Queen City Pizza, Inc. v. Domino’s Pizza, Inc.

Domino’s Pizza, Inc. (Domino’s) (defendant) was the second-largest pizza company in the United States with a total of 4,200 stores. Seven hundred of the stores were owned and operated by Domino’s, and the remaining 3,500 were owned and operated by independent franchisees. Section 12.2 of Domino’s standard franchise agreement required that all ingredients, beverages, and materials used by a franchisee conform with corporate standards and further stated that Domino’s could require supplies to be purchased directly from Domino’s or approved suppliers. Due to these requirements, 90 percent of the supplies and ingredients used by franchisees were bought from Domino’s. Domino’s purchased these supplies and ingredients (other than pizza dough, which was made in house) from suppliers and sold them to franchisees for a profit. A group of franchisees (the franchisees) (plaintiffs) sued Domino’s, arguing that Domino’s violated §§ 1 and 2 of the Sherman Act by restraining trade and limiting competition through their regulation of ingredients. The franchisees alleged that if they attempted to purchase supplies from outside suppliers in accordance with the franchise agreement, Domino’s would alter the agreement in a way that was impossible to comply with. The information and switching costs created by the shifting requirements of the franchise agreement essentially forced the franchisees to purchase their supplies directly from Domino’s. This, they claimed, gave Domino’s a monopoly on the supplies sold to its franchisees, which was used to extract exorbitant profits from the franchisees. The district court dismissed the antitrust actions for failure to state a claim for which relief could be granted. The franchisees appealed.