Shamrock Mktg. Inc. v. Bridgestone Bandag Llc.

• Decision Date: 11 March 2011
• Docket Number: Civil Action No. 3:10–CV–74–H.
• Citation: 775 F.Supp.2d 972
• Parties: SHAMROCK MARKETING, INC., Plaintiffv.BRIDGESTONE BANDAG, LLC., Defendant.
• Court: U.S. District Court — Western District of Kentucky

775 F.Supp.2d 972

2011-1 Trade Cases P 77,383

SHAMROCK MARKETING, INC., Plaintiff

v.BRIDGESTONE BANDAG, LLC., Defendant.

Civil Action No. 3:10–CV–74–H.

United States District Court, W.D. Kentucky.

March 11, 2011.

M. Stephen Pitt, Merrill S. Schell, Wyatt, Tarrant & Combs, LLP, Louisville, KY, for Plaintiff.Michael M. Denbow, O. Scott Barber, III, Philip W. Collier, Stites & Harbison, PLLC, Louisville, KY, for Defendant.

MEMORANDUM OPINION

JOHN G. HEYBURN, II, District Judge.

Shamrock Marketing, Inc. (“Shamrock”) filed a four-count complaint against Bridgestone Bandag, LLC (“Bandag”), alleging that Bandag implemented a tying arrangement that unlawfully restrains competition in violation of Section 1 (15 U.S.C. § 1) and Section 2 (15 U.S.C. § 2) of the Sherman Act. Bandag has moved to dismiss Shamrock's claims on the grounds that Shamrock lacks standing to bring such claims, that Shamrock failed to establish the existence of an actual tying arrangement, and that Shamrock's definition of the relevant market in Counts I and IV is flawed.

This motion raises some difficult questions at the intersection of franchise agreements and antitrust enforcement. Defendant has made a strong argument that these claims cannot succeed legally and otherwise. It may be correct. For now and for the reasons explained below, however, the Court will sustain Bandag's motion in part, and deny it in part.

I.

At this stage, the Court must consider Shamrock's allegations as true.

Shamrock is a family-owned Kentucky corporation that supplies “curing envelopes” and other accessories to tire retreading shops, including Bandag franchisees. Bandag is a tire retreading company based in Muscatine, Iowa, which owns and franchises the “Bandag Process” for retreading tires. The Bandag Process consists of stripping the old tire of its tread, which creates a “casing,” then attaching the casing to a “bonding layer,” and finally attaching the bonding layer to precured tread rubber. The casing, bonding layer, and precured tread rubber are then enclosed in a round elastic case called a curing envelope. After removing the excess air from the curing envelope, the entire assembly is placed in a “curing chamber” that applies the necessary heat and pressure to cause the bonding layer to cure, permanently affixing the precured tread rubber to the casing.¹

Bandag has entered into Bandag Dealer Franchise Agreements (the “Franchise Agreement”) with approximately 300 tire dealerships in the U.S. and Canada who use the Bandag Process, sell Bandag retreaded tires, and provide maintenance and support services to Bandag customers. Bandag requires its franchisees to purchase all of their precured tread rubber from Bandag. The section of the Franchise Agreement entitled, “Product Purchase Requirements,” also states:

If certain tire retreading equipment or machinery is a specific requirement for use in the Process, as specified in the Manual(s) for the Dealership, then you agree to purchase or lease it from us. We will sell to you, and you agree to purchase from us, your entire requirements of Materials for use in the Process. Prices are subject to change. All other supplies, equipment, inventory and fixtures purchased for use in the Process must comply with requirements prescribed periodically in the Manual(s).

The Franchise Agreement defines “Materials” as “Bandag tread, cushion gum, repair gum, repairs (patches), and certain other proprietary materials we make or distribute.” Thus, the term “Materials” admittedly does not mention curing envelopes. However, Bandag also provides all of its franchisees with the Franchise Disclosure Document, which says, “If your Franchise Agreement licenses you to operate a Production Facility, you must purchase your entire requirement of Materials and you must purchase or lease all of your tire retreading equipment and machinery from Bandag or its affiliates.” Consequently, Bandag maintains that it retained the right to require franchisees to purchase equipment used in the Bandag Process from Bandag, including curing envelopes.

On December 4, 2007, Bandag announced creation of something called the Q–Fund, which provides incentives for its franchisees to purchase curing envelopes and other accessories from Bandag. Every franchisee must participate in the Q–Fund program. Each franchisee has a Q–Fund account which is automatically credited with $0.05 for every pound of precured tread rubber purchased from Bandag. The credited funds may only be spent purchasing designated Bandag and Bandag-sponsored accessories, including curing envelopes. ² If not used within eighteen (18) months, the credit is lost. However, franchisees are not forced to use the credit. They may purchase curing envelopes and other accessories from third parties.

