978-1285770178 Case Printout Case CPC-26-03

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United States Court of Appeals,

Seventh Circuit.

John D. SHERIDAN and S & D Holdings, Inc., on their own behalf and that of all

others similarly situated, Plaintiffs-Appellants,

MARATHON PETROLEUM COMPANY LLC and Speedway SuperAmerica LLC,

Defendants-Appellees.

No. 07-3543.

Argued May 5, 2008.

Decided June 23, 2008.

Background: Franchisee petroleum dealer and his company, to which he

assigned his dealership contract, filed class action against franchisor oil company

and wholly owned subsidiary, claiming per se violation of Sherman Act by

franchisor’s alleged tying of processing of all credit card sales to franchise, under

tying agreement requiring franchisees to use franchisor’s designated processing

service for credit card sales paid for with franchisor’s proprietary credit card, and

claiming that franchisor conspired with banks to fix price of processing service.

The United States District Court for the Southern District of Indiana, Sarah Evans

Barker, J., 2007 WL 2900556, granted franchisor’s motion to dismiss for failure to

state a claim. Franchisee appealed.

Holdings: The Court of Appeals, Posner, Circuit Judge, held that:

(1) franchisor lacked market power required for tying violation under Sherman

Act, and

(2) franchisor did not conspire with credit card issuers to fix price of processing

service.

Affirmed.

Key29TVI Antitrust Regulation in General

West Headnotes

[1] Headnote Citing References KeyCite Citing References for this Headnote

Key29T Antitrust and Trade Regulation

530 F.3d 590, 2008-1 Trade Cases P 76,192

Key29Tk568 Tying Agreements

Key29Tk569 k. In General. Most Cited Cases

Key29T Antitrust and Trade Regulation

Key29TVI Antitrust Regulation in General

Key29TVI(D) Illegal Restraints or Other Misconduct

Key29Tk568 Tying Agreements

Key29Tk569 k. In General. Most Cited Cases

product from him as well, and the result will be a second monopoly, but only if the

tied product is used mainly with the tying product, and not if the tied product has

many other uses. Sherman Act, § 1, 15 U.S.C.A. § 1; Clayton Act, § 3, 15

U.S.C.A. § 14.

Key29Tk569 k. In General. Most Cited Cases

Tying agreements as a method of price discrimination do not violate the Sherman

Act unless the agreements have an exclusionary effect, and a monopolist does

not have to actually take over the market for the tied product in order to

Key29T Antitrust and Trade Regulation

Key29TVI Antitrust Regulation in General

Key29TVI(D) Illegal Restraints or Other Misconduct

Key29Tk568 Tying Agreements

Key29Tk571 k. Economic Power. Most Cited Cases

Key29T Antitrust and Trade Regulation

Key29TVI Antitrust Regulation in General

Key29TVI(E) Particular Industries or Businesses

Key29Tk597 k. Oil, Gas and Mining. Most Cited Cases

unilateral power over market price of gasoline so that franchisor could charge

supracompetitive price folded into price for gasoline charged to franchisees for

credit card processing, under tying agreement requiring franchisees to use

franchisor’s designated processing service for credit card sales paid for with

franchisor’s proprietary credit card. Sherman Act, § 1, 15 U.S.C.A. § 1.

Key382Tk1183 k. In General. Most Cited Cases

A trademark does not confer a monopoly; all it does is prevent a competitor from

attaching the same name to his product.

Franchisee petroleum dealers’ allegations that franchisor oil company conspired

to receive kickbacks from credit card issuers in price-fixing scheme to overcharge

franchisees for credit card processing, under tying agreement requiring

franchisees to use franchisor’s designated processing service for credit card

Headnote Citing References KeyCite Citing References for this Headnote

Key382T Trademarks

Key382TXI Trademarks and Trade Names Adjudicated

Key382Tk1800 k. Alphabetical Listing. Most Cited Cases

David M. Rodi (argued), Baker Botts, Houston, TX, for Marathon Ashland

Petroleum LLC.

T. Joseph Wendt, Barnes & Thornburg, Indianapolis, IN, for Speedway

SuperAmerica, LLC.

[1] Headnote Citing References The plaintiffs, a Marathon dealer in Indiana and a

company owned by him to whom he assigned his dealership contract, filed suit

against Marathon under section 1 of the Sherman Act, 15 U.S.C. § 1, charging it

with tying the processing of credit card sales to the Marathon franchise and also

with conspiring with banks to fix the price of the processing service. The tying

Custom Tops, Inc. v. Chrysler Motors Corp., 959 F.2d 468, 495-96 (3d Cir.1992)

(en banc); Smith Machinery Co. v. Hesston Corp., 878 F.2d 1290, 1298-99 (10th

Cir.1989).

The suit purports to be on behalf of all Marathon and Speedway dealers and so

motion to certify the suit as a class action was filed.

The complaint alleges that as a condition of granting a dealer franchise Marathon

requires the dealer to agree to process credit card “purchases of petroleum and

other products, services provided and merchandise sold at or from the [dealer’s]

duplicate the processing equipment supplied by Marathon. We‘ll assume that this

would be so costly as to compel dealers to process all their credit card sales by

means of Marathon’s designated system, since that system can process credit

card sales whether or not they are made with Marathon’s credit card, thereby

enabling the dealer to handle all such sales with one set of equipment. So

(as in this case) by direction of the seller. The traditional antitrust concern with

such an agreement is that if the seller of the tying product is a monopolist, the tie–

in will force anyone who wants the monopolized product to buy the tied product

from him as well, and the result will be a second monopoly. This will happen,

however, only if the tied product is used mainly with the tying product; if it has

monopoly of that market and used it to jack up the price of ink, customers for its

machines would not be willing to pay as much for them because their cost of

using them would be higher. In economic terms, the machine and the ink used

with it are complementary products, and raising the price of a product reduces

the demand for its complements. (If the price of nails rises, the demand for

might be hard for him to do. Entering two markets having unrelated production

characteristics might both entail delay and increase the risk and hence cost of

the new entrant.

