Can Del Taco prevent franchisees from having an interest in a competitive business?
Del_Taco Franchise · 2025 FDDAnswer from 2025 FDD Document
Divert or attempt to divert any business or customer of the Restaurant or of any Del Taco Restaurant using the System to any competitor, by direct or indirect inducement or otherwise, or do or perform, directly or indirectly, any other act injurious or prejudicial to the goodwill associated with the Proprietary Marks and the System.
- 10.5.2 Except as otherwise approved in writing by Del Taco directly or indirectly own, maintain, operate, engage in, have any interest in or provide any assistance to (whether as owner, stockholder, partner, officer, director, employee, consultant, franchisor, lessor, or otherwise) any "Competitive Business," which shall mean a restaurant or food service business that offers one or more Mexican or similar style menu items, and is operated in a quick service, fast food, or fast casual format.
- 10.6 Post-Term Covenants. Except as otherwise approved in writing by Del Taco, Franchisee shall not, for a continuous uninterrupted period of two (2) years from the date of: (a) a transfer permitted under Section 12.3 above; (b) expiration or termination of this Agreement (regardless of the cause for termination); or (c) a final order of a duly authorized arbitrator, panel of arbitrators, or a court of competent jurisdiction (after all appeals have been taken) with respect to any of the foregoing or with respect to the enforcement of this Section 10.6; either directly or indirectly own, maintain, operate, engage in, have any interest in, or provide any assistance to (whether as owner, stockholder, partner, officer, director, employee, consultant, franchisor, lessor or otherwise) any Competitive Business which is, or is intended to be, located: (a) within the Protected Area of the Restaurant or (b) within two (2) miles of any other Del Taco restaurant owned and/or operated or then under construction by Del Taco or any other franchisee or licensee of Del Taco as of the time that the obligations under this Section 10.6 commence. If Franchisee does not comply with the post-term covenants as specified in this Section 10.6, the post-term non-compete period shall not begin to run until Franchisee begins to comply.
- 10.7 Publicly-Held Corporations. Section 10.6 above shall not apply to ownership by Franchisee of less than a five percent (5%) beneficial interest in the outstanding equity securities of any publicly held corporation. As used in this Agreement, the term "publicly held corporation" shall be deemed to refer to a corporation which has securities that have been registered under the Securities Exchange Act of 1934.
- 10.8 Individual Covenants. Franchisee shall require and obtain execution of covenants similar to those set forth in Sections 8, 9, 10, 12, and 14 (as modified to apply to an individual, if applicable) from any or all of Franchisee's owners holding a ten percent (10%) or greater interest in Franchisee and the Operating Principal. The covenants required by this Section 10.8 shall be in the form provided in Exhibit F to this Agreement. Franchisee shall deliver to Del Taco copies of such executed covenants immediately upon Del Taco's request.
Source: Item 15 — OBLIGATION TO PARTICIPATE IN THE ACTUAL OPERATION OF THE FRANCHISE BUSINESS (FDD page 42)
What This Means (2025 FDD)
According to Del Taco's 2025 Franchise Disclosure Document, Del Taco can restrict franchisees from engaging in competitive businesses both during the term of the franchise agreement and for a period after the agreement terminates. During the franchise term, unless Del Taco provides written approval, franchisees cannot directly or indirectly own, maintain, operate, engage in, have any interest in, or provide assistance to a "Competitive Business." A Competitive Business is defined as a restaurant or food service that offers Mexican or similar style menu items and operates in a quick service, fast food, or fast casual format. This restriction aims to prevent franchisees from diverting business or customers to competitors and to protect the goodwill associated with Del Taco's brand and system.
Post-termination, the franchisee is restricted for two years from the date of transfer, expiration, termination, or a final order from an arbitrator or court. This prevents them from engaging in a Competitive Business within the Protected Area of their former Del Taco restaurant or within two miles of any other Del Taco restaurant owned or under construction by Del Taco or its franchisees. The non-compete period does not begin until the franchisee complies with these post-term covenants.
However, there is an exception: the post-term covenant does not apply to the ownership of less than a five percent beneficial interest in the outstanding equity securities of any publicly held corporation. This allows franchisees to invest in publicly traded companies that may have competing restaurant brands without violating the non-compete agreement. These measures are typical in franchising to protect the brand and market share of the franchise system.