# Petition for Writ of Certiorari — Eastman Kodak Co. v. Image Technical Services, Inc. > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386013_2183%3A1 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition for Writ of Certiorari - **Published:** January 1, 1998 - **Citation:** 523 U.S. 1094 ## Text 971298 FEBS 1998. No. 97-___ In The Supreme Court of the United States October Term, 1997 * EASTMAN KODAK COMPANY, Petitioner, IMAGE TECHNICAL SERVICES, INC., J-E-S-P COMPANY, INC., SHIELDS BUSINESS MACHINES, INC., MICROGRAPHIC SERVICES, INC., OMNI MICRO-GRAPHIC SERVICES, INC., ATLANTA GENERAL MICROFILM CO., INC., DATEK LTD., B.C.S. TECHNICAL SERVICES, INC., CPO LTD., INC., ADVANCED SYSTEMS SERVICE, INC., AND AMTECH EQUIPMENT MAINTENANCE, INC., Respondents. ¢ On Petition For A Writ Of Certiorari To The United States Court Of Appeals For The Ninth Circuit » PETITION FOR WRIT OF CERTIORARI ¢ Donn P. Pickett Counsel of Record HERBERT HOVENKAMP DanieL M. WALL University of Iowa ALFRED C. PFEIFFER, JR. College of Law McCutcHen, Dove, BROWN 407 Boyd Law Building & Enersen, LLP University of Iowa Three Embarcadero Center Iowa City, Iowa 52242 San Francisco, California Telephone: (319) 335-9079 94111 Of Counsel Telephone: (415) 393-2000 Attorneys for Petitioner February 5, 1998 COCKLE LAW BRIEF PRINTING CO., (800) 225-6964 OR CALL COLLECT (402) 342-2831 QUESTIONS PRESENTED 1. Whether Section 2 of the Sherman Antitrust Act limits the statutory rights of a patent or copyright owner, acting unilaterally, to refuse to sell or license its protected works to competitors, and, if so, whether such rights are lost or compromised because of the mental state that accompanied the refusal to deal, i.e., because the refusal to deal was anticompetitively motivated. 2. Whether a firm may be found to have violated Sec- tion 2 of the Sherman Act by refusing to provide competitors with goods or services that were not proven to be (a) monopo- lized, (b) elsewhere unavailable to competitors, or (c) essen- tial to their competitive viability. 3. Whether, under Eastman Kodak Co. v. Image Techni- cal Services, Inc., 504 U.S. 451 (1992), monopoly power in an aftermarket for the service of a single branded good may be found notwithstanding that (a) the defendant lacks monop- oly power in the primary equipment markets, and (b) there is no evidence that it raised prices to supracompetitive levels following an opportunistic policy change. il LIST OF PARTIES AND RULE 29.6 LIST The caption of this petition identifies all parties in the lower court. Petitioner Eastman Kodak Company has no par- ent corporation. Kodak’s subsidiaries, other than wholly owned subsidiaries, are listed below: Beijing Imagetek Information Co., Ltd. Chinon Industries, Inc. Chinon Insurance Co., Ltd. Hermes Precisa Pty., Ltd. HPA (Old) Pty., Ltd. HPA Unit Trust Imagetek International, Ltd. K.H. Optical Co., Ltd. Kodak India, Ltd. NanoSystems L.L.C. Union Fotografica Venezolana II, C.A. lil TABLE OF CONTENTS Page oy ky 9 |) i LIST OF PARTIES AND RULE 29.6 LIST........... ii ee sk acd s pce ceases ee seaae l STATEMENT OF JURISDICTION ................... l STATUTORY PROVISIONS INVOLVED ............. l SiAlomen: OF THE CASE ...... cc cccscccccccces I REASONS FOR GRANTING THE PETITION ........ 7 I. The Petition Shouid Be Granted To Resolve Con- flicting Decisions As To Whether Antitrust Law Restricts The Rights Of Patent And Copyright Owners To Refuse To Deal With Rivals ......... 9 A. Unilateral Refusals to Share Intellectual Prop- erty Have Been Historically Exempt from Anti- ee er cake eek awed ines 10 B. Intellectual Property Rights Are Not Subject to Antitrust “Business Justification” Doctrine... 12 II. The Petition Should Be Granted To Resolve Wide- spread Confusion On The Elements Of A Monopo- we baadaeeaecs 16 A. The Requirements of Monopoly, Unavailability OO EE Pee er ere 16 B. The Ninth Circuit’s “More General” Refusal- ee ay wa ae ee 19 III. The Petition Should Be Granted To Clarify The Conditions Under Which A Derivative Aftermarket May Be Deemed A Relevant Antitrust Market ... 24 ee ib sake es ap wk eh bs aod eee omens 30 es iV TABLE OF CONTENTS - Continued Page APPENDIX: A. Opinion of the Court of Appeals................ 1A B. Opinion and Order of the District Court........ 80B C. Order of the Court of Appeals Denying IEE 600 abs a ode sd USE Oe eee beer 97C FE ee eer CORee Tere TS 99D E. List of Aftermarket Monopoly Cases Active ee SE ios ke vhd dena beds edereee ceases 104E TABLE OF AUTHORITIES Page CASES Abcor Corp. v. AM Int'l, Inc., 916 F.2d 924 (4th Cir. FOES $0.5 + win stance dew Mew eeu eiae en Kaainieasdcs 21 Advanced Computer Servs. v. MAI Sys. Corp., 845 F. OD. Se: Te i Dei seiko vives ck aks ce. 1] Alaska Airlines, Inc. v. United Airlines, Inc., 948 F.2d 536 (9th Cir. 1991), cert. denied, 503 U.S. 977 ROMs Vid 40 kab Sooo euas ee ee eee 18, 19 American Bearing Co., Inc. v. Litton Indus., Inc., 729 F.2d 943 (3d Cir.), cert. denied, 469 U.S. 854 Eo SP pe Peep epee ete ek Ral wt. Ryton Se. 29 Aspen Skiing Co. v. Aspen Highlands Skiing Corp., OFe 5A: Se MRO o aicen Ouse steaetiaeees passim Blue Cross & Blue Shield United v. Marshfield Clinic, 65 F.3d 1406 (7th Cir. 1995), cert. denied, 116 S. GA, Cae SEE van ca bed ed waucee cee 18, 19, 30 Brown Shoe Co. v. United States, 370 U.S. 294 (1962) .... 20 City of Anaheim v. Southern Cal. Edison Co., 955 ae SaEe RO Oe ss uae voc oh oe, 18 Collins v. International Dairy Queen, Inc., 980 F. weep. base CHEE. Ge, FOOT) 4g oovnchketeeec eed 26 Data Gen. Corp. v. Grumman Sys. Support Corp., 36 sf Bi ses) os 2) | nnn 9, 12, 13, 14 Dawson Chem. Co. v. Rohm & Haas Co., 448 U.S. EO TONES: 66s UE aa oe we wee deen ee 10 Digital Equip. Corp. v. Unig Digital Tech., Inc., 73 Y.56 TOO Cth Cir. 1996)... 2.0000 csccecs 26, 27, 28, 30 Eastman Kodak Co. v. Image Technical Servs., Inc., Pe Was WOE CP ho heb e eee passim vi TABLE OF AUTHORITIES — Continued Page Eastman Kodak Co. v. Southern Photo Materials Co.., rye ie Me. OR, y ee ere 17, 22 Hecht v. Pro-Football, Inc., 570 F.2d 982 (D.C. Cir. 1977), cert. denied, 436 U.S. 956 (1978)............ 18 In re British Oxygen Co., 86 F.T.C. 1241 (1975), rev'd on other grounds, BOC Int'l Ltd. v. FTC, 557 F.2d BS Ce Ge is hi ic hk a naked 04 Rk ee a 20 In re Indep. Serv. Orgs. Antitrust Litig., ___F. Supp. __, 1997 WL 805237 (D. Kan. 1997)....... dine ae Key Enters. of Del., Inc. v. Venice Hosp., 919 F.2d 1550 (11th Cir. 1990), cert. denied, 511 U.S. 1126 CTDPED cick shedkds betestenG ease el eee 23 Laurel Sand & Gravel, Inc. v. CSX Transp., Inc., 924 F.2d 539 (4th Cir.), cert. denied, 502 U.S. 814 CESOEY . ons vkc thoes Sa ea ee eee 17 Lee v. Life Insur. Co. of N. Am., 23 F.3d 14 (Ist Cir.), cert. denied, 513 U.S. 964 (1994) ...............27, 30 Lorain Journal Co. v. United States, 342 U.S. 143 by) 2 rr tty oe Er cree en 17, 22 Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 frog: (ee 89 e?l corr ee. 13 MCI Communications v. AT&T Corp., 708 F.2d 1081 (7th Cir.), cert. denied, 464 U.S. 891 (1983) ..... 17, 18 Miller Insituform, Inc. v. Insituform of North Amer- ica, Inc., 830 F.2d 606 (6th Cir. 1987), cert. denied, SSG UB. Se icc cs ss 0 bare ee tees 1} Olympia Equip. Leasing Co. v. Western Union Tel. Co., 797 F.2d 370 (7th Cir. 1986), cert. denied, 480 oh Me 2 og ee rr ee ae 14, 19, 21, 22 a ee vii TABLE OF AUTHORITIES —- Continued Page Otter Tail Power Co. v. United States, 410 U.S. 366 | ES Sen ae re en get erg a RE 17, 22 Professional Real Estate Investors, Inc. v. Columbia Pictures Indus., Inc., 508 U.S. 49 (1993).... 2, 8, 9, 15 PSI Repair Serv., Inc. v. Honeywell, Inc., 104 F.3d 811 (6th Cir.), cert. denied, 117 S. Ct. 2434 (1997) 28, 30 Queen City Pizza, Inc. v. Domino's Pizza, Inc., 124 Pie ee Ae REL BOERS suds bide k acd beauie. 26, 27, 30 SCFC ILC, Inc. v. Visa USA, Inc., 36 F.3d 958 (10th Cir. 1994), cert. denied, 515 U.S. 1152 (1995)....... 23 Service & Training, Inc. v. Data Gen. Corp., 963 F.2d Pe Re tins nav koa. bse bie oc vee | SCM Corp. v. Xerox Corp., 645 F.2d 1195 (2d Cir. 1981), cert. denied, 455 U.S. 1016 (1982)........ 10, 12 Sony Corp. of Am. v. Universal City Studios, Inc., 464 Meee Se BON oS reese Vee: voces one cWabxce. 10, 15 Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447 LP SU Mie wid Cha eee Whe VCREC ANGE ence eek 6 evan os 8 Triad Sys. Corp. v. Southeastern Express Co., 64 F.3d 1330 (9th Cir. 1995), cert. denied, 116 S. Ct. 1015 GE Win dice Ondo ea b a 5 KCC EPO eek 13 Tricom, Inc. v. Electronic Data Sys. Corp., 902 F. supp. 741 (B.D. Mick. 1995)... ...cccccccccscccecss 1] Twin Lab., Inc. v. Weider Health & Fitness, 900 F.2d Se Se es Re ee ht 18, 19 United States v. Colgate, 250 U.S. 300 (1919)......... 17 United States v. Grinnell Corp., 384 U.S. 563 (1966).... 20 United States v. Terminal R.R. Ass'n, 224 U.S. 383 ES 5 RE CP ity GER AER REN, LAN Ny eR ie OPE ons 17 i il TABLE OF AUTHORITIES - Continued Page United States v. Univis Lens Co., Inc., 316 U.S. 241 SES ee Pe ke rn er ON eee wire rhea 10 United States v. Westinghouse Elecs. Corp., 648 F.2d 8, De Me |) eer rres Serre curr Trier 11 Valley Prods. Co., Inc. v. Landmark, Div. of Hosp. Franchise, Inc., 128 F.3d 398 (6th Cir. 1997)........ 26 | Virtual Maintenance, Inc. v. Prime Computer, Inc., 11 | F.3d 660 (6th Cir. 1993), cert. dismissed, 512 U.S. SE as Riek 000 e ORES a ae 116d Erk aaeee 26 Wilson v. Mobil Oil, __ F. Supp. __, 1997 WL ee Be 8 es eer ee err ee 26 Zenith Radio Corp. v. Hazeltine Research, Inc., 395 ba. 2) Re rer et reer re cer re 10, 13 STATUTES BU eR er ean ney mney eeper ype S i ye fi ok 2 Ferrer rerrrrr ve Torre rT TT rs l et 8 ae) eer ey rey heer er or rrr Try 10 28 U.S.C. § 1254(1) .. ee cece eee eee eee eee e eee ees l Be Se Eg on pe eae ee bad ep ecaeraene Ke wee 1, 10 Te Ua. Oh BT a ch occ tetis eve teccdoncvsnts sas 1, 10 OTHER AUTHORITIES ABA Antitrust Section, Antitrust Law Developments (Parts (IOPED vacncctseccss PTET ery Tee . aaa ee Areeda, Phillip E. & Hovenkamp, Herbert, Antitrust CN TIES barks yas sees eves oeeiass 57, te. 89, 23, 2S ix TABLE OF AUTHORITIES - Continued Page Areeda, Phillip, Essential Facilities: An Epithet in Need of Limiting Principles, 58 Antitrust L.J. 841 Sy EE SEO eee ne ee 16 Arthur, Thomas C., The Costly Quest for Perfect Competition: Kodak and Nonstructural Market Oe WONT e Bis GUS BD CHD nick vncccs ccc ceees 24 Bork, Robert H., The Antitrust Paradox: A Policy at War with Itself (revised ed. 1993)................05. 25 Boudin, Michael, Antitrust Doctrine and the Sway of Metaphor, 75 Geo. L.J. 395 (1986) ................. 17 Carlton, Dennis W. & Perloff, Jeffrey M., Modern Industrial Organization (2d ed. 1994) ............... 30 Easterbrook, Frank H., On Identifying Exclusionary Conduct, 61 Notre Dame L. Rev. 972 (1986)........ 23 FTC Staff Report: Competition Policy in the New High-Tech, Global Marketplace, 64 Antitrust L.J. Pe a ag 6 C8 Bai pa bk 8 as bind ds 4 Kir a le ¥ vox 9 Gifford, Daniel J., The Damaging Impact of the East- man Kodak Precedent Upon Product Competition: Antitrust Law in Need of Correction, 72 Wash. U. ne re Oe arn ae 24, 25 Glazer, Kenneth L. & Lipsky, Abbott B., Jr., Uni- lateral Refusals to Deal Under Section 2 of the Sherman Act, 63 Antitrust L.J. 749 (1995)........ 16, 17 Hovenkamp, Herbert, Market Power in Aftermarkets: Antitrust Policy and the Kodak Case, 40 U.C.L.A. ae Se I I vn 0c os 0s hee RE orld cannes 24 Kauper, Thomas, Antitrust in 1992: The Year of the Storyteller, 61 Antitrust L.J. 347 (1993)........... 8, 27 TABLE OF AUTHORITIES - Continued Klein, Benjamin, Market Power in Antitrust: Eco- nomic Analysis After Kodak, 3 Sup. Ct. Econ. Rev. 2: SERS Rear Om mE annie tert ae Krattenmaker, Thomas G. & Salop, Steven C., Anti- competitive Exclusion: Raising Rivals’ Costs To Achieve Power Over Price, 96 Yale L.J. 209 (1986) Kumar, Salil, Comment, Parts and Service Included: An Information-Centered Approach to Kodak and the Problem of Aftermarket Monopolies, 62 U. Chi. in: SAGE. SES COR Sta cSic ew ek nbs vsdvce wens sc Lazaroff, Daniel E., Reflections on Eastman Kodak Co. v. Image Technical Services, Inc.: Continued Confusion Regarding Tying Arrangements and Antitrust Jurisprudence, 69 Wash. L. Rev. 10! PNG 445 ba creda kane Caven seca ken LeNeaetaee Ponsoldt, James F., Refusals to Deal in “Locked-in” Health Care Markets Under Section 2 of the Sher- man Act After Eastman Kodak Co. v. Image Techni- cal Services, 1995 Utah L. Rev. 503 (1995)..... Porter, Michael E., Competitive Advantage (1985) .. Post-Chicago Analysis After Kodak: Interview With Professor Steven C. Salop, Antitrust, Fall/Winter OIE io ands: i aa a Sea is nak alain hee ace. ke ae a ew 8 Shapiro, Carl, Aftermarkets and Consumer Welfare: Making Sense of Kodak, 63 Antitrust L.J. 483 Sere re pe ne er re ree eee The Supreme Court, 1991 Term: Leading Cases, 106 Sere. 3. Bee Ge CO saa . Sexe Wek eee edewdccs Page 26 fw ere > a | XI TABLE OF AUTHORITIES — Continued Page Tom, Willard K. & Newberg, Joshua A., Antitrust and Intellectual Property: From Separate Spheres to Unified Field, 66 Antitrust L.J. 167 (1997)........... 