Rehearing and Rehearing En Banc Denied February 24, 1982.
ELY, Circuit Judge:
In this class action antitrust suit against Baskin-Robbins Ice Cream Company [BRICO] and its area franchisors,
I. FACTUAL BACKGROUND
BRICO, the nation's largest chain of ice cream specialty stores, operates the quintessential franchise system. See generally ABA Antitrust Section, Monograph 2, Vertical Restrictions Limiting Intrabrand Competition, 1-6 (1977). Originally a small Southern California ice cream manufacturer, BRICO
The distribution system employed by BRICO has essentially three tiers. At the top is BRICO itself. It manages the chain of franchised stores, selects the area franchisors, and, through a wholly owned subsidiary,
At the second level of the system are the eight independent manufacturers licensed by BRICO to operate as area franchisors. BRICO, again through a wholly owned subsidiary, also operates at this level, acting as an area franchisor in six exclusive territories. The independent area franchisors are contractually bound to BRICO by Area Franchise Agreements. These agreements provide each area franchisor with an exclusive territory in which to manufacture Baskin-Robbins ice cream products. They also authorize the area franchisors, in conjunction with BRICO, to establish and service Baskin-Robbins franchised stores within their respective territories. Under these agreements, the area franchisors are forbidden to disclose the secret formulae and processes by which Baskin-Robbins ice cream products are manufactured.
The third level of the Baskin-Robbins system is composed of the franchised store owners. These independent businessmen are bound to both BRICO and the area franchisor by the standard form Store Franchise Agreement. Under these agreements, the franchised store may sell only Baskin-Robbins ice cream products purchased from the area franchisor in whose territory the store is located.
It is important to note that BRICO utilizes a "dual distribution" system. Under this system, BRICO operates on two distinct levels of the distributional chain. As the owner of the Baskin-Robbins trademarks and formulae, it licenses independent area franchisors to manufacture Baskin-Robbins
BRICO provides extensive advertising and promotional support for both the area franchisors and the store franchisees. As part of its services to the area franchisors, BRICO sponsors quarterly Marketing, Organization, and Planning [MOAP] meetings. Attendance of these meetings is voluntary but, generally, a majority of the area franchisors are represented. At these meetings, topics of current interest are discussed, including marketing strategy, industry trends and costs. On occasion, informal discussions regarding wholesale and retail prices have taken place.
Certain franchisees of Baskin-Robbins bring this treble damage antitrust suit, alleging three separate per se violations of § 1 of the Sherman Act (15 U.S.C. § 1). First, they contend that Baskin-Robbins ice cream products are unlawfully tied to the sale of the Baskin-Robbins trademark. Second, they challenge the Baskin-Robbins "dual distribution" system as an unlawful horizontal market allocation. Finally, franchisees allege that BRICO and its area franchisors conspired to fix the wholesale prices of Baskin-Robbins ice cream products.
At the close of franchisees' case in chief, Baskin-Robbins moved to dismiss the action, pursuant to Rule 41(b) of the Federal Rules of Civil Procedure. The District Court, sitting without a jury, granted the motion, holding, inter alia, that: 1) The tie-in claim failed because franchisees did not establish that the Baskin-Robbins trademark was a separate product from Baskin-Robbins ice cream; 2) the horizontal market allocation claim failed because franchisees did not establish the requisite concerted activity among competitors; and 3) the wholesale price fixing claim failed for lack of proof of a purpose or effect to fix prices.
A. Standard of Review
Our first step in resolving the important issues presented by this appeal is a determination of the applicable standard of review. Rule 52(a) of the Federal Rules of Civil Procedure provides that the findings of fact made by the District Court, sitting without a jury, are not to be disturbed on appeal unless "clearly erroneous."
Franchisees argue, however, that where the case rests primarily upon documentary evidence rather than live testimony, a more exacting inquiry by the appellate court is warranted. Because this case is based in large part on documentary evidence, franchisees contend the appropriate standard is one of de novo review.
