# KFC v. Diversified Packaging: Approved Suppliers, Quality Control, and the Limits of Tying

> The Fifth Circuit held a franchisor's approved-source rule was not a tie because franchisees never had to buy from KFC, and found infringement where mark use was part of a scheme to mislead franchisees.

Topic: Trademarks  |  Author: Lidiia Levitska  |  Source: Intellectual Property Law (outsideipcounsel.com)
Canonical: https://outsideipcounsel.com/blog/kfc-v-diversified-packaging-franchise-quality-control/


Franchising sits at the intersection of two bodies of law that pull in opposite directions. Trademark law tells a franchisor it must control the quality of goods sold under its mark, while antitrust law forbids using a mark's power to force franchisees to buy unwanted products. *Kentucky Fried Chicken Corp. v. Diversified Packaging Corp.*, 549 F.2d 368 (5th Cir. 1977), is a foundational effort to reconcile the two. Decided March 25, 1977, the Fifth Circuit held that KFC's requirement that franchisees buy supplies only from approved sources was not an unlawful tying arrangement, because franchisees were never required to take a single unit of supplies from KFC itself or from any source in which KFC held a financial stake. At the same time, the court held a rival packager liable for infringement, though only because its use of the KFC marks formed part of a broader scheme to mislead franchisees into believing it was an approved supplier. The opinion remains a touchstone on how far a franchisor may go in policing supplies to protect its brand.

## At a glance

- **Case:** *Kentucky Fried Chicken Corp. v. Diversified Packaging Corp.*, 549 F.2d 368 (5th Cir. 1977).
- **Decided:** March 25, 1977; U.S. Court of Appeals for the Fifth Circuit; judgment for Kentucky Fried Chicken affirmed.
- **Holding:** A franchisor's approved-source requirement was not an unlawful tie because it did not compel purchases from the franchisor, and a rival supplier's use of the marks as part of a scheme to mislead franchisees was trademark infringement. The court expressly reserved whether use of the marks on supplies, standing alone, would infringe.
- **Status:** Final.

## The supplier fight behind the chicken

KFC's franchise agreements required each franchisee to buy carry-out boxes, napkins, and similar supplies either from KFC or from suppliers that KFC approved in writing, and the agreement provided that KFC's approval would "not be unreasonably withheld." At the time of trial there were ten approved sources for cartons, only one of them a KFC affiliate, and KFC's uncontradicted assertion was that it had never withheld approval from a supplier who requested it. Into that system stepped Diversified Packaging Corporation, which manufactured and sold supplies bearing the KFC trademarks and marketed them directly to KFC franchisees. Diversified never asked KFC to approve it as a supplier, and in significant respects its products failed to meet KFC's specifications. KFC sued for trademark infringement and unfair competition. Diversified counterclaimed, arguing that KFC's approved-source requirement was an illegal tying arrangement in violation of the antitrust laws, an attempt to leverage the franchise and trademark into forced purchases of supplies. The district court ruled for KFC, and the Fifth Circuit affirmed.

## The elements of an unlawful tie

A tying arrangement conditions the sale of one product, the tying product, on the buyer also purchasing a second, separate product, the tied product. To establish a per se unlawful tie, a claimant generally must show two separate products, sufficient economic power in the market for the tying product to coerce purchases of the tied product, and an effect on a not-insubstantial volume of commerce. The trademark and franchise license can supply the economic power, a point the Ninth Circuit had driven home a few years earlier in *Siegel v. Chicken Delight, Inc.*, 448 F.2d 43 (9th Cir. 1971), where a franchisor that licensed its name for free but required franchisees to buy cookers, packaging, and food mixes from the franchisor itself was held to have created a per se unlawful tie. The question in *Diversified Packaging* was whether KFC's arrangement crossed the same line.

