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

No. 90-1029 | | cst |

IN THE

Supreme Court of the United States

OcTOBER TERM. 199]

EASTMAN KODAK COMPANY

Petitioner

Vs

IMAGE TECHNICAL SERVICE, INC.: J-E-S-P Co.. INC.: SHIELDS

BUSINESS MACHINES, INC.; MICRO-GRAPHIC SERVICES, IN«

MICRO MAINTENANCE, INC.; ATLANTA GENERAL MICROFILM Co

INC.; ROGER KATONA, D/B/A G & S ELECTRONICS: AMTECH

EQUIPMENT MAINTENANCE, INC.; ADVANCED SYSTEMS SERVICES.

INC.; B.C.S. TECHNICAL SERVICES, INC.; BoB INGLE, INC.; Data

PROX EQUIPMENT CO.: FISHER MICROGRAPHICS, INC.: 1.0.A

DATA CorP.; SEARLE ENTERPRISES, D/B/A MICRO IMAGE. IN«

MIDWEST MICROFILM EQUIPMENT & SERVICE, INC.; OMNI MI

CROGRAPHIC SERVICES, INC.; AND CPO, LTD..

Respondents

On Writ Of Certiorari To The United States Court Of

Appeals For The Ninth Circuit

BRIEF OF THE NATIONAL OFFICE MACHINE DEALERS

ASSOCIATION AND THE NATIONAL ASSOCIATION OF

SERVICE DEALERS AS AMICUS CURIAE IN

SUPPORT OF RESPONDENTS

Robert C. Goldberg

Denise M. Kennedy

National Office Machine

Dealers Association

Mark P. Cohen

Counsel of Record

222 South Riverside Plaza

Suite 2700

Chicago, Illinois 60606

(312) 648-2300

QUESTION PRESENTED

Whether an equipment manufacturer, lacking sufficient mar-

kel power in the interbrand market of equipment sales, can possess

market power in the parts and service segment of the industry

TABLE OF CONTENTS

PAGE

QUESTION PRESENEED on. ccc ccc ccc vcces ae il

TABLE OF AUTHORITIES ........... ae iv

STATEMENT OF THE CASE .... | keene - 3

SUMMARY OF ARGUMENT... .. iw 4 alee 5

REPENS 06 é4b5e bares teense eee 6

I, The ISO’s Presence In The Market Promotes

Both Interbrand And Intrabrand Competition . 7

I] Market Separation Of Parts And Service Under

PE Te pec ccébaae ce oeeeen i 5

A. Characteristics Of Demand ie own 9

B. Distinct Product Markets... . 2a 10

il Kodak's Market Power In Parts And Service

Negatively Affects Competition ..... . arate 1!

IV Kodak Equipment Owners Suffer From

Kodak's Tying Arrangement ......... 12

Vv Competition In Interbrand Equipment Market

Does Not Preclude Violation Of The Sherman

Act In An Aftermarket....... - 13

VI Lack Of An Authorized Dealer *hannel

Eliminates Intrabrand Competition And

Secures Kodak's Market Power ...... oa 14

Vil. The Decision Below Supports C ompetition

And Establishes A Factual Inquiry On The

Merits Of The Case.............6.6-. ; 16

VIII. Kodak's Business Justifications Do Not

Preclude Section 2 Liability ......... a 17

CONCLUSION

sopeesé te 20

1V

TABLE OF AUTHORITIES

PAGE

Cases

Aspen Skiing Co. v. Aspen Highland Skiing Co

472, U.S. 585 (1985)... ... feos . 17, 18

Business Electronics Corp. v. Sharp Electronics

Corp., 485 U.S. 717 (1988)... 2... 8, 14-19

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

433 U.S. 366 (1977) ....... rare le S

Digidyne Corp. v. Data General Corp., 734 F.2d

1336 (1984) ........ aa 5, 10, 16, 17

Dimidowich v. Bell & Howell, 8303 F.2d 1473

te s & » < Ae — A Oe 5

Fortner Enterprises v. U.S. Steel Corp., 394 U.S

495 (1969)... ._._.. ; 13.14

Image Technical Service, Inc. v. Eastman Kodak

Co., No. C-87-1686 WWS at 5 (1988) 4

Image Technical Service. Inc. v. Eastman Kodak

Co., 903 F.2d 612 (1990) 6.9. 12

Jefferson Parish Hospital District No. 2 v. Hyde

466 U.S. 2 (1984) 9. 10, 11, 12,

13, 16

Matsushita Electric Industrial Co. v. Zenith

Radio, 475 U.S. 574 (1986) 16, 17

United States v. Loews, 371 U.S. 38 (1962) 17

Statutes

15S USC

Section | 2.4

Section 2 4.17

Rules

Federal Rules of Civil Procedure

37 >

No. 90-1029

IN THE

Supreme Court of the United States

OcTOBER TERM, 1991

EASTMAN KODAK COMPANY.

Petitioner.

vs

IMAGE TECHNICAL SERVICE, INC.: J-E-S-P Co.. INC.: SHIELDS

BUSINESS MACHINES, INC.; MICRO-GRAPHIC SERVICES, INC:

MICRO MAINTENANCE, INC.; ATLANTA GENERAL MICROFILM Co..

INC.; ROGER Katona, D/B/A G & S ELECTRONICS: AMTECH

EQUIPMENT MAINTENANCE, INC.;: ADVANCED SYSTEMS SERVICES.

INC.; B.C.S. TECHNICAL SERVICES, INC.; BoB INGLE, INC.; Data

PROX EQUIPMENT Co.; FISHER MICROGRAPHICS, INC.: 1.0.A.

Data Corp., SEARLE ENTERPRISES, D/B/A Micro IMAGE, INC.:

MIDWEST MICROFILM EQUIPMENT & SeRVICE, INC.;. OMNI MI-

CROGRAPHIC SERVICES, INC... AND CPO, LTD..

