Dayan v. McDonald's Corp.

• Citation: 466 N.E.2d 958,125 Ill.App.3d 972
• Decision Date: 16 April 1984
• Docket Number: No. 82-2411,82-2411
• Parties: , 81 Ill.Dec. 156 Raymond DAYAN, individually and as representative for Raybill Associates, an Illinois limited partnership and Paris Mac, S.A., an alien corporation, Plaintiffs-Appellants, v. McDONALD'S CORPORATION, a Delaware corporation, Defendant-Appellee.
• Court: United States Appellate Court of Illinois

Page 958

466 N.E.2d 958

125 Ill.App.3d 972, 81 Ill.Dec. 156

Raymond DAYAN, individually and as representative for

Raybill Associates, an Illinois limited partnership and Paris Mac, S.A., an alien corporation, Plaintiffs-Appellants, v. McDONALD'S CORPORATION, a Delaware corporation, Defendant-Appellee.

No. 82-2411.

Appellate Court of Illinois,

First District, First Division.

April 16, 1984.

Rehearing Denied July 31, 1984.

Epton, Mullin, Segal & Druth, Ltd., Chicago (Saul A. Epton, Gerald B. Mullin, Chicago, of counsel), for plaintiffs-appellants.

Foran, Wiss & Schultz, Chicago (Thomas A. Foran, Richard G. Schultz, James R. Figliulo, Chicago, of counsel), for defendant-appellee.

BUCKLEY, Presiding Justice:

This appeal arises out of a suit brought to enjoin McDonald's Corporation from terminating plaintiff Raymond Dayan's restaurant franchise in Paris, France. Other issues relating to this controversy have been considered twice before by this court. (Dayan v. McDonald's Corp. (1979), 78 Ill.App.3d 194, 33 Ill.Dec. 768, 397 N.E.2d 101; Dayan v. McDonald's Corp. (1978), 64 Ill.App.3d 984, 21 Ill.Dec. 761, 382 N.E.2d 55.) ¹ After a 65 day trial, the circuit court of Cook County denied plaintiff's request for a permanent injunction and dissolved an existing preliminary injunction, holding the Paris operations breached the franchise agreement by failing to adhere to McDonald's quality, service, and cleanliness standards (QSC). The trial court issued a 114-page memorandum opinion setting forth its findings of fact and conclusions of law and a 3-page judgment order terminating plaintiff's franchise to operate McDonald's restaurants in and around Paris. Under the order, plaintiff Dayan retains all of his restaurants and is allowed to compete with McDonald's. However, he is prohibited from using McDonald's trademarks or representing the Paris restaurants as being, in any way, affiliated with the McDonald's system. On appeal Dayan raises the following issues for review: (1) whether the trial court erred in making certain evidentiary rulings; (2) whether the trial court applied an erroneous legal standard in determining whether McDonald's acted in good faith in terminating Dayan's franchise; and (3) whether certain findings of fact were against the manifest weight of the evidence. ²

This case has a lengthy legal and historical background involving prior litigation. Dayan originally filed an action against McDonald's in 1970 alleging the defendant corporation had breached a prior agreement giving Dayan the right to purchase certain franchises and to develop and operate certain restaurants in Paris. In 1971, pursuant to a consent decree, the parties entered into a master license agreement (MLA) over which the courts of France and Illinois were to have concurrent jurisdiction over all controversies. In 1978, McDonald's filed two separate actions against plaintiff Dayan in the High Court of Paris alleging breach of the franchise agreement and infringement of the McDonald's trademark. Dayan responded by initiating the present suit to enjoin McDonald's from terminating the MLA. Additional background material chronicling the litigious relationship between McDonald's and Dayan has been set forth in our previously cited opinions disposing of two interlocutory appeals and will not be repeated here.

I. FACTS

The central issues in this case are factual, involving the propriety of the trial court's findings on Dayan's noncompliance with McDonald's QSC standards and the related finding of McDonald's good faith termination of the franchise agreement. To the extent necessary, specific trial court findings and the evidentiary basis for those findings have been summarized.

The unique character of the 1971 license agreement was a key factor at trial. The record reveals that the terms of this agreement were the subject of extensive negotiations between McDonald's and Dayan and differed substantially from McDonald's standard licensing agreement. These differences formed the basis for many of the trial court's pivotal evidentiary rulings and findings of fact.