9 U.S. Dept. of Justice & Fed. Trade Comm’n, Antitrust Guidelines for the Licensing of Intellectual Prop- erty (April 6, 1995), reprinted in 4 Trade Reg. Rep. oo ek Pr errr mere Sh Far emee _ 1] l OPINIONS BELOW The Ninth Circuit’s decision is reported at 125 F.3d 1195 and is reproduced in the Appendix (“App.”) at 1A-79A. The district court’s unreported permanent injunction order is at App. 80B-85B, and its post-judgment memorandum on motion for permanent injunction, reported at 1996-2 Trade Cas. (CCH) J 71,624 and 1996 WL 101173, is at App. 86B-96B. The Court of Appeals’ unreported order denying Kodak’s petition for rehearing is at App. 97C-98C. STATEMENT OF JURISDICTION The Court of Appeals entered judgment on August 26, 1997, and denied rehearing on November 7, 1997. App. 1A; 97C. This Court has jurisdiction under 28 U.S.C. § 1254(1). STATUTORY PROVISIONS INVOLVED The statutes involved are 15 U.S.C. § 2, 35 U.S.C. §§ 154 & 271(d)(4), and 17 U.S.C. § 106. They appear verbatim at App. 99D-103D. STATEMENT OF THE CASE In the name of Eastman Kodak Co. v. Image Technical Services, Inc., 504 U.S. 451 (1992) (“Kodak I”), a prior decision in this case, the Ninth Circuit has stripped all objec- tive content from the antitrust doctrine governing monopolis- tic refusals to deal. It has held that a refusal to deal may be found unlawful without inquiry into whether (a) defendant monopolized the specific competitive inputs plaintiffs demanded, (b) plaintiffs had no alternative sources for those inputs, or (c) access to those inputs from defendant was essential to plaintiffs’ competitive survival. By eliminating the objective elements other circuits use to evaluate refusal- to-deal claims, the court affirmed an absurd, anticompetitive result: that Kodak monopolized by refusing to inventory for competitors parts they could get elsewhere. So sweeping is the Ninth Circuit’s new doctrine that it even forces Kodak to share patented and copyrighted parts ime 2 with competitors, thus nullifying explicit statutory rights. It was settled that patent and copyright owners, even monopol- ists, had unconstrained rights to exclusive use of their inven- tions, and thus could refuse to share their works with competitors. The Ninth Circuit simply changed this rule, holding that an anticompetitively motivated refusal to sell or license intellectual property is unlawful. This decision — from the Court of Appeals that covers America’s principal technol- ogy centers — conflicts with every other decision on point, especially Professional Real Estate Investors, Inc. v. Colum- bia Pictures Industries, Inc., 508 U.S. 49, 64 (1993), which held that conditioning the exercise of a copyright “upon a demonstrated lack of anticompetitive intent would upset the notion of copyright as a ‘limited grant’ of ‘monopoly privi- leges." ” Moreover, this all concerns a fictitious monopoly that nearly all manufacturers of durable goods have: a monopoly over the service of Kodak’s own products. In Kodak I, this Court (over the dissent of Justices Scalia, O’Connor and Thomas), held that a derivative aftermarket could be a rele- vant antitrust market, even for a firm that does not monopol- ize the equipment foremarket. But there were limits to the Court’s willingness to entertain “aftermarket monopoly” claims, the most important being an evidentiary requirement of “installed-base opportunism” leading to supracompetitive price increases. The First, Sixth and Seventh Circuits under- stood this, but the } e' did not. It affirms a finding of monopoly power that is «« onomic nonsense, as indicated most ironically by Kodak’s exit from the copier business (sales and service) because of consistent unprofitability shortly after being condemned as a monopolist. The common thread in this petition is that monopoliza- tion law must have objective content, lest jury evaluations of what is “reasonable” and “intended” expose all competitive business conduct, even the exercise of intellectual property rights, to potential liability. The Ninth Circuit chose a differ- ent path. The result shows how unrestrained monopolization law can have distinctly anticompetitive effects. That is unprecedented and wrong. The danger of letting courts make their own judgments as to when it is socially acceptable to exercise intellectual prop- erty rights is seen in the fact that the First and Ninth Circuits are now in conflict not only with other circuits, but with each other. Under Data General, only copyright privileges are at risk, the key issue is whether refusals to license “frustrate the objectives of the Copyright Act,” 36 F.3d at 1187 n.64, and “a search for an overriding ‘antisocial’ motivation,” is imma- terial. Jd. at 1188-89. The Ninth Circuit rule covers patents and copyrights, and makes intent dispositive. Two departures from a settled rule; two conflicting tests. 2. The Ninth Circuit’s test presents two important ques- tions. First, even if business justification analysis were to apply, why should an objectively justified refusal to deal be condemned on intent alone? Consider the result in this case: Kodak indisputably has valid intellectual property rights and the Court of Appeals held that the ISOs’ demand for “an assured supply of parts” “promotes free-riding.” ER-223; App. 67A. Kodak thus had two objectively valid objections to the ISOs’ demands. Yet because of a cryptic hint in Kodak | of pretextualness as a basis for invalidating a business justi- fication, 504 U.S. at 484, Kodak stands condemned. The Court cannot have intended this result. It is too arbitrary, and contradicts Aspen’s holding that intent is “merely relevant to the question whether the challenged con- duct is fairly characterized as ‘exclusionary’ ” — which cannot be when there are objectively valid justifications for a refusal to deal. 472 U.S. at 602. It also reverses a strong trend in antitrust law away from the vagaries of intent determinations towards more objective analyses. Olympia Equip. Leasing Co. > See App. 46A & 47A (“liability depends largely on [antitrust] market definition” principles and “the legitimacy of the asserted business justifications”). The court acknowledged but ignored the misuse standards of intellectual property law. Jd. at 44A. ember ne i | 15 v. Western Union Tel. Co., 797 F.2d 370, 379 (7th Cir. 1986) (Posner, J.), cert. denied, 480 U.S. 934 (1987). Second, even if Kodak I meant to permit intent findings to undermine some business justifications, that cannot be the rule for intellectual property. This Court foreclosed intent- based nullifications of intellectual property rights in Profes- sional Real Estate Investors. 508 U.S. at 64. There, Columbia Pictures sued PRE for copyright infringement. PRE counter- claimed in antitrust, claiming the suit was a “sham” because, even though there was admittedly probable cause to bring it, Columbia acted with a “predatory motive.” Jd. at 56. This Court held that a “showing of malice alone” would not under- mine Columbia’s right to enforce its copyright. Jd. at 63. And it rooted its decision in the policies of the copyright laws: “[T]o condition a copyright upon a demonstrated lack of anticompetitive intent would upset the notion of a copyright as a ‘limited grant’ of ‘monopoly privileges’ intended simul- taneously ‘to motivate the creative activity of authors’ and ‘to give the public appropriate access to their work product.’ ” Id. at 64 (quoting Sony Corp. of Am. v. Universal City Studios, Inc., 464 U.S. 417, 429 (1984)). The arbitrariness of an intent rule is evident in the Ninth Circuit’s “harmless error” ruling. The Court relied primarily on the testimony of one Kodak “parts manager” that patents were not in his mind when he decided not to supply parts to ISOs. App. 51A. But he and others also testified that the desire to protect Kodak’s “very large investment in research and development” had motivated them. Tr.4182. The point of the intellectual property system, of course, is to protect the investment. But the Ninth Circuit drew an illusory distinction between the desire to profit from investments in intellectual property and intellectual property rights per se, and thus found (without jury input) Kodak’s “defense” pretextual. App. 52A. This is utterly capricious, and has already been repudiated in the identical Xerox case. See In re Indep. Serv. Orgs. Antitrust Litig., ___ F. Supp. __, 1997 WL 805237, at *9 (Ninth Circuit’s standard “makes it very difficult for a jury, a judge, or even the patent holder, to distinguish between” lawful and unlawful refusals to deal). 16 The Ninth Circuit erred by not deferring to the Congres- sional judgment about refusals to share intellectual property, by making the issue turn on case-specific business justifica- tion analysis, and especially by conditioning intellectual property rights upon the absence of anticompetitive intent. The conflict with other circuits and decisions of this Court is manifest, as is the potential to chill innovation. Before other intellectual property owners have their rights compromised through the type of mind-reading exercise that condemned Kodak, the Court should grant review. II. The Petition Should Be Granted To Resolve Wide- spread Confusion On The Elements Of A Monopolis- tic Refusal To Deal. Courts and commentators decry the confusing state of unilateral refusal-to-deal law. A recent article notes that while “courts have developed specialized rules for [most] distinct categories of monopolizing conduct, . . . the category . . . known as the ‘unilateral refusal to deal’ has not given rise to such a specific and well-structured framework of analysis.” Kenneth L Glazer & Abbott B. Lipsky, Jr., Unilateral Refusais to Deal Under Section 2 of the Sherman Act, 63 Antitrust L.J. 749-50 (1995). The late Phillip Areeda called the “essential facilities” doctrine, as refusal-to-deal law is sometimes known, “less a doctrine than an epithet.” Phillip Areeda, Essential Facilities: An Epithet in Need of Limiting Principles, 58 Antitrust L.J. 841 (1990). He saw no case “that provides a consistent rationale for the doctrine or that explores the social costs and benefits or the administrative costs of requiring the creator of an asset to share it with a rival.” Jd. This case illustrates the uncertainty and provides an ideal vehicle for this Court to supply the needed guidance. A. The Requirements of Monopoly, Unavailability and Essentiality. The notion that a monopolist might have a duty to share assets with rivals sprang from five decisions of this Court, not one of which stated objective conditions for the imposition of oe ene ed 17 such a duty. Despite “its embarrassing weakness,”? the doc- trine spread. And without clear Supreme Court guidance, the lower courts splintered. A minority -— a dwindling minority until this case — adopted an “intent test” rooted in dictum in United States v. Colgate, 250 U.S. 300, 307 (1919). See ABA Antitrust Section, Antitrust Law Developments (Fourth) 271-76 (1997) (“ALD”). There the Court spoke of the right not to deal with others “[iJn the absence of any purpose to create or maintain a monopoly.” Colgate, 250 U.S. at 307. This implied that a refusal to deal “in pursuance of a purpose to monopol- ize” was actionable. Southern Photo, 273 U.S. at 375. Most courts see that the intent test “fails to provide specific guidance for particular cases,” and that objective stan- dards are needed. See Glazer & Lipsky, 63 Antitrust L.J. at 755. These courts have articulated the conditions that define an objectively anticompetitive refusal to deal. See ALD at 276-82. The leading case is MCI Communications v. AT&T Corp., 708 F.2d 1081, 1132-33 (7th Cir.), cert. denied, 464 U.S. 891 (1983), in which the Seventh Circuit adopted objective stan- dards for evaluating refusal-to-deal claims. The MC/ test, embraced in various forms by most circuits, includes elements of monopoly, unavailability, and essentiality.8 Monopoly and Unavailability: Most cases require plaintiff to show that defendant “possessed monopoly power over [the] essential facility” (or other competitive input), to the point that it is not practically available to the plaintiff elsewhere. Laurel Sand & Gravel, Inc. v. CSX Transp., Inc., 924 F.2d 539, 544 © See United States v. Terminal R.R. Ass'n, 224 U.S. 383 (1912) (a concerted refusal to deal); Eastman Kodak Co. v. Southern Photo Materials Co., 273 U.S. 359 (1927); Lorain Journal Co. v. United States, 342 U.S. 143, 152 (1951); Otter Tail Power Co. v. United States, 410 US. 366 (1973); Aspen Skiing, 472 U.S. 585. 7 Michael Boudin, Antitrust Doctrine and the Sway of Metaphor, 75 Geo. L.J. 395, 402 (1986). 8 Many courts and commentators use the term “essentiality” to encompass all three of these elements. See IIIA Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law J 773b1 (1996). Kodak’s proposed jury instructions separated the concept into its analytically distinct components. 18 (4th Cir.), cert. denied, 502 U.S. 814 (1991); MCI, 708 F.2d at 1132; Blue Cross & Blue Shield United v. Marshfield Clinic, 65 F.3d 1406, 1413 (7th Cir. 1995), cert. denied, 116 S. Ct. 1288 (1996); Twin Lab., Inc. v. Weider Health & Fitness, 900 F.2d 566, 568 (2d Cir. 1990) (“At the very least, a plaintiff must demonstrate that ‘duplication of the facility would be economically infeasible’ ”) (quoting Hecht v. Pro-Football, Inc., 570 F.2d 982, 992 (D.C. Cir. 1977), cert. denied, 436 U.S. 956 (1978)); IIIA Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law { 773, at 208 (1996) (“Areeda & Hovenkamp”] (“the alleged facility must be shown to dominate a properly defined relevant market”).9 These are common sense requirements. The issue is whether a refusal to deal “extend[s] monopoly power from one stage of production to another.” MC/, 708 F.2d at 1132: Anaheim, 955 F.2d at 1380 (whether an asset “can be and is used to improperly interfere with competition”). An input that is not monopolized carries no power to “extend.” And criti- cally, neither do inputs that are monopolized, i.e., the defen- dant has monopoly power over them, if they are still elsewhere available to rivals.!° Indeed, there is a particularly strong policy basis for rejecting claims based on monopo- lized-but-available inputs, since “requiring the defendant to share actually perpetuates the monopoly by reducing the incentive for development of realistically available competi- tive alternatives.” Areeda & Hovenkamp § 771b, at 176.!! ° Previous Ninth Circuit cases agreed. See City of Anaheim vy. Southern Cal. Edison Co., 955 F.2d 1373, 1380 (9th Cir. 1992) (if an item “can be reasonably or practically duplicated it is highly unlikely, even impossible, that it will be found to be essential”): Alaska Airlines, Inc. vy. United Airlines, Inc., 948 F.2d 536, 544 (9th Cir. 199] ), cert. denied, 503 U.S. 977 (1992). '0 For example, where the demand by service providers for a particular part is only a fraction of the total demand for that part, the monopolist’s rivals might easily satisfy it. '! See also id. | 773b2, at 203-04. In another striking inconsistency, the Ninth Circuit held that the “all parts” injunction “unnecessarily entrenches Kodak as the only parts supplier to ISOs.” App. 67A. ig Letnnatn: 19 Essentiality: Only assets “vital to the plaintiff’s competi- tive viability,” that is, its survival, ought to be subjected to forced dealing. Areeda & Hovenkamp { 773b1, at 202. Other- wise Section 2 may be used to appropriate the legitimate competitive advantages from investment in superior produc- tion facilities, distribution networks, supply sources, and, as here, service capabilities. See generally Michael E. Porter, Competitive Advantage 39-40 (1985). These investments may, and indeed are intended to, capture business. But, since investments in quality capture business by catering to con- sumer preferences, they are not anticompetitive, and there is no antitrust justification for interfering with the natural cycle of investment-reward. “The suggestion that the price of being ‘best’ is to be brought under the regulatory aegis of antitrust law and stripped of your power to decide whom to do busi- ness with does not identify an interest that the antitrust laws protect.” Marshfield Clinic, 65 F.3d at 1413. The Circuits have defined “essentiality” in different ways. The Seventh Circuit states that an asset must be “indis- pensable to effective competition,” Olympia, 797 F.2d at 379; the Second and D.C. Circuits state that an asset’s denial must impose a “severe handicap,” Twin Lab., 900 F.2d at 568; Hecht, 570 F.2d at 992: and the Ninth (before this case) referred to an asset’s “power to eliminate competition.” Alaska Airlines, 948 F.2d at 544. But the point is the same: except in the extraordinary case where meaningful competi- tion would otherwise cease to exist, a defendant’s property rights in competitive assets it developed should not be dis- turbed. B. The Ninth Circuit’s “More General” Refusal-to- Deal Doctrine. The ISOs had good reason to oppose an objective refusal- to-deal doctrine. Most (if not all) of the parts they sought were not monopolized by Kodak and were available else- where. Nor did Kodak’s refusal to deal eliminate ISO compe- tition. Plaintiffs admitted “[t]here never was a machine these plaintiffs couldn’t fix because they didn’t have a part,” 20 ER-223, and ISO service grew notwithstanding Kodak’s poli- cies. Plaintiffs’ micrographics service revenues doubled in the first five years of the parts policy, ER-321, and the only significant copier plaintiff grew twenty-fold between 1986 and 1994. ER-312. There has also been successful new entry. ER-14; 37; 86; 177. Nevertheless, the Ninth Circuit accepted plaintiffs’ claim that Kodak should be liable because ISOs were “handicapped” to some unstated degree by Kodak’s policies. But without objective guideposts, how can anyone know whether the lack of “an assured supply of parts” was a sufficient “handicap,” and a handicap rooted in Kodak’s monopoly power, to warrant this most extraordinary form of antitrust intervention? A careful look at the jury instructions shows that plaintiffs were required to prove nothing about the specific competitive inputs they demanded from Kodak. e Plaintiffs were not required to prove that Kodak monopolized specific parts. Instead, they were allowed to claim that Kodak monopolized “all parts,” which is imma- terial, since even a monopolist need not share inputs it does not monopolize.'