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MARTINO v. MCDONALD'S SYSTEM

December 6, 1985

LOUIS MARTINO, ET AL., PLAINTIFFS,
v.
MCDONALD'S SYSTEM, INC., ET AL., DEFENDANTS. MICHAEL MARTINO, ET AL., PLAINTIFFS, V. MCDONALD'S CORPORATION, A DELAWARE CORPORATION, DEFENDANT.



The opinion of the court was delivered by: Moran, District Judge.

MEMORANDUM AND ORDER

These cases were originally filed to challenge, as a per se illegal tie-in contrary to Section 1 of the Sherman Act, 15 U.S.C. § 1, McDonald's contractual requirement that franchisees must buy and use Coca-Cola as its only sugar-sweetened cola beverage. The standard franchise agreement restricts franchisee purchases to "approved menu items" and only Coca-Cola has been designated as an approved sugar-sweetened cola.

Mindful of developing case law, plaintiffs later amended their complaint to allege that the practice was, alternatively, an unreasonable restraint of trade. See Fortner Enterprises, Inc. v. United States Steel Corp. (Fortner I), 394 U.S. 495, 499-501, 89 S.Ct. 1252, 1256-1257, 22 L.Ed.2d 495 (1969).*fn1 That led to a motion in limine for a ruling that the plaintiffs' complaint, on its face and on the undisputed facts, is legally insufficient in charging a per se illegal tying arrangement. A ruling on that motion would have affected, at most, the way the case would be tried; continual skirmishing over whether the case was properly a class action at all was still in progress; and, after a ruling that it was,*fn2 the first action had to be brought procedurally parallel to the second. The motion in limine was, therefore, held in abeyance. The two actions are now parallel, the parties are now prepared to finish what discovery remains to be done, and the matter is set for trial. Defendant has moved for summary judgment.

The complaint alleges, simply, that McDonald's explicitly requires its franchisees to purchase Coca-Cola and no other sugar-sweetened cola, that the imposition of the requirement constitutes both a per se unlawful tying arrangement and an unreasonable restraint of trade, and that the requirement has caused franchisees to pay a higher price for cola syrup than they otherwise would have had to pay. The motion in limine, as originally filed, rested upon the undisputed facts that defendant does not sell Coca-Cola to its franchisees, nor does it receive any rebate or commission on Coca-Cola's sales to franchisees. Due to the nature of Coca-Cola's distribution system, franchisees buy Coca-Cola syrup from a number of sources, with some variation of price depending on the source. Franchisees can shop around. That was a material fact bearing upon the "fact of injury" issue, which was paramount in the dispute over class certification.

Plaintiffs responded by urging that McDonald's did have an economic interest in the requirement. McDonald's, throughout the relevant period, has developed advertising formats through advertising agencies. Franchisees are committed to the expenditure of a stated percentage of their gross for advertising. Almost all have, over the years, discharged some or all of that obligation by contributions to OPNAD (the operators' national advertising fund), which was separate from McDonald's. OPNAD then pays for the media expense of national television, radio and print advertising and promotions. Franchisees can, and do, also satisfy that obligation by cooperative advertising in regional markets, using national formats. They may also satisfy that obligation by individual advertising, subject to verification that it occurred. Until the end of 1972 (the relevant time period begins in October 1971 for the first action; the plaintiffs contend, and defendant disputes, that it began at the same time for the second action), Coca-Cola paid advertising allowances to the OPNAD fund. Since the beginning of 1973 Coca-Cola has paid that allowance directly to the franchisees, which then use it to defray OPNAD contributions or for cooperative regional advertising or individual advertising programs. The allowance was and is for the purpose of promoting Coca-Cola in conjunction with other McDonald's products, although the nature of the Coca-Cola exposure is not specified. Plaintiffs appear to argue that OPNAD is McDonald's-controlled, that until 1973 the allowance was in practical effect to McDonald's, and that since then the encouragement of advertising participation through OPNAD and regional programs has resulted in a change in form but not substance since the allowance "still goes into McDonald's Coke-related advertising." The amount of that allowance influences, or may influence, McDonald's ongoing review of whether or not to stick with its Coca-Cola requirement. Thus, insist plaintiffs, the Coca-Cola requirement leads to allowances which are funneled into advertising controlled by McDonald's and thus primarily benefiting defendant, giving McDonald's a financial interest in Coca-Cola syrup sales to franchisees.

