Amicus Curiae Brief — Eastman Kodak Co. v. Image Technical Services, Inc.

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No. 90-1029 ~ | Supreme Count”

eS ee se

IN THE on 18 SR

Supreme Court of the ——

OCTOBER TERM, 1990

at AK COMPANY,

Petitioner.

SER Ee. et al..

Respondents.

On Petition for a Writ of Certiorari to the

Lnited States Court of Appeals

for the Ninth Circuit

BRIEF AMICUS CURIAE OF DIGITAL EQUIPMENT

CORPORATION, HEWLETT-PACKARD COMPANY,

PRIME COMPUTER, INC., UNISYS CORPORATION, AND

WANG LABORATORIES INC. IN SUPPORT OF THE

PETITION FOR A WRIT OF CERTIORARI

S.T. JACK BRIGHAM III KURT W. MELCHIOR

MARCIA HOWE ADAMS Counsel of Record

HEWLETT-PACKARD COMPANY NOSSAMAN, GUTHNER. KNOX

3000 Hanover Street & ELLiottr

Palo Alto, CA 94303 50 California Street

(415) 857-5816 San Francisco, CA 94111-4712

(415) 398-3600

ROBERT A. SKITOL

JAMES A. MEYERS

PEPPER, HAMILTON & SCHEETZ

1300 Nineteenth Street, N.W.

Washington, D.C. 20036-1685

(202) 828-1200

Attorneys for

January 18, 1991 Hewlett-Packard Company

[Additional Attorneys Listed on Inside Front Cover]

i eeeeeeeeeeeeenerntemeeenm

PRESS OF BYRON S. ADAMS, WASHINGTON, D.C. (202) 347-8203

IvOR CARY ARMISTEAD, III

Law Department

Digital Equipment Corporation

111 Powdermill Road

Maynard, MA 01754

(508) 493-3980

Attorney for Digital

Equipment Corporation

JAMES W. OLSON

Law Department

Unisys Corporation

P.O. Box 500

Bluebell, PA 19424-0001

215) 986-4105

Attorney for Unisys

Corporation

STEPHEN WASIN

HONIGMAN MILLE!

AND COHN

2290 First Nat

Detroit. MI 4822¢

(313) 256-772¢

Attorneys for Pr

Computer lr

FLORINDA J. IAS

Wang Laboratories

1 Industrial Avenue

Lowell, MA 01851

(508) 967-6367

Attorney for Wang

Laboratories Inc

ARGUMENT

Tying Issues

l.

2.

3.

4.

CON(

Relevant Market Issues

TABLE OF CONTENTS

ih hhh EEE EEE EEE CEE ETE TTT eee

TABLE OF AUTHORITIES

CASES: Page

Abcor Corp. v. AM Int'l, Inc., 916 F.2d 924 (4th

TUN cnscnicstnsectecsentiensiazaniamansiueccos 16

A.l. Root Co. v. Computer/Dynamics, Inc., 806 F.2d

673 (6th Cir. 1986) oo. ecccescessesecseseeccc 13

Allen-Myland, Inc. v. IBM Corp., 693 F. Supp. 262

oe WN UID dninsienisetnitaninnmenieaaans. 13

ALW, Ine. v. United Air Lines, Inc., 510 F.2d 52

Gee GI MI ceritnniciinnstseanniinctiiesiaeienc.. 13

Aspen Skiing Co. v. Aspen Highlands Skiing Corp.,

472 US. a NE teninhicstniteienieiieee 15

Brown Shoe Co. v. United States, 370 U.S. 294

CETTE) ccrcasensensncsnssessnstescenestensesstuassssenaeses........ 12

Bushie v. Stenocord Corp., 460 F.2d 116 (9th Cir.

UTED cccssecssnssstcvenecesssnsteseneetiesentinmemaees cess... 13

Business Elecs. Corp. v. Sharp Elecs. Corp., 485

es PEF EE sninitinhiniueidlationn 8,18

Byars v. Bluff City News Co., 609 F.2d 843 (6th

pl ts 16

Continental T.V., Inc. v. GTE Sylvania, Inc., 433

US. 36 (1977) 0... eccsessecssessseseeeseeorecccsc 8,10,16

Data General Corp. v. Digidyne Corp., 473 US.

FD CEITID aseccccocnsscsscescocssesonvenssonassssseneesecce,..... 4,10

Dawson Chemical Co. v. Rohm & Haas Co., 448

as: BU GUD srcuesstsicsnsininisiisaieten. 16

Digidyne Corp. v. Data Gen. Corp., 734 F.2d 1336

(9th Cir. 1984), cert. denied. 473 U.S. 908

GEINEND <nreniniecictniseniacinsetsenmsetaisaieiaeniieiei 4,10,11

Dimidowich v. Bell & Howell, 803 F.2d 1473 (9th

Cir. 1986), modified, 810 F.2d 1517 (9th Cir.

1987)

oeeesesencesesessecsscesoosssosososssoscossseosooocscoesooss..., 1]

Domed Stadium Hotel, Inc. v. Holiday Inns, Inc..

732 F.2d 480 (5th Cir. Pa 12

Dunn & Mavis, Inc. v. Nu-Car Driveaway, Inc., 691

F.2d 241 (6th Cir. 1982) 0! 13

Table of Authorities Continued

Page

Edward J. Sweeney & Sons, Inc. v. Texaco, Inc..

637 F.2d 105 (3d Cir. 1980), cert. denied, 451

I aati 13

Florida Fuels, Inc. v. Belcher Oil Co., 717 F. Supp.

1528, (S.D. Filla. 1989) .................ccccccscssssecsseeee 15

General Business Sys. v. North Am. Philips Corp.,

699 F.2d 965 (9th Cir. 1983) oes. 8-10,13

H & B Equip. Co. v. International Harvester Co..

