Groups that do not like landmark cases sometimes go into a state of denial. For example, many fruitless post-decision battles have been fought against Brown v. Board of Education, 347 U.S. 483 (1954). Roe v. Wade, 410 U.S. 113 (1973). Now added to the ranks of denial are a group of antitrust lawyers, many supportive of the Chicago School of Economics, who have been telling anyone who would listen that Eastman Kodak Company v. Image Technical Services, Inc., 112 S. Ct. 2072 (1992) was "merely a summary judgment case."
That this position is absurd is demonstrated by several facts:
- Less than 50% of the Kodak opinion discussed summary judgment. In the more significant portions of the opinion, the Court articulated and clarified several important rules of law, which will be discussed below.
- The dissent correctly recognized that Kodak is not merely "just 'another case that concerns the standard for summary judgment in an antitrust controversy.'" Id. at 2092. As will be described below, other legal problems were disturbing the author of the dissent, Justice Scalia.
- With respect to summary judgment, Kodak did nothing extraordinary -- the case simply held, in accordance with black letter law, that disputed material facts prevent summary judgment: "Far from being 'anomalous' . . . requiring Kodak to provide evidence of this factual question is completely consistent with our prior precedent." Id. at 2087, n.24.
This paper will explore the context, text, and subsequent history -- both legal and practical -- of Kodak. The overwhelming evidence is that it has had and will continue to have a major legal and practical impact.
II. The Context of Kodak
A. History
Kodak arose out of the battle between original equipment manufacturers (OEMs) and independent service organizations (ISOs), which are companies that service equipment that they do not manufacture. OEMs such as Kodak and ISOs such as Image Technical Services compete to maintain the equipment manufactured by the OEM. Usually the parts required to service this equipment are unique (i.e., Kodak copier parts do not work on Xerox copiers and vice versa) ; also, the knowledge that maintenance personnel must have in order to do their jobs is unique for each manufacturer's equipment.
Although service is now one of the most profitable lines of business of high technology hardware OEMs, before the late 1970s service was not very important. OEMs at that time were making so much money on their products that in many companies service was not even considered a profit center. People in the service end of the business definitely felt that they were second class citizens.
There were not many ISOs. Most of them came from the ranks of field engineers at manufacturers. Because ISOs were a negligible factor in a relatively unimportant part of the overall business, manufacturers cooperated with or benignly neglected them. The most cooperative manufacturer was IBM because of its consent decree with the U.S. government (which IBM is now trying to terminate over the objection of ISOs). See 1963 Trade Cas. (CCH) ¶ 70,628 and 1956 Trade Cas. (CCH) ¶ 68,245.
In this early period, ISOs served at least two useful purposes for manufacturers. First, the ISOs were strong advocates of the proprietary computer systems of the manufacturers. This advocacy helped to sell product and to keep customers loyal. Second, if the customer became unhappy with service from a manufacturer, using an ISO for service provided an alternative -- much preferable from the point of view of the OEM -- to the customer migrating to another OEM.
Although the vast majority of customers preferred to use the OEM for service, it was impossible for the OEMs to satisfy all of their thousands of customers. The dissatisfied and bargain-hunting customers retained the services of ISOs while keeping the product of the manufacturer with whose service the customer had become dissatisfied.
The above picture changed dramatically as a result of changing economic forces. In the 1980s, profits on computers began to decline rapidly as the products became more like commodities. On the other hand, profits on service became much higher as customers became more and more dependent on their computers. Rising demand for computer service increased the price that could be charged for that service. Profit margins were high because the needs were great and the products were very reliable.
The above economic forces caused changes in the market place. Service went from being a cost center to a profit center, one which produced a hefty share of total profits. Many OEMs wanted to increase those profits even further by lessening competition from ISOs, which (although ISOs generally had less than fifteen percent of the market) had grown and prospered with increasing demand for service and with the cooperation (or indifference) of the OEMs.
Not only were these ISOs taking business away from OEMs, but also their very presence put downward pressure on profit margins. Although many customers preferred to use the manufacturer, there were a distinct minority that preferred the lower prices, multivendor service and increasing quality that the ISOs had to offer. Also, ISOs began to enlarge from their previous start-up status, and a number of large companies like Bell Atlantic, GE, TRW and Grumman entered the business.
