For Chatime, can actions violating the non-compete covenants by those holding any interest in the franchisee entity result in an injunction, default, and termination of the Franchise Agreement?
Chatime Franchise · 2025 FDDAnswer from 2025 FDD Document
ded to prevent: (i) the owners, members, shareholders, officer, directors, managers and employees of the Franchised Business from taking unfair advantage of the benefits that may be provided by a franchise for a Chatime Store Business; (ii) the misappropriation, misuse or unauthorised use of the Intellectual Property including the Business System or Confidential Information; and (iii) damage to the Network.
5. DAMAGES NOT AN ADEQUATE REMEDY
I acknowledge and agree that without prejudice to any right or remedy available to the Franchisee or the Franchisor:
- (a) damages are not an adequate remedy if a person breaches this Agreement;
- (b) the Franchisee or the Franchisor may apply for and obtain, without the necessity
of posting a bond, injunctive relief if:
- (i) a person breaches or threatens to breach any provision of this Agreement; or
- (ii) it believes a person is likely to or threatening to breach any provision of this Agreement.
Source: Item 23 — Receipts (FDD pages 58–262)
What This Means (2025 FDD)
According to the 2025 Chatime FDD, violations of non-compete agreements can lead to injunctions. Chatime acknowledges that damages may not be an adequate remedy if a person breaches the agreement. Therefore, Chatime or the franchisee may seek injunctive relief without needing to post a bond if there's a breach or threatened breach of any agreement provision. This indicates that actions violating non-compete covenants could result in legal measures like injunctions.
Furthermore, if a Chatime franchisee, guarantor, or their interested parties breach clause 9.2 or 9.3, the franchisee must account for and pay to Chatime all compensation, profits, monies, accruals, increments, or other benefits derived or received as a result of such breach. This suggests that financial penalties and disgorgement of profits are potential consequences for violating non-compete clauses.
It is important to note that the FDD includes amendments for specific states like North Dakota and New York, which may modify or limit the enforceability of certain non-compete provisions or other clauses within the franchise agreement. For example, in North Dakota, covenants restricting competition are generally considered unenforceable. Therefore, the specific consequences for violating non-compete covenants can vary based on the franchisee's location and the applicable state laws. A prospective franchisee should carefully review the FDD and any state-specific addenda with legal counsel to understand the full scope and implications of these provisions.