Virtual Maintenance, Inc. v. Prime Computer, Inc.
United States Court of Appeals for the Sixth Circuit
957 F.2d 1318 (6th Cir. 1992) (Virtual I)

Suhrheinrich, Circuit Judge.

Defendant Prime Computer, Inc. (Prime) appeals the district court's denial of its motion for judgment notwithstanding the verdict (j.n.o.v.) or a new trial following a jury's general verdict in favor of plaintiff Virtual Maintenance, Inc. (Virtual) in this antitrust action. The jury found that Prime's sale of certain computer software support services in conjunction with computer hardware maintenance for Prime's 50 Series minicomputers amounted to an illegal tying arrangement in violation of § 1 of the Sherman Act. The jury awarded Virtual $8.4 million in compensatory damages, which the district court trebled under the antitrust statute for a total award of $25.4 million. The district court then issued a injunction prohibiting Prime from enforcing a contract provision requiring the purchase of Prime's hardware maintenance with its software support services and declaring void any Prime hardware maintenance contracts with customers using Ford-required CAD/CAM applications.

Prime's appeal challenges the three alternative legal theories presented to the jury, the scope of damages awarded, and the specificity of the injunction. We conclude that Prime lacks market power in a properly defined interbrand tying product market. We further find that Prime's conduct did not have substantial anticompetitive effects in the tied product market. Therefore, the district court erred by not granting Prime's motion for j.n.o.v. Because judgment should have been entered for Prime, the award of damages and the injunction must be vacated. We reverse, vacate, and remand with instructions to enter judgment in favor of Prime.

Background

Prime manufactures and markets computer systems, distributes software, and provides hardware maintenance services for those systems. One of Prime's hardware systems is the Prime 50 Series minicomputer. In the general market for computers and software, Prime competes with companies such as IBM, UNISYS, NCR, DEC, Hewlett-Packard, and Data General. All large companies that sell computers and software provide hardware maintenance for their own computers.

Part of Prime's business is to supply companies with Computer Aided Design/Computer Aided Manufacturing Systems (CAD/CAM) used in product design. Prime also distributes software for the CAD/CAM systems and accounts for approximately 11% of the general CAD/CAM software sold throughout the world, making it the second largest vendor of CAD/CAM in the world.

One software design program distributed by Prime, called PDGS, was created by Ford Motor Company (Ford). A general version of PDGS is widely available from other distributors. Ford licenses Prime as the exclusive distributor of a modified version of PDGS used in automotive design under a year-to-year contract. Ford frequently updates PDGS and requires all companies that provide it with design services to use the most current version of PDGS in order to facilitate translation of the designs into Ford's identical PDGS software.

Although Ford's version of PDGS runs only on Prime's 50 Series minicomputers, it can be translated to other systems at a higher cost. The Prime 50 Series computer is in use in approximately 23,000 systems worldwide. Software compatible with the 50 Series accounts for approximately 3% of the worldwide CAD/CAM market, and Ford's PDGS software accounts for an even smaller percentage of the total CAD/CAM market. Approximately 350-400 of the 23,000 Prime 50 Series computers, or about 2%, are capable of using PDGS.

In addition to distributing Ford's PDGS software, Prime distributes revisions, modifications, updates, and support services (collectively software support) for general CAD/CAM software. Prime also distributes software support for PDGS software, offering it to Ford's design suppliers as part of a package that includes hardware maintenance on the 50 Series minicomputers. The cost of the package is $16,000 per year for each installation. Customers are free to buy the software support separately from the hardware maintenance, but the cost to purchase software support without the maintenance package varies from $80,000 to $160,000 per year for each installation.

Virtual services computer systems and provides hardware maintenance for various companies. When Virtual entered the market for hardware maintenance of Prime 50 Series computers in April 1989, it discovered Prime's practice of packaging its software support with hardware maintenance of 50 Series computers. Virtual tried unsuccessfully to enter into hardware maintenance contracts with companies that owned Prime 50 Series computers. Although some purchasers of Prime's software support desired to use Virtual's hardware maintenance, the design companies in need of the continuous software support were reluctant to switch to Virtual's hardware maintenance because of the increased price Prime charged for the purchase of software support apart from its hardware maintenance package. It is unclear how many Prime 50 Series owners do design work for Ford or how many of these owners desired to switch to Virtual for hardware maintenance. It is undisputed, however, that this number could not exceed 400 because that is the total number of 50 Series systems capable of using PDGS.

