How is the fee calculated for breaching the non-compete covenants for a Cinch I.T. franchise?
Cinch_I_T Franchise · 2024 FDDAnswer from 2024 FDD Document
- 11.7 You acknowledge that Your violation of the terms of this Section 11 would result in irreparable injury to Us for which no adequate remedy at law may be available, and You accordingly consent to the issuance of an injunction by any court of competent jurisdiction or arbitrator having jurisdiction over the Agreement prohibiting any conduct by You in violation of the terms of this Section 11.
You agree to pay all costs and expenses (including reasonable attorneys' fees) incurred by Us in connection with the enforcement of this Section 11 provided We prevail in any or all of Our claims against You.
- (b) The parties further agree that, in addition to such other damages awarded, awarded or any and all other damages We may have in the future for any violations of Your post-termination obligations, if this Agreement is terminated by Us because of Your default or if You terminate without cause, You shall be liable to Us for a lump sum termination fee equal to the net present value of the Royalties and Marketing Fund Fees that would have become due following termination of this Agreement for the period this Agreement would have remained in effect but for Your default. Royalties and Marketing Fund Fees for purposes of this Section shall be calculated based on the Franchised Business' average monthly Gross Sales for the twelve (12) months preceding the termination date or the number of months in operation if less than twelve (12). If You have not operated Your Franchised Business for at least twelve (12) months preceding
the termination date, Royalty Fees and Marketing Fund Fees will be calculated based on the average monthly Gross Sales of all CINCH I.T. franchised businesses during Our last fiscal year and the payment amount would be equal to the net present value utilizing the Prime Rate as published per the Wall Street Journal. This fee is in addition to, and not in lieu of, any other damages We sustain as a result of the termination. The parties hereto acknowledge and agree that it would be impracticable to determine precisely the damages We would incur from this Agreement's termination due to Your default, and the loss of cash flow due to, among other things, the complications of determining what costs, if any, We might have saved and how much the fees would have grown over what would have been this Agreement's remaining Term. The parties consider this liquidated damages provision to be a reasonable, good faith and genuine pre-estimate of those damages, and not a penalty.
Source: Item 23 — RECEIPTS (FDD pages 60–269)
What This Means (2024 FDD)
The 2024 Cinch I.T. Franchise Disclosure Document (FDD) outlines the remedies available to Cinch I.T. in the event of a franchisee's breach of the franchise agreement, but it does not explicitly detail a specific fee or calculation method for violating the non-compete covenants. Instead, it focuses on the potential for injunctive relief and recovery of costs associated with enforcing the non-compete agreement.
Specifically, Cinch I.T. emphasizes that a violation of the non-compete terms would cause irreparable harm for which monetary damages might not be sufficient. Therefore, Cinch I.T. can seek a court order (injunction) to stop the franchisee from engaging in the prohibited activities. Additionally, the franchisee is responsible for covering all costs and expenses, including reasonable attorney's fees, incurred by Cinch I.T. in enforcing the non-compete obligations, provided Cinch I.T. prevails in its claims.
While the FDD does not provide a precise monetary penalty for breaching the non-compete, it makes clear that Cinch I.T. intends to vigorously protect its interests through legal means, potentially resulting in significant financial burdens for a franchisee found in violation. A prospective franchisee should seek clarification from Cinch I.T. regarding specific examples or scenarios and how the non-compete would be enforced in practice.
It is important to note that the FDD also mentions a lump-sum termination fee under certain conditions, but this fee is related to the termination of the agreement itself, not specifically to violations of the non-compete covenants. This termination fee is calculated based on the net present value of future royalties and marketing fund fees that would have been due had the agreement remained in effect, using the franchise's average monthly gross sales or, if the business has been operating for less than a year, the average monthly gross sales of all Cinch I.T. franchised businesses. This fee serves as a form of liquidated damages to compensate Cinch I.T. for the early termination of the agreement due to the franchisee's default or termination without cause.