APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA (D.C. Civil No. 72-88) (D.C. Civil No. 72-1526).
Aldisert, Hunter and Garth, Circuit Judges.
This appeal from a plaintiff class certification of claims brought under § 1 of the Sherman Act, 15 U.S.C. § 1,*fn1 alleging illegal tie-in sales, arises from two consolidated actions by franchisees against their franchisor, Dunkin' Donuts of America, Inc. The district court decided that it was not necessary for each franchisee to prove that he individually was coerced by the franchisor to accept the allegedly tied items; rather it would be sufficient if the franchisees as a group could prove either that the franchisor had a policy to persuade the franchisees to accept the allegedly tied items, or that a large number of franchisees had, in fact, accepted them. Based on this view of the required proof, the district court concluded that common questions would predominate over individual ones and certified a class under Rule 23(b)(3), F.R. Civ. P.*fn2 This interlocutory appeal, challenging the propriety of these rulings, was requested by the district court under 28 U.S.C. § 1292(b)*fn3 and was permitted by a divided panel of this court by order of May 7, 1975. We conclude that the alternative modes of proof which the district court deemed sufficient cannot substitute for proof by each franchisee that he, individually, was coerced to accept the alleged tie-in sales. Accordingly, the class certification -- expressly premised on the district court's contrary view -- cannot stand. The district court opinion is reported at 68 F.R.D. 65 (E.D. Pa. 1975).
Adversaries will always differ as to the propriety of the grant or denial of class certification and it is to be expected that litigants and district judges may often desire immediate review of that decision. However, this court has taken a strong position that a class certification decision, per se, is not an appealable final order under 28 U.S.C. § 1291. Hackett v. General Host Corp., 455 F.2d 618 (3d Cir.), cert. denied, 407 U.S. 925, 32 L. Ed. 2d 812, 92 S. Ct. 2460 (1972). To qualify for interlocutory review in this circuit a class certification decision must be attended by special factors which take it outside the ambit of the general rule. Katz v. Carte Blanche Corp., 496 F.2d 747, 756 (3d Cir.), cert. denied, 419 U.S. 885, 42 L. Ed. 2d 125, 95 S. Ct. 152 (1974).
The proceedings in the district court were not cursory. The court heard oral argument on the request for class status in March, 1974. Almost a year later it rendered its decision in a 155 page opinion. In a second, 11 page, opinion, setting forth the § 1292(b) criteria, the district court wrote:
[A controlling question of law] exists here on two levels. The matter of class certification itself is "serious to the conduct of the litigation", both practically and legally. See Katz v. Carte Blanche Corp., 496 F.2d at 755. On the practical level, a number of factors held cognizable by the Court in Katz are present here: (1) the expense to the litigants of discovery on the merits of a class action and of trial of such an action; (2) inhibition of potential settlement caused by uncertainty as to the propriety of class certification; and (3) the saving of time of the District Court. However, even if we were to focus solely upon the legal questions and posit that a "controlling question" does not exist when the sole issue is whether the factual complex of a given case meets the class action requirements of Rule 23, we would find a controlling question here -- that is, the propriety of our rejection of the individual coercion doctrine and the correctness of our resultant conclusions (following some 75 pages of discussion of the antitrust law of tying) as to the requisite proof to establish conduct constituting an illegal tie. As we have indicated, our finding of predominance of common questions, essential to determination of the class, was in large measure a function of our conclusion concerning the requisite proof to establish an illegal tie.
While we believe that the conclusions in our opinion regarding the law of tying were correct, the opinion also reflects a rejection of the views of many other District Court Judges who have adopted the individual coercion doctrine. Although we believe we have demonstrated that the individual coercion doctrine initially evolved from a misreliance on certain cases and have also demonstrated that it cannot be maintained in the face of the Supreme Court's decision in Perma Life Mufflers, Inc. v. International Parts Corp., 392 U.S. 134, 20 L. Ed. 2d 982, 88 S. Ct. 1981 (1968), the presence of these differing District Court opinions requires that we declare that there is "substantial ground for difference of opinion" as to the correctness of our decision.
App. at 185a-86a (footnote omitted).
We doubt that this interlocutory appeal would have been accepted by this court had it not involved the question of the district court's rejection of the doctrine of individual coercion. Accordingly, the focus of our discussion will be on the propriety vel non of that rejection.
Dunkin' Donuts began as a small chain of company owned coffee and doughnut shops in New England. Today it is the largest coffee and doughnut franchising system in the country. By 1975 -- 20 years after Dunkin' Donuts began franchising its operation -- more than 700 shops dotted the United States, most of them franchises.
Typically, Dunkin' Donuts provides its franchisees with a "turn-key" operation. It selects suitable sites for doughnut shops and either purchases or leases them. It builds a doughnut shop, and offers the prospective franchisee a lease on the land and building. It also offers to sell him the equipment needed to operate the shop. Appellant contends that it is this package deal aspect of the franchise that often attracts the prospective franchisee: the new businessman has only to turn the key, and he is in business. Dunkin' Donuts does not manufacture or sell the products, or the ingredients of the products, sold in the shops. Rather, to assure uniform quality of products sold under the trademark, Dunkin' Donuts maintains a quality control system for the most important supplies used in the operation, and supervises an approved supplier system as to those supplies.
