During the Restraint Period, is a Chatime Developer Party prohibited from holding shares or securities of any entity engaging in a Restrained Business?
Chatime Franchise · 2025 FDDAnswer from 2025 FDD Document
antor (as applicable) is legally compelled to disclose, provided Developer/Guarantor must have used its best efforts and afforded Franchisor the opportunity to obtain an appropriate protective order or other assurance
satisfactory to Franchisor of confidential treatment for the information required to be disclosed; or
- (c) Is otherwise permitted under the terms of this Agreement.
- (4) If required by Franchisor, Developer must ensure that Developer's Owner managers, directors, shareholders, agents, employees and any Interested Party enter into a confidentiality agreement in a form that is acceptable to Franchisor.
7 Protection of Goodwill
7.1 Acknowledgements and Restriction
Developer Parties acknowledge that:
- (1) The System used in connection with Developer's conduct of Developer's Operation, the Marks, the Raw Materials and other Products is unique and has been developed by Franchisor at great effort and expense;
- (2) Franchisor has considerable and recognized goodwill in the conduct of its business of developing and promoting the System;
- (3) Franchisor should be entitled to protect that goodwill for its own benefit by restricting Developer's and Guarantor's ability to damage that goodwill by competing with Franchisor; and
- (4) Each of the restraints imposed upon Developer and Guarantor under clause 7.2 is fair and reasonable and is no greater than is reasonably necessary to protect this goodwill.
7.2 No Other Business Interests
Developer Parties jointly and severally agree with Franchisor that neither Developer nor any Guarantor will:
- (1) During the Initial Term or any New Term finance, invest in or have a financial interest in any business other than Developer's Operation without the prior written consent of Franchisor; or
- (2) During the Restraint Period, in the Restraint Area, directly or indirectly do any of the following things:
- (a) be concerned or interested in any Restrained Business (directly or indirectly, or through any interposed corporate entity, trust, partnership, or entity as trustee, principal, agent, shareholder, beneficiary, or as an independent contractor, consultant, adviser or in any other capacity);
- (b) advise, assist, consult with or for or in connection with any Restrained Business or any person associated with or in any manner whatsoever connected to or engaged by or in connection with any Restrained Business;
- (c) hold or own (beneficially or non-beneficially) whether directly or indirectly and whether absolutely or contingently or hold options over shares or any other securities or units of any entity engaging in a Restrained Business; and
- (d) procure, employ, seek to employ or engage, or appoint in any capacity (whether as a consultant, director or otherwise), any person who is or has been in the 12 months
prior to such action an employee, independent contractor, or prospective franchisee of the Franchisor, its affiliates, or any Chatime Store Business.
(e) These restraints shall not apply to the Developer's or its affiliates' continued operation of individual Chatime Stores being operated under valid Franchise Agreement, which have not been terminated and are not in default.
7.3 Restraint Applies to Conduct in Any Capacity
The agreement by Developer Parties in clause 7.2 applies to any of them, the Interested Parties, and those acting:
- (1) In partnership or association with another person;
- (2) As principal, agent, representative, director, officer, employee, or financier;
- (3) As member, shareholder, debenture holder, note holder, or holder of any other security;
- (4) As trustee of or as a consultant or adviser to any person; or
- (5) In any other capacity.
Source: Item 23 — Receipts (FDD pages 58–262)
What This Means (2025 FDD)
According to Chatime's 2025 Franchise Disclosure Document, a Developer Party is restricted from holding shares or securities in an entity involved in a Restrained Business during the Restraint Period. Specifically, Developer Parties agree that during the Restraint Period, within the Restraint Area, they will not hold or own shares, securities, or units of any entity engaging in a Restrained Business, whether directly or indirectly. A Restrained Business is defined as a business that is the same as or substantially similar to Chatime stores, or one that is engaged in the retail or supply of products or services similar to those offered by Chatime stores. The Restraint Period lasts for two years following the termination or expiration of the agreement. The Restraint Area includes the Development Area and any area within twenty-five miles of any Chatime store.
This restriction is designed to protect Chatime's goodwill and prevent Developer Parties from using their knowledge of the Chatime system to compete against it after the franchise relationship ends. The agreement specifies that these restraints apply to Developer Parties acting in various capacities, including as a shareholder or security holder. This broad application ensures that the non-compete obligations are comprehensive and enforceable.
However, there is an exception: Developer Parties are permitted to own less than 5% of the securities in a listed corporation. This exception allows for minor investments in publicly traded companies, even if those companies might have some tangential involvement in a Restrained Business. This exception is fairly standard in franchise agreements, as it acknowledges that franchisees may have diversified investment portfolios that include small holdings in large, publicly traded companies.
If a Developer Party breaches these non-compete obligations, they must account for and pay to Chatime all compensation, profits, or other benefits derived from the breach. This "disgorgement" clause serves as a strong deterrent against non-compliance and protects Chatime's interests. Prospective franchisees should carefully consider these restrictions and their potential impact on their future business activities before entering into a franchise agreement with Chatime.