In support of this contention, franchisees cite James Burrough, Ltd. v. Sign of the Beefeater, Inc., 540 F.2d 266 (7th Cir. 1976). In that case, the Seventh Circuit held, that where the issue is likelihood of confusion in a trademark infringement case, the appellate court "is as capable as ... the district court of determining" the ultimate legal issue based on an undisputed factual record and, therefore, de novo review is proper. Id. at 273. While we employ a similar rule in trademark infringement cases, see J. B. Williams Co. v. Le Conte Cosmetics, Inc., 523 F.2d 187, 190-91 (9th Cir. 1975), cert. denied, 424 U.S. 913, 96 S.Ct. 1110, 47 L.Ed.2d 317 (1976), we have repeatedly made clear that the propriety of
B. The Tie-in Claim
It is well settled that there can be no unlawful tying arrangement absent proof that there are, in fact, two separate products, the sale of one (i.e., the tying product) being conditioned upon the purchase of the other (i. e., the tied product).
The critical issue here is whether the Baskin-Robbins trademark may be properly treated as an item separate from the ice cream it purportedly represents. We conclude, as did the District Court, that it may not.
In support of their tie-in claim, franchisees rely heavily on Siegel v. Chicken Delight, Inc., 448 F.2d 43 (9th Cir. 1971). They contend that Chicken Delight established, as a matter of law, that a trademark is invariably a separate item whenever the product it represents is distributed through a franchise system. A careful reading of Chicken Delight, however, precludes such an interpretation and discloses that it stands only for the unremarkable proposition that, under certain circumstances, a trademark may be sufficiently unrelated to the alleged tied product to warrant treatment as a separate item.
In Chicken Delight, we were confronted with a situation where the franchisor conditioned the grant of a franchise on the purchase of a catalogue of miscellaneous items used in the franchised business. These products were neither manufactured by the franchisor nor were they of a special design uniquely suited to the franchised business. Rather, they were commonplace paper products and packaging goods, readily available in the competitive market place. In evaluating this arrangement, we stated that, "in determining whether the [trademark] ... and the remaining ... items ... are to be regarded as distinct items ... consideration must be given to the function of trademarks." Chicken Delight, 448 F.2d
A determination of whether a trademark may appropriately be regarded as a separate product requires an inquiry into the relationship between the trademark and the products allegedly tied to its sale. See id. at 48. In evaluating this relationship, consideration must be given to the type of franchising system involved. In Chicken Delight, we distinguished between two kinds of franchising systems: 1) the business format system; and 2) the distribution system. See id. at 49.
Where, as in Chicken Delight, the tied products are commonplace articles, the franchisor can easily maintain its quality standards through other means less intrusive upon competition.
Where a distribution type system, such as that employed by Baskin-Robbins, is involved, significantly different considerations are presented. See McCarthy, Trademark Franchising and Antitrust: The Trouble with Tie-ins, 58 Cal.L.Rev. 1085, 1108 (1970). Under the distribution type system, the franchised outlets serve merely as conduits through which the trademarked goods of the franchisor flow to the ultimate consumer. These goods are generally manufactured by the franchisor or, as in the present case, by its licensees according to detailed specifications.
In the case at bar, the District Court found that the Baskin-Robbins trademark merely served to identify the ice cream products distributed by the franchise system. Based on our review of the record, we cannot say that this finding is clearly erroneous. Accordingly, we conclude that the District Court did not err in ruling that the Baskin-Robbins trademark lacked sufficient independent existence apart from the ice cream products allegedly tied to its sale, to justify a finding of an unlawful tying arrangement.
C. The Horizontal Market Allocation Claim
Franchisees contend that the "dual distribution" system used by Baskin-Robbins constitutes an unlawful horizontal market allocation. This contention is premised on BRICO's dual role as both trademark licensor and area franchisor. According to franchisees, BRICO's practice of licensing exclusive territories to other area franchisors while retaining certain areas for itself constitutes a market allocation among competitors. Franchisees further argue that any "dual distribution" system is, in and of itself, a per se violation of the antitrust laws. We address the former contention first.
The hallmark of a horizontal market allocation is collusion among competitors to confer upon each a monopoly in a specific area. See Continental T.V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36, 97 S.Ct. 2549, 53 L.Ed.2d 568 (1977); Timken Roller Bearing Co. v. United States, 341 U.S. 593, 71 S.Ct. 971, 95 L.Ed. 1199 (1951).
