Sheridan, John D. v. Marathon Petroleum ( 2008 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 07-3543
JOHN D. SHERIDAN and S & D HOLDINGS, INC.,
on their own behalf and that of
all others similarly situated,
Plaintiffs-Appellants,
v.
MARATHON PETROLEUM COMPANY LLC and
SPEEDWAY SUPERAMERICA LLC,
Defendants-Appellees.
____________
Appeal from the United States District Court
for the Southern District of Indiana, Indianapolis Division.
No. 1:06-cv-1233-SEB-VSS—Sarah Evans Barker, Judge.
____________
ARGUED MAY 5, 2008—DECIDED JUNE 23, 2008
____________
Before CUDAHY, POSNER, and ROVNER, Circuit Judges.
POSNER, Circuit Judge. The plaintiffs, a Marathon dealer
in Indiana and a company owned by him to whom he
assigned his dealership contract, filed suit against Mara-
thon 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
2 No. 07-3543
arrangement is challenged under section 1 of the Sherman
Act rather than section 3 of the Clayton Act because the
things alleged to be tied—the franchise and the processing
service—are services rather than commodities. Though
some old cases say otherwise, the standards for adjudicat-
ing tying under the two statutes are now recognized to
be the same. E.g., Southern Card & Novelty, Inc. v. Lawson
Mardon Label, Inc., 138 F.3d 869, 874 (11th Cir. 1998); Town
Sound & 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 names Speedway as an addi-
tional defendant. But while Speedway is a wholly owned
subsidiary of Marathon, the plaintiffs do not have a
Speedway dealership and so we cannot see what Speed-
way is doing in the case or how these plaintiffs can repre-
sent Speedway dealers. But these are the lesser anomalies
in the case, and need not detain us. The district court
granted the defendants’ motion to dismiss the complaint
for failure to state a claim, Fed. R. Civ. P. 12(b)(6), before
a 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] Premises” through a processing
service designated by Marathon. The terms of the dealer-
ship (set forth in a dealers’ handbook cited in the com-
plaint) impose the requirement only with regard to
sales paid for with Marathon’s proprietary credit card,
which however the dealer is required to accept in payment.
A dealer who wanted to process sales paid for with other
No. 07-3543 3
credit cards by means of a different processing system
would be contractually free to do so, but he would have
to duplicate the processing equipment supplied by Mara-
thon. 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 equip-
ment. So Marathon might be said to have tied the process-
ing of all credit card sales by its dealers to the Marathon
franchise, and so we’ll assume—for the moment. The
plaintiffs contend that such a tie-in is a per se violation
of the Sherman Act.
In a tying agreement, a seller conditions the sale of a
product or service on the buyer’s buying another product
or service from or (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 trying product; if it has many other
uses, the tie-in will not create a monopoly of the tied
product. Suppose the tying product is a mimeograph
machine and the tied product is the ink used with the
machine, as in the old case of Henry v. A.B. Dick Co.,
224 U.S. 1 (1912). Since only a small percentage of the total
ink supply was used with mimeograph machines, A.B.
Dick’s monopoly would not have enabled it to mono-
polize the ink market. If, moreover, A.B. Dick did obtain
a monopoly of that market and used it to jack up the price
4 No. 07-3543
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 hammers will fall.)
Only if all or most ink were used in conjunction
with mimeograph machines might the manufacturer use
the tie-in to repel competition. For then someone who
wanted to challenge the mimeograph monopoly might
have difficulty arranging for a supply of ink for his cus-
tomers unless he entered the ink business. That 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.
Tying agreements can also be a method of price dis-
crimination—the more ink the buyer of a mimeograph
machine uses, and hence the more he uses the machine,
the more valuable in all likelihood the machine is to him.
