Opinion ID: 75953
Heading Depth: 3
Heading Rank: 3

Heading: Contract Power Versus Market Power

Text: 49 Finally, Maris argues that the directed verdict was improper because the district court based part of its reasoning on the fact that Anheuser-Busch's actions were an exercise in contract power, rather than in market power. Maris notes that § 1 claims always involve a contract or agreement, but that fact does not insulate them from antitrust liability. Maris contends that the exercise of contract power, particularly where a plaintiff is locked in to the defendant's product or business, may violate the antitrust laws. Although Maris's argument has some intuitive appeal, in that Anheuser-Busch clearly had some power over Maris and its other distributors by virtue of the contractual provisions in its distribution agreements, we find the cases relied upon by Maris distinguishable, and agree with the district court that Anheuser-Busch's exercise of its contract power over Maris did not show that Anheuser-Busch had market power in the relevant market. 50 We begin by noting what the relevant question before us is not. It is not whether the exercise of contract power can be an antitrust violation. Contracts, and the exercise of contract power, may run afoul of the antitrust laws, as evidenced by the fact that § 1 of the Sherman Act prohibits any  contract, combination..., or conspiracy, in restraint of trade. 15 U.S.C. § 1 (emphasis added). Therefore, if the district court had held that Anheuser-Busch had not violated the antitrust laws simply because its actions were pursuant to a contract, that would have been incorrect. Anticompetitive actions are not immunized by virtue of being memorialized in a contract. 51 The more interesting issue, and the one we think the district court was addressing when it spoke of contract power, is the relationship between contract power and market power. We believe, for the reasons that we discuss below, that the district court correctly recognized that, while a party who exercises contract power may have market power and may violate the antitrust laws under some circumstances, the mere existence and exercise of contract power does not show that a defendant had market power or violated the law. In other words, courts must attempt to ascertain a defendant's economic position in the relevant market, rather than its power pursuant to a particular contract, when considering whether a defendant has market power. 52 In arguing that the district court erred with respect to the contract power issue, Maris begins by pointing to the Supreme Court's decision in Eastman Kodak v. Image Technical Servs., 504 U.S. 451, 112 S.Ct. 2072, 119 L.Ed.2d 265 (1992), the relevant part of which involved a tying claim. Although Kodak does not address the issue of when the exercise of contract power should be viewed as market power, it does address issues of market definition and market power in a context in which a plaintiff is locked in to a relationship with a defendant. In Kodak, the plaintiffs had established triable issues of fact concerning the existence of a tying arrangement — i.e., whether Kodak parts and service for Kodak photocopy and micrographic equipment were distinct products subject to a tying analysis. Id. at 462-64, 112 S.Ct. at 2080. The Court noted that there was sufficient evidence that consumers viewed parts and service as separate products. Id. The Court also noted that parts for Kodak equipment were unique and were not interchangeable with other manufacturers' parts because only Kodak parts would work on Kodak machines. Id. at 456-57, 112 S.Ct. at 2077. Because of these factors, the Supreme Court held that a jury could find a tying arrangement between Kodak parts (the tying product), and Kodak service (the tied product). Id. at 463-64, 112 S.Ct. at 2080. 53 The Court then proceeded to consider whether there was sufficient evidence that Kodak had market power in the market for Kodak parts such that it could force unwanted purchases of the tied product (service for Kodak machines). Id. at 464, 112 S.Ct. at 2081. Kodak defended, arguing that the brisk competition in the original market for photocopy and micrographic equipment would prevent it from having market power in the aftermarkets for service and parts, even though it had a dominant share of those markets — nearly 100% of the market for Kodak parts. Id. at 465-68, 112 S.Ct. at 2081-83. Kodak argued that any attempt by it to charge supracompetitive prices for service or parts would inevitably lead to a reduction in sales of Kodak equipment because consumers would buy, or switch to, competing equipment. Id. at 465-66, 112 S.Ct. at 2081-82. Among the factors undermining this argument by Kodak, the Supreme Court pointed to the heavy initial cost for Kodak equipment. Id. at 476-77, 112 S.Ct. at 2087. The Court concluded that this high switching cost served to lock in existing customers, inhibiting their taking advantage of the brisk competition in the equipment market by switching to competitors' equipment. Id. 54 Maris argues that the same is true when a plaintiff, such as itself, is locked in by a distribution agreement with a manufacturer. Therefore, Maris urges us to find that this lock-in gave Anheuser Busch market power. 