Petition for Writ of Certiorari — Pacific Express, Inc. v. United Air Lines, Inc.

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92-723 |

| SEP 2€ 1892

No. OFECE OF Fue Corer |

A A te

IN THE SUPREME COURT

OF THE UNITED STATES

October Term, 1992

PACIFIC EXPRESS, INC.,

Petitioner,

UNITED AIR LINES, INC.,

Respondent.

Petition For Writ Of Certiorari

To The United States Court Of

Appeais For The Ninth Circuit

PETITION FOR WRIT OF CERTIORARI

BLECHER & COLLINS, P. C.

MAXWELL M. BLECHER

611 West Sixth Street

Suite 2000

Los Angeles, California 90017

Telephone: (213) 622-4222

Attorneys for Petitioner

PACIFIC EXPRESS, INC.

Westside Law P_blishers * Los Angeles, California 90025 * (310) 207-0272

_——_—_

QUESTIONS PRESENTED

The two questions presented by this petition for

certiorari are:

1. Can antitrust injury flowing from unreasonably

exclusionary conduct be established by proof that (a) entry

into a market by a large, weil established airline was

retaliation against a smaller, vulnerable rival which rejected

a plan to enter into a non-competition agreement with the

larger competitor, and (b) such entry would produce long-

run monopolization, even though the short-term effect of

the entry was to stimuiate competition?

2. If, as this Court ruled in Eastman Kodak Co. v.

Image Technical Services, Inc.,___ U.S. __, 112 S.

Ct. 2072 (1992), plaintiff's burden on summary judgment

is to present evidence permitting a reasonable inference

from

which a trier of fact could find a defendant's proffered

legitimate business justification defense "pretextual," was

summary judgment appropriate where (a) plaintiff presents

substantial evidence of anticompetitive purpose; (b) defen-

dant submits its legitimate justification defense through a

conclusory statement in the reply brief supporting its

summary judgment motion; and (c) defendant's justification

was not supported by even a single contemporaneous

document produced during the course of the litigation?

PARTIES AND RULE 29.1 STATEMENT

All parties to this proceeding appear on the caption

of this petition.

Pursuant to Supreme Court Rule 29.1, the petitioner

submits the following information:

Petitioner Pacific Express, Inc., is a subsidiary of

Pacific Express Holding Company, Inc.

Respondent United Air Lines, Inc., is a wholly

owned subsidiary of UAL, Inc.

ill

TABLE OF CONTENTS

Page

QUESTIONS PRESENTED ..........---++::> i

PARTIES AND RULE 29.1 STATEMENT ...... ii

TABLE OF AUTHORITIES .... 2... 2-2 ceeeee Vv

«0 0 00) | A ae l

JURISDICTIONAL STATEMENT .........--- l

STATUTORY PROVISIONS INVOLVED ....... 2

STATEMENT OF THE CASE ...........---- 2

A. Factual Overview ........0206: 2

B. Proceedings Below ..........---. 7

REASONS FOR GRANTING THE WRIT ....... 7

A. The Decision Below Is in Conflict

with This Court's Decision in Ko-

B. Market Entry Can, Like Low Pric-

ing, Be Predatory, When It Retaliates

Against a Smaller, More Vulnerable

Competitor Which Refused to Agree

Not to Compete 0 we 10

oa Rs a ee 12

APPENDIX:

A. Opinion of the Court of Appeals for the

a a a A-1

B. Order of the Court of Appeals for the Ninth

Circuit Denying the Petition for Rehearing

and the Suggestion for Rehearing En Banc . . B-1

al Declaration of Stephen E. Ensberg in Sup-

port of Filing a Copy of Declaration of Judy

Bishop in Support of Reply Memorandum in

Support of Motion for Summary Judgment . . C-1

D. Supplemental Memorandum in Support of

Appellant's Petition for Rehearing and

Suggestion for Rehearing En Banc ...... D-1

E. Order of the Court of Appeals for the Ninth

Circuit Denying Request for Leave to File a

Supplemental Memorandum ........... E-1

TABLE OF AUTHORITIES

CASES Page(s)

Anderson v. Liberty Lobby, Inc.,

OTT UB BRR AT 3 56 cc ee eh ewes 9

Celotex Corp. v. Catrett,

O77 US. SEF GPRS os 60 6 ee ee ee 9

Eastman Kodak Co. v. Image Technical Services,

Inc.,

__—-UCS. __, 112 S. Ct. 2072

i.) eer errr r se i 7, 8, 9, 30,

Matsushita Electric Industrial Co. v. Zenith Radio

Corp.,

GIS U.S. STA CIRO) onc occ ee ctwes es 9

Pacific Express, Inc. v. United Air Lines, Inc.,

959 F.2d 814 (9th Cir. 1992) ........... 1

Riverview Investments, Inc. v. Ottawa Community

Improvement Corp.,

769 F.2d 324 (6th Cir. 1985). ......... 10

United States v. American Airlines, Inc.,

743 F.2d 1114 (Sth Cir. 1984), cert. dismissed,

ry oie So 8). re ee rere re 10

William Inglis & Sons Baking Co. v. ITT

Continental Baking Co.,

668 F.2d 1014 (9th Cir. 1981), cert. denied,

O59 US. Glo (ime). sn ee ee ee teks 10

STATUTES

> Rie oe 2 Reererare ee a 8 re ee ge a 10

Fas Lee} re ee ee ee 2, 7, 8, 10, 12

)

AP OF | BE oe a 0 eee 6 ee 2

‘

ee ee GR) ek oe ae a oe ee wee 2

No.

IN THE SUPREME COURT

OF THE UNITED STATES

October Term, 1992

PACIFIC EXPRESS, INC.,

Petitioner,

UNITED AIR LINES, INC.,

Respondent.

PETITION FOR WRIT OF CERTIORARI

Petitioner PACIFIC EXPRESS, INC., respectfully

requests that a writ of certiorari be issued to review the

judgment and decision of the Court of Appeals for the

Ninth Circuit filed on March 25, 1992.

OPINION BELOW

The opinion of the Ninth Circuit is published at 959

F.2d 814 (9th Cir. 1992). It is reprinted in the appendix

("App.") at A-1-A-12.

JURISDICTIONAL STATEMENT

The Court of Appeals for the Ninth Circuit entered

its judgment on March 25, 1992. The Ninth Circuit denied

Pacific Express’ timely petition for rehearing and sugges-

tion for rehearing en banc on July 25, 1992. A copy of that

Order is reprinted at App. B-1. This Petition is filed within

ninety (90) days of that Order. Jurisdiction of this Court is

founded on 28 U.S.C. § 1254(1).

STATUTORY PROVISIONS INVOLVED

Section 2 of the Sherman Act (15 U.S.C. § 2)

provides in pertinent part:

Every person who shall monopolize

. any part of the trade or commerce

among the several States . . . shall be

deemed guilty....

Section 4 of the Clayton Act (15 U.S.C. § 15)

provides in pertinent part:

[A]ny person who shall be injured in

his business or property by reason of any-

thing forbidden in the antitrust laws may sue

therefor in any district court of the United

States . . . and shall recover threefold the

damages by him sustained... .

STATEMENT OF THE CASE

A. Factual Overview

Petitioner Pacific Express, Inc. ("Pacific Express"),

initiated service in 1982 as the first post-regulation airline

to be certificated on the West Coast. As a nonunion, low-

cost, all-jet fleet airline, it posed a serious competitive

threat to respondent United Air Lines, Inc. ("United"),

which had high labor costs and was experiencing substan-

tial systemwide losses. (ER 106, Davis Decl. at 8; ER

106, Cobb Decl. at 25; ER 106, Roberts Decl. at 41.)

Pacific Express began operations by confronting

United directly in one of its major markets, the Los

Angeles-San Francisco corridor. (ER 106, Davis Decl. at

8.) United responded by denying Pacific Express access to

scarce gate space at San Francisco (ER 106, Cobb Decl. at

26-27; ER 106, Davis Decl. at 8-9) and terminal space in

Medford, Oregon and Sacramento, California (ER 106,

Davis Decl. at 5). Additionally, United used its computer-

ized reservation system, Apollo, the dominant system in the

Pacific Express/United territory, to impact Pacific Express

adversely. These tactics included biased displays favoring

United, poor and unreliable information concerning Pacific

Express flights and charging Pacific Express an exorbitant

booking fee. (ER 106, Davis Decl. at 9-11; ER 106, Cobb

Decl. at 28-29.)

By late 1982, chastened by United's response and its

inability to secure a toehold in the Los Angeles-San Fran-

cisco market, Pacific Express adopted a new strategy of

serving the "unserved and underserved" markets out of San

Francisco International Airport, many of which had been

abandoned, in whole or material part, by the larger airlines

after deregulation made entry into larger markets more

inviting. (ER 106, Davis Decl. at 12-13; ER 106, Cobb

Decl. at 28-29.) For example, United, after deregulation,

stopped serving Stockton, Modesto, Visalia, Merced and

Bakersfield, California. Air Cal and PSA, then two large

intrastate airlines operating in California, abandoned many

of their original intrastate routes, and Republic, then a large

regional carrier, stopped serving Klamath Falls and Bend,

Oregon and Redding, California. Finally, at least three

commuter airlines (Golden West, Swift and Inland Empire),

impacted by deregulation, ceased operations. (ER 106,

Davis Decl. at 2-3, 6-7, 12.)

These unserved and underserved markets suited

Pacific Express perfectly. Within months of introducing

service into these markets, Pacific Express was exceeding

passenger and revenue forecasts and, for the first time, in

August 1983, produced a monthly profit in its 83 city-pair

market route system. (ER 106, Davis Decl. at 12-13; ER

106, Cobb Decl. 29-30.) Moreover, in its new format,

Pacific Express became the number one producer of

connecting traffic for both United and TransWorld Airlines

at the San Francisco International Airport. (ER 106, Davis

Decl. at 13.)

In the Spring of 1983, while Pacific Express was in

transition to its profit-making status, United initiated

negotiations to effect a formal feeder arrangement between

the two carriers at San Francisco International Airport

under which Pacific Express would have operated flights

from smaller cities into San Francisco to connect passengers

on United flights. While Pacific Express saw this as an

opportunity to eliminate its gate and Apollo problems,

United entertained a totally different agenda. After secur-

ing from Pacific Express its most confidential plans consist-

ing of new routes and anticipated schedules, United pro-

posed it would enter into a feeder arrangement only if

Pacific Express would agree not to compete head-to-head

with United. In particular United sought to extract a

promise that Pacific Express would never re-enter the Los

Angeles-San Francisco market and would withdraw from

serving cities capable of supporting two carriers, such as

Boise, Idaho. When Pacific Express refused to agree to

this non-competition agreement, United terminated the

feeder negotiations. (ER 106, Davis Decl. at 13-5; ER

106, Cobb Decl. at 30.)

—

With lightning-like speed, a mere six weeks after

terminating the negotiations, United announced its intention

to introduce jet service into virtually every short-haul

market then served by Pacific Express. (ER 106, Davis

Decl. at 15; ER 106, Cobb Decl. at 31.) Remarkably,

during discovery United failed to produce even a single

contemporaneously prepared analysis assessing the costs or

profitability of entering and re-entering these markets.

More remarkable is the grant of summary judgment in this

case, predicated solely (or, at a minimum, dominantly) on

the declaration of Judy Bishop, a Regional Manager for

Passenger Sales, at United's headquarters outside of

Chicago, submitted in the reply memorandum in support of

United's summary judgment motion. That declaration,

which purports to set forth United's legitimate business

justification defense is utterly lacking in concrete particulars

and contains nothing but ambiguous speculation and self-

serving conclusions, and is reprinted at App. C-1-C-7. (See

also ER 111; ER 134.)

United's sweeping re-entry into previously aban-

doned markets was made while it was incurring significant

systemwide losses. (ER 106, Roberts Decl. at 41.) Other

facts evidence unusual and anticompetitive behavior.

United actually increased service on certain routes in

September 1983, a time of the year, after the peak summer

months, when schedules are traditionally reduced. More-

over, when United resumed service in the Pacific Express

markets, it carefully skimmed off Pacific Express’ passen-

gers by either sandwiching the Pacific Express flight

between two United flights or meeting Pacific Express’

exact departure time. (ER 106, Cobb Decl. at 31-32; ER

106, Davis Decl. at 15-17.)

By February 1984, United had bled Pacific Express

to death. (ER 106, Roberts Decl. at 39.) Moreover, the

activities of United dried up Pacific Express' ongoing

efforts to raise external financing. (ER 106, Cobb Decl. at

9.)

Content that it had destroyed a serious potential and

actual rival, United now sought to minimize its losses.

Four months after Pacific Express stopped flying, United

began to negotiate its withdrawal from the unprofitable

markets it entered. It then commenced new negotiations for

a feeder agreement, this time with a turbo-prop commuter

airline called Westair, which was not positioned to compete

with United. (ER 106, Davis Decl. at 16-17; ER 118 at 2-

3; ER 106, Cobb Decl. at 33.) Subsequently, those

carriers did in fact enter into a feeder agreement which set

joint fares and precluded Westair from flying new routes

without United's approval. (ER 106, Westair Agreement

at 273; ER 106, Zielinski Depo. at 260: 1-6.)

The record reflects the anticompetitive effect of

United's conduct in eliminating Pacific Express. Six years

after Pacific Express stopped flying, in August 1990 when

the summary judgment motion was being briefed, United

and its puppet Westair, faced NO competition in 13 city-

pair routes in and out of San Francisco International

Airport. (ER 106, Roberts Decl. at 44.) Moreover,

United/Westair had significant market power in six other

San Francisco city-pair markets. Pacific Express' economic

expert, in a declaration supporting the opposition to the

summary judgment motion, opined that after Pacific

Express exited, United/Westair were able to and did

actually increase fares in those markets. (ER 106, Koehn

Decl. at 231.)

B. Proceedings Below

On October 1, 1990, the district court granted

summary judgment for United on Pacific Express’ Section

2 claim holding that plaintiff could not establish, as a matter

of law, injury flowing from a reduction in competition

because United's entry, even if for an anticompetitive

purpose, increased competition and was, therefore, procom-

petitive. At that time, the district court denied United's

companion motion for summary judgment as to plaintiff's

state law claim of tortious interference. United then filed

a second motion for summary judgment as to the state law

claim which was granted on January 16, 1991. On appeal,

the Court of Appeals for the Ninth Circuit affirmed the

summary judgment in favor of United on both counts.

App. A-9-A-12.

REASONS FOR GRANTING THE WRIT

A. The Decision Below Is in Conflict

with This Court's Decision in

Kodak

The Ninth Circuit decision which, incredibly,

suggests that conspiring with a competitor is an appropriate

way in which to survive and prosper (App. A-9) is an insult

to the competitive spirit embraced in the antitrust laws.

The Court's cavalier adoption of United's proffered

business justification in the face of strong, contrary evi-

dence is an extremely egregious decision which, if allowed

to stand, would eviscerate this Court's summary judgment

analysis in Eastman Kodak Co. v. Image Technical Servic-

es, Inc., __ U.S. ___, 112 S. Ct. 2072 (1992).' There,

as in this case, "[l]iability turns, then, on whether ‘valid

business reasons' can explain [respondent's] actions." Jd.

at 2091 (citation omitted). There, as here, "“[f]actual

questions exist . . . about the validity and sufficiency of

each claimed justification, making summary judgment

inappropriate." Jd. Where, as here, there is abundant

evidence "'from which a reasonable trier of fact could

conclude that [respondent's] . . . [business] reason is

pretextual'" (id. (citation omitted)), then summary judg-

ment must be denied even though at trial the antitrust

defendant might win. Courts are not permitted to dispose

of factually complex antitrust issues "as a matter of law on

a record this sparse." Jd. at 2092.

The record presented in Kodak is gigantic compared

to this one. If summary judgment can be granted on the

dispositive issue of legitimate business justification in a case

challenging a monopolist's alleged predatory conduct solely

on the basis of a conclusory four-page declaration support-

ing a reply brief where there is not a single contemporane-

ous business document produced to support those conclu-

sions, then NO case under Section 2 of the Sherman Act is

likely to survive summary judgment. This case cries for at

least a per curiam reversal and remand for trial.

The primary danger to private antitrust enforcement

is the overbroad use of summary judgment. This Court

must ensure the integrity of that procedure. This decision

' Although the Ninth Circuit's decision predates Kodak, that case

was called to the Ninth Circuit's attention in connection with Pacific

Express’ petition for rehearing (App. D-1- — and rejected by the

court (see App. E-1).

of the Ninth Circuit denigrates the process by elevating the

Court of Appeals to the function of fact finder. In conclud-

ing that plaintiff had not established antitrust injury, the

court, in reality, finds no antitrust violation, because it

accepts, contrary to every established rule of procedure

governing summary judgment, United's proffered business

justification defense. That defense was tendered only in the

deciaration of Judy Bishop in the reply brief and was not

supported by even one document prepared contemporane-

ously with the events in question.

Summary judgment has now become the rule in

antitrust cases. The lower courts have read the 1986 trilogy

of decisions: Anderson v. Liberty Lobby, Inc., 477 U.S.

242 (1986); Celotex Corp. v. Catrett, 477 U.S. 317 (1986);

and Matsushita Electric Industrial Co. v. Zenith Radio

Corp., 475 U.S. 574 (1986), as a “green light" for granting

summary judgment. Now the grant of summary judgment

in antitrust litigation runs rampant. We do not suggest that

with changes both in substantive and procedural antitrust

law and given the press of massive criminal dockets,

summary judgment should be repudiated or even disap-

proved. Rather, it must be confined to its limited role.

