Kentucky Fried Chicken Corp. v. Diversified Packaging Corp.

Decision Date25 March 1977
Docket NumberNo. 74-3060,74-3060
Citation549 F.2d 368
Parties, 1977-1 Trade Cases 61,339 KENTUCKY FRIED CHICKEN CORPORATION, Plaintiff-Appellee, v. DIVERSIFIED PACKAGING CORPORATION et al., Defendants-Appellants.
CourtU.S. Court of Appeals — Fifth Circuit

Burton H. Shostak, Lloyd A. Palans, St. Louis, Mo., Edward F. O'Herin, Malden, Mo., Philip de V. Claverie, New Orleans, La., for defendants-appellants.

William I. Dunaj, Miami, Fla., Robert R. Feagin, III, Tallahassee, Fla., for plaintiff-appellee.

Appeals from the United States District Court for the Southern District of Florida.

Before BROWN, Chief Judge, and JONES and GOLDBERG, Circuit Judges.

GOLDBERG, Circuit Judge:

This case presents us with something mundane, something novel, and something bizarre. The mundane includes commercial law issues now well delimited by precedent. The novel aspects of the case center on intriguing and difficult interrelationships between trademark and antitrust concepts. And the bizarre element is the facially implausible some might say unappetizing contention that the man whose chicken is "finger-lickin' good" has unclean hands.

Kentucky Fried Chicken Corporation, a franchisor of fast-food restaurants, brought this action claiming that defendants were infringing its trademarks and engaging in unfair competition by their manner of selling boxes and other supplies to Kentucky Fried franchisees. Defendants placed Kentucky Fried's trademarks on the supplies without Kentucky Fried's consent, and they allegedly misled franchisees with respect to the supplies' source and quality. Defendants counterclaimed, asserting that Kentucky Fried's franchise agreements, which required franchisees to buy supplies from approved sources, constituted an illegal tying arrangement. The district court, in a penetrating opinion reprinted at 376 F.Supp. 1136 (S.D.Fla.1974), ruled in Kentucky Fried's favor on every issue and enjoined defendants' activities. Although some of the issues are not without difficulty, and although we find that franchisors must walk a narrow path when including in their franchise agreements clauses requiring franchisees to buy supplies from approved sources, we affirm.

I. Facts

Colonel Harland Sanders founded the Kentucky Fried Chicken business in the early 1950s. The Colonel prepared chicken in accordance with his own secret recipe, and among the Colonel's achievements has been to convince much of the American public that his product bears a close resemblance to the southern fried chicken that preceded peanuts as the south's most famous cuisine. The Colonel no longer owns the business, having transferred it in five different segments. The plaintiff, Kentucky Fried Chicken Corporation, now conducts the business in 47 states, and four unrelated entities conduct the business in the other three states. 1

Although Kentucky Fried owns some retail stores, its primary manner of conducting business, and the one of importance here, is franchising local outlets for its product. The franchise agreements require franchisees to purchase various supplies and equipment from Kentucky Fried or from sources it approves in writing. The agreements provide that such approval "shall not be unreasonably withheld." Before purchasing supplies from a source not previously approved, a franchisee must submit a written request for approval, and Kentucky Fried may require that samples from the supplier be submitted for testing. Of crucial importance is the fact that Kentucky Fried has never refused a request to approve a supplier.

The supplies that are subject to the approved-source requirement include those around which this litigation revolves: three sizes of carry-out chicken boxes, napkins, towelettes, and plastic eating utensils technically known as "sporks." 2 Kentucky Fried sells these items to its franchisees, but under the franchise agreement the franchisees may also purchase any or all of these supplies from other approved sources. There are nine independent approved sources of cartons and a tenth that is a subsidiary of Kentucky Fried.

The specifications for these supplies require, among other things, that they bear various combinations of Kentucky Fried's trademarks. The marks, now widely known to the American public, include (1) "it's finger-lickin' good," (2) "Colonel Sanders' Recipe," (3) the portrait of Harland Sanders, (4) "Kentucky Fried Chicken," and (5) "Colonel Sanders' Recipe, Kentucky Fried Chicken." 3

Upon its formation in 1972, defendant Diversified Container Corporation (Container) began using Kentucky Fried's marks without its consent. 4 Container used the marks on chicken cartons, napkins and towelettes that it advertised and sold to Kentucky Fried franchisees. 5 Unlike other suppliers who sought and received approval, Container never requested that Kentucky Fried approve it as a source of these products, and in important respects Container's products failed to meet Kentucky Fried's specifications. 6

Container garnered buyers for its low-quality imitations of Kentucky Fried's supplies by making inaccurate and misleading statements. Container's advertisements invited franchisees to "buy direct and save" and represented that Container's products met "all standards." Container affixed Kentucky Fried's trademarks to the shipping boxes in which it delivered chicken cartons to franchisees. And when asked by franchisees whether Container was an "approved supplier" of cartons, Container employees evaded the question and said that Container sold "approved boxes."

