Casey v. Diet Center, Inc.

• Decision Date: 17 July 1984
• Docket Number: No. C-83-1043-WWS.,C-83-1043-WWS.
• Citation: 590 F. Supp. 1561
• Court: U.S. District Court — Northern District of California
• Parties: Caroline CASEY, Mary Anne Johnson and Peggy Garvey, individuals, on behalf of themselves and all others similarly situated, Plaintiffs, v. DIET CENTER, INC., a corporation, Jenkins Diet Centers, Inc., a corporation, Seth L. Jenkins, dba Jenkins Diet Center, a sole proprietorship, Seth L. Jenkins, S. Bradley Jenkins, Cathy R. Jenkins, Verla Archibald, individuals, and all others similarly situated, Defendants.

590 F. Supp. 1561

Caroline CASEY, Mary Anne Johnson and Peggy Garvey, individuals, on behalf of themselves and all others similarly situated, Plaintiffs, v. DIET CENTER, INC., a corporation, Jenkins Diet Centers, Inc., a corporation, Seth L. Jenkins, dba Jenkins Diet Center, a sole proprietorship, Seth L. Jenkins, S. Bradley Jenkins, Cathy R. Jenkins, Verla Archibald, individuals, and all others similarly situated, Defendants.

No. C-83-1043-WWS.

United States District Court, N.D. California.

July 17, 1984.

Richard B. McDonough, Elizabeth G. Leavy, Carroll, Burdick & McDonough, San Francisco, Cal., for plaintiffs.

Ralph C. Alldredge, San Francisco, Cal., Daniel L. Berman, Berman & Anderson, Gary F. Bendinger, Giauque & Williams, Salt Lake City, Utah, for defendants.

MEMORANDUM OF OPINION AND ORDER

SCHWARZER, District Judge.

This is an antitrust action brought by subfranchisees of defendant Diet Center, Inc., which franchises a system to promote weight loss and control for individual clients. Plaintiffs claim that defendants require franchisees¹ to purchase from Diet Center, Inc., at excessive prices the Diet Center Diet Supplement ("Diet Supp"), a nutritional tablet Diet Center clients must take. They argue that the forced purchase of Diet Supp constitutes a tying arrangement illegal per se under Section 1 of the Sherman Act, 15 U.S.C. § 1. The action is before the Court on cross-motions for summary judgment on the issue whether the purchase requirement is an illegal tying arrangement. No facts material to the disposition of these motions are in dispute, and no triable issue is presented.

I. Background Facts.

Diet Center is a nation-wide chain of approximately 1830 franchised weight-control centers. The franchise is structured in three tiers. Diet Center, Inc., the primary franchisor, sells franchises to area franchisees who are permitted to subfranchise; area franchisees operate a total of 350 outlets directly, and subfranchise another 1130 outlets to third-tier operators. Plaintiff Garvey is a third-tier operator who subfranchises from defendant Jenkins Diet Centers which is an area franchisee of defendant Diet Center, Inc. Plaintiffs Casey and Johnson are joint operators who subfranchise one outlet from defendant Archibald, also an area franchisee of Diet Center, Inc., and a second outlet from defendant Jenkins.

Diet Center offers a five-phase weight-control program, the second or "reducing" phase of which is relevant here. Clients in that phase (1) attend daily personalized counseling sessions, (2) follow prescribed diets, (3) have access to nutrition and behavior modification classes, and (4) take various nutritional products daily, including eight Diet Supps which they obtain from their Diet Center outlet. Clients pay a weekly fee which covers all costs including that of the Diet Supps.

The Diet Supp is a chewable tablet consisting of a vitamin B complex in a base of soy protein and invert sugar, together with panothenic acid and niacin. Its inactive ingredients, not listed on its label, are excipients and binding agents which give the supplement its taste, texture, and consistency. It serves as a nutritional supplement, an appetite depressant, and a digestive, and both parties concede its importance to the Diet Center program.

All Diet Center franchisees must purchase their requirements of Diet Supps (either directly or through a subfranchisor) from Diet Center, Inc., which has produced the tablets at an in-house laboratory since early 1980; before then, Diet Center, Inc., had the supplement manufactured by outside sources. Diet Center, Inc., has never sold Diet Supps separately from its weight control program. Supplements with the same active ingredients are or could be made available from other sources, but Diet Center, Inc., claims that the quality of its ingredients and the particular excipients it uses to create taste and texture are secret and unique.

