The movie ‘the Founder’ is delightful to understand what is meant by the term “founder”. Is it someone who conceives the idea, expresses it, and eventually implements it from scratch, or is it someone who uses their entrepreneurial skills to expand on the concept/idea originated and implemented by the other from scratch? I believe the former to be accurate; that is, the founder who conceived the idea and implemented it.
The Founder focuses on the astute salesman Ray Kroc. Despite not being the founder of the McDonald’s restaurant chain, the latter made it a global brand and, in the process, sabotaged the founders in every possible manner. As we see in the movie, the brothers did try their hand at opening franchisees. However, the rapid growth and expansion only happened when Mr. Kroc joined their company, and that’s when legal troubles started for the brothers, partly because of their ignorance and partly due to Mr. Kroc’s connivance. Mr. Kroc was appointed as the franchise manager of McDonald’s in 1955. In 1961, Mr. Kroc made a buy-out at a massive deal of 2.7 million US dollars. The period between 1955-1961, that is, the appointment of Mr. Kroc as Franchise Manager and the eventual buy-out by him, is the prime focus of the movie.
The success of Mcdonald’s can be partly attributed to the trend of drive-in eateries business gradually emerging in Southern California in the 1930s. The McDonald brothers, on witnessing this trend, decided to get their own restaurant business in 1937. After hitting few roadblocks, they opened a new restaurant from scratch called ‘McDonald’s’ in 1948 in San Bernardino, California, eventually transforming the food industry. The brothers created a new service model, which they coined ‘the speede service’; this highly efficient model reduced the delivery of meals to 30 seconds after ordering and used paper cutlery and the walk-up window for customers.
Mr. Kroc came up with nothing original to him and took a free ride on brothers’ invention by utilizing the franchise model for expansion. He strictly maintained cleanliness standards and the speede service established by the brothers in the original. This model led to McDonalds becoming the world’s largest fast-food chain. What is indeed interesting is that apart from the food they serve, McDonald’s striking logo design (golden arches) is more successful in capturing the public imagination, making it one of the most valuable brands in the world with 40.3bn USD in market valuation. The logo’s idea was not conceived by the Mr. Kroc but by one of the brothers as we see in the movie.
The expansion phase of McDonald’s between 1955-1961 was filled with disputes between the brothers and Mr. Kroc on issues relating to menu, expansion rate, revenue generation, and his share in the profits. During this period, Mr. Kroc met Harry Sonneborn (who became the first CEO of McDonald), who explained to him that he is not in a burger business but a real-estate business. This epiphanic moment led Mr. Kroc to open a real estate company known as McDonald’s Corporation. He did not invite brothers to participate in the company and later took steps to keep them away. Through this company, he bought the land and leased it to Franchisees for their operations. The franchisees would pay Mr. Kroc an annual rent for the leased land or a percentage of their sales, whichever was higher. If he were partners in the brothers, the common law would have imposed a fiduciary duty on him to disclose the existence of the real estate company. The same company went on to become worth billions, thereby making Mr. Kroc incredibly powerful.
Eventually, due to constant fights, both the parties hired lawyers, and the deal was struck wherein the entire business control was handed over to Mr. Kroc except for the original restaurant. The brothers were to be paid 2.7 million USD and a ‘handshake’ deal to receive 1% as royalty of all the revenues that Mr. Kroc would make in perpetuity. This handshake deal was never honoured by Mr. Kroc, and the brothers were entirely devoid of their fortune.
Under Mr. Kroc’s leadership, the franchise spread like wildfire in every nook and corner of the USA with more than a thousand restaurants in 1968, followed by globalization in the coming decades and franchises going international in more than a hundred countries with 3600 restaurants. The logo was revamped multiple times until its final iteration in 2003. However, the golden arches in logo remained the part of the design since 1968 and thereafter making it easily recognisable in any demography around the world.
Although the dispute between the parties could have been avoided, had the McDonalds bothers not been so complacent in their attitude. The professional relationship between them and Mr. Kroc was of partnership. However, it ends with the brothers losing the entire control, including using their own names. After every fight, the brothers had multiple opportunities to take charge of their business, but they did not do so. This, as a result, only fuelled Mr. Kroc predatory tendencies as he very well understood brothers would not act against him until, and when they did, it was too late, and Mr. Kroc was powerful enough to sink them in just litigation costs.
What the McDonalds brothers ought to have done is that they should have never ignored the disagreements. Undiscussed agreements never disappear but decay over time. In the movie, every argument ended with slamming the phone, leaving no scope of compromise. The brothers lost touch with their own business as it increased and insisted on maintaining control of their national franchise while running the original restaurant in California. This misstep created a lack of knowledge and a gap between what they believed was happening and what was happening.
Moreover, when Mr. Kroc was pushing the limits of the contract, they led themselves to get bullied by never standing up for themselves. This lack of action on their part led him to believe that his actions have no negative consequences. As a result, Mr. Kroc capitalized on the gap. He rewrote the history by attributing himself as the founder of McDonald’s and the inventor of the ‘Speede Service’ and throwing brothers out of their own company. They could have sought external advisory/consultancy when these disagreements were taking place, and Mr. Kroc was repeatedly breaching the contract terms. They even let Mr. Kroc define their options for them. In the movie, Mr. Kroc admits to contravening the contractual terms and that brothers will win in the court. Still, he has the power and resources to sink them in legal costs. The brothers signed their rights away, took an inadmissible handshake deal, and deprived themselves and their future generation of billions of dollars of revenues. This action reflects appointing bad counsel for negotiations and further propagated the myth that big corporations are unbeatable. They could have been more mindful, especially when the stakes were so high. In the movie, Mr. Kroc cheated and stole from them. Therefore, it was not surprising that he did not honor the handshake deal. Had the same been in writing, the brothers would not have suffered the agony of being deprived of their fortune.
Ananya Singh is currently serving as a TRIP Fellow & Academic Tutor at O.P. Jindal Global University. She completed her B.A., LL.B. (Hons.), and LL.M. from Jindal Global Law School. She is an IPR law enthusiast with a special focus on Trademark Law, and Media & Entertainment Law.