Opinion ID: 59474
Heading Depth: 2
Heading Rank: 6

Heading: Sterling's Antitrust Claims

Text: The district court granted judgment as a matter of law on Sterling's antitrust claims. Sterling argues the judgment was error because when Schlotzsky's required franchisees to enter into the participation agreements, an illegal tying arrangement was created under the Sherman Act. 15 U.S.C. § 1. The principal authority on which Sterling relies is Eastman Kodak Co. v. Image Tech. Servs., Inc., 504 U.S. 451, 112 S.Ct. 2072, 119 L.Ed.2d 265 (1992). In that case, the Supreme Court defined a tying arrangement in this way: an agreement by a party to sell one product but only on the condition that the buyer also purchases a different (or tied) product, or at least agrees that he will not purchase that product from any other supplier. Northern Pacific R. Co. v. United States, 356 U.S. 1, 5-6, 78 S.Ct. 514, 518, 2 L.Ed.2d 545 (1958). Such an arrangement violates § 1 of the Sherman Act if the seller has appreciable economic power in the tying product market and if the arrangement affects a substantial volume of commerce in the tied market. Id. at 461-62, 112 S.Ct. 2072. At issue in Kodak was the company's policy of selling machines and parts only to purchasers who would also use Kodak to service their machines. Id. at 458, 112 S.Ct. 2072. This policy largely prevented non-Kodak companies from accessing Kodak parts. Such limits would prevent other companies from servicing Kodak equipment. Kodak agreed with original equipment manufacturers that parts fitting Kodak equipment would only be sold to the Kodak company, excluding independent service providers. Kodak limited the availability of used Kodak machines and pressured companies not to sell Kodak parts to independent service providers. The result of Kodak's efforts was that customers were forced to obtain service and repairs from Kodak because the independent service providers were unable to obtain parts. Id. Independent service providers sued Kodak, alleging that Kodak had violated antitrust laws by tying the sales of parts and service together for Kodak machines. Id. at 459, 112 S.Ct. 2072. The independent service providers presented direct evidence that Kodak has market power to raise prices and drive out competition in the aftermarkets. . . . Id. at 477, 112 S.Ct. 2072. The Supreme Court noted that evidence was also presented to infer that Kodak chose to gain immediate profits by exerting that market power where locked-in customers, high information costs, and discriminatory pricing limited and perhaps eliminated any long-term loss. Id. at 477-78, 112 S.Ct. 2072. The Supreme Court found that these facts could support a violation of the Sherman Act. Id. at 479-80, 112 S.Ct. 2072. Sterling argues that Schlotzsky's also engaged in lock-in conduct. In this view, Schlotzsky's tied the right to use its trademark to the purchase of specific products, forcing franchisees to purchase both proprietary and non-protected products on terms that they would not otherwise have accepted. Sterling had some evidence that a few franchisees were reluctant to enter into the new contracts, though there was substantial evidence as well that the financial benefits to the struggling franchises of the new arrangement was clear. A post- Kodak interpretation of tying arrangements was handed down by the Supreme Court in 2006. Illinois Tool Works, Inc. v. Indep. Ink, Inc., 547 U.S. 28, 126 S.Ct. 1281, 164 L.Ed.2d 26 (2006). The Court concluded that many tying arrangements, even those involving patents and requirements ties, are fully consistent with a free, competitive market. Id. at 45, 126 S.Ct. 1281. The Court also stated that while tying arrangements are still unlawful, such as those that are the product of a true monopoly or a marketwide conspiracy, that conclusion must be supported by proof of power in the relevant market rather than by a mere presumption thereof. Id. at 43-44, 126 S.Ct. 1281 (internal citation omitted). [T]he essential characteristic of an invalid tying arrangement lies in the seller's exploitation of its control over the tying product to force the buyer into the purchase of a tied product that the buyer either did not want at all, or might have preferred to purchase elsewhere on different terms. Id. at 34-35, 126 S.Ct. 1281 (quoting Jefferson Parish Hospital Dist. No. 2 v. Hyde, 466 U.S. 2, 12, 104 S.Ct. 1551, 80 L.Ed.2d 2 (1984) (internal quotation marks omitted)). Though there is some logic to Sterling's application of the phrase tying arrangement to the requirement that Schlotzsky's imposed on its franchisees to contract only with SYGMA and COI, it is obvious from these precedents that in the Sherman Act context, there is much more to tying under antitrust law than the words in their everyday usage suggests. Sterling's argument that product-purchasing contracts for franchisees should be analyzed as tying arrangements is inconsistent with prior analysis of the Sherman Act. As stated in the precedent on which Kodak relied for its definition of a tying arrangement, such agreements are unreasonable in and of themselves whenever a party has sufficient economic power with respect to the tying product to appreciably restrain free competition in the market for the tied product and a `not insubstantial' amount of interstate commerce is affected. Northern Pacific, 356 U.S. at 6, 78 S.Ct. 514 (cited in Kodak, 504 U.S. at 462, 112 S.Ct. 2072). A significant flaw in Sterling's argument is that there has been no proof, and indeed it is unlikely, that a substantial amount of interstate commerce was affected by Schlotzsky's efforts to get potato chips, sauce, and bread products sold at its franchises purchased through one of two distributors. In addition, an example which follows in Northern Pacific immediately after what we have just quoted is apt: Of course where the seller has no control or dominance over the tying product so that it does not represent an effectual weapon to pressure buyers into taking the tied item any restraint of trade attributable to such tying arrangements would obviously be insignificant at most. As a simple example, if one of a dozen food stores in a community were to refuse to sell flour unless the buyer also took sugar it would hardly tend to restrain competition in sugar if its competitors were ready and able to sell