One factor permitting the ISOs to grow had been cooperation from manufacturers, many of whom gave ISOs access to spare parts, diagnostics, manuals, schematics, expedited delivery, and other necessary components of the service business. The first battles between ISOs and OEMs occurred when OEMs began to cut off access to these necessary components. ISOs and OEMs then evolved from allies to enemies. The stage was set for Kodak, a battle for tens of billions of aftermarket dollars, not about summary judgment.
B. Attitude of OEMs
The attitude of OEMs was basically that they owned the aftermarket for service and that they allowed ISOs to compete in that market only so long as it benefited OEMs. This attitude was reinforced by lax U.S. government antitrust enforcement in the 1980s, which itself was buttressed by the Chicago School of Economics. The latter did not recognize the existence of aftermarkets for purposes of the antitrust laws because of the undocumented belief that anticompetitive power could not exist in aftermarkets like service unless a company also controlled the product market, e.g., the market for high-speed copiers Kodak.
This attitude is best illustrated in the amicus brief submitted to the Supreme Court in Kodak by the Computer and Business Equipment Manufacturers Association (CBEMA), which consisted of most of the major computer OEMs. Instead of acknowledging that there were legitimate legal issues, the CBEMA brief at page 4 ascribed all of the problems of Kodak to a "small cadre of attorneys," and, in particular, at page 24, to one attorney:
And these practitioners have been putting their program into practice; ten of the eighteen cases cited below, for example, have been commenced by a single attorney (who, in fact, is credited in the materials prepared for potential clients as having "pioneered" the "new approach").
I was that one attorney.
This theory was belied when many as amici appeared in support of the Kodak plaintiffs, including twenty-nine state attorneys general; the purchasing agents of over 1300 jurisdictions; six major insurance companies; the Ralph Nader group called Public Citizen (probably the only time that that group and the insurance companies were on the same side) ; Bell Atlantic Business Systems Services; Grumman Systems Support Corporation; and numerous trade associations such as Computer Service Network International and National Electronic Service Dealers Association.
The fact that both sides in Kodak had an impressive array of amici is an indicator that this decision was about important economic issues affecting the growing multi-billion dollar service industry, not about a "mere summary judgment."
C. The Facts of Kodak
The facts of Kodak are simple. ISOs had successfully competed with Kodak to maintain high-speed copiers. In order to squelch this competition, Kodak stopped selling parts to ISOs or to Kodak customers that used ISOs.
The ISOs sued Kodak for tying service to parts and for monopolization of the service market for Kodak copiers. They lost a summary judgment motion in the District Court without a hearing. Discovery was limited in a highly unusual way for an antitrust case: only one set of interrogatories, one set of requests for production of documents, and six depositions.
In 1990, the Ninth Circuit (in Image Technical Services, Inc. v. Eastman Kodak Co., 903 F.2d 612 (9th Cir. 1990) ) reversed the District Court on the primary ground that the Ninth Circuit did not have enough facts to make a decision on such fact-intensive antitrust issues as market definition and market power.
D. The Effect on the Case of Kodak's Litigation Miscalculations
Kodak made two major litigation miscalculations which led to its defeat in the Supreme Court. The first was to petition for certiorari. The Ninth Circuit's opinion -- that there were not enough facts to decide antitrust issues -- was certainly not unreasonable in light of the sparse record. Accepting that decision and returning to a District Court which obviously thought well of Kodak's case would have almost certainly led to a different result. Indeed, such a turn of events would have made Kodak a mere summary judgment case.
The second miscalculation was to concede the market definition issue for purposes of the Supreme Court argument. Kodak's theory was that, because it did not have power in the product (copier) market, it could not, as a matter of law, have power in the service aftermarket.
By taking this position, however, Kodak conceded the most important question in the case, i.e., whether a product market could be defined for the service of Kodak copiers. Any antitrust novice knows that market definition is the key to virtually all tying and monopolization cases. To concede that definition is the legal equivalent of leading with your chin. This concession also caused the Court to discuss at length the nature of the relationship between product markets and aftermarkets, a discussion which prevented Kodak from being a mere summary judgment case.
