Image Technical Services, Inc. v. Eastman Kodak Co.
Docket: Nos. 96-15293, 96-15296
Court: Court of Appeals for the Ninth Circuit; August 26, 1997; Federal Appellate Court
Plaintiffs-Appellees, including Image Technical Services and ten other independent service organizations (ISOs), sued Eastman Kodak Co. for Sherman Act violations, alleging Kodak leveraged its monopoly on photocopier and micrographic parts to establish a secondary monopoly in the service market. A jury awarded the ISOs $71.8 million in treble damages, and the district court imposed a ten-year permanent injunction mandating Kodak to sell all parts to ISOs. Kodak appealed, contesting the jury's verdict, the evidence presented, jury instructions, damage awards, the injunction, and claims of juror bias. The case involves antitrust principles regarding a monopolist's unilateral refusal to deal with competitors, as well as overlapping patent and copyright issues. The court has jurisdiction under 28 U.S.C. § 1291 and affirms in part, reverses in part, and remands with instructions to amend the injunction. Kodak, a manufacturer and servicer of high-volume photocopiers and micrographic equipment, faces competition from major companies like Xerox and Canon. Despite offering similar functionalities, Kodak's parts are not interchangeable with those of competitors. Kodak has historically serviced its machines, repairing over 80% of them, while ISOs began offering competitive repair services in the 1980s. As ISOs became more competitive, Kodak restricted their access to parts, ceasing sales of copier parts in 1985 and micrographic parts in 1986, and securing agreements with original equipment manufacturers to prevent parts sales to ISOs. This restriction impaired ISOs' ability to compete, limiting their access to necessary parts and forcing some out of business.
In 1987, ISOs initiated legal action against Kodak for violations of the Sherman Act, claiming that Kodak unlawfully tied the sale of services for its machines to parts sales (violating § 1) and attempted to monopolize service sales (violating § 2). Kodak sought summary judgment before discovery, which was initially granted by the district court. Upon appeal, the Ninth Circuit reversed this decision, and the Supreme Court later affirmed the denial of summary judgment, indicating that factual disputes existed regarding both claims. The Supreme Court also stated that Kodak's lack of market power in high-volume photocopiers did not eliminate the possibility of market power in related aftermarkets for parts and services.
Following remand, the case proceeded to trial, where the ISOs withdrew their § 1 claims. The jury found in favor of the ISOs on the § 2 claims, awarding $71.8 million in damages, which included compensation for lost service profits and used equipment sales. The district court then issued a ten-year injunction requiring Kodak to sell parts to ISOs under reasonable and non-discriminatory terms.
The ISOs presented two theories under § 2: attempted monopolization and monopolization. To succeed on their attempt claim, they needed to prove specific intent to control prices or destroy competition, predatory conduct, a dangerous probability of achieving monopoly power, and causal antitrust injury. The requirements for the monopolization claim were similar but differed in intent and the level of monopoly power required.
To succeed in a § 2 monopoly claim, the Independent Service Organizations (ISOs) must demonstrate that Kodak possesses monopoly power in the relevant market and that it willfully acquired or maintained that power. Additionally, plaintiffs must establish antitrust injury. Kodak challenges the ISOs' monopoly claim, asserting that its success would potentially invalidate the verdict regarding an attempted monopolization.
Kodak's primary argument targets the ISOs' theory of monopoly power, defined as the ability to control prices or exclude competition. The ISOs presented evidence of market power through both direct and circumstantial means, though the court concluded that sufficient circumstantial evidence was provided. To establish market power circumstantially, plaintiffs must define the relevant market, show that the defendant has a dominant market share, and demonstrate significant barriers to entry in that market.
The relevant market is determined by the presence of meaningful competition, typically defined by product and geographic parameters. The court emphasized that without a proper market definition, assessing a party's market influence becomes impossible. The Supreme Court's Kodak decision highlighted that service and parts can be considered separate markets and that a single brand might constitute a distinct market. Thus, the ISOs contended that Kodak monopolized two specific parts markets: the Kodak photocopier parts market and the Kodak micrographic parts market. Kodak contended that the ISOs' broad "all parts" market theory lacked support in antitrust law, prompting the court to review the district court’s denial of Kodak’s motion for judgment as a matter of law de novo.
Reversal of the district court’s denial of Kodak’s motion is necessary if the evidence supports a single, reasonable conclusion that contradicts the jury’s finding. Kodak argues for a segmented market definition, contending that each individual part for its photocopiers and micrographics equipment constitutes a separate market, leading to thousands of individual 'part' markets. Kodak claims that ISOs must show they could not obtain specific nonpatented parts, which would demonstrate Kodak's monopoly over service. This argument is rejected, as Kodak's definition ignores the 'commercial realities' faced by ISOs and equipment owners. The Supreme Court, in Kodak, recognized that parts and services for Kodak equipment are not interchangeable with those of other manufacturers, suggesting that the relevant market consists solely of companies servicing Kodak machines. A detailed factual inquiry into these 'commercial realities' indicates that an 'all parts' market theory is more appropriate. Service providers need access to all parts to compete effectively. Unlike the automotive parts market, where various components can be sourced independently, the Kodak parts market is highly specialized, necessitating that service providers have access to all parts to fulfill service contracts. This specialized nature distinguishes Kodak parts from general automotive supplies, supporting the argument for a unified market for Kodak parts.
