DFA Annual Meeting Las Vegas Hilton September 15 -17, 2008
Legal Update Scott Korzenowski Dady & Garner, P. A. 5100 IDS Center 80 South Eighth Street Minneapolis, MN 55402
What I will talk about n Minnesota litigation update n California litigation update n Role of legal counsel in DFA n Analysis of new franchise agreement n Comparison of SFA to Little Caesar, Papa John’s and Pizza Hut franchise agreements
Minnesota Litigation Update Section 8. 2 “We will provide you with specifications for … computer hardware and software. You may purchase items meeting our specifications from any source. ”
Minnesota Litigation Update District Court: Section 8. 2 precludes Domino’s from forcing franchisees to acquire one computer system from one source. n If Domino’s requires PULSE, it must give specifications for PULSE; or n Domino’s can approve other suppliers who meet Domino’s reasonable specifications n
Minnesota Litigation Update Appellate Court: “Specification” can mean a completed system. n “Any source” can mean the only source able to meet specification. n
Minnesota Litigation Update Domino’s seeking attorneys’ fees Section 22. 2: “If any legal or equitable action is commenced, either to challenge, interpret, or to secure or protect our rights under or to enforce the terms of this Agreement, in addition to any judgment entered in our favor, we shall be entitled to recover such reasonable attorney’s fees as we may have incurred together with courts costs and expenses of litigation. ”
California Litigation Update Rick Swisher challenged Domino’s right to require franchisees to sign new agreement upon renewal requiring PULSE.
California Litigation Update Argument: n Domino’s could not tie one product (the purchase of PULSE) to another product (the renewal of the franchise agreement).
California Litigation Update Result? n District Court said Domino’s ability to change the agreement to require the purchase of PULSE was the result of contract and not market power.
Success or Failure? n Did not get results we wanted. n Did get Domino’s attention
Success or Failure? That’s how we know! n Domino’s improved PULSE n Domino’s re-wrote agreements n Domino’s must respect agreements
Role of legal counsel n Advise and counsel DFA n Provide legal opinions n Address current topics
Role of legal counsel What to do in bad times? n Store closures n Asset protection Advertising Profit-Sharing Agreement
Role of legal counsel Store closures n Agreement precludes abandonment n Breach of agreement n Exposure to damages
Role of legal counsel Asset protection n Personal guarantees create exposure for personal assets n Bankruptcy will have to be both corporate and personal
Role of legal counsel Options n Get approval from Domino’s n Sell (even for a reduced price)
Role of legal counsel Advertising n n n Domino’s deleted references to the Roll-Up co-op advertising program. Domino’s cannot require franchisees to pay more than 4% to national advertising Domino’s cannot require franchisees to pay more than 2% to co-ops.
Role of legal counsel Profit-Sharing Agreement n Offered in mid-1990 s n Initial five-year term n Extended to 2014
Role of legal counsel Profit-Sharing Agreement n Franchisee agrees to buy all products from Domino’s n Domino’s agrees to share profits
Role of legal counsel Profit-Sharing Agreement Domino’s may terminate if: n It sells “substantially all of its assets” n To purchaser not affiliated with Domino’s
Analysis of New Franchise Agreement Added PULSE Requirement n Changed 8. 2 n Added new Section 15. 9
Analysis of New Franchise Agreement History of Changes: n Late 2007 added PULSE requirement n April 2008 introduced new FDD n August 2008 amended FDD
Analysis of New Franchise Agreement Section 8. 2: n n Took out reference to computer hardware and software. Now can specify “brands, types or models. ” May limit suppliers Approved vendor may be only source.
Analysis of New Franchise Agreement Section 15. 9. 1: n n n You agree to use system designated by Domino’s. You agree we may modify system from time to time. You agree to acquire hardware and software from vendors designated by us.
Analysis of New Franchise Agreement n n We may require you to enter into a license with us or others. We may require you to enter into agreements with us or others. We may charge reasonable fees for modifications. We shall have independent access to your data.
Analysis of New Franchise Agreement Section 15. 9. 2: n Computer expenditures capped at 1. 5% of royalty sales from opening to present, not to exceed 10 years.
