Does the Chocolate Bash Franchise Agreement contain a covenant not to compete that extends beyond the expiration or termination of the agreement?
Chocolate_Bash Franchise · 2024 FDDAnswer from 2024 FDD Document
13.2 Covenants Not to Compete.
- (a) Restriction In Term. During the term of this Agreement, neither Franchisee, any Owner, nor any spouse of an Owner (the "Restricted Parties") shall directly or indirectly have any ownership interest in, or be engaged or employed by, any Competitor.
- (b) Restriction Post Term. For two years after this Agreement expires or is terminated for any reason (or, if applicable, for two years after a Transfer), no Restricted Party shall directly or indirectly have any ownership interest in, or be engaged or employed by, any Competitor within five miles of Franchisee's Territory or the territory of any other Chocolate Bash business operating on the date of termination or transfer, as applicable.
- (c) Interpretation. The parties agree that each of the foregoing covenants is independent of any other covenant or provision of this Agreement. If all or any portion of the covenants in this Section is held to be unenforceable or unreasonable by any court, then the parties intend that the court modify such restriction to the extent reasonably necessary to protect the legitimate business interests of CB Franchising. Franchisee agrees that the existence of any claim it may have against CB Franchising shall not constitute a defense to the enforcement by CB Franchising of the covenants of this Section. If a Restricted Party fails to comply with the obligations under this Section during the restrictive period, then the restrictive period will be extended an additional day for each day of noncompliance.
Source: Item 22 — CONTRACTS (FDD pages 38–39)
What This Means (2024 FDD)
According to Chocolate Bash's 2024 Franchise Disclosure Document, the Franchise Agreement includes a covenant not to compete that extends beyond the termination or expiration of the agreement. Specifically, for two years after the agreement expires or is terminated, the franchisee, any owner, or any spouse of an owner cannot have any ownership interest in, or be engaged or employed by, any competitor within five miles of the franchisee's territory or the territory of any other Chocolate Bash business operating on the date of termination or transfer. This restriction applies regardless of the reason for termination.
This post-term covenant not to compete is a standard practice in franchising to protect the franchisor's brand and market. However, the FDD also notes that Section 13.2, which contains this covenant, may not be enforceable under California Law. This highlights a potential legal challenge to the enforceability of the non-compete clause, particularly in California, where such restrictions are often scrutinized. Prospective franchisees should be aware of this clause and its potential limitations, especially if they plan to operate in California.
Additionally, the Guaranty and Non-Compete Agreement also contains a similar post-term covenant not to compete. For two years after the Franchise Agreement expires or is terminated, the Guarantor cannot have any ownership interest in, or be engaged or employed by, any Competitor located within five miles of Franchisee's Territory or the territory of any other Chocolate Bash business operating on the date of termination or transfer. This agreement also states that if any part of the covenants is deemed unenforceable, the parties intend for the court to modify the restriction to protect Chocolate Bash's business interests.
It is important for potential franchisees to understand the implications of these non-compete clauses. They should consult with legal counsel to assess the enforceability of these provisions in their specific jurisdiction and to understand their obligations upon termination or expiration of the Franchise Agreement. The franchisee should also consider how these restrictions might impact their future career options if they decide to leave the Chocolate Bash system.