eastman kodak co. v. image technical services kodak changes policy to require most users of its...

Eastman Kodak Co. v. Image Technical Services

• Kodak Changes Policy to Require Most Users of its Micrographic Equipment to Purchase Service from Kodak in order to get Replacement Parts

• Majority Finds Sufficient Evidence to go to Jury re:– Parts and Service Market as Separate– Sufficient Power in Parts Market– Harm to Consumers


• Kodak/DOJ/Scalia: tying & monopolization claims involving aftermarkets should be barred as a matter of law if D has no power in original equipment market

• Kodak: If consumers harmed, they’d switch to competitors’ equipment

• Majority Rejects Claim:– Theory Imperfect

– Evidence Doesn’t Support


Ps’ Explanations of Why Theory Doesn’t Work:

1.Buyers have high info costsa.Hard to figure LT costs of durable gds/services.

b.Many purchases are govtsa.don't do good job

b.different departments do capital costs & operating costs.

2.High costs to switch

3.Evidence of Price Discrimination



1. Buyers have high info costs

2. High costs to switcha. High sunk costs (training & price if already paid

for machine)

b. Unlikely to invest in new machine just b/c service expensive

3. Evidence of Price Discrimination



1. Buyers have high info costs

2. High costs to switch

3. Evidence of Price Discrimination– Favoring high volume users; supports P's theory– Suggests treating more favorably those customers

most likely to have had good info or incentive to switch machines


DOJ version of theory:

K’s tie is part of marketing strategy: spread costs over time

• Hide true price of machines

• Low sale price for equipment

• Make up with high service prices


DOJ version of theory:

K’s tie is marketing strategy: spread costs over time• Hide true price of machines• Low sale price for equipment• Make up with high service prices

Majority: Again record doesn't support• K says its equipment prices were normal, not low• If theory true, K shouldn’t allow purchasers to self-

service.


SCALIA version of theory:

• Ties of either parts or service to original equipment OK if no power in equipment market. (undisputed).



• Ties of either parts or service to original equipment OK if no power in equipment market. Should be same here b/c:

1. Rational consumers should take policy into account when purchasing equipment

2. Shouldn’t base rule on irrational consumers

3. Nut-N-Bolt analysis applies to Parts-N-Service



1. Rational consumers should take policy into account when purchasing equipment

– BUT policy changed; no evidence that customers aware of in advance

– Leads to lower ct cases: different result if made explicit to consumers at sale



2. Shouldn’t base rule on irrational consumers. Sounds appealing BUT:

• Not merely about stupid consumers; thought process hard and expensive (e.g., cars)

– changes in models, service, etc.– hard to get info



2. Shouldn’t base rule on irrational consumers. Sounds appealing BUT:

• Not merely about stupid consumers; thought process hard and expensive (e.g., cars)

• Not clear monopolist should be allowed to take advantage

– If consumers irrational or have bad info, shd co. get monopoly profits?

– If gov’t bad consumer, shd taxpayers have to pay?




• Scalia assumes services/parts purchased in fixed proportions, so no addt’l harm to consumer from spreading parts monopoly into service.




• Scalia assumes services/parts purchased in fixed proportions, so no addt’l harm to consumer from spreading parts monopoly into service. BUT

– No evidence of this at all – Counterintuitive; service varies; may not require parts



Note that Scalia’s analysis focuses entirely on theory; no discussion of evidence or of what Kodak actually was doing.


Significance of Case: • Evidence > Theory

– Like Brown & Williamson: won’t preclude cause of action based on theory alone; look at evidence

– Note good lawyering by Ps:• Demonstrated evidence was inconsistent w D’s theory

• Theoretical explanation for why D’s theory didn’t work

• Further evidence supporting that explanation


Significance of Case: • Evidence > Theory

• 6-3 Majority (including Rehnquist) reject broad read of Matsushita.

– Key Language in middle paragraph of p.402

Eastman Kodak Co. v. Image Technical Services: p.402

The Court’s requirement in Matsushita that the plaintiffs’ claims make economic sense did not introduce a special burden on plaintiffs facing summary judgment in antitrust cases. The Court did not hold that if the moving party enunciates any economic theory supporting its behavior, regardless of its accuracy in reflecting the actual market, it is entitled to summary judgment. Matsushita demands only that the nonmoving party’s inferences be reasonable in order to reach the jury, a requirement that was not invented, but merely articulated, in that decision. If the plaintiff’s theory is economically senseless, no reasonable jury could find in its favor, and summary judgment should be granted.


