Siegel v. Chicken Delight, Inc.

• Decision Date: 10 April 1970
• Docket Number: Civ. No. 46271-GBH.
• Citation: 311 F. Supp. 847
• Court: U.S. District Court — Northern District of California
• Parties: Harvey SIEGEL and Elaine Siegel, husband and wife, et al., Plaintiffs, v. CHICKEN DELIGHT, INC., et al., Defendants, Vance E. SHEPHERD and Ben Zachary, a partnership, et al., Intervening Plaintiffs. CHICKEN DELIGHT, INC., et al., Cross-Claimants, v. Harvey SIEGEL et al., Cross-Defendants.

311 F. Supp. 847

Harvey SIEGEL and Elaine Siegel, husband and wife, et al., Plaintiffs, v. CHICKEN DELIGHT, INC., et al., Defendants, Vance E. SHEPHERD and Ben Zachary, a partnership, et al., Intervening Plaintiffs.

CHICKEN DELIGHT, INC., et al., Cross-Claimants, v. Harvey SIEGEL et al., Cross-Defendants.

Civ. No. 46271-GBH.

United States District Court, N. D. California.

April 6, 1970.

Supplemental Memorandum April 10, 1970.

Broad, Busterud & Khourie, Michael N. Khourie, Royce H. Schulz, San Francisco, Cal., for plaintiffs, intervening plaintiffs and the class.

M. Laurence Popofsky, Richard L. Goff, Stephen V. Bomse, Heller, Ehrman, White & McAuliffe, San Francisco, Cal., for defendants.

MEMORANDUM OPINION AND ORDER ON MOTION FOR DIRECTED VERDICT

GEORGE B. HARRIS, Chief Judge.

This matter is before the Court on plaintiffs' motion for a directed verdict following the close of defendants' case case and the submission of the evidence. The Court being fully advised and having considered all of the testimony and evidence, including the numerous and lengthy oral arguments of counsel, all of the briefs, depositions and affidavits, has now reached the following decision and opinion.^*

The issues, simply stated, are: (1) Are the defendants' standard contract and practices requiring the purchase of various packaging items, cookers and fryers, and certain mix preparations for food a tying agreement in violation of Section 1 of the Sherman Act? (2) If so, have the plaintiffs been injured by the said violation?

Tying arrangements, by definition agreements in which the seller offers two separate items for sale but will not sell the first item (or tying item) unless the buyer agrees to purchase the second item (or tied item), have uniformly been treated harshly by the United States Supreme Court. International Business Machines v. United States, 298 U.S. 131, 56 S.Ct. 701, 80 L.Ed. 1085 (1936); International Salt Co. v. United States, 332 U.S. 392, 68 S.Ct. 12, 92 L.Ed. 20 (1947); Northern Pacific Ry. Co. v. United States, 356 U.S. 1, 78 S.Ct. 514, 2 L.Ed.2d 545 (1958); United States v. Loew's, Inc., 371 U.S. 38, 83 S.Ct. 97, 9 L.Ed.2d 11 (1962); Hanover Shoe, Inc. v. United Shoe Machinery Corp., 392 U.S. 481, 88 S.Ct. 2224, 20 L.Ed.2d 1231 (1968); Fortner Enterprises v. United States Steel, 394 U.S. 495, 89 S.Ct. 1252, 22 L.Ed.2d 495 (1969). The instant case is conceptually an illustration of the classical tie. Defense counsel argues that this case involves a single product, "the Chicken Delight System," thus attempting to come within the single product ruling of Times-Picayune Publishing Co. v. United States, 345 U.S. 594, 73 S.Ct. 872, 97 L.Ed. 1277 (1953), wherein the traditional statement of the per se rule against tying arrangements was first enunciated by Mr. Justice Clark.

However, the case of Susser v. Carvel Corp., 332 F.2d 505 (2nd Cir., 1964), which is factually most akin to this litigation, clearly holds contra. Both the majority and the dissent in Susser recognize that a trademark license which is granted on the condition that the licensee purchase other products can clearly be a "tying item" within the meaning of the above cases. This Court is in full accord with such a finding. In the economic context of present franchising trends, it is clear that a franchise license is marketable separate and apart from the various products which the franchisees are required to purchase from and through the franchisor.

In the case at bar, it is manifest that the license to use the Chicken Delight name, trademark and method of operations was a tying item in the traditional sense. The tied items were the required paper packaging products, the cookers and fryers and the food preparation mixes. Thus, for purposes of the Sherman Act, this Court finds as a matter of law that a tying agreement exists.

