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
 Analysis of new franchise agreement
 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.
If Domino’s requires PULSE, it must give
specifications for PULSE; or
Domino’s can approve other suppliers who meet
Domino’s reasonable specifications
Minnesota Litigation Update
Appellate Court:


“Specification” can mean a completed system.
“Any source” can mean the only source able to
meet specification.
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:

Domino’s could not tie one product (the
purchase of PULSE) to another product (the
renewal of the franchise agreement).
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.
Success or Failure?
 Did
not get results we wanted.
 Did get Domino’s attention
Success or Failure?
That’s how we know!
 Domino’s improved PULSE
 Domino’s re-wrote agreements
 Domino’s must respect agreements
Role of legal counsel
 Advise
and counsel DFA
 Provide legal opinions
 Address current topics
Role of legal counsel
What to do in bad times?
 Store
closures
 Asset protection
Advertising
Profit-Sharing Agreement
Role of legal counsel
Store closures
 Agreement
precludes abandonment
 Breach of agreement
 Exposure to damages
Role of legal counsel
Asset protection
 Personal
guarantees create exposure
for personal assets
 Bankruptcy will have to be both
corporate and personal
Role of legal counsel
Options
 Get
approval from Domino’s
 Sell (even for a reduced price)
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.
Role of legal counsel
Profit-Sharing Agreement
 Offered
in mid-1990s
 Initial five-year term
 Extended to 2014
Role of legal counsel
Profit-Sharing Agreement
 Franchisee
agrees to buy all
products from Domino’s
 Domino’s agrees to share profits
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
Analysis of New Franchise
Agreement
Added PULSE Requirement
 Changed
8.2
 Added new Section 15.9
Analysis of New Franchise
Agreement
History of Changes:
Late 2007 added PULSE requirement
 April 2008 introduced new FDD
 August 2008 amended FDD

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.
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.
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.
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.
Analysis of New Franchise
Agreement
Section 15.9.3:

We can require you to get PULSE
training at your cost.
Analysis of New Franchise
Agreement
Section 15.9.4:

We can require you to use
centralized or technology-based
methods of order taking.
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.”
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.
Analysis of April 2008 FDD

Recognized change in corporate
structure
Analysis of April 2008 FDD
Securitization

Corporate Parent is now Domino’s Pizza, Inc.

Was formed in 2004 to replace prior holding
company, TISM, Inc.
Analysis of April 2008 FDD
Domino’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.
Analysis of April 2008 FDD
Domino’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.]

Analysis of April 2008 FDD
Domino’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.
Analysis of April 2008 FDD
United 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.
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:



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:

Provides updates to the Minnesota case
Analysis of August 2008 FDD
Item 6 – Other Fees:


Provides updates to PULSE disclosures
Adds reference to Gift Card Program
Analysis of August 2008 FDD
Item 7 – Initial Investment:

Provides updates for the Delivering The
Dream Program and IRH Capital
program for PULSE purchases
Analysis of August 2008 FDD
Item 8 – Restrictions:


Provides updates to PULSE disclosures
Adds reference to Gift Card Program
Analysis of August 2008 FDD
Item 10 – Financing:

Provides updates for the Delivering The
Dream Program and IRH Capital
program for PULSE purchases
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)

Comparison to Other Franchises
Term/Renewal




Domino’s
Little Caesar
Papa John’s
Pizza Hut
10 plus one 10-year renewal
10 plus one 10-year renewal
10 plus one 10-year renewal
20 year initial term only
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

Comparison to Other Franchises
Territories




Domino’s
Little Caesar
Papa John’s
Pizza Hut
1 mile
1 mile
1.5 miles
500 yards
Comparison to Other Franchises
Territorial Protection




Domino’s
Pizza Hut
Little Caesar
Papa John’s
Exclusive
Exclusive
Allows competition
Allows competition
Comparison to Other Franchises
Royalties and other Fees
Domino’s Little Caesar Papa John’s
Pizza Hut
Royalties
5.5%
6%
5%
6%
Advertising
3-8%
< or = 7%
> or = 7%
6.25-7.25%
Maintenance
1.5%
Unspecified
Unspecified
Unspecified
Computer
Maintenance
1.5%
Unspecified
Unspecified
Unspecified
Comparison to Other Franchises
Training


All provide training.
Only Domino’s reserves right to charge
franchisees.
Comparison to Other Franchises
Store Products



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


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

All require franchisees to at least utilize
software required by the franchisor.
Comparison to Other Franchises
Termination by Franchisee

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

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.
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).
Comparison to Other Franchises
Termination After Opp’ty to Cure


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

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

Domino’s:
1-year
10 miles of store premises
“Any carry-out or delivery pizza store business.”

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

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.”

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



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

All reserve the right to purchase the franchise
on the same terms offered by the buyer.
Comparison to Other Franchises
Attorneys’ Fees



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

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