There are many antitrust cases which may be

appropriately disposed of by summary judgment. But this

is not such a case. Refusal to review this case -- even by

per curiam or summary disposition -- will not only produce

an enormous injustice, it will encourage continued disregard

of the holding in Kodak that,-if factually disputed, legiti-

mate business justification is a jury issue.

Because it is apparent that there is a justiciable

controversy requiring trial and because this case presents a

typical fact pattern in which summary judgment is all too

frequently granted, as in Kodak, this case presents an

important issue in the procedures affecting private antitrust

enforcement.

B. Market Entry Can, Like Low Pric-

ing, Be Predatory, When It Retali-

ates Against a Smaller, More

Vulnerable Competitor |§ Which

Refused te Agree Not to Compete

To the extent that the Ninth Circuit opinion implies

that entry cannot be predatory in any circumstance, then it

has made a major error of substantive antitrust analysis

which threatens to have serious practical and legal ramifica-

tions.

Entry, normally competitive, like low pricing which

is also normally competitive, can become predatory if its

tendency is to eliminate competition and thereby enhance a

firm's long-term ability to reap the benefits of monopoly

power. William Inglis & Sons Baking Co. v. ITT Coniti-

nental Baking Co., 668 F.2d 1014 (9th Cir. 1981), cert.

denied, 459 U.S. 825 (1982); Riverview Investments, Inc.

v. Ottawa Community Improvement Corp., 769 F.2d 324

(6th Cir. 1985).

Here, United tendered to Pacific Express an agree-

ment to form a cartel. Had Pacific Express agreed, it

would have violated the conspiracy to restrain trade or the

conspiracy to monopolize provisions of Sections | and 2 of

the Sherman Act, or both. See United States v. American

Airlines, Inc., 743 F.2d 1114 (Sth Cir. 1984), cert. dis-

missed, 474 U.S. 1001 (1985). The Ninth Circuit sugges-

tion that had Pacific Express accepted United's tender to

form a cartel, it would have “survived and prospered"

(App. A-9) is one of the grossest insults to the principles

embodied in the antitrust laws ever expressed by a court in

the United States. That statement alone warrants at least per

curiam reversal. This Court should not tolerate for a

moment the suggestion that a large competitor which has

the ability to destroy its smaller, more vulnerable rival may

exercise its power if the smaller, more vulnerable rival

elects to reject a non-competition agreement and instead, in

"red blooded American fashion,” elects to compete.

This Court cannot let stand a decision which

promotes non-competition agreements among competitors as

the means by which a smaller, vulnerable competitor may

survive and prosper. Surely, that concept chills the competi-

tive process and encourages conspiracy, not competition. In

short, according to the Ninth Circuit, Pacific Express had

its chance to survive and prosper by knuckling under to

United's demand that it not compete against it, and should

not now complain because United then destroyed it for

refusing to agree. Incredible!

For these reasons, this Court should grant certiorari.

CONCLUSION

For the reasons set forth herein, we respectfully

urge that the Court grant certiorari in this case. The

decision is not only an evisceration of the rule governing

summary judgment in a Section 2 Sherman Act case

enunciated in Kodak, but is a threat to the very principles

of antitrust enforcement.

Dated: October 23, 1992

Respectfully submitted,

BLECHER & COLLINS, P.C.

MAXWELL M. BLECHER

611 West Sixth Street

Suite 2000

Los Angeles, California 90017

Telephone: (213) 622-4222

Attorneys for Petitioner

PACIFIC EXPRESS, INC.

APPENDICES

APPENDIX A

A-1

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

PaciFIC Express, INc.,

Plaintiff-Appellant, No. 91-55208

D.C. No.

i CV-84-5185-ER

UNITED AIRLINES, INC.,

Defendant-Appellee. OPINION

Appeal from the United States District Court

for the Central District of California

Edward Rafeedie, District Judge, Presiding

Argued and Submitted

February 6, 1992—Pasadena, California

Filed March 25, 1992

Before: Arthur L. Alarcon, Robert R. Beezer and

Pamela Ann Rymer, Circuit Judges.

Opinion by Judge Alarcon

SUMMARY

Antitrust/Torts

The court of appeals affirmed a district court grant of sum-

mary judgment for defendants, holding that facts offered to

support claims alleging antitrust violations and tortious inter-

ference with prospective economic advantage did not show

that the defendant's efforts to compete were more than legiti-

mate competitive behavior.

2969

A-2

2970 Paciric Express v. UNITED AIRLINES

Appellant Pacific Express, Inc. began operating as an air-

line in 1982, serving routes connecting western cities with

San Francisco and Los Angeles. In 1983, shortly after Pacific

had begun to show a profit, appellee United Airlines, Inc.

expanded its service in Pacific Express’ service area. Pacific

Express filed for bankruptcy protection in 1984. Pacific sued

United, contending that United monopolized, or attempted to

monopolize, airline routes in violation of the Sherman Act

and that United’s conduct tortiously interfered with Pacific’s

prospective economic advantage. The district court granted

Summary judgment in favor of United on each claim.

[1] To state a claim under § 2 of the Sherman Act, a plain-

uff must prove possession of monopoly power in the relevant

market, willful acquisition or maintenance of that power, and

causal antitrust injury. [2] Even assuming that an inference of

anti-competitive intent can be drawn from the facts presented

by Pacific, those facts do not demonstrate that United's

expansion of services to compete with Pacific was predatory

or anticompetitive conduct. Directive evidence of intent to

vanquish a rival in an honest competitive struggle cannot help

to establish an antitrust violation. [3] Pacific did not show that

its losses were caused by anything other than increased com-

petition.

[4] In asserting its claim for tortious interference with pro-

spective economic advantage, Pacific contended United’s pre-

dominant motive in dealing with Pacific was to eliminate it as

a competitor. [5] The correct standard, in California, for deter-

mining whether a compeiitor’s actions are priviliged is

whether the competitor’s purpose is at least in part to advance

his interest in competing with the other. [6] Since Pacific did

not contradict United’s evidence that its motive in expanding

its service, at least in part, involved a genuine competitive

purpose, no genuine issue of material fact existed regarding

the defense of competitor’s privilege.

A-3

Pactric Express v. Untrep AIRLINES 2971

COUNSEL

Maxwell M. Blecher, Blecher & Collins, Los Angeles, Calli-

fornia, for the plaintiff-appellant.

S. William Livingston, Covington & Burling, Washington,

D.C., for the defendant-appellee.

OPINION

ALARCON, Circuit Judge:

In this action, Pacific Express, Inc. (Pacific Express)

alleges that United Airlines, Inc. (United) monopolized, or

attempted to monopolize, various airline routes in the western

part of the United States, in violation of Section 2 of the Sher-

man Act, 15 U.S.C. § 2, and that its conduct tortiously inter-

fered with Pacific Express’ prospective economic advantage,

contrary to California law. The district court granted summary

judgment in favor of United Airlines on each claim.

Pacific Express began operating as an airline on January

27, 1982. At the outset, it concentrated on the route between

Los Angeles and San Francisco. After sustaining losses in this

market, Pacific Express restructured its business to serve

routes connecting western cities with San Francisco and Los

Angeles. In the spring of 1983, United entered into negotia-

tions with Pacific Express to provide it with passengers from

the western region of the United States so that United could

concentrate on its longer routes. These negotiations were ter-

minated in June of that year.

In the summer months of 1983, Pacific Express began

showing a profit. On July 27, 1983, United announced that it

would expand its service to cities in the western region of the

United States which were previously served solely by Pacific

A-4

2972 PaciFic Express v. UNITED AIRLINES

Express. United also increased its service on routes where it

had previously competed with Pacific Express. By early 1984,

Pacific Express was unable to continue business operations.

Pacific Express sought protection under Chapter 11 of the

Bankruptcy Act on February 4, 1984.

On May 1, 1984, United entered into an agreement with

Westair to provide passengers for United’s longer flights by

serving some of the routes previously maintained by Pacific

Express.

Pacific Express argues that reversal of the order granting

Summary judgment is compelled because genuine issues of

material fact exist regarding whether United’s expansion of its

service had an anti-competitive effect and interfered with

Pacific Express’ prospective economic advantage.

We affirm because we conclude that Pacific Express failed

to present facts showing that its injury resulted from anticom-

petitive conduct, or that United’s sole purpose in expanding

its service was anticompetitive. We discuss each of Pacific

Express’ contentions and the facts pertinent thereto under sep-

arate headings.

DISCUSSION

I. Antitrust Injury

Pacific Express contends that summary judgment was

improperly granted because the facts in this record support a

reasonable inference that United’s purpose in expanding its

service was to reduce competition and that its conduct was

exclusionary or predatory. We review a grant of summary

judgment de novo. In re Bullion Reserve of N. Am., 922 F.2d

544, 546 (9th Cir. 1991). In reviewing an order granting sum-

mary judgment, we must determine, viewing the evidence in

the light most favorable to the nonmoving party, whether

there are any genuine issues of material fact and whether the

A-5

Pactric Express v. UNITED AIRLINES 2973

district court correctly applied the relevant substantive law.

Id. at 546. The inferences to be drawn from the underlying

facts must be viewed in the light most favorable to the non-

moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242,

255 (1986). “[T]here is no genuine issue if the evidence pres-

ented in the opposing affidavits is of insufficient caliber or

quantity to allow a rational finder of fact to find .... that the

plaintiff proved his case by the quality and quantity of evi-

dence required by the governing law.” /d. at 254. In

Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S.

574 (1986), the Supreme Court noted, in the context of a Sec-

tion 1 violation, that “antitrust law limits the range of permis-

sible inferences from ambiguous evidence.” /d. at 588. In

ruling on a motion for summary judgment, the court must

apply “the substantive evidentiary standard of proof that

would apply at the trial on the merits.” Anderson, 477 US. at

252. The plaintiff bears the burden of proving a Section 2

claim by a preponderance of the evidence. Shoppin’ Bag of

Pueblo, Inc. v. Dillon Companies, Inc., 783 F.2d 159, 161

(10th Cir. 1986); Deauville Corp. v. Federated Dep't Stores,

Inc., 756 F.2d 1183, 1188 (Sth Cir. 1985).

[1] In order to state a claim for monopolization under Sec-

tion 2 of the Sherman Act, a plaintiff must prove:

(1) Possession of monopoly power in the relevant

market;

(2) willful acquisition or maintenance of that

power, and

(3) causal antitrust injury.

Movie 1 & 2 v. United Artists Communications’ Inc., 909 F.2d

1245, 1254 (9th Cir. 1990), cert. denied, —U.S.—, 111 S. Ct.

2852 (1991).

The following facts must be proved to establish an attempt

to monopolize claim:

A-6

2974 PaciFic Express v. UNITED AIRLINES

(1) specific intent to control prices or destroy com-

petition;

(2) predatory or anticompetitive conduct to accom-

plish the monopolization;

(3) dangerous probability of success; and

(4) causal antitrust injury.

Id. at 1254.

To support its contention that its expansion of service did

not constitute predatory conduct, United offered the declara-

tion of Judy Bishop, United’s Regional Manager for Passen-

ger Sales. Bishop declared that United’s expansion of service

was preceded by extensive planning that began before the air-

lines began negotiations concerning a possible feeder arrange-

ment. Bishop further stated that United expected that the

expanded service would produce more passengers to connect

with existing San Francisco flights.

United also introduced the declaration of Gary Dorman, a

consulting economist. Dorman testified that United continued

to serve the western region routes for at least four years after

it expanded its services in 1983. During the time that Pacific

Express and United were competing on the same routes,

Pacific Express’ fares were lower than those charged by

United.

Pacific Express relies on the following circumstances to

support its claim that United’s purpose in expanding its ser-

vice was anticompetitive. Pacific Express presented evidence

that United made it difficult and costly for automated travel

agencies who used United’s computerized reservations system

to find and book Pacific Express’ competing flights. Pacific

Express also introduced evidence that during this same period

United prevented Pacific Express from gaining access to gates

A-7

PaciFic ExprRESS V. UNITED AIRLINES 2975

at the San Francisco Airport. These events occurred prior to

the date United expanded its service to compete with Pacific

Express in cities outside the Los Angeles-San Francisco cormi-

dor.

Pacific Express also introduced the declaration of Frederick

Davis, Pacific Express’ marketing vice-president. Davis stated

that Bill Andres of United told him that United was concerned

that Pacific Express and United “would get into each other’s

pockets.” Pacific Express also cites portions of the deposition

of Donald C. Moonjian, a United employee who participated

in the failed negotiations with Pacific Express, in an attempt

to prove United’s anticompetitive intent. Moonjian testified

that United “did not ask Pacific Express to serve Los Angeles

to San Francisco.” He further stated that he did not “think we

would have wished them to do so because we fly [the Los

Angeles to San Francisco route], nor would we wish anyone

else to fly [that route]. We would like to have [that route] all

to ourselves.”

[2] Even assuming that an inference of anti-competitive

intent can be drawn from these facts, they do not demonstrate

that United’s expansion of its service to compete with Pacific |

Express was predatory or anticompetitive conduct. “Direct |

evidence of intent to vanquish a rival in an honest competitive

struggle cannot help to establish an antitrust violation.”

William Inglis & Sons Baking Co. v. ITT Continental Baking

Co., Inc., 668 F.2d 1014, 1028 (9th Cir. 1981), cert. denied,

459 U.S. 825 (1982); See Universal Analytics, Inc. v.

MacNeal-Schwendler Corp., 914 F.2d 1256, 1259 (9th Cir.

1990) (even assuming that a secondary motivation of hiring

a competitor's employee was to “wound” the competitor, no

genuine issue of material fact existed with regards to preda-

tory conduct because legitimate business reasons for the hir-

ing existed).

In order to demonstrate that it suffered an antitrust injury,

Pacific Express must show that its injury was caused by anti-

oOo

A-8

2976 Pactric Express v. UnrTeD AIRLINES

competitive or predatory aspects of United’s conduct, not by

competition. In Atlantic Richfield Co. v. USA Petroleum Co.,

495 U.S. 328 (1990), the Supreme Court held that a private

plaintiff seeking to recover damages under Section 4 of the

Clayton Act must prove the existence of an injury “of the type

the antitrust laws were intended to prevent and that flows

from that which makes defendants’ acts unlawful.” Jd. at 334

(quoting Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429

U.S. 477, 489 (1977). The injury must be “attributable to an

anti-competitive aspect of the practice under scrutiny, ‘since

{i]t is inimical to [the antitrust] laws to award damages” for

losses stemming from continued competition.” * Jd. (quoting

Cargill, Inc. v. Monfort of Colorado, Inc., 479 U.S. 104, 109-

10 (1986)). “The antitrust injury requirement ensures that a

plaintiff can recover only if the loss stems from a

competition-reducing aspect or effect of the defendant's

behavior.” /d. at 344 (emphasis in original).

In Atlantic Richfield, the Supreme Court rejected the notion

that the antitrust injury requirement can be satisfied by a

showing that the long-term effect of the allegedly violative

conduct would ultimately reduce competition. /d. at 337 n.7.

“Rivals cannot be excluded in the long run by a nonpredatory

maximum-price scheme unless they are relatively inefficient.

Even if that were false, however, a firm cannot claim antitrust

injury from nonpredatory price competition on the asserted

ground that it is ‘ruinous.’ ” /d. (citations omitted). The Court

pointed out that the purpose of the antitrust laws is “the pro-

tection of competition, not competitors.” Id. at 338 (quoting

Brown Shoe Co. v. United States, 370 U.S. 294, 320 (1962)

(emphasis in original)).

A defendant’s behavior may fairly be characterized as pred-

atory when the defendant is “attempting to exclude rivals on

some basis other than efficiency.” Aspen Skiing Co. v. Aspen

Highlands Skiing Corp., 472 U.S. 585, 605 (1985) (citations

omitted). United’s attempts to induce Pacific Express to serve

routes not flown by United in order to provide United’s long

;

A-9

Paciric Express v. UNITED AIRLINES 2977

distance flights with passengers does not establish predatory

or anticompetitive conduct. If the negotiations had not failed,

Pacific Express may have survived and prospered. Likewise,

proof that United entered into an agreement with Westair to

fly routes previously flown by Pacific Express, after Pacific

Express ceased operating, does not demonstrate anticompeti-

tive conduct that injured Pacific Express.’

[3] In sum, Pacific Express has not shown that its losses

were caused by anything other than increased competition.

Undoubtedly, the entry of United, a large, well-known carrier,

into Pacific Express’ markets injured Pacific Express’ busi-

ness opportunities. However, Pacific Express can only

recover if its loss “stems from a competition-reducing aspect

or effect of the defendant’s behavior.” Atlantic Richfield, 495

U.S. at 344 (emphasis in original). The Sherman Act was “not

designed, and has never been interpreted, to reach all business

practices, unfair or otherwise, damaging to individual

companies.” Cascade Cabinet Co. v. Western Cabinet & Mill-

work, Inc., 710 F.2d 1366, 1374 (9th Cir. 1983). Because

Pacific Express has failed to demonstrate an antitrust injury,

we must affirm the summary judgment in favor of United on

this claim.

B. Tortious Interference with Prospective Economic Advan-

tage.