Respondents

On Writ Of Certiorari Te The United States Court Of

Appeals For The Ninth Circuit

BRIEF OF THE NATIONAL OFFICE MACHINE DEALERS

_ ASSOCIATION AND THE NATIONAL ASSOCIATION OF

SERVICE DEALERS AS AMICUS CURIAE IN

SUPPORT OF RESPONDENTS

Robert C. Goldberg

Denise M. Kennedy

National Office Machine

Dealers Association

Mark P. Cohen

Counsel of Record

222 South Riverside Plaza

Suite 2700

Chicago, Illinois 60606

(312) 648-2300

a

.

INTEREST OF THE AMICUS CURIAE

The National Office Machine Dealers Association

(“NOMDA”) is a national and international organization repre-

senting approximately 6,500 independent business equipment and

systems dealers. NOMDA is recognized as the major spokesperson

for the industry. Premised upon NOMDA’s commitment to service

and integrity, one of NOMDA’s principal organization goals is to

assist its members in providing the highest level of pre-sale, point-

of-sale, and post-sale support to end-users of sophisticated office

products. NOMDA achieves these goals through education and

guidance offered to its members over the past sixty-six years.

As a non-profit organization representing business equipment

and systems dealers as wel! as manufacturers, NOMDA has a sub-

stantial interest in this litigation. It is NOMDA’s position that

absent an authorized dealer channel, parts should be made avail-

able to qualified technicians for service of end-users’ equipment. In

simplest terms, the owner of equipment, rather than the manufac-

turer, should decide who shall service the product. Anything to the

contrary 1s illegal restraint.

This case involves the treatment of this issue under the Sher-

man Antitrust Act. Eastman Kodak Company (“Kodak’’) instituted

and enforces a policy which effectively prevents any independent

service organization (“ISO”) from obtaining repair parts to be used

for service of Kodak equipment in competition with Kodak.

Through its refusal to sell parts to ISO's, Kodak has created a

monopoly in the service of Kodak equipment by depriving end-

users of the ability to choose a service organization. The absence of

an authorized dealer channel enables Kodak to maintain a total

monopoly on parts and service for Kodak products.

NOMDA’s membership contains both ISO’s and dealers au-

thorized by a manufacturer to market and service highly technical

products to end-users. This Court's decision will affect the ability of

end-users to select the source for post-sale support of the products

they purchase and the ability of independent service organizations

to provide that support. In an already fragile economy. Kodak's

practice serves to increase prices and the freedom of end-users to

contract for service. Accordingly, NOMDA has a strong interest in

the disposition of this case. !

' The parties’ letters of consent pursuant to Rule 37 of the Rules of

this Court have been filed with the Clerk of the Court

3

STATEMENT

The Respondents in this case are ten ISO’s who compete for

service for all brands of micrographic and copier equipment. The

ISO"s competitor, Kodak, manufactures the equipment and directly

markets the equipment, parts and service to end-users. The ISO's

do not seek the right to sell Kodak equipment, only to service such

equipment as requested by owners of that equipment.

Prior to 1985, ISO’s were able to purchase parts from Kodak.

at premium prices, pursuant to the policy stated in Kodak's Cus-

tomer Equipment Service Division. Kodak’s former policy provid-

ed, “Kodak will sell replacement parts to any party who intends to

use them to repair Kodak equipment.” JA 435? In reliance upon

Kodak's policy and their ability to obtain parts, the Respondents

went into direct competition with Kodak fo: the sale of used equip-

meni and service of Kodak equipment.

After losing a substantial amount? of service business to the

competitive ISO's, Kodak implemented a change in its “Replace-

ment Parts Principles” by eliminating the commitment to “sell

replacement parts to any party who intends to use them to repair

Kodak equipment.” JA 435. Kodak further modified its terms of

sale by limiting sales to the “dealers, distributors, and service out-

lets” which were “Kodak authorized.”* Brief for Appellants at | 4.

Image Technical Service v. Kodak, 903 F.2d 612 (1988) No

88-2686. Kodak's policy of distributing parts to “Kodak author-

ized” dealers and distributors effectively means only direci distri-

bution by Kodak, which unlike its competitors does not include

“authorized dealers.” Kodak's policy change insulates Kodak from

all competitive forces for service of Kodak equipment through the

* See e.g.. Joint Appendix (“JA”). Documents lodged with the Clerk

~~"

* In 1986, ISO's provided service to a number of large governmental

and non-governmental entities, ISO customers included: Internal Rev-

enue Service, U.S. Department of Agriculture, U.S. Veterans Adminis-

tration, State of California, Commercial Trust, State Farm Insurance.

Blue Cross Blue Shield of Minnesota, Dow Chemical, Mobil Oil.

Pennzoil, Bechtel Corporation and Northern Pacific Railway. JA 488.

492-93. JA 546. 501. L 149-50, L 165. In addition. ISO's provided

service to a wide range of less recognized Kodak equipment customers.

* The term “authorized” implies a distributor or dealer who is

trained by a manufacturer to provide pre-sale, point-of-sale. and

post-sale support to customers.

4

elimination of the ISO’s source of parts and denies the benefits of

competition to Kodak end-users.

In 1987, the ISO's brought suit against Kodak alleging viola-

tion of Sections | and 2 of the Sherman Antitrust Act. Specificaliy,

Respondents allege Kodak is engaging in a per ser illegal tie-in

arrangement through its refusal to sell parts to end-users unless the

end-user agrees not to utilize the services of an ISO. Respondents

also allege Kodak created a monopoly through their refusal to sell

parts to ISO's, effectively eliminating all competition in the service

market for Kodak manufactured equipment.