O77 F.2d 239 (5th Cir. 1978) ooo. ccceceecceeeee. 13

H.J., Inc. v. International Tel. & Tel. Corp., 867

F.2d 1531 (8th Cir. 1989) oo... ceeeeceeeeeees 13

H.L. Hayden Co. v. Siemens Medical Sys., Inc., 879

F.2d 1005 (2d Cir. 1989) ..............ccsccceseecceeeees 13

ILC Peripherals Leasing Corp. v. IBM Corp., 458

F. Supp. 423 (N.D. Cal. 1978), affd sub nom.

Memorex Corp. v. IBM Corp., 636 F.2d 1188

(9th Cir. 1980), cert. denied, 452 U.S. 972

UIE ieeseinrnceschinseianienlsnienaninatinenstaindiidieitiieieritatte eneenenntnie 10,13

In re IBM Peripheral EDP Devices Antitrust Lit-

gation, 481 F. Supp. 965 (N.D. Cal. 1979).

aff'd sub nom. Transamerica Computer Co. v.

IBM Corp., 698 F.2d 1377 (9th Cir.), cert. de-

nied, 464 U.S. 955 (1983) 0.00.00... 13

International Logistics Group, Ltd. v. Chrysler

Corp., 884 F.2d 904 (6th Cir. 1989), cert. de-

nied, 110 S. Ct. 1783 (1990) ...........cccceceeeeeeeee 13

Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466

Sf nen ERE Sun ern 3,6-7

Kaplan v. Burroughs Corp., 611 F.2d 286 (9th Cir.

1979), cert. denied, 447 U.S. 924 (1980) ........ 10

Key Financial Planning Corp. v. ITT Life Ins.

Corp., 828 F.2d 635 (10th Cir. 1987) ............. 13

Matsushita Elec. Indus. Co. v. Zenith Radio Corp.,

SID We. GOO COD ccccecccccsnscscccssccccssssssssescosens 9g

Table of Authorities Continued

Page

Monsanto Co. v. Spray-Rite Serv. Corp., 465 U.S.

SUN IIIT silnccitesiechiaieieciletilaendanitebeindiehiat 16

Mullis v. ARCO Petroleum Corp., 502 F.2d 290 (7th

Ee A 13

Olympia Equip. Leasing Co. v. Western Union Tel.

Co., 797 F.2d 370 (7th Cir. 1986), cert. denied,

480 U.S. 934 (1987) oo... ceccceccscsscssecsceeesss, 15,16

Parsons v. Ford Motor Co., 669 F.2d 308 (5th Cir.),

cert. denied, 459 U.S. 832 (1982) ................... 13

Seidenstein v. National Medical Enters.. 769 F.2d

1100 (Sth Cir. 1985) oo... cccsccssssesseeeeess.. 13

Shaw v. Rolex Watch, U.S.A., Inc., 673 F. Supp.

| tl 12

Spectrofuge Corp. v. Beckman Instruments, Ine., 575

F.2d 256 (5th Cir. 1978), cert. denied, 440 U.S.

a Ae RS a meus 14

Telex Corp. v. IBM Corp., 510 F.2d 894 (10th Cir.),

cert. dismissed, 423 U.S. 802 (1975) .............. 10,13

Transource Int'l, Inc. v. Trinity Indus., Inc., 725

F.2d 274 (5th Cir. 1984) ooo cccccccccceccecseess.. 13

United States v. Baker Hughes, Inc., 908 F.2d 98]

I. CIR, BIG) cccccccccccccccecccccoccccencsccceossesee...... )

United States v. Columbia Steel Co., 334 U.S. 495

IIT cetiebeieihtielataaiincderesetiiiitalacideedpteiinntis pescubeneebnenesees 12

United States v. EI. du Pont de Nemours & Co.,

351 U.S. 377 (1956) oo ecccccecceeeeeeeeeeee... 12

United States v. Grinnell Corp., 384 U.S. 563

GENTE cneutniemsicscsncticietmeeiiesesiessiasitastmtiniaiaanaii ites. 14

United States v. Syufy Enters., 903 F.2d 659 (9th

ts MINI senicecsaesieiaeiiniaciaciineititetin ate NS)

United States Football League v. National Football

League, 842 F.2d 1335 (2d Cir. 1988) ........... 17

Table of Authorities Continued

Page

STATUTES:

Sherman Act

ey a I, 4,5,11-12,17

GD OE ER ) Pee passim

MISCELLANEOUS:

Brief for the United States as Amicus Curiae, Data

Gen. Corp. v. Digidyne Corp., No. 84-761 (U.S.

ge A SE aieedunenen 10

R. Pitofsky, New Definitions of Relevant Market

and the Assault on Antitrust, 90 Colum. L.

Rev. 1805 (1990) .o.cccccccccccccccccccccsccecceccesceeceeee 4

IN THE

Supreme Court of the Gnited States

OCTOBER TERM, 1990

No. 90-1029

EASTMAN KODAK COMPANY.

Petitioner.

Vv.

IMAGE TECHNICAL SERVICES, et al..

Respondents.

On Petition for a Writ of Certiorari to the

United States Court of Appeals

for the Ninth Circuit

BRIEF AMICUS CURIAE OF DIGITAL EQUIPMENT

CORPORATION, HEWLETT-PACKARD COMPANY,

PRIME COMPUTER, INC., UNISYS CORPORATION, AND

WANG LABORATORIES INC. IN SUPPORT OF THE

PETITION FOR A WRIT OF CERTIORARI

INTEREST OF AMICUS CURIAE

Amici are all members of the computer industry. Intense

competition in this industry—now greatly pressed from

abroad—has produced wave after wave of innovation that

has changed the face of the world. Calculations that once

took weeks (if they could be done at all) now take minutes.