On the same day that it instituted the Q–Fund, Bandag raised the price of precured tread rubber by $0.12/lb, or 5 percent.³ Bandag claims that the Q-fund was intended: 1) to promote the sale of Bandag accessories by standardizing the products used in the Bandag Process; and 2) to help franchisees absorb necessary price increases.

Shamrock claims that the Q–Fund totally or nearly totally offsets the price for Bandag curing envelopes. As a consequence, Shamrock has experienced a 90% decrease in its sales of curing envelopes to Bandag franchisees since Bandag's implementation of the Q–Fund.

II.

The complaint alleges an unlawful tying arrangement under four separate factual circumstances. In other words, each count of the complaint alleges a tying arrangement under a different set of assumed market circumstances.

The common theme of each count is that Bandag's Q–Fund incentive program creates an unlawful tying arrangement. The Q–Fund does this, the complaint alleges, by unlawfully tying the sale of precured tread rubber to the sale of Bandag curing envelopes and other Bandag accessories. This amounts to an unlawful restraint on competition.

Specifically, Counts I and II contend that the alleged tying arrangement is a per se violation of 15 U.S.C. § 1. A per se violation requires a certain economic “clout” in the tying market. These two counts differ only in their definition of the relevant tying product market. Count I uses the sale of precured tread rubber to Bandag franchisees as the relevant market; Count II uses a broader market, the sale of precured tread rubber to all purchasers in the entire United States.

Count III asserts that the alleged tying agreement violates 15 U.S.C. § 1 under a Rule of Reason analysis, incorporating both market definitions. Finally, Count IV alleges that Bandag has monopoly power and that the tying arrangement is a willful and unlawful exercise of that power in violation of 15 U.S.C. § 2. This count incorporates only the narrower market definition from Count I—the sale of precured tread rubber to Bandag franchisees.⁴

Bandag has moved to dismiss on the grounds (1) that Shamrock lacks standing, (2) that the narrow, single-brand market defined in Counts I and IV of the complaint is inappropriate, and (3) that pleading an inferred tying arrangement requires dismissal.

To survive a motion to dismiss, a plaintiff's Sherman Act allegations must support a plausible finding of the alleged violation. Churchill Downs Inc. v. Thoroughbred Horsemen's Group, LLC, 605 F.Supp.2d 870, 887 (W.D.Ky.2009). “ Twombly established that antitrust complaints are held to a ‘plausibility standard,’ which requires Plaintiffs to plead ‘enough facts to raise a reasonable expectation that discovery will reveal evidence of illegal agreement.’ ” Id. at 886 (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 1965, 167 L.Ed.2d 929 (2007)). Factual allegations must constitute more than a mere recitation of the elements of the cause of action; however, the allegations need not be detailed in order to survive a motion to dismiss. Id. at 887 (citing Twombly, 127 S.Ct. at 1964–65).

III.

The Court must first consider whether Shamrock has standing to bring these antitrust claims. For this purpose, the Court must assume two things: (1) that the facts in the complaint are true, and that (2) those facts actually amount to an antitrust violation of some kind. Id. at 880. To establish standing, the Sixth Circuit has said that an antitrust plaintiff must show “(1) that the alleged violation tends to reduce competition in some market and (2) that the plaintiff's injury would result from a decrease in that competition rather than from some other consequence of the defendant's actions.” Tennessean Truckstop, Inc. v. NTS, Inc., 875 F.2d 86, 88 (6th Cir.1989).

The purpose of the first factor is the ensure that plaintiffs allege antitrust injuries—injuries on market competition, not individual competitors. See Id. “The fact that a particular competitor in a particular market has lost profits does not inevitably mean that competition as a whole is lessened.” Id. Shamrock alleges that the Q–Fund creates an illegal tying arrangement that eliminates competition throughout the market for curing envelopes and accessories. Assuming the allegations in Shamrock's complaint as true and that there are more facts that further support an antitrust violation, it does seem plausible that all other competitors suffered a reduction in sales of curing envelopes similar to the 90% reduction suffered by Shamrock.

Bandag, relying on the requirements as stated in Midwest Agency Services, Inc. v. JP Morgan Chase Bank, No. 2: 09–165–DCR, 2010 WL 935450, 2010 U.S. Dist. LEXIS 22457 (E.D.Ky. Mar. 11, 2010), argues strenuously and quite effectively that Shamrock did not allege a decrease in market competition with sufficient specificity. In Midwest Agency, the Eastern District of Kentucky found that the plaintiff had not stated an antitrust injury with sufficient specificity because it did not provide facts such as the number of market competitors actually affected. Midwest Agency, 2010 WL 935450, at *4, 2010 U.S. Dist....