The District Court found that franchisees had failed to establish the concerted activity among competitors required to sustain a finding of a horizontal market allocation. In challenging this ruling, franchisees rely primarily on three cases: United States v. Topco Associates, Inc., 405 U.S. 596, 92 S.Ct. 1126, 31 L.Ed.2d 515 (1972); United States v. Sealy, 388 U.S. 350, 87 S.Ct. 1847, 18 L.Ed.2d 1238 (1967); and Timken Roller Bearing Co. v. United States, 341 U.S. 593, 71 S.Ct. 971, 95 L.Ed. 1199 (1951).
In Timken, a domestic manufacturer conspired with its foreign competitors to allocate, among themselves, the world market for anti-friction bearings. In both Topco and Sealy, competing manufacturers created wholly owned trademark licensors. The licensors then granted each competitor an exclusive area in which to manufacture and distribute the trademarked products. In both cases, the Supreme Court recognized that the trademark licenses were merely facades to mask an allocation of markets by pre-existing competitors.
The present case is markedly different. BRICO is neither owned nor controlled by the area franchisors. Unlike the situations in Topco and Sealy, the area franchisors have no voice over BRICO's decisions regarding grants of additional territories. Indeed, the District Court found that at all times the allocation of territory was dictated unilaterally by BRICO. "When a manufacturer acts on its own, in pursuing its own market strategy, it is seeking to compete with other manufacturers by imposing what may be defended as reasonable vertical restraints." Cernuto, Inc. v. United Cabinet Corp., 595 F.2d 164, 168 (3rd Cir. 1979) (emphasis added) (cited with approval in Ron Tonkin Gran Turismo v. Fiat Distributors, Inc., 637 F.2d 1376, 1385 (9th Cir. 1981)). Accordingly, the District Court concluded that the territorial restrictions imposed by BRICO are vertical in nature and therefore not per se illegal.
Franchisees attack this conclusion by pointing to several instances where, they allege, territories were transferred by one area franchisor directly to another. BRICO, however, introduced evidence indicating that the transfers were not between area franchisors but rather were instances where BRICO transferred territory from one area franchisor to another better able to service the area. The District Court, after weighing the evidence, concluded that these transfers were not the result of concerted activity by the area franchisors. It is not the function of this court to substitute its interpretation of the evidence for that of the District Court. See, e. g., United States v. Mountain States Construction Co., 588 F.2d 259 (9th Cir. 1978). Because the findings on this issue are not clearly erroneous, we decline to overturn the District Court's determination that franchisees failed to establish their horizontal market allocation claim.
Franchisees also urge us to extend the rule of per se illegality to encompass dual distribution systems such as that practiced by Baskin-Robbins.
Neither the Supreme Court nor this court has yet squarely ruled whether dual distribution systems fall within the rule of per se illegality. Both times it has faced the issue, the Supreme Court has, sub silentio, treated dual distribution systems as imposing only vertical restraints. See United States v. Arnold, Schwinn & Co., 388 U.S. 365, 87 S.Ct. 1856, 18 L.Ed.2d 1249 (1967); White Motor Co. v. United States, 372 U.S. 253, 83 S.Ct. 696, 9 L.Ed.2d 738 (1963).
We take as our starting point the Supreme Court's admonition in Continental T.V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36, 58-59, 97 S.Ct. 2549, 2562, 53 L.Ed.2d 568 (1977): "[D]eparture from the rule-of-reason standard must be based upon demonstrable economic effect rather than — as in Schwinn — upon formalistic line drawing." Accordingly, our inquiry focuses not on whether the vertical or horizontal aspects of the system predominate, but rather, on the actual competitive impact of the dual distribution system employed by Baskin-Robbins.
The test for determining whether the rule of per se illegality should be extended to a business practice not heretofore afforded per se treatment is "whether the practice facially appears to be one that would always or almost always tend to restrict competition and decrease output ... or instead one designed to `increase economic efficiency and render markets more, rather than less, competitive.'" Broadcast Music, Inc. v. CBS, 441 U.S. 1, 19-20, 99 S.Ct. 1551, 1562, 60 L.Ed.2d 1 (1980) (citations omitted). Applying this test to the system at issue here, we conclude that application of the rule of per se illegality would be both inappropriate and anti-competitive.