[4] Pacific Express asserts that genuine issues of material

fact exist regarding whether United interfered with Pacific

Express’ prospective economic advantage under California

law. Pacific Express contends that the evidence, when viewed

in the light most favorable to it, shows that United’s predomi-

nant motive in dealing with Pacific Express was to eliminate

‘For example, Pacific Express did not show that United offered preda-

tory prices on its expanded service. In fact, the evidence shows that Unit-

ed's prices were higher than Pacific Express in the markets in which they

competed. ‘

A-10

2978 PaciFic Express v. UNITED AIRLINES

it as a competitor. Under California law, a competitor is not

liable for the tort of interference with prospective business

advantage if the competitor can show that:

(a) the relation concerns a matter involved in the

competition between the actor and the other and

(b) the actor does not employ wrongful means and

restraint of trade and

(d) his purpose is at least in part to advance his inter-

est in competing with the other.

A-Mark Coin Co. v. General Mills, Inc., 148 Cal. App. 3d

312, 323, 195 Cal. Rptr. 859, 867 (1983) (quoting Restate-

ment (Second) of Torts § 768).

At the hearing on the motion for summary judgment, the

district court commented that the existence of the first three

elements raised “no real dispute.” This assertion was not dis-

puted by Pacific Express at the hearing.

Pacific Express argues for the first time in this appeal that

United employed improper means when it used confidential

information provided to it by Pacific Express during their

unsuccessful negotiations. Generally, we decline to hear

issues which were not raised before the district court unless

exceptional circumstances exist. 7m re: Professional Invest-

ment Properties of America, No. 90-35175, Slip op. 957,961

(9th Cir. Jan. 30, 1992). This circuit has recognized that an

exceptional circumstance may exist where the newly raised

issue is a purely legal one which either does not depend on the

factual record developed below or the pertinent record has

been fully developed. /d.

Whether United used confidential information wrongfully

is a highly fact-specific question. Since United did not have

A-11

Paciric Express v. UNITED AIRLINES 2979

the opportunity to present any evidence to demonstrate that it

did not use confidential information improperly because no

factual dispute on this question was asserted before the dis-

trict court, we decline to consider this issue.

The only issue raised during the summary judgment pro-

ceedings regarding this claim was whether United had a genu-

ine intent to compete when it expanded its service on routes

served by Pacific Express. Although Pacific Express has

offered evidence that United’s motives were not solely

competitive, it did not contradict United’s proof that its pur-

pose was, at least in part, competitive. Judy Bishop, United’s

Regional Manager for Passenger Sales, stated in her declara-

tion that United anticipated that the expansion would

“generate substantial new connecting traffic for other San

Francisco routes.” Moreover, she declared that United

expanded its operations at its San Francisco hub with “the full

expectation that the [expanded] routes would make a positive

contribution to profitability.” Pacific Express has failed to

demonstrate that United’s only purpose in increasing its ser-

vice was to drive Pacific Express out of business.

Pacific Express contends that California decisions have not

found the actions of a competitor to be privileged if the plain-

tiff demonstrates that the predominant motive of the defen-

dant was improper. Pacific Express mistakenly relies upon

Hamro v. Shell Oil Co., 674 F.2d 784 (9th Cir. 1982) to sup-

port its argument. However, Hamro and the California cases

cited therein involved actions for interference with prospec-

tive economic advantage against “person[s] seeking to influ-

ence the conduct of a business in which he or she has a

financial interest.” Jd. at 789. Hamro did not involve the

defense of competitor’s privilege.

[5] In A-Mark, the California Court of Appeal set forth the

correct standard to determine whether a competitor’s actions

are privileged. 148 Cal. App. 3d at 323, 195 Cal. Rptr. at 867.

The court in A-Mark held that a person who asserts the com-

A-12

2980 PactFic Express v. UNtTED AIRLINES

petitor privilege defense must demonstrate that his “purpose

is at least in part to advance his interest in competing with the

other.” Jd. (emphasis added). The court in A-Mark explained

its ruling as follows:

The policy of the common law has always been in

favor of free competition, which proverbially is the

life of trade. So long as the plaintiff's contractual

relations are merely contemplated or potential, it is

considered to be in the interest of the public that any

competitor should be free to divert them to himself

by all fair and reasonable means. .. . In short, it is no

tort to beat a business rival to prospective customers.

Thus, in the absence of prohibition by statute, illegit-

imate means, or some other unlawful element, a

defendant seeking to increase his own business may

Cut rates or prices, allow discounts or rebates, enter

into secret negotiations behind the plaintiff’s back,

refuse to deal with him or threaten to discharge

employees who do, or even refuse to deal with third

parties unless they cease dealing with the plaintiff,

all without incurring liability.

Id. at 323-24, 195 Cal. Rptr. at 867 (quoting Prosser, The Law

of Torts § 130 (4th ed. 1971).

[6] Since Pacific Express has not contradicted United's evi-

dence that its motive in expanding its service, at least in part,

involved a genuine competitive purpose, no genuine issue of

material fact exists regarding the defense of competitor’s priv-

ilege. We are persuaded from an independent review of the

record that no genuine issue of material fact exists regarding

the defense of competitor’s privilege.

AFFIRMED.

IN THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

PACIFIC EXPRESS, INC., No. 91-55208

D.C. No. CV-

Plaintiff-Appellant, 84-5185-ER

Vv ORDER

UNITED AIRLINES, INC.,

Defendant-Appellee.

Before: ALARCON, BEEZER, and RYMER, Circuit

Judges

The panel as constituted in the above case has voted

unanimously to deny the petition for rehearing and to reject

the suggestion for a rehearing en banc.

The full court has been advised of the suggestion for

an en banc hearing, and no judge of the court has requested

a vote on the suggestion for rehearing en banc. Fed. R.

App. P. 35(b).

The petition for rehearing is denied and the sugges-

tion for a rehearing en banc is rejected.

C-1

APPENDIX C

ROBERTS B. OWEN

S. WILLIAM LIVINGSTON, JR.

COVINGTON & BURLING

1201 Pennsylvania Avenue, N.W.

P.O. Box 7566

Washington, D.C. 20044

(202) 662-6000 ¥ -

ROBERT B. FLAIG tines

THELEN, MARRIN, JOHNSON & BRIDGES

333 South Grand Avenue, Suite 3400

Los Angeles, California 90071

(213) 621-9800

Attorneys for Defendant

United Air Lines, Inc.

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

PACIFIC EXPRESS, INC.

and PACIFIC EXPRESS

HOLDING, INC.

Plaintiffs,

CASE NO. CV-

84-5185-ER (Mcx)

DECLARATION OF

STEPHEN E. ENS-

BERG IN SUPPORT

OF FILING A COPY

OF DECLARATION

OF JUDY BISHOP IN

SUPPORT OF REPLY

VS.

UNITED AIR LINES, INC.,

Defendant.

a, A 4 4 a a a a eee

MEMORANDUM IN

SUPPORT OF

MOTION FOR SUM-

MARY JUDGMENT

HEARING DATE:

SEPT. 10, 1990

BEFORE: JUDGE

EDWARD RAFEEDIE

TIME: 2:00 p.m.

DECLARATION OF STEPHEN E, ENSBERG

I, STEPHEN E. ENSBERG, declare:

1. | am an attorney duly licensed to practice before

this Court and all Courts of the State of California and am

a partner with the law firm of Thelen, Marrin, Johnson &

Bridges, local counsel for United Air Lines, Inc., defendant

herein. In my capacity as such I have gained personal

knowledge of the facts set forth below and could and would

competently testify thereto if called as a witness to do so.

2. Attached hereto is a true and correct copy of the

declaration of Judy Bishop in support of reply memorandum

in support of motion for summary judgment.

3. The original reply was sent today via Federal

Express from Elk Grove Township, Illinois to our office

and has not yet been received. Therefore, this copy of Judy

Bishop's declaration is filed herewith and the original will

be filed and served as soon as it is received.

4. I declare under penalty of perjury under the laws

of the State of California and the United States that the

foregoing is true and correct.

C-3

Executed this 3lst day of August 1990 at Los

Angeles, California.

A forth, —

STEP E. ENSBERG ()

C-4

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

PACIFIC EXPRESS, INC. and

PACIFIC EXPRESS HOLDING,

INC., :

Plaintiffs : No. CV 84-

Vv. : 5185-ER (Mcx)

UNITED AIR LINES, INC.,

Defendant : DECLARA-

; TION OF

JUDY BISHOP

1. Iam currently the Regional Manager for Passen-

ger Sales for United Air Lines, Inc. I have been employed

by United for 24 years, during which time I have held

various positions in sales and marketing. During the early

1980's, I was involved in the Market Management Depart-

ment for the West Coast markets. In 1983, I was also

assigned to Special Projects, one of which was the expan-

sion of the United hub at San Francisco.

2. As a part of my role in the expansion of the San

Francisco hub, I was assigned the responsibility to partic-

ipate in developing and presenting the plan for the expan-

sion to the top management of the company. I also partic-

ipated, along with others at United, in the discussions with

Pacific Express regarding the possibility of a joint market-

ing agreement between Pacific Express and United.

3. In September 1983, United implemented an ex-

pansion of its operations from its San Francisco hub. In that

period United initiated or expanded service on a number of

routes. United entered only three routes on which Pacific :

C-5

Express was an incumbent carrier. Those routes were San

Francisco-Monterey, San Franciso-Fresno and San Francis-

co-Redding. On several other routes on which Pacific

Express provided service, United increased existing service.

United had served these routes for a number of years, and

it was Pacific Express that had entered the routes against

United.

4. United expanded its operations at its San Francis-

co hub in September 1983 only after the usual extensive

planning process. I am aware that the planning effort that

culminated in that expansion was initiated well before 1983

and involved all three of United's major hub airports.

5. United's planning process for the San Francisco

expansion continued during its discussions with Pacific

Express concerning a possible feeder arrangement in 1983.

United did not expand its San Francisco hub in reaction to

these discussions. The plans for expansion, including plans

for service to Fresno, Monterey, and Redding, had started

before Pacific Express approached United with a proposal

for a feeder arrangement. To the best of my knowledge, no

one representing United ever promised Pacific Express per-

sonnel that United would suspend consideration of any plans

merely because Pacific Express wanted to propose a feeder

relationship.

6. In its September 1983 schedule change, United

began new service or added service to fifteen cities from

San Francisco. Those fifteen cities were Boise, Eugene,

Eureka, Fresno, Las Vegas, Los Angeles, Monterey, On-

tario, Portland, Redding, Reno, Sacramento, Santa Barbara,

San Diego, and Spokane. It is not true, as Pacific Express

alleges, that United then withdrew from those routes or

turned them over to WestAir. United continued to fly to

C-6

every one of those fifteen cities for at least four years.

United still flies to twelve of those cities today.

7. United began or expanded service on each of its

San Francisco routes with the full expectation that the

routes would make a positive contribution to profitability.

We at United expected, among other things, that United's

short-haul routes would generate substantial new connecting

traffic for other San Francisco routes.

8. One of the principal reasons United flies short-

haul routes (such as those flown by Pacific Express) to and

from its San Francisco hub is to feed connecting passengers

to United's other flights. It is impossible to evaluate

whether United's participation on any given route is profit-

able without taking into account the revenues contributed by

connecting passengers. ;

9. United has never had any ownership interest in or

control over WestAir, which now operates as a United Ex-

press carrier on the West Coast. WestAir did not become

a United Express carrier until July 1, 1986. United did not

even enter into a marketing feeder arrangement with West-

Air until well after Pacific Express had gone out of busi-

ness.

10. United has never served many of routes on

which Pacific Express claims that United has “monopoly”

power, including Chico, Oxnard, Santa Maria, Santa Rosa,

San Luis Obispo, and Lake Tahoe. In the case of two other

routes, United has not served Modesto and Stockton since

1980.

SUBSCRIBED AND GHORW TO

BEFORD NE & TRAY

or 1 $999 |

: y . '

/ 7

44 - hag eee

C4 ye

D-1

APPENDIX D

No. 91-55208

IN THE

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

PACIFIC EXPRESS, INC.

APPELLANT-PETITIONER,

UNITED AIR LINES, INC.

APPELLEE-RESPONDENT.

APPEAL FROM THE UNITED STATES DISTRICT

COURT FOR THE CENTRAL DISTRICT

OF CALIFORNIA

HONORABLE EDWARD RAFEEDIE,

DISTRICT JUDGE

L T IN RT

OF APPELLANT'S PETITION FOR REHEARING

AND I R. RING EN BAN

BLECHER & COLLINS, P.C.

MAXWELL M. BLECHER

611 West Sixth Street

Suite 2000

Los Angeles, California 90017

Telephone: (213) 622-4222

Attorneys for Appellant-Petitioner

PACIFIC EXPRESS, INC.

D-2

In our Petition For Rehearing And Suggestion for

Rehearing En Banc filed on or about April 8, 1992,

appellant argued that, having correctly determined that the

issue presented for appellate review was whether there was

evidence adequate for a jury to find United's conduct to be

predatory or anticompetitive, the panel erred in failing to

apply summary judgment standards and adjudicate that a

justiciable controversy existed on that factual issue. (Peti-

tion for Rehearing at 5.)

The decision of the Supreme Court on Monday,

June 8, 1992, in Eastman Kodak Co, v, Image Technical

Services, Inc., U.S. _, 60 U.S.L.W. 4465 (U.S.

June 8, 1992) (attached hereto as Exhibit 1), bears directly

on this question and, we respectfully submit, requires

reversal.

The court's attention is invited to page 4474, where

the Supreme Court notes that in a Section 2 Sherman Act

case, “[l]iability turns, then, on whether ‘valid business

reasons' can explain Kodak's action," citing to Aspen

Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S.

585, 605, 105 S. Ct. 2847, 2858 (1985), also relied upon

by appellant at page 7 on the Petition for Rehearing.

Noting that Kodak advanced three allegedly valid

business justifications for its action, the Supreme Court

finds that the grant of summary judgment on any of the

three would be inappropriate because plaintiffs " ‘have

presented evidence from which a reasonable trier of fact

could conclude that Kodak's first reason is pretextual.' " 60

U.S.L.W. at 4474 (quoting Image Technical Services, Inc.

v. Eastman Kodak Co., 903 F.2d 612, 618 (9th Cir.

1990)).

—_—_

D-3

The Supreme Court went on to reach an identical

conclusion on Kodak's second proffered justification. It

found that the third business justification was legally

insufficient.

The Supreme Court then made this observation

which bears directly on appellant's contention in this case.

"In the end, of course, Kodak's arguments may prove to be

correct. . . . But we cannot reach these conclusions [as to

legitimate justification] asa matter of law on a record this

sparse." 60 U.S.L.W. at 4474-75.

The Supreme Court, in affirming this court's

reversal of a grant of summary judgment in Kodak, did so

on a record which was expansive in comparison to this. As

we have pointed out, this court's opinion affirming summa-

ry judgment rests solely on a factually unsupported declar-

ation of Ms. Judy Bishop submitted in support of a reply

memorandum in a case where not a single contemporaneous

document was produced by United in the course of discov-

ery to support its alleged business justification defenses.

As discussed in the Petition for Rehearing, pages 9-

13, there is plenty of controverting evidence from which,

as the Supreme Court put it "'a reasonable trier of fact

could conclude that [United's] . . . reason is pretextual.'”

Kodak, 60 U.S.L.W. at 4474 (quoting Kodak, 903 F.2d at

618).

With due respect, the decision reached by the panel

in this case is wrong. It is inconsistent with the law govern-

ing summary judgment as clarified by Kodak. We urge that

the earlier decision be withdrawn and that the grant of

summary judgment be reversed.

Dated: June 18, 1992. Respectfully,

——————aaoeorer

D-4

BLECHER & COLLINS, P.C.

MAXWELL M. BLECHER

Attorneys for Appellant-

Petitioner PACIFIC

EXPRESS, INC.

_ ee

D-5

6-9-92 The United States LAW WEEK 60 LW 4465

No. 90-1029

EASTMAN KODAK COMPANY, PETITIONER v.

IMAGE TECHNICAL SERVICES, INC., ET AL.

ON WRIT OF CERTIORARI TO THE UNITED

STATES COURT OF APPEALS FOR THE NINTH

CIRCUIT

Syllabus

No. 90-1029. Argued December 10, 1991 -- Decided June

8, 1992

After respondent independent service organizations

(ISOs) began servicing copying and micrographic equipment

manufactured by petitioner Eastman Kodak Co., Kodak

adopted policies to limit the availability to ISOs of replace-

ment parts for its equipment and to make it more difficult

for ISOs to compete with it in servicing such equipment.

Respondents then filed this action, alleging, inter alia, that

Kodak had unlawfully tied the sale of service for its

machines to the sale of parts, in violation of § 1 of the

Sherman Act, and had unlawfully monopolized and attempt-

ed to monopolize the sale of service and parts for such

machines, in violation of § 2 of that Act. The District Court

granted summary judgment for Kodak, but the Court of

Appeals reversed. Among other things, the appellate court

found that respondents had presented sufficient evidence to

D-6

raise a genuine issue concerning Kodak's market power in

the service and parts markets, and rejected Kodak's

contention that lack of market power in service and parts

must be assumed when such power is absent in the equip-

ment market.

Held:

1. Kodak has not met the requirements of Fed. Rule

Civ. Proc. 56(c) for an award of summary judgment on the

§ 1 claim.

(a) A tying arrangement i. e. an agreement by a

party to sell one product on the condition that the buyer

also purchases a different (or tied) product, or at least

agrees that he will not purchase that product from any other

supplier violates § 1 only if the seller has appreciable

economic power in the tying product market.

