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

DFA Annual DFA Annual MeetingMeeting

Las Vegas Hilton Las Vegas Hilton

September 15-17, 2008September 15-17, 2008

Legal UpdateLegal UpdateScott KorzenowskiScott Korzenowski

Dady & Garner, P.A.Dady & Garner, P.A.

5100 IDS Center5100 IDS Center

80 South Eighth Street80 South Eighth Street

Minneapolis, MN 55402Minneapolis, MN 55402

What I will talk What I will talk aboutabout

Minnesota litigation updateMinnesota litigation update California litigation updateCalifornia litigation update Role of legal counsel in DFARole of legal counsel in DFA Analysis of new franchise Analysis of new franchise

agreementagreement Comparison of SFA to Little Comparison of SFA to Little

Caesar, Papa John’s and Pizza Hut Caesar, Papa John’s and Pizza Hut franchise agreementsfranchise agreements

Minnesota Litigation Minnesota Litigation UpdateUpdate

Section 8.2Section 8.2

““We will provide you with We will provide you with specifications for … computer specifications for … computer hardware and software. You may hardware and software. You may purchase items meeting our purchase items meeting our specifications from any source.”specifications from any source.”


District Court:District Court: Section 8.2 precludes Domino’s from Section 8.2 precludes Domino’s from

forcing franchisees to acquire one forcing franchisees to acquire one computer system from one source.computer system from one source.

If Domino’s requires PULSE, it must If Domino’s requires PULSE, it must give specifications for PULSE; orgive specifications for PULSE; or

Domino’s can approve other suppliers Domino’s can approve other suppliers who meet Domino’s reasonable who meet Domino’s reasonable specificationsspecifications


Appellate Court:Appellate Court: ““Specification” can mean a Specification” can mean a

completed system.completed system. ““Any source” can mean the only Any source” can mean the only

source able to meet specification.source able to meet specification.


Domino’s seeking attorneys’ feesDomino’s seeking attorneys’ feesSection 22.2:Section 22.2:

““If any legal or equitable action is commenced, If any legal or equitable action is commenced, either to challenge, interpret, or to secure or either to challenge, interpret, or to secure or protect our rights under or to enforce the protect our rights under or to enforce the terms of this Agreement, in addition to any terms of this Agreement, in addition to any judgment entered in our favor, we shall be judgment entered in our favor, we shall be entitled to recover such reasonable attorney’s entitled to recover such reasonable attorney’s fees as we may have incurred together with fees as we may have incurred together with courts costs and expenses of litigation.”courts costs and expenses of litigation.”

California Litigation California Litigation UpdateUpdate

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


Argument: Argument: Domino’s could not tie one product Domino’s could not tie one product

(the purchase of PULSE) to another (the purchase of PULSE) to another product (the renewal of the product (the renewal of the franchise agreement).franchise agreement).


Result?Result? District Court said Domino’s ability District Court said Domino’s ability

to change the agreement to require to change the agreement to require the purchase of PULSE was the the purchase of PULSE was the result of contract and not market result of contract and not market power.power.

Success or Failure?Success or Failure?

Did not get results we Did not get results we wanted.wanted.

Did get Domino’s attentionDid get Domino’s attention

Success or Failure?Success or Failure?

That’s how we know!That’s how we know!Domino’s improved PULSEDomino’s improved PULSEDomino’s re-wrote Domino’s re-wrote

agreementsagreementsDomino’s must respect Domino’s must respect

agreementsagreements

Role of legal counselRole of legal counsel

Advise and counsel DFAAdvise and counsel DFAProvide legal opinionsProvide legal opinionsAddress current topicsAddress current topics


What to do in bad times?What to do in bad times? Store closuresStore closures Asset protectionAsset protection

AdvertisingAdvertising

Profit-Sharing AgreementProfit-Sharing Agreement


Store closuresStore closures Agreement precludes Agreement precludes

abandonmentabandonment Breach of agreementBreach of agreement Exposure to damagesExposure to damages


Asset protectionAsset protection Personal guarantees create Personal guarantees create

exposure for personal assetsexposure for personal assets Bankruptcy will have to be Bankruptcy will have to be

both corporate and personalboth corporate and personal


OptionsOptions Get approval from Domino’sGet approval from Domino’s Sell (even for a reduced Sell (even for a reduced

price)price)

Role of legal counselRole of legal counselAdvertisingAdvertising Domino’s deleted references to the Domino’s deleted references to the

Roll-Up co-op advertising program.Roll-Up co-op advertising program. Domino’s cannot require Domino’s cannot require

franchisees to pay more than 4% franchisees to pay more than 4% to national advertisingto national advertising

Domino’s cannot require Domino’s cannot require franchisees to pay more than 2% franchisees to pay more than 2% to co-ops.to co-ops.


