Arch Enemies

McDonald’s Corp. blames former agency Simon Marketing for an embezzlement scheme that cost the chain $35 million. Simon blames McDonald’s for destroying the $768 million agency in retaliation — in part so McDonald’s allegedly could buy out Simon’s operations on the cheap.

McDonald’s, Oak Brook, IL, in October filed suit against Simon in U.S. District Civil Court in Chicago, charging fraud, racketeering, declaratory judgment, breach of contract, breach of fiduciary obligation, indemnity, and civil conspiracy, and asking for up to $105 million and court costs in class-action suits against the chain.

Separately, Los Angeles-based Simon’s parent, Simon Worldwide, filed suit against McDonald’s in California Superior Court for the County of Los Angeles, charging fraud, breach of contract, breach of licensing agreement, defamation, interference with existing and prospective contractual relations, and unfair competition. The suit asks for $1.9 billion in damages, a year’s worth of McDonald’s net income. Both suits were filed Oct. 23.

McDonald’s senior vp-U.S. marketing R.J. Milano and senior director-U.S. marketing Kim Poston resigned a week later (see People, pg. 105).

Both arguments hinge in part on the Master Product License Agreement that McDonald’s and Simon have had since January 1995. McDonald’s contends that the agreement requires Simon to indemnify the QSR for any problems. Simon claims that McDonald’s didn’t legally terminate the agreement, which requires 10 days’ notice. McDonald’s gave Simon no notice when it fired the shop on Aug. 21, the day the FBI arrested eight defendants — including Jerome Jacobson, Simon’s then-director of security (October PROMO).

McDonald’s suit blames the agency for the scam, in which Jacobson allegedly embezzled high-value gamepieces: “Simon, acting by and through defendant Jacobson, implemented an unlawful scheme to defraud McDonald’s and its customers.” The chain says it relinquished control over printing and seeding the gamepieces on Simon’s advice, to preserve the integrity of the games (which it calls common practice in sweepstakes). McD claims the debacle cost $20 million in diverted prizes, plus another $15 million in prize money and related advertising for an Aug. 30-Sept. 3 make-good game. It asks for triple damages and — since it blames “Simon’s misconduct” for the consumer suits which have been levied against Big Mac — calls on Simon to cover any legal costs associated with them.

In the suit, McDonald’s argues that the Master License Agreement holds it harmless for any negligence or illegal activity affecting promotions, and that Simon’s indemnity insurance (required by the license contract) covers McD’s losses and damage to its reputation. The suit also names five individuals not affiliated with Simon who were arrested in the scheme.

What Simon Says

Simon contends that McDonald’s made “tens of millions” in profits during promotional games that McD knew were rigged — but Simon didn’t. By keeping the agency in the dark during the nearly year-long FBI investigation, McDonald’s ran a “calculated and fraudulent campaign to use and then intentionally destroy Simon for its own public relations and financial benefit.” (McDonald’s said it doesn’t comment on pending litigation.)

Simon alleges that McDonald’s defamed and destroyed the agency by publicly dismissing it the same day the FBI announced its arrests — then later having reps call other Simon clients and premiums factories, urging them to quit doing business with the shop. The agency says McDonald’s terminated the Master License Agreement without the required 10 days notice, then skirted Simon to deal directly with suppliers. Had McD given notice, Simon says it could have assuaged other clients.

The suit calls those tactics “a campaign to take over Simon’s manufacturing capacities and contractual relationships by telling potential and existing customers … that Simon was not trustworthy … by refusing to pay Simon for goods [that] McDonald’s had contracted for … and by making new, independent deals with the manufacturing and supplier network Simon had built up over the years.”

Simon also contends that McDonald’s owes the agency more than $50 million for premiums ordered on the chain’s behalf.

The suit charges McDonald’s with fraud for running games that it knew consumers wouldn’t win — games Simon says it thought were legitimate. Simon claims it was duped into running games while McD cooperated with the FBI in order to “engineer a public relations coup, at Simon’s expense, when the scheme was fully unmasked.”

Winston & Strawn, Chicago, is representing McDonald’s. Fogel, Feldman, Ostrov, Ringler & Klevens, Los Angeles, represents Simon.