Today, a worker sitting at a desk can guide rockets through

space, activate the nation’s defenses, access vast libraries

of information or operate an industrial assembly line—all

by computer. Computers have made typewriters, slide

rules, linotype machines and the like obsolete. And to-

morrow the computer will let Americans order groceries

and transact their banking and other business through their

home television sets.

Interbrand systems competition has fostered these ad-

vances in technology. The decision below puts such inter-

brand competition in jeopardy. In the computer business,

the highest-performance, lowest-cost combinations of hard-

ware, software and service are required to meet the de-

mands of sophisticated buyers adept at comparing the

overall quality and price of each element of systems per-

formance, including post-sale service. Amici have neither

the ability nor the incentive to take advantage of system

users by lowering the quality or raising the price of such

service. Any firm attempting to do so would quickly lose

system sales and place its entire systems business at risk.

Computer users have greatly benefited from the explosive

rate of technological change and the resulting great decline

in the cost of computing power fostered by intense systems

competition.

These realities of the computer and similar industries

are at the heart of numerous precedents rejecting attempts

by antitrust plaintiffs to label one or another firm in these

industries as a ‘“‘monopolist” in or as having “market

power” over a “‘market”’ limited to one isolated part of

that firm’s overall systems or equipment business. Under

these precedents, a firm’s lack of market or monopoly

power in the interbrand market for computer sales pre-

cludes the service of its brand of computers from being

a relevant antitrust market because of the inextricable

relationship between such service and interbrand systems

competition. Numerous other precedents give computer

manufacturers the flexibility to make business decisions to

enhance their interbrand competitiveness even though such

decisions may injure intrabrand rivals.

ae

A majority of the court of appeals panel below misap-

plied these controlling precedents. The result, if allowed

to stand, could permit a jury to find that petitioner East-

man Kodak Company (‘‘Kodak’’)—or any other integrated

firm—possesses market or even monopoly power over serv-

icing its own brand of equipment even while plainly lacking

such power in the interbrand equipment market. Such a

result makes no economic or antitrust sense. The major-

ity’s misapplication of market definition and market and

monopoly power principles may well materially impair com-

petition by restraining the freedom of equipment and sys-

tems manufacturers to innovate with regard to service and

other product development efforts so as to enhance their

overall competitiveness. Similarly, the erroneous finding

below of a triable issue regarding Kodak’s conduct extends

a manufacturer’s duty to deal with intrabrand rivals to

unprecedented limits, and could thereby chill manufactur-

ers from engaging in vigorous interbrand competition.

In short, the effect of the decision below will be to

discourage innovation and thereby to freeze the status quo.

To maintain competition in the computer industry, we urge

the Court to review and reverse the decision below.’

ARGUMENT

The decision below is contrary to law and misguided. It

conflicts with this Court’s decision in Jefferson Parish

Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2 (1984), and with

the decisions of several other courts of appeals. The ma-

jority below employed market definition and market and

monopoly power principles that defy antitrust and eco-

nomic sense.

This case presents an ideal and necessary opportunity

for the Court to clarify the market definition and monopoly

' This brief is filed pursuant to Rule 37.2 of the Rules of this Court,

accompanied by the written consent of all parties.

power requirements of Section 2 of the Sherman Act, 15

U.S.C. § 2, which it has not addressed in 25 years. During

that time, “no aspect of antitrust enforcement has been

handled nearly as badly as market definition. This failure

has resulted in part because of persistent and unreconciled

conflicts of approach in important judicial opinions."’ R

Pitofsky, New Definitions of Relevant Market and the As.

sault on Antitrust, 90 Colum. L. Rev. 1805, 1807 (1990)

(footnote omitted). This case also provides an opportunity

to clarify the market power requirement of the tying of

fense under Section 1 of the Sherman Act, 15 U.S.C. § 1,

which the Ninth Circuit has misapplied on more than one

occasion.”

As Justices White and Blackmun recognized in Digi-

dyne,® which raised issues similar to those involved here,

the logic of the decision below has potentially enormous

consequences for the ability of integrated firms—most of

which compete in highly competitive international mar-

kets—to provide the lowest-price, highest-quality systems

or equipment to consumers. More specifically, the decision

below will have a tremendous impact on the way these

firms structure their equipment and service offerings. Nu-

merous pending cases involve the same or substantially

similar market definition and market or monopoly power

issues as those involved here, and the results have been

confusing and inconsistent. See Pet. App. at 42E-43E. This

Court’s prompt intervention is required to provide uniform

jurisprudence in this important area of the law and to

‘See also Digidyne Corp. v. Data Gen. Corp., 734 F.2d 1336 (9th

Cir. 1984), cert. denied, 473 U.S. 908 (1985). Since many of the high

technology companies that may be affected by the decision below are

subject to suit in the Ninth Circuit, the decision below threatens a

particularly deleterious effect on competition in this vital sector of the

U.S. economy

Data General Corp. v. Digidyne Corp., 473 U.S. 908 (1985) (White

and Blackmun, J.J., dissenting from denial of the petition for a writ

of certiorari). See infra at 10

eliminate the possibility of further confusion or inconsis-

tency.

The decision below improperly inhibits interbrand sys-

tems manufacturers from engaging in procompetitive con-

duct. The majority held that there was a triable issue

regarding the “intent” underlying Kodak’s refusal to sell

parts to its intrabrand competitors, even though the record

forecloses any claim that those competitors need Kodak's

parts in order to compete.‘ This holding extends to un-

precedented limits a monopolist’s duty to deal (assuming

arguendo Kodak’s monopoly power). Worse, it chills sys-

tems manufacturers’ actions to enhance interbrand com-

petition—where the real clash of market forces occurs—

simply because such actions may not be to the liking of

intrabrand rivals.

