Thursday, November 29, 2007

Sandwich Shop Franchisees' Tying Claims Dismissed

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reports.

Twelve Wisconsin Quizno's franchisees may not proceed with tying claims against their franchisor, the federal district court in Green Bay, Wisconsin, has ruled. Quizno's motion to dismiss the franchisees' federal and state antitrust claims was granted.

The franchisees claimed that Quizno's illegally tied the sale of the "essential goods" required to operate the franchises (the tied product)to the sales of its franchises (the tying product). For the tying arrangement to be actionable, Quizno's had to enjoy substantial market power in the tying product, the court explained.

Relevant Market

The franchisees alleged that Quizno's enjoyed substantial market power in the "quick service toasted sandwich restaurant franchise" market. However, the court rejected the franchisees’ relevant market definition as "patently absurd." The relevant product market should have included equivalent investment opportunities, the court said.

It could be that the franchisor held substantial market power for those investors who wished to purchase a fast food restaurant that sold toasted submarine sandwiches, but that was like saying that the seller of any franchise known for a particular product had market power over investors who were already determined to sell such a product. Such could not be the test, according to the court.

The mere fact that a particular franchise was known for a unique product and a way of doing business did not show market power over investors. Product identification was at the very core of franchising, the court explained.

Coercion of Investors

The crucial question was whether the franchisor was in a position to coerce investors not otherwise determined to purchase its franchise. Having chosen to enter into relationships with Quizno's, the franchisees were bound by the terms of their agreements. If Quizno's breached its agreement with them by charging them exorbitant prices for goods and services they were contractually required to purchase, then their remedy lay in contract, not under the antitrust laws.

The November 5 decision in Westerfield v. Quizno’s Franchise Co., LLC, appears at 2007-2 Trade Cases ¶75,942 and at CCH Business Franchise Guide ¶13,734.

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