Eastman%20Kodak%20Co.%20v.%20Image%20Technical%20Services

1
Eastman Kodak Co. v. Image Technical Services

• Kodak Changes Policy to Require Most Users of its
  Micrographic Equipment to Purchase Service from
  Kodak in order to get Replacement Parts
• Majority Finds Sufficient Evidence to go to Jury
  re
• Parts and Service Market as Separate
• Sufficient Power in Parts Market
• Harm to Consumers

2
Eastman Kodak Co. v. Image Technical Services

• Kodak/DOJ/Scalia tying monopolization claims
  involving aftermarkets should be barred as a
  matter of law if D has no power in original
  equipment market
• Kodak If consumers harmed, theyd switch to
  competitors equipment
• Majority Rejects Claim
• Theory Imperfect
• Evidence Doesnt Support

3
Eastman Kodak Co. v. Image Technical Services

• Ps Explanations of Why Theory Doesnt Work
• Buyers have high info costs
• Hard to figure LT costs of durable gds/services.
• Many purchases are govts
• don't do good job
• different departments do capital costs
  operating costs.
• High costs to switch
• Evidence of Price Discrimination

4
Eastman Kodak Co. v. Image Technical Services

• Ps Explanations of Why Theory Doesnt Work
• Buyers have high info costs
• High costs to switch
• High sunk costs (training price if already paid
  for machine)
• Unlikely to invest in new machine just b/c
  service expensive
• Evidence of Price Discrimination

5
Eastman Kodak Co. v. Image Technical Services

• Ps Explanations of Why Theory Doesnt Work
• Buyers have high info costs
• High costs to switch
• Evidence of Price Discrimination
• Favoring high volume users supports P's theory
• Suggests treating more favorably those customers
  most likely to have had good info or incentive to
  switch machines

6
Eastman Kodak Co. v. Image Technical Services

• DOJ version of theory
• Ks tie is part of marketing strategy spread
  costs over time
• Hide true price of machines
• Low sale price for equipment
• Make up with high service prices

7
Eastman Kodak Co. v. Image Technical Services

• DOJ version of theory
• Ks tie is marketing strategy spread costs over
  time
• Hide true price of machines
• Low sale price for equipment
• Make up with high service prices
• Majority Again record doesn't support
• K says its equipment prices were normal, not low
• If theory true, K shouldnt allow purchasers to
  self-service.

8
Eastman Kodak Co. v. Image Technical Services

• SCALIA version of theory
• Ties of either parts or service to original
  equipment OK if no power in equipment market.
  (undisputed).

9
Eastman Kodak Co. v. Image Technical Services

• SCALIA version of theory
• Ties of either parts or service to original
  equipment OK if no power in equipment market.
  Should be same here b/c
• Rational consumers should take policy into
  account when purchasing equipment
• Shouldnt base rule on irrational consumers
• Nut-N-Bolt analysis applies to Parts-N-Service

10
Eastman Kodak Co. v. Image Technical Services

• SCALIA version of theory
• 1. Rational consumers should take policy into
  account when purchasing equipment
• BUT policy changed no evidence that customers
  aware of in advance
• Leads to lower ct cases different result if made
  explicit to consumers at sale

11
Eastman Kodak Co. v. Image Technical Services

• SCALIA version of theory
• 2. Shouldnt base rule on irrational consumers.
  Sounds appealing BUT
• Not merely about stupid consumers thought
  process hard and expensive (e.g., cars)
• changes in models, service, etc.
• hard to get info

12
Eastman Kodak Co. v. Image Technical Services

• SCALIA version of theory
• 2. Shouldnt base rule on irrational consumers.
  Sounds appealing BUT
• Not merely about stupid consumers thought
  process hard and expensive (e.g., cars)
• Not clear monopolist should be allowed to take
  advantage
• If consumers irrational or have bad info, shd co.
  get monopoly profits?
• If govt bad consumer, shd taxpayers have to pay?

13
Eastman Kodak Co. v. Image Technical Services

• SCALIA version of theory
• 3. Nut-N-Bolt analysis applies to
  Parts-N-Service
• Scalia assumes services/parts purchased in fixed
  proportions, so no addtl harm to consumer from
  spreading parts monopoly into service.

14
Eastman Kodak Co. v. Image Technical Services

• SCALIA version of theory
• 3. Nut-N-Bolt analysis applies to
  Parts-N-Service
• Scalia assumes services/parts purchased in fixed
  proportions, so no addtl harm to consumer from
  spreading parts monopoly into service. BUT
• No evidence of this at all
• Counterintuitive service varies may not require
  parts

15
Eastman Kodak Co. v. Image Technical Services

• SCALIA version of theory
• Note that Scalias analysis focuses entirely on
  theory no discussion of evidence or of what
  Kodak actually was doing.

