Principe v. McDonald's Corp., 79-1702

• Decision Date: 26 September 1980
• Docket Number: No. 79-1702,79-1702
• Parties: , 1980-2 Trade Cases 63,556 Frank A. PRINCIPE, Ann Principe and Frankie, Inc., Appellants, v. McDONALD'S CORPORATION, McDonald's System, Inc., and Franchise Realty Interstate Corporation, Appellees.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 303

631 F.2d 303

208 U.S.P.Q. 377, 1980-2 Trade Cases 63,556

Frank A. PRINCIPE, Ann Principe and Frankie, Inc., Appellants, v. McDONALD'S CORPORATION, McDonald's System, Inc., and Franchise Realty Interstate Corporation, Appellees.

No. 79-1702.

United States Court of Appeals, Fourth Circuit.

Submitted June 3, 1980.

Decided Sept. 26, 1980.

Harold L. Ward, Miami, Fla. (Harold Brown, John R. Kelso, Miami, Fla., James G. Harrison, Hopewell, Va., Fowler, White, Burnett, Hurley, Banick & Strickroot, P. A., Miami, Fla., on brief), for appellants.

Earl E. Pollock, Chicago, Ill. (Alan H. Silberman, Louis C. Keiler, Robert T. Joseph, Sonnenschein, Carlin, Nath & Rosenthal, Chicago, Ill., Thomas G. Slater, Jr., Ray V. Hartwell, III, Hunton & Williams, Richmond, Va., Shelby Yastrow, Oak Brook, Ill., on brief), for appellees.

Before WINTER, Circuit Judge, HARRY PHILLIPS, Senior United States Circuit Judge, Sixth Circuit, sitting by designation, and J. DICKSON PHILLIPS, Circuit Judge.

HARRY PHILLIPS, Senior Circuit Judge.

This appeal presents the question of whether a fast food franchisor that requires its licensees to operate their franchises in premises leased from the franchisor is guilty of an illegal tying arrangement in violation of § 1 of the Sherman Act, 15 U.S.C. § 1. ¹ On the facts of this case, we hold it does not and affirm the directed verdict for the defendants.

I

The appellants, Frank A. Principe, Ann Principe and Frankie, Inc., a family owned corporation, are franchisees of McDonald's System, Inc. The Principes acquired their first franchise, a McDonald's hamburger restaurant in Hopewell, Virginia, in 1970. At that time, they executed a twenty year franchise license agreement and a store lease of like duration. In consideration for their rights under these agreements, the Principes paid a $10,000 license fee and a $15,000 security deposit, and agreed to remit 2.2 per cent of their gross receipts as royalties under the franchise agreement and 8.0 per cent as rent under the lease. ² In 1974, Frank Principe and his son, Raymond, acquired a second franchise in Colonial Heights, Virginia, on similar terms. The Colonial Heights franchise subsequently was transferred to Frankie, Inc., a corporation owned jointly by Frank and Raymond Principe.

The Principes sought to purchase a third franchise in 1976 in Petersburg, Virginia. Robert Beavers, McDonald's regional manager, concluded the plaintiffs lacked sufficient management depth and capabilities to take on a third store without impairing the quality of their existing operations. During the next twenty months, the Principes obtained corporate review and reconsideration of the decision to deny them the franchise. They were notified in May 1978 that the Petersburg franchise was being offered to a new franchisee.

They filed this action a few days later alleging violations of federal and state antitrust and securities laws and state franchising laws. Counts I and II alleged McDonald's violated federal antitrust laws by tying store leases and $15,000 security deposit notes to the franchise rights at the Hopewell and Colonial Heights stores. Count XII alleged McDonald's denied the Principes a third franchise in retaliation for their refusal to follow McDonald's pricing guidelines. The remaining counts, alleging violations of state and federal antitrust and securities laws, as well as Virginia franchising laws, were dismissed prior to trial and are not before us on this appeal.

Following discovery the district court granted summary judgment for McDonald's on the security deposit note tie in claims. District Judge D. Dortch Warriner found the notes represented deposits against loss and do not constitute a product separate from the store leases to which they pertain.

The court directed a verdict for McDonald's on the store lease tie in counts at the close of all the evidence. Relying on the decision of this court in Phillips v. Crown Central Petroleum Corp., 602 F.2d 616 (4th Cir.), cert. denied, 444 U.S. 1074, 100 S.Ct. 1021, 62 L.Ed.2d 756 (1980), Judge Warriner held the Principes had failed to introduce any evidence of McDonald's power in the tying product market, which he held is the food retailing market. The court held, however, McDonald's sells only one product: the license contract and store lease are component parts of the overall package McDonald's offers its prospective franchisees. Accordingly, Judge Warriner held as a matter of law there was no illegal tie in.

