Mumford v. Gnc Franchising LLC

Decision Date29 June 2006
Docket NumberNo. CIV A. 05-1280.,CIV A. 05-1280.
Citation437 F.Supp.2d 344
PartiesJean Ann MUMFORD, Spirit Enterprises Inc., Karyn Delaney, and Blue Sea Enterprises, Inc., Plaintiffs, v. GNC FRANCHISING LLC, General Nutrition Corp., General Nutrition Distribution Corp., and Apollo Management Lp, Defendants.
CourtU.S. District Court — Western District of Pennsylvania

Jeffrey M. Goldstein, Goldstein Law Group, Washington, DC, for Plaintiff.

Curtis L. Frisbie, Jr., Randy D. Gordon, Samuel E. Joyner, Gardere Wynne Sewell, Dallas, TX, Gordon W. Schmidt, Gerald J. Stubenhofer, Kevin S. Batik, McGuire Woods, Pittsburgh, PA, for Defendant.

MEMORANDUM ORDER

CONTI, District Judge.

Jean Anne Mumford ("Mumford"), Spirit Enterprises, Inc., Karyn Delaney, and Blue Sea Enterprises, Inc. (collectively, the "plaintiffs") owned and operated franchise stores subject to franchise agreements with defendants. Plaintiffs filed this civil action alleging various antitrust violations under sections 1 and 2 of the Sherman Antitrust Act, 15 U.S.C. §§ 1, et seq. (the "Sherman Act"), and the Robinson-Patman Price Discrimination Act, 15 U.S.C. § 13(a) (the "Robinson-Patman Act"), and asserting state law claims for breach of contract, breach of the implied covenant of good faith and fair dealing, breach of contract as third-party beneficiary, and negligent and fraudulent misrepresentation.

Pending before the court is a motion filed pursuant to Federal Rule of Civil Procedure 12(b)(6) by defendants General Nutrition Corporation ("GNC"), GNC Franchising LLC, and General Nutrition Distribution LP (collectively, the "GNC Defendants") to dismiss plaintiffs' second amended complaint in its entirety for failure to state a claim. (Doc. No. 28.) On May 12, 2006, the court heard oral argument on the motion. Because plaintiffs' claims under the Sherman Act are predicated upon a "relevant market" that is defined by the bounds of the franchise agreement and does not encompass all interchangeable substitute products even when all factual inferences are granted in plaintiffs' favor, the court finds that plaintiffs fail to state a claim under the Sherman Act. By reason of plaintiffs' claims under the Robinson-Patman Act being predicated on a comparison between prices given by GNC to plaintiffs and prices given by GNC to its company-owned stores, entities considered to be one person with GNC for the purpose of antitrust scrutiny, the court finds that plaintiffs fail to state a claim under the Robinson-Patman Act. The court, therefore, will grant the motion to dismiss with respect to the plaintiffs' federal antitrust claims. The court will not address the remaining state law claims because it declines to retain jurisdiction over those claims.

Facts Accepted as True

Plaintiffs owned and operated GNC franchises subject to franchise agreements executed with GNC Franchising, Inc. Plaintiffs' Second Amended Complaint ("Pl.'s Sec. Am. Compl.") ¶ 1-4; Exhibits A and B to Defendants' Motion to Dismiss ("Ex."). On September 16, 1997, Mumford and Tasha M. Fink "jointly and severally" entered into an ag'eement as "Franchisee" with GNC Franchising, Inc. as "Franchisor" (the "September 16, 1997 franchise agreement") for a retail store located in Bell Hollow Shopping Center in Hickory, North Carolina. Ex. A at 1. On April 28, 1998, Mumford and Tasha M. Fink assigned the September 16, 1997 franchise agreement to Spirit Enterprises, Inc. Id. at Ex. 1. On March 24, 1999, Mumford entered into another agreement as "Franchisee" with GNC Franchising, Inc. as "Franchisor" (the "March 24, 1999 franchise agreement") for a retail store located in Pine Creek Center in Pittsburgh, Pennsylvania. Ex. B at 1.1

Each of the franchise agreements provided, inter alia, that franchisor GNC developed and owns a unique and comprehensive system relating to the opening and operation of retail nutrition, health, and fitness stores ("General Nutrition Centers"), GNC identifies elements of the system by means of certain proprietary marks, and GNC continues to develop, use and control the use of the proprietary marks. Ex. A at 2; Ex. B at 2. The agreements further provided that GNC grants to each of the franchisees the right and franchise to operate a retail General Nutrition Center store and to use solely in connection with the operation of that store the GNC proprietary marks and system. Ex. A at 9; Ex. B at 9. The agreements set forth various other conditions, including certain duties of the franchisor and duties of each franchisee. Ex. A at 12-16; Ex. B at 12-17.