Profit-Sharing AgreementProfit-Sharing AgreementOffered in mid-1990sOffered in mid-1990s Initial five-year termInitial five-year termExtended to 2014Extended to 2014


Profit-Sharing AgreementProfit-Sharing AgreementFranchisee agrees to buy Franchisee agrees to buy

all products from all products from Domino’sDomino’s

Domino’s agrees to share Domino’s agrees to share profitsprofits


Profit-Sharing AgreementProfit-Sharing AgreementDomino’s may terminate if:Domino’s may terminate if: It sells “substantially all of its It sells “substantially all of its

assets”assets” To purchaser not affiliated To purchaser not affiliated

with Domino’swith Domino’s

Analysis of New Analysis of New Franchise AgreementFranchise Agreement

Added PULSE RequirementAdded PULSE Requirement Changed 8.2Changed 8.2 Added new Section 15.9Added new Section 15.9


History of Changes:History of Changes: Late 2007 added PULSE Late 2007 added PULSE

requirementrequirement April 2008 introduced new FDDApril 2008 introduced new FDD August 2008 amended FDDAugust 2008 amended FDD


Section 8.2: Section 8.2: Took out reference to computer Took out reference to computer

hardware and software.hardware and software. Now can specify “brands, types or Now can specify “brands, types or

models.”models.” May limit suppliersMay limit suppliers Approved vendor may be only Approved vendor may be only

source.source.


Section 15.9.1:Section 15.9.1: You agree to use system You agree to use system

designated by Domino’s.designated by Domino’s. You agree we may modify system You agree we may modify system

from time to time.from time to time. You agree to acquire hardware and You agree to acquire hardware and

software from vendors designated software from vendors designated by us.by us.

Analysis of New Analysis of New Franchise AgreementFranchise Agreement We may require you to enter into We may require you to enter into

a license with us or others.a license with us or others. We may require you to enter into We may require you to enter into

agreements with us or others.agreements with us or others. We may charge reasonable fees We may charge reasonable fees

for modifications.for modifications. We shall have independent access We shall have independent access

to your data.to your data.


Section 15.9.2:Section 15.9.2: Computer expenditures Computer expenditures

capped at 1.5% of royalty capped at 1.5% of royalty sales from opening to sales from opening to present, not to exceed 10 present, not to exceed 10 years.years.


Section 15.9.3:Section 15.9.3: We can require you to get We can require you to get

PULSE training at your PULSE training at your cost.cost.


Section 15.9.4:Section 15.9.4: We can require you to use We can require you to use

centralized or technology-centralized or technology-based methods of order based methods of order taking.taking.

Analysis of April 2008 Analysis of April 2008 FDDFDD

““Domino’s Pizza Stores” have become Domino’s Pizza Stores” have become “Domino’s Pizza Traditional Stores.” “Domino’s Pizza Traditional Stores.”

““Domino’s Pizza Transitional Stores” Domino’s Pizza Transitional Stores” are still “Domino’s Pizza Transitional are still “Domino’s Pizza Transitional Stores.”Stores.”

““Domino’s C Stores have become Domino’s C Stores have become “Domino’s Pizza Non-Traditional “Domino’s Pizza Non-Traditional Stores.” Stores.”


Domino’s deleted references to Domino’s deleted references to the Roll-Up co-op advertising the Roll-Up co-op advertising program.program.

Domino’s cannot require Domino’s cannot require franchisees to pay more than 4% franchisees to pay more than 4% to national advertisingto national advertising

Domino’s cannot require Domino’s cannot require franchisees to pay more than 2% franchisees to pay more than 2% to co-ops.to co-ops.


