Opinion
Civil Action No. 03-11202-RWZ.
August 30, 2004
MEMORANDUM OF DECISION AND ORDER
Almost from the moment in 1762 when John Montagu, Fourth Earl of Sandwich, sank his teeth into a piece of salt beef between two slices of toast, the world has been immeasurably enriched by the culinary invention that bears his name. Fame and fashion are fleeting. Our leaders are all too human. Even the loftiest ideals give way to disappointing reality. But the sandwich is tried and true: convenient, delicious, and on occasion sublime. Cf. Alice Childress, A Hero Ain't Nothing But a Sandwich (1973).
According to popular legend, the Earl invented the sandwich while on a gambling bender — so that he could eat a meal without leaving the card table. According to Montagu's biographer, however, the Earl merely wanted to be able to sup at his desk while working late. N.A.M. Rodger, The Insatiable Earl: A Life of John Montagu, Fourth Earl of Sandwich, 1718-1792, at 79 (1994). This factual conflict is not presently before the Court.
Montagu's contribution to humankind has not solely been of the epicurean variety. Sandwiches are a big business, as the present case attests. Plaintiffs are New England-area franchisees of D'Angelo Sandwich Shops. Their franchise agreements required that all perishables, meats, dairy, poultry, seafood, and janitorial and paper products be purchased from suppliers designated by the franchisor, D'Angelo Franchising Corporation. One of these designated suppliers was U.S. Foodservice, Inc., along with its wholly owned subsidiary JP Foodservice Distributors, Inc. ("U.S. Foods defendants"). Every week from April 1999 through March 2001, U.S. Foods charged the plaintiffs a flat delivery fee of $284 plus state sales tax, and from April 2001 until mid-January 2002, the delivery fee was ten percent of the supply purchases, plus tax. Plaintiffs allege that unbeknownst to them, U.S. Foods was kicking back a substantial portion of the delivery fees — $157 of the $284 fee and four percent of the supply purchases — to the franchisor. Since learning of this financial arrangement, plaintiffs have protested and fought, culminating in this lawsuit filed on June 25, 2003, against the D'Angelo and U.S. Foods defendants. In their First Amended Complaint, plaintiffs allege commission payments in excess of $887,000, in violation of section 2(c) of the Robinson-Patman Act, codified at 15 U.S.C. § 13(c) (Count I); Massachusetts, Connecticut, Rhode Island and Maine unfair trade practices statutes (Counts II-V); the Massachusetts Antitrust Act, Mass. Gen. L. ch. 93, §§ 1-14A (Count VI); and the implied covenant of good faith and fair dealing (Count VII). The D'Angelo defendants and U.S. Foods defendants have filed two motions to dismiss for failure to state a claim for which relief can be granted.
According to the Complaint, D'Angelo Franchising Corporation ("DFC") is wholly owned by D'Angelo Sandwich Shops, Inc. ("DSSI"), which is in turn "owned and/or controlled by Papa Gino's, Inc. ("PGI") and/or Papa Gino's Holding Corp." All four companies are defendants in this matter, as is Thomas J. Galligan III, the "president, chief executive officer and/or chairman of the board of DFC and PGI." Collectively, these defendants shall be referred to herein as the "D'Angelo defendants." DSSI competes with the franchisees with its own D'Angelo Sandwich Shops.
One plaintiff, McKenna Enterprises, Inc., has stipulated that all of its claims against the D'Angelo defendants shall be dismissed with prejudice. The stipulation is hereby approved.
