Simon says suit

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Simon Marketing, the promotion agency fired by McDonald's Corp. after its security director was indicted on charges of rigging promotional games over 12 years, is suing the fast-food giant for $1.9 billion in damages.

Simon's suit, filed Oct. 23 in Los Angeles County Superior Court, charges McDonald's with fraud, breach of contract, breach of licensing agreement, defamation, interference with existing and prospective contractual relations and unfair competition through corporate theft. McDonald's on the same day filed its own suit in Illinois U.S. District Court against Simon and individual members of the alleged crime ring, seeking to make Simon liable for more than $35 million in "losses and expenses" related to the scandal. To date, 33 people have been indicted and at least two dozen lawsuits have been filed against McDonald's and its 25-year promotion agency over the scam. Read more: QuikFIND AAM77X.

Neither Simon nor McDonald's would comment on the suits.

In its suit, Simon contends that it invested heavily in infrastructure to meet McDonald's needs and effectively had become a "captive supplier" for the fast-feeder, which accounted for 65% of its 2000 revenue. Moreover, Simon alleges that McDonald's had long planned to end its relationship with Simon and set out to "acquire Simon's business operations and services without paying fair compensation to Simon and its shareholders for that business."

The charge that much of Simon's case hinges on is the allegation that McDonald's concealed and allowed the fraud scheme to continue and then accused Simon of fraud and deception despite knowing a "rogue employee" was responsible, all "to intentionally destroy Simon for its own public relations and financial benefit."

So far, no hearings have been set in either case, and they may not be scheduled for months. When the sides eventually meet in court, McDonald's will have to prove Simon was criminally negligent.

Central questions raised by the McDonald's suit include: "How complicated was the fraud? How was it carried out? And what are the standards in the industry to check up on fraudulent activity?" said Lewis Clayton, partner at Paul, Weiss, Rifkind, Wharton & Garrison, New York, and a corporate litigation expert. He suggested Simon might have steeper legal hurdles to clear, particularly as McDonald's already has claimed it concealed the fraud in cooperation with the Department of Justice. "It is going to be difficult for Simon to prove that McDonald's wanted to allow this fraud to continue for any period of time," he said.

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