III. The Text of Kodak
A. Why Kodak Is Not a "Mere Summary Judgment" Case
1. The First Non-Summary-Judgment Rule of Law
Kodak was the beginning of the end of the ascendancy of the highly theoretical Chicago School of Economics. Instead of unsupported economic theories, the Supreme Court held in Kodak that it would -- as it had since the passage of the Sherman Act in 1890 -- look at the facts to determine the ultimate issues.
The Chicago School of Economics gained ascendancy with the case of Continental T.V. Inc v. GTE Sylvania Inc., 433 U.S. 36 (1977). That case related to intrabrand competition, i.e., competition between dealers selling the exact same product, Sylvania television sets. The Court essentially ruled that this type of competition, which resulted from the vertical relationship that Sylvania dealers had with Sylvania, was not of as much concern to the antitrust laws as the horizontal, interbrand competition between Sylvania and competing manufacturers of television sets such as Zenith.
In order to use Sylvania as a precedent, Kodak strongly took the position that competition between it and ISOs in the market for the service of Kodak copiers was intrabrand competition. In a critical holding (having nothing to do with summary judgment), the Court correctly rejected this position because competition between Kodak and Image Technical Services was horizontal interbrand competition between the Kodak brand of service for Kodak copiers and the Image Technical Services brand of service for Kodak copiers:
Although Kodak repeatedly relied on Continental T.V. as support for its factual assertion that the equipment market will prevent exploitation of the service and parts markets, the case is inapposite. In Continental T.V., the Court found that a manufacturer's policy restricting the number of retailers that were permitted to sell its product could have a procompetitive effect. See 433 U.S. at 55, 97 S. Ct., at 2560. The Court also noted that any negative effect of exploitation of the intrabrand market (the competition between retailers of the same product) would be checked by competition in the interbrand market (competition over the same generic product) because consumers would substitute a different brand of the same product. Unlike Continental T.V., this case does not concern vertical relationships between parties on different levels of the same distribution chain. In the relevant market, service, Kodak and the ISOs are direct competitors, their relationship is horizontal. The interbrand competition at issue here is competition over the provision of service. Despite petitioner's best effort, repeating the mantra "interbrand competition" does not transform this case into one over an agreement the manufacturer has with its dealers that would fall under the rubric of Continental T.V.
Id. at 2084-2085, n. 18.
Perhaps another illustration will help drive home this all-important point. Chevrolet dealers perform service on Chevrolets. Their competition with each other in this area is intrabrand competition because they all supply the same brand -- the Chevrolet brand -- of service. These dealers, however, also compete with independent mechanics like Joe's Auto Shop. That is interbrand competition between the Chevrolet brand of service and the Joe brand of service.
2. The Second Non-summary-Judgment Rule of Law
Another critical holding of Kodak was that the ISOs, as a matter of law, were not "free-riding" on Kodak's investment in its product business. "Free-riding" was a favorite concept of the Chicago School. It was enunciated clearly in the Sylvania case. Sylvania had the right to limit dealerships in a geographic area so that responsible dealers would make the investments in advertising, sales force, etc. in order to sell a profitable amount of televisions. If Sylvania could not give territorial exclusivity to a dealer, then other dealers could sell televisions based, for example, on the advertising investment of the responsible dealer, i.e, other dealers could "free ride" on the investment of the responsible dealer.
Kodak maintained that the ISOs were free-riding on its investments in ". . . product development, manufacturing and equipment sales in order to take away Kodak's service revenues." Id. 2092. The Supreme Court roundly rejected this position with another holding having nothing to do with summary judgment:
Kodak does not dispute that respondents invest substantially in the service market, with training of repair workers and investment in parts inventory. Instead, according to Kodak, the ISOs are free-riding because they have failed to enter the equipment and parts markets. This understanding of free-riding has no support in our caselaw. To the contrary, as the Court of Appeals noted, one of the evils proscribed by the antitrust laws is the creation of entry barriers to potential competitors by requiring them to enter two markets simultaneously.
Id. at 2092.
