The characters in Mac Donald Land always reminded me of H.R. Puff and Stuff people.
Famous legal case is the one in which Sid and Marty Krofft sued McDonald's for ripping off the look-and-feel of H.R. Puffnstuff, and won.
From the Wiki - and I'm not sure if all of this is 100% accurate - it IS Wikipedia after all. I don't think that "magical place" was phased out of the commercials due to the lawsuit. But, regardless of any inaccurate statements, this contains the story.
Lawsuit
Needham Harper & Steers, an ad agency (now known as the Omnicom Group) vying for McDonald's advertising accounts had originally hoped Sid and Marty Krofft, the creators of H.R. Pufnstuf, would agree to license their characters for commercial promotions. After the McDonaldland promotion went forward, the Kroffts were dismissed without being credited or paid.[2]
In 1973, the Kroffts successfully sued McDonald's, arguing that the entire McDonaldland premise was essentially a ripoff of their television show. Specifically, the Kroffts claimed that the character Mayor McCheese was a direct rip-off of their character, "H.R. Pufnstuf" (a mayor himself). McDonald's initially was ordered to pay $50,000. The case was later remanded as to damages, and McDonald's was ordered to pay the Kroffts more than $1,000,000 when the case was finally settled in 1977. As a result of the lawsuit, the concept of the "magical place" was all but phased out of the commercials, as were many of the original characters.