What happens to the covenants in Section 20 after the termination or expiration of a Carls franchise agreement?
Carls Franchise · 2024 FDDAnswer from 2024 FDD Document
D. Franchisee and all persons and entities subject to the covenants contained in Section 20 shall continue to abide by those covenants and shall not, directly or indirectly, take any action that violates those covenants.
H. Franchisee shall not, except with respect to a restaurant franchised by CJR or its affiliates which is then open and operating pursuant to an effective franchise agreement or a restaurant franchised by CJR or its affiliates which is under construction pursuant to a fully-signed franchise agreement: (1) operate or do business under any name or in any manner that might tend to give the public the impression that Franchisee is connected in any way with CJR or its affiliates or has any right to use the System or the Proprietary Marks; (2) make, use or avail itself of any of the materials or information furnished or disclosed by CJR or its affiliates under this Agreement or disclose or reveal any such materials or information or any portion thereof to anyone else; or (3) assist anyone not licensed by CJR or its affiliates to construct or equip a foodservice outlet substantially similar to a Carl's Jr. Restaurant.
Accordingly, Franchisee further covenants and agrees that, during the term of this Agreement and for a period of 2 years following the expiration or earlier termination of this Agreement, Franchisee shall not, either directly or indirectly, for itself, or through, on behalf of, or in conjunction with any person, firm, partnership, corporation, or other entity, sell, assign, lease or transfer the Franchised Location to any person, firm, partnership, corporation, or other entity which Franchisee knows, or has reason to know, intends to operate a restaurant business at the Franchised Location that would violate Section 20.C.(2)(b) if operated by Franchisee.
Following the expiration, transfer or termination of this Agreement, this restriction shall apply to any restaurant business located within a 2 mile radius of the Franchised Location and any restaurant business within a 2 mile radius of any then-existing Carl's Jr.
Restaurant.
This restriction shall not apply to Franchisee's existing restaurant or foodservice operations, if any, which are identified in Appendix A, nor shall it apply to other restaurants operated by Franchisee that are franchised by CJR or its affiliates.
Source: Item 22 — CONTRACTS (FDD page 80)
What This Means (2024 FDD)
According to Carls's 2024 Franchise Disclosure Document, the covenants outlined in Section 20 of the franchise agreement remain in effect even after the agreement's termination or expiration. Specifically, the franchisee and all individuals or entities subject to these covenants must continue to adhere to them and refrain from any actions that would violate them.
One key restriction is that for a continuous period of two years following the expiration, transfer, or termination of the agreement, the franchisee is restricted from engaging in any competitive restaurant business within a 2-mile radius of the former franchised location or any existing Carls restaurant. This includes owning, operating, or having any interest in a restaurant where designated entrée items (like hamburger, chicken, or breakfast sandwiches) are likely to account for 20% or more of the restaurant's sales during any part of the day, or that features or promotes these items in its advertising, or that operates in a quick-service format. This restriction does not apply to existing restaurants or foodservice operations the franchisee already owns, as identified in Appendix A, or to other restaurants franchised by Carls or its affiliates.
Moreover, the franchisee is prohibited from operating under any name or manner that might suggest a connection with Carls or using any materials or information provided by Carls to assist anyone in constructing a foodservice outlet similar to a Carls Restaurant. The franchisee must also make necessary alterations to the former franchised location to clearly distinguish it from its previous appearance as a Carls restaurant. These post-termination covenants are designed to protect Carls's brand and market position by preventing former franchisees from unfairly competing using the knowledge and goodwill gained during their franchise agreement.