# Amicus Curiae Brief — Eastman Kodak Co. v. Image Technical Services, Inc. > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385013_0064%3A23 ## Record - **Collection:** Supreme Court brief - **Document type:** Amicus Curiae Brief - **Published:** January 1, 1992 - **Citation:** 504 U.S. 451 ## Text FILED Supreme Court, U.S. | SEP 20 199] | No. 90-1029“ OFFKE OF Th: In The Supreme Court of the United States October Term, 1991 EASTMAN KODAK COMPANY, Petitioner, VS. IMAGE TECHNICAL SERVICES, INC. et ai., Respondents. 7 On Writ Of Certiorari To The United States Court Of Appeals For The Ninth Circuit + BRIEF OF AMICI CURIAE NATIONAL ASSOCIATION OF STATE PURCHASING OFFICIALS AND NATIONAL INSTITUTE OF GOVERNMENTAL PURCHASING, INC. IN SUPPORT OF RESPONDENTS sd RicHarRD D. MONKMAN* Ditton & FINDLEY One Sealaska Plaza Juneau, Alaska 99801 Telephone: (907) 586-4000 *Counsel of Record COCKLE LAW BRIEF PRINTING CO., (800) 225-4964 OR CALL COLLECT (402) 342-2831 | TABLE OF CONTENTS Page TABLE OF AUTHORITIES....... ii INTEREST OF AMICI ........ l SUMMARY OF ARGUMENT... 2 PE os cceusenseecs< 3 B. D. F. The Issue of Market Power in Aftermarkets is a Fact Question That Cannot Be Resolved on This Record by a “Per Se” Rule of Competitiveness Governments are Major Purchasers of Photo copiers and Micrographic Equipment A Competitive Service Aftermarket Provides the ETO a ae a rea Procurement Rules Result in Market Imperfec- Ea Pat Se eee ee ea eee ae eee rage Separation of Purchasing and Operating Func- tions in Government Results in Market Imperfec- RC Oe ee Pre The “Lock-In” Effect Results in Market Imperfec- PE Sb Seat acsecdeuaceesecnes The Matsushita Standard Applied. NEE bd Goo bbe 0006's oes 066s JT NJ ii TABLE OF AUTHORITIES Page CASES: Image Technical Services, Inc. v. Eastman Kodak Co., oe &® Be. Ee Be Sr er 4 Jefferson Parish Hospital Dist. No. 2 v. Hyde, 466 U.S. ot, ere 4,7, 14 Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Coop., G75 US. GFE GIRGEc oc cvccscusuccssuusens 13, 14 NCAA uv. Board of Regents, 468 U.S. 65 (1984)......... 2 Parts and Elec. Motors, Inc. v. Sterling Elec., Inc., 866 wy B- By, ge | ewer 8 Llnited States v. E.I. DuPont deNemours & Co., 351 US. S7F CHBGS occ cccconsecdesbvaseeeee 4 STATUTES: 1S USL. Gostiom § .cccccvccceuueceesn ee 2 Alsene Siatute DOSS «occ cece seccess eee 10 Alaska Statute SE.S0. OEP ous ccccvccevcescssene 2 Alaska Ghatwhe BE.Fe. Bae. occ ck cvcescececsenuee q Aliases Siatube FE.Fe. TT ccc vcecscessesssesee 8 1991 Session Laws of Alaska, Chapter 73 ........... 10 1991 Session Laws of Alaska, Chapter 96, Sec. 163 .... 10 RULEs: Federal Rule of Civil Procedure 56................... INTEREST OF AMICI The National Association of State Purchasing Offi- cials and the National Institute of Governmental Purchas- ing, Inc. file this brief as amici curiae in support of Respondents, Image Technical Services, Inc., et al. The National Association of State Purchasing Offi- cials (“NASPO”) is a non-profit affiliate of the Council of State Governments. NASPO is comprised of the heads of the purchasing agencies of all fifty States, the District of Columbia, Puerto Rico, the Virgin Islands, Guam, Ameri- can Samoa, and the Northern Mariana Islands. The National Institute of Governmental Purchasing, Inc. (“NIGP”) is a non-profit educational and technical organization of State and local governmental buying agencies. The members of NIGP include over 1,300 gov- ernmental purchasing agencies of the United States, the fifty States, the Provinces of Canada, and many county, city and municipal governments. The members of NASPO and NIGP purchase a com- bined total of about $550 billion in goods and services annually on behalf of State and local taxpayers. State governments alone purchase more than $200 billion annually. These purchases include Kodak photo-copiers and micrographic equipment, and related purchases of supplies, replacement parts and repair services for those machines. This case arises under the Sherman Act, 15 USC § 1 et seq. (1982), intended by Congress to encourage competi- tion and protect the interests of consumers. See NCAA uv. Board of Regents, 468 U.S. 65, 107 (1984). NASPO and NIGP have strong interests in promoting competition among suppliers of goods and services to governmental consumers. The members of both organizations seek to obtain the best quality product, at the lowest price, for the taxpayers. “More value for the tax dollar” is NIGP’s informal motto. The goals of NASPO and NIGP are firmly embedded in established public policy. Virtually every State and local government in the United States is required, by law, to use