Section 2(c) of the Robinson-Patman Act has "bewildered lawyers and judges ever since" its enactment in 1936. Augusta News Co. v. Hudson News Co., 269 F.3d 41, 44 (1st Cir. 2001). The section prohibits
any person engaged in commerce, in the course of such commerce, to pay or grant, or to receive or accept, anything of value as a commission, brokerage, or other compensation, or any allowance or discount in lieu thereof, except for services rendered in connection with the sale or purchase of goods, wares or merchandise, either to the other party to such transaction or to an agent, representative, or other intermediary therein where such intermediary is acting in fact for or in behalf, or is subject to the direct or indirect control, of any party to such transaction other than the person by whom such compensation is so granted or paid.15 U.S.C. § 13(c). While its original purpose targeted the use of "dummy" brokerage fees as an indirect means to secure discriminatory pricing, "Congress used broad language to cover not only the methods then in existence but others that might be devised." Seaboard Supply Co. v. Congoleum Corp., 770 F.2d 367, 371 (3d Cir. 1985). The D'Angelo defendants contend that section 2(c) does not apply to commercial bribery, "whereby one party to the transaction corrupts an agent of the other." Augusta News Co., 269 F.3d at 45. The First Circuit has not decided whether commercial bribery is actionable. See id. at 44, 45 n. 4;Bridges v. MacLean-Stevens Studios, Inc., 201 F.3d 6, 11 (1st Cir. 2000). The D'Angelo defendants assert that the fact that the issue is unresolved compels dismissal of Count I, but that is simply not the case. This Court shall resolve the issue in the first instance by following the five circuits that have held that commercial bribery is actionable under section 2(c). See Bridges, 201 F.3d at 11 (collecting cases).
The Supreme Court has twice suggested, in dicta, that commercial bribery falls within the ambit of section 2(c). See California Motor Transport Co. v. Trucking Unlimited, 404 U.S. 508, 513 (1972) ("[B]ribery of a public purchasing agent may constitute a violation of § 2(c) of the Clayton Act, as amended by the Robinson-Patman Act."); F.T.C. v. Henry Broch Co., 363 U.S. 166, 169 n. 6 (1960) ("[A]lthough not mentioned in the Committee Reports, the debates on the bill show clearly that § 2(c) was intended to proscribe other practices such as the 'bribing' of a seller's broker by the buyer.").
In the alternative, defendants argue that even if commercial bribery were actionable under section 2(c), a bribery claim requires a fiduciary relationship between plaintiff and defendant that is lacking in the franchising context. In Bridges, the First Circuit provided a useful guide to the scope of section 2(c) by assuming for the sake of argument that it did cover commercial bribery. Id. Bridges involved contracts made by a photography studio with schools in exchange for an exclusive right to take portraits on school property. The studio paid schools an extra twenty-percent "commission" that it then passed along to consumers. In outlining the contours of a section 2(c) violation for commercial bribery, the Court noted that "the payments involved must be made to a party to the transaction or to someone connected with that party in an agency, representative, or intermediary relationship. In other words, the payments must cross the seller-buyer line." Id. (internal citations and quotation marks omitted). The commission payments were deemed not actionable because the schools could not force parents to purchase portraits. As a result, the payments never crossed the sellerbuyer line. Id. at 12 (citing Stephen Jay Photography, Ltd. v. Olan Mills, Inc., 903 F.2d 988 (4th Cir. 1990)).
In the present case, by contrast, plaintiffs allege that they were "effectively compelled" by the D'Angelo defendants to purchase supplies from the U.S. Foods defendants and that the D'Angelo defendants placed orders for supplies with U.S. Foods "in accordance with plaintiffs' instructions." First Amended Complaint, ¶¶ 30, 33, 46. In addition, the D'Angelo defendants purchased supplies directly from U.S. Foods for use in the franchisor-owned Sandwich Shops. Id. at ¶ 47. By the logic ofBridges, the seller-buyer line has been crossed, and defendants' contention that there is no fiduciary relationship between franchisor and franchisee is immaterial.
The D'Angelo defendants additionally assert that no commercial bribery has occurred because plaintiffs had constructive notice of the payments from the U.S. Foods to the D'Angelo defendants. Although plaintiffs have alleged secrecy, id. at ¶ 2, the D'Angelo Franchising Corporation's 2000 Uniform Franchising Offering Circular notes that "[w]e and our parent, or persons affiliated with us, may derive revenue as a result of your purchases of approved supplies or from approved suppliers. . . ." The Circular, which was filed with the appropriate authorities in New York and Rhode Island, is provided to prospective and not to existing franchisees. At this early stage in the proceedings, it is unclear whether the Circular was something of which plaintiffs knew or should have known.
