Window World of Baton Rouge, LLC v. Window World, Inc.; Window World of St. Louis, Inc. v. Window World, Inc., 2016 NCBC 80.
STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE SUPERIOR COURT DIVISION WILKES COUNTY 15 CVS 1
WINDOW WORLD OF BATON ROUGE, LLC; WINDOW WORLD OF DALLAS, LLC; WINDOW WORLD OF TRI STATE AREA, LLC; and JAMES W. ROLAND,
Plaintiffs,
v.
WINDOW WORLD, INC. and WINDOW WORLD INTERNATIONAL, LLC,
Defendants.
WILKES COUNTY 15 CVS 2
WINDOW WORLD OF ST. LOUIS, INC.; WINDOW WORLD OF KANSAS CITY, INC.; WINDOW WORLD OF SPRINGFIELD/PEORIA, INC.; JAMES T. LOMAX III; JONATHAN GILLETTE; B&E INVESTORS, INC.; WINDOW WORLD OF NORTH ATLANTA, INC.; WINDOW WORLD OF CENTRAL ALABAMA, INC.; MICHAEL EDWARDS; MELISSA EDWARDS; WINDOW WORLD OF CENTRAL PA, LLC; ANGELL P. WESNERFORD; KENNETH R. FORD, JR.; WORLD OF WINDOWS OF DENVER, LLC; RICK D. ROSE; CHRISTINA M. ROSE; WINDOW WORLD OF ROCKFORD, INC.; WINDOW WORLD OF JOLIET, INC.; SCOTT A. WILLIAMSON; JENNIFER L. WILLIAMSON; BRIAN C. HOPKINS; WINDOW WORLD OF LEXINGTON, INC.; TOMMY R. JONES; JEREMY T. SHUMATE; WINDOW WORLD OF PHOENIX LLC; JAMES BALLARD; and TONI BALLARD,
ORDER AND OPINION ON DEFENDANTS’ MOTION TO DISMISS AND SECOND MOTION FOR JUDGMENT ON THE PLEADINGS
1. THIS MATTER is before the Court upon Defendants Window World, Inc.
and Window World International, LLC’s (collectively, “Window World” or
“Defendants”) Motion to Dismiss pursuant to Rule 12(b)(6) of the North Carolina
Rules of Civil Procedure in Window World of Baton Rouge, LLC v. Window World,
Inc., 15 CVS 1 (the “Roland Action”), and Defendants’ Second Motion for Judgment
on the Pleadings pursuant to Rule 12(c) of the North Carolina Rules of Civil
Procedure in Window World of St. Louis, Inc. v. Window World, Inc., 15 CVS 2 (the
“Lomax Action”) (collectively, the “Motions”).
2. After considering the Motions, the briefs in support of and in opposition to
the Motions, and the arguments of counsel at a hearing held on June 15, 2016, the
Court hereby GRANTS both Motions and DISMISSES with prejudice Plaintiffs’1
1 “Plaintiffs” herein means all plaintiffs in the Roland Action and the Lomax Action collectively: Window World of Baton Rouge, LLC; Window World of Dallas, LLC; Window World of Tri State Area, LLC; James W. Roland; Window World of St. Louis, Inc.; Window World of Kansas City, Inc.; Window World of Springfield/Peoria, Inc.; James T. Lomax III; Jonathan Gillette; B&E Investors, Inc.; Window World of North Atlanta, Inc.; Window World Ninth Cause of Action in the Roland Action and Plaintiffs’ Eleventh Cause of Action
in the Lomax Action, each of which allege Defendants are liable to Plaintiffs for
violation of N.C. Gen. Stat. § 75-1.
Brooks, Pierce, McLendon, Humphrey & Leonard LLP, by Charles E. Coble, Benjamin R. Norman, Jeffrey E. Oleynik, and Andrew L. Rodenbough, and Keogh Cox & Wilson, Ltd, by John P. Wolff, III, for Plaintiffs Window World of Baton Rouge, LLC, Window World of Dallas, LLC, Window World of Tri State Area LLC, James W. Roland, Window World of St. Louis, Inc., Window World of Kansas City, Inc., Window World of Springfield/Peoria, Inc., James T. Lomax III, Jonathan Gillette, B&E Investors, Inc., Window World of North Atlanta, Inc., Window World of Central Alabama, Inc., Michael Edwards, Melissa Edwards, Window World of Central PA, LLC, Angell P. Wesnerford, Kenneth R. Ford, Jr., World of Windows of Denver, LLC, Rick D. Rose, Christina M. Rose, Window World of Rockford, Inc., Window World of Joliet, Inc., Scott A. Williamson, Jennifer L. Williamson, Brian C. Hopkins, Window World of Lexington, LLC, Tommy R. Johns, Jeremy T. Shumate, Window World of Phoenix LLC, James Ballard, and Toni Ballard.
Manning, Fulton & Skinner, P.A., by Michael T. Medford, Judson A. Welborn, Natalie M. Rice, Jessica B. Vickers, and Pia Anderson Dorius Reynard & Moss, by Mark M. Leitner, Joseph S. Goode, Travis James West, and Jessica L. Farley, for Defendants Window World, Inc. and Window World International, LLC.
Bledsoe, Judge.
I.
INTRODUCTION
3. As pleaded here, this case involves a dispute between Window World, a
franchisor of its own brand of vinyl replacement windows, doors, and related
of Central Alabama, Inc.; Michael Edwards; Melissa Edwards; Window World of Central PA, LLC; Angell P. Wesnerford; Kenneth R. Ford, Jr.; World of Windows of Denver, LLC; Rick D. Rose; Christina M. Rose; Window World of Rockford, Inc.; Window World of Joliet, Inc.; Scott A. Williamson; Jennifer L. Williamson; Brian C. Hopkins; Window World of Lexington, Inc.; Tommy R. Jones; Jeremy T. Shumate; Window World of Phoenix LLC; James Ballard; and Toni Ballard. materials, and Plaintiffs, who are various Window World franchisees around the
United States. Plaintiffs filed these two lawsuits in 2015, alleging that Window
World knowingly and intentionally withheld information from Plaintiffs that
Plaintiffs allege they were entitled to receive under federal franchise law.
