Sheridan, John D. v. Marathon Petroleum

Citation: Not availableDocket: 07-3543

Court: Court of Appeals for the Seventh Circuit; June 23, 2008; Federal Appellate Court

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In the case before the Seventh Circuit, John D. Sheridan and S. D. Holdings, Inc. sued Marathon Petroleum Company LLC and Speedway SuperAmerica LLC under section 1 of the Sherman Act, alleging illegal tying arrangements and price-fixing conspiracies related to credit card processing services. The plaintiffs, representing themselves and other Marathon dealers, claimed that Marathon required dealers to use a designated credit card processing service as a condition of their franchise. This arrangement was characterized as a tie-in, which the plaintiffs argued constituted a per se violation of antitrust laws.

The court noted that the complaint focused on services rather than commodities, justifying the use of the Sherman Act over the Clayton Act for the tying claim. While Speedway is a wholly owned subsidiary of Marathon, the plaintiffs lacked a Speedway dealership, raising questions about their ability to represent Speedway dealers in the case. Ultimately, the district court dismissed the complaint for failure to state a claim without considering a class action certification motion.

The plaintiffs contended that Marathon's requirement to use its processing system for all credit card sales, despite being able to accept other credit cards, created a financial burden compelling them to rely solely on Marathon's service. They argued that this practice could lead to monopolistic control over both the franchise and the processing service. The court acknowledged the complexities surrounding the legitimacy of the tying arrangement but focused on the antitrust implications of such agreements, particularly regarding potential monopolistic practices.

A tying arrangement is deemed lawful if the tied product is primarily used with the tying product; if the tied product has various applications, it does not establish a monopoly. For instance, in Henry v. A.B. Dick Co., the tied product (ink) used with the tying product (mimeograph machine) accounted for only a small share of the ink market, preventing A.B. Dick from monopolizing ink sales. If A.B. Dick raised ink prices, the demand for its machines would decrease due to the higher operational costs for consumers. Complementary products, like ink and mimeographs, demonstrate that price increases in one can reduce demand for the other. A monopolist could leverage tying arrangements to facilitate price discrimination, charging higher ink prices while keeping machine prices low to maximize revenue from higher-value users, provided this does not have an exclusionary effect under the Sherman Act. Historically, tying agreements were considered illegal if they involved a substantial amount of interstate commerce, but since the 1970s, the Supreme Court has reassessed these antitrust doctrines, requiring proof of market power for the tying product to establish illegality. The tying rule remains, but its application has evolved, emphasizing the need for market power evidence in cases like Illinois Tool Works, Inc. v. Independent Ink, Inc. and Jefferson Parish Hospital Dist. No. 2 v. Hyde.

The normal per se rule eliminates the need to demonstrate market power, as established in multiple cases including FTC v. Superior Court Trial Lawyers Ass’n and NCAA v. Board of Regents. Judge Boudin referred to tying arrangements as “quasi” illegal per se. Monopoly power is defined as a seller's ability to set prices above competitive levels without losing significant sales to competitors or new entrants. This concept does not imply a single seller in the market; instead, a seller with a large market share can maintain higher prices despite competition. The reduction in output resulting from higher prices may not be sufficiently countered by small competitors, who face higher costs. As market structures evolve from one dominant firm to several large firms, the potential for monopoly power diminishes, allowing competitors to adjust their output to stabilize prices. The mere possibility of collusion does not equate to monopoly power, as it would unjustly categorize all firms as having market power. The plaintiffs acknowledged the need to demonstrate that Marathon possessed significant unilateral market power to charge prices above competitive levels for credit card processing. However, their complaint only notes Marathon's size in the industry and its sales figures, which represent merely 4.3% of total U.S. gasoline sales, indicating a lack of substantial market power.

Marathon possesses a trademark that prevents competitors from using the same name, but this does not equate to a monopoly in any market. The complaint fails to demonstrate that Marathon holds monopoly power or market share in any local gasoline markets, providing no statistics to support such claims. The concept of 'monopolistic competition' is not alleged either, meaning that any slight pricing power Marathon might have does not justify invoking federal antitrust laws. If Marathon were to increase prices for its credit card processing services, competing companies could counteract this by maintaining their gasoline prices. The complaint lacks evidence of collusion among oil companies to raise prices. Under the standards set by Bell Atlantic Corp. v. Twombly, the plaintiffs' vague claims of Marathon's 'appreciable economic power' do not substantiate their case. Additionally, the assumption that Marathon tied credit card processing to its franchises is flawed. Marathon merely requires franchisees to process credit card transactions through its system to ensure a consistent purchasing experience. This arrangement benefits franchisees by allowing them to offset credit card revenues against their gasoline purchase costs, presenting an incentive for them to use Marathon's processing system rather than incurring duplicate processing costs. The plaintiffs do not contest Marathon’s right to provide this service.

The additional costs associated with using multiple card processing systems are characterized as a natural outcome of Marathon's credit card and processing service, rather than as a penalty to compel use of its system. This situation is likened to a car manufacturer selling tires with its vehicles, where the buyer is free to purchase elsewhere but is unlikely to do so after paying for the manufacturer's tires. Plaintiffs' claims of antitrust liability based on Marathon allegedly overcharging dealers for processing fees and receiving kickbacks from banks are deemed illogical. If Marathon imposes high fees, this would ultimately harm credit card issuers by reducing gasoline demand, which contradicts the notion of banks incentivizing Marathon to lower demand for credit cards. The complaint fails to provide a plausible theory of antitrust illegality, leading to the dismissal of the entire suit, which was affirmed.