The D'Angelo defendants further contend that plaintiffs have not adequately alleged "antitrust injury." Arising from section 4 of the Clayton Act, 15 U.S.C. § 15, the "antitrust injury" requirement means that the injury "must amount to the type of harm the antitrust laws were intended to prevent, and it must flow from that which makes the defendants' acts unlawful." Caribe BMW, Inc. v. Bayerische Motoren Werke Aktiengesellschaft, 19 F.3d 745, 752 (1st Cir. 1994) (internal punctuation omitted) (citingBrunwick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 489 (1977)). Plaintiffs allege that the payment scheme forced them to operate their sandwich shops at a competitive disadvantage to the franchisor-owned shops and other competitors, estimating lost sales and profits in excess of $1.5 million. First Amended Complaint, ¶¶ 49-50. On a motion to dismiss, these allegations sufficiently suggest "that the probable effect of the discrimination would be to allow the 'favored competitor to draw sales or profits from him, the unfavored competitor.'" Best Brands Beverage, Inc. v. Falstaff Brewing Co., 842 F.2d 578, 584 (2d Cir. 1987) (quoting J. Truett Payne Co. v. Chrysler Motor Corp., 451 U.S. 557, 569-70 (1981) (Powell, J., dissenting in part)). Count I states a claim for a violation of section 2(c) of the Robinson-Patman Act.
Regarding the state law claims (Counts II-VII), plaintiffs concede that they have no standing to sue under the Rhode Island and Maine statutes. Dismissal is therefore appropriate on Counts IV and V. As to Counts II (Mass. Gen. Laws ch. 93A) and III (Connecticut Unfair Trade Practices Act), the allegations that give rise to a section 2(c) violation are sufficient to state claims for unfair trade practices. See PMP Associates, Inc. v. Globe Newspaper Co., 321 N.E.2d 915, 917 (Mass. 1975);Whitehall Co. Ltd. v. Merrimack Valley Distributing Co., Inc., 780 N.E.2d 479, 485 n. 14 (Mass.App.Ct. 2002). As to Count VI, the Massachusetts Antitrust Act, Mass. Gen. Laws ch. 93, §§ 1-14A, "contains no specific analog to the Robinson-Patman Act and no other specific reference to price discrimination." Whitehall Co., 780 N.E.2d at 486. While a primary line case of price discrimination may require monopolistic intent, id., a secondary line case such as that alleged by plaintiffs states a claim for a "restraint of trade or commerce" within the meaning of Mass. Gen. Laws ch. 93, § 4.Cf. United States v. Whiting, 212 F. 466 (D. Mass. 1914) ("There may be, I think, an unreasonable restraint of trade which does not constitute a monopoly. . . ."). On Count VII, the implied covenant of good faith and fair dealing "cannot override the express terms of a contract." Dunkin Donuts Inc. v. Gav-Stra Donuts, Inc., 139 F. Supp. 2d 147, 156 (D. Mass. 2001) (citation and internal quotation marks omitted). Defendants argue that plaintiffs cannot state a claim for a breach of the implied covenant because they have not alleged any violation of the franchise agreement. Plaintiffs agree there has been no breach of contract but contend that the D'Angelo defendants violated the spirit of the agreements by using the discretionary right to choose suppliers in order to extract more money from the franchisees. Such allegations state a claim under Massachusetts law. Anthony's Pier Four, Inc. v. HBC Associates, 583 N.E.2d 806, 820-21 (Mass. 1991).
Although defendants rely heavily on Whitehall Co. for ruling that "price discrimination without an adverse impact on competition, and not simply on competitors, is not an unfair method of competition or an unfair trade practice," id. at 487, the holding only applies to price discrimination at the "primary line," or price discrimination by competing sellers. The case recognizes that price discrimination at the "secondary line" — "discrimination that injures competitors of a seller's favored customers," id. at 484 n. 13 — is materially different and presents a situation in which the "Robinson-Patman Act does protect against injury to competitors." Id. at 485 n. 14. The present case involves competing buyers and is therefore a "secondary line" case.
Defendants attempt to show that the franchise agreements have not been breached by seeking to introduce an agreement between one of the plaintiffs and the D'Angelo Franchising Corporation. Plaintiffs vigorously oppose its consideration with the Motion to Dismiss. This one agreement alone would not be dispositive as to all plaintiffs, nor does the section of the contract most pertinent to the case, section 7.16, differ materially from the bare allegations of the First Amended Complaint, ¶ 30. Because the parties agree that defendants had a discretionary right to choose suppliers, there is no need to address the admissibility of the one franchise agreement.
