What constitutes a 'Competitive Business' in the context of the Fat Shack post-termination covenant not to compete?
Fat_Shack Franchise · 2025 FDDAnswer from 2025 FDD Document
The term "Competitive Business" as used in this Agreement shall mean any business operating, or granting franchises or licenses to others to operate a restaurant or other business deriving more than 10 percent of its gross receipts, excluding gross receipts relating to the sale of alcoholic beverages, from the sale of sandwiches, burgers and wings (other than another FAT SHACK Restaurant operated by Franchisee); provided, however, neither Franchisee nor the other Bound Parties shall be prohibited from owning securities in a Competitive Business if such securities are listed on a stock exchange or traded on the over-the-counter market and represent 2 percent or less of that class of securities issued and outstanding.
Source: Item 23 — Receipts (FDD pages 53–223)
What This Means (2025 FDD)
According to Fat Shack's 2025 Franchise Disclosure Document, a 'Competitive Business' is defined in the context of restrictive covenants, specifically regarding non-competition during the term of the agreement and post-termination. A business is considered competitive if it operates a restaurant or grants franchises/licenses to others for a restaurant, and more than 10 percent of its gross receipts (excluding alcohol sales) are derived from selling sandwiches, burgers, and wings. This definition applies to both the franchisee and related parties during and after the franchise agreement.
However, there is an exception: franchisees are not prohibited from owning securities in a Competitive Business if those securities are listed on a stock exchange or traded over-the-counter, and if they represent 2 percent or less of the outstanding securities of that class. This exception allows for minor, passive investments in competing businesses without violating the non-compete agreement.
This definition is crucial for prospective Fat Shack franchisees because it clearly outlines what activities are prohibited during and after the franchise term. Understanding this definition helps franchisees avoid unintentionally violating the non-compete clause, which could lead to legal repercussions. The 10% revenue threshold and the specific food items (sandwiches, burgers, and wings) provide a measurable standard for determining what constitutes a competitive threat to Fat Shack. The exception for minor stock ownership provides some flexibility, but franchisees must remain below the 2% threshold to avoid violating the agreement.