By Steven B. Feirman and Susan H. Pope
Over the last decade, franchisees have brought numerous antitrust claims against franchisors seeking to rely on the Supreme Court’s "lock-in" analysis of Eastman Kodak Co. v. Image Technical Services, Inc., 504 U.S. 451 (1992). In the typical fact pattern, the franchisee alleges that the franchisor has unlawfully tied the sale of some product (such as the sale of a franchisor-required ingredient) to the sale of the franchise itself. In an unusual fact pattern that recently was presented to the 11th Circuit Court of Appeals, a beer distributorship owned by the family of the late Roger Maris (a New York Yankees baseball star during the 1960s) claimed that Anheuser-Busch’s prohibition on any public ownership of its distributors also created an unlawful tying arrangement. In both situations, it is claimed that "market power" in the tying market (allegedly a single brand or the franchise system itself) derives from the contractual relationship between the supplier/franchisor and the franchisee, and that the supplier/franchisor has market power in a market consisting solely of its single brand.
In the wake of Kodak, some franchisees successfully extended the Supreme Court’s lock-in concept to franchise antitrust tying cases. The leading case where this occurred is in Collins v. International Dairy Queen, Inc., 939 F. Supp. 875 (M.D. Ga. 1996), where Dairy Queen franchisees alleged that Dairy Queen’s requirement that food and supplies be purchased from Dairy Queen 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 into which the franchisee freely entered, and that any power over the franchisees resulted from that agreement rather than market power. The district court rejected Dairy Queen’s summary judgment motion based on a variation of Kodak, holding that "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."
A majority of courts, however, have refused to automatically equate a franchisor’s contractual power over a franchisee with the possession of market power for purposes of antitrust analysis. In the leading case taking this position, Queen City Pizza v. Domino’s Pizza, 124 F.3d 430 (3d Cir. 1997), cert. denied, 523 U.S. 1059 (1998), the 3rd Circuit distinguished a lock-in that is the result of a contractual relationship (such as a franchise agreement) from a lock-in resulting from the tying product’s "uniqueness" (such as the uniqueness of the Kodak-brand repair parts that were the tying product in Kodak). In Queen City, the plaintiff franchisees argued that the franchisor, Domino’s, unlawfully tied the sale of pizza ingredients to the sale of pizza dough and illegally monopolized the market for Domino’s Pizza ingredients and supplies. The franchisees argued that they were "locked-in" to their position as Domino’s franchisees, making it economically impractical for them to abandon the Domino system and enter a different line of business. The 3rd Circuit disagreed and distinguished Kodak because, inter alia, the Kodak case arose out of concerns about unilateral changes in Kodak’s parts and repair policies -- Kodak’s change in policy was not foreseen at the time of the sale due to high information costs, so buyers had no ability to calculate these higher costs at the time of purchase or to incorporate them into their purchase decision. In contrast, the franchisees in Queen City knew that Domino’s Pizza retained significant power over their ability to purchase cheaper supplies from alternative sources because that authority was spelled out in detail in an offering circular. Thus, the court concluded that, unlike the plaintiffs in Kodak, the Queen City plaintiffs had to purchase products from Domino’s Pizza not because of Domino’s market power over a unique product, but because they were bound by contract to do so.
The 11th Circuit’s recent decision in Maris Distributing Company v. Anheuser-Busch, Inc., 302 F.3d 1207 (11th Cir. 2002), which held that a beer brewer did not violate anti-tying laws by prohibiting any public ownership of its independent distributors, embraces the narrow interpretation of Kodak’s lock-in analysis. Maris was one of Anheuser-Busch’s 700 beer distributors, with an exclusive territory in parts of Florida. Maris unsuccessfully sought to secure a buyer for its distributorship and blamed its failure on the distribution agreement’s prohibition against public ownership. According to Maris, the provision effected an unreasonable non-price vertical restraint by suppressing the prices in the relevant market for the purchase and sale of equity ownership interests in beer distributorships, and in the relevant submarket for the purchase and sale of equity ownership interests in Anheuser-Busch beer distributorships. In order to prevail on its antitrust claim, Maris was required to prove either that (1) Anheuser-Busch had market power in the relevant market such that the restraint had potential anticompetitive effects, or (2) the restraint resulted in actual anticompetitive effects in the relevant market. The evidence, however, demonstrated that Anheuser-Busch did not possess market power in the market for the sale of beer distributorships generally, or even in the narrower market for the sale of Anheuser-Busch brand beer distributorships. Indeed, Anheuser-Busch owned all or part of only 20 of its 700 distributorships, constituting a market share of 2.9 percent. Further, Anheuser-Busch’s 20 distributorships represented less than 1 percent of the 2,700 distributorships of all brands of beer. Thus, in order to maintain its claim, Maris was forced to either establish market power in some other way or to establish actual adverse competitive effects. Accordingly, Maris attempted to offer expert opinion evidence demonstrating market power based on the fact that Anheuser-Busch had a 48 percent market share in the manufacture of beer, coupled with its contractual influence over the valuations and sales of distributorships. The district court excluded the expert testimony and entered a directed verdict in favor of Anheuser-Busch on the issue of market power. While the district court submitted the issue of actual anticompetitive effects to the jury, the jury found that no anticompetitive effects resulted.
On appeal, Maris argued, among other things, that Anheuser-Busch had market power in the relevant markets by way of its contractual power over its distributors. Relying on Kodak, Maris argued that distributors were "locked-in" by the distributorship agreement with Anheuser-Busch, and that this "lock-in" or contract power gave Anheuser-Busch market power. The 11th Circuit rejected Maris’s attempt to extend Kodak’s "lock-in" concept to transform contract power into market power for antitrust purposes. The court explained that Kodak’s "lock-in" concept was based on the fact that consumers for Kodak copier equipment faced high information and switching costs relating to parts and repair services for the equipment. Here, however, as in the Queen City Pizza decision, the court held that Kodak "did not address … whether contract power is the equivalent of market power for antitrust purposes. . . . The instant case does not involve the Kodak issue of whether or not consumers can switch to a competitor." The 11th Circuit observed that, in contrast to Kodak, Maris was fully aware of the public ownership prohibition provision in the distribution agreement at the time it entered into that agreement. Thus, Anheuser-Busch’s "power" was distinguishable from "market power."
It is worth noting that the Maris decision occurred in the same federal circuit as the pro-franchisee Dairy Queen case and effectively overturns much of the reasoning contained in Dairy Queen. Indeed, the court went out of its way to state that "we reject [Dairy Queen] in favor of what we consider to be the more persuasive rationale of Queen City and its progeny." Moreover, although the Maris case involved distributorships and not franchises, the court nevertheless held that the plaintiff’s theory, if accepted, "would place significant additional risks on such legitimate business practices as . . . franchise tying agreements."
In addition to this 11th Circuit decision and the 3rd Circuit decision in Queen City, the 5th Circuit also rejected the applicability of Kodak to franchise tying claims in United Farmers Agents Association, Inc. v. Farmers Insurance Exchange, 89 F.3d 233 (5th Cir. 1996).
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