‘Clash of the Bubble’: Understanding the Tealive vs Chatime case

The coverage on Tealive vs Chatime case for the last few weeks can be quite confusing for many people as the courts appeared to make several differing judgments as to the fate of Tealive. The final decision would certainly affect thousands of many concerned staff at Tealive as it would affect their livelihood in case the court orders Tealive to shut down.

We know that many people have written about this topic, but we still think it’s a good idea for us to offer our version by dissecting and sharing our thoughts on what are key issues that you may pick up and may reflect as a business owner.

Quick recap: How it all happened

Since 2010, Chatime had been offering variety of premium bubble tea beverages to its Malaysian customers.

What many of us bubble tea lovers never knew is that Chatime was actually operated under a franchising model. The owner of Chatime brand, La Kaffa International Co Ltd (La Kaffa), a listed entity in Taiwan with presence in over 30 countries as franchisor had licensed Chatime’s rights to Loob Holding Sdn Bhd (Loob), led by a young and charming Bryan Loo as franchisee to manage Chatime’s operations in Malaysia.

Like other franchises such as McDonald’s and Burger King, in return for using the brand and business, Loob too had to pay certain royalty fees to La Kaffa for using Chatime’s brand name and using their business model.

Sometime in late 2016, La Kaffa claimed that Loob had failed to comply with certain franchising agreement such as withholding certain payments which resulted in La Kaffa being deprived of its royalty fees. Another claim by La Kaffa is that Loob had been using unapproved raw materials in the drinks which were sold to its customers and La Kaffa was refused to access the accounts and books of Chatime’s business. La Kaffa then terminated the franchising agreement it had with Loob.

After several press conferences independently held by both La Kaffa and Loob, Loob launched Tealive. As we all already know, Tealive’s operations is pretty much similar to Chatime. Some may even argue that Tealive’s business model is a complete replica of Chatime’s menu, layout, outlets including the same old team with different uniform!

Naturally upset due Loob’s actions, La Kaffa began a legal action in the High Court against Loob to prevent Tealive from continuing its operations. This legal action is known as injunction which is a form of remedy granted by court to prevent or restrict from certain acts or conduct from continuing or occurring.

We really won’t dwell so much on the technicalities on how injunction work or how courts operate, but if you’re keen to know more about how they work, do read this excellent two parts post written by Foong Cheng Leong, an intellectual property lawyer published on Deal Street Asia which is a good guide on the chronologies with some explanation of how the judges interpreted the issues.

Franchise Law 101: What you need to know

In Malaysia, we have this law known as Franchise Act. This law deals with relationships between a franchisor and franchisee. The act also has certain criminal actions if any party fails to comply with the act. Having this piece of law is actually a unique situation as some countries like the United Kingdom and India have no such laws.

To illustrate, if you have a restaurant business and you think you have a fantastic menu and business model, you may want to get it registered as a franchise. As a franchisor, you may be worried if you license it out to other people (ie as franchisee) if the franchisee may misuse your brand. However, having the Franchise Act means that the law provides certain statutory protections to your franchise. If you’re running a franchise in say UK or India, you would have no choice but to initiate a legal action to seek remedy if there’s a breach by the other party.

Okay, so what actually happened at the High Court?

Coming back to the case, La Kaffa applied to the High Court to get the court to stop Tealive from continuing its business. The judge in this stage denied La Kaffa’s request on the basis that La Kaffa didn’t have a strong clause in its franchise agreement when it comes to restricting Loob from operating Tealive as a new outfit. This concept is known as the restraint of trade.

Under the act, Loob was required to give a guarantee to La Kaffa that its directors including the spouses and immediate family members and their employees won’t be doing a similar business like Chatime during the franchise period and for two years after the franchise is terminated.

As we all already know, Loob went on and started Tealive right after La Kaffa terminated their franchise seem pretty clear cut a breach of their original franchise agreement as well as a breach of the Franchise Act 1998.

Dissatisfied with the High Court’s decision, La Kaffa appealed the decision to the Court of Appeal, which is the court with appellate powers. This time round, the Court of Appeal granted La Kaffa’s application to stop Tealive from continuing its business. Tealive tried to get the court to postpone the decision by applying a stay on the injunction. However, the Court of Appeal rejected the stay request by Tealive on a 2:1 split vote.

So what’s the latest verdict now?

On Monday, 16 July 2018, Tealive successfully reversed the ruling on the injunction order granted by the Court of Appeal on its appeal the Federal Court. This by no means suggest that the case is over.

At the moment, the dispute is under arbitration in Singapore as agreed between the parties in the earlier franchise agreement. Generally, Malaysian courts are reluctant to interfere from being involved if the parties have agreed beforehand (in the agreement) to resolve their dispute by way of arbitration.

Conclusion

The Tealive vs Chatime case is a good example of why good contracts matters a lot. In addition, the case emphasises the importance of our Franchise Act in providing legal assurance to franchisors and franchisees. The legal protection given under Franchise Act is not only designed to protect the brand reputation built by the franchisor (in this case, La Kaffa) but to also protect its intellectual property rights (which is Chatime’s brand).

I’m a business owner, what are the important lessons that I should know?

  • When entering into an agreement, you should pay attention on any clause on restraint of trade and be aware of its restrictions (if any). Just to be on the safe side, the clause may not be reasonable (note: This is also a good reason why you should spend some money in getting a good lawyer to advise you on the agreement).
  • As a franchisor, you need to review your existing franchise agreement especially on the clauses on restraint of trade and governing law clauses to ensure they are effective as well as ensure a written guarantee
  • As a franchisee, you are bound by the rights and obligations as set out in the franchising agreement with the franchisor to operate a business using the brand and concepts owned and developed by the franchisor.
  • As a franchisee, you cannot misuse the franchisor’s intellectual property such as setting up a similar business with an identical product, or even replacing ingredients without prior approval from the franchisor.

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