Differing Perspectives on Kodak

I. Introduction

Since the Supreme Court's opinion in Eastman Kodak Co. v. Image Technical Services, Inc., 112 S. Ct. 2072 came down, critics and practicing attorneys in the antitrust field have differed greatly on the impact and importance of the Kodak ruling. Some have argued that the Kodak case has only minimal significance; they claim that Kodak is only a case about summary judgment in the antitrust area.

Others believe that Kodak changes the rules of the game, making it clear that independent service organizations have the right to compete with manufacturers for service of high-tech equipment such as computers. This article will discuss both viewpoints, and conclude that Kodak will have a substantial effect even if it is a "mere" summary judgment opinion.

II. The Facts of Kodak

After purchasing an expensive piece of high-tech equipment, most end users contract with the manufacturer for service. In the 1980s new companies began to spring up that specialized in servicing a single manufacturer's equipment. The existence of these new companies gave end users a choice of who to use for maintenance, and resulted in lower prices for consumers.

At first, the manufacturers cooperated with the ISOs; however, when the ISOs began to make inroads into the market once entirely dominated by the manufacturers, their policies changed. Manufacturers began denying ISOs access to unique spare parts necessary to repair the equipment. This resulted in ISOs being driven out of business, and consumers were left with no choice for their maintenance services.

The pattern was no different in Kodak. Eighteen ISOs sued Kodak after Kodak changed its policy with regard to access to Kodak replacement parts for copiers. Those parts are unique in that they cannot be used on another manufacturer's copier and vice versa. Kodak's new policy allowed access to Kodak replacement parts only to customers who were under contract with Kodak for maintenance. In other words, Kodak tied the availability of necessary spare parts to Kodak's maintenance service. Under this scheme, owners of Kodak copiers had to contract with Kodak for maintenance if they wanted access to Kodak parts.

The eighteen ISOs claimed that Kodak was both illegally tying its parts to service and monopolizing the market for service of Kodak copiers. After limited fact discovery, Kodak moved for summary judgment, relying on the theory that economics dictated that a market for the service of Kodak copiers could not exist.
Although the District Court sided with Kodak, granting summary judgment in Kodak's favor, the Ninth Circuit Court of Appeals reversed.

The Supreme Court agreed with the Ninth Circuit, holding that facts, not economic theories, must govern when determining what constitutes a relevant market for antitrust purposes. The Supreme Court, in a detailed opinion, made specific findings: (1) that summary judgment was no different in antitrust cases than in other cases, (2) that competition between service providers for a single brand of equipment is "interbrand" competition, (3) that the market realities faced by consumers must be examined, (4) that consumers who purchase expensive high-tech equipment are essentially "locked in" to that equipment and cannot easily switch to another brand of equipment, (5) that aftermarkets should be treated the same as any other market in antitrust cases, (6) that business justifications must be examined closely before granting summary judgment to a defendant in an antitrust case.

III. Differing Views of the Potential Impact of Kodak

A. The critics of the decision

1. The Reagan Antitrust pundits

Soon after the Kodak decision came down, commentators began critiquing the opinion. Specifically, Charles Rule, former Assistant Attorney General in charge of the Antitrust Division at the Department of Justice, decried the opinion as "truly bad news." C.F. Rule, Back to the Dark Ages of Antitrust, Wall St. J., June 17, 1992, A17. Mr. Rule called the opinion a "dramatic departure from the economic enlightenment apparent in most of [the Supreme Court's] recent opinions. Mr. Rule believed the Court erred in not buying into Kodak's "common sense defense."

Specifically, Mr. Rule objected to what he perceived to be the Court's "smug condescension" toward consumers. According to Rule, the Kodak opinion was bad for consumers because it found that consumers are not able to determine the long-term cost of high-tech equipment for themselves.

In a separate article, the Wall Street Journal called the Kodak case "startling," and stated that "[w]ith a few paragraphs [the Supreme court] made volumes of lower court opinions and scholarly articles obsolete."

William Baxter, also a former Assistant Attorney General with the Antitrust Division at the Department of Justice, also viewed the Kodak case as "a regrettable setback" for consumers. California Lawyer, Is Antitrust Law Coming Alive? Interview of William Baxter by Ronald S. Katz, December 1992 at 34. From Baxter's viewpoint, the competition the ISOs bring to the market for service of a single manufacturer's equipment is "socially harmful." Id. Baxter stated that "...there are some kinds of competition under certain circumstances that really are not socially useful. And this case falls in that category." Id. at 34-35.