? Worse, the Ninth Circuit held that it was sufficient if Kodak had merely close-to-monopoly power over '2 The court’s ruling that there was a relevant antitrust market for “all parts” was plainly incorrect. The jury had been properly instructed that a relevant market is composed of reasonably interchangeable products. But no two replacement parts are interchangeable, any more than a carburetor and an oil filter are. Nonetheless, the court found that because service providers “need” all parts, there could be an all-parts “cluster market.” See United States v. Grinnell Corp., 384 U.S. 563, 572 (1966). This is not a proper basis for finding a cluster market, even if the issue had been tendered to the jury. Jn re British Oxygen Co., 86 F.T.C. 1241, 1369 (1975) (“complementarity in end use . . . does not establish” cluster market), rev'd on other grounds, BOC Int'l Ltd. v. FTC, 557 F.2d 24 (2d Cir. 1977). Alternatively, the court held “all parts” might be a relevant “submarket.” That is no better, since by definition “submarkets” exist within the contours of a market defined by reasonable interchangeability. Brown Shoe Co. vy. United States, 370 U.S. 294, 325 (1962). It is clearly wrong to link non- interchangeable products into a broader “submarket.” eeetehe oo ARID ROL, Sanat 21 “all parts.” App. 20A-21A. This was the first-ever articulation of a “less-than-monopoly leveraging” doctrine, and explicitly expands the scope of liability by subjecting non-monopolists to mandatory dealing. e Plaintiffs were not required to prove unavailability: neither that they could not get specific parts elsewhere, nor that they could not practically duplicate Kodak’s warehousing operations, the “parts coffers” to which they were seeking access. What is especially remarkable is that after it affirmed the finding of liability, the Ninth Circuit removed from the permanent injunction Kodak’s obligation to sell ISOs parts made by others because it is “unnecessary and anticompeti- tive” to force Kodak to sell parts for which “ISOs have an alternative source.” App. 67A. That is exactly Kodak’s point, and why plaintiffs’ claims should fail as a matter of law. See Abcor Corp. v. AM Int'l, Inc., 916 F.2d 924, 929 (4th Cir. 1990) (rejecting ISO access to manufacturer’s parts depots). e Plaintiffs were not required to prove essentiality, i.e., that getting any or all parts from Kodak was “indispensable to effective competition.” Olympia, 797 F.2d at 379. That bar was lowered all the way to “unnecessarily restricts or hand- icaps competitors,” a vacuous conclusion that allowed plain- tiffs to posit “less restrictive alternatives” to Kodak’s policies and the ubiquitous prospect in any monopolization case of a “more competitive” market.!3 Trial under these instructions turned on the jury’s view of the legitimacy and genuineness of Kodak’s business reasons for not assisting its competitors. That produced its own bizarre result: the Ninth Circuit affirmed liability even though it found Kodak had a meritorious “free-riding” objection to the demand for “all parts,” App. 66A-67A, and a presump- tively valid intellectual property “defense.” App. 48A. Thus, '3 Kodak sought an instruction that the existence of less restrictive alternatives does not undermine a refusal to deal. Plaintiffs opposed on the ground that the “unnecessarily restrictive” standard requires a comparison of the defendant’s business practices to available alternatives. Tr.6700. The district court rejected Kodak’s instruction and, based on Aspen, the Ninth Circuit affirmed. App. 34A-36A. 22 at the end of the day, intent — the least predictable most consistently criticized basis for resolving antitrust disputes — was dispositive. See Olympia, 797 F.2d at 379-80. Most troubling is the court’s reliance on Aspen and Kodak I. App. 26A (“relying on Kodak and Aspen Skiing, we endorse the ISOs’ theory”). This suggests other courts not only could, but must, follow the Ninth Circuit’s lead. But if Aspen and Kodak I support this decision, it is solely through the unintended consequences of imprecise language. This Court could not have meant to adopt a refusal-to-deal law devoid of meaningful standards. The Ninth Circuit divined three unintended messages from Aspen. The first was that because the Court discussed Aspen Skiing’s refusal to deal “without referencing the essen- tial facilities doctrine,” App. 28A, it must have wanted refusals to deal analyzed without reference to the elements established in essential-facilities cases. App. 30A. This is simply wrong. Every Supreme Court decision addressing refusals to deal, including Aspen, has stressed monopoly, unavailability and essentiality. E.g., Aspen, 472 U.S. at 594-95, 607-08 (plaintiff was unable “to develop a substitute product” and saw its market share drop from 20.5% to 11%): Kodak I, 504 U.S. at 458 (“ISOs were unable to obtain parts from reliable sources”); Otter Tail, 410 U-S. at 377 (defendant controlling natural monopoly foreclosed plaintiff “from obtaining electric power from outside sources of supply”); Lorain Journal, 342 U.S. at 152 (99% monopoly made news- paper “an indispensable medium of advertising”); Southern Photo, 273 U.S. at 377 (plaintiff “otherwise . . . could not purchase or secure the goods necessary in the conduct of its business”). Second, the court found that Aspen requires monopolists to justify all “change[s] [in] established pattern[s] of distribu- tion to the detriment of competitors.” App. 30A (citing 472 U.S. at 603).'4 But Aspen does not require justifications for '* This, regrettably, has been evident in several cases interpreting Aspen, and has led to another split of authority. Compare Olympia, 797 Pe ee Cee a Rc BALAI On Pelt Seg Nb ln SEH: AR satin ar 23 refusing to share non-essential or otherwise available inputs. Essentiality and unavailability are “initial condition[s] that must be satisfied before a court can even contemplate forcing a defendant to provide access.” Areeda & Hovenkamp { 773b, at 201. They were proven in Aspen. And change, which is to be expected whenever a monopolist is tested by entry, is not a substitute for proof of unavailability and essentiality. Responding to emerging competition by refusing to share superior but duplicable competitive resources does not offend antitrust policy, even if it involves change. Third, and most importantly, the court found that by approving the jury instructions used in Aspen, 472 U.S. at 597, this Court intended to excuse plaintiffs from proving essentiality and unavailability. App. 30A. Many commenta- tors have criticized the generality of those instructions.!5 But until this case, few if any courts thought this Court was endorsing them for all refusal-to-deal cases, and to the exclu- sion of more specific, objective instructions.'!© One would not see the dozens of post-Aspen cases applying the MCI criteria if that were so. The Ninth Circuit’s expansive reading of Aspen is therefore a major development. Perhaps the Ninth Circuit was right, and this Court wants refusals to deal condemned without objective analysis, and F.2d at 376 (a monopolist does not incur antitrust liability by withdrawing a “helping hand”), with Key Enters. of Del., Inc. v. Venice Hosp., 919 F.2d 1550, 1558 (11th Cir. 1990) (change requires defendant to come forward with valid business reasons), cert. denied, 511 U.S. 1126 (1994), and SCFC ILC, Inc. v. Visa USA, Inc., 36 F.3d 958, 971 (10th Cir. 1994) (stressing change), cert. denied, 515 U.S. 1152 (1995). 'S See Areeda & Hovenkamp { 772, at 190 (“virtually any act of a monopolist might be condemned under the jury instruction that Aspen approved”); Frank H. Easterbrook, On Identifying Exclusionary Conduct, 61 Notre Dame L. Rev. 972, 978 (1986) (“A fog-bound instruction of the sort given in Aspen ensures that confusion and random results will emerge’’). '© In fact, though lengthy, the discussion of the jury instructions in Aspen is entirely dicta, since the petitioner did not “criticize the trial court's instructions” regarding monopoly conduct. 472 U.S. at 596. 24 merely on a jury’s view of what was “necessary” and “intended.” But we doubt it. It seems much more plausible that the Ninth Circuit’s decision is the unintended result of Aspen’s and Kodak I’s less disciplined passages. The clear conflict with so many post-Aspen cases Supports this view. But if this does explain this decision, then we respectfully submit that this Court bears a special obligation to review this case. It is intolerable that such an empty refusal-to-deal doc- trine should proliferate in the name of this Court. III. The Petition Should Be Granted To Clarify The Con- ditions Under Which A Derivative Aftermarket May Be Deemed A Relevant Antitrust Market. The holding that made Kodak J the most Significant and controversial antitrust decision in decades was that “market imperfections,” in particular switching and information costs, can support a finding of market or monopoly power over the service of a single manufacturer’s products, even if the manu- facturer lacks power over the primary product. See 504 U.S. at 460, 465-79. Because the decision threatens practically all manufacturers of durable goods with monopolization claims, it has drawn extensive criticism. !7 Judge Bork’s comments are typical: The majority’s style of reasoning can be applied to all antitrust questions, and it is capable of driving rational economic analysis once more from the law. It is always possible to posit “market imperfec- tions” that may result in markets working contrary to the predictions of economics. Those “imperfec- tions” are typically, as they were in Kodak, both '7 See, e.g., Daniel J. Gifford, The Damaging Impact of the Eastman Kodak Precedent Upon Product Competition: Antitrust Law in Need of Correction, 72 Wash. U. L.Q. 1507 (1994); Thomas C. Arthur, The Costly Quest for Perfect Competition: Kodak and Nonstructural Market Power, 69 N.Y.U. L. Rev. 1 (1994); Herbert Hovenkamp, Market Power in Aftermarkets: Antitrust Policy and the Kodak Case, 40 U.C.L.A. L. Rev. 1447 (1993); Benjamin Klein, Market Power in Antitrust: Economic Analysis After Kodak, 3 Sup. Ct. Econ. Rev. 43 (1993). PS ee 25 ingenious and imaginary. The result of reintroduc- ing them into the law is lengthy trials on baseless claims and with unpredictable outcomes. Robert H. Bork, The Antitrust Paradox: A Policy at War with Itself 438 (revised ed. 1993). Much of the criticism of Kodak I stems from the fact that it is not clear whether the decision is procedural, about the standards for summary judgment, or substantive, in that the Court intended to embrace widespread findings of aftermarket monopolies based on proof of “market imperfections.”!8 But the overwhelming majority of commentators have focused on the potentially boundless ability of the decision to support aftermarket monopoly findings, and have all but pled for limits. E.g., X Areeda & Hovenkamp ¥ 1740; Salil Kumar, Comment, Parts and Service Included: An Information-Cen- tered Approach to Kodak and the Problem of Aftermarket Monopolies, 62 U. Chi. L. Rev. 1521 (1995); Gifford, 72 Wash. U. L.Q. at 1535 (“the opinion fails to satisfy that standard of clarity which the legal profession has a right to expect of all Supreme Court antitrust decisions”); Carl Shap- iro, Aftermarkets and Consumer Welfare: Making Sense of Kodak, 63 Antitrust L.J. 483 (1995). The reach and ramifications of Kodak I have indeed proven to be vast. The “torrent” of aftermarket litigation that the dissent predicted (504 U.S. at 489) did in fact ensue, as dozens of private plaintiffs sued single-brand “monopolists.” See App. 104E-105E. And Kodak I’s impact goes far beyond relations between equipment manufacturers and ISOs. There has been a spate of antitrust cases involving franchising, with plaintiffs basing claims on monopolies over the likes of pizza 18 See Daniel E. Lazaroff, Reflections on Eastman Kodak Co. v. Image Technical Services, Inc.: Continued Confusion Regarding Tying Arrangements and Antitrust Jurisprudence, 69 Wash. L. Rev. 101, 151 (1994) (“Arguably the most critical uncertainty engendered by Kodak is whether the case is properly viewed as merely a procedural decision regarding the propriety of summary judgment rather than as a far-reaching, substantive ruling that changes the face of antitrust jurisprudence.”); X Areeda & Hovenkamp, supra note 8, J 1733f2, at 35-37. 