Plaintiffs' response to the motion in limine did not deal with their "rule of reason" concept, since the motion was restricted. Defendant now urges, in light of Carl Sandburg Village Condominium Association No. 1 v. First Condominium Development Co., 758 F.2d 203 (7th Cir. 1985), that its lack of economic interest in Coca-Cola syrup sales disposes of plaintiffs' rule-of-reason theory as well, and it moves for summary judgment. Plaintiffs dispute Carl Sandburg's impact upon their tie-in theory and contend that it has nothing to do with their rule-of-reason argument. According to plaintiffs, the Coca-Cola syrup requirement is a vertical restraint wholly apart from tie-in law. It restricts the ability of a franchisee or a syrup seller other than Coca-Cola, or both, to compete and therefore is, without regard to any economic interest by McDonald's, an unreasonable restraint of trade absent a yet to be litigated competitive justification.

In Carl Sandburg, the district court dismissed a complaint which alleged that a condominium developer's sale of condominium units subject to two-year management contracts with an unaffiliated company was an unlawful tie-in and (somewhat more equivocally) was an unreasonable restraint of trade. The court held that the sellers of the tying product, condominiums, were not alleged to have a sufficient economic interest in the management services contract, the tied product. 586 F. Supp. 155, 158 (N.D.Ill. 1983 and 1984). Plaintiffs, conceding that they were not claiming any direct financial interest by the developers by way of commissions or rebates, contended that it was enough that the developers were receiving an economic benefit from the failure of the management services defendants to disclose defects to potential buyers and that they, the plaintiffs, could have purchased better and less expensive management services elsewhere. The district court, 586 F. Supp. 155 at 159, concluded after considerable discussion of the case law, which need not be repeated here, that such an identifiable economic benefit was insufficient to claim illegal tying. Plaintiffs then asked for review under the rule of reason. The district court concluded that the conduct alleged was not within the concern of the Sherman Act. Id. at 161-162. The Court of Appeals affirmed, holding that some economic benefit amounting to a commission or rebate is required for a tying claim. 758 F.2d at 208. It went on to state that a rule-of-reason claim in a tying context likewise requires a substantial danger that the tying seller will acquire market power in the tied product market. When the seller of the tying product has no financial interest in the tied product and the tied product is independently priced there is no danger to competition and no actionable conduct. 758 F.2d at 210-211.

If Carl Sandburg means what it says, then plaintiffs cannot prevail in these actions. A review of the legal context from which Carl Sandburg arises persuades this court that it does mean what it says in the circumstances presented here, and that, accordingly, defendants are entitled to summary judgment.

We turn first to tying arrangements as per se violations. As many have noted, the designation of conduct as a per se violation is a judicial conclusion that the conduct is so pernicious that no extended analysis of its anticompetitive effects in a particular market is necessary. "[T]here are certain agreements or practices which because of their pernicious effect on competition and lack of any redeeming virtue are conclusively presumed to be unreasonable and therefore illegal without elaborate inquiry as to the precise harm they have caused or the business excuse for their use." Northern Pacific Ry. Co. v. United States, 356 U.S. 1, 5, 78 S.Ct. 514, 518, 2 L.Ed.2d 545 (1958). It is a useful judicial shortcut so long as it generally although not invariably accords with economic reality. See Arizona v. Maricopa County Medical Society, 457 U.S. 332, 350-351, 102 S.Ct. 2466, 2476, 73 L.Ed.2d 48 (1982). The classic per se violation remains price-fixing among competitors. Since at least 1947 tying arrangements have also been illegal per se. International Salt Co., Inc. v. United States, 332 U.S. 392, 68 S.Ct. 12, 92 L.Ed. 20 (1947). The classic condemned tying arrangement was and remains the monopolist requiring purchase from it of an unwanted or excessively-priced product as a requirement for purchasing the desired product controlled by the seller. While the anticompetitive impact of tying arrangements in vertical distribution systems has been vigorously questioned, e.g., Easterbrook, Vertical Arrangements and the Rule of Reason, 51 Antitrust L.J. 135 (1984), there can be little dispute that tying arrangements resulting in the extension of market power over another product as evidenced by price discrimination is a per se violation.

The judicial shortcut has never, however, been that abrupt. The rule is not an end in itself but a means to an end, an expeditious way of proscribing anticompetitive conduct. Legal writers are fond of pointing out that it is permissible to require a shoe purchaser to purchase both a right and left shoe. That can be characterized as not involving a tie because the shoes are one product, a concept extended into the franchise cases, e.g., Krehl v. Baskin-Robbins Ice Cream Co., 664 F.2d 1348 (9th Cir. 1982); Principe v. McDonald's Corp., 631 F.2d 303 (4th Cir. 1980), cert. denied, 451 U.S. 970, 101 S.Ct. 2047, 68 L.Ed.2d 349 (1981). That extension would appear, however, to be limited by the emphasis in Jefferson Parish Hospital District No. 2 v. Hyde, 466 U.S. 2, 104 S.Ct. 1551, 80 L.Ed.2d 2 (1984), to separate product markets, despite some question whether franchise systems, for sec. 1 purposes, should be treated as a single product. See Will v. Comprehensive Accounting Corp., 776 F.2d 665, 670 n. 1, (7th Cir. 1985). There are, after all, distinctive markets for McDonald's brand products or McDonald's franchises and for Coca-Cola or sugar-sweetened cola beverages generally.