ISOs contend that Kodak's anticompetitive practices have resulted in Kodak maintaining exclusive control over the inventory of all parts for its high volume photocopiers and micrographic equipment. Kodak's claim that the Supreme Court did not address the relevant market is acknowledged, yet the Court's analysis of the market consistently points to 'all parts' as the relevant market. The Court examined three distinct markets: equipment, parts, and service, emphasizing Kodak’s 'parts monopoly' without suggesting interchangeability among parts. Factors from Brown Shoe Co. v. United States support the acceptance of an 'all parts' market, including lack of consumer recognition of individual part markets, the specialized nature of the equipment, and the singular use of all parts for servicing Kodak equipment. Kodak fails to provide evidence countering this conclusion. The Supreme Court has established that non-interchangeable products can form a single relevant market, as seen in cases like United States v. Philadelphia National Bank and JBL Enterprises, Inc. v. Jhirmack Enterprises. Kodak's assertion that the cluster market theory does not apply due to the absence of a single manufacturer for all parts lacks merit; both ISOs and Kodak supply parts to self-service customers, and the differences in service offerings do not negate the existence of a relevant market. The Supreme Court's precedent indicates that commercial realities allow for the aggregation of diverse products under a single market definition.
Kodak argues that due to its exclusive manufacturing of some parts and complete lack of production for others, disparate market shares prevent the aggregation of all parts within the parts market. Citing United States v. AT&T, the court indicated that improper aggregation occurs if it creates a misleading causal link between anticompetitive behavior and monopoly power that vanishes when markets are analyzed separately. However, in the AT&T case, aggregation was permitted because the anticompetitive conduct affected the entire equipment spectrum rather than isolated products. The court emphasized that to avoid redundant evidence and lessen the burden on plaintiffs, it did not require proof of anticompetitive conduct for each specific telecommunications product.
In Kodak's case, disaggregation is unnecessary since it holds a monopoly share in most necessary parts. The ruling in Brown Shoe supports aggregating shares in similar submarkets, asserting that whether considered separately or together, the competitive landscape remains unchanged. Aggregating the parts into a single market for photocopiers and micrographic equipment is also justified for administrative efficiency, as service contracts necessitate a supply of all parts. Requiring independent proof of Kodak's monopoly in numerous markets would be excessively burdensome and impractical.
Kodak's claim that measuring market share in an all-parts context could misrepresent the market is countered by the Supreme Court's emphasis on the factual nature of market inquiries, highlighting that each case is unique. Kodak possesses undisputed 100% monopoly shares in certain components, with claims of monopolistic control across the entire parts market.
For establishing monopolization under § 2, a plaintiff must demonstrate that the defendant holds a dominant market share. This measurement is crucial for understanding the defendant’s market influence. A dominant share often implies the ability to control market output and pricing. Generally, courts consider a 65% market share as a threshold for a prima facie case of market power.
The Supreme Court in Kodak determined that Kodak possessed monopoly power, supported by evidence of controlling nearly 100% of the parts market and 80% to 95% of the service market, with no readily available substitutes. The court noted that the ISOs had a viable claim that Kodak could control prices and exclude competition. Kodak contested the calculation of its market share, arguing against the inclusion of shares held by original equipment manufacturers that were allegedly restricted. The ISOs claimed that Kodak monopolized the parts market for high-volume photocopiers and micro-graphics by not selling parts it manufactures (which constitute 30% of needed parts) and imposing restrictions on manufacturers and end users. Kodak's objections to the jury instructions were dismissed because it did not raise these issues at trial, waiving its right to appeal. The jury was instructed that it could aggregate Kodak's market share with that of restricted manufacturers, and Kodak had agreed to a requirement of 65% market share for a monopoly finding. The court reviewed the jury's verdict for substantial evidence, concluding that the jury's finding of Kodak's monopoly share was supported by evidence including Kodak's own parts manufacturing, control over OEM sales, and discouragement of self-servicing by users. Kodak's argument that ISOs did not demonstrate a complete lack of available parts was deemed unpersuasive against the substantial evidence provided.
Substantial evidence in the record indicates a significant shortage of parts for post-1986 models and difficulty in obtaining parts for older models, with Kodak acknowledging the 'limited' availability of parts. Kodak's contention that independent service organizations (ISOs) acquired parts by purchasing and stripping Kodak equipment does not undermine its monopoly in the parts market. The ISOs do not need to demonstrate Kodak's total control over every part to establish monopoly power. Testimony from Alan Conklin, who managed parts acquisition for Kodak, reveals that Kodak manufactured about 30% of its own parts. Although Kodak claims that other manufacturers could produce substitutes, this merely suggests that original equipment manufacturers could create parts if Kodak permitted it. Kodak's refusal to sell 'proprietary' parts and the testimony from ISO representatives, who reported an inability to purchase parts from independent manufacturers, supports the conclusion of Kodak's market dominance.
