Upon termination or expiration of the Franchise Agreement, must a Fat Shack franchisee abide by the restrictive covenants in Article 21?
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. Franchisee agrees that nothing in this Article 21 shall be construed to grant Franchisee any protected territory.
21.2. Post-Termination Covenant Not to Compete
For a period of two years from termination or expiration of this Agreement for any reason, or the date on which Franchisee ceases to conduct business, whichever is later, neither Franchisee nor any Bound Party shall have any direct or indirect interest as a disclosed or beneficial owner, investor, partner, director, officer, employee, consultant, representative or agent or in any other capacity in any Competitive Business located or operating within a 10-mile radius of the former Restaurant Location or within a 10-mile radius of any other franchised or company-owned FAT SHACK Restaurant. If Franchisee or any other Bound Party breaches this section, the two-year period shall start on the date that such person is enjoined from competing or stops competing, whichever is later. Franchisee and the Bound Parties expressly acknowledge that they possess skills and abilities of a general nature and have other opportunities for exploiting such skills. Consequently, enforcement of the covenants made in this section will not deprive them of their personal goodwill or ability to earn a living.
Source: Item 23 — Receipts (FDD pages 53–223)
What This Means (2025 FDD)
According to Fat Shack's 2025 Franchise Disclosure Document, franchisees must adhere to the restrictive covenants outlined in Article 21 of the Franchise Agreement following termination or expiration. Specifically, for a period of two years after the agreement ends or the franchisee ceases operations—whichever is later—the franchisee and any "Bound Party" are restricted from holding any interest in a Competitive Business. This restriction applies to any Competitive Business operating within a 10-mile radius of the former Fat Shack location or any other franchised or company-owned Fat Shack restaurant. A "Competitive Business" is defined as any establishment deriving more than 10 percent of its gross receipts (excluding alcohol sales) from selling sandwiches, burgers, and wings.
The agreement clarifies that owning securities in a Competitive Business is permissible if the securities are publicly traded and represent 2 percent or less of the outstanding securities. Fat Shack emphasizes that the restrictive covenants will not deprive franchisees of their ability to earn a living, as they possess general skills and abilities applicable to other opportunities. If a franchisee breaches this covenant, the two-year restriction period restarts from the date they are legally stopped from competing or voluntarily cease competition, whichever occurs later.
These post-termination covenants are designed to protect Fat Shack's market position and brand integrity by preventing former franchisees from directly competing using knowledge gained during their franchise operation. Prospective franchisees should carefully consider the implications of these restrictions, particularly if they plan to remain in the restaurant industry after their franchise agreement ends. Understanding the scope and duration of these covenants is crucial for making informed business decisions and avoiding potential legal issues.