It is evident that were BRICO to abandon its area franchisor responsibilities, the system here would be identical to that involved in GTE Sylvania. We do not believe that BRICO's decision to retain these responsibilities in certain areas has any significant effect on competition. Regardless of BRICO's decision, there would still be fourteen areas, each exclusively served by a single manufacturer-franchisor. Only the identity of the franchisor in a given area is affected by BRICO's decision to retain area franchisor responsibilities in certain territories. To invalidate a distribution system on such basis is to revert to the kind of "formalistic line drawing" eschewed by the Court in GTE Sylvania. See GTE Sylvania, 433 U.S. at 58-59, 97 S.Ct. at 2562.
Franchisees have failed to establish here any significant, adverse impact upon either interbrand or intrabrand competition. Regarding intrabrand competition, the District Court found that franchisees failed to show that any area franchisor is capable of servicing the area of another on a sustained basis. Nor did franchisees establish the feasibility of a more extensive licensing program for the manufacture of Baskin-Robbins ice cream products.
Franchisees similarly failed to establish any adverse effect upon interbrand competition. Indeed, it appears that the distribution system at issue here may have actually fostered interbrand competition. Through the exclusive licensing of independent manufacturers, BRICO was able to expand into new geographic markets and promote the wider availability of its products.
Moreover, modern economic thought indicates that the invalidation of a distribution system, absent a showing of anti-competitive effect, may actually retard competition. "Competition is promoted when manufacturers are given wide latitude in establishing their method of distribution and in choosing particular distributors. Judicial deference to the manufacturer's business
Accordingly, we conclude that, in the absence of proof of anti-competitive purpose or effect, dual distribution systems must be evaluated under the traditional rule of reason standard.
D. The Wholesale Price Fixing Claim
Franchisees final contention is that BRICO and its area franchisors conspired to fix the wholesale prices of Baskin-Robbins ice cream products. This contention is premised on two somewhat overlapping arguments. First, franchisees allege that BRICO and the area franchisors engaged in pricing discussions which resulted in the actual fixing of wholesale prices. Second, they allege that BRICO and its area franchisors engaged in continual exchanges of price information which facilitated the establishment of the maximum attainable wholesale prices. This latter practice, they contend, is a per se violation under United States v. Container Corp. of America, 393 U.S. 333, 89 S.Ct. 510, 21 L.Ed.2d 526 (1969).
The District Court ruled that franchisees had failed to sustain their burden of proof on this issue. On appeal franchisees do little more than re-argue the facts found against them at trial, contending that the findings below are clearly erroneous. We disagree.
At trial, franchisees presented evidence of roughly a dozen isolated communications regarding prices over a seven-year period. Several of these communications involved persons with no direct pricing responsibilities. Many were found by the District Court to be no more than idle "shop talk" such as often occurs between persons in the same field of endeavor. To counter the charge of actual price fixing, Baskin-Robbins introduced evidence, set forth in the margin, indicating that the prices charged by area franchisors were at all times widely disparate.
The District Court also found that franchisees had established only sporadic exchanges of price information, not involving all the area franchisors, and having no effect upon actual pricing decisions. This finding is amply supported by the record. Because the mere exchange of price information, without more, is not per se illegal, United States v. Citizens & Southern National Bank, 422 U.S. 86, 113, 95 S.Ct. 2099, 2115, 45 L.Ed.2d 41 (1975); United States v. Container Corp. of America, 393 U.S. 333, 338, 89 S.Ct. 510, 513, 21
We conclude that franchisees failed to establish per se violations of the Sherman Act on the part of Baskin-Robbins. Because the parties stipulated that Baskin-Robbins should prevail absent proof of per se violation of the antitrust laws, the judgment below is
Date Range ---- ----- January 1972 38 ¢ January 1974 48 ¢ January 1975 70 ¢ January 1976 60 ¢ January 1977 40 ¢ January 1978 87 ¢