Kodak's assertion that its tooling and engineering clauses are standard practices is deemed irrelevant, as legal actions by a monopolist may have anti-competitive implications. While the ISOs did not precisely quantify Kodak’s market shares, they based their estimates on Kodak's manufacturing share and shares influenced by tooling and engineering clauses. A reasonable jury could conclude that Kodak's share of the parts markets exceeds 65%. Even a lower estimate around 50% would still imply market power for the ISOs’ monopolization claim. To establish monopoly power, plaintiffs must demonstrate more than just market share; they need to show significant barriers to entry and limitations on competitors' ability to expand. High entry barriers and restricted competitor output are crucial for substantiating monopoly power claims under antitrust law.
Barriers to entry in a market must significantly hinder normal market operations to prevent self-correction. Common barriers include patents, control of essential resources, entrenched buyer preferences, high capital costs, and economies of scale. Kodak contends that Independent Service Organizations (ISOs) did not demonstrate substantial entry barriers, but evidence shows Kodak possesses 220 patents, controls its designs and manufacturing capabilities, and maintains a dominant market share. Despite Kodak's claims about the ease of market entry, there is significant evidence of barriers, such as high capital costs and consumer demand, which impede market self-correction.
The second element of a monopoly claim under Section 2 involves the use of monopoly power to restrict competition or harm competitors. ISOs assert that Kodak leveraged its monopoly on parts to dominate the service market for its equipment, a theory supported by the Supreme Court. Kodak's conduct must be exclusionary and not simply a result of competitive growth. Kodak challenges jury instructions related to monopoly conduct, particularly asserting that it does not have a general duty to cooperate with competitors but cannot engage in conduct that unnecessarily excludes them to maintain its monopoly. The jury's verdict will be upheld if supported by substantial evidence.
Kodak challenges Instruction No. 29, claiming it lacks objective standards and improperly encompasses lawful monopolistic competition by using the phrase "unnecessarily excludes or handicaps competitors." Kodak argues this language reflects a rejected concept of "monopoly leveraging" from Alaska Airlines, which overturned the Second Circuit's ruling in Berkey Photo. In Berkey Photo, liability under § 2 of the Sherman Act was established based on monopoly leveraging without the need to monopolize the second market. However, Alaska Airlines clarified that such leveraging cannot establish § 2 liability unless it involves an attempt to monopolize the downstream market. Kodak accuses the district court of incorporating Berkey Photo’s rejected standards, but the court maintains that Instruction No. 29 requires the jury to find Kodak acted to maintain its monopoly, a stricter standard than Berkey Photo's.
Kodak also contests jury instructions on attempted monopolization and monopolization, claiming they inadequately address the "essential facilities" doctrine, which Kodak believes is the only applicable legal theory requiring it to sell all parts. Kodak asserts that this doctrine necessitates proof that its parts monopoly could eliminate competition. However, the court rejects this theory, asserting that § 2 of the Sherman Act prohibits monopolists from refusing to deal to maintain a monopoly without a legitimate business justification, independent of the essential facilities doctrine. The court emphasizes that unilateral refusals to deal can be anticompetitive if they harm the competitive process without a legitimate justification, citing Alaska Airlines' definition of the essential facilities doctrine as requiring reasonable access to compete.
A facility is deemed “essential” if it cannot be practically or reasonably duplicated. In Anaheim v. Southern California Edison Co., the Ninth Circuit defined this condition. The Supreme Court in Otter Tail Power Co. v. United States found that Otter Tail Power's electrical utility infrastructure was an essential facility, which it exploited to monopolize commercial electrical services. Otter Tail refused to provide wholesale services to municipalities aiming to offer retail services, which eliminated competition in the retail market. This conduct was ruled exclusionary and in violation of Section 2 of the Sherman Act.
In interpreting Otter Tail, the Alaska Airlines case established that plaintiffs must demonstrate that control over an essential facility can eliminate downstream market competition. A successful essential facilities claim requires proof that denial of access has significantly hindered market competition. Kodak criticized a district court's jury instructions regarding the necessity for Kodak's conduct to eliminate competition in the downstream market to be liable under Section 2.
The Supreme Court has not explicitly required that a refusal to deal claim be grounded solely in the essential facilities doctrine. In Kodak, the court did not discuss this doctrine, nor did it cite relevant cases employing its analysis. The court acknowledged a firm's right to refuse dealings with competitors but specified that this right exists only with legitimate competitive reasons. In Aspen Skiing, the Court considered a refusal to deal in the context of a monopolist in the recreational ski market, where a previously available ski pass was argued to be an essential facility. The jury ruled in favor of the plaintiffs, but the Supreme Court affirmed the decision without relying on the essential facilities doctrine, focusing instead on the right to refuse to deal, which is not absolute.
