# Petition for Writ of Certiorari — Baughans, Inc. v. Domino's Pizza, Inc. > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386013_2033%3A1 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition for Writ of Certiorari - **Published:** January 1, 1998 - **Citation:** 523 U.S. 1059 ## Text ’ up Court, U.S, No. 97-_9 1184 ys 1998’ In The OFFICE OF THE CLERK Supreme Court of the United States October Term, 1997 a vv BAUGHANS, INC.; BLUE EARTH ENTERPRISES, INC.; KEVIN BORES; CHARLES F. BUCK; DAVIS PIZZA ENTER- PRISES, INC.; DIANE A. DAVIS; FISHER PIZZA, INC.; JAMES B. FISHER, JR.; JRW PIZZA, INC.; LUGENT PIZZA, INC.; JOSEPH J. LUGENT; SCALE PIZZA, INC.; SPRING GARDEN PIZZA, INC.; BRAD L. WALKER; JAMES R. WOOD; INTER- NATIONAL FRANCHISE ADVISORY COUNCIL, INC., Petitioners, V. DOMINO’S PIZZA, INC., Respondent. , 4 On Petition For A Writ Of Certiorari To The United States Court Of Appeals For The Third Circuit vv PETITION FOR A WRIT OF CERTIORARI é& vv SHERYL G. SNYDER 400 West Market Street Suite 3200 Louisville, Kentucky 40202-3363 (502) 589-5400 Counsel of Record Of Counsel: Barry D. HunNrTER Rosert W. Disert Amy D. CusBBaGE Brown, Topp & HeryvsurN PLLC 400 West Market Street Suite 3200 Louisville, Kentucky 40202 (502) 589-5400 ‘Attorneys for Petitioners QUESTION PRESENTED This case involves the derivative aftermarket in which franchisees of Domino’s Pizza, Inc. (“Domino's”) purchase the ingredients and supplies which they use to make Domino’s brand pizza. Although the Domino’s offering circular promised an aftermarket policed by price competition among several approved suppliers, Domino’s acquired a 90% share of this aftermarket. Using that market power to obtain exclusive dealing arrange- ments with customers and requirements contracts from suppliers, Domino’s changed its policy of approving alternate suppliers, and excluded a franchisee coopera- tive from competing with Domino’s in this aftermarket. The franchisees’ substantial investments in their fran- chises, coupled with noncompetition covenants, make switching to a different franchise financially impossible. Consequently, Domino’s continues to reap supracompeti- tive profits on the sale of approved ingredients and sup- plies. The sharply divided Court of Appeals immunized these acts and affirmed the Rule 12(b)(6) dismissal of the franchisees’ antitrust claim, which the District Court had entered without permitting any discovery at all. ‘ — This petition presents the following question: Whether the derivative aftermarket for ingredients and supplies which the franchisees use to make the prod- uct sold in the franchised business format, may be a relevant market for analyzing under the antitrust laws the franchisor’s willful acquisition and maintenance of a monopolistic share of that derivative aftermarket? ii TABLE OF CONTENTS Page QUBRTIONS PRMD. gk Ks eins i TASER GP MEPTIIe. .. 555s. css iv OPINIONS AND ORDERS BELOW ................ 1 CI oe se a 1 STATUTES (HVORFED © 5 i 2 STATEMENT OF THE CASE...............00000e0: 2 SUD SE TS ask a Wn kick occ dose ceks dexons 2 The Precontings Behe “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). App. 12 As we have noted, the district court held that none of the plaintiffs’ antitrust claims was cognizable under fed- eral law. We will analyze each claim in turn. A. 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 deter- mined 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 (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 bound- aries of a product market are determined by the reason- able 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 (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-elas- ticity of demand, or alleges a proposed relevant market that clearly does not encompass all interchangeable sub- stitute products even when all factual inferences are App. 13 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) (affirm- ing district court’s dismissal of claim for failure to plead a relevant market; proposed relevant market consisting of only one specific television channel defined too nar- rowly); Tower Air, Inc. v. Federal Exp. Corp., 956 F. Supp. 270 (E.D.N.Y. 1996) (“Because a relevant market includes all products that are reasonably interchangeable, plain- tiff’s failure to define its market by reference to the rule of reasonable interchangeability is, standing alone, valid grounds for dismissal.”); B.V. Optische Industrie De Oude Delft v. Hologic, Inc., 909 F. Supp. 162 (S.D.N.Y. 1995) (dismissal for failure to plead a valid relevant market; plaintiffs failed to define market in terms of reasonable interchangeability or explain rationale underlying narrow proposed market definition); Re-Alco Industries, Inc. v. Nat'l Center for Health Educ., Inc., 812 F. Supp. 387 (S.D.N.Y. 1993) (dismissal for failure to plead a valid relevant market; plaintiff failed to allege that specific health education product was unique or explain why product was not part of the larger market for health education materials); E. & G. Gabriel v. Gabriel Bros., Inc., No. 93 Civ. 0894, 1994 WL 369147 (S.D.N.Y. 1994) (dis- missal for failure to plead valid relevant market; pro- posed relevant market legally insufficient because it clearly contained varied items with no cross-elasticity of demand). - App. 14 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 mainte- nance 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 (1985) (quoting United States v. Grinnell Corp., 384 U.S. 563, 570-71 (1966)). See also Ideal Dairy Farms, Inc. v. John Labatt, Ltd., 90 F.3d 737, 749 (3d Cir. 1996) (same); Bon- jorno 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. Plain- tiffs 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., App. 15 504 U.S. 451, 482 (1992); Brown Shoe Co. v. U.S., 370 U.S. 294, 325 (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 assess- ing reasonable interchangeability, “[fJactors to be consid- ered include price, use, and qualities.” Tunis Brothers, 952 F.2d at 722. Reasonable interchangeability is also indi- cated by “cross-elasticity of demand between the product itself and substitutes for it.” Brown Shoe Co. v. U.S., 370 U.S. 294, 325 (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, the rise in the price of a good within a relevant product market would tend to create a greater demand for other like goods in that market.” Tunis Brothers, 952 F.2d at 722.6 © Cross-elasticity is a measure of reasonable interchangeability. As one treatise observes: “The economic tool most commonly referred to in determining what should be included in the market from which one then determines the defendant’s market share is cross-elasticity of demand. Cross- elasticity of demand is a measure of the substitutability of products from the point of view of buyers. More technically, it measures the responsiveness of the demand for one product to changes in the price of a different product.” E. Thomas Sullivan App. 16 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 mar- ket. Of course, Domino’s-approved pizza ingredients and supplies differ from other available ingredients and sup- plies 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 suffi- cient 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 particu- lar plaintiff, but “commodities reasonably interchange- able by consumers for the same purposes.” United States v. E.I. du Pont de Nemours & Co., 351 U.S. 377, 395 (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 deter- mining whether a product is interchangeable, but to the and Jeffrey L. Harrison, Understanding Antitrust and its Economic Implications 217 (1994). App. 17 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 agree- ment 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.7 Indeed, the only cases we have found involving similar claims rejected plaintiffs’ position as a matter of law. See United Farmers Agents Ass’n, Inc. v. Farmers Ins. Exchange, 89 F.3d 233 (5th Cir. 1996) (“Economic power derived from contractual arrangements such as franchises or in this case, the agents’ contract with Farmers’, has nothing to do with market power, ultimate consumers’ welfare, or anti- trust.”) (internal citation and quotation omitted), cert. denied, __ U.S. __, 117 S. Ct. 960 (1997); Ajir v. Exxon 7 In Mozart Co. v. Mercedes-Benz of North America, 833 F.2d 1342 (9th Cir. 1987), the Court of Appeals for the Ninth Circuit observed that market power exists in three circumstances: where the government has granted a seller a patent or similar monopoly, where the seller possesses a unique product, or where the seller possesses a high market share. Id. at 1345-1346. The court made no mention of contractual limitations as a source of market power. App. 18 Corp., No. C 93-20830, 1995 WL 429234, *3 (N.D. Ca.) (“Just because Exxon’s direct serve dealers may contrac- tually purchase gasoline from only one source — Exxon - does not mean that the relevant market is Exxon gas- oline”; the correct relevant market is all gasoline). See also Seagood Trading Corp. v. Jerrico, Inc., 924 F.2d 1555, 1570 n. 39 (11th Cir. 1991) (declining to reach issue but noting the district court rejected plaintiffs’ claim that proposed mar- ket for sales of supplies to Long John Silver’s fast food stores was a relevant market for antitrust purposes). Plaintiffs argue that the Supreme Court’s decision defining relevant markets in Eastman Kodak Co. v. Image Technical Services, Inc., 504 U.S. 451 (1992) requires a dif- ferent 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. 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 ingre- dients approved for use by Domino’s franchisees are interchangeable with other items available on the market. App. 19 Plaintiffs contend that they face information and switching costs that “lock them in” to their position as Domino’s franchisees, making it economically impractica- ble 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 plain- tiffs misread Kodak. The defendants in Kodak argued that there was no relevant market in Kodak repair parts, even if they were unique and non-interchangeable 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.* The Court held that whether there was cross-elasticity of demand between parts and copiers was, in this case, a factual question that could not be determined as a matter of law. The Court reached this conclusion because switching and information costs arise when one purchases an expensive piece of equipment like a copier. In some circumstances, these costs might create 8 In a typical antitrust case, plaintiffs assert that the products or services in their proposed relevant market are reasonably interchangeable because they possess positive cross- elasticity of demand: a rise in the price of one product in the market will increase demand for the other items in the market. By contrast, in Kodak the defendants argued that Kodak copier parts, though not reasonably interchangeable with the copiers themselves, were not a relevant market because of negative cross-elasticity between parts and copiers: an increase in the price of parts would, they argued, decrease demand for copiers using those parts. App. 20 an economic lock-in that could reduce or eliminate the cross-elasticity of demand between copiers and the repair parts for those 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 sum- mary judgment by a defendant's assertion that the pro- posed derivative market is cross-elastic with the primary market, if there is a reasonable possibility that the defen- dant’s assertion about cross-elasticity is factually incor- rect. But 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.!° In Kodak, the repair parts and service were unique and there was a question of fact about cross-elasticity. Judgment as a matter of law was therefore inappropriate. Here, it is uncontroverted that ° A franchisee considering exiting one franchise system faces information costs associated with researching alternative investment opportunities and switching costs stemming from the loss of invested funds that may not be recovered if it abandons its current business and start-up costs associated with the new venture. 