After filing their complaint in the District Court, Kodak filed a

Motion for Summary Judgment. Following a brief and limited peri-

od of discovery, and without oral argument, Judge Schwartz grant-

ed Kodak's Motion for Summary Judgment. In his opinion, Judge

Schwartz stated. “A Kodak customer...can buy parts if he simply

owns Kodak equipment.” mage Technical Service, Inc. v. Eastman

Kodak Co., No. C-87-1686 WWS at 5 (1988). Judge Schwartz’ rul-

ing and factual interpretation of the limited facts available at the

summary judgment are clearly erroneous. The [SO’s showed availa-

bility of parts was conditioned on the Kodak customer agreeing not

to use an ISO for service of equipment. JA 428-29, L 140, L 143.

Kodak repeatedly warned customers of the ISO’s inability to

purchase parts and the likely prospect of not obtaining service from

ISO's. JA 465.

Respondent ISO's appealed Judge Schwartz's decision to the

United States Court of Appeals for the Ninth Circuit. The Ninth

Circuit reversed and remanded the case to the District Court, ruling

the ISO’s had presented sufficient evidence to withstand summary

judgment. The Court of Appeals correctly found Kodak may have

monopoly power in the interbrand market for parts and service .

which may have eliminated competition in the relevant market.

While the Court of Appeals correctly found issues of fact existed, its

decision mistakenly relied on Kodak's interpretation of the facts

Kodak alleged Respondents had conceded that equipment consum-

ers consider the cost of parts and service when determining which

brand of equipment to purchase. JA 823, JA 779-80. Kodak also

alleged, and the Court of Appeals adopted the position, that Re-

spondents acknowledged the fact that Kodak lacks market power in

the interbrand market for equipment sales. Neither concession was

made by Respondent in its brief or oral argument.

sn i

5

The Ninth Circuit noted interbrand competition in the equip-

ment market may not negate the ISO's claim that Kodak has mo-

nopoly power in the parts market. (See, e.g. Dimidowich v. Bell &

Howell, 803 F.2d 1473, 1480, n.3 (1986), modified 810 F.2d 1517

(1987), Digidyne Corp. v. Data General Corp., 734 F.2d 1336, 1339

(1984).) The Ninth Circuit concluded the District Court's lack of

consideration of the issue of market power prevented the trial court

from being able to determine whether Kodak had monopoly power.

Based on the limited evidence presented, the Ninth Circuit found it

unlikely that Kodak's limited presence in the interbrand market

precluded a finding of monopoly power in the parts market

SUMMARY OF ARGUMENT

Because independent dealers are a key link in the chain of

product distribution, the sales practices they adopt greatly affect the

competitiveness of the market, manufacturer sales levels, and end-

user satisfaction with their purchases. Dealers, as their name im-

plies, are authorized by manufacturers to offer pre-sale, point-of-

sale, and post-sale support for a manufacturer's product. In order to

be authorized, a dealer is trained by a manufacturer or third party in

the proper sale, service, and support of business equipment. ISO's

are also trained on equipment either by a manufacturer as a techni-

cian or as an authorized dealer for a competing brand of equipment.

An ISO network often is established where no authorized dealer

channel exists or merely as an alternative to an authorized channel.

Most dealer appointments are non-exclusive, resulting in the

dealer competing with other authorized dealers, as well as the direct

marketing branch of the manufacturer, creating significant in-

trabrand as well as interbrand competition.

ISO's and authorized dealers provide significant intrabrand

competition in the technologically complex business equipment

and systems marketplace. Intrabrand competition affords an end-

user a choice of service provided either by a dealer or the manufac-

turer. If a dealer offers non-competitive pricing or unsatisfactory

service, the end-user should not be locked into one source for

aftermarket service and support. Intrabrand competition benefits

both end-users, who receive better service at lower prices, as well as

dealers who add valuable services to the economy.

The absence of an authorized dealer channel eliminates this

intrabrand competition. Kodak eliminated all intrabrand competi-

tion through its refusa. to sell parts to customers who choose to use

Sa

6

ISO's. The ISO’s presence created desired intrabrand competition,

resulting in lowered Kodak service prices and improved service in

those instances where ISO’s and Kodak directly competed.>

All manufacturers have an interest in the proper maintenance

of equipment after it is sold. ISO’s have an equal interest in proper

maintenance for it is the very foundation of their success. A service

provider makes a substantial investment to establish and maintain

a business and will not risk that investment through inferior service.

Most importantly the end-user benefits from the freedom to choose

who shall maintain the complex equipment owned.

For these reasons, it is appropriate to enforce per se liability

rules to determine the legality of Kodak’s tying arrangement. Ko-

dak’s blatant attempt to eliminate the ISO’s from the service

aftermarket by refusing to sell parts to end-users who choose ISO

service allows Kodak to maintain a monopoly through an illegal

tying arrangement. This tying arrangement prohibits competition

in the parts and service after-markets.

ARGUMENT

The Ninth Circuit found sufficient basis to reverse the District

Court's decision granting summary judgment. Respondents suc-

cessfully presented triable issues of fact which remain disputed

between the parties. The central issue in this case is whether an

equipment manufacturer, lacking sufficient market power in the

interbrand market of equipment sales, can possess market power in

the parts and service segment of the industry. Respondents contend

parts and service are separate markets from equipment sales where

Kodak maintains monopoly power through the implementation of

its tie-in arrangement. Kodak’s policy has permitted them to estab-

lish prices without restraint and eliminate competition by refusing

to sell the parts required to service the product.

> The record and Court of Appeals recognized that service prices

declined in those cases where Kodak directly competed against an ISO

for service. Image Technical Service, Inc. v. Eastman Kodak Co.. 903

F.2d 612, 617 (1990).

7

THE ISO’S PRESENCE IN THE MARKET

PROMOTES BOTH INTERBRAND

AND INTRABRAND COMPETITION

Providing good service is competitively essential for a manu-

facturer or distributor of high technology products. Service repre-

sents future revenues through renewed maintenance agreements,

equipment upgrades, sales of peripherals and future placements of

additional equipment. A competitor who is unable to efficiently

provide good quality service at affordable prices will soon find their

customer seeking alternative sources for service or alternative

products.

