Source: http://www.leagle.com/decision/19851780620FSupp1160_11598/KFC%20CORP.%20v.%20MARION-KAY%20CO.,%20INC.
Timestamp: 2017-07-23 08:56:04
Document Index: 633709254

Matched Legal Cases: ['§ 43', '§ 1125', '§ 1', '§ 1', '§ 1331', '§ 1121', '§ 1332', '§ 15', '§ 15', '§ 1', '§ 1', '§ 15', '§ 1', '§ 1', '§ 1']

620 F.Supp. 1160 (1985) | KFC CORP. v. MARION... | Leagle.com
620 F.Supp.
620 F.Supp. 1160 (1985)
KFC CORP. v. MARION-KAY CO., INC.
No. NA 81-207-C.
Citing Case 620 F.Supp. 1160 (1985)
MARION-KAY COMPANY, INC., Defendant, Counter Plaintiff, and Third-Party Plaintiff,
JOHN W. SEXTON CO., INC., and Stange Co., Third-Party Defendants.
1. KFC initiated this action with the filing of its complaint on December 9, 1981, alleging that Marion-Kay violated § 43(a) of the Lanham Act, 15 U.S.C. § 1125(a), through false descriptions and representation of Marion-Kay seasoning products to KFC franchisees of "Kentucky Fried Chicken" restaurants and that Marion-Kay tortiously interfered with KFC's contractual relations with its franchisees. In its amended counterclaim and third-party complaint, Marion-Kay claims that KFC, Sexton, and Stange entered into a contract, combination, and conspiracy to unlawfully restrain trade in violation of § 1 of the Sherman Act, 15 U.S.C. § 1.
5. Stange is alleged to be a Delaware corporation having a place of business at 342 Northwestern Avenue, Chicago, Illinois.
6. As the franchisor of "Kentucky Fried Chicken" restaurants, KFC has developed and registered certain trademarks and servicemarks used in connection with its business. KFC's registered service marks and trademarks are as follows:
Registration      Date of
Mark                   Number        Registration
Cartoon caricature of             757,835        10/1/63
Colonel with Cane and
Chef's Cap (Trademark)
It's Finger Lickin' Good          759,776        11/5/63
It's Finger Lickin' Good          801,095       12/28/65
Colonel Sanders' Recipe           805,773        3/15/66
Design of Colonel Sanders'        806,104        3/22/66
Head (Service
Cartoon Caricature of             807,043        4/12/66
Colonel Sanders with
Cane and Chef's Cap
North America's Hospitality       808,595        5/17/66
Dish (Trademark)
Design of Colonel Sanders'        810,835         7/5/66
Head (Trademark)
North American's Hospitality      811,497        7/19/66
Dish (Service
Col. Sanders Recipe Kentucky      813,559        8/23/66
Col. Sanders Recipe               814,610         9/6/66
Kentucky Fried Chicken            815,167        9/13/66
Colonel Sanders' Recipe           838,062       10/31/67
Kentucky Fried Chicken            838,895       11/14/67
We Fix Sunday Dinner              841,000       12/19/67
Representation of Colonel         846,026        3/12/68
Sanders in White Suit
Holding Menu (Service
Picturization of Colonel          886,050        2/10/70
Sanders' Head with
Chef's Cap (Service
Striped Roof Design and           889,169         4/7/70
America Loves What the            991,605        8/20/74
Colonel Cooks (Service
Have a Barrel of Fun            1,005,464        2/25/75
Visit the Colonel (Service      1,063,585        4/12/77
KFC grants each of its franchisees a license to use these trademarks and servicemarks in connection with the preparation and sale of "Original Recipe Kentucky Fried Chicken."
12. KFC neither manufactures nor sells KFC Seasoning to its franchisees and does not receive a royalty or other economic benefit from the sale of KFC Seasoning by Sexton and Stange.
13. Marion-Kay has never been licensed by KFC to manufacture or distribute seasoning to be used in preparing Original Recipe Kentucky Fried Chicken.
Having come to that conclusion, based on the best information available to us, I should perhaps point out again that an essential element of our contractual relationships with our franchisees is that they use in their operations the spice formula, process and recipe which are the exclusive property of Kentucky Fried Chicken Corporation. Using any other spice formula, process or recipe would be a serious violation of their franchise agreements and a matter of grave concern to KFC is our desire to vigorously protect our trademarks, trade secrets and standards of national uniformity and quality in the preparation and sale of Kentucky Fried Chicken. I well understand that it is not your desire to interfere in any way with our contractual relationships with our franchisees and I solicit your continued cooperation in that regard. This is of course well within the boundaries of business ethics which I believe, after my conversation with you, you have practiced these many years.