10 If Kodak repair parts had not been unique, but rather, could be obtained from additional sources at a reasonable price, Kodak could not have forced copier purchasers to buy repair parts from Kodak. This would be true even if the copier purchasers faced information and switching costs that locked them into to use of Kodak copiers. This fact indicates that switching and information costs alone cannot create market power. Rather, it is the lack of a competitive market in the object to be purchased - for instance, a competitive market in Kodak parts — that gives a company market power. | App. 21 Domino’s approved supplies and ingredients are fully interchangeable in all relevant respects with other pizza supplies outside the proposed relevant market. For this reason, dismissal of the plaintiffs’ claim as a matter of law is appropriate. Kodak is distinguishabie 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 inde- pendent 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 con- trast, 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 trans- action. Kodak’s sale of its product involved no contrac- tual framework for continuing relations with the App. 22 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 compel- ling." 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 revi- sions 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 cus- tomers to buy unwanted hardware maintenance con- tracts. 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 interchange- able with any other products, it constituted its own rele- vant 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 11 See Alan Silberman, The Myths of Franchise “Market Power”, 65 Antitrust L.J. 181, 217 (1996). App. 23 not because they are unique, but because they are obli- gated by contract to do so. Were we to accept plaintiffs’ relevant market, vir- tually all franchise tying agreements requiring the fran- chisee 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 sub-standard qual- ity insufficient to maintain the reputational value of the franchise product while benefitting from the quality con- trol efforts of other actors in the franchise system.12 Fran- chising is a bedrock of the American economy. More than one third of all dollars spent in retailing transactions in the United States are paid to franchise outlets.13 We do not believe the antitrust laws were designed to erect a serious barrier to this form of business organization.'4 12 See Mozart Co. v. Mercedes-Benz of North America, Inc., 833 F.2d 1342, 1349-50 (9th Cir. 1987); Alan J. Meese, Antitrust Balancing in a (Near) Coasean World: The Case of Franchise Tying Contracts, 95 Mich. L.Rev. 111, 117-119 (1996); Warren S. Grimes, When Do Franchisors Have Market Power?, 65 Antitrust L.J. 105 145-47 (1996); Benjamin Klein and Lester F. Saft, The Law and Economics of Franchise Tying Contracts, 28 J.L. & Econ. 345, 346-48 (1985). 13 Warren S. Grimes, When Do Franchisors Have Market Power?, 65 Antitrust L.J. 105, 105 n.1 (1996). 14 See United States v. Arnold, Schwinn & Co., 388 U.S. 365, 387 (1967) (Stewart, J., concurring in part and dissenting in part) (“Indiscriminate invalidation of franchising arrangements would eliminate their creative contributions to competition and 9 np: sitaciaaall : | App. 24 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 (1993). Here, plaintiffs’ acceptance of a franchise package that included purchase requirements and contractual restrictions is con- sistent 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 avail- ability of alternative franchise opportunities. Plaintiffs need not have become Domino’s franchisees. If the con- tractual restrictions in section 12.2 of the general fran- chise 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.!5 They chose not to do so. Unlike the plaintiffs in Kodak, plaintiffs here must pur- chase products from Domino’s Pizza not because of Dom- ino’s market power over a unique product, but because they are bound by contract to do so. If Domino’s Pizza, Inc. acted unreasonably when, under the franchise agree- ment, it restricted plaintiffs’ ability to purchase supplies force suppliers to abandon franchising and integrate forward to the detriment of small business. In other words, we may inadvertently compel concentration by misguided zealousness.”) (internal quotations omitted). The majority’s opinion in Arnold was later overturned. See Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36 (1977). 15 As one scholar has noted, there are thousands of franchise opportunities available to investors and disclosure laws to help them make informed choices about these alternatives. George A. Hay, Is the Glass Half-Empty or Half-Full?: Reflections on the Kodak Case, 62 Antitrust L.J. 177, 188 (1993). App. 25 from other sources, plaintiffs’ remedy, if any, is in con- tract, not under the antitrust laws.16 For these reasons, we agree with the district court that plaintiffs have not pleaded a valid relevant market.!7 ¢.. Plaintiffs’ claim for attempt to monopolize fails for the same reasons. To prevail on an attempted monopoliz- ation claim under § 2 of the Sherman Act, “a plaintiff 16 The dissent contends Domino’s has acted ina “predatory way.” But plaintiffs may have a right to sue for breach of contract. 17 The reasoning adopted by the district court in this case has been criticized recently by two other district court decisions. See Wilson v. Mobil Oil Corp., 940 F. Supp. 944 (E.D. La. 1996); Collins v. International Dairy Queen, Inc., 939 F. Supp. 875 (M.D. Ga. 1996). In Wilson, the court disagreed with the district court's interpretation of Kodak, arguing that under Kodak information and switching costs alone, absent a unique product or service, may create a relevant market for antitrust Purposes. As noted above, we disagree with this interpretation, for the Supreme Court specifically found that the copier parts involved in the case were unique. The basis of the Collins court's criticism of the district court’s decision here is less clear, though it appears the court believed that the district court’s holding was too expansive. The Collins court apparently wished to reserve judgment whether some franchise tying arrangements might be deemed anti-competitive in the future. The approach taken by the district court in this case has received support in recent scholarly literature. See Alan J. Meese, Antitrust Balancing in a (Near) Coasean World: The Case of Franchise Tying Contracts, 95 Mich. L. Rev. 111, 128 (1996) (“economic theory suggests . . . that tying contracts that actually reduce free riding are unrelated to any exercise of market power”); Alan H. Silberman, The Myths of Franchise “Market Power”, 65 Antitrust L.J. 181 (1996). App. 26 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 (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 dan- gerous 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 (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 interchange- able with other products outside of the proposed market, the claim was properly dismissed. D. 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. App. 27 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-competi- tive 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. Laxicaster General Hospital, 87 F.3d 624, 639 (3d Cir. 1996); Orson Inc. v. Miramax Film Corp., 79 F.3d 1358. 1246 (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 anticom- petitive 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.18 18 Monopoly power under § 2 requires “something greater” than market power under § 1. Kodak, 504 U.S. at 481. This does not imply, however, that the analyses employed in the two types of cases to define relevant markets differ. In the past, we intimated that the relevant market analysis required under § 2 of the Sherman Act was “instructive” in § 1 cases, though perhaps not identical. See Tunis Bros., 952 F.2d at 724 n. 3. The Supreme Court and lower courts have consistently held that relevant markets under both sections are defined by the same two factors: reasonable interchangeability of use and cross- elasticities of demand. See, e.g., Allen-Myland, 33 F.3d at 201 and 201 n. 8 (applying Brown Shoe relevant market test of reasonable interchangeability and cross-elasticity of demand in § I tying case). In this case, we see no difference in the relevant market analyses required under the two provisions. —EEeee App. 28 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 arrange- ment, the seller sells one item, known as the tying prod- uct, 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 would not, thereby restraining com- petition in the tied product market.” Id. “Even if a seller has obtained a monopoly in the tying product legit- imately (as by obtaining a patent), courts have seen the expansion of that power to other product markets as illegitimate and competition suppressing.” Town Sound and Custom Tops, Inc. v. Chrysler Motors Corp., 959 F.2d 468, 475 (3d Cir. 1992). “The first inquiry in any § 1 tying case is whether the defendant has sufficient market power over the tying product, which requires a finding that two separate product markets exist and a determination pre- cisely what the tying and tied products markets are.” Allen-Myland, 33 F.3d at 200-201. 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- App. 29 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 distin- guishes 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 defini- tion. 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 plain- tiffs’ contractual agreement to purchase the tying prod- uct, no claim will lie. For that reason, plaintiffs’ claim was properly dismissed. F. 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 arrange- ment, 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 App. 30 Standard Franchise Agreement” is not a “market.” Rather, it is a function of Domino’s contractual powers under the franchise agreement to terminate the participa- tion of franchisees in the franchise system if they violate the agreement. Because plaintiffs failed to plead any rele- vant tying market, the claim was properly dismissed. G. 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 monop- olized a relevant market comprised of franchise oppor- tunities of a particular sort was not raised or mentioned in their complaint, first amended complaint, memoran- dum 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). App. 31 Nonetheless, plaintiffs argue that this claim was raised before the district court. In support of this conten- tion, they note that facts which might support such a claim were pleaded in paragraphs 60 and 65 of their proposed second amended complaint. Though we con- strue pleadings liberally, plaintiffs have a duty to make the district court aware that they intend to rely on a particular relevant market theory. This is particularly true in a complex case like this one, where plaintiffs bring multiple antitrust claims based on multiple and alterna- tive relevant market theories. See Pastore v. Bell Telephone Co. of Pennsylvania, 24 F.3d 508, 513 (3d Cir. 1994) (plain- tiff bound by relevant market theory raised before district court); TV Communications Network, Inc. v. Turner Network Television, Inc., 964 F.2d 1022, 1025 (10th Cir. 1992) (same); Edward J. Sweeney & Sons, Inc. v. Texaco, Inc., 637 F.2d 105, 117 (3d Cir. 1980) (same). We do not believe a fleeting reference in a proposed second amended complaint to facts that might support a proposed relevant market is sufficient, on its own, to preserve that relevant market theory for appellate review. See Frank v. Colt Industries, Inc., 910 F.2d 90, 100 (3d Cir. 1990) (issues not raised before district court are waived on appeal; fleeting refer- ence to issue before district court insufficient to preserve it for appellate review). “Particularly where important and complex issues of law are presented, a far more detailed exposition of argument is required to preserve an issue.” Id. at 100. Because this claim was not properly raised before the district court and is not properly before us, we decline to address it. See generally Salvation Army v. Department of Community Affairs of State of N.J., 919 F.2d 183, 196 (3d Cir. 1990) (“The matter of what questions App. 32 may be taken up and resolved for the first time on appeal is one left primarily to the discretion of the courts of appeals, to be exercised on the facts of each case.”). H. 