Law, Business and Society 11th Edition by Tony McAdams

Exercise 54

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 state-law counts.…
DISCUSSION
Tying Claim
a. The market power allegations are flawed.
The alleged tying product here is gasoline franchises. Rick-Mik 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.
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Rick-Mik argues that it alleged sufficient facts to infer that Equilon has sufficient economic power in the gasoline-franchise 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 tied- product market."... Because intellectual property rights are no longer presumed to confer market power, see Illinois Tool-works 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.")
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b. Credit-card processing is not a distinct product.
There is another fatal flaw in Rick-Mik's complaint. Equilon's franchises are not a separate and distinct product from the credit-card processing services that are part of the franchise.
Franchises, almost by definition, necessarily consist of "bundled" and related products or services-not separate products.
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With franchises, "the proper inquiry is... whether [the allegedly tied-products] are integral components of the business method being franchised. Where the challenged aggregation is an essential ingredient of the franchised system's formula for success, there is but a single product and no tie in exists as a matter of law." Principe v. McDonald's Corp., 631 F.2d 303, 309 (4th Cir. 1980).
Here, Equilon's credit card services are an essential part of its franchise. Its agreement authorizes Equilon to use credit card proceeds to pay off a franchisee's account (i.e., money the franchisee owes Equilon for the gasoline Equilon delivers to the franchisee). The agreement also authorizes Equilon to charge or refund unauthorized transactions to the franchisee, helping secure the integrity of point-of-sale transactions.
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Equilon points to the many other areas which are part and parcel of a franchise: signs, advertising, marketing, appearance, as well as methods of delivery and payment. Similarly, the method of receiving and processing credit transactions is an integral part of the franchise's operation. The franchise and the method of processing credit transactions are not separate products, but part of a single product (the franchise).
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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.
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Affirmed.
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.