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CASE 40-3
EASTMAN KODAK CO. v. IMAGE TECHNICAL SERVICES,
INC.
Supreme Court of the United States, 1992
504 U.S. 451, 112 S.Ct. 2072, 119 L.Ed.2d 265 http://scholar.google.com/scholar_case?
case=6652719385155799724&q=504+U.S.+451&hl=en&as_sdt=2,22
Blackmun, J.
* * *
Kodak manufactures and sells complex business machines—as relevant here, high-volume
photocopier and micrographics equipment. Kodak equipment is unique; micrographic
software programs that operate on Kodak machines, for example, are not compatible with
competitors’ machines. Kodak parts are not compatible with other manufacturers’
equipment, and vice versa. Kodak equipment, although expensive when new, has little resale
value.
Kodak provides service and parts for its machines to its customers. It provides some of
the parts itself; the rest are made to order for Kodak by independent original-equipment
manufacturers (OEMs). Kodak does not sell a complete system of original equipment,
lifetime service, and lifetime parts for a single price. Instead, Kodak provides service after
Some of the ISOs’ customers purchase their own parts and hire ISOs only for service.
Others choose ISOs to supply both service and parts. ISOs keep an inventory of parts,
purchased from Kodak or other sources, primarily the OEMs.
In 1985 and 1986, Kodak implemented a policy of selling replacement parts for
micrographic and copying machines only to buyers of Kodak equipment who use Kodak
service or repair their own machines.
As part of the same policy, Kodak sought to limit ISO access to other sources of Kodak
parts. Kodak and the OEMs agreed that the OEMs 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 of used machines.
Kodak intended, through these policies, to make it more difficult for ISOs to sell service
for Kodak machines. It succeeded. ISOs were unable to obtain parts from reliable sources,
* * *
A tying arrangement is “an agreement by a party to sell one product but only on the
condition that the buyer also purchases a different (or tied) product, or at least agrees that he
will not purchase that product from any other supplier.” [Citation.] Such an arrangement
violates §1 of the Sherman Act if the seller has “appreciable economic power” in the tying
product market and if the arrangement affects a substantial volume of commerce in the tied
market. [Citation.]
For the respondents to defeat a motion for summary judgment on their claim of a tying
arrangement, a reasonable trier of fact must be able to find, first, that service and parts are
two distinct products, and, second, that Kodak has tied the sale of the two products.
For service and parts to be considered two distinct products, there must be sufficient
consumer demand so that it is efficient for a firm to provide service separately from parts.
[Citation.] Evidence in the record indicates that service and parts have been sold separately
in the past and still are sold separately to self-service equipment owners. Indeed, the
development of the entire high-technology service industry is evidence of the efficiency of a
separate market for service.
* * *
Having found sufficient evidence of a tying arrangement, we consider the other
necessary feature of an illegal tying arrangement: appreciable economic power in the tying
market. Market power is the power “to force a purchaser to do something that he would not
do in a competitive market.” [Citation.] It has been defined as “the ability of a single seller
to raise price and restrict output.” [Citations.] The existence of such power ordinarily is
inferred from the seller’s possession of a predominant share of the market. [Citations.]
* * *
* * *
We conclude * * * that Kodak has failed to demonstrate that respondents’ inference of
market power in the service and parts markets is unreasonable, and that, consequently,
Kodak is entitled to summary judgment. It is clearly reasonable to infer that Kodak has
market power to raise prices and drive out competition in the aftermar-kets, since
* * *
We need not decide whether Kodak’s behavior has any procompetitive effects and, if so,
whether they outweigh the anticompetitive effects. We note only that Kodak’s service and
parts policy is simply not one that appears always or almost always to enhance competition,
* * *
Respondents also claim that they have presented genuine issues for trial as to whether
Kodak has monopolized or attempted to monopolize the service and parts markets in
violation of §2 of the Sherman Act. “The offense of monopoly under §2 of the Sherman Act
has two elements: (1) the possession of monopoly power in the relevant market and (2) the
willful acquisition or maintenance of power as distinguished from growth or development as
a consequence of a superior product, business acumen, or historic accident.” [Citation.]
The existence of the first element, possession of monopoly power, is easily resolved. As
has been noted, respondents have presented a triable claim that service and parts are separate
Kodak also contends that, as a matter of law, a single brand of a product or service can
never be a relevant market under the Sherman Act. We disagree. The relevant market for
antitrust purposes is determined by the choices available to Kodak equipment owners.
