The opinion of the court was delivered by: MCGLYNN
Plaintiffs Philadelphia Fast Foods, Inc., and Philadelphia Fast Foods Partnership, collectively known as "PFF", brought this action against defendants Popeyes, Inc. ("Popeyes") and the Marriott Corporation ("Marriott") alleging that Popeyes and Marriott violated the antitrust laws, that Popeyes breached a contract with PFF, and that Marriott tortiously interfered with PFF's actual and prospective contractual relations with Popeyes. Specifically, PFF claims that Popeyes and Marriott conspired to restrain trade and monopolize the market in "spicy fast food chicken" and that PFF had entered an agreement with Popeyes that gave PFF the right to open five additional franchises in the Philadelphia area, which Popeyes breached by granting Marriott the exclusive right to develop Popeyes' franchises in the Philadelphia area.
At the close of a jury trial lasting three weeks, I directed a verdict for the defendants on PFF's per se claim under Section 1 of the Sherman Act (the "Act"). The jury found for the defendants on all of the remaining claims. In answer to special interrogatories, the jury found that Popeyes and Marriott did not conspire to restrain trade and that PFF had failed to prove the existence of the alleged product market in "spicy fast food chicken." The jury further found that Popeyes and PFF had not entered into an agreement extending PFF additional franchise rights because they did not intend to be bound contractually until they entered into a formal Popeyes' Option Agreement, and that Marriott did not tortiously interfere with any of PFF's actual or prospective contractual rights.
PFF has now moved for a judgment notwithstanding the verdict or for a new trial contending that this court made numerous errors, 132 to be exact. As the discussion below will reveal, this catalog of errors is characterized by misstatements of the governing principles, objections not raised at trial, facts not supported by the record, and irrelevant issues which the jury was never required to reach. Accordingly, for the reasons that follow, PFF's motion for a judgment notwithstanding the verdict or for a new trial will be denied.
Popeyes is a Louisiana corporation which has franchised fast food restaurants specializing in the sale of fried chicken since 1976. At the time of trial, there were eleven Popeyes' franchised restaurants in Philadelphia, ten of which are operated by Marriott and one by Charles Maxwell, Arlie Maxwell, Robert Carrick and Glenna Malcolm, who together formed the Philadelphia Fast Food Partnership.
According to the evidence adduced at trial, there is a four step procedure for obtaining a Popeyes' franchise. First, when an interested applicant contacts Popeyes, Popeyes sends the applicant information and a financial information request form. Second, if the applicant complies and returns the form, the applicant will be asked to forward a refundable $5000.00 good faith deposit and come in for an interview. Both Terrel Rhoton and William A. Copeland, III of Popeyes testified that the purpose of the deposit is to demonstrate that the applicant is seriously interested in acquiring franchise rights.
If Popeyes finds the applicant to be an acceptable operator and financially sound, Popeyes and the applicant may enter into an Option Agreement. The Option Agreement is a standard Popeyes' form agreement which grants the applicant an option to develop (1) an agreed upon number of Popeyes' stores (2) in a defined area (3) to be opened within a specific time period. The option agreements do not specify individual locations for each store, but rather set out geographic boundaries in terms of city blocks within which all agreed upon stores must be located. If after receipt of the $5000.00 deposit, Popeyes and the applicant cannot, for any reason whatsoever, agree upon these three terms, or any other terms, Popeyes refunds the $5000.00 in full.
Copeland testified that Popeyes has never granted franchise rights without first executing a Popeyes Option Agreement.
In October of 1982, Charles Maxwell and his partners entered into a standard Popeyes Option Agreement for one store. This Option Agreement provided that Maxwell and his three partners would be given until April 8, 1983, to open one Popeyes franchise. Maxwell exercised this option and entered into a Franchise Agreement on December 16, 1982, for a store at 139-143 West Chelten Avenue in Philadelphia.
On March 24, 1983, Maxwell wrote to Popeyes enclosing an unsolicited $5000.00 check and stating inter alia :
This $5000.00 will be used to secure territorial franchise rights to the following area of Philadelphia pending a formal contract:
The eastern portion of territory formally (sic) held by Mr. Kenneth Wall PLUS an extension of the southern boundary of that territory to Chestnut Street.
The formal definition of the territory will be made after the franchise conference with all territorial rights transferred by April 30th.
Philadelphia Fast Food Partnership maintains its right to withdraw the $5000.00 (minus expenses) if a mutually agreeable number of options for this area cannot be determined.
We have substantial financial commitment. Our sources of capital should be stronger than any franchisee in the franchise community.
Popeyes responded by letter dated April 1, 1983, as follows:
This letter acknowledges receipt of your check #1161 in the amount of $5000.00 payable to Popeyes Famous Fried Chicken. This sum represents a good faith deposit and will secure a yet to be determined five (5) store area in Philadelphia, Pennsylvania.
In your letter to us dated March 24, 1983 you made reference that you have secured a strong financial commitment. Please forward to us a copy of this financial commitment. If it is strong enough we would be more than happy to let you acquire additional territory.
PFF contends that these letters created a binding agreement between itself and Popeyes to enter into an option agreement for five additional stores in the Philadelphia area. PFF concedes that it never entered into a standard Option Agreement, nor did it send any financial information.
