Siegel v. Chicken Delight, Inc.

• Citation: 448 F.2d 43
• Decision Date: 09 September 1971
• Docket Number: No. 25908,26860.,25908
• Parties: Harvey SIEGEL and Elaine Siegel, husband and wife, et al., Plaintiffs-Appellees, v. CHICKEN DELIGHT, INC., et al., Defendants-Appellants. CHICKEN DELIGHT, INC., et al., Appellants-Petitioners, v. George B. HARRIS, District Judge, Respondent, Harvey and Elaine SIEGEL et al., Real Parties in Interest.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

448 F.2d 43 (1971)

Harvey SIEGEL and Elaine Siegel, husband and wife, et al., Plaintiffs-Appellees, v. CHICKEN DELIGHT, INC., et al., Defendants-Appellants.

CHICKEN DELIGHT, INC., et al., Appellants-Petitioners, v. George B. HARRIS, District Judge, Respondent, Harvey and Elaine SIEGEL et al., Real Parties in Interest.

Nos. 25908, 26860.

United States Court of Appeals, Ninth Circuit.

September 9, 1971.

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M. Laurence Popfsky (argued), Richard L. Goff, Stephen V. Bomse, of Heller, Ehrman, White & McAuliffe, San Francisco, Cal., for defendants-appellants.

Michael N. Khourie (argued), of Broad, Busterud & Khourie, San Francisco, Cal., Royce H. Schulz, New York City, Cherrin & Cherrin, Southfield, Mich., for plaintiffs-appellees.

Before MADDEN, Judge of the United States Court of Claims, and MERRILL and HUFSTEDLER, Circuit Judges.

MERRILL, Circuit Judge:

This antitrust suit is a class action in which certain franchisees of Chicken Delight seek treble damages for injuries allegedly resulting from illegal restraints imposed by Chicken Delight's standard form franchise agreements. The restraints in question are Chicken Delight's contractual requirements that franchisees purchase certain essential cooking equipment, dry-mix food items, and trade-mark bearing packaging exclusively from Chicken Delight as a condition of obtaining a Chicken Delight trade-mark license. These requirements are asserted to constitute a tying arrangement, unlawful per se under § 1 of the Sherman Act, 15 U.S.C. § 1.

After five weeks of trial to a jury in the District Court, plaintiffs moved for a directed verdict, requesting the court to rule upon four propositions of law: (1) That the contractual requirements constituted a tying arrangement as a matter of law; (2) that the alleged tying products — the Chicken Delight name, symbols, and system of operation — possessed sufficient economic power to condemn the tying arrangement as a matter of law; (3) that the tying arrangement had not, as a matter of law, been justified; and (4) that, as a matter of law, plaintiffs as a class had been injured by the arrangement.

The court ruled in favor of plaintiffs on all issues except part of the justification defense, which it submitted to the jury. On the questions submitted to it, the jury rendered special verdicts in favor of plaintiffs. The opinion of the District Court and the special verdicts appear at 311 F.Supp. 847 et seq. Pursuant to an order of April 27, 1970, Chicken Delight has taken this interlocutory appeal from the trial court rulings and verdicts.

I. FACTUAL BACKGROUND

Over its eighteen years existence, Chicken Delight has licensed several hundred franchisees to operate home delivery and pick-up food stores. It charged its franchisees no franchise fees or royalties. Instead, in exchange for the license granting the franchisees the right to assume its identity and adopt its business methods and to prepare and market certain food products under its trade-mark, Chicken Delight required its franchisees to purchase a specified number of cookers and fryers and to purchase certain packaging supplies and mixes exclusively from Chicken Delight.¹ The prices fixed for these purchases were higher than, and included a percentage markup which exceeded that of, comparable products sold by competing suppliers.

II. THE EXISTENCE OF AN UNLAWFUL TYING ARRANGEMENT

In order to establish that there exists an unlawful tying arrangement plaintiffs must demonstrate First, that the scheme in question involves two distinct items and provides that one (the tying product) may not be obtained unless the other (the tied product) is also purchased. Times-Picayune Publishing Co. v. United States, 345 U.S. 594, 613-614, 73 S.Ct. 872, 97 L.Ed. 1277 (1953). Second, that the tying product possesses sufficient economic power appreciably to restrain competition in the tied product market. Northern Pacific R. Co. v. United States, 356 U.S. 1, 6, 78 S.Ct. 514, 2 L.Ed.2d 545 (1958). Third, that a "not insubstantial" amount of commerce is affected by the arrangement. International Salt Co. v. United States, 332 U.S. 392, 68 S.Ct. 12, 92 L.Ed. 20 (1947). Chicken Delight concedes that the third requirement has been satisfied. It disputes the existence of the first two. Further it asserts that, even if plaintiffs should prevail with respect to the first two requirements, there is a fourth issue: whether there exists a special justification for the particular tying arrangement in question. United States v. Jerrold Electronics Corp., 187 F.Supp. 545 (E.D.Pa.1960), aff'd per curiam, 365 U.S. 567, 81 S.Ct. 755, 5 L.Ed.2d 806 (1961).