Two actions, seeking damages as well as declaratory and injunctive relief, were filed in 1972 against Dunkin' Donuts by 14 of its present and former franchisees. One action, Ungar, arises under franchise agreements signed before November 1, 1970, the date Dunkin' Donuts changed its franchise agreement form. The other, Rader, arises under franchise agreements signed after that date. The actions were consolidated below; insofar as this appeal is concerned, the plaintiffs do not rely on the terms of their franchise agreements. We treat the two actions as one.
The claims asserted against Dunkin' Donuts were wide-ranging, including counts based on violations of the antitrust,*fn4 patent and securities laws, as well as counts alleging fraud, breach of fiduciary duty, breach of contract and tortious interference with business expectations. Class action status was sought with respect to most, but not all, of the claims; the proposed class consisted of all present and former franchisees, a group estimated to number over 600. The district court certified a class as to three aspects of the case only: "(1) the antitrust tying claims with respect to equipment, signs, real estate and supplies; (2) the contractual claim with respect to the Advertising Fund; and (3) the antitrust claims with respect to the in-term restrictive covenant." 68 F.R.D. 150 (footnote omitted). The class certification was only on the issue of liability. The district court reserved the question of damages, and the question whether certain individual claims were barred by the statute of limitations, for a separate proceeding should liability be established.
Neither side has briefed the issue of class certification of the Advertising Fund claim; both sides have briefed the issue of certification of the in-term restrictive covenant claim. The district court's § 1292(b) certification does not include either of those issues. The sole question presented on this appeal is the propriety of class certification of the antitrust tying claims, which question subsumes review of the district court's conclusions as to the proof requisite to establish an illegal tie-in.
Summarized, it was appellees' contention that Dunkin' Donuts had a policy of granting a license to use its trademark only on the condition that the licensee accept certain other items from Dunkin' Donuts, and that this practice constituted a tying arrangement illegal under the antitrust laws. Specifically, appellees contended that four kinds of items were illegally tied to the trademark: real estate, equipment, signs and supplies. Appellees contended that Dunkin' Donuts prevented its franchisees from using their own premises, requiring them to lease or sublease the shop premises from Dunkin' Donuts on onerous terms. With respect to equipment, appellees contended that, prior to 1970, the franchise agreement required the franchisee to purchase his "equipment package" from Dunkin' Donuts. In 1970, allegedly in response to the Siegel v. Chicken Delight litigation,*fn5 Dunkin' Donuts changed the standard form franchise agreement deleting the equipment purchase provision. But, the argument continued, Dunkin' Donuts' de facto policy of tying the equipment purchase to the trademark license did not change. Franchisees were given a "woefully inadequate" 30 day option to obtain equipment elsewhere, and those who inquired about it were pressured not to exercise it. Moreover, there was only one approved equipment vendor, and there was evidence that it would not sell directly to franchisees. The signs required for a Dunkin' Donuts store could be purchased from two sources: directly from Dunkin' Donuts, or from an approved sign vendor. Appellees argued that the apparent freedom of choice was wholly illusory because the only approved vendors were those who secretly paid to Dunkin' Donuts substantial sums for each sign purchase, raising prices to the franchisee accordingly and eliminating any economic savings that might otherwise have been available.
Dunkin' Donuts does not now sell or manufacture the supplies necessary to operate a doughnut shop. Instead, with the asserted purpose of assuring uniform quality of products sold,*fn6 it approves certain suppliers to sell to franchisees and, in the alternative, provides quality control specifications which non-approved vendors must satisfy. Appellees contended that this is not a quality control system at all, but a disguised tying arrangement: the quality control specifications are useless, designed only to insure that non-approved vendors do not qualify to sell to franchisees; approved suppliers make payments to Dunkin' Donuts as quid pro quo for being approved, and raise their prices accordingly. The effect of this system, appellees argued, is to tie to the trademark license the purchase of supplies from a limited group of sellers whose prices pass on to the franchisee the cost of the payments to Dunkin' Donuts. Appellees' arguments with respect to the tying aspect of the case stressed that the absence of express contractual tying provisions could have no importance if illegal tying policies could be satisfactorily established in other ways. And appellees emphasized that the focus of their case was not individual instances of illegal conduct, but a pervasive company policy, "firm and resolutely enforced", to tie the real estate, equipment, signs and supplies to the trademark license.
Appellant both denied the existence of any illegal tie-ins, and insisted that, if there were any illegality, the absence of express contractual tying provisions robbed the case of significant common issues and required that the focus of proof be on the individual franchisee.
Whether a franchisee was attracted by a "turn-key" offer, or compelled to accept a tie, could only be determined on an individual basis. Defendant emphasized the explicit statements in its promotional material and in its form contracts which reflected franchisees' freedom of choice. It emphasized also the variety of experiences admitted to by plaintiffs in their depositions and interrogatory answers. Some acknowledged dealing with defendant because they could not afford to acquire their own real estate or build their own shop, or buy equipment independently. They never considered dealing with anyone but defendant -- the topic never came up. Some acknowledged they purchased equipment from other sources. Some acknowledged they had been persuaded by defendant's salesmen, not coerced, to deal with defendant. And a few plaintiffs testified that their franchise salesman had told them they must deal with defendant if they wanted the franchise.
Concerning the "approved supplier" claim, defendant argued that the issue was not whether in retrospect some less restrictive means of quality control could be devised, or whether defendant's specifications were good or bad, but rather whether defendant's specifications and procedures had been fairly applied. That issue was an individual one.
Appellant's Brief at 6-8 (footnotes ...