Vaughn v. General Foods Corp.

Decision Date09 September 1986
Docket NumberNo. 85-1847,85-1847
Citation797 F.2d 1403
PartiesAl VAUGHN, Marjorie Vaughn, Algon Corporation and Springfield Drive-Ins, Inc., Plaintiffs-Appellees, v. GENERAL FOODS CORPORATION and Burger Chef Systems, Inc., Defendants-Appellants.
CourtU.S. Court of Appeals — Seventh Circuit

Daniel A. Medrea, Lucas, Holcomb & Medrea, Merrillville, Ind., Michael D. Hausfeld, Kohn, Milstein, Cohen & Hausfeld, Washington, D.C., for defendants-appellants.

John J. Kirby, Jr., Mudge, Rose, Guthrie, Alexander & Ferdon, New York City, for plaintiffs-appellees.

Before WOOD, EASTERBROOK and RIPPLE, Circuit Judges.

RIPPLE, Circuit Judge.

In 1982, plaintiffs Al Vaughn, Marjorie Vaughn, Algon Corporation, and Springfield Drive-Ins, Inc. (Vaughns) instituted this diversity action against General Foods Corporation and Burger Chef Systems, Inc. (the Company) claiming that they had been fraudulently induced to invest in Burger Chef franchises. The Vaughns claimed that Burger Chef engaged in a ten-year plan to dispose of its business (the System) while representing to its franchisees that it planned to build the System into a "fast food contender." Following a jury trial on a claim of fraudulent misrepresentation, 1 a verdict was entered for the plaintiffs. The defendants filed a motion for a judgment notwithstanding the verdict (JNOV) pursuant to Fed.R.Civ.P. 50(b) or, in the alternative, for a new trial pursuant to Fed.R.Civ.P. 59. The district judge denied the motion. For the reasons detailed below, we reverse the judgment of the district court.


The Vaughns' relationship with Burger Chef began in 1963 when they opened their first Burger Chef fast food restaurant in the St. Louis, Missouri area. By 1967, the Vaughns owned and operated five Burger Chef restaurants and, in 1970, they acquired a sixth. In 1968, General Foods entered the hamburger fast food market by In December 1975, General Foods commissioned the consulting firm of Booz-Allen & Hamilton to analyze the Company's marketing strategy. As a result of that firm's recommendations, another new plan was developed. Among the facets of that strategy were recruitment of new management experienced in the hamburger fast food industry and minimization of the risks of the franchise operation. In order to implement this new approach, General Foods hired Terrance Collins, an expert in the hamburger fast food industry, from McDonald's to serve as president and chief operating officer of Burger Chef. In August 1978, the Company's financial department devised a study on the salability of the Burger Chef System. This study, code-named "Project Beethoven," indicated that Burger Chef was now ranked fourth in the hamburger fast food market and that it still held second place in its "heartland" markets.

acquiring the Burger Chef chain as a wholly-owned subsidiary for $16 million and the assumption of substantial preexisting liabilities. The business did not, however, proceed according to General Foods' expectations. Accordingly, in 1971, General Foods, as a result of significant losses, wrote down $80 million of its investment in Burger Chef. This write down was widely publicized and was well known to Burger Chef's franchisees. As a result of the write down, some 460 franchised and company-owned stores were closed, and General Foods considered selling its Burger Chef operation which consisted of the 908 remaining restaurants. However, no buyer could be found. Therefore, instead of selling the Burger Chef operation at that time, General Foods decided to "manage the loss" and shifted its focus to developing its "heartland" market in the Midwest. As part of its new strategy, General Foods discontinued its former practice of guaranteeing leases for franchisees and diminished the amounts of capital it infused into the System. The new strategy did not, however, yield the return that the Company had anticipated. Continuing financial difficulties caused the Company to begin voluntarily to waive and abate franchise fees.

