VZCZCXYZ0001
PP RUEHWEB

DE RUEHSN #0407/01 0472055
ZNY CCCCC ZZH
P 162055Z FEB 06
FM AMEMBASSY SAN SALVADOR
TO RUEHC/SECSTATE WASHDC PRIORITY 1058
INFO RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY

C O N F I D E N T I A L SAN SALVADOR 000407 

SIPDIS 

SIPDIS 

STATE PASS USTR 
USDOC FOR 4332/ITA/MAC/MSIEGELMAN 
USDOC FOR 3134/ITA/USFCS/OIO/MKESHISHIAN/BARTHUR 

EO 12958 DECL: 02/15/2016 
TAGS EINV, PREL, ES 
SUBJECT: UPDATE ON MCDONALD’S CONTRACTUAL DISPUTE 
REF: 05 SAN SALVADOR 3544

Classified By: Amb. H. Douglas Barclay. Reason 1.4 (B) and (D)

¶1. (C) Summary. On December 7, 2005, an appeals court ruled that McDonald’s had illegally terminated its contract with a local franchisee on July 1, 1996, and therefore owed him $24 million in losses and damages. McDonald’s is appealing the decision, but the composition of the chamber that will hear the case makes it unlikely that justice will be served. On February 10, McDonald’s corporate representatives outlined for the Ambassador the company’s strategy to pressure the Salvadorans to ensure a fair hearing by linking the case to CAFTA-DR implementation--an approach the Ambassador suggested would be counterproductive. They also outlined efforts to convince Salvadoran government officials of the importance that the case get a fair hearing, which the Ambassador agreed to support vigorously. End summary.

¶2. (C) Since 1996, Post has supported McDonald’s in resolving its licensing dispute and related intellectual property rights dispute with a former franchisee, Roberto Bukele. The latest twist in this ten-year legal battle, described below in paras. 6-10, is an appeals court’s ruling on December 7, 2005, that McDonald’s had illegally terminated its contract with Bukele on July 1, 1996, and therefore owed him $24 million in losses and damages, a figure claimed by Bukele based on a projection of lost future earnings. On December 27, 2005, McDonald’s General Counsel for Latin America and Canada Maria Leggett briefed Ambassador Barclay on the case, expressing frustration with the legal system, but indicating that her firm would go forward with an appeal to the Supreme Court’s Civil Chamber--McDonald’s local counsel has told us that an appeal was filed on January 4, 2006. She suggested that a fair resolution of the case was unlikely given the current composition of the Civil Chamber. Two neutral judges have recused themselves based on previous involvement in the case. Judging from her case record on the bench, the third judge, an FMLN partisan, will rule against McDonald’s regardless of the merits of the case. McDonald’s is seeking to have this judge removed, and three substitute judges named. McDonald’s has filed a motion to have the FMLN-linked judge recused from the proceedings on the grounds that her well-documented anti-Americanism will prevent her from hearing the case impartially. Local counsel do not believe Supreme Court Chief Justice Agustin Calderon will decide on the recusal or name replacement justices until after March 12 elections.

¶3. (C) On February 10, McDonald’s Vice President for Government Relations Dick Crawford and Maria Legett briefed the Ambassador on the company’s efforts to see a fair resolution of the case. They explained that the company has engaged in a Washington-focused advocacy effort to put pressure on the Salvadorans to resolve the case according to the rule of law, suggesting that CAFTA-DR implementation should be delayed pending resolution of the case. The Ambassador, however, voiced concern that McDonald’s strategy ran directly counter to U.S. interests in seeing CAFTA-DR implemented as soon as possible. Emboffs also noted that McDonald’s invocation of CAFTA-DR in the lead-up to legislative elections would play into the hands of those who have resisted CAFTA-DR by alienating senior government officials who are already working to see that the case is resolved according to the rule of law and by complicating efforts to get additional CAFTA-related reforms through the Legislative Assembly. It would also unnecessarily thrust the case into the public spotlight, creating just the kind of negative publicity that McDonald’s representatives have said they seek to avoid. Crawford acknowledged these concerns and agreed to tone down, but not cease, his company’s efforts on this issue.

¶4. (C) Through local counsel, McDonald’s representative also said they would continue to pursue all available legal means to see that the case is decided according to the rule of law.  Emboffs suggested that this is essentially a political issue--getting a fair hearing for McDonald’s means finding a way to exclude judges known to follow FMLN instructions in their rulings from the process. This is an especially delicate issue at anytime, but especially in the run-up to elections and a lame-duck legislative session that provides an excellent opportunity to push through constitutional reforms to strengthen the judicial system. McDonald’s local counsel outlined a strategy it is pursuing to pressure Chief Justice Agustin Calderon to name three impartial judges to the Civil Chamber to hear the McDonald’s case. In particular, they are meeting with local business associations, think tanks, and government officials to ask them to press Calderon on naming judges who will ensure the rule of law is carried out. McDonald’s representatives also suggested they might participate in some of those meetings through a “road show” in El Salvador that would also include other corporate outreach activities.

¶5. (C) The Ambassador told Crawford and Leggett that he believes the Salvadoran Government is extremely interested in seeing the case decided fairly, and that on February 7 Foreign Minister Lainez raised the issue with the Ambassador and advised him to speak to President Saca and impress upon him the importance of the case. The Ambassador said that on February 8, he did raise the issue with Saca, emphasizing the stakes at play for a government in desperate need of foreign investment. The Ambassador emphasized that he would continue pressing this issue as appropriate to encourage resolution of McDonald’s investment dispute according to the rule of law. However, he asked McDonald’s representatives to consider beefing-up their presence in El Salvador to more actively work on the case to compliment his efforts here--a point that Crawford and Leggett took on board.