flour by itself. Northern Pacific, 356 U.S. at 6-7, 78 S.Ct. 514. Sterling might argue that the proper understanding of the grocery store analogy is to consider the relevant market as the narrow universe of Schlotzsky's franchises; all dozen food stores that the analogy posits are Schlotzsky's stores. To the contrary, the Schlotzsky's universe was created by contract and not by dominance of a market. A franchisor usually exercises control not through market power but by voluntary agreement. This conclusion does not deny the existence of some of the traditional elements of antitrust violations in the franchise arrangement. Indeed, expert commentators have phrased the similarity this way: At one level, there is no meaningful difference in evaluating antitrust issues  including tying arrangements  regardless of whether the parties are merely a seller and its customers or a franchisor and its franchisees. . . . The key question in any antitrust situation is the impact on competition of the particular activity. . . . KINTNER, supra n. 3, § 13.37, 311. This first level of analysis then gives way to the more important level, which is the understanding that a franchise relation is a symbiotic one. The success of franchisor and franchisee are interrelated, making more nuanced the evaluation of what superficially could be described as tying arrangements: [T]he fact that a tying arrangement arises in a franchising context will affect both the evaluation of the competitive effects of the arrangement . . . and also the applicability of certain defenses. Among the issues raised are whether there are one or two products involved in the arrangement [ i.e., are the trademark and a product sold at the franchise one or two products?]; whether the franchisor has coerced its franchisees to take the tied product; whether the franchisor has the requisite economic power in the tying product market; and, as noted, the application of defenses. . . . Id. at 312. We find the analysis of the Third Circuit in a dispute with some similarities to our own to be instructive. Queen City Pizza, Inc. v. Domino's Pizza, Inc., 124 F.3d 430, 438 (3d Cir.1997). There, several pizza franchisees alleged that their being required to buy most of their ingredients such as fresh dough from their franchisor was an illegal tying arrangement, citing Kodak as a key precedent. The court found no antitrust violation, both because the franchisor did not have the requisite economic power and because the franchise agreement gave the franchisor the right to insist on the single-source distribution. Id. at 442-43. As we have noted already, Sterling acknowledged that Schlotzsky's had the contractual right to require franchisees to purchase from a specific distributor. That contract power is distinguishable from market power such as in Kodak that more readily may be classified as leading to an illegal tying arrangement. This Court has previously explained that [e]conomic power derived from contractual agreements such as franchises or [an] agents' contract . . . has nothing to do with market power, ultimate consumers welfare, or antitrust. United Farmers Agents Ass'n. v. Farmers Ins. Exch., 89 F.3d 233, 236-37 (5th Cir.1996) (internal quotation marks omitted). This contract power is essential to a franchise operation such as the one at issue here. The essence of a successful nationwide fast-food chain is product uniformity and consistency. Uniformity benefits franchisees because customers can purchase pizza from any Domino's store and be certain the pizza will taste exactly like the Domino's pizza with which they are familiar. This means that individual franchisees need not build up their own good will. Uniformity also benefits the franchisor. It ensures the brand name will continue to attract and hold customers, increasing franchise fees and royalties. Queen City Pizza, 124 F.3d at 433. Sterling's exclusion from future business with Schlotzsky's franchisees was a termination that was consistent with Sterling's status as a non-exclusive supply chain manager. Even if Schlotzsky's required franchisees to turn from Sterling to SYGMA and COI as part of the franchisees' continuation of doing business under that name, such a requirement was not an antitrust tying arrangement because it was not an exercise of market power but of contract power. The reasoning of the district court as to Sterling's claim is persuasive: [T]here is no evidence, not even insufficient, but no evidence to submit any theory of antitrust in this case. I have no evidence of any relevant market, any impact on the relevant market. I have no evidence of any anti-competitive injury other than one entity not able to sell wares after becoming a non-approved, following his nonexclusive approved rights. I have no antitrust injury in the sense of anti-competition. Antitrust claims are best reviewed on a case-by-case basis, focusing on the particular facts disclosed by the record. Kodak, 504 U.S. at 467, 112 S.Ct. 2072 (quoting Maple Flooring Mfrs. Ass'n. v. United States, 268 U.S. 563, 579, 45 S.Ct. 578, 69 L.Ed. 1093 (1925)). Relevant inquiry includes a close examination of the economic reality of the market at issue. Kodak, 504 U.S. at 467, 112 S.Ct. 2072. Far from being anti-competitive, Schlotzsky's efforts to return its troubled franchises to profitability benefitted competition by avoiding the disappearance of the Schlotzsky's brand stores. The record demonstrates that by the end of June 2005, ninety-nine percent of franchisees had signed supply agreements with SYGMA and COI. The few that had not yet signed were free to continue their restaurant business, but would have to leave the Schlotzsky's system. After the new distribution system under SYGMA and COI was instituted, some franchisees experienced a twenty percent sales increase. There was evidence that increased sales partly resulted from additional advertising. The evidence supports that Schlotzsky's actions were a good faith effort to see each franchisee prosper. Competition in the market was improved by the exercise of Schlotzsky's contract power in its small part of the relevant market. Sterling presented no evidence that market power was at work. The district court properly granted judgment as a matter of law with respect to Sterling's antitrust claims. The judgment of the district court is AFFIRMED.