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

< SEP 2.0 1991

No. 90-1029 OFFAL OF ihc CLERK

a

IN THE

Supreme Court of the United States

OCTOBER TERM, 1991

EASTMAN KODAK COMPANY,

Petitioner,

V.

IMAGE TECHNICAL SERVICE, INC.., et. ai,

Respondents.

On Writ of Certiorari to the United States Court

of Appeals for the Ninth Circuit

Brief Of The Amici Curiae Automotive Warehouse Distributors

Association, Automotive Body Parts Association, Automotive

Engine Rebuilders Association, Auto International Association,

Automotive Parts And Accessories Association, Automotive Parts

Rebuilders Association, Automotive Service Association,

Automotive Service Industries Association, International Mass

Retail Association, National Independent Automobile Dealers

Association, And Specialty Equipment Market Association

As Amici Curiae In Support Of Respondent

Basil J. Mezines* Donald A. Randall

George A. Tobin Washington, D.C. 20002

STEIN MITCHELL & MEZINES Telephone (202) 543-1440

Suite 1130 Michael J. Conlon

1100 Connecticut Avenue, N.W. CONLON, FRANTZ, PHELAN, KNAPP,

Washington, D.C. 20036 PIRES & BIRKEL

Telephone (202) 737-7777 Washington D.C. 20036

* Counsel of Record Telephone (202) 331-7050

prnane Curiae Louis R. Marchese

Of Counsel: HALFPENNY, HAHN, ROCHE

John Russell Deane, III & MARCHESE

Christopher J. Kersting Chicago, IL 60606

TRAINUM, SNOWDEN, HYLAND Telephone (312) 782-1829

& DEANE, P.C. ere

Washington, D.C. 20004 Robert J. Verdisco

Telephone (202) 783-5488 INTERNATIONAL MASS RETAIL

ASSOCIATION

Washington, D.C. 20006

(202) 861-0774

ah

rf x

i

CONTENTS

TABLE OF AUTHIORITIES ......ccccccccccece: li

PRELIMINARY STATEMENT .................. ]

' THE INTEREST OF AMICI CURIAE AND

SUMMARY OF ARGUMENT ..................

Nm

ARGUMENT:

THE EXISTENCE OF INTERBRAND

COMPETITION FOR ORIGINAL EQUIP-

MENT SALES CANNOT PREVENT

MONOPOLISTIC PRICING IN SERVICE

AND REPLACEMENT PARTS MARKETS

WHERE INDEPENDENT COMPETITION

BUAS BEN ERCLAUIIED 2. ccc cccccces 5

A. The Economics of Durable Equipment Severs

the Impact of Downstream Maintenance

Costs on Equipment Sales ...... 6

B. Competition in the Market for Vehicle

Sales Cannot Discipline Prices in Vertically

Monopolized Markets for Parts and

Removal of Independent Competition in the

Parts and Service Markets Would be Suffi-

ciently Significant to Warrant a Per Se

Application of the Antitrust Laws .. . . 13

D. In the Clean Air Act Congress Expressly

Recognized the Nature of the Anticompetitive

Injury Inherent in the Exclusion of Inde-

pendent Automobile Parts and Service

i lua 2k & «ee ee © 17

CONCLUSION

TABLE OF AUTHORITIES

CASES PAGES

Grappone, Inc. v. Subaru of New England, Inc. 858

F.2d 792 (let Cie. I9GZ) . wc ccccccccescsess 11

Metrix Warehouse, Inc. v. Mercedes-Benz of North

America, Inc., 828 F.2d 1033 (4th Cir. 1986),

cert.denied, 486 U.S. 1017 (1988) .......... 11

Miller Motors, Inc. v. Ford Motor Company, 252

F.2d 441 (4th Cis. 1956) 2... ccccccccssscess 11

Mozart Co. v. Mercedes-Benz of North America,

Inc., 833 F.2d 1342 (9th Cir. 1987), cert.denied,

468 U.S. STO (IGG) .. cc ccccccccescssesss 11

Parts & Electric Motors, Inc. v. Sterling Electric,

Inc., 866 F.2d 228 (7th Cir. 1988), cert. denied,

110 S.CX. 141 (1SGR) .. wc cccccccscccsscses 13

Pick Mfg. Co. v. General Motors Corp., 80 F.2d 641

(7th Cir. 1935), aff'd, 299 U.S. 3 (1936) ..... 11

STATUTES

42 U.S.C.A. §§ 7522, 7541 (1983) .........+4--- 18

MISCELLANEOUS

136 Cong. Rec. $3271 (daily ed. March 27,1990) ... 18

Akerlof, The Market for ‘Lemons’: Quality Uncer-

tainty and the Market Mechanism, 84 Q.J.