26 dough, paper napkins and soap;'? arguments based on Kodak | are transforming health care antitrust litigation;2° and numerous “mundane commercial case[s]” now include Kodak /-inspired antitrust claims. E.g., Digital Equip. Corp. vy. Uniq Digital Tech., Inc., 73 F.3d 756, 762-63 (7th Cir. 1996). As “Kodak claims” increase, the lower courts are divided on how broadly this Court intended to permit aftermarket monopoly claims. One line sees Kodak ] as a general rebuke to the widely accepted economic theory that competitive foremarkets protect consumers from aftermarket exploitation. Under this view, the existence of Switching and information costs alone points powerfully toward a finding of a relevant aftermarket, and there is no requirement of so-called “oppor- tunism,” i.e., conduct, such as an unexpected price increase, that makes consumers worse off than they expected to be when choosing the defendant's products over alternatives. Examples of this school are Virtual Maintenance, Inc. y. Prime Computer, Inc., 11 F.3d 660, 664 (6th Cir. 1993), cert. dismissed, 512 U.S. 1216 (1994) where an aftermarket defined as “the sale of software revisions and support of software necessary to do business with Ford Motor Company” was approved, and Collins v. International Dairy Queen, 980 F. Supp. at 1254, where evidence of information and switch- ing costs supported a market of “food products and supplies to Dairy Queen franchisees.” Other courts have limited Kodak | by stressing exactly what the ISOs stressed when they were in this Court. It is, in '9 See, e.g., Queen City Pizza, Inc. v. Domino's Pizza, Inc., 124 F.3d 430, 439-41 (3d Cir. 1997); Valley Prods. Co., Inc. v. Landmark, Div. of Hosp. Franchise, Inc., 128 F.3d 398, 407 (6th Cir. 1997); Collins y. International Dairy Queen, Inc., 980 F. Supp. 1252 (M.D. Ga. 1997); Wilson v. Mobil Oil, __ F. Supp. ___, 1997 WL 675326, at *11 (E.D. La. 1997). 20 See James F. Ponsoldt, Refusals to Deal in “Locked-in” Health Care Markets Under Section 2 of the Sherman Act After Eastman Kodak Co. v. Image Technical Services, 1995 Utah L. Rev. 503 (1995). WN sel a 27 substance, the economic concept of installed-base opportu- nism.?! Plaintiffs claimed in Kodak | that Kodak had exploited market imperfections by first unexpectedly changing its poli- cies toward ISOs from cooperation to exclusion, and then surprising “captive Kodak equipment owners who bought equipment prior to 1985” with an unanticipated service-price increase. Respondents’ 9/20/91 Supreme Court Brief at 20-22: ER-1-4. This was the theory the Court held made “economic sense,” and the alleged price increase was critical to the Court’s conclusion. See 504 U.S. at 465 (Kodak “boosted service prices”), 469 (Kodak had to overcome “evidence of increased prices”), 472 (“Service prices have risen for Kodak customers”). Indeed, Professor Kauper has said that “[t]he Court’s analysis begins, and in a sense ends” with the price increase, for it put Kodak in “the unenviable position of countering what the Court accepted . .. as evidence of adverse price and output effects with a purely theoretical” argument. Kauper, 61 Antitrust L.J. at 355. Sophisticated courts picked up on this and, beginning with Lee v. Life Insurance Co. of North America, 23 F.3d 14, 20 (Ist Cir.), cert. denied, 513 U.S. 964 (1994), stressed “the timing of the ‘lock-in’ at issue in Kodak.” See also Digital Equip. Corp., 73 F.3d at 762-63; Queen City, 124 F.3d at 440 (2-1 decision affirming dismissal of complaint). In Digital, Judge Easterbrook honed in specifically on the alleged ser- vice-price increase: “The Court held that evidence in the record that prices had increased prevented a grant of summary judgment. * * * The material dispute that called for a trial was whether the change in policy enabled Kodak to extract supra-competitive prices from customers who had already 1 See Shapiro, 63 Antitrust L.J. at 487, 504. The economist who developed the theory has identified it as installed-base opportunism. See Post-Chicago Analysis After Kodak: Interview With Professor Steven C. Salop, Antitrust, Fall/Winter 1992, at 20-21. 28 purchased its machines.” 73 F.3d at 762. Since an Opportunis- tic price increase was lacking, Digital received summary judgment. /d. at 763. In PSI Repair Service, Inc. y. Honeywell, Inc., 104 F.3d 811 (6th Cir.), cert. denied, 117 S. Ct. 2434 (1997), a case essentially identical to this one was dismissed because there was no opportunistic policy change. Honeywell would not sell circuit boards to ISOs that serviced its industrial control equipment. But it had never done so, and it had been gener- ally “forthcoming about its pricing structure and service poli- cies.” Id. at 822. Based on those two facts, the court affirmed summary judgment. /d. It held that “the change in policy in Kodak was the crucial factor in the Court’s decision,” since “the evil condemned by the Court” was the exploitation of the installed base subsequent to that change. /d. at 820. Without an opportunistic policy change, there is, accordingly, no rele- vant aftermarket. Jd. at 820. There is no evidence that Kodak raised prices oppor- tunistically after either changing its micrographics parts pol- icy or rejecting the ISOs’ demand for an “assured supply” of copier parts. To repeat: © Kodak never cut off the supply of any micrographics parts. Its 1985 policy change was prospective only, and there- fore did not disrupt the ability of ISOs to service the existing installed base. ¢ Kodak never changed copier parts policies — no mat- ter what the Ninth Circuit says. App. 4A. Kodak chose not to sell parts to copier ISOs the first time it was an issue, and when there were only one or two copier ISOs in the country.22 There is no evidence that pre-1986 consumers bought Kodak copiers expecting ISO service. ¢ Kodak did not increase service prices oppor- tunistically. Plaintiffs’ economist admitted that Kodak “cus- tomers were not suddenly confronted with a price increase” after Kodak decided not to be the ISOs’ assured source of 22 These one or two ISOs bought a few copier parts before there was any policy. This could not have affected overall consumer expectations. LORNA 8h Vn ia ore aa ne Mihalis Sie! 29 supply. Tr.1621. The core allegation of the Kodak / analysis was entirely false. The district court nonetheless denied Kodak’s motion for a new trial, and the Ninth Circuit affirmed in a paragraph. App. 32A-33A. Erroneously applying a “plain error” standard of review,?? the court said it was enough that plaintiffs had presented evidence that: (1) Kodak had high service-market shares in servicing its own machines, which virtually all manufacturers do, and which begs the question whether those are relevant shares; (2) ISOs were adversely affected by the refusal to deal, which would be true whether or not Kodak had monopoly power; (3) Kodak customers experienced switching and information costs, which durable equipment customers always do;*4 (4) “Kodak’s market share in the equipment markets further limits choices by consumers,” an unexplained and unexplainable statement since the court else- where recognized the “strong competition” in those markets; and (5) that “Kodak earns supracompetitive profits,” a wholly 23 The Ninth Circuit held that Kodak waived any appeal based on the denial of its motion for judgment as a matter of law, because Kodak failed to raise the aftermarket monopoly issue at the close of evidence. App. 32A. Kodak disagrees there was waiver, but it need not concern this Court. Kodak timely moved for a new trial, and timely appealed the denial of that motion. Thus the court should have considered whether the district court abused its discretion by upholding the verdict where there was no evidence on a key element of plaintiffs’ case. E.g., American Bearing Co., Inc. v. Litton Indus., Inc., 729 F.2d 943, 948-49 (3d Cir.), cert. denied, 469 U.S. 854 (1984). In any event, it is plain error to uphold a jury finding of aftermarket monopoly on the record in this case. 24 There is no doubt that Kodak's aftermarket prices are “generally known” to consumers, which all members of the Kodak I Court agreed should result in judgment for Kodak. 504 U.S. at 477 n.24 (majority opinion), 492 (Scalia, J., dissenting). The great majority of Kodak’s customers — 88% of copier purchasers and over two thirds of micrographics purchasers — are repeat purchasers, and thus have personal experience that helps them estimate lifecycle prices. ER-133; 152; 191; 315; 317. Further, Kodak routinely provides consumers “total cost of ownership” data in sales proposals. ER-104; 117; 133-134; 153-154. 30 unsupported statement that is immaterial if Kodak’s profits did not result from opportunism.25 App. 33A. However, the court simply excluded from the analysis the most important point: “whether the change in policy enabled Kodak to extract supra-competitive prices from customers who had already purchased its machines.” Digital, 73 F.3d at 763. The result, again, is that limiting principles have been excised from the law, and ubiquitous characteristics of real- world markets for durable goods lead to findings of monop- oly. At a minimum, this decision conflicts with PSI/, Digital, Lee, and Queen City. But this is no ordinary circuit split, because the minority position reflected in this decision is on remand from Kodak |. That surely gives it heightened visi- bility, and possibly persuasiveness. It should not be the last word in this historic case. CONCLUSION The Petition for a Writ of Certiorari should be granted. Respectfully submitted, Donn P. Pickett Counsel of Record HERBERT HOvENKAMP DanieL M. Watt University of Iowa ALFRED C. Preirrer, Jr. College of Law McCutcuen, Doyie, Brown 407 Boyd Law Building & Enersen, LLP University of Iowa Three Embarcadero Center Iowa City, Iowa 52242 San Francisco, California Of Counsel 94111 Attorneys for Petitioner 2 The only evidence of these alleged profits was testimony about Kodak's gross margins on service and systems. There is, however, no useful correlation between gross margins and monopoly power. See Blue Cross & Blue Shield United v. Marshfield Clinic, 65 F.3d 1406, 1412 (7th Cir. 1995), cert. denied, 116 S. Ct. 1288 (1996); Dennis W. Carlton & Jeffrey M. Perloff, Modern Industrial Organization 342 (2d ed. 1994). Ce at Pe RR NN DRE Paes et § a dle onal iD aula eee aiaes : 7 iA FOR PUBLICATION Volume 1 of 2 UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT IMAGE TECHNICAL SERVICES, INC.; J-E-S-P Company, INc.; SHIELDS Business MACHINES, INc.; MiIcRo- GRAPHIC SErRvICES, INC.; OMNI Micro-Grapuic SERvICcES, INC.; ATLANTA GENERAL MICROFILM Co., Inc.; Datek Ltp; B.C.S. TecHNicar Services, INc.; CPO Lrtp, INnc.; ADVANCED SysTEMS SERVICE, INC.; AMTECH EQuIPMENT MAINTENANCE, INc., Plaintiffs-Appellees, V. EASTMAN Kopak Co., Defendant-Appellant. Nee eee ee eee eee eee eee eee Nos. 96-15293 96-15296 D.C. No. CV-87-01686-AWT OPINION Appeal from the United States District Court for the Northern District of California A. Wallace Tashima, District Judge, Presiding Argued and Submitted September 19, 1996 - San Francisco, California Filed August 26, 1997 2A Before: Robert R. Beezer and David R. Thompson, Circuit Judges, Helen W. Gillmor, District Judge.** Opinion by Judge Beezer; Partial Concurrence and Partial Dissent by Judge Gillmor COUNSEL Donn P. Pickett and Daniel M. Wall, McCutchen, Doyle, Brown & Enersen, San Francisco, California, for the defendant-appellant. Maxwell M. Blecher, Blecher & Collins, Los Angeles, Cali- fornia, for the plaintiffs-appellees. OPINION BEEZER, Circuit Judge: Plaintiffs-Appellees Image Technical Services, and ten other independent service organizations (“ISOs”) that service Kodak photocopiers and micrographic equipment sued the Eastman Kodak Co. (“Kodak”) for violations of the Sherman Act. The ISOs alleged that Kodak used its monopoly in the market for Kodak photocopier and micrographic parts to create a second monopoly in the equipment service markets. A jury verdict awarded treble damages totaling $71.8 million. The district court denied Kodak’s post trial motions and entered a ten year perma- nent injunction requiring Kodak to sell “all parts” to ISOs. Kodak filed a timely appeal, challenging the jury’s verdict, the ISOs’ evidence, the jury instructions, the ** The Honorable Helen W. Gillmor, United States District Judge for the District of Hawaii, sitting by designation. ‘4 Seeks a du 3A damage awards and the permanent injunction. Kodak also seeks reversal on the basis of an alleged biased juror. This appeal raises questions relating to the applica- tion of antitrust principles upon a finding that a monopo- list unilaterally refused to deal with competitors. We also address overlapping patent and copyright issues and their significance in the antitrust context. We have jurisdiction pursuant to 28 U.S.C. § 1291 and we affirm in part, reverse in part and remand with instructions to amend the injunction. I Kodak manufactures, sells and services high volume photocopiers and micrographic (or microfilm) equipment. Competition in these markets is strong. In the photo- copier market Kodak’s competitors include Xerox, IBM and Canon. Kodak’s competitors in the micrographics market include Minolta, Bell & Howell and 3M. Despite comparable products in these markets, Kodak’s equip- ment is distinctive. Although Kodak equipment may per- form similar functions to that of its competitors, Kodak’s parts are not interchangeable with parts used in other manufacturers’ equipment. Kodak sells and installs replacement parts for its equipment. Kodak competes with ISOs in these markets. Kodak has ready access to all parts necessary for repair services because it manufactures many of the parts used in its equipment and purchases the remaining necessary parts from independent original-equipment manufac- turers. In the service market, Kodak repairs at least 80% 4A of the machines it manufactures. ISOs began servicing Kodak equipment in the early 1980’s, and have provided cheaper and better service at times, according to some customers. ISOs obtain parts for repair service from a variety of sources, including, at one time, Kodak. As ISOs grew more competitive, Kodak began restricting access to its photocopier and micrographic parts. In 1985, Kodak stopped selling copier parts to ISOs, and in 1986, Kodak halted sales of micrographic parts to ISOs. Additionally, Kodak secured agreements from their contracted original-equipment manufacturers not to sell parts to ISOs. These parts restrictions limited the ISOs’ ability to compete in the service market for Kodak machines. Competition in the service market requires that service providers have ready access to all parts. Kodak offers annual or multi-year service contracts to its customers. Service providers generally contract with equipment owners through multi-year service con- tracts. ISOs claim that they were unable to provide simi- lar contracts because they lack a reliable supply of parts. Some ISOs contend that the parts shortage forced them out of business. In 1987, the ISOs filed this action against Kodak, seeking damages and injunctive relief for violations of the Sherman Act. The ISOs claimed that Kodak both: (1) unlawfully tied the sale of service for Kodak machines with the sale of parts in violation of § 1 of the Sherman Act, and (2) monopolized or attempted to monopolize the sale of service for Kodak machines in violation of § 2 of the Sherman Act. Ee ee Bn.) re 5A Kodak moved for summary judgment prior to dis- covery. The district court allowed brief discovery and then granted summary judgment in Kodak’s favor. Image Technical Serv., Inc. v. Eastman Kodak Co., 1988 WL 156332 (N.D. Cal.). We reversed. Image Technical Serv., Inc. v. Eastman Kodak Co., 903 F.2d 612 (9th Cir. 1990). Kodak appealed to the Supreme Court, which affirmed the denial of summary judgment. The Court held that the record disclosed sufficient factual disputes to survive summary judgment on both the § 1 and § 2 claims. Eastman Kodak Co. v. Image Technical Serv., Inc., 504 U.S. 451 (1992). The Supreme Court also held that Kodak’s lack of market power in the market for high volume photocopiers and micrographic equipment did not preclude, as a matter of law, the possibility of market power in the derivative aftermarkets for parts and ser- vice. Id. at 477. The Court recognized that resolution of other key issues required a more complete record. The Court concluded: In the end, of course, Kodak’s arguments may prove to be correct. It may be that its parts, service, and equipment 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 anticompetitive effects of Kodak’s behavior are outweighed by its competitive effects. But we cannot reach these conclusions as a matter of law on a record this sparse. 