Many manufacturers choose to offer their products to the pub-

lic through an authorized dealer channel. Dealers take on various

names such as distributor, reseller, remarketer, or value-added re-

seller but all perform essentially the same duties for the authorizing

manufacturer. The dealer cha*eel provides pre-sale, point-of-sale,

and post-sale support to the end-user. Dealers and their employees

are trained by the manufacturer or a third party to market and

support equipment to end-users.

Dealerships, although authorized by a manufacturer, are indi-

vidual business entities independent from the manufacturer from

which they purchase products for distribution. Most dealers are

appointed as “non-exclusive”. The term “non-exclusive” enables a

manufacturer to appoint additional dealers or authorize additional

channels of distribution to compete with the existing dealers.°

Kodak competitors who, like Kodak, wish to increase their

market share of equipment sales, do so through intense interbrand

competition among their dealers and intrabrand competition

among all channels. Competition is present in distribution at two

levels, manufacturers and dealers competing in the interbrand mar-

ket, i.e. Kodak v. Canon, and dealers competing against other deal-

ers for equipment placement and service in the intrabrand market

(i.e. Canon v. Canon).

The vertical and horizontal competition described above also

occurs in the parts and service aftermarket for high technology

equipment. Intrabrand competition results from one manufacturer

and a number of dealers competing to support the equipment sold.

® Full service dealers provide a wide range of products and services

to end-users. Discount retailers provide little or no service or support to

equipment purchasers.

8

The dual competition, interbrand and intrabrand, affords an end-

user, who is dissatisfied with their service provider, the opportunity

to choose another source for service. Intrabrand competition maxi-

mizes end-user benefits such as efficient service, low prices and

superior customer education. It further allows ful! market penetra-

tion through a number of independently owned and operated deal-

ers competing against each other and their manufacturer for

revenues from equipment sale and service.

A few manufacturers, such as Kodak, do not utilize an author-

ized dealer channel but choose instead to compete in the interbrand

market by offering their products directly to the end-user. Kodak’s

decision to forego the dealer channel and directly market their

products is not contested. (See, Continental T_V., Inc. v. GTE Sylva-

nia, Inc., 433 U.S. 366 (1977), manufacturer refuses to sell product

to competitor for distribution, Business Electronics Corp. v. Sharp

Electronics Corp., 485 U.S. 717 (1988) manufacturer terminates

dealer in equipment sales.) The right to directly distribute products

cannot be disputed, however, this right cannot be transferred to

aftermarket support of an end-user’s equipment. Once sold to an

end-user or leasing company, the equipment is no longer Kodak’s

property to control but becomes the possession of an end-use cus-

tomer. The principles which support Kodak’s right to refuse to deal

with a competitor in equipment sales cease to apply. Kodak,

through its arrangement of tying parts to service, attempts to extend

its right to refuse to deal with competitors in equipment sales to its

refusal to sell parts to ISO’s. The refusal to sell parts to end-users,

unless they agree not to use another service provider, results in a per

se illegal tying arrangement.

MARKET SEPARATION OF PARTS AND SERVICE

UNDER JEFFERSON PARISH

To determine whether a per se tying arrangement is present,

this Court must first ascertain whether separate markets exist for

the sale of equipment and the sale of parts and service. Kodak

argues the sale of equipment encompasses the aftermarket sale of

parts and service for Kodak equipment as derivative markets. In

order to dispel this argument, the relative markets in which equip-

ment, parts and service are sold must be considered. To assist in

determining whether a tying arrangement is anti-competitive, this

Court has considered whether “two separate products may be tied

together and, if so, whether they have used their market power to

9

force” acceptance of the tying arrangement. Jefferson Parish Hospi-

tal District No. 2 v. Hyde, 466 U.S. 2, 18 (1984). The establishment

of separate markets for each of the products is essential to establish

Kodak has used its market power in parts to force Kodak end-users

to purchase Kodak service.

A. Characteristics of Demand

To determine whether one or two products are involved in a

tying arrangement, this Court has reviewed the characteristics of

demand for the products. Jd. at 19. Kodak claims the demand for

parts is synonymous with the demand for service. This claim is

without merit. Respondents have shown a separate demand for

service exists when end-users have requested Kodak parts, but not

requested Kodak service. JA. 428-429. On those occasions where

customers made requests for Kodak parts, but not for Kodak ser-

vice, Kodak agreed to sell the part only if the customer agreed not to

use ISO service (i.e., the customer installs the part themselves).

Where a customer or an ISO offers to buy a part, with service

provided by an ISO, Kodak refused to fill the parts order. JA.

428-429. In implementing its parts policy, Kodak thus recognizes a

separate demand for parts and service, and attempts to eliminate

the demand. If there was no demand for parts without purchasing

Kodak service, Kodak would have no need for a policy conditioning

the sale of parts with the sale of Kodak service.’

Kodak’s current parts policy, enacted on December 1, 1986,

illustrates the separate demand for parts and service. Kodak’s

Terms of Sale provide that parts would only be sold to: “Kodak

authorized...dealers, distributors and service outlets” and “other

users who purchased equipment directly from Kodak and who ser-

vice their own machines.” Brief for Appellant at 14, Image Techni-

cal Service, Inc. v. Kodak, 903 F. 2d 612 (1990) No. 88-2686. The

policy explicitly forbids the sale of parts to an end-user unless the

end-user agrees not to use ISO service. The distinction between an

end-user who installs his own parts and an end-user who chooses a

trained ISO to install that same part is without basis and irrational.

The distinction confirms the ISO’s argument that a separate market

for parts and service exists.

