SCIRICA, Circuit Judge.
OPINION OF THE COURT
In this appeal, we must decide whether certain franchise tying restrictions support a claim for violation of federal antitrust laws. Eleven franchisees of Domino's Pizza stores and the International Franchise Advisory Council, Inc. filed suit against Domino's Pizza, Inc., alleging violations of federal antitrust laws, breach of contract, and tortious interference with contract. The district court dismissed the antitrust claims under Fed.R.Civ.P. 12(b)(6) for failure to state a claim for which relief can be granted, because the plaintiffs failed to allege a valid relevant market. The district court declined to exercise supplemental jurisdiction over the plaintiffs' remaining common law claims. Queen City Pizza, Inc. v. Domino's Pizza, Inc., 922 F.Supp. 1055 (E.D.Pa.1996). We will affirm.
I. Facts and Procedural History
Domino's Pizza, Inc. is a fast-food service company that sells pizza through a national network of over 4200 stores. Domino's Pizza owns and operates approximately 700 of these stores. Independent franchisees own and operate the remaining 3500. Domino's Pizza, Inc. is the second largest pizza company in the United States, with revenues in excess of $1.8 billion per year.
A franchisee joins the Domino's system by executing a standard franchise agreement with Domino's Pizza, Inc. Under the franchise agreement, the franchisee receives the right to sell pizza under the "Domino's" name and format. In return, Domino's Pizza receives franchise fees and royalties.
The essence of a successful nationwide fast-food chain is product uniformity and consistency. Uniformity benefits franchisees because customers can purchase pizza from any Domino's store and be certain the pizza will taste exactly like the Domino's pizza with which they are familiar. This means that individual franchisees need not build up their own good will. Uniformity also benefits the franchisor. It ensures the brand name will continue to attract and hold customers, increasing franchise fees and royalties.
For these reasons, section 12.2 of the Domino's Pizza standard franchise agreement requires that all pizza ingredients, beverages, and packaging materials used by a Domino's franchisee conform to the standards set by Domino's Pizza, Inc. Section 12.2 also provides that Domino's Pizza, Inc. "may in our sole discretion require that ingredients, supplies and materials used in the preparation, packaging, and delivery of pizza be purchased exclusively from us or from approved suppliers or distributors." Domino's Pizza reserves the right "to impose reasonable limitations on the number of approved suppliers or distributors of any product." To enforce these rights, Domino's Pizza, Inc. retains the power to inspect franchisee stores and to test materials and ingredients. Section 12.2 is subject to a reasonableness clause providing that Domino's Pizza, Inc. must "exercise reasonable judgment with respect to all determinations to be made by us under the terms of this Agreement."
Under the standard franchise agreement, Domino's Pizza, Inc. sells approximately 90% of the $500 million in ingredients and supplies used by Domino's franchisees.
The plaintiffs in this case are eleven Domino's franchisees and the International Franchise Advisory Council, Inc. ("IFAC"), a Michigan corporation consisting of approximately 40% of the Domino's franchisees in the United States, formed to promote their common interests.
First, plaintiffs allege that Domino's Pizza, Inc. has restricted their ability to purchase competitively priced dough. Most franchisees purchase all of their fresh dough from Domino's Pizza, Inc. Plaintiffs here attempted to lower costs by making fresh pizza dough on site. They contend that in response, Domino's Pizza, Inc. increased processing fees and altered quality standards and inspection practices for store-produced dough, which eliminated all potential savings and financial incentives to make their own dough. Plaintiffs also allege Domino's Pizza, Inc. prohibited stores that produce dough from selling their dough to other franchisees, even though the dough-producing stores were willing to sell dough at a price 25% to 40% below Domino's Pizza, Inc.'s price.
Next, plaintiffs object to efforts by Domino's Pizza, Inc. to block IFAC's attempt to buy less expensive ingredients and supplies from other sources. In June 1994, IFAC entered into a purchasing agreement with FoodService Purchasing Cooperative, Inc. (FPC). Under the agreement, FPC was appointed the purchasing agent for IFAC-member Domino's franchisees. FPC was charged with developing a cooperative purchasing plan under which participating franchisees could obtain supplies and ingredients at reduced cost from suppliers other than Domino's Pizza, Inc. Plaintiffs contend that when Domino's Pizza, Inc. became aware of these efforts, it intentionally issued ingredient and supply specifications so vague that potential suppliers could not provide FPC with meaningful price quotations.
Plaintiffs also allege Domino's Pizza entered into exclusive dealing arrangements with several franchisees in order to deny FPC access to a pool of potential buyers sufficiently large to make the alternative purchasing scheme economically feasible. In addition, plaintiffs contend Domino's Pizza, Inc. commenced anti-competitive predatory pricing to shut FPC out of the market. For example, they maintain that Domino's Pizza, Inc. lowered prices on many ingredients and supplies to a level competitive with FPC's prices and then recouped lost profits by raising the price on fresh dough, which FPC could not supply. Further, plaintiffs contend Domino's Pizza, Inc. entered into exclusive dealing arrangements with the only approved suppliers of ready-made deep dish crusts and sauce. Under these agreements, the suppliers were obligated to deliver their entire output to Domino's Pizza, Inc. Plaintiffs allege the purpose of these agreements was to prevent FPC from purchasing these critical pizza components for resale to franchisees.