16
Eastman Kodak Co. v. Image Technical Services

• Significance of Case
• Evidence gt Theory
• Like Brown Williamson wont preclude cause of
  action based on theory alone look at evidence
• Note good lawyering by Ps
• Demonstrated evidence was inconsistent w Ds
  theory
• Theoretical explanation for why Ds theory didnt
  work
• Further evidence supporting that explanation

17
Eastman Kodak Co. v. Image Technical Services

• Significance of Case
• Evidence gt Theory
• 6-3 Majority (including Rehnquist) reject broad
  read of Matsushita.
• Key Language in middle paragraph of p.402

18
Eastman Kodak Co. v. Image Technical Services
p.402

• The Courts requirement in Matsushita that the
  plaintiffs claims make economic sense did not
  introduce a special burden on plaintiffs facing
  summary judgment in antitrust cases. The Court
  did not hold that if the moving party enunciates
  any economic theory supporting its behavior,
  regardless of its accuracy in reflecting the
  actual market, it is entitled to summary
  judgment. Matsushita demands only that the
  nonmoving partys inferences be reasonable in
  order to reach the jury, a requirement that was
  not invented, but merely articulated, in that
  decision. If the plaintiffs theory is
  economically senseless, no reasonable jury could
  find in its favor, and summary judgment should be
  granted.

19
Eastman Kodak Co. v. Image Technical Services

• Significance of Case
• Evidence gt Theory
• 6-3 Majority (including Rehnquist) reject broad
  read of Matsushita.
• No reason for stronger test here than in
  Matsushita
• Didnt want to overdeter alleged behavior in
  Matsushita (price-cutting)
• Here, OK to deter high prices market
  foreclosure

20
Eastman Kodak Co. v. Image Technical Services

• Significance of Case
• Evidence gt Theory
• 6-3 Majority (including Rehnquist) reject broad
  read of Matsushita.
• No reason for stronger test here than in
  Matsushita
• Mid-para p.406 2d sentence It is clearly
  reasonable to infer that Kodak has market power
  to raise prices and drive out competition in the
  aftermarkets, since respondents offer direct
  evidence that Kodak did so.

21
Eastman Kodak Co. v. Image Technical Services

• Qs on Kodak?

22
Post-Kodak Tying Caselaw

• Unsurprisingly, after Kodak, lot of cases re
  aftermarkets, including
• Kodak on Remand
• Franchising Cases
• Aftermarket Policies Announced in Advance
• University Housing/Food Service Cases

23
Post-Kodak Tying Caselaw

1. Kodak on Remand Info in Outline p. 416
2. Franchising Cases
3. Aftermarket Policies Announced in Advance
4. University Housing/Food Service Cases

24
Post-Kodak Tying Caselaw

1. Kodak on Remand
2. Franchising Cases (p.416)
3. Aftermarket Policies Announced in Advance
4. University Housing/Food Service Cases

25
Post-Kodak Tying Caselaw Franchising Cases
(p.416)

• Nature of claims
• To operate franchise (tying product), franchisee
  must use specific product brands (tied products)
• Franchisees claim that their investment in the
  franchise gives the franchisor market power

26
Post-Kodak Tying Caselaw Franchising Cases
(p.416)

• Cases split as to availability of tying cause of
  action
• Some courts
• Kodak n/a once franchise agreement signed.
• E.g., Queen City (3d Cir. 1997) (Franchisees
  purchase products because bound by contract, not
  because forced by market power) ME Too simple
  contract could forcing
• Some courts
• Switching costs for franchisees higher than those
  in Kodak
• Franchisor can force franchisee to buy fungible
  goods from it at market or above-market prices

27
Post-Kodak Tying Caselaw Franchising Cases

• Franchise Cases Arguably Different From Kodak
• Franchisees are dealers of package of products
  services
• To get franchise, agree to sell package chosen by
  franchisor
• Franchisor needs franchisees has interest in
  their profitability.
• Tie is more like a non-price restraint on how
  franchise products sold (generally OK under
  Sylvania)
• Franchisee is not ultimate consumer
• No info/switching costs for consumer
• Consumers can discipline franchisor if they don't
  like package or if prices too high
• Should disputes between franchisees franchisors
  be treble damage AT suits? Cf. Photovest (p.352)