Particularly relevant to these Motions, Plaintiffs allege that Window World
misrepresented a key fact on which the franchise relationships were formed—that by
becoming a licensee of the Window World marks, each Plaintiff would gain access to
the lowest available wholesale prices for the Window World windows, doors, and
related materials Plaintiffs sold and installed.
4. Plaintiffs’ Second Amended Complaint in each action alleges various causes
of action against Window World for declaratory judgment, reformation, injunction,
breach of contract, fraud, negligent misrepresentation, violation of N.C. Gen. Stat. §§
75-1 and 75-1.1, unjust enrichment, and fraudulent transfer. Plaintiffs seek over $5
million in damages in each action.
5. Defendants’ Motions seek dismissal of a single claim in each Second
Amended Complaint: Plaintiffs’ claim against Defendants for an illegal combination
in restraint of trade in violation of N.C. Gen. Stat. § 75-1. Defendants argue that
Plaintiffs’ Second Amended Complaint in each action fails to allege facts sufficient to
establish necessary elements under section 75-1, including (i) the identity of a
relevant market, (ii) that Window World has sufficient market power in the relevant
market, (iii) that Window World’s conduct had an anticompetitive effect, and (iv) that
Plaintiffs suffered antitrust injury. The allegations relevant to the determination of the Motions are substantially similar in each of Plaintiffs’ Second Amended
Complaints.
II.
PROCEDURAL AND FACTUAL BACKGROUND
6. The Court does not make findings of fact on motions to dismiss under Rule
12(b)(6) or on motions for judgment on the pleadings under Rule 12(c), but only recites
those facts included in each Second Amended Complaint that are relevant to the
Court's determination of the Motions. See, e.g., Concrete Serv. Corp. v. Investors
Grp., Inc., 79 N.C. App. 678, 681, 340 S.E.2d 755, 758 (1986).
7. According to Plaintiffs, Window World is a North Carolina franchisor that
operates a network of approximately 200 franchises across the United States that
includes Plaintiffs’ franchises. (Second Am. Compl., 15 CVS 1, hereafter, “Roland
SAC,” ¶¶ 15, 19, 22; Second Am. Compl., 15 CVS 2, hereafter, “Lomax SAC," ¶¶ 50,
54.)
8. Plaintiffs and other Window World franchisees purchase vinyl replacement
windows, doors and siding, related accessories, and other Window World-
trademarked items from Window World’s approved vendors. (Roland SAC ¶¶ 19, 24;
Lomax SAC ¶¶ 54, 59.) The franchisees then resell to, and install the products for,
customers. (Roland SAC ¶¶ 19, 24; Lomax SAC ¶¶ 54, 59.)
9. Each of Window World’s multiple franchisees is assigned an exclusive
geographic area. (Roland SAC ¶¶ 30, 31, 35, 36; Lomax SAC ¶¶ 65–95.) Plaintiffs are long-standing Window World franchisees and sell Window World-trademarked
products in different parts of the United States. (Roland SAC ¶ 2; Lomax SAC ¶ 2.)
10. In addition to providing the right to use the Window World trademarks,
Window World endeavors to use the bargaining power created by its network of
franchisees to negotiate with Window World’s approved vendors to provide lower
prices to its franchisees for Window World-trademarked products. (Roland SAC ¶¶
98, 99, 102; Lomax SAC ¶¶ 187, 188, 197.) Window World has historically charged
its franchisees a modest upfront franchise fee when the franchisee acquired its
franchise. (Roland SAC ¶¶ 30, 32, 36; Lomax SAC ¶¶ 65, 74, 75, 81, 82, 83, 90, 91,
93, 95.) Instead of collecting royalties directly from franchisees on their sales of
Window World-trademarked items, Window World collects its royalties through the
approved vendors as a percentage of the sales price of Window World items sold by
these vendors. (Roland SAC ¶ 68; Lomax SAC ¶ 160.)
11. Plaintiffs allege that these payments from approved vendors are in the form
of “kickbacks” or “rebates” and were not disclosed to Plaintiffs until soon before
Plaintiffs initiated these lawsuits. (Roland ¶ 68; Lomax SAC ¶ 160.) Plaintiffs
further allege that these payments supplied nearly all of the revenue that Window
World has collected in the course of its franchising business over the time period
relevant to this dispute. (Roland ¶ 68; Lomax SAC ¶ 160.)
12. According to Plaintiffs, since as early as 2002, Window World has
consistently represented to Plaintiffs that participation in the Window World
franchisee network would allow Plaintiffs to receive the lowest available wholesale pricing for Window World-trademarked products. (Roland ¶ 72, Lomax SAC ¶ 164.)
As stated in the typical Window World licensing agreement with its franchisees,
Window World “shall endeavor to arrange for the supply of the items to LICENSEE
at prices which are less than those charged to non-licensees within the trade area
herein defined.”2 (Roland SAC ¶ 102; Lomax SAC ¶ 197; Defs.’ Mot. Dismiss Exs. A,
B, C, D § 4.)
13. The licensing agreements also required, however, that Plaintiffs agree to
“sell and install only and exclusively those products, goods, equipment, and parts
from vendors approved by [Window World].” (Defs.’ Mot. Dismiss Exs. A, B, C, D § 4)
(emphasis in original). Nonetheless, Plaintiffs allege that “the parties’ business
relationship existed independent of those written agreements, predated the execution
of those written agreements, continued unabated and unaltered after the expiration
of those written agreements, and was not limited by those written agreements.”
(Roland SAC ¶ 29; Lomax SAC ¶ 64.)
14. Since at least 2000, Associated Materials, LLC (“AMI”) has served as a
Window World-approved supplier of vinyl replacement windows to Window World
franchisees. (Roland SAC ¶ 24; Lomax SAC ¶ 59.) In 2007, Window World announced
to its franchisees that it would be moving to AMI as the “sole source” supplier of
windows within the Window World franchise network. (Roland SAC ¶ 137; Lomax
SAC ¶ 159.)
