• The business history of the franchisor
• The employment history of the officers and executives of the company
• The litigation history of the officers and executives of the company
• The history of the company and certain key individuals with regard to filing for bankruptcy
• Financial statements

• Detailed description of the franchised business
• Initial investment to be made by the franchisee
• Any requirements that the franchisee make certain purchases or use specific suppliers
• Details of any finances provided by the franchisor
• Services that the franchisor is obligated to perform on behalf of the franchisee
• Right to use trademarks, patents, and copyrights
• Restrictions, if any, on sales
• Details about both current and terminated franchisees
• Site selection
• Employee and management training

• Required fees
• Exclusive right to serve an area
• Extent of the franchisee's personal participation in the business
• Renewal, repurchase, and termination rights and responsibilities
• Procedures for modifying the agreement
• Covenants not to compete
• Term of the agreement
• Arrangements upon the death of the franchisee

• Item 1--Background Information. Basic information about the franchisor and franchise offering, definitions of terms used in the circular, and regulations specific to the industry in which the franchise will operate.
• Item 2--Business Experience. The business experience of the franchisor's directors, officers and executives.
• Item 3--Litigation History. The litigation history of the franchisor, predecessors, and affiliates selling franchises under the franchisor's principal trademark, including confidential settlement terms of concluded litigation.
• Item 4--Bankruptcy History. Whether the franchisor, any predecessor, or general partner has been involved in a bankruptcy or reorganization within the past 10 years.
• Item 5--Initial Fees.
• Item 6--Ongoing Fees. In tabular form, all additional, ongoing fees to be paid by the franchisee, including but not limited to royalties, service charges, lease payments, and advertising fees.
• Item 7--Initial Investment. In tabular form, the initial costs and expenses.
• Item 8--Required Purchases:
  • Restrictions on sources of products and services, including required purchases by the franchisee
  • Disclosure of any franchisor or affiliate revenues from any required purchases or leases
  • The existence of any purchasing or distribution cooperatives
  • Disclosure of any consideration the franchisor receives from any required sales or leases of supplies by the franchisee
  • Disclosure of any requirement that the franchisor negotiate purchase agreements with suppliers on behalf of franchisees
• Item 9--Franchisee Obligations.
• Item 10--Financing. All direct or indirect offers of financing, and the franchisee's potential liabilities upon default.
• Item 11--Franchisor Obligations. Details of the franchisor's obligations to the franchisee, including site location, training, record-keeping, and advertising.
• Item 12--Territorial Limitations.
• Item 13--Trademarks. The principal trademarks, service marks, trade names, logotypes, or any other commercial symbols to be licensed to the franchisee.
• Item 14--Patents and Copyrights. All patents and copyrights to be licensed to the franchisee and the terms, conditions, and duration thereof.
• Item 15--Operation of Business. The obligation, if any, of the franchisee to participate personally in the direct operation of the business and whether the franchisor recommends such participation.
• Item 16--Restrictions on Goods and Services Sold by the Franchisee.
• Item 17--Termination and Other Events. In tabular form, the conditions for termination, renewal, repurchase, modification, or assignment of rights under the franchise agreement.
• Item 18--Public Figures. The names of public figures whose images are used in the promotion of franchise sales, compensation given to the public figures, their actual interest in the franchise, and the extent of their actual involvement in the business.
• Item 19--Earnings Claims. Any reasonable earnings claims made in the franchisor's offer. If no earnings claims are made, the UFOC must contain a negative disclosure, the wording of which is specified in the UFOC Guidelines.
• Item 20--Statistics. Statistics about the franchisor's total number of franchises, broken down by location, type of franchise agreement, and owner, and the names of terminated franchisees, dates of termination, and reasons for termination.
• Item 21--Financial Statements. Detailed financial statements of the franchisor conforming to Generally Accepted Accounting Principles and audited by an independent public accountant.

Federal Penalties for Failure to Disclose

Florida also regulates the sale of business opportunities, which may include some franchise relationships. The Florida Sale of Business Opportunities Act requires full disclosure in a format described by the Act or in a disclosure statement in compliance with the FTC Rule. All business opportunity contracts must be in writing, and the Act sets forth various other requirements for business opportunity sellers. The sale of a franchise is exempt from these requirements if the franchise meets the FTC Rules definition of a franchise and the franchisor pays a fee and files a notice with the Florida Department of Agriculture and Consumer Services indicating its compliance with the requirements of the FTC Rule.

A proper evaluation of a dealer termination requires the following six-step analysis: (1) determine the reasons for the termination, (2) review the written agreement, (3) evaluate potential antitrust concerns, (4) analyze potentially applicable dealer protection statutes, (5) consider the potential for common law contract and tort claims, and (6) do a damages analysis. Manufacturers typically do a good job on steps 1 through 3, then skip steps 4 and 5 entirely, thereby underestimating their damages exposure. Such oversights can be very costly.

Step One: Determine the Reasons for the Termination

Step Two: Review the Written Agreement

Common Termination at Will Language: "The Dealer's appointment may be terminated at any time by written notice by either the Company or the Dealer to the other party given at least one hundred twenty (120) days prior to the effective date specified in such notice."

