DAYAN V. MCDONALD’S CORP.

125 Ill. App. 3d 972 (1984) 466 N.E.2d 958

Dayan v. McDonald’s, illustrates the difficulty in supervising the operations of a franchisee in a foreign country.
Consider how any U.S. franchiser will allow its franchisees to adapt to the cultural environment in a foreign
country while still providing the same consistent quality and service that is expected whenever anyone patronizes
one of its establishments anywhere in the world.

Facts: Dayan is a franchisee of McDonald’s in Paris, France, evidenced by a master license agreement (MLA). The
license agreement chosen by Dayan provided for a 1% royalty fee, for Dayan to develop his own real estate, and that
no McDonald's service would be provided except as ordered and paid for by Dayan.

Under the MLA, Dayan is expected to uphold McDonald’s current quality, service, and cleanliness (QSC) standards
and to observe subsequent improvements McDonald's may initiate because a departure would impede the successful
operation of the restaurant and injure the value of McDonald’s patents, trademarks, trade name, and property. The
MLA also gave McDonald’s the right to terminate the franchise if Dayan shall default in the performance of any
term of the agreement and shall fail to remedy such default within sixty (60) days after written notice.

Despite Dayan only choosing the 1% royalty fee, McDonald’s did not simply stand aside to watch him struggle
during the early years of the business (1970). Instead, they went above and beyond the terms of the MLA to help
Dayan plan his development program, seeking out suppliers, and securing financing. There was never a written
request for any of this help, nor was Dayan ever charged by McDonald's for this assistance.

However, on June 1974, the McDonald’s management was very upset and disappointed at Dayan’s failure to
maintain the agreed QSC standards. Various witnesses had testified of the deplorable condition of the restaurants:
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.

Over the years, McDonald’s demanded Dayan make changes in his operating procedures. By 1976, McDonald’s
informed Dayan that his substandard operation could no longer be tolerated and that he had 6 months bring his
restaurants up to standard. At the end of the period, McDonald’s would exercise its right to formal inspection.

By February 1977, two McDonald’s employees conducted inspections at all 5 Paris stores and found gross violations
of QSC standards. The inspectors prepared detailed reports of their observations and recommendations. Follow-up
inspection were conducted in June and July 1977.

In July 1977, instead of sending a formal notice of default, McDonald’s wrote 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. The lower court found that good cause existed for the termination and Dayan
appealed.

Issues:

1. W/N McDonald’s acted in good faith and proper motive in terminating the franchise agreement
2. W/N Mcdonald’s breached its contractual obligation to provide assistance to the franchisee
3. W/N Mcdonald’s violated its established procedures in termination

Petitioner’s argument:

1. Dayan contends that the trial court confused the distinction between the two separate legal doctrines of good
faith and improper motive. Dayan argues that even if McDonald's had good cause for termination, if it also had
an improper motive the termination would be a breach of the implied covenant of good faith. The circumstantial
 evidence presented at trial indicated that McDonald's sole motive in terminating the MLA was a desire to
recapture the lucrative Paris market.
2. Dayan also argues that McDonald's was obligated to provide him with the operational assistance necessary to
enable him to meet the QSC standards.
3. Dayan argues that there is no evidence that the absence of a 3% standard service agreement removed
McDonald's obligation to follow customary termination procedures

Respondent’s argument:

1. McDonald's argues that motive is irrelevant where good cause for termination exists and that it acted in good
faith under the most stringent of standards.
4. Under the MLA, Dayan was to pay a 1% royalty on gross receipts and receive no service unless he first
requested it in writing, McDonald's overseas personnel were available to render service, and Dayan paid for the
service
5. McDonald's argues that termination was exercised under the most stringent of standards

Ruling:

1. McDonald's terminated the franchise agreement for good cause and in good faith.

In Illinois, a covenant of good faith and fair dealing is implied in every contract absent express disavowal. Problems
relating to good faith performance typically arise where one party to the contract is given broad discretion in
performance. The dependent party must then rely on the party in control to exercise that discretion fairly. The
doctrine of good faith performance imposes a limitation on the exercise of discretion vested in one of the parties to a
contract.

In describing the nature of that limitation the courts of this State have held that a party vested with contractual
discretion must exercise that discretion reasonably and with proper motive, and may not do so arbitrarily,
capriciously, or in a manner inconsistent with the reasonable expectations of the parties.

Various cases reflect judicial concern over longstanding abuses in franchise relationships, particularly contract
provisions giving the franchisor broad unilateral powers of termination at will. Taken collectively, they stand for the
proposition that the implied covenant of good faith restricts franchisor discretion in terminating a franchise
agreement to those cases where good cause exists.