## Why the approved-supplier rule survived

The Fifth Circuit rejected all three of Diversified's antitrust theories. The decisive distinction from *Siegel* was that KFC did not force franchisees to buy from KFC. The court drew what it called a fundamental distinction between coercing franchisees to purchase from KFC and coercing them to purchase from approved sources. Only the first is a tie, and the record was barren of any suggestion of it. The rule the court stated is narrow and concrete: when the victim of an alleged tie-in is not required to buy a single unit of the tied product from the tying party, or from any source in which the tying party has an interest or on whose sales it earns a commission, the arrangement is not a tie at all. Neither of the classic tying evils was present, because ten approved carton sources with unrestrained entry left competitors unforeclosed and franchisees free to shop around.

The court then declined Diversified's invitation to make approved-source requirements a new per se category, reasoning that too little was known about their competitive effects to condemn them across the board. That left the rule of reason, and Diversified lost there too, because it presented no evidence at all of the arrangement's actual competitive effect and failed to show that KFC's system was an unreasonable means of controlling quality. On that last point the burden mattered: quality control is an affirmative defense the franchisor must prove, including least-burdensome means, only when the arrangement is a per se tie. Under the rule of reason, the antitrust claimant bears the burden, so the availability of less burdensome alternatives was a factor rather than the decisive one. Read against *Siegel*, the message is that the antitrust vice lies not in controlling quality but in exploiting the mark to compel purchases from the franchisor when less restrictive means, such as specifications and approved-supplier lists, would protect the brand.

## The infringement side of the ledger

If the antitrust counterclaim failed, KFC's affirmative claims for unfair competition and trademark infringement succeeded. But the ground was narrower than it first appears. The court called the question whether use of the marks on supplies, standing alone, would confuse anyone the most difficult aspect of the case, and it expressly declined to resolve it. It had good reason for hesitating. The buyers here were not the consuming public but franchisees who understood the corporate structure, and, as the court put it, so long as KFC requires franchisees to use supplies bearing the marks, it cannot prevent all competing suppliers from using them, because doing so would itself be an illegal tie-in. Affixing the marks to a carton is partly utilitarian: a franchisee needs boxes that hold chicken and advertise the business.

What decided the case was everything Diversified did around the marks. The district court compiled fourteen findings, and Diversified challenged none of them as clearly erroneous: cartons bearing KFC's marks and red-and-white trade dress but not Diversified's own name, advertisements and envelopes in that same trade dress urging franchisees to "buy direct and save" on "KFC boxes that meet exact specifications," shipping cases carrying KFC's marks, seven-digit part numbers containing the same digits as KFC's own numbers but rearranged and used nowhere in Diversified's invoicing, and salespeople who dodged the question whether Diversified was an approved supplier. Diversified had also never asked to be approved, and it used cartons made from thinner board that failed KFC's thickness specifications. Some franchisees were actually misled. Against that record the court held the mark use was part of the larger scheme and contributed to the confusion, so infringement existed regardless of whether the marks alone would have confused anyone, and it upheld the injunction in full as justified by Diversified's history of improper behavior. Diversified had tried to sell trademarked supplies through the back door while attacking the front-door approval system as anticompetitive, and it lost on both fronts.

## What the decision changed

*Diversified Packaging* became a leading authority on the trademark-antitrust interface in franchising. It confirmed that an approved-supplier requirement, honestly administered, is a permissible quality-control device rather than a per se tie, and it gave franchisors a workable blueprint: specify standards, approve any supplier who meets them, and do not steer purchases to the franchisor. Together with *Siegel*, the case marks the boundary between lawful brand protection and unlawful leverage. It also shows the two bodies of law constraining each other rather than running on separate tracks: the court said that so long as a franchisor requires franchisees to use supplies bearing its marks, it cannot bar every competing supplier from applying them, because that would be an illegal tie-in. What the franchisor can still reach is mark use bundled with deception.