2 These documents were not attached to Plaintiffs’ Second Amended Complaints, but were
referred to therein, and Window World has attached the referenced documents to its Motions. As a result, the Court may properly consider such documents in resolving the Motions. See, e.g., Oberlin Capital, L.P. v. Slavin, 147 N.C. App. 52, 60, 554 S.E.2d 840, 847 (2001). 15. Plaintiffs allege that Window World unlawfully conspired with AMI to
require Window World franchisees to purchase only from AMI, to inflate the prices
Window World franchisees, including Plaintiffs, were required to pay to AMI, and
therefore to increase the revenue that Window World collected from each purchase
its franchisees made from AMI. (Roland ¶ 134; Lomax SAC ¶ 230.) Plaintiffs allege
that these actions harmed competition and injured Window World franchisees,
including Plaintiffs. (Roland SAC ¶ 138; Lomax SAC ¶ 234.)
16. Plaintiffs further allege that Window World has failed to meet its
commitment to secure superior wholesale pricing for its franchisees. In addition,
Plaintiffs allege that the amounts Plaintiffs have paid to AMI exceed the amounts
they would otherwise have paid to AMI or other suppliers of comparable products in
the relevant markets were they not Window World franchisees. (Roland SAC ¶ 106;
Lomax SAC ¶ 201.) Plaintiffs also contend that they have been required to pay above-
market prices for vinyl replacement windows and for various other products,
including caulk, doors, siding, and garage doors. (Roland SAC ¶ 111; Lomax SAC ¶
206.)
17. Plaintiffs assert that these actions and other allegedly wrongful conduct by
Window World motivated Plaintiffs to file these actions on January 2, 2015. Since
the filing of the lawsuits, the parties have engaged in pretrial motions practice as
well as voluminous discovery, none of which is relevant for the resolution of the
current Motions, which is based solely on an examination of the allegations of each
Second Amended Complaint. 18. Plaintiffs filed the Second Amended Complaint in the Lomax Action on
September 8, 2015, and the Second Amended Complaint in the Roland Action on
March 22, 2016. On April 25, 2016, Window World filed its Motion to Dismiss in the
Roland Action and its Motion for Judgment on the Pleadings in the Lomax Action.
The Motions have been fully briefed, the Court held a hearing on the Motions on June
15, 2016, and the Motions are now ripe for resolution.
III.
LEGAL STANDARD
19. In ruling on a motion to dismiss pursuant to Rule 12(b)(6) of the North
Carolina Rules of Civil Procedure, the Court reviews the allegations of the operative
complaint in the light most favorable to the plaintiff. The Court’s inquiry here is
“whether, as a matter of law, the allegations of the [Second Amended Complaint in
the Roland Action], treated as true, are sufficient to state a claim upon which relief
may be granted under some legal theory.” Harris v. NCNB Nat’l Bank of N.C., 85
N.C. App. 669, 670, 355 S.E.2d 838, 840 (1987). The Court construes the Second
Amended Complaint liberally and accepts all allegations as true. Laster v. Francis,
199 N.C. App. 572, 577, 681 S.E.2d 858, 862 (2009).
20. Dismissal of a claim pursuant to Rule 12(b)(6) is proper “(1) when the
complaint on its face reveals that no law supports plaintiff’s claim; (2) when the
complaint reveals on its face the absence of fact sufficient to make a good claim; [or]
(3) when some fact disclosed in the complaint necessarily defeats the plaintiff’s
claim.” Oates v. JAG, Inc., 314 N.C. 276, 278, 333 S.E.2d 222, 224 (1985); see also Jackson v. Bumgardner, 318 N.C. 172, 175, 347 S.E.2d 743, 745 (1986). Otherwise,
“a complaint should not be dismissed for insufficiency unless it appears to a certainty
that plaintiff is entitled to no relief under any state of facts which could be proved in
support of the claim.” Sutton v. Duke, 277 N.C. 94, 103, 176 S.E.2d 161, 166 (1970)
(emphasis omitted).
21. The Court is not required “to accept as true allegations that are merely
conclusory, unwarranted deductions of fact, or unreasonable inferences.” Good Hope
Hosp., Inc. v. N.C. Dep’t of Health & Human Servs., 174 N.C. App. 266, 274, 620
S.E.2d 873, 880 (2005). A “trial court can reject allegations that are contradicted by
the documents attached, specifically referred to, or incorporated by reference in the
complaint.” Laster, 199 N.C. App. at 577, 681 S.E.2d at 862.
22. The standard for a motion for judgment on the pleadings under Rule 12(c)
is similar. “’A complaint is fatally deficient in substance, and subject to a motion by
the defendant for judgment on the pleadings if it fails to state a good cause of action
for plaintiff and against defendant[.]’” Bigelow v. Town of Chapel Hill, 227 N.C. App.
1, 3, 745 S.E.2d 316, 319 (2013) (quoting George Shinn Sports, Inc. v. Bahakel Sports,
Inc., 99 N.C. App. 481, 486, 393 S.E.2d 580, 583 (1990)). The Court must “view the
facts and permissible inferences in the light most favorable to the nonmoving party.”
Ragsdale v. Kennedy, 286 N.C. 130, 137, 209 S.E.2d 494, 499 (1974). Thus,
Defendants’ Rule 12(c) motion for judgment on the pleadings in the Lomax Action
should be denied “unless it is clear that [Plaintiffs are] not entitled to any relief under any statement of the facts.” Praxair, Inc. v. Airgas, Inc., 1999 NCBC LEXIS 5, at *8
(N.C. Super. Ct. May 26, 1999).
IV.
ANALYSIS
23. N.C. Gen. Stat. § 75-1 makes illegal “[e]very contract, combination in the
form of trust or otherwise, or conspiracy in restraint of trade or commerce in the State
of North Carolina.” Our Supreme Court has directed trial courts that “the body of
law applying the [federal] Sherman Act, although not binding upon this Court in
applying [section] 75-1, is nonetheless instructive in determining the full reach of
that statute.” Rose v. Vulcan Materials Co., 282 N.C. 643, 655, 194 S.E.2d 521, 530
(1973).
24. Restraints of trade, which section 75-1 makes illegal, are most often
evaluated under the rule of reason. See, e.g., Oksanen v. Page Mem. Hosp., 945 F.2d
696, 708–09 (4th Cir. 1991). “Under the rule of reason, [a plaintiff] bears the burden
of proving that the actions of the defendants have unreasonably restrained trade.”