1. Tying Issues. As stated by the majority below (Pet.

App. at 2A), this case involves antitrust claims by inde-

pendent service organizations (‘ISOs’’) servicing Kodak

copier and micrographic equipment attacking Kodak's busi-

ness policies (a) not to sell replacement parts to Kodak

equipment owners that use ISOs for service; and (b) not

knowingly to sell replacement parts to ISOs. The first

claim alleges an unlawful tying arrangement under Section

1 of the Sherman Act, and the second claim alleges an

unlawful refusal to deal under Section 2 of the Sherman

Act.

a. On the tying claim, respondents did not dispute

that Kodak lacks market power in the interbrand markets

for copier and micrographic equipment, and the majority

below recognized the ‘“‘logical appeal” in Kodak's argument

that it could not have market or monopoly power in the

‘A similar question of what conduct a firm alleged to have monopoly

power may properly engage in is currently before the Court in Con

solidated Rail Corp. v. Delaware & H. Ry., No. 90-380 (cert. filed Sept

4. 1990). in which the Court has requested the views of the United

States

alleged after-markets for replacement parts and service if

it lacks such power in the interbrand markets. Pet. App.

at 8A n.3, 19A.° Nevertheless, the majority held that there

was a triable issue whether Kodak had market power over

the alieged “‘tying product’—Kodak replacement parts—

because, in its view, ‘“‘market imperfections can keep eco-

nomic theories about how consumers will act from mir-

roring reality.” Jd. at 10A. Remarkably, it added that,

while respondents had “not conducted a market analysis

and pin-pointed specific imperfections in the copier and

micrographic markets, a requirement that they do so in

order to withstand summary judgment would elevate the-

ory above reality.” Jd.

This formulation creates a ‘‘theory of reality” that would

eliminate summary judgment in a large class of cases.

Under the decision below, no tying (or Section 2 mono-

polization) case could be disposed of until inquiry into hy-

pothetical market imperfections—whose breadth would be

limited only by the imagination of the parties’ economists—

had been made. This result would lead to extremes of

economic speculation never intended by the authors of the

Sherman Act.

The decision below conflicts irreconcilably with Jefferson

Parish, which prohibits tying arrangements only when the

seller has market power ‘‘to force a purchaser to do some-

’ Specifically, the majority correctly observed that ‘competition in

the interbrand markets might prevent Kodak from possessing power

in the parts market” and that

just as equipment purchasers would turn to one of Kodak’s

competitors if Kodak tied supercompetitively priced parts

or service directly to equipment, equipment purchasers might

turn to one of Kodak’s competitors if Kodak ties supercom-

petitively priced service to parts. Kodak’s desire to attract

new customers might, therefore, keep it from charging su-

percompetitive prices for service.

Pet. App. at 8A, 9A.

thing that he would not do in a competitive market.”

Jefferson Parish, 466 U.S. at 13-14. The Court there held

that defendants’ 30% share of the tying product market

for hospital services, even combined with evidence of ac-

tual market imperfections, was insufficient as a matter of

law to support a finding of market power: while those

market imperfections may have ‘“generate[d] ‘market

power’ in some abstract sense, they d[id] not generate the

kind of market power that justifies condemnation of tying.”’

Id. at 26-27 (footnote omitted). The majority below failed

to abide by Jefferson Parish in holding that a 23% market

share plus unidentified, theoretical market imperfections

could create otherwise nonexistent market power. Review

is necessary to correct this plainly erroneous decision,

which would elevate innocuous conduct into an antitrust

violation.

b. The majority’s holding that Kodak’s undisputed lack

of market power in the interbrand copier and micrographic

equipment markets did not necessarily prevent Kodak from

having market power in the alleged after-markets for parts

and service (Pet. App. at 10A-12A) is insupportable.® If,

as is undisputed, Kodak lacks interbrand market power,

a fortiori it cannot possess such power in any alleged

after-market for its parts or service. Any attempt to raise

prices above competitive levels in those alleged after-mar-

kets would constitute commercial suicide, because the re-

sulting price increase would cost Kodak far more in lost

copier and micrographic equipment sales than it could hope

to gain in increased parts or service revenues.’ Thus, as

Judge Wallace explained in his dissent below, Pet. App.

‘It also conflicts with decisions of the First and Sixth Circuits and

with other decisions of the Ninth Circuit. See Pet. at 18-20.

The district court thus properly entered summary judgment and did

not err by denying respondents additional discovery; such discovery

could not have yielded evidence sufficient to create a triable issue where

respondents did not dispute Kodak’s lack of interbrand market power.

at 23A, Kodak’s lack of interbrand market power precludes

any possibility of anticompetitive effect in the hypothetical

after-markets for parts or service.

This Court has long recognized that interbrand, not in-

trabrand, competition is the antitrust law’s “primary con-

cern.’ Continental T.V., Inc. v. GTE Sylvania, Inc., 433

U.S. 36, 52 n. 19 (1977); Business Elecs. Corp. v. Sharp

Elecs. Corp., 485 U.S. 717, 724, 726 (1988).* By contrast,

the decision below in effect subordinates interbrand com-

petition to intrabrand competition. Such a result makes no

economic or antitrust sense, and must be reviewed and

reversed.

c. The majority attempted to distinguish this case from

the Ninth Circuit’s controlling decision in General Business

Sys. v. North Am. Philips Corp., 699 F.2d 965 (9th Cir.