Analysis of New Franchise Agreement Section 15. 9. 3: n We can require you to get PULSE training at your cost.
Analysis of New Franchise Agreement Section 15. 9. 4: n We can require you to use centralized or technology-based methods of order taking.
Analysis of April 2008 FDD n n n “Domino’s Pizza Stores” have become “Domino’s Pizza Traditional Stores. ” “Domino’s Pizza Transitional Stores” are still “Domino’s Pizza Transitional Stores. ” “Domino’s C Stores have become “Domino’s Pizza Non-Traditional Stores. ”
Analysis of April 2008 FDD n n n Domino’s deleted references to the Roll-Up co-op advertising program. Domino’s cannot require franchisees to pay more than 4% to national advertising Domino’s cannot require franchisees to pay more than 2% to co-ops.
Analysis of April 2008 FDD n Recognized change in corporate structure
Analysis of April 2008 FDD Securitization n Corporate Parent is now Domino’s Pizza, Inc. n Was formed in 2004 to replace prior holding company, TISM, Inc.
Analysis of April 2008 FDD Domino’s Pizza, LLC (DPLLC) n n n Wholly-owned subsidiary of Domino’s Pizza, Inc. Former franchisor Provider of services Seller of franchises Owner and operator of company stores Agreement with Domino’s National Advertising Fund, Inc. (“DNAF”) to provide services relating to the administration of advertising funds.
Analysis of April 2008 FDD Domino’s IP Holder LLC (DPIP) Holds the rights to all Domino’s trademarks n Licenses right to use trademarks to Domino’s Pizza Master Issuer, LLC (“DPMI”) and Domino’s Pizza Franchising, LLC (“DPF”) for the purpose of franchising. [DPMI is the parent of DPF. ] n
Analysis of April 2008 FDD Domino’s Pizza Dist. , LLC (DPD) n n n Newly-formed LLC that provides the products, supplies and equipment (including PULSE) to franchisees. Replaces the former Domino’s Pizza Distribution, which was a division of DPLLC. Is party to new PULSE Agreement.
Analysis of April 2008 FDD United States Franchising n n DPF will now be the franchisor franchises located in Hawaii and Alaska, although these franchisees must sign International Store Franchise Agreements. Previously, the International franchising unit of Domino’s was the franchisor for these stores.
Analysis of April 2008 FDD Corporate Structure Domino’s Pizza, Inc. (Domino’s) Domino’s Pizza, LLC (DPLLC) (Former franchisor) Domino’s Pizza Overseas Franchising BV Domino’s National Advertising Fund, Inc. (DNAF) Domino’s Pizza Master Issuer, LLC (DPMI) Domino’s IP Holder LLC (TM Holder) Domino’s Pizza Franchising LLC (DPF) (Franchisor) Domino’s Pizza Dist. , LLC (DPD) (Producer-Supplier)
Analysis of August 2008 FDD Item 2 - Business Experience: n n n Noted departure of VP of Marketing Ken Calwell President Patrick Doyle now covering marketing Wendy Beck is new CFO
Analysis of August 2008 FDD Item 3 – Litigation: n Provides updates to the Minnesota case
Analysis of August 2008 FDD Item 6 – Other Fees: n n Provides updates to PULSE disclosures Adds reference to Gift Card Program
Analysis of August 2008 FDD Item 7 – Initial Investment: n Provides updates for the Delivering The Dream Program and IRH Capital program for PULSE purchases
Analysis of August 2008 FDD Item 8 – Restrictions: n n Provides updates to PULSE disclosures Adds reference to Gift Card Program
Analysis of August 2008 FDD Item 10 – Financing: n Provides updates for the Delivering The Dream Program and IRH Capital program for PULSE purchases
Comparison to Other Franchises Initial Fees n Domino’s $25, 000 n Papa John’s $25, 000 n Pizza Hut $25, 000 n Little Caesar $20, 000 (and only $5, 000 for existing franchisees)
Comparison to Other Franchises Term/Renewal Domino’s n Little Caesar n Papa John’s n Pizza Hut n 10 plus one 10 -year renewal 20 year initial term only
Comparison to Other Franchises Conditions of Renewal Refurbish? All n Then-current form of agreement? All (but Domino’s reserves the right that the terms may be materially different) n General Release? Little Caesar and Papa John’s n
Comparison to Other Franchises Territories Domino’s n Little Caesar n Papa John’s n Pizza Hut n 1 mile 1. 5 miles 500 yards
Comparison to Other Franchises Territorial Protection Domino’s n Pizza Hut n Little Caesar n Papa John’s n Exclusive Allows competition
Comparison to Other Franchises Royalties and other Fees Domino’s Little Caesar Papa John’s Pizza Hut Royalties 5. 5% 6% Advertising 3 -8% < or = 7% > or = 7% 6. 25 -7. 25% Maintenance 1. 5% Unspecified Computer Maintenance 1. 5% Unspecified
Comparison to Other Franchises Training n n All provide training. Only Domino’s reserves right to charge franchisees.