Id. at 709. In order to meet this burden, a plaintiff must show that a defendant has
market power3 by showing “what market [the plaintiff] contends was restrained and
that the defendants played a significant role in the relevant market.” Id. The
3 Market power has been defined as the power “to force a purchaser to do something that he would not do in a competitive market.” Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 14 (1984). It is ‘“the ability to raise prices above those that would be charged in a competitive market”’ and “is usually demonstrated by a defendant’s ‘dominant market share in a well-defined market.”’ Carolina Rest. Group, Inc. v. Pepsico Sales, Inc., No. 3:14-CV-668, 2015 U.S. Dist. LEXIS 90598, at *18 (W.D.N.C. July 13, 2015) (quoting Flegel v. Christian Hosp., 4 F.3d 682, 688–89 (8th Cir. 1993)). “purpose of the inquiries into market definition and market power is to determine
whether an arrangement has the potential for genuine adverse effects on
competition.” FTC v. Ind. Fed'n of Dentists, 476 U.S. 447, 460 (1986). Courts have
observed that “[a]ntitrust claims often rise or fall on the definition of the relevant
market.” Bathke v. Casey’s Gen. Stores, 64 F.3d 340, 345 (8th Cir. 1995).
25. Window World thus contends that in order to state a valid claim under
section 75-1, Plaintiffs must allege facts sufficient to show that Window World had
market power in a valid and relevant market. Plaintiffs concede that federal case
law interpreting the Sherman Act is instructive in interpreting section 75-1, but
nonetheless argue that no North Carolina state court has required market power to
be specifically pleaded in order to withstand 12(b)(6) dismissal. Therefore, Plaintiffs
contend, even if they have not sufficiently pleaded market power, Plaintiffs’ section
75-1 claim should not be dismissed on that basis alone.
26. The Court finds this argument without merit. As explained above, our
Supreme Court has stated that federal decisions are instructive in interpreting
section 75-1. Rose, 282 N.C. at 655, 194 S.E.2d at 530. Moreover, this Court (Gale,
J.) has recently looked to federal case law in dismissing a section 75-1 claim for failure
to plead sufficiently a relevant product market or market power. See SiteLink
Software LLC v. Red Nova Labs, Inc., 2016 NCBC LEXIS 45 (N.C. Super. Ct. June
14, 2016). Indeed, in 1995, the North Carolina General Assembly amended certain
provisions of North Carolina’s antitrust laws, and titled such revision “An Act to
Revise the Statutes Regarding Antitrust Law to Ensure that These Provisions Are . . . Consistent with Federal Antitrust Laws.” See 1995 N.C. Sess. Laws 550. Plaintiffs
have cited no North Carolina case inconsistent with the federal case law relied upon
by both Window World and Plaintiffs in arguing the Motions. Thus, the Court looks
to federal case law interpreting the Sherman Act, 15 U.S.C. § 1, in resolving the
current Motions.
27. Nevertheless, the Court is mindful that Window World’s Motions must be
resolved under North Carolina’s more indulgent Rule 12(b)(6) standard rather than
the more exacting plausibility standard under federal Rule 12(b)(6) that governs the
federal cases that the parties cite in their briefs and that the Court relies on here.
Compare Sutton, 277 N.C. at 104, 176 S.E.2d at 167 (noting that a pleading complies
with North Carolina’s standard if it gives sufficient notice of the events underlying
the claims), with Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556–57 (2007) (requiring
that a complaint must state a plausible claim); see SiteLink, 2016 NCBC LEXIS 45,
at *17 (noting the difference between the federal and North Carolina Rule 12(b)(6)
standards in the context of evaluating federal antitrust precedents).
28. Despite the broad nature of the antitrust-related allegations in the Second
Amended Complaints, it has become clear through the parties’ briefing and argument
that Plaintiffs are asserting a “lock-in” theory of antitrust liability under section 75-
1. Plaintiffs’ claim is not that Window World exercised market power in the broad
market for windows and related accessories by enjoying a dominant market share in
particular geographic regions of the United States. Rather, the gravamen of
Plaintiffs’ claim is that Window World exercised market power over its franchisees by locking them into franchise agreements and then imposing unilaterally a sole-
supplier requirement that the “locked in” franchisees could not have anticipated
before entering into their franchise agreements. Window World argues, however,
that Plaintiffs’ Second Amended Complaints fail to define a valid relevant market
and, additionally, fail to allege that Window World had market power in the relevant
market, such that Plaintiffs’ claim must fail in each action.
29. As noted above, “Plaintiffs have the burden of defining the relevant
market.” Queen City Pizza v. Domino’s Pizza, 124 F.3d 430, 436 (3d Cir. 1997).
Generally, a relevant market is defined:
by the reasonable interchangeability of use or the cross-elasticity of demand between the product itself and substitutes for it. Where the plaintiff fails to define its proposed relevant market with reference to the rule of reasonable interchangeability and cross-elasticity of demand, or alleges a proposed relevant market that clearly does not encompass all interchangeable substitute products even when all inferences are granted in plaintiff’s favor, the relevant market is legally insufficient and a motion to dismiss may be granted.
Id. Courts have also held that a “relevant market has both a product and a geographic
dimension,” Carolina Rest. Group, Inc., 2015 U.S. Dist. LEXIS 90598, at *17, and
have defined the relevant geographic market as “‘the area of effective competition . .
. in which the seller operates, and to which the purchaser can practicably turn for
supplies.’” Id. at *18 (quoting United States v. Philadelphia Nat’l Bank, 374 U.S. 321,
359 (1963)).
30. Window World argues that Plaintiffs’ section 75-1 claim here must be
dismissed because Plaintiffs do not, and cannot, allege that interchangeable
substitutes do not exist in the relevant market and further because the relevant market cannot be restricted to a single franchisor or its products, as Plaintiffs contend
is appropriate here. Window World relies, in particular, on the Third Circuit’s
decision in Queen City Pizza, which held that “the relevant market . . . cannot be
restricted solely to those products currently approved by [the franchisor] for use by
[the] franchisees” and therefore “reject[ed] plaintiffs’ proposed relevant market.” Id.
at 438.
