What are the potential damages to the Fat Shack franchise system resulting from an Act of Deception?
Fat_Shack Franchise · 2025 FDDAnswer from 2025 FDD Document
The occurrence of an Act of Deception will result in serious damage to FSI and the FSI franchise system in that it would (i) result in FSI receiving less compensation than it is entitled; (ii) result in substantial costs to FSI in responding to the Act of Deception, based on the need to research Franchisee's activities, contact third parties, coordinate an audit, and/or take other actions; (iii) demand substantial effort and attention of FSI's representatives, in turn diverting their attention from their ordinary duties devoted to FSI and its services for the FSI franchise system; and (iv) encourage other franchisees, distributors, or Area Representatives of FSI to engage in similar acts, thereby contributing to a general atmosphere of noncompliance within the FSI franchise system.
At the same time, FSI and Franchisee acknowledge and agree that these damages, due to their nature, would be difficult to quantify.
Therefore, upon discovery of an Act of Deception by FSI, Franchisee shall pay FSI as liquidated damages and not as a penalty, 100 percent of Franchisee's Gross Sales involved in the Act of Deception, together with any administrative fees and late fees in accordance with Section 5.4 of this Agreement, plus interest at 2.5 percent per month or the highest rate allowable by applicable law, whichever is less, on such amount from the first date any fees arising from such Gross Sales were due to FSI.
With respect to an Act of Deception, this interest provision shall supersede any other interest provision in this Agreement.
This same interest rate shall apply as the post-judgment interest rate, regardless of the applicable statutory rate, in the event of any legal actions related to this Agreement.
Additionally, once an Act of Deception is discovered, FSI or its designated representatives may conduct an inspection or audit of the records of Franchisee or any of its affiliated parties as stated in Section 16.4 above, provided, however, that any inspection or audit conducted as a result of the discovery of an Act of Deception shall be performed at Franchisee's sole cost and expense and shall be conducted at any time of FSI's choosing.
Source: Item 23 — Receipts (FDD pages 53–223)
What This Means (2025 FDD)
According to Fat Shack's 2025 Franchise Disclosure Document, an Act of Deception by a franchisee can cause significant harm to Fat Shack and its franchise system. These damages include Fat Shack receiving less compensation than it is entitled to, incurring substantial costs to investigate the deception, and diverting the attention of Fat Shack's representatives from their normal duties. Furthermore, such acts can encourage other franchisees to engage in similar noncompliant behavior, creating a widespread issue within the franchise system.
Because the exact monetary value of these damages is difficult to determine, the FDD stipulates that if Fat Shack discovers an Act of Deception, the franchisee must pay liquidated damages. These damages are calculated as 100 percent of the franchisee's gross sales involved in the Act of Deception. In addition to this amount, the franchisee is responsible for any administrative and late fees, as well as interest on the unpaid amount. The interest is calculated at a rate of 2.5 percent per month or the highest rate allowed by law, whichever is less, from the date the fees were originally due.
Moreover, the 2025 Fat Shack FDD states that Fat Shack can conduct an inspection or audit of the franchisee's records, or those of affiliated parties, at any time following the discovery of an Act of Deception. Unlike regular audits, the franchisee bears the full cost and expense of these audits. This includes fees for independent accountants, travel and living expenses for Fat Shack employees or agents, and compensation for those conducting the audit. The interest rate specified for Acts of Deception also supersedes any other interest rate provisions in the Franchise Agreement and applies as the post-judgment interest rate in any legal actions related to the agreement.