Recognized change in Recognized change in corporate structure corporate structure


SecuritizationSecuritization

Corporate Parent is now Domino’s Corporate Parent is now Domino’s Pizza, Inc.Pizza, Inc.

Was formed in 2004 to replace prior Was formed in 2004 to replace prior holding company, TISM, Inc.holding company, TISM, Inc.


Domino’s Pizza, LLC Domino’s Pizza, LLC (DPLLC)(DPLLC)

Wholly-owned subsidiary of Domino’s Pizza, Inc.Wholly-owned subsidiary of Domino’s Pizza, Inc. Former franchisorFormer franchisor Provider of servicesProvider of services Seller of franchisesSeller of franchises Owner and operator of company storesOwner and operator of company stores Agreement with Domino’s National Advertising Agreement with Domino’s National Advertising

Fund, Inc. (“DNAF”) to provide services relating Fund, Inc. (“DNAF”) to provide services relating to the administration of advertising funds.to the administration of advertising funds.


Domino’s IP Holder LLC Domino’s IP Holder LLC (DPIP)(DPIP)

Holds the rights to all Domino’s Holds the rights to all Domino’s trademarkstrademarks

Licenses right to use trademarks to Licenses right to use trademarks to Domino’s Pizza Master Issuer, LLC Domino’s Pizza Master Issuer, LLC (“DPMI”) and Domino’s Pizza (“DPMI”) and Domino’s Pizza Franchising, LLC (“DPF”) for the Franchising, LLC (“DPF”) for the purpose of franchising. [DPMI is the purpose of franchising. [DPMI is the parent of DPF.]parent of DPF.]


Domino’s Pizza Dist., LLC Domino’s Pizza Dist., LLC (DPD)(DPD)

Newly-formed LLC that provides Newly-formed LLC that provides the products, supplies and the products, supplies and equipment (including PULSE) to equipment (including PULSE) to franchisees.franchisees.

Replaces the former Domino’s Replaces the former Domino’s Pizza Distribution, which was a Pizza Distribution, which was a division of DPLLC.division of DPLLC.

Is party to new PULSE Agreement.Is party to new PULSE Agreement.


United States United States FranchisingFranchising

DPF will now be the franchisor for DPF will now be the franchisor for franchises located in Hawaii and franchises located in Hawaii and Alaska, although these franchisees Alaska, although these franchisees must sign International Store must sign International Store Franchise Agreements.Franchise Agreements.

Previously, the International Previously, the International franchising unit of Domino’s was franchising unit of Domino’s was the franchisor for these stores. the franchisor for these stores.

Analysis of April Analysis of April 2008 FDD Corporate 2008 FDD Corporate

StructureStructureDomino’s Pizza, Inc.(Domino’s)

Domino’s Pizza, LLC (DPLLC)(Former franchisor)

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)

Domino’s Pizza Overseas Franchising BVDomino’s National Advertising Fund, Inc.

(DNAF)

Analysis of August Analysis of August 2008 FDD2008 FDD

Item 2 - Business Item 2 - Business Experience: Experience:

Noted departure of VP of Noted departure of VP of Marketing Ken CalwellMarketing Ken Calwell

President Patrick Doyle now President Patrick Doyle now covering marketingcovering marketing

Wendy Beck is new CFOWendy Beck is new CFO


Item 3 – Litigation:Item 3 – Litigation:

Provides updates to the Provides updates to the Minnesota caseMinnesota case


Item 6 – Other Fees:Item 6 – Other Fees:

Provides updates to PULSE Provides updates to PULSE disclosuresdisclosures

Adds reference to Gift Card Adds reference to Gift Card ProgramProgram


Item 7 – Initial Item 7 – Initial Investment: Investment:

Provides updates for the Provides updates for the Delivering The Dream Delivering The Dream Program and IRH Capital Program and IRH Capital program for PULSE purchasesprogram for PULSE purchases


Item 8 – Restrictions:Item 8 – Restrictions:

Provides updates to PULSE Provides updates to PULSE disclosuresdisclosures

Adds reference to Gift Card Adds reference to Gift Card ProgramProgram


Item 10 – Financing:Item 10 – Financing:

Provides updates for the Provides updates for the Delivering The Dream Program Delivering The Dream Program and IRH Capital program for and IRH Capital program for PULSE purchasesPULSE purchases