Kentucky Fried brought this suit to enjoin Container's activities, relying upon the related theories of unfair competition and trademark infringement. Kentucky Fried did not seek damages. 7 Defendants counterclaimed seeking treble damages for purported antitrust violations. The case was tried to the court, which resolved all claims in Kentucky Fried's favor. The court's findings of fact are incorporated in its memorandum opinion. See 376 F.Supp. 1136. The court entered an appropriate injunction.

On this appeal the central issues are whether the district court correctly held defendants liable on the unfair competition and trademark infringement theories and whether the court correctly held that Kentucky Fried's franchise arrangements were not shown to violate the antitrust laws. We must also address defendants' contentions that the district court should have granted a new trial on the basis of evidence allegedly discovered after trial, that the district court lacked subject matter jurisdiction, and that the district court erred in allowing Kentucky Fried to amend its reply to defendants' counterclaim. We find a kernel of truth in all Kentucky Fried's contentions and therefore affirm.

II. Antitrust

Container's antitrust counterclaim forces us to confront three contentions: (1) that Kentucky Fried's conduct constitutes a tie-in and thus a per se antitrust violation, (2) that if Kentucky Fried's approved-source requirement is not a tie it should nonetheless be held to constitute a new category of per se offense, and (3) that in any event Kentucky Fried's arrangement contravenes the rule of reason. We reject each contention of the triad.

Container's primary contention is that Kentucky Fried has established a tying arrangement in violation of § 1 of the Sherman Act, 15 U.S.C. § 1. That section prohibits "every contract, combination . . . or conspiracy in restraint of trade or commerce." For the most part an arrangement runs afoul of the § 1 mandate only if its restraint on trade is unreasonable. See, e. g., Standard Oil Co. v. United States, 221 U.S. 1, 31 S.Ct. 502, 55 L.Ed. 619 (1911); Chicago Board of Trade v. United States, 246 U.S. 231, 38 S.Ct. 242, 62 L.Ed. 683 (1918). A § 1 plaintiff must therefore generally establish the anticompetitive impact of the conduct it challenges. Certain categories of business arrangements, however, exhibit a high likelihood of anticompetitive impact and offer virtually no prospect at all of enhancing competition. With respect to such arrangements, antitrust plaintiffs need not demonstrate unreasonableness; the conduct constitutes a per se violation of the Sherman Act.

Tying arrangements comprise one such category of behavior that is illegal per se. See, e. g., Fortner Enterprises, Inc. v. United States Steel Corp., 394 U.S. 495, 89 S.Ct. 1252, 22 L.Ed.2d 495 (1969); United States v. Loew's, Inc., 371 U.S. 38, 83 S.Ct. 97, 9 L.Ed.2d 11 (1962); Northern Pacific Railway Co. v. United States, 356 U.S. 1, 78 S.Ct. 514, 2 L.Ed.2d 545 (1958); Miller v. Granados, 529 F.2d 393 (5th Cir. 1976).

The per se label indicates that a plaintiff need not demonstrate that the effects of the tie are unreasonable. Indeed, not only is the plaintiff relieved from establishing that the effects are unreasonable, but in addition the defendant is not free to demonstrate that the effects are reasonable or even affirmatively desirable. The competitive impact of the arrangement simply is not an issue for trial. Unless a defendant can establish certain narrow affirmative defenses, a finding that the defendant's conduct falls within the category of per se tying arrangements disposes of the case in the plaintiff's favor.

Here, as elsewhere, however, the per se label can sometimes prove misleading. Per se analysis is susceptible to the unwarranted inference that a plaintiff prevails in a tying case merely by finding some way to characterize the defendant's conduct as a tie. A tie can be generally defined as an arrangement under which a seller agrees to sell one product (the "tying product") only on the condition that the buyer also purchase a second product (the "tied product"). See Northern Pacific, supra, 356 U.S. at 5-6, 78 S.Ct. 514. To bring a defendant's conduct within the category of ties that are per se violations of the Sherman Act, however, a plaintiff must go beyond some colorable characterization of the arrangement as fitting...

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