’ The separation of parts and service was acknowledged by Judge

Wiggins in his majority opinion for the Ninth Circuit. He noted Ko-

dak’s policy for parts implied a desire separate from Kodak service,

which implies separate markets. /mage Technical Service, Inc. v. East-

man Kodak Co., 903 F.2d 612, 616 (1990).

10

Kodak’s brief acknowledges the existence of aftermarket Ko-

dak service contracts to customers. Kodak provides service through

(1) initial warranty; (2) annual service contracts: or (3) on a “per

call” basis.* PB at 3. The last two service arrangements are contract-

ed separately from the sale of equipment and therefore, create a

separate market after the initial equipment sale. Kodak. by virtue of

its manufacture and sale of equipment to the end-user. demands

that this Court support the elimination of competition in the equip-

ment support aftermarket. This demand would eliminate in-

trabrand competition in equipment service.

B. Distinct Product Markets

In Jefferson Parish, this Court ruled a tying arrangement may

not exist unless there is sufficient demand for the tying product

(parts) separate from the tied product (service) to identify a distinct

product market in which it is efficient to offer the tying product

separate from the tied product. 466 U.S. 2, 22 (1984). By offering to

service Kodak equipment, ISO’s created a separate demand for

Kodak parts exclusive of the demand for Kodak service. The ISO’s

presence in the service market for service of Kodak equipment

creates intrabrand competition for parts and service. Intrabrand

competition in turn creates a competitive market for service of

equipment for end-users.

Kodak’s single-market view of equipment sales encompassing

all derivative markets is without merit when viewed in light of

commercial realities. In Dimidowich v. Bell & Howell. the Ninth

Circuit correctly recognized the existence of the service

aftermarket:

[A]n owner of broken B & H micrographic equipment is

indifferent to people who can service Kodak or 3M ma-

chines. If the owner's only option is to request service from

B & H or Comgraphic (depending on location) [both B& H

repairers], that is obviously the market the owner faces.

803 F.2d 1473, 1481 n.3 (1986).

Market realities dictate demand in the three separate markets:

the new equipment market; the parts market: and the service mar-

ket. The demand in each of these markets is separate and distinct, as

illustrated by Kodak equipment end-users’ request for ISO service

on their Kodak equipment. JA 411, JA 449, JA 462, JA 470-71. JA

504. End-users should continue to have the freedom they once

* See e.g. Petitioner’s Brief “PB”.

1]

enjoyed to select the service entity of their choice without Kodak’s

exercise of its monopoly power.

KODAK’S MARKET POWER IN PARTS AND

SERVICE NEGATIVELY AFFECTS COMPETITION

In Jefferson Parish, this Court acknowledged the legality of

offering two distinguishable services in a Single transaction. 466

U.S. 2, 24 (1984). This Court concluded that. had the patients in

Jefferson Parish been forced to purchase the services of-a particular

anesthesiologist (tying product) as a result of the hospital’s market

power, the arrangement would be considered anti-competitive. The

patients in Jefferson Parish were able to choose another anesthesiol-

ogist if they desired. It is in this concept that distinguishes this case

from Jefferson Parish. Respondents in this case have shown Ko-

dak’s policy to sell parts only to those customers who agree not to

use ISO service has resulted in Kodak equipment user’s purchase of

Kodak service. Unlike the patients in Jefferson Parish, Kodak end-

users have no choice.

Kodak’s market power in parts forces the end-user to purchase

the tied product, Kodak service. Unlike the tie-in in Jefferson Par-

ish, Kodak’s parts policy directly forecloses all competition for ser-

vice of Kodak equipment. In Jefferson Parish, this Court correctly

found the hospital had no relevant market power, as a patient could

go to another hospital or another anesthesiologist if they did not

want the anesthesiology services offered by the petitioner. Here.

Kodak end-users are foreclosed from using any other service pro-

vider except Kodak, due to Kodak’s market power in parts and

service.

Kodak has forced its end-users to accept a tie which is an-

ticompetitive and unprotected in light of Jefferson Parish. This

Court stated, “tying arrangements need only be condemned if they

restrain competition on the merits by forcing purchases that would

not otherwise be made.” /d. at 27. Unlike the patients in Jefferson

Parish, Kodak customers have no choice of service provider after

they purchase Kodak equipment. Due to Kodak’s elimination of |

ISO’s as contenders in the intrabrand market, and Kodak’s failure |

to authorize a dealer channel for service support, no alternative

service provider exits. The market effect of Kodak’s tying arrange-

ment eliminates any competition in the Kodak equipment support

aftermarket thus forcing an end-user to purchase Kodak service

when the end-user would prefer to buy Kodak parts for installation

by another.

12

Respondents have shown the effect of Kodak’s “forcing”

through limited discovery conducted in this case, which indicated

end-users were prevented from choosing ISO’s equipment service

once ISO’s were unable to purchase parts. JA 465. Unlike the Peti-

tioner’s policy in Jefferson Parish, Kodak's tying arrangement sig-

nificantly restrains the end-users’ freedom to select a specific service

provider through the elimination of any choice in the service

market.

The recognition that some competitive advantages are justifia-

ble in light of the competitive ideal has been established throughout

recent antitrust precedents. In its decisions, this Court has noted

when a seller’s power is “used loumapair competition on the merits

in another market, a potentially inferior product may be insulated

from competitive measures.” /d at 14. Insulation from competitive

forces for uniform products are not protected by the Sherman Act.

Competition, both interbrand and intrabrand, prevents an inferior

product from being protected in the market. Kodak’s tying of parts

to service has eliminated intrabrand competition and enabled Ko-

dak to market its inferior service to Kodak equipment owners free

from the competitive presence of the ISO’s. Respondents have of-

fered evidence of superior ISO service when compared to Kodak

service. L 133, JA 424-26. Comparative ISO service is not surpris-

ing considering most ISO’s are factory trained Kodak technicians

who were former Kodak employees. Kodak’s measures to force

ISO’s out of the service market insulate Kodak service from ISO

competition and helps to maintain their employment of techni-

cians. The ISO’s presence forced Kodak to compete on the merits of

the services offered. Rather than lowering service prices and com-

peting with ISO’s, Kodak chose to curtail competition in order to

maintain their profits without ISO interference.