Comparison to Other Comparison to Other FranchisesFranchises

Initial FeesInitial Fees Domino’sDomino’s $25,000$25,000 Papa John’sPapa John’s $25,000$25,000 Pizza HutPizza Hut $25,000$25,000 Little CaesarLittle Caesar $20,000 $20,000

(and only $5,000 for existing (and only $5,000 for existing franchisees)franchisees)


Term/RenewalTerm/Renewal Domino’sDomino’s 10 plus one 10-year 10 plus one 10-year

renewalrenewal Little CaesarLittle Caesar 10 plus one 10-year 10 plus one 10-year

renewalrenewal Papa John’sPapa John’s 10 plus one 10-year 10 plus one 10-year

renewalrenewal Pizza HutPizza Hut 20 year initial term 20 year initial term

onlyonly


Conditions of RenewalConditions of Renewal Refurbish?Refurbish? AllAll Then-current form of agreement?Then-current form of agreement? AllAll

(but Domino’s reserves the right that the (but Domino’s reserves the right that the terms may be materially different)terms may be materially different)

General Release? Little Caesar and General Release? Little Caesar and Papa John’sPapa John’s


TerritoriesTerritories Domino’sDomino’s 1 mile1 mile Little CaesarLittle Caesar 1 mile1 mile Papa John’sPapa John’s 1.5 miles1.5 miles Pizza HutPizza Hut 500 yards500 yards


Territorial ProtectionTerritorial Protection Domino’sDomino’s ExclusiveExclusive Pizza HutPizza Hut ExclusiveExclusive Little CaesarLittle Caesar Allows competitionAllows competition Papa John’sPapa John’s Allows competitionAllows competition


Royalties and other FeesRoyalties and other Fees

Domino’Domino’ss

Little Little CaesarCaesar

Papa Papa John’sJohn’s

Pizza Pizza HutHut

RoyaltiesRoyalties 5.5%5.5% 6%6% 5%5% 6%6%AdvertisingAdvertising 3-8% 3-8% < or = 7% < or = 7% > or = 7% > or = 7% 6.25-6.25-

7.25% 7.25% MaintenanMaintenancece

1.5% 1.5% UnspecifieUnspecified d

UnspecifieUnspecified d

UnspecifiUnspecified ed

Computer Computer MaintenanMaintenancece

1.5% 1.5% UnspecifieUnspecified d

UnspecifieUnspecified d

UnspecifiUnspecified ed


TrainingTraining All provide training.All provide training. Only Domino’s reserves right to Only Domino’s reserves right to

charge franchisees.charge franchisees.


Store ProductsStore Products All require franchisees to buy All require franchisees to buy

from designated suppliers.from designated suppliers. All allow franchisees to submit All allow franchisees to submit

alternative suppliers for approval.alternative suppliers for approval. But Little Caesar does not offer But Little Caesar does not offer

this for franchisees joining the this for franchisees joining the system after April 1, 2004.system after April 1, 2004.


RecordkeepingRecordkeeping All require franchisees to turn All require franchisees to turn

over certain information.over certain information. Domino’s and Papa John’s Domino’s and Papa John’s

require franchisees to allow require franchisees to allow franchisor to access information franchisor to access information in database.in database.


Designated Hardware and Designated Hardware and SoftwareSoftware

All require franchisees to at All require franchisees to at least utilize software required least utilize software required by the franchisor.by the franchisor.


Termination by FranchiseeTermination by Franchisee Only Domino’s expressly Only Domino’s expressly

authorizes franchisees to authorizes franchisees to terminate the agreement upon terminate the agreement upon the provision of proper notice the provision of proper notice and opportunity to cure of a and opportunity to cure of a franchisor material breach.franchisor material breach.


Immediate Termination W/O Immediate Termination W/O NoticeNotice

Only Little Caesar and Papa Only Little Caesar and Papa John’s expressly reserve for John’s expressly reserve for themselves the right, in certain themselves the right, in certain circumstances, to terminate the circumstances, to terminate the franchise immediately without franchise immediately without the provision of notice.the provision of notice.


