What are the potential consequences for a Chesters franchisee who violates the non-competition agreement (Item 7), considering the franchisor's right to engage in any activities they deem appropriate (Item 12)?
Chesters Franchise · 2025 FDDAnswer from 2025 FDD Document
non-controlling interest as an owner in, or perform services as a director, officer, manager, employee, consultant, representative, or agent for, a Competitive Business at the Location or within a five (5)-mile radius from the Location.
For each violation of this restriction on the operation of a Competitive Business, you acknowledge that we will suffer substantial Brand Damages. "Brand Damages" means, among other things, lost market penetration and goodwill, loss of CHESTER'S Restaurant representation in the Location's market area, customer confusion, lost opportunity costs, and expenses that we will incur in developing or finding another operator to develop another CHESTER'S Restaurant in the Location's market area. We and you acknowledge that Brand Damages are difficult to estimate accurately, and proof of Brand Damages would be burdensome and costly, although such damages are real and meaningful to us. Therefore, for each violation of the restriction on the operation of a Competitive Business, you must pay us in a lump sum, on or before the date we specify, liquidated damages equal to Ten-Thousand Dollars ($10,000). Payment is due by credit card or ACH transfer. You agree that these liquidated damages represent the best estimate of our Brand Damages arising from each violation of the restriction on the operation of a Competitive Business. Your payment of the liquidated damages to us will not be considered a penalty but, rather, a reasonable estimate of fair compensation to us for the Brand Damages we will incur. You acknowledge that your payment of liquidate
What This Means (2025 FDD)
According to Chesters's 2025 Franchise Disclosure Document, a franchisee violating the restriction on operating a competitive business will face significant financial penalties. Chesters and the franchisee acknowledge that such violations cause substantial "Brand Damages," including lost market penetration, goodwill, customer confusion, and lost opportunity costs. Estimating these damages precisely is difficult, so the FDD specifies a liquidated damage amount.
For each violation, the franchisee must pay Chesters $10,000 as liquidated damages. This payment is due in a lump sum via credit card or ACH transfer by the date Chesters specifies. Chesters considers this amount a reasonable estimate of the brand damages incurred due to the violation, not a penalty.
It's important to note that paying these liquidated damages only compensates Chesters for the brand damages. The franchisee remains obligated to fulfill all other financial and contractual obligations under the franchise agreement. This means that in addition to the $10,000 payment, the franchisee must continue to pay any other amounts owed to Chesters and adhere to all other terms of the agreement.