55 In addition to Kodak, Maris also seeks support from a case in which a franchisee brought antitrust claims against a franchisor challenging a provision in the franchise agreement, and a district court in our circuit found that the exercise of rights under a contract may run afoul of the antitrust laws. See Collins v. Int'l. Dairy Queen, Inc., 939 F.Supp. 875 (M.D.Ga.1996). In that case, the court considered a tying claim brought by a franchisee, alleging that Dairy Queen's requirement that food and supplies be purchased from it constituted an unlawful tying arrangement. Dairy Queen argued that it could not be held liable for tying because the restraint was simply part of the franchise agreement and that any power over the franchisee resulted from that agreement rather than market power. Id. at 883. The district court rejected this argument, relying on a variation of the lock-in concept from the Kodak decision: 56 Plaintiffs have shown that Dairy Queen franchisees make significant initial investments in their franchises, which also provide them the option to open additional stores without paying another franchise fee. In addition, IDQ/ADQ can terminate or refuse to renew a franchise agreement if a franchisee fails to carry the full authorized menu of food products or does not meet quality standards. Because of the excessive costs and potential losses associated with purchasing another franchise, a Dairy Queen franchisee wishing to obtain products and supplies from alternative sources at lower costs may be locked in to the existing arrangement enjoyed by IDQ/ADQ. Based upon these cases, the court finds that plaintiffs have produced sufficient evidence of economic loss, overpriced products, and refusal to consider alternative sources of comparable products to preclude the entry of partial summary judgment based on the existence of a franchisor-franchisee relationship. 57 Id. at 883. Therefore, the court held that the franchisee might have a viable claim against the franchisor, even though the restriction of which it complained was contained in the franchise agreement to which it had agreed. 58 In tension with the district court's holding in Collins, several of our sister circuits have cautioned against placing too much weight on the existence of contract power when defining relevant markets and determining whether defendants possess market power. In a case involving facts similar to those in Collins, the Third Circuit reached a different result. See Queen City Pizza, Inc. v. Domino's Pizza, Inc., 124 F.3d 430 (3d Cir.1997). In Queen City the court considered a § 2 monopoly claim brought by a franchisee against a franchisor related to a requirement in the franchise agreement that the franchisee only purchase from the franchisor or approved suppliers. The franchisor, Domino's, argued that its: 59 [P]ower to force plaintiffs to purchase ingredients and supplies from them stemmed not from the unique nature of the product or from its market share in the fast food franchise business, but from the franchise agreement. For that reason, plaintiffs' claims implicate principles of contract, and are not the concern of the antitrust laws. 60 Id. at 435 (citations and quotations omitted). The district court agreed and dismissed the plaintiffs' claim. 61 The Third Circuit agreed that the exercise of contract power resulting from the provisions of a franchise agreement did not raise antitrust concerns and that the franchisee failed to state a valid, relevant product market when it limited the alleged relevant market to parties who had entered into Domino's franchise agreements. Id. at 438. The court stated: 7 62 A court making a relevant market determination looks not to the contractual restraints assumed by a particular plaintiff when determining whether a product is interchangeable, but to the uses to which the product is put by consumers in general. Thus, the relevant inquiry here is not whether a Domino's franchisee may reasonably use both approved or non-approved products interchangeably without triggering liability for breach of contract, but whether pizza makers in general might use such products interchangeably. Clearly, they could. Were we to adopt plaintiffs' position that contractual restraints render otherwise identical products non-interchangeable for purposes of relevant market definition, any exclusive dealing arrangement, output or requirement contract, or franchise tying agreement would support a claim for violation of antitrust laws. Perhaps for this reason, no court has defined a relevant product market with reference to the particular contractual restraints of the plaintiff. 63 Id. In this regard, the Third Circuit also rejected a lock-in argument derived from Kodak, noting that the challenged provision in the franchise agreement was part of the deal when the franchisee entered the agreement, and holding that the crucial fact driving the determination of the relevant product market was that Domino's-approved supplies and ingredients were fully interchangeable with substitutes from other pizza suppliers. Id. at 439-40. The court recognized that contracts always restrain and affect a party's available choices, but that for purposes of determining a relevant product market, a court looks not to contractual restraints on a particular consumer, but rather to the uses to which the product is put by consumers in general and whether there are interchangeable substitutes. 64 The Fifth Circuit also took this approach when faced with a similar claim in United Farmers Agents Assoc., Inc. v. Farmers Ins. Exchange, 89 F.3d 233 (5th Cir.1996). The court stated that [e]conomic power derived from contractual agreements such as franchises or in this case, the agents' contract with Farmers, `has nothing to do with market power, ultimate consumers' welfare, or antitrust.' Id. at 236. The court looked for the insurance company's market share in the market for insurance, rather than in a more specific market related to services required for the company's agents. Id. at 237. 65 Likewise, in Hack v. President and Fellows of Yale College, 237 F.3d 81 (2d Cir. 2000), the Second Circuit considered this issue in the context of a monopolization claim brought by students against their college based on the college's requirement that the students live in dormitories for their freshman and sophomore years. Citing Queen City, the court rejected the plaintiffs' market definition and affirmed dismissal of the claim, holding: Economic power derived from contractual arrangements affecting a distinct class of consumers cannot serve as a basis for a monopolization claim. Id. at 85. Accord Double D Spotting Serv., Inc. v. Supervalu, Inc., 136 F.3d 554, 560-61 (8th Cir.1998) (holding that market defined by one contract was not relevant market for antitrust purposes). 