competitive processes to purchase goods and ser- vices. See e.g., Alaska Stat. 36.30.100 (. . . unless specifi- cally exempted by law, an agency contract shall be awarded by competitive sealed bidding”). Long experi- ence has shown that vigorous competition among multi- ple suppliers is essential to obtaining the best product while protecting the public fisc. The members of NASPO and NIGP are in a unique position to address the practical effects of the issues raised in this case. SUMMARY OF ARGUMENT Governments routinely buy expensive pieces of micrographic and photocopier equipment, including Kodak’s machines. This equipment must be maintained and serviced on a regular basis. Without constant atten- tion from skilled technicians, much of today’s “high tech” equipment will not function for very long - if at all. Public agencies are easily locked-in by budget con- straints to a particular type of equipment. There are legal constraints on public purchasers which make total cost pricing of equipment difficult. Vigorous competition among multiple service providers is essential for the members of NASPO and NIGP to obtain the “most value for the tax dollar.” Monopolization of aftermarket for parts, and the con- sequent elimination of competition in the aftermarket for service, is injurious to the public fisc. Tying sales of parts to service leaves the equipment manufacturer free to charge the public agency higher prices for less service than could be obtained in a competitive market. The factual record in this case is almost nonexistent. The Court of Appeals correctly held that remand was appropriate. ARGUMENT THE ISSUE OF MARKET POWER IN AFTERMARKETS IS A FACT QUESTION THAT CANNOT BE RESOLVED ON THIS RECORD BY A “PER SE” RULE OF COMPETITIVENESS The issue of Kodak’s market power is central to the correct resolution of this case. Respondents’ tying claims require a showing of “some special ability - usually called ‘market power’ — to force a purchaser to do some- thing that he would not do in a competitive market.” Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 27 (1984). Similarly, respondents’ claims of monopolization require proof that Kodak enjoyed the “power to control prices or exclude competition in the relevant market.” United States v. E.1. DuPont deNemours & Co., 351 U.S. 377, 391 (1956). Kodak argues that a manufacturer that lacks market power in the “interbrand” original equipment market cannot, as a matter of law, wield market power in the aftermarkets for parts and repair services. See Petitioner’s Br., 16-27. In an area of particular interest to NASPO and NIGP, Kodak argues that it cannot succeed in overcharg- ing its customers in these aftermarkets: “[a] lock-in strat- egy works only if Kodak can make more total profit by overcharging its existing customers for service than it will lose as its new and repeat product sales dry up.” Petitioner’s Br. at 25. Given the constraints on public purchasing agencies, the members of NASPO and NIGP believe that an equip- ment manufacturer with market power in the after- markets is quite able to make a “lock-in strategy” work in the public sector, regardless of whether the manufacturer has market power in the interbrand equipment market. This is precisely the sort of “market imperfection” the Court of Appeals held can “keep economic theories about how consumers will act from mirroring reality.” Image Technical Services, Inc. v. Eastman Kodak Co., 903 F.2d 612, 617 (9th Cir. 1990). A. Governments Are Major Purchasers of Photocopiers and Micrographic Equipment. State, county and local governments are among the nation’s largest purchasers of copiers and micrographic equipment. This equipment is necessary to perform essential governmental services at a manageable cost. Court records in the State of Alaska, for example, are transferred to microfiche for permanent storage and easy retrieval. Land records, once kept in rows and rows of dusty books, are maintained in easily accessed microfiche files. With the assistance of computers, these records can be searched quickly, accurately and inexpensively by the public. Similarly, photocopiers (low, medium, and high vol- ume) are fixtures in virtually every State and local gov- ernmental office in the nation. It may well be, as some say, that the invention of the photocopier was the greatest advance in printing since moveable type. Combined with the desktop publishing capacities of personal computers, photocopiers have become essential in government oper- ations. A Competitive Service Aftermarket Provides the Best Value. Micrographic equipment and photocopiers are expensive to buy and to