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 contrac- tual 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 the- ory. We see no error. The district court declined to exercise supplemental jurisdiction over the plaintiffs’ remaining state law con- tract 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. App. 33 IV. For the foregoing reasons, we will affirm the judg- ment 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 (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 Dom- ino’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 product or from its market share in the fast food franchise business, but from the franchise agreement.”! ? The district court relied on “two influential commentators,” Benjamin Klein and Lester F. Saft, The Law and Economics of Franchise Tying Contracts, 28 J.L. & Econ. 345, 356 (1985) and two pre-Kodak cases, Mozart Co. v. Mercedes-Benz of App. 34 The plaintiffs allege that DPI has harmed the compet- itive 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, accord- ing to the pleadings, has excluded other potential distrib- utors, and thereby preempted market forces from disciplining the sale of ingredients and supplies. Interchangeability In adopting the district court’s approach to relevant market definition, the majority reasons that all ingre- dients and supplies, whether or not approved by DPI, are North America, Inc., 833 F.3d 1342 (9th Cir. 1987), and Tominaga v. Shepherd, 682 F. Supp. 1489 (C.D. Cal. 1988). The district court adopted the Ninth Circuit’s analysis from Mozart that an alleged economic-lock-in is irrelevant to the determination of a defendant’s market power. See Tominaga, 682 F. Supp. at 1494 (quoting Mozart, 833 F.2d at 1346-47). This reasoning is simply irreconcilable with the Supreme Court’s analysis of information and switching costs in Kodak. See Kodak, 504 U.S. at 473-77. 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). App. 35 interchangeable for making pizzas generally and there- fore 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 pur- pose of analyzing interchangeability is to find competing products which are reasonable substitutes and thereby prevent market power.? In Kodak, the question was whether the cross-elasticity of demand between the equipment market and the derivative aftermarkets for parts and service was sufficient to deprive Kodak of market power. Our question is whether the inter- changeability of, or cross-elasticity of demand between, DPI-approved ingredients and supplies and other ingre- dients and supplies is sufficient to make the alleged relevant market invalid. The issue, whether under the framework of market power as it was in Kodak, or as market definition as here, is whether competition from other providers of ingredients and supplies for pizzas will restrain the power of DPI over ingredients and sup- plies it sells to franchisees. See Kodak, 504 U.S. at 469 n.15. The plaintiffs allege not only that they are limited to buying ingredients and supplies from DPI, but also that information and switching costs prevented them from ? The basic definition of market power is “the power to raise prices above competitive levels without losing so many sales that the price increase is unprofitable.” Herbert Hovenkamp, Federal Antitrust Policy: The Law of Competition and its Practice § 3.1, at 79 (1994) (footnote omitted). App. 36 anticipating and being able to respond to DPI’s power to substantially raise price for the ingredients and supplies. They allege that competition from independent providers of ingredients and supplies does not restrain DPI’s power in the aftermarket for ingredients and supplies, and therefore ingredients and supplies not approved by DPI need not be included in the relevant market.? 3 The majority, in footnote 17, ante at 20, states that the district court’s approach has “received support in recent scholarly literature,” citing Alan J. Meese, Antitrust Balancing in a (Near) Coasean World: The Case of Franchise Tying Contracts, 95 Mich. L. Rev. 111, 128 (1996). However, Professor Meese does not argue that the approach taken is correct under current antitrust law. In fact, on page 126 he concedes that the Kodak decision “found that the existence of relationship-specific investments can confer ‘market power’ ”, and at 152-55 he states that “under current law” franchisors may have market power over derivative aftermarkets due to “lock-in” of the franchisees, and because of this he proposes a new framework for analyzing such claims. He argues that “the focus on market power and less restrictive alternatives, though perfectly natural given the partial equilibrium framework that dominates antitrust law and the premises that underlie tying jurisprudence,” does not properly apply to the franchise tying context. Id. at 128. Professor Meese argues that tying contracts that reduce free riding, a form of opportunistic behavior taken at the expense of the franchise system, should be prima facie legal. Whatever the value of Professor Meese’s argument, he presupposes that “under current law” from the Supreme Court the district court in this case may have erred. Id. at 152. In addition, it is not even clear that Professor Meese would find the plaintiffs’ allegations insufficient as a matter of law because they allege that DPI charged supracompetitive prices for the ingredients and supplies. See id. at 155. App. 37 Information and Switching Costs A closely related problem with the district court's opinion is its scant treatment of information and switch- ing 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 fran- chisees “could not foresee that Domino’s would not fol- low 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 fran- chise, 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 equip- ment and service markets act as pure complements to one another.” Kodak, 504 U.S. at 477. In fact, other circuit courts have held that the presence of these market imper- fections was the crucial factor in Kodak, and that had Kodak’s policy been known at the time businesses bought App. 38 copiers from Kodak, the result would have been differ- ent.4 See PSI Repair Servs., Inc. v. Honeywell, Inc., 104 F.3d 811, 820 (6th Cir. 1997) (“We likewise agree that the change in policy in Kodak was the crucial factor in the Court’s decision. By changing its policy after its cus- tomers were ‘locked in,’ Kodak took advantage of the fact that its customers lacked the information to anticipate this change.”), cert. denied, 1997 WL 195257; see also Digital Equip. Corp. v. Unig Digital Techs., Inc., 73 F.3d 756, 763 (7th Cir. 1996); Lee v. Life Ins. Co. of North America, 23 F.3d 14, 20 (1st Cir. 1994). Several commentators have described how the analysis from Kodak could mean that franchisors’ derivative aftermarkets may be relevant anti- trust markets. Meese, 95 Mich. L. Rev. at 152 (“Under current law, [post-contract market power] can arise once the cost to the franchisee of switching to a different franchise is significant. . ..”); Warren S. Grimes, When Do Franchisors Have Market Power? Antitrust Remedies For Franchisor Opportunism, 65 Antitrust L.J. 105, 112 (1996) (“A franchisor has market power if it can, without losing substantial sales, raise the price of a good or service sold to a franchisee above the level at which an equivalent good or service is available from other suppliers.”); see * This conclusion seems quite sensible. If Kodak customers knew about Kodak’s subsequent parts-and-service policy when they bought the copiers, or were not economically restricted from switching to other copiers, then Justice Scalia’s dissent, which assumes a perfect competition/perfect information world, should be right. Kodak is merely a concession to fact that markets do not always work perfectly, and sometimes, but not always, these imperfections can create sufficient market power to justify possible antitrust liability. App. 39 also Robert H. Lande, Chicago Takes It On The Chin: Imper- fect Information Could Play A Crucial Role In The Post-Kodak World, 62 Antitrust L.J. 193, 195 (1993) (“Another impor- tant lesson of Kodak is that imperfect information can be a crucial factor in defining relevant markets.”). But see Alan Silberman, The Myths of Franchise “Market Power”, 65 Anti- trust L.J. 181, 217 (1996). Uniqueness 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 16 (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 mar- ket 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 preoc- cupied with the “uniqueness” of the Kodak replacement parts, the opinion itself as well as economic theory sug- gest that uniqueness was not a sine qua non in finding a App. 40 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 465.5 The term unique seems to be important for antitrust purposes only in describing a product which has no reasonable substitutes.° The fact that Kodak parts were unique was important only because it limited the choices available to Kodak equipment owners seeking to replace worn out parts. The Court stated: “The relevant market for antitrust purposes is determined by the choices avail- able to Kodak equipment owners.” 504 U.S. at 481-82. Here, the plaintiffs’ choices are limited to DPI-approved ingredients and supplies, and therefore the alleged rele- vant market is identical in kind to that involved in Kodak. 5 In Market Power in Aftermarkets: Antitrust Policy and the Kodak Case, 40 U.C.L.A. L. Rev. 1447 (1993), Professor Hovenkamp argues that whether a product requires “unique” replacement parts is absolutely irrelevant to whether the manufacturer of that product has market power. He states that the portion of the Kodak opinion about unique parts is wrong, but that the evidence cited of increased prices was relevant to the question of market power. Id. at 1454-55. 6 For example, if someone patented a new material for bottling soft drinks, it would certainly be true that there were no other materials just like it. But, provided glass and plastic were still reasonable substitutes, the description “unique” would not be meaningful for antitrust analysis. App. 41 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/fran- chisee 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 prod- ucts, like Kodak parts, makes Kodak inapplicable to the franchise relationship: This Court is not convinced that a principled distinction can be drawn as a matter of law between the franchise context and the durable equipment market involved in Kodak. No facts have been adduced to indicate that a business format franchise cannot create a derivative aftermarket for the purchase and sale of prod- ucts that must be used in the franchise operation by the franchise network. Nor have facts been adduced that such an aftermarket could not be subject to the same economic dislocations that permitted market power to be possible in Kodak. The Kodak court did not purport to base its market power analysis solely on the fact that Kodak’s machines were unique, nor did it limit the application of its reasoning to durable equipment markets. If anything, Kodak cautions against making economic assumptions on a blank factual record. See Kodak, 504 U.S. at 466-67. Id. at 951-52. This analysis is compelling because it incor- porates the understanding that a unique product does not App. 42 itself confer market power and then analyzes the work- ings 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 recon- sider 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 after- market 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 7 The majority cities United Farmers Agents v. Farmers Ins. Exchange, 89 F.3d 233 (Sth Cir. 1996), cert. denied, 117 S. Ct. 960 (1997), for the argument that a derivative aftermarket defined by contractual restraints must be rejected. However, this case does not stand for the proposition for which it is cited. In United Farmers, the 5th Circuit does cite the statement from Professors Klein and Saft, that the economic power derived from contractual agreements has nothing to do with market power for purposes of antitrust. 