In that event, by charging a high price for the ink and a
low price for the machine, the manufacturer can extract
more revenue from the higher-value (less elastic) users
without losing too many of the low-value users, since they
don’t use much ink and hence are not much affected by
the high price of the ink but benefit from the low price of
the machine. See Eastman Kodak Co. v. Image Technical
Services, Inc., 504 U.S. 451, 475-76 (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 discrimi-
nation does not violate the Sherman Act unless it has an
No. 07-3543 5
exclusionary effect. And a monopolist doesn’t have to
actually take over the market for the tied product in order
to discriminate in price. He just has to interpose himself
between the sellers of the tied product and his own cus-
tomers so that he can reprice that product to his customers.
The Supreme Court used to deem tying agreements
illegal provided only that, as the language of section 3
of the Clayton Act seemed to require, the tying arrange-
ment embraced a nontrivial amount of interstate com-
merce. E.g., Northern Pacific Ry. v. United States, 356 U.S.
1, 5-7 (1958); International Salt Co. v. United States, 332 U.S.
392, 396 (1947). Beginning in the 1970s, however, the
Court began to reexamine and in some instances discard
antitrust doctrines that (like tying agreements) place
limitations on distributors or dealers. See Leegin Creative
Leather Products, Inc. v. PSKS, Inc., 127 S. Ct. 2705 (2007)
(minimum resale price maintenance); State Oil Co. v.
Khan, 522 U.S. 3 (1997) (maximum resale price mainte-
nance); Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S.
36 (1977) (territorial restrictions in distribution); cf. Illinois
Tool Works, Inc. v. Independent Ink, Inc., 547 U.S. 28 (2006).
The Court has not discarded the tying rule, and we have
no authority to do so. But it has modified the rule by
requiring proof that the seller has “market power” in the
market for the tying product. Illinois Tool Works, Inc. v.
Independent Ink, Inc., supra, 547 U.S. at 35; Jefferson Parish
Hospital Dist. No. 2 v. Hyde, 466 U.S. 2, 15-18 (1984); see
also Reifert v. South Central Wisconsin MLS Corp., 450 F.3d
312, 316 (7th Cir. 2006). Since the normal per se rule
dispenses with proof of market power, FTC v. Superior
Court Trial Lawyers Ass’n, 493 U.S. 411, 432-33 (1990); NCAA
v. Board of Regents, 468 U.S. 85, 109-10 (1984); U.S.
Healthcare, Inc. v. Healthsource, Inc., 986 F.2d 589, 593 n. 2
6 No. 07-3543
(1st Cir. 1993), Judge Boudin, in the Healthcare case, de-
scribed tying arrangements as “quasi” illegal per se. Id.
So “market power” is key, but its meaning requires
elucidation. Monopoly power we know is a seller’s ability
to charge a price above the competitive level (roughly
speaking, above cost, including the cost of capital) without
losing so many sales to existing competitors or new
entrants as to make the price increase unprofitable. E.g.,
United States v. Microsoft Corp., 253 F.3d 34, 51 (D.C. Cir.
2001) (per curiam). The word “monopoly” in the expres-
sion “monopoly power” was never understood literally,
to mean a market with only one seller; a seller who has
a large market share may be able to charge a price persis-
tently 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 competitive
level; their costs of doing so would be too high—that is
doubtless why they are small. George J. Stigler, “The
Dominant Firm and the Inverted Umbrella,” in Stigler,
The Organization of Industry 108 (1983); George L. Mullin
et al., “The Competitive Effects of Mergers: Stock Market
Evidence From the U.S. Steel Dissolution Suit,” 26 RAND
Journal of Economics 314 (1995).
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 com-
petitors 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
No. 07-3543 7
the competitive level. Eventually a point is reached at
which there is no threat to competition unless sellers are
able to agree, tacitly or explicitly, to limit output in order
to drive price above the competitive level. The mere
possibility of collusion cannot establish monopoly
power, even in an attenuated sense to which the term
“market power” might attach, because then every firm,
no matter how small, would be deemed to have it, since
successful collusion is always a possibility.
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 supra-
competitive price (folded into the price for gasoline that
it charges its dealers) for credit card processing. But all
that the complaint states on this score is that Marathon is
“the fourth-largest United States-based integrated oil
and gas company and the fifth-largest petroleum refiner
in the United States” and sells “petroleum products to
approximately 5,600 Marathon and Speedway branded
direct-served retail outlets and approximately 3,700 jobber-
served retail outlets.” Marathon and Speedway’s alleged
annual sales of six billion gallons of gasoline (improperly
swollen by inclusion of Speedway’s sales) is 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.
