• 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

• A detailed description of the franchised business
• The 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
• The 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 of the offering circular must describe basic information about the franchisor and franchise offering, as well as define terms used in the circular and describe regulations specific to the industry in which the franchise will operate.

Item 2 requires disclosure of the business experience of the franchisor's directors, officers and executives.

Item 3 must detail 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 must describe whether the franchisor, any predecessor, or general partner has been involved in a bankruptcy or reorganization within the past 10 years.

Item 5 must describe the initial fees to be paid by the franchisee, including whether payable in a lump sum or in installments, and under what conditions, if any, the initial fee is refundable.

Item 6 must describe, 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 requires the use of tables to identify initial costs and expenses, an estimate of any additional funds necessary to operate the business during a reasonable startup period, and the factual basis for that figure.

Item 8 must include:

• 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 requires the franchisor to list in tabular form all the franchisee's obligations under the franchise and other related agreements.

Item 10 must disclose all direct or indirect offers of financing, and the franchisee's potential liabilities upon default. It is strongly suggested that disclosure be in tabular form and all financing documents must be attached as exhibits.

Item 11 must give a detailed description of the franchisor's obligations to the franchisee, both pre-opening and ongoing during the operation of the business. These obligations may include site location, training, record-keeping, and advertising. Specific non-technical disclosure of any electronic cash register or computer systems must be made.

Item 12 must describe any exclusive rights granted to the franchisee to serve a particular geographic area, whether such exclusive rights are dependent upon meeting set sales goals, and the conditions under which they can be altered. Item 12 also must describe whether the franchisor operates company-owned units or distributes products through other methods of distribution using the principal or different trademarks.

Item 13 must describe the principal trademarks, service marks, trade names, logotypes, or any other commercial symbols to be licensed to the franchisee.

Item 14 must describe all patents and copyrights to be licensed to the franchisee and the terms, conditions, and duration thereof.

Item 15 must describe the obligation of the franchisee to participate personally in the direct operation of the business and whether the franchisor recommends such participation.

Item 16 requires the franchisor to describe limits on the goods and services that the franchisee may sell under the agreement, and any restrictions on parties to whom the franchisee may sell.

Item 17 must disclose, in tabular form, the conditions for termination, renewal, repurchase, modification, or assignment of rights under the franchise agreement. Termination is discussed further below.

Item 18 must disclose the names of public figures whose images are used in the promotion of franchise sales. The information must include compensation given to the public figure, his or her actual interest in the franchise and the extent of his or her actual involvement in the business.

Item 19 requires that any earnings claims made in the franchisor's offer must be included in the UFOC and must be reasonable at the time they are made. 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 requires the franchisor to provide statistics about the total number of franchises, broken down by location, type of franchise agreement, and owner. The information must include the names of terminated franchisees, dates of termination and reasons for termination.

Item 21 requires that the franchisor provide detailed financial statements conforming to Generally Accepted Accounting Principles and audited by an independent public accountant.

• A contract or agreement between two parties that gives the franchisee a right to do business using the franchisor's trade name, trademark, service mark, logotype, advertising, or other commercial symbol, for which the franchisee pays a franchise fee, or
• Any business opportunity in which a seller sells or leases products or services to a purchaser and represents that the seller will assist in finding locations for the buyer or that the seller will purchase products made under the agreement, or guarantees that the buyer will make a profit.

• California
• Connecticut
• Florida
• Georgia
• Hawaii
• Illinois
• Indiana
• Iowa
• Kentucky
• Maine
• Maryland
• Michigan
• Nebraska
• New Hampshire
• New York
• North Carolina
• North Dakota
• Ohio
• Oklahoma
• Oregon
• Rhode Island
• South Carolina
• South Dakota
• Texas
• Utah
• Virginia
• Washington
• Wisconsin

Federal Penalties for Failure to Disclose

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 and thus underestimate their damages exposure in step 6. Such oversights can be very costly.

Step One: Determine the Reasons for the Termination

Step Two: Review the Written Agreement

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."

"Company may terminate this Agreement immediately by delivering to Dealer or its representative written notice of such termination in the event of any of the following:

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."

Forum Selection, Arbitration, Choice of Law, and Integration Clauses

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 otherwise available statutory protection:

• Did the parties agree to the choice of law in advance?
• Are the parties evenly divided between the chosen state and the plaintiff's 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

The Minnesota Franchise Act defines prohibited "unfair and inequitable" practices, which may be enjoined, as follows:

"It is an unfair and inequitable practice for a person to . . . :

(b) terminate or cancel a franchise except for good cause. "Good cause" means failure by the franchisee to substantially comply with the material and reasonable franchise requirements imposed by the franchisor including, but not limited to:

(1) the bankruptcy or insolvency of the franchisee;

(2) assignment for the benefit of creditors or similar disposition of the assets of the franchise business;

(3) voluntary abandonment of the franchise business;

(4) conviction or a plea of guilty or no contest to a charge of violating any law relating to the franchise business; or

(5) any act by or conduct of the franchisee which materially impairs the good will associated with the franchisor's trademark, trade name, service mark, logotype or other commercial symbol. The Act also prohibits unfair and inequitable practices with respect to nonrenewal of a franchise."

