Bender v. Southland Corp.

• Citation: 749 F.2d 1205
• Decision Date: 07 December 1984
• Docket Number: No. 83-1525,83-1525
• Parties: 1984-2 Trade Cases 66,309 Paul BENDER, Plaintiff, George and Diane DeCarlo, et al., Plaintiffs-Appellants, v. SOUTHLAND CORPORATION, Defendant-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)

Page 1205

749 F.2d 1205

1984-2 Trade Cases 66,309

Paul BENDER, Plaintiff, George and Diane DeCarlo, et al., Plaintiffs-Appellants, v. SOUTHLAND CORPORATION, Defendant-Appellee.

No. 83-1525.

United States Court of Appeals, Sixth Circuit.

Argued Sept. 18, 1984.

Decided Dec. 7, 1984.

George DeCarlo, Diane DeCarlo, Charles Spinks, Shirley Spinks, pro se.

Steven P. Resnick (argued), Bereano & Resnick, Annapolis, Md., for plaintiffs-appellants.

Francis E. Bentley, David Ettinger, Mark J. Spooner, Boris Feldman, Arnold & Porter, Peter Bleakley (argued), Washington, D.C., for defendant-appellee.

Before EDWARDS and CONTIE, Circuit Judges, and BELL, District Judge. ^*

CONTIE, Circuit Judge.

The plaintiffs, who are franchisees of 7-Eleven convenience stores, appeal from a summary judgment rendered in favor of defendant Southland Corporation, the franchisor. The plaintiffs' complaint filed on October 2, 1981 accused Southland of vertical price fixing (Count I) and imposing a tying arrangement (Count II) in violation of 15 U.S.C. Sec. 1 (Sherman Antitrust Act) and of racketeering (Count III) in violation of 18 U.S.C. Sec. 1962 (Racketeer Influenced and Corrupt Organizations Act, i.e., RICO). The district court dismissed the RICO count and subsequently granted Southland's motion for summary judgment on the vertical price fixing and tying arrangement counts. We affirm both the dismissal of the RICO claim and the summary judgment on the tying arrangement claim and reverse the summary judgment on the vertical price fixing claim.

I.

The allegations underlying Count I may be summarized as follows. The plaintiffs contracted with Southland to operate 7-Eleven convenience stores in the 1970s. Although Southland suggests retail prices and recommends inventory suppliers, the standard franchise agreement expressly provides that a franchisee is not required either to charge the suggested retail price or to purchase inventory from recommended vendors. The plaintiffs contend, however, that Southland in fact requires them to do both of these things through the operation of its retail inventory accounting system and through pressure exerted by its representatives.

Southland's retail inventory accounting system measures inventory shortages and overages for which the franchisees are contractually responsible (Kanawyer affidavit at 8). Under this system, a franchisee's inventory is valued at Southland's suggested retail price unless the franchisee notifies Southland of a different actual retail price. The franchisee must complete one line on a form provided by Southland for each product on which the franchisee wishes to deviate from the suggested retail price. Moreover, if a franchisee purchases inventory from a nonrecommended vendor, the franchisee must forward the invoice to Southland together with information about the actual retail price being charged. Furthermore, Southland does not permit franchisees to make permanent price changes. Instead, a franchisee must submit a price change report whenever Southland changes the suggested retail price, even though the franchisee may not have changed the actual retail price.

The plaintiffs do not contend that retail inventory accounting systems are inherently suspect under the Sherman Act. In fact, the plaintiffs appear willing to report all retail price changes and to report, one time, the retail prices of items purchased from nonrecommended suppliers. The plaintiffs object, however, to Southland's requirement that they repeatedly report unchanged actual retail prices whenever suggested retail prices change or whenever purchases are made from nonrecommended vendors.

The plaintiffs assert that since dozens of suggested price changes occur in a sixty-day period on the several thousand items stocked in their stores, they are forced to follow Southland's suggested retail prices, which are higher than the prices they wish to charge, on sixty to seventy percent of their items. The plaintiffs claim that although they wish to charge lower prices on more items, they cannot do so because of the extraordinary amount of paperwork that would be involved. Moreover, the plaintiffs contend that partially because of Southland's reporting requirements, they must purchase sixty-five to seventy-five percent of their inventory from recommended suppliers even though these vendors charge between ten and forty percent more than nonrecommended suppliers. ¹ These higher wholesale costs are reflected in the actual retail prices. The plaintiffs claim that Southland has intentionally structured its retail inventory accounting system to insure that high prices will be maintained at franchisees' stores.