The hardware maintenance provision was included in all of Prime's CAD/CAM software support contracts. However, the general contract to purchase PDGS contained no hardware maintenance requirement. Only the frequent software updates were linked to hardware maintenance, not the initial purchase of PDGS design software. However, as noted, Prime's software support could be purchased separately only at a prohibitive cost increase over the combined software support/maintenance package.

Virtual sued Prime, claiming that Prime's marketing strategy of linking its software support with hardware maintenance on 50 Series computers amounted to an illegal tying arrangement in violation of the antitrust laws. Virtual alleged that purchase of software support for general CAD/CAM and/or Ford-required CAD/CAM software (the tying product) was conditioned on the purchase of hardware maintenance for Prime 50 Series computers (the tied product). Virtual claimed that this tie-in unlawfully restricted its ability to compete with Prime in the 50 Series hardware maintenance market.

Prior to trial, Prime moved for summary judgment claiming that there was no genuine issue of material fact regarding whether it had sufficient economic power in the market for the tying product to restrain competition appreciably in the tied product market. The district court determined that genuine issues of material fact were present as to the definition of the relevant product market and denied Prime's motion for summary judgment. At trial, the jury found in favor of Virtual.

The district court denied Prime's motion for j.n.o.v. or a new trial and issued an injunction prohibiting Prime from continuing its practice of selling software support with hardware maintenance. This court denied Prime's motion to stay the injunction pending appeal.

Discussion

Section 1 of the Sherman Act prohibits “every contract, combination...or conspiracy, in restraint of trade or commerce.” The Supreme Court has consistently held that this provision only proscribes unreasonable restraints of trade. Tying arrangements have long been considered unable restraints of trade.

A tying arrangement is an agreement by a party to sell one product but only on the condition that the buyer also purchase a different (or tied) product. Not all sales of two products together constitute an illegal arrangement. The packaging of two items together violates the antitrust laws only when a seller has sufficient market power over the tying product such that it can force buyers to purchase the tied product.

A plaintiff can establish an illegal tying arrangement under either a per se standard or a rule of reason standard. To establish a per se violation:

1) There must be a tying arrangement between two distinct products or services;

2) The seller must have sufficient economic power in the tying market to restrain appreciably competition in the tied product market; and

3) The amount of commerce affected must be “not insubstantial.”

Even if a per se violation is established, a defendant may prevail by showing a substantial business justification for the tie-in.

A. Existence of Tie–In

A tying arrangement clearly exists here because the large price differential between software support alone and the software support/hardware maintenance package induces all rational buyers of Prime's software support to accept its hardware maintenance. It is also clear that two separate products or services, software support and hardware maintenance, are involved in this case due to the evidence of separate consumer demand for each product. We therefore turn to the issue of Prime's economic power in the tying product market.

B. Economic Power

The second element of a per se tying case is proof of sufficient economic power in the tying market to affect appreciably the competition in the tied market. Such economic power exists when the tying party enjoys some significant advantage in the tying product market, not enjoyed by its competitors, that enables it to condition the availability of the tying item on acceptance of the tied item. If this market power over consumers is not present, then purchasers of the tying product can simply turn to other sources of supply, and the attempted tie will ultimately collapse for want of takers.

The market power inquiry has both a product and a geographic dimension. Because the relevant market provides the framework against which economic power can be measured, defining the product and geographic markets is a threshold requirement. The parties agree that the relevant geographic market is the entire world. Virtual submits, however, that we need not determine the relevant product market because Prime's market power is established by evidence that Prime was able to force an appreciable number of customers to submit to the tie. Virtual claims that when forcing is present the Sherman Act is violated.