Immediate Termination/Written Immediate Termination/Written NoticeNotice

All reserve right to terminate the franchise All reserve right to terminate the franchise immediately, upon the provision of written immediately, upon the provision of written notice, for certain conditions.notice, for certain conditions.

Domino’s, Papa John’s and Pizza Hut Domino’s, Papa John’s and Pizza Hut include receipt of three or more defaults include receipt of three or more defaults (although Domino’s requires it to be a (although Domino’s requires it to be a failure to comply with the agreement’s failure to comply with the agreement’s provisions).provisions).


Termination After Opp’ty to CureTermination After Opp’ty to Cure Domino’s, Little Caesar, and Pizza Domino’s, Little Caesar, and Pizza

Hut provide the franchisee with 30 Hut provide the franchisee with 30 days’ notice and opportunity to cure days’ notice and opportunity to cure most defaults. most defaults.

Papa John’s, on the other hand, Papa John’s, on the other hand, provides only 15 days’ notice and provides only 15 days’ notice and opportunity to cure.opportunity to cure.


Option to PurchaseOption to Purchase Domino’s, Little Caesar and Domino’s, Little Caesar and

Papa John’s reserve for Papa John’s reserve for themselves the right to themselves the right to purchase the assets upon purchase the assets upon termination or expiration of the termination or expiration of the agreement.agreement.


Post-term CovenantsPost-term Covenants Domino’s:Domino’s: 1-year1-year

10 miles of store premises10 miles of store premises““Any carry-out or delivery pizza store Any carry-out or delivery pizza store business.”business.”

Little Caesar: 1-year within DMA of any Little Little Caesar: 1-year within DMA of any Little CaesarCaesar

2-years within franchisee’s DMA2-years within franchisee’s DMA““Any quick or fast-service restaurant Any quick or fast-service restaurant engaged, not only in the sale of pizza, but also engaged, not only in the sale of pizza, but also in the sale of pasta, sandwiches, chicken in the sale of pasta, sandwiches, chicken wings or related products.”wings or related products.”


Post-term CovenantsPost-term Covenants Papa John’s:Papa John’s: 2-years2-years

10 miles of any Papa John’s10 miles of any Papa John’s““Pizza or non-pizza products similar to those Pizza or non-pizza products similar to those sold by Papa John’s on a delivery or carry-out sold by Papa John’s on a delivery or carry-out basis.”basis.”

Pizza Hut:Pizza Hut: 18 months18 months25 miles of any Pizza Hut 25 miles of any Pizza Hut

restaurantrestaurant““Any pizza, pasta or other similar food item.”Any pizza, pasta or other similar food item.”


Assignment/TransferAssignment/Transfer All require franchisor approval.All require franchisor approval. But Domino’s does not require But Domino’s does not require

execution of general release.execution of general release. Only Papa John’s allows transfer of Only Papa John’s allows transfer of

current agreement.current agreement.


Right of First Refusal Right of First Refusal All reserve the right to purchase All reserve the right to purchase

the franchise on the same terms the franchise on the same terms offered by the buyer.offered by the buyer.


Attorneys’ FeesAttorneys’ Fees Only Domino’s requires the franchisee to Only Domino’s requires the franchisee to

pay the franchisor’s attorneys’ fees, costs pay the franchisor’s attorneys’ fees, costs and expenses for litigation.and expenses for litigation.

Pizza Hut requires the losing party to pay Pizza Hut requires the losing party to pay the prevailing party’s attorneys’ fees.the prevailing party’s attorneys’ fees.

Little Caesar requires the franchisee to Little Caesar requires the franchisee to pay Little Caesar’s attorneys’ fees only if pay Little Caesar’s attorneys’ fees only if the franchisee fails to cure a default within the franchisee fails to cure a default within the applicable period of time.the applicable period of time.


LitigationLitigation Every franchisor, except Domino’s, Every franchisor, except Domino’s,

requires franchisee to waive jury requires franchisee to waive jury and sue in location of franchisor.and sue in location of franchisor.

Legal UpdateLegal UpdateScott KorzenowskiScott Korzenowski

Dady & Garner, P.A.Dady & Garner, P.A.

5100 IDS Center5100 IDS Center

80 South Eighth Street80 South Eighth Street

Minneapolis, MN 55402Minneapolis, MN 55402

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

Documents

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