1983), and other directly relevant appellate decisions by

observing that (a) ‘‘Kodak charges up to twice as much as

[respondents] for service that is of lower quality”; (b) “‘in

some instances competition from ISOs drove down the

price that Kodak was willing to charge for service’: and

(c) “in other instances some owners of large Kodak equip-

ment packages will pay higher prices for Kodak service

rather than switch to competitors’ systems.’ Pet. App. at

10A-11A. Even if such evidence existed (see Pet. at 19-

20, 21-22), it would fail to raise a triable issue.

Higher prices for Kodak service could be suggestive of

market power “under proper circumstances” (General

‘In GTE Sylvania, 433 U.S. at 54, the Court held that the rule of

reason, not the per se rule, should apply to vertical nonprice restraints

because such restraints ‘‘promote interbrand competition by allowing

the manufacturer to achieve certain efficiencies in the distribution of

his products.” The Court further noted that “interbrand competition

confronting the manufacturer’ can provide a “significant check on the

exploitation of intrabrand market power because of the ability of con-

sumers to substitute a different brand of the same product.” Jd. at 52

n.19

Business Systems, 699 F.2d at 977), but no such circum-

stance exists in this case.’ Respondents presented no evi-

dence supporting their assertion that Kodak’s higher prices

resulted from the exercise of market power. Conduct as

consistent with lawful as with unlawful competition does

not, standing alone, create a triable issue. Matsushita Elec.

Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 588 (1986).

The possibility that Kodak charged more than ISOs at

one point in time does not mean that it has the power to

sustain higher prices over a period of time long enough

to permit a trier of fact reasonably to conclude that it has

market power. See Syufy, 903 F.2d at 665-66 (‘ijn eval:

uating monopoly power, it is not market share that counts,

but the ability to maintain market share’’ (emphasis by

the court)). Indeed, as the majority found, in the short

run, “competition from ISOs drove down the price that

Kodak was willing to charge for service” (Pet. App. at

11A), thus confirming that Kodak lacks the power to sus-

tain higher prices.'® Over the long run, interbrand com-

petition even more definitively forecloses Kodak from

maintaining higher prices; any attempt to do so would only

‘“hasten[{ ] the date on which [Kodak] surrender(s] to its

competitors” in the equipment market. General Business

‘One circumstance that is not only proper but essential to any in

ference of market power is a showing of ‘‘significant barriers to entry’ ;

absent that circumstance, “any attempt to raise prices above the com-

petitive level will lure into the market new competitors able and willing

to offer their commercial goods or personal services for less."’ United

States v. Syufy Enters., 903 F.2d 659, 664 (9th Cir. 1990). Accord

United States v. Baker Hughes, Inc., 908 F.2d 981, 987 (D.C. Cir. 1999)

(“{iJn the absence of significant barriers, a company probably cannot

maintain supra-competitive pricing for any length of time’’). There is

no basis in this record for finding entry barriers allowing Kodak to

maintain higher prices. Absent such barriers, the mere fact that Kodak

might have been charging higher prices at some point in time cannot

suffice to create a genuine issue as to its market power

This evidence, far from distinguishing General Business Systems,

shows that Kodak lacks market power

ae

10

Systems, 699 F.2d at 977. See also GTE Sylvania, 433

U.S. at 55 (‘[t}he availability and quality of [service and

repair] affect a manufacturer’s goodwill and the compet-

itiveness of his product’’).

The possibility that some Kodak equipment owners will

pay higher service prices rather than switch to competi-

tors’ equipment is just a different way of advancing the

so-called “lock-in” notion that a buyer becomes “locked

in’’ to components of or service for the product it buys.

The courts have repeatedly rejected this notion as a basis

for finding market (or monopoly) power."

The only case even arguably supporting the lock-in the-

ory is Digidyne. There, however, the Ninth Circuit did not

find that an alleged lock-in gave defendant market power;

it simply observed that lock-in ‘“‘enhanced”’ economic power

that the court had already found from the existence of a

copyright. 734 F.2d at 1341-43. Digidyne has been roundly

criticized by other courts of appeals, and the Ninth Circuit

itself has declined to apply it. See Pet. at 16-17.

This Court’s denial of the petition for a writ of certiorari

in Digidyne was over the dissent of Justices White and

Blackmun,” and against the recommendation of the United

States. In urging the Court to grant the petition in Dig-

idyne, the United States explained that the lock-in theory

is unacceptable as a matter of sound economics because

General Business Systems, 699 F.2d at 975; Kaplan v. Burroughs

Corp., 611 F.2d 286, 293-95 (9th Cir. 1979), cert. denied, 447 U.S. 924

(1980); Telex Corp. v. IBM Corp., 510 F.2d 894, 917 (10th Cir.), cert.

dismissed, 423 U.S. 802 (1975); ILC Peripherals Leasing Corp. v. IBM

Corp., 458 F. Supp. 423, 429 (N.D. Cal. 1978), aff'd sub nom. Memorex

Corp. v. IBM Corp., 636 F.2d 1188 (9th Cir. 1980), cert. denied, 452

U.S. 972 (1981).

* The dissent in Digidyne stated that the question “whether market

power over ‘locked in’ customers must be analyzed at the outset of

the original decision to purchase”’ raised a substantial issue of antitrust

law and policy warranting the Court's review. 473 U.S. at 909.

1]

it improperly focuses only on the customer’s post-purchase

as opposed to pre-purchase alternatives: ‘‘the relevant time

frame for measuring the seller’s competitive position is

when the buyer entered into the contract in preference to

some alternative arrangement.’’ Brief for the United States

as Amicus Curiae at 15, Data Gen. Corp. v. Digidyne Corp.,

No. 84-761 (U.S. May 1985). The lock-in theory “ignores

how competition in the market operates,” “‘depart{s] from

commercial and economic reality’’ and “‘skews proper anal-

ysis” by erroneously assuming that buyers take no steps

to avoid lock-in at the time of purchase and that the seller

has no need or desire to attract new customers. /d. at 14-

17.