Virtual is mistaken. Proof that a defendant forced a consumer to accept a tying arrangement is not alone adequate to establish an illegal tie. Rather, forcing is simply a proxy for determining whether the seller has conditioned the tying product on acceptance of the tied product. Evidence of forcing is necessary to show that a tie exists between two products, but is not sufficient to establish that the tie is illegal. Proof of such conduct does not establish per se illegal se not all ties are illegal. Application of the forcing concept confronts courts with a dilemma. Obviously a seller must have some degree of leverage or power to require buyers to accept the conditions of having to purchase the tied products: if buyers always purchased the product voluntarily, the condition would be unnecessary. But if that leverage or power alone suffices to establish the presence of forcing and thus to invoke the per se rule, then every tying agreement would ipso facto be illegal per se.

Indeed, if proof of forcing alone were sufficient to establish a illegal tie, the Supreme Court's market analysis in Jefferson Parish Hosp. Dist. v. Hyde, 466 U.S. 2 (1984), would have been superfluous. Jefferson Parish involved a hospital that had contracted with a certain firm to provide all of its anesthesiological services. The hospital's patients were forced to purchase that firm's anesthesiological services (the tied product) whenever they purchased hospital care (the tying product). Nevertheless, the Court found that the arrangement did not violate the Sherman Act. The Court indicated that the hospital had to possess market power over the tying product to be liable under a per se tying claim. Similarly, Virtual must show that Prime is able to force customers to buy its software support plus hardware maintenance because of its market power over the tying product. Thus evidence of forcing without market power over the tying product does not establish a antitrust violation.

To determine whether Prime has market power over the tying product, it is essential first to define the tying product market. The district court's definition of the relevant tying product market in its jury instructions involves the articulation of a legal standard which is then applied by the jury to the factual circumstances of each case. Accordingly, the district court's formulation of the market tests may be freely reviewed on appeal as a matter of law; the conclusion that the relevant markets consist of certain products sold within specific (geographic areas] is a finding of fact subject to the clearly erroneous rule.

A market is any grouping of sales whose sellers, if unified by a hypothetical cartel or merger, could raise prices significantly above the competitive level. The essential test for ascertaining the relevant product market involves the identification of those products or services that are either (1) identical to or (2) available substitutes for the defendant's product or service. This comparative analysis has been characterized as the reasonable interchangeability standard. The reasonable interchangeability standard focuses on cross-elasticity of demand—the degree that buyers of one product switch to another in response to a price change. Cross-elasticity of supply also helps define a relevant product market. Cross-elasticity of supply is the degree to which producers will enter the market to compete if prices rise. With these principles of product market definition in mind, we turn to the district court's formulation of the relevant markets in its jury instructions.

1. CAD/CAM Software Market

The district court presented the jury with two alternative definitions of the tying product market under the per se theory. The court defined these markets as: (1) the sale of software revisions and support for the CAD/CAM industry in general, or (2) the sale of software revisions and support for software necessary to do business with Ford Motor Company. We consider each of these product market definitions in turn.

We find no error in the legal adequacy of the district court's first market definition. However, this market definition required the jury to find that Prime possessed power over price or market power in the sale of all software suitable for CAD/CAM purposes. Viewing the evidence in the light most favorable to Virtual, Prime possessed at most an 11% share of this market. This market share is insufficient to confer market power. An 11% market share, standing alone, is insufficient as a matter of law to confer the great market power, evidenced by an exceptional demand for the tying product necessary for a per se illegal tie.

Virtual urges that proof of power over some appreciable number of consumers in a market can establish market power throughout that market. Even if we accepted this argument, Prime can only control customers who desire PDGS software and PDGS accounts for less than 3% of the general CAD/CAM market. Moreover, the fact that some of Prime's customers prefer PDGS does not enable Prime to influence competitive conditions in the general CAD/CAM market because virtually every seller of a branded product has some customers who especially prefer its product. Jefferson Parish convinces us that the Court means the market power requirement to be serious enough to screen out this class of harmless tie.

Therefore, a per se tying violation could not be established under the district court's first jury instruction because Prime lacks market power in the general CAD/CAM product market. Because the jury returned a general verdict when one of the theories of liability was legally incorrect, we must reverse.