(b) Respondents have presented sufficient evidence

of a tying arrangement to defeat a summary judgment

motion. A reasonable trier of fact could find, first, that

service and parts are two distinct products in light of

evidence indicating that each has been, and continues in

some circumstances to be, sold separately, and, second that

Kodak has tied the sale of the two products in light of

evidence indicating that it would sell parts to third parties

only if they agreed not to buy service from ISOs.

ic power in the tying market, this Court's precedents have

defined market power as the power to force a purchaser to

do something that he would not do in a competitive market,

and have ordinarily inferred the existence of such power

from the seller's possession of a predominate share of the

market.

D-7

(d) Respondents would be entitled under such

precedents to a trial on their claim that Kodak has sufficient

power in the parts market to force unwanted purchases of

the tied service market, based on evidence indicating that

Kodak has control over the availability of parts and that

such control has excluded service competition, boosted

service prices, and forced unwilling consumption of Kodak

service.

(e) Kodak has not satisfied its substantial burden of

showing that, despite such evidence, an inference of market

power is unreasonable. Kodak's theory that its lack of

market power in the primary equipment market precludes -

- aS a matter of law -- the possibility of market power in

the derivative aftermarkets rests on the factual assumption

that if it raised its parts or service prices above competitive

levels, potential customers would simply stop buying its

equipment. Kodak's theory does not accurately describe

actual market behavior, since there is no evidence or

assertion that its equipment sales dropped after it raised its

service prices. Respondents offer a forceful reason for this

discrepancy: the existence of significant information and

switching costs that could create a less responsive connec-

tion between aftermarket prices and equipment sales. It is

plausible to infer from respondents' evidence that Kodak

chose to gain immediate profits by exerting market power

where locked-in customers, high information costs, and

discriminatory pricing limited and perhaps eliminated any

long-term loss.

(f) Nor is this Court persuaded by Kodak's conten-

tion that it is entitled to a legal presumption on the lack of

market power because there is a significant risk of deterring

procompetitive conduct. Because Kodak's service and parts

D-8

policy is not one that appears always or almost always to

enhance competition, the balance tips against summary

judgment.

2. Respondents have presented genuine issues for

trial as to whether Kodak has monopolized or attempted to

monopolize the service and parts markets in violation of §

(a) Respondents' evidence that Kodak controls

nearly 100% of the parts market and 86% to 95% of the

service market, with no readily available substitutes, is

sufficient to survive summary judgment on the first element

of the monopoly offense, the possession of monopoly

power. Kodak's contention that, as a matter of law, a single

brand of a product or service can never be a relevant

market contravenes cases of this Court indicating that one

brand of a product can constitute a separate market in some

instances. The proper market definition in this case can be

determined only after a factual inquiry into the commercial

realities faced by Kodak equipment owners.

(b) As to the second element of a § 2 claim, the

willful use of monopoly power, respondents have presented

evideiice that Kodak took exclusionary action to maintain its

parts monopoly and used its control over parts to strengthen

its monopoly share of the service market. Thus, liability

turns on whether valid business reasons can explain Ko-

dak's actions. However, none of its asserted business

justifications -- a commitment to quality service, a need to

control inventory costs, and a desire to prevent ISOs from

free-riding on its capital investment -- are sufficient to

prove that it is entitled to a judgment as a matter of law.

903 F. 2d 612, affirmed.

D-9

BLACKMUN, J., delivered the opinion of the

Court, in which REHNQUIST, C. J., and WHITE,

STEVENS, KENNEDY, and SOUTER, JJ., joined.

SCALIA, J., filed a dissenting opinion, in which O'CON-

NOR and THOMAS, JJ., joined.

JUSTICE BLACKMUN delivered the opinion of the

Court.

This is yet another case that concerns the standard

for summary judgment in an antitrust controversy. The

principal issue here is whether a defendant's lack of market

power in the primary equipment market precludes -- as a

matter of law -- the possibility of market power in deriva-

tive aftermarkets.

Petitioner Eastman Kodak Company manufactures

and sells photocopiers and micrographic equipment. Kodak

also sells service and replacement parts for its equipment.

Respondents are 18 independent service organizations

(ISOs) that in the early 1980s began servicing Kodak

copying and micrographic equipment. Kodak subsequently

adopted policies to limit the availability of parts to ISOs and

to make it more difficult for ISOs to compete with Kodak

in servicing Kodak equipment.

Respondents instituted this action in the United

States District Court for the Northern District of California

alleging that Kodak's policies were unlawful under both §§

1 and 2 of the Sherman Act, 15 U.S.C. §§ 1 and 2. After

truncated discovery, the District Court granted summary

judgment for Kodak. The Court of Appeals for the Ninth

Circuit reversed. The appellate court found that respondents

had presented sufficient evidence to raise a genuine issue

concerning Kodak's market power in the service and parts

markets. It rejected Kodak's contention that lack of market

D-10

power in service and parts must be assumed when such

power is absent in the equipment market. Because of the

importance of the issue, we granted certiorari. __ U.S.

____ (1991).

Because this case comes to us on petitioner Kodak's

motion for summary judgment, "[t]he evidence of [respon-

dents] is to be believed, and all justifiable inferences are to

be drawn in [their] favor." Anderson v. Liberty Lobby,

Inc., 477 U.S. 242, 255 (1986); Matsushita Electric

Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 587

(1986). Mindful that respondents’ version of any disputed

issue of fact thus is presumed correct, we begin with the

factual basis of respondents’ claims. See Arizona v. Mari-

copa County Medical Society, 457 U.S. 332, 339 (1982).

Kodak manufactures and sells complex business

machines -- as relevant here, high-volume photocopier and

micrographics equipment.' Kodak equipment is unique;

micrographic software programs that operate on Kodak

machines, for example, are not compatible with competit-

ors' machines. See App. 424-425, 487-489, 537. Kodak

' Kodak's micrographic equipment includes four different product

areas. The first is capture products such as microfilmers and electronic

scanners, which compact an image and capture it on microfilm. The

second is equipment such as microfilm viewers and viewer/printers.

This equipment is used to retrieve the images. The third is Computer

Output Microform (COM) recorders, which are data-processing

peripherals that record computer-generated data onto microfilm. The

fourth is Computer Assisted Retrieval (CAR) systems, which utilize

computers to locate and retrieve micrographic images. See App. 156-

158.

D-11

parts are not compatible with other manufacturers’ equip-

ment, and vice versa. See id., at 432, 413-415. Kodak

equipment, although expensive when new, has little resale

value. See id., at 358-359, 424-425, 427-428, 467, 505-

506, 519-521.

Kodak provides service and parts for its machines to

its customers. It produces some of the parts itself; the rest

are made to order for Kodak by independent original-

equipment manufacturers (OEMs). See id., at 429, 465,

490, 496. Kodak does not sell a complete system of original

equipment, lifetime service, and lifetime parts for a single

price. Instead, Kodak provides service after the initial

warranty period either through annual service contracts,

which include all necessary parts, or on a per-call basis.

See id. , at 98-99; Brief for Petitioner 3. It charges, through

negotiations and bidding, different prices for equipment,

service, and parts for different customers. See App., at

420-421, 536. Kodak provides 80% to 95% of the service

for Kodak machines. See id., at 430.

Beginning in the early 1980s, ISOs began repairing

and servicing Kodak equipment. They also sold parts and

reconditioned and sold used Kodak equipment. Their

customers were federal, state, and local government

agencies, banks, insurance companies, industrial enterpris-

es, and providers of specialized copy and microfilming

services. See id. , at 417, 419-421, 492-493, 499, 516, 539.

ISOs provide service at a price substantially lower than

Kodak does. See id., at 414, 451, 453-454, 469, 474-475,

488, 493, 536-537; Lodging 133. Some customers found

that the ISO service was of higher quality. See App. 425-

426, 537-538.

D-12

Some of the ISOs' customers purchase their own

parts and hire ISOs only for service. See Lodging 144-147.

Others choose ISOs to supply both service and parts. See

id., at 133. ISOs keep an inventory of parts, purchased

from Kodak or other sources, primarily the OEMs.” See

App. 99, 415-416, 490.

In 1985 and 1986, Kodak implemented a policy of

selling replacement parts for micrographic and copying

machines only to buyers of Kodak equipment who use

Kodak service or repair their own machines. See Brief for

Petitioner 6; App. 91-92, 98-100, 140-141, 171-172, 190,

442-447, 455-456, 483, 484.

As part of the same policy, Kodak sought to limit

ISO access to other sources of Kodak parts. Kodak and the

OEMs agreed that the OEMs would not sell parts that fit

Kodak equipment to anyone other than Kodak. See id., at

417, 428-429, 447, 468, 474, 496. Kodak also pressured

Kodak equipment owners and independent parts distributors

not to sell Kodak parts to ISOs. See id., at 419-420, 428-

429, 483-484, 517-518, 589-590. In addition, Kodak took

steps to restrict the availability of used machines. See id.,

at 427-428, 465-466, 510-511, 520.

Kodak intended, through these policies, to make it

more difficult for ISOs to sell service for Kodak machines.

See id., at 106-107, 171, 516. It succeeded. ISOs were

unable to obtain parts from reliable sources, see id. , at 429,

? In addition to the OEMs, other sources of Kodak parts include (1)

brokers who would buy parts from Kodak, or strip used Kodak

equipment to obtain the useful parts and resell them, (2) customers who

buy parts from Kodak and make them available to ISOs, and (3) used

equipment to be stripped for parts. See id., at 419, 517; Brief for

Petitioner 38.

D-13

468, 496, and many were forced out of business, while

others lost substantial revenue. See id. at 422, 458-459,

464, 468, 475-477, 482-484, 495-496, 50! . 521. Customers

were forced to switch to Kodak service even though they

preferred ISO service. See id., at 420-422.

In 1987, the ISOs filed the present action in the

District Court, alleging, inter alia, that Kodak had unlaw-

fully tied the sale of service for Kodak machines to the sale

of parts, in violation of §1 of the Sherman Act, and had

unlawfully monopolized and attempted to monopolize the

sale of service for Kodak machines, in violation of §2 of

that Act.?

Kodak filed a motion for summary judgment before

respondents had initiated discovery. The District Court

permitted respondents to file one set of interrogatories and

one set of request for production of documents, and to take

six depositions. Without a hearing, the District Court

granted summary judgment in favor of Kodak. App. to Pet.

for Cert. 29B.

* Section 1 of the Sherman Act states in relevant part: "Every

contract, combination in the form of trust or otherwise, or conspiracy,

in restraint of trade or commerce among the several States, or with

foreign nations, is.declared to be illegal.” 15 U.S.C. § 1.

Section 2 of the Sherman Act states: "Every person who shall

monopolize, or attempt to monopolize, or combine or conspire with any

other person or persons, to monopolize any part of the trade or

commerce among the several States, or with foreign nations, shall be

deemed guilty of a felony, and, on conviction thereof, shall be punished

by fine not exceeding one million dollars if a corporation, or, if any

other person, one hundred thousand dollars, or by imprisonment not

exceeding three years, or by both said punishments, in the discretion

of the court." 15 U.S.C. § 2.

D-14

As to the §1 claim, the court found that respondents

had provided no evidence of a tying arrangement between

Kodak equipment and service or parts. See App. to Pet. for

Cert. 32B-33B. The court, however, did not address

respondents' §1 claim that is at issue here. Respondents

allege a tying arrangement not between Kodak equipment

and service, but between Kodak parts and service. As to

the §2 claim, the District Court concluded that although

Kodak had a “natural monopoly over the market for parts

it sells under its name," a unilateral refusal to sell those

parts to ISOs did not violate §2.

The Court of Appeals for the Ninth Circuit, by a

divided vote, reversed. 903 F.2d 612 (1990). With respect

to the §1 claim, the court first found that whether service

and parts were distinct markets and whether a tying

arrangement existed between them were disputed issues of

fact. Id., at 615-616. Having found that a tying arrange-

ment might exist, the Court of Appeals considered a

question not decided by the District Court: was there “an

issue of material fact as to whether Kodak has sufficient

economic power in the tying product market [parts] to

restrain competition appreciably in the tied product market

[service]." Id., at 616. The court agreed with Kodak that

competition in the equipment market might prevent Kodak

from possessing power in the parts market, but refused to

uphold the District Court's grant of summary judgment “on

this theoretical basis" because "market imperfections can

keep economic theories about how consumers will act from

mirroring reality." Jd., at 617. Noting that the District

Court had not considered the market power issue, and that

the record was not fully developed through discovery, the

court declined to require respondents to conduct market

analysis or to pinpoint specific imperfections in order to

D-15

withstand summary judgment.‘ "It is enough that

[respondents] have presented evidence of actual events from

which a reasonable trier of fact could conclude that. . .

competition in the [equipment] market does not, in reality,

curb Kodak's power in the parts market." Jbid.

The court then considered the three business

justifications Kodak proffered for its restrictive parts policy:

(1) to guard against inadequate service, (2) to lower

inventory costs, and (3) to prevent ISOs from free-riding on

Kodak's investment in the copier and micrographic indus-

try. The court concluded that the trier of fact might find the

product quality and inventory reasons to be pretextual and

that there was a less restrictive alternative for achieving

Kodak's quality-related goals. Jd., at 618-619. The court

also found Kodak's third justification, preventing ISOs from

profiting on Kodak's investments in the equipment markets,

legally insufficient. Jd., at 619.

As to the §2 claim, the Court of Appeals concluded

that sufficient evidence existed to support a finding that

Kodak's implementation of its parts policy was

“anticompetitive” and “exclusionary” and “involved a

specific intent to monopolize." Jd., at 620. It held that the

ISOs had come forward with sufficient evidence, for

* Specifically, the Court of Appeals explained that the District

Court had denied the request for further discovery made by respondents

in their opposition to Kodak's summary judgment motion: “For

example, [respondents] reqvasted to depose two ISO customers who

allegedly would not sign accurate statements concerning Kodak's

market power in the parts market. Not finding it necessary to reach the

market power issue in its decision, the district court, of course, had no

reason to grant this request.” 903 F.2d 612, 617, n. 4 (CA9 1990).

D-16

summary judgment purposes, to disprove Kodak's business

justifications. Ibid.

The dissent in the Court of Appeals, with respect to

the §1 claim, accepted Kodak's argument that evidence of

competition in the equipment market "necessarily precludes

power in the derivative market.” /d., at 622 (emphasis in

original). With respect to the §2 monopolization claim, the

dissent concluded that, entirely apart from market power

considerations, Kodak was entitled to summary judgment on

the basis of its first business justification because it had

“submitted extensive and undisputed evidence of a market-

ing strategy based on high-quality service." Jd., at 623.

A tying arrangement is "an agreement by a party to

sell one product but only on the condition that the buyer

also purchases a different (or tied) product, or at least

agrees that he will not purchase that product from any other

supplier." Northern Pacific R. Co. v. United States, 356

U.S. 1, 5-6 (1958). Such an arrangement violates §1 of the

Sherman Act if the seller has “appreciable economic

power" in the tying product market and if the arrangement

affects a substantial volume of commerce in the tied

market. Fortner Enterprises, Inc. v. United States Steel

Corp., 394 U.S. 495, 503 (1969).

Kodak did not dispute that its arrangement affects a

substantial volume of interstate commerce. It, however, did

challenge whether its activities constituted a "tying arrange-

ment" and whether Kodak exercised “appreciable economic

power" in the tying market. We consider these issues in

turn.

D-17

For respondents to defeat a motion for summary

judgment on their claim of a tying arrangement, a reason-

able trier of fact must be able to find, first, that service and

parts are two distinct products, and, second, that Kodak has

tied the sale of the two products.

For service and parts to be considered two distinct

products, there must be sufficient consumer demand so that

it is efficient for a firm to provide service separately from

parts. Jefferson Parish Hospital Dist. No. 2 v. Hyde, 466

U.S. 2, 21-22 (1984). Evidence in the record indicates that

service and parts have been sold separately in the past and

still are sold separately to self-service equipment owners.°

Indeed, the development of the entire high-technology

service industry is evidence of the efficiency of a separate

market for service.°

Kodak insists that because there is no demand for

parts separate from service, there cannot be separate

markets for service and parts. Brief for Petitioner 15, n. 3.

By that logic, we would be forced to conclude that there

can never be separate markets, for example, for cameras

* The Court of Appeals found: "Kodak's policy of allowing custom-

ers to purchase parts on condition that they agree to service their own

machines suggests that the demand for parts can be separated from the

demand for service." Jd., at 616.

* Amicus briefs filed by various service organizations attest to the

magnitude of the service business. See e.g., Brief for Computer Service

Network International as Amicus Curiae; Brief for National Electronics

Sales and Service Dealers Association as Amicus Curiae; Brief for

California State Electronics Association, et al. as Amici Curiae; Brief

for National Office Machine Dealers and Association of Service

Dealers as Amicus Curiae.

D-18

and film, computers and software, or automobiles and tires.

That is an assumption we are unwilling to make. "We have

often found arrangements involving functionally linked

products at least one of which is useless without the other

to be prohibited tying devices." Jefferson Parish, 466 U.S..,

at 19, n. 30.

Kodak's assertion also appears to be incorrect as a

factual matter. At least some consumers would purchase

service without parts, because some service does not

require parts, and some consumers, those who self-service

for example, would purchase parts without service.’ Enough

doubt is cast on Kodak's claim of a unified market that it

should be resolved by the trier of fact.