Finally, plaintiffs allege Domino's Pizza, Inc. refused to sell fresh dough to franchisees unless the franchisees purchased other ingredients and supplies from Domino's Pizza, Inc. As a result of these and other alleged practices, plaintiffs maintain that each franchisee store now pays between $3000 and $10,000 more per year for ingredients and supplies than it would in a competitive market. Plaintiffs allege these costs are passed on to consumers.
As noted, eleven Domino's franchisees and IFAC filed an amended complaint in United
Domino's Pizza, Inc. moved to dismiss the antitrust claims for failure to state a claim, contending the plaintiffs failed to allege a "relevant market," a basic pleading requirement for claims under both § 1 and § 2 of the Sherman antitrust act. They maintained that the relevant market defined in the complaint—the "market" in Domino's-approved ingredients and supplies used by Domino's Pizza franchisees—was invalid as a matter of law because the boundaries of the proposed relevant market were defined by contractual terms contained in the franchise agreement, and not measured by cross-elasticity of demand or product interchangeability.
The district court granted defendant's motion to dismiss with prejudice plaintiffs' federal antitrust claims. The district court observed that "in order to state a Sherman Act claim under either § 1 or § 2, a plaintiff must identify the relevant product and geographic markets and allege that the defendant exercises market power within those markets." Queen City Pizza, Inc. v. Domino's Pizza, Inc., 922 F.Supp. 1055, 1060 (E.D.Pa.1996). Noting that plaintiffs did "not explicitly identify the relevant product and geographic markets in their amended complaint," the court said that "it is clear from the context, and confirmed in their memorandum in opposition to the instant motion, that Plaintiffs consider the relevant product market to be the market for ingredients and supplies among Domino's franchisees." Id. at 1061. Rejecting this concept of the relevant market, the court held that "antitrust claims predicated upon a `relevant market' defined by the bounds of a franchise agreement are not cognizable." Id. at 1063. The court noted that Domino's Pizza, Inc.'s power to force plaintiffs to purchase ingredients and supplies from them stemmed "not from the unique nature of the product or from its market share in the fast food franchise business, but from the franchise agreement." Id. at 1062. For that reason, plaintiffs' claims "implicate principles of contract, and are not the concern of the antitrust laws." Id. The district court also held plaintiffs had failed adequately to allege harm to competition, "a bedrock premise of antitrust law." Id. at 1063. Because plaintiffs failed to assert a cognizable antitrust claim and there was neither diversity among the parties nor special circumstances justifying exercise of supplemental jurisdiction, the court dismissed without prejudice plaintiffs' common law claims for lack of subject matter jurisdiction. Id. at 1063-64.
The district court granted plaintiffs leave to file an amended complaint to cure the jurisdictional pleading deficiencies in their state law claims. Plaintiffs decided not to replead their state law claims. Instead, they sought to amend their complaint for a second time in an attempt to state a valid federal antitrust claim. The district court denied their motion, noting that though the plaintiffs' proposed second amended complaint would cure the failure to plead harm to competition, it would not cure the failure to allege a valid relevant market. The court stated: "Plaintiffs do not and cannot purchase ingredients and supplies from alternative suppliers not because Domino's dominates the ingredient and supply market or because Defendant is the market's only supplier, but because the franchisee-plaintiffs are contractually bound to purchase only from suppliers approved by Defendant. It is economic power resulting from the franchise agreement, therefore, and not market power, that defines the `relevant market' Plaintiffs allege in support of their antitrust claims." The district court rejected plaintiffs' argument that a different result was required under the Supreme Court's decision in Eastman Kodak Co. v. Image Technical Services, Inc., 504 U.S. 451, 112 S.Ct. 2072, 119 L.Ed.2d 265 (1992). This appeal followed.
II. Jurisdiction and Standard of Review
The district court had jurisdiction over the antitrust counts under 15 U.S.C. §§ 15 and 26 and 28 U.S.C. §§ 1331 and 1337. It declined to exercise supplemental jurisdiction over the common law counts. We have jurisdiction under 28 U.S.C. § 1291. Our review of the district court's dismissal under Fed.R.Civ.P. 12(b)(1) and 12(b)(6) is plenary. Stehney v. Perry, 101 F.3d 925 (3d Cir.1996).