In late 1980, General Foods contracted with Goldman Sachs, an investment banking firm, to review its options with respect to Burger Chef. Goldman Sachs advised General Foods that the value of the System was unlikely to deteriorate and that they should reconsider selling the System after 1981. Goldman Sachs' reasoning was that, if the new strategy worked and the business turned around, its profitability would make it more salable. This reasoning would appear to have been sound. In 1981, Burger Chef finally showed a profit and, in summer 1981, General Foods received an unsolicited inquiry concerning the purchase of the System. Several months of negotiations resulted in the December 1981 agreement to sell Burger Chef to Hardee's, a competing chain. By the time that the System was sold to Hardee's for $43.5 million, General Foods had infused between $45 and $70 million in capital into the System in addition to the purchase price.

Shortly after the sale was consummated, the Vaughns instituted suit in the district court alleging that the defendants had violated the antitrust laws, had breached their fiduciary duties to the Vaughns, and had fraudulently misrepresented their intentions with respect to the Burger Chef System. On June 30, 1983, the Vaughns filed a first amended complaint, which contained claims only for breach of contract, breach of fiduciary duty, fraud and punitive damages. The breach of contract and breach of fiduciary duty claims were dismissed at the close of the plaintiffs' case.

At trial, the Vaughns attempted to prove that various statements made by General Foods and certain omissions, coupled with assertions contained in brochures and trade publications, created a false impression in the minds of the Vaughns and other franchisees that the System was viable and that it was supported fully by General Foods. According to the Vaughns, these statements and omissions constitute actionable fraud. Specifically, the Vaughns point to statements made in certain written documents.

At trial, Mr. Vaughn testified that, in or around 1970, he became aware of these undated publications which reflected the Company's intent to expand its franchise operation. Tr. 827. One such document, an undated brochure designed to woo prospective franchisees to open a Burger Chef restaurant, stated:


A Burger Chef Restaurant franchise gives you the opportunity to be an independent business person while still being a part of a proven system. As a franchisee, you'll enjoy the full support and backing of one of the largest hamburger fast-food chains in the nation. Our plans call for aggressive but controlled growth, and a big part of our plan includes bringing new franchisees into the system.

* * *

* * *

As a wholly owned subsidiary of General Foods Corporation, Burger Chef Systems, Inc. has the financial stability which this multi-billion dollar, international food corporation brings to it.

Yet Burger Chef remains an independent, autonomous corporate entity which is managed and directed by seasoned executives with many years of experience in the fast-food industry.

Plaintiffs' Ex. 762 at 5. The brochure also stated that the franchisor would provide the franchisee with a wide variety of support services:


Once your franchise application is approved, Burger Chef Systems will implement a systemized program to help you get your restaurant open and operating with the greatest possible ease. We'll provide you with the kind of support you need, when you need it--and you'll be assisted by experienced personnel during each phase of the development process ... and beyond.

* * *

* * *


You can be sure of customers from the moment your restaurant opens for business because long before this important event you'll begin receiving the advantages of Burger Chef's marketing support services.

Outstanding television and radio commercials, newspaper ads, point-of-sale materials and more are available for your own use and combine to spread the word about Burger Chef--and the quality it represents.

Burger Chef's Regional Field Marketing Representative will work with you and provide the help you need to turn your restaurant opening, grand opening and other future events into important community occasions. Burger Chef will make available numerous marketing and public relations tools to help you launch your business venture.

Utilizing the best of creative talent in the areas of advertising and promotion you'll receive the benefit of Burger Chef's fully coordinated advertising and promotion campaigns.

* * *

* * *


After your restaurant is open, you'll continue to receive professional assistance and support from Burger Chef's regional operations and functional support departments.

A Burger Chef Field Consultant in your area is responsible for helping you achieve success. You can depend on this person who has already proven to be a successful restaurant manager. Your Field Consultant's years of experience assure you that no details in the operation will be overlooked. The Field Consultant is your personal link with Burger Chef Systems, who will provide you with information and direct you to company resources which will help you maximize sales and profits and operating ability. Periodic visits to your restaurant in response to your personal requests for help and annual comprehensive on-site reviews of your operation will provide you with the professional guidance and information you need to realize your restaurant's Id. at 8, 10, 11.

operational potential. But perhaps most important, your Field Consultant will be there anytime you need help.