A. Two Products

The District Court ruled that the license to use the Chicken Delight name, trade-mark, and method of operations was "a tying item in the traditional sense," 311 F.Supp. at 849, the tied items being the cookers and fryers, packaging products, and mixes.

The court's decision to regard the trade-mark or franchise license as a distinct tying item is not without precedent. In Susser v. Carvel Corp., 332 F.2d 505 (2d Cir. 1964), all three judges regarded as a tying product the trade-mark license to ice cream outlet franchisees, who were required to purchase ice cream, toppings and other supplies from the franchisor. See also Baker v. Simmons Co., 307 F.2d 458, 466-469 (1st Cir. 1962). Nevertheless, Chicken Delight argues that the District Court's conclusion conflicts with the purposes behind the strict rules governing the use of tying arrangements.

The hallmark of a tie-in is that it denies competitors free access to the tied product market, not because the party imposing the arrangement has a superior product in that market, but because of the power or leverage exerted by the tying product. Northern Pac. R. Co. v. United States, supra. Rules governing tying arrangements are designed to strike, not at the mere coupling of physically separable objects, but rather at the use of a dominant desired product to compel the purchase of a second, distinct commodity. Times-Picayune Publishing Co. v. United States, supra, 345 U.S. at 614, 73 S.Ct. 872, 97 L.Ed. 1277. In effect, the forced purchase of the second, tied product is a price exacted for the purchase of the dominant, tying product. By shutting competitors out of the tied product market, tying arrangements serve hardly any purpose other than the suppression of competition. Standard Oil Co. v. United States, 337 U.S. 293, 305-306, 69 S.Ct. 1051, 93 L.Ed. 1371 (1949).

Chicken Delight urges us to hold that its trade-mark and franchise licenses are not items separate and distinct from the packaging, mixes, and equipment, which it says are essential components of the franchise system.² To treat the combined sale of all these items as a tie-in for antitrust purposes, Chicken Delight maintains, would be like applying the antitrust rules to the sale of a car with its tires or a left shoe with the right. Therefore, concludes Chicken Delight, the lawfulness of the arrangement should not be measured by the rules governing tie-ins. We disagree.

In determining whether an aggregation of separable items should be regarded as one or more items for tie-in purposes in the normal cases of sales of products the courts must look to the function of the aggregation.³ Consideration is given to such questions as whether the amalgamation of products resulted in cost savings apart from those reductions in sales expenses and the like normally attendant upon any tie-in, and whether the items are normally sold or used as a unit with fixed proportions.⁴

Where one of the products sold as part of an aggregation is a trade-mark or franchise license, new questions are injected. In determining whether the license and the remaining ("tied") items in the aggregation are to be regarded as distinct items which can be traded in distinct markets consideration must be given to the function of trade-marks.

The historical conception of a trade-mark as a strict emblem of source of the product to which it attaches has largely been abandoned. The burgeoning business of franchising has made trade-mark licensing a widespread commercial practice and has resulted in the development of a new rationale for trade-marks as representations of product quality.⁵ This is particularly true in the case of a franchise system set up not to distribute the trade-marked goods of the franchisor, but, as here, to conduct a certain business under a common trade-mark or trade name.⁶ Under such a type of franchise, the trade-mark simply reflects the goodwill and quality standards of the enterprise which it identifies. As long as the system of operation of the franchisees lives up to those quality standards and remains as represented by the mark so that the public is not misled, neither the protection afforded the trade-mark by law nor the value of the trade-mark to the licensee depends upon the source of the components.

This being so, it is apparent that the goodwill of the Chicken Delight trade-mark does not attach to the multitude of separate articles used in the operation of the licensed system or in the production of its end product. It is not what is used, but how it is used and what results that have given the system and its end product their entitlement to trademark protection. It is to the system and the end product that the public looks with the confidence that established goodwill has created.

Thus, sale of a franchise license, with the attendant rights to operate a business in the prescribed manner and to benefit from the goodwill of the trade name, in no way requires the forced sale by the franchisor of some or all of the component articles. Just as the quality of a copyrighted creation cannot by a tie-in be appropriated by a creation to which the copyright does not relate, United States v. Paramount Pictures, Inc., 334 U.S. 131, 158, 68 S.Ct. 915, 92 L.Ed. 1260 (1948), so here...