The Court then elaborated on this important
concept:
Kodak claims that both Continental T.V. and Monsanto support its free-rider argument. Neither is applicable. In both Continental T.V., 433 U.S. at 55, 97 S. Ct., at 2560, and Monsanto, 465 U.S. at 762-763, 104 S. Ct., at 1470, the Court accepted free-riding as a justification because without restrictions a manufacturer would not be able to induce competent and aggressive retailers to make the kind of investment of capital and labor necessary to distribute the product. In Continental T.V. the relevant market level was retail sale of televisions and in Monsanto retail sales of herbicides. Some retailers were investing in those markets; others were not, relying instead on the investment of the other retailers. To be applicable to this case, the ISOs would have to be relying on Kodak's investment in the service market; that, however, is not Kodak's argument.
Id., n. 33.
Closely related to Kodak's free-riding business justification for its anti competitive conduct toward ISOs is Kodak's business justification that its inventory costs would rise if it had to sell parts to ISOs. The Court dismissed this business justification as pretextual: "Presumably, the inventory of parts needed to repair Kodak machines turns only on breakdown rates, and those rates should be the same whether Kodak or ISOs perform the repair." Id. at 2091.
Although this language is not a rule of law, it provides a hard guideline to lower courts considering this important issue in the service industry. Again, this important point has nothing to do with summary judgment.
A similar point -- not a rule of law, but a hard guideline -- applies to Kodak's other alleged business justification for its misconduct, i.e., that customers will blame Kodak products if ISOs provide poor-quality service that lessens product performance. In taking aim at this "justification" the Court criticizes a major inconsistency in the Chicago School tenet that consumers have sufficient knowledge to make every important economic decision:
Moreover, there are other reasons to question Kodak's proffered motive of commitment to quality service; its quality justification appears inconsistent with its thesis that consumers are knowledgeable enough to lifecycle price [i.e., price on the basis of the cost of the product, which is known, plus the unknown cost of servicing the product over its life expectancy], and its self-service policy. Kodak claims the exclusive-service contract is warranted because customers would otherwise blame Kodak equipment for breakdowns resulting from inferior ISO service. Thus, Kodak simultaneously claims that its customers are sophisticated enough to make complex and subtle lifecycle pricing decisions, and yet too obtuse to distinguish which breakdowns are due to bad equipment and which are due to bad service. Kodak has failed to offer any reason why informational sophistication should be present in one circumstance and absent in the other.
Id. at 2091.
3. The Third Non-Summary-Judgment Rule of Law
A third holding of the majority Kodak opinion relates to Kodak's claim that its behavior was merely a unilateral refusal to deal. The Court rejects this position with another holding entirely unrelated to summary judgment:
In a footnote, Kodak contends that this practice [the tie between parts and service] is only a unilateral refusal to deal, which does not violate the antitrust laws. See Brief for Petitioner 15, n. 4. Assuming, arguendo, that Kodak's refusal to sell parts to any company providing service can be characterized as a unilateral refusal to deal, its alleged sale of parts to third parties on condition that they buy service from Kodak is not. See 903 F.2d. at 619.
Id. at 2080, n. 8.
Although this rule of law seems plain, there are lower court opinions which appear to conflict with it. See City of Chanute v. Williams Natural Gas Co., 955 F.2d 641 (10th Cir.), cert. denied, 113 S. Ct. 96 (1992), and Service & Training, Inc. v. Data General Corp., 963 F.2d 680 (4th Cir. 1992).
4. The Fourth Non-Summary-Judgment Rule of Law
The OEMs, supported by the Chicago School, fervently held the belief that aftermarkets were somehow immune from antitrust problems. The Court fobbed off this belief with another rule of law: "[the Court] has not adopted any exception to the usual antitrust analysis, treating derivative aftermarkets as it has every other separate market." Kodak at 2089, n. 29.
IV. Legal Reaction to Kodak
The legal reaction to Kodak can be divided in several ways: commentators like me who think it is an important substantive change; commentators who believe it is a mere summary judgment decision; courts that read it broadly, and courts that read it narrowly. Assuming that enough has been said in this paper about the first category, let us briefly look at the other three categories.
Lawyers who support the Chicago School originally reacted to Kodak as if Western Civilization had ended. An op-ed piece by Charles Rule, the Assistant Attorney General in charge of the Antitrust Division under Presidents Reagan and Bush, in the June 17, 1992 Wall Street Journal, blared the headline "Back to the Dark Ages of Antitrust." Mr. Rule's predecessor, William Baxter, stated in an interview in the December 1992 edition of the California Lawyer ("Is Antitrust Law Coming Alive") that "Some kinds of competition are not socially useful. And this case [Kodak] falls into that category."