Marathon does of course have a “monopoly” of Mara-
thon franchises. But “Marathon” is not a market; it is a
trademark; and a trademark does not confer a monopoly;
all it does is prevent a competitor from attaching the
8 No. 07-3543
same name to his product. “Not even the most zealous
antitrust hawk has ever argued that Amoco gasoline,
Mobil gasoline, and Shell gasoline”—or, we interject,
Marathon gasoline—“are three [with Marathon, four]
separate 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 there are any local gasoline
markets in which Marathon has monopoly (or market)
power. No market share statistics for Marathon either
locally or nationally are given, and there is no information
in the complaint that would enable local shares to be
calculated.
What is true is that a firm selling under conditions of
“monopolistic competition”—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 enough harm to the economy
to warrant trundling out the heavy artillery of federal
antitrust law. And anyway in this case monopolistic
competition is not alleged either. So we are given no
reason to doubt that if Marathon raises the price of
using the Marathon name above the competitive level
by raising the price of the credit card processing service
that it offers, competing oil companies will nullify its
price increase simply by keeping their own wholesale
No. 07-3543 9
gasoline prices at 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, 127 S. Ct. 1955, 1965-66 (2007), the plaintiffs’
naked assertion of Marathon’s “appreciable economic
power”—an empty phrase—cannot save the complaint.
See, e.g., Kendall v. Visa U.S.A., Inc., 518 F.3d 1042, 1046-
47 (9th Cir. 2008); In re Elevator Antitrust Litigation, 502
F.3d 47, 50 (2d Cir. 2007) (per curiam).
There is more that is wrong with the plaintiffs’ charge
of illegal tying. Earlier we assumed that Marathon had
indeed tied credit card processing to the franchise, 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 Mara-
thon to offset in an economical and expeditious manner
revenues from credit card sales against costs of gasoline
sold to the dealers. When a dealer makes a sale with a
credit card, the Marathon processing system credits his
Marathon account with the price of the sale and thus
reduces the amount of money that the dealer owes Mara-
thon for the gasoline that he buys from it.
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 Mara-
thon supplies and lose the benefit of being able to use
10 No. 07-3543
his retail sales revenue to offset what he owes Marathon.
The additional cost of using multiple card processing
systems is not a penalty imposed by Marathon to force the
use of its system, but an economy that flows directly
from Marathon’s offering its own credit card and credit
card processing service. To call this tying would be like
saying that a manufacturer of automobiles who sells
tires with his cars is engaged in tying because, although
the buyer is free to buy tires from someone else, he is
unlikely to do so, having paid for the tires supplied by
the car’s manufacturer. Jack Walters & Sons Corp. v. Morton
Building, Inc., 737 F.2d 698, 704-06 (7th Cir. 1994); see
also United States v. Microsoft Corp., supra, 253 F.3d at 87.
The plaintiffs’ other theory of antitrust liability is that
in exchange for overcharging its dealers for credit card
processing, Marathon is receiving kickbacks from the
banks and other financial institutions that offer credit
cards. This theory, as pleaded in the complaint and ex-
plained in the plaintiffs’ briefs and argument, makes no
sense. If Marathon is forcing its dealers to pay an exorbi-
tant fee for processing credit card sales, as the plain-
tiffs claim, this can only hurt firms that offer credit
cards. Most of the fee will be passed on to 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 re-
duce 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 may involuntarily
induce dealers to switch to other franchisors, unless the
price-fixing conspiracy targets them as well. In any event
the complaint gives no hint of the role that Marathon
No. 07-3543 11
might be hired to play in a conspiracy of the card compa-
nies. So this claim, too, must be dismissed under the rule
of Bell Atlantic for failure to allege a plausible theory
of antitrust illegality. And therefore the entire suit was
rightly dismissed.
AFFIRMED.
USCA-02-C-0072—6-23-08