## Open questions

- **What if approvals are not automatic?** KFC had never refused a supplier. A program that rejected applicants, or dragged out approvals, might edge closer to the coercion that defines an unlawful tie, and the opinion does not fix how much friction is too much.
- **How detailed must specifications be?** The court credited KFC's interest in conforming supplies, but did not delineate how specific and objective quality standards must be to justify supply restrictions.
- **How has modern antitrust reshaped the power presumption?** Later doctrine grew skeptical of presuming market power from a trademark alone, leaving some tension with the era in which *Siegel* and *Diversified Packaging* were decided.

## Implications for brands and businesses

- **Approve openly, do not funnel purchases.** A franchisor can require supplies to come from approved sources, but the safest programs approve any qualified vendor and never route purchases to the franchisor itself.
- **Write down objective specifications.** Ground supply restrictions in clear, quality-based standards that any competent supplier can meet. That grounding is what distinguishes quality control from an unlawful tie.
- **The mark does not give you a closed supply market.** A franchisor that requires franchisees to use supplies bearing its marks cannot bar every competing supplier from applying them, and the court left open whether that use, standing alone, would confuse anyone. What it condemned was mark use bundled with deception: false hints of approval, missing source identification, copycat part numbers, evasive sales calls.
- **Study Siegel and Diversified Packaging together.** The two cases mark the line. Forcing purchases from the franchisor invites a tying claim; approving independent suppliers to protect quality generally does not.

## Frequently asked questions

**Why was KFC's approved-supplier requirement not an illegal tie?** Because franchisees were not required to buy a single unit of supplies from KFC itself, or from any source in which KFC had an interest or earned a commission. The court distinguished coercion to buy from the franchisor, which is a tie, from coercion to buy from approved sources, which is not, and found no evidence of the former. It then declined to treat approved-source requirements as a new per se offense, and rejected the rule-of-reason claim because Diversified offered no evidence of actual competitive effect.

**How does this decision differ from Siegel v. Chicken Delight?** In Siegel, the Ninth Circuit found a per se unlawful tie because Chicken Delight charged no franchise fees or royalties and instead required franchisees to buy cookers, packaging, and food mixes directly from the franchisor at marked-up prices. KFC's system was different: franchisees never had to buy any supplies from KFC itself, and could purchase from any of ten approved sources. The contrast shows that an approved-source program that does not funnel purchases to the franchisor can avoid the tying problem.

**Was Diversified's use of the KFC marks infringement?** Yes, but on narrow grounds. The Fifth Circuit expressly declined to decide whether using the marks on supplies, standing alone, would confuse anyone, noting that antitrust law bars a franchisor from stopping all competing suppliers from using marks it requires franchisees to display. It found infringement because Diversified's mark use was part of a larger scheme to mislead franchisees into thinking it was connected with or approved by KFC: cartons without Diversified's own name, ads in KFC's trade dress urging franchisees to "buy direct and save," shipping cases bearing KFC's marks, part numbers rearranged from KFC's, and evasive answers about approval. Some franchisees were actually misled, and the court upheld the injunction in full.

## Authorities and sources

- [*Kentucky Fried Chicken Corp. v. Diversified Packaging Corp.*, 549 F.2d 368 (5th Cir. 1977) (full opinion, No. 74-3060)](https://law.resource.org/pub/us/case/reporter/F2/549/549.F2d.368.74-3060.html)
- [*Siegel v. Chicken Delight, Inc.*, 448 F.2d 43 (9th Cir. 1971) (full opinion)](https://law.resource.org/pub/us/case/reporter/F2/448/448.F2d.43.25908.26860.html)
- [15 U.S.C. § 1114 (Lanham Act, infringement of registered marks)](https://www.law.cornell.edu/uscode/text/15/1114)
- [15 U.S.C. § 1052(d) (Lanham Act, concurrent registration)](https://www.law.cornell.edu/uscode/text/15/1052)
- [15 U.S.C. § 1 (Sherman Act, restraint of trade)](https://www.law.cornell.edu/uscode/text/15/1)