Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 451 (1992), is a 1992 Supreme Court decision in which the Court held that even though an equipment manufacturer lacked significant market power in the primary market for its equipment—copier-duplicators and other imaging equipment—nonetheless, it could have sufficient market power in the secondary aftermarket for repair parts to be liable under the antitrust laws for its exclusionary conduct in the aftermarket.. The reason was that it was possible that, once customers were committed to the particular brand by having purchased a unit, they were "locked in" and no longer had any realistic alternative to turn to for repair parts.
Background Since 1975, Kodak had followed a policy of selling patented and unpatented repair parts only to direct purchasers of its equipment. The 18 plaintiffs in this case are Independent Service Organizations ("ISOs") engaged in repairing and servicing Kodak's copiers and other equipment, and in buying, reconditioning and selling used Kodak copiers and equipment. The effect of these practices is to bar sales of parts required to repair and maintain Kodak copiers and imaging equipment to the ISOs. In addition, Kodak refuses to sell maintenance service contracts on used equipment unless it is first inspected and brought up to standard by Kodak. Therefore, purchasers of used equipment from ISOs who want to purchase a maintenance agreement for the equipment from Kodak must first submit the equipment to Kodak for inspection and any necessary repair and upgrading. Image Technical Servs., Inc. v. Eastman Kodak Co., No. C-87-1686-WWS, 1988 U.S. Dist. LEXIS 17218, at *2–3 (N.D. Cal. Apr. 15, 1988).
In addition, Kodak has allegedly entered into agreements with original equipment manufacturers to prevent them from providing parts for Kodak equipment to the ISOs, with owners of Kodak equipment to prevent them from selling parts to the ISOs, with organizations that repair Kodak equipment to refuse to deal with the ISOs, and with entities providing financing for the purchase of Kodak equipment to cause them to require Kodak repair and service as a condition of financing.
The ISOs sued Kodak, alleging that it violated Sections 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1, 2, and Section 3 of the Clayton Act, 15 U.S.C. § 14.
District court summary judgment ruling
The district court granted Kodak's motion for summary judgment and dismissed the complaint. It said:
The fact that Kodak refused to sell parts to plaintiffs and other ISOs does not violate Section 1. The right of a manufacturer unilaterally to select its customers and to refuse to sell to others is well-established, regardless of the possible adverse effect on would-be customers.1988 U.S. Dist. LEXIS at *6. The court turned to the section 2 monopolization claim. The ISOs contended that Kodak monopolized by leveraging monopoly power in one market to gain competitive advantage in another. The court rejected this argument as lacking any factual support. Kodak competes as an OEM with Xerox, IBM, Bell and Howell, 3M, and various Japanese manufacturers and has no significant market share as an OEM. The ISOs contended that Kodak "has a dominant share of a purported market for servicing Kodak copiers and micrographic equipment." But the conduct alleged does not "suggest that Kodak has attempted to leverage power in that market to gain competitive advantage in another market." To be sure, Kodak has "a natural monopoly over the market for parts it sells under its name but that imposes no duty on it to sell to plaintiffs." Therefore, "Kodak's unilateral refusal to sell its parts to plaintiffs does not violate Section 2."1988 U.S. Dist. LEXIS at *8-9.
The district court dismissed the complaint and the ISOs appealed to the Ninth Circuit.
Ninth Circuit reversal of summary judgment
The Ninth Circuit reversed the summary judgment, 2–1. Preliminarily, the Ninth Circuit characterized at least one of the issues somewhat differently from the district court—as involving concerted rather than unilateral action. The Ninth Circuit said there were two main issues: "First, Kodak will not sell replacement parts for its equipment to Kodak equipment owners unless they agree not to use ISOs. Second, Kodak will not knowingly sell replacement parts to ISOs." The court added, "Kodak admits that the purpose of these policies is to prevent ISOs from competing with Kodak's own service organization for the repair of Kodak equipment."903 F.2d at 614.
The Ninth Circuit also emphasized some facts to which the district court had not referred. After 1982 ISOs began to compete significantly against Kodak in the repair of Kodak equipment. ISOs offered service for as little as half of Kodak's price. To better compete, Kodak in some cases cut its price for service. Some customers found ISO service superior to Kodak service. Kodak then developed its present policies of not selling replacement parts to ISOs or to customers who use ISOs.
As to the Section 1 issue, Kodak and the district court misconceived the statute. Kodak argued that it does not force owners to buy service in order to receive parts; Kodak only requires owners not to buy ISO service to receive parts. Kodak will sell parts to owners who agree to self-service their machines. The Ninth Circuit said that an unlawful tie-in violation occurs not only when a seller conditions a sale of one thing on the purchase of another thing too. It is also a violation to get the purchaser to agree not to purchase things from another seller.903 F.2d at 615. Thus § 3 of the Clayton Act, 15 U.S.C. § 14, makes it unlawful to sell goods "on the condition, agreement, or understanding that the [buyer] shall not use or deal in the goods . . . of a competitor or competitors of the . . . seller, where the effect . , , may be to substantially lessen competition or tend to create a monopoly in any line of commerce."