Finally, respondents have presented sufficient

evidence of a tie between service and parts. The record

indicates that Kodak would sell parts to third parties only if

they agreed not to buy service from ISOs.*

’ The dissent suggests that parts and service are not separate

products for tying purposes because all service may involve installation

of parts. Post, at 9-10, n. 2. Because the record does not support this

factual assertion, under the approach of both the Court and the

concurrence in Jefferson Parish Hospital Dist. No. 2 v. Hyde, 466 U.S.

1 (1984), Kodak is not entitled to summary judgment on whether parts

and service are district markets.

* In a footnote, Kodak contends that this practice is only a

unilateral refusal to deal, which does not violate the antitrust laws. See

Brief for Petitioner 15, n. 4. Assuming, arguendo, that Kodak's refusal

to sell parts to any company providing service can be characterized as

a unilateral refusal to deal, its alleged sale of parts to third parties on

condition that they buy service from Kodak is not. See 903 F.2d, at

619.

D-19

Having found sufficient evidence of a tying arrange-

ment, we consider the other necessary feature of an illegal

tying arrangement: appreciable economic power in the tying

market. Market power is the power "to force a purchaser

to do something that he would not do in a competitive

market." Jefferson Parish, 466 U.S., at 14.° It has been

defined as "the ability of a single seller to raise price and

restrict output." Fortner Inc., 394 U.S., at 503; United

States v. E.1. du Pont de Nemours & Co., 351 U.S. 377,

391 (1956). The existence of such power ordinarily is

inferred from the seller's possession of a predominant share

of the market. Jefferson Parish, 466 U.S., at 17; United

States v. Grinnell Corp., 384 U.S. 563, 571 (1966); Times-

Picayune Publishing Co. v. United States, 345 U.S. 594,

611-613 (1953).

Respondents contend that Kodak has more than

sufficient power in the parts market to force unwanted

purchases of the tied market, service. Respondents provide

evidence that certain parts are available exclusively through

Kodak. Respondents also assert that Kodak has control over

the availability of parts it does not manufacture. According

tc respondents’ evidence, Kodak has prohibited independent

manufacturers from selling Kodak parts to ISOs, pressured

* “(T]he essential characteristic of an invalid tying arrangement lies

in the seller's exploitation of its control over the tying product to force

the buyer into the purchase of a tied product that the buyer either did

not want at all, or might have preferred to purchase elsewhere on

different terms. When such ‘forcing’ is present, competition on the

merits in the market for the tied item is restrained and the Sherman Act

is violated." Jefferson Parish, 466 U.S., at 12.

D-20

Kodak equipment owners and independent parts distributors

to deny ISOs the purchase of Kodak parts, and taken steps

to restrict the availability of used machines.

Respondents also allege that Kodak's control over

the parts market has excluded service competition, boosted

service prices, and forced unwilling consumption of Kodak

service. Respondents offer evidence that consumers have

switched to Kodak service even though they preferred ISO

service, that Kodak service was of higher price and lower

quality than the preferred ISO service, and that ISOs were

driven out of business by Kodak's policies. Under our prior

precedents, this evidence would be sufficient to entitle

respondents to a trial on their claim of market power.

Kodak counters that even if it concedes monopoly

share of the relevant parts market, it cannot actually

exercise the necessary market power for a Sherman Act

violation. This is so, according to Kodak, because competi-

tion exists in the equipment market.'° Kodak argues that it

'0 In their brief and at oral argument, respondents argued that

Kodak's market share figures for high-volume copy machines,

computer-assisted retrieval systems, and micrographic-capture equip-

ment demonstrate Kodak's market power in the equipment market.

Brief for Respondents 16-18, 32-33; Tr. of Oral Arg. 28-31.

In the Court of Appeals, however, respondents did not contest

Kodak's assertion that its market shares indicated a competitive

[equipment] market. The Court of Appeals believed that respondents

“do not dispute Kodak's assertion that it lacks market power in the

[equipment markets.” 903 F.2d at 616, n. 3. Nor did respondents

question Kodak's asserted lack of market power in their Brief in

Opposition to the Petition for Certiorari, although they acknowledged

that Kodak's entire case rested on its understanding that respondents

(continued...)

D-2Z1

could not have the ability to raise prices of service and

parts above the level that would be charged in a competitive

market because any increase in profits from a higher price

in the aftermarkets at least would be offset by a correspond-

ing loss in profits from lower equipment sales as consumers

began purchasing equipment with more attractive service

costs.

Kodak does not present any actual data on the equip-

ment, service, or parts markets. Instead, it urges the

adoption of a substantive legal rule that "equipment compe-

tition precludes any finding of monopoly power in deriva-

tive aftermarkets." Brief for Petitioner 33. Kodak argues

that such a rule would satisfy its burden as the moving

party of showing "that there is no genuine issue as to any

'0(. ..continued)

were not disputing the existence of competition in the equipment

market. Brief in Opposition 8.

Recognizing that on summary judgment we may examine the

record dc novo, without relying on the lower courts’ understanding,

United States v. Diebold, Inc. , 369 U.S. 654, 655 (1962), respondents

now ask us to decline to reach the merits of the questions presented in

the petition, and instead to affirm the Ninth Circuit's judgment based

on the factual dispute over market power in the equipment market. We

decline respondents’ invitation. We stated in Oklahoma City v. Tuttle,

471 U. S. 808, 816 (1985): "Our decision to grant certiorari represents

a commitment of scarce judicial resources with a view to deciding the

merits of one or more of the questions presented in the petition."

Because respondents failed to bring their objections to the premise

underlying the questions presented to our attention in their Opposition

to the petition for certiorari, we decide those questions based on the

same premise as the Court of Appeals, namely, that competition exists

in the equipment market.

D-22

material fact" on the market power issue.'' See Fed. Rule

Civ. Proc. 56(c).

Legal presumptions that rest on formalistic distinc-

tions rather than actual market realities are generally

disfavored in antitrust law. This Court has preferred to

resolve antitrust claims on a case-by-case basis, focusing on

the “particular facts disclosed by the record." Maple

Flooring Mfrs. Assn. v. United States, 268 U.S. 563, 579

(1925); du Pont, 351 U.S., at 395, n. 22; Continental T. V.,

Inc. v. GTE Sylvania Inc., 433 U.S. 36, 70 (1977) (WHITE,

J., concurring in judgment)."? In determining the existence

'' Kodak argues that such a rule would be per se, with no opportu-

nity for respondents to rebut the conclusion that market power is

lacking in the parts market. See Brief for Petitioner 30-31 ("There is

nothing that respondents could prove that would overcome Kodak's

conceded lack of market power"); id., at 30 (discovery is “pointless

once the “dispositive fact” of lack of market power in the equipment

market is conceded); id., at 22 (Kodak's lack of market power in the

equipment market “dooms any attempt to extract monopoly profits”

even in an allegedly imperfect market); id., at 25 (it is “impossible” for

Kodak to make more total profit by overcharging its existing customers

for service).

As an apparent second-best alternative, Kodak suggests

elsewhere in its brief that the rule would permit a defendant to meet its

summary judgment burden under Fed. Rule Civ. Proc. 56(c); the

burden would then shift to the plaintiffs to “prove. . . that there is a

specific reason to believe that normal economic reasoning does not

apply." Brief for Petitioner 30. This is the United States’ position. See

Brief for United States as Amicus Curiae 10-11.

'2 See generally Business Electronics Corp. v. Sharp Electronics

Corp., 485 U.S. 717, 723-726 (1988); FTC v. Indiana Federation of

Dentists, 476 U.S. 447, 458-459 (1986); National Coliegiate Athletic

Assn. v. Board of Regents of Univ. of Okla., 468 U.S. 85, 100-104

(1984); Continental T.V. Inc. v. GTE Sylvania Inc. , 433 U.S. 36, 59

(1977).

D-23

of market power, and specifically the “responsiveness of the

sales of one product to price changes of the other," du

Pont, 351 U.S., at 400; see also id., at 394-395, and 400-

401, this Court has examined closely the economic reality

of the market at issue."

Kodak contends that there is no need to examine the

facts when the issue is market power in the aftermarkets. A

legal presumption against a finding of market power is

warranted in this situation, according to Kodak, because the

existence of market power in the service and parts markets

absent power in the equipment market "simply makes no

economic sense," and the absence of a legal presumption

would deter procompetitive behavior. Matsushita, 475 U.S.,

at 587; id., at 594-595.

Kodak analogizes this case to Matsushita where a

group of American corporations that manufactured or sold

consumer electronic products alleged that their 21 Japanese

counterparts were engaging in a 20-year conspiracy to price

below cost in the United States in the hope of expanding

their market share sometime in the future. After several

years of detailed discovery, the defendants moved for

summary judgment. 475 U.S., at 577-582. Because the

defendants had every incentive not to engage in the alleged

conduct which required them to sustain losses for decades

'? See, e.g., Jefferson Parish, 466 U.S. at 26-29; United States v.

Connecticut National Bank, 418 U.S. 656, 661-666 (1974); United

States v. Grinnell Corp. , 384 U.S. 563, 571-576 (1966); International

Boxing Club of New York, Inc. v. United States, 358 U.S. 242, 250-

251 (1959); see also Jefferson Parish, 466 U.S., at 37, n. 6

(O'CONNOR, J., concurring) (citing cases and describing the careful

consideration the Court gives to the particular facts when determining

market power).

D-24

with no foreseeable profits, the Court found an “absence of

any rational motive to conspire." /d., at 957. In that

context, the Court determined that the plaintiffs’ theory of

predatory pricing makes no practical sense, was “specula-

tive" and was not "reasonable." Jd. , at 588, 590, 593, 595,

597. Accordingly, the Court held that a reasonable jury

could not return a verdict for the plaintiffs and that summa-

ry judgment would be appropriate against them unless they

came forward with more persuasive evidence to support

their theory. /d., at 587-588, 595-598.

The Court's requirement in Matsushita that the

plaintiffs' claims make economic sense did not introduce a

special burden on plaintiffs facing summary judgment in

antitrust cases. The Court did not hold that if the moving

party enunciates any economic theory supporting its

behavior, regardless of its accuracy in reflecting the actual

market, it is entitled to summary judgment. Matsushita

demands only that the nonmoving party's inferences be

reasonable in order to reach the jury, a requirement that

was not invented, but merely articulated, in that decision."*

'* See, e.g., Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248

(1986) ("summary judgment will not lie . . . if the evidence is such that

a reasonable jury could return a verdict for the nonmoving party");

Monsanto Co. v. Spray-Rite Service Corp., 465 U.S. 752, 768 (1984)

(to survive summary judgment there must be evidence that “reasonably

tends to prove" plaintiff's theory); First National Bank of Arizona v.

Cities Service Co. , 391 U.S. 253, 288-289 (1968) (defendant meets his

burden under Rule 56(c) when he "conclusively show[s] that the facts

upon which [the plaintiff] relied to support his allegation were not

susceptible of the interpretation which he sought to give them");

Eastman Kodak Co. v. Southern Photo Materials Co., 273 U.S. 359,

375 (1927). See also H.L. Hayden Co. of New York, Inc. v. Siemens

Medical Systems, Inc., 879 F.2d 1005, 1012 (CA2 1989) (“only

(continued...)

’

D-25

If the plaintiff's theory is economically senseless, no

reasonable jury could find in its favor, and summary

judgment should be granted.

Kodak, then, bears a substantial burden in showing

that it is entitled to summary judgment. It must show that

despite evidence of increased prices and excluded competi-

tion, an inference of market power is unreasonable. To

determine whether Kodak has met that burden, we must

unravel the factual assumptions underlying its proposed rule

that lack of power in the equipment market necessarily pre-

Cludes power in the aftermarkets.

The extent to which one market prevents exploitation

of another market depends on the extent to which consum-

ers will change their consumption of one product in

response to a price change in another, i.e., the "cross-

elasticity of demand." See du Pont, 351 U.S., at 400; P.

Areeda & L. Kaplow, Antitrust Analysis { 342(c) (4th ed.

1988)."° Kodak's proposed rule rests on a factual assump-

'4(...continued)

reasonable inferences can be drawn from the evidence in favor of the

nonmoving party") (emphasis in original); Arnold Pontiac-GMC, Inc.

v. Budd Baer, Inc., 826 F.2d 1335, 1339 (CA3 1987) (Matsushita

directs us " ‘to consider whether the inference of conspiracy is

reasonable’ "); Instructional Systems Development Corp. v. Aetna

Casualty & Surety Co., 817 F.2d 639, 646 (CA10 1987) (summary

judgment not appropriate under Matsushita when defendants “could

reasonably have been economically motivated").

'S What constrains the defendant's ability to raise prices in the

service market is “the elasticity of demand faced by the defendant -- the

degree to which its sales fall . . . as its price rises." P. Areeda & L.

Kaplow, Antitrust Analysis 342(c) (4th ed. 1988).

(continued...)

D-26

tion about the cross-elasticity of demand in the equipment

and aftermarkets: "If Kodak raised its parts or service

prices above competitive levels, potential customers would

simply stop buying Kodak equipment. Perhaps Kodak would

be able to increase short term profits through such a

Strategy, but at a devastating cost to its long term inter-

ests."'° Brief for Petitioner 12. Kodak argues that the Court

should accept, as a matter of law, this "basic economic

realit{y]," id., at 24, that competition in the equipment

'S(...continued)

Courts usually have considered the relationship between price

in one market and demand in another in defining the relevant market.

Because market power is often inferred from market share, market

definition general determines the result of the case. Pitofsky, New

Definitions of Relevant Market and the Assault on Antitrust, 90 Colum.

L. Rev. 1805, 1806-1813 (1990). Kodak chose to focus on market

power directly rather than arguing that the relationship between

equipment and service and parts is such that the three should be

included in the same market definition. Whether considered in the

conceptual category of “market definition" or “market power,” the

ultimate inquiry is the same -- whether competition in the equipment

market will significantly restrain power in the service and parts

markets.

'© The United States as Amicus Curiae in support of Kodak echoes

this argument: “The ISOs’ claims are implausible because Kodak lacks

market power in the markets for its copier and micrographic equip-

ment. Buyers of such equipment regard an increase in the price of parts

or service as an increase in the price of the equipment, and sellers

recognize that the revenues from sales of parts and service are

attributable to sales of the equipment. In such circumstances, it is not

apparent how an equipment manufacturer such as Kodak could exercise

power in the aftermarkets for parts and service.” Brief for United States

as Amicus Curiae 8.

D-27

market necessarily prevents market power in the

aftermarkets.!’

Even if Kodak could not raise the price of service

and parts one cent without losing equipment sales, that fact

would not disprove market power in the aftermarkets. The

sales of even a monopolist are reduced when it sells goods

at a monopoly price, but the higher price more than

compensates for the loss in sales. Areeda & Kaplow, at f

112 and 340(a). Kodak's claim that charging more for

service and parts would be “a short-run game," Brief for

Petitioner 26, is based on the false dichotomy that there are

only two prices that can be charged -- a competitive price

or a ruinous one. But there could easily be a middle,

optimum price at which the increased revenues from the

higher-priced sales of service and parts would more than

compensate for the lower revenues from lost equipment

Sales. The fact that the equipment market imposes a

restraint on prices in the aftermarkets by no means dis-

proves the existence of power in those markets. See Areeda

& Kaplow, at { 340(b) ("[T]he existence of significant

substitution in the event of further price increases or even

at the current price does not tell us whether the defendant

already exercises significant market power") (emphasis in

original). Thus, contrary to Kodak's assertion, there is no

immutable physical law -- no "basic economic reality" --

insisting that competition in the equipment market cannot

coexist with market power in the aftermarkets.

'’ It is clearly true, as the United States claims, that Kodak “cannot

set service or parts prices without regard to the impact on the market

for equipment." Jd., at 20. The fact that the cross-elasticity of demand

is not Zero proves nothing; the disputed issue is how much of an impact

an increase in parts and service prices has on equipment sales and on

Kodak's profits.

D-28

We next consider the more narrowly drawn ques-

tion: Does Kodak's theory describe actual market behavior

so accurately that respondents’ assertion of Kodak market

power in the aftermarkets, if not impossible, is at least

unreasonable?'® Cf. Matsushita, supra.

To review Kodak's theory, it contends that higher

service prices will lead to a disastrous drop in equipment

sales. Presumably, the theory's corollary is to the effect

that low service prices lead to a dramatic increase in

equipment sales. According to the theory, one would have

expected Kodak to take advantage of lower-priced ISO

service aS an opportunity to expand equipment sales.

Instead, Kodak adopted a restrictive sales policy consciously

designed to eliminate the lower-priced ISO service, an act

that would be expected to devastate either Kodak's equip-

ment sales or Kodak's faith in its theory. Yet, according to

'® Although Kodak repeatedly relies on Continental T. V. as support

for its factual assertion that the equipment market will prevent

exploitation of the service and parts markets, the case is inapposite. In

Continental T.V., the Court found that a manufacturer's policy

restricting the number of retailers that were permitted to sell its product

could have a pro-competitive effect. See 433 U.S., at 55. The Court

aiso noted that any negative effect of exploitation of the intrabrand

market (the competition between retailers of the same product) would

be checked by competition in the interbrand market (competition over

the same generic product) because consumers would substitute a

different brand of the same product. Unlike Continental T. V. , this case

does not concern vertical relationships between parties on different

levels of the same distribution chain. In the relevant market, service,

Kodak and the [SOs are direct competitors: their relationship is

horizontal. The interbrand competition at issue here is competition over

the provision of service. Despite petitioner's best effort, repeating the

mantra “interbrand competition” does not transform this case into one

over an agreement the manufacturer has with its dealers that would fall

under the rubric of Continental T. V.