Plaintiffs assert six distinct antitrust claims on appeal. First, plaintiffs allege Domino's Pizza, Inc. has monopolized the market in pizza supplies and ingredients for use in Domino's stores, in violation of § 2 of the Sherman Act, 15 U.S.C. § 2. In support of this contention, plaintiffs allege Domino's Pizza, Inc. has sufficient market power to control prices and exclude competition in this market. Second, plaintiffs contend Domino's Pizza, Inc. has attempted to monopolize the market for Domino's pizza supplies and ingredients, in violation of § 2 of the Sherman Act. Third, plaintiffs allege Domino's Pizza, Inc.'s exclusive dealing arrangements have unreasonably restrained trade in violation of § 1 of the Sherman Act, 15 U.S.C. § 1. Fourth, plaintiffs allege Domino's Pizza, Inc. imposed an unlawful tying arrangement
As we have noted, the district court held that none of the plaintiffs' antitrust claims was cognizable under federal law. We will analyze each claim in turn.
As a threshold matter, plaintiffs argue that "relevant market determinations are inherently fact intensive, and therefore are inappropriate for disposition on a Rule 12(b)(6) motion." (Appellant's brief at 16). It is true that in most cases, proper market definition can be determined only after a factual inquiry into the commercial realities faced by consumers. See Eastman Kodak Co. v. Image Technical Services, Inc., 504 U.S. 451, 482, 112 S.Ct. 2072, 2090, 119 L.Ed.2d 265 (1992). Plaintiffs err, however, when they try to turn this general rule into a per se prohibition against dismissal of antitrust claims for failure to plead a relevant market under Fed.R.Civ.P. 12(b)(6).
Plaintiffs have the burden of defining the relevant market. Pastore v. Bell Telephone Co. of Pennsylvania, 24 F.3d 508, 512 (3d Cir.1994); Tunis Bros. Co., Inc. v. Ford Motor Co., 952 F.2d 715, 726 (3d Cir. 1991). "The outer boundaries of a product market are determined by the reasonable interchangeability of use or the cross-elasticity of demand between the product itself and substitutes for it." Brown Shoe Co. v. U.S., 370 U.S. 294, 325, 82 S.Ct. 1502, 1523, 8 L.Ed.2d 510 (1962); Tunis Brothers, 952 F.2d at 722 (same). Where the plaintiff fails to define its proposed relevant market with reference to the rule of reasonable interchangeability and cross-elasticity of demand, or alleges a proposed relevant market that clearly does not encompass all interchangeable substitute products even when all factual inferences are granted in plaintiff's favor, the relevant market is legally insufficient and a motion to dismiss may be granted. See, e.g., TV Communications Network, Inc. v. Turner Network Television, Inc., 964 F.2d 1022, 1025 (10th Cir.1992) (affirming district
Plaintiffs allege Domino's Pizza, Inc. has willfully acquired and maintained a monopoly in the market for ingredients, supplies, materials and distribution services used in the operation of Domino's stores, in violation of § 2 of the Sherman Act, 15 U.S.C. § 2. Section 2 sanctions those "who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several states, or with foreign nations." "The offense of monopoly under § 2 of the Sherman Act has two elements: (1) the possession of monopoly power in the relevant market and (2) the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident." Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585, 596 n. 19, 105 S.Ct. 2847, 2854 n. 19, 86 L.Ed.2d 467 (1985) (quoting United States v. Grinnell Corp., 384 U.S. 563, 570-71, 86 S.Ct. 1698, 1703-04, 16 L.Ed.2d 778 (1966)). See also Ideal Dairy Farms, Inc. v. John Labatt, Ltd., 90 F.3d 737, 749 (3d Cir.1996) (same); Bonjorno v. Kaiser Aluminum & Chemical Corp., 752 F.2d 802, 808 (3d Cir.1984) (same).
The district court dismissed plaintiffs' § 2 monopoly claims for failure to plead a valid relevant market. Plaintiffs suggest the "ingredients, supplies, materials, and distribution services used by and in the operation of Domino's pizza stores" constitutes a relevant market for antitrust purposes. We disagree.