"We have just received additional information concerning your sale of a seasoning blend to Kentucky Fried Chicken franchisees. One of our franchisees in Tennessee has advised KFC that you are supplying as many as 200 Kentucky Fried Chicken stores with Marion-Kay seasoning products.
1. This Court has jurisdiction over the complaint pursuant to 28 U.S.C. §§ 1331 and 1332 and 15 U.S.C. § 1121. The Court has jurisdiction over Marion-Kay's counterclaim and third-party complaint pursuant to 28 U.S.C. § 1332 and 15 U.S.C. § 15.
2. Marion-Kay's counterclaim and third-party complaint for damages are not time-barred by the four-year statute of limitations contained in Section 4B of the Clayton Act, 15 U.S.C. § 15b, for the reasons that KFC has maintained a continuous and exclusive contractual relationship with Sexton and Stange for the manufacture and sale of KFC Seasoning to KFC franchisees. This allegedly unlawful activity falls within the "continuing violation" exception to the general rule under Section 4B that an action accrues at the time of the initial violation, and thus Marion-Kay may lawfully challenge KFC's activities with regard to the sale and distribution of KFC Seasoning. See National Souvenir Center v. Historic Figures, Inc., 728 F.2d 503 (D.C.Cir.1984).
4. In a situation involving the sale of franchise items, there can be no unlawful tying arrangement absent some proof that there has been a sale of two separate products. Krehl v. Baskin-Robbins Ice Cream Co., 664 F.2d 1348, 1352 (9th Cir.1982). See also Times-Picayune Publishing Co. v. United States, 345 U.S. 594, 613-14, 73 S.Ct. 872, 883, 97 L.Ed. 1277 (1953). A determination as to whether a franchise may appropriately be regarded as a separate product requires an inquiry into the relationship between the franchise itself and the products allegedly being tied to its sale. Id. at 1353.
5. In a situation where the "tied products" are commonplace articles, such as paper products, See, e.g., Kentucky Fried Chicken v. Diversified Packaging, 549 F.2d 368 (5th Cir.1977), and there is generally only a remote connection between the trademark and the tied products the franchisee is required to purchase, the trademark simply reflects the good will and quality standards of the enterprise itself. Id. As such, as long as the franchisee maintains those quality standards, the source of the tied products is not actually related to the value of the trademark itself. Because the franchisor could easily maintain its quality standards through means other than the coerced purchase of the tied product, such a tying arrangement impedes competition and is violative of the Sherman Act. Id.
6. Where, as here, however, the tied product is manufactured pursuant to a secret formula, "the franchised outlets serve merely as conduits through which the trademarked goods of the franchisor flow to the ultimate consumer." Id. In this situation
"the trademark actually serves as a representation of the end product marketed by the [franchise] system. `It is to the system and the end product that the public looks with the confidence that the established goodwill has created.'"
Id. at 1354 (citing Siegal v. Chicken Delight, Inc., 448 F.2d 43, 49 (9th Cir.1971)). In these citations, the Court is precluded from finding that the trademark is a separate product from the allegedly tied item because the trademark itself and the quality of the end product are identified as a single item. Id.
This is an action brought by the plaintiff KFC Corporation, a franchisor of Kentucky Fried Chicken Restaurants, against Marion-Kay for alleged tortious interference with KFC's contractual relations with its franchisees. Marion-Kay is a manufacturer of seasoning products and has filed a counterclaim against KFC and a third-party complaint against Sexton and Stange alleging that the restrictive agreement between KFC and Sexton and Stange for the production and distribution of KFC seasoning, also known as Colonel Harlan Sander's "secret recipe," is an unlawful restraint of trade in violation of § 1 of the Sherman Act. This matter is before the Court on KFC's motion for partial summary judgment on Marion-Kay's amended counterclaim and third-party complaint.
In its counterclaim and third-party complaint, Marion-Kay alleges that KFC has violated § 1 of the Sherman Act in two respects. First, Marion-Kay claims that KFC has unlawfully tied the sale of a KFC franchise (tying product) to the sale of KFC seasoning (tied product). Second, Marion-Kay alleges that KFC has wrongfully refused to approve Marion-Kay as an additional supplier of KFC seasoning. Marion-Kay maintains that the recipes and formulas for the making of KFC seasoning are not unique and that Marion-Kay is capable, both financially and technically, of producing KFC seasoning. Marion-Kay claims that the agreement between KFC and Sexton and Stange for the blending of KFC seasoning, and KFC's refusal to deal with Marion-Kay and other spice blenders, is an unlawful restraint on commerce because KFC has foreclosed competition in the sale of seasoning products used by KFC franchises.1
KFC Corporation argues that the four-year statute of limitations (15 U.S.C. § 15b) began to run on March 15, 1973, when Marion-Kay was advised by Mr. Edward Ellis, General Counsel for KFC, that KFC would not permit Marion-Kay to sell its products to KFC franchisees. KFC contends that Marion-Kay's cause of action accrued at this time and that the filing of the counterclaim and third-party complaint almost ten years later is time-barred.