89 F.3d at 236-7. However, the court proceeded to expressly address whether there were sufficient information and switching costs to justify invoking Kodak and upholding the plaintiffs’ alleged relevant market. The district court in Wilson addressed the importance of the United Farmers opinion and concluded: “If anything, this decision suggests that when parties seek to invoke Kodak, issues of information costs and switching costs must be addressed before tying claims can be rejected out of hand.” Wilson, 940 F. Supp. at 952. App. 43 suppliers use the most current version of Prime’s soft- ware 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 pur- poses. By contrast, Domino’s does not sell a unique prod- uct or service.” Ante at 18. However, this misstates the facts; Prime’s product was not unique. In fact, the plain- tiffs in Virtual Maintenance made products that were rea- sonably 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 Cir- cuit analyzed the market realities, including evidence of price manipulation and an economic lock-in, and con- cluded that under Kodak the alleged relevant market was valid. The Franchise Agreement The second argument, that the alleged relevant mar- ket 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 supracompeti- tive prices because the franchise agreement gave DPI the power to do so. Ante at 17. This statement is illusory for two reasons. First, it ignores the information in the Offer- ing Circulars: the plaintiffs are supposed to have antici- pated these actions despite the fact that they are directly App. 44 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 agree- ment, included for the very legitimate purpose of fran- chise quality control, would be applied in such an odd and predatory way.’ It seems hard for DPI to argue that the franchise agreement justifies its actions when all it’s doing is buying the ingredients and supplies, marking up the prices, and then reselling them to the franchisees.? Conclusion 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 rele- vant 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 / ® It is alleged the DPI’s Offering Circular represented to prospective franchisees that DPI would approve a sufficient number of suppliers to ensure a competitive aftermarket for ingredients and supplies, and that it would only utilize its approval power to maintain quality control. % Moreover, the majority’s analysis, that what the plaintiffs knew when they entered the franchise agreement is an important distinguishing factor, concedes that imperfect information is a crucial factor in determining relevant market definition. App. 45 franchisee antitrust disputes. My main concern with affirming the district court’s opinion is the broad rejec- tion 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 monop- olization 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 fran- chisees 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. A True Copy: Teste: Clerk of the United States Court of Appeals for the Third Circuit App. 46 Filed October 27, 1997 UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT No. 96-1638 QUEEN CITY PIZZA, INC.; THOMAS C. BOLGER; SCALE PIZZA, INC.; BAUGHANS, INC.; CHARLES F. BUCK; F.M. PIZZA, INC.; ROBERT S. BIGELOW; BLUE EARTH ENTERPRISES, INC.; KEVIN BORES; DAVIS PIZZA ENTERPRISES, INC.; DIANE A. DAVIS; FISHER PiZZA, INC.; JAMES B. FISHER, JR.; SEPCO, INC.; S&S PIZZA CORP.; G&L PIZZA CO.; STEPHEN D. GALLUP; LUGENT PIZZA, INC.; JOSEPH J. LUGENT; BILLIO’S PIZZA, INC.; WILLIAM J. MURTHA; SPRING GARDEN PIZZA, INC.; BRAD L. WALKER; JRW PIZZA, INC.; JAMES R. WOOD, Individually and as Class Representatives of a Class Consisting of All Present and Certain Former Domino’s Franchisees in the United States INTERNATIONAL FRANCHISE App. 47 Brad L. Walker; JRW Pizza, Inc.; James R. Wood; and International Franchise Advisory Council, Inc., Appellants (D.C. Civ. No. 95-cv-03777) SUR PETITION FOR REHEARING Present: SLOVITER, Chief Judge, BECKER, STAPLETON, MANSMANN, GREENBERG, SCIRICA, COWEN, NYGAARD, ALITO, ROTH, LEWIS, McKEE and LAY,* Circuit Judges ORDER The petition for rehearing filed by appellants in the above-entitled case having been submitted to the judges who participated in the decision of this Court and to all the other available circuit judges of the circuit in regular active service, and no judge who concurred in the deci- sion having asked for rehearing, and a majority of the circuit judges of the circuit in regular service not having voted for rehearing, the petition for rehearing by the panel and the Court in banc, is denied. Chief Judge * The Honorable Donald P. Lay. United States Circuit Judge for the Eighth Judicial Circuit, who sat by designation, as to panel rehearing only. App. 48 Sloviter and Judges Becker, Mansmann, Nygaard and Roth would grant rehearing. BY THE COURT, /s/ Anthony J. Scirica Circuit Judge Dated: October 27, 1997 BECKER, Circuit Judge, Statement Sur Denial of the Petition for Rehearing. The majority opinion’s interpretation of the Supreme Court’s decision in Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 451 (1992) has serious consequences for our future examination of franchisor/franchisee rela- tionships in the context of the antitrust laws. The majority states that Kodak does not hold that the existence of infor- mation and switching costs alone, such as those faced by the Domino’s franchisees, renders an otherwise invalid relevant market valid. Queen City Pizza, Inc., et al. v. Domino's Pizza, Inc., No. 96-1638. Slip op. at 16. Instead the majority believes that the ratio decidendi of the Kodak case is that the aftermarket commodity or service alleged to constitute a single brand market must be unique. Slip op. at 15-16. When this view is combined with the majority’s further holding that uniqueness must come from the nature of the product, not the franchise agreement, slip op. at 13-14, the result is that the franchisor/franchisee relationship is rendered virtually immune from antitrust scrutiny. App. 49 Judge Lay’s splendid dissenting opinion fully exposes the flaws in the majority’s relevant product mar- ket analysis, and I need not labor the point. I do, how- ever, write separately to elucidate a concern about the majority’s approach to antitrust policy in the franchising area that Judge Lay discusses only briefly, slip op. at 34-35, but which also strongly counsels that this case be heard en banc. I have long believed that “The way you come out in [a] case depends on how you go in.” See Larry Muko, Inc. v. Southwestern Pa. Bldg. & Constr. Trades Council, 609 F.2d 1368, 1377 (3d Cir. 1979) (Aldisert, J., dissenting). The majority’s holdings stem, I believe, from how it has gone into the case, i.e. from the fact that the majority has bought into the oft-heard paeans of praise for franchis- ing: Franchising is a bedrock of the American econ- omy. More than one third of all dollars spent in retailing transactions in the United States are paid to franchise outlets. We do not believe the antitrust laws were designed to erect a serious barrier to this form of business organization. Queen City Pizza, Inc., et al. v. Domino's Pizza, Inc., No. 96-1638. Slip op. at 18. It also has endorsed the question- able theory that the kind of tying arrangements involved here “are an essential and important aspect of the fran- chise form of business organization.” Id. But these theo- ries are also flawed. I believe that the approach endorsed by the majority might have been acceptable two decades ago, see Ungar v. Dunkin’ Donuts, 531 F.2d 1211 (3d Cir. 1976), when fran- chising was in its nascent, or at least its growing stage. App. 50 But now the food franchisors are leviathans, and I am underwhelmed by the suggestion that they may be per- mitted with impunity to perpetuate the type of arrange- ments pled in the complaint. These arrangements are clearly quite onerous to the average franchisee, a rela- tively small business person whose sunk costs in the franchise represent all or most of his or her assets and who lack the considerable resources necessary to switch or defranchise. Moreover, the amount of commerce that the franchisors are foreclosing in the tied product market - for the pizza sauce, flour and other supplies (for which non-franchisor dominated suppliers, be they individual firms or a franchise cooperative, could easily meet quality control specifications) is enormous. Additionally, to the extent that the plaintiffs have alleged coercion in connection with their acceptance of a burdensome tie, a Rule 12(b)(6) dismissal would be inconsistent with Ungar. Indeed, even if the majority's legal position is correct, it can only be sustained if it were an affirmance of a summary judgment on a full record, which is how the opinion seems to read. It can not stand under its actual procedural status - review of a Rule 12(b)(6) dismissal. For all the foregoing reasons, I dissent from the denial of rehearing en banc. A True Copy: Teste: Clerk of the United States Court of Appeais for the Third Circuit App. 51 IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA QUEEN CITY PIZZA, INC., et al., : Plaintiffs, v. : No. 95-CV-3777 DOMINO’S PIZZA, INC., Defendant. MEMORANDUM AND ORDER (Filed April 30, 1996) Joyner, J. The plaintiffs in this antitrust action are eleven owners and operators of Domino’s Pizza franchises located in Delaware, Florida, Illinois, Minnesota, Missis- sippi, New Hampshire, North Carolina, Pennsylvania and South Carolina, as well as International Franchise Advi- sory Council, Inc. (“IFAC”), a Michigan corporation whose members include approximately 40% of the Dom- ino’s Pizza franchisees located in the United States. IFAC brings this suit on its own behalf and on behalf of its member franchisees. On September 25, 1995, Plaintiffs filed an amended complaint against Domino’s Pizza, Inc. (“DPI”), also a Michigan corporation, seeking (1) declara- tory, injunctive and compensatory relief under §§ 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1 and 2; and (2) damages for DPI’s alleged breach of contract, breach of the implied covenant of good faith and fair dealing, and tortious interference with contractual relations. DPI has since filed the instant motion for summary judgment as to the claims App. 52 brought by IFAC in both its individual and representative capacities on the grounds that IFAC lacks standing. More- over, DPI contends that the breach of contract, breach of covenant of fair dealing, and antitrust claims should be dismissed for failure to state a claim on which relief can be granted. We conclude that the facts set forth in the amended complaint do not give rise to causes of action cognizable under the federal antitrust laws. Accordingly, we will dismiss the anti-trust claims pursuant to Fed. R. Civ. P. 12(b)(6) and dismiss the remaining claims in accor- dance with Rule 12(b)(1). FACTUAL BACKGROUND The facts giving rise to this action, as recited in the amended complaint, are as follows. The Domino’s pizza business is comprised of a network of stores that sell pizza and other food products largely on a take-out or delivery basis. The Domino’s network consists of approx- imately 700 stores owned and operated by DPI and 3,500 stores owned and operated by Domino’s franchisees. In order to acquire a Domino’s franchise, a franchisee must enter into a franchise agreement! with DPI, pursuant to which the franchisee is entitled to market food products under DPI’s business format and trade and service marks in exchange for franchise fees and royalties. The franchise 