The Franchise Memorandum

An Ohio federal court recently denied Wendy’s International Inc.’s motion to dismiss a franchisee’s claim that Wendy’s violated Sherman Act § 1 by requiring it to purchase food supplies from approved sellers in which Wendy’s had a financial interest. Burda v. Wendy’s Int’l, Inc., 2009 U.S. Dist. LEXIS 86044 (E.D. Ohio Sept. 21, 2009). The court held that the franchisee sufficiently pled a tying claim under a “Kodak lock-in” theory.   

When Plaintiff Robert Burda acquired a Wendy’s franchise in 1996, there were multiple Wendy’s-approved food suppliers. In Burda’s region, Sygma and Willow Foods competed to supply food and, each year, Burda requested that the two suppliers submit competing bids. In addition, prior to 1997, Burda purchased hamburger buns from LePage Bakery. In 1997, Wendy’s insisted, on threat of terminating Burda as a franchisee, that Burda purchase all of his buns from New Bakery Co. of Ohio, Inc., a subsidiary of Wendy’s. In 2004, Wendy’s granted Willow Run Foods exclusive rights to supply Burda’s region and guaranteed Willow Run Foods a minimum profit by imposing a 4-cent-per-case surcharge on any purchases of food supplies that Burda made from any other approved suppliers. Burda alleged that he was a victim of an illegal tying arrangement whereby Wendy’s used its control over franchise rights (the tying good) to compel him to accept New Bakery hamburger buns and food supplies from Willow Run Foods (the tied goods), thus increasing his operating costs.

The court’s reading of the approved supplier provision in the Wendy’s franchise agreement was the critical element that led it to reject Wendy’s motion to dismiss. The court acknowledged that a lock-in tying theory under Eastman Kodak Co. v. Image Technical Services, Inc., 504 U.S. 451 (1992), would be unavailable to Burda if the terms of his franchise agreement put him on notice of the potential imposition of the exclusive purchasing restrictions; in that event, he would not have been locked in when he executed the franchise agreement and accepted the possibility of such restrictions. The Wendy’s agreement required Burda to purchase all food items from suppliers whose goods met Wendy’s specifications, who had sufficient quality controls, “and who have been approved in writing by Franchisor.” But the court found that this language raised a question of fact that could not properly be resolved on a motion to dismiss:

There is no language in this Section that would put a potential franchisee on notice that Defendants would be able [to] eliminate all competition by naming an exclusive supplier . . . .  Instead, the language suggests that supplier competition was welcome . . . .

In contrast, the court noted that the Domino’s Pizza franchise agreement at issue in Queen City Pizza, Inc. v. Domino’s Pizza, Inc., 124 F.3d 430 (3d Cir. 1997), provided that Domino’s may in its “sole discretion require that . . . [ingredients and supplies] be purchased exclusively from us or from approved suppliers or distributors.” Thus, the Domino’s franchisees were made aware of the possibility of exclusive purchasing requirements before they bought their franchises and became locked in.