Queen City Pizza, Inc. v. Domino's Pizza, Inc.

• Citation: 922 F. Supp. 1055
• Decision Date: 30 April 1996
• Docket Number: No. 95-CV-3777.,95-CV-3777.
• Parties: QUEEN CITY PIZZA, INC., et al., Plaintiffs, v. DOMINO'S PIZZA, INC., Defendant.
• Court: U.S. District Court — Eastern District of Pennsylvania

922 F. Supp. 1055

QUEEN CITY PIZZA, INC., et al., Plaintiffs, v. DOMINO'S PIZZA, INC., Defendant.

No. 95-CV-3777.

United States District Court, E.D. Pennsylvania.

April 30, 1996.

COPYRIGHT MATERIAL OMITTED

Lawrence T. Hoyle, Jr., Richard M. Bernstein, Hoyle, Morris & Kerr, Philadelphia, PA, Sheryl G. Snyder, Barry D. Hunter, Brown, Todd & Heyburn, P.L.L.C., Lexington, KY, for Plaintiffs.

Laurence Z. Shiekman, Thomas E. Zemaitis, Barbara T. Sicalides, Pepper Hamilton & Scheetz, Philadelphia, PA, Daniel F. Kolb, Thomas P. Ogden, Davis Polk & Wardwell, New York City, for Defendant.

MEMORANDUM AND ORDER

JOYNER, District Judge.

The plaintiffs in this antitrust action are eleven owners and operators of Domino's Pizza franchises located in Delaware, Florida, Illinois, Minnesota, Mississippi, New Hampshire, North Carolina, Pennsylvania and South Carolina, as well as International Franchise Advisory Council, Inc. ("IFAC"), a Michigan corporation whose members include approximately 40% of the Domino's Pizza franchisees located in the United States. IFAC brings this suit on its own behalf and on behalf of its member franchisees. On September 25, 1995, Plaintiffs filed an amended complaint against Domino's Pizza, Inc. ("DPI"), also a Michigan corporation, seeking (1) declaratory, injunctive and compensatory relief under §§ 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1 and 2; and (2) damages for DPI's alleged breach of contract, breach of the implied covenant of good faith and fair dealing, and tortious interference with contractual relations. DPI has since filed the instant motion for summary judgment as to the claims brought by IFAC in both its individual and representative capacities on the grounds that IFAC lacks standing. Moreover, DPI contends that the breach of contract, breach of covenant of fair dealing, and antitrust claims should be dismissed for failure to state a claim on which relief can be granted. We conclude that the facts set forth in the amended complaint do not give rise to causes of action cognizable under the federal antitrust laws. Accordingly, we will dismiss the antitrust claims pursuant to Fed.R.Civ.P. 12(b)(6) and dismiss the remaining claims in accordance with Rule 12(b)(1).

FACTUAL BACKGROUND

The facts giving rise to this action, as recited in the amended complaint, are as follows. The Domino's pizza business is comprised of a network of stores that sell pizza and other food products largely on a take-out or delivery basis. The Domino's network consists of approximately 700 stores owned and operated by DPI and 3,500 stores owned and operated by Domino's franchisees. In order to acquire a Domino's franchise, a franchisee must enter into a franchise agreement¹ with DPI, pursuant to which the franchisee is entitled to market food products under DPI's business format and trade and service marks in exchange for franchise fees and royalties. The franchise agreement is crafted so as to maintain uniformity and consistency of quality throughout the network. Franchisees must therefore purchase ingredients, materials, and supplies from either DPI or a DPI-approved supplier. The relevant provision of the franchise agreement reads as follows:

12.2 Pizza Ingredients, Supplies and Materials. All pizza ingredients, beverage products, cooking materials, containers, packaging materials, other paper and plastic products, utensils, uniforms, menus, forms, cleaning and sanitation materials and other supplies and materials used in the operation of the Store must conform to the specifications established by us DPI from time to time. You franchisee must use in the operation of the Store boxes, containers and other paper products imprinted with the Marks as prescribed from time to time by us. We 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. Any ingredient, supply or material not previously approved by us as conforming to our specifications and quality standards must be submitted for examination and/or testing prior to use. We reserve the right from time to time to examine the facilities of any approved supplier or distributor, including the commissary, if any, operated by you, and to conduct reasonable testing and inspection of ingredients, materials or supplies to determine whether they meet our standards and specifications. We also reserve the right to charge fees for testing and evaluating proposed suppliers or distributors and examining or inspecting operations and to impose reasonable limitations on the number of approved suppliers of any product. Approval of a supplier or distributor may be conditioned on requirements relating to frequency of delivery, standards of service including prompt attention to complaints and the ability to service and supply Stores within areas designated by us.