Comparison to Other Franchises Store Products n n n All require franchisees to buy from designated suppliers. All allow franchisees to submit alternative suppliers for approval. But Little Caesar does not offer this for franchisees joining the system after April 1, 2004.
Comparison to Other Franchises Recordkeeping n n All require franchisees to turn over certain information. Domino’s and Papa John’s require franchisees to allow franchisor to access information in database.
Comparison to Other Franchises Designated Hardware and Software n All require franchisees to at least utilize software required by the franchisor.
Comparison to Other Franchises Termination by Franchisee n Only Domino’s expressly authorizes franchisees to terminate the agreement upon the provision of proper notice and opportunity to cure of a franchisor material breach.
Comparison to Other Franchises Immediate Termination W/O Notice n Only Little Caesar and Papa John’s expressly reserve for themselves the right, in certain circumstances, to terminate the franchise immediately without the provision of notice.
Comparison to Other Franchises Immediate Termination/Written Notice All reserve right to terminate the franchise immediately, upon the provision of written notice, for certain conditions. n Domino’s, Papa John’s and Pizza Hut include receipt of three or more defaults (although Domino’s requires it to be a failure to comply with the agreement’s provisions). n
Comparison to Other Franchises Termination After Opp’ty to Cure n n Domino’s, Little Caesar, and Pizza Hut provide the franchisee with 30 days’ notice and opportunity to cure most defaults. Papa John’s, on the other hand, provides only 15 days’ notice and opportunity to cure.
Comparison to Other Franchises Option to Purchase n Domino’s, Little Caesar and Papa John’s reserve for themselves the right to purchase the assets upon termination or expiration of the agreement.
Comparison to Other Franchises Post-term Covenants n Domino’s: 1 -year 10 miles of store premises “Any carry-out or delivery pizza store business. ” n Little Caesar: 1 -year within DMA of any Little Caesar 2 -years within franchisee’s DMA “Any quick or fast-service restaurant engaged, not only in the sale of pizza, but also in the sale of pasta, sandwiches, chicken wings or related products. ”
Comparison to Other Franchises Post-term Covenants n Papa John’s: 2 -years 10 miles of any Papa John’s “Pizza or non-pizza products similar to those sold by Papa John’s on a delivery or carry-out basis. ” n Pizza Hut: 18 months 25 miles of any Pizza Hut restaurant “Any pizza, pasta or other similar food item. ”
Comparison to Other Franchises Assignment/Transfer n n n All require franchisor approval. But Domino’s does not require execution of general release. Only Papa John’s allows transfer of current agreement.
Comparison to Other Franchises Right of First Refusal n All reserve the right to purchase the franchise on the same terms offered by the buyer.
Comparison to Other Franchises Attorneys’ Fees n n n Only Domino’s requires the franchisee to pay the franchisor’s attorneys’ fees, costs and expenses for litigation. Pizza Hut requires the losing party to pay the prevailing party’s attorneys’ fees. Little Caesar requires the franchisee to pay Little Caesar’s attorneys’ fees only if the franchisee fails to cure a default within the applicable period of time.
Comparison to Other Franchises Litigation n Every franchisor, except Domino’s, requires franchisee to waive jury and sue in location of franchisor.
Legal Update Scott Korzenowski Dady & Garner, P. A. 5100 IDS Center 80 South Eighth Street Minneapolis, MN 55402
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