31. Queen City Pizza explains that “[a] court making a relevant market
determination looks not to the contractual restraints assumed by a particular
plaintiff [or plaintiffs] when determining whether a product is interchangeable, but
to the uses to which the product is put by consumers in general.” Queen City Pizza,
124 F.3d at 438. Thus, analogizing Queen City Pizza to the present case, the Third
Circuit posits that “the relevant inquiry here is not whether a [Window World]
franchisee may reasonably use both approved or non-approved products
interchangeably without triggering liability for breach of contract, but whether
[window resellers and installers] in general might use such products
interchangeably.” Id. Window World argues that the Third Circuit’s conclusion in
Queen City Pizza that approved and non-approved products could be used
interchangeably applies equally here and that Plaintiffs have not pleaded otherwise.
(Defs.’ Br. Supp. Disp. Mots. 18–19.)
32. Notwithstanding the above, Plaintiffs argue that they have defined, based
on a “lock-in” theory of antitrust liability, a valid relevant market, in particular, “the
market formed by the large group of Window World franchisees.” (Pls.’ Br. Opp. Defs.’ Disp. Mots. 6.) The lock-in theory stems from the United States Supreme Court’s
decision in Eastman Kodak Co. v. Image Technical Services, 504 U.S. 451 (1992). In
that case, the defendant, Kodak, was a manufacturer and seller of photocopiers, and
also sold service and replacement parts for its equipment. The plaintiffs were
eighteen independent service organizations (“ISOs”) that repaired and serviced
Kodak equipment at prices substantially lower than Kodak’s prices. Kodak
eventually implemented a policy of selling replacement parts for their machines only
to buyers of Kodak equipment who used Kodak service or who repaired their own
machines, thus reducing the ISOs’ access to the replacement parts they needed to
provide service to Kodak machines. Kodak also took steps to limit ISO access to other
sources of Kodak parts.
33. This policy succeeded in making it more difficult for the ISOs to sell service
for Kodak machines, and many ISOs were forced out of business or lost substantial
revenue. Customers were also forced to pay higher prices for Kodak service rather
than the lower prices offered by the ISOs. Eventually, the ISOs sued Kodak for
federal antitrust violations, alleging that Kodak’s policies limiting the availability of
parts to the ISOs made it more difficult for those ISOs to compete with Kodak in
servicing Kodak equipment. The Supreme Court upheld the denial of Kodak’s motion
for summary judgment, holding that there was a triable issue of fact as to the
availability of interchangeable substitutes for Kodak replacement parts and service
in the market. 34. In so holding, the Supreme Court recognized the general rule that “[t]he
relevant market for antitrust purposes is determined by the choices available to
Kodak equipment owners.” Id. at 482. The Court concluded, however, that “[b]ecause
service and parts for Kodak equipment are not interchangeable with other
manufacturers’ service and parts, the relevant market from the Kodak equipment
owner’s perspective is composed of only those companies that service Kodak
machines.” Id.
35. Further, in upholding the denial of Kodak’s motion for summary judgment,
the Supreme Court considered it important that high switching costs, such as where
a consumer has purchased an expensive piece of copying equipment, could force the
consumer to pay supracompetitive prices in the services aftermarket for replacement
parts, observing that a “locked in” consumer will likely tolerate some level of price
increases before switching brands. See Kodak, 504 U.S. at 476. Thus, the Court
concluded, it was reasonable to infer that Kodak had market power to raise prices
and drive out competition in the aftermarkets of service and repair.
36. Kodak did not, however, involve a franchise network like that alleged to
exist here. In Queen City Pizza, the Third Circuit considered the Kodak decision in,
and distinguished it from, the franchise context. Queen City Pizza involved Domino’s
Pizza, which operated in large measure at that time through a network of
approximately 3,500 franchisees around the United States. The plaintiffs were
Domino’s franchisees who alleged that Domino’s had restricted their ability to
purchase competitively priced dough and other ingredients by making it practically impossible for franchisees to obtain ingredients from another source, or to
manufacture the ingredients themselves, at more favorable prices. The plaintiffs
defined the relevant market as the market for ingredients and supplies among
Domino’s franchisees.
37. In considering the applicability of Kodak to the franchise context, the Third
Circuit concluded that “Kodak does not hold that the existence of information and
switching costs alone, such as those faced by the Domino’s franchisees, renders an
otherwise invalid relevant market valid.” 124 F.3d at 439. In determining that
Kodak was distinguishable from the typical franchise situation, the Third Circuit
noted that, in Kodak, there was a “change in policy [that] was not foreseen at the time
of sale, [thus] buyers had no ability to calculate these higher costs at the time of
purchase and incorporate them into their purchase decision.” Id. at 440.
38. In contrast, the plaintiffs in Queen City Pizza:
knew that Domino’s Pizza retained significant power over their ability to purchase cheaper supplies from alternative sources because that authority was spelled out in detail in section 12.2 of the standard franchise agreement. Unlike the plaintiffs in Kodak, the Domino’s franchisees could assess the potential costs and economic risks at the time they signed the franchise agreement. The franchise transaction between Domino’s Pizza, Inc. and plaintiffs was subjected to competition at the pre-contract stage. That cannot be said of the conduct challenged in Kodak because it was not authorized by contract terms disclosed at the time of the original transaction. Kodak’s sale of its product involved no contractual framework for continuing relations with the purchaser. But a franchise agreement regulating supplies, inspections, and quality standards structures an ongoing relationship between franchisor and franchisee designed to maintain good will. These differences between the Kodak transaction and franchise transactions are compelling.
Id. (emphasis added). The Court therefore concluded that “Domino’s does not sell a
unique product or service” and further that “[f]ranchisees must buy Domino’s- approved supplies and ingredients not because they are unique, but because they are
obligated by contract to do so.” Id. As such, the Third Circuit concluded that
Domino’s did not exercise market power in a relevant market sufficient to state a
violation of the Sherman Act. Id. at 441.