As we have noted, the outer boundaries of a relevant market are determined by reasonable interchangeability of use. Eastman Kodak Co. v. Image Technical Services, Inc., 504 U.S. 451, 482, 112 S.Ct. 2072, 2090, 119 L.Ed.2d 265 (1992); Brown Shoe Co. v. U.S., 370 U.S. 294, 325, 82 S.Ct. 1502, 1523, 8 L.Ed.2d 510 (1962); Tunis Brothers Co., Inc. v. Ford Motor Co., 952 F.2d 715, 722 (3d Cir.1991). "Interchangeability implies that one product is roughly equivalent to another for the use to which it is put; while there may be some degree of preference for the one over the other, either would work effectively. A person needing transportation to work could accordingly buy a Ford or a Chevrolet automobile, or could elect to ride a horse or bicycle, assuming those options were feasible." Allen-Myland, Inc. v. International Business Machines Corp., 33 F.3d 194, 206 (3d Cir.1994) (internal quotations omitted). When assessing reasonable interchangeability, "[f]actors to be considered include price, use, and qualities." Tunis Brothers, 952 F.2d at 722. Reasonable interchangeability is also indicated by "cross-elasticity of demand between the product itself and substitutes for it." Brown Shoe Co. v. U.S., 370 U.S. 294, 325, 82 S.Ct. 1502, 1523, 8 L.Ed.2d 510 (1962). As we explained in Tunis Brothers Co., Inc. v. Ford Motor Co., 952 F.2d 715, 722 (3d Cir.1991), "products in a relevant market [are] characterized by a cross-elasticity of demand, in other words,
Here, the dough, tomato sauce, and paper cups that meet Domino's Pizza, Inc. standards and are used by Domino's stores are interchangeable with dough, sauce and cups available from other suppliers and used by other pizza companies. Indeed, it is the availability of interchangeable ingredients of comparable quality from other suppliers, at lower cost, that motivates this lawsuit. Thus, the relevant market, which is defined to include all reasonably interchangeable products, cannot be restricted solely to those products currently approved by Domino's Pizza, Inc. for use by Domino's franchisees. For that reason, we must reject plaintiffs' proposed relevant market.
Of course, Domino's-approved pizza ingredients and supplies differ from other available ingredients and supplies in one crucial manner. Only Domino's-approved products may be used by Domino's franchisees without violating section 12.2 of Domino's standard franchise agreement. Plaintiffs suggest that this difference is sufficient by itself to create a relevant market in approved products. We disagree. The test for a relevant market is not commodities reasonably interchangeable by a particular plaintiff, but "commodities reasonably interchangeable by consumers for the same purposes." United States v. E.I. du Pont de Nemours & Co., 351 U.S. 377, 395, 76 S.Ct. 994, 1007, 100 L.Ed. 1264 (1956); Tunis Brothers, 952 F.2d at 722. A court making a relevant market determination looks not to the contractual restraints assumed by a particular plaintiff when determining whether a product is interchangeable, but to the uses to which the product is put by consumers in general. Thus, the relevant inquiry here is not whether a Domino's franchisee may reasonably use both approved or non-approved products interchangeably without triggering liability for breach of contract, but whether pizza makers in general might use such products interchangeably. Clearly, they could. Were we to adopt plaintiffs' position that contractual restraints render otherwise identical products non-interchangeable for purposes of relevant market definition, any exclusive dealing arrangement, output or requirement contract, or franchise tying agreement would support a claim for violation of antitrust laws. Perhaps for this reason, no court has defined a relevant product market with reference to the particular contractual restraints of the plaintiff.
Plaintiffs argue that the Supreme Court's decision defining relevant markets in Eastman Kodak Co. v. Image Technical Services, Inc., 504 U.S. 451, 112 S.Ct. 2072, 119 L.Ed.2d 265 (1992) requires a different outcome. We disagree.
In Kodak, the Supreme Court observed that a market is defined with reference to reasonable interchangeability. Kodak, 504 U.S. at 482, 112 S.Ct. at 2090. The Court held that the market for repair parts and services for Kodak photo-copiers was a valid relevant market because repair parts and services for Kodak machines are not interchangeable with the service and parts used to fix other copiers. Id. Plaintiffs suggest that Kodak supports its proposed relevant market because it indicates that in some circumstances, a single brand of a product or service may constitute a relevant market. This is correct where the commodity is unique, and therefore not interchangeable with other products. But here, it is uncontested that contractual restraints aside, the sauce, dough, and other products and ingredients approved for use by Domino's franchisees are interchangeable with other items available on the market.
Plaintiffs contend that they face information and switching costs that "lock them in" to their position as Domino's franchisees, making it economically impracticable for them to abandon the Domino's system and enter a different line of business. They argue that under Kodak, the fact that they are "locked in" supports their claim that an "aftermarket" for Domino's-approved supplies is a relevant market for antitrust purposes. We believe plaintiffs misread Kodak.
The defendants in Kodak argued that there was no relevant market in Kodak repair parts, even if they were unique and noninterchangeable with other repair parts, because of cross-elasticity of demand between parts prices and copier sales. If the price of parts were raised too high, defendants contended, it would decrease demand for copiers.