504 U.S. at 486. After remand, the case proceeded to trial in the dis- trict court. Before closing arguments, the ISOs withdrew 6A their § 1 tying and conspiracy claims. The remaining § 2 attempted monopolization and monopolization claims were submitted to the jury. A unanimous verdict awarded damages to the ISO’s totaling $71.8 million after trebling.! Ten ISOs were awarded damages covering lost service profits in the amount of $12,172,900 (before trebling) and six ISOs were awarded damages covering lost profits for used equipment sales totaling $11,775,400 (before tre- bling). After accepting the verdict, the district court crafted a ten year injunction requiring Kodak to sell all parts to ISOs on “reasonable and nondiscriminatory terms and prices.” The injunction required Kodak to sell: (1) all parts for Kodak equipment; (2) all parts described in Kodak’s Parts Lists; (3) all parts of supply items that are field replaceable by Kodak technicians; (4) all service manuals and price lists; and (5) all tools or devices “essential to servicing Kodak equipment.” II Section 2 of the Sherman Act prohibits monopolies, attempts to form monopolies, as well as combinations and conspiracies to do so. 15 U.S.C. § 2.2 The ISOs pre- sented evidence in support of two § 2 theories: attempted ’ The district court excused two jurors during deliberations and thus only ten jurors deliberated on the final verdict. One juror was dismissed, over Kodak’s objection, for disrupting the jury’s deliberations. A second juror was dismissed by agreement of both parties and the district court. * Section 2 of the Sherman Act reads in relevant part: “Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other persons, to monopolize a +) eg ek) oN lies Sita ue aS LAO PL 7A monopolization and monopolization. They alleged, and the jury concluded, that Kodak used its monopoly over Kodak photocopier and micrographic parts to attempt to create and actually create a second monopoly over the service markets. To prevail on a § 2 attempt claim, the ISOs were required to establish: “(1) a specific intent to control prices or destroy competition; (2) predatory or anticom- petitive conduct directed at accomplishing that purpose; (3) a dangerous probability of achieving ‘monopoly power,’ and (4) causal antitrust injury.” Rebel Oil Co., Inc. v. Atlantic Richfield, Co., 51 F.3d 1421, 1434 (9th Cir.) (citing McGlinchy v. Shell Chem. Co., 845 F.2d 802, 811 (9th Cir. 1988)), cert. denied, 116 S. Ct. 515 (1995). The require- ments of a § 2 monopolization claim are similar, differing primarily in the requisite intent and the necessary level of monopoly power. See California Computer Products, Inc. v. International Business Machines Corp., 613 F.2d 727, 736-37 (9th Cir. 1979). To prevail on a § 2 monopoly claim the ISOs were required to prove that Kodak: (1) possessed monopoly power in the relevant market and (2) willfully acquired or maintained that power. Kodak, 504 U.S. at 481 (citing United States v. Grinnell Corp., 384 U.S. 563, 570-71 (1966)). Section 2 plaintiffs must also establish antitrust injury. See Cost Management Services, Inc. v. Washington Natural Gas Co., 99 F.3d 937, 949 (9th Cir. 1996). Kodak primarily attacks the ISQs’ monopoly claim because success would likely upset the “attempt” verdict any part of the trade or commerce . . . [commits a felony].” 15 USC. § 2. 8A as well. We now address Kodak’s appeal against the background of the Supreme Court’s opinion in Kodak and the extensive record developed at trial. A. Market Power Kodak first attacks the ISOs’ monopoly power theory and its supporting evidence. Monopoly power is “the power to control prices or exclude competition.” Grinnell, 384 U.S. at 571 (quoting United States v. E.I. du Pont De Nemours & Co., 351 U.S. 377, 391 (1956)). As noted, § 2 monopoly claims require a showing of monopoly power, commonly referred to as market power. See Cost Manage- ment Services, 99 F.3d at 950 n.15. Market power can be proven by either direct or circumstantial evidence. Rebel Oil, 51 F.3d 1421, 1434. The ISOs offered proof of market power by both means. We hold that there is sufficient proof of market power by circumstantial evidence. We need not consider the ISOs’ direct evidence. To demonstrate market power by circumstantial evi- dence, a plaintiff must: “(1) define the relevant market, (2) show that the defendant owns a dominant share of that market, and (3) show that there are significant bar- riers to entry and show that existing competitors lack the capacity to increase their output in the short run.” Id. at 1434 (citations omitted). We review these requirements in turn. i. We begin with the relevant market determination. The relevant market is the field in which meaningful 9A competition is said to exist. See United States v. Continental Can Co., 378 U.S. 441, 449 (1964). Generally, the relevant market is defined in terms of product and geography. See Rebel Oil, 51 F.3d at 1434; see, e.g., Oahu Gas Service, Inc. v. Pacific Resources, Inc., 838 F.2d 360, 364-65 (9th Cir. 1988) (all propane sales in Hawaii). In Rebel Oil Co., Inc. v. Atlantic Richfield Co., we defined “market” as the group of sellers or producers who have the “actual or potential ability to deprive each other of significant levels of busi- ness.” 51 F.3d at 1434 (quoting Thurman Industries, Inc. v. Pay 'N Pak Stores, Inc., 875 F.2d 1369, 1374 (9th Cir. 1989)). Without a proper definition of the relevant market, it is impossible to determine a party’s influence over that market. Id. Ultimately what constitutes a relevant market is a factual determination for the jury. Id. at 1435. In Kodak, the Supreme Court noted two guiding prin- ciples pertinent to the relevant market definition here. First, the Court held that service and parts could consti- tute separate markets. Kodak, 504 U.S. at 462-63, 481-82. Second, the Supreme Court held that a single brand could constitute a separate market. Id. at 482. Thus, as to the market for Kodak parts, the ISOs proceeded on the theory that Kodak held monopolies over two relevant parts mar- kets: the Kodak photocopier parts market and the Kodak micrographic parts market. Both markets, the ISOs argued, consisted of the entirety of necessary Kodak parts for that field of equipment. Kodak disagrees and argues that the district court erred in denying its renewed motion for judgment as a matter of law, because the ISOs’ “all parts” market theory, upon which the jury relied to define the market, has no support in existing antitrust precedent. We review de 10A novo the district court’s denial of Kodak’s renewed motion of judgment as a matter of law. Acosta v. City & County of San Francisco, 83 F.3d 1143, 1145 (9th Cir.), cert. denied, 117 S. Ct. 514 (1996). We would be required to reverse the district court’s denial of Kodak’s motion if the evidence, construed in the light most favorable to the ISO’s, permits only one reasonable conclusion, and that conclusion is contrary to that of the jury’s. Id. On appeal and in their renewed motion for judgment as a matter of law, Kodak proposes a segmented parts market. It argues that because no two parts are inter- changeable, the relevant markets for parts consist of the market for each individual part for Kodak photocopiers and each single part for Kodak micrographics equipment. Under Kodak’s theory there are not two relevant parts markets, but thousands of individual “part” markets. Kodak contends that the ISOs should have been required to demonstrate that they could not obtain particular non- patented parts and that the failure to obtain that particu- lar part resulted in a Kodak monopoly over service. We reject Kodak’s market definition. Kodak’s market definition focuses exciusively on the interchangeability of the parts although ignoring the “commercial realities” faced by ISOs and end users. Kodak, 504 U.S. at 482. In Kodak, the Supreme Court rea- soned that: Because service and parts for Kodak equipment are not interchangeable with other manufac- turers’ service and parts, the relevant market from the Kodak equipment owner’s perspective is composed of only those companies that ser- vice Kodak machines. ee ee eee ee ee 11A Id. The Court also recognized however, that the market definition here could “be determined only after a factual inquiry into the ‘commercial realities’ faced by con- sumers.” Id. (citing Grinnell, 384 U.S. at 572). Consider- ation of the “commercial realities” in the markets for Kodak parts compels the use of an “all parts” market theory. The “commercial reality” faced by service pro- viders and equipment owners is that a service provider must have ready access to all parts to compete in the service market. As the relevant market for service “from the Kodak equipment owner’s perspective is composed of only those companies that service Kodak machines,” id., the relevant market for parts from the equipment owners’ and service providers’ perspective is composed of “all parts” that are designed to meet Kodak photocopier and micrographics equipment specifications. The makers of these parts “if unified by a monopolist or a hypothetical cartel, would have market power in dealing with” ISOs and end users. Rebel Oil, 51 F.3d at 1436 (quoting Areeda & Hovenkamp, Antitrust Law, { 518.1b, at 534 (Supp. 1993)) (defining relevant “market”). Kodak argues that service providers’ need for all parts is not pertinent to the relevant market determina- tion. Kodak, citing In re British Oxygen Co., 86 F.T.C. 1241 (1975), rev'd on other grounds, BOC Intern., Lae. & ie. C.., 557 F.2d 24 (2nd Cir. 1977), analogizes to the automotive supplies market, arguing that the fact that automobile owners need tires, oil and gasoline does not mean that these elements constitute a single relevant market. The market for Kodak parts is distinguishable. First, Kodak parts, unlike tires, oil or gasoline, are not interchangeable with parts for other brands or equipment: the market for — to sell or license protected work. See Westinghouse, 648 F.2d at 647. In United States v. West- inghouse Electric Corp, we held that “[t]he right to license [a] patent, exclusively or otherwise, or to refuse to license at all, is the ‘untrammeled right’ of the patentee.” Id. (quoting Cataphote Co:poration v. DeSoto Chemical Coatings, Inc., 450 F.2d 769, 774 (9th Cir. 1971)); see Zenith Radio Corp., 395 U.S. at 135(the patent holder has the “right to invoke the State’s power to prevent others from utilizing [the] discovery witheut [the patent holder’s] consent”) (citations omitted); Ticom Inc. v. Electronic Data Systems Corp., 902 F.Supp. 741, 743 (E.D. Mich.1995) (“Under pat- ent and copyright law, [the owner] may not be compelled to license . . . to anyone.”) (citations omitted). 2. Next we lay out the problem presented here. The Supreme Court touched on this question in Kodak, i.e., the effect to be given a monopolist’s unilateral refusal to sell 42A or license a patented or copyrighted product in the con- text of a § 2 monopoly leveraging claim. In footnote 29, previously discussed, the Supreme Court in Kodak refutes the argument that the possession by a manufacturer of “inherent power” in the market for its parts “should immunize [that manufacturer] from the antitrust laws in another market.” 504 U.S. at 480 n.29. The Court stated that a monopolist who acquires a dominant position in one market through patents and copyrights may violate § 2 if the monopolist exploits that dominant position to enhance a monopoly in another market. Although foot- note 29 appears in the Court’s discussion of the § 1 tying claim, the § 2 discussion frequently refers back to the § 1 discussion, and the Court’s statement that “exploit[ing][a] dominant position in one market to expand [the] empire into the next” is broad enough to cover monopoly leveraging under § 2. Id.* By responding 8 The cases cited by the Supreme Court also support this conclusion. In Times-Picayune, the Court addressed both a § 1 tying claim and a § 2 monopolization claim. 345 U.S. at 611. Regarding the § 1 claim, the Court found insufficient power in the relevant market to support “dominance.” Id. Later in addressing the § 2 claim, the Supreme Court held that “[t]his case does not demonstrate an attempt by a monopolist established in one area to nose into a second market. . . . ” Id. at 626. Also relevant to the relationship between § 1 and § 2, the Court in Leitch Manufacturing held that it made no difference that the defendant had not expanded its monopoly “by contract.” 302 U.S. at 463. The Court held: [T]he owner of the patent monopoly, ignoring the limitation ‘inherent in the patent grant,’ sought by its method of doing business to extend the monopoly to unpatented material 43A in this fashion, the Court in Kodak supposed that intellec- tual property rights do not confer an absolute immunity from antitrust claims. The Kodak Court, however, did not specifically address the question of antitrust liability based upon a unilateral refusal to deal in a patented or copyrighted product. Kodak and its amicus correctly indicate that the right of exclusive dealing is reserved from antitrust lia- bility. We find no reported case in which a court has imposed antitrust liability for a unilateral refusal to sell or license a patent or copyright.? Courts do not generally view a monopolist’s unilateral refusal to license a patent as “exclusionary conduct.” See Data General, 36 F.3d at 1186 (citing Miller Instituform, Inc. v. Instituform of North America, 830 F.2d 606, 609 (6th Cir. 1987) (“A patent .... [This is unlawful] whatever the nature of the device by which the owner of the patent seeks to effect such unauthorized extension of the monopoly. Id. (citation omitted); see also Mercoid Corp. v. Mid-Continent Investment Co., 320 U.S. 661, 665 (1943) (“The method by which the monopoly is sought to be extended is immaterial.”) The particular patent misuse issues addressed in Leitch and Mercoid are now controlled by 35 U.S.C. § 271, Dawson Chem. Co. v. Rohm & Haas, 448 U.S. 176 (1980), but this does not alter the application of their reasoning here. * The ISOs correctly observe that this case involves a selective refusal to sell products protected by patents and copyrights, not an absolute refusal to license. This distinction makes no difference. See Westinghouse, 648 F.2d at 647 (“the right to license . . . exclusively or otherwise . . . is the ‘untrammeled right’ of the patentee.”). The ISOs offer no rationale for a distinction between discriminatory licensing and discriminatory sales. 