The Court referenced Lorain Journal Co. v. United States to assert that the right to refuse to deal is not absolute and can violate the Sherman Act if used to monopolize interstate commerce. While individuals have the discretion to choose with whom to deal, such choices may breach the Sherman Act if they aim to create or maintain a monopoly. In Aspen Skiing, the Court indicated that a defendant’s refusal to deal could indicate intent relevant to whether the conduct is exclusionary or predatory. The refusal to deal was linked to a monopolist's change in distribution patterns originating from a competitive market, with evidence suggesting that competitors still offered interchangeable products, satisfying consumer demand.
The Court upheld the jury's finding of liability based on the context and strength of evidence, emphasizing the need for juries to differentiate between exclusionary practices and legitimate business success. The refusal to deal does not violate Section 2 of the Sherman Act if valid business reasons exist. The Supreme Court's decision in Aspen Skiing indicated a preference for traditional principles in unilateral refusal to deal cases, which were reflected in the jury instructions in the current case.
The situation at hand involved a monopolist altering an established distribution pattern detrimental to competitors, similar to Aspen Skiing. However, this case differed in that the service market was relatively new and growing, and there were multiple markets rather than one. Additionally, the case did not involve a supplier’s refusal to deal with customers to control a downstream market, distinguishing it from typical essential facilities cases. Despite these differences, the analysis in Aspen Skiing remained applicable to the current case, as highlighted by the First Circuit in Data General v. Grumman Systems Support.
The Supreme Court, in Aspen Skiing, is interpreted to support a broader application of principles concerning refusal to deal cases. In this context, the plaintiff is not required to conform their argument to a specific category of unilateral refusals. The jury instruction provided by the district court was deemed appropriate. Kodak challenges the jury's verdict, arguing that the Independent Service Organizations (ISOs) did not present a viable aftermarket monopoly theory that aligns with economic principles, claiming they abandoned their previous theory. Kodak's appeal is reviewed for plain error due to its failure to request judgment as a matter of law at the close of evidence, as mandated by Federal Rule of Civil Procedure Rule 50(a).
Kodak argues, citing out-of-circuit cases, that a motion for judgment need not be made if it would be futile. However, the court has rejected this subjective interpretation of Rule 50. The denial of Kodak's motion for summary judgment does not equate to futility regarding a Rule 50(a) motion, as the ISOs presented different evidence at trial than what had been considered during summary judgment. The evidence presented by the ISOs was sufficient to demonstrate Kodak's monopoly power in the service market, particularly noting Kodak's significant market shares (95% in high-volume photocopier services and 88% in micrographic services).
Several ISOs exited or limited their service due to a lack of parts, while others profited and grew, indicating that the service market's viability may depend on the longevity of pre-1986 models. Issues of customer "lock-in" and information asymmetry complicate the relationship between equipment and service markets. Kodak's dominance in the equipment market restricts consumer options. Despite Kodak's criticisms of the ISOs' methodology, evidence supporting Kodak's supracompetitive profits in the service market was substantial, affirming the jury’s verdict regarding Kodak's monopoly. The conclusion that the ISOs demonstrated both the attainment of monopoly power and exclusionary conduct necessitates further examination.
Kodak's potentially unlawful conduct may be excused if it is justified by legitimate business reasons, as established under Section 2 of the Sherman Act. A plaintiff can challenge this justification by showing it fails to enhance competition or is merely a pretext. Kodak claims that its anticompetitive actions are valid due to the protection of its patented and copyrighted materials and argues that the district court's jury instructions hindered proper consideration of this justification. Specifically, Kodak criticizes the court for not providing a “less restrictive alternatives” instruction and failing to adequately address its intellectual property rights in the jury instructions.
Jury instructions must accurately reflect the legal issues without being misleading. The court applies an abuse of discretion standard when assessing potential errors in the jury instructions. Kodak contends that the district court neglected to instruct the jury about evaluating less restrictive alternatives in achieving business goals and questions the sufficiency of the ISOs' pretext evidence. The ISOs assert that Kodak waived its arguments regarding business justifications by not seeking judgment as a matter of law, but the court disagrees, stating Kodak's concerns relate to jury instructions rather than evidence sufficiency, thus Rule 50(b) is not applicable.
Kodak's argument against the necessity of considering less restrictive alternatives lacks supporting authority. It is based on the district court's refusal to adopt Kodak's suggested language and its disagreement with the phrasing in Jury Instructions Nos. 29 and 34. Kodak claims this allowed the ISOs to present a "necessity" standard to the jury. However, the language used was deemed acceptable under precedent, and Instruction No. 28, which defined "exclusionary conduct," closely resembled both Kodak’s proposed language and the language endorsed by the Supreme Court, indicating that the court's approach was consistent with established legal standards.
Kodak can refuse to engage in business dealings if valid reasons exist, and the jury is not permitted to critique Kodak's business judgment retrospectively. The jury instructions prevented consideration of "less restrictive alternatives" without infringing on Kodak's business decisions. Kodak contends that the Independent Service Organizations (ISOs) primarily countered its business justifications with "less restrictive alternative" arguments, particularly targeting Kodak's quality control rationale as pretextual. The ISOs argued that Kodak’s quality control claims were unfounded, asserting they did not impede service quality. The court upheld its jury instructions, noting Kodak waived its claim regarding evidence sufficiency by not motioning for judgment as a matter of law during the trial. The ISOs presented sufficient evidence to support the jury's rejection of Kodak's justifications, including that Kodak’s parts policy emerged after an ISO secured a contract with California, allowed customers to service their machines, and that many customers preferred ISO services.