This case demonstrates the mischief that Digidyne has

caused. Review is necessary to put to rest once and for

all the misguided notion that a supposed “‘lock-in’”’ effect

gives a seller market power.

2. Relevant Market Issues. The decision below as to

the relevant product market for the Section 2 refusal to

deal claim warrants review.'* Respondents defined the rel-

evant market as the service of Kodak equipment. See Pet.

App. at 18A. The majority held that there was a triable

issue on that definition solely on the ground that the Ninth

Circuit had previously ‘‘suggested that service of one com-

pany’s micrographic equipment can be a relevant market

under Section 2.”" Id."

On the Section 2 claim, the majority admitted to “hav{ing] more

trouble with the monopoly power... issue’’ because monopoly power

“is something more than the market power that is a prerequisite to

liability under Section 1."" Pet. App. at 18A, 19A. Since respondents

failed to present significant probative evidence to overcome summary

judgment on their Section 1 claim, they necessarily also failed to present

significant probative evidence on their Section 2 claim.

‘The majority cited Dimidowich v. Bell & Howell, 803 F.2d 1473,

1480-81 n.3 (9th Cir. 1986), modified, 810 F.2d 1517 (9th Cir. 1987).

But, as Kodak showed (Pet. at 25 n.11), the Dimidowich court's dis-

ee

12

This holding makes no economic or antitrust sense. As

this Court stated in United States v. E.1. du Pont de Nem-

ours & Co., 351 U.S. 377, 393 (1956) (footnote omitted),

one can theorize that we have monopolistic com-

petition in every nonstandardized commodity with

each manufacturer having power over the price

and production of his own product. However, this

power that, let us say, automobile or soft-drink

manufacturers have over their trade-marked

products is not the power that makes an illegal

monopoly. Illegal power must be appraised in

terms of the competitive market for the product.

The Court held that the “competitive market’’ must take

account of the constraints on a firm’s ability to raise price

or limit output, and specifically must include all reasonably

interchangeable substitutes for the products in question

and all suppliers that could readily assign productive ca-

pacity if given proper incentive to do so. Jd. at 389-94.

See also Brown Shoe Co. v. United States, 370 U.S. 294,

325 (1962); United States v. Columbia Steel Co., 334 U.S.

495, 510-11 (1948).

This proposition has become an antitrust axiom. Follow-

ing du Pont, “‘the lower courts have consistently refused

to restrict a relevant market to a company’s trademarked

product.’ Shaw v. Roler Watch, U.S.A., Inc., 673 F. Supp.

674, 678 ‘S.D.N.Y. 1987). See also Domed Stadium Hotel,

Inc. v. Holiday Inns, Inc., 732 F.2d 480, 488 (5th Cir.

1984) (“as a matter of law, ... absent exceptional market

conditions, one brand in a market of competing brands

cannot constitute a relevant product market’’). Numerous

cussion of Section 1 issues has nothing to do with relevant market

definition under Section 2. Its colloquial use of the word “‘market”’ was,

at most, dictum

13

decisions have rejected market definitions limited to a sin-

gle manufacturer’s equipment or to service therefor.’

In General Business Systems, 699 F.2d at 972, the Ninth

Circuit rejected, as a matter of law, a market definition

limited to magnetic ledger cards used in defendant’s com-

puter systems in light of undisputed evidence of compe-

tition in the interbrand systems market. In Bushie v.

Stenocord Corp., 460 F.2d 116, 121 (9th Cir. 1972), the

Ninth Circuit affirmed summary judgment against a com-

plaint alleging a relevant market limited to servicing Sten-

ocord equipment because there was no evidence “that

Stenocord dominated the market for office dictating ma-

chines generally, or that it controlled a major share of the

Many such cases have involved the computer industry. E.g., A./

Root Co. v. Computer/Dynamics, Inc., 806 F.2d 673, 675 (6th Cir. 1986),

General Business Systems, 699 F.2d at 972-75; Telex, 510 F.2d at 919

Allen-Myland, Inc. v. IBM Corp., 693 F. Supp. 262, 272-79 (E.D. Pa

1988); In re IBM Peripheral EDP Devices Antitrust Litigatwn, 481 F

Supp. 965, 985 (N.D. Cal. 1979), aff'd sub nom. Transamerica Computer

Co. v. IBM Corp., 698 F.2d 1377 (9th Cir.), cert. denied, 464 U.S. 955

(1983); ILC Peripherals, 458 F Supp. at 429

The rule is the same for other industries. E.g., International Lo

gistics Group, Ltd. v. Chrysler Corp., 884 F.2d 904, 908 (6th Cir. 1989)

(“a manufacturer cannot be charged with antitrust violations if it mo

nopolizes its own brand”’), cert. denied, 110 S. Ct. 1783 (1990); H.L

Hayden Co. v. Siemens Medical Sys., Inc., 879 F.2d 1005, 1018 (2d

Cir. 1989); H.J., Inc. v. International Tel. & Tel. Corp., 867 F.2d 1531

1538 (8th Cir. 1989); Key Financial Planning Corp. v. ITT Life Ins

Corp., 828 F.2d 635. 643 (10th Cir. 1987); Seidenstein 1 National

Medical Enters., 769 F.2d 1100, 1106 (5th Cir. 1985), Transource Int’

Inc. % Trinity Indus.. Inc., 725 F.2d 274, 282-83 (5th Cir. 1984), Dun

& Mavis, Inc. v. Nu-Car Driveaway, Inc., 691 F.2d 241, 244 (6th Cir

1982): Parsons v. Ford Motor Co., 669 F.2d 308, 312 (5th Cir.), cert

denied, 459 U.S. 832 (1982); Edward J. Sweeney & Sons, Inc. v. Tezxac

Inc.. 637 F.2d 105, 117-18 (3d Cir. 1980), cert. denied, 451 U.S. 911

(1981); H & B Equip. Co. v. International Harvester Co., 577 F.2d 239

242 (5th Cir. 1978); ALW, Inc. v. United Air Lines, 510 F.2d 52, 56

(9th Cir. 1975); Mullis v. ARCO Petroleum Corp., 502 F.2d 290, 296

(7th Cir. 1974)

—_—

CO

14

market for machines of its particular type.’’ And in Speec-

trofuge Corp. v. Beckman Instruments, Inc., 575 F.2d 256,

278-86 (5th Cir. 1978), cert. denied, 440 U.S. 939 (1979),

the Fifth Circuit held that there was no market limited

to servicing Beckman scientific instruments because ser-

vice was an integral part of the market for equipment

sales. See also United States v. Grinnell Corp., 384 U.S.

563, 572-73 (1966) (no submarkets for central station alarm

services because, to compete effectively, central station

companies had to offer all or nearly all types of alarm

services).

These cases preclude finding a market limited to one

element (such as servicing) of one manufacturer’s products

if competition with other manufacturers prevents the ex-

ercise of monopoly power over the one element alleged to

be the relevant market. In this case, the undisputed fact

of interbrand competition precludes definition of a market

limited to servicing Kodak equipment.

3. Conduct Issues. While purporting to recognize the

general rule that a monopolist has no duty to deal with

its competitors, the majority below stated that a ‘‘monop-

olist may not refuse to deal with a competitor in an ex-

clusionary attempt to impede competition without a

legitimate business reason’’ and that “a monopolist may

not retaliate against a customer who is also a competitor

by denying him access to a facility essential to his oper-

ations, absent legitimate business justifications.” Pet. App.

at 16A-17A. It held that (1) there was a triable issue

whether Koedak’s first two justifications of promoting in-

terbrand competition and reducing inventories (see Pet. at

5-6) were “genuine rather than pretextual’; and

(2) Kodak’s third justification of preventing freeriding by

ISOs (see Pet. at 6) was illegitimate as a matter of law.

Pet. App. at 17A-18A.

The decision below extends to unprecedented limits a

monopolist’s duty to deal (assuming arguendo Kodak’s mo-

—————e ee

15

nopoly power). This Court has never “required an unre-

gulated monopolist, acting independently, to share its

facility with a competitor with which it has had no prior

history of dealing.’ Florida Fuels, Inc. v. Belcher Oil Co.,

717 F. Supp. 1528, 1535-36 (S.D. Fla. 1989) (collecting

cases). But the decision below imposes just such a require-

ment and, in effect, forces such a firm to subsidize its

competitors unless it can prove its business justification.'*

To date, this Court has held—at most—that ‘“‘a monop-

olist may be guilty of monopolization if it refuses to co-

operate with a competitor in circumstances where some

cooperation is indispensable to effective competition.”

Olympia Equip. Leasing Co. v. Western Union Tel. Co.,

797 F.2d 370, 379 (7th Cir. 1986) (discussing Aspen Skiing

Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985)),

cert. denied, 480 U.S. 934 (1987).'’ The majority never

made the critical inquiry: whether providing replacement

parts to ISOs (or to customers using ISOs) was indispen-

sable to effective competition..

The record in this case precludes any such finding. While

Kodak has for several years followed a policy of not pro-

viding replacement parts to ISOs or customers using ISOs,

the 18 respondents in this case continue in business and,

as the majority observed, “‘presented evidence that their

‘ The majority purported to recognize that a Section 2 plaintiff bears

the burden of proving lack of business justification. Pet. App. at 17A

n.9. But it rejected Kodak’s proffered justifications on the basis of

speculative inferences, not on the basis of significant probative evidence

showing that those justifications did not exist or were not legitimate

In Aspen, the Court upheld a jury verdict holding a monopolist

liable for, inter alia, withdrawing from an interchangeable ski ticket

program. In doing so, the Court found it significant that ‘interchange

able tickets are used in other multimountain areas which apparently

are competitive,’ and on that basis “‘inferjred] that such tickets satisfy

consumer demand in free competitive markets.’ 472 U.S. at 603. Thus,

the defendant's participation in an interchangeable ticket program could

be viewed as indispensable to effective competition.

a

16

service is superior to Kodak service.’’ Pet. App. at 134A.

Plainly, if respondents can provide superior service without

access to parts from Kodak, access to such parts is not

indispensable to effective competition. Accordingly, Kodak

can have no legal duty to deal.

Moreover, the holding below that Kodak’s desire to pre-

vent freeriding by ISOs is illegitimate as a matter of law

(see Pet. App. at 14A-15A) is contrary to this Court’s

repeated recognition (in a variety of circumstances) that

it is perfectly legitimate for businesses to take steps to

eliminate freeriding. Monsanto Co. v. Spray-Rite Serv.

Corp., 465 U.S. 752, 762-63 (1984); Dawson Chemical Co.

v. Rohm & Haas Co., 448 U.S. 176, 222 (1980); GTE Syl-

vania, 432 U.S. at 55. It also conflicts with the Fourth

Circuit’s recent decision in Abcor Corp. v. AM Int’l, Inc.,

916 F.2d 924 (4th Cir. 1990). In Abcor, defendant had for

many years allowed ISOs to purchase replacement parts

on a same-day basis. In 1988, it terminated this service

for ISOs, in part to force ISOs to maintain their own parts

inventory rather than freeriding on its inventory by de-

ferring parts purchases until the day they were needed.