44A holder who lawfully acquires a patent cannot be held liable under Section 2 of the Sherman Act for maintaining the monopoly power he lawfully acquired by refusing to license the patent to others.”); Westinghouse, 648 F.2d at 647 (finding no antitrust violation because “Westinghouse has done no more than to license some of its patents and refuse to license others”); SCM Corp., 645 F.2d at 1206 (“where a patent has been lawfully acquired, subsequent conduct permissible under the patent laws cannot trigger any liability under the antitrust laws.”). This basic right of exclusion does have limits. For example, a patent offers no protection if it was unlawfully acquired. Data General, 36 F.3d at 1186 (citing SCM Corp., 645 F.2d at 1208-09). Nor does the right of exclusion protect an attempt to extend a lawful monopoly beyond the grant of a patent. See Mercoid, 320 U.S. at 665. Section 2 of the Sherman Act condemns exclusionary conduct that extends natural monopolies into separate markets. Much depends, therefore, on the definition of the patent grant and the relevant market. The relevant market for determining the patent or copyright grant is determined under patent or copyright law. See, e.g., id. at 666 (the patent's grant “is limited to the invention which it defines.”). The relevant markets for antitrust purposes are determined by examining eco- nomic conditions. See Kodak, 504 U.S. at 462 (citing Jeffer- son Parish Hospital Dist. No. 2. v. Hyde, 466 U.S. 2, 21-22 (1984)). We recently noted the distinction between copy- right market definition and antitrust market definition in Triad Systems Corp. v. Southeastern Express Co., 64 F.3d 1330 (9th Cir. 1995). There, the plaintiff, Southeastern, argued that the copyright of the defendant, Triad, did not 45A “extend to the service market” for Triad computers. We disagreed stating: Triad invented, developed, and marketed its software to enable its customers and its own technicians to service Triad computers. South- eastern is getting a free ride when it uses that / software to perform precisely the same service. Triad is entitled to licensing fees from South- : eastern and other [SOs. .. . : Id. at 1337. Rather than merely requiring Southeastern to pay for future use, the district court enjoined South- eastern from servicing the computers that had licensed software. See id. at 1334. We never reached Southeastern’s antitrust counterclaims, as they had not yet been tried. Id. at 1338 (district court properly bifurcated the copyright and antitrust claims). Neither did we refer to antitrust principles in defining the reach of Triad’s copyright. : Parts and service here have been proven separate markets in the antitrust context, but this does not resolve the question whether the service market falls “reasonably within the patent [or copyright] grant” for the purpose of determining the extent of the exclusive rights conveyed. Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700, 708-09 (Fed. Cir. 1992). These are separate questions, which may result in contrary answers. At the border of intellectual property monopolies and antitrust markets lies a field of dissonance yet to be harmonized by statute or the Supreme Court. When an owner of intellectual property takes con- certed action in violation of § 1, this dissonance does not 46A threaten his core right of exclusion.!° See Brownell v. Ket- cham Wire & Manufacturing Co., 211 F.2d 121, 129 (9th Cir. 1954) (listing acts giving rise to antitrust liability). Con- trary to the ISOs’ arguments, there is an important differ- ence between § 1 tying and § 2 monopoly leveraging: the limiting principles of § 1 restrain those claims from mak- ing the impact on intellectual property rights threatened by § 2 monopoly leveraging claims. Where, as here, the claim involves a failure to act that is at the heart of the property right, liability depends largely on market defini- tion and lacks the limiting principles of § 1. Under § 2, “[bJehavior that might otherwise not be of concern to the antitrust laws — or that might even be viewed as procom- petitive — can take on exclusionary connotations when practiced by a monopolist.” Kodak, 504 U.S. at 488 (Scalia, J. dissenting) (citing 3 Areeda & Turner, I 813, at 300-302); see also Greyhound Computer v. International Busi- ness Machines, 559 F.2d 488, 498 (9th Cir. 1977) (otherwise lawful conduct may be exclusionary when practiced by a monopolist). Harmonizing antitrust monopoly theory with the monopolies granted by intellectual property law requires that some weight be given to the intellectual property rights of the monopolist. The effect of claims based upon unilateral conduct on the value of intellectual property rights is a cause for serious concern. Unilateral conduct is the most common 10 The ISOs withdrew their tying claim. The ISOs’ Amici, National Electronics Service Dealers Association and Professional Service Association, argue that the record reflects concerted action by Kodak, but the jury instructions do not define such action and we should not presume that it was found. ine ae ones 47A conduct in the economy. After Kodak, unilateral conduct by a manufacturer in its own aftermarkets may give rise to liability and, in one-brand markets, monopoly power created by patents and copyrights will frequently be found. Under current law the defense of monopolization claims will rest largely on the legitimacy of the asserted business justifications, as evidenced by the jury instruc- tions approved in Aspen Skiing. Without bounds, claims based on unilateral conduct will proliferate. The history of this case demonstrates that such claims rest on highly disputed factual questions regarding market definition. Particularly where treble damages are possible, such claims will detract from the advantages lawfully granted to the holders of patents or copyrights by subjecting them to the cost and risk of lawsuits based upon the effect, on an arguably separate market, of their refusal to sell or license. The cost of such suits will reduce a patent holder’s “incentive . . . to risk the often enormous costs in terms of time, research, and development.” Kawanee Oil Co. v. Bicron Corp., 416 U.S. 470, 480 (1974). Such an effect on patent and copyright holders is contrary to the fundamental and complemen- tary purposes of both the intellectual property and anti- trust laws, which aim to “encourag[e] innovation, industry and competition.” Atari Games Corp. v. Nintendo of America, Inc., 897 F.2d 1572, 1576 (Fed. Cir. 1990) (citing Loctite Corp. v. Ultraseal Ltd., 781 F.2d 861, 876-77, (Fed. Cir. 1985)).1} 11 That antitrust claims may cut into the core rights conferred by patents and copyrights is illustrated by the injunction imposed by the district court here. The injunction 48A 3. We now resolve the question detailed above. Under the fact-based approaches of Aspen Skiing and Kodak, some measure must guarantee that the jury account for the procompetitive effects and Statutory rights extended by the intellectual property laws. To assure such consid- eration, we adopt a modified version of the rebuttable presumption created by the First Circuit in Data General, and hold that “while exclusionary conduct can include a monopolist’s unilateral refusal to license a [patent or] copyright,” or to sell its patented or copyrighted work, a monopolist’s “desire to exclude others from its [pro- tected] work is a presumptively valid business justifica- tion for any immediate harm to consumers.” Data General, 36 F.3d at 1187. This presumption does not “rest on formalistic dis- tinctions” which “are generally disfavored in antitrust laws;” rather it is based on “actual market realities.” Kodak, 504 U.S. at 466-67. This presumption harmonizes the goals of the relevant statutes and takes into account the long term effects of regulation on these Purposes. The Presumption should act to focus the factfinder on the primary interest of both intellectual property and anti- trust laws: public interest. Mercoid, 320 U.S. at 665 (cita- tion omitted) (“It is the public interest which is dominant requires that Kodak supply all ISOs with its patented and copyrighted materials at “reasonable prices.” Even the ISOs do not dispute that Kodak is entitled to reap monopoly prices from the sale or licensing of these materials. reece ermine remem cmmener ar 49A in the patent system.”); Standard Oil, 221 U.S. at 58 (anti- trust laws serve the public interest by encouraging effec- tive competition). Given this presumption, the district court’s failure to give any weight to Kodak’s intellectual property rights in the jury instructions constitutes an abuse of discretion. This error was, however, harmless. The ISOs maintain that Kodak argued protection of intellectual property as a business justification to the jury, which rejected this justi- fication as pretextual. An error in instructing the jury in a civil case does not require reversal if it is more probable than not harmless. Jenkins v. Union Pacific R. Co., 22 F.3d 206, 210 (9th Cir. 1994). Kodak contends that the district court’s jury instruc- tions prevented it from arguing intellectual property to the jury. Although Kodak listed “Protect[ ] Kodak’s R & D investment and intellectual property rights” among the seven business justifications it presented, the only argument Kodak made in closing was this: Protecting Investments. By itself, again, another legitimate business reason. You’ve already seen the size of the investments. And indeed, Plain- tiffs themselves recognized that they wouldn’t be in business unless Kodak made those invest- ments. Phrased in these broad terms, Kodak’s argument repeats the “free-riding” justification rejected, as a matter of law, by the Supreme Court. Kodak, 504 U.S. at 485. The Supreme Court held that preventing the ISOs from “exploit[ing] the investment Kodak has made in product development, manufacturing and equipment sales” does 50A not suffice as a business justification. Id. (“This under- standing of free-riding has no support in our case law.”). Given the interplay of the antitrust and intellectual property laws discussed above, Kodak’s contention that its refusal to sell its parts to ISOs was based on its reluctance to sell its patented or copyrighted parts was a presumptively legitimate business justification. See Data General, 36 F.3d. at 1187. Kodak may assert that its desire to profit from its intellectual property rights justifies its conduct, and the jury should presume that this justifica- tion is legitimately procompetitive. Nonetheless, this presumption is rebuttable. See id. at 1188. In Data General, the First Circuit reasoned that the plaintiff did not rebut the presumption by drawing an analogy to Aspen Skiing, where a monopolist made an important change in its practices, which had both origi- nated in a competitive market and persisted for several years. See Data General, 36 F.3d at 1188. Because competi- tive conditions had never prevailed in the service market, the First Circuit concluded that it would be inappropriate to infer “from [defendant's] change of heart that its for- mer policies ‘satisfy consumer demand in free competi- tive markets.’ ” Id. at 1188 (quoting Aspen Skiing, 472 U.S. at 603). As in Data General, we are not faced here with a simple comparison between the monopolist’s market and the established competitive market found in Aspen Skiing. The Data General court noted that the presumption of legitimacy can be rebutted by evidence that the monopol- ist acquired the protection of the intellectual property laws in an unlawful manner. See 36 F.3d at 1188 (citation 51A omitted). The presumption may also be rebutted by evi- dence of pretext. Neither the aims of intellectual property law, nor the antitrust laws justify allowing a monopolist to rely upon a pretextual business justification to mask anticompetitive conduct. See Kodak, 504 U.S. at 484 (Because “Kodak’s willingness to allow self-service casts doubt on its quality claim. . . . a reasonable trier of fact could conclude that [this justification] is pretextual.”) (citation omitted). Kodak defends its intellectual property rights “justi- fication” against claims of pretext. Kodak argues that its subjective motivation is irrelevant. Kodak also contends, citing Olympia Equipment Leasing Co. v. Western Union Telegraph Co., 797 F.2d 370, 379 (7th Cir.), reh’g denied, (7th Cir. 1986), that a desire to best the competition does not prove pretext, nor does hostility to competitors. Kodak’s argument and its accompanying authority stands for nothing more than the proposition that a desire to com- pete does not demonstrate pretext. Evidence regarding the state of mind of Kodak employees may show pretext, when such evidence sug- gests that the proffered business justification played no part in the decision to act. Kodak’s parts manager testi- fied that patents “did not cross [his] mind” at the time Kodak began the parts policy. Further, no distinction was made by Kodak between “proprietary” parts covered by tooling or engineering clauses and patented or copy- righted products. In denying Kodak’s motion for a new trial, the district court commented that Kodak was not actually motivated by protecting its intellectual property rights. Kodak argues that the district court should have allowed the jury to reach this conclusion. Fae ee 52A Kodak photocopy and micrographics equipment requires thousands of parts, of which only 65 were pat- ented. Unlike the other cases involving refusals to license patents, this case concerns a blanket refusal that included protected and unprotected products. Cf. Westinghouse, 648 F.2d at 647 (refusal to license patents); SCM Corp., 645 F.2d at 1197 (same); Miller Instituform, 830 F.2d at 607 (claim based on termination of license agreement). From this evidence, it is more probable than not that the jury would have found Kodak’s presumptively valid business justification rebutted on the grounds of pretext.12 Kodak argues that the existence of some patented and copyrighted products undermines ISOs “all parts” theory. To the contrary, as discussed above, the “all parts” market reflects the “commercial realities” of the mar- ketplace and the lack of identifiable Separate markets for individual parts. The fact that Kodak did not differentiate between patented and nonpatented parts lends further support to the existence of these commercial realities. The jury accepted the “all parts” theory and found a scheme to monopolize the service market through Kodak’s con- duct. We hold that the district court’s failure to instruct on Kodak’s intellectual Property rights was harmless. 