McAlpine v. AAMCO Automatic Transmissions, Inc.

• Decision Date: 03 April 1978
• Docket Number: Civ. A. No. 4-70762.
• Citation: 461 F. Supp. 1232
• Parties: William H. McALPINE, John Folino, Joseph Stolaruk, Donald Stewart, Donald Layman, John E. Prior, Stuart W. Adams, Aaron A. Reavis, Evelyn W. Smith and Luther J. Smith, Plaintiffs and Counterclaim-Defendants, v. AAMCO AUTOMATIC TRANSMISSIONS, INC., a Foreign Corporation, Defendant, Counterclaim-Plaintiff and Third-Party Defendant, v. Aram MAGARIAN, Luther J. Smith, III, J. B. Delco, Inc., SSS Corporation, LJS Corporation, SLJ Corporation, Layman and Stewart, Inc., William H. McAlpine, Inc., Tombly Enterprises, Inc., Interstate Automatic Transmissions Co., Inc., Jay Enterprises, Inc., Donald & Donald, Inc., and Cox & Reavis Transmissions, Inc., Third-Party Defendants.
• Court: U.S. District Court — Western District of Michigan

461 F. Supp. 1232

William H. McALPINE, John Folino, Joseph Stolaruk, Donald Stewart, Donald Layman, John E. Prior, Stuart W. Adams, Aaron A. Reavis, Evelyn W. Smith and Luther J. Smith, Plaintiffs and Counterclaim-Defendants, v. AAMCO AUTOMATIC TRANSMISSIONS, INC., a Foreign Corporation, Defendant, Counterclaim-Plaintiff and Third-Party Defendant, v. Aram MAGARIAN, Luther J. Smith, III, J. B. Delco, Inc., SSS Corporation, LJS Corporation, SLJ Corporation, Layman and Stewart, Inc., William H. McAlpine, Inc., Tombly Enterprises, Inc., Interstate Automatic Transmissions Co., Inc., Jay Enterprises, Inc., Donald & Donald, Inc., and Cox & Reavis Transmissions, Inc., Third-Party Defendants.

Civ. A. No. 4-70762.

United States District Court, E. D. Michigan, S. D.

April 3, 1978.

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Richard A. Solomon, Detroit, Mich., for plaintiffs and counterclaim-defendants.

Sheldon S. Toll, Detroit, Mich., R. Michael Kennedy, Jr., Bridgeport, Pa., for defendant, counterclaim-plaintiff and third-party defendant.

OPINION

GUY, District Judge.

This case was brought by William McAlpine and eleven other individuals (hereinafter referred to as "plaintiffs") against AAMCO Automatic Transmissions, Incorporated, a Pennsylvania Corporation and the largest franchisor of transmission repair shops in the United States (hereinafter referred as to "defendant"). Plaintiffs were all licensed franchisees of AAMCO operating in the greater Detroit area when they broke away from AAMCO in November, 1973, to form Interstate Transmissions, the competing transmission repair business that is the subject of this lawsuit.

When plaintiffs broke away from AAMCO on November 29, 1973, they instituted suit against AAMCO in this court. Their complaint alleged that certain AAMCO marketing and tie-in practices had constituted a breach of contract and violation of antitrust laws, such breach and violation entitling plaintiffs to leave AAMCO and go into business as Interstate Transmissions. AAMCO answered by defending its practices, then counterclaimed alleging that when plaintiffs broke away from AAMCO they wrongfully terminated Franchise Agreements, violated antitrust laws, infringed on AAMCO's trademark, and misappropriated the AAMCO merchandising system.

The case was tried by this court without a jury for nine days concluding on November 3, 1977. At that time the court found in favor of plaintiffs in part, in favor of defendant in part, and took certain matters under advisement. After careful consideration of the evidence, stipulations and pertinent authorities, the court has now concluded that the contracts at issue were breached by plaintiffs and that damages in the amount of $412,708.49 are owing to defendant.

During the trial it became evident that the major theme of this case would concern the problem of the successful franchisee who becomes dissatisfied in his franchise arrangement and desires to sever relations with the franchisor. This is an emerging and increasing phenomenon in franchisee-franchisor relationships. See Impact of Franchising on Small Business, A Report of the Select Committee on Small Business, United States Senate, November 13, 1970. See also, "Problem Areas of Franchising," Federal Trade Commission Study; Appendix IV, reprinted in Antitrust Laws and Trade Regulation, Von Kalinowski, Vol. 9, App. III-A-105 (1976).

This phenomenon may involve the franchisee who finds that the profits he anticipated from gross sales are being consumed by an array of payments to the franchisor not revealed to the franchisee prior to operation. Or, the franchisee may find that the profits he expected to make are substantially less than the franchisor's promotional statements led him to believe would be forthcoming. See "Problem Areas of Franchising," Federal Trade Commission Study, supra.

Sometimes, however, as in this case, the scenario is different. The franchise arrangement starts as a mutually advantageous business relationship. Both the franchisor and franchisee contribute to this arrangement in order to obtain benefits they could not obtain independently. The franchisor's contribution is a combination of several factors: trademark, recognized product or service, experience, advertising and management support. The franchisee's contribution is capital, day-to-day management of the franchise, and the payment of franchise fees — usually in the form of a set percentage of gross franchise sales once the franchise has become operational. See Antitrust Laws and Trade Regulation, Von Kalinowski, § 65.01(2), and Appendix III-A-108, Vol. 9 (1976) for a good discussion of this subject.

The franchisor benefits from the use of franchisee capital, fees, and lower-level management, for it allows the franchise organization to expand more rapidly than would otherwise be possible. Similarly, the benefits to the franchisee are: greater independence than the status of an "employee" would confer, the opportunity to make money, and a reduction — by virtue of a proven trademark and system — in the risk of failure associated with owning and operating a small business.

As the franchise becomes successful, however, the partnership arrangement which seemed reasonable at its inception sometimes appears burdensome to the franchisee. The franchisee whose hard work has enabled him to carve out a niche of profitability comes to regard the payment of franchise fees as restricting that profitability. The franchisee who has learned a system and has reaped its benefits wonders if his new-found knowledge of the trade could enable him to prosper to a greater degree as an independent. Status, success, name, and product all seem brighter to an independent businessman or as franchisee under different terms.

Such a situation became a reality for the plaintiffs in November, 1973, when they broke their Franchise Agreements with AAMCO. After four years of litigation, this court now makes the following dispositions on the issues raised:

A. PLAINTIFFS' TIE-IN CLAIM:

Plaintiffs contend that AAMCO has violated Section 1 of the Sherman Act, 15 U.S.C. § 1, by imposing a tie-in arrangement in connection with the licenses granting plaintiffs use of AAMCO's trademark. The contention is that AAMCO, by virtue of its dominant economic power over its franchisees, used threats of disenfranchisement to coerce plaintiffs into purchasing AAMCO transmission repair and automotive parts for use in each plaintiff's repair shop. As a result of this alleged coercion and abuse of dominant power by AAMCO, the plaintiffs claim they were forced to purchase transmission repair and automotive parts at prices higher than offered in the open market. Plaintiffs cite several types of acts which could constitute a tie-in violation:

(1) non-negotiable contractual provisions;

(2) threats of termination for not buying AAMCO parts;

(3) publicizing disenfranchisement for not buying AAMCO parts;

(4) allegations of consumer fraud for not buying AAMCO parts;

(5) regular inspections to "police" the alleged tie;

(6) the use of computerized records to "police" the alleged tie.

At the outset, however, plaintiffs' theory that a contractual tie-in arrangement was accomplished via any non-negotiable contract provisions must be rejected. Pursuant to a November 1969 court order AAMCO agreed to modify its Franchise Agreements to allow franchisees to "install parts of equal quality, type, and quantity" to AAMCO parts or assembly sets (Pretrial Order, Exhibit A). Although the modification allowed plaintiffs to purchase parts only from those vendors determined by AAMCO to offer "equal quality" parts, it is well established that the licensor of a registered trademark owes a duty to the public to monitor the quality of parts sold by its licensed dealers. Siegel v. Chicken Delight, Inc., 448 F.2d 43, at 51 (9th Cir. 1971). For a licensor, through relaxation of quality control, to permit inferior products to be presented to the public under its licensed mark might well constitute a misuse of the mark. 15 U.S.C. §§ 1055, 1127. AAMCO therefore had the right, if not the duty, to establish a minimum "equal quality" standard for the transmission parts used by its franchisees.

An illegal tie-in need not be accomplished by a formal contractual provision, however. Advance Business Systems & Supply Co. v. SCM Corporation, 415 F.2d 55, 63-64 (4th Cir. 1969). In the absence of a formal provision, the presence of an illegal tying condition may be inferred from an extrinsic course of conduct supplementing any written contract. Osborn v. Sinclair Refining Co., 286 F.2d 832 (4th Cir. 1960). Such conduct might consist of proof of a persistent and deliberate course of coercive dealing through misrepresentations and threats of cancellation, N. W. Controls, Inc. v. Outboard Marine Corp., 333 F.Supp. 493, at 511 (D.C.Del.1971), the crucial factor being that economic power be utilized to coerce the purchase of the tied product. Times-Picayune Publishing Co. v. United States, 345 U.S. 594, 73 S.Ct. 872, 97 L.Ed. 1277 (1953).

The three requisites of a per se illegal non-contractual tying arrangement are thus:

(1) There must be two separate products, one the tying product which cannot be obtained without purchase of the tied product. Times-Picayune Publishing Co., supra.

(2) The seller must have sufficient economic power with respect to the tying product to appreciably restrain competition in the market for the tied product. Northern Pacific Ry. v. United States, 356 U.S. 1, 78 S.Ct. 514, 2 L.Ed.2d 545 (1958).

(3) The antitrust violation must affect a "not insubstantial" amount of commerce. International Salt Co. v. United States, 332 U.S. 392, 68 S.Ct. 12, 92 L.Ed. 20 (1947).

The alleged tying product in this case is the AAMCO trademark, and the tied product is the AAMCO transmission repair kit and parts. AAMCO urges this...