McDonald's Corp. v. Markim, Inc., 43287

CourtSupreme Court of Nebraska
Citation209 Neb. 49,306 N.W.2d 158
Docket NumberNo. 43287,43287
PartiesMcDONALD'S CORPORATION, a Delaware Corporation, Appellant, v. MARKIM, INC., a Nebraska Corporation, Appellee. McDONALD'S CORPORATION, a Delaware Corporation, Appellant, v. ROSELI, INC., a Nebraska Corporation, Appellee.
Decision Date29 May 1981

Syllabus by the Court

1. Equity: Appeal and Error. On appeal of an equity action, our review is de novo.

2. Contracts. Absent contrary statutory provisions, manufacturers are free to enter into franchise agreements for the distribution of their products as they see fit.

3. Contracts. Generally, any person may do business with whomsoever he desires. Also, he may refuse business relations with any person whomsoever, whether the refusal is based on reason, whim, or prejudice.

4. Contracts. A contract which provides that an existing franchise holder must be given first consideration for an extension or renewal of the term does not mean that such franchisee must be given thoughtful or sympathetic regard in preference to anyone else, but only that the franchisee's qualifications be examined first and that a decision by the franchisor regarding the granting or denying of such extension must be actually and honestly exercised. Such decision must be made with entire good faith and not captiously or capriciously.

Maureen E. McGrath of Kutak, Rock & Huie, Omaha, and Burton, Cohen and Ira Feldman, Oak Brook, Ill., for appellant.

Frederick S. Cassman of Abrahams, Kaslow & Cassman, Omaha, for appellees.


HASTINGS, Justice.

McDonald's Corporation filed these actions, which have been consolidated on appeal, seeking a declaratory judgment by the District Court for Douglas County of its obligations under franchise agreements with Markim, Inc. and Roseli, Inc. McDonald's also sought an injunction barring Markim and Roseli from using its trademarks, trade names, and service marks after the expiration date of their agreements. Markim and Roseli counterclaimed, alleging that McDonald's had acted in bad faith and had violated the Nebraska Franchise Practices Act by failing to renew their expiring franchises without good cause. The trial court determined that the Nebraska Franchise Practices Act was inapplicable retroactively; however, it did find that McDonald's had acted in bad faith, and therefore entered a mandatory injunction requiring McDonald's to extend each of the expiring franchise agreements for a period of 5 years.

McDonald's appealed from the adverse rulings and assigned the following as error: (1) The court erred in finding that McDonald's acted wrongfully in exercising its discretion and acted in bad faith; (2) The court erred in holding that McDonald's did not fulfill its obligation to give appellees "first consideration" to an "additional franchise period" when it decided that it did not want to have any further franchise relation with them; and (3) The court erred in not enjoining appellees from using McDonald's trademarks, trade names, and service marks after the agreed expiration dates of their franchises. We reverse.

Markim and Roseli are corporations whose principal business is the operation of McDonald's restaurants as franchisees in the national system of fast-food hamburger restaurants. Some background is necessary to understand the ownership of the franchise rights. During the period from 1959 to 1964, when McDonald's was still in its infant stages, Bernard Copeland and John Skoog acquired a total of six McDonald's franchises in the Omaha-Council Bluffs area. In each instance, McDonald's granted a franchise and entered into a sublease of the premises for a term of 20 years. The first franchise was entered into in 1959 for the location at 8022 West Dodge Road, and the second franchise was entered into in 1961 for the location at 4802 Ames Street. Late in 1964, Eli I. Schupack and Julian J. Wineberg, who were partners in a Chicago accounting firm, on behalf of themselves and other investors, purchased the six franchises from Copeland and Skoog. McDonald's consented to the assignment of the franchises and subleases upon the express condition that Schupack and Wineberg continue to retain ownership of 51 percent of the stock of the corporations holding the franchises, and that one of the men move to Omaha and devote substantially all of his time to the active management of the six McDonald's restaurants. Eli Schupack moved to Omaha and has managed the six restaurants since the acquisition. The investors acquired a seventh restaurant in 1971 with a 20-year franchise term, which Schupack also manages.