Significance of Case: • Evidence > Theory• 6-3 Majority (including Rehnquist) reject broad

read of Matsushita. – No reason for stronger test here than in Matsushita

• Didn’t want to overdeter alleged behavior in Matsushita (price-cutting)

• Here, OK to deter high prices & market foreclosure

–


Significance of Case: • Evidence > Theory• 6-3 Majority (including Rehnquist) reject broad read

of Matsushita. – No reason for stronger test here than in Matsushita

– Mid-para p.406 2d sentence: It is clearly reasonable to infer that Kodak has market power to raise prices and drive out competition in the aftermarkets, since respondents offer direct evidence that Kodak did so.


Qs on Kodak?

Post-Kodak Tying Caselaw

Unsurprisingly, after Kodak, lot of cases re aftermarkets, including:

1. Kodak on Remand

2. Franchising Cases

3. Aftermarket Policies Announced in Advance

4. University Housing/Food Service Cases


1. Kodak on Remand: Info in Outline p. 416





1. Kodak on Remand:

2. Franchising Cases (p.416)



Post-Kodak Tying Caselaw: Franchising Cases (p.416)

• Nature of claims: – To operate franchise (tying product), franchisee

must use specific product brands (tied products)

– Franchisees claim that their investment in the franchise gives the franchisor market power

Post-Kodak Tying Caselaw: Franchising Cases (p.416)

Cases split as to availability of tying cause of action:• Some courts:

– Kodak n/a once franchise agreement signed.

– E.g., Queen City (3d Cir. 1997) (Franchisees purchase products because bound by contract, not because forced by market power) [ME: Too simple; contract could = forcing]

• Some courts: – Switching costs for franchisees higher than those in Kodak

– Franchisor can force franchisee to buy fungible goods from it at market or above-market prices

Post-Kodak Tying Caselaw: Franchising Cases

Franchise Cases Arguably Different From Kodak:• Franchisees are dealers of package of products & services

– To get franchise, agree to sell package chosen by franchisor– Franchisor needs franchisees; has interest in their profitability. – “Tie” is more like a non-price restraint on how franchise

products sold (generally OK under Sylvania)

• Franchisee is not ultimate consumer– No info/switching costs for consumer– Consumers can discipline franchisor if they don't like package

or if prices too high

• Should disputes between franchisees & franchisors be treble damage AT suits? Cf. Photovest (p.352)


1. Kodak on Remand


3. Aftermarket Policies Announced in Advance (p.416)


Post-Kodak Tying Caselaw: Prior Knowledge

• Several cases distinguish Kodak where purchasers knew of tie involving aftermarkets prior to purchasing equipment

• These cases say that you can’t succeed on Kodak claim w/o market power in equipment market unless the tie is a change in policy or is hidden


1. Kodak on Remand



4. University Housing/Food Service Cases (not in outline)

Post-Kodak Tying Caselaw: University “Aftermarkets”

Hamilton: 128 F.3d 59 (2d Cir. 1997)• §2 claim by fraternities against D college

re both housing & meal plans• Court allows to proceed over motion to

dismiss– Sufficient claim that interstate commerce

is involved (even though D is college)– Sufficient allegations of monopoly &

potential harm from monopoly


Hack, 237 F.3d 81 (2d Cir. 2000)

Challenge to Yale U. requirement that underclassmen live in co-ed housing.

1. 1st Amdt.: Interference w Free Exercise of Religion (held not state actor)

2. Fair Housing Act: Discrimination on Basis of Religion (insufficient allegations)

3. Sherman Act: Tying (insufficient power)


Hack, 237 F.3d 81 (2d Cir. 2000)Tying challenge to Yale U. housing requirement fails:

1. Yale doesn’t have market power in higher education market– Market isn’t local– Lots of superb institutions of higher learning

(citing US News)


Hack, 237 F.3d 81 (2d Cir. 2000)Tying challenge to Yale U. housing requirement fails:

1. Yale doesn’t have market power in higher ed. market

2. Can’t claim economic power on basis that you’re locked into Yale once you’ve accepted– For tying purposes, can’t claim economic power arises from

contractual arrangement affecting distinct class of consumers (citing Queen City: franchising case)

– Distinguishes Hamilton b/c there college “abruptly” changed rules after students attending


Hack/Hamilton fact pattern could give rise to several different issues

• Kodak issues (market power; 1 product or 2)

• Is university education subject to AT laws?

• State action issues if public university – Policy clearly articulated in grant of authority? – When is public univ. like municipality (as

opposed to actual arm of state)

LOGISTICS & ANNOUNCEMENTS

• Project – Questions?– I’ll take questions Thursday; not after

• Exam Workshop Online + Live Shows– Today: 1:00-1:45 Room 209– Thursday: 12:30- 1:45 Room 109

• Missing Write-Ups & End-of-Chapter Info

Microsoft: Section Two in

the New Millennium

Difficulty Inherent in §2 Conduct Cases

• Monopoly Power inherently harmful b/c output low & prices high– Don’t want to allow monopoly to perpetuate itself

– Don’t want to allow monopoly to get extra advantages in other markets


• Monopoly Power inherently harmful• BUT don’t want threat of enforcement to exacerbate

harm to market– Want monopoly to compete aggressively

– Want monopoly to innovate

– Want to take advantage of scale economies & other efficiencies

– Enforcement is expensive


• Monopoly Power inherently harmful• Don’t want threat of enforcement to exacerbate harm• How draw legal standards to strike balance?

