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Dayan v. Mcdonald's Corp.





Appeal from the Circuit Court of Cook County; the Hon. Richard L. Curry, Judge, presiding.


Rehearing denied July 31, 1984.

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, 397 N.E.2d 101; Dayan v. McDonald's Corp. (1978), 64 Ill. App.3d 984, 382 N.E.2d 55.) *fn1 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 three-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. *fn2

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.


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 Caribbean 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 existed" and to observe subsequent improvements McDonald's may initiate. Article 7.1 further provides that Dayan will not vary from QSC standards without prior written approval.

The MLA also contains specific default provisions. Article 23.1(a) gives McDonald's the right to terminate if "Dayan shall default in the performance of any term of this agreement and shall fail to remedy such default within sixty (60) days after written notice * * *." Article 13.2 provides "Dayan personally, fully, and unconditionally guarantees the prompt and full performance * * * of all obligations to McDonald's."

In addition, the MLA required McDonald's to issue Dayan operating licenses for each restaurant opened. Pursuant to the MLA, McDonald's issued 14 operating license agreements (OLA) to Dayan which also unequivocally obligated him to maintain McDonald's standards in the operation of each restaurant. Paragraph 8(A) of each OLA required Dayan to keep each establishment "in good condition and repair and in a clean and neat appearance, in compliance with the standards fixed * * * in the Operating Manual * * *." Paragraph 8(C) also provides that all employees will wear uniforms and render courteous service, that only approved paper goods and packaging be used, and that "only such flavoring and garnishments and ingredients as shall comply with the specifications, selection, variety, proportion, appearance, quality, flavoring, and other ingredients or characteristics for such designated food products as are set forth in the Operations Manual" shall be used in the restaurants. The OLAs also included the following termination provision:

"(G) Licensee acknowledges that uniform quality and taste of food, excellence of service, cleanliness, appearance and general performance are of the utmost importance to the successful operation of the business venture of the Licensee and of all other Licensees using said System, and in order to assure adherence to the above standards and all other provisions in this License Agreement relating to the general operation (as more fully set forth in this paragraph 8) the Licensee agrees that any violation of this paragraph 8 shall be deemed to be a substantial breach of this Agreement and shall give the Licensor the right to terminate this Agreement in accordance with the terms of paragraph 16 herein."

In the trial court's memorandum opinion the MLA was characterized as "a unique and stylized franchise for Dayan" and "the result of protracted negotiations." The trial court contrasted McDonald's service obligations under the standard license agreement and the developmental license agreement, finding "a developmental licensee who pays a 1% royalty * * * neither pays for nor receives these inspectional, education, and consultation services from [McDonald's]." The trial court further noted:

"Since QSC is the standard to measure a restaurant's operations whether or not the service fee is being paid, the 3% fee appears from this record only to impact McDonald's conduct in nursing a substandard operator back to compliance. The testimony is clear, if the licensee pays the 3% service fee the total resources of the parent company will be marshalled to help the operator. If however the licensee does not pay the 3% royalty then the company feels justified (as in the case of the Caribbean license as well as Dayan's) in standing aside and watching the operator struggle."

Pursuant to the provisions of the MLA, Dayan and McDonald's set about the business of developing the Paris market. The trial court found that prior to February 1977 McDonald's exercised good faith in attempting to obtain compliance with QSC standards. Far from "standing aside and watching the operator struggle," the trial court found that during these early years McDonald's "encouraged him [Dayan], assisted him, financed him, accommodated him, nurtured him, cajoled him, pleaded with him and supported him."