KODAK EQUIPMENT OWNERS SUFFER

FROM KODAK’S TYING ARRANGEMENT

To Kodak end-users, the elimination of ISO’s from the service

market meant increased prices and often inferior service.’ “The

freedom to select the best bargain in the second market is impaired

* As acknowledged by the Ninth Circuit, the ISO’s provided evi-

dence which showed they provided better quality service at prices less

than Kodak. Image Technical Service v. Kodak, 903 F.2d 612, 617

(1990). Kodak employees also acknowledged the ISO’s “good service”

of Kodak equipment. Respondent’s Brief at 13, L 180.

13

by a need to purchase the tying product, and the corresponding

inability to evaluate the true cost of either product when available

only as a package.” Jefferson Parish, 466 U.S. at 15. Kodak’s parts

policy effectively eliminates the freedom to select the best choice in

the second market. The alternative choice of an ISO for service

provided a bargain for consumers, achieved through the competi-

tive prices and service packages offered by ISO’s. Intrabrand com-

petition to provide service for Kodak equipment afforded

consumers the freedom to choose the “best bargain” of either ISO

or Kodak service.

Unlike other recent antitrust cases considered by this Court,

this case involves a clear separation of products and the resultant

market power necessary to create a tying arrangement causing “eco-

nomic harm to competition in the tied market.” /d. at 19, n. 31. The

refusal to recognize the existence of an aftermarket for parts and

service separate from equipment sales is unreasonable in an econo-

my which is becoming more and more service oriented. Respon-

dents provided evidence to the District Court that the price and

quality of the tied product, service, was adversely affected by Ko-

dak’s restraint. The evidence offered sufficiently established that

some Kodak equipment purchasers were forced to purchase Kodak

service due to the anti-competitive effects of Kodak’s tying

arrangement.

COMPETITION IN THE INTERBRAND EQUIPMENT

MARKET DOES NOT PRECLUDE VIOLATION

OF THE SHERMAN ACT IN AN AFTERMARKET

The issue most often disputed in this case is the existence of

market power — the ability of Kodak to exclude competition and

set prices. This question is debated due to the requisite factors

needed to establish violations of Sections | and 2 of the Sherman

Act. This Court has found a tying arrangement is per se unreasona-

ble if the defendant has sufficient market power in the tying product

market to restrain competition appreciably in the tied product mar-

ket. Fortner Enterprises v. U.S. Steel Corp., 394 U.S. 495 (1969).

Kodak and amici claim Kodak cannot possess market power

in the parts and service after-markets due to Kodak's lack of market

power in the interbrand equipment sales market. The Ninth Circuit

in their majority opinion disagreed with Kodak’s position by con-

cluding in reality Kodak could have monopoly power in a single

brand market. /mage Technical Service, Inc. v. Eastman Kodak, 903

F.2d 612, 621 (1990). As discussed above, Respondent ISO’s have

a es

14

produced evidence demonstrating the existence of a separate de-

mand for parts created by ISO service of Kodak equipment. The

sole fact that ISO's operate as a business concern to service Kodak

equipment demonstrates a separate market for parts and service.

The ISO's further offer evidence of Kodak’s ability to decrease

prices in the parts and service aftermarkets where the parties en-

gaged in direct competition. JA 420, JA 422, JA 474-75, JA 482: JA

514.

This Court has held the proper focus of concern hinges on

“whether the seller has the power to raise prices, or impose other

burdensome terms such as a tie-in, with respect to any appreciable

number of buyers within the market.” Fortner Enterprises, Inc. v.

U.S. Steel, 394, U.S. 495, 504 (1969). After considering this fact in

light of the evidence offered by Respondents, the Ninth Circuit

correctly found the issue of market power created a factual dispute

which precluded summary judgment.

Kodak states it controls only a small portion of the interbrand

market for the sale of micrographic and copier equipment. The

ISO’s dispute this statement, contending Kodak does have market

power in two of the relevant markets. Kodak’s dominance in the

high end copier segment is well known. RB at 21-22.'° Kodak’s

competitors, Xerox, Savin, Canon, Ricoh, 3M, Bell & Howell and

Minolta, each share a portion of the market in the sale of equip-

ment. These manufacturers compete with Kodak for the sale of

equipment in the interbrand market. None of Kodak’s competitors

or their dealers compete with Kodak in the sale of Kodak parts and

service for Kodak equipment. The intense interbrand competition

that exists in the sale of micrographic and photocopier equipment

disappears in the product support aftermarket for Kodak equip-

ment. The aftermarket of support for Kodak equipment is now

exclusively controlled by Kodak as a result of the tying

arrangement.

LACK OF AN AUTHORIZED DEALER

CHANNEL ELIMINATES INTRABRAND

COMPETITION AND SECURES KODAK’S MARKET

POWER

As NOMDA argued in its amicus brief in support of Respon-

dent Sharp in Business Electronics Corporation v. Sharp, 485 U.S.

717 (1988), the authorized dealer channel or full service dealer

' See e.g. Respondent's Brief “RB”.

15

promotes intrabrand competition, which produces optimum ser-

vice levels. Factory trained authorized dealers offer pre-sale, point-

of-sale and post-sale service in competition with other dealers who

market and service a specific brand of equipment. Direct marketers

like Kodak and other manufacturers possess a vested interest in the

proper maintenance of end-user equipment. Proper maintenance

helps assure end-user satisfaction, and a satisfied customer will

return for equipment upgrades, new equipment or extended main-

tenance agreements. It is therefore important to insure proper ser-

vice is given to protect the goodwill associated with a

manufacturer’s name.