Kodak, we believe, held that a plaintiff's proposed relevant market in a unique and non-interchangeable derivative product or service cannot be defeated on summary judgment by a defendant's assertion that the proposed derivative market is cross-elastic with the primary market, if there is a reasonable possibility that the defendant's assertion about cross-elasticity is factually incorrect. But Kodak does not hold that the existence of information and switching costs alone, such as those faced by the Domino's franchisees,
Kodak is distinguishable from the present appeal in other important respects. The Kodak case arose out of concerns about unilateral changes in Kodak's parts and repairs policies. When the copiers were first sold, Kodak relied on purchasers to obtain service from independent service providers. Later, it chose to use its power over the market in unique replacement parts to squeeze the independent service providers out of the repair market and to force copier purchasers to obtain service directly from Kodak, at higher cost. Because this change in policy was not foreseen at the time of sale, buyers had no ability to calculate these higher costs at the time of purchase and incorporate them into their purchase decision. In contrast, plaintiffs here knew that Domino's Pizza retained significant power over their ability to purchase cheaper supplies from alternative sources because that authority was spelled out in detail in section 12.2 of the standard franchise agreement. Unlike the plaintiffs in Kodak, the Domino's franchisees could assess the potential costs and economic risks at the time they signed the franchise agreement. The franchise transaction between Domino's Pizza, Inc. and plaintiffs was subjected to competition at the pre-contract stage. That cannot be said of the conduct challenged in Kodak because it was not authorized by contract terms disclosed at the time of the original transaction. Kodak's sale of its product involved no contractual framework for continuing relations with the purchaser. But a franchise agreement regulating supplies, inspections, and quality standards structures an ongoing relationship between franchisor and franchisee designed to maintain good will. These differences between the Kodak transaction and franchise transactions are compelling.
Plaintiffs also contend that Virtual Maintenance, Inc. v. Prime Computer, Inc., 11 F.3d 660 (6th Cir.1993), supports their claim that the boundaries of a relevant market may be defined by contract. In Virtual Maintenance, Ford Motor Co. granted Prime Computer an exclusive right to market Ford designed software and software revisions that automobile design companies must use to design cars for Ford. Prime Computer sold the software revisions only in a package with uncompetitive hardware maintenance services. The Court of Appeals for the Sixth Circuit held that Prime could not legally exercise its monopoly power over software revisions to force customers to buy unwanted hardware maintenance contracts. Plaintiffs note that Prime's de facto monopoly power over software stemmed from a contract with Ford, which they argue implies that the boundaries of a market may be defined by contract. But Prime had a monopoly because it possessed a unique product that no one else sold. Since the product was unique, and not interchangeable with any other products, it constituted its own relevant market for antitrust purposes. By contrast, Domino's does not sell a unique product or service. Franchisees must buy Domino's-approved supplies and ingredients not because they are unique, but because they are obligated by contract to do so.
Were we to accept plaintiffs' relevant market, virtually all franchise tying agreements requiring the franchisee to purchase inputs such as ingredients and supplies from the franchisor would violate antitrust law. Courts and legal commentators have long recognized that franchise tying contracts are an essential and important aspect of the franchise form of business organization because they reduce agency costs and prevent franchisees from freeriding — offering products of
The purpose of the Sherman Act "is not to protect businesses from the working of the market; it is to protect the public from the failure of the market." Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 458, 113 S.Ct. 884, 891, 122 L.Ed.2d 247 (1993). Here, plaintiffs' acceptance of a franchise package that included purchase requirements and contractual restrictions is consistent with the existence of a competitive market in which franchises are valued, in part, according to the terms of the proposed franchise agreement and the availability of alternative franchise opportunities. Plaintiffs need not have become Domino's franchisees. If the contractual restrictions in section 12.2 of the general franchise agreement were viewed as overly burdensome or risky at the time they were proposed, plaintiffs could have purchased a different form of restaurant, or made some alternative investment.
For these reasons, we agree with the district court that plaintiffs have not pleaded a valid relevant market.
Plaintiffs' claim for attempt to monopolize fails for the same reasons. To prevail on an attempted monopolization claim under § 2 of the Sherman Act, "a plaintiff must prove that the defendant (1) engaged in predatory or anticompetitive conduct with (2) specific intent to monopolize and with (3) a dangerous probability of achieving monopoly power." Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 456, 113 S.Ct. 884, 890, 122 L.Ed.2d 247 (1993). Ideal Dairy Farms, Inc. v. John Labatt, Ltd., 90 F.3d 737, 750 (3d Cir.1996); Advo, Inc. v. Philadelphia Newspapers, Inc., 51 F.3d 1191, 1197 (3d Cir.1995). In order to determine whether there is a dangerous probability of monopolization, a court must inquire "into the relevant product and geographic market and the defendant's economic power in that market." Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 459, 113 S.Ct. 884, 892, 122 L.Ed.2d 247 (1993); Ideal Dairy Farms at 750; Pastore v. Bell Telephone Co. of Pennsylvania, 24 F.3d 508, 512 (3d Cir.1994).
Plaintiffs' attempted monopoly claim is predicated on the identical proposed relevant market underlying its monopoly claim: a market in the ingredients, supplies, and materials used by Domino's pizza stores. Because the products within this proposed market are interchangeable with other products outside of the proposed market, the claim was properly dismissed.
Plaintiffs allege exclusive dealing arrangements entered into by Domino's Pizza, Inc. have unreasonably restrained trade in violation of § 1 of the Sherman Act, 15 U.S.C. § 1. Section 1 of the Sherman Act provides: "Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several states, or with foreign nations, is declared to be illegal." 15 U.S.C. § 1.
