The Ninth Circuit recently affirmed the dismissal of a franchisee’s tying and price fixing conspiracy claims against its franchisor, Equilon Enterprises LLC, which does business as Shell Oil Products.  Rick-Mik Enterprises, Inc. v. Equilon Enterprises LLC, __ F.3d __, 2008 WL 2697793 (9th Cir. July 11, 2008).  The putative class action complaint alleged that Equilon required its franchisees, Shell and Texaco gas stations, to use Equilon to process credit card transactions.  Plaintiff also alleged that Equilon received transaction fees for such processing and received "kickbacks" from unidentified banks that processed the transactions.

Plaintiff franchisee asserted that Equilon was illegally tying two distinct products, franchises and credit card processing services.  Plaintiff also alleged that Equilon agreed with banks to fix prices for processing fees. 15 U.S.C. § 1.

District Judge Real dismissed both the federal claims and the California state law claims asserting tying and price fixing, and a state law claim for unfair competition.  Fed.R.Civ.P. 12(b)(6).  The Ninth Circuit affirmed, applying Bell Atl. Corp. v. Twombly, 127 S.Ct. 1955, 1964-65 (2007) ("Factual allegations must be enough to raise a right to relief above the speculative level[.]"  Twombly, at 1965).

Tying.  Gasoline station franchises were the alleged tying product.  Credit card processing services were the alleged tied product.  The court of appeals affirmed the dismissal of the tying claim on two separate, independent grounds:  (1) inadequate allegations that the tying product conferred market power on Equilon; and (2) credit card processing was not a separate product from the franchise.

A claim for tying requires that defendant have market power in the tying product market.  Without such power, the court stated, Equilon would have no power to force a franchisee to purchase the tied product, or to affect competition in the tied product market.  Plaintiff alleged in the complaint that Equilon was very large (9,000 retail outlets; first in total gallons of gasoline sold with 13 percent of the market; gross revenues of $24 billion, etc.).

Plaintiff did not however, make specific allegations concerning the franchise market, such as the percentage of gasoline station franchises that were Equilon’s compared to Chevron, Mobil and others.  Thus, plaintiff had failed to plead market power in the relevant market for gasoline station franchises.

Plaintiff also alleged in the complaint that Equilon had market power because Shell and Texaco-branded gasolines are protected by various trademarks, copyrights and patents. The court noted that intellectual property rights are no longer presumed to confer market power.  Illinois Tool Works Inc. v. Independent Ink, 547 U.S. 28, 42-43 (2006).  The court stated that plaintiff’s complaint did not set forth factual allegations showing that Equilon’s intellectual property gave Equilon the power to restrain competition in the tied product market.

The court concluded its market power analysis by stating, "A tying claim generally requires that the defendant’s economic power be derived from the market, not from a contractual relationship that plaintiff has entered into voluntarily."  Rick-Mik, 2008 WL 2697793 at 8.  (The court refused to follow Siegel v. Chicken Delight, Inc., 448 F.2d 43 (9th Cir. 1971), stating that Siegel is "no longer relevant after Jefferson Parish and Illinois Tool Works, Inc."  Rick-Mik, 2008 WL 2697793 at 9 n.3.)

The court then rejected the tying claim on the additional ground that franchises and credit card processing were not two separate products, noting that the "very essence of a franchise is the purchase of several related products in a single competitively attractive package."  Rick-Mick, 2008 WL 2697793 at 8.  The court stated that "[i]f competitive firms always bundle the tying and tied goods, then they are a single product.”  Id. at 9 (citation omitted).  In addition, plaintiff had failed to plead the facts necessary to show that the "character of the demand" among franchisees was such that franchisees viewed credit card processing as distinct from franchises.

The court stated that business reasons justified Equilon’s inclusion of credit card processing services in its franchise agreements.  Equilon’s control over those services, the court stated, was an essential component of the franchise system’s formula for success.  E.g., Rick-Mik at 9 ("The arrangement gives Equilon some ability to ensure the quality and reliability of credit card processing and helps guard against franchise default and unauthorized transactions").

Price fixing.   In the court of appeal’s view, the complaint contained only conclusory allegations of an asserted conspiracy between Equilon and unidentified banks to fix the "Merchant Discount Fee" paid by franchisees.  Thus, the price fixing claim failed under Twombly, 127 S.Ct. at 1964-65.

The court stated that Equilon entering into agreements with banks on a price for providing card processing services for franchisees was an ordinary sales contract, not an antitrust violation.  Nor could such an agreement be horizontal because Equilon did not compete with banks in the credit card services market.  Even viewed as a vertical minimum resale price maintenance agreement, such an agreement is no longer necessarily a per se antitrust violation (Leegin Creative Leather Prods., Inc.  v. PSKS, Inc, 127 S.Ct. 2705, 2725 (2007)), and plaintiff had not pleaded facts that would support a finding that the alleged resale price maintenance violated the antirust laws.  While plaintiff alleged that Equilon received "kickbacks" from financial institutions, the "kickbacks" were not violations of the antitrust laws, and could well have been lawful commissions.

The court of appeals also held that plaintiff had waived any right to amend its complaint.  Rick-Mik, 2008 WL 2697793 at 11-12.

Authored by:

Thomas D. Nevins

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