Both the dealer and manufacturer distribution channels mar-

ket equipment and service to end-users. After the sale, equipment is

installed at a user’s location, and ceases being the manufacturer's

property and becomes the end-user’s property. Without an author-

ized dealer channel, Kodak customers have two choices for service:

the consumer may service equipment themselves or have Kodak

provide service. ISO’s, when able to purchase Kodak parts, provid-

ed a third alternative which maintained intrabrand competition for

the service of Kodak equipment.

A dealer who sells equipment but fails to offer competitive

service may lose a maintenance contract and the potential for future

sales to the manufacturer or another authorized dealer. Alternative-

ly, intrabrand competition allows a dealer who did not competitive-

ly price equipment for sale the opportunity to market a service

agreement to a end-user who purchased equipment elsewhere. In-

trabrand competition allows them to purchase equipment from one

dealer and service from another, thereby using market forces to

achieve the best value for the their money.

The effect of Kodak’s tie-in arrangement results in stifled in-

trabrand competition in the Kodak aftermarket for service and

eliminates the end-user’s freedom to choose. Prior to Kodak’s poli-

cy change, ISO’s provided end-users a much needed selection of

service providers. The ISO's provided competent service to Kodak

equipment owners in order to secure future service revenue. The

intrabrand competition which resulted from ISO competition con-

tinued without interruption until Kodak began to lose service prof-

its to the highly competitive ISO's. Kodak then instituted its tie-in

arrangement to recapture service profits through the elimination of

intrabrand service competition. Kodak ended the end-users right to

choose and replaced it with its own.

16

Kodak’s effective elimination of competition in the in-

trabrand market affords Kodak market power in the parts and ser-

vice aftermarkets. This Court has condemned tying arrangements

“when the seller has some special ability — usually called ‘market

power’ — to force a purchaser to do something he would not do ina

competitive market.” Jefferson Parish, 466 U.S. at 14. Kodak end-

users who purchased ISO service prior to Kodak’s tying arrange-

ment are now forced to purchase Kodak service. Kodak’s tying of

parts to service has brought about the ISO’s demise as a viable

competitor in the service market of Kodak equipment. Kodak in

effect forces the end-user into purchasing parts they would prefer to

purchase elsewhere. See Digidyne Corp. v. Data General Corp., 734

F.2d 1336, 1340-41 (1984). The ISO’s presence in the service mar-

ket brought about intrabrand competition which prevented Kodak

from possessing the power to force a purchaser to do something he

would not do in a competitive market. Specifically, the [SO’s in-

trabrand competition prevented Kodak from forcing a customer to

purchase Kodak service. It is the complete lack of competition in

the intrabrand market for service of Kodak equipment which grants

Kodak the special ability to create an illegal tying arrangement.

THE DECISION BELOW SUPPORTS COMPETITION AND

ESTABLISHES A FACTUAL INQUIRY ON THE MERITS

OF THE CASE

The intense interbrand and intrabrand competition in the

business equipment and systems industry promotes technical ad-

vancements and consumer benefits such as lower prices, education

and exceptional product service. The Court of Appeals, recognizing

the importance of intrabrand competition, reversed the District

Court’s summary judgment decision and remanded this case for

trial on the merits. Kodak, in its brief argues summary judgment is

proper if plaintiff's claim is contrary to “economic sense.” PB at 29

citing Matsushita Electric Industrial Co. v. Zenith Radio, 475 VU. S.

574 (1986). At issue in this case is whetiier Kodak's theory of mar-

ket power or the ISO’s theory of market power makes “economic

sense.” Each party argues their interpretation of market power is

correct, creating a triable issue of fact which should not be

dismissed.

The Ninth Circuit correctly found price competition in

aftermarket service to be sufficient evidence of market power to

withstand summary judgment. Kodak and amici suggest that Re-

spondents produce market analysis to survive summary judgment.

17

PB at 21. This suggestion is overly burdensome and in direct con-

flict with this Court's opinion in United States v. Loews, which

provided, “it should seldom be necessary in a tie-in sale case to

embark upon a full scale factual inquiry into the scope of the rele-

vant market for the tying product and into the corollary problem of

seller's percentage share in that market.” United States v. Loews,

371 U.S. 38 (1962), cited by Digidyne Corp v. Data General Corp..

734 F.2d 1336, 1340 (1984). Respondent’s evidence of market and

monopoly power in the tying product (parts) is sufficient to restrain

competition in the relevant (tied) service market. To determine

otherwise could have staggering effects on the viability of future

antitrust claims.

It is not implausible to imagine that any manufacturer faced

with eroding profit margins on equipment sales would turn to ser-

vice as a source to increase its revenues. To do so the manufacturer

may terminate their authorized dealer channel and begin to exclu-

sively provide service for its own brand of products. A decision

determining Respondent’s failure to present a triable issue of fact

would preclude dealers or other authorized distribution channels

from bringing suit should their manufacturer follow Kodak’s exam-

ple and foreclose intrabrand competition. Manufacturers could be

empowered to eliminate all intrabrand competition based on the

premise each lacks market power in the relative interbrand market

of equipment sales.

The evidence Respondents provide, namely that Kodak has

sufficient power in the parts market to force customers to purchase

its service illustrates that there is more than “some metaphysical

doubt as to the material facts." Matsushita Electric Industrial Co. v.

Zenith Radio, 475 U.S. 574, 586 (1986). The standard Kodak asks

this Court to impose would establish an onerous burden on Respon-

dent to survive summary judgment through in depth market analy-

sis illustrating that the effects of market imperfections in

contradiction with other decisions.

KODAK’S BUSINESS JUSTIFICATIONS DO NOT

PRECLUDE SECTION 2 LIABILITY

Section 2 of the Sherman Act prohibits monopolies through

unlawful means. Business activities which are considered anticom-

petitive or exclusionary are prohibited conduct for a monopolist.