Ordinarily, we would remand this case for a new trial. However, a new trial is unnecessary here because the evidence presented is insufficient to establish an antitrust violation by Prime in any conceivable product market. We therefore turn to the district court's second proffered tying product market instruction.

2. Ford–Required CAD/CAM

Prime contends that the second market instruction defined the tying product market too narrowly as a matter of law. Prime claims that the market definition of Ford-required CAD/CAM must fail because this market is limited to PDGS, a single manufacturer's brand of software. We agree.

The antitrust laws were enacted for the protection of competition, not competitors. Consequently, interbrand competition among manufacturers of the same generic product is the primary concern of antitrust law. Courts therefore consistently reject market definitions limited to a single manufacturer's products because such markets do not reflect interbrand competition.

Virtual attempts to avoid this authority by claiming that Ford's preference for Prime's software can define the relevant market. Virtual claims that Ford-required CAD/CAM is not a single brand market because Ford requires four brands of CAD/CAM software: PRIMOS, PRIMENET, CAADS and PDGS. While Prime manufactures three of these products, Ford makes one itself. Therefore, Virtual submits that defining the market by Ford's requirements does not create a single brand market because Ford requires more than one brand. Even giving Virtual every inference, we conclude that a market defined by three Prime products and one Ford product is unduly narrow. The flaw in such a market definition is that it is based solely on one customer's requirements. A single customer's ultimate preference for a particular manufacturer's brand does not create a separate product market.

Virtual argues that Ford is not the only customer of Prime's products; rather, all of Ford's design suppliers make up the customer market for Ford-required CAD/CAM. This ignores the fact that Ford requires its suppliers to purchase the software updates for Ford's benefit. Ford is ultimately the single consumer of its specialized design software because Ford's requirements define the demand for the software and the updates. But defining the market by Ford's requirements creates the appearance of market power based only upon the demand side of the market. Defining a market, or submarket, on the basis of demand considerations alone is erroneous because such an approach fails to consider the supply side of the market. The relevant product market cannot be determined without considering the cross-elasticity of supply.

Virtual contends that Prime has no supply side competition because it has a exclusive license for PDGS and thus only Prime can market the software updates for PDGS. This argument confuses the tying product (software support for PDGS) with the interbrand market relevant for antitrust analysis. This court previously has refused to ignore interbrand competition by limiting the product market to one manufacturer's product. In the present case, the relevant tying product market is comprised of all CAD/CAM software reasonably interchangeable with PDGS.

Virtual claims that PDGS constitutes a relevant submarket because of evidence that Prime was able to raise prices in this submarket. Evidence of short-term price increases in an intrabrand submarket does not defeat the theory of supply substitution. Prime has market power in the trivial sense that no one else makes PDGS. But true market power — power sufficient to charge and sustain anticompetitive prices — cannot be inferred from this because were Prime to charge exorbitant prices for its software support, its customers would simply switch to some other manufacturer of PDGS-type software. Prime's lack of market power over the general market for CAD/CAM software thus prevents Prime from controlling the submarket for PDGS software.

Virtual responds that Ford and its design suppliers cannot switch to a new supplier of software support because they are locked-in to Prime as the sole supplier due to their substantial investments in Prime 50 Series computers and other hardware. While Ford might believe it is locked-in, this is due in large part to its own decision to purchase Prime's software and invest in Prime's computer systems. But a customer's initial purchase of a particular manufacturer's product does not justify a limited market definition. Defining the market by customer demand after the customer has chosen a single supplier fails to take into account that the supplier (here Prime) must compete with other similar suppliers to be designated the sole source in the first place. Given the intense competition in the general market for computers and software, Ford presumably had many companies to choose from prior to purchasing Prime s equipment.

Numerous cases have rejected the lock-in theory as a viable basis for antitrust liability when there is a potential for a reasonable interchangeability of supply. It is undisputed that IBM, Data General and other competitors of Prime have contacted Ford about supplying PDGS software and updates for Ford and Ford's designers. Ford itself has tried to make PDGS compatible with hardware other than the Prime 50 Series. There exists at least a potential for a reasonable interchangeability of supply.