66 We agree with the approach taken by our sister circuits on this issue, and conclude that the district court correctly distinguished between contract power and market power in determining that Anheuser-Busch was entitled to a directed verdict as to part of Maris's claim. 8 The fact that Anheuser-Busch had considerable power over many aspects of Maris's business by virtue of the provisions of the contract to which they agreed (at least 3 separate times) reveals little about the issue of whether Anheuser-Busch had market power in the broader, relevant market for the purchase and sale of equity ownership interests in beer distributorships. And there is no reason for us to believe that Anheuser-Busch's decision to exercise its rights under that agreement also were exercises of market power. 67 Our conclusion is consistent with the decision of the former Fifth Circuit in Kestenbaum v. Falstaff Brewing Corp., 514 F.2d 690 (5th Cir.1975). 9 In that case, a beer distributor brought a § 1 Sherman Act claim challenging, among other things, the manufacturer's right to restrain the price at which the distributor could sell his distributorship. Id. at 693. We concluded that the district court erred by instructing the jury that it would be a per se violation of the antitrust laws for the manufacturer to dictate the sale price of the plaintiff's distributorship. Id. at 695. We held that any such restriction was subject to rule of reason review, and noted that [i]t is beyond question ... that [a manufacturer] may legitimately restrict the class of persons with whom it would agree to continue a ... franchise, so long as such restriction was not artificially employed to further some unlawful practice. Id. at 696. Based on this right, the Court continued: 68 It logically follows that Falstaff has a right to restrict the sales price of one of its distributorship franchises to the reasonable value of that franchise in order to insure that the purchaser will have a chance to realize a reasonable return on his investment. Falstaff clearly has a strong interest in the financial vitality of a new franchisee. If the purchaser of a franchise makes a bad bargain when he buys, then he cannot give the distributorship the solid, concerned management which it must have to be successful for him and to enhance Falstaff's image and relative position in the market. 69 Id. We also noted that this recognition of a manufacturer's interest in the identity of its distributors and in the transfer of its distributorships had been recognized by an earlier case in which we had held that an automobile manufacturer possessed a limited privilege to approve or disapprove a prospective purchaser since it would deal with the purchaser in the future and would represent it to the public. Id. (citation omitted). Although we did not directly address the issue in Kestenbaum, it is clear from our discussion that we did not believe that the defendant's contractual power under its distribution agreement with the plaintiff yielded market power. 70 Consistent with the holdings of the Third Circuit in Queen City, and the Fifth Circuit in United Farmers Agents, we believe that the Supreme Court decision in Kodak is distinguishable from the instant case. As noted in our discussion of Kodak above, that opinion did not address at all the issue in this case — i.e., whether contract power is the equivalent of market power for antitrust purposes. Moreover, the context of Kodak is entirely different from the instant context. There is no argument in this case that brisk competition in one market would prevent a defendant from having market power in another market, despite the defendant's dominant share in that market, because consumers would switch to competitors' substitute products in the competitive market. Unlike Kodak, Maris has not adduced sufficient evidence of a tying arrangement, coupled with a high market share in the relevant product market for the tying product. Kodak, 504 U.S. at 464-65, 112 S.Ct. at 2080-81. Unlike Kodak, the defendant in the instant case has not defended against an otherwise viable antitrust claim (supported by sufficient evidence of the defendant's high market share in the relevant market) by arguing that market power was lacking, despite its high share of the market, because of the brisk competition in another market. It was because of this defense in Kodak that it became relevant whether or not customers could switch to competitors' equipment. In this context, Anheuser-Busch has made no such argument that an otherwise viable claim involving a defendant with a large share of the relevant market is undermined by brisk competition in some other market. Thus, the instant case does not involve the Kodak issue of whether or not consumers can switch to a competitor. 71 Indeed, Maris has never argued, either in the district court or on appeal, that high switching costs were relevant in the instant case. Nor does he explain how such costs, even if proved, would be relevant to the issues before us. 10 For all these reasons, we find Maris's reliance on Kodak to be misplaced. 11 72 For the foregoing reasons, we follow the rationale of the Third Circuit in Queen City and its progeny. We would be reluctant to adopt Maris's assertion that contract power should automatically be equated with market power. To do so would radically transform the accepted rule of reason analysis applicable to vertical restraints. Maris's theory would place significant additional risks on such legitimate business practices as exclusive dealing arrangements, output contracts and franchise tying agreements. See Queen City, 124 F.3d at 438 (Were we to adopt plaintiff's position that contractual restraints render otherwise identical products non-interchangeable for purposes of relevant market definition, any exclusive dealing arrangement, output or requirement contract, or franchise tying agreement would support a claim for violation of antitrust laws.). Therefore, we affirm the district court's directed verdict in favor of Anheuser-Busch on the issue of market power.