Good cause has been defined as a failure to substantially comply with obligations under the agreement. One
commentator has also noted that the test used by most courts in defining good cause seems to center on a
determination of commercial reasonability. Breaches of contract affecting the interest of the franchisor in marketing
his product constitute good cause for termination.

However, no case has been cited nor has research revealed any case where a franchise termination for good cause
was overcome by the presence of an improper motive. As a general proposition of law, it is widely held that where
good cause exists, motive is immaterial to a determination of good faith performance. Where the franchisee is in
substantial breach of the franchising agreement, particularly where the nature of the breach logically affects the
interest of the franchisor in marketing its product, no legitimate expectations of the franchisee are violated by
termination regardless of what other motives the franchisor might have.

Thus the scope of our inquiry is necessarily reduced to a determination of whether or not the evidence presented at
trial warrants a finding of substantial noncompliance with QSC standards. Throughout trial the various witnesses
struggled to find the appropriate words to describe the ineffably unsanitary conditions observed in these restaurants.
There is ample evidence on record (e.g. various statements and photographic evidence) showing deplorable
conditions of filth which support the trial court's finding of substantial noncompliance with McDonald's QSC
standards.

6. McDonald’s had sufficiently complied with its contractual obligation to provide assistance to the franchisee
During the first five years of the MLA, Dayan consistently refused to request any operational assistance even though
several McDonald's employees testified that they urged him to do so after observing the disgraceful condition of his
restaurants.

Following the 1977 restaurant inspections, Dayan had verbally asked for a French-speaking operations person to
work in the market for six months. Dayan had rejected their idea of sending an English-speaking person instead, due
to the difficulty of finding the right person. However, McDonald’s still attempted to locate a qualified person with
the required language skills. They later found Maycock, who Dayan hired, and placed in charge of training,
operations, quality control, and equipment.

Clearly, Maycock satisfied Dayan's request for a French-speaking operations man to run his training program. Thus,
McDonald's fulfilled its contractual obligation to provide requested operational assistance to Dayan.

7. McDonald’s “termination procedures” is nothing more than the extensive inspection and instruction given to
noncomplying standard licensees under the 3% license agreement in order to assist them in meeting QSC
standards.

However, the MLA chosen by Dayan provided that no McDonald's service would be provided except as ordered and
paid for by Dayan. Thus, he is not entitled to the same operational assistance prior to termination as the standard
licensee

Decision: In view of the foregoing reasons, the judgment of the trial court denying Dayan’s request for a permanent
injunction and finding that McDonald's properly terminated the franchise agreement is affirmed. McDonald’s had
fulfilled all of its responsibility under the agreement to assist Dayan in complying with the provisions of the license.
Dayan had violated the provisions of the agreement by not complying with the QSC standards. Dayan was permitted
to continue operation of his restaurants, but without use of the McDonald’s trademarks or representing the Paris
restaurants as being, in any way, affiliated with the McDonald's system.
 CASE STUDY QUESTIONS

Q1: What social or cultural factors might have affected McDonald’s presence in Paris?

Factors resulting in positive effects

a. Sense of liberty. McDonald’s answered a need among young people. To them, it is a meeting place where
they can experience independence from their families1

b. Novelty. McDonald’s is seen as typically “American” that for young people, eating there is a form of
rebellion against tradition and conformism. To be in such a place, eating a hamburger and drinking Coke is
“living like an American”2

c. Reduced lunch hours. Employees were granted shorter lunch hours to make up for the time lost due to the
35-hour workweek imposed by the government. Less time to eat automatically translates into consumers
seeking the most efficient meal available, a need which is addressed by fast food 3

d. Tourists and brand recognition. S

e. Increased number of women in the workforce. As more women hold jobs outside the home, there came a
need for more efficiency in food preparation4

f. Increase in the spending income of adolescents. A rising trend has been for more teenagers joining the
workforce while in school. Many of them join the ranks of fast food restaurants as employees 5

g. Increased urban congestion. Traffic prevents workers from travelling home and back during midday,
forcing them to take their meals in the city6

Factors resulting in negative effects

a. French pride in its union groups. Labor unions have been a fixture in the daily lives of Parisians for years.
However, McDonald’s has a long track record of anti-unionism going well back to the 1960s and 1970s,
when the corporation frequently used lie-detector tests to weed out trade union sympathisers in its US
operations. In its expansion into Europe, avoiding industry-level collective bargaining with unions is not
always feasible. Nevertheless it still fights hard to avoid company-level agreements where it can and tries to
keep unions out of the restaurants7