Common Termination for Good Cause Language: "Company may terminate this Agreement by giving Dealer not less than sixty (60) days prior written notice of termination in the event of any of the following:

• Dealer does not maintain a level of sales of products and parts to the satisfaction of Company as required by this Agreement.
• Dealer does not perform satisfactorily its obligations listed in this Agreement.
• Failure of Dealer to perform any of the promises given or obligations undertaken in this Agreement.
• Any dispute, disagreement or controversy between or among principals, partners, managers, officers or shareholders of Dealer, which in the opinion of Company may adversely affect the business of Dealer or Company."

• Any transfer or assignment, or attempted transfer or assignment of this Agreement or any right or obligation hereunder or any sale or transfer of any interest in the ownership or active management of Dealer without prior written approval of Company; or
• The insolvency of Dealer;
• The filing of a petition for bankruptcy or for reorganization, whether voluntary or involuntary;
• If Dealer makes an assignment for the benefit of creditors;
• If a receiver is appointed for a Dealer or its property if Dealer defaults in the payment of any obligation owing to Company or its affiliates, successors or assigns; or, upon demand fails to account to Company, or its affiliates, successors or assigns for the proceeds from the sale of goods for which Dealer is indebted to Company or its affiliates, successors or assigns.
• Dealer makes any material written or oral statement or representation which is false or otherwise misleading."

Historically, state statutes regulating the conduct of parties to a franchise or dealership agreement have been viewed as the embodiment of the state's public policy and, as such, the statutes prevailed over conflicting language in agreements between the parties. Recent cases, however, have dramatically eroded this view and led to the development of a four-part test to determine whether conflicting contractual provisions--such as choice of law provisions designating the law of a different state to govern--should eliminate statutory protection that otherwise would be available:

• Did the parties agree to the choice of law in advance?
• Is there an equal number of parties in each state?
• Are the parties of relatively equal bargaining strength?
• Is the application of the law chosen repugnant to the public policy of the franchisor's state?

Step Three: Evaluate Potential Antitrust Concerns

Step Four: Analyze Potentially Applicable Dealer Protection Statutes

Most, if not all, states have consumer protection statutes, many of which are modeled after the Uniform Deceptive Trade Practices Act. These statutes generally prohibit "deceptive" trade practices and therefore may encompass conduct that might not meet the definition of fraudulent. However, they frequently provide only for injunctive relief, not damages.

Many states have statutes patterned after Section 5 of the Federal Trade Commission Act, which prohibit unfair methods of competition and unfair or deceptive acts or trade practices. Unlike most deceptive trade practices acts, these "Little FTC" acts prohibit "unfair" conduct as well as deceptive conduct, and often allow private actions for damages, attorneys' fees, and sometimes multiple damages. These claims have been successfully advanced in some dealer termination cases.

The search for potentially applicable state dealer protection statutes must go beyond the state where the distributor or dealer has its principal place of business, and must include (1) the other states in which the distributor or dealer is doing business, (2) the state where the manufacturer has its principal business location, and (3) any other state mentioned in any choice of law clause in the written dealer agreement.

Many dealer and franchise statutes have been enacted relatively recently, and their applicability to existing contracts is often in dispute. These disputes frequently arise either under statutes that do not address retroactive application, or under statutes that provide that they apply to agreements with no expiration date that were in effect at the time the statute was enacted. Even if a statute purports to apply to a contract existing prior to its enactment, the court may decline to apply the statute because of concerns over the constitutionality of its retroactive application. An attorney experienced in franchise litigation should be able to advise a concerned party about whether state law applies.

• Failure to meet performance criteria. To constitute good cause, the performance criteria must be reasonable, essential, and applied in a non-discriminatory way.
• System-wide changes. A non-discriminatory, reasonable change in all of a manufacturer's dealerships may constitute good cause under certain circumstances.
• Violations of contract or law.
• Market withdrawal. There are conflicting decisions as to whether a manufacturer's withdrawal from a market constitutes good cause. However, a change in distribution allegedly required by economic necessity is not good cause for termination of existing dealers absent withdrawal from the market.

Step Five: Common Law Considerations

Such evidence is admissible to explain or clarify ambiguous writings in all jurisdictions. If the language used in a contract is "reasonably susceptible of more than one meaning," it is ambiguous. In such cases, evidence of the custom and practice in the industry with respect to dealer terminations, and the course of dealing between the particular manufacturer and dealer, commonly is admissible to assist the jury in determining the extent of the agreement. Courts have permitted introduction of evidence of course of performance, dealing, and usage of trade, as long as that evidence does not completely negate the terms of the written contract.

If a manufacturer has, by its conduct, led the dealer to believe it would not rely on a particular clause against that dealer, the dealer may invoke the doctrine of "estoppel." The manufacturer is said to be "estopped" or prevented from relying on the clause in question.

"Recoupment" implies a minimum term in an at-will agreement, and is defined as the length of time in which the dealer can reasonably be expected to recoup its investment. It is a breach of contract if the agreement is terminated before the recoupment term. A few courts have interpreted the recoupment doctrine to apply only to exclusive dealers.