Additionally, Kodak criticized the jury instructions for inadequately addressing its intellectual property rights as justifications for its conduct. Kodak holds 220 U.S. patents for parts related to its photocopiers and has copyrights on its diagnostic software. The district court instructed the jury that if Kodak engaged in monopolization through misuse of its parts monopoly, its patent and copyright claims would not serve as defenses against antitrust allegations. Kodak's proposed inclusion of "exercising lawful patents and copyrights" as non-exclusionary conduct was rejected by the court, raising complex issues about the interplay between federal antitrust law and intellectual property rights.
Determining the impact of a monopolist's unilateral refusal to sell or license a patented or copyrighted product is crucial for assessing a monopolization claim under Section 2, particularly in the context of monopoly leveraging. This is a novel legal question requiring an understanding of antitrust, copyright, and patent law principles, necessitating their harmonization in response to Kodak’s challenge. Antitrust law aims to foster a competitive marketplace, as established in cases like Standard Oil Co. v. United States. The Sherman Act prohibits trade restraints and monopolistic practices, while patent law protects inventions and encourages market introduction for public benefit, effectively creating a permissible monopoly. Copyright law similarly seeks to balance fair returns for creators with public access to creative works, granting copyright owners exclusive distribution rights, including the right to refrain from licensing.
The interplay between these legal frameworks reveals inherent tensions; while patent and copyright laws may grant monopoly power, antitrust laws seek to limit it. Two key principles emerge: patent and copyright holders are not exempt from antitrust liability, and they retain the right to refuse to sell or license their works. Case law indicates that such refusals may lead to antitrust violations if they involve anti-competitive concerted actions.
Power derived from natural advantages, such as patents or copyrights, can lead to liability if a seller exploits their dominant market position to extend into another market. Historical case law supports the right of patent and copyright holders to refuse to sell or license their protected works. The Supreme Court has reinforced that such rights are fundamental, as seen in United States v. Westinghouse Electric Corp., where the right to license or refuse licensing is deemed an "untrammeled right."
In the context of antitrust law, the Supreme Court in Kodak highlighted that monopolists could violate antitrust provisions if they leverage their dominant position in one market to enhance their monopoly in another. This principle indicates that intellectual property rights do not grant absolute immunity from antitrust scrutiny. However, the Kodak Court did not specifically resolve the issue of antitrust liability stemming from a unilateral refusal to deal with patented or copyrighted products. Generally, courts do not classify a monopolist's unilateral refusal to license a patent as exclusionary conduct, and there is no precedent for imposing antitrust liability on such refusals. Consequently, a lawful patent holder cannot be held liable under Section 2 of the Sherman Act for maintaining their acquired monopoly power through refusal to license.
Westinghouse established that licensing patents does not inherently violate antitrust laws, provided the patents were lawfully acquired. Subsequent actions permissible under patent law cannot trigger antitrust liability, but there are limitations, especially if a patent was unlawfully acquired or if a lawful monopoly is extended beyond the patent's scope. Section 2 of the Sherman Act addresses exclusionary practices that unlawfully extend monopolies into different markets. The definition of the patent grant and the relevant market is crucial; the patent's scope is defined by patent law, while antitrust market definitions are determined by economic conditions. The case of Triad Systems Corp. clarified that a copyright does not extend to service markets if the service utilizes the copyrighted software, and licensing fees are warranted for such use. The court did not address antitrust claims related to this case as they had not been tried. The distinction between copyright and antitrust market definitions remains unresolved, indicating a gap in legal harmonization. Actions by intellectual property owners that violate antitrust laws do not undermine their fundamental exclusion rights. Lastly, the distinction between tying and monopoly leveraging claims is significant, as the latter lacks the same limiting principles and can lead to different legal outcomes.
Certain behaviors that may typically be non-concerning or procompetitive can become exclusionary when executed by a monopolist. Citing *Kodak*, it is noted that otherwise lawful conduct may be deemed exclusionary in the context of monopoly. There is a need to reconcile antitrust monopoly theory with intellectual property rights, as unilateral conduct by a monopolist, particularly in aftermarkets, can lead to liability and reinforce monopoly power associated with patents and copyrights.
Claims of monopolization will largely depend on the validity of the business justifications supporting the conduct. Without clear limits, unilateral conduct claims are likely to increase, often hinging on contentious factual disputes regarding market definitions. The potential for treble damages creates a chilling effect on patent and copyright holders, who may face significant legal costs and risks due to lawsuits over their licensing decisions, undermining the intended incentives for innovation and competition established by intellectual property and antitrust laws.
To address these concerns, a modified rebuttable presumption from *Data General* is adopted, stipulating that while a monopolist's unilateral refusal to license a patent or copyright can be exclusionary, the intent to exclude others from its protected work is a presumptively valid business justification for any immediate consumer harm. This presumption aims to ensure that juries consider both the procompetitive impacts and the statutory rights conferred by intellectual property laws, aligning the interests of both intellectual property and antitrust statutes with the overarching public interest.