(i) There were frequent strikes and forms of labor action and solidarity to protest against degrading work
conditions, low pay, and American-style management policy (standardisation)

1 Debouzy, M. (2006). Working for McDonald's, France: Resistance to the Americanization of Work. International Labor and
Working-Class History, (70), 126-142. Retrieved February 10, 2021, from http://www.jstor.org/stable/27673051
2 Debouzy, M. (2006). Working for McDonald's, France: Resistance to the Americanization of Work. International Labor and
Working-Class History, (70), 126-142. Retrieved February 10, 2021, from http://www.jstor.org/stable/27673051
3 Fantasia, R. (1995). Fast Food in France. Theory and Society, (24), 201-243. Retrieved February 10, 2021, from
http://ucparis.fr/files/3813/4728/2114/PCC131_Dufoix_FastFood_FA12.pdf
4 Fantasia, R. (1995). Fast Food in France. Theory and Society, (24), 201-243. Retrieved February 10, 2021, from
http://ucparis.fr/files/3813/4728/2114/PCC131_Dufoix_FastFood_FA12.pdf
5 Fantasia, R. (1995). Fast Food in France. Theory and Society, (24), 201-243. Retrieved February 10, 2021, from
http://ucparis.fr/files/3813/4728/2114/PCC131_Dufoix_FastFood_FA12.pdf
6 Fantasia, R. (1995). Fast Food in France. Theory and Society, (24), 201-243. Retrieved February 10, 2021, from
http://ucparis.fr/files/3813/4728/2114/PCC131_Dufoix_FastFood_FA12.pdf
7 Royle, T. (2002). Just Vote No! Union-busting in the European fast food industry: the case of McDonald’s. Industrial
Relations Journal, (33), 262-278. Retrieved February 10, 2021, from http://homepages.se.edu/cvonbergen/files/2013/11/Just-
Vote-No_Union-busting-in-the-European-Fast-food-Industry_The-Case-of-McDonalds.pdf
 (ii) McDonald’s “Americanness” can be seen in its concept of work and in its drive for efficiency and
profit. However, this drive means lack of respect for workers, disregard for labor law, and hostility for
unionism8

h. Disdain for things distinctly American. Good food and cooking are at the core of French culture and
French identity. Fast food, with its suggestion of speed, standardization, and the homogenization of taste,
represent the direct inverse of French gastronomic practices. The desire of the French to be proud of their
heritage shows resistance, by all means necessary, of all the negative influences from the US9

(i) Fast food is seen as a threat to the French’s food habits

(ii) Certain groups, particularly those in the French agricultural sector, disdain American agricultural
policy because it imposes a standardisation of products and ruins small farmers

i. Disdain for tasteless and unhealthy food. With the arrival of Foot and Mouth Disease and mad Cow
Disease in Europe, the French chose a diet of organic produce over genetically-engineered and US style fast
food. France is further known for its support of Jose Bove, a French farmer/agro-engineer who disdained la
malboufe (junk food). His philosophy is that Frenchmen should not become “servile slaves at the service of
agribusiness”. As a sheep farmer and political activist, it was Bové who in 1999 led a group of angry
protesters in the demolition of a McDonald’s under construction in his native town of Millau

j. Demonstrations against the Iraq war. Paris is home to a large Muslim population. In times of political
tension, McDonald’s became a clear symbol of the hated “Americanness”. During demonstration agains the
US war on Iraq, several McDonald’s restaurants were vandalised and destroyed. McDonald’s is no longer
as a symbol of tasteless food but of America’s unwanted presence and of American imperialism 10

Q2: How could McDonald’s have exercised greater control over its foreign franchisee?

a. Franchise contract. There must be strict adherence to the franchise contract11:

(i) Non-compliance will results in sanctions or other negative legal outcomes. For example, franchisees
who are performing poorly may not be offered the right to purchase an additional unit in a
neighbouring territory
(ii) Compliance may be a result from the use of a reward or bonus system. For example, good franchisees
may enjoy extending their franchise agreements and waiving renewal fees

k. Selection process. The parent firm should12:

(i) Take into account several factors such as governance choice, support mechanisms, relationship
management, required capabilities
(ii) Manage cultural differences, demonstrate an awareness of and sensitivity to language barriers, business
practices, and political and legal differences, and adapt accordingly to local market conditions
(iii) Consider the financial capabilities of the foreign franchise partner because that partner can bring
positive results to the franchise system