For example, the September 16, 1997 franchise agreement provided that the duties of the franchisor include making available to franchise stores standard specifications for the store, training programs, an initial advertising and promotional package, and administrative and accounting forms. Ex. A at 12. It further provided that GNC will seek to maintain the high standards of quality, appearance, and service of the system and will from time to time provide advisory assistance to the franchise store. Id. The March 24, 1999 franchise agreement provided similar, though not identical, terms describing GNC's duties. Ex. B at 12-13.

The franchise agreements also provided for certain duties of the franchisees. Ex. A at 14-16; Ex. B at 14-17. For example, the franchise agreements required a franchisee to display prominently and maintain in the retail store signs prescribed by GNC, to maintain the store in a clean, orderly condition, and—importantly in this case—to purchase inventory from GNC or its affiliates or from an approved supplier in categories and minimum quantities specified in the GNC Inventory Plans (or "Plan-O-Grams") that are attached to the agreements. Id. In addition, and also germane to this case, the agreements required franchisees to sell or offer for sale only products and services that have been expressly approved in writing by GNC. Id. Further, the franchise agreements explicitly provided that "Franchisor reserves the right to modify the General Nutrition Center Inventory Plan, or Plan-O-Grams, by providing reasonable advance notice of such changes to Franchisee." Ex. A at 12 (provision VI.B); Ex. B at 14 (provision VI.B). The agreements also cover other issues relevant to the franchise arrangement including, but not limited to, confidentiality, use of proprietary marks, accounting and recordkeeping, advertising, insurance, and default and termination of the arrangement. See Ex. A and B.

In addition to the GNC franchise stores owned and operated by plaintiffs and other franchisees, there are stores owned and operated by GNC (the "company-owned stores"). See Pl.'s Sec. Am. Compl. ¶ 36. Plaintiffs set forth a variety of practices by the GNC defendants which plaintiffs allege constitute predatory behavior designed to benefit company-owned stores to the detriment of franchise stores and to ensure the failure of the franchise stores. Id. ¶ 6-54, 62-63. Some of these complaints relate to pricing at the retail stores. For example, GNC offered promotions and discounts that were available only at company-owned stores. Id. ¶ 37. GNC advertised these specials using customer information collected in part by franchisee stores. Id. GNC used the "buying power" associated with its large number of franchises to solicit and obtain discounts from third-party vendors, manufacturers, and wholesalers for products required for the company-owned and franchise stores. Id. ¶ 38. GNC charged franchise stores, but not company-owned stores, a "marked up price" for these supplies. Id. ¶ 39. GNC periodically imposed discount programs on franchise stores. Id. ¶ 42-44. These imposed discounts were severe enough to make it difficult for franchisees to stay in business. Id. ¶ 43.

Some of plaintiffs' complaints relate to obtaining products and supplies that were needed to operate successfully the stores. For example, GNC company-owned stores sold products that were unavailable for franchise stores. Id. ¶ 45. GNC imposed "slotting" requirements to ensure that franchise stores carried the products most profitable to GNC. Id. ¶ 46. GNC restricted franchisee access to third-party vendors, refused to approve franchisee's requests to purchase third-party products, pressured third-party vendors to boycott direct sales to franchisees, and pressured third-party vendors to set minimum prices below which third-party vendors were not permitted to sell to franchisees and to raise existing prices so that franchisees instead must buy from GNC's warehouse. Id. ¶ 48-50. GNC sold products to its franchise stores at prices higher than the retail prices it offered at the company-owned stores. Id. ¶ 52.

Plaintiffs allege various and sundry other complaints related to GNC's treatment of its franchisees. For example, GNC charged outrageous franchise charges and finance charges to Mumford. Id. ¶ 54. GNC failed to enforce uniformly its requirement that franchise stores sell only approved product to the detriment of Mumford's store when a nearby franchise sold unapproved products with impunity. Id. GNC promised to support its franchise stores, but was not available to plaintiffs when needed. Id. ¶ 56.

Plaintiffs complain that they were induced to enter into the franchise agreements without full and complete information about the relationship that would ensue. For example, plaintiffs allege that franchisees lack knowledge of the extent of the pricing and marketing schemes imposed by GNC when they enter the franchise relationship. Id. ¶ 55. Mumford was told by a GNC salesman that "all stores earn at least $250,000 but yours will do even better," and "if you're unhappy, we'll buy you out." Id. ¶ 59. In addition, GNC promised Mumford that the construction she needed for her North Carolina store "wouldn't cost [her] a penny," and she "wouldn't have to move a thing." Id. ¶ 60. GNC, however, charged Mumford $8,619.68 for the construction, claiming "standard procedure," as well as a $3,109 finance charge for the...

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