Assignment:
Judge King
Equilon Enterprises, LLC ("Equilon") does business as Shell Oil Products. Equilon's standard franchise agreement requires its franchisees, Shell and Texaco gasoline stations, to use Equilon to process credit-card transactions. In addition to payment for sales of petroleum products, Equilon allegedly gets (1) transaction fees associated with the processing, or (2) some kind of unspecified "kickback" from unidentified banks that process the transactions, or both. Rick-Mik Enterprises, Inc., Mike M. Madani, and Alfred Buczkowski (collectively "Rick-Mik") are Equilon franchisees who-on behalf of themselves and other, similarly situated Equilon franchisees- allege that Equilon violated antitrust laws by illegally tying two distinct products (the franchises and the credit-card processing services). Rick-Mik contends franchisees could pay lower transaction fees from others for credit-card processing. The district court dismissed the antitrust and related statelaw counts.
DISCUSSION Tying Claim
a. The market power allegations are flawed. The alleged tying product here is gasoline franchises. RickMik has a contract for an Equilon franchise to sell Shell branded gasoline and diesel. The alleged tied-product is credit-card processing services. Rick-Mik alleges it cannot get a franchise without the "tied" credit-card processing services. Rick-Mik's complaint does not allege that Equilon has market power in the relevant market, which is the market for the tying product-gasoline franchises. Indeed, other than stating that "[Equilon] rank[s] number one in the industry in branded gasoline stations," there are no specific allegations at all as to the franchise market. The complaint alleges nothing about, for example, what percentage of gasoline franchises are Equilon's (Shell/Texaco) as compared to other franchises like Chevron, Mobil, Marathon Oil, or Union 76. There are no factual allegations as to the percentage of gasoline retail sales that are made through non-franchise outlets.
There are no factual allegations regarding the amount of power or control that Equilon has over prospective franchisees. There are no factual allegations regarding the relative difficulty of a franchisee to switch franchise brands. If Equilon lacks market power in the gasoline-franchise market, there can be no cognizable tying claim. For, in that case, Equilon has no power to force, exploit, or coerce a franchisee to purchase a tied-product such as credit card processing (if the processing is a distinct product for tying purposes) or to affect competition in the tied-product market. Such an arrangement would not raise antitrust concerns.
Rick-Mik argues that it alleged sufficient facts to infer that Equilon has sufficient economic power in the gasolinefranchise market, which has significant barriers to entry. It points to statistics indicating Equilon is an important player in the petroleum industry. According to the complaint:
(1) Equilon sells petroleum products to approximately 9,000 Shell and Texaco-branded retail outlets;
(2) it ranks first in the industry in branded gasoline stations;
(3) at 13 percent of the market, it ranks first in total gallons of gasoline sold in the United States;
(4) it has annual gross revenues of approximately $24 billion;
(5) it is number one or two in gasoline market share in 17 states;
(6) it has four refineries, refining approximately 753,000 barrels of petroleum products per day and owns a 50 percent interest in Motiva's three refineries, refining approximately 865,000 barrels of petroleum products per day;
(7) it owns an interest in approximately 10,000 miles of pipeline used to transport its petroleum products throughout the United States; and
(8) it serves, on average, more than six million customers per day and sells approximately 19 billion gallons of gasoline per year, most of which is purchased by customers' credit or debit cards issued by thousands of banks, banking associations and financial institutions throughout the United States. All of those allegations, however, relate to the retail gasoline market-a market where Rick-Mik is a seller-not the relevant market for franchises where it is a buyer.
Further, the statistics alleged in the complaint do not distinguish between franchise-based sales and other potential types of sales (e.g., sales by directly owned outlets or sales to other distributors). Thus, the complaint fails to allege market power in the relevant market. Nor is Rick-Mik's complaint saved by the allegation that "Shell and Texaco-branded gasolines are protected by various trademarks, copyrights and patents providing Equilon sufficient economic power over Plaintiffs in connection with its tying products to appreciably restrain competition in the tiedproduct market." Because intellectual property rights are no longer presumed to confer market power, see Illinois Toolworks Inc., 547 U.S. at 42-43, Rick-Mik's conclusory allegation that Equilon's intellectual property rights nonetheless do confer market power, unaccompanied by supporting facts, is insufficient.
Finally, the complaint's allegation of a contractual franchise relationship also fails to plead market power. A tying claim generally requires that the defendant's economic power be derived from the market, not from a contractual relationship that the plaintiff has entered into voluntarily. See, e.g., Queen City Pizza, Inc., 124 F.3d at 443 ("where the defendant's ‘power' to ‘force' plaintiffs to purchase the alleged tying product stems not from the market, but from plaintiffs' contractual agreement to purchase the tying product, no claim will lie.")
With franchises, the franchisee knows the contractual limitations and duties before entering into the contract. A complaint about such contractual obligations is not an antitrust matter.
Affirmed.
Questions
1. a. Identify the tying and tied products in the Rik-Mik case.
b. Explain how Rik-Mik attempted to establish that Equilon had market power in the tying product.
2. How does Rik-Mik claim to have been harmed by the alleged tying arrangement?
3. Why did the Court reason that a franchising contract ordinarily cannot, by itself, be the basis for an antitrust claim?
4. Who won this case and why?
5. In recent years, Apple has been accused of tying violations both in the United States and in Europe. In brief, the plaintiffs are claiming that Apple's software prevents music bought from Apple's iTunes from being played on a player other than Apple's iPod. The plaintiffs argue that Apple has monopoly power in the portable digital player market and the online music market and that it uses that power to force consumers to bundle the iPod and iTunes music. The result, the plaintiffs' claim, is fewer options and higher prices. Do you share these concerns about Apple's iPod/iTunes strategy? Explain. For one decision in this ongoing litigation, see Somers. v. Apple, 2011 U.S. Dist. LEXIS 77165. For the class action website, see https://ipodlawsuit.com.
6. When Late Night with David Letterman was an NBC show, the network, for some time, reportedly required those wanting to advertise on Late Night (then generally favored by a younger audience) to also buy spots on another talk show, the Tonight Show with Johnny Carson (then generally favored by an older audience).
a. Does that packaging constitute a tying arrangement?
b. Was it lawful? Explain.
7. Chrysler included the price of a sound system in the base price of its cars. Chrysler's share of the auto market was 10 to 12 percent. Chrysler did not reveal the "subprice" for the sound systems. Independent audio dealers objected on antitrust grounds. Explain their claim. Decide. See Town Sound and Custom Tops, Inc. v. Chrysler Motor Corp. 959 F.2d 468 (3d Cir. 1992); cert. den., 113 S.Ct. 196 (1992).