Finally, the D'Angelo defendants argue that plaintiffs have failed to allege sufficient facts to establish that the one individual defendant, D'Angelo CEO Thomas Galligan III, "authorized, ordered or d[id]" acts connected with the brokerage arrangement. 15 U.S.C. § 24. Plaintiffs have alleged that Galligan "participated in and/or authorized the acts of the D'Angelo defendants described" in the First Amended Complaint. Although this bare allegation may not in itself be adequate,Cash Energy, Inc. v. Weiner, 768 F. Supp. 892, 895 (D. Mass. 1991), an exhibit submitted by the U.S. Foods defendants in connection with their Motion to Dismiss shows that Galligan signed the 1999 supply agreement that appears to be the root of the entire case. Galligan remains personally liable for the antitrust violations alleged by plaintiffs.
The U.S. Foods defendants in their Motion to Dismiss contend that the four-year statute of limitations has run on every count except Count V and that the state unfair trade practices statutes are inappropriate bases for suit, "as plaintiffs' claims more properly would sound" under state antitrust laws. As an initial matter, there is no legal basis for the argument that the state law causes of action for unfair trade practices fail because of the availability of relief under state antitrust laws. For example, even though Massachusetts has its own antitrust statute, antitrust violations may also be brought under Chapter 93A. See Ciardi v. Hoffman-LaRoche, Ltd., 762 N.E.2d 303, 308 (Mass. 2002). The U.S. Foods defendants do not cite a single case to suggest that anything is different with respect to Connecticut's statutory scheme.
Maine's unfair trade practices statute has a six-year limitations period.
Because plaintiffs' concede that they have no standing as to Counts IV and V, it is unnecessary to discuss the scope of the unfair trade practices statutes in Rhode Island and Maine.
The statute of limitations argument is based on the fact that the initial payment agreement between the D'Angelo and U.S. Foods defendants was made early in 1999, more than four years before the present suit was filed. Plaintiffs argue that the U.S. Foods and D'Angelo defendants engaged in a continuing violation and that each time the U.S. Foods defendants paid the D'Angelo defendants, antitrust laws were violated anew. "In the context of a continuing conspiracy to violate the antitrust laws, . . . each time a plaintiff is injured by an act of the defendants a cause of action accrues to him to recover the damages caused by that act and that, as to those damages, the statute of limitations runs from the commission of the act." Zenith Radio Corp. v. Hazeltine Research, Inc., 401 U.S. 321, 338 (1971). Where there is an agreement to pay illegal brokerage fees, the Circuits are split on the question of whether individual payments start the statute of limitations anew. Compare Grand Rapids Plastics, Inc. v. Lakian, 188 F.3d 401, 406 (6th Cir. 1999) ("[I]ndividual payments . . . were only a manifestation of the previous agreement."), with Hennegan v. Pacifico Creative Service, Inc., 787 F.2d 1299, 1301 (9th Cir. 1986) ("[A]n antitrust conspiracy begun outside the limitations period is actionable if new overt acts in furtherance of the conspiracy damage the plaintiff within the limitations period.").
In the present case, plaintiffs at the very least are entitled to pursue their action as to the payments that allegedly occurred after April 2001 because the U.S. Foods and D'Angelo defendants changed the terms of their agreement. Regarding the earlier payments, while Lakian extrapolates from the continuing violation doctrine that developed in the context of the Sherman Act, 188 F.3d at 406 (citing DXS, Inc. v. Siemens Med. Sys., Inc., 100 F.3d 462 (6th Cir. 1996)), the language of the Sherman Act, which prohibits combinations in restraint of trade, 15 U.S.C. § 1, has an entirely different emphasis from that of the Robinson-Patman Act, which proscribes the payment of brokerage fees. The payments themselves, not the agreement, constitute the misconduct, and each payment from the U.S. Foods defendants to the D'Angelo defendants violated the Robinson-Patman Act anew. Plaintiffs, therefore, may also press their claims as to payments made between June 25, 1999, and April 2001.
Accordingly, the defendants' Motions to Dismiss are allowed as to Counts IV and V and denied as to all other counts. The claims of plaintiff McKenna Enterprises, Inc., against the D'Angelo defendants are dismissed with prejudice, in accordance with their stipulation.