To establish a section 1 violation for unreasonable restraint of trade, a plaintiff must prove (1) concerted action by the defendants; (2) that produced anti-competitive effects within the relevant product and geographic markets; (3) that the concerted action was illegal; and (4) that the plaintiff was injured as a proximate result of the concerted action. Mathews v. Lancaster General Hospital, 87 F.3d 624, 639 (3d Cir.1996); Orson Inc. v. Miramax Film Corp., 79 F.3d 1358, 1366 (3d Cir.1996); Petruzzi's IGA Supermarkets, Inc. v. Darling-Delaware Co., Inc., 998 F.2d 1224, 1229 (3d Cir.1993).
Plaintiffs allege defendant's actions caused anticompetitive effects within the market for ingredients and supplies used by Domino's pizza stores. Again, this claim fails because the products within the proposed market are interchangeable with products outside the proposed market.
Plaintiffs allege Domino's Pizza, Inc. imposed an unlawful tying arrangement by requiring franchisees to buy ingredients and supplies from them as a condition of obtaining Domino's Pizza fresh dough, in violation of § 1 of the Sherman Act, 15 U.S.C. § 1. "In a tying arrangement, the seller sells one item, known as the tying product, on the condition that the buyer also purchases another item, known as the tied product." Allen-Myland, Inc. v. International Business Machines Corp., 33 F.3d 194, 200 (3d Cir. 1994). "[T]he antitrust concern over tying arrangements is limited to those situations in which the seller can exploit its power in the market for the tying product to force buyers to purchase the tied product when they otherwise
Here, plaintiffs allege Domino's Pizza, Inc. used its power in the purported market for Domino's-approved dough to force plaintiffs to buy unwanted ingredients and supplies from them. This claim fails because the proposed tying market — the market in Domino's-approved dough — is not a relevant market for antitrust purposes. Domino's dough is reasonably interchangeable with other brands of pizza dough, and does not therefore constitute a relevant market of its own. All that distinguishes this dough from other brands is that a Domino's franchisee must use it or face a suit for breach of contract. As we have noted above, the particular contractual restraints assumed by a plaintiff are not sufficient by themselves to render interchangeable commodities non-interchangeable for purposes of relevant market definition. If Domino's had market power in the overall market for pizza dough and forced plaintiffs to purchase other unwanted ingredients to obtain dough, plaintiffs might possess a valid tying claim. But where the defendant's "power" to "force" plaintiffs to purchase the alleged tying product stems not from the market, but from plaintiffs' contractual agreement to purchase the tying product, no claim will lie. For that reason, plaintiffs' claim was properly dismissed.
Plaintiffs allege Domino's Pizza, Inc. imposed an unlawful tie-in arrangement by requiring franchisees to buy ingredients and supplies "as a condition of their continued enjoyment of rights and services under their Standard Franchise Agreement," in violation of § 1 of the Sherman Act, 15 U.S.C. § 1. This claim is meritless. Though plaintiffs complain of an illegal tie-in arrangement, they have failed to point to any particular tying product or service over which Domino's Pizza, Inc, has market power. Domino's Pizza's control over plaintiffs' "continued enjoyment of rights and services under their Standard Franchise Agreement" is not a "market." Rather, it is a function of Domino's contractual powers under the franchise agreement to terminate the participation of franchisees in the franchise system if they violate the agreement. Because plaintiffs failed to plead any relevant tying market, the claim was properly dismissed.
On appeal, the plaintiffs advance a new claim based on a different relevant market theory — that Domino's has a monopoly in a relevant market comprised of pizza franchise opportunities of the type that Domino's Pizza, Inc. offers. Plaintiffs raise this new theory, which the district court did not address, in the hopes of obtaining a remand.
Plaintiffs' argument that Domino's Pizza has monopolized a relevant market comprised of franchise opportunities of a particular sort was not raised or mentioned in their complaint, first amended complaint, memorandum of law in support of their motion for leave to file a second amended complaint, or in the "claims for relief" section of the proposed second amended complaint. When the district court denied plaintiffs leave to file a second amended complaint, on grounds of futility, it had no idea that plaintiffs intended or desired to raise such a claim. "This court has consistently held that it will not consider issues that are raised for the first time on appeal." Harris v. City of Philadelphia, 35 F.3d 840, 845 (3d Cir.1994).
Nonetheless, plaintiffs argue that this claim was raised before the district court. In support of this contention, they note that facts which might support such a claim were
Plaintiffs also contend the district court held that the availability of contract remedies prohibited recovery under antitrust laws. But this misstates the district court's holding. The district court held that Domino's Pizza's ability to block franchisees from purchasing ingredients from other sources stemmed from its exercise of contractual powers, not market power, and the remedy for this problem lies, if at all, under contract law. The court did not say that as a matter of law the availability of common law remedies prohibits recovery under an antitrust theory. We see no error.
