate interests, I turn to consider this issue.
162 Mr Smith testified that Blockbuster's "good operating systems and intellectual property" were two of the reasons for his consideration in 1998 that Blockbuster would make the best partner. Mr Fife in his oral testimony said that (in 1998) he was hopeful that Karioi would get some benefit from Blockbuster's experience in the video rental industry. In his affidavit sworn on 29 October 2008, Mr Uniacke detailed at [67-79] the confidential information which he considered Blockbuster provided to Karioi. He recounts at [76]:
"Over the past ten (10) years whilst operating as Blockbuster franchisees, the First and Second Defendants would have gained extensive knowledge of:
(a) the confidential information pertaining to the Blockbuster franchise system;
(b) the film data prepared and provided by the plaintiff to Blockbuster franchisees;
(c) marketing strategies of other Blockbuster franchisees and marketing plans of the plaintiff generally; and
(d) the nature of the customer base in Noosaville and Nambour, including customer hiring habits and what kinds of marketing would work best for particular segments of the market."
163 And at [78]:
" T he information described above is kept confidential by the plaintiff for the benefit of itself and its franchisees. Based on my experience, the information described above would give people operating other video stores a significant competitive advantage over franchise stores operating in the same area or in a nearby area."
164 Mr Fife in his affidavit sworn 22 December 2008 stated at [36-37]:
"Between 2 April 1998 and 2 April 2008, Karioi:
a. received by post or email from Blockbuster information about marketing and promotional programs for Blockbuster stores;
b. acquired information about the film titles, categories of films and rental records of films held by the Nambour store and the Noosaville store;
c. acquired information about the customers of the Nambour store and the Noosaville store, including membership profiles and historical data relating to the sale and rental of DVD, video cassette or computer game products;
d. received from Blockbuster a financial 'ranking' in respect of the Nambour store and Noosaville store compared to the other stores in the Queensland group; and
e. received from Blockbuster the Operation Manual Disc Version
1 April 2004.
I do not consider that the information referred to in sub-paragraphs (b) and (c) above constitutes "confidential information" to Blockbuster. As to sub-paragraph (b) above, the information regarding films was available by many other means some of which we valued more highly than what we received from Blockbuster. For example, video trade magazines such as "Screen Print", offered information about movies and help with determining which movies to buy. As to sub paragraph (c) above, the information about customers was created and maintained by Karioi using software called "Video Minder". Video Minder is owned and licensed by Customsoft Developments Sydney. Video Minder is not Blockbuster software. Karioi purchased Video Minder for the opening of the Noosaville store in 1990 (as a Video Ezy franchise) and for the opening of the Nambour store in 1994 (as a Video Flicks franchise). Video Minder was used by Karioi to create a database of customers, to track rental entries and the video library, and to record all business transactions generally. Karioi has never been offered Blockbuster's software. I understand that Blockbuster did use another system for their corporate stores; however, Blockbuster never offered Karioi that system to replace Video Minder. In or about November 2007 and December 2007, one or both of Mr Uniacke and Mr Nedelko have stated words to the Queensland franchisees at meetings held in Brisbane, at which I was present and heard words to the following effect:
"I hope that the Video Ezy software will be available to Blockbuster franchisees in the future. It is currently held up by an ACCC ruling."
Furthermore, as to sub-paragraph (a) above, although we received information about marketing and promotional programs, much of it was never used by us; on other occasions we accepted the marketing, and at other times we were compelled by Blockbuster to participate in certain marketing and promotional programs. As to sub-paragraph (d) above, the document containing the 'financial ranking' sent by Blockbuster each week was a curiosity report that one could monitor to examine varying trends between stores. In order for Blockbuster to compile the report, each store provided Blockbuster with its financial information, from which Blockbuster would rank each store. However, stores were only identified by number, not store name, and so people outside the group would not know to what stores the report was referring. As to sub-paragraph (e) above, although we received the Operation Manual Disc, I never ran the CD, because I understood that it contained the operational manual adopted by the corporate Blockbuster stores, and I did not wish to adopt that system."
165 Mr Uniacke in his affidavit sworn 12 February 2009 stated at [10] that the franchisees could "at times choose which marketing and promotional programs they wish to acquire (and pay for). Some of these programs are national, some state based, some regional and some local store only. Some are mandatory and others optional." Mr Uniacke annexed the records of material delivered each month by Blockbuster to Karioi at tabs 2-4 of his affidavit.
166 Mr Uniacke, in my opinion, in the passages of his affidavit which have been quoted at [162-163] above, overstates the value of the information provided to Karioi and the competitive edge it would give to a Blockbuster competitor. Mr Fife is a very experienced video retail operator and I accept his evidence as to the limited value of the Blockbuster material.
167 Mr Fife's opinion, however, that the information to which he referred in sub-paragraphs (a) and (b) in the passages of his affidavit at [164] above was not confidential information disregards the definition of Confidential Information in cl 1 of the franchise agreements which includes:
" (b) marketing and promotional programs for BLOCKBUSTER VIDEO STORES; and
…
(f) data regarding film categories, film titles, number of copies of each film title..."
168 The information referred to by Mr Fife in subparagraphs (d) and (e) would also fall within the definition of Confidential Information. Although Karioi did not use Blockbuster software to create the database of customers and member information to which Mr Fife refers in subparagraph (c) in the passages quoted at [164] above, it seems to me that this material which was acquired before the expiration of the franchise agreements falls within subparagraph (g) of the definition of Confidential Information.