12 In Jury Instruction No. 34, the jury was instructed that, if they “find that any Kodak business reason” is a legitimate business reason, in that it “furthers competition on the merits, reduces prices, enhances the quality or attractiveness of a product, increases efficiency by reducing costs or otherwise benefits consumers,” they “should then consider whether each such reason is pretextual — in other words, not a genuine reason for Kodak’s conduct.” ‘4 | 3 fe f | & 53A IV Kodak asserts that the district court erred in failing to excuse Juror John Bushong on the grounds of bias. We recognize the district court’s broad discretion on matters concerning juror bias and review such challenges for an abuse of discretion. Hard v. Burlington Northern R.R. Co., 870 F.2d 1454, 1460 (9th Cir. 1989). Kodak’s complaint revolves around Bushong’s prior relationship with Kodak. At voir dire, Bushong disclosed that he had dealt with Kodak previously in conjunction with a photo laboratory he owned from 1979 to 1987. Kodak’s counsel questioned Bushong as to how this prior experience might influence his objectivity. Bushong responded that he could put aside his personal opinions and base a verdict on the evidence in an impartial and fair manner. Neither party moved to strike Bushong from the jury panel and he was subsequently seated on the jury. On the second day of trial Bushong sent a note to the judge expressing concern over his ability to remain impartial given his prior dealings with Kodak. Bushong wrote that he was “having difficulty not remembering [his] sometimes adversarial relationship with Kodak.” The note continued: “I don’t know if this will effect [sic] me in my decision on the case. But could you please advise me how you feel about this.” The judge had Bush- ong brought into open court, alone, for questioning by the court and counsel. Further inquiry revealed Bush- ong’s feelings of resentment toward Kodak stemming trom Kodak’s handling of his prior account. Bushong indicated that he was struggling to remain impartial. 54A Kodak then moved to strike Bushong for cause. The court decided to allow Bushong to remain on the jury subject to questioning two days later. The judge indicated that if Bushong harbored any conflict at the second hearing, Bushong would be removed. At the second hearing, Bushong assured the court of his impartiality and confirmed his ability to judge the case fairly. He stated: I can tell you that I’ve always prided myself in being a just and fair person and being observant of the facts. And that I think that in this case | can judge by the facts as presented and will give the facts a chance to speak for themselves. Bushong also indicated that his negative memories of Kodak were “not coming back stronger. They are actually subsiding.” Consequently, the judge denied Kodak's motion to dismiss Bushong for cause. Kodak can only succeed on a challenge for cause by showing that Bushong was actually biased. Ward v. United States, 694 F2d 654, 665 (11th Cir. 1983). Actual bias involves an inability to act impartially or a refusal to weigh the evidence Properly. Id. A juror’s initial impres- sions or initial bias may be irrelevant, at the trial judge’s discretion, when that juror commits to lay aside those feelings and reach a verdict based on the evidence pre- sented and the court’s instructions. See United States v, Claiborne, 765 F.2d 784, 800 (9th Cir. 1985), abrogated on other grounds, Ross v, Oklahoma, 487 U.S. 81 (1988). The trial judge, who observes the demeanor and credibility of a juror, is best suited to determine a juror’s impartiality. See Thompson v. Keohane, 116 S. Ct. 457, 464-65 (1995). i ne an pee re 55A The district judge determined that Juror Bushong was fit to serve on the jury. We see no reason to upset that determination or to disregard Mr. Bushong’s oath to judge the evidence fairly and obey the court's instruc- tions. See United States v. Quintero-Barraza, 78 F.3d 1344, 1350 (9th Cir. 1995) (court “must pay due respect for the oath taken by [a juror] given the absence of any stated intention to disregard it.”), cert. denied, 117 S. Ct. 135 (1996). Kodak argues that Bushong’s initial bias takes on greater weight in light of the prolonged and contentious jury deliberations. Kodak cites the jurors’ notes indicating “serious conflict,” the district court’s Allen charge and dismissal of a juror, as well as the need for supplemental instructions. Whether these irregularities were the conse- quence of the quantity and complexity of the evidence or otherwise, we need not decide; these factors are not rele- vant to our review of the district court’s denial of Kodak’s motion to exclude Juror Bushong. The district judge did not abuse his discretion in denying Kodak’s motion, and the failure to dismiss Bushong did not deprive Kodak of a fair trial. V Kodak next attacks both the jury’s award of service damages and used equipment damages. We review a jury’s verdict for substantial evidence. Davis, 927 F.2d at 1486. In the context of antitrust violations that standard is relaxed once liability is shown because market uncertain- ties often preclude a precise showing of “where” the plaintiff would have been absent the proven antitrust 56A violation. See Hasbrouck v. Texaco, Inc., 842 F.2d 1034, 1044 (9th Cir. 1987) (citation omitted), aff'd, 496 U.S. 543, 572-73 (1990). We allow juries to rely on probable and inferential proof, and to approximate damages. See J. Truett Payne Co. v. Chrysler Motors Corp., 451 USS. 557, 565-66 (1981); Dolphin Tours, Inc. v. Pacifico Creative Ser- vice, 773 F.2d 1506, 1511 (9th Cir. 1985). The ISOs employed a “yardstick” methodology in calculating damages. That is, the ISOs calculated dam- ages by comparing their business to a comparable busi- ness not affected by the anticompetitive conduct at issue. Id. (“In economic terms, the amount of damages is the difference between what the plaintiff could have made in a hypothetical free economic market and what the plain- tiff actually made in spite of the anticompetitive activ- ities.”). Whether that “unaffected” business properly compares to the relevant market presents a question of fact for the jury. Syufy Enterprises v. American Multicinema, Inc., 793 F.2d 990, 1003 (9th Cir. 1986). Volume 2 of 2 FOR PUBLICATION UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT IMAGE TECHNICAL Services, INc.; J-E-S-P Company, INc.; SHIELDs Business Macuines, INc.; MIcRo- Nos. 96-152 GrapPHic Services, INc.; OMNI Os. 96-15293 96- Micro-Grapuic Services, INc.; “anew ATLANTA GENERAL MICROFILM Co., D.C. No. Inc.; Datek Lrp; B.C.S. CV-87-01686-AWT TECHNICAL Services, INc.; CPO OPINION Lrp. Inc.; ADVANCED SysTEMS Service, INc.; AMTECH EQUIPMENT MAINTENANCE, INC., Plaintiffs-Appellees, V. EASTMAN Kopak Co., Defendant-Appellant. eee ee ee ee ee ee ee ee le ae Appeal from the United States District Court for the Northern District of California A. Wallace Tashima, District Judge, Presiding Argued and Submitted September 19, 1996 - San Francisco, California Filed August 26, 1997 Before: Robert R. Beezer and David R. Thompson, Circuit Judges, Helen W. Gillmor, District Judge.** Opinion by Judge Beezer; Partial Concurrence and Partial Dissent by Judge Gillmor _ ** The Honorable Helen W. Gillmor, United States District Judge for the District of Hawaii, sitting by designation. 58A A. Service Damages The ISOs’ damage expert employed two basic yard- Sticks in determining damages: “1) plaintiffs’ own non- Kodak revenues, and 2) the composite growth of other plaintiff ISOs’ non-Kodak revenue.” The ISOs’ expert, Thomas Neches, found that ten of the eleven plaintiffs had sufficient non-Kodak revenues to justify using the first yardstick. Seven ISOs had insufficient non-Kodak revenues, so Neches calculated damages by comparing ISO’s growth to the averaged annual composite growth of the other ISOs’ non-Kodak revenues, the second yard- Stick. Neches used other methods in determining dam- ages for plaintiffs MSI, CPO and ITS. Neches based MSI’s lost profits on the statements of MSI's president to the effect that MSI would have earned 50% more “but for” the Kodak parts policy. For CPO and ITS copier service, Neches derived his damage estimates using an averaged growth rate of the ISOs servicing micrographic equip- ment. Kodak now challenges both the MSI and CPO estimates. Kodak, citing Gray v. Shell Oil Co., 469 F.2d 742 (9th Cir. 1972), argues that the testimony of MSI's president Provides insufficient support for the MSI yardstick. In Gray, we noted: [plaintiff's] opinion, based on his hindsight, that he would have been able to make a greater margin of profit . . . is pure guess work and without foundation in this record. Id. at 748. The record Supports MSI’s damage estimates. The record shows that MSI's lost profits were caused by its inability to obtain sufficient parts to compete for 59A Kodak’s large contracts. Further, MSI’s president explained how he and his employees arrived at the 50% estimate, amounting to an extra $20,000 in service sales per year in each of MSI’s twenty metropolitan areas. Kodak argues that Neches used MSI's 50% figure “without further inquiry.” To the contrary, Neches testi- fied that he conducted additional analysis to verify that the 50% figure was a “reasonable projection;” he con- cluded “it was.” Neches also prepared a market share study to verify that a sufficient number of machines were available to support MSI’s claimed market share increase. This evidence sufficiently supports Neches’ damage esti- mates. As to CPO and ITS, Kodak challenges the benchmark used for their damage claims: the average growth rate of the micrographic services of the other ISOs. Neches used this method because ITS had no copier service other than Kodak and although CPO serviced Xerox machines, Xerox adopted a parts policy similar to that of Kodak. Neches used the ISOs as his comparable market, and Kodak fails to identify any record evidence demonstrat- ing that the markets used were not comparable. If there were “no meaningful economic similarity” between the ISOs and the firms used for comparison, we would have cause to overturn the damages. See William Inglis & Sons v. Continental Baking, 942 F.2d 1332, 1341 (9th Cir. 1991), vacated in part on other grounds, 981 F.2d 1023 (9th Cir. 1992). There is such a similarity here. We hold that sub- stantial evidence supports the jury’s finding. Kodak next focuses on the incongruity between the damages awarded to the larger ISOs (MSI and CPO) and 60A the smaller ISOs. Kodak highlights the distinction between the two groups: the larger ISOs had access to parts and profited, while the smzller ISOs often gave up the search for parts. That the larger [SOs earned profits, however, does not preclude them from recovering dam- ages to compensate any losses stemming from Kodak’s anticompetitive behavior. Juries may award damages to profitable businesses for lost sales as the result of anti- competitive behavior. See Great Western Directories, Inc. v. Southwestern Bell Telephone Co., 63 F.3d 1378, 1387-88 (5th Cir. 1995), superseded in part on other grounds, 74 F.3d 613, cert. dismissed, 117 S. Ct. 26 (1996); see also Pierce v. Ramsey Winch Co., 753 F.2d 416, 436-37 (5th Cir. 1985) (plaintiff can establish antitrust injury by showing that it would have earned an even higher profit but for antitrust injury). MSI and CPO, though profitable, showed that Kodak’s parts policy handicapped their growth. Kodak also claims that it was not responsible for the losses of ASI, which went out of business, as those losses resulted from ASI’s inability to adapt to Kodak’s conduct. ASI’s president admitted that he simply stopped trying to obtain parts and let his contracts expire after Kodak instituted its parts policy. The fact that other ISOs took ASI’s customers and profited shows that ASI’s exit was caused by factors other than Kodak’s conduct. See Data- gate, Inc. v. Hewlett-Packard Co., 941 F.2d 864, 868 (9th Cir. 1991) (no antitrust injury where exiting ISO lost its cus- tomers to an entering ISO). Accordingly, substantial evi- dence does not support ASI’s damage award, and we reverse as to those damages. Kodak next argues that the ISOs’ damage study failed to properly consider later changes in the ISOs’ ae ST a PN, Sabet ke SS Sear ae a ae et 61A claims. First, Kodak cites testimony by principals of var- ious ISOs establishing the availability of parts for pre-1986 micrographics equipment. Yet, Kodak argues, Neches testified that he built the damage study on the assumption that the micrographics plaintiffs “were claim- ing damages on both pre-1986 and post-1986 equipment.” Nonetheless the damages estimates remain valid, because, as Neches explained, the pre and post-1986 dis- tinction made no difference in his projections: The way that my study was done, I don’t look at specific equipment, specific parts, speci- fic customers. I look at the overall trend of the sales. If [plaintiffs] were selling pre-’86 equipment or able to service some post-’86 equipment, that would show up in their actual sales and would act as a reduction to damages. Neches calculated lost revenues by subtracting Kodak revenues from non-Kodak revenues (the yardstick) and multiplying by marginal profit rates.13 This method accounted for revenues actually earned from pre-1986 Kodak equipment, but the damage awards did not include lost profits from service of pre-1986 equipment for these ISOs. Kodak argues that the damage study failed to account for the fact that the ISOs did not compete with Kodak for the point-of-sale contracts entered into between equipment sellers and purchasers. Kodak does ‘3 Kodak does not point to evidence showing that MSI's president based his 50% earnings growth estimate on pre-1986 equipment. 62A not point to evidence in the record, however, establishing that the ISOs’ non-Kodak revenue derived from such contracts. Absent this evidence, Kodak does not demon- strate that the comparative use of non-Kodak revenue as a yardstick is inaccurate.'4 Kodak also argues that the ISOs’ failure to alter the damage study after the withdrawal of the ISOs’ tying and conspiracy claims invalidates the study. In the conspiracy and tying claims the ISOs alleged a different legal theory for the same harm that the jury found at trial: exclusion- ary conduct leading to the monopolization of the service market. The jury found that Kodak’s conduct deprived the ISOs of service contracts they would otherwise have obtained. That Kodak accomplished this through its parts policy and restrictions on original-equipment manufac- turers and not through overt tying or conspiracy does not affect the total damages. Section 4 of the Clayton Act provides for damages upon a showing of antitrust injury. 