Chillin'Competition

Relaxing whilst doing Competition Law is not an Oxymoron

Mighty Simple: Important Competition Lessons from McDonald’s Quarter Pounder

with 5 comments

Quarter-Pounder-with-Cheese

Other stuff on our plate has prevented us from commenting on many of the competition law developments that took place in the past few weeks. But we know you are hungry for commentary. Without a doubt, the meatiest recent development is the class action accusing McDonald’s of anticompetitive tying.  Don’t assume this is just going to be another post with puns; there really is food for thought here.

Background

The plaintiff challenges McDonald’s distribution of the Quarter Pounder line of burgers. The allegation is that McDonald’s only markets the Quarter Pounder and Double Quarter Pounder with cheese (in the past it also sold defaults without cheese) and only as part of a value meal. The plaintiff argues that this practice forces consumers to “pay for two slices of cheese, which they do not want, order, or receive”.  They estimate that non-cheese-eaters are charged 30 to 90 cents for the cheese they don’t want even if they have to ask for the cheese to be removed (or have to remove it themselves). This would enable McDonald’s to charge for cheese it does not deliver.  The plaintiffs have done their research and noted that the original 1975 trademark does not refer to cheese (only to a frozen beef patty, a sesame-seed bun, one tablespoon of diced fresh onion, mustard, ketchup and two Heinz pickle slices). The full class action complaint is available here.

McDonald’s has replied that “the advertised Quarter Pounder burger comes with cheese. We try to accommodate our customers’ requests by allowing them to customize their orders, such as a Quarter Pounder with no cheese.”

The merits

This is a US case, but imagine you wanted to run a case like this in the EU. Could it fly? What would you do to meet the requirements set by the case law? Is this really a crazy case as it may seem to many? Let’s see:

First, you would argue that the tying and the tied products are separate products. The two were once sold separately by McDonalds; cheese can be added or not; the trademark does not cite cheese; there are independent producers of cheese. At the same time it’s true that the forked versions of the Quarter Pounder do incorporate two slices of cheese (see e.g. here) [yes, there are many different types of McDonald’s forks]. Overall, one could get away with saying that a Quarter Pounder and cheese are different products. Box ticked.

Second, you could argue that McDonald’s is dominant in the tying product. You would only need to argue that McDonald’s franchisees don’t really have the option of buying burgers from any other source. So McDonald’s is dominant in the market for “franchisable burguers to be sold at McDonald’s restaurants”. The plaintiffs refer to McDonald’s market power in the “fast food quarter pound hamburger market” (para. 75). Box ticked.

Third, customers have no option of obtaining the tying product without the tied. That’s the point the plaintiff is making. One is certainly not forced to eat the cheese and to customize the burger further (you can pretty much put anything in there and McDonald’s will let you) but it is true that the cheese comes pre-installed as a default. The plaintiffs in this case also invoke the “uniqueness” and “desirability” of the tying products.

Fourth, you would need to show that the tying is capable of restricting competition. One can argue that McDonald’s is hindering consumers choice. You can even define a market for cheese to be used in McDonald’s Quarter Pounders and conclude that rival ingredients are being excluded (even if there is no technical obstacle for users to add other ingredients to be added to the Quarter Pounder; McDonald’s even facilitates that: see e.g. here).

Piece of cake. The plaintiffs wouldn’t even have to argue that they are overpaying, as they do in this class action. I guess they could make the same allegation even if McDonald’s provided the burger and the cheese for free.

[As this is a US damages claim, the plaintiffs also need to prove that they suffered injury as a result of their purchase. That may be easier to show, but I doubt the injury I have in mind could be attributed to the alleged tying…]

The lessons

One can argue anything in a competition case (see here for some example on market definition), but most of you will –hopefully- agree that the case makes little sense. But let’s try to slice and reason that intuition:

Franchise business model necessarily implies a package of interrelated items. Whilst tying is assumed to be restrictive (because it is presumed that it serves no procompetitive goal), franchise agreements are presumed procompetitive and justify even what would otherwise be seen as hardcore restrictions (non-compete clauses, outright exclusivity; see e.g para. 191 of the Vertical Guidelines). How do we then square this out? It all depends on the issue of severability. This was made clear by US Courts in a case involving… alleged McDonald’s tying (Principe v McDonalds; a case concerning licensees obligation to operate their franchises in premises leased from the franchisor). What is the actual licensed/franchised tying product? Is it just trademark or is it rather a business format?

In that case McDonald’s had argued that “the appellants are asking the court to invalidate the way McDonald’s does business and to require it to adopt the licensing procedures of its less successful competitors” (para. 23). The Fourth Circuit agreed. It observed the question depends on whether the items were “integral components of the business method being franchised” (para. 32).

After analyzing the specific contributions of the obligation at issue to McDonald’s business method (paras. 34-37, which take into consideration protecting the “system’s goodwill”, ensuring “consistent quality”. “broadening the applicant base and opening the door to persons who otherwise could not afford a McDonald’s franchise” as well as the extent of McDonald’s financial investment), it concluded the following:

All of these factors contribute significantly to the overall success of the McDonald’s system. The formula that produced system wide success, the formula that promises to make each new McDonald’s store successful, that formula is what McDonald’s sells its franchisees. To characterize the franchise as an unnecessary aggregation of separate products tied to the McDonald’s name is to miss the point entirely”.

Severability in Principe v McDonalds was analyzed at the “separate products” step, whilst in in the EU it would be part of the assessment of the economic and legal context (this is true of any restraint that may be part of a wider context, not only franchising; see e.g. Cartes Bancaires 73-79). But the substantive reasoning is pretty much the same. Ignoring the relevant context to any restraint leads to missing the point entirely. Much like in Principe v McDonald’s, EU Courts have also observed that restraints are deemed to fall outside the scope of the competition rules when the such analysis shows that they are related to a main operation that “could not be implemented or could only be implemented under more uncertain conditions, at substantially higher cost, over an appreciably longer period or with considerably less probability of success” (T-112/99, Métropole, para. 111).

This explains why competition experts would find this new class action complaint hard to swallow.

Written by Alfonso Lamadrid

5 June 2018 at 1:49 pm

Posted in Uncategorized

5 Responses

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  1. Good article – but is there a version without the EU law analysis? I’m only interested in reading the U.S. part.

    Ashwin

    7 June 2018 at 2:05 pm

  2. I would add that with an increased awareness about food intolerances (here lactose), this case should be highly prioritised by competition authorities to protect vulnerable consumers.

    Walckiers

    8 June 2018 at 5:32 am

  3. Nice one – my l my question is how you resisted the urge to reference the „Quarter Pounder with Cheese“ discussion in Pulp Fiction..

    Fred W

    11 June 2018 at 7:06 am


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