Even if we accepted Virtual's lock-in argument, it seems unlikely that a large consumer like Ford would be locked-in by Prime when Ford controls the license to PDGS. The lock-in theory is viable only when the producer can charge its customer monopoly prices without fear of being replaced by competitors due to the customer's substantial investments. Ford's control of the product it is allegedly being forced to buy precludes Prime from maintaining the market share necessary to charge monopoly prices. Market power cannot be sustained absent the ability to maintain market share.

Virtual next argues that Prime's market power was established by the uniqueness of the PDGS software. The Supreme Court has held that the uniqueness of a product can establish market power in tying cases. However, the Court held as a matter of law that mere factual uniqueness was not enough. In order to establish market power by showing a unique package, a plaintiff must prove that the seller has some advantage not shared by his competitors in the market for the tying product. In other words, the plaintiff must show a barrier to entry that prevents competition. If rivals may design and offer a similar package for a similar cost, there is no barrier, and without a barrier there is no market power. Uniqueness means the inability of a seller's rivals to offer similar packages, not simply the fact that no rival has chosen to do so.

Virtual contends that substantial en barriers prevent competitors from entering the market or Ford-required CAD/CAM. The barriers are mainly high entry costs, high investment costs in equipment to produce the software, and Ford's exclusive license with Prime. However, there was substantial evidence that large companies such as IBM, DEC, and Data General already possess the production capacity and facilities to develop software for Ford within one year. All competitors are interested in having a large customer such as Ford and thus market power is not created by the year-to-year exclusive licensing of PDGS. The notion that Prime can charge anticompetitive prices rests on the suspect assumption that Ford is willing to pay greatly increased costs to its design suppliers, who will pass any price increase in software on to Ford. Even giving Virtual every inference, a jury verdict in an antitrust case that ignores economic reality cannot stand.

Virtual claims that Prime's exclusive license is a significant barrier to entry into the PDGS market that enhances PDGS's uniqueness. This court has held that a copyright for BOSS software did not make equipment using such software a unique product. A.I. Root, 806 F.2d at 676-77. Because the presumption of market power for copyrights was based on the uniqueness of the copyrighted material, any curtailment of the presumption of market power from copyrights necessarily limits the use of the uniqueness test as a shortcut to a finding of economic power. A.I. Root precludes reliance on the uniqueness of a long term copyright to find market power. Therefore, a finding of uniqueness from a mere one year exclusive license is foreclosed. This is especially true when there is evidence that other barriers to entry, at least with large competitors like IBM, are low on the supply side.

We conclude that the district court erred by allowing Virtual's proposed Ford-required CAD/CAM market instruction to go to the jury. Such a instruction is too narrow as a matter of law because it defines the tying product market only by demand considerations. In a properly defined tying product market, Prime lacks the market power necessary to commit a per se illegal tie. We therefore next address whether substantial evidence supports a determination that Prime committed illegal tying under the rule of reason.

C. Rule of Reason

When, as here, a seller does not possess the market power that enables it to force customers to purchase a second product as a condition to obtaining the tying product, a antitrust violation for tying can nonetheless be established by evidence that the tie is a unreasonable restraint on competition in the market for the tied product. Under the rule of reason a plaintiff must show not only that a restraint exists but that it actually has anticompetitive effects in a interbrand market.

Under exclusive dealing principles, foreclosure of hardware maintenance customers to Virtual by Prime's tie-in becomes unreasonable only when a significant portion of all available purchasers are foreclosed by the exclusive conduct. Virtual did not produce evidence of a significant amount of foreclosure due to the tie-in in the tied product market for computer hardware maintenance.

Nor can Virtual limit the definition of the tied product market to hardware maintenance of Prime 50 Series computers simply because it desires to service only Prime's systems. Markets are defined by ease of supply and demand substitution, not by one competitor's business preferences. Hardware maintenance of Prime's computers is similar to servicing other minicomputers. Thus companies performing hardware maintenance on the Prime 50 Series can easily switch to maintenance of other computers. The market extends beyond hardware maintenance of Prime's 50 Series because hard- ware maintenance skills are easily transferable.