operate. The initial capital outlay is substantial, not only for the machines themselves but for their associated “systems” — data retrieval software, for example, and employee training. To amortize the cost of these expensive machines at an affordable level, State and local governments need to keep them in operation for as long as possible. As the District Court observed, “customers who have purchased Kodak equipment in a competitive market will tend to retain that equipment for its economic life.” Pet. App. 34B. Put another way, once the equipment purchase is made, the public agency is “on the hook” for parts and service until the equipment wears out. Where can the governmental agency turn for parts and service? Its interest is in obtaining the best value for the least cost to the taxpayer. This combination is not always found in the cumbersome bureaucracies of equip- ment manufacturers like Kodak. In response to demand for better (and cheaper) service than that provided by manufacturers, independent service organizations have sprung up to provide specialized and aggressive service for the owners of many types of equipment, including copiers and micrographic equipment. See, e.g., JA 420, 425-27, 474-75 and 482-84. An independent service organization may not be able to manufacture a microfiche machine, but it is likely to do a quicker, cheaper and often better job of servicing that machine than the original manufacturer.! The members ' The Court of Appeals accurately found that evidence in the record of Kodak’s own conduct suggests that “the demand for parts can be separated from the demand for service.” 903 F.2d at 616. In the view of the more than 1,300 public purchas- ing agencies which make up NASPO and NIGP, this conclusion (Continued on following page) of NASPO and NIGP have found that a competitive envi- ronment, where independent service organizations com- pete fiercely among themselves and with manufacturers, results in lower prices and better customer service. The challenge from independent organizations sharpens the manufacturers’ response to its customer’s problems; the smaller, more flexible independent organizations adapt quickly to new market needs. The record confirms the experience of NASPO and NIGP members. See, e.g., JA 420 4 30, JA 424-35 4] 42-47, JA 451 7 5 and JA 536 74 5-7. To effectively compete, these independent service entrepreneurs need parts. As any owne’ of a photocopier can aver, high technology equipment needs maintenance and repair ceaselessly - and virtually every service call requires parts. By exploiting its control over parts, and starving the independent service organizations, a manu- facturer can force the public agency to buy service from it: “a tied product that the buyer. .. might have preferred to purchase elsewhere on different terms.” Jefferson Parish Hosp., 466 U.S. at 12. Cc. Procurement Rules Result in Market Imperfections. Kodak argues that an equipment manufacturer which uses this power to overcharge its customers will soon (Continued from previous page) is correct. The development and early success of Respondents’ businesses is additional evidence from which it may be inferred that parts and service are separate markets in the photocopier and micrographic industries. Fed. R. Civ. Pro. 56. find its sales of new equipment declining. Petitioner’s Br. at 26. Thus, it argues, overcharging in the aftermarkets is an “implausible strategy,” or in Judge Posner’s pithy phrase, “a short-run game.” Id., citing Parts and Elec. Motors, Inc. v. Sterling Elec., Inc., 866 F.2d 228, 236 (7th Cir. 1988) (Posner, J., dissenting). Kodak’s economic theory is largely irrelevant to the real world of public purchasing. Government agencies face restrictions not found in the private sector. One of these is the requirement of competitive bidding. As a matter of public policy, State and local governments almost uniformly use competitive bidding to obtain the lowest price. Where more than one supplier exists (i.c., where there is “interbrand” competi- tion), most public agencies are required by law to buy equipment from the lowest bidder. See, e.g., Alaska Stat. 36.30.170(a) (“the procurement officer shall award a con- tract . . . to the lowest responsible and responsive bid- der”). A rational bidder can “low-ball” the price for its equipment, and make up for lost profits by higher service costs once the agency is locked-in. To avoid this, Kodak argues, the consumer will “con- sider” service costs at the time of purchase. The type of analysis required by Kodak’s economic theory — estimat- ing the total (or “life-cycle”) cost of a given piece of equipment - is notoriously difficult and imprecise. This is particularly the case for high technology, where there may not be enough data to estimate the cost of maintain- ing newly developed equipment over the term of its useful life. Long term service contracts covering the use- ful life of new equipment, at a fixed cost, are generally not available at the time of purchase. Consequently, Kodak’s approach to purchasing is disfavored by State and local governments. In the State of Alaska, for example, life-cycle costing is only allowed upon a special showing: A contract based on total or life cycle costs may be awarded only when the chief procurement officer or, for construction contracts or procure- ment for the state equipment fleet, the commis- sioner of transportation and public facilities, determines in writing at the time of the contract solicitation that the contract promotes overall economy for the purposes intended, encourages competition, is not unduly restrictive, and is in the best interests of the state. Alaska Stat. 36.30.150(b). It takes a courageous purchasing officer to certify that all these factors are present on a bid for untested equipment. Government officials know they are not omniscient in purchasing decisions. The public interest and closely drawn procurement regulations demand that they err on the side of caution. This generally means taking vendors’ claims with the proverbial grain of salt, and relying on empirically verifiable specifications rather than the rosy projections of an eager salesman. The “per- fectly omniscient consumer,” as posited by Kodak, does not exist in the public purchasing sector. 10 D. Separation of Purchasing and Operating Functions In Government Results in Market Imperfections. Kodak’s theory also ignores institutional barriers to evaluation of service costs at the time a competitive bid is issued. A central procurement officer may be charged with buying equipment, but is rarely charged with oper- ating, maintaining, or servicing the equipment. See e.g., Alaska Stat. 36.30.005 (centralized procurement author- ity). Equipment purchased en masse, at a quantity dis- count, may be delivered far and wide across the State, locking-in operating agencies regardless of the availabil- ity (or cost) of manufacturer service. The interests of the centralized procurement officer in obtaining the lowest possibile cost for equipment may not take into account the total cost to the operating agency, as measured by the cost of parts and service. Additionally, State and local budgets are subject to a variety of constraints which Kodak’s economic theory does not take into consideration. For example, the State of Alaska has different budgets for capital appropriations and for operating expenses. The capital budget funds one-time costs of purchasing equipment, funding con- struction projects, condemning land, and the like. See e.g., 1991 Session Laws of Alaska, Chapter 96, § 163 (appropri- ates $450,000 for purchase of “duplicating equipment”). The operating budget gives agencies the funds needed for the day-to-day-operations of government, including funds to repair and service equipment. See e.g., 1991 Session Laws of Alaska, Chapter 73 (appropriates funds 11 for “the operating expenses . . . of state government” on an agency basis). A central procurement officer charged with buying $450,000 of duplicating equipment will measure success by the number of copiers purchased. Capital funds can- not be used to service the machines, and if not spent will lapse back into the State’s general fund. After the copiers are delivered, the recipient agencies use funds from the operating budget to obtain the best quality service at the lowest price to the taxpayer. Where a competitive aftermarket exists, these goals are complementary. The central procurement officer pur- chases the maximum amount of equipment for the amount budgeted, possibly obtaining quantity discounts and attracting more bidders by the large scale of the purchase. The operating agency is able to obtain the best value for its budget among competing service organiza- tions. However, when a manufacturer eliminates competi- tion in the aftermarkets, either through monopolization or by tying parts to service, the public purchasing mecha- nism does not operate effectively. A central purchasing officer, required by law to seek the lowest bid for equip- ment, using funds which if not spent will lapse, and facing uncertainty in estimating life-cycle costs, is going to award the purchase contract to the lowest bidder. This decision provides a manufacturer with market power in the aftermarkets an opportunity to charge higher prices for service than it could charge in a competitive situation. The net result is less value for the taxpayer dollar. 