Antitrust Law Daily Wrap Up, ANTITRUST—W.D.N.C.: Wendy’s operator’s unlawful trade restraint claim rejected, (Jul 14, 2015)

By Greg Hammond, J.D.

An operator of various Wendy’s fast food restaurants in North and South Carolina could not move forward with a North Carolina antitrust law claim against Pepsico Sales, Inc., arising from a “Permitted Termination” clause in the parties’ agreement. In dismissing the unlawful restraint on trade claim, the federal district court in Charlotte determined that the operator failed to define relevant product and geographic markets and failed to show that Pepsi has market power (Carolina Restaurant Group, Inc. v. Pepsico Sales, Inc., July 13, 2015, Mullen, G.).

Carolina Restaurant Group, Inc. (CRG), an operator of a number of Wendy’s fast food restaurants in North and South Carolina, entered into a contract with Pepsi to exclusively serve Pepsi postmix fountain beverage products at its Wendy’s franchise restaurants. The contract contained a “Permitted Termination” clause, giving CRG the right to terminate the agreement upon 90 days’ prior notice to Pepsi in the event that CRG made the reasonable, good faith determination that the continuation of the agreement will materially and adversely affect the ability of CRG to achieve the Outlet Growth Targets.

After the franchisor of Wendy’s signed national contracts with Coca-Cola, obligating franchisees to offer Coca-Cola fountain products at their restaurants, CRG missed all Outlet Growth Targets set out in the Pepsi agreement. It sent a letter to Pepsi, expressing interest in terminating the relationship. Pepsi allegedly responded with two letters, the first seeking over $2.6 million as a termination payment and the second seeking over $3.6 million as a termination payment and $5.5 million in liquidated damages. CRG subsequently terminated the agreement, asserting it had done so as a permitted termination.

CRG later filed suit against Pepsi, bringing claims of unlawful restraint on trade, unfair and deceptive trade practices, declaratory judgment, breach of contract, and breach of implied covenant of good faith and fair dealing. Pepsi moved to dismiss.

Restraint of trade. CRG claimed that the Pepsi agreement constituted an unreasonable restraint of trade in violation of North Carolina’s antitrust statute, due to the length of the agreement and exclusive dealing provision, in addition to Pepsi’s unwillingness to agree to permitted termination or a discount on CRG’s repayment of marketing funds. The court granted Pepsi’s motion to dismiss, first finding CRG’s bare allegation that the product market is the postmix fountain beverage market fails to define a product market with reference to the rule of reasonable interchangeability and cross-elasticity of demand. Specifically, there were no allegations identifying the types of products included in the alleged product market or other participants in the market, or alleging why there are not reasonable substitutes for postmix fountain beverage products. CRG also failed to adequately allege a relevant geographic market, because the mere assertion that North and South Carolina is the relevant geographic market failed to explain the competitive or economic significance of such a broad region.

Lastly, the court found that CRG did not allege facts sufficient to show Pepsi had market power. The mere assertion that Pepsi had market power because “the failure to accept a Permitted Termination and use of an unreasonable exclusivity provision harms the public as a whole because they limit consumer choice and increase prices in the market for postmix fountain beverage products” was deemed conclusory, falling short of demonstrating Pepsi has the ability to raise prices above those that would be charged in a competitive market.

Breach of contract. In support of its breach of contract claim, CRG asserted that Pepsi’s unsubstantiated refusal to recognize and failure to accept CRG’s termination as a permitted termination is a material and aggravated breach of Pepsi’s duties under the agreement. The court rejected this argument, noting that Pepsi’s alleged refusal to recognize a permitted termination was merely a dispute concerning the interpretation of the contract, not a failure of Pepsi to perform its duties. The breach of contract and breach of the implied covenant of good faith and fair dealing claims were therefore dismissed.

Unfair trade practices. CRG also claimed that Pepsi violated North Carolina’s Unfair and Deceptive Trade Practices Act by refusing to accept CRG’s right to a permitted termination and a net present value discount on the advanced revenues and funds. CRG alleged that this was an inequitable assertion of power. The argument failed, however, because CRG did not demonstrate that Pepsi breached the agreement, much less conducted an “aggravated” breach. The court further noted that Pepsi’s refusal to grant a permitted termination was not unfair or deceptive, did not offend public policy, and was not immoral, unethical, oppressive, or unscrupulous because CRG was permitted to terminate the agreement at any time.

Declaratory judgment. The only claim to survive Pepsi’s motion to dismiss was CRG’s claim seeking a declaratory judgment that CRG was entitled to a permitted termination under the agreement, and that CRG is entitled to a net present value discount on the advanced revenues and funds. The court rejected Pepsi’s argument that the permitted termination provision expired, finding that the clause did not state that the option expired after five years. Because the provision was reasonably susceptible to more than one interpretation, the motion to dismiss this claim was denied.

The case is No. 3:14-cv-668.

Attorneys: Brian Andrew Kahn (Helms, Mulliss & Wicker, PLLC) and Brian Patrick Troutman (McGuireWoods LLP) for Carolina Restaurant Group, Inc. Brandie Nicole Smith (Womble Carlyle Sandridge & Rice, LLP) for Pepsico Sales, Inc.

Companies: Carolina Restaurant Group, Inc.; Pepsico Sales, Inc.

Cases: Antitrust FranchisingDistribution StateUnfairTradePractices NorthCarolinaNews