8 Debouzy, M. (2006). Working for McDonald's, France: Resistance to the Americanization of Work. International Labor and
Working-Class History, (70), 126-142. Retrieved February 10, 2021, from http://www.jstor.org/stable/27673051
9 Debouzy, M. (2006). Working for McDonald's, France: Resistance to the Americanization of Work. International Labor and
Working-Class History, (70), 126-142. Retrieved February 10, 2021, from http://www.jstor.org/stable/27673051
10 Debouzy, M. (2006). Working for McDonald's, France: Resistance to the Americanization of Work. International Labor and
Working-Class History, (70), 126-142. Retrieved February 10, 2021, from http://www.jstor.org/stable/27673051
11 Frazier, L., Wright, O., & Merrilees, B. (2007). Power and control in the franchise network: An investigation of ex-
franchisees and brand piracy. Journal of Marketing Management, (23), 1037-1054. DOI: 10.1362/026725707X250458
12 Rosado-Serrano, A., Paul, J., & Dikova, D. (2018). International franchising: A literature review and research agenda.
Journal of Business Research, (85), 238-257.
 l. Support mechanisms. Training and other assistance, site visits and national advertisements by the
franchisor may be used to change and control the behavior of the franchisee13

(i) Appropriate codification and transfer of know-how and assets across the firm's boundaries and between
the franchisor and its local partners14

m. Franchise relationship. Promoting a cooperative environment requires managing the power and control in
franchise relationships by zooming in on the role of trust, satisfaction, communication, and cultural
sensitivity

(i) It is important to find the balance between standardisation and permitting local market adaptation
(ii) This relationship begins during the selection process and should be nurtured throughout the franchise
relationship

Q3: What types of products or services are most suitable for foreign licensing?

In a 2016 study by the International Licensing Industry Merchandiser’s Association (LIMA) 15, there are different
property types of licensed merchandise with their relative shares of estimated overall licensing industry revenues
generated:

a. Character and Entertainment Licensing (45%). Character & Entertainment licensing is one of the largest
segments of the licensing business, and is probably the part most recognized by the general public.

(i) This category of licensing encompasses properties originating primarily from feature films, television
shows, videogames and online entertainment. (Characters and franchises that are created via books are
also a popular licensing category, but are generally classified as “publishing” properties for the purpose
of Licensing International’s numbers.)

n. Corporate Trademark and Brand Licensing (21%). The licensing of company names, logos, or brands
(referred to as corporate trademark/brand licensing) is one of the fastest-growing segments of the licensing
business. Much of the growth is spurred by the fact that licensing provides enormous strategic, marketing
and earning benefits to both licensor and licensee.

(ii) An ever-increasing number of major corporations in the trademark/brand sector are using their
corporate trademarks and brands to build marketing visibility for a core brand by licensing its use in
non-core businesses; to protect the company’s trademarks; to enhance their brand images; to increase
their brand exposure; and to generate extra revenues and profits. For a brand owner, licensing offers a
way to achieve any or all of those goals without making a large upfront investment in internal product
development and manufacturing.
(iii) The realm of brand licensing stretches from the rather mundane of featuring a corporate logo on a t-
shirt to much more sophisticated integrated marketing and product development efforts in which a
brand is extended into new product areas in ways that are seamless to consumers.

o. Fashion Licensing (12%). The licensing of designer fashion names and brands into such categories as
apparel, fashion accessories, health & beauty aids and home goods is one of the best-known facets of the
business.

13 Alon, I., Apriliyanti, I., & Parodi, M. (2021). A systematic review of international franchising. Multinational Business
Review, (29), 43-69. DOI 10.1108/MBR-01-2020-0019
14 Rosado-Serrano, A., Paul, J., & Dikova, D. (2018). International franchising: A literature review and research agenda.
Journal of Business Research, (85), 238-257.
15 Licensing International (2021). Types of Licensing. Retrieved on February 10, 2021, from
https://licensinginternational.org/what-is-licensing/#1555922711413-cd9c5966-0ffb
 (iv) In some cases a fashion label may exist only as a license – even the main “core” apparel categories are
licensed to third parties for manufacturing, marketing and distribution. The designer or brand owner is
responsible for creating the design direction and the marketing umbrella that defines the brand’s
appeal. In most other cases, however, the designer or brand owner creates, markets and manufactures
specific core categories, and uses licensing as a way of extending the brand into tangential areas such
as other apparel areas (i.e. outerwear or intimate apparel), accessories (i.e. belts, headwear, watches,
luggage and footwear), fragrances and beauty products, or home fashions.
(v) Fashion licensing is often invisible to the consumer, who is not to even considering that a third-party
licensee is making the products that carry the designer’s name. Of course, in a well-executed, tightly
run licensing program, the brand owner maintains strict control over design and quality, and the
licensee manufactures to the agreed-upon specifications, thus achieving a seamless brand image.

p. Sports Licensing (10%). Sports licensing has grown in scope and sophistication over the past decade, and
is one of the top four revenue producers in the licensing world.