Steven Barnes, the chairman of McDonald's international division, and Donald Lubin, McDonald's outside counsel, negotiated the subject licensing agreement with Dayan and his attorney partner. Lubin testified that Dayan had initially declared a preference for a license agreement similar to the one given for the development of the Canadian market. In October 1970, McDonald's submitted three alternate proposals to Dayan. Proposal 1 was McDonald's standard license agreement with a 3% royalty fee on gross receipts, real estate to be bought and developed by McDonald's with rental rates comparable to U.S.A. leases. Proposal 2 was a joint venture with McDonald's and Dayan each owning 50% equity. Proposal 3 was a developmental license similar to the original Canadian franchises and provided for a 1% royalty fee, Dayan to develop his own real estate and no McDonald's service except as ordered and paid for by Dayan.

Under the standard McDonald's license embodied in proposal 1, McDonald's would be obligated to provide extensive services to Dayan in all areas of restaurant operations and Dayan would pay a correspondingly higher royalty fee. McDonald's personnel gave testimony on the elaborate nature of the service program under the standard 3% McDonald's contract. It consists of a minimum of one annual full-field inspection by a specially trained McDonald's consultant. The inspection process takes two to three days to complete and is viewed by McDonald's as both a training opportunity for the operator and a process to ensure that minimum QSC standards are being met by their franchisees. During the inspection, the consultant reviews all aspects of the restaurant's operation, completes a standardized full-field inspection form, and reviews the form "point by point" with the operator. The consultant returns in 30 to 90 days for an unannounced follow-up visit and assigns a letter grade in each of the three categories of quality, service and cleanliness and a permanent overall grade to the restaurant. Additional "work visits" are made during the year by the consultant, the field service manager, and the regional manager. In addition to these services, McDonald's provides the operator with extensive assistance in the areas of advertising, purchasing, production, bookkeeping, and personnel.

McDonald's personnel testified further on the assistance given substandard operators under the 3% license agreement. When a consultant finds that an operator is not meeting QSC standards, he will set up a program to work with the operator to correct any deficiencies. Within six months after the first full-field inspection and follow-up visit, the inspection process will be repeated. The consultant will also immediately begin working with the operator by making frequent visits to the restaurant and offering assistance and advice. If the field consultant is still unsuccessful in assisting the operator in curing QSC deficiencies, the regional manager will work with the operator to correct the problem. After McDonald's has provided the above services, and the regional director determines that the operator is unable or unwilling to meet minimum standards, McDonald's will suggest that the operator sell to a qualified buyer. If the franchisee refuses to sell, the matter is then referred to McDonald's legal department which will not begin default proceedings unless it determines field service gave "maximum effort" and "has given the operator every assistance toward upgrading his operation."

Both Barnes and Lubin testified that they urged Dayan to accept the standard license agreement but Dayan insisted upon the 1% developmental license. Barnes testified that he told Dayan the 1% license was a mistake and that Dayan would have to spend more than the 2% difference to properly develop the market without McDonald's operational assistance. Lubin testified that he attempted to persuade Dayan to accept the 3% service agreement, stating that the Carribean franchisees who had similar 1% developmental licenses were having difficulty in complying with QSC standards because they were not requesting that McDonald's provide service under the agreement. Dayan prevailed in his demand for the 1% royalty fee with the limited service provision and the MLA was executed on May 5, 1971.

While McDonald's had initially proposed a 1% royalty for a 20-year franchise, Dayan negotiated a 30-year franchise in consideration for periodic 1/2% increases in 1981 and 1986 to a maximum of 2 1/2% beginning July 1, 1991. The service provision provides:

"Article 8.3. McDonald's further agrees that, at the written request of Dayan, it will make available to Dayan in the Territory [France] such of its personnel assigned overseas responsibilities as may be reasonably available for consultation with Dayan or his employees, for reasonable periods of time, to help give effect to this Agreement. However, the parties acknowledge that McDonald's personnel are limited and that McDonald's may not be able to fulfill all of Dayan's requests for consultation."

Article 8.4 provides that Dayan will bear the cost of any service provided.

The necessity of maintaining the QSC standards is explicitly recognized in the MLA. In Article 7.3 of the agreement Dayan acknowledged his familiarity "with the 'McDonald's system,' with McDonald's standards of 'Quality, Service, and Cleanliness,' with the need for the maintenance of McDonald's quality standards and controls * * *." The same article also recites the rationale for maintaining QSC standards--"departure of Restaurants anywhere in the world from these standards impedes the successful operation of Restaurants * * * throughout the world, and injures the value of its [McDonald's] Patents, Trademarks, Tradename, and Property * * *." Under Article 7.3 Dayan agreed to "maintain these standards as they presently...