The remaining issue, whether McDonald's denied the Principes a third franchise in retaliation for their pricing independence, went to the jury which held for the defendants. The jury returned an unsolicited note stating they felt the Principes had been wronged, although price fixing was not the reason, and should be awarded the Petersburg franchise. The court disregarded the jury's note and entered judgment on the verdict for McDonald's.

The Principes appeal from the summary judgment for McDonald's on the security deposit tying claim, the directed verdict on the lease tying claim, various evidentiary rulings and the refusal of the district court to order a new trial. We affirm.

II

At the time this suit was filed, McDonald's consisted of at least four separate corporate entities. McDonald's Systems, Inc. controlled franchise rights and licensed franchisees to sell hamburgers under the McDonald's name. ³ Franchise Realty Interstate Corporation (Franchise Realty) acquires real estate, either by purchase or long term lease, builds McDonald's hamburger restaurants, and leases them ⁴ either to franchisees or to a third corporation, McOpCo. McOpCo, which is not a party to this suit, operates about one-fourth of the McDonald's restaurants in the United States as company stores. Straddling this triad is McDonald's Corporation, the parent, who owns all the stock of the other defendants. Because the various defendants have substantially similar corporate hierarchies and operate in conjunction under the direction and control of the corporate parent, we shall refer to them collectively as McDonald's unless the context requires otherwise.

McDonald's is not primarily a fast food retailer. While it does operate over a thousand stores itself, the vast majority of the stores in its system are operated by franchisees. Nor does McDonald's sell equipment or supplies to its licensees. Instead its primary business is developing and collecting royalties from limited menu fast food restaurants operated by independent business people.

McDonald's develops new restaurants according to master plans that originate at the regional level and must be approved by upper management. Regional administrative staffs meet at least annually to consider new areas into which McDonald's can expand. Once the decision is made to expand into a particular geographic area, specialists begin to search for appropriate restaurant sites.

McDonald's uses demographic data generated by the most recent census and its own research in evaluating potential sites. McDonald's attempts to analyze and predict demographic trends in the geographic area. This process serves a two fold purpose: (1) by analyzing the demographic profile of a given market area, McDonald's hopes to determine whether the residents are likely to buy fast food in sufficient quantities to justify locating a restaurant there; (2) by anticipating future growth, McDonald's seeks to plan its expansion to maximize the number of viable McDonald's restaurants within a given geographic area. Based on a comparison of data for various available sites, the regional staffs select what they believe is the best site in each geographic area. Occasionally no available site suits McDonald's requirements and expansion must be postponed.

The regional staffs compile master plans for expansion once particular sites are selected. These generally extend three years into the future and are broken down by site and month. Each proposed new restaurant is assigned projected dates for acquisition of the land, ground breaking and opening. These dates vary from location to location because of differences in restaurant size, zoning and special permit requirements and various other factors. The completed master plans must be approved first by regional management and later by corporate management.

As part of the planning process, McDonald's decides what type of store to build on each site and where to locate it on the land. Differences in lot size and shape necessitate adjustments in store and parking lot configurations. Projected market size dictates dining room size. Land elevation, sign restrictions, store visibility and local set back requirements control restaurant placement.

After the specifics of each proposed new restaurant are approved, McDonald's decides whether the store will be company operated or franchised. If the decision is to franchise the store McDonald's begins the process of locating a franchisee. This involves offering the store either to an existing franchisee or to an applicant on the franchise waiting list. Applicants need not live near the store in order to be offered the franchise, and they need not accept the first franchise they are offered. The Principes lived in Kenosha, Wisconsin, and rejected eleven separate McDonald's restaurants before accepting their first franchise in Hopewell, Virginia. McDonald's often does not know who will operate a franchised store until it is nearly completed because a new restaurant may be offered to and rejected by several different applicants.

Meanwhile, Franchise Realty acquires the land, either by purchase or long term lease and constructs the store. Acquisition and development costs averaged over $450,000 per store in 1978. All McDonald's restaurants bear the same distinctive features with a few exceptions due to architectural restrictions: the golden arches motif, the brick and glass construction and the distinctive roofline....