D-29

the record, it has done neither. Service prices have risen for

Kodak customers, but there is no evidence or assertion that

Kodak equipment sales have dropped.

Kodak and the United States attempt to reconcile

Kodak's theory with the contrary actual results by describ-

ing a "marketing strategy of spreading over time the total

cost to the buyer of Kodak equipment.” Brief for United

States as Amicus Curiae 18; see also Brief for Petitioner 18.

In other words, Kodak could charge subcompetitive prices

for equipment and make up the difference with

supracompetitive prices for service, resulting in an overall

competitive price. This pricing strategy would provide an

explanation for the theory's descriptive failings -- if Kodak

in fact had adopted it. But Kodak never has asserted that it

prices its equipment or parts subcompetitively and recoups

its profits through service. Instead, it claims that it prices

its equipment comparably to its competitors, and intends

that both its equipment sales and service divisions be

profitable. See App. 159-161, 170, 178, 188. Moreover,

this hypothetical- pricing strategy is inconsistent with

Kodak's policy toward its self-service customers. If Kodak

were underpricing its equipment, hoping to lock in custom-

ers and recover its losses in the service market, it could not

afford to sell customers parts without service. In sum,

Kodak's theory does not explain the actual market behavior

revealed in the record.

Respondents offer a forceful reason why Kodak's

theory, although perhaps intuitively appealing, may not

accurately explain the behavior of the primary and deriva-

tive markets for complex durable goods: the existence of

significant information and switching costs. These costs

D-30

could create a less responsive connection between service

and parts prices and equipment sales.

For the service-market price to affect equipment

demand, consumers must inform themselves of the total

cost of the "package" -- equipment, service and parts -- at

the time of purchase; that is, consumers must engage in

accurate lifecycle pricing.'? Lifecycle pricing of complex,

durable equipment is difficult and costly. In order to arrive

at an accurate price, a consumer must acquire a substantial

amount of raw data and undertake sophisticated analysis.

The necessary information would include data on price,

quality, and availability of products needed to operate,

upgrade, or enhance the initial equipment, as well as

service and repair costs, including estimates of breakdown

frequency, nature of repairs, price of service and parts,

length of "down-time" and losses incurred from down-

time.”° ,

Much of this information is difficult -- some of it

impossible -- to acquire at the time of purchase. During the

life of a product, companies may change the service and

parts prices, and develop products with more advanced

features, a decreased need for repair, or new warranties. In

'? See Craswell, Tying Requirements in Competitive Markets: The

Consumer Protection Issues, 62 B. U. L. Rev. 661, 676 (1982);

Beales, Craswell, & Salop, The Efficient Regulation of Consumer

Information, 24 J. Law & Econ. 491, 509-511 (1981); Jefferson

Parish, 466 U.S., at 15.

® In addition, of course, in order to price accurately the equipment,

a consumer would need initial purchase information such as pricts,

features, quality, and available warranties, for different machinery with

different capabilities, and residual value information such as the

longevity of product use and its potential resale or trade-in value.

| ceili

D-31

addition, the information is likely to be customer-specific;

lifecycle costs will vary from customer to customer with the -

type of equipment, degrees of equipment use, and costs of

down-time.

Kodak acknowledges the cost of information, but

Suggests, again without evidentiary support, that customer

information needs will be satisfied by competitors in the

equipment markets. Brief for Petitioner 26, n. 11. It is a

question of fact, however, whether competitors would

provide the necessary information. A competitor in the

equipment market may not have reliable information about

the lifecycle costs of complex equipment it does not service

or the needs of customers it does not serve. Even if

competitors had the relevant information, it is not clear that

their interests would be advanced by providing such

information to consumers. See 2 P. Areeda & D. Turner,

Antitrust Law, ¢ 404b1 (1978).?!

*" To inform consumers about Kodak, the competitor must be

willing to forgo the opportunity to reap supracompetitive prices in its

own service and parts markets. The competitor may anticipate that

charging lower service and parts prices and informing consumers about

Kodak in the hopes of gaining future equipment sales will cause Kodak

to lower the price on its service and parts, cancelling any gains in

equipment sales to the competitor and leaving both worse off. Thus, in

an equipment market with relatively few sellers, competitors may find

it more profitable to adopt Kodak's service and parts policy than to

inform the consumers. See 2 P.Areeda & D. Turner, Antitrust Law ¢

404b1 (1978); App. 177 (Kodak, Xerox, and IBM together have nearly

100% of relevant market).

Even in a market with many sellers, any one competitor may

not have sufficient incentive to inform consumers because the increased

patronage attributable to the corrected consumer beliefs will be shared

among other competitors. Beales, Craswell & Salop, 24 J. Law &

Econ., at 503-504, 506.

i |

D-32

Moreover, even if consumers were capable of

acquiring and processing the complex body of information,

they may choose not to do so. Acquiring the information is

expensive. If the costs of service are small relative to the

equipment price, or if consumers are more concerned about

equipment capabilities than service costs, they may not find

it cost-efficient to compile the information. Similarly, some

consumers, such as the Federal Government, have pur-

chasing systems that make it difficult to consider the

complete cost of the "package" at the time of purchase.

State and local governments often treat service as an

operating expense and equipment as a capital expense,

delegating each to a different department. These govern-

mental entities do not lifecycle prices, but rather choose the

lowest price in each market. See Brief for National Associ-

ation of State Purchasing Officials et al., as Amici Curiae;

Brief for State of Ohio et al., as Amici Curiae; App. 429-

430.

As Kodak notes, there likely will be some large-

volume, sophisticated purchasers who will undertake the

comparative studies and insist, in return for their patronage,

that Kodak charge them competitive lifecycle prices. Kodak

contends that these knowledgeable customers will hold

down the package price for all other customers. Brief for

Petitioner 23, n. 9. There are reasons, however, to doubt

that sophisticated purchasers will ensure that competitive

prices are charged to unsophisticated purchasers, too. As an

; initial matter, if the number of sophisticated customers is

relatively small, the amount of profits to be gained by

supracompetitive pricing in the service market could make

it profitable to let the knowledgeable consumers tak2 their

business elsewhere. More importantly, if a company is able

to price-discriminate between sophisticated and unsophisti-

D-33

cated consumers, the sophisticated will be unable to prevent

the exploitation of the uninformed. A seller could easily

price-discriminate by varying the equipment/parts/service

package, developing different warranties, or offering price

discounts on different components.

Given the potentially high cost of information and

the possibility a seller may be able to price-discriminate

between knowledgeable and unsophisticated consumers, it

makes little sense to assume, in the absence of any eviden-

tiary support, that equipment-purchasing decisions are based

on an accurate assessment of the total cost of equipment,

service, and parts over the lifetime of the machine.”

Indeed, respondents have presented evidence that

Kodak practices price-discrimination by selling parts to

customers who service their own equipment, but refusing to

sell parts to customers who hire third-party service compa-

nies. Companies that have their own service staff are likely

to be high-volume users, the same companies for whom it

is most likely to be economically worthwhile to acquire the

complex information needed for comparative lifecycle

pricing.

A second factor undermining Kodak's claim that

supracompetitive prices in the service market lead to

ruinous losses in equipment sales is the cost to current

owners of switching to a different product. See Areeda &

2 See Salop & Stiglitz, Bargains and Ripoffs: A Model of

Monopolistically Competitive Price Dispersion, 44 Rev. Econ. Studies

493 (1977); Salop, Information and Market Structure -- Information and

Monopolistic Competition, 66 Am. Econ. Rev. 240 (1976); Stigler,

The Economics of Information, 69 J. Pol. Econ. 213 (1961).

D-34

Turner, at { 519a.” If the cost of switching is high,

consumers who already have purchased the equipment, and

are thus "locked-in," will tolerate some level of service-

price increases before changing equipment brands. Under

this scenario, a_ seller profitably could maintain

supracompetitive prices in the aftermarket if the switching

costs were high relative to the increase in service prices,

and the number of locked-in customers were high relative

to the number of new purchasers.

Moreover, if the seller can price-discriminate

between its locked-in customers and potential new custom-

ers, this strategy is even more likely to prove profitable.

The seller could simply charge new customers below-

marginal cost on the equipment and recoup the charges in

service, or offer packages with life-time warranties or long-

term service agreements that are not available to locked-in

customers.

Respondents have offered evidence that the heavy

initial outlay for Kodak equipment, combined with the

required support material that works only with Kodak

equipment, makes switching costs very high for existing

Kodak customers. And Kodak's own evidence confirms that

. it varies the package price of equipment/parts/service for

different customers.

In sum, there is a question of fact whether informa-

tion costs and switching costs foil the simple assumption

3 A firm can exact leverage whenever other equipment is not a

ready substitute. F.M. Scherer & D. Ross, Industrial Market Structure

and Economic Performance 16-17 (3d ed. 1990).

i aaneemseaneiiaiaaiaaaiaaai nia aera

’

D-35

that the equipment and service markets act as pure comple-

ments to one another.”

We conclude, then, that Kodak has failed to demon-

Strate that respondents’ inference of market power in the

service and parts markets is unreasonable, and that,

consequently, Kodak is entitled to summary judgment. It is

clearly reasonable to infer that Kodak has market power to

raise prices and drive out competition in the aftermarkets,

since respondents offer direct evidence that Kodak did so.5

It is also plausible, as discussed above, to infer that Kodak

chose to gain immediate profits by exerting that market

power where locked-in customers, high information costs,

and discriminatory pricing limited and perhaps eliminated

any long-term loss. Viewing the evidence in the light most

favorable to respondents, their allegations of market power

“mak[e]. . . economic sense." Cf. Matsushita, 475 U.S., at

587.

* The dissent disagrees based on its hypothetical case of a tie

between equipment and service. "The only thing lacking" to bring this |

case within the hypothetical case, states the dissent, “is concrete

evidence that the restrictive parts policy was... . generally known."

Post, at 7. But the dissent's “only thing lacking” is the crucial thing

lacking -- evidence. Whether a tie between parts and service should be

treated identically to a tie between equipment and service, as the dissent

and Kodak argue, depends on whether the equipment market prevents

the exertion of market power in the parts market. Far from being

“anomalous,” post, at 8, requiring Kodak to provide evidence on this

factual question is completely consistent with our prior precedent. See,

e.g., mn. 13, supra.

® Cf. Instructional Systems, 817 F.2d, at 646 (finding the conspira-

cy reasonable under Matsushita because its goals were in fact

achieved).

D-36

Nor are we persuaded by Kodak's contention that it

is entitled to a legal presumption on the lack of market

power because, as in Matsushita, there is a significant risk

of deterring procompetitive conduct. Plaintiffs in Matsushita

attempted to prove the antitrust conspiracy “through

evidence of rebates and other price-cutting activities." /d. ,

at 594. Because cutting prices to increase business is “the

very essence of competition," the Court was concerned that

mistaken inferences would be “especially costly," and

would “chill the very conduct the antitrust laws are de-

signed to protect." /bid. See also Monsanto Co. v. Spray-

Rite Service Corp., 465 U.S. 752, 763 (1984) (permitting

inference of concerted action would “deter or penalize

perfectly legitimate conduct"). But the facts in this case are

just the opposite. The alleged conduct -- higher service

prices and market foreclosure -- is facially anticompetitive

and exactly the harm that antitrust laws aim to prevent. In

this situation, Matsushita does not create any presumption

in favor of summary judgment for the defendant.

Kodak contends that, despite the appearance of anti-

competitiveness, its behavior actually favors competition

because its ability to pursue innovative marketing plans will

allow it to compete more effectively in the equipment

market. Brief for Petitioner 40-41. A pricing strategy based

on lower equipment prices and higher aftermarket prices

could enhance equipment sales by making it easier for the

buyer to finance the initial purchase.” It is undisputed that

competition is enhanced when a firm is able to offer various

marketing options, including bundling of support and

* It bears repeating that in this case Kodak has never claimed that

it is in fact pursuing such a pricing strategy.

mcmama aa eaten le

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D-37

maintenance service with the sale of equipment. Nor do

such actions run afoul of the antitrust laws.”’ But the

procompetitive effect of the specific conduct challenged

here, eliminating all consumer parts and service options, is

far less clear.”

We need not decide whether Kodak's behavior has

any procompetitive effects and, if so, whether they out-

weigh the anticompetitive effects. We note only that

Kodak's service and parts policy is simply not one that

appears always or almost always .to enhance competition,

and therefore to warrant a legal presumption without any

evidence of its actual economic impact. In this case, when

we weigh the risk of deterring procompetitive behavior by

proceeding to trial against the risk that illegal behavior go

unpunished, the balance tips against summary judgmeni. Cf.

Matsushita, 475 U.S., at 594-595.

For the foregoing reasons, we hold that Kodak has

not met the requirements of Fed. Rule Civ. Proc. 56(c).

7 See Jefferson Parish, 466 U.S., at 12 ("Buyers often find

package sales attractive: a seller's decision to offer such packages can

merely be an attempt to compete effectively -- conduct that is entirely

consistent with the Sherman Act"). See also Yates & DiResta, Software

Support and Hardware Maintenance Practices: Tying Considerations,

8 The Computer Lawyer 17 (1991) (describing various service and

parts policies that enhance quality and sales but do not violate the

antitrust laws).

* Two cf the largest consumers of service and parts contend that

they are worse off when the equipment manufacturer also controls

service and parts. See Brief for State Farm Mutual Automobile

Insurance Company et al. as Amici Curiae; Brief for State of Ohio et

al. as Amici Curiae.

D-38

We therefore affirm the denial of summary judgment on

respondents’ § 1 claim.”

* The dissent urges a radical departure in this Court's antitrust law.

It argues that because Kodak has only an “inherent” monopoly in parts

for its equipment, post, at 4, the antitrust laws do not apply to its

efforts to expand that power into other markets. The dissent's proposal

to grant per se immunity to manufacturers competing in the service

market would exempt a vast and growing sector of the economy from

antitrust laws. Leaving aside the question whether the Court has the

authority to make such a policy decision, there is no support for it in

our jurisprudence or the evidence in this case.

Even assuming, despite the absence of any proof from the

dissent, that all manufacturers possess some inherent market power in

the parts market, it is not clear why that should immunize them from

the antitrust laws in another market. The Court has held many times

that power gained through some natural and legal advantage such as a

patent, copyright, or business acumen can give rise to liability if “a

selier exploits his dominant position in one market to expand his empire

“~~~~~“into the next." Times-Picayune Publishing Co. v. United States, 345

U.S. 594, 611 (1953); see e.g., Northern Pacific R. Co. v. United

States, 356 U.S. 1 (1958); United States v. Paramount Pictures, Inc. ,

334 U.S. 131 (1948); Leitch Mfg. Co. v. Barber Co., 302 U.S. 458,

463 (1938). Moreover, on the occasions when the Court has considered

tying in derivative aftermarkets by manufacturers, it has not adopted

any exception to the usual antitrust analysis, treating derivative

aftermarkets as it has every other separate market. See Jnternational

Salt Co. v. United States, 332 U.S. 392 (1947); International Business

Machines Corp. v. United States, 298 U.S. 131 (1936); United Shoe

Machinery Co. v. United States, 258 U.S. 451 (1922). Our past

decisions are reason enough to reject the dissent's proposal. See

Patterson v. McLean Credit Union, 491 U.S. 164, 172-173 (1989)

("Considerations of stare decisis have special force in the area of

statutory interpretation, for here, unlike in the context of constitutional

interpretation, the legislative power is implicated,and Congress remains

free to alter what we have done”).

Nor does the record in this case support the dissent's proposed

exemption for aftermarke's. The dissent urges its exemption because the

tie here "does not permit the mdinufacturer to project power over a class

(continued...)

“90

WI Shatitndit yy erctry KO or

Ill

Respondents also claim that they have presented

genuine issues for trial as to whether Kodak has monopo-

lized or attempted to monopolize the service and parts

markets in violation of § 2 of the Sherman Act. "The

offense of monopoly under § 2 of the Sherman Act has two

elements: (1) the possession of monopoly power in the

relevant market and (2) the willful acquisition or mainte-

nance of that power as distinguished from growth or

development as a consequence of a superior product,

business acumen, or historic accident." United States v.

Grinnell Corp., 384 U.S. at 570-571.

The existence of the first element, possession of

monopoly power, is easily resolved. As has been noted,

(...continued)

of consumers distinct from that which it is already able to exploit (and

fully) without the inconvenience of the tie." Post, at 13-14. Beyond the

dissent's obvious difficulty in explaining why Kodak would adopt this

expensive tying policy if it could achieve the same profits more

conveniently through some other means, respondents offer an alterative

theory, supported by the record, that suggests Kodak is able to exploit

some customers who in the absence of the tie would be protected from

increases in parts prices by knowledgeable customers. See supra, at 22-

23.

At bottom, whatever the ultimate merits of the dissent's

theory, at this point it is mere conjecture. Neither Kodak nor the

dissent have provided any evidence refuting respondents' theory of

forced unwanted purchases at higher prices and price discrimination.

While it may be, as the dissent predicts, that the equipment market will

prevent any harms to consumers in the aftermarkets, the dissent never

makes plain why the Court should accept that theory on faith rather

than requiring the usual evidence needed to win a summary judgment

motion.