[Citation.] Because service and parts for Kodak equipment are not interchangeable with
other manufacturers’ service and parts, the relevant market from the Kodak equipment
owner’s perspective is composed of only those companies that service Kodak machines. See
Du Pont, [citation] (the “market is composed of products that have reasonable
interchangeability”). This Court’s prior cases support the proposition that in some instances
one brand of a product can constitute a separate market. [Citations.]
* * *
In the end, of course, Kodak’s arguments may prove to be correct. It may be that its
parts, service, and equipment are components of one unified market, or that the equipment
market does discipline the aftermarkets so that all three are priced competitively overall, or
that any anti-competitive effects of Kodak’s behavior are outweighed by its competitive
effects. But we cannot reach these conclusions as a matter of law on a record this sparse.
Accordingly, the judgment of the Court of Appeals denying summary judgment is affirmed.
It is so ordered.
NOTE: See Figure 40:1: Restraints of Trade under Sherman Act.
*** Question to Discuss***
Explain monopolization, attempts and conspiracies to monopolize and why they are
illegal.
Monopolies
Monopoly power is the ability to effectively prevent others from competing in
the same market. A company’s market share is determined by evaluating
the relevant product and geographic markets. A relevant product market
refers to products that are similar with respect to price, quality, and
adaptability. The relevant geographic market concerns the area where the
company sells its products. To address the problem of monopolization,
Section 2 of the Sherman Act prohibits monopolies and all attempts or
conspiracies to monopolize. Thus, Section 2 prohibits both agreements
among businesses and, unlike Section 1, unilateral conduct by one &rm.
Monopolization — Following the establishment of monopoly power it must
also be shown that the company either attained the monopoly power unfairly
or abused that power, once attained. Monopoly power is the ability to
control prices or to exclude competitors from the marketplace. In grappling
Attempts to Monopolize — Section 2 also prohibits attempts to
monopolize, but the courts have had difficulty de&ning what distinguishes
undesirable conduct likely to lead to a monopoly from healthy, competitive
conduct. The standard test applied by the courts requires proof of a speci&c
intent to monopolize plus a dangerous probability of success, but does not
de&ne “intent” or “success.”
Conspiracies to Monopolize — Section 2 also condemns conspiracies to
monopolize. Few cases involve this offense alone, as any conspiracy to
monopolize would also constitute a combination in restraint of trade in
violation of Section 1.
*** Chapter Outcome***
Explain the Clayton Act and its rules governing (a) tying contracts, (b) exclusive dealing,
(c) horizontal mergers, (d) vertical mergers, and (e) conglomerate mergers.
B. CLAYTON ACT
Enacted in 1914, the Clayton Act provides only for civil actions, not for
criminal penalties. Private parties may bring civil actions in federal court for
treble damages and attorneys’ fees. In addition, the Justice Department and
Tying Contracts and Exclusive Dealing
Section 3 of the Clayton Act is intended to attack =edgling anticompetitive
practices before they grow into violations of Section 1 or 2 of the Sherman
Act. Unlike the Sherman Act, however, Section 3 applies only to practices
involving commodities (goods), not to those that involve services,
intangibles, or land.
Mergers
A horizontal merger occurs where one company acquires a competing
company. Because of the much greater likelihood of impeding competition
and increasing monopoly power, the Justice Department looks very closely at
horizontal mergers. A vertical merger is where a company acquires one of
its customers or suppliers. The term conglomerate is used to describe all
mergers that are not horizontal or vertical. In reviewing horizontal mergers
courts consider the following:
• the market share of each of the merging &rms,
• the degree of industry concentration,
• the number of &rms in the industry,
• entry barriers,
• market trends,
• the vigor and strength of other competitors in the industry,
• the character and history of the merging &rms,
• market demand, and
• the extent of industry price competition.
In general, most courts condemn vertical mergers where the effect is clearly
anti-competitive. Conglomerate mergers are generally questioned only (1)
CASE 40-4
HOSPITAL CORPORATION OF AMERICA v. FTC
United States Court of Appeals, Seventh Circuit, 1986
807 F.2d 1381
http://scholar.google.com/scholar_case?case=2172341578258873948&q=807+F.2d þ
1381&hl=en&as_sdt=2,34
Posner, J.
Hospital Corporation of America, the largest proprietary hospital chain in the United States,
asks us to set aside the decision by the Federal Trade Commission that it violated section 7
of the Clayton Act, [citation], by the acquisition in 1981 and 1982 of two corporations,
Hospital Affiliates International, Inc. and Health Care Corporation. Before these acquisitions
(which cost Hospital Corporation almost $700 million), Hospital Corporation had owned
one hospital in Chattanooga, Tennessee. The acquisitions gave it ownership of two more. In
transaction that may have been made to improve Hospital Corporation’s litigating position.