What the courts have condemned ". . . is the wielding of monopolistic leverage; a seller exploits his dominant position in one market to expand his empire into the next." Times-Picayune Publishing Co. v. United States, 345 U.S. 594, 611, 73 S.Ct. 872, 882, 97 L.Ed. 1277 (1953). There has been, however, a recognition, perhaps an increasing recognition, that vertical restraints upon intrabrand competition may promote interbrand competition. Monsanto Company v. Spray-Rite Service Corp., 465 U.S. 752, 104 S.Ct. 1464, 79 L.Ed.2d 775 (1984). The competitive benefits of franchise distribution systems have been often noted, e.g., Ungar v. Dunkin' Donuts of America, Inc., 531 F.2d 1211, 1222-1223 (3d Cir.), cert. denied, 429 U.S. 823, 97 S.Ct. 74, 50 L.Ed.2d 84 (1976). The "single product" concept has been a means of ameliorating the rigors of the per se rule. The rule has been qualified by a business justification or quality control exception, Carpa v. Ward Foods, Inc., 536 F.2d 39 (5th Cir. 1976), so long as the control method adopted was the least restrictive means of accomplishing the purpose. Other concepts have arisen for the same purpose. See generally, ABA Antitrust Section, Monograph No. 8, Vertical Restrictions upon Buyers Limiting Purchases of Goods from Others (1982). And, increasingly, the per se rule has yielded to a redefinition of market power and more searching market analysis. Plaintiffs insist that the law has remained unchanged. Perhaps that is so when we look only to verbal formulations. In that sense, all continue to worship at the same altar. The beliefs of the worshipers have, however, perceptively changed.

The first action here was filed back before United States Steel Corp. v. Fortner Enterprises, Inc. (Fortner II), 429 U.S. 610, 97 S.Ct. 861, 51 L.Ed.2d 80 (1977), and the second action was filed shortly thereafter. Fortner II, picking up upon a footnote in Fortner I, 394 U.S. at 505 n. 2, 89 S.Ct. at 1259 n. 2, emphasized the necessity for market power in the tying product sufficient to raise prices in the tied product or, alternatively, force acceptance of an unwanted tied product, 429 U.S. at 617-622, 97 S.Ct. at 866-868. Shortly thereafter, in Continental T.V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36, 54-55, 97 S.Ct. 2549, 2559-2560, 53 L.Ed.2d 568 (1977), the Court recognized that vertical restraints may have redeeming virtues, including prevention of "free rider" effects which reduce distribution alternatives (a consideration germane to McDonald's advertising campaign structure but not, in view of the positions of the parties, discussed by them in this case). Jefferson Parish, 466 U.S. at 16, 104 S.Ct. at 1560, refused to abandon the per se doctrine in tying cases, but it further emphasized the necessity for market power and for extensive economic analysis. Four justices would have jettisoned a per se approach altogether. 104 S.Ct. at 1570 (O'Connor, J., concurring in judgment). The necessity for extensive economic analysis, because of possible procompetitive justification and to determine actual market power, has since been echoed in National Collegiate Athletic Association v. Board of Regents of the University of Oklahoma, 468 U.S. 85, 104 S.Ct. 2948, 2962 n. 26, 82 L.Ed.2d 70 (1984), and in Northwest Wholesale Stationers, Inc. v. Pacific Stationery & Printing Co., 472 U.S. ___, 105 S.Ct. 2613, 2621, 86 L.Ed.2d 202 (1985). Monsanto v. Spray Rite, 465 U.S. at 766, 104 S.Ct. at 1472 (1984) recognized, at least implicitly, that dealers in a vertical distribution system do not have an unfettered right to make independent decisions.

Even if there has been no change in the analytic approach, as plaintiffs insist, there has been a change in emphasis, particularly in this circuit. Photovest Corp. v. Fotomat Corp., 606 F.2d 704 (7th Cir. 1979), cert. denied, 445 U.S. 917, 100 S.Ct. 1278, 63 L.Ed.2d 601 (1980), assumed that a trademark carried with it a presumption of market power, as it gave some power over some buyers (Fortner I). It is a far cry from Will, 669, where tying is termed "not cooperation among competitors, the focus of § 1, it is aggressive conduct akin to monopolization under § 2 of the Sherman Act." Will implies (at 672) that market power, at least in the absence of direct proof of price discrimination, requires a market share in the tying product of more than 30 per cent so as to command an ability to control price in the tied ...


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