1 Plaintiffs state that while the terms of the franchise agreement have varied over the years, the material provisions of the franchise agreements at issue here are substantially the same for each of the franchisee plaintiffs. Thus, Plaintiffs refer in their complaint amended to a “Standard Franchise Agreement.” App. 53 agreement is crafted so as to maintain uniformity and consistency of quality throughout the network. Fran- chisees must therefore purchase ingredients, materials, and supplies from either DPI or a DPI-approved supplier. The relevant provision of the franchise agreement reads as follows: 12.2 Pizza Ingredients, Supplies and Materials. All pizza ingredients, beverage products, cook- ing materials, containers, packaging materials, other paper and plastic products, utensils, uni- forms, menus, forms, cleaning and sanitation materials and other supplies and materials used in the operation of the Store must conform to the specifications established by us [DPI] from time to time. You [franchisee] must use in the operation of the Store boxes, containers and other paper products imprinted with the Marks as prescribed from time to time by us. We 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. Any ingredient, supply or mate- rial not previously approved by us as conform- ing to our specifications and quality standards must be submitted for examination and/or test- ing prior to use. We reserve the right from time to time to examine the facilities of any approved supplier or distributor, including the commiss- ary, if any, operated by you, and to conduct reasonable testing and inspection of ingredients, materials or supplies to determine whether they meet our standards and specifications. We also reserve the right to charge fees for testing and evaluating proposed suppliers or distributors and examining or inspecting operations and to App. 54 impose reasonable limitations on the number of approved suppliers of any product. Approval of a supplier or distributor may be conditioned on requirements relating to frequency of delivery, standards of service including prompt attention to complaints and the ability to service and sup- ply stores within areas designated by us. Moreover, DPI is required “to exercise reasonable judg- ment with respect to all determinations to be made by us under the terms of [the franchise agreement].” Franchise Agreement § 22.9. The franchisees purchase the great majority of the required ingredients and supplies from Domino’s Pizza Distribution Division (“DPDD”), formerly a subsidiary and now a division of DPI. The nub of the amended complaint is that DPI employs the above-quoted fran- chise agreement provisions unreasonably, so that fran- chisees are effectively precluded from purchasing ingredients and supplies in a competitive market. For example, Plaintiffs contend that when they initiated efforts to produce fresh pizza dough at the store level, DPI arbitrarily increased the processing fees and altered the standards and inspection practices so as to eliminate any savings the franchisees may have realized, in an effort to protect DPDD from competition. Moreover, the franchisees producing fresh dough in approved commiss- aries were prohibited by DPI from selling the dough to other franchisees, even though the dough-producing franchisees could deliver the dough to other franchisees at a cost 25% to 40% less than DPDD’s price. In 1993, IFAC began to pursue alternative means of acquiring ingredients and supplies at more competitive | App. 55 prices for its member franchisees. To that end, IFAC entered into a purchasing affiliation agreement (“pur- chasing agreement”) with FoodService Purchasing Coop- erative, Inc. (“FPC”) on June 15, 1994. Pursuant to the purchasing agreement, FPC was appointed to act as pur- chasing agent for the IFAC-member franchisees and to develop a cooperative purchasing plan for franchisees seeking to purchase ingredients and supplies from a source other than DPDD. Plaintiffs contend that once DPI became aware of IFAC’s efforts, it initiated a campaign to prevent FPC from establishing a cooperative purchasing program that would compete with DPDD. Thus, when IFAC and FPC requested that DPI provide specifications so that FPC could solicit bids from potential suppliers, DPI eventually issued specifications so vague that sup- pliers could not furnish FPC with meaningful price quo- tations. Further, Plaintiffs assert that in response to IFAC and FPC’s efforts, DPI entered into exclusive dealing arrangements with a broad base of Domino’s franchisees for the purpose of denying FPC a pool of purchasers sufficiently large to make the alternative purchasing effort feasible. Plaintiffs allege that DPI has engaged in other anti- competitive conduct for the purpose of shielding DPDD from competition. DPI’s alleged activity includes: (1) entering into an exclusive dealing arrangement with the only approved supplier of deep-dish pizza crusts, thereby effectively preventing FPC from arranging for the pur- chase of this ingredient from an alternative source; (2) effectively denying FPC access to approved pizza sauce suppliers and refusing to consider approving a low-cost alternative supplier for many months, even though the App. 56 alternative supplier’s product met DPI’s standards for quality; and (3) commencing a “predatory pricing” effort, whereby DPI lowered prices on most ingredients and supplies to a level competitive with the prices FPC was expected to offer, while raising prices on fresh dough, an ingredient over which DPI maintained almost exclusive control, and tying the purchase of fresh dough to the purchase of other ingredients and supplies. Finally, Plaintiffs contend that when it solicited them to become Domino's franchisees, DPI represented that DPDD was but one of a number of approved suppliers and that the terms of the franchise agreement would provide for a competitive purchasing environment. They claim that DPI reneged on this promise in the manner described above, forcing them to pay an additional $3,000 to $10,000 per store annually for ingredients and sup- plies. Moreover, Plaintiffs allege that they are effectively “locked in” to the franchises in view of their investments, and since DPI must approve any sale of a franchise and applies an unreasonably restrictive approval policy. Thus, any franchisee desiring to switch its investment to an alternative franchise system is likely to incur a significant financial loss. ANALYSIS A. The Antitrust Claims As noted above, Plaintiffs seek injunctive relief and treble damages as a result of DPI’s alleged violation of §§ 1 and 2 of the Sherman Act. In Count One, Plaintiffs contend that the facts set forth in the amended complaint constitute an unreasonable restraint on trade and a tying ee App. 57 arrangement that is per se unlawful under § 1. Plaintiffs allege in Count Two that DPI has unlawfully monopo- lized the relevant market in violation of § 2. DPI contends that the antitrust claims should be dismissed pursuant to Rule 12(b)(6). Specifically, DPI argues that the amended complaint must be dismissed in light of Plaintiffs’ failure to allege a relevant product market, and that to the extent Plaintiffs contend that the relevant market is the market for ingredients and supplies among Domino’s fran- chisees, such a market definition must be rejected as a matter of law. We turn now to evaluate these arguments. 1. Standard of Review We first address DPI’s argument that the antitrust claims should be dismissed on the grounds that Piaintiffs have failed to allege a relevant market. DPI has thus challenged the legal sufficiency of Plaintiffs’ antitrust claim. Accordingly, we must examine whether Plaintiffs have set forth facts which state a claim as a matter of law. Taha v. I.N.S., 828 F. Supp. 362, 364 (E.D. Pa. 1993). In so doing, the court must accept as true all of the factual averments in the complaint and extend to the plaintiff the benefit of every favorable inference that can be drawn from those allegations. Schrob v. Catterson, 948 F.2d 1402, 1405 (3d Cir. 1991); Markowitz v. Northeast Lane Co., 906 F.2d 100, 103 (3d Cir. 1990). Thus, a complaint is properly dismissed only if it appears certain that the plaintiff cannot prove any set of facts in support of his claim which would entitle him to relief. Ransom v. Marrazzo, 848 F.2d 398, 401 (3d Cir. 1988). App. 58 2. Relevant Market As stated above, Plaintiffs allege that DPI’s conduct amounts to both an unreasonable restraint of trade and an unlawful tying arrangement under § 1. Section 1 pro- vides that “[e]very 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. A vertical non-price restraint, such as the one at issue in the instant case, is governed by the rule of reason, which requires an examination of whether the restraint had an anti-competi- tive effect in the relevant market. Muenster Butane, Inc. v. Stewart Co., 651 F.2d 292, 295 (5th Cir. 1981) (citing Conti- nental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 58-59 (1977)). A plaintiff contending that defendant employed an unlawful tying arrangement must likewise identify the relevant market. A tying arrangement is an agreement by one party to sell a product (the tying product) to a buyer, but only on the condition that the buyer also purchase from the seller a different product (the tied product). Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 451, 461 (1992); Advo, Inc. v. Philadelphia Newspapers, Inc., 854 F. Supp. 367, 377 (E.D. Pa. 1994), aff'd, 51 F.3d 1191 (3d Cir. 1995). The “essential characteristic” of a tying arrangement violative of § 1 “lies in the seller’s exploita- tion of its control over the tying product to force the buyer into the purchase of a tied product that the buyer either did not want at all, or might have preferred to purchase elsewhere on different terms.” Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 12 (1984). Thus, there cen be no Sherman Act violation in the absence of the App. 59 seller’s ability to “force” the buyer to act in a manner different from the way he would behave in a competitive market. Id. at 13-14. This ability is termed “market power” in the tying market — the ability of the seller to raise price and restrict output. Kodak, 504 U.S at 464. Plaintiffs further contend that DPI is liable under § 2 for its monopolization or attempted monopolization of the relevant market. Section 2 sanetions 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.” 15 U.S.C. § 2. In order to sustain a claim for monopolization, a plaintiff must show that the defendant (1) possessed monopoly power in the relevant product and geographic markets; and (2) acquired and maintained that power wilfully, as distin- guished from having developed its business as a result of a superior product, business acumen, or historic accident. Borough of Lansdale v. Philadelphia Elec. Co., 692 F.2d 307, 311i (1982) (citing United States v. Grinnel Corp., 384 U.S. 563, 570-71 (1966)). As for attempted monopolization, a plaintiff must show (1) that defendant has engaged in predatory or anti-competitive conduct with (2) a specific intent to monopolize and (3) a dangerous probability of achieving monopoly power, an inquiry requiring an examination of the relevant market and the defendant's ability to affect competition in that market. Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 456 (1993). Monop- oly power, like market power in the § 1 context, is gener- ally defined as the ability to control price and exclude competition within the relevant product and geographic markets, and is usually determined by examining the App. 60 extent of the alleged monopolist’s market share. Pennsyl- vania Dental Ass'n v. Medical Serv. Ass'n of Pennsylvania, 745 F.2d 248, 260 (3d Cir. 1984), cert. denied, 471 U.S. 1016 (1985); Lansdale, 692 F.2d at 313. Thus, 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. Brader v. Allegheny General Hosp., 64 F.3d 869, 877 (3d Cir. 1995); Tunis Bros. Co., Inc. v. Ford Motor Co., 952 F.2d 715, 726 (3d Cir. 1991), cert. denied, 505 U.S. 1221 (1992).2 The relevant product market is defined as “those ‘commodi- ties reasonably interchangeable by consumers for the same purposes.’” Tunis Bros., 952 F.2d at 722 (quoting United States v. E.I. du Pont de Nemours & Co., 351 U.S. 377, 395 (1956)). In determining the relevant product market, the court examines the cross-elasticity of demand; that is, the court considers, in light of the product’s characteris- tics and price, the extent to which a rise in price of the product creates a rise in demand for like products in that market. Id. The relevant geographic market consists of the area in which customers would look to purchase the product. Id. at 726. 