On July 12, 1983, Popeyes sent Maxwell the following letter:
It has been three months since accepting your $5000.00 deposit on Philadelphia and nothing has transpired since that time. You have failed to live up to running your store in an organized manner and therefore I have no other alternative but to return your $5000.00 therefore giving you no further rights to any other portion of the City of Philadelphia.
PFF contends that this constituted a breach of the agreement created by the two letters. Although Charles Maxwell protested to Popeyes both orally and in writing concerning Popeyes' withdrawal from negotiations over additional stores, Maxwell subsequently cashed the refund check.
The evidence introduced at trial also reveals that Popeyes first discussed the possibility of selling franchise rights to Marriott in mid to late April of 1983, but that no agreement was reached with Marriott until December 8, 1983, when a formal Option Agreement was executed. PFF's contention that William Copeland of Popeyes informed Marriott that PFF had existing rights to obtain additional franchises prior to the return of the deposit on July 12, 1983, is not supported by any citation to the record, and indeed, Copeland expressly denied this in his testimony. May 7 Tr. at 27 and 30. In addition, Copeland testified that the use of an exclusive development agreement was a desirable marketing strategy, and Popeyes has regularly used such agreements in other parts of the country.
THE PER SE CLAIM UNDER § 1 OF THE SHERMAN ACT
PFF's initial contention is that the grant of exclusive territorial rights by Popeyes to Marriott constitutes a per se violation of § 1 of the Sherman Act, which it variously describes as a "horizontal market allocation", a "group boycott" and a "concerted refusal to deal." Specifically, PFF contends that Marriott demanded exclusivity although it knew of PFF's existing rights in Popeyes' franchises, and by acceding to this request, Popeyes entered into a conspiracy with Marriott to exclude PFF from the market. PFF asserts that the court erred in directing a verdict for the defendant with respect to the plaintiff's per se claim under § 1 of the Act, and in refusing to charge the jury or submit special interrogatories to them on this issue.
PFF's contention is flawed in several respects. First the jury found that there was no conspiracy to restrain trade, thus precluding the existence of any claim under Section 1 of the Act. Secondly, the relationship between Popeyes and Marriott is a vertical one, and the conduct complained of involves the grant of exclusive territorial rights by a franchisor to a franchisee. Application of the per se rule in this context has been expressly rejected by the Supreme Court. Continental T.V., Inc. v. G.T.E. Sylvania, Inc., 433 U.S. 36, 53 L. Ed. 2d 568, 97 S. Ct. 2549 (1977). Finally, PFF has failed to identify any facts that establish the concerted action necessary to support a claim of group boycott. Accordingly, PFF's claim that this court erred in directing a verdict on the per se claim is without merit.
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 (1982).
Because almost all business agreements may be interpreted as restraining trade to some degree, § 1 has been construed to preclude only those contracts or combinations that "unreasonably" restrain competition. Northern Pacific R. Co. v. United States, 356 U.S. 1, 5, 2 L. Ed. 2d 545, 78 S. Ct. 514 (1958). In determining whether conduct unreasonably restricts competition, the courts employ two rules -- the per se rule and the rule of reason. Generally, a "rule of reason" analysis is employed to determine whether § 1 has been violated. Malley-Duff & Assoc. v. Crown Life Ins. Co., 734 F.2d 133 (3d Cir. 1984). Under this analysis, agreements are evaluated by examining their effects upon competition within relevant geographic and product markets.
An exception to the rule of reason approach has been carved out for those agreements which have a "pernicious effect" on competition and "lack any redeeming virtue" so that they may be presumed unreasonable "without elaborate inquiry as to the precise harm they have caused or the business excuse for their use." Northern Pacific R. Co. v. United States, supra, 356 U.S. at 5 (1958); Malley Duff & Assoc. v. Crown Life Ins. Co., supra, 734 F.2d at 139. Activities that have been identified as per se violations include price fixing, retail price maintenance, group boycotts, tying arrangements, and certain types of reciprocal dealing. Cernuto, Inc. v. United Cabinet Corp., 595 F.2d 164, 166 (3d Cir. 1979).
Whether a claim is governed by the per se rule or the rule of reason under § 1, the Act requires proof of a "contract, combination or conspiracy" in restraint of trade. It is beyond peradventure that the Act does not reach unilateral conduct, and a manufacturer may sell its products to whomever it wishes. United States v. Colgate & Co., 250 U.S. 300, 63 L. Ed. 992, 39 S. Ct. 465 (1919); Cernuto, Inc. v. United Cabinet Corp., supra, 595 F.2d at 167. The Third Circuit has noted that the statutory language presents a "single concept about common action". and thus simply requires proof of "concerted action". Edward J. Sweeney & Sons, Inc. v. Texaco, 637 F.2d 105, 111 (3d Cir. 1980), cert. denied, 451 U.S. 911, 101 S. Ct. 1981, 68 L. Ed. 2d 300 (1981).
Although I directed a verdict for the defendants with respect to the per se claim, the jury was nevertheless asked to consider whether there was a contract, conspiracy to restrain trade, a prerequisite to any claim under § 1 of the Act. May 9 Tr. at 122-123. It is only after the finder of fact has made this initial determination that the per se or rule of reason ...