Fraudulent inducement generally means one person has misrepresented a material fact, knowing it is false, intending that the other party rely on the misrepresentation, and on which the other party does, in fact, rely. The person making the promise must have had--or appeared to have had--the authority to make the representation. Franchisors are having increasing success in asserting that the integration clauses contained in the written agreements bar, as a matter of law, fraudulent inducement claims.

Another issue that is frequently overlooked is whether the conduct of the manufacturer satisfies the elements of tortious interference with contracts and prospective contractual relationships. By introducing a tort theory of liability into dealer termination litigation, the possibility of punitive damages follows. This may have a substantial effect on the manufacturer's potential exposure and the terminated dealer's potential recovery. Tortious interference theories may successfully be employed in dealer termination litigation, and may give rise to liability under circumstances in which no obligation can be found in the relevant agreements or statutes. Tortious interference with a contract is intentionally and improperly interfering with the performance of a contract between another and a third person by causing the third person not to perform the contract.

Many jurisdictions also recognize a cause of action for tortious interference with prospective business relationships. Elements of this tort generally include (1) the existence of a valid business relationship or expectancy, (2) knowledge of the relationship or expectancy on the part of the interferer, (3) an intentional interference causing a breach or termination of the relationship or expectancy, and (4) resulting damage to the party whose relationship or expectancy has been disrupted. There are three types of interference that may occur in the franchise context: (1) interference with the dealer/distributor contractual relationships with its customers and prospective customers, (2) interference with contractual relationship between individual owners or operators and the corporate entity itself, and (3) manufacturer refusal to provide customary and reasonable assistance to the dealer during the time between notice of termination and the effective date.

Step Six: Do a Damage Analysis

First, different liability theories justify different types of damages recoveries. Statutory violations typically permit the recovery of attorneys' fees. The recoupment theory permits the recovery of unrecouped investments in the dealership. For example, a dealership that has never made a profit, but has lost $500,000 over the years in an effort to build up a market for the manufacturer's product, may be able to recover that amount, plus interest. Tort theories create the possibility of punitive damages in an amount sufficient to punish the wrongdoer for its conduct and to deter others from engaging in similar conduct in the future.

Second, even in those cases in which the measure of damages is limited to the value of what has been lost, courts have allowed far greater damages awards than what would be yielded by a simple multiplier of the pro rata net profits of the dealership. For example, a dealer who carried five lines of equipment may have covered its overhead with the first four and made its profit on the fifth. The loss of the fifth line represents the difference between profit and loss to the dealer, a loss much greater than the proportion of profit represented by revenues from the terminating manufacturer's product. Some courts therefore have recognized that a dealer whose overhead was not substantially reduced by a termination may recover damages on the basis of anticipated gross profits attributable to the terminating manufacturer's products.

A strategic consideration for both sides in a dealer termination case is whether to seek injunctive relief or a declaratory judgment. Courts recognize that often a dealer threatened with termination will not want to live on the income from a damages award, but would prefer to continue to operate the business. Courts often grant injunctive relief to preserve the relationship pending trial if an injunction is sought before termination becomes effective. However, courts generally are unwilling to grant injunctive relief after the termination becomes effective. In other words, even though one party may prefer the franchise relationship to continue, courts are loathe to order the continuation of a franchise gone sour.

• Ask good questions about how the termination provision will work and obtain a side letter with respect to termination concerns.
• Pay close attention to forum selection, arbitration, choice of law, limitation of damages, and contractual "statute of limitation" clauses.
• If you see a termination coming, try to negotiate reasonable performance criteria as an alternative to termination.
• Consider seeking injunctive relief in advance of the effective date of the termination, negotiate an extension of the termination date, and try to negotiate a resolution of the dispute, such as continuation of the distributorship or dealership subject to meeting reasonable performance criteria.
• Consult a franchise attorney before entering into a franchise relationship and upon receiving notice of termination.

• Terminate for good reasons only, and communicate those reasons in advance of the termination, giving the distributor or dealer a reasonable opportunity to correct any correctable reasons for termination.
• Do the above six-step analysis before implementing a termination decision.
• Make sure the written franchise agreement contains a definite duration, the right of the manufacturer to appoint other dealers within the territory, the right of the manufacturer to terminate the relationship upon sale of assets or a decision to go to direct distribution, a choice of law provision, a forum selection clause, and a limitation of damages clause.
• Make sure any written contract contains an integration clause, with references to how ongoing relationships, including day-to-day business agreements, will be handled.
• Consult an experienced franchise attorney before establishing the franchise and when termination issues arise.

Evaluating a Franchise Opportunity (with Checklist), David Laufer and Patrick Carter, 40 The Practical Lawyer 59 (Apr.1994).

The following agencies have specific information about franchises and dealerships, as well as registration and disclosure forms:

Federal Trade Commission, Sixth Street and Pennsylvania Avenue, Washington, D.C. 20560, (202) 326-2000. Florida Attorney General, The Capitol, Tallahassee, FL 32399-1050, (904) 488-8253.

Florida Consumer Services Department, Consumer Protection Bureau, Mayo Building, Room 235, Tallahassee, FL 32399-0800, (904) 922-2818.