(vi) In the U.S., the business is dominated by the four major sports leagues — National Football League,
Major League Baseball, National Basketball Association and the National Hockey League – along with
NASCAR. Each of those leagues runs the licensing business on behalf of its teams out of a centralized
league office.
(vii) Other significant licensing campaigns surround smaller professional sports leagues (i.e. Major
League Soccer, Minor League Baseball), organizations such as the U.S. Olympic Committee and the
National Collegiate Athletic Association (NCAA), and major sports events such as the Olympics and
soccer’s World Cup.
(viii) In addition more than 300 colleges and universities in the U.S. are involved in collegiate licensing,
marketing their rights primarily to the apparel market with sometimes very respectable revenues,
depending on the performance of their sports teams and the size of the university or college.

Pharmaceutical Licensing. A license where a drug company that owns the patent to a certain drug, as licensor,
grants a license to another drug company, as licensee, allowing them to manufacture and sell a drug that utilizes the
patented formula

a. Partners should focus on property rights (formula, know-how, intellectual property rights), uses of the product
(manufacture, use in a manufacturing process, sub-license), geographic coverage and indications (for instance,
veterinary use as opposed to human use). There are three major classifications of drug manufacturing
companies16:

(i) Drug manufacturing companies that are ‘development-oriented’ as they have acquired a significant number
of new products from outside entities. For this group, mainly composed of American companies (Schering-
Plough, Johnson & Johnson, American Home Products, Bristol-Myers Squibb Co, Abbott), the number of
products acquired under license was equal or superior to half of the products that constituted their pipeline.
(ii) The manufacturing company with a well-balanced portfolio. For the latter, the percentage of new products
under license is close to the average of the sample (that is 41.6 per cent). Among these are mostly European
drug manufacturing companies (Aventis, Roche, Novartis, GlaxoSmithKline)
(iii) ‘Research-oriented’, as these only have a small number of products under license in their portfolio. They
appeal less often to licensing agreements to enrich their portfolio of products under development. Most of
them are European (Boehringer Ingelheim, Novo Nordisk, Schering AG), followed by US (Merck & Co)
and Japanese (Yamamouchi) companies

16 Simonet, D. (2002). Licensing Agreements in the Pharmaceutical Industry. Journal of Medical Marketing, (2), 329-341. DOI:
10.1057/palgrave.jmm.5040090
Technology Licensing. Technology licensing17 refers to a contractual arrangement whereby one firm (licensor) sells
the rights to the use of technology, in the form of products, processes, patents, trademarks, marketing, and technical
know-how to another firm (licensee). In return, the licensee pays a lump sum and/or royalty on the sale of the
product.

A license where a technology company, as licensor, grants a license to an individual or company, as licensee, to use
a particular technology. An example would include Microsoft granting a license to individual users allowing them to
use the Windows operating system

a. The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) was conceived with the
objective to “contribute to the transfer and dissemination of technology, to the mutual advantage of producers
and users of technological knowledge and in a manner conducive to social and economic welfare18

(i) IP protection is associated with a 65% increase in the predicted probability of licensing foreign technology
for the subpopulation of affiliated firms
(ii) IP protection is associated with with a 47% increase in the predicted probability of licensing foreign
technology for firms operating in upper-middle-income countries

17 Atuahene-Gima, K. (1993). International Licensing of Technology: An Empirical Study of the Differences between Licensee
and Non-Licensee Firms. Journal of International Marketing, 1(2), 71-87. Retrieved February 10, 2021, from
https://www.jstor.org/stable/25048495?read-now=1&refreqid=excelsior
%3A9f12b2da6888346ab02d7ebc5e56e4c9&seq=2#page_scan_tab_contents
18 Asian Development Bank (2017). Intellectual Property Rights and Foreign Technology Licensing in Developing Countries:
An Empirical Investigation. ADB Economics Working Paper Series (515). Retrieved on February 10, 2021, from
https://www.adb.org/sites/default/files/publication/343596/ewp-515.pdf