Are investors of an Azal Coffee franchisee subject to the non-compete restrictions?
Azal_Coffee Franchise · 2024 FDDAnswer from 2024 FDD Document
r Term.
On the termination (including termination on transfer), expiration, or non-renewal of this Agreement, you and your shareholders, officers, directors, partners, members, managers, owners and investors, Family Members, and affiliates, must not, for a period of three (3) years commencing on the later of the effective date of termination, expiration, or non-renewal, or the date of any Court order enforcing this provision, directly or indirectly, engage in any activity in competition with us or our franchisees and licensees, including involvement, whether as an owner (except ownership of no more than one percent (1%) of a publicly traded entity), partner, director, officer, member, manager, employee, consultant, lender, representative or agent, or in any other capacity in any business that is involved, in whole or in part, in a Competing Business or in any business or entity that franchises, licenses or otherwise grants to others the right to operate a Competing Business; provided that, the restrictions in this Section will only apply within the "Geographic Areas" (defined in Section 13.4).
13.3 Other Restrictions.
You and your shareholders, officers, directors, partners, members, managers, owners and investors, Family Members, and affiliates, must not, during the term of this Agreement and for a period of three (3) years after termination, expiration, or non-renewal of this Agreement, directly or indirectly: (a) divert or attempt to divert any business or customer of the Franchise Business or any other Store to any Competing Business by direct or indirect inducements or otherwise; (b) sponsor, appoint or encourage or influence or promote friends, relatives or associates to operate a Competing Business; or (c) employ any person or furnish of permit access to our Confidential Information to any person who is engaged or has arranged to become engaged in any activity in competition with Azal Coffees, including involvement, either as an owner (except no more than one percent (1%) of the publicly traded securities of an entity), member, manager, partner, director, officer, employee, consultant, lender, representative or agent, or in any other capacity, of any business that is involved, in whole or in part, in a Competing Business or in any business or entity that franchises, licenses or otherwise grants to others the right to operate a Competing Business.
13.4 Definitions of Competing Business, Geographic Areas, and Family Members. The following definitions will apply to this Agreement:
- (a) "Competing Business" means any business that competes with the Stores and/or is the same or similar to an Azal Coffee Store, including but not limited to a business that sells the same or similar coffee beverages, baked goods, food products, coffee beans, or coffee accessories for dine-in, carry-out, catering, or delivery or other products that may be offered by Azal Coffee Stores now or in the future.
- (b) "Geographic Areas" means: (i) the Franchise Location; (ii) the area within twenty-five (25) miles of the Franchise Location; and (iii) the areas within twenty-five (25) miles of any other Azal Coffee Store existing or in development at the time you cease to operate the Competing Business.
- (c) "Family Members" means all individuals with any of the following relationships with you or any of your shareholders, officers, directors, partners, managers, members, owners and investors, and affiliates: (i) spouse; (ii) children; (iii) grandchildren;
Source: Item 22 — CONTRACTS (FDD page 51)
What This Means (2024 FDD)
According to Azal Coffee's 2024 Franchise Disclosure Document, the non-compete restrictions apply to the franchisee and their shareholders, officers, directors, partners, members, managers, owners, and investors. These parties are restricted both during the term of the Franchise Agreement and for a period of three years after the agreement's termination, expiration, or non-renewal. This restriction prevents them from engaging in activities that could divert business from the Azal Coffee franchise or any other store to a competing business.
The restrictions include not sponsoring or encouraging others to operate a competing business and not employing or providing confidential information to anyone involved in a competing business. A "Competing Business" is defined as any business that competes with Azal Coffee stores, including those selling similar coffee beverages, baked goods, food products, coffee beans, or coffee accessories. The geographic scope of these restrictions includes the franchise location and the area within twenty-five miles of both the franchise location and any other Azal Coffee store.
This broad application of non-compete obligations means that investors in an Azal Coffee franchise must be aware of these limitations. Even passive investors could be restricted from involvement in competing businesses, which could impact their investment decisions and opportunities. The FDD does provide an exception, allowing ownership of no more than one percent of the publicly traded securities of an entity involved in a competing business.
Azal Coffee also states that the franchisee acknowledges the restrictions are fair and reasonable to protect the competitive interests of the franchisor and its franchisees. However, Azal Coffee retains the right to reduce the scope of these restrictions at any time without the franchisee's consent, effective immediately upon notice. This clause provides Azal Coffee with flexibility but also introduces uncertainty for the franchisee and its investors regarding the extent of the non-compete obligations.