124 F.3d 430 (3rd Cir. 1997), 96-1638, Queen City Pizza, Inc. v. Domino's Pizza, Inc.

Docket Nº:96-1638.
Citation:124 F.3d 430
Party Name:QUEEN CITY PIZZA, INC.; Thomas C. Bolger; Scale Pizza, Inc.; Baughans, Inc.; Charles F. Buck; F.M. Pizza, Inc.; Robert S. Bigelow; Blue Earth Enterprises, Inc.; Kevin Bores; Davis Pizza Enterprises, Inc.; Diane A. Davis; Fisher Pizza, Inc.; James B. Fisher, Jr.; SEPCO, Inc.; S & S Pizza Corp.; G & L Pizza Co.; Stephen D. Gallup; Lugent Pizza, Inc.;
Case Date:August 27, 1997
Court:United States Courts of Appeals, Court of Appeals for the Third Circuit
 
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124 F.3d 430 (3rd Cir. 1997)

QUEEN CITY PIZZA, INC.; Thomas C. Bolger; Scale Pizza,

Inc.; Baughans, Inc.; Charles F. Buck; F.M. Pizza, Inc.;

Robert S. Bigelow; Blue Earth Enterprises, Inc.; Kevin

Bores; Davis Pizza Enterprises, Inc.; Diane A. Davis;

Fisher Pizza, Inc.; James B. Fisher, Jr.; SEPCO, Inc.; S

& S Pizza Corp.; G & L Pizza Co.; Stephen D. Gallup;

Lugent Pizza, Inc.; Joseph J. Lugent; Billio's Pizza,

Inc.; William J. Murtha; Spring Garden Pizza, Inc; Brad

L. Walker; JRW Pizza, Inc.; James R. Wood, Individually

and as Class Representatives of a Class Consisting of All

Present and Certain Former Domino's Franchisees in the

United States; International Franchise Advisory Council, Inc.,

v.

DOMINO'S PIZZA, INC.; Queen City Pizza, Inc.; Thomas C.

Bolger; Scale Pizza, Inc.; Baughans, Inc.; Charles F.

Buck; F.M. Pizza, Inc.; Robert S. Bigelow; Blue Earth

Enterprises, Inc.; Kevin Bores; Davis Pizza Enterprises,

Inc.; Diane A. Davis; Fisher Pizza, Inc.; James B.

Fisher, Jr.; SEPCO, Inc.; S & S Pizza, Inc.; G & L Pizza,

Inc.; Stephen D. Gallup; Lugent Pizza, Inc.; Joseph J.

Lugent; Billio's Pizza, Inc.; William J. Murtha; Spring

Garden Pizza, Inc.; Brad L. Walker; JRW Pizza, Inc.;

James R. Wood; and International Franchise Advisory

Council, Inc., Appellants.

No. 96-1638.

United States Court of Appeals, Third Circuit

August 27, 1997

Argued Feb. 28, 1997.

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[Copyrighted Material Omitted]

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Sheryl G. Snyder, (Argued), Brown, Todd & Hayburn, Louisville, KY, for Appellants.

Daniel F. Kolb, (Argued), Thomas P. Ogden, Davis, Polk & Wardwell, New York City, Laurence Z. Shiekman, Pepper, Hamilton

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& Scheetz, Philadelphia, PA, for Appellee.

Before: SCIRICA, ALITO and LAY, [*] Circuit Judges.

SCIRICA, Circuit Judge.

OPINION OF THE COURT

In this appeal, we must decide whether certain franchise tying restrictions support a claim for violation of federal antitrust laws. Eleven franchisees of Domino's Pizza stores and the International Franchise Advisory Council, Inc. filed suit against Domino's Pizza, Inc., alleging violations of federal antitrust laws, breach of contract, and tortious interference with contract. The district court dismissed the antitrust claims under Fed.R.Civ.P. 12(b)(6) for failure to state a claim for which relief can be granted, because the plaintiffs failed to allege a valid relevant market. The district court declined to exercise supplemental jurisdiction over the plaintiffs' remaining common law claims. Queen City Pizza, Inc. v. Domino's Pizza, Inc., 922 F.Supp. 1055 (E.D.Pa.1996). We will affirm.

I. Facts and Procedural History

A.

Domino's Pizza, Inc. is a fast-food service company that sells pizza through a national network of over 4200 stores. Domino's Pizza owns and operates approximately 700 of these stores. Independent franchisees own and operate the remaining 3500. Domino's Pizza, Inc. is the second largest pizza company in the United States, with revenues in excess of $1.8 billion per year.

A franchisee joins the Domino's system by executing a standard franchise agreement with Domino's Pizza, Inc. Under the franchise agreement, the franchisee receives the right to sell pizza under the "Domino's" name and format. In return, Domino's Pizza receives franchise fees and royalties.