D-40

respondents have presented a triable claim that service and

parts are separate markets, and that Kodak has the “power

to control prices or exclude competition” in service and

parts. du Pont, 351 U.S., at 391. Monopoly power under

§ 2 requires, of course, something greater than market

power under § 1. See Fortner, 394 U.S., at 502.

Respondents’ evidence that Kodak controls nearly 100% of

the parts market and 80% to 95% of the service market,

with no readily available substitutes, is, however, sufficient

to survive summary judgment under the more stringent

monopoly standard of § 2. See National Collegiate Athletic

Assn. v. Board of Regents of Univ. of Okla. , 468 U.S. 85,

112 (1984). Cf. United States v. Grinnell Corp., 384 U.S..,

at 571 (87% of the market is a monopoly); American

Tobacco Co. v. United States, 328 U.S. 781, 797 (1946)

(over 2/3 of the market is a monopoly).

Kodak also contends that, as a matter of law, a

single brand of a product or service can never be a relevant

market under the Sherman Act. We disagree. The relevant

market for antitrust purposes is determined by the choices

available to Kodak equipment owners. See Jefferson Parish,

466 U.S., at 19. Because service and parts for Kodak

equipment are not’ interchangeable with other

manufacturers’ service and parts, the relevant market from

the Kodak-equipment owner's perspective is composed of

only those companies that service Kodak machines. See du

Pont, 351 U.S., at 404 (the “market is composed of

products that have reasonable interchangeability").*° This

* Kodak erroneously contends that this Court in du Pont rejected

the notion that a relevant market could be limited to one brand. Brief

for Petitioner 33. The Court simply held in du Pont that one brand does

(continued...)

D-41

Court's prior cases support the proposition that in some

instances one brand of a product can constitute a separate

market. See National Collegiate Athletic Assn., 468 U.S..,

at 101-102, 111-112 (1984); International Boxing Club of

New York, Inc. v. United States, 358 U.S. 242, 249-252

(1959); International Business Machines Corp. v. United

States, 298 U.S. 131 (1936).*' The proper market definition

in this case can be determined only after a factual inquiry

into the "commercial realities" faced by consumers. United

States v. Grinnell Corp., 384 U.S., at 572.

The second element of a § 2 claim is the use of

monopoly power "to foreclose competition, to gain a

competitive advantage, or to destroy a competitor." United

States v. Griffith, 334 U.S. 100, 107 (1948). If Kodak

adopted its parts and service policies as part of a scheme of

willful acquisition or maintenance of monopoly power, it

will have violated § 2. Grinnell Corp., 384 U.S., at 570-

*(...continued)

not necessarily constitute a relevant market is substitutes are available.

351 U.S., at 393. See also Boxing Club, 358 U.S., at 249-250. Here

respondents contend there are no substitutes.

* Other courts have limited the market to parts for a particular

brand of equipment. See e.g., International Logistics Group, Lid. v.

Chrysler Corp., 884 F.2d 904, 905, 908 (CA6 1989) (parts for

i Chrysler cars is the relevant market), cert. denied, 494 U.S. 1066

(1990); Dimidowich v. Bell & Howell, 803 F.2d 1473, 1480-1481, n.

3 (CA9 1986), modified, 810 F.2d 1517 (1987) (service for Bell &

Howell equipment is the relevant market); Jn re General Motors Corp.,

99 F.T.C. 464, 554, 584 (1982) (crash parts for General Motors cars

; is the relevant market; Heatransfer Corp. v. Volkswagenwerk A.G. , 553

| F.2d 964 (CAS 1977), cert. denied, 434 U.S. 1087 (1978) (air

conditioners for Volkswagens is the relevant market).

D-42

571; United States v. Aluminum Co. of America, 148 F.2d

416, 432 (CA2 1945); Aspen Skiing Co. v. Aspen High-

lands Skiing Corp., 472 U.S. 585, 600-605 (1985).

As recounted at length above, respondents have

presented evidence that Kodak took exclusionary action to

maintain its parts monopoly and used its control over parts

to strengthen its monopoly share of the Kodak service

market. Liability turns, then, on whether "valid business

reasons" can explain Kodak's actions. Aspen Skiing Co.,

472 U.S., at 605; United States v. Aluminum Co. of

America, 148 F.2d, at 432. Kodak contends that it has three

valid business justifications for its actions: "(1) to promote

interbrand equipment competition by allowing Kodak to

stress the quality of its service; (2) to improve asset

management by reducing Kodak's inventory costs; and (3)

to prevent ISOs from free riding on Kodak's capital

investment in equipment, parts and service." Brief for

Petitioner 6. Factual questions exist, however, about the

validity and sufficiency of each claimed justification,

making summary judgment inappropriate.

Kodak first asserts that by preventing customers

from using ISOs, "it [can] best maintain high quality

service for its sophisticated equipment” and avoid being

"blamed for an equipment malfunction, even if the problem

is the result of improper diagnosis, maintenance or repair

by an ISO." /d., at 6-7. Respondents have offered evidence

that ISOs provide quality service and are preferred by some

*2 It is true that as a general matter a firm can refuse to deal with

its competitors. But such a right is not absolute; it exists only if there

are legitimate competitive reasons for the refusal. See Aspen Skiing Co.

v. Aspen Highlands Skiing Corp., 472 U.S. 585, 602-605 (1985).

D-43

Kodak equipment owners. This is sufficient to raise a

genuine issue of fact. See /nternational Business Machines

Corp. v. United States, 298 U.S., at 139-140 (rejecting

IBM's claim that it had to control the cards used in its

machines to avoid "injury to the reputation of the machines

and the good will of" IBM in the absence of proof that

other companies could not make quality cards); Internation-

al Salt Co. v. United States, 332 U.S. 392, 397-398 (1947)

(rejecting International Salt's claim that it had to control the

supply of salt to protect its leased machines in the absence

of proof that competitors could not supply salt of equal

quality).

Moreover, there are other reasons to question

Kodak's proffered motive of commitment to quality service;

its quality justification appears inconsistent with its thesis

that consumers are knowledgeable enough to lifecycle price,

and its self-service policy. Kodak claims the exclusive-

service contract is warranted because customers would

otherwise blame Kodak equipment for breakdowns resulting

from inferior ISO service. Thus, Kodak simultaneously

claims that its customers are sophisticated enough to make

complex and subtle lifecycle-pricing decisions, and yet too

obtuse to distinguish which breakdowns are due to bad |

equipment and which are due to bad service. Kodak has

failed to offer any reason why informational sophistication

3 should be present in one circumstance and absent in the

other. In addition, because self-service customers are just

as likely as others to blame Kodak equipment for break-

downs resulting from (their own) inferior service, Kodak's

willingness to allow self-service casts doubt on its quality

claim. In sum, we agree with the Court of Appeals that

respondents “have presented evidence from which a

D-44

reasonable trier of fact could conclude that Kodak's first

reason is pretextual." 903 F.2d, at 618.

There is also a triable issue of fact on Kodak's

second justification -- controlling inventory costs. As

respondents argue, Kodak's actions appear inconsistent with

any need to control -inventory costs. Presumably, the

inventory of parts needed to repair Kodak machines turns

only on breakdown rates, and those rates should be the

same whether Kodak or ISOs perform the repair. More

importantly, the justification fails to explain respondents’

evidence that Kodak forced OEMs, equipment owners, and

parts brokers not to sell parts to ISOs, actions that would

have no effect on Kodak's inventory costs.

Nor does Kodak's final justification entitle it to

summary judgment on respondents' § 2 claim. Kodak

claims that its policies prevent ISOs from “exploit[ing] the

investment Kodak has made in product development,

manufacturing and equipment sales in order to take away

Kodak's service revenues." Brief for Petitioner 7-8. Kodak

does not dispute that respondents invest substantially in the

service market, with training of repair workers and invest-

ment in parts inventory. Instead, according to Kodak, the

ISOs are free-riding because they have failed to enter the

equipment and parts markets. This understanding of free-

riding has no support in our case law.* To the contrary, as

* Kodak claims that both Continental T.V. and Monsanto support

its free-rider argument. Neither is applicable. In both Continental T. V.,

433 U.S., at 55, and Monsanto, 465 U.S., at 762-763, the Court

accepted free-riding as a justification because without restrictions a

manufacturer would not be able to induce competent and aggressive

retailers to make the kind of investment of capital and labor necessary

(continued...)

—

D-45

the Court of Appeals noted, one of the evils proscribed by

the antitrust laws is the creation of entry barriers to poten-

tial competitors by requiring them to enter two markets

simultaneously. Jefferson Parish, 466 U.S., at 14; Fortner,

394 U.S., at 509.

None of Kodak's asserted business justifications,

then, are sufficient to prove that Kodak is "entitled to a

judgment as a matter of law" on respondents’ § 2 claim.

Fed. Rule. Civ. Proc. 56(c).

In the end, of course, Kodak's arguments may prove

to be correct. It may be that its parts, service, and equip-

ment are components of one unified market, or that the

equipment market does discipline the aftermarkets so that

all three are priced competitively overall, or that any anti-

competitive effects of Kodak's behavior are outweighed by

its competitive effects. But we cannot reach these conclu-

sions as a matter of law on a record this sparse. According-

ly, the judgment of the Court of Appeals denying summary

judgment is affirmed.

It is so ordered.

3(.. continued)

to distribute the product. In Continental T. V. the relevant market level

was retail sale of televisions and in Monsanto retail sales of herbicides.

Some retailers were investing in those markets; others were not,

relying, instead, on the investment of the other retailers. To be

applicable to this case, the ISOs would have to be relying on Kodak's

investment in the service market; that, however, is not Kodak's

argument.

D-46

JUSTICE SCALIA, with whom JUSTICE

O'CONNOR and JUSTICE THOMAS join, dissenting.

This is not, as the Court describes it, just “another

case that concerns the standard for summary judgment in an

antitrust controversy." Anse, at 1. Rather, the case presents

a very narrow -- but extremely important -- question of

substantive antitrust law: Whether, for purposes of applying

our per se rule condemning "ties," and for purposes of

applying our exacting rules governing the behavior of

would-be monopolists,a manufacturer's conceded lack of

power in the interbrand market for its equipment is some-

how consistent with its possession of “market,” or even

"monopoly," power in wholly derivative aftermarkets for

that equipment. In my view, the Court supplies an errone-

ous answer to this question,and I dissent.

Per se rules of antitrust illegality are reserved for

those situations where logic and experience show that the

risk of injury to competition from the defendant's behavior

is SO pronounced that it is needless and wasteful to conduct

the usual judicial inquiry into the balance between the

behavior's procompetitive benefits and its anticompetitive

costs. See, e. g., Arizona v. Maricopa County Medical

Society, 457 U. S. 332, 350-351 (1982). "The character of

the restraint produced by [behavior to which a per Se rule

applies] is considered a sufficient basis for presuming

unreasonableness without the necessity of any analysis of

the market context in which the [behavior] may be found."

Jefferson Parish Hospital Dist. No. 2 v. Hyde, 466 U. S.

2, 9 (1984). The per se rule against tying is just such a

rule: Where the conditions precedent to application of the

rule are met, i.e., where the tying arrangement is backed

—

ARH I ka

D-47

up by the defendant's market power in the "tying" product,

the arrangement is adjudged in violation of § 1 of the

Sherman Act, 15 U. S. C. §1, without any inquiry into the

practice's actual effect on competition and consumer

welfare. But see United States v. Jerrold Electronics Corp.,

187 F. Supp. 545, 560 (ED Pa. 1960), aff'd per curiam,

365 U.S. 567 (1961) (accepting affirmative defense to per

Se tying allegation).

Despite intense criticism of the tying doctrine in

academic circles, see, e.g., R. Bork, The Antitrust Paradox

365-381 (1978), the stated rationale for our per se rule has

varied little over the years. When the defendant has genuine

"market power" in the tying product -- the power to raise

price by reducing output -- the tie potentially enables him

to extend that power into a second distinct market, enhanc-

ing barriers to entry in each. In addition:

"Tying arrangements may be used to

evade price control in the tying product

through clandestine transfer of the profit to

the tied product; they may be used as a

counting device to effect price discrimina-

tion; and they may be used to force a full

line of products on the customer so as to

extract more easily from him a monopoly

return on one unique product in the line."

Fortner Enterprises, Inc. v. United States

Steel Corp., 394 U.S. 495, 513-514 (1969)

(Fortner I) (WHITE, J., dissenting) (foot-

notes omitted).

For these reasons, as we explained in Jefferson Parish, “the

law draws a distinction between the exploitation of market

power by merely enhancing the price of the tying product,

D-48

on the one hand, and by attempting to impose restraints on

competition in the market for a tied product, on the other."

466 U. S., at 14.

Our Section 2 monopolization doctrines are similarly

directed to discrete situations in which a defendant's

possession of substantial market power, combined with his

exclusionary or anticompetitive behavior, threatens to defeat

or forestall the corrective forces of competition and thereby

sustain or extend the defendant's agglomeration of power.

See United States v. Grinnell Corp., 384 U. S. 563, 570-

571 (1966). Where a defendant maintains substantial market

power, his activities are examined through a special lens:

Behavior that might otherwise not be of concern to the

antitrust laws -- or that might even be viewed as

procompetitive -- can take on exclusionary connotations

when practiced by a monopolist. 3 P. Areeda & D. Turner,

Antitrust Law q 813, pp. 300-302 (1978) (hereinafter 3

Areeda & Turner).

The concerns, however, that have led the courts to

heightened scrutiny both of the “exclusionary conduct"

practiced by a monopolist and of tying arrangements subject

to per se prohibition, are completely without force when the

participants lack market power. As to the former, "[t]he

[very] definition of exclusionary conduct,” as practiced by

a monopolist, ". . . [is] predicated on the existence of

substantial market power." Jd., at { 813, p. 301 (1978);

see, e. g., Walker Process Equipment, Inc. vy. Food

Machinery & Chemical Corp., 382 U. S. 172, 177-178

(1965) (fraudulent patent procurement); Standard Oil Co.

of N.J. v. United States, 221 U.S. 1, 75 (1911) (acquisition

of competitors); 3 Areeda and Turner { 724, at 195-197

(vertical integration). And with respect to tying, we have

D-49

recognized that bundling arrangements not coerced by the

heavy hand of market power can serve the procompetitive

functions of facilitating new entry into certain markets, see,

e.g., Brown Shoe Co. v. United States, 370 U.S. 294, 330

(1962), permitting "clandestine price cutting in products

which otherwise would have no price competition at all

because of fear of retaliation from the few other producers

dealing in the market," Fortner I, supra, at 514, n. 9

(WHITE, J., dissenting), assuring quality control, see, e.g.,

Standard Oil Co. of Cal. v. United States, 337 U.S. 293,

306 (1949), and, where "the tied and tying products are

functionally related, . . . reduc[ing] costs through econo-

mies of joint production and distribution." Fortner I, supra,

at 514, n. 9 (WHITE, J., dissenting). "Accordingly, we

have [only] condemned tying arrangements [under the per

Se rule] when the seller has 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, supra, at 13-14.

The Court today finds in the typical manufacturer's

inherent power over its own brand of equipment -- over the

sale of distinctive repair parts for that equipment, for

example -- the sort of "monopoly power” sufficient to bring

the sledgehammer of § 2 into play. And, not surprisingly in

light of that insight, it readily labels single-brand power

over aftermarket products “market power" sufficient to

permit an antitrust plaintiff to invoke the per se rule against

tying. In my opinion, this makes no economic sense. The

holding that market power can be found on the present

record causes these venerable rules of selective proscription

to extend well beyond the point where the reasoning that

Supports them leaves off. Moreover, because the sort of

power condemned by the Court today is possessed by every

crease aaa

D-50

manufacturer of durable goods with distinctive parts, the

Court's opinion threatens to release a torrent of litigation

and a flood of commercial intimidation that wil! do much

more harm than good to enforcement of the antitrust laws

and to genuine competition. I shall explain, in Parts II and

III, respectively, how neither logic nor experience suggests,

let alone compels, application of the per se tying prohibition

and monopolization doctrine to a seller's behavior in its

single-brand aftermarkets, when that seller is without power

at the interbrand level.

On appeal in the Ninth Circuit, respondents, having

waived their "rule of reason" claim, were limited to arguing

that the record, construed in the light most favorable to

them, Anderson v. Liberty Lobby, Inc., 477 U. S. 242, 255

(1986), supported application of the per se tying prohibition

to Kodak's restrictive parts and service policy. See /mage

Technical Services, Inc. v. Eastman Kodak Co., 903 F. 2d

612, 615, n. 1 (CA9 1990). As the Court observes, in

order to survive Kodak's motion for summary judgment on

this claim, respondents bore the burden of proffering

evidence on which a reasonable trier of fact could conclude

that Kodak possesses power in the market for the alleged

“tying” product. See ante, at 10; Jefferson Parish Hospital

Dist. No. 2 v. Hyde, 466 U.S., at 13-14.

We must assume, for purposes of deciding this case,

that petitioner is without market, much less monopoly,

power in the interbrand markets for its micrographics and

photocopying equipment. See ante, at 11-12, n. 10; Oklaho-

ma City v. Tuttle, 471 U. S. 808, 816 (1985). In the

District Court, respondents did in fact, include in their

D-51

complaint an allegation which posited the interbrand

equipment markets as the relevant markets; in particular,

they alleged a § 1 "tie" of micrographics and photocopying

equipment to the parts and service for those machines. 1

App. 22-23. Though this allegation was apparently aban-

doned in pursuit of § 1 and § 2 claims focused exciusively

on the parts and service aftermarkets (about which more

later), I think it helpful to analyze how that claim would

have fared under the per se rule.