Boon. 468 (IDFR . oc ccccccccessecaseeeens 8

Center for Policy Alternatives, Massachusetts Institute

of Technology, Consumer Durables: Warranties,

Service Contracts and Alternatives (1978) ...... 9

Coase, Durability and Monopoly, 15 J. L. Econ. 143

(2DTE) oc ccccceseseseuesun eee ; 6

ill

Federal Trade Commission, Staff Report on

Automobile Warranties, (1968) .............

Hearings on Warranties and Guaranties before the

House Committee on Interstate and Foreign

Commerce, 91st Cong., 2d Sess. (1970) ......

Kiley, Measuring the Full Life of a Car, 32 Adweek’s

Marketing Week 57, (March 11,1991) ........

Monopolistic Tendencies of Auto Emission Warranty

Provisions: Hearings Before the Subcommittee

on Environmental Problems Affecting Small

Business of the Permanent Select Subcommittee

on Small Business, House of Representatives,

93rd Cong. 2d. Sess. (1974) ...............

Motor Vehicle Manufacturers Association, MVMA

feces ccceccececce:

Pitofsky, New Definitions of Relevant Market and

the Assault on Antitrust, 90 Colum. L. Rev.

EE

Punj and Staelin, A Model of Consumer Information

Search Behavior for New Automobiles, 9 J.

Consumer Res. 366 (1982) ................

Sherman and Hoffer, Does Automobile Styling

Change Pay Off?, 3 Applied Econ. 153

ES es BU Gey 6606606%ccccecces

Shimp and Bearden Warranty and Other Extrinsic

Cue Effects on Consumers’ Risk Perceptions, 9

J. Consumer Res. 38 (1982) ...............

Winston et al., Blind Intersection, Policy and the Auto-

mobile Industry (Brookings Institution 1987) .... .

Zelenitz, Below-Cost Original Equipment Sales as a

Promotional Means, 59 Rev. Econ. Stat. 438

CN cwccccces

18

6,7

17

No. 90-1029

iN THE

Supreme Court of the Anited States

OCTOBER TERM, 1991

EASTMAN KODAK COMPANY,

Petitioner,

We

IMAGE TECHNICAL SERVICE, INC., et. ai,

Respondents.

On Writ of Certiorari to the United States Court

of Appeals for the Ninth Circuit

Brief Of The Amici Curiae Automotive Warehouse Distributors

Association, Automotive Body Parts Association, Automotive

Engine Rebuilders Association, Auto International Association,

Automotive Parts And Accessories Association, Automotive Parts

Rebuilders Association, Automotive Service Association,

Automotive Service Industries Association, International Mass

Retail Association, National Independent Automobile Dealers

Association, And Specialty Equipment Market Association

As Amici Curiae In Support Of Respondent

PRELIMINARY STATEMENT

With consent of the parties, the Automotive Warehouse

Distributors Association, Automotive Body Parts Association,

Automotive Engine Rebuilders Association, Auto International

Association, Automotive Parts and Accessories Association,

Automotive Parts Rebuilders Association, Automotive Service

Association, Automotive Service Industries Association, Inter-

national Mass Retail Association, National Independent

Automobile Dealers Association and Specialty Equipment

Market Association (collectively, “independent auto after-

market associations”) submit this brief amicus curiae. This

2

brief will argue for upholding the decision of the United States

Court of Appeals for the Ninth Circuit. To do otherwise could

establish an erroneous presumption that the existence of inter-

brand competition for original sales of durable equipment can

by itself be sufficient to discipline prices in service and replace-

ment parts markets from which independent competition has

been excluded.

Such a presumption would obliterate the distinctions be-

tween the market for new equipment and the distinctly separate

markets for replacement parts and service. Without that distinc-

tion, the antitrust protection otherwise available for firms in the

parts and service markets would be lessened or removed. This

brief endorses the discussion contained in the Respondent’s

Brief on the Merits (Sept., 20 1991).

THE INTEREST OF AMICI CURIAE AND

SUMMARY OF ARGUMENT

The associations listed as amici curiae on this brief are

trade associations whose members do business in the inde-

pendent automotive aftermarket, including the sale of used

vehicles. The combined membership of these associations com-

prises more than 45,000 firms operating at every level of the

automotive aftermarket, including used vehicles sales, parts

manufacture, rebuilding, distribution, wholesaling, retailing and

vehicle service.

The independent automotive aftermarket is comprised of

those firms in the replacement parts and service markets which

are not affiliated with the vehicle assembly companies. At

present, the independent automotive aftermarket comprises a

much larger share of the parts and service markets than does the

car company-affiliated sector. More than 90% of the nation’s

390,000 retail automotive service establishments are unaf-

filiated with any of the vehicle assembly companies. At least

3

seventy five percent of all service and repair work is done by

independents in vigorously competitive markets where price

and quality are paramount consumer concerns. The inde-

pendent sector is also the major source for replacement parts,

both new and rebuilt, moreover many manufacturers of replace-

ment parts sell both to the car companies and through inde-

pendent distribution channels. In many instances the same part

will be sold in different boxes — one with a car company label,

one with an independent label.

Like Kodak, the vehicle assembly firms, do not

manufacture the vast majority of the components used in the

assembly of their equipment. The vast majority of parts used

for equipment assembly and as replacement parts are ob-

tained through outside purchases from parts manufacturing

firms.! When an equipment assembly firm acts not in its

capacity as an equipment assembler but instead as a buyer,

distributor, wholesaler and/or retailer of replacement parts,

its actions in those markets or distribution levels should be

recognized as actions undertaken in markets distinct and

separate from the market for new equipment.

The concern of these associations with respect to the issues

presented in this case is that a reversal of the decision of the

United States Court of Appeals for the Ninth Circuit would

encourage vehicle assembly companies to institute tying arran-

gements whereby control over selected classes of replacement

parts would be used to control related but distinct markets for

automotive service and parts.

The ready availability of replacement parts is the lifeblood

of any service industry. A significant foreclosure of parts

availability for the purpose of eliminating competitors in the

' See, Petitioner's brief on the Merits at 37-38(Conceding that Kodak

obtains many parts from other manufacturers and discussing Respondents’

estimate that 90% of Kodak’s component parts are obtained from outside

firms).

4

service industry is a cognizable antitrust injury and likely

evidence of market power. The elimination of competitive

service alternatives also subjects parts suppliers to a form of

monopsony in which the tying equipment assembler acting as a

replacements parts distributor/reseller becomes the only remain-

ing customer for replacement parts. Lastly, users, sellers and

rebuilders of existing equipment would be hostage to parts and

service pricing policies of equipment assemblers which would

be determined in a non-competitive environment.

It is of particular concern to the independent automotive

aftermarket amici that the trial court relied on an erroneous and

grossly oversimplified economic model of a complex industry

analogous in many respects to the automotive industry. This had

the effect of concealing the enormous potential for anticompeti-

tive harm in Kodak’s parts distribution policy. A presumption

that competition in original equipment markets can alone undo

anticompetitive injury in parts and service markets is erroneous

as a matter of economics. This presumption grants equipment

assemblers carte blanche to pursue grossly anticompetive ob-

jectives when they act in the capacity of parts resellers and

service providers.

The record below also suggests that the imposition of this

erroneous economic presumption by the tnal court was a root

cause of the restriction of plaintiff’s discovery into issues related

to the relationship between the equipment assembler and parts

manufacturers with respect to parts sales to independents. This

is an indication that reliance on this offending presumption not

only distorted the economic analysis of the case but unfairly

increased the burden on the plaintiff.

The independent automotive aftermarket amici want to

make it clear that the history of the automotive industry

demonstrates that interbrand competition for vehicle sales has

never operated as a check on replacement part prices and cannot

be relied upon to do so in vertically monopolized parts and

5

service channels in the automotive industries or in analogous

industries. It is important that the erroneous economic model

relied upon by the trial court below not be approved as a

substitute for factually based economic analysis.

The relevant experience of the automotive industry can be

explained as a function of the economics of durable goods. Any

attempt to tie future sales of parts and service to the sale of durable

equipment ought to be especially suspect because (1) the purchase

of complex, long-lived equipment is invariably made on the basis

of criteria other than maintenance costs and thus price increases for

maintenance are easily concealed or overwhelmed by other con-

siderations; (2) the elimination of an independent service sector

leaves replacements parts manufacturers and rebuilders at the

mercy of a single powerful buyer; and, (3) equipment makers have

a disincentive to permit the use of existing, older equipment to

remain a cost-effective alternative to the purchase of new equip-

ment. Therefore, tying arrangements involving equipment and the

replacement parts and service should be found harmful per se.

The independent automotive aftermarket amici offer in this

brief an outline of the economics of the automotive aftermarket in

order to illustrate how and why tying arrangements of the kind at

issue in this case are inherently harmful. Additionally, these amici

would like to briefly summarize how the relevant economics of this

industry have been reflected in litigation and have influenced the

decisions of the Congress with respect to environmental regulation

of automobiles.

ARGUMENT

THE EXISTENCE OF INTERBRAND COMPETITION

FOR ORIGINAL EQUIPMENT SALES CANNOT

PREVENT MONOPOLISTIC PRICING IN SERVICE

AND REPLACEMENT PARTS MARKETS WHERE IN-

DEPENDENT COMPETITION HAS BEEN EXCLUDED

6

The economics of durable equipment is such that consumer

decisions concerning long-term maintenance costs are largely

severed from the decision processes that govern purchase of the

original equipment. This is a function of the time separating the

purchases, the disparity in the criteria governing equipment

purchases versus those governing purchases of parts and service

and the cost of acquiring information. Where parts and service

must be obtained in a single monopolized market for both parts

and service, there are significant opportunities to extract

monopoly profits without any corresponding corrective impact

in the market for new equipment.

A. The Economics of Durable Equipment Severs

the Impact of Downstream Maintenance

Costs on Equipment Sales

A distinctive feature of the economics of durable goods

(such as commercial copiers or automobiles) is that the con-

tinued availability of existing older equipment reduces the

demand for new equipment. See, Coase, Durability and

Monopoly, 15 J. L. Econ. 143 (1972). Before a consumer makes

a selection within the market for new equipment he or she must

first decide to forgo the purchase or the continued use of an older

piece of equipment.* In the automobile industry for example,

of the more than 175 million cars and trucks currently in use in

the United States, more than 70% are at least four years old and

more than 40% are nine years or older. Motor Vehicle Manufac-

turers Association, MVMA Facts & Figures 199] at 28. This

means that the majority of vehicle owners maintain an out-of-

warranty, older piece of equipment rather than purchase a new

vehicle. Millions of vehicle owners have purchased their

vehicles second or third hand and purchase all parts and service

-

The availability of used automobiles has a profound impact on the sale

of new vehicles. An example of a demand forecasting model incorporating

this factor can be found in Winston et al., Blind Intersection, Policy and the

Automobile Industry, 36-60 (Brookings Institution 1987).

5

solely from the independent aftermarket. Three-fourths of all

automotive aftermarket sales are made through independent

service providers.

The economics of durability has a profound impact on the

incentive structure of assemblers of durable equipment. If new

equipment assemblers began to wage vigorous competition for

new equipment sales largely on the basis of product durability

in combination with low-maintenance costs they would do so in

a Shrinking market. They would find that consumer demand

was increasingly filled by older pieces of equipment. It is

therefore in the collective interest of any equipment industry to

move the field of competition away from an emphasis on

durability towards an emphasis on innovative features and sty]-

ing. This lesson is well-applied in the automobile industry

where competition takes place in a number of distinct market

niches defined entirely by styling issues and equipment base

price.>

Another aspect of the economics of durability is that the

consumer who buys equipment when new may not be the same

person who will buy parts and service in later years after the

express warranty expires.4 Style and purchase price are the

dominant, if not sole concerns of the original purchaser. When

consumers invest time and effort to obtain information prior to

a new vehicle purchase, they tend to focus most heavily on

obtaining a particular style of vehicle for the lowest possible

purchase price. Punj and Staelin, A Model of Consumer Infor-

mation Search Behavior for New Automobiles, 9 J. Consumer

Res. 366 (1982). Any awareness of disparities in the cost of

> Studies have long shown that consumer preferences are greatly affected

by styling changes. See, e.g., Sherman and Hoffer, Does Automobile Styling

Change Pay Off?, 3 Applied Econ. 153 (1971).

At the time of vehicle purchase, the majority of consumers expect to

keep the vehicle for five years or less. MVMA Facts & Figures 199] at 46.

8

maintaining a vehicle may be obliterated by the common

misperception that the vehicle will remain free of any defecis

during the warranty period. See, e.g., Hearings on Warranties

and Guaranties before the House Committee on Interstate and

Foreign Commerce, 91st Cong., 2d Sess. (1970); Federal Trade

Commission, Staff Report on Automobile Warranties, (1968).

Published studies on consumer satisfaction with vehicle perfor-

mance are usually done on vehicles still within the express

warranty period so that accurate consumer data on the likely

longer term costs of repair is difficult to obtain. See, eg., Kiley,

Measuring the Full Life of a Car, 32 Adweek’s Marketing Week

57, (March 11, 1991) (discussing benefits of the decision of J.D.

Power & Associates to develop longer term surveys of auto

consumer Satisfaction).

Consumer perceptions in such a market are largely immune

to all-butthe grossest, sustained disparities in long-term main-

tenance costs. The psychological effects of express warranties,

the typical succession of ownership of vehicles, the disparity in

intensity of use, the variance in performance within the same

vehicle model in successive vehicle years and the difficulty in

obtaining accurate future cost information combine to eradicate

the effect supercompetitive pricing might otherwise have on

new equipment sales. Because consumers are unable or unwill-

ing to focus significantly on repair prices, the car companies

have little or no incentive to compete significantly on that basis.

See, Akerlof, The Market for ‘Lemons’: Quality Uncertainty

and the Market Mechanism, 84 Q. J. Econ. 488 (1970).

The studies cited by the independent aftermarket amici,

supra, and the collective experience of their industry flatly

contradict the model of consumer behavior offered by

Petitioner. See, Petitioner’s Brief on the Merits at 4, 19-20

(arguing that consumers directly translate any increase in part

or service costs into an equivalent increase in equipment price).

The complexity of the purchase decision itself, the effect of

9

express warranties, variations in intensity of use and perceptions

of risk? all serve to blunt any effect that supercompetitive pricing

in monopolized parts and service markets may otherwise have

on equipment sales. In order for any market pressures to come

to bear on prices for parts and service the true cost of repaiz

would have to be made available in some meaningful way at the

time of sale and the evaluation of such information must not be

overwhelmed by other considerations.

B. Competition in the Market for Vehicle Sales

Cannot Discipline Prices in Vertically Mo-

nopolized Markets for Parts and Service

The crux of the economic argument advanced by Petitioner

and endorsed in the Brief of the United States as amicus curiae

is that an increase for prices in service and or parts in an

exclusive aftermarket would necessarily entail a proportionate

loss of sales or a decrease in the price for equipment sales.

Petitioner’s Brief on the Merits at 3-4; Brief of the United States

at 12-14. Similarly, Petitioner’s amici Motor Vehicle Manufac-

turers Association and Association of International Automobile

Manufacturers (“MVMA & AIAM”) argue that:

It is unrealistic to suppose that automobile manufacturers

could exercise any hypothetical market power by raising

prices of replacement parts or service; if they tried to do so,

many consumers would perceive it as an increase in the price

of new vehicles and the manufacturers would lose sales.

> There are indications that persons with less education and lower income

are more risk averse and much more likely to overspend on parts and service

where such purchases are offered in the form of extended warranties available

at the time of the equipment purchase. See, Center for Policy Alternatives,

Massachusetts Institute of Technology, Consumer Durables: Warranties,

Service Contracts and Alternatives (1978); Shimp and Bearden Warranty and

Other Extrinsic Cue Effects on Consumers’ Risk Perceptions, 9 J. Consumer Res.

38 (1982).

10

Brief of amicus curiae Motor Vehicle Manufacturers Associa-

tion and Association of International Automobile Manufac-

turers at 5.

This argument about loss of sales presumes that a

competing vehicle assembler will intervene and capture a

larger market share of new vehicle sales pursuant to any

increase in part prices by any one car assembly firm. The

hypothetical competitor would supposedly step forward

and compete on the basis of lower parts and service prices.

However, in order for the hypothetical competitor to com-

pete on this basis with the tying monopolizer of parts and

service, it must first forgo its own opportunity to reap

supercompetitive prices in similarly tied markets for ser-

vice and parts for its own equipment. This would certainly

be an enormous sacrifice for a distribution monopolist in

the automotive industry. Current new car dealer prices for

many replacement parts (even with competition from in-

dependent sources) often run anywhere from 25% to 75%

higher than competitive levels. If exclusive control of the

markets were established, it is unlikely that the equipment

firm would give up certain supercompetitive profits of this

(or more likely, greater) magnitude in exchange for future,

potential marginal increases in sales in the various dis-

tinct, shifting, style-driven markets for equipment sales.

The hypothetical competitor would have to hope that his

comparative generosity with respect to parts and service

prices over a significant time period will be sufficiently

conspicuous to persuade consumers to buy the hypothetical

competitor’s equipment despite vigorous competition in

niche markets overwhelmingly driven by issues of styling,

features and equipment base price. If the automotive in-

dustry is any guide, the hypothetical competitor of Kodak

would quickly relinquish the risky pursuit of the future bird

11

in the bush and seize his birds in the hand in the form of

supercompetitive profits in parts sales and service safe in the

knowledge that all of his competitors will do the same.®

The tendency for the vehicle assemblers to take the bird in

the hand is born out by the ancient strugg!e between the car

companies and their new car dealers over control of the source

of replacement parts. This battle has generated a long and

instructive litigation history. E.g., Pick Mfg. Co. v. General

Motors Corp., 80 F.2d 641 (7th Cir. 1935), aff'd, 299 U.S. 3

(1936); Miller Motors, Inc. v. Ford Motor Company, 252 F.2d

441 (4th Cir. 1958); Mozart Co. v. Mercedes-Benz of North

America, Inc., 833 F.2d 1342 (9th Cir. 1987), cert. denied, 488

U.S. 870 (1988); Metrix Warehouse, Inc. v. Mercedes-Benz of

North America, Inc., 828 F.2d 1033 (4th Cir. 1986) cert. denied,

486 U.S. 1017 (1988); Grappone, Inc. v. Subaru of New

England, Inc. 858 F.2d 792 (1st Cir. 1982). In each of these

cases, a new car dealer sought to enhance his competitiveness

in the retail service market by buying lower-priced parts from

independent sources only to be opposed by a franchisor vehicle

assembler.

Under the theory advanced by Petitioner and endorsed in

the Brief submitted by the United States, all of this bitter and

expensive struggle over the past fifty years between the car

companies and their dealers could have been easily avoided.

The car company in each instance could have lowered replace-

ment part prices to a point at or below that offered by inde-

pendent competitors. This would have driven out the

competition and satisfied the wishes of the new car dealers. The

ensuing loss of revenue to the vehicle assembler would have

been offset by a proportionate increase in new car prices.

° Predictably, Kodak’s chief competitor, Xerox embarked on a similar

restrictive parts distribution program shortly after Kodak implemented the

program now being challenged by Respondents.

12

Presumably, consumers would have been indifferent to this

shifting of costs from parts to equipment price. The fact that

this strategy has not been undertaken by any foreign or domestic

vehicle company operating in the United States is a strong

indication that these markets simply do not, and never have

functioned in the manner outlined by Petitioner and its amici.

It is instructive to compare the actual behavior of vehicle

and copier assemblers to the idealized competitive situation

outlined by the Petitioner, e.g.: “a competitive supplier selling

at the prevailing price and attempting to impose a tie-in upon a

buyer, would merely be displaced by a seller who did not.”

Petitioner’s Brief on the Merits at 19 (quoting Bowman, Tying

Arrangements and the Leverage Problem, 67 Yale L.J. 19, 20

(1957)). In reality, the competing equipment assemblers are far

more likely to follow suit than compete in either market for all

of the reasons discussed in this section and the previous one.

The model relied upon by Petitioner may indeed be serviceable

when the corner grocer ties flour to sugar but it has little or no

applicability in the markets in which Petitioner actually

operates.

What is missing from the Petitioner’s analysis is the fact

that lower prices for replacement parts and service also has the

effect of extending the life and value of older equipment. If

some of the demand for equipment is being filled by used

equipment, then the demand for new equipment is reduced.

Control over the cost and availability of all aspects of main-

tenance permits the equipment maker (rather than the consumer

and the market) to set the value and life span of older equipment.

It is also noteworthy that the trial court apparently

presumed that the economic life of the tying equipment is

immutable and not affected by the pricing of parts and service.

Image Technical Services, Inc. v. Eastman kodak Co., No.

C-87-18-WWS at 3 (N.D. Cal. April 18, 1988)(WESTLAW

1988 WL 15332)(Memorandum of Opinion and Order Granting

13

Summary Judgment) (“customers who have purchased Kodak

equipment in a competitive market will tend to retain that

equipment for its economic life.”) However, the life of that

equipment will be largely dictated by the cost and availability

of parts and service. Where an assembler of durable equip-

ment gains control of parts and service, and therefore of

equipment life span, an equipment sale functions more like

a lease of arbitrary duration in which the lessee assumes all

risks. This is market power, indeed.

C. The Injury Which Would Result from the

Removal of Independent Competition in the

Parts and Service Markets Would be Suffi-

ciently Significant to Warrant a Per Se Ap-

plication of the Antitrust Laws

Given the complex economics of durable equipment and

their maintenance, it is unreasonable to argue that competi-

tion in the sale of equipment can restrain prices in monopo-

lized markets. The elimination of lower-priced independent

competitors alone virtually guarantees such an increase. A

remaining issue is whether the potential increases will be of

sufficient significance to warrant per se application of the

antitrust laws. The independent auto aftermarket amici argue

that such application is warranted and necessary.

Even the example cited by Petitioner illustrates the

potential for harm in such tying arrangements. Petitioner

endorses Judge Posner’s dissenting opinion in the Parts &

Electric case. Petitioner’s Brief on the Merits at 20-21,

26(citing Parts & Electric Motors, Inc. v. Sterling Electric,

Inc., 866 F.2d 228 (7th Cir. 1988), cert. denied, 110 S.Ct.

141 (1989). In dissent, Judge Posner wrote:

Sterling could in principle exploit its “monopoly” by set-

ting its price for replacement parts just below the point at

which owners of Sterling motors would decide to scrap the

14

motors rather than pay exorbitant prices for the parts neces-

Sary to keep them in service. But this would be a short-run

game, since as soon as word got out no one would buy

Sterling motors.

Id. at 236.

This analysis would be valid if Sterling had only two

options — setting part prices at competitive levels or setting

prices at conspicuously ruinous, extortionate levels. Under

those circumstances, there would be a foreseeable impact in

the market for new equipment. In actual practice, however,

there is a lot of room in between those two decision points

and every point in between represents supercompetitive,

monopoly profit. The fact that there is an upper limit as to

how much can be extracted is not a demonstration that

allocative efficiency has been enhanced or that competition

is alive and well. Nor does the presumed existence of an

ultimate ceiling on the rate of overcharge for parts justify the

additional assumption that there would also be proportionate

corrections for overpricing done on a smaller scale. For the

reasons discussed at length supra, this additional assumption

is invalid.

In practice, Judge Posner’s example is reducible to a

Situation in which the tying equipment assembler does have

significant market power and can charge significantly higher

prices in the tied markets. The only check on such prices is

that they must be less than the amount required to force the

consumer to scrap his equipment altogether. The functional

difference between this limitation and outright monopoly

power is difficult to discern. The power to impose sig-

nificantly higher prices itself suggests the existence of

market power irrespective of tying equipment market share.

See, Pitofsky, New Definitions of Relevant Market and the

Assault on Antitrust, 90 Colum. L.Rev. 1805, 1847

15

(1990)(arguing that high profit levels are per se indications of

market power).

The program instituted by Kodak would allow Kodak to keep

prices for new equipment at current levels while shifting the burdens

of uncertainty, market risk, and the cost of acquiring information

onto the consumer in the form of higher prices for parts and service.

Additionally, Kodak can also be assured from the evidence of

analogous industrial history that instead of competitive pressure

there will be emulation by, not competition from, other equipment

assemblers. :

The assumption that replacement parts and service prices

are passively integrated into the perceived price of equipment

sales is not only erroneous but serves to conceal broad oppor-

tunities to constrict consumer welfare and destroy competition

in distinct markets. A tying arrangement involving (1) equip-

ment and (2) the means to maintain that equipment over time

would grant to the tying seller a range of anticompetitive oppor-

tunities not otherwise available where parts and service markets

are competitive.

Under a program of exclusive control of parts and service

by an equipment manufacturer, price discrimination against

older machines or particular classes of equipment would become

possible by means of selective increases in part prices. The

tying seller would be able to remove less profitable classes of

machines from continued use altogether when it suited his

purposes. Costs could also be shifted away from favored users

onto others. Obsolescence in original equipment could be

prematurely ordained and exploited. Instead of allocative ef-

ficiencies arising from competition in both the equipment sales

market and in the parts and service markets, the equipment

maker could dictate both the uses and intensities of use of its

equipment. It is untenable to maintain that this kind of situation

is the functional equivalent of distinct, competitive markets for

new equipment, used equipment, parts and service.

16

Nor is it reasonable to claim that such sweeping economic

power could be justified as merely another means of promoting

interbrand competition. It is implausible that consumer dissatis-

faction with inferior (independent) service would redound to the

detriment of the equipment assembler as Petitioner claims.

Petitioner’s Brief on the Merits at 7(arguing that Kodak, in its

Capacity as an assembler of new equipment, would be blamed

for deficient service performed by an ISO.) Unlike monopoly

pricing of parts and service in exclusive markets, the cost and

consequence of poor service are quickly discovered. It is far

more likely that consumers will seek out a new service provider

rather than simply nurture a grudge against the equipment maker

for the remaining life of the equipment. The very fact that a

consumer sought out and contracted with an independent service

provider in the first place demonstrates that the consumer was

aware of the option to deal with a new service provider. If

anything, the independent service provider is under more pres-

sure to establish a reputation for quality and low price than is an

equipment company-affiliated service provider who may

benefit from a presumption of expertise.

As for Petitioner’s claim that exclusion of service competi-

tion is justified by the necessity to reduce inventory costs, the

independent automotive aftermarket amici merely wish to point

out that there is evidence in the record that the Respondents did

attempt to establish independent channels of replacement parts

distribution. Joint Appendix 429, 468, 496. If Kodak did in fact

attempt to block the development of an arrangement that would

certainly have lifted the alleged burden of additional inventory

costs, then the claim is without merit.

The validity of Petitioner’s claim that the Independent

Service Organizations were “free riding” ought to be examined

in light of the fact that Kodak, like a vehicle assembler, does not

make the vast majority of component parts used in the assembly

of its equipment. The investment made by the actual parts

17

manufacturer in both the design and the efficiency of the manufac-

turing process for component parts is at least as great as that made

by the equipment assembler. Kodak can recoup its investment

through the sale of new equipment, but the parts manufacturer may

require access to the replacement parts market in order to recoup its

investment. See, e.g. Zelenitz, Below-Cost Original Equipment

Sales as a Promotional Means, 59 Rev. Econ. Stat. 438 (1977\dis-

cussing pricing strategies of automobile component manufacturers

and methods of estimating future replacement parts demand).

However, if the equipment manufacturer is the only buyer in the

replacement parts market by virtue of elimination of all other service

providers, then the interests of the actual parts manufacturer will be

hostage to the intentions of the equipment assembly firm.

For all of the reasons discussed supra, the tying of parts and

service to the sale of new pieces of durable equipment merits per

se application of antitrust law. The potential for harm is inherently

substantial.

D. Inthe Clean Air Act Congress Expressly Recog-

nized the Nature of the Anticompetitive Injury

Inherent in the Exclusion of Independent

Automobile Parts and Service Providers

A further example of the nature of the economics of the

automotive aftermarket can be found in the legislative history of

those provisions of the Clean Air Act dealing with automobile

emissions. Legislation creating long-term warranty and emissions

performance obligations for vehicle assemblers could have had the

unintended effect of bringing vehicle owners into a compulsory

service customer relationship with the car companies. From the

enactment of the Clean Act Act in 1970, the independent automo-

tive aftermarket consistently and unanimously opposed broad,

long-term, mandated emissions warranties on vehicle exhaust

systems on the grounds that such warranties would cause a large

volume of “drag along” repair work to be shifted away from mure

aan

18

competitive independent service providers. See, Monopolistic Ten-

dencies of Auto Emission Warranty Provisions: Hearings Before

the Subcommittee on Environmental Problems Affecting Small

Business of the Permanent Select Subcommittee on Small Business,

House of Representatives, 93rd Cong. 2d. Sess. (1974).

Congress responded in a highly detailed manner to the potential

problems created by the warranties mandated by the Clean Air Act .

The carefully enumerated delineation of major emissions com-

ponents and other emissions-related auto parts in both the 1977 and

1990 amendments to the Clean Air Act were due solely to Congress’

concems about the anticompetitive effects of a statutorily mandated

warranty relationship between consumers and the car companies.

Sections 203 and 207 of the Act as amended in 1977 also prohibited

any vehicle assembler from requiring the use of name brand parts

when replacing emissions-critical parts. 42 U.S.CA. §§ 7522,

7541(1983).

Congress also established a requirement in the 1990 amend-

ments to the Clean Air Act that motor vehicles be equipped with

electronic diagnostic devices. Again, solely in deference to the

potential for anticompetitive injury, Congress mandated that these

devices be standardized with respect to connecting fittings for diag-

nostic equipment in service shops and also banned proprietary

encryption of stored diagnostic data. See, eg., 136 Cong. Rec. $3271

(daily ed. March 27, 1990) (statement of Sen. Gore the open diag-

nostics provisions are “an effort to make certain that we do not

inadvertently curtail a vehicle owner’s right to choose where he or

She pays to have their car or truck repaired, nor thwart competition in

the repair industry”). Had Congress not made such provisions,

vehicle makers could have taken exclusive control of virtually all

future engine (and other) repairs simply by refusing to disclose

electronic codes.

In all of these actions, Congress clearly recognized a poten-

tial for anticompetitive abuse that could not have been corrected

by interbrand competition for vehicle sales.

19

Conclusion

The unique economics of durable goods makes tying ar-

rangements in the markets for parts and service inherently

suspect. Competition for new durable equipment sales cannot

discipline prices in a tied market for sales and service. Com-

parative market shares in the tying equipment market are not a

reliable indicator of the potential for significant harm in the tied

markets for parts and service. No antitrust litigation should ever

be decided on the basis of economic presumptions or models

that contradict demonstrable economic realities clearly evident

in analogous industrial history. The decision of the United

States Court of Appeals for the Ninth Circuit should be upheld.

Respectfully submitted,

Basil J. Mezines* Donald A. Randall

George A. Tobin 321 D Street N.E.

STEIN MITCHELL & MEZINES Washington, D.C. 20002

Suite 1130 Telephone (202) 543-1440

1100 Connecticut Avenue, N.W.

Washington, D.C. 20036 Michael J. Conlon

Telephone (202) 737-7777 CONLON, FRANTZ, PHELAN, KNAPP,

* Counsel of Record _ Pires & BIRKEL

for Amici Curiae Suite 200

1818 N Street N.W.

Of Counsel: Washington D.C. 20036

John Russell Deane, III Telephone (202) 331-7050

Christopher J. Kersting ;

TRAINUM, SNOWDEN, HYLAND Louis R. Marchese

& DEANE, P.C. HALFPENNY, HAHN, ROCHE

1317 F Street, N.W. _ & MARCHESE

Suite 550 Suite 3330

Washington, D.C. 20004 20 North Wacker Drive

Telephone (202) 783-5488 Chicago, IL 60606

Telephone (312) 782-1829

Robert J. Verdisco

INTERNATIONAL MASS RETAIL

ASSOCIATION

1091 Pennsylvania Avenue, N.W.

10th Floor

Washington, D.C. 20006

(202) 861-0774