Each restaurant is owned by a different corporation of which Schupack and Wineberg own 51 percent. The appellee Markim, Inc., is the owner of the Dodge Street restaurant, and appellee Roseli, Inc., owns the Ames Street restaurant. The original 20-year term of the Dodge Street franchise expired on February 8, 1980, and the Ames Street franchise is to expire on December 12, 1981. Pursuant to company policy to meet in the 17th year of a 20-year franchise to determine whether the franchisee will have his franchise renewed, the McDonald's rewrite committee met on August 23, 1977, to discuss the Ames Street and Dodge Street restaurants. At the conclusion of the discussion, the committee voted unanimously not to grant any additional franchise periods to appellees after the current franchise periods expire. Markim and Roseli were notified of this action by letters dated March 6, 1978, and May 8, 1979, respectively.

Subsequent to notification of the denial of the franchise renewal, it appears that appellees contended that their agreements contained a renewal option. That claim was later dropped. However, McDonald's commenced these actions, seeking a declaratory judgment that it had fully complied with its franchise agreement to give appellees first consideration for renewal and that it was not obligated to offer appellees an additional franchise period. The clause in the franchise agreement which is in issue stated:

"20. This agreement and said franchise and license granted hereunder, unless theretofore terminated, shall be and remain in full force and effect for a period of twenty (20) years from and after the first day of the month following the month during which the said establishment shall have been constructed and equipped as hereinbefore provided. If at the end of the franchise term of twenty years the premises are available and Licensee is determined in good standing by Licensor, Licensee will be given first consideration for an additional franchise period of five years, consistent with Licensor's rights and interests in the property." (Emphasis supplied.)

Prior to trial, McDonald's filed a motion for partial summary judgment which the trial court sustained, and from which no appeal has been taken. In that motion McDonald's asked the court to decide the issues of (a) the meaning of paragraph 20 and the nature of the rights and obligations it created, and (b) the applicability of the Nebraska Franchise Practices Act, Neb.Rev.Stat. §§ 87-401 et seq. (Cum.Supp.1980), effective July 22, 1978. The court held that there were no genuine issues of material fact involved in those two issues, and that McDonald's was entitled to judgment as a matter of law. The court found that the Nebraska Franchise Practices Act was not intended to apply retroactively and therefore the statutes were not applicable to the franchises involved in this lawsuit, and that McDonald's was not subject to nor in violation of the act. The court further found that the "first consideration" clause of paragraph 20 is clear and unambiguous and does not grant an option to the defendants for an extended 5-year term, nor does it obligate McDonald's to extend the franchise for an additional 5 years. However, according to the trial court's orders, the clause does require McDonald's to review and reflect upon the facts concerning the defendants' qualifications and capabilities as franchisees before considering anyone else for the franchise at the particular locations. The clause did not, in the trial court's opinion, impose any obligation on McDonald's to exercise its discretion in favor of extending defendants' franchises even if the relevant facts disclose that defendants are qualified for an additional 5-year term. In other words, once McDonald's complied with the obligation to give first consideration to the defendants, McDonald's could consider anyone else for the subsequent franchise should McDonald's desire to continue doing business at those locations. Such findings appear in the court's two orders, and are conclusive as to the parties.

After the case was tried to the court, it entered a decree reaffirming and incorporating its partial summary judgment findings and conclusions. The decree stated: "22. The Court finds that McDonald's, in each instance, failed to give Markim or Roseli 'first consideration' within the meaning of Paragraph 20, since 'first consideration' implies that such consideration will be given in a reasonable manner and based upon good faith and the requirements of reasonableness and good faith consideration were not afforded by McDonald's to the defendants." The court found that evidence establishing lack of good faith was based in part on litigation pending between McDonald's and defendants which was on appeal to this court from an adverse decision, and from which management must have harbored some resentment and dissatisfaction with Eli Schupack for the filing of the suit (see Schupack v. McDonald's System, Inc., 200 Neb. 485, 264 N.W.2d 827 (1978)); emphasis that was placed on Schupack's failure to donate to a voluntary advertising fund; letters of refusal to renew that were sent at unreasonable and unconscionable lengths of time subsequent to the decision of the committee; the management of McDonald's that misled defen...

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