Baxter likened the Court's decision in Kodak to another Supreme Court decision: National Society of Professional Engineers v. United States, 435 U.S. 679 (1978). In Professional Engineers an association of engineers entered into an agreement whereby none of the engineers would provide customers with prices until the customer had chosen which engineer would perform the job. The Association's rationale behind this prohibition was that price competition would force engineers to cut corners in order to get customers. This cost cutting in turn would adversely affect the public health, safety and welfare. Professional Engineers, 435 U.S. at 685-86.

The Supreme Court held that such an arrangement "impedes the ordinary give and take of the market place". Id. at 692. Competition was the cornerstone of the Professional Engineers decision: "The Sherman Act reflects a legislative judgment that ultimately competition will produce not only lower prices, but also better goods and services." Id. at 695.

The Court continued: "The assumption that competition is the best method of allocating resources in a free market recognizes that all elements of a bargain - quality, service, safety, and durability - and not just cost, are favorably affected by the free opportunity to select among alternative offers." Id. In other words, competition should govern. Baxter found that to be a "dramatic and troubling holding." California Lawyer interview at 35.

Similarly, Baxter found that the Court's holding that aftermarkets should be treated the same as nay other market to be a "continuation of a mistake the court has been making for a very long time in a number of cases." Id. Baxter accused the Court of "not really fac[ing] up to the economic implications of this entire set of cases." Id.

Finally, Baxter concluded that Kodak "may in fact be treated as a very, very minor case having to do with nothing but summary judgment." Id. However, Baxter conceded that whether Kodak is a mere summary judgment case or a substantive antitrust decision remains to be seen.

2. Kodak's lawyers

In the aftermath of Kodak, the lawyers who represented Kodak at all three stages of the litigation (district court, court of appeals and Supreme Court) attempted to come to grips with the decision. Kodak's attorneys continued to cling to their notion that economics should have dictated the result in the case. Not surprisingly, Kodak's attorneys claimed that the Kodak decision was "limited." D. Wall, Kodak: A Personal Perspective, Antitrust, Fall/Winter 1992 at 4. Mr. Wall suggested that "[t]here is strong reason to believe that the victory plaintiffs achieved in Kodak will turn out to be largely empty." Id.

The basis for this suggestion is what Mr. Wall perceives to be a misapprehension of Kodak's argument on behalf of the Court. Contrary to the Court's opinion, Mr. Wall states, Kodak did not argue that economics must govern in all aftermarket cases, just in this one. He views the decision as "no more than the rejection of the per se legality rule." Id. at 6.

Mr. Wall takes heart in a decision rendered by federal district judge Charles Legge shortly after the Kodak case came down. In TSJ et al. v. Wang Laboratories, Inc., Case No. 91-2243 (N.D.Cal. June 15, 1992), Judge Legge viewed Kodak not as a sweeping antitrust decision, but as a summary judgment decision. Judge Legge stated that "all Kodak did was to overrule a summary judgment." Transcript at 55. Judge Legge did not believe that Kodak was a "bell ringer for the plaintiffs." Id.

B. The supporters of the decision

Other commentators believe that Kodak will have a much more widespread and profound effect in the antitrust world. Most important among the Supreme Court's holdings are the recognition of aftermarkets and the reaffirmation of the Supreme Court's decision in Aspen Skiing v. Aspen Highlands Skiing Corp, 472 U.S. 585 (1985). R.S. Katz and D. Rosenthal, The Benefits and Burdens of Kodak from a Litigant's Perspective, Antitrust, Fall/Winter 1992 at 8 ("Benefits and Burdens").

The Supreme Court specifically recognized that aftermarkets should not be treated any differently for purposes of an antitrust case than any other market. Id. (citing Kodak, 112 S. Ct. at 2089 n.29). This is directly contrary to what Kodak's lawyers urged, and what William Baxter believes is the correct position economically. The authors of Benefits and Burdens argued that Kodak had broad-ranging implications for aftermarkets: "The issue of a manufacturer foreclosing an aftermarket will likely become more prevalent because of [the] increased focus [on aftermarkets] and because of accelerating developments in technology." Id. at 9.