This reaction quickly changed, however, as supporters of the Chicago School realized that recognition of its demise might do them no good. The change began with the then-editor of Antitrust magazine, who also represented Kodak in the Supreme Court. He used the "Editor's Note" column of the Fall/Winter 1992 issue ("Kodak: A Personal Perspective.") as a forum for the view that Kodak was an empty victory:
". . . plaintiffs will have a difficult time proving cases under the new antitrust theory blessed in Kodak. There is strong reason to believe that the victory plaintiffs achieved in Kodak will turn out to be largely empty."
Other commentators have followed this tack, writing myopic articles which focus on lower court cases which have read Kodak narrowly. These commentators are misapprehending the effects of a landmark case like Kodak and they are ignoring settled cases.
Landmark cases affect our system slowly as they work their way back through the lower courts. For example, Brown v. Board of Education, supra, did not end cases about integration. There were (and are) many lower court cases on the subject, and some of these cases cut against Brown, at least temporarily.
The point of the landmark case, however, is that there is a sea change. With Brown, integration became a legal inevitability in spite of setbacks along the way. So it is with Kodak: it is legally inevitable that competition in aftermarkets will increase even though not every lower court will read Kodak expansively.
In fact, not surprisingly, there have been lower court cases since Kodak reading it both narrowly and broadly. The most significant of these is Virtual Maintenance, Inc. v. Prime Computer, Inc., 957 F.2d 1318 (6th Cir.) ; cert. granted, judgment vacated, 113 S. Ct. 314 (1992) ; on remand, 995 F.2d 1324 (6th Cir. 1993), opinion withdrawn and superseded, 11 F.3d 660 (6th Cir. 1993) ; cert. dismissed, 114 S. Ct. 2700. The reason that it is the most significant is that it was a jury verdict reversed by the Sixth Circuit before Kodak, vacated and remanded by the Supreme Court after Kodak, and amended by the Sixth Circuit in light of Kodak. That amended opinion held that the jury could have awarded its verdict based on a per se tying analysis involving the market for the maintenance of Prime computers. The case has since settled (see below).
The only other Kodak-type case to reach the Supreme Court is Allen Myland, Inc. v. International Business Machines Corp., 33 F.3d 194 (3rd Cir. 1994), cert. denied, ___ S. Ct. ___ (December 12, 1994) ; 1994 WL 597411. That case held that a narrow market for the installations of IBM upgrades could exist; the Third Circuit instructed the District Court to try that issue, among others. IBM petitioned for certiorari, which was denied. Id.
A recent case unsupportive of Kodak is Data General Corp. v. Grumman Systems Support Corporation, 36 F.3d 1147 (1st Cir. 1994). The case has settled, so that we will never know how the Supreme Court would have reacted to it. The case, however, appears to fly in the face of Kodak.
Data General sued Grumman for infringing Data General's copyrighted hardware diagnostics. Grumman filed a counterclaim for antitrust violations, claiming that Data General was using its power over diagnostic software to increase its monopoly of the market for maintenance of Data General computers.
In deciding against Grumman, the First Circuit chose to create an entirely new presumption regarding copyrights and market power.
[W]e hold that while exclusionary conduct can include a monopolist's unilateral refusal to license a copyright, an author's desire to exclude others from use of its copyrighted work is a presumptively valid business justification for any immediate harm to consumers.
Id. at 1187.
Kodak, however, counsels against presumptions:
Legal presumptions that rest on formalistic distinctions rather than actual market realities are generally disfavored in antitrust law. This Court has preferred to resolve antitrust claims on a case-by-case basis, focusing on the particular facts disclosed by the record.
Kodak at 2082.
Further confusing matters, the First Circuit's treatment of presumptions is contrary to the way the Ninth Circuit and the Supreme Court have handled presumptions. In Digidyne Corp. v. Data General Corp., 734 F.2d 1336, 1344 (9th Cir. 1984), cert. denied, 473 U.S. 908 (1985), the Ninth Circuit held that a copyrighted product "created a presumption of economic power sufficient to render the tying arrangement illegal per se. The burden to rebut the presumption shifted to the defendant."