Minn. Stat. § 80C.14, subd. 4 provides as follows:

"Failure to renew. Unless the failure to renew a franchise is for good cause as defined in subdivision 3, paragraph (b), and the franchisee has failed to correct reasons for termination as required by subdivision 3, no person may fail to renew a franchise unless (1) the franchisee has been given written notice of the intention not to renew at least 180 days in advance of the expiration of the franchise; and (2) the franchisee has been given an opportunity to operate the franchise over a sufficient period of time to enable the franchisee to recover the fair market value of the franchise as a going concern, as determined and measured from the date of the failure to renew. No franchisor may refuse to renew a franchise if the refusal is for the purpose of converting the franchisee's business premises to an operation that will be owned by the franchisor for its own account."

Typically these statutes have arisen out of prior terminations and litigation in those particular industries. Accordingly, if the particular industry has had a recent rash of terminations and litigation, the chances are good that an industry specific statute has been passed to regulate it. For example, the Minnesota Agricultural Equipment Dealership Act requiring good cause for cancellation, failure to renew or substantially changing the competitive circumstances of farm equipment dealerships all arose out of a rash of terminations in that industry in Minnesota.

• Failure to meet performance criteria: To constitute good cause, the performance criteria must be reasonable. Additionally, there is a developing body of law to the effect that, in order for the failure to meet reasonable performance criteria to constitute good cause, the criteria must be both essential and applied in a non-discriminatory way.
• System-wide changes: A non-discriminatory, reasonable change in all dealerships of a manufacturer compelled by business considerations 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 made necessary by economic necessity is not good cause for termination of existing dealers absent withdrawal from the market.

Generally, attempts to establish common law successor liability on manufacturers in asset purchase situations fare poorly. However, some courts have attempted to find, and some legislatures have attempted to impose, statutory successor liability under unforgiving circumstances.

Step Five: Common Law Considerations

"For a contract to exist the parties must agree with reasonable certainty about the same thing, and on the same terms. In other words, there must be an agreement between the parties as to all the essential terms and conditions of the contract. In determining whether or not there was an agreement you may consider the parties' words, written or oral, their actions and conduct, and all of the circumstances surrounding their dealings. A contract may be formed orally, in writing, by the actions of the parties, or by a combination of all three methods. The usual way in which a contract is formed is through the process of an offer by one party and an acceptance of that offer by the other party."

Parol 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 and parol evidence may be introduced. 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, is commonly admissible to assist the jury in determining what the agreement was. Courts have interpreted these provisions to permit introduction of evidence of course of performance, dealing and usage of trade when that evidence does not completely negate the terms of a written contract.

A few courts have interpreted the recoupment doctrine to apply only to exclusive dealers. In calculating unrecouped expenditures recoverable in recoupment, the court must "tak[e] into account, of course, the value of any benefits it may have derived from the arrangement during its existence or may derive thereafter."

Principal issues for making a claim of fraudulent inducement include: did the person making the promise appear to have the authority to make it, was the promise or statement with respect to when termination would occur false when made, and was there a failure to disclose material facts that should have been made at the time to avoid misleading the dealer?

Incredibly, franchisors are having increasing success in asserting that the integration clauses contained in the written agreements operate to 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 often has 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.

This section is generally construed to require (1) a contract; (2) the defendant's intentional interference with the performance of the contract; (3) no justification for the defendant's actions; and (4) resulting damage. The interference need not be directed at the person with whom the plaintiff has a contract, but may be directed at the plaintiff.

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 (i.e., unrecovered) investments in the dealership (such that, for example, a dealership that has never made a profit, but instead 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, the courts have allowed calculations that yield a far greater damages award than would a simple multiplier of the pro rata net profits of the dealership. For example, a dealer who carries five lines of equipment often covers the overhead with the first four and makes the profit on the fifth. The loss of that fifth line represents the difference between profit and loss to the dealer, a loss much greater than the proportion of the profit that is represented by revenues from the terminating manufacturer's product. Some courts have therefore recognized that a dealer whose overhead was not substantially reduced by a termination may recover damages on the basis of its anticipated gross profits that were attributable to the terminating manufacturer's products.

• Assuming the parties have unequal bargaining power, do without a written agreement if possible.
• Ask good questions as to how the termination provision will really 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, and try to obtain a side letter stating that they do not apply to you.
• If you see a termination coming, try and negotiate reasonable performance criteria as an alternative to termination.
• Consider commencing a lawsuit and seeking injunctive relief in advance of the effective date of the termination and seek to negotiate an extension of the termination date to allow you to try and negotiate a resolution of the dispute, allowing continuation of the distributorship or dealership subject to meeting reasonable performance criteria.

  Recommendations for Manufacturers

• 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.
• Most importantly, have a written agreement, which should contain:
  • Definite duration
  • Reservation of rights to the manufacturer, such as the right to appoint other dealers within the territory; rights to terminate the relationship upon sale of assets or a decision to go to direct distribution, even if those rights are not presently exercised
  • Disclaimer of any franchise relationship
  • Choice of law provision
  • Forum selection clause
  • Possibly an arbitration clause in a specified forum
  • Limitation of damages and contractual statute of limitations clauses
  • Integration clause, with references to how ongoing relationships, including day-to-day business agreements, will be handled
  • Authority clause limiting those who can bind the corporation
  • Possibly a two-way street provision requiring payment of attorneys' fees by the losing party
  • Possibly a "good cause" requirement for termination, specifically allowing termination for a reasonable array of good business reasons.

Business Franchise Guide (Commerce Clearing House, Chicago, IL, 1995 (updated periodically; contains state and federal regulations)).

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