2 This is not to say that the degree of the defendant's dominance of the relevant market that would trigger liability under § 1 would necessarily raise a § 2 claim. The Supreme Court has long held that “[mJonopoly power under § 2 requires, of course, something greater than market power under § 1.” Kodak, 504 U.S. at 481 (citing Fortner Enterprises, Inc. v. United States Steel Corp., 394 U.S. 495, 502 (1969)). App. 61 While they do not explicitly identify the relevant product and geographic markets in their amended com- plaint, 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. Further, Plaintiffs argue that the franchisees are “consumers” for purposes of this litigation, and that the relevant geographic market encompasses the entire nation. Thus, in support of its tying claim, for example, Plaintiffs assert that DPI enjoys monopoly power over pizza dough, and uses it both to exclude other potential sellers from the market and to charge super-competitive prices for other ingredients and supplies. Moreover, Plaintiffs allege that DPI possesses monopoly power in the market comprised of Domino’s franchisees, and that it improperly uses that power to exclude DPDD’s poten- tial competitors from the market. For its part, DPI contends that as a matter of law, a relevant market cannot arise from a franchise agreement. Thus, this case presents the issue of whether the antitrust laws are implicated where a franchisor dominates a “mar- ket” created by virtue of franchise agreements. In the past, courts have concluded that an illegal tying arrange- ment can arise in the franchise context where franchisees are compelled to purchase equipment or other tied prod- ucts from the franchisor in order to obtain the franchise. Photovest Corp. v. Fotomat Corp., 606 F.2d 704, 722 (7th Cir. 1979), cert. denied, 445 U.S. 917 (1980); Northern v. McGraw-Edison Co., 542 F.2d 1336, 1345 (8th Cir. 1976), cert. denied, 429 U.S. 1097 (1977); Siegel v. Chicken Delight, 448 F.2d 43, 49 (9th Cir. 1971), cert. denied, 405 U.S. 955 App. 62 (1972). In these cases, the courts concluded that the defendants possessed market power as a result of the unique nature of the franchise’s trademark, a basis for market power that has since been discredited. See Mozart Co. v. Mercedes-Benz of N. Am., Inc., 833 F.2d 1342, 1346 (9th Cir. 1987), cert. denied, 488 U.S. 870 (1988) (“[W]hile many individual purchasers of automobiles undoubtedly regard a Mercedes as unique, it is by no means clear that franchisees (dealers) view the Mercedes in the same man- ner. To them it is an article that is purchased at wholesale and sold at retail.”). Still, these cases illustrate the key distinction to be drawn in defining market power in the franchise context: that between a franchisor’s pre- contractual market power versus the post-contractual economic power it possesses under the contract. Two influential commentators describe the distinction as fol- lows: The important economic distinction that must be made is between pre- and postcontract eco- nomic power. Precontract, competition among franchisors (such as McDonald’s or Kentucky Fried Chicken) to sign up franchisees prevents {a single franchisor] from exercising any eco- nomic power in setting contract terms with potential franchisees. [The franchisor], although it possesses a trademark, does not possess any economic power in the market in which it oper- ates — the fast food franchising (or perhaps, more generally, the franchising) market. Postcontract, on the other hand, a franchisor can use the threat of termination to “hold up” a franchisee that has made a specific investment in the marketing arrangement. However, this potential economic power has nothing to do with App. 63 market power, ultimate consumers’ welfare, or anti- trust. Benjamin Klein & Lester F. Saft, The Law and Economics of Franchise Tying Contracts, 28 J. Law & Econ. 345, 356 (1985) (emphasis added). Thus, market power in the pre- contractual setting derives not from the trademark or from the franchisor’s power to award a franchise, but instead focuses on the product, and is defined by the extent to which the franchisor is able to force a potential franchisee to purchase a tied product rather than acquire a franchise to sell a competing brand. Mozart, 833 F.2d at 1346. As we noted above, Plaintiffs here do not allege that DPI enjoyed market power in the fast food franchise business such that it could force potential franchisees to purchase a tied product. Instead, they contend that DPI has employed its contractual power to coerce existing franchisees to purchase ingredients and supplies from DPDD. Accordingly, they assert that the relevant market is the market for ingredients and supplies among Dom- ino’s franchisees. The court in Tominaga v. Shepherd, 682 F. Supp. 1489 (C.D. Cal. 1988), rejected just such an attempt to define the relevant market in the post-contractual con- text when presented with facts similar to the ones at issue here: Plaintiff’s implicit argument is that the relevant market is the “Pizza Man” franchising market. This market definition is erroneous as a matter of law. No reasonable argument can be made that Pizza Man possesses the power to coerce potential franchisees to purchase the tied prod- uct rather than sell a different brand of fast food App. 64 (the tying product). The analysis must take place at the “pre-contract” stage. Klein & Saft, supra, at 356. Plaintiff, however, engages in “post-contract” analysis concerning defendant's power over already existing franchises by virtue of their “sunk costs.” This argument was explic- itly rejected in Mozart. Id. at 1494. We conclude that such reasoning applies here and compels the dismissal of Plaintiffs’ antitrust claims. The economic power DPI possesses results not from the unique nature of the product or from its market share in the fast food franchise business, but from the franchise agreement. And as recognized above, allegations of wrongdoing in the postcontractual setting implicate prin- ciples of contract, and are not the concern of the antitrust laws. Id. at 1495 & n.4. Thus, we must conclude that the relevant market definition Plaintiffs urge in support of their antitrust claims — one that encompasses the market for ingredients and supplies among Domino’s franchisees ~ fails as a matter of law. See Ajir v. Exxon Corp., No. C 93-20830, 1995 WL 429234, at *3 (N.D. Cal. July 7, 1995) (“Just because Exxon’s direct serve dealers may contrac- tually purchase gasoline from only one source — Exxon - does not mean that the relevant market is Exxon gas- oline.”). Moreover, Plaintiffs have failed to allege, and most probably could not allege, that DPI possesses mar- ket power such that it could coerce potential franchisees to purchase tied goods against their will. Accordingly, since Plaintiffs have failed to set forth the relevant mar- ket, they have failed to plead claims on which relief under the antitrust laws could be granted. | | App. 65 In their effort to defeat the instant motion, Plaintiffs cite the Supreme Court’s Kodak opinion and argue that (1) a single brand may constitute a market for antitrust pur- poses and (2) the definition of the relevant market can occur only after the development of a factual record. Such arguments, based upon the mistaken notion that the Kodak opinion applies to the instant case, demonstrate the fundamental flaw in Plaintiffs’ theory of antitrust lia- bility. In Kodak, the plaintiff-repair service organizations alleged that Kodak refused to provide them with spe- cialized replacement parts, thereby forcing Kodak equip- ment owners to use ‘only Kodak’s repair services. In allowing the plaintiffs’ claims to go forward, the Court rejected Kodak’s argument that a single brand or product can never be a relevant market for antitrust purposes, holding that, under certain circumstances, “one brand of a product can constitute a separate market.” Kodak, 504 U.S. at 482. Unlike the present case, however, the service market for Kodak equipment arose due to the unique nature of the Kodak machines, and not by virtue of a valid and binding franchise agreement. And as we have concluded above, antitrust claims predicated upon a “rel- evant market” defined by the bounds of a franchise agreement are not cognizable. Thus, the amended com- plaint fails not because the purported relevant market arises from a single brand of a product, but because the “market” was created by virtue of the franchise agree- ments Plaintiffs freely entered. More importantly, the Kodak Court noted that the relevant market inquiry primarily considers the choices available to the ultimate consumer: “The relevant market App. 66 for antitrust purposes is determined by the choices avail- able to Kodak equipment owners.” Id. at 481-82. Such an approach recognizes that the antitrust laws were enacted not to bolster individual firms, but “to protect the com- petitive process in order to help individual consumers by bringing them the benefits of low, economically efficient prices, efficient production methods and innovation.” Grappone, Inc. v. Subaru of New England, Inc., 858 F.2d 792, 794 (1st Cir. 1988). Indeed, our Court of Appeals has held that no antitrust action may lie in the absence of harm to competition. See Tunis Bros, 952 F.2d at 728 (ordering judgment n.o.v. in favor of defendants on the grounds that plaintiffs failed to show injury to competition). Plaintiffs’ route around this bedrock premise of anti- trust law is to assert in their memorandum that they are consumers, so that the relevant market should be defined with respect to the choices available to them. This asser- tion is belied by the amended complaint, of course, which reveals that Plaintiffs are in fact competitors “in the highly competitive retail food service market” who sell food products to consumers. Am. Compl. { 25. As for competition generally, the raison d'etre of antitrust law, Plaintiffs have failed to assert that any harm has resulted from DPI’s alleged conduct. There are no allegations in the amended complaint relating to higher prices or restricted choice at the consumer level. Indeed, while Plaintiffs allege that DPI’s actions have caused the fran- chisees to pay an additional $3,000 to $10,000 for ingre- dients and supplies per year, they concede in their memorandum that competition generally has not been harmed. Plaintiffs’ theory of antitrust liability, in their words, “does not follow a single pizza to its ultimate App. 67 consumer.” Pls.” Memo. at 21. And as the axiom goes, antitrust laws exist to protect competition, not competi- tors. Thus, for this reason as well, Plaintiffs’ antitrust claims must be dismissed. B. The Pendent Claims Having determined that Plaintiffs’ federal antitrust claims must be dismissed, we now conclude that the pendent claims should be dismissed pursuant to Rule 12(b)(1) for want of jurisdiction over the subject matter. First, since both DPI and IFAC are citizens of Michigan, we cannot exercise our diversity jurisdiction over the amended complaint. 