Tominaga v. Shepherd

• Decision Date: 06 April 1988
• Docket Number: No. CV 87-0172-ER.,CV 87-0172-ER.
• Citation: 682 F. Supp. 1489
• Court: U.S. District Court — Central District of California
• Parties: Milton TOMINAGA, Plaintiff, v. Vance SHEPHERD, et al., Defendants.

682 F. Supp. 1489

Milton TOMINAGA, Plaintiff, v. Vance SHEPHERD, et al., Defendants.

No. CV 87-0172-ER.

United States District Court, C.D. California.

April 6, 1988.

COPYRIGHT MATERIAL OMITTED

Paul Sigelman, Beverly Hills, Cal., for plaintiff.

Royce H. Schulz, John E. Rumel and Thomas D. Nevins, Broad, Schulz, Larson & Wineberg, Los Angeles, Cal., for defendants.

ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTION FOR SUMMARY JUDGMENT

RAFEEDIE, District Judge.

The captioned case came on for hearing before this Court, the Honorable Edward Rafeedie, United States District Judge, presiding, on March 21, 1988, on the motion of defendants El Centro Foods, Inc. and Vance Shepherd, for summary judgment. Plaintiff Milton Tominaga, doing business as PM Distributors, was represented by Paul Sigelman. Defendants were represented by John E. Rumel of Broad, Schulz, Larson & Wineberg.

The Court, having read and considered the papers in support of and in opposition to the motion, finds that summary judgment is appropriate for all plaintiff's claims except the claim for interference with economic advantage or contractual relations.

Defendants El Centro and Vance Shepherd move this court to grant summary judgment on plaintiff's Complaint. The Complaint alleges violations of section 1 of the Sherman Act, and section 3 of the Clayton Act (tying arrangement, group boycott, refusal to deal), as well as the following state law claims: unfair competition, interference with contract or prospective advantage, and violation of the implied covenant of good faith and fair dealing.

FACTUAL BACKGROUND

Defendant El Centro is a California corporation and is the franchisor of "Pizza Man — He Delivers" and "Chicken Delight" franchises in Los Angeles and Orange Counties. There are currently forty-five Pizza Man, six combination Pizza Man and Chicken Delight, and one Chicken Delight franchisees in the Southern California area. Defendant Vance Shepherd is the president of El Centro. El Centro has registered its Pizza Man and Chicken Delight service marks with the United States Patent and Trademark office.

Plaintiff Milton Tominaga does business as P.M. Distributors in the Los Angeles area, and is a wholesale distributor of ingredients for prepared foods and restaurant supplies. He is an authorized distributor of food and packaging products to El Centro's franchisees. Tominaga owned a franchised store from 1975 until 1985. From 1982 to the present, he supplied various Pizza Man franchises with ingredients and supplies. In 1985, Tominaga sold his Pizza Man store, according to his affidavit, because defendant Shepherd told him he would become the exclusive distributor for Pizza Man ingredients and supplies.

El Centro franchisees entered into a franchise agreement with El Centro in order to obtain licenses to operate Pizza Man stores (all facts pertaining to Pizza Man should be assumed to apply to Chicken Delight unless otherwise noted) and to utilize the service mark. Under the franchise agreement, a franchisee is not limited to purchasing its food products and supplies from any one distributor:

a franchisee may purchase any and all authorized food products and packaging from suppliers of his choice, provided that such food and packaging are uniform and high quality and comply with the standards and specifications set forth in the Operations Manual.

Also, under the standard form franchise agreements, each El Centro franchisee is obligated to package all goods sold to the public in approved Pizza Man packaging unless such packaging is unavailable, in which case written permission must be obtained from El Centro. Each franchisee is further required to prepare its menu and use ingredients in accordance with the methods and specifications set forth in the Pizza Man Operations Manual.

Tominaga was an authorized distributor of packaging materials and refrigerated food products, however, Tominaga was never the exclusive Pizza Man distributor (although Tominaga states that he was promised an exclusive dealership). There are substantial factual disputes as to Tominaga's performance as a distributor, and the circumstances surrounding El Centro's entry into the market for the distributing packaging products to franchisees.

El Centro claims that Tominaga's conduct as a distributor of poor quality merchandise damaged its goodwill, as embodied in the service marks. Defendants have provided evidence that Tominaga provided substandard food and packaging products which did not meet El Centro's quality standards, and that he overcharged the franchisees. El Centro claims to have provided Tominaga with notice of its dissatisfaction on numerous occasions.