See id. at 929. The Fourth Circuit held that defendant’s

change in parts policy did ‘‘not rise to the... level of

anticompetitive activity’ because defendant merely elimi-

nated plaintiff's “ ‘free ride’ by shifting the inventory cost

to the plaintiff.” Jd. at 930. Abcor thus recognizes that

the desire to eliminate freeriding by competitors is a le-

gitimate business justification. Review is warranted to re-

solve this conflict.'*

More fundamentally, review is necessary to encourage

vigorous, procompetitive conduct. Assuming the existence

of monopoly power, even monopolists must be given “‘some

leeway in making business decisions.”” Byars v. Bluff City

‘* The decision below also conflicts with Olympia, 797 F.2d at 377,

in which the Seventh Circuit held that even a monopolist need not give

a competitor a ‘free ride’ by subsidizing the competitor’s business.

17

News Co., 609 F.2d 848, 862 (6th Cir. 1979). And “‘{a}

monopolist has the same right to compete as any other

company. Under the antitrust laws, a monopolist is en-

couraged to compete vigorously with its competitors and

to remain responsive to the needs and demands of its

customers.”’ United States Football League v. National

Football League, 842 F.2d 1335, 1360-61 (2d Cir. 1988)

(approving jury instructions). The decision below deters

brand-name manufacturers from engaging in vigorous com-

petition by exposing them to trials to examine the motives

underlying their business decisions, and to the attendant

possibility of treble damages liability if a jury does not

like those decisions.'* Review is necessary to prevent this

result.

4. Consequences of the Decision Below. This case has

potentially enormous consequences for the way that all

firms that are even in part vertically integrated conduct

their businesses. Under the decision below, every firm that

services and provides replacement parts for its equipment

is subject to a finding that it is a ‘“‘monopolist”’ in a “mar-

ket”’ limited to service of or replacement parts for that

equipment, even if there is vigorous interbrand competi-

tion. Such a result would affect countless firms in a variety

of industries, mostly at the frontiers of the United States’

competitive position in hotly contested international mar-

kets for equipment and systems sales.

This departure from sound market definition and mo-

nopoly power principles, and the majority’s holding that

there is a triable issue regarding the intent behind Kodak’s

conduct, both invite groundless antitrust charges whenever

an integrated firm modifies its service arrangements to

enhance its interbrand competitiveness in a manner not

to the liking of intrabrand independent service firms. In-

‘Two juries have recently returned large verdicts under Sections 1

and 2 against integrated systems manufacturers on similar antitrust

theories. See Pet. at 13.

I oO

18

dependent service firms that have “adopted’”’ one manu-

facturer’s products as their own service targets will almost

always seek shelter in some aspect of the manufacturer’s

service structure, and then claim an antitrust violation if,

in pursuit of systems business, the manufacturer alters its

service or parts business in a way that coincidentally up-

sets their arrangements. The threat that such litigation

will survive summary judgment and advance to the point

of permitting a jury to find ‘‘monopolization” of such a

‘“‘market”’ chills precisely the kind of innovation and com-

petition that the antitrust laws are intended to foster. See

Business Electronics, 485 U.S. at 728 (‘‘{mJanufacturers

would be likely to forgo legitimate and competitively useful

conduct rather than risk treble damages and perhaps even

criminal penalties’’).

This concern is quite real, not merely academic. As dis-

cussed in Kodak’s petition, numerous cases are currently

pending in the computer, medical equipment and printing

equipment industries that involve identical market defini-

tion and monopoly power issues and that challenge the

same or similar business practices or decisions as are in-

volved here. See Pet. at 13-14 & Pet. App. at 42E-43E.

This Court’s intervention at this time is required to provide

uniform jurisprudence in this important area of the law,

and to keep the law in the lower courts from becoming

even more confused than it already is.

ly

CONCLUSION

For the foregoing reasons, Kodak’s petition for a writ

of certiorari should be granted.

S.T. JACK BRIGHAM II]

MARCIA HOWE ADAMS

HEWLETT-PACKARD COMPANY

3000 Hanover Street

Palo Alto, CA 94303

(415) 857-5816

Respectfully submitted,

KURT W. MELCHIOR

Counsel of Record

NOSSAMAN, GUTHNER, KNOX

& ELLIOTT

50 California Street

San Francisco, CA 94111-4712

(415) 398-3600

ROBERT A. SKITOL

JAMES A. MEYERS

PEPPER, HAMILTON & SCHEETZ

1300 Nineteenth Street, N.W.

Washington, D.C. 20036-1685

(202) 828-1200

Attorneys for

Hewlett-Packard Compan 7

ee

20

IvoR CARY ARMISTEAD, III STEPHEN WASINGER

Law Department HONIGMAN MILLER SCHWARTZ

Digital Equipment Corporation AND COHN

111 Powdermill Road 2290 First National Building

Maynard, MA 01754 Detroit, MI 48226-3583

(508) 493-3980 (313) 256-7726

Attorney for Digital Attorneys for Prime

Equipment Corporation Computer, Inc.

JAMES W. OLSON F'LORINDA J. IASCONE

Law Department Wang Laboratories Inc.

Unisys Corporation 1 Industrial Avenue

P.O. Box 500 Lowell, MA 01851

Bluebell, PA 19424-0001 (508) 967-6367

(215) 986-4105

Attorney for Unisys Attorney for Wang

Corporation Laboratories Inc

January 18, 1991