A Conversation with Shelby Yastrow

A Conversation With Shelby Yastrow

I grew up in Kewanee, Illinois, and an old boyhood friend forwarded to me an article from the Kewanee paper about Sandy's. This website was mentioned as a repository of information on the history of the company. I doubt if there is anyone living today who knows more than I do about the beginning of the company insofar as it relates to the "McDonald's connection." My own involvement results from a series of wild coincidences.

When I was in grade and high school, I hung out a lot at Midland Country Club , a small 9-hole golf course, outside of Kewanee, and naturally knew Paul White, Bob Wenger, and Gus "Brick" Lundberg. While Kenny Davidson wasn't a member, as far as I recall, and certainly didn't play golf like the rest of them, he was a good pal of my father's, and we regularly ate at his restaurant which was a short walk from my parent's store. At first I used to caddy for Paul, Bob and Brick, and by the time I was a junior in high school I often played with them. Their regular foursome was often filled out by R. Sheridan (Sherry) Welsh who was also their lawyer when they started business.

When I graduated from Northwestern Law School in 1959, I went to work for a Chicago law firm that had just started representing Ray Kroc and McDonald's which was a very young enterprise at the time. I, as a young clerk, was asked to do some work on a lawsuit McDonald's had filed against a place called Sandy's and its four founders. When I realized that our adversaries were people I had known when I was a kid, and whom my folks still knew, I reported the fact to my superiors. They didn't see it as a serious conflict of interest, but nonetheless we notified the opposing lawyers who, after consulting with Sherry Welsh and his partners, agreed that I had no confidential information which would disqualify me. (Today, with stricter ethics rules, I think my personal and family relationships would be enough to disqualify me, but in any event there was never a problem or reason for one. On the contrary, as you will see, my personal relationship helped resolve the case years later to everyone's satisfaction.) By the way, years later I became General Counsel, Executive VP and Secretary of McDonald's, and retired in 1998 to live in Arizona.)

As you know, the four guys had great success in their McDonald's franchise in Urbana. When they found a site in Peoria and asked Kroc for a franchise, he explained that he had already granted an "exclusive" to someone else for Peoria. It had nothing to do with lease problems as reported in the Kewanee paper. The four guys then hired a local architect by the name of Armstrong who designed a building which became the first Sandy's. It was an exact duplicate of their McDonald's store -- not surprising since Armstrong testified at the trial that he used the McDonald's blueprints for the interior of the building and they used the same equipment sold by Illinois Range Company.

Digressing here, it helps to view the history of this thing in the context of what was going on at the time. When Ray "sold" Urbana to the four guys, McDonald's was in its infancy. There was no broad advertising, no brand recognition,and very little demand for franchises. In those days, Ray would have sold to a serial killer. The first store in Des Plaines was in '56 or '57, and Ray could hardly give them away. But in a miraculously short time, McDonald's became a craze - not only for burgers but for franchises. By 1959, when I joined the law firm and began working on the case, McDonald's was already a household name. I'd guess, therefore, that by the time the guys started thinking seriously about Peoria that many others were begging for franchises.

And two important changes were made during that very short time that worked against the four guys:

a. Kroc wanted to own the real estate and lease it to the franchisees, but the guys had their own site as I recall. (There's a long story to explain this, but it was Ray's genius and accounts in great measure for the company's ensuing success.)

b. Ray had learned by then that he no longer wanted to franchise to partnerships -- by 1958 a franchise had to be to only one person with no obvious or silent partners or outside investors. He wanted one owner only who devoted his full time to the business -- and not treat it as an investment.

The case eventually set a national precedent for "in term" covenants not to compete and reversed an old Illinois case that had refused to enforce any "non-compete" clauses if they covered the entire state. The trial "judge" who was a Peoria lawyer named Hunt served as a "Master in Chancery" and was appointed for the case by a trial judge who later affirmed his findings. Hunt based his ruling at the trial level against McDonald's on an old Illinois case, Parish v. Schwartz, which held that a non-compete clause that covers the entire state is "on its face" void and against public policy because it forces a person to leave the state to pursue his trade. (The non-compete clause covered Illinois and contiguous states.) He also ruled that McDonald's had no protectable trade secrets. The Appellate court reversed, holding that Parish v. Schwartz should not apply to an "in-term" covenant -- i..e., one that applies only during the term of the franchise but not thereafter, which is what this one did. The court held that it was no different than a "full time and best efforts" clause, and that the four guys didn't have to leave Illinois to sell hamburgers -- they could do it pursuant to their Urbana franchise agreement. The Appellate Court also held that there were indeed trade secrets since, at the time of the Urbana franchise, no one else successfully was able to build a profitable chain of selling burgers for fifteen cents at a profit.

Anyway, the Kewanee guys won the trial in Peoria, but McDonald's won the appeal in the Illinois Appellate court. After working almost full time on that appeal, I but immediately thereafter left that law firm to open my own firm in Waukegan, Illinois. Sandy's then appealed to the Illinois Supreme Court. After the case was argued in the Supreme Court, but before it was decided, each side realized that winning would not be as helpful as losing would be a disaster-- If McDonald's lost it could mean that all of their franchisees could appropriate everything they learned from McDonald's, open their own restaurant in new names and not pay royalties, and McDonald's could be out of business; conversely, if the Appellate court decision was affirmed it would mean that Sandy's would literally have to close down and that the four guys would have to pay all the profits they had earned to McDonald's as "the gains of a willful and wrongful breach of contract."

The upshot was that Paul White and Kenny Davidson approached my father and asked him if I, who knew all the players but was no longer associated with McDonald's law firm, could intercede and facilitate a settlement. My dad put it to me, and then I called Ray Kroc who agreed "to listen." Both sides then notified the Illinois Supreme Court that settlement talks were taking place and requested that the Court defer ruling in the meantime, and the Court agreed. I then rented three large rooms at the Drake Hotel in Chicago -- I sat in the middle room and the negotiating teams from either side were in the adjacent rooms. (A bit of trivia -- we chose the Drake because one of Sandy's lawyers, Marty O'Connor, had polio and was confined to a wheelchair, and the Drake was one of the few places that had ramps, wide doors, etc.)

The final settlement: The appeal was withdrawn and the Appellate Court decision upholding the McDonald's non-compete clause became the ruling of the case. The four guys forfeited and closed their Urbana franchise, and paid $100,000 in legal fees to McDonald's. On the other hand, they were permitted to continue with the Sandy's venture which was the most important thing for them. The final provision that was both sides would split my exorbitant fee for acting as mediator over three days -- $1,500!!

If you have any memorabilia, pictures or stories of Sandy's, please email me!