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DFA Annual Meeting

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. Minnesota litigation update California litigation update Role of legal counsel in DFA

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DFA Annual Meeting

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  1. DFA Annual Meeting Las Vegas Hilton September 15-17, 2008

  2. Legal Update Scott Korzenowski Dady & Garner, P.A. 5100 IDS Center 80 South Eighth Street Minneapolis, MN 55402

  3. What I will talk about • Minnesota litigation update • California litigation update • Role of legal counsel in DFA • Analysis of new franchise agreement • Comparison of SFA to Little Caesar, Papa John’s and Pizza Hut franchise agreements

  4. 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.”

  5. Minnesota Litigation Update District Court: • Section 8.2 precludes Domino’s from forcing franchisees to acquire one computer system from one source. • If Domino’s requires PULSE, it must give specifications for PULSE; or • Domino’s can approve other suppliers who meet Domino’s reasonable specifications

  6. Minnesota Litigation Update Appellate Court: • “Specification” can mean a completed system. • “Any source” can mean the only source able to meet specification.

  7. 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.”

  8. California Litigation Update Rick Swisher challenged Domino’s right to require franchisees to sign new agreement upon renewal requiring PULSE.

  9. California Litigation Update Argument: • Domino’s could not tie one product (the purchase of PULSE) to another product (the renewal of the franchise agreement).

  10. California Litigation Update Result? • 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.

  11. Success or Failure? • Did not get results we wanted. • Did get Domino’s attention

  12. Success or Failure? That’s how we know! • Domino’s improved PULSE • Domino’s re-wrote agreements • Domino’s must respect agreements

  13. Role of legal counsel • Advise and counsel DFA • Provide legal opinions • Address current topics

  14. Role of legal counsel What to do in bad times? • Store closures • Asset protection Advertising Profit-Sharing Agreement

  15. Role of legal counsel Store closures • Agreement precludes abandonment • Breach of agreement • Exposure to damages

  16. Role of legal counsel Asset protection • Personal guarantees create exposure for personal assets • Bankruptcy will have to be both corporate and personal

  17. Role of legal counsel Options • Get approval from Domino’s • Sell (even for a reduced price)

  18. Role of legal counsel Advertising • 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.

  19. Role of legal counsel Profit-Sharing Agreement • Offered in mid-1990s • Initial five-year term • Extended to 2014

  20. Role of legal counsel Profit-Sharing Agreement • Franchisee agrees to buy all products from Domino’s • Domino’s agrees to share profits

  21. Role of legal counsel Profit-Sharing Agreement Domino’s may terminate if: • It sells “substantially all of its assets” • To purchaser not affiliated with Domino’s

  22. Analysis of New Franchise Agreement Added PULSE Requirement • Changed 8.2 • Added new Section 15.9

  23. Analysis of New Franchise Agreement History of Changes: • Late 2007 added PULSE requirement • April 2008 introduced new FDD • August 2008 amended FDD

  24. Analysis of New Franchise Agreement Section 8.2: • Took out reference to computer hardware and software. • Now can specify “brands, types or models.” • May limit suppliers • Approved vendor may be only source.

  25. Analysis of New Franchise Agreement Section 15.9.1: • 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.

  26. Analysis of New Franchise Agreement • 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.

  27. Analysis of New Franchise Agreement Section 15.9.2: • Computer expenditures capped at 1.5% of royalty sales from opening to present, not to exceed 10 years.

  28. Analysis of New Franchise Agreement Section 15.9.3: • We can require you to get PULSE training at your cost.

  29. Analysis of New Franchise Agreement Section 15.9.4: • We can require you to use centralized or technology-based methods of order taking.

  30. Analysis of April 2008 FDD • “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.”

  31. Analysis of April 2008 FDD • 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.

  32. Analysis of April 2008 FDD • Recognized change in corporate structure

  33. Analysis of April 2008 FDDSecuritization • Corporate Parent is now Domino’s Pizza, Inc. • Was formed in 2004 to replace prior holding company, TISM, Inc.

  34. Analysis of April 2008 FDDDomino’s Pizza, LLC (DPLLC) • 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.

  35. Analysis of April 2008 FDDDomino’s IP Holder LLC (DPIP) • Holds the rights to all Domino’s trademarks • 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.]

  36. Analysis of April 2008 FDDDomino’s Pizza Dist., LLC (DPD) • 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.

  37. Analysis of April 2008 FDDUnited States Franchising • DPF will now be the franchisor for 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.

  38. Analysis of April 2008 FDD Corporate Structure

  39. Analysis of August 2008 FDD Item 2 - Business Experience: • Noted departure of VP of Marketing Ken Calwell • President Patrick Doyle now covering marketing • Wendy Beck is new CFO

  40. Analysis of August 2008 FDD Item 3 – Litigation: • Provides updates to the Minnesota case

  41. Analysis of August 2008 FDD Item 6 – Other Fees: • Provides updates to PULSE disclosures • Adds reference to Gift Card Program

  42. Analysis of August 2008 FDD Item 7 – Initial Investment: • Provides updates for the Delivering The Dream Program and IRH Capital program for PULSE purchases

  43. Analysis of August 2008 FDD Item 8 – Restrictions: • Provides updates to PULSE disclosures • Adds reference to Gift Card Program

  44. Analysis of August 2008 FDD Item 10 – Financing: • Provides updates for the Delivering The Dream Program and IRH Capital program for PULSE purchases

  45. Comparison to Other Franchises Initial Fees • Domino’s $25,000 • Papa John’s $25,000 • Pizza Hut $25,000 • Little Caesar $20,000 (and only $5,000 for existing franchisees)

  46. Comparison to Other Franchises Term/Renewal • Domino’s 10 plus one 10-year renewal • Little Caesar 10 plus one 10-year renewal • Papa John’s 10 plus one 10-year renewal • Pizza Hut 20 year initial term only

  47. Comparison to Other Franchises Conditions of Renewal • Refurbish? All • Then-current form of agreement? All (but Domino’s reserves the right that the terms may be materially different) • General Release? Little Caesar and Papa John’s

  48. Comparison to Other Franchises Territories • Domino’s 1 mile • Little Caesar 1 mile • Papa John’s 1.5 miles • Pizza Hut 500 yards

  49. Comparison to Other Franchises Territorial Protection • Domino’s Exclusive • Pizza Hut Exclusive • Little Caesar Allows competition • Papa John’s Allows competition

  50. Comparison to Other Franchises Royalties and other Fees

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