Martino v. McDonald's System, Inc.

Citation598 F.2d 1079
Decision Date09 May 1979
Docket NumberNo. 78-1480,78-1480
Parties1979-1 Trade Cases 62,624 Louis J. MARTINO and McDonald's Drive-In of Ottumwa, Iowa, Inc., Plaintiffs- Appellants, v. McDONALD'S SYSTEM, INC. and Franchise Realty Interstate Corporation, Defendants-Appellees.
CourtU.S. Court of Appeals — Seventh Circuit

Judson H. Miner, Chicago, Ill., for plaintiffs-appellants.

Earl E. Pollock, Chicago, Ill., for defendants-appellees.

Before FAIRCHILD, Chief Judge, and PELL and WOOD, Circuit Judges.

PELL, Circuit Judge.

The plaintiffs, Louis J. Martino and McDonald's Drive-In of Ottumwa, Iowa, Inc., (McDonald's Ottumwa) appeal from the district court's entry of summary judgment against them on one count of their two count antitrust complaint against the defendants, McDonald's System, Inc. (McDonald's System) and Franchise Realty Interstate Corporation (FRIC). The only issue before this court is whether a 1973 consent judgment against Martino precludes the cause of action set forth in Count I of the present complaint. The district court held that both res judicata and the compulsory counterclaim rule of Fed.R.Civ.P. 13(a) barred the plaintiffs from suing on their first cause of action. Martino v. McDonald's System, Inc., 432 F.Supp. 499 (N.D. Ill. 1977).

In 1962 the plaintiff Louis Martino and three brothers not involved in this action entered into a franchise and lease agreement with the defendants. 1 Martino and his brothers then organized McDonald's Ottumwa, the corporate plaintiff here, to operate the business. The contract to which Martino and the defendants were parties provided that neither Martino nor a member of his immediate family would acquire a financial interest in a competing self-service food business without the written consent of McDonald's System and FRIC. In 1968 Martino's son purchased a Burger Chef franchise in Pittsburg, Kansas. Martino financed this transaction.

On the basis of this transaction FRIC and McDonald's System brought a federal diversity action in Iowa against Martino and his three brothers, charging that Martino had violated the contract provision restricting acquisitions described above. This lawsuit, commenced in 1972, ended in 1973 with a consent judgment to which the district court appended findings of fact and conclusions of law. The court order also provided that the parties had entered an agreement for the sale of McDonald's Ottumwa franchise to FRIC for $140,000. The sale was completed according to the terms of the agreement. Martino's brothers later cancelled their stock in McDonald's Ottumwa, leaving Martino as the sole shareholder.

Martino and McDonald's Ottumwa brought this action in 1975. Count I of their complaint alleges that the enforcement of the restriction on acquisition in the franchise and lease agreements violated Section 1 of the Sherman Act, 15 U.S.C. § 1. As a basis for damages, Martino claims profits he would have earned as owner of the McDonald's franchise. Both plaintiffs claim damages for having had to sell the franchise, allegedly below its market value.

The defendants have presented two theories for barring Count I of the plaintiffs' antitrust complaint. The first theory is based on the preclusive effect of Fed.R.Civ.P. 13(a), applying to compulsory counterclaims. The second theory is based on the principle of res judicata. We shall now consider the merits of each theory.

The defendants argue that the district court correctly held that Count I is precluded by Fed.R.Civ.P. 13(a). 2 Claims coming within the definition of "compulsory counterclaim" are lost if not raised at the proper time. Baker v. Gold Seal Liquors, Inc., 417 U.S. 467, 469 n. 1, 94 S.Ct. 2504, 41 L.Ed.2d 243 (1974); Fagnan v. Great Central Insurance Co., 577 F.2d 418 (7th Cir.), cert. denied, 439 U.S. 1004, 99 S.Ct. 615, 58 L.Ed.2d 680 (1978). According to the defendants, Rule 13(a) required Martino to raise this antitrust challenge to the contract provision in the earlier suit based on the same provision. If Rule 13(a) were applicable to these facts, the defendants' argument might have merit. 3 Rule 13(a), however, by its own terms does not apply unless there has been some form of pleading.

The rule expressly says that "a Pleading shall state as a counterclaim any claim which at the time of serving the Pleading the Pleader has against any opposing party . . . ." (Emphasis added). In the prior Iowa action at issue here, Martino filed no pleading as the word is defined in Fed.R.Civ.P. 7(a). 4 For this reason, Martino argues that we must not apply Rule 13(a) to the claim stated in Count I of his complaint. We agree.

Rule 13(a) is in some ways a harsh rule. It forces parties to raise certain claims at the time and place chosen by their opponents, or to lose them. The rule, however, is the result of a balancing between competing interests. The convenience of the party with a compulsory counterclaim is sacrificed in the interest of judicial economy. See Southern Construction Co. v. Pickard, 371 U.S. 57, 60, 83 S.Ct. 108, 9 L.Ed.2d 31 (1962); Dindo v. Whitney, 451 F.2d 1, 3 (1st Cir. 1971). We do not believe that the drafters of Rule 13 chose the term "pleading" unadvisedly. It no doubt marks, although somewhat arbitrarily, a point at which the judicial burden of the earlier lawsuit outweighs the opposing party's interest in bringing an action when and where it is most convenient. The earlier action between these parties was terminated by a consent judgment before the answer was filed. We see little sense in applying the broad bar established in Rule 13(a) to an action that ended with virtually no burden on the judicial calendar.