Barnes, the president of McDonald's international division, testified at length about the Dayan-McDonald's relationship during these early years (1970-1977). Barnes traveled to Paris frequently and helped Dayan plan his development program, he looked for real estate sites with Dayan, he visited suppliers with Dayan, he sought out suppliers in Europe and advised Dayan "to use our suppliers in Holland and Germany," he arranged for numerous advisors to parade in and out of Paris over the years in an effort to assist or advise Dayan, he negotiated price reductions with suppliers for Dayan, and he secured Dayan financing by McDonald's beyond the MLA limits. There was never a written request for any of this help, nor was Dayan ever charged by McDonald's for this assistance. Barnes also testified that in June 1974 he "was upset and disappointed" that two years after the opening of the first restaurant in Paris "the only likeness that I could see to McDonald's was the sign" on Dayan's stores. Barnes stated that Dayan's stores were filthy, and he personally reminded Dayan of his responsibility to maintain McDonald's QSC standards. In October 1975 Barnes told Dayan he was "discouraged and completely destroyed" by three years of Dayan's lip-service with "no intention of improving" the condition of his stores. Barnes also testified that he was "ashamed and embarrassed" at what other European franchisees and personnel had seen and experienced in one of Dayan's restaurants during a purchasing meeting in Paris.

Other witnesses called by McDonald's corroborated Barnes' testimony as to the deplorable condition of Dayan's restaurants. In particular, their testimony revealed that Dayan was not using approved products, he refused to delay the opening of his first restaurant even though McDonald's personnel had declared it unfinished and unsuitable for opening, he used no pickles, he charged extra for catsup or mustard, he hid straws and napkins under the counter, he responded to complaints from McDonald's personnel with "If they don't like it, they can buy me out," he refused to take a refresher course at McDonald's "Hamburger University," the stores were filthy and without many items of necessary equipment, the store crews were poorly trained and frequently out of uniform, and customer complaints were numerous.

Dayan's own testimony corroborates the fact that over the years McDonald's made demands for changes in his operating procedures. Dayan testified that McDonald's had made these demands with respect to the training of personnel and concerning the maintenance of equipment and had warned him about using raw food products not in accord with McDonald's specifications.

The trial court found the testimony of Barnes and the other McDonald's witnesses to be highly credible and noted that Dayan himself confirmed many of Barnes' recollections. The trial court stated "he [Dayan] admitted receiving the assistance and meeting a wide variety of McDonald's staff sent by Barnes over the years — where Barnes or others testified that they had rebuked him for his operational deficiencies Dayan generally did not remember."

Barnes further testified that in June 1976 he told Dayan that his substandard operation could no longer be tolerated. Barnes informed Dayan that he would be given six months to bring his restaurants up to standard and at the end of this period McDonald's would exercise its right to formal inspection. These inspections were performed eight months later in February 1977 by Sollars and Allin, two McDonald's employees. The trial court characterized these inspections as signaling the "end of five years of indulgence, forbearance, and carte blanche tolerance of Dayan's excuses."

Allin and Sollars visited all of the Paris McDonald's stores, doing a full-field inspection at four and a partial full-field at a fifth. They found gross violations of McDonald's QSC standards at all the stores they visited. Sollars testified that he "told Raymond that if the worst store I had ever seen in the United States was an A then his had to be Z," to which Allin added, "these are absolutely the worst stores I have ever seen in my life." Both Sollars and Allin testified that over an eight-day period they counseled store managers at each location, noting deficiencies and the methods needed to overcome them; they prepared cleaning and maintenance checklists for store managers; they demonstrated approved techniques to store crews and managers; they prepared an outline of their observations for Dayan and discussed remedial procedures with him for nearly eight hours. Allin and Sollars returned to Paris for follow-up inspections in June and July of 1977. Conditions in the restaurants generally had not changed — QSC standards were not being met, products were not properly prepared and some stores were even dirtier.

The record reveals that after being advised of the continuing substandard conditions of the Paris restaurants, McDonald's considered sending a formal notice of default. Instead, in July 1977, a stern warning letter was sent to Dayan advising him that the number, variety and severity of QSC deficiencies justified a default declaration but that such declaration would be held in abeyance for six months to "give you an opportunity to take immediate corrective action." Ultimately, McDonald's brought suit in Paris to terminate the MLA, which resulted in Dayan filing the present suit in Illinois to enjoin termination.


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