39. Accordingly, the Third Circuit concluded in Queen City Pizza that the
franchisor’s disclosures to franchisees through the franchise agreement are critical
in assessing whether the franchisees could have anticipated the franchisor’s conduct
and thus whether the franchisees should have relief from any resulting “locked in”
franchise arrangement. Id. at 440. Significantly for that case, Domino’s’ standard
franchise agreement expressly provided that Domino’s “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 suppliers or
distributors.” Id. at 433. The Third Circuit concluded that this provision clearly put
franchisees on notice that Domino’s retained control over the approval of suppliers
such that the franchisees had the ability to assess the costs and economic risks of
entering into a franchise agreement with Domino’s before they entered the franchise
relationship. Id. at 440.
40. Since Kodak and Queen City Pizza were decided, numerous federal courts
evaluating Kodak-type, lock-in based, antitrust claims in the franchise context have
looked to the specific language of the parties’ franchise agreement to determine
whether the franchisor effected an unforeseen change in policy after the franchisee
entered into the franchise agreement that prevented the franchisee from evaluating the economic costs and risks of the franchise prior to entry. If so, courts have
generally allowed claims under the Sherman Act to survive; if not, federal courts have
not hesitated to dismiss a franchisee’s claims under the Sherman Act. See, e.g.,
George Lussier Enters. v. Subaru of New Eng., Inc., 286 F. Supp. 2d 86, 100 (D.N.H.
2003) (since Kodak, “the prevailing view is that a contractual lock-in ordinarily does
not give rise to concerns that the antitrust laws were enacted to address”).
41. For example, in Burda v. Wendy’s International, Inc., 659 F. Supp. 2d 928
(S.D. Ohio 2009), the plaintiff became a Wendy’s franchisee in 1996 and signed a
franchise agreement that provided, in relevant part, as follows:
Franchisee shall purchase all food items, ingredients, supplies, materials, and other products used or offered for sale at the Restaurant solely from suppliers (including manufacturers, distributors, and other sources) who demonstrate, to the continuing reasonable satisfaction of Franchisor, the ability to meet Franchisor’s then-current standards and specifications for such items; who possess adequate quality controls and capacity to supply Franchisee’s needs promptly and reliably; and who have been approved in writing by Franchisor prior to any purchases by Franchisee from any such supplier, and have not thereafter been disapproved. If Franchisee desires to purchase any products from an unapproved supplier, Franchisee shall submit to Franchisor a written request for such approval. Franchisee shall not purchase from any supplier until, and unless, such supplier has been approved in writing by Franchisor.
Id. at 931.
42. When the plaintiff in Burda first acquired his franchise, there were a
number of Wendy’s-approved food suppliers from which the franchisees could
purchase needed supplies. Prior to 1997, the plaintiff purchased hamburger buns
from an approved supplier, LePage Bakery. In 1997, Wendy’s eliminated LePage
Bakery as an approved supplier and insisted that the plaintiff change bun suppliers and purchase all buns thereafter from New Bakery, which was a subsidiary of
Wendy’s. Plaintiff alleged that he had no knowledge of a potential obligation to buy
buns from New Bakery when he became a franchisee, and therefore, he had no means
of incorporating the costs of the New Bakery buns into his calculation of the potential
financial return on his contemplated investment in a Wendy’s franchise prior to
making his investment. Wendy’s, on the other hand, contended that the possibility
of a sole supplier requirement was specifically set forth in the franchise agreement
and, therefore, that the plaintiff knew, before becoming a Wendy’s franchisee, that
Wendy’s could require the plaintiff to purchase some essential items, like hamburger
buns, from a particular vendor.
43. The district court concluded that
[t]here is no language in [the franchise agreement] that would put a potential franchisee on notice that [Wendy’s] would be able to eliminate all competition by naming an exclusive supplier or that they could impose a surcharge on approved suppliers. Instead, the language suggests that supplier competition was welcome so long as prospective suppliers met [Wendy’s’] “standards and specifications,” and “possess[ed] adequate quality controls and capacity to supply [the plaintiff’s] needs.”
Id. at 935–36. Accordingly, the court held that the appointment of an exclusive bun
supplier constituted a “change of policy” that had not been disclosed to the franchisee
plaintiff and that therefore plaintiff had stated a claim under the federal antitrust
laws. Id. at 936.
44. In contrast, in Wilson v. Mobil Oil Corp., 984 F. Supp. 450 (E.D. La. 1997),
the plaintiffs, franchisees of SpeeDee Oil Change Systems, Inc., alleged that
defendants’ refusal to permit plaintiffs to purchase automotive supplies from vendors other than Mobil Oil Corporation resulted in their paying supracompetitive prices for
these required products. Each of the franchisees signed substantially similar
franchise agreements, with each agreement containing a provision that the
“[f]ranchisor . . . reserves the right to require that the [franchisees] purchase and use
specific brand name items to be used in the operation of the franchise.” The
agreements also specifically designated certain companies, including Mobil, as the
exclusive lubricant suppliers to the franchisees. See id. at 453–54.
45. In granting summary judgment for the defendants, the federal district
court concluded that SpeeDee could not have had market power in the relevant
market—defined here as the SpeeDee franchise network—because the plaintiffs “had
sufficient information to evaluate the SpeeDee franchise opportunity before they
‘locked-in’ to the franchise.” Id. at 461. Relying on Queen City Pizza and other
similar cases from the federal courts, the district court concluded that “the effect of
advance disclosure of a tying arrangement is to prevent the purchaser from being
locked-in.” Id. at 459. The court further held that “arguments about information
costs and switching costs are inapposite in the franchise context if there is advance
disclosure of the tying arrangement.” Id. at 460 (citing several commentators).
46. In the instant case, Plaintiffs allege that Window World’s arrangement
with AMI as its sole source supplier “locked in place a substantial volume of
purchasers at a fixed price, while preventing them from seeking alternative
suppliers” and thus violated section 75-1. (Roland SAC ¶ 141; Lomax SAC ¶ 237.)
The Court disagrees. 47. Here, the Window World licensing agreements explicitly provided that the
“LICENSEE expressly agrees that it will sell and install only and exclusively those
products, goods, equipment, and parts from vendors approved by [Window World].”