McDonald's System and FRIC emphasize, however, that the deadline for filing the answer in the earlier action had passed, 5 and that Rule 13(a) should therefore apply regardless of the absence of a responsive pleading. Citing as support several cases construing rules similar to Rule 13(a), Brenner v. Mitchum, Jones & Templeton, Inc., 494 F.2d 881 (9th Cir. 1974) (California rule); Mensing v. Sturgeon, 250 Iowa 918, 97 N.W.2d 145, 149 (1959); Keller v. Keklikian, 362 Mo. 919, 244 S.W.2d 1001, 1004-05 (1951); Friedrichsen v. Cobb, 84 Mont. 238, 275 P. 267, 271 (1929); McDonald v. Krause, 77 Nev. 312, 362 P.2d 724, 729 (1961); Harris v. Jones, 404 S.W.2d 349, 351-52 (Tex.Civ.App.1966); See also Firemen's Insurance Co. v. L. P. Steuart & Bros., Inc., 158 A.2d 675, 677 (D.C. Mun.App. 1960) (construing Fed.R.Civ.P. 13(a)), McDonald's System and FRIC argue that to hold otherwise is to reward noncompliance with the Federal Rules. We believe that this argument exaggerates the effect of not applying Rule 13(a). The Rules themselves provide for default judgments against a party for failure to plead, Fed.R.Civ.P. 55, and the effect of such a judgment as res judicata, Morris v. Jones, 329 U.S. 545, 550-51, 67 S.Ct. 451 91 L.Ed. 488 (1947); 1B Moore's Federal Practice P 0.409(4) (2d ed. 1974), prevents the nonpleading party from profiting as the result of his noncompliance. 6 See also Restatement (Second) of Judgments § 56.1, Comment a (Tent. Draft No. 1, 1973).

Although Rule 13(a) does not dispose of Martino's antitrust claim, long-standing principles of res judicata establish a narrowly defined class of "common law compulsory counterclaims." See Restatement (Second) of Judgments § 56.1(2)(b), Reporter's Note on Comment f (Tent. Draft No. 1, 1973). We hold that the antitrust claim set forth in Count I of Martino's complaint falls within this narrow class of claims and that the res judicata effect of the earlier consent judgment is a bar to raising it now.

The principle of res judicata at issue here treats a judgment on the merits as an absolute bar to relitigation between the parties and those in privity with them 7 of every matter offered and received to sustain or defeat the claim or demand and to every matter which might have been received for that purpose. Commissioner v. Sunnen, 333 U.S. 591, 597, 68 S.Ct. 715, 92 L.Ed. 898 (1948); Chicot County Drainage District v. Baxter State Bank,308 U.S. 371, 375, 60 S.Ct. 317, 84 L.Ed. 329 (1940); Cromwell v. County of Sac, 94 U.S. 351, 352, 24 L.Ed. 195 (1876).

The conclusion of the earlier contract lawsuit with a consent judgment does not prevent the earlier judgment from having a res judicata effect. Beloit Culligan Soft Water Service, Inc. v. Culligan, Inc., 274 F.2d 29, 35 (7th Cir. 1959); 1B Moore's Federal Practice P 0.409(5), at 1026 (2d ed. 1974). See Lawlor v. National Screen Service, 349 U.S. 322, 327, 75 S.Ct. 865, 99 L.Ed. 1122 (1955); United States v. Swift & Co., 286 U.S. 106, 115, 52 S.Ct. 460, 76 L.Ed. 999 (1932); Brunswick Corp. v. Chrysler Corp., 287 F.Supp. 776, 777 (E.D. Wis. 1968). The plaintiffs argue that the former judgment has no res judicata effect because the parties did not sign mutual releases. We recognize that if a consent decree is expressly entered without prejudice or reserving rights the decree will not have a preclusive effect. Brunswick Corp. v. Chrysler Corp., supra. The mere absence of releases, however, is insufficient to indicate the unambiguous intent of the parties to counteract what would otherwise be the preclusive effect of the judgment. Although the earlier judgment at issue here was entered pursuant to the agreement of the parties, it was accompanied by judicial findings of fact and conclusions of law that go to the merits of the controversy. The court described Martino's actions as "a material breach of the agreements sufficient to justify termination." 8 The trial "court is not properly a recorder of contracts, but is an organ of government constituted to make judicial decisions and when it has rendered a consent judgment it has made an adjudication." 1B Moore's Federal Practice P 0.409(5) at 1030 (2d ed. 1974).

Having determined that the prior consent judgment is an adjudication on the merits, we conclude that this judgment precludes...

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