McDonald's, Ex-Franchisee Embroiled In Court Battle

By Bob Rielly, Tribune writer

Tribune Newspapers, Business, Section E, Sunday, October 18, 1992

Despite the tranquil, wholesome family image it cultivates, McDonald's has been involved in disputes over the years, from defending the weight of the meal in its quarter-pound burger to battling angry neighborhood groups wishing to keep the golden arches from rising in their area.

Now the fast-food giant is in a legal tussle with a disabled Mesa man who is launching his own version of a "Big Mack Attack" - legal action that would stir up the franchisee business coast-to-coast.

Marshall Magruder, who owned two McDonald's franchises in Mesa, claims the multi-billion dollar Oak Brook, Ill, Ill-based corporation forced him out of business. He is asking for $9 million in actual damages and $15 million in punitive damages.

Magruder, who owned franchises at 1212 W. Main St. and near the corner of Southern and Dobson, said in his lawsuit McDonald's opened six competing outlets within 1.7 to 5 miles his two Mesa restaurants after he opened up his stores in 1969 and 1974, respectively, costing him several hundred thousands of dollars a year in lost business.  He claims gross annual sales at his Southern and Dobson store fell from $1.8 to $1.1 million after those other outlets opened.

"In such densely populated areas like New York City or downtown Boston, 1.5 miles may be an acceptable distance," Magruder's Miami, Fla.-based lawyer Robert Zarco said.  "In Mesa, it's next door."

Lawyers term such alleged encroachment "cannibalism."

Magruder also said McDonald's interfered with his business operations, made financial promise it didn't keep, and prevented him from selling one of his stores for $720,000 in cash to his brother Mac, who operates 10 McDonald's franchises.

McDonald's, which said it has first refusal rights for any of its franchises that's for sale, initiated the court battle by filing a lawsuit on Aug. 28 in U.S. District Court in Phoenix--- 10 days after Magruder's lawyer wrote a letter demanding monetary compensation.  Magruder then field an answer to that lawsuit and a counterclaim on Sept. 16.

McDonald's suit said the company obtained Magruder's franchises legally, had signed contracts that absolved it from any claims from the Mesa businessman, while claiming Magruder's personal actions negate the "cannibalism" charge.

"Magruder was forced to sell his Southern-Dobson location to McDonald's for a non-cash sale price of $720,000," said his counterclaim.  "Magruder did not receive any portion of the sale proceeds after McDonald's deducted all prior amounts owed by Magruder."

McDonald's said it assumed control over the franchise at 1212 W. Main in March 1991 when Magruder voluntarily abandoned it after defaulting on financial obligations to the fast-food chain.

"Magruder advised McDonald's that no steps to cure the default would be taken and that it was his intent to abandon the 1212 W. Main McDonald's and the franchise rights," the McDonald's suit said.

The claims by Magruder are "not matters which are appropriate for judicial inquiry since the Southern Avenue McDonald's purchase and sale agreement and the West Main franchise termination agreement are valid and in full force," states McDonald's suit.  "The claims are barred by the releases, assignment and abandonment."

McDonald's claims Magruder still owes more than $140,000 for fees and expenses.

The corporate disputes the "cannibalism" claim, saying Magruder entered into a franchise agreement to close his store at 1059 W. Main St. and voluntarily moved to the 1212 W. Main St. location in April 1990, even though he knew of the competing McDonald's restaurants.

"The fact that these restaurants were open and operating was disclosed to Marshall Magruder by McDonald's prior to his entry into the Franchise Letter Agreement," McDonald's said in its lawsuit.

McDonald's spokeswoman Rebecca Caruso said the company won't discuss the issues because the lawsuit hasn't been settled.

However, Magruder's attorney is talking.  Zarco said his client acted under duress caused by the financial pressure applied by McDonald's.

"McDonald's wanted him out and did everything they could to accomplish their goal," Zarco said in a telephone interview.

He said the fast-food company didn't like Magruder.  Zarco said Magruder angered McDonald's management by frequently raising concerns about encroachment and stating his desire to own more franchises.  The counterclaim said McDonald's wanted the franchises to pass to new owners who would pay higher fees that would climb up to 17 percent of gross sales from 8.5 percent the long-time owners like Magruder paid.

Zarco made several other claims including:

McDonald's, who said Magruder was getting an undue financial windfall before the competition came, never conducted encroachment studies to determine the effect newer franchises would have on this businesses.

Although Magruder was given an excellent performance grade, the company downgraded his marks every time a new franchise became available in his area.

McDonald's allegedly told potential buyers the Southern and Dobson franchise wasn't worth what Magruder was asking.