More importantly, under established Supreme Court precedent a patent or copyright creates a presumption of market power. See Jefferson Parish Hospital Dist. No. 2 v. Hyde, 466 U.S. 2, 16 (1984) (". . . if the government has granted the seller a patent or similar monopoly over a product, it is fair to presume that the inability to buy the product elsewhere gives the seller market power") ; U.S. v. Loew's, 371 U.S. 38, 45 (1962) ("The requisite economic effect is presumed when the tying product is patented or copyrighted.")
Beyond the above appellate court cases, there are some Kodak-type District Court cases. By definition these are less authoritative and more directionless than the appellate cases. Any lawyer who claims to be able to read these tea leaves definitively is probably a devout believer in the Chicago School.
V. Practical Effects of Kodak
The practical effects of Kodak have been enormous -- much more important than the legal effects reported above. These also divide into two categories -- settlements of cases and conduct in the marketplace.
Many settlements have occurred since Kodak, and most, as usual, are confidential. Because of SEC reporting requirements, two Kodak-type settlements had to be reported publicly. Both, not surprisingly, are favorable to ISOs.
The most spectacular of these is the $225 million of coupons (cash value: $125 million) which Xerox paid to settle a case brought against it by ISOs and consumers. This settlement, reported in the December 8, 1993 Wall Street Journal at page B7, is another strong indication that Kodak is not a mere summary judgment case. Xerox obviously did not like the looks of the merits.
The second reported settlement is in the Virtual case, supra. Prime unconditionally surrendered by paying $7.5 million to Virtual and opening up the service aftermarket to competition from Virtual. Again, it appears that Prime's decision had nothing to do with summary judgment but rather had to do with the merits of the case.
More telling than settlements is conduct in the marketplace. Most OEMs now provide spare parts to ISOs. Indeed, in what has been a remarkable transformation, many OEMs have become ISOs in that the OEMs, unlike before, will now service machines that the OEMs do not themselves manufacture.
Sometimes the OEM provides such service itself; sometimes the OEM simply manages the service and subcontracts with an ISO that performs the actual service. Truly, in these latter cases, the lion has lain down with the lamb!
VI. Justice Scalia's View
As noted in the introduction above, Justice Scalia, in dissent, correctly noted that Kodak was not a summary judgment case. He said that Kodak decided
. . . a narrow -- but extremely important -- question of substantive antitrust law: Whether, for purposes of applying our per se rule condemning 'ties,' and for purposes of applying our exacting rules governing the behavior of would-be monopolists, a manufacturer's conceded lack of power in the interbrand market for its equipment is somehow consistent with its possession of 'market' or even 'monopoly' power in wholly derivative aftermarkets for that equipment.
Kodak, supra, at 2092.
Justice Scalia fears that Kodak ". . . threatens to release a torrent of litigation . . ." Id. at 2094.
Again, however, this is merely the nature of landmark cases. Brown v. Board, supra, for example, released a torrent of litigation, but that was not bad. It was simply necessary because of wrongs pent-up over many years and because of the inevitable gaps which the lower courts must fill in with any Supreme Court decision.
Similarly, Kodak is part of our economy's adjustment from a more manufacturing-based economy into a more service-based economy. Aftermarkets like service and applications software have become more economically important than the product markets from which they derive. That change may well require some litigation in order to distribute justice properly (whether or not such litigation is a "torrent" is probably in the eye of the beholder). Indeed, one might say that it is one function of our courts to effect such economic transitions smoothly.
Such economic transitions are particularly important in high technology markets which contain many aftermarkets based on standard setting technology. For example, by setting the standard in operating system software, Microsoft has market power with respect to certain aftermarkets for the applications software that runs on that operating system software. Because of Kodak, those aftermarkets may now be monitored for antitrust violations.
VII. Conclusion
It is simply not possible to say in any balanced way that Kodak is merely a summary judgment case. With Kodak, the Supreme Court has set a major change in motion that will have a particularly strong effect on how competition occurs in high technology markets. If Kodak had not given litigants the power to define markets around proprietary technologies, the proposed information superhighway, for example, would probably be nothing but a series of toll roads.