[3] Headnote Citing References Tying agreements can also be a method of price

from the low price of the machine. See Eastman Kodak Co. v. Image Technical

Services, Inc., 504 U.S. 451, 475-76, 112 S.Ct. 2072, 119 L.Ed.2d 265 (1992);

Mozart Co. v. Mercedes-Benz of North America, Inc., 833 F.2d 1342, 1345 n. 3

(9th Cir.1987); Hirsh v. Martindale-Hubbell, Inc., 674 F.2d 1343, 1348-49 (9th

Cir.1982). However, price discrimination does not violate the Sherman Act unless

agreements illegal provided only that, as the language of section 3 of the Clayton

Act seemed to require, the tying arrangement embraced a nontrivial amount of

interstate commerce. E.g., Northern Pacific Ry. v. United States, 356 U.S. 1, 5-7,

78 S.Ct. 514, 2 L.Ed.2d 545 (1958); International Salt Co. v. United States, 332

U.S. 392, 396, 68 S.Ct. 12, 92 L.Ed. 20 (1947). In the 1970s, however, the Court

2549, 53 L.Ed.2d 568 (1977) (territorial restrictions in distribution); cf. Illinois Tool

Works, Inc. v. Independent Ink, Inc., 547 U.S. 28, 126 S.Ct. 1281, 164 L.Ed.2d

26 (2006). The Court has not discarded the tying rule, and we have no authority

to do so. But it has *594 modified the rule by requiring proof that the seller has

“market power” in the market for the tying product. Illinois Tool Works, Inc. v.

109-10, 104 S.Ct. 2948, 82 L.Ed.2d 70 (1984); U.S. Healthcare, Inc. v.

Healthsource, Inc., 986 F.2d 589, 593 n. 2 (1st Cir.1993), Judge Boudin, in the

Healthcare case, described tying arrangements as “quasi” illegal per se. Id.

So “market power” is key, but its meaning requires elucidation. Monopoly power

seller who has a large market share may be able to charge a price persistently

above the competitive level despite the existence of competitors. Although the

price increase will reduce the seller’s output (because quantity demanded falls as

price rises), his competitors, if they are small, may not be able to take up enough

of the slack by expanding their own output to bring price back down to the

As one moves from a market of one very large seller plus a fringe of small firms

to a market of several large firms, monopoly power wanes. Now if one firm tries

to charge a price above the competitive level, its competitors may have the

productive capacity to be able to replace its reduction in output with an increase

in their own output at no higher cost, and price will fall back to the competitive

[5] Headnote Citing References The plaintiffs in drafting their complaint were at

least dimly aware that they would have to plead and prove that Marathon had

significant unilateral power over the market price of gasoline and so could charge

a supracompetitive price (folded into the price for gasoline that it charges its

gasoline (improperly swollen by inclusion of Speedway’s sales) are only 4.3

percent of total U.S. gasoline sales per year (computed from “Official Energy

Statistics from the United States Government,” www. eia. doe. gov/ basics/

quickoil. html, visited May 30, 2008). That is no one’s idea of market power.

product markets.” Generac Corp. v. Caterpillar, Inc., 172 F.3d 971, 977 (7th

Cir.1999); see also Town Sound & Custom Tops, Inc. v. Chrysler Motors Corp.,

supra, 959 F.2d at 479-80; International Logistics Group, Ltd. v. Chrysler Corp.,

884 F.2d 904, 908 (6th Cir.1989); Grappone, Inc. v. Subaru of New England,

Inc., 858 F.2d 792, 796-97 (1st Cir.1988). The complaint does not allege that

the situation in which minor product differences (or the kind of locational

advantage that a local store, such as a barber shop, might enjoy in competing for

some customers) limit the substitutability of otherwise very similar products-will

want to trademark its brand in order to distinguish it from its competitors’ brands.

But the exploitation of the slight monopoly power thereby enabled does not do

the existing level. The complaint does not allege that Marathon is colluding with

the other oil companies to raise the price of credit card processing. And under

the pleading regime created by Bell Atlantic Corp. v. Twombly, — U.S. —-, 127

S.Ct. 1955, 1965-66, 167 L.Ed.2d 929 (2007), the plaintiffs’ naked assertion of

Marathon’s “appreciable economic power”-an empty phrase-cannot save the

but that assumption will not withstand scrutiny. All it has done is require its

franchisees to honor Marathon credit cards and to process sales with them

through the system designated by Marathon so that customers of Marathon who

use its card have the same purchasing experience no matter which Marathon

gas station they buy from. The combination of card and card processing enables

The plaintiffs do not challenge Marathon’s right to offer this service. But once it is

in place the dealer has a powerful incentive to route all his credit card

transactions through the Marathon system, as otherwise he would have to

duplicate the processing equipment that Marathon supplies and lose the benefit

of being able to use his retail sales revenue to offset what he owes Marathon.

tires supplied by the car’s manufacturer. Jack Walters & Sons Corp. v. Morton

Building, Inc., 737 F.2d 698, 704-06 (7th Cir.1984); see also United States v.

Microsoft Corp., supra, 253 F.3d at 87.

[7] Headnote Citing References The plaintiffs’ other theory of antitrust liability is

the consumer in the form of a higher gasoline price, which reduces the demand

for gasoline and hence the use of credit cards. Why would issuers of credit cards

pay Marathon to reduce the demand for their product? If they are colluding

among themselves, they will simply charge the Marathon dealers a

supracompetitive price for processing credit card transactions. By doing this they