Respondents argue that Kodak's anticompetitive actions of tying

parts to service constitutes a violation of Section 2. In Aspen Skiing

18

Co. v. Aspen Highland Skiing Co., 472 U.S. 585 (1985), a competi-

tor with anti-competitive motives instituted a policy change which

resulted in a change of character of the market. This Court in Aspen

was not persuaded by the Petitioner's “normal business justifica-

tion” argument to condone its actions. On the contrary, this Court

found “the evidence supports an inference that [defendant] was not

motivated by efficiency concerns.” Jd. at 610. Kodak argues its

business justifications, namely, “promoting high quality service,

reducing inventory costs and eliminating free riding were brushed

aside” by the Ninth Circuit. PB at 38. The Ninth Circuit found

Kodak's first two business justifications to be “pretextual” and “not

genuine” and therefore remanded the case to the District Court.

The Ninth Circuit correctly discredited Kodak’s business jJus-

lufications due to the ISO’s specific skills and the timeliness of the

tying arrangement. Kodak’s claimed interest in providing well

trained technical staff to provide support of equipment is a legiti-

mate concern to all manufacturers. Kodak, however, is narrow

minded in its view that only the equipment manufacturer is able to

provide the high caliber service necessary to properly support Ko-

dak products. Kodak's competitors in the interbrand market of

equipment sales provide service support for their brand of equip-

ment through an authorized dealer channel. The manufacturer

trains the dealer in the proper care and maintenance of equipment

and then allows the dealer to compete for service in order to insure

high quality support of equipment. In absence of the authorized

dealer channel, when able to purchase Kodak parts, ISO’s were able

to provide high quality service of Kodak equipment. The ISO’s.

many of them former Kodak employees, bring years of experience

and factory training by Kodak to their customers.

ISO’s, like Kodak, have a strong interest in providing high

quality service to Kodak customers. Like an authorized dealer, if an

[SO fails to properly maintain equipment, they run the risk of losing

future service revenues. ISO’s, as their name implies, are strictly

service Organizations dedicated to the service of equipment. As

strictly a service provider, ISO’s must rely on their superior service

to insure customer satisfaction anc future revenues. ISO’s must

overcome the burden that they are not authorized service providers

and are therefore, forced to provide outstanding service in order to

compete effectively against Kodak. NOMDA does not object to

reasonable requirements or standards establ shed for ISO’s by Ko-

dak. NOMDA’S objection is to the total elimination of ISO’s from

the marketplace.

19

Kodak alleges the elimination of ISO’s reduces parts invento-

ry which justifies the tying arrangement. This argument is without

merit, as Kodak’s parts inventory is directly related to the number

of Kodak machines placed with end-users. The elimination of the

ISO's will not decrease Kodak's parts inventory. Instead, customers

who are forced to use Kodak service will no longer obtain parts

from ISO’s but instead purchase parts from Kodak. Rather than

selling parts to ISO’s, Kodak will inventory all parts for all end-

users and increase inventory due to the lack of parts purchases from

ISO’s. The quantity of parts required to be maintained by Kodak

depends directly on product reliability not the existence of ISO’s.

Petitioners’ brief contends Kodak's refusal to sell parts to

ISO’s eliminates free riding. Free riding is an undesirable market

henomenon which allows a dealer to benefit from another party's

services, thereby omitting capital expenditures to develop their own

services. It is difficult to apply the term “free riding” to the ISO's

practice of purchasing Kodak parts. In its Amicus Curiae Brief on

behalf of Respondent in Business Electronics Corporation v. Sharp

Electronics Corp., NOMDA condemned the Petitioner free rider

who offered no services themselves. “Instead free riders divert buy-

ers who have taken advantage of another dealer’s services, offering

prices that are lower because they do not reflect the true cost of

making a sale.”’ Amicus Brief for Respondent at 6, Business Elec-

tronics Corp. v. Sharp Electronics Corp., 485 U.S. 717 (1988) No.

85-1910. There are few similarities between the free rider criticized

in Sharp and the ISO's service of Kodak equipment. The free rider

in Sharp took advantage of the pre-sale, point-of-sale and post-sale

services offered by a full service dealer in equipment sales. Without

providing any support, the free rider in Sharp cut prices in equip-

ment sales after diverting customers who had taken advantage of

another dealer’s services. Respondent ISO’s do not partake of any

actions similar to the free rider in Sharp. ISO's as Kodak parts

customers, paid premium prices to obtain Kodak parts. In reality

Kodak is merely relabeling its inventory argument which has previ-

ously been invalidated. The analogy of ISO’s free riding as Kodak’s

subsidizing ISO's parts purchases is without basis. There is nothing

“free” about ISO’s purchases of parts from Kodak.

NOMDA and NASD conclude that the lack of intrabrand

competition in the parts and service aftermarkets equips Kodak

with market power to eliminate competition and the benefits com-

petition brings. Dealers would welcome a decision in this case rec-

Ognizing that parts and service are separate markets than that of

equipment sales. By doing so, this Court would insure the existence

20

of dealers as future service providers should manufacturers choose

to eliminate the dealer channel in equipment sales. Because manu-

facturers such as Kodak are not obligated to distribute products

through dealers in the interbrand market, this Court’s decision

recognizing separate markets and the subsequent market power

which exists from a single source of distribution, will protect the

dealer channel as service providers for aftermarket support of

equipment.

CONCLUSION

The judgment of the Court of Appeals should be affirmed.

Respectfully submitted,

Robert C. Goldberg

Denise M. Kennedy

National Office Machine

Dealers Association

Mark P. Cohen

Counsel of Record

222 South Riverside Plaza

Suite 2700

Chicago, Illinois 60606

(312) 648-2300

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