The essence of a successful nationwide fast-food chain is product uniformity and consistency. Uniformity benefits franchisees because customers can purchase pizza from any Domino's store and be certain the pizza will taste exactly like the Domino's pizza with which they are familiar. This means that individual franchisees need not build up their own good will. Uniformity also benefits the franchisor. It ensures the brand name will continue to attract and hold customers, increasing franchise fees and royalties. 1

For these reasons, section 12.2 of the Domino's Pizza standard franchise agreement requires that all pizza ingredients, beverages, and packaging materials used by a Domino's franchisee conform to the standards set by Domino's Pizza, Inc. Section 12.2 also provides that Domino's Pizza, Inc. "may in our sole discretion require that ingredients, supplies and materials used in the preparation, packaging, and delivery of pizza be purchased exclusively from us or from approved suppliers or distributors." Domino's Pizza reserves the right "to impose reasonable limitations on the number of approved suppliers or distributors of any product." To enforce these rights, Domino's Pizza, Inc. retains the power to inspect franchisee stores and to test materials and ingredients. Section 12.2 is subject to a reasonableness clause providing that Domino's Pizza, Inc. must "exercise reasonable judgment with respect to all determinations to be made by us under the terms of this Agreement."

Under the standard franchise agreement, Domino's Pizza, Inc. sells approximately 90% of the $500 million in ingredients and supplies used by Domino's franchisees. 2 These sales, worth some $450 million per year, form a significant part of Domino's Pizza, Inc.'s profits. Franchisees purchase only 10% of their ingredients and supplies from outside sources. With the exception of fresh dough, Domino's Pizza, Inc. does not manufacture

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the products it sells to franchisees. Instead, it purchases these products from approved suppliers and then resells them to the franchisees at a markup.

B.

The plaintiffs in this case are eleven Domino's franchisees and the International Franchise Advisory Council, Inc. ("IFAC"), a Michigan corporation consisting of approximately 40% of the Domino's franchisees in the United States, formed to promote their common interests. 3 The plaintiffs contend that Domino's Pizza, Inc. has a monopoly in "the $500 million aftermarket for sales of supplies to Domino's franchisees" and has used its monopoly power to unreasonably restrain trade, limit competition, and extract supra-competitive profits. Plaintiffs point to several actions by Domino's Pizza, Inc. to support their claims.

First, plaintiffs allege that Domino's Pizza, Inc. has restricted their ability to purchase competitively priced dough. Most franchisees purchase all of their fresh dough from Domino's Pizza, Inc. Plaintiffs here attempted to lower costs by making fresh pizza dough on site. They contend that in response, Domino's Pizza, Inc. increased processing fees and altered quality standards and inspection practices for store-produced dough, which eliminated all potential savings and financial incentives to make their own dough. Plaintiffs also allege Domino's Pizza, Inc. prohibited stores that produce dough from selling their dough to other franchisees, even though the dough-producing stores were willing to sell dough at a price 25% to 40% below Domino's Pizza, Inc.'s price.

Next, plaintiffs object to efforts by Domino's Pizza, Inc. to block IFAC's attempt to buy less expensive ingredients and supplies from other sources. In June 1994, IFAC entered into a purchasing agreement with FoodService Purchasing Cooperative, Inc. (FPC). Under the agreement, FPC was appointed the purchasing agent for IFAC-member Domino's franchisees. FPC was charged with developing a cooperative purchasing plan under which participating franchisees could obtain supplies and ingredients at reduced cost from suppliers other than Domino's Pizza, Inc. Plaintiffs contend that when Domino's Pizza, Inc. became aware of these efforts, it intentionally issued ingredient and supply specifications so vague that potential suppliers could not provide FPC with meaningful price quotations.

Plaintiffs also allege Domino's Pizza entered into exclusive dealing arrangements with several franchisees in order to deny FPC access to a pool of potential buyers sufficiently large to make the alternative purchasing scheme economically feasible. In addition, plaintiffs contend Domino's Pizza, Inc. commenced anti-competitive predatory pricing to shut FPC out of the market. For example, they maintain that Domino's Pizza, Inc. lowered prices on many ingredients and supplies to a level competitive with FPC's prices and then recouped lost profits by raising the price on fresh dough, which FPC could not supply. Further, plaintiffs contend Domino's Pizza, Inc. entered into exclusive dealing arrangements with the only approved suppliers of ready-made deep dish crusts and sauce. Under these agreements, the suppliers were obligated to deliver their entire output to Domino's Pizza, Inc. Plaintiffs allege the purpose of these agreements was to prevent FPC from purchasing these critical pizza components for resale to franchisees.

Finally, plaintiffs allege Domino's Pizza, Inc. refused to sell fresh dough to franchisees unless the franchisees purchased other ingredients and supplies from Domino's Pizza, Inc. As a result of these and other alleged practices, plaintiffs maintain that each franchisee store now pays between $3000 and $10,000 more per year for ingredients and supplies than it would in a competitive market. Plaintiffs allege these costs are passed on to consumers.

C.

As noted, eleven Domino's franchisees and IFAC filed an amended complaint in United

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States District Court for the Eastern District of Pennsylvania against Domino's Pizza, Inc. seeking declaratory, injunctive, and compensatory relief under §§ 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1 and 2. The plaintiffs also sought damages for breach of contract, breach of implied covenants of good faith and fair dealing, and tortious interference with contractual relations. 4

Domino's Pizza, Inc. moved to dismiss the antitrust claims for failure to state a claim, contending the plaintiffs failed to allege a...

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