McDonald's Asks Federal Judge To Dismiss 'Cannibalization' Suit

By Gregory C. Baumann, Opinions Editor

The New Daily Record, Maryland's Business & Legal News, Tuesday, February 4, 1997

McDonald's Corp. yesterday moved to snuff out a lawsuit filed by a long-time Baltimore store owner who claims the company wronged him by placing too many of its restaurants in the market. 

Osborne A. Payne, the city's first African-American McDonald's owner, sued the fast food giant in October after he and the corporation couldn't agree on a proposed sale of his four restaurants.

In January, McDonald's struck back.  It asked U.S. District Judge Alexander Harvey II to issue a temporary restraining order that would give it power to take over Payne's locations.

The company claimed that Payne violated his franchise agreement by falling behind on rent and service fees, and by letting sanitary conditions in the restaurant decline.

But last week Harvey refused the company's request for immediate control of Payne's restaurants.  Instead he said he would reconsider a transfer of control after determining whether Payne's October suit should go forward.

Yesterday, McDonald's lawyer, Stephen H. Sachs argued that Payne's claims should be dismissed.

"He's asking for an exclusive territory," Sachs said.  "The franchise agreement makes clear, however, that no McDonald's franchisee has an exclusive territory."

But Robert Zarco, Payne's Miami lawyer, said his client was not asking for an exclusive territory--and that McDonald's violated its duty to deal fairly with Payne.

"Our position is not that we're trying to read into the contract a protection we don't have---Our argument is that just because there is not an exclusive territory [arrangement] doesn't give the franchisor the right to put new stores in a market indiscriminately," he said.

In his complaint, Payne claimed McDonald's maintains a non-encroachment policy to protect current store owners from future expansion stores.

Among those protections: preparation of impact studies to predict a new store's "potential cannibalization" of a current franchisee's business, and a grant of compensation to existing franchisees who lose more than 10 percent of their gross sales to a new store.

But Zarco claimed McDonald's didn't follow its own non-encroachment policy in Baltimore.

"It's not commercially reasonable to expect that a franchisor will put a store next to your store even if you don't have an exclusive territory," he said.

After argument yesterday, Harvey said he would consider McDonald's request to dismiss Payne's lawsuit and issue a written opinion this month.

That opinion is likely to explore some of the issues that will be argued Feb. 24, when McDonald's again claims it has an immediate right to take control of Payne's restaurants.