Moreover, DPI is required "to exercise reasonable judgment with respect to all determinations to be made by us under the terms of the franchise agreement." Franchise Agreement § 22.9.

The franchisees purchase the great majority of the required ingredients and supplies from Domino's Pizza Distribution Division ("DPDD"), formerly a subsidiary and now a division of DPI. The nub of the amended complaint is that DPI employs the above-quoted franchise agreement provisions unreasonably, so that franchisees are effectively precluded from purchasing ingredients and supplies in a competitive market. For example, Plaintiffs contend that when they initiated efforts to produce fresh pizza dough at the store level, DPI arbitrarily increased the processing fees and altered the standards and inspection practices so as to eliminate any savings the franchisees may have realized, in an effort to protect DPDD from competition. Moreover, the franchisees producing fresh dough in approved commissaries were prohibited by DPI from selling the dough to other franchisees, even though the dough-producing franchisees could deliver the dough to other franchisees at a cost 25% to 40% less than DPDD's price.

In 1993, IFAC began to pursue alternative means of acquiring ingredients and supplies at more competitive prices for its member franchisees. To that end, IFAC entered into a purchasing affiliation agreement ("purchasing agreement") with FoodService Purchasing Cooperative, Inc. ("FPC") on June 15, 1994. Pursuant to the purchasing agreement, FPC was appointed to act as purchasing agent for the IFAC-member franchisees and to develop a cooperative purchasing plan for franchisees seeking to purchase ingredients and supplies from a source other than DPDD. Plaintiffs contend that once DPI became aware of IFAC's efforts, it initiated a campaign to prevent FPC from establishing a cooperative purchasing program that would compete with DPDD. Thus, when IFAC and FPC requested that DPI provide specifications so that FPC could solicit bids from potential suppliers, DPI eventually issued specifications so vague that suppliers could not furnish FPC with meaningful price quotations. Further, Plaintiffs assert that in response to IFAC and FPC's efforts, DPI entered into exclusive dealing arrangements with a broad base of Domino's franchisees for the purpose of denying FPC a pool of purchasers sufficiently large to make the alternative purchasing effort feasible.

Plaintiffs allege that DPI has engaged in other anti-competitive conduct for the purpose of shielding DPDD from competition. DPI's alleged activity includes: (1) entering into an exclusive dealing arrangement with the only approved supplier of deep-dish pizza crusts, thereby effectively preventing FPC from arranging for the purchase of this ingredient from an alternative source; (2) effectively denying FPC access to approved pizza sauce suppliers and refusing to consider approving a low-cost alternative supplier for many months, even though the alternative supplier's product met DPI's standards for quality; and (3) commencing a "predatory pricing" effort, whereby DPI lowered prices on most ingredients and supplies to a level competitive with the prices FPC was expected to offer, while raising prices on fresh dough, an ingredient over which DPI maintained almost exclusive control, and tying the purchase of fresh dough to the purchase of other ingredients and supplies.

Finally, Plaintiffs contend that when it solicited them to become Domino's franchisees, DPI represented that DPDD was but one of a number of approved suppliers and that the terms of the franchise agreement would provide for a competitive purchasing environment. They claim that DPI reneged on this promise in the manner described above, forcing them to pay an additional $3,000 to $10,000 per store annually for ingredients and supplies. Moreover, Plaintiffs allege that they are effectively "locked in" to the franchises in view of their investments, and since DPI must approve any sale of a franchise and applies an unreasonably restrictive approval policy. Thus, any franchisee desiring to switch its investment to an alternative franchise system is likely to incur a significant financial loss.

ANALYSIS

A. The Antitrust Claims

As noted above, Plaintiffs seek injunctive relief and treble damages as a result of DPI's alleged violation of §§ 1 and 2 of the Sherman Act. In Count One, Plaintiffs contend that the facts set forth in the amended complaint constitute an unreasonable restraint on trade and a tying arrangement that is per se unlawful under § 1. Plaintiffs allege in Count Two that DPI has unlawfully monopolized the relevant market in violation of § 2. DPI contends that the antitrust claims should be dismissed pursuant to Rule 12(b)(6). Specifically, DPI argues that the amended complaint must be dismissed in light of Plaintiffs' failure to allege a relevant product market, and that to the extent Plaintiffs contend that the relevant market is the market for ingredients and...