Generally, a cause of action "accrues" for purposes of a statute of limitations when the plaintiff first suffers an injury from an unlawful contract or conspiracy. National Souvenir Center v. Historic Figures, Inc., 728 F.2d 503, 509 (D.C.Cir.1984). There is, however, a "continuing violation" exception to this general rule which becomes applicable where the alleged conspiracy has been ongoing. In Zenith Radio Corp. v. Hazeltine, Inc., 401 U.S. 321, 338, 91 S.Ct. 795, 806, 28 L.Ed.2d 77 (1971), the Supreme Court stated the exception in these terms:
"[i]n the context of a conspiracy to violate the anti-trust laws, ... each time a plaintiff is injured by an act of the defendants a cause of action accrues to him to recover the damages caused by that act and that, as to those damages, the statute of limitations runs from the commission of the act."
KFC also argues that Marion-Kay unreasonably delayed in bringing its claims for injunctive relief and that those claims are barred by the doctrine of laches. In determining what constitutes an unreasonable delay, courts have turned to the four-year statute-of-limitations requirement for damage claims under the Clayton Act. See, e.g., International Telephone and Telegraph Corp. v. General Telephone & Electronics Corp., 518 F.2d 913, 928 (9th Cir.1975). The Court finds that, for the same reasons, this case is not barred by the statute of limitations, it is also not barred by laches. Because the alleged violation was continuing, the defendant did not unreasonably delay in bringing its counterclaim and third-party complaint for the violations occurring within the last four years, and Marion-Kay may bring its action for the alleged violation occurring during that period.
Section 1 of the Sherman Act provides, in relevant part, that "[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several states, ... is declared to be illegal ..." 15 U.S.C. § 1. The Supreme Court has interpreted this provision to prohibit only those contracts or actions which the common law had deemed to be undue restraints of trade or which might be unreasonable after considering the changing times and economic conditions. Cincinnati Riverfront Coliseum, Inc. v. Cincinnati, 556 F.Supp. 664, 666 (S.D.Ohio 1983) (citing Standard Oil Company v. United States, 221 U.S. 1, 31 S.Ct. 502, 55 L.Ed. 619 (1911)). Activities such as tying arrangements have been held to constitute per se violations of the Sherman Act, if such activities are proven to have occurred. See United States v. Socony-Vacuum Oil Co., 310 U.S. 150, 210-18, 60 S.Ct. 811, 838, 84 L.Ed. 1129, 1162-63 (1940); Klors v. Broadway-Hale Stores, Inc., 359 U.S. 207, 79 S.Ct. 705, 3 L.Ed.2d 741 (1959). Under a per se rule analysis, a plaintiff is not required to prove any anti-competitive consequences of a defendant's activity because those anti-trust acts are considered so typically and traditionally anti-competitive that the courts have found it appropriate to "short-circuit" the usual analysis of competitive effects to allow a presumption of anti-competitive effects, which the courts dub a per se violation of the anti-trust laws. In Re Yarn Processing Patent Validity Litigation, 541 F.2d 1127, 1134 (5th Cir.1976), cert. denied 433 U.S. 910, 97 S.Ct. 2976, 53 L.Ed.2d 1094 (1977).
A tying arrangement occurs when a buyer is permitted to purchase a desired product (tying product) only if he agrees to buy a second, generally unwanted, item ("tied product") from the seller. See, e.g., U.S. Steel Corp. v. Fortner Enterprises, Inc., (Fortner II) 429 U.S. 610, 97 S.Ct. 861, 51 L.Ed.2d 80 (1977). It is well-settled that there can be no illegal tie-in under Section 1 of the Sherman Act unless the seller is in fact selling two distinct and separate products. See Lupia v. Stella D'Oro Biscuit Company, Inc., 586 F.2d 1163, 1173 (7th Cir.1978), cert. denied 440 U.S. 982, 99 S.Ct. 1791, 60 L.Ed.2d 242 (1979). The question of whether there has actually been a sale of two separate products is generally an issue of fact that must be resolved by the trier of fact. However, where, as here, the underlying facts are not in dispute and there are other relevant uncontroverted facts, summary judgment is appropriate.