Another such document, entitled "Burger Chef, Independence with Security," also was designed to encourage potential franchisees to join the Burger Chef System. Plaintiffs' Ex. 730. That brochure noted that the...

To continue reading

Request your trial
64 cases
  • CPS Medmanagement LLC v. Bergen Reg'l Med. Ctr., L.P.
    • United States
    • U.S. District Court — District of New Jersey
    • August 8, 2013
    ...franchise were merely opinions of future events and could not be justifiably relied upon as “facts”); Vaughn v. General Foods Corp., 797 F.2d 1403, 1411 (7th Cir.1986) (court rejected a franchisee's efforts to sustain a claim for fraudulent non-disclosure against its franchisor, based on th......
  • Alexander v. Cigna Corp.
    • United States
    • U.S. District Court — District of New Jersey
    • January 5, 1998
    ...franchise were merely opinions of future events and could not be justifiably relied upon as "facts"); Vaughn v. General Foods Corp., 797 F.2d 1403, 1411 (7th Cir.1986) (court rejected a franchisee's efforts to sustain a claim for fraudulent non-disclosure against its franchisor, based on th......
  • Carlock v. Pillsbury Co.
    • United States
    • U.S. District Court — District of Minnesota
    • August 9, 1989
    ...v. Burger Chef Systems, Inc., 860 F.2d 1341 (6th Cir. 1988) (suit by franchisee for fraud under Tennessee law) and Vaughn v. General Foods Corp., 797 F.2d 1403 (7th Cir.1986), cert. denied, 479 U.S. 1087, 107 S.Ct. 1293, 94 L.Ed.2d 149 (1987) (same under Indiana The elements required to est......
  • Williams v. Dresser Industries, Inc.
    • United States
    • U.S. District Court — Northern District of Georgia
    • May 4, 1992 Dismiss, pp. 5-9 (discussing, inter alia, O'Neal v. Burger Chef Systems, Inc., 860 F.2d 1341 (6th Cir.1988); Vaughn v. General Foods Corp., 797 F.2d 1403 (7th Cir.1986), cert. denied, 479 U.S. 1087, 107 S.Ct. 1293, 94 L.Ed.2d 149 The Court finds, however, that Defendant's reliance upon t......
  • Request a trial to view additional results
3 books & journal articles
  • Table of Cases
    • United States
    • ABA Antitrust Library Franchise and Dealership Termination Handbook
    • January 1, 2012
    ...France, 87 F.3d 604 (2d Cir. 1996), 8 Van Ness Auto Plaza, In re , 120 B.R. 545 (Bankr. N.D. Cal. 1990), 70 Vaughn v. General Foods Co., 797 F.2d 1403 (7th Cir. 1986), 24, 130, 131 Vera, Inc. v. The Tug “Dakota” or “Miss Natalie,” 769 F. Supp. 451 (E.D.N.Y. 1991), 92 Verizon Commc’ns v. Law......
  • Adjunct Claims And Defenses
    • United States
    • ABA Antitrust Library Franchise and Dealership Termination Handbook
    • January 1, 2012
    ...1030, 1032-33 (8th Cir. 1999); Crosthwait Equip. Co. v. John Deere Co., 992 F.2d 525, 528 (5th Cir. 1993); Vaughn v. Gen. Foods Corp., 797 F.2d 1403, 1410-16 (7th Cir. 1986); Crossland v. Canteen Corp., 711 F.2d 714, 724 (5th Cir. 1983). 4. Carlock v. Pillsbury Co., 719 F. Supp. 791, 827-30......
  • Preparation And Review
    • United States
    • ABA Antitrust Library Franchise and Dealership Termination Handbook
    • January 1, 2012
    ...misrepresented 10. See, e.g., O’Neal v. Burger Chef Sys., 860 F.2d 1341, 1348-49 (6th Cir. 1988); Vaughn v. General Foods Co ., 797 F.2d 1403, 1410 (7th Cir. 1986) (affirming that “puffing” as to future events contained in franchise brochures were not statements of existing fact but rather ......

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT