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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Amicus Curiae Brief
- **Published:** January 1, 1992
- **Citation:** 504 U.S. 451

## Text

< 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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385013_0064%3A21. Public record. Not legal advice.