28 U.S.C. § 1332. See Stanley v. Exxon Corp., 824 F. Supp. 52, 53 (E.D. Pa. 1993) (“complete” diversity is required before court may exercise jurisdic- tion pursuant to § 1332). Moreover, although Plaintiffs have brought a claim under the Declaratory Judgment Act, 28 U.S.C. § 1332, that statute merely provides a means of relief for aggrieved persons, and does not itself confer jurisdiction. Gruntal & Co., Inc. v. Steinberg, 854 F. Supp. 324, 332 (D. N.J.), aff'd without op., 46 F.3d 1116 (3d Cir. 1994). Finally, we are aware of no “special circum- stances” that would justify the invocation of our supple- mental jurisdiction. Shaffer v. Board of School Directors, 730 F.2d 910, 912 (3d Cir. 1984). Accordingly, Plaintiffs’ pen- dent claims will be dismissed without prejudice. See TM Marketing, Inc. v. Art & Antiques Assocs., L.P., 803 F. Supp. 994, 997 (D. N.J. 1992) (“when it becomes apparent that App. 68 subject matter jurisdiction is lacking, the court must dis- miss the action regardless of the stage of the litigation.”).5 CONCLUSION Since the relevant market on which Plaintiffs’ anti- trust claims are premised — that created by the power DPI exercises pursuant to the franchise agreement - cannot support those claims as a matter of law, and because Plaintiffs have alleged that harm has been visited only upon themselves and not upon competition generally, Plaintiffs have failed to state claims on which relief under the antitrust laws can be granted. Moreover, Plaintiffs’ remaining claims must be dismissed pursuant to Rule 12(b)(1). In view of the conclusions we have reached above, we need not address the remaining issues raised in DPI’s motion. An appropriate order follows. 3 We will allow Plaintiffs to file a second amended complaint that cures the amended complaint’s jurisdictional defects within fourteen days of the date of the attached order. App. 69 IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA QUEEN CITY PIZZA, INC., et al., : Plaintiffs, v. DOMINO’S PIZZA, INC., Defendant. No. 95-CV-3777 ORDER AND NOW, this 30th day of April, 1996, upon con- sideration of Defendant’s Motion for Partial Summary Judgment and to Dismiss, and the Response thereto, it is hereby ORDERED that said Motion is GRANTED in part as follows: 1. Counts One, Two, and Three of Plaintiffs’ Amended Complaint are hereby DISMISSED WITH PRE]J- UDICE; 2. Count Seven of Plaintiffs’ Amended Complaint is hereby DISMISSED WITH PREJUDICE to the extent it seeks declaratory relief under federal antitrust laws; and 3. The remaining counts of Plaintiffs’ Amended Complaint are hereby DISMISSED WITHOUT PREJU- DICE. Plaintiffs may file a Second Amended Complaint within fourteen (14) days of the date of this Order. BY THE COURT: /s/ J. Curtis Joyner, J. - Curtis Joyner, J. App. 70 Exhibit 1 IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA QUEEN CITY PIZZA, INC., et al., : Plaintiffs, No. 95-CV-3777 v. DOMINO’S PIZZA, INC., ’ Defendant. ORDER AND NOW, this 12th day of July, 1996, upon consid- eration of Plaintiffs’ Motion for Leave to File Second Amended Complaint, Defendant’s Response, and Plain- tiffs’ Reply thereto, it is hereby ORDERED that said Motion is DENIED. The decision to grant or deny a motion for leave to amend a pleading rests within the trial court’s discretion. Dole v. Arco Chem. Co., 921 F.2d 484, 486 (3d Cir. 1990); Mowze v. Jones & Laughlin Steel Corp., 750 F.2d 1208, 1212 (3d Cir. 1984). Pursuant to the Federal Rules, the general rule is that “leave shall be freely given when justice so requires.” Fed. R. Civ. P. 15(a). Thus, Rule 15(a) “embodies a liberal approach to amendment,” Dole, 921 F.2d at 486-87; see Long v. Lipkins, 96 F.R.D. 234, 234 (E.D. Pa. 1983) (noting that a court’s Rule 15(a) discretion “should be generally exercised in favor of Amendment”). As our Court of Appeals has noted, however, the policy favoring liberal amendment of a pleading is not unbounded. Dole, 921 F.2d at 487. Indeed, the court App. 71 should deny a Rule 15(a) motion if the proposed amended complaint would not survive a motion to dis- miss. Cundlach v. Reinstein, 924 F. Supp. 684, 690 (E.D. Pa. 1996). On April 20, 1996, this Court issued a Memorandum and Order dismissing Plaintiffs’ federal antitrust claims pursuant to Fed. R. Civ. P. 12(b)(6) and dismissing with- out prejudice Plaintiffs’ pendant claims pursuant to Rule 12(b)(1). Queen City Pizza, Inc. v. Domino's Pizza, Inc., 922 F. Supp. 1055 (E.D. Pa. 1996). We rejected Plaintiffs’ anti- trust claims on two grounds. First, we held that the relevant market on which Plaintiffs’ antitrust claims were premised - the market for ingredients and supplies among Domino’s franchisees - could not support the antitrust claims as a matter of law. Id. at 1062. We further concluded that the antitrust claims had to be dismissed in light of Plaintiffs’ failure to allege harm to competition. Id. at 1063. By the instant motion, Plaintiffs ask the Court to allow them to re-plead their antitrust claims. They have submitted a proposed Second Amended Complaint crafted to address the rationale supporting our decision. With respect to our latter concern, Plaintiffs’ proposed Second Amended Complaint alleges that harm will be visited upon consumers as a result of Defendants’ alleged conduct. As for the primary issue, however, Plaintiffs insist that the Supreme Court's decision in Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 451, 112 S.Ct. 2072 (1992), sanctions the sort of relevant market on which they seek to base their antitrust claims. App. 72 In addressing Plaintiffs’ antitrust claims in our April 30 Memorandum, we formed the issue as “whether the antitrust laws are implicated where a franchisor domi- nates a ‘market’ arrested by virtue or franchise agree- ments.” Queen City, 922 F. Supp. at 1041. We answered this question by examining decisions in antitrust cases brought by franchisees, such an Mozart Co. v. Mercedes- Benz of N. Am., Inc., 833 F.2d 1342 (9th Cir. 1987), cert. denied, 488 U.S. 870 (1988), and Tominaga v. Shepherd, 682 F. Supp. 1499 (C.D. Cal. 1988). In those cases, the courts recognized the importance of analyzing the relevant mar- ket in the pre-contract context, and rejected the very argument that Plaintiffs advance here: “Plaintiff, how- ever, engages in ‘post-contract’ analysis concerning defendant’s power over already existing franchisees by virtue of their ‘sunk costs.’ This argument was explicitly rejected in Mozart.” Tominaga, 682 F. Supp. at 1494. Plaintiffs contend that the Kodak decision essentially overruled the conclusions reached by the Mozart and Tominaga courts as to the issue of whether a relevant market can arise as a result of the power a franchisor possesses over a franchisee by virtue of the franchisee’s sunk costs. According to Plaintiffs, the Kodak Court held that market power can exist in an after-market even in the absence of market power in the pre-market, as long as consumers are “locked-in” as a result of significant switching costs. Thus, Plaintiffs allege that they have made significant investments in their franchisees, and are “looked-in” by their investment as a result of: (1) the long-term franchise agreements they entered; and (2) their contractual obligation to sell their franchises only to buyers approved by Defendant. Proposed Second Am. i 8 App. 73 Compl. 61. They contend that this alleged lock-in is sufficient to give rise to a relevant market on which they may base their antitrust claims. Upon careful re-examination of the Kodak opinion, however, we remain unpersuaded by Plaintiffs’ line of argument. As we remarked in our April 30 Memoran- dum, the Kodak Court concluded that the relevant market arose from the unique nature of the Kodak machines, and not, as Plaintiffs contend, by virtue of the fact that Kodak equipment owners were locked-in to their investment. The Supreme Court explicitly held that “[b]ecause service and parts for Kodak equipment are not interchangeable with other manufacturer’s service and parts, the relevant market from the Kodak-equipment owner’s perspective is composed of only those companies that service Kodak machines.” Kodak, 112 S. Ct. at 2090. The Supreme Court employed the lock-in argument not to define the relevant market, as Plaintiffs insist, but merely to refute Kodak’s contention that a lack of market power in the pre-market for equipment necessarily precluded market power in the after-markets for parts and service. Id. at 2087. Thus, the analogy Plaintiffs envision between their case and Kodak unravels at the outset. The relevant market in Kodak was defined with respect to the ‘choices available to Kodak equipment owners. Id. at 2090. The Kodak plaintiffs were able to clear the summary judgment hurdle with regard to the market power issue because they had presented sufficient evi- dence to show that Kodak controlled the papers market for Kodak machines. Id. at 2081. Kodak equipment App. 74 owners could not purchase parts from rival manufac- turers because the parts produced by Kodak’s competi- tors were not compatible with Kodak machines. They had little choice but to purchase parts and service from Kodak, since parts and service were unavailable else- where. By contrast, Plaintiffs here make no allegation that Defendant controls the market for pizza supplies. Indeed, Plaintiffs concede that there are other suppliers in the market from which they could acquire the ingredients they need to produce the pizzas and other food products they sell. Plaintiffs do not and cannot purchase ingre- dients and supplies from alternative suppliers not because Defendant dominates the ingredient and supply market or because Defendant is the market’s only sup- plier, but because the franchisee-plaintiffs are contrac- tually 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. Thus, since the Kodak case concerned allegations of unreasonable restraints within a market dominated by Kodak, it does nothing to undercut the rationale supporting Mozart and Tominaga, which rejected relevant markets predicated upon a fran- chisor’s economic power over a franchisee. Accordingly, we remain convinced that Kodak has little applicability harm. Plaintiffs have still failed to allege a relevant market that concerns antitrust: [Franchisor’s] ability to “coerce” its franchisees to purchase a product it may not wish to pur- chase (post-contract), and its claimed ability to App. 75 raise prices because of the franchisees [sic] sunk investment, does not show market power in the fast food franchising market. The “power” exer- cised is merely the power of a franchiser over its franchisees. Tominaga, 682 F. Supp. at 1495. We therefore conclude that Plaintiffs’ proposed Sec- ond Amended Complaint could not survive a motion to dismiss; and as a result, we must deny Plaintiffs’ Rule 15(a) motion. This action is hereby DISMISSED with prejudice. BY THE COURT: /s/ J. Curtis Joyner J. Curtis Joyner, J. App. 76 UNITED STATES DISTRICT COURT EASTERN DISTRICT OF PENNSYLVANIA QUEEN CITY PIZZA, INC.,) et al., ) ) Civil No. 95-CV-3777 Plaintiffs me ) JURY TRIAL ) DEMANDED DOMINO'S PIZZA, INC., ; Defendant. ) SECOND AMENDED COMPLAINT All Plaintiffs except Plaintiff International Franchise Advisory Council, Inc. bring this action against Defen- dant Domino’s Pizza, Inc. (“DPI”) for damages and other relief based on violations of Sections 1 and 2 of the Sherman Act, 15 U.S.C. §§1 and 2; Section 3 of the Clay- ton Act, 15 U.S.C. §14; breach of contract; and breach of the implied covenant of good faith and fair dealing. Plaintiff International Franchise Advisory Council, Inc. (“IFAC”) brings this action on behalf of itself and its member Domino’s franchisees for declaratory and injunc- tive relief and money damages, based upon DPI’s actions and omissions constituting violations of Sections 1 and 2 of the Sherman Antitrust Act, 15 U.S.C. §§1 and 2; Section 3 of the Clayton Act, 15 U.S.C. §14; breach of contract; breach of the implied covenant of good faith and fair dealing; and tortious interference with contractual and prospective economic relations. App. 77 Jurisdiction and Venue 1. Subject matter jurisdiction with respect to Counts One, Two, and Three are conferred upon this Court by Sections 4 and 16 of the Clayton Act, 15 U.S.C. §§15 and 26, and by 28 U.S.C. §§1331 and 1337. Subject matter jurisdiction over Counts Four, Five, and Six are conferred by 28 U.S.C. §1332, the diversity of citizenship statute, and by 28 U.S.C. §1367, the supplemental jurisdiction statute. Subject matter jurisdiction over Count Seven, Plaintiffs’ claim for declaratory judgment under 28 U.S.C. §2201, is conferred by 28 U.S.C. §§1331, 1332, 1337 and 1367. 