Dallas Bar Association
HEADNOTES
Focus International/Franchise & Distribution Law
February 2011 Volume 36 Number 2
DBA Board Chair and Vice Chair Elected Jessica d. smith
Brad C. Weber and Jerry Alexander have been elected as Chair and Vice Chair, respectively, of the 2011 Dallas Bar Association Board of Directors. Mr. Weber, a partner at Locke Lord Bissell & Liddell LLP, is CoLeader of the firm’s Antitrust Litigation Practice Group. He is a graduate of University of Michigan Law School. An active mem- Brad C. Weber ber of the DBA Business Litigation and Energy Law Sections, Mr. Weber is also Co-Chair of the 2011-2012 Campaign for Equal Access to Justice and serves as the 2011 Chair of the
Focus
Finance Committee. In addition, he is the Board Advisor for the Antitrust and Trade Regulation Section, the Trial Skills Section and the Media Relations Committee. He is also past chair of numerous committees, including the Bylaws Committee and the Morris Harrell Professionalism Committee. Mr. Weber is a past president of the Dallas Association of Young Lawyers. A shareholder at Passman & Jones, Mr. Alexander’s areas of practice Jerry Alexander include antitrust, business torts, patents, trade secrets, unfair competition and labor-related business continued on page 12
MLK Day Celebrated at the Belo Mansion
Past recipient Kim Askew, left, and DBA President Barry Sorrels, right, presented the MLK Justice Award to E. Leon Carter, a partner at Munck Carter, LLP, for inspiring others and reflecting the values and service portrayed by Dr. King. The Dallas Bar Association has celebrated Martin Luther King Jr.’s birthday annually since 1993.
International/Franchise & Distribution Law
The Franchise Disclosure Document: Puzzling or Just a Puzzle? by Stephanie L. Russ and Kelly G. Dion
Drafting a Franchise Disclosure Document (FDD) is much like assembling a jigsaw puzzle. Each puzzle piece represents an element of the franchise program. When assembled, the viewer sees and understands the big picture— the franchise model as a whole. The FDD is arranged in 23 chapters— called Items—which are designed to provide prospective franchisees detailed information about the franchised business so that they can make an informed decision about whether or not to purchase a franchise. The FDD includes the franchisor’s audited financial statements and a copy of all agreements that a franchisee must sign. Federal law prescribes the content and format of the FDD, and requires delivery of the FDD at least 14 calendar days (or sooner in the sales process if requested) before a prospective franchisee signs a binding agreement or pays any consideration in connection with the franchise. Additionally, 15 states have franchise investment laws, some of which require additional disclosures to potential franchisees who live in, or will operate the franchise in, their states. Drafting with these franchisespecific statutes in mind is important because state sales and relationships laws may override provisions of the franchise agreement, as described below. While buyers become franchisees for various reasons, they usually ask the following two
questions: What is the cost of my investment? And how much can I make? To help avoid litigation, franchisors must be cautious as to the information contained in Item 7 and Item 19. Item 7 of the FDD is a table that contains a list of items representing the potential franchisee’s total estimated initial investment. The goal of Item 7 is to provide potential franchisees with material information regarding the expenses that are likely to occur in the start-up phase of the franchise so that potential franchisees can determine if they have the financial resources to start the business and support it during its initial phase. It is critical that Item 7 is accurate. Numbers are easy to compare and fairly easy to compile. If a franchisor underestimates initial investment costs, it may expose itself to misrepresentation and other fraud-based claims. With regard to potential earnings, federal law permits, but does not require, franchisors to disclose in the FDD any earnings information. Dissemination of any kind of historical or projected earnings information is considered a “financial performance representation,” and if made, must be contained in Item 19 of the FDD. Franchisors electing not to make a financial performance representation in the FDD are prohibited from providing any earnings or profit information to prospective franchisees. It is currently estimated that 30-40 percent continued on page 10
Inside 6 The Inaugural of President Barry Sorrels 9
Can They Really Do That? Expectations Meet Franchising Realities
11 Going Global: Strategic Considerations for International Expansion 13 Oil, Royalties, and Death: Transfer of a Mineral Estate
Several past recipients attended the luncheon, including (left to right) Commisioner John Wiley Price, Hon. Sam Lindsay, H. Ron White, DeMetris Sampson, Adelfa Callejo, L.A. Beford, Jr., Hon. Carolyn Wright, Kim Askew, Rhonda Hunter and Hon. Cleophas Steele.
(Left to right) Attendees John Carr, Leon Carter and DBA President Barry Sorrels.