With respect to the essential ingredient of market control, the cases dictate but one conclusion—that as a matter of law Chicken Delight's admittedly unique, registered trademark combined with its power to impose the tie-in demonstrates the existence of sufficient market power to bring the case within the Sherman Act. A review of Northern Pacific Ry. Co. v. United States, 356 U.S. 1, 78 S.Ct. 514, 2 L.Ed.2d 545 (1957); United States v. Loew's, Inc., 371 U.S. 38, 83 S.Ct. 97, 9 L.Ed.2d 11 (1962); Fortner Enterprises v. United States Steel, 394 U.S. 495, 89 S.Ct. 1252, 22 L.Ed.2d 495 (1969) and Advanced Business Systems & Supply Co. v. SMC Corp., 415 F.2d 55 (4th Cir., 1969) demands this result. To enmesh the jury in the rubric of market power in light of the clear guidelines laid down in the above cases should be unnecessary. This Court clearly may and does rule upon this question as a matter of law.

The Northern Pacific Ry. case gave the first indication that market power is evidenced by the fact of the tie-in. "The very existence of this host of tying arrangements is itself compelling evidence of the defendant's great power * * *." 356 U.S. at pp. 7-8, 78 S.Ct. at p. 519.

The Loew's case likewise strongly indicated that market power can be inferred from the existence of the tie-in.

They tying agreements are an object of antitrust concern for two reasons— they may force buyers into giving up the purchase of substitutes for the tied product * * * and they may destroy the free access of competing suppliers of the tied product to the consuming market * * *. A tie-in contract may have one or both of these undesirable effects when the seller, by virtue of his position in the market for the tying product, has economic leverage sufficient to induce his customers to take the tied product along with the tying item. * * * Even absent a showing of market dominance, the crucial economic power may be inferred from the tying product's desirability to consumers or from uniqueness in its attributes. (citations omitted). 371 U.S. at pp. 44-45, 83 S.Ct. at p. 102.

In a footnote to the above quote, Mr. Justice Goldberg stated that "it should seldom be necessary in a tie-in sale case to embark upon a full-scale factual inquiry into the scope of the relevant market for the tying product * * *" Where the tying item is the subject of a patent or a copyright, sufficient market power is presumed.

In Fortner, Mr. Justice Black further narrowed the scope of inquiry into market power. "Accordingly, the proper focus of market power concern is whether the seller has the power to raise prices, or impose other burdensome terms such as a tie-in, with respect to any appreciable number of buyers within the market." 394 U.S. at p. 504, 89 S.Ct. at p. 1259.

Subsequently, citing Fortner, the Fourth Circuit in Advanced Business Systems held that "a seller's successful imposition of a tying arrangement on a substantial amount of commerce may be taken as proof of his economic power over the tying product." 415 F.2d at p. 62. Although this statement was made with regard to a violation of the Clayton Act, this Court is of the opinion that any distinction between the Sherman Act and Clayton Act with regard to the question of market power is wholly artificial. See, Handler, "Antitrust: 1969," 55 Cornell L.Rev. 161, 171 (1970).

For purposes of the Sherman Act, the effect on interstate commerce need merely be said to be "not insubstantial." International Salt Co. v. United States, 332 U.S. 392, 396, 68 S.Ct. 12, 92 L.Ed. 20 (1947). This test is fulfilled if the dollar amount is not de minimis or not "paltry." Fortner Enterprises v. United States Steel, 394 U.S. 495, 501-502, 89 S.Ct. 1252, 22 L.Ed.2d 495 (1969). In the present case (millions of dollars being involved), the dollar amount cannot be said to be de minimis. Thus, as a matter of law, this Court finds that the interstate commerce affected is "not insubstantial." A per se violation of the Sherman Act is therefore found to exist.

When a per se violation of the Sherman Act exists, the areas of justification for a tie-in are indeed narrow. See, Baker, "Another Look at Franchise Tie-ins After Texaco and Fortner," 14 Antitrust Bulletin 767, 778 et seq. (1969). In this litigation, defendants propound four so-called justifications for the tie-in of the various required products. They are: (1) Quality control for protection of trademark good will; (2) New business justification; (3) A convenient accounting device for compensation of the trademark license; and (4) Franchisor's assurance of initial equipment and a continuing source of supply of essential items.

In the factual structure and posture of this case, the Court rules as a matter of law that the latter two asserted justifications cannot and do not justify so onerous an anti-competitive device as the tie-in agreement herein condemned.

Use of a tie-in cannot be justified as an accounting device for compensation for a trademark license. The defendants cite no relevant authority for such a proposition. In fact, such a justification is contrary to the uncontradicted evidence in this case, which evidence shows that the defendants charged no franchise fee or continuing royalty. Furthermore, an accounting method which specified a percentage of gross from the franchisees is just as convenient and has none of the anti-competitive effects of a tie-in.

Defendants' fourth attempted justification insists that they had a legal duty to assure franchisees of initial equipment and continuing supplies of other essential items. The admissions and the evidence are replete that defendants' alleged obligations could easily have been fulfilled without tying the purchase of those items to a trademark license. Defendants, like most franchisors, could have designated manufacturers and distributors who are available throughout the United States and anxious to do business as those sources of supply. This Court rules as a matter of law that such a justification is not available or defensive to the per se tying arrangement in this case.

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