The patent system prioritizes public interest, as established in Mercoid and Standard Oil. The district court's failure to adequately consider Kodak's intellectual property rights in jury instructions was deemed an abuse of discretion, but the error was classified as harmless. Kodak's argument regarding intellectual property as a business justification was dismissed by the jury, which found it pretextual. In civil cases, errors in jury instructions do not mandate reversal if they are likely harmless. Kodak claimed that the jury instructions limited its ability to argue for the protection of its investments and intellectual property; however, its closing argument focused on protecting investments without adequately addressing intellectual property rights. This approach echoed the "free-riding" justification rejected by the Supreme Court. Although Kodak's refusal to sell parts to independent service organizations (ISOs) may initially appear to be a legitimate business justification, such presumptions can be rebutted. The First Circuit's decision in Data General highlighted that a monopolist's previous policies do not guarantee they meet consumer demand in a competitive market. The presumption of legitimacy can be challenged by evidence of wrongful acquisition of intellectual property protections or by demonstrating that the justification is merely a pretext for anticompetitive behavior.
Kodak’s self-service policy raises questions about the legitimacy of its claims regarding the protection of its intellectual property. A reasonable jury could view Kodak's rationale as potentially pretextual, as internal testimonies suggest that protecting patents was not a primary motivation for Kodak's actions. Specifically, Kodak's parts manager indicated that patents were not considered when implementing the parts policy, and Kodak failed to distinguish between proprietary and non-proprietary parts. The district court noted that Kodak's motivations did not align with claims of protecting intellectual property, and the jury found evidence supporting a monopolistic scheme in the service market. Kodak's assertion that the existence of some patented products diminishes the claims against it is countered by the fact that the market realities do not separate these products clearly. Regarding jury bias, Kodak challenged Juror John Bushong's impartiality due to his previous interactions with the company. However, Bushong indicated he could be objective, and neither party sought to remove him, despite his later expressed concerns about impartiality. The district court's decision not to excuse him is reviewed for abuse of discretion.
Bushong expressed difficulty in remaining impartial due to a past adversarial relationship with Kodak. He was questioned in open court regarding his feelings of resentment towards Kodak, which stemmed from the company's handling of a previous account. Kodak moved to strike him from the jury for cause, but the court allowed him to remain, pending further questioning. At a subsequent hearing, Bushong assured the court of his impartiality and stated that his negative feelings about Kodak were subsiding. The judge denied Kodak’s motion to dismiss him, emphasizing that actual bias requires an inability to act impartially. Initial impressions or biases may be disregarded if a juror commits to judging based on evidence. The trial judge, who assesses juror credibility, deemed Bushong fit to serve. Kodak’s argument regarding the impact of Bushong’s initial bias was noted but deemed irrelevant to the court's decision to retain him. The judge's discretion was upheld, concluding that the failure to dismiss Bushong did not compromise Kodak's right to a fair trial. Additionally, Kodak challenged the jury's award of damages, which is subject to review for substantial evidence, particularly in antitrust cases where precise damage calculations may be difficult due to market uncertainties.
Jurors are permitted to utilize probable and inferential proof to estimate damages, as established in Hasbrouck v. Texaco, Inc. and J. Truett Payne Co. v. Chrysler Motors Corp. The Independent Service Organizations (ISOs) used a "yardstick" methodology for damage calculations, comparing their performance to a similar business not affected by anticompetitive behavior. The damages represent the difference between potential earnings in a free market and actual earnings under the anticompetitive conditions. The determination of whether the comparison business is relevant is a factual question for the jury.
The ISOs’ damage expert, Thomas Neches, employed two primary methods: analyzing the plaintiffs’ own non-Kodak revenues and assessing the composite growth of non-Kodak revenues among other ISOs. Neches found sufficient non-Kodak revenues to justify the first method for ten out of eleven plaintiffs, while for seven plaintiffs with inadequate revenues, he used the averaged growth of the remaining ISOs.
Neches based MSI's damages on the president's assertion that MSI would have earned 50% more but for Kodak's parts policy, translating to an estimated $20,000 in additional service sales per year across twenty metropolitan areas. Kodak challenged this estimate based on precedent from Gray v. Shell Oil Co., arguing the president's testimony lacked foundation. However, the record indicates that MSI's lost profits were indeed linked to limited part availability for competing in Kodak's contracts, and Neches validated the 50% estimate through additional analysis and a market share study.
For CPO and ITS, Kodak contested the use of the average growth rate of micrographic services from other ISOs as a benchmark. Neches defended this approach based on ITS's lack of alternative copier service and CPO's similar parts policy with Xerox. Kodak did not provide evidence to refute the comparability of the markets used in Neches' analysis.
A lack of meaningful economic similarity between the Independent Service Organizations (ISOs) and the firms used for comparison could justify overturning the damages awarded; however, substantial evidence supports the jury's findings of similarity. Kodak argues that the damages awarded to larger ISOs, MSI and CPO, were disproportionate compared to smaller ISOs, noting that the larger firms had access to parts and profited, while smaller ISOs abandoned the search for parts. Nonetheless, profitability does not preclude recovery for damages due to Kodak's anticompetitive practices, as profitable businesses can still claim lost sales from such behavior.