28
Post-Kodak Tying Caselaw

1. Kodak on Remand
2. Franchising Cases
3. Aftermarket Policies Announced in Advance (p.416)
4. University Housing/Food Service Cases

29
Post-Kodak Tying Caselaw Prior Knowledge

• Several cases distinguish Kodak where purchasers
  knew of tie involving aftermarkets prior to
  purchasing equipment
• These cases say that you cant succeed on Kodak
  claim w/o market power in equipment market unless
  the tie is a change in policy or is hidden

30
Post-Kodak Tying Caselaw

1. Kodak on Remand
2. Franchising Cases
3. Aftermarket Policies Announced in Advance
4. University Housing/Food Service Cases (not in
   outline)

31
Post-Kodak Tying Caselaw University
Aftermarkets

• Hamilton 128 F.3d 59 (2d Cir. 1997)
• 2 claim by fraternities against D college re
  both housing meal plans
• Court allows to proceed over motion to dismiss
• Sufficient claim that interstate commerce is
  involved (even though D is college)
• Sufficient allegations of monopoly potential
  harm from monopoly

32
Post-Kodak Tying Caselaw University
Aftermarkets

• Hack, 237 F.3d 81 (2d Cir. 2000)
• Challenge to Yale U. requirement that
  underclassmen live in co-ed housing.
• 1st Amdt. Interference w Free Exercise of
  Religion (held not state actor)
• Fair Housing Act Discrimination on Basis of
  Religion (insufficient allegations)
• Sherman Act Tying (insufficient power)

33
Post-Kodak Tying Caselaw University
Aftermarkets

• Hack, 237 F.3d 81 (2d Cir. 2000)
• Tying challenge to Yale U. housing requirement
  fails
• Yale doesnt have market power in higher
  education market
• Market isnt local
• Lots of superb institutions of higher learning
  (citing US News)

34
Post-Kodak Tying Caselaw University
Aftermarkets

• Hack, 237 F.3d 81 (2d Cir. 2000)
• Tying challenge to Yale U. housing requirement
  fails
• Yale doesnt have market power in higher ed.
  market
• Cant claim economic power on basis that youre
  locked into Yale once youve accepted
• For tying purposes, cant claim economic power
  arises from contractual arrangement affecting
  distinct class of consumers (citing Queen City
  franchising case)
• Distinguishes Hamilton b/c there college
  abruptly changed rules after students attending

35
Post-Kodak Tying Caselaw University
Aftermarkets

• Hack/Hamilton fact pattern could give rise to
  several different issues
• Kodak issues (market power 1 product or 2)
• Is university education subject to AT laws?
• State action issues if public university
• Policy clearly articulated in grant of authority?
  
• When is public univ. like municipality (as
  opposed to actual arm of state)

36
LOGISTICS ANNOUNCEMENTS

• Project
• Questions?
• Ill take questions Thursday not after
• Exam Workshop Online Live Shows
• Today 100-145 Room 209
• Thursday 1230- 145 Room 109
• Missing Write-Ups End-of-Chapter Info

37
Microsoft Section Two in the New Millennium
38
Difficulty Inherent in 2 Conduct Cases

• Monopoly Power inherently harmful b/c output low
  prices high
• Dont want to allow monopoly to perpetuate itself
  
• Dont want to allow monopoly to get extra
  advantages in other markets

39
Difficulty Inherent in 2 Conduct Cases

• Monopoly Power inherently harmful
• BUT dont want threat of enforcement to
  exacerbate harm to market
• Want monopoly to compete aggressively
• Want monopoly to innovate
• Want to take advantage of scale economies other
  efficiencies
• Enforcement is expensive

40
Difficulty Inherent in 2 Conduct Cases

• Monopoly Power inherently harmful
• Dont want threat of enforcement to exacerbate
  harm
• How draw legal standards to strike balance?
• Is biggest danger under-enforcement or
  over-deterrence?
• i.e., When in doubt, should you presume harmful
  or OK?
• Obviously hard to draw lines precisely
• Also want to give adequate notice to firms w
  market power

41
Difficulty Inherent in 2 Conduct Cases

• Monopoly Power inherently harmful
• Dont want threat of enforcement to exacerbate
  harm
• How draw legal standards to strike balance?
• Subset of more general issue What to do with
  arrangements that plausibly have both pro- and
  anti-competitive effects?
• Exclusion from Joint Ventures
• Mergers
• Vertical Price-Fixing

42
Overview of Microsoft

• Microsoft Windows
• The Backstreet Boys

43
Overview of Microsoft

• Common Claim by Opponents of Lawsuit Punishing
  MS for Success

44
Overview of Microsoft

• Claim by Opponents Punishing MS for Success
• Common Industry View
• Not successful b/c of strengths of products
• History of Windows made difficulties for
  software competitors
• Re compatibility
• Re unnecessary size of Windows