The plaintiffs also allege that Southland, through the conduct of its representatives, has forced them to honor its suggested retail prices and to purchase inventory items from recommended vendors. The plaintiffs rely upon the affidavits of Diane DeCarlo and Shirley Spinks to support this claim. The plaintiffs contend that because they independently price thirty to forty percent of their inventory items and purchase twenty-five to thirty-five percent of their inventories from nonrecommended vendors, they have been subjected to frequent dishonoring of price change forms (resulting in inventory shortages), abusive audits (including nighttime audits and findings of unusually large inventory shortages), late payments by Southland of payrolls and franchisee draws, threats of terminating the plaintiffs' franchises, threats of Southland opening competing 7-Eleven franchises and visits during which Southland representatives have forced the plaintiffs to conform their prices to Southland's suggested retail prices.

Count II of the complaint involves a provision in the standard franchise agreement requiring franchisees to deposit their daily proceeds, save for amounts used to pay nonrecommended vendors, into Southland accounts at Southland-approved banks. These accounts are accessible only to Southland and Southland retains all interest earned on the accounts. The standard franchise agreement further provides that Southland will pay the franchisees' operating expenses (e.g., inventory costs and payroll) from the funds contained in these accounts. Moreover, Southland is obligated to disburse the franchisees' draws from these accounts.

According to Southland, the daily deposit requirement has three purposes (Kanawyer affidavit at 14). First, the deposits provide Southland a fund from which to pay its franchisees' operating expenses. Second, the deposits are part of the security interest that Southland possesses in most franchisees' inventory. ² Third, the daily deposit requirement helps the company to collect its share of a given store's profits. The plaintiffs' complaint alleges that the daily deposit system is a tying arrangement in which "the surrender of the right of the franchisee to manage the proceeds of his own business" (complaint at 9) is tied to the awarding of a 7-Eleven franchise (the tying product).

Count III of the complaint asserts that Southland, through use of the mails, has engaged in racketeering activity. Southland is alleged to have charged the plaintiffs for expenses that Southland had not paid from the plaintiffs' deposited funds, charged the plaintiffs royalties on sales that never occurred and required inventory suppliers to designate certain allowances as advertising allowances so that these sums would not have to be credited to the plaintiffs' accounts. Under the franchise agreement, advertising allowances need not be credited to the franchisees.

The district court dismissed Count III pursuant to Federal Rule of Civil Procedure (FRCP) 12(b)(6) on the alternative grounds that the plaintiffs had inadequately alleged mail fraud (the predicate unlawful conduct for purposes of this RICO claim), that plaintiffs had not pleaded fraud with particularity as required by FRCP 9(b) and that RICO does not apply to business organizations like Southland which have no connection with organized crime.

The district court also granted Southland's subsequent motion for summary judgment on Counts I and II. As to the vertical price fixing claim, the court held that whether Southland's retail inventory accounting system had caused the plaintiffs to follow suggested retail prices more than they would have otherwise presented a genuine issue of material fact. On the other hand, the court held that no genuine issues of fact remained on the elements of intent and coercion. Moreover, the court held that since the plaintiffs had not appealed from a magistrate's order imposing sanctions for having unsatisfactorily answered Southland's interrogatories about damages, they were precluded from obtaining monetary relief. The court further ruled that the absence of evidence on damages rendered injunctive relief unavailable.

The district court granted summary judgment to Southland on the tying claim primarily on the ground that surrendering the right to manage the proceeds of a business is not a product or a service for purposes of tying arrangement analysis. The court further held that even if a tied product or service were involved, the plaintiffs were precluded by the magistrate's order from demonstrating any entitlement to monetary or injunctive relief.

II.

Before addressing the vertical price fixing, tying arrangement and RICO claims in detail, several preliminary points merit discussion. First, this case involves a summary judgment granted to defendant Southland by the district court. Although the use of summary procedures certainly is not prohibited in antitrust cases, Bouldis v. U.S. Suzuki Motor Corp., 711 F.2d 1319, 1324 (6th Cir.1983), summary judgment motions in antitrust litigation are disfavored. Poller v. Columbia Broadcasting System, Inc., 368 U.S. 464, 473, 82 S.Ct. 486, 491, 7 L.Ed.2d 458 (1962); Bouldis, 711 F.2d at 1324. Accordingly, this court must strictly apply, id., the general rule that the party...