Kodak contends it is not responsible for the losses of ASI, which went out of business due to its inability to adapt to Kodak's conduct; ASI's president admitted to ceasing efforts to obtain parts after Kodak's policy change. The fact that other ISOs profited from ASI's former customers suggests ASI's exit was influenced by factors beyond Kodak's actions, leading to the conclusion that substantial evidence does not support ASI’s damage award, which is therefore reversed.
Kodak also criticizes the ISOs’ damage study for not accurately reflecting later changes in claims. While Kodak cites testimony about the availability of parts for pre-1986 micrographics equipment, the damage study was based on overall sales trends rather than specific equipment, and thus remained valid. The study calculated lost revenues by comparing Kodak revenues to non-Kodak revenues, excluding lost profits from servicing pre-1986 equipment. Kodak's assertion that the ISOs did not compete for point-of-sale contracts lacks supporting evidence in the record.
Kodak failed to provide sufficient evidence to challenge the accuracy of using non-Kodak revenue as a benchmark in the damage study. The ISOs’ withdrawal of certain claims does not invalidate the study, as the jury determined Kodak's exclusionary conduct monopolized the service market, resulting in lost service contracts for the ISOs. Kodak's argument that damages were improperly assessed based on a hypothetical open sale policy is countered by agreement that increased parts prices would indeed reduce ISOs' profits. The jury's damage assessment compared ISOs’ revenues from unrestricted equipment brands, reflecting market dynamics under competitive conditions. Kodak's challenge regarding the jury's award for reduced sales of refurbished Kodak equipment is based on the assertion that the damages were not properly distinguished between losses due to Kodak's parts market control and those from its service monopoly. The district court upheld the jury's decision, citing precedent that supports awards even when damages are not clearly separated between lawful and unlawful conduct. However, it is emphasized that damages must be disaggregated to comply with the Clayton Act, distinguishing lawful competition from Kodak's monopolistic actions.
The district court limited jury damages to those specifically linked to Kodak’s monopolization of the service market. However, the Independent Service Organizations (ISOs) failed to provide sufficient evidence to quantify lost sales of used equipment due to Kodak's service monopoly; their claims were primarily based on individual complaints about the inability to sell equipment due to Kodak's refusal to service it. The jury could not properly consider Kodak's used equipment service policy as anticompetitive since the ISOs' claim regarding used equipment monopolization was dismissed. Although the ISOs argued they clarified causation to the jury, any awarded damages were deemed speculative. The ISOs contended that disaggregation of damages was unnecessary unless some damages stemmed from lawful activities, which blurred the line between lawful competitive actions and those deemed unlawful. It was emphasized that conduct found anti-competitive in one market might not hold the same in another, necessitating disaggregation of damages when a monopolization claim was dismissed. The case cited MCI Communications Corp. v. AT&T to illustrate that damages must be adjusted based on liability findings. As a result, the court remanded the case for a new trial on damages related to used equipment.
Kodak also challenged the district court’s ten-year permanent injunction requiring it to sell parts to ISOs at reasonable prices. The appellate review focused on whether the injunction constituted an abuse of discretion or relied on erroneous legal principles. While appellate courts typically defer to trial courts on injunction framing, they will modify injunctions if necessary for effective relief. Kodak argued that the injunction encouraged free-riding by ISOs on Kodak's investments in the service market. The Supreme Court's position indicated that for free-riding to apply, ISOs must rely on Kodak's investments, and alternatives like maintaining their own stockpiles could mitigate this issue. Consequently, Kodak's inventory costs were viewed as part of its investment, indicating ISOs were indeed free-riding.
The injunction mandates Kodak to sell all parts for its equipment, regardless of whether it manufactures them, and prohibits Kodak from interfering with sales to Independent Service Organizations (ISOs) by original equipment manufacturers. This gives ISOs the option to buy either from Kodak, which must maintain a large inventory, or from other suppliers. This setup is deemed unnecessary and anticompetitive, as it encourages free-riding and creates barriers for non-Kodak suppliers, compelling them to price competitively against Kodak’s offerings. The directive is to limit Kodak to selling only its manufactured parts, which should include subassemblies specified in the injunction to prevent confusion.
Kodak argues that the injunction imposes a regulatory burden on pricing and infringes upon its rights to profit from its patented products. The court clarifies that while Kodak has the right to charge monopoly prices for its patented goods, the context involves ensuring reasonable pricing due to Kodak’s historical monopolistic practices in the service market. The injunction is seen as potentially detrimental to Kodak’s incentive to innovate, particularly as it requires reasonable pricing for all new products introduced during the ten-year injunction period.
To balance protecting Kodak’s intellectual property with ending its service monopoly, the court suggests removing the requirement for "reasonable" pricing and allowing Kodak to set nondiscriminatory prices based on market conditions. The court affirms the appropriateness of the injunction’s coverage of nonparty ISOs and reinforces that an individual harmed by antitrust violations has the right to seek injunctive relief, emphasizing the effectiveness of a single injunction in addressing such violations.