Critics of Kodak also strongly disapproved of the Court's reaffirmation of Aspen Skiing. In Aspen Skiing, the Court held that if a monopolist cooperates with a competitor and then removes that cooperation, the monopolist may be liable under the antitrust laws. Id. (citing Aspen Skiing, 472 U.S. at 610). On the other hand, proponents of Kodak have stated that "[t]he implications [of the reaffirmation of Aspen Skiing] are particularly important regarding aftermarkets: competitors in aftermarkets are often dependant on the manufacturer in one way or another, almost by definition." Id. at 9-10.

Neither Mr. Baxter nor the authors of Benefits and Burdens believes that Kodak is a radical departure from the past Supreme Court cases. Mr. Baxter views the decision as simply another mistake in a long line of mistakes (California Lawyer interview at 35), while the authors of Benefits and Burdens believe the decision is a "return to basics." In other words, "future battles will be decided more by facts than by theories...." Id. at 13.

Another commentator also praised the Supreme Court's return to examination of facts rather than a reliance on economic theory. See H. Brown, Tying: Return to Reality, New York Law Journal, August 27, 1992. Specifically, Mr. Brown found that "[f]acts and reality have been restored to the antitrust laws, to displace the presumptions and probabilities era of conservative economic doctrine."

In spite of perceiving the ISOs as troublemakers meddling with the economics of the market, Mr. Brown viewed them as "courageous." "Without courageous government and private prosecutions like those of the ISOs in the Kodak case, there may not be the vigorous public or private enforcement of the antitrust laws, in spite of the lure of exemplary treble damages and attorney fees allowances." Id. This perception is in sharp contrast to the Reagan era antitrust gurus such as Baxter and Rule, who saw the decision as harmful, rather than helpful, to consumers.

IV.A recent GAO ruling illustrates that the reasoning of Kodak is trickling down to lower tribunals.

Despite claims by critics that economics should govern aftermarkets and that the type of competition offered by ISOs is not "socially useful," in application, it appears that competition offered by ISOs is in demand, at least from the federal government. A requirement by the U.S. Department of Interior's Bureau of Land Management that computer hardware and software maintenances be provided by the same company was recently held to unduly restrict competition by the Comptroller General of the General Accounting Office. Although the GAO did not rely on the Kodak case in reaching its decisions, the theories and issues are very similar.

NCE Computer Group, an ISO, protested the requirement before the GAO. The ruling now enables ISOs to compete for service contracts where they were previously precluded from doing so. NCE's claim that the regulation unduly restricted competition was accepted by the GAO. In fact, the GAO's ruling focused on competition: "It is clear that bundling the requirements does restrict the competition by excluding offerors of hardware maintenance that are unable to provide for software maintenance as well." Decision of Comptroller General of GAO at 5.

The Bureau of Land Management offered some of the same justifications for the restrictions it imposed as did Kodak. For example, the BLM said that the same provider of hardware and software maintenance was essential to prevent "finger pointing." The GAO found that "maximizing competition" was a most important factor:

[W]hen concerns of economy or efficiency are being weighed against maximizing competition, CICA [the Competition in Contracting Act] and the implementing of regulations require that the scales by tipped in favor of maximizing competition. While having one contractor handle both hardware and software maintenance may be administratively convenient for the agency, mere administrative convenience cannot justify restricting competition.

Id. at 6 (citation omitted).

The Comptroller General specifically recognized that "[r]estricting competition is presumed to raise, not lower, the cost that the government will pay, and the desire to reduce costs [another justification offered by the BLM] is generally neither a permissible nor a logical basis to restrict competition." Id. at 7.

V. Conclusion

Despite the arguments of Reagan's antitrust pundits and Kodak's lawyers, the Kodak case cannot be a "mere" summary judgment decision. Even if Kodak is not remembered as a landmark case in the antitrust field and is considered a case about summary judgment, it will still have a major impact on antitrust cases. In the wake of Kodak, it will be much more difficult for defendants to win summary judgment motions. The practical effect of this will be a major change in how antitrust cases are tried: there will be more discovery and more trials. Many more cases will go to juries that tend to be more sympathetic to ISOs.