McDonald's Corp. v. Robert A. Makin, Inc.
653 F.Supp. 401, 1986 U.S. Dist. LEXIS 16684 (1986)
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Rule of Law:
A franchisee's claim that a franchisor has violated antitrust laws or otherwise breached a franchise agreement is not a valid defense to a breach of contract action based on the franchisee's failure to pay franchise fees, especially while the franchisee continues to retain the benefits of the agreement.
Facts:
- On November 22, 1971, McDonald’s Corporation entered into a franchise agreement with Robert A. Makin for a restaurant in Clarence, New York, with Robert A. Makin, Inc., and Carol Makin later becoming parties to the agreement.
- The franchise agreement required the Makins to make monthly payments to McDonald's, calculated as a percentage of the restaurant's gross sales.
- The agreement specified that McDonald's had the option to terminate the franchise if the Makins defaulted on any payments owed to McDonald's.
- Beginning in October 1985, the Makins ceased making their required monthly payments to McDonald's.
- Despite their non-payment, the Makins continued to possess and operate the restaurant under the McDonald's brand.
- McDonald's sent four notices to the Makins demanding payment, which were unsuccessful.
- On February 7, 1986, McDonald’s formally notified the Makins that it was terminating the franchise agreement due to the payment default.
- Following the termination notice, the Makins refused to surrender the restaurant premises and cease operations.
Procedural Posture:
- McDonald’s Corporation sued Robert A. Makin, Inc., and Carol Makin in the United States District Court for the Western District of New York.
- McDonald's complaint included causes of action for breach of contract, seeking a declaration of termination and recovery of unpaid franchise fees.
- The Makins filed an amended answer asserting affirmative defenses and counterclaims, alleging that McDonald's had engaged in an illegal combination in restraint of trade, discrimination, and breach of contract.
- McDonald's moved for summary judgment on its first and third causes of action, concerning the termination of the franchise and the recovery of the amounts owed.
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Issue:
Does a franchisee's counterclaim, alleging that the franchisor engaged in antitrust violations and other breaches of contract, constitute a valid legal defense to a franchisor's action for termination and unpaid fees after the franchisee stopped making payments but continued to operate the business?
Opinions:
Majority - Chief Judge Curtin
No, a franchisee's counterclaim does not excuse its failure to pay required franchise fees while continuing to operate the business. It is a fundamental principle of contract law that a party cannot repudiate its obligations under a contract while simultaneously retaining the benefits received from that contract. The Makins' allegations against McDonald's, including claims of antitrust violations, breach of contract, and tortious interference, constitute separate claims that must be adjudicated on their own merits; they do not serve as an affirmative defense to the non-payment of fees. The court cited the Supreme Court case Kelly v. Kosuga, which established that an antitrust violation is generally not a defense to a contract action, with a very narrow exception for cases where a court's judgment would enforce the 'precise conduct made unlawful by the Act.' Here, the obligation to pay franchise fees is consideration for the use of the McDonald's system, not an enforcement of the alleged illegal price-fixing. Therefore, McDonald's had a clear contractual right to terminate the franchise upon the Makins' breach, and the Makins cannot 'stay and not pay.'
Analysis:
This decision reinforces the legal principle that contractual obligations are severable from collateral claims like antitrust violations. It provides a strong precedent for franchisors, allowing them to swiftly enforce payment obligations and terminate agreements for non-payment via summary judgment, without getting bogged down in the franchisee's complex counterclaims. The ruling significantly limits the ability of a party to use an antitrust defense in a contract dispute, forcing them to pursue such claims in a separate action. This prevents defendants from unjustly enriching themselves by retaining the benefits of a contract while refusing to perform their own obligations.
