SAMPLE ARGUMENTS for Diddy’s Burger King and the National Franchise Assoc. v. Burger King Holdings, Inc. 1) What standard should the Eleventh Circuit Court of Appeals use to determine if Burger King Holdings, Inc. violated the Sherman Antitrust Act when Burger King Holdings required its franchisees to sell double cheeseburgers for $1? 2) Does the uniform national Burger King $1 double cheeseburger campaign unreasonably restrain trade in violation of the Sherman Antitrust Act?
For Diddy’s Burger King and the National Franchise Association: The Eleventh Circuit Court of Appeals should place the burden on Burger King, Inc. to demonstrate that its uniform $1 price fixing of a double cheeseburger does not have anticompetitive effects.State Oil v. Khan, 522 U.S. 3 (1997) ruled that courts should use the rule of reason and place the burden on small business franchisees to demonstrate that vertical price restraints have anticompetitive effects. The Eleventh Circuit chose the rule of reason test when the only other choice from precedent made vertical price restraints per se unreasonable. See Albrecht v. Herald Co., 390 U.S. 145 (1968). The Eleventh Circuit should enunciate a new antitrust standard that focuses on small businesses, lowers litigation costs for small businesses, and lowers bias against minority-owned businesses.
State Oil v. Khan 522 U.S. 3 (1997) ruled against a small business that it characterized as inefficient. The Court unfortunately seemed to place all threatened small businesses in that category. Khan’s independent gas station and convenience store fell behind in lease payments within a year of operation. After commencing a suit to terminate the franchise agreement, State Oil obtained a receiver to operate the gas station. State Oil required Khan to sell gasoline below a maximum retail price while the receiver, without price restraints, made a profit by selling regular gasoline at a low price and premium gasoline at a price above the previous maximum constraint. Id., at 8.
Justice O’Connor’s opinion argued that franchisor maximum price restraints would justifiably hurt inefficient businesses while not harming competition or consumers. “…[A]lthough vertical maximum price fixing might limit the viability of inefficient dealers, that consequence is not necessarily harmful to competition and consumers,” id., at 17. Quoting Judge Posner’s 7th Circuit opinion in this case, 93 F.3d at 1362, Justice O’Connor assumed that when vertical maximum prices threatened a small business franchisee, it could just run ‘into the arms of a competing supplier,’ id., at 16. Based upon this reasoning, the State Oil Court erroneously declared that “rule-of-reason analysis will effectively identify those situations in which vertical maximum price amounts to anticompetitive conduct,” id., at 22.
The Supreme Court should have focused on small businesses and found that they should not bear the burden of proving that maximum prices are anticompetitive. Instead Burger King Holdings, Inc. should demonstrate that its prices do not harm the freedom of small businesses.
First, the State Oil v. Khan Court focused exclusively on the fact that Congress did not show enthusiastic support for the per se rule of Albrecht that all vertical maximum prices violate §1 of the Sherman Act. See State Oil v. Khan, 522 U.S., at 19. The Court did not consider the long legislative history from the formation of the Sherman Act through the present that Congress has been concerned about protecting small businesses from the aggression of larger, dominating corporations and trusts. For example, as late as 1950, Senator O’Connor explained that Congress designed the Sherman Act to advance “the interests of small business as an important competitive factor in the American economy,” 96 Cong. Rec. 16, 433 (1950). Congress has regularly recognized that the Sherman Act is concerned about “1) the condemnation of big business and 2) maintaining the ease of entry and viability of small business,” Jeneen Y. Ramos, “Note: The ‘Wrath of Khan’: A Look at the Impact on Minority Franchisees” 42 HOW. L.J. 569, 598-599 (1999).
In light of that legislative history, the Eleventh Circuit should not require small businesses to bear the extra costs and legal burden of proving that larger franchisors’ price fixing is anticompetitive. Small business franchisees are most likely in financial danger once they file a Sherman Act complaint. The majority of small business that can still yet survive will seriously weigh the costs of meeting this high burden of proof against tolerating anticompetitive conduct because not suing may be least costly. Supplier franchisors have more access to franchise data and greater resources. Supplier franchisors are in a much better position to show that their maximum price restraints promote competition. “In short, the rule of reason may be tantamount to per se legality in this instance,” id., at 591.
Additionally, the Eleventh Circuit Court of Appeals should not force minority-owned small business franchisees to bear the burden of proof when they disproportionately face business failure. Of 4000 black-owned franchises that operated between 1984 and 1987, only 57.2% remained in business by 1995. On the other hand, of those minority-owned businesses that were not responsible to franchisors between 1984 and 1987, 70% remained in business by 1995. In this survey, the majority of African-American franchisees felt dissatisfied with their parent companies. Id., at 593.
But franchisee/franchisor conflicts are not just the concerns of minority owners. A 1996 survey conducted by the American Franchisee Association and Indiana University found that 2/3rds of franchisees felt they were not getting their money’s worth from their franchise fees. Id., at 593. To require small businesses to bear costs of litigation and the burden of proof is an unrealistic expectation for their weaker economic positions. Franchisors should demonstrate that their vertical maximum prices promote competition.
Burger King Holding, Inc.'s $1 uniform price for a double cheeseburger takes advantage of Diddy’s franchisee investments and prevents him from competitively meeting consumer demand in New York City.
Because a $1 double cheeseburger will increase the volume of double cheeseburgers sold, Burger King Holding, Inc. will make more money with this national campaign. While Burger King Holdings argues that a lower priced double cheeseburger serves consumers and reaches a larger part of the U.S. population, Burger King is pursuing its own self-interest and not that of the consumer.
In State Oil v. Khan 522 U.S. at 15-16, Justice O'Connor argued that "unless the supplier is a monopsonist, he cannot squeeze his dealers margins below a competitive level." (quoting Judge Posner) Justice O'Connor was mistaken because Burger King, Inc. can uniquely use its franchisor position to exercise pricing power over Diddy's Burger King to the detriment of Diddy's store and New York consumers.
The Eleventh Circuit should first find that Burger King Holdings, Inc. exercised inordinate power over Diddy's Burger King because Burger King, Inc. has so adamantly insisted on this national uniform price campaign in the face of protests from many stores and the National Franchise Association. When McDonald's attempted to offer its double cheeseburger for $1 dollar, franchisees protested and reached a settlement to offer a double burger without cheese for one dollar.
Burger King Holdings, Inc. is likely to use its inordinate market power to extract profits from Diddy's Burger King that is in a weakened position. As a franchisee, Diddy has sunk his franchise fees into his restaurant and can, barring recovery in this suit, only recoup his investment by complying with Burger King Holdings, Inc.'s demands. On average, fees, supply purchases, rental fees, and required cash on hand amount to $300,000. The sunk cost is even greater for multi-operators in the National Franchise Association who have purchased more than one Burger King at a time.
More than likely, Burger King Inc.'s $1 double cheeseburger will hurt consumers because Burger King Inc.'s uniform price campaign has ignored consumer tastes and dealers' freedom to respond to those tastes. The Eleventh Circuit can ascertain the uncompetitive nature of Burger King Inc.'s requirements by simply asking this question: What is the competitive price of a $1 double cheeseburger? Diddy's Burger King, Inc. in New York City will not know because he has not been able to respond to consumer tastes and demands. Consumers might want more goods (fries or mozzarella sticks) or services (foil to keep the burgers warmer or a more spacious restaurant) along with their double cheeseburgers and express a willingness to pay for those goods and services.
Burger King Inc. has deprived Diddy's Burger King of many consumer possibilities and violated Section 1 of the Sherman Antitrust Act in unreasonable restraint of trade.