The contract was cancelled after the Commission began investigating Hospital Corporation’s
acquisition of Hospital Affiliates, and while the initiative in cancelling was taken by the
managed hospital, Hospital Corporation reacted with unaccustomed mildness by allowing
the hospital to withdraw from the contract. For it had sued three other hospitals that tried to
get out of their management contracts—only none of these hospitals was in a market where
Hospital Corporation’s acquisition of Hospital Affiliates was likely to be challenged.
Post-acquisition evidence that is subject to manipulation by the party seeking to use it is
entitled to little or no weight. [Citation.] * * *
The Commission may have made its task harder (and opinion longer) than strictly
necessary, however, by studiously avoiding reliance on any of the [U.S.] Supreme Court’s
section 7 decisions from the 1960s except [citation], which took an explicitly economic
approach to the interpretation of the statute. The other decisions in that decade * * * seemed,
The most important developments that cast doubt on the continued vitality of such
[1960s] cases as [citations] are found in other cases, where the Supreme Court, echoed by
the lower courts, has said repeatedly that the economic concept of competition, rather than
any desire to preserve rivals as such, is the lodestar that shall guide the contemporary
application of the antitrust laws, not excluding the Clayton Act * * *. Applied to cases
brought under section 7, this principle requires the district court (in this case, the
Commission) to make a judgment whether the challenged acquisition is likely to hurt
consumers, as by making it easier for the firms in the market to collude, expressly or tacitly,
and thereby force price above or farther above the competitive level. So it was prudent for
the Commission, rather than resting on the very strict merger decisions of the 1960s, to
inquire into the probability of harm to consumers. * * *
When an economic approach is taken in a section 7 case, the ultimate issue is whether
the challenged acquisition is likely to facilitate collusion. In this perspective the acquisition
of a competitor has no economic significance in itself; the worry is that it may enable the
acquiring firm to cooperate (or cooperate better) with other leading competitors on reducing
Moreover, both the ability of the remaining firms to expand their output should the big
four reduce their own output in order to raise the market price (and, by expanding, to offset
the leading firms’ restriction of their own output), and the ability of outsiders to come in and
build completely new hospitals, are reduced by Tennessee’s certificate-of-need law. Any
addition to hospital capacity must be approved by a state agency.
* * *
In showing that the challenged acquisitions gave four firms control over an entire market
so that they would have little reason to fear a competitive reaction if they raised prices above
the competitive level, the Commission went far to justify its prediction of probable
anticompetitive effects. Maybe it need have gone no further. [Citations.] But it did. First it
Second, there is a tradition, well documented in the Commission’s opinion, of
cooperation between competing hospitals in Chattanooga * * *. But a market in which
competitors are unusually disposed to cooperate is a market prone to collusion. * * *
Third, hospitals are under great pressure from the federal government and the insurance
companies to cut costs. One way of resisting this pressure is by presenting a united front in
negotiations with the third-party payors * * *. The fewer the independent competitors in a
hospital market, the easier they will find it, by presenting an unbroken phalanx of
representations and requests, to frustrate efforts to control hospital costs. This too is a form
of collusion that the antitrust laws seek to discourage * * *.
*** Chapter Outcome***
Describe (a) the Robinson-Patman Act and the various defenses to it and
(b) the Federal Trade Commission Act.
C. ROBINSON-PATMAN ACT
The Robinson-Patman Act amended the Clayton Act to prohibit buyers from
inducing and sellers from granting price discrimination in interstate
commerce of commodities of similar grade and quality. To violate the act,
the price discrimination must substantially lessen competition or tend to
create a monopoly. Violation of Robinson-Patman, with few exceptions, is
civil, not criminal.
Primary-line Injury
Injuries to a seller’s competitors are called “primary-line” injuries. The
Secondary- and Tertiary-line Injury
Injuries to some buyers because of the lower prices granted to other buyers
are called “secondary-line” injuries. A plaintiff in a secondary-line injury case
must either show substantial and sustained intra-market price differentials or
offer a detailed market analysis that demonstrates actual harm to
competition.
Cost Justification
If a seller can show that it costs less to sell a product to a particular buyer,
the seller may lawfully pass along the cost savings. It is usually extremely
difficult, however, to calculate and prove such savings.
Meeting Competition
A seller may lower its price in a good faith attempt to meet competition, and
may beat its competitor’s price if it does not know the competitor’s price,
D. FEDERAL TRADE COMMISSION ACT
Enacted in 1914 this act prohibited unfair methods of competition and unfair
or deceptive acts or practices in commerce. To this end, the &ve-member