(E.g., Defs.’ Mot. Dismiss Ex. A § 4.) The Court finds that this provision, like the
provisions at issue in the franchise agreements in Queen City Pizza and Wilson,
clearly put franchisees on notice that the franchisor, Window World, retained the
authority to require the franchisees to purchase products from only a vendor that
Window World had approved. See Queen City Pizza, 124 F.3d at 433; Wilson, 984 F.
Supp. at 461. As such, the Court is not persuaded that Plaintiffs were locked in to an
arrangement that would allow Window World to raise the prices of its Window World-
trademarked windows to artificially high levels, as Plaintiffs contend. See Queen
City Pizza, 124 F.3d at 440 (explaining that, unlike in Kodak, where the conduct
challenged “was not authorized by contract terms disclosed at the time of the original
transaction,” the franchise transaction at issue here “was subjected to competition at
the pre-contract stage”); Wilson, 984 F. Supp. at 459 (“[T]he effect of advance
disclosure of a tying arrangement is to prevent the purchaser from being locked-in.”)
and compare Burda, 659 F. Supp. 2d at 937 (rejecting 12(b)(6) challenge because
plaintiffs “could not have reasonably anticipated being required to purchase buns and
food supplies from exclusive suppliers.”).
48. To the contrary, like the Third Circuit in Queen City Pizza, the Court
concludes here that, based on the language of the Window World licensing
agreements, Plaintiffs were able to anticipate that Window World might move to a sole source supplier, which it ultimately did. See Queen City Pizza, 124 F.3d at 440
(“[P]laintiffs here knew that Domino’s . . . retained significant power over their ability
to purchase cheaper supplies from alternative sources because that authority was
spelled out in detail in section 12.2 of the standard franchise agreement.”). If, as
Plaintiffs contend, they were locked in to purchasing from a sole supplier here, the
Court concludes that this was the result of the specific terms of the licensing
agreements, not because of Window World’s purported market power. See Wilson,
984 F. Supp. at 460 (“[I]f the franchise agreement creates the tie-in, plaintiff is not
locked-in to anything.”).
49. The Court does not find Plaintiffs’ additional arguments in opposition
persuasive. First, Plaintiffs contend that the use of the word “vendors” in the
licensing agreements, rather than the singular term “vendor,” failed to put Plaintiffs
on notice that Window World might approve only a single vendor from which
Plaintiffs could purchase products. The Court concludes, however, that the specific
use of the plural term “vendors” here cannot be interpreted as a requirement for a
particular number of vendors or a guarantee that there would always be at least two
vendors, but rather simply that Window World retained the authority to approve any
vendor that sold Window World-trademarked products to Plaintiffs and other
franchisees. See generally N.C. Gen. Stat. § 12-3(1) (providing a rule of statutory
construction in North Carolina that “every word importing the plural number only
shall extend and be applied to one person or thing, as well as to several persons or things”); Antonin Scalia & Bryan A. Garner, Reading Law: The Interpretation of
Legal Texts § 14 (2012) (noting that use of the plural includes the singular).4
50. Plaintiffs also attempt to avoid the effect of the licensing agreements’ plain
language by contending in conclusory fashion that they “entered into a regular,
definite, and consistent course of dealings establishing a business relationship”
between Plaintiffs and Window World that “existed independent of” and “was not
limited by” the written licensing agreements. (Roland SAC ¶ 29; Lomax SAC ¶ 64.)
Plaintiffs’ conclusory allegations, however, without supporting factual allegations,
are insufficient to withstand Defendants’ Motion. See, e.g., Estate of Vaughn v. Pike
Elec., LLC, 230 N.C. App. 485, 493, 751 S.E.2d 227, 233 (2013) (“On a motion to
dismiss under Rule 12(b)(6), the court is not . . . required to accept mere conclusory
allegations, unwarranted deductions of fact, or unreasonable inferences as true.”);
Global Promotions Grp., Inc. v. Danas Inc., 2012 NCBC LEXIS 40, at *12 (N.C. Super.
Ct. June 22, 2012) (“Absent specific, supportive, factual allegations, the court need
not accept as true general conclusory allegations of the elements of a cause of action
for purposes of a motion to dismiss.”); see also Livingston v. Bakewell, No. COA13-
4 Although not raised by either party, the Court acknowledges that it has previously concluded in Pro-Tech Energy Solutions, LLC v. Cooper, 2015 NCBC LEXIS 76 (N.C. Super. Ct. July 30, 2015), that the plural term “Managers,” as used in the LLC operating agreement at issue in that case, did not include the singular term “Manager” as a matter of law, id. at *18, which might appear in conflict with the Court’s conclusion here. In the Pro-Tech case, however, the singular form “Manager” and the plural form “Managers” were each used elsewhere in the Operating Agreement, which strongly supported the interpretation that “Managers” and “Manager” were intended to have different meanings. In the licensing agreements at issue here, however, there is no use of the singular form “vendor”—only the plural form “vendors”—which, as used here, plainly suggests that the term “vendors” was not intended to exclude Window World’s approval of only a single vendor. 748, 2014 N.C. App. LEXIS 141, at *15 (N.C. Ct. App. 2014) (unpublished) (“By not
providing some factual foundation for these conclusory allegations, plaintiff's
complaint, on its face, is insufficient to defeat defendants’ motion to dismiss.”).
51. The Court also finds unpersuasive Plaintiffs’ reliance on Burda and two
additional federal district court cases Plaintiffs advance in opposition to the Motions,
Collins v. International Dairy Queen, 980 F. Supp. 1252 (M.D. Ga. 1997) and Little
Caesar Enterprises, Inc. v. Smith, Nos. 93-CV-40521-FL, 96-CV-40254-FL, 1998 U.S.
Dist. LEXIS 22039 (E.D. Mich. Sep. 30, 1998).
52. In Burda, as noted above, the court found it significant that the franchise
agreement included language that “supplier competition was welcome so long as
prospective suppliers met [Wendy’s’] ‘standards and specifications,’ and ‘possess[ed]
adequate quality controls and capacity to supply [the plaintiff’s] needs.” Burda, 659
F. Supp. 2d at 935–36. Indeed, the franchise agreement specifically provided a
mechanism for Wendy’s franchisees to request Wendy’s’ approval of previously
unapproved suppliers. The court concluded that this language created an expectation
that Wendy’s would not unilaterally approve only a single supplier. Id. The language
in the licensing agreements at issue here is far different, makes clear that Window
World franchisees would not be able to choose their own suppliers, and vests sole
approval authority for all vendors in Window World.