The district court declined to exercise supplemental jurisdiction over the plaintiffs' remaining state law contract claims. This decision is committed to the sound discretion of the district court. Stehney v. Perry, 101 F.3d 925, 939 (3d Cir.1996); Growth Horizons, Inc. v. Delaware County, Pa., 983 F.2d 1277, 1284-85 (3d Cir.1993). Because all federal claims were correctly dismissed and dismissal of the remaining contract claims would not be unfair to the litigants or result in waste of judicial resources, we see no abuse of discretion.
For the foregoing reasons, we will affirm the judgment of the district court.
LAY, Circuit Judge, dissenting.
I respectfully dissent.
The district court, at the pleading stage, dismissed plaintiffs' complaint alleging violations under § 1 and § 2 of the Sherman Antitrust Act holding that plaintiffs failed to allege a relevant market. The issue is complex. Judge Scirica's opinion is logically reasoned. Our differences lie in the interpretation and application of the Supreme Court's recent opinion in Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 451, 112 S.Ct. 2072, 119 L.Ed.2d 265 (1992). I respectfully submit, for the reasons that follow, that the district court's opinion in this case rests on several incorrect hypotheses. To the extent that the majority adopts the district court's rationale, I dissent.
The district court rejected as a matter of law the plaintiffs' alleged relevant market, that of the derivative aftermarket for ingredients and supplies among Domino's Pizza, Inc. ("DPI")'s franchisees. The district court found that "[t]he economic power DPI possesses results not from the unique nature of
The plaintiffs allege that DPI has harmed the competitive process by "foreclos[ing] interbrand competition in the market for distributing approved Ingredients and Supplies to Domino's franchisees." The plaintiffs argue that DPI prevented a franchise cooperative and other distributors of ingredients and supplies from entering that market. By stopping any interbrand competition for ingredients and supplies for DPI franchisees, DPI, according to the pleadings, has excluded other potential distributors, and thereby preempted market forces from disciplining the sale of ingredients and supplies.
In adopting the district court's approach to relevant market definition, the majority reasons that all ingredients and supplies, whether or not approved by DPI, are interchangeable for making pizzas generally and therefore must be included within the relevant market. Kodak made a similar argument. As in Kodak, this ignores the reality that there are no substitutes for ingredients and supplies sold only by DPI. The majority's approach to the interchangeability concept is not faithful to the purpose of interchangeability analysis or the Supreme Court's understanding of market definition and power. The purpose of analyzing interchangeability is to find competing products which are reasonable substitutes and thereby prevent market power.
Information and Switching Costs
A closely related problem with the district court's opinion is its scant treatment of information and switching costs and their relevance to defining a valid relevant market. The plaintiffs argue that they have experienced information and switching costs which have prevented them from anticipating or responding to the price increases for ingredients and supplies from DPI. They argue that these information and switching costs create a "lock-in" which makes the aftermarket for DPI-approved ingredients and supplies the relevant market. Specifically, the imperfect information they proffer is that the franchisees "could not foresee that Domino's would not follow the policy represented in its Offering Circular and would, instead, commence excluding potential suppliers in order to foreclose competition in the aftermarket." They suggest switching costs arise from sunk costs in the franchise, limits on franchisees's ability to sell their franchise, and noncompetition covenants in the Standard Franchise Agreement.
An important part of the Supreme Court's decision in Kodak that the plaintiffs presented a triable claim was that "there is a question of fact whether information costs and switching costs foil the simple assumption that the equipment and service markets act as pure complements to one another." Kodak, 504 U.S. at 477, 112 S.Ct. at 2087. In fact, other circuit courts have held that the presence of these market imperfections was the crucial factor in Kodak, and that had Kodak's policy been known at the time businesses bought copiers from Kodak, the result would have been different.
In rejecting the plaintiffs' theory that the information and switching costs they face justify the alleged relevant market under Kodak, the majority states: "Kodak does not hold that the existence of information and switching costs alone, such as those faced by the Domino's franchisees, renders an otherwise invalid relevant market valid." Ante at 439 (footnotes omitted). Both the district court and the majority make a more difficult argument, that a necessary factor in Kodak was that the repair parts were "unique." They state that this uniqueness is what gave Kodak market power, and that the lack of this factor herein warrants rejecting the plaintiffs' alleged relevant market. The basis for not applying Kodak in this case lies in two arguments: (1) the aftermarket ingredients and supplies are not unique, and (2) the franchisees knew of the policy because it was contained in the franchise agreement.
The first argument fails as a matter of law. Whether the product is unique was not the key component of the Kodak opinion. Even if the Court was somehow preoccupied with the "uniqueness" of the Kodak replacement parts, the opinion itself as well as economic theory suggest that uniqueness was not a sine qua non in finding a triable claim of market power. Justice Blackmun describes the plaintiffs' allegations regarding the market realities, including the facts that Kodak had excluded independent parts distributors and service competition and then boosted prices above prior levels. After this discussion, Justice Blackmun states: "Under our prior precedents, this evidence would be sufficient to entitle respondents to a trial on their claim of market power." 504 U.S. at 465.