– Is biggest danger under-enforcement or over-deterrence?

– i.e., When in doubt, should you presume harmful or OK?

– Obviously hard to draw lines precisely

– Also want to give adequate notice to firms w market power


• Monopoly Power inherently harmful

• Don’t want threat of enforcement to exacerbate harm

• How draw legal standards to strike balance?

• Subset of more general issue: What to do with arrangements that plausibly have both pro- and anti-competitive effects?– Exclusion from Joint Ventures

– Mergers

– Vertical Price-Fixing

Overview of Microsoft

Microsoft Windows® &

The Backstreet Boys


• Common Claim by Opponents of Lawsuit: “Punishing MS for Success”


• Claim by Opponents : “Punishing MS for Success”

• Common Industry View– Not successful b/c of strengths of products– History of Windows® : made difficulties for software

competitors• Re compatibility

• Re unnecessary size of Windows


• Claim by Opponents : “Punishing MS for Success”

• Common Industry View– Not successful b/c of strengths of products– History re Windows : made difficulties for software

competitors

• Lots of evidence of specific bad conduct often ignored in commentary


• Theory of case: MS trying to maintain monopoly by discouraging development of platforms in competition with Windows®

• Unusual b/c not really trying to leverage Windows monopoly into market power/profits elsewhere


• Theory of case: MS trying to maintain monopoly by discouraging development of competing platforms

• E.g., §2 Claim: Attempt to monopolize browser market– Lots of evidence of use of monopoly power to try to eliminate

Netscape

– But not targeted at making monopoly profits in browser market

– Attempt to eliminate alternate platforms from which competitors could attack Windows


• Conduct: Lots of evidence of attempts to prevent growth of systems that would compete with Windows

• Enough to be pretty clearly violation under existing cases: “maintenance” of Windows monopoly– Lot of very bad behavior ,

• Threats to IBM & Intel

• Lying about compatibility w Java

– Some more questionable: • Aspects of integrating Explorer into Windows

• Exclusionary Ks


• Monopoly Power: Pretty Clear– 95% share – Entry barriers from network effects– Behavior suggests market power (threats to

IBM/Intel)


Important Questions Raised• Relevance of High-Tech Markets & Network

Effects

• Burdens of Proof in §2 Conduct Cases

• Application of Tying Doctrine to Software Integration

• Difficulty of Remedy

Microsoft: Network Effects in Rapidly Changing High-Tech

Markets• Two special contextual problems raised by

Microsoft noted in “Overview” in case

1. Rapidly Changing High-Tech Markets

2. Network Effects


Markets1.Rapidly Changing High-Tech Markets

• Market conditions regularly change with technical improvements

• How should we address Antitrust violations? – Focus on Deterrence

• Act quickly & firmly• Punish so others don’t take advantage

– Laissez-Faire? • Assume market will cure harms in medium run• Assume costs of intervention & enforcement > harms


Markets1.Rapidly Changing High-Tech Markets

• Market conditions regularly change with technical improvements

• How should we address Antitrust violations?

• Court notes great difficulties re remedy– Conduct remedies may be rendered obsolete very

quickly– Difficult to arrive at appropriate structural

remedies


Markets2. Network Effects

• P. 419: “ In markets characterized by network effects, one product or standard tends towards dominance, because ‘the utility that a user derives from consumption of the good increases with the number of other agents consuming the good.’ Michael L. Katz & Carl Shapiro, Network Externalities, Competition, and Compatibility.”



• Utility … increases with the number of other agents consuming the good

• E.g., VHS, Windows, telephone networks, YouTube/MySpace




• Competition may be sequential not simultaneous




• Competition may be sequential not simultaneous

• Court: no consensus about how to address– Let market operate v. – Worry about acts to extend/maintain ST monop


MarketsLegal Effects of Two Taken Together?

• Court notes might push in opposite directions

• MS argued should affect Q of monopoly power

• MS did not argue conduct (might be stronger)

• Also argument going to remedy

Microsoft: Burdens of Proof in §2 Conduct Cases

• MS was allowed to offer justification for conduct

• Aspen & IBM suggest OK if legitimate business reason (LBR), at least …

– For refusal to deal w rival – For physical integration of system

• Who bears burden of proof on LBR? – cf. per se v. Rule of Reason

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