That raised the question whether, if there was a tie-in, did Kodak have the market power necessary to make the tie unlawful. The ISOs argued that Kodak does have power in the parts market for two interdependent reasons. First, many Kodak parts are unique and available only from Kodak. Second, owners of Kodak machinery cannot readily switch to other companies' machinery (thereby obviating the need for Kodak parts). Once one owns Kodak's expensive machinery, he is locked in to it. Kodak countered that it had no power in the primary market, because its market share relative to IBM, Xerox, 3M, and the others was small. If equipment buyers find Kodak charging too much for parts and services, they will buy from IBM, Xerox, 3M, etc. instead of from Kodak. But once a purchaser has bought a Kodak copier, he cannot turn to IBM or Xerox for parts to fix his broken Kodak copier. But this is all theory, not fact, the court continued, and "market imperfections can keep economic theories about how consumers will act from mirroring reality." The court pointed to evidence that Kodak charged up to twice as much as the ISOs for service that is of lower quality than the ISOs's service. A price differential is evidence of market power. This indicates that there is a material issue of fact over market power, and therefore summary judgment on the issue was improvident.903 F.2d at 616–18.
Kodak argued that it acted unilaterally in refusing to deal with the ISOs. But the Ninth Circuit responded that Kodak entered into agreements with its equipment owners, which expressly set out in its "Terms of Sale," that Kodak will sell parts only to users "who service only their own Kodak equipment." That was sufficient to make the conduct concerted rather than unilateral.903 F.2d at 618–19.
Turning to the monopolization claim, the Ninth Circuit concluded that there were material issues of fact concerning whether Kodak fell within one of the exceptions to the principle that a firm generally has no duty to deal with competitors. On the factual record before the court, it was not possible to determine that summary judgment was proper. Therefore, the issue would have to be tried in the district court.903 F.2d at 620-21.
The dissent accepted Kodak's argument that Kodak was justified in imposing its restrictions to guard against inadequate service, because it had "submitted extensive and undisputed evidence of a marketing strategy based on high-quality service."903 F.2d at 623. The dissent also agreed with Kodak that that evidence of competition in the primary equipment market "necessarily precludes power in the derivative [parts] market."903 F.2d at 622. With respect to the § 2 monopolization claim, the dissent concluded that, entirely apart from market power considerations, Kodak was entitled to summary judgment on the basis of its first business justification because it had "submitted extensive and undisputed evidence of a marketing strategy based on high-quality service."
Opinion of the Court Justice Blackmun delivered the opinion of the Court, in which Chief Justice Rehnquist and Justices White, Stevens, Kennedy and Souter joined. Justice Scalia filed a dissenting opinion, in which Justices O'Connor and Thomas joined.
Majority opinion The Supreme Court affirmed the Ninth Circuit's denial of Kodak's summary judgment motion reversing the district court. Justice Blackmun began by emphasizing some additional facts from the record that neither court below had relied on. Kodak did not make all of the parts that went into its equipment. It purchased parts from parts manufacturers. As part of Kodak's policy to limit sales of replacement parts for micrographic and copying machines only to buyers of Kodak equipment who use Kodak service or repair their own machines, Kodak sought to limit ISOs' access to other sources of Kodak parts besides Kodak itself, Kodak got manufacturers of its parts to agree with it that they would not sell parts that fit Kodak equipment to anyone other than Kodak. Kodak also pressured Kodak equipment owners and independent parts distributors not to sell Kodak parts to ISOs. In addition, Kodak took steps to restrict the availability to ISOs of used machines.Eastman Kodak Co., 504 U.S. at 458.
Kodak intended to and was successful, through these policies, in making it more difficult for ISOs to sell service for Kodak machines. ISOs were unable to obtain parts from reliable sources, and many were forced out of business, while others lost substantial revenue. Customers were forced to switch to Kodak service even though they preferred ISO service.
Kodak argued that it could not have the power to raise prices of service and parts above the level that would be charged in a competitive market, because any increase in profits from a higher price in the aftermarkets at least would necessarily be offset by a corresponding loss in profits from lower equipment sales as consumers began purchasing equipment with more attractive service costs from other sellers. It urged the Court to adopt an irrebuttable presumption or substantive legal rule that "equipment competition precludes any finding of monopoly power in derivative aftermarkets."504 U.S. at 465–66.
The Court refused to do that. It insisted that this was a fact issue, not something to be decided by theory. Kodak was equally insistent that the existence of market power in the service and parts markets, absent power in the equipment market, "simply makes no economic sense," and the absence of a legal presumption would deter procompetitive behavior.504 U.S. at 467.
The Court refused to accept Kodak's economic theories and responded that they were flawed: