In May 2008, McDonald’s Corporation terminated its franchise agreement with J.C., Inc., owner of the first McDonald’s restaurant in Lancaster, Ohio. The termination was based on J.C.’s failure to comply with the terms of the Franchise Agreement and a series of letters from Sean Bakes, president of McDonald’s Corporation United States from September 11, 2007, through March 7th, 2009 that warned J.C., Inc. of their non-compliance.
According to In May 2004, J.C. defaulted on its royalty payment of $90,000 for the period from January to March 2004. After receiving no response from the franchisee despite several communications from McDonald’s Corporation (MCD), MCD terminated the franchise agreement in June 2004 by written notice sent by first-class mail to J.C.’s registered agent for service of process, Gilbert and Associates, P.S. But one month later, J.C. filed a form 1099 for $90,000 for the quarter ended March 31, 2004, which stated J.C. did not receive notice of termination from MCD because of a “communications breakdown” between McDonald’s and J.C., Inc.
In response to J.C.’s action, MCD filed a lawsuit in federal court alleging J.C. had failed to pay the required monthly royalty fees for January through March 2004 and had failed to comply with its franchise agreement by not registering “its establishments with McDonald’s as it was obligated to do.” MCD asserted its right to terminate and claimed breach of contract damages over $250,000 plus interest and attorney fees. J.C. made its first four monthly payments on time, but the fifth payment was late. McDonald’s sent J.C. a notice that the late payment constituted a breach of the franchise agreement. The notice gave J.C. 30 days to “cure” the breach by making the payment. J.C. made the payment within 30 days. Six months later, J.C. again made a late payment. McDonald’s sent J.C. another notice of breach, this time stating that the late payment could not be “cured” and that McDonald’s was immediately terminating the franchise agreement. J.C. sued McDonald’s, alleging that McDonald’s had waived its right to terminate the franchise agreement because it had accepted late payments on two occasions. 1. What contract law principles are relevant to this case? 2. What arguments could J.C. make in support of its position? 3. What arguments could McDonald’s make in support of its position? 4. Who is likely to prevail in this case, and why? 1. The relevant contract law principles, in this case, are waiver and cure. 2. J.C. could argue that McDonald’s waived its right to terminate the franchise agreement because it accepted late payments on two occasions. 3. McDonald’s could argue that the late payments were not cured and that the franchise agreement was terminated according to the terms of the agreement. 4. McDonald’s is likely to prevail in this case because the contract terms state that late payments cannot be cured and that the franchise agreement can be terminated if there are late payments.
The original franchise agreement between McDonald’s Corporation and J.C., Inc., then headed by Ronald A. Schumacker, was signed in 1990. The Franchise Agreement granted Schumacker the right to operate a McDonald’s restaurant in Lancaster, Ohio for an initial term of twenty years, with a renewal option for an additional ten years thereafter. The Franchise Agreement also included a covenant not to compete, which provided that Schumacker would not within a ten-mile radius of the franchised restaurant open any restaurant selling hamburgers and/or other food products for consumption on or off the premises and served by a person working behind a counter unless the said person was wearing McDonald’s trademarked costume or distinctive uniform.
J.C., Inc., under Ronald A. Shumacker’s supervision, opened the first McDonald’s restaurant in Lancaster, Ohio in 1991. Shortly thereafter, Schumacker initiated a series of projects to expand the restaurant to include an indoor playground and an outdoor play area. These expansion projects ran over budget and eventually left J.C., Inc., with no funds for its post-expansion operations at the Lancaster location. Under Ronald A. Shumacker’s supervision, J.C., Inc., opened the first McDonald’s restaurant in Lancaster, Ohio in 1990. Shortly thereafter, Schumacker initiated a series of projects to expand the restaurant to include an indoor playground and an outdoor play area. These expansion projects ran over budget and eventually left J.C., Inc., with no funds for its post-expansion operations at the Lancaster location after only five years of business..
.Schumacker kept the post-expansion operations of the Lancaster location afloat with funds from his savings and loans. The accounts receivable accrued as a result of these mismanagement decisions were eventually passed on to the corporate office in Norfolk, Va., where because of prior questionable business practices, he was unable to generate funds from investors to repay his debts.
Mr. Shumacker, who is a convicted felon, had an agreement with McDonald’s Corporation to operate McDonald’s restaurants in Lancaster Ohio. However, he was deceiving both the public and investors with his fraudulent activities and as a result, harmed both of these parties in various ways.
Mr. Shumacker had a franchise agreement with McDonald’s Corporation to operate McDonald’s restaurants in Lancaster Ohio. He was required to be the sole owner of all corporations operating these McDonald’s locations, and he was required to comply with federal, state, and local laws as well as the rules and regulations of the McDonald’s corporation.
Due to these alleged violations, J.C.’s franchise agreement was terminated by the corporation in 2004. This ultimately resulted in bankruptcy proceedings that were caused by this termination. Mr. Shumacker not only failed to comply with the franchise agreement in a good faith manner, but he also deceived the franchisees and investors who loaned money for these franchises. This is documented below:
In 2011, Schumacker was arrested and charged by a federal grand jury for conspiracy to commit wire and mail fraud. He was presently convicted of these charges in 2012. Schumacker is scheduled to be sentenced in this case on February 5, 2014.
Schumacker’s conviction has caused a considerable amount of public harm because the public was deceived by his fraudulent activities.
In his affidavit, the undersigned stated that the community was harmed because Schumacker and J.C., Inc. had engaged in numerous acts of fraud, including:
Schumacker lied to a lender who, as a result of this misrepresentation, provided funding that was used to finance expenses related to the expansion project at the Lancaster location; 2.) Schumacker lied to other lenders who financed transactions that were part of his corporate expansions projects;
Critical questions
1. What was the nature of the franchise agreement between J.C. and McDonald’s?
2. What were the consequences of J.C. making late payments to McDonald’s?
3. Did McDonald’s accept a late payment from J.C.?
4. If so, did this constitute a waiver of McDonald’s right to terminate the franchise agreement?
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