Diet Center franchisees are charged a refundable "initial franchising fee" of $24,000 (this amount has varied over the years) and a "continuing License Fee" of approximately $1.05 per dieter per day of enrollment in the program. It is unclear from the record whether the license fee is a charge solely for the Diet Supp, solely for the franchise (i.e. a royalty), or both, primarily because Diet Center, Inc., has been inconsistent in characterizing the fee in license agreements, disclosure documents, and promotional literature. In any event, the fee covers the cost of the Diet Supp. Defendants do not appear to dispute that a dieter's daily ration of Diet Supps costs Diet Center, Inc., from 35 to 45 cents to produce, an amount it has also on occasion characterized as the price to subfranchisors of the Diet Supp. Subfranchisors pass along these charges to subfranchisees with a mark-up of about 50 cents which covers their charge for processing orders for the Diet Supp. Plaintiffs maintain that products equivalent to the Diet Supp are available for 25 to 30 cents from various sources including a former Diet Center franchisee, a Diet Center competitor, and the laboratory which originally produced the Diet Supp.

II. Does the Diet Center Franchise Package Tie Separate Products?

Diet Center, Inc., offers its franchisees a comprehensive program of weight reduction and control services, products, and techniques. Sufficient goodwill attaches to the Diet Center trademark to induce franchisees to pay for the right to operate the program and pay for its component products such as the Diet Supp. Plaintiffs argue that this franchise arrangement is a tying agreement illegal per se because it ties two products and because Diet Center possesses sufficient market power in the tying product to appreciably restrain trade in the tied product, Fortner Enters., Inc. v. United States Steel Corp., 394 U.S. 495, 499, 89 S.Ct. 1252, 1256, 22 L.Ed.2d 495 (1969) ("Fortner I"); Northern Pac. Ry. Co. v. United States, 356 U.S. 1, 6, 78 S.Ct. 514, 518, 2 L.Ed.2d 545 (1958); California Glazed Products, Inc. v. Burns & Russell Co., 708 F.2d 1423, 1427 (9th Cir.), cert. denied, ___ U.S. ___, 104 S.Ct. 348, 78 L.Ed.2d 314 (1983).² Defendants argue first that the trademarked franchise and the Diet Supp are inseparable components of a single product which is therefore not subject to scrutiny as a tying arrangement.

In its recent decision in Jefferson Parish Hosp. Dist. No. 2 v. Hyde, ___ U.S. ___, 104 S.Ct. 1551, 80 L.Ed.2d 2 (1984), the Supreme Court held that defendant hospital's requirement that its patients employ the services of a specified group of anethesiologists did not violate Section 1. A majority of the Court, however, rejected defendants' contention that hospital services and those offered by the anesthesiologists were inseparable merely because they were functionally integrated:

Our cases indicate ... that the answer to the question whether one or two products are involved turns not on the functional relation between them, but rather on the character of the demand for the two items.

104 S.Ct. at 1562.

The Court relied on Times-Picayune Publishing Co. v. United States, 345 U.S. 594, 73 S.Ct. 872, 97 L.Ed. 1277 (1953), which held that advertising in a morning newspaper and in an afternoon newspaper was a single product because the purchasing advertisers viewed the newspaper reading public of both papers as fungible and not distinct, id. 345 U.S. at 613-14, 73 S.Ct. at 883. Hyde thus defined the test for separate products to be whether the arrangement "links two distinct markets for products ... distinguishable in the eyes of buyers," 104 S.Ct. at 1562. That test, it held, derives from the underlying rationale for the rule against tying to prohibit only those arrangements which create the possibility of "foreclosing competition on the merits in a product market distinct from the market for the tying item," id. at 1563.

In Hyde, plaintiff presented evidence that patients differentiated between hospital services and anesthesiological services: the latter were frequently separately arranged for and paid for. No such evidence is offered here. Although alternatives to the Diet Supp do exist, it does not follow that the purchase of the Supp or its equivalents by franchisees creates a distinct market. Under Hyde, "no tying arrangement can exist unless there is a sufficient demand for the purchase of the tied product separate from the tying product to identify a distinct product market in which it is efficient to offer the tied product separately from the tying product," 104 S.Ct. at 1563.

Here the demand for the Diet Supp is not separate from that for the franchise: it is generated wholly by the franchisee's operation of the franchise. Were it not for the Diet Center's franchised weight control program, there would be no market for the Diet Supp. Indeed, the Diet Supp may be purchased only by Diet Center franchisees who use it solely as an integral part of the Diet Center method.³ Treating the Diet Supp as a separate market would thus not serve the purpose of the tying rule to protect distinct markets from anticompetitive restraints.

Ninth Circuit decisions have sought to address the separate products issue by application of two tests. In Siegel v. Chicken Delight, Inc., 448 F.2d 43, 48 (9th Cir.1971), cert. denied, 405 U.S. 955, 92 S.Ct. 1172, 31 L.Ed.2d 232 (1972), the court articulated a "function of the aggregation" analysis, but this has quite clearly been rejected in Hyde. More recently, the court, in Krehl v. Baskin-Robbins Ice Cream Co., 664 F.2d 1348, 1353 (9th Cir.1982), and subsequent decisions, rested on a distinction between business format systems and distribution systems, making the determination of separateness of franchised trademarks and component products turn primarily on the extent to which the trademark is associated in the public mind with the source of the allegedly tied product. See also Roberts, supra note 2, 708 F.2d at 1481; California...