45
Overview of Microsoft

• Claim by Opponents Punishing MS for Success
• Common Industry View
• Not successful b/c of strengths of products
• History re Windows made difficulties for
  software competitors
• Lots of evidence of specific bad conduct often
  ignored in commentary

46
Overview of Microsoft

• Theory of case MS trying to maintain monopoly by
  discouraging development of platforms in
  competition with Windows
• Unusual b/c not really trying to leverage Windows
  monopoly into market power/profits elsewhere

47
Overview of Microsoft

• Theory of case MS trying to maintain monopoly by
  discouraging development of competing platforms
• E.g., 2 Claim Attempt to monopolize browser
  market
• Lots of evidence of use of monopoly power to try
  to eliminate Netscape
• But not targeted at making monopoly profits in
  browser market
• Attempt to eliminate alternate platforms from
  which competitors could attack Windows

48
Overview of Microsoft

• Conduct Lots of evidence of attempts to prevent
  growth of systems that would compete with Windows
• Enough to be pretty clearly violation under
  existing cases maintenance of Windows monopoly
• Lot of very bad behavior ,
• Threats to IBM Intel
• Lying about compatibility w Java
• Some more questionable
• Aspects of integrating Explorer into Windows
• Exclusionary Ks

49
Overview of Microsoft

• Monopoly Power Pretty Clear
• 95 share
• Entry barriers from network effects
• Behavior suggests market power (threats to
  IBM/Intel)

50
Overview of Microsoft

• Important Questions Raised
• Relevance of High-Tech Markets Network Effects
• Burdens of Proof in 2 Conduct Cases
• Application of Tying Doctrine to Software
  Integration
• Difficulty of Remedy

51
Microsoft Network Effects in Rapidly Changing
High-Tech Markets

• Two special contextual problems raised by
  Microsoft noted in Overview in case
• Rapidly Changing High-Tech Markets
• Network Effects

52
Microsoft Network Effects in Rapidly Changing
High-Tech Markets

• Rapidly Changing High-Tech Markets
• Market conditions regularly change with technical
  improvements
• How should we address Antitrust violations?
• Focus on Deterrence
• Act quickly firmly
• Punish so others dont take advantage
• Laissez-Faire?
• Assume market will cure harms in medium run
• Assume costs of intervention enforcement gt harms

53
Microsoft Network Effects in Rapidly Changing
High-Tech Markets

• Rapidly Changing High-Tech Markets
• Market conditions regularly change with technical
  improvements
• How should we address Antitrust violations?
• Court notes great difficulties re remedy
• Conduct remedies may be rendered obsolete very
  quickly
• Difficult to arrive at appropriate structural
  remedies

54
Microsoft Network Effects in Rapidly Changing
High-Tech Markets

• 2. Network Effects
• P. 419 In markets characterized by network
  effects, one product or standard tends towards
  dominance, because the utility that a user
  derives from consumption of the good increases
  with the number of other agents consuming the
  good. Michael L. Katz Carl Shapiro, Network
  Externalities, Competition, and Compatibility.

55
Microsoft Network Effects in Rapidly Changing
High-Tech Markets

• 2. Network Effects
• Utility increases with the number of other
  agents consuming the good
• E.g., VHS, Windows, telephone networks,
  YouTube/MySpace

56
Microsoft Network Effects in Rapidly Changing
High-Tech Markets

• 2. Network Effects
• Utility increases with the number of other
  agents consuming the good
• Competition may be sequential not simultaneous

57
Microsoft Network Effects in Rapidly Changing
High-Tech Markets

• 2. Network Effects
• Utility increases with the number of other
  agents consuming the good
• Competition may be sequential not simultaneous
• Court no consensus about how to address
• Let market operate v.
• Worry about acts to extend/maintain ST monop

58
Microsoft Network Effects in Rapidly Changing
High-Tech Markets

• Legal Effects of Two Taken Together?
• Court notes might push in opposite directions
• MS argued should affect Q of monopoly power
• MS did not argue conduct (might be stronger)
• Also argument going to remedy

59
Microsoft Burdens of Proof in 2 Conduct Cases

• MS was allowed to offer justification for conduct
  
• Aspen IBM suggest OK if legitimate business
  reason (LBR), at least
• For refusal to deal w rival
• For physical integration of system
• Who bears burden of proof on LBR?
• cf. per se v. Rule of Reason