In Wilson v. Mobil Oil Corp., 940 F.Supp. 944 (E.D.La.1996), the district court analyzed the relevance of the Kodak opinion to the franchise context. The defendants argued that Kodak does not apply to the franchisor/franchisee relationship and cited the district court opinion from this case for support. Wilson, 940 F.Supp. at 951. The court rejected the argument that the lack of unique products, like Kodak parts, makes Kodak inapplicable to the franchise relationship:
Id. at 951-52. This analysis is compelling because it incorporates the understanding that a unique product does not itself confer market power and then analyzes the workings of the market in question.
The majority also distinguishes Virtual Maintenance, Inc. v. Prime Computer, Inc., 11 F.3d 660 (6th Cir.1993), on the basis of the importance of a unique product. In Virtual Maintenance, the Sixth Circuit was directed by the Supreme Court, in light of its opinion in Kodak, to reconsider the Sixth Circuits' earlier rejection of the plaintiff's antitrust claims. Upon reconsideration in light of Kodak, the court upheld the alleged relevant market for "the sale of software revisions and support of software necessary to do business with Ford Motor Company." Id. at 664 (citation omitted). In upholding the derivative aftermarket as a relevant market, the court held: "Like Kodak, Prime is able to exercise control over the sale of software support because of its exclusive distribution license from Ford, and Ford's requirement that its automotive design suppliers use the most current version of Prime's software support." Id. at 666. The majority in the present case rejects application of Virtual Maintenance to this case: "But Prime had a monopoly because it possessed a unique product that no one else sold. Since the product was unique, and not interchangeable with any other products, it constituted its own relevant market for antitrust purposes. By contrast, Domino's does not sell a unique product or service." Ante at 440-41. However, this misstates the facts; Prime's product was not unique. In fact, the plaintiffs in Virtual Maintenance made products that were reasonably interchangeable with that of Prime. Thus, this analysis slights the significance of Prime's distribution license from Ford and Ford's requirement that suppliers use the latest version of Prime's product. The Sixth Circuit analyzed the market realities, including evidence of price manipulation and an economic lock-in, and concluded that under Kodak the alleged relevant market was valid.
The Franchise Agreement
The second argument, that the alleged relevant market fails because franchisees knew of the policy, fails as a matter of fact. Adopting the district court's position, the majority states that the franchisees knew the potential costs and economic risks of DPI forcing them to buy ingredients and supplies only from DPI at supracompetitive prices because the franchise agreement gave DPI the power to do so. Ante at 440. This statement is illusory for two reasons. First, it ignores the information in the Offering Circulars: the plaintiffs are supposed to have anticipated these actions despite the fact that they are directly contrary to what DPI told them. The plaintiffs argue that the Offering Circulars DPI presented when they were considering a DPI franchise stated that there would be alternative suppliers for the ingredients and supplies. Second, it would be illogical for the franchisees to expect that the franchisor's right to sell ingredients and supplies coupled with its approval power in the franchise agreement, included for the very legitimate purpose of franchise quality control,
Concern is expressed about the possible impact on the franchise industry from adopting plaintiffs' theory of relevant market definition. However, plaintiffs still have to prove the arguments they present for the alleged relevant market, and seek more discovery in order to do so. There are many defenses, which have not been argued, which may be applicable in this case or other franchisor/franchisee antitrust disputes. My main concern with affirming the district court's opinion is the broad rejection of the basis for any antitrust claims by franchisees against franchisors in derivative aftermarkets. See Grimes, 65 Antitrust L.J. at 125-26 (describing several types of post-contract franchisor opportunism which may lead to antitrust claims if the franchisor has market power). There may be other problems, which are not before the court, with the plaintiffs' allegations of monopolization and illegal tying in the derivative aftermarkets by a franchisor, but the Supreme Court's clear direction in Kodak that information and switching costs are relevant to the ultimate determination of market power is honored by the district court only in the breach. The reality of the aftermarket for ingredients and supplies faced by these plaintiffs, according to the pleadings, is that alternative suppliers do not restrain DPI's ability to increase price, and information and switching costs lock-in the franchisees thereby preventing any competitive response to the price increases from DPI.
For the reasons set forth, I would reverse the district court's 12(b)(6) dismissal of plaintiffs' complaint.
It should also be noted Professor Klein recognized, contrary to his original thesis, that Kodak permits the recognition of market power in a derivative aftermarket "despite the absence of market power in the equipment market, by taking advantage of imperfectly informed consumers that become `locked-in' to their existing Kodak equipment." See Benjamin Klein, Market Power in Antitrust: Economic Analysis After Kodak, 3 Sup.Ct. Econ. Rev. 43, 48 (1993).