2. Venue is proper in this District under the general venue provisions of 28 U.S.C. §1391 and the special venue provisions of Sections 4, 12 and 16 of the Clayton Act, 15 U.S.C. §§15, 22 and 26, in that Defendant DPI may be found and transacts business in this District and a sub- stantial part of the events or omissions giving rise to the claims occurred in this District. Parties 3. Plaintiff Queen City Pizza, Inc., a Pennsylvania corporation, owns and operates three Domino's pizza stores in Allentown, one Domino’s pizza store in West Lawn, one Domino’s pizza store in Emmaus, one Dom- ino’s pizza store in Reading, one Domino’s pizza store in Whitehall, and one Domino’s pizza store in North- ampton, Pennsylvania. The controlling shareholder of this corporation and the individual Domino’s franchisee for these Stores is Thomas C. Bolger. These two Plaintiffs App. 78 are sometimes referred to collectively as “the Bolger Plaintiffs”. 4. Plaintiff Scale Pizza, Inc., a Pennsylvania corpo- ration, owns and operates three Domino’s pizza stores in Bethlehem, Pennsylvania. Plaintiff Baughans, Inc., a Pennsylvania corporation, owns and operates one Dom- ino’s pizza store in East Stroudsburg, Pennsylvania. The controlling shareholder of these two corporations and the individual Domino’s franchisee for these two stores is Plaintiff Charles F. Buck. These plaintiffs are sometimes referred to collectively as “the Buck Plaintiffs”. 5. Plaintiff FM. Pizza, Inc., a Florida corporation, owns and operates five Domino’s pizza stores in Ft. Myers, one Domino’s pizza store in North Ft. Myers, one Domino’s pizza store in Bonita Springs, one Domino’s pizza store in San Carlos, one Domino’s pizza store in Lehigh, and one Domino’s pizza store in Fort Myers Beach, Florida. The controlling shareholder of this corpo- ration and the individual Domino’s franchisee for these Stores is Robert S. Bigelow. These two Plaintiffs are some- times referred to collectively as “the Bigelow Plaintiffs”. 6. Plaintiff Blue Earth Enterprises, Inc., a Minnesota corporation, owns and operates two Domino’s pizza stores in Mankato, one Domino’s pizza store in St. Peter, one Domino’s pizza store in New Ulm, and one Domino’s pizza store in Waseca, Minnesota. The controlling share- holder of this corporation and the individual Domino’s franchisee for these Stores is Plaintiff Kevin Bores. These two Plaintiffs are sometimes referred to collectively as “the Bores Plaintiffs”. App. 79 7. Plaintiff Davis Pizza Enterprises, Inc., a Missis- sippi corporation, owns and operates Domino’s pizza stores in Oxford, Senatobia and Southaven, Mississippi and a Domino’s “Pizza Pizzazz” Store in Olive Branch, Mississippi. The controlling shareholder of this corpora- tion and the individual Domino’s franchisee for these Stores is Plaintiff Diane A. Davis. These two Plaintiffs are sometimes referred to collectively as “the Davis Plain- tiffs”. 8. Plaintiff Fisher Pizza, Inc., an Illinois corporation, owns and operates five Domino’s pizza stores in Chicago, Illinois. The controlling shareholder of this corporation and the individual Domino’s franchisee for these Stores is Plaintiff James B. Fisher, Jr. These two Plaintiffs are some- times referred to collectively as “the Fisher Plaintiffs”. 9. Plaintiff Sepco Pizza, Inc., a New Hampshire cor- poration, owns and operates a Domino’s pizza store in Portsmouth, a Domino’s pizza store in Manchester, and a Domino's pizza store in Dover, New Hampshire. S & S Pizza Corp., a New Hampshire corporation, owns and operates a Domino’s pizza store in Manchester, New Hampshire. G & L Pizza Co., a New Hampshire corpora- tion, owns and operates a Domino’s pizza store in Man- chester and a Domino’s pizza store in Hudson, New Hampshire. The controlling shareholder of these corpora- tions and the individual Domino’s franchisee for these Stores is Plaintiff Stephen D. Gallup. These four Plaintiffs are sometimes referred to collectively as “the Gallup Plaintiffs”. 10. Plaintiff Lugent Pizza, Inc., a South Carolina corporation, owns and operates Domino’s pizza stores in App. 80 Darlington and Hartsville, South Carolina. The control- ling shareholder of this corporation and the individual Domino’s franchisee for these stores is Plaintiff Joseph J. Lugent. These two plaintiffs are sometimes referred to collectively as “the Lugent Plaintiffs”. 11. Plaintiff Billio’s Pizza, Inc., a Minnesota corpo- ration, owns and operates one Domino’s pizza store in Hutchinson, Minnesota. The controlling shareholder of this corporation and the individual Domino’s franchisee for this Store is Plaintiff William J. Murtha. These two Plaintiffs are sometimes referred to collectively as “the Murtha Plaintiffs”. 12. Plaintiff Spring Garden Pizza, Inc., a North Car- olina corporation, owns and operates eight Domino’s pizza stores in Greensboro, North Carolina. The control- ling shareholder of this corporation and the individual Domino’s franchisee for these Stores is Plaintiff Brad L. Walker. These two plaintiffs are sometimes referred to collectively as “the Walker Plaintiffs”. 13. Plaintiff JRW Pizza, Inc., a Delaware corpora- tion, owns and operates three Domino’s pizza stores in Dover, one Domino’s pizza store in Smyrna, one Dom- ino’s pizza store in Georgetown, and one Domino’s pizza store in Rehoboth Beach, Delaware. The controlling shareholder of this corporation and the individual Dom- ino’s franchisee for these Stores is Plaintiff James R. Wood. These two plaintiffs are sometimes referred to collectively as “the Wood Plaintiffs”. 14. The Plaintiffs referred to in paragraphs three through thirteen of the Complaint are sometimes referred to collectively as “the Franchisee Plaintiffs”. App. 81 15. Plaintiff IFAC is a membership corporation organized under the laws of Michigan with its principal place of business in Scottsdale, Arizona. Its members are Domino’s franchisees located throughout the United States. The purpose of IFAC is to promote and foster the interests of Domino’s franchisees. To that end, IFAC has sought to develop alternative purchasing sources for Domino’s franchisees to assist them in obtaining goods and services needed in their businesses at competitive prices. Pursuant to that objective, IFAC entered into a Purchasing Affiliation Agreement with FoodService Pur- chasing Cooperative, Inc. (“FPC”) on June 15, 1994 to obtain purchasing services for IFAC members and other Domino’s franchisees at competitive prices on a coopera- tive basis. 16. Defendant DPI is a Michigan corporation with its principal place of business in Ann Arbor, Michigan. DPI is registered to do business in the Tommonwealth of Pennsylvania and transacts business throughout the United States, including the Easter® “istrict of Pennsy]l- vania. Factual Allegations 17. The Domino’s pizza and food service business includes a nationwide and international system of stores (collectively, “Domino’s Stores” or the “Domino’s Sys- tem”) selling pizza and other food and beverage products to consumers primarily through delivery and carry-out service. In the territorial United States, DPI owns and operates approximately 700 stores while Domino’s fran- chisees own and operate approximately 3500 stores. Sales App. 82 of pizza and other products by Domino’s Stores in the aggregate exceed $1.8 billion annually in the United States, and the Domino’s System is reported to be the second-largest seller of pizza in the United States. 18. Unlike some franchise businesses that promote a “secret recipe” to foster consumer appeal of a unique product, the Domino’s System has developed its market on the basis of a business format specializing in fast delivery and made-on-the-premises pizza and other food products. The Franchise Offering Circular for Prospective Franchisees in use by DPI on June 5, 1992 described the business franchise opportunity as follows: We have developed a method of preparing pizza and stores which specialize in the sale of such pizza, feature carry out and delivery services and operate with a uniform business format, specially designed equipment, methods, pro- cedures and designs. We grant to certain quali- fied persons the right to own and operate a DOMINO’s PIZZA Store selling pizza through pick-up and delivery service and other approved products pursuant to the terms of our Standard Franchise Agreements. 19. DPI uses its offering circulars, franchise agree- ments and other advertising to market franchises, distrib- ute products, and receive franchise fees, royalties and payments for goods and services from franchisees in interstate commerce throughout the United States. 20. In order to conduct business in the Domino’s business format using the Domino’s trade name, trade- marks and service marks, each franchisee must enter into a “Standard Franchise Agreement” with DPI. A typical App. 83 form Standard Franchise Agreement is attached hereto as Exhibit A. The Standard Franchise Agreement grants Franchisees the right to use DPI’s business format and its trade and service marks to prepare and sell pizza, chicken wings, submarine sandwiches, and other food and drink products in accordance with procedures, product speci- fications, and quality control standards prescribed by DPI. Although the form of the Standard Franchise Agree- ment used by DPI has varied somewhat over the years, the material provisions of the Standard Franchise Agree- ments at issue in this case are substantially the same for all Franchisee Plaintiffs. 21. The Standard Franchise Agreement obligates DPI to act reasonably in performing under and enforcing the Agreement. Section 22.9 of the Agreement provides as follows: Standard of Reasonableness. Unless otherwise stated in this Agreement, we agree to exercise reasonable judgment with respect to all deter- minations to be made by us under the terms of this Agreement. 22. The Standard Franchise Agreement requires that ingredients used to make pizzas and other food items in Domino’s Stores as well as beverage products, cooking materials, containers, packaging materials, other paper and plastic products, utensils, uniforms, menus, business forms, cleaning and sanitation materials and other sup- plies and materials purchased by franchisees for use in their Stores (collectively, “Ingredients and Supplies”) con- form to specifications and standards prescribed by DPI, purportedly to ensure consistency and quality through- out the Domino’s System. App. 84 23. In addition to prescribing specifications and standards for Ingredients and Supplies, the Standard Franchise Agreement gives DPI the power to control the sources from which Domino’s franchisees may purchase Ingredients and Supplies, as well as materials and distri- bution services by limiting such sources to DPI itself or a supplier or distributor approved in advance by DPI. Sec- tion 12.2 of the Standard Franchise Agreement provides as follows: 12.2 Pizza Ingredients and Supplies and Materials. All pizza ingredients, beverage products, cook- ing materials, containers, packaging materials, other paper and plastic products, utensils, uni- forms, menus, forms, cleaning and sanitation materials and other supplies and materials used in the operation of the Store must conform to the specifications and quality standards estab- lished by us [DPI] from time to time. You [fran- chisee] must use in the operation of the Store boxes, containers and other paper or plastic products imprinted with the Marks as pre- scribed from time to time by us. We 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. Any ingre- dient, supply or material not previously approved by us as conforming to our specifica- tions and quality standards must be submitted for examination and/or testing prior to use. We reserve the right from time to time t [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386013_2033%3A1. Public record. Not legal advice.