15 U.S.C. § 15; Datagate, 941 F.2d at 868 (citations omit- ted). Kodak argues that the ISOs’ damages do not comport with the impact of a hypothetical open sale policy on parts. Neches agreed that if Kodak increases its parts prices, the ISOs’ service profits would decrease in the “but for” world without Kodak parts policy. These changes could decrease the ISOs’ profit margins. For most-- '* Although Neches’ calculation of the equipment available to service in different markets might have been skewed by failing to take equipment under point-of-sale contracts into account, certain exhibits show that these contracts were taken into account in his market calculation. AP RSS oe et a a nel eg > - Ee et Ia a a - 63A ISOs, however, the jury was asked to compare revenues from service on equipment brands not restricted by a parts policy.'® These competitive markets would reflect new entry, parts price increases and optimal service prices. We uphold these damages and all service damages with the exception of those damages awarded to ASI. B. Used Equipment Damages Kodak challenges the jury’s damage award, to six ISOs, for reduced sales of refurbished Kodak equipment. The district court previously dismissed the ISOs’ used equipment monopoly claims “on the merits.” The court nonetheless gave Jury Instruction No. 52, submitted by Kodak, which allowed the jury to award damages for lost equipment sales “caused by some of the consequences flowing from the monopolization of the service market.” Kodak now argues that the used equipment damage award was improper because Neches did not distinguish between equipment sales lost due to Kodak’s control over the parts market and equipment sales lost due to Kodak’s service monopoly. In denying Kodak’s motion for judg- ment as a matter of law, the district court relied on Litton Systems, Inc. v. AT & T Co., 700 F.2d 785 (2d Cir. 1983), and concluded that the jury “had an evidentiary basis for finding that . . . ISOs would not only be able to get parts to service used equipment, but also to refurbish used 'S MSI's president factored in a 20% “attrition rate” in order to account for new competition. MSI’s projected growth rate for the relevant period was less than the other ISOs. 64A equipment.” We review Kodak’s mo‘ion for judgment as a matter of law de novo. Bank of the West v. Valley Nat’! Bank of Arizona, 41 F.3d 471, 477 (9th Cir. 1994), In Litton, the Second Circuit upheld a damage award despite the fact that the plaintiff's damages study failed to differentiate between lawful and unlawful practices. 700 F.2d at 825. The Second Circuit indicated that, con- trary to the defendant's argument, the study did not assume the absence of certain practices not proven at trial. Id. Litton did not address the issue presented here: the disaggregation of damages attributable to different acts and suffered in different markets. The ISOs must segregate damages attributable to lawful competition from damages attributable to Kodak's monopolizing conduct. Vernon v. Southern Cal. Edison Co., 955 F.2d 1361, 1372 (9th Cir. 1992) (citing MCI Communica- tions Corp. v. AT & T, 708 F.2d 1081, 1161 (7th Cir. 1983)). A failure to do so contravenes the command of the Clay- ton Act. Although the district court instructed the jury to award only those damages arising from Kodak’s monopo- lization of the service market, the ISOs point to no basis in the record for quantifying lost sales of used equipment caused by Kodak’s service monopoly. The ISOs’ evidence consists only of complaints by individual ISO owners that they could not sell used equipment because they could not find anyone to service that equipment besides Kodak, who effectively refused. Kodak’s used equipment service policy could not properly be presented to the jury as an anticompetitive practice given the district court dis- missed the ISOs’ used equipment monopolization claim. 65A The ISOs counter that they explained the causation issue to the jury, which did not award all the damages requested. Nonetheless, any damages awarded were speculative. Maintaining that all damages were caused by Kodak’s anticompetitive conduct, the ISOs argue that disaggregation is required only where some damage has been caused by lawful activity. This argument renders the distinction between conduct not adjudicated unlawful and “purely lawful competitive action” illusory.!© In the context of a § 2 monopolization claim, conduct is unlaw- ful because of its anticompetitive effects on the relevant market. Yet conduct found anticompetitive in one market may not be anticompetitive in another market. When a § 2 monopolization claim has been dismissed or adjudicated against a plaintiff, damages attributable to that claim must be disaggregated. See id. at 1371-72 (citing MCI, 708 F.2d at 1161-63). In MCI Communications Corp. v. AT & T, for example, the damage study employed assumed twenty-two unlawful acts, yet the jury found liability on a substantially lower number of violations. 708 F.2d at 1163. The Seventh Circuit reversed and remanded for a new trial on damages, holding: [MCI’s damage] study does not contain any information indicating how to adjust MCI’s pro- jected revenues and profits to reflect a possible finding that [some items] were lawfully priced. Id. Faced with the same difficulty, we also remand for a new trial on used equipment damages. ‘© The ISOs’ argument that they were entitled to recover damages under a more general “proximate cause” instruction also founders on this untenable distinction. VI Last, Kodak challenges the district court’s ten year permanent injunction requiring Kodak to sell all parts to all ISOs at reasonable prices.'7 We review the district court’s grant of permanent injunctive relief for an abuse of discretion or application of erroneous legal principles. Dexter v. Kirshner, 984 F.2d 979, 982 (9th Cir. 1992). Appel- late courts often defer to trial courts on issues involving the “framing” of injunctions. Appellate courts will mod- ify injunctions, however, when such action is “necessary to assure that the relief will be effective.” United States v. Glaxo Group Ltd., 410 U.S. 52, 64 (1973) (internal quotation and citation omitted). Kodak attacks the injunction on the grounds that requiring Kodak to inventory parts for the ISOs promotes free-riding by the ISOs. In Kodak, the Supreme Court noted that for Kodak to have an objection based upon free-riding, “the [ISOs] would have to be relying on Kodak’s investment in the service market. . -. ” 504 U.S. 485 n.33; see, e.g., Abcor Corp. v. AM Int'l, Inc., 916 F.2d 924, 929 (4th Cir. 1990) (“If [the plaintiff] wants to ensure emergency access to a supply of parts, it may do so by maintaining its own stockpile rather than ‘free riding’ on the inventory costs incurred by [the defendant].”). Kodak’s costs for maintaining an inventory of original- ‘7 Counsel informed this court, by letter dated February 24, 1997, of an amendment to the district court’s injunction. We recommend that the district court review that amendment in light of the modifying language set forth below. _ 67A equipment manufacturer produced parts constitute a por- tion of its investment in the service market and thus the ISOs are free-riding. Further, the injunction requires Kodak to sell all parts for Kodak equipment, whether or not Kodak manufac- tures those parts, and forbids Kodak from interfering with sales to ISOs by original-equipment manufac- turers.1° Through these two provisions, the injunction allows the ISOs to choose between purchasing from Kodak, which must warehouse parts, or from individual suppliers. Because the ISOs have an alternative source for these parts, the “no interference with [original-equipment manufacturers]” requirement is unnecessary and anti- competitive. It promotes free-riding by requiring Kodak to pay for keeping a massive inventory of parts for the ISOs. This “all parts” requirement creates barriers for non-Kodak original-equipment manufacturers by requir- ing them to price replacement parts at levels necessary to attract ISOs away from Kodak’s parts counter. It also unnecessarily entrenches Kodak as the only parts sup- plier to ISOs. Consequently, we direct the injunction to require Kodak to sell only Kodak-manufactured parts. In order to avoid confusion over combinations of parts made from some elements manufactured by Kodak and some by original-equipment manufacturers, we require '8 The injunction limits this requirement where “the ISOs or vendors are . . . causing the breach of any obligation of themselves or a third party not to disclose proprietary Kodak data... provided that the sale of a part... shall not be deemed to be a disclosure of Kodak proprietary data.” The net effect is to require the sale of parts. 68A that “Kodak parts” include any “subassemblies, [etc.]” as specified in the injunction. Next, Kodak contends that the injunction imposes utility-like regulation of prices and deprives Kodak of its right to earn monopoly profits on its patented and copy- righted products. This requirement involves the court in a matter generally considered beyond our function, namely, direct price administration. See Concord v. Boston Edison Co., 915 F.2d 17, 25 (1st Cir. 1990) (citations omit- ted). The district court observed that Kodak “erroneously assumes that it is still entitled to charge monopolistic prices.” In fact, Kodak is entitled to monopoly prices on its patented and copyrighted parts, as the ISOs admit. The cases cited by the district court involve forced sales at reasonable prices where the defendant has restrained trade in the market for patented goods. See, e.g., Glaxo Group, 410 U.S. at 62 (defendant required to sell bulk chemical controlled by illegal patent pooling). Kodak used its monopoly on parts, including patented and copy- righted products, to monopolize the service market. If future harm may be prevented without eroding the value of Kodak’s intellectual property rights, less restrictive means need be pursued. Protecting Kodak’s intellectual property rights takes on special significance where the injunction requires reasonable prices for the sale or licensing of parts for all new Kodak equipment intro- duced during the injunction’s ten year period. This requirement substantially lowers Kodak’s incentive to create new products. Dropping the reasonableness element and requiring nondiscriminatory pricing will both end Kodak’s service monopoly and protect Kodak’s intellectual property ch aaah olf abate lal eblaed ak che ins aaa WNT Anthea” gender Alle a 2g, 69A rights. Kodak should be permitted to charge all of its customers, including end users (both self-servicers and those under service contracts with Kodak),!9 service com- panies contracting with Kodak and ISOs, any non- discriminatory price that the market will bear.2° We direct the district court to modify the injunction by deleting the requirement that prices “in any event, be reasonable.” Kodak’s remaining challenges to the injunction are without merit. Injunctive relief covering nonparty ISOs is proper under these circumstances. See Hawaii v. Standard Oil Co., 405 U.S. 251, 261 (1971) (“While .. . any individ- ual threatened with injury by an antitrust violation may- . . sue for injunctive relief . . . one injunction is as effective as 100.”); Bresgal v. Brock, 843 F.2d 1163, 1170-72 (9th Cir. 1987) (relief in favor of nonparties appropriate where same defendant enjoined and where broad scope is necessary to give prevailing parties relief). Relief in favor of all ISOs prevents entrenching the ISOs as service or parts oligopolists. Likewise, the district court had ample authority for ordering forced sale or licensing of patented or copyrighted products. See Glaxo Group, 410 U.S. at 62. We direct the following modifications to the injunc- tion: '? Forcing nondiscriminatory pricing will force Kodak to restructure its pricing policies, but this result is less onerous than direct price regulation. 20 The district court observed that the prices Kodak charges to companies like Danka and Canon, which have entered into servicing contracts with Kodak, provide a basis for assessing the reasonableness of Kodak prices. When the ISOs expand their markets, however, the demand for Kodak parts will increase, and Kodak should not be limited to its current prices. 70A 1. DEFINITION OF TERMS As used in this permanent injunction, the following terms shall have the following mean- ings: (a) “Kodak” shall mean the defendant Eastman Kodak Company, its officers, agents, servants, employees, attorneys and all persons in active concert or participation with any of them who receive notice of this injunction[, and Kodak’s successors and assigns]. (b) “Kodak equipment” shall refer to all past, present and future micrographic equip- ment (whether film or digitized media based) made by or for defendant and to all Kodak high volume photocopiers made by or for defendant Kodak including, without limitation, all such equipment serviced by Kodak personnel in the field. (c) “ISOs” shall refer to any person, firm, corporation or other entity engaged, in whole or in part, in providing equipment on site or field repair or maintenance service to end user cus- tomers possessing Kodak micrographic equip- ment or Kodak high volume photocopiers in the United States. (d) “Parts” udes the following: (i) parts for Kodak equipment; (ii) parts identified or described in Kodak’s Parts Lists; (iii) all parts or supply items that are field replaceable by Kodak technicians (includ- ing, without limitation, subassemblies — to the extent that subassemblies are available to Kodak 71A technicians - circuit board level parts, IC chips, image loops, pm packs, filters and cleaning kits); (iv) service manuals (including those incorporated in hard copy, microfiche or other medium), parts, lists, price lists; and (v) all tools or devices essential to ser- vicing Kodak equipment including, but not lim- ited to, service modules, meters and electrometers, but excluding tools and devices which are generally available from normal com- mercial sources and which are not distributed by Kodak to its technicians. (e) “Kodak parts” include any part assem- bled, prepared or manufactured by Kodak. Kodak parts shall not include parts manufac- tured by original-equipment manufacturers for Kodak. 2. SALE OR PARTS FOR HIGH VOLUME COPIERS AND MICROGRAPHIC EQUIP- MENT [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386013_2183%3A1. Public record. Not legal advice.