53. In Collins, the plaintiffs were Dairy Queen franchisees who alleged that
Dairy Queen controlled the process of approving alternative suppliers through its
franchise agreements. The franchise agreement at issue specifically required Dairy Queen “to consider requests of [franchisees] for approval of specific alternate sources
of supply and to cooperate with [franchisees] in this regard.” Collins, 980 F. Supp. at
1259. The agreement also explicitly provided that “neither Franchisor nor any of its
affiliates are the only approved suppliers of any goods, services, [or] supplies . . .
relating to the establishment or operation of the franchised business.” Id. The
plaintiffs alleged that the franchise agreement failed to put the plaintiffs on notice
that Dairy Queen would not authorize certain alternative products and suppliers, as
it was alleged to have done.
54. Faced with this franchise agreement language, the federal district court
determined that there was “a triable issue of fact” whether the effect of this language
was to cause the franchisees to be “locked in to the existing arrangement.” Id. The
language in the Dairy Queen franchise agreement, however, is far less clear and
decidedly more ambiguous than the plain directive in the licensing agreements in this
case that the franchisees will “sell and install only and exclusively those products,
goods, equipment, and parts from vendors approved by [Window World].” Moreover,
the Eleventh Circuit, in Maris Distrib. Co. v. Anheuser-Busch, Inc., 302 F.3d 1207
(11th Cir. 2002), considered and rejected the district court’s holding in Collins,
concluding in that case that:
[t]he fact that [the franchisor] had considerable power over many aspects of [the plaintiff’s] business by virtue of the provisions of the contract to which they agreed . . . reveals little about the issue of whether [the franchisor] had market power in the broader, relevant market for the purchase and sale of equity ownership interests in beer distributorships.
Id. at 1222. 55. Plaintiffs also rely on Little Caesar. There, the plaintiffs were Little
Caesar’s franchisees who alleged that “Little Caesar Enterprises made promises [in
the franchise agreement] to approve alternate distributors,” and by thereafter
denying approval of an alternate distributor, “changed its position” and “force[d] [the
franchisees] to purchase the tied product of the foods and other goods necessary to
operate their franchises.” Little Caesar, 1998 U.S. Dist. LEXIS 22039, at *55–58.
Little Caesar is distinguishable, however, because the Court has concluded that the
language in the licensing agreements here permitted Window World to select AMI as
a sole source supplier, and, thus, Window World’s selection of AMI did not reflect a
change in position as did the franchisor’s action in Little Caesar.
56. In sum, the Court concludes that the licensing agreements at issue here are
unambiguous and made clear to Plaintiffs and other Window World franchisees at
the time they entered into the agreements that Plaintiffs would be required to
purchase exclusively from approved vendors, which came to include AMI. The
agreements did not promise that Window World would approve a specific or minimum
number of vendors or preclude Window World from approving a single supplier such
as AMI. The Court thus concludes that Window World’s requirement that Plaintiffs
purchase Window World-trademarked windows solely from AMI was not a “change
in policy,” but rather the implementation of a contractual provision concerning
vendor approval as set forth in the licensing agreements. As in Queen City Pizza,
“[i]f the contractual restrictions . . . were viewed as overly burdensome or risky at the time they were proposed, [Plaintiffs] could have purchased a different [franchise], or
made some alternative investment.” Queen City Pizza, 124 F.3d at 441.
57. Although the Court recognizes, as did the Third Circuit in Queen City, that
“relevant market determinations are inherently fact intensive” and “in most cases,
proper market definition can be determined only after a factual inquiry into the
commercial realities faced by consumers,” this general rule, under either North
Carolina or federal law, is not “a per se prohibition against dismissal of antitrust
claims for failure to plead a relevant market under [Rule 12(b)(6).]” Queen City Pizza,
124 F.3d at 436 (granting Federal Rule 12(b)(6) motion for failure to plead a valid
relevant market); see also Todd v. Exxon Corp., 275 F.3d 191, 200 (2d Cir. 2001)
(“Cases in which dismissal on the pleadings is appropriate frequently involve . . .
failed attempts to limit a product market to a single brand, franchise, institution, or
comparable entity that competes with potential substitutes . . . .”).
58. For the reasons set forth above, the Court concludes that Plaintiffs have
failed to allege a valid relevant market over which Window World maintained market
power sufficient to maintain a claim under section 75-1. As a result, the Court
determines that Window World’s Motions should be granted.
59. Plaintiffs request that, if the Court determines, as it has, that Plaintiffs’
section 75-1 claim should be dismissed, such dismissal should be without prejudice,
and that Plaintiffs should be permitted leave to amend their complaints to address
pleading deficiencies. The Court concludes, however, that any such amendment
would be futile. As has been explained, the market limited to Window World franchisees that Plaintiffs insist is the relevant one cannot, as a matter of law,
constitute a valid market for antitrust liability in the circumstances pleaded here.
Further, Plaintiffs do not contend, nor does it appear that they could contend, that
Window World has market power in a market properly defined by the reasonable
interchangeability of use. See, e.g., Queen City Pizza, 124 F.3d at 439 (“[H]ere, it is
uncontested that contractual restraints aside, the . . . products . . . approved for use
by Domino’s franchisees are interchangeable with other items available on the
market.”).
60. Therefore, the Court concludes, in the exercise of its discretion, that
allowing Plaintiffs to amend their complaints with respect to Plaintiffs’ section 75-1
would be futile, and that Plaintiffs’ claims should be dismissed with prejudice.
CONCLUSION
61. For the foregoing reasons, the Court hereby GRANTS the Motions and
DISMISSES Plaintiffs’ Ninth Cause of Action under N.C. Gen. Stat. § 75-1 in the
Roland Action and Plaintiffs’ Eleventh Cause of Action under N.C. Gen. Stat. § 75-1
in the Lomax Action, each with prejudice.
SO ORDERED, this the 25th day of October, 2016.
/s/ Louis A. Bledsoe, III Louis A. Bledsoe, III Special Superior Court Judge for Complex Business Cases