The facts in the present case are very similar to those in Krehl v. Baskin-Robbins Ice Cream Co., 664 F.2d 1348 (9th Cir.1982), and the Court finds this case controlling in disposing of Marion-Kay's tying arrangement claim. In Krehl, the plaintiffs argued that Baskin-Robbins illegally tied the purchase of Baskin-Robbins' ice cream products to the sale of Baskin-Robbins' franchise and trademark licenses. Under the franchise agreement, Baskin-Robbins' franchisees were required to purchase ice cream products from a designated third-party licensee. At the close of plaintiffs' case-in-chief, the district court granted Baskin-Robbins' motion to dismiss, pursuant to Rule 41(b) of the Federal Rules of Civil Procedure, finding that the plaintiff had not established that the Baskin-Robbins' trademark was a separate product from Baskin-Robbins ice cream. 664 F.2d at 1350-1351.
On appeal, the Ninth Circuit Court of Appeals affirmed the district court's ruling, holding that plaintiffs had failed to show that the franchise (trademark) itself served merely to represent the end product (ice cream). The Court of Appeals concluded that the two products were so interrelated in the mind of the consumer that they were not separate items for tie-in purposes. Id. at 1354. In reaching this conclusion, the court reasoned that under the distribution type system implemented by Baskin-Robbins, the franchisees served merely as conduits through which the trademarked goods flowed to the ultimate consumer. Id. at 1353.2 In these situations the goods are generally manufactured pursuant to a specific or secret formula, and an alternative product of similar quality is not available.3 The trademark
"in a distribution franchise system serves merely as a representation of the end product marketed by the system. `It is to the system and the end product that the public looks with the confidence that the established goodwill has created.' Consequently, sale of substandard products under the mark would dissipate this goodwill and reduce the value of the trademark. The desirability of the trademark is therefore utterly dependent upon the perceived quality of the product it represents."
Mark             Registration     Date of
Number      Registration
"Colonel Sanders Recipe"     757,835       10/1/63
"Col. Sanders Recipe         813,559       8/23/66
Kentucky Fried Chicken"
"Col. Sanders Recipe"        814,610        9/6/66
"Colonel Sanders' Recipe     838,062      10/31/67
"America Loves What          991,605       8/20/74
the Colonel Cooks"
In the counterclaim, Marion-Kay also contends that it is entitled to become a distributor of KFC seasoning. Specifically, Marion-Kay claims that KFC's exclusive arrangement with Sexton and Stange for the production and distribution of KFC seasoning is a restraint of trade in violation of § 1 of the Sherman Act. Marion-Kay maintains that KFC seasoning can be easily duplicated by any competent spice blender and that the rationale of Kentucky Fried Chicken v. Diversified Packaging Corp., 549 F.2d 368 (5th Cir.1977), compels a ruling requiring KFC to open the KFC seasoning market and approve such competent seasoning blenders. KFC, on the other hand, argues that because KFC seasoning is a trade secret, central to the success of its business, the Court cannot require it to disclose its recipe secret to any supplier claiming it is worthy to produce seasoning.
On appeal, the Fifth Circuit Court of Appeals stated that a franchisor who requires its franchisees to purchase
"trademarked supplies does not escape the impact of tying principles to any extent. The franchisor's right to prevent others from selling supplies bearing its trademarks must yield to the anti-trust laws' command to open the tied market to competitors." (citations omitted).
"The option is limited to approved suppliers, but there are ten such suppliers of cartons, and franchisees are free to nominate additional suppliers whenever they can be found.... Franchisees might fare better if fifty or a hundred suppliers competed for their business, but a market with ten suppliers and unrestrained entry surely poses a far different problem than a market available to the victim of a traditional tie: one supplier and no entry."
FootNotes 1. In its original counterclaim, Marion-Kay claimed that the § 1, Sherman Act, violation resulted from the fact that Marion-Kay was precluded from selling its seasoning products to KFC franchisees. It appears that this claim has been abandoned and that Marion-Kay is now contending that KFC has unlawfully foreclosed Marion-Kay from selling KFC seasoning to KFC franchises.
2. In a business format franchising system, the franchisor merely provides a trademark and some supplies to be used in the operation of the business. Id. See also Siegel v. Chicken Delight, Inc., 448 F.2d 43 (9th Cir.1972). In these situations the tied products are generally common-place articles and are only remotely connected with the trademark itself. Id.
3. In a business format system a franchisor can easily maintain its quality standards through less intrusive means other than requiring its franchisees to purchase those items from the franchisor. As a result, the coerced purchase of those tied products is nothing "more than an effort to impede competition on the merits in the market for the tied products." Id. (citations omitted).