Background
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¶6. (SBU) In 1972, Roberto Bukele, a licensed franchisee of McDonald’s, opened the first McDonald’s restaurant in El Salvador. By 1992, Bukele operated three McDonald’s restaurants in El Salvador, and on June 9 of that year, McDonald’s Corporation agreed to extend Bukele’s licenses to operate all three restaurants until December 19, 1995. On April 27, 1994, McDonald’s wrote Bukele outlining the terms under which the corporation would consider renewing Bukele’s licenses and extending licenses for new restaurants. Terms included remodeling of existing restaurants (to be financed by a loan from McDonald’s to Bukele), use of McDonald’s-approved sources for food products, establishment of a staff hiring and training plan, and corporate approval of new restaurant sites and new menu items. Although not in full compliance with the terms of the April 27 letter, in December 1995 McDonald’s agreed to extend Bukele’s existing licenses until June 30, 1996, and put forth specific actions Bukele must take to remain a McDonald’s franchisee. Correspondence between Bukele and Bukele provided by McDonald’s suggest that Bukele did not meet the terms of the April 27 letter.

¶7. (SBU) On July 1, 1996, McDonald’s wrote Bukele informing him that his licenses had expired, while offering him one last chance to remain a franchisee by closing unauthorized restaurants, using McDonald’s-approved food products, establishing a staff hiring and training program, and meeting other conditions--essentially, he was asked again to meet the terms established in the April 27 letter under which contract renewal would be considered. On July 10, 1996, McDonald’s notified Bukele that his right to be a McDonald’s licensee had expired and he no longer had the right to use McDonald’s trademarks or proprietary information. Bukele continued to use McDonald’s trademarks and proprietary information in his restaurants despite the expiration of the franchising agreement.

¶8. (SBU) Although there have been a number of court cases related to this dispute, the one in play now involves a suit Bukele filed against McDonald’s in the Fourth Mercantile Court in March 1997 claiming damages for an alleged breach of contract. The court ruled in favor of McDonald’s in 1999, and in 2000 the Second Appeals Court, at the time composed of two judges not linked to Bukele or the FMLN, affirmed the decision in response to an appeal Bukele had filed. Bukele then appealed to the Supreme Court’s Civil Chamber, which at the time included two pro-FMLN judges. In 2003, the Civil Chamber remanded the case to the Second Appeals Court, requiring that the appeals court to hear additional evidence to be submitted by Bukele and annulling the 2000 verdict in favor of McDonald’s. On December 6, 2005, the appeals court, which now included two judges rumored to be friendly to Bukele--either through church links or through Bukele’s attorney--ruled in favor of Bukele, declaring that the April 27, 2004, letter was actually a 20-year contract renewal and that McDonald’s owed Bukele $24 million in damages and losses resulting from the unlawful termination of the contract.

¶9. (SBU) On January 4, 2006, McDonald’s appealed the decision to the Supreme Court’s Civil Chamber, which now includes two neutral judges who have recused themselves based on prior involvement in the case and one FMLN judge XXXXXXXXXXXX. McDonald’s has not been formally notified that the appeal has been accepted for consideration, nor has it been notified formally of the two recusals. However, the company has already filed a motion to have the FMLN-linked judge recused from the proceedings on the grounds that her well-documented anti-Americanism will prevent her from hearing the case impartially. Local counsel do not believe Supreme Court Chief Justice Agustin Calderon will forward the recusal to the entire 15-member Supreme Court for decision until after March 12 elections. Eight votes in favor of the motion would be enough to force recusal, at which point the Supreme Court en bloc would designate three judges from a pool of nine alternates to hear the case. Of the nine judges, four are linked to the FMLN. If XXXXXXXXXXXX is not recused, two will be named from this list. Either way, the reconstituted Civil Chamber would then decide on the case, with a decision ready by 2007. If McDonald’s loses, they plan to appeal to the Constitutional Chamber of the Supreme Court, and to the International Court of Justice if need be.

¶10. (SBU) There have been several other court cases related to this dispute. McDonald’s sued Bukele in 1996 in the Second Mercantile Court seeking the closure of one unauthorized restaurant. The court ruled in favor of McDonald’s, but Bukele appealed the case to an appeals court and then to the Supreme Court’s Civil Chamber, which remanded the case back to the Second Mercantile Court. The case currently languishes in that court of first instance, but in 2000 the police and prosecutors enforced an injunction issued by the Second Mercantile Court to force the restaurant involved to discontinue using McDonald’s intellectual property. McDonald’s also filed suit in 1997 in the Fifth Mercantile Court to seek an injunction under an unfair competition provision in the Commercial Code to prevent Bukele from using McDonald’s trademarks without authorization in all his restaurants. That court ruled in favor of McDonald’s, and in 1999 the Third Court of Appeals confirmed the decision. The Supreme Court’s Civil Chamber confirmed the decision of the Appeals Court in 2003, and that same year the Constitutional Chamber of the Supreme Court denied an extraordinary appeal filed by Bukele. In July 2003, the police and prosecutor’s office enforced an injunction to remove all intellectual property from Bukele’s restaurants; this case is closed. Separate criminal charges filed by McDonald’s in 1997 were dismissed, and that case is closed. Two other cases Bukele filed against McDonald’s alleging breech of contract--one in 1996 in the First Mercantile Court and another in the third Mercantile Court--were dismissed and are closed. Barclay