Had Kodak -- from the date of its entry into the

micro-graphics and photocopying equipment markets --

included a lifetime parts and service warranty with all

original equipment, or required consumers to purchase a

lifetime parts and service contract with each machine, that

bundling of equipment, parts and service would no doubt

constitute a tie under the tests enunciated in Jefferson

Parish Hospital Dist. No. 2 v. Hyde, supra. Nevertheless,

it would be immune from per se scrutiny under the antitrust

laws because the tying product would be equipment, a

market in which (we assume) Kodak has no power to

influence price or quantity. See Jefferson Parish, supra, at

(3-14; United States Steel Corp. v. Fortner Enterprises,

Inc., 429 U.S. 610, 620 (1977) (Fortner 11; Northern

Pacific R. Co. v. United States, 356 U.S. 1, 6-7 (1958).

The same result would obtain, I think, had Kodak -- from

the date of its market entry -- consistently pursued an an-

nounced policy of limiting parts sales in the manner alleged

in this case, so that customers bought with the knowledge

that aftermarket support could be obtained only from

Kodak. The foreclosure of respondents from the business of

servicing Kodak's micrographics and photocopying ma-

chines in these illustrations would be undeniably complete -

- as complete as the foreclosure described in respondents’

aia

D-52

complaint. Nonetheless, we would inquire no further than

u ask whether Kodak's market power in the equipment

niarket effectively forced consumers to purchase Kodak

micrographics or photocopying machines subject to the

company's restrictive aftermarket practices. If not, that

would end the case insofar as the per se rule was con-

cerned. See Jefferson Parish, supra, at 13-14; 9 P. Areeda,

Antitrust Law ¢ 1709c5, pp. 101-102 (1991); Klein & Saft.

The Law and Economics of Franchise Tying Contracts, 28

J. Law & Econ. 345, 356 (1985). The evils against which

the tying prohibition is directed would simply not be

presented. Interbrand competition would render Kodak

powerless to gain economic power over an additional class

of consumers, to price discriminate by charging each

customer a "system" price equal to the system's economic

value to that customer, or to raise barriers to entry in the

interbrand equipment markets. See 3 Areeda and Turner 4

829d, at 331-332.

I have described these illustrations as hypothetical,

but in fact they are not far removed from this case. The

record below is consistent -- in large part -- with just this

sort of bundling of equipment on the one hand, with parts

and service on the other. The restrictive parts policy, with

respect to micrographics equipment at least, was not even

alleged to be anything but prospective. See 1 App. 17. As

respondents summarized their factual proffer below:

"Under this policy, Kodak cut off parts on

new products to Kodak micrographics ISOs.

The effect of this, of course, was that as

customers of Kodak micrographics ISOs

obtained new equipment, the ISOs were

unable to service the equipment for that

D-53

customer, and, service for these customers

was lost by the Kodak ISOs. Additionally, as

equipment became obsolete, and the equip-

ment population became all "new equip-

ment" (post April 1985 models), Kodak

micrographics ISOs would be able to service

no equipment at all." 2 id., at 360.

As to Kodak copiers, Kodak's restrictive parts policy had

a broader foundation: Considered in the light most favor-

able to respondents, see Anderson, supra, at 255, the

record suggests that, from its inception, the policy was

applied to new and existing copier customers alike. But at

least all post-1985 purchasers of micrographics equipment,

like all post-1985 purchasers of new Kodak copiers, could

have been aware of Kodak's parts practices. The only thing

lacking to bring all of these purchasers (accounting for the

vast bulk of the commerce at issue here) squarely within the

hypotheticals we have described is concrete evidence that

the restrictive parts policy was announced or generally

known. Thus, under the Court's approach the existence vel

non of such evidence is determinative of the legal standard

(the per se rule versus the rule of reason) under which the

alleged tie is examined. In my judgment, this makes no

sense. It is quite simply anomalous that a manufacturer

functioning in a competitive equipment market should be

exempt from the per se rule when it bundles equipment

with parts-and-service, but not when it bundles parts with

service. This vast difference in the treatment of what will

ordinarily be economically similar phenomena is alone

enough to call today's decision into question.

D-54

In the Court of Appeals, respondents sought to

sidestep the impediment posed by interbrand competition to

their invocation of the per se tying rule by zeroing in on the

parts and service "aftermarkets" for Kodak equipment. By

alleging a tie of parts to service, rather than of equipment

to parts-and-service, they identified a tying product in

which Kodak unquestionably held a near-monopoly share:

the parts uniquely associated with Kodak's brand of ma-

chines. See Jefferson Parish, 466 U. S., at 17. The Court

today holds that such a facial showing of market share in a

single-brand aftermarket is sufficient to invoke the per se

rule. The existence of even vibrant interbrand competition

is no defense. See ante, at 17-18.

I find this a curious form of market power on which

to premise the application of a per se proscription. It is

enjoyed by virtually every manufacturer of durable goods

requiring aftermarket support with unique, or relatively

unique, goods. See P. Areeda & H. Hovenkamp, Antitrust

Law { 525.1, p. 563 (Supp. 1991). "[S]Juch reasoning

makes every maker of unique parts for its own product a

holder of market power no matter how unimportant its

product might be in the market.” Ibid. (emphasis added).'

' That there exist innumerable parts and service firms in such

industries as the automobile industry, see Brief for Automotive

Warvhouse Distributors Assn., et al., as Amici Curiae 2-3, does not

detract from this point. The question whether power to control an

aftermarket exists is quite distinct from the question whether the power

has bern exercised. Manufacturers in some markets have no doubt

determised that exclusionary intrabrand conduct works to their

disadvantage at the competitive interbrand level, but this in no way

refutes the self-evident reality that control over unique replacement

(continued...)

D-55

Under the Court's analysis, the per se rule may now be

applied to single-brand ties effected by the most insignifi-

cant players in fully competitive interbrand markets, as long

as the arrangement forecloses aftermarket competitors from

more than a de minimis amount of business. Fortner I, 394

U. S., at 501. This seems to me quite wrong. A tying

arrangement "forced" through the exercise of such power

no more implicates the leveraging and price discrimination

concerns behind the per se tying prohibition than does a tie

of the foremarket brand to its aftermarket derivatives,

which -- as I have explained --wouid not be subject to per

se condemnation.” As implemented, the Kodak arrangement

'(...continued)

parts for single-branded goods is ordinarily available to such manu-

facturers for the taking. It confounds sound analysis to suggest, as

respondents do, see Brief for Respondents 5, 37, that the asserted fact

that Kodak manufactures only 10% of its replacement parts, and

purchases the rest from original equipment manufacturers, casts doubt

on Kodak's possession of an inherent advantage in the aftermarkets. It

does no such thing, any more than Kodak's contracting with others for

the manufacture of all constituent parts included in its original

equipment would alone suggest that Kodak lacks power in the

interbrand micrographics and photocopying equipment markets. The

suggestion implicit in respondents’ analysis -- that if a seller chooses to

contract for the manufacture of its branded merchandise, it must permit

the contractors to compete in the sale of that merchandise -- is plainly

unprecedented.

* Even with interbrand power, I may observe, it is unlikely that

Kodak could have incrementally exploited its position through the tie

of parts to service alleged here. Most of the “service” at issue is

inherently associated with the parts, i.e., that service involved in

incorporating the parts into Kodak equipment, and the two items tend

to be demanded by customers in fixed proportions (one part with one

(continued...)

D-56

challenged in this case may have implicated truth-in-

advertising or other consumer protection concerns, but

those concerns do not alone suggest an antitrust prohibition.

See e.g., Town Sound and Custom Tops, Inc. v. Chrysler

Motors Corp., 959 F.2d 468 (CA3 1992)(en banc).

In the absence of interbrand power, a seller's

predominant or monopoly share of its single-brand deriva-

tive markets does not connote the power to raise derivative

market prices generally by reducing quantity. As Kodak and

its principal amicus, the United States, point out, a rational

consumer considering the purchase of Kodak equipment will

inevitably factor into his purchasing decision the expected

cost of aftermarket support. "[BJoth the price of the equip-

ment and the price of parts and service over the life of the

equipment are expenditures that are necessary to obtain

copying and micrographic services." Brief for United States

as Amicus Curiae 13. If Kodak set generally

2(...continued)

unit of service necessary to install the part). When that situation

obtains, "no revenue can be derived from setting a higher price for the

tied product which could not have been made by setting the optimum

price for the tying product.” P. Areeda & L. Kaplow, Antitrust

Analysis { 426(a), p. 705 (4th ed. 1988) (quoting Bowman, Tying

Arrangements and the Leverage Problem, 67 Yale L. J. 19 (1957)).

These observations strongly suggest that Kodak parts and the service

involved in installing them should not be treated as distinct products for

antitrust tying purposes. See Jefferson Parish, 466 U. S. 2, 39

(O'CONNOR, J., concurring in judgment) ("For products to be treated

as distinct, the tied product must, at a minimum, be one that some

consumers might wish to purchase separately without also purchasing

the tying product") (emphasis in original) (footnote omitted); Ross, The

Single Product Issue in Antitrust Tying: A Functional Approach, 23

Emory L. J. 963, 1009-1010 (1974).

D-57

supracompetitive prices for either spare parts or repair

services without making an offsetting reduction in the price

of its machines, rational consumers would simply turn to

Kodak's competitors for photocopying and micrographic

systems. See, e. g., Grappone, Inc. v. Subaru of New

England, Inc., 858 F. 2d 792, 796-798 (CA1 1988). True,

there are -- as the Court notes, see ante, at 21 -- the occa-

sional irrational consumers that consider only the hardware

cost at the time of purchase (a category that regrettably

includes the Federal Government, whose "purchasing

system," we are told, assigns foremarket purchases and

aftermarket purchases to different entities). But we have

never before premised the application of antitrust doctrine

on the lowest common denominator of consumer.

The Court attempts to counter this theoretical point

with theory of its own. It says that there are "information

costs" -- the costs and inconvenience to the consumer of

acquiring and processing life-cycle pricing data for Kodak

machines -- that "could create a less responsive connection

between service and parts prices and equipment sales."

Ante, at 19. But this truism about the functioning of

markets for sophisticated equipment cannot create "market

power" of concern to the antitrust laws where otherwise

there is none. “Information costs," or, more accurately,

gaps in the availability and quality of consumer informa-

tion, pervade real-world markets; and because consumers

generally make do with "rough cut" judgments about price

in such circumstances, in virtually any market there are

zones within which otherwise competitive suppliers may

overprice their products without losing appreciable market

share. We have never suggested that the principal players

in a market with such commonplace informational deficien-

cies (and, thus, bands of apparent consumer pricing

D-58

indifference) exercise market power in any sense relevant

to the antitrust laws. "While [such] factors may generate

‘market power’ in some abstract sense, they do not generate

the kind of market power that justifies condemnation of

tying." Jefferson Parish Hospital Dist. No. 2 v. Hyde, 466

U. S., at 27; see e.g., Town Sound and Custom Tops, Inc.

v. Chrysler Motors Corp., supra.

Respondents suggest that, even if the existence of

interbrand competition prevents Kodak from raising prices

generally in its single-brand aftermarkets, there remain

certain consumers who are necessarily subject to abusive

Kodak pricing behavior by reason of their being "locked in"

to their investments in Kodak machines. The Court agrees;

indeed, it goes further by suggesting that even a general

policy of supracompetitive aftermarket prices might be

profitable over the long run because of the "lock-in"

phenomenon. "[A] seller profitably could maintain

supracompetitive prices in the aftermarket,” the Court

explains, "if the switching costs were high relative to the

increase in service prices, and the number of locked-in

customers were high relative to the number of new purchas-

ers." Ante, at 23. In speculating about this latter possibility,

the Court is essentially repudiating the assumption on which

we are bound to decide this case, viz., Kodak's lack of any

power whatsoever in the interbrand market. If Kodak's

general increase in aftermarket prices were to bring the

total "system" price above competitive levels in the

interbrand market, Kodak would be wholly unable to make

further foremarket sales -- and would find itself exploiting

an ever-dwindling aftermarket, as those Kodak micrograph-

ic and photocopying machines already in circulation passed

into disuse.

D-59

The Court's narrower point, however, is undeniably

true. There will be consumers who, because of their capital

investment in Kodak equipment, "will tolerate some level

of service-price increases before changing equipment

brands," ante, at 23; this is necessarily true for “every

maker of unique parts for its own product." Areeda &

Hovenkamp, Antitrust Law q 525.1b, at 563. But this

“circumstantial” leverage created by consumer investment

regularly crops up in smoothly functioning, even perfectly

competitive, markets, and in most -- if not all -- of its

manifestations, it is of no concern to the antitrust laws. The

leverage held by the manufacture of a malfunctioning

refrigerator (which is measured by the consumer's reluc-

tance to walk away from his initial investment in that

device) is no different in kind or degree from the leverage

held by the swimming pool contractor when he discovers a

5-ton boulder in his customer's backyard and demands an

additional sum of money to remove it; or the leverage held

by an airplane manufacturer over an airline that has "stan-

dardized" its fleet around the manufacturer's models; or the

leverage held by a drill press manufacturer whose custom-

ers have built their production lines around the

manufacturer's particular style of drill press; the leverage

held by an insurance company over its independent sales

force that has invested in company-specific paraphernalia;

or the leverage held by a mobile home park owner over his

tenants, who are unable to transfer their homes to a

different park except at great expense, see generally Yee v.

Escondido, 503 U. S. __ (1992). Leverage, in the form of

circumstantial power, plays a role in each of these relation-

ships; but in none of them is the leverage attributable to the

dominant party's market power in any relevant sense.

Though that power can plainly work to the injury of certain

D-60

consumers, it produces only "a brief perturbation in

competitive conditions -- not the sort of thing the antitrust

laws do or should worry about." Parts & Elec. Motors,

Inc. v. Sterling Elec., Inc., 866 F. 2d 228, 236 (CA7

1988)(Posner, J., dissenting).

The Court correctly observes that the antitrust laws

do not permit even a natural monopolist to project its

monopoly power into another market, i.e., to " ‘exploi[t]

his dominant position in one market to expand his empire

into the next.' " Ante, at 27, n. 29 (quoting Times-Picayune

Publishing Co. v. United States, 345 U. S. 594, 611

(1953)). However when a manufacture uses its control over

single-branded parts to acquire influence in single-branded

service, the monopoly "leverage" is almost invariably of no

practical consequence, because of perfect identity between

the consumers in each of the subject aftermarkets (those

who need replacement parts for Kodak equipment, and

those who need servicing of Kodak equipment). When that

condition exists, the tie does not permit the manufacturer to

project power over a class of consumers distinct from that

which it is already able to exploit (and fully) without the

inconvenience of the tie. Cf., e. g., Bowman, Tying Ar-

rangements and the Leverage Problem, 67 Yale L. J. 19,

21-27 (1957).

We have never before accepted the thesis the Court

today embraces: that a seller's inherent control over the

unique parts for its own brand amounts to "market power"

of a character sufficient to permit invocation of the per se

rule against tying. As the Court observes, ante, at 27, n.

29, we have applied the per se rule to manufacturer ties of

foremarket equipment to aftermarket derivatives -- but only

when the manufacturer's monopoly power in the equipment,

———

D-61

coupled with the use of derivative sales as "counting

devices" to measure the intensity of customer equipment

usage, enabled the manufacturer to engage in price discrim-

ination, and thereby more fully exploit its interbrand power.

See International Salt Co. v. United States, 332 U. S. 392

(1947); International Business Machines Corp. v. United

States, 298 U. S. 131 (1936); United Shoe Machinery Corp.

v. United States, 258 U. S. 451 (1922). That sort of endur-

ing opportunity to engage in price discrimination is unavail-

able to a manufacturer -- like Kodak -- that lacks power at

the interbrand level. A tie between two aftermarket deriva-

tives does next to nothing to improve a competitive

manufacturer's ability to extract monopoly rents from its

consumers.’

3 The Court insists that the record in this case suggests otherwise,

i.e., that a tie between parts and service somehow does enable Kodak

to increase overall monopoly profits. See ante, at 27, n. 29. Although

the Court does not identify the record evidence on which it relies, the

suggestion, apparently, is that such a tie facilitates price discrimination

between sophisticated, “high-volume” users of Kodak equipment and

their unsophisticated counterparts. The sophisticated users (who, the

Court presumes, invariably self-service their equipment) are permitted

to buy Kodak parts without also purchasing supracompetitively-priced

Kodak service, while the unsophisticated are -- through the imposition

of the tie -- compelled to buy both. See anie, at 22-23.

While superficially appealing, at bottom this explanation lacks

coherence. Whether they self-service their equipment or not, rational

foremarket consumers (those consumers who are not yet “locked in" to

Kodak hardware) will be driven to Kodak's competitors if the price of

Kodak equipment, together with the expected cost of aftermarket

support, exceeds competitive levels. This will be true no matter how

Kodak distributes the total system price among equipment, parts, and

service. See supra, at 10. Thus, as to these consumers, Kodak's lack

of interbrand power wholly prevents it from employing a tie between

continued...)

ae and service as a vehicle for price discrimination. Nor does a tie

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Nor has any court of appeals (save for the Ninth

Circuit panel below) recognized single-branded aftermarket

power as a basis for invoking the per se tying prohibition.

See V

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