Relief can be granted to non-parties when the same defendant is enjoined and broad relief is necessary for prevailing parties. This ensures that Independent Service Organizations (ISOs) do not become entrenched as service or parts monopolists. The district court has the authority to order the forced sale or licensing of patented or copyrighted products, as established in Glaxo Group.
The injunction includes specific definitions:
- "Kodak" encompasses Eastman Kodak Company and its affiliates.
- "Kodak equipment" refers to all micrographic equipment and high-volume photocopiers made by Kodak.
- "ISOs" are entities providing on-site repair or maintenance for Kodak equipment.
- "Parts" covers various components related to Kodak equipment, including service manuals and essential tools, with exclusions for commercially available tools.
- "Kodak parts" are those manufactured by Kodak, excluding parts made by original-equipment manufacturers for Kodak.
Kodak is required to sell parts to ISOs or cooperatives for all models serviced by Kodak, with the right to mandate cash on delivery for buyers without an acceptable credit history. Orders must be made through Kodak’s designated Customer Parts and Product Support Center. Kodak must offer individual parts and subassemblies to interested parties on reasonable and nondiscriminatory terms, and this injunction applies to both existing and future equipment models. The term "sale" includes licensing for copyrighted parts under similar terms.
Kodak is prohibited from interfering with Independent Service Organizations (ISOs) in their purchase of parts from third-party vendors, including Kodak's own suppliers, provided that neither the ISOs nor the vendors violate confidentiality obligations regarding Kodak's proprietary information. Kodak must treat all ISOs equitably, offering the same prices, terms, and conditions for parts as it provides to other ISOs or service providers. Discrimination against customers using non-Kodak parts is also prohibited, although Kodak may charge a reasonable inspection fee prior to entering maintenance agreements for its equipment.
Kodak retains its proprietary rights and can take legal action against unauthorized duplication of its parts. Within 45 days of the injunction's entry, Kodak must notify past and current service customers that it is mandated to sell parts to ISOs for maintaining Kodak equipment. This injunction is set to expire ten years from its entry unless otherwise ordered by the court, and it will cease to apply if Kodak exits the service market for high-volume copiers or micrographic equipment.
The court retains jurisdiction to address further orders related to this injunction's provisions. The appellate court affirmed liability but reversed damages awarded to ASI and remanded the case for a new trial on certain equipment damages. Partial attorney’s fees for ISOs will be determined by the district court. Additionally, procedural details regarding juror dismissals during deliberations are noted, along with references to the Sherman Act regarding monopolization and market definitions relevant to this case.
The Third Circuit in American Bearing denied the appellant’s attempt to introduce a new market theory on appeal, affirming the ISOs’ reliance on their established "all parts" theory. The court clarified that prior criticisms by the Kodak Court regarding simultaneous entry barriers to parts and service did not reduce the burden of proof for demonstrating market power; instead, it invalidated Kodak's defense of preventing ISO free-riding on its investment in parts. Jury Instruction No. 28 defined exclusionary conduct as practices that unreasonably hinder fair competition, distinguishing such conduct from standard competitive practices like offering superior products or using better technology.
In 1988, the patent laws were amended to assert that a patent owner cannot be denied relief for infringement due to refusal to license the patent (35 U.S.C. 271(d)). The First Circuit noted that this amendment might effectively prohibit antitrust claims based on licensing refusals, although it does not mandate this outcome and has been interpreted as codifying existing law. The amendment indicates a legislative intent to uphold the patent owner's right to exclude others. The Supreme Court's previous rulings, including Times-Picayune and Leitch Manufacturing, reinforce the notion that attempts to extend patent monopolies into unpatented areas are unlawful, regardless of the methods used. These issues are now governed by 35 U.S.C. 271.
The ISOs argue that the case involves a selective refusal by Kodak to sell patented and copyrighted products, rather than an absolute refusal to license, a distinction that does not impact the legal reasoning. The ISOs withdrew their tying claim and their amici contend there is evidence of Kodak's concerted action, although jury instructions fail to define this action clearly. The district court's injunction requires Kodak to supply ISOs with its materials at reasonable prices, acknowledging Kodak's right to charge monopoly prices for these products. Jury instructions indicated that Kodak's business reasons for its actions should be considered genuine unless proven pretextual. Evidence regarding MSI's president's growth estimates and market calculations is contested, with discrepancies noted in how equipment under point-of-sale contracts was accounted for. The ISOs' claim for damages based on a "proximate cause" theory is undermined by the distinction between discriminatory licensing and sales. An amendment to the district court's injunction limits the requirement for Kodak to supply parts when ISOs or vendors breach obligations to protect proprietary data. This amendment aims to enforce nondiscriminatory pricing, which would necessitate Kodak to adjust its pricing strategies, although the impact is deemed less severe than direct price regulation. The district court suggested that Kodak's pricing to companies with servicing contracts could help determine reasonable prices, while acknowledging that increased market demand from ISOs might justify adjustments in Kodak's pricing.