12 E. The “Lock-In” Effect Results in Market Imperfections. The lock-in effect noted by Respondents in their brief is of special concern to governments. It is not simply the cost of replacing the primary equipment, but associated costs which must be taken into account when analyzing the lock-in effect of an equipment purchase. For example, governments are major consumers of micrographic equipment. Libraries microfilm books, peri- odicals, newspapers, and government publications. State archives contain masses of documents, from deeds to birth certificates, which are transferred to microfiche both to save storage costs and to preserve fading or disin- tegrating paper records from oblivion. Court systems use micrographic systems to record the contents of closed case files, wills, and judicial decisions. Micrographic systems generally include a computer assisted information retrieval system. A retrieval system can include equipment to record documents on micro- fiche, a means of encoding data on documents so that it can be read by computer, computer hardware, a software program to tie the whole package together, and terminals so that the public and government employees can access the data. Such a system can cost several hundred thou- sand dollars in fixed costs, not including the labor needed to design the system so that it meets the needs of the government and the public. These systems are integrated. That is, the component elements of one element are designed to work together 13 with those of another. Before a governmental purchaser of Kodak micrographic equipment can rationally consider changing brands, it must consider costs of the entire system. These costs include retraining personnel and recoding data. “Industry standards” for data transfer not- withstanding, changing from one micrographic system to another is fraught with expense and peril. See, e.g., JA 424-425. In practical terms, the lock-in effect of an initial deci- sion by a public agency to purchase a certain brand of equipment is substantial. This results in market imperfec- tions that, as the Court of Appeals noted, “can keep economic theories about how consumers will act from mirroring reality.” 903 F.2d at 617. F. The Matsushita Standard Applied. The members of NASPO and NIGP have vast experi- ence in public purchasing. They strongly disagree with Kodak’s view that it “simply makes no economic sense” that a manufacturer with market power in the parts mar- ket will use that power to earn monopoly profits in the service market. Petitioner’s Br., at 29; Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). The nature of public purchasing, budgetary con- straints, and the lock-in effect make it quite likely that such an equipment manufacturer - even without market power in the interbrand market - can reap monopoly profits in service through a judicious use of its power over parts. 14 Kodak’s theory that consumers accurately project the lifetime costs of high technology equipment at the time of purchase, accurately weigh the possibility of monopoly rents for parts and service, and take these factors into account when making an initial equipment purchase is simply unrealistic when applied to the public sector. This is not a perfect market, and cannot be examined using theory alone. If the record were complete, this Court could make an informed decision on the anti-competitive effects of the conduct involved. But the record is not complete. As other amici and Respondents note, the District Court drastically truncated discovery. The Court of Appeals was correctly reluctant to decide this case on a “theoreti- cal basis.” 903 F.2d at 617. Respondents have raised disputed issues of material fact, and - as shown above - their arguments “make[] economic sense.” Matsushita, 475 U.S. at 587. The public interest is best served by a vigorous, competitive business environment in the aftermarkets for parts and service. When market power over parts is used to restrain compe- tition in service, both competitors and consumers suffer. Jefferson Parish Hosp., 466 U.S. at 15. + 15 CONCLUSION The judgment of the Court of Appeals should be affirmed. Respectfully submitted, RicHarD D. MONKMAN Ditton & FINDLEY One Sealaska Plaza Juneau, Alaska 99801 (907) 586-4000 Attorneys for the National Associa- tion of State Purchasing Officials and the National Institute of Govern- mental Purchasing, Inc. --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385013_0064%3A23. Public record. Not legal advice.