Tominaga disputes El Centro's charges, and claims that Vance Shepherd was angry with Tominaga when Tominaga refused to provide El Centro with a "kick back" from the manufacturers. When Shepherd offered to buy Tominaga out, Tominaga refused, and was allegedly threatened by Shepherd ("I'll break your back").

El Centro, on the other hand, argues that all its actions were based upon a perceived business need to standardize its distribution system and the quality of products delivered to the franchisees. This was the basis for El Centro's decision to enter into the distribution business, and its offer to buy out Tominaga.

In November of 1986, El Centro notified some of Tominaga's suppliers, as well as Tominaga, that El Centro would be the exclusive distributor of non-refrigerated and monogrammed goods bearing its service marks to Pizza Man franchisees. All franchisees were notified of this change, but were also told that Tominaga would continue to serve the franchisees with all refrigerated items and miscellaneous supplies. El Centro claims that the refrigerated items were the most expensive and most profitable items, while Tominaga complains that they are the least profitable items.

In April 1987, El Centro reinstated Tominaga's authorization to distribute goods bearing its service mark to its franchisees and notified the suppliers that Tominaga had been reinstated. Thus, since April, Tominaga and El Centro have competed for the franchisees' business.

DISCUSSION

I. STANDARD FOR SUMMARY JUDGMENT

The moving party is entitled to summary judgment when the non-moving party bears the burden of proof at trial as to an element essential to its case, and the party fails to make a showing sufficient to establish a genuine dispute with respect to the existence of that element. Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 2552-53, 91 L.Ed.2d 265 (1986). In order to show that there are genuine factual issues that can properly be resolved only by a finder of fact, the non-moving party must show that the disputed facts may reasonably be resolved in favor of either party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 2511, 91 L.Ed.2d 202 (1986). If the factual context makes the non-moving party's claim implausible, that party must come forward with more persuasive evidence than would otherwise be necessary to show that there is a genuine issue for trial. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986); California Architectural Bldg. Prod. v. Franciscan Ceramics, Inc., 818 F.2d 1466, 1468 (9th Cir.1987).

II. ANTITRUST CLAIMS

A. Illegal Tying Arrangement Claim

A "tying arrangement" occurs where a seller refuses to sell one product (the tying product) unless the buyer also purchases another product (the tied product). In Jefferson Parish Hospital District No. 2 v. Hyde, 466 U.S. 2, 104 S.Ct. 1551, 80 L.Ed.2d 2 (1984), the Court reaffirmed the per se rule against tying.¹ Thus, a tying arrangement is illegal per se where the controlling prerequisites are met. Digidyne Corp. v. Data General Corp., 734 F.2d 1336 (9th Cir.1984), cert denied, 473 U.S. 908, 105 S.Ct. 3534, 87 L.Ed.2d 657 (1985). In order to prevail under a per se theory, plaintiff must establish the following three elements; "(1) a tie-in between two distinct products or services; (2) sufficient economic power in the tying product market to impose significant restrictions in the tied product market; and (3) an effect on a non-insubstantial volume of commerce in the tied product market." Robert's Waikiki U-Drive, Inc. v. Budget Rent-A-Car Sys., 732 F.2d 1403, 1407 (9th Cir.1984). Plaintiff has failed to present competent evidence that El Centro had market power in the tying market.

It has been observed that the "per se" rule under which tying arrangements are analyzed is "unusual because of the essential role of economic analysis" in applying the standard. Klein & Saft, The Law and Economics of Franchise Tying Contracts, 28 J.Law & Econ. 345, 345 (1985) (cited with approval in Mozart Co. v. Mercedes-Benz of North America, 833 F.2d 1342, 1346 (9th Cir.1987)); Hyde, 466 U.S. at 34, 104 S.Ct. at 1570 (O'Conner concurring)². As recognized by the court in Mozart, the majority in Hyde, "rather than abandoning the per se rule against tying, chose to limit antitrust liability for tie-ins by insisting on a showing of actual market power in the tying product." Mozart, 833 F.2d at 1345 (emphasis added) (citing, Hyde, 466 U.S. at 13-17, 104 S.Ct. at 1558-1561).

Tying arrangements, therefore, receive per se condemnation only when "the seller has some special ability — usually called market power' — to force a purchaser to do something that he would not do in a competitive market." Hyde, 466 U.S. at 13-14, 104 S.Ct. at 1558-1559. Since the primary purpose of the rule is to prevent the extension of market power from the tying product to the tied product³, market power is deemed an essential element because such an "extension of power is impossible unless the seller has substantial market power in the tying product." Mozart, 833 F.2d at 1345.

Courts have identified three sources of market power; (1) when the government has granted the seller "a patent or similar...