During the Development Term for a Carls Jr. franchise, can a developer divert business from any restaurant franchised or operated by CJR or its affiliates to a competitor?
Carls_Jr Franchise · 2025 FDDAnswer from 2025 FDD Document
System and their trade secrets and confidential and proprietary information against unauthorized use or disclosure and would be unable adequately to encourage a free exchange of ideas and information among operators of Carl's Jr.
Restaurants if franchisees or developers were permitted to engage in the activities described in Section 12.C.(2)(a) or to hold interests in the businesses described in Section 12.C.(2)(b); (e) all restaurants operating in a quick-service format are substantial and direct competitors of the Carl's Jr.
System; and (f) the restrictions on Developer's right to hold interests in, or perform services for, businesses described in Section 12.C.(2)(b) will not unduly limit its activities.
(2) Accordingly, Developer covenants and agrees that, except with CJR's prior written consent, during the Development Term, and for a continuous period of 2 years following its expiration, transfer or termination, Developer 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:
(a) Divert or attempt to divert any business or customer, or potential business or customer, of any restaurant franchised or operated by CJR or its affiliates to any competitor, by direct or indirect inducement or otherwise.
(b) Own, maintain, operate, engage in, grant a franchise to, advise, help, make loans to, lease property to, sell the real property underlying any Franchised Location and related assets to, or have any interest in, either directly or indirectly, any restaurant business: (i) whose sales of Designated Entrée Items (as defined below) during any daypart are reasonably likely to account collectively for 20% or more of the restaurant's sales of all entrée items during that daypart; (ii) that features or promotes any Designated Entrée Item in its advertising; or (iii) that operates in a quick-service format (with or without table service).
Source: Item 23 — RECEIPTS (FDD pages 76–364)
What This Means (2025 FDD)
According to the 2025 Carls Jr. Franchise Disclosure Document, during the Development Term, a developer is generally prohibited from diverting business away from Carls Jr. restaurants to competitors. Specifically, the developer agrees not to divert or attempt to divert any business or customer of any restaurant franchised or operated by CJR or its affiliates to any competitor, whether through direct or indirect means. This restriction is in place to protect the Carls Jr. system, trade secrets, and confidential information, and to encourage a free exchange of ideas among operators.
This restriction extends not only during the Development Term but also for a period of two years following its expiration, transfer, or termination. This means that even after the development agreement ends, the developer cannot engage in activities that would take business away from Carls Jr. restaurants. The developer is also restricted from owning, operating, or having any interest in a restaurant business that competes with Carls Jr., particularly those that focus on similar entrée items or operate in a quick-service format.
However, the FDD states that these restrictions can be waived with CJR's prior written consent. Therefore, if a developer wishes to engage in any activity that might be seen as diverting business to a competitor, they must first obtain written permission from Carls Jr. This requirement ensures that Carls Jr. maintains control over its brand and market share, and that developers remain committed to the success of the Carls Jr. system.
This clause highlights the importance of carefully considering the competitive landscape and potential conflicts of interest before entering into a development agreement with Carls Jr. Prospective developers should be aware of these restrictions and seek legal counsel to fully understand their obligations and rights under the agreement.