MR. FARBER
December 9, 1998

INSTRUCTIONS

1. (20 points)

You are an associate in a Gotham City law firm. One of your firm's clients owns a tavern in Gotham.

Jack Smith, owner of the tavern, comes to your firm with the following story:

Apparently, all the local banks in Gotham decided to eliminate duplication of effort and expense by setting up a common agency to investigate local applicants for loans to determine if they were creditworthy. Upon the request of a bank, the joint agency investigated any person or concern and circulated to all banks a resume of information supporting its conclusions as to whether the party involved was a good or bad risk under general criteria established by the local bankers' association.

Mr. Smith applied for a loan. The joint agency, however, determined that Mr. Smith's loan should be regarded as a "high risk" because his tavern was located in a "crime-ridden" section of town and therefore was subject to constant risk of robbery. Mr. Smith was unable to get a loan from any Gotham bank. Mr. Smith claims that the refusals were racially motivated, since almost all of the establish ments in the part of town designated as "crime-ridden" were patronized by Blacks. Attempts to obtain loans from banks in nearby cities proved unavailing when Mr. Smith explained why he thought he had been turned down by the Gotham banks.

Mr. Smith eventually received a loan from an out-of-state bank at higher interest rates than available earlier to businesses in Gotham.


 

Mr. Smith wants your firm's advice as to whether he has a cause of action under Section 1 of the Sherman Act. You are asked to prepare a memorandum for the partner in charge of Mr. Smith's account to assist her in advising Mr. Smith.


Do it.

 

 




II. (35 points)



Glory Rinse is one of the ten leading preparations in the United States for tinting hair. Glory accounts for about 15% of the United States market.

The product is marketed primarily through wholesalers who sell to retail druggists. Each wholesaler buys the product for $5.60 per bottle. Glory suggests a wholesale price of $7.00 and a retail price of $9.50. Glory advertises heavily in fashion magazines and other media, aiming to create the image of a prestige product. Consistent with that advertising campaign, it asks its wholesalers not to sell to discount druggists and other discount outlets.

To assure that its recommended prices are followed, Glory has notified all retailers of its product as follows:



If you are disturbed by retail sales of others of Glory at less than the suggested retail price, you should notify your wholesaler of the facts surrounding those prices.


Wholesalers have been informed that:

It is Glory's policy to maintain suggested retail prices. However, you must not under any circumstances consult with retailers selling at less than the suggested price. Action speaks louder than words.


Wholesalers are expected to warehouse and deliver the product promptly to retailers on order. Retailers are asked but not required to display Glory's product prominently. No other services are required or requested.

The following pattern has developed:

If a retailer sells Glory products at less than the suggested resale price, the wholesaler fills the particular order but refuses to honor future orders. The wholesaler also refuses to discuss the matter with the retailer that has been cut off. At some later date, usually after about 18 months, the wholesaler may offer to fill orders of the retailer; the wholesaler will again refuse to discuss the retailer's practices. Where wholesalers have not followed this practice promptly upon receiving complaints of cut-rate sales, Glory has cut off the wholesalers and performed its own wholesaling function, including the temporary suspension of sales to price-cutting retailers. Six of the other nine hair rinse manufacturers follow similar distribution practices. Their prices to wholesalers are identical with Glory's and they suggest the same wholesale and retail price. The other three manufacturers aggressively market their products to all outlets.

Last year, Able Drug complained to its wholesaler and Glory that Baker Drug, a direct rival, was purchasing Glory Rinse in vast quantities, not for sale to customers, but for transshipment to discount drug stores in the area. After investigating the matter, the wholesaler cut off Baker without ever discussing the matter with Glory. Has Glory violated the antitrust laws?


Discuss.



 



III. (45 points)
 

You are a law clerk to a recently appointed Federal District Court judge. She knows you have taken an antitrust course and she is a bit weak in that area of the law. You received the following memorandum from her:


I am having trouble in getting the handle on a matter which has been submitted to me on defendant's motion for summary judgment. The facts seem to be as follows:


 

Plaintiff is a franchisee of Checker's Pizza, a fast-food service company that sells pizza through a national network of over 4,200 stores. Checker's owns and operates approximately 700 of these stores. Independent franchisees own and operate the remaining 3,500. Checker's is the second largest pizza company in the United States, with revenues in excess of $2 billion per year.


A franchisee joins the Checker's system by executing a standard franchise agreement with Checker's Pizza. Under the franchise agreement, the franchisee receives the right to sell pizza under the "Checker's" name and format. In return, Checker's Pizza receives franchise fees and royalties.



Section 12.2 of the Checker's Pizza standard franchise agreement requires that all pizza ingredients, beverages, and packaging materials used by a Checker's franchisee conform to the standards set by Checker's Pizza. Section 12.2 also provides that Checker's Pizza "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 supplies or distributors." Checker's Pizza reserves the right "to impose reasonable limitations on the number of approved suppliers or distributors of any product." To enforce these rights, Checker's Pizza retains the power to inspect franchisee stores and to test materials and ingredients. Section 12.2 is subject to a reasonableness clause providing that Checker's Pizza must "exercise reasonable judgment with respect to all determinations to be made by us under the terms of this Agreement."



Checker's Pizza sells approximately 90% of the $500 million in ingredients and supplies used by Checker's franchisees. These sales, worth more than $450 million per year, form a significant part of Checker's Pizza's profits. Franchisees purchase only 10% of their ingredients and supplies from outside sources. With the exception of fresh dough, Checker's Pizza does not manufacture the products it
sells to franchisees. Instead, it purchases these products from approved suppliers and resells them to the franchisees at a markup.



Plaintiff contends that Checker's Pizza has a monopoly in "the $500 million aftermarket for sales of supplies to Checker's franchisees" and has used its monopoly power to unreasonably restrain trade, limit competition, and extract supra-competitive profits. Plaintiff points to several actions by Checker's Pizza to support its claims.



First, plaintiff alleges that Checker's Pizza has restricted its ability to purchase competitively priced dough. Most franchisees purchase all of their fresh dough from Checker's Pizza. Plaintiff (and other franchisees) attempted to lower costs by making fresh pizza dough on site. It contends that in response, Checker's Pizza increased processing fees and altered quality standards and inspection practices for store-produced dough, which eliminated all potential savings and financial incentives for franchisees to make their own dough. Plaintiff also alleges Checker's Pizza prohibited stores that produce dough from selling their dough to other franchisees, even though the dough-producing stores were willing to sell dough at a price 25% to 40% below Checker's Pizza's price.

 

Next, plaintiff contends Checker's Pizza entered into exclusive dealing arrangements with the only approved suppliers of ready-made deep dish crusts and sauce. Under these agreements, the suppliers were obligated to deliver their entire output to Checker's Pizza. Plaintiff alleges the purpose of these agreements was to prevent the franchisees from purchasing these critical components directly from the suppliers.




Finally, plaintiff alleges Checker's Pizza refused to sell fresh dough to franchisees unless the franchisees purchased other ingredients and supplies from Checker's Pizza. As a result of these and other alleged practices, plaintiff maintains that each franchisee store now pays between $3000 and $10,000 more per year for ingredients and supplies than it would in a competitive market. Plaintiff alleges these costs are passed on to consumers.