APPEALS COURT AWARDS FORMER MCDONALD'S FRANCHISEE

C O N F I D E N T I A L SECTION 01 OF 02 SAN SALVADOR 003544

SIPDIS

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

E.O. 12958: DECL: 12/20/2015
TAGS: EINV PGOV ECON ES
SUBJECT: APPEALS COURT AWARDS FORMER MCDONALD'S FRANCHISEE
$24 MILLION

REF: A. SAN SALVADOR 3505


B. 2003 SAN SALVADOR 1955

Classified By: A/DCM Mark Silverman. Reason 1.4 (D).


1. (SBU) Summary: In an unexpected twist in McDonald's
ten-year legal battle with former franchisee Servipronto, the
Second Court of Appeals ruled on December 7, 2005, that the
U.S. fast-food giant had illegally terminated its franchising
agreement with Servipronto on July 1, 1996, and therefore
owed the local firm $24 million in damages for unrealized
earnings during what would have been a 20-year extension, to
June 30, 2016. One other case involving McDonald's and
Servipronto has been resolved in favor of McDonald's, while
two others are unresolved. The Salvadoran Courts are
inefficient, politicized, and occasionally corrupt. Their
inability to effectively enforce commercial law detracts from
the country's ability to attract investment. Post will
continue to encourage the Government of El Salvador to press
for meaningful judicial reform. End summary.


2. (U) The Second Court of Appeals ruled on December 7,
2005, that McDonald's had illegally terminated its
franchising agreement with Salvadoran franchisee Servipronto
on July 1, 1996, and therefore owed the local firm $24
million in damages for unrealized earnings during what would
have been a 20-year extension, to June 30, 2016.
Servipronto's president, Roberto Bukele, originally filed
this case against McDonald's in the Fourth Mercantile Court
in February 1997, alleging that McDonald's had agreed to
extend his franchise agreement in a letter agreement dated
April 27, 1994. The letter agreement states that licenses
for two restaurants "would be re-written upon their
expiration for new 20-year terms provided they are remodeled
to comply with McDonald's current standards." The letter
agreement also required Bukele to close one restaurant
operated at a location (Metrocentro) not approved by
McDonald's and required him to use only approved suppliers of
goods and services. McDonald's claimed that Bukele did not
live up to the terms of the letter agreement (for example, he
did not remodel, did not close the outlet in question, and
continued to use unauthorized suppliers),and on July 10,
1996, McDonald's notified Bukele that his right to be a
McDonald's license had expired as of July 1.


3. (U) The Fourth Mercantile Court ruled in favor of
McDonald's in May 1997, stating that there was no franchise
agreement because Bukele had not lived up to the terms of the
April 27, 1994 letter agreement. Bukele appealed the case to
the Second Court of Appeals, which in January 2000 affirmed
the lower court's decision. Bukele then appealed the case to
the Supreme Court's Civil Chamber, which ruled in February
2003 that the Second Court of Appeals should hear the case
again to allow Bukele to submit new evidence (financial
data). McDonald's local counsel has told Emboffs that before
the January 5, 2006, deadline for doing so, the company will
appeal the December 7, 2005, ruling to the Civil Chamber of
the Supreme Court. McDonald's would not be required to pay
the $24 million fine while the case were pending before the
Civil Chamber. Whichever party loses the case would likely
file a final appeal that would be heard by the Constitutional
Chamber of the Supreme Court.


4. (C) McDonald's local counsel is concerned that the case
will not receive a fair hearing in the Civil Chamber.
Although judges are subject to possible reassignment in
January 2006 within the court's different chambers, local
counsel believes two of the judges currently serving in the
Civil Chamber would likely recuse themselves from the case
based on previous involvement, while a third judge is a
former FMLN guerilla with a strong bias against U.S.
interests. If she or the other judges are reassigned in
January, there is no guarantee the Civil Chamber will be more
willing to look at the facts of the case instead of basing
their decisions on political factors--several of the 15
judges sitting on the Supreme Court are FMLN partisans. The
December 7 decision, meanwhile, may itself have been tainted.
Local counsel suspects that Bukele may have influenced the
Second Court of Appeals judge through their common membership
in a local evangelical church headed by Edgar Lopez, who
pleaded guilty to passport fraud earlier this year in Texas.


5. (U) This case is but one of three pending lawsuits
involving McDonald's and Servipronto. McDonald's filed the
second case against Servipronto in June 1996, seeking closure
of Servipronto's Metrocentro outlet. The Second Mercantile
Court is currently hearing the case--the Second Court of
Appeals and Civil Chamber of the Supreme Court have already
heard it, but it was remanded to the court of first instance
on technicalities. Meanwhile, a court injunction prohibits
Servipronto from using McDonald's trademarks at its
Metrocentro location. The third pending case Bukele filed in
2002 is against McDonald's current franchisee Servimatic for
building a restaurant across the street from a now-closed
Servipronto outlet. That case has not yet been heard. In
June 2003, the Supreme Court's Civil Chamber rejected
Bukele's appeal on a fourth case that McDonald's filed
against Bukele to prevent him from using McDonald's
trademarks in his restaurants. That case is closed and the
verdict enforced (Ref. B).


6. (SBU) Comment: The Salvadoran Courts are often an
obstacle to the country's economic development. Inexplicable
delays and erratic decisions are common. The judicial system
is politicized, and FMLN judges in particular have shown a
strong bias against U.S. interests in a number of cases.
There are numerous allegations of corruption against judges
across the political spectrum. The result is an unreliable
justice system that often fails to protect the rule of law.
Government officials, especially those tasked with promoting
foreign investment, have a difficult task in promoting new
investments desperately needed to promote job creation. From
a policy perspective, the country is "on track," that is,
macroeconomic fundamentals are strong, investment barriers
are low, and the government provides a generally good
investment climate; on most days, it is a good place to do
business. However, on those days when things do not go well,
and an investor seeks resolution of a dispute with a business
partner, El Salvador is not the place to be.


7. (SBU) Comment continued: Judicial reform has been until
now considered politically impossible, but President Saca's
approval rating remains high among the public, and his ARENA
party is poised to convert that popularity into additional
seats in the Legislative Assembly in March elections (Ref.
A). Over the next few years, El Salvador may have an
opportunity to push through meaningful judicial reforms, some
of which require constitutional amendments, a lengthy process
that requires approval by two consecutive Assemblies. Post
will continue to encourage President Saca and other
decision-makers, especially Supreme Court President Agustin
Calderon, to push forward this necessary judicial reform.
End comment.
Barclay