Virtual claims that a jury could reasonably find that Prime possessed almost total control over the Prime 50 Series hardware maintenance market. This mistakenly assumes that the tied product market is limited to Prime's own system. The flaws of this analysis have been discussed above. The relevant tied product market is computer hardware maintenance in general.

Even assuming that Prime had market power over consumers of its own brand of software, Prime's tie foreclosed competition for hardware maintenance of at most the 400 50 Series systems capable of using PDGS. The foreclosure of 400 computer systems out of the thousands of systems in the worldwide market for computer hardware maintenance Is insignificant as a matter of law. Consequently, Prime's tie-in did not have anticompetitive effects in the general hardware maintenance market. Without a showing of actual adverse effect on competition, [Virtual] cannot make out a case under the antitrust laws, and no such showing has been made. There is insufficient evidence to support the jury verdict under the rule of reason.

The judgment of the trial court is reversed because it is based upon an erroneous determination of the fundamental issue of relevant product market. A j.n.o.v. is entered for Prime because the facts presented show that Prime lacks market power in the interbrand market for general CAD/CAM software. Moreover, there is no proof that Prime's conduct had a substantial anticompetitive effect in the general market for computer hardware maintenance. Therefore, the award of damages and the injunction are vacated.

Eastman Kodak Co. v. Image Technical Services, Inc.
United States Supreme Court
504 U.S. 451 (1992)

Justice Blackmun delivered the opinion of the Court.

This is yet another case that concerns the standard for summary judgment in an antitrust controversy. The principal issue here is whether a defendant's lack of market power in the primary equipment market precludes — as a matter of law — the possibility of market power in derivative aftermarkets.

Petitioner Eastman Kodak Co. (Kodak) manufactures and sells photocopiers and micrographic equipment. Kodak also sells service and replacement parts for its equipment. Respondents are 18 independent service organizations (ISOs) that in the early 1980s began servicing Kodak copying and micrographic equipment. Kodak subsequently adopted policies to limit the availability of parts to ISOs and to make it more difficult for ISOs to compete with Kodak in servicing Kodak equipment.

Respondents instituted this action in the district court, alleging that Kodak's policies were unlawful under both §§ 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1 and 2. After truncated discovery, the district court granted summary judgment for Kodak. The Ninth Circuit reversed. The appellate court found that respondents had presented sufficient evidence to raise a genuine issue concerning Kodak's market power in the service and parts markets. It rejected Kodak's contention that lack of market power in service and parts must be assumed when such power is absent in the equipment market.

Background

Because this case comes to us on petitioner Kodak's motion for summary judgment, the evidence of respondents is to be believed, and all justifiable inferences are to be drawn in their favor. Mindful that respondents' version of any disputed issue of fact thus is presumed correct, we begin with the factual basis of respondents' claims.

Kodak manufactures and sells complex business machines — as relevant here, high-volume photocopier and micrographics equipment. (Kodak's micrographic equipment includes four different product areas. The first is capture products such as microfilmers and electronic scanners, which compact an image and capture it on microfilm. The second is equipment such as microfilm viewers and viewer/printers. This equipment is used to retrieve the images. The third is Computer Output Microform (COM) recorders, which are data-processing peripherals that record computer-generated data onto microfilm. The fourth is Computer Assisted Retrieval (CAR) systems, which utilize computers to locate and retrieve micrographic images. 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 produces 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 the initial warranty period either through annual service contracts, which include all necessary parts, or on a per-call basis. It charges, through negotiations and bidding, different prices for equipment, service, and parts for different customers. Kodak provides 80% to 95% of the service for Kodak machines.

Beginning in the early 1980s, ISOs began repairing and servicing Kodak equipment. They also sold parts and reconditioned and sold used Kodak equipment. Their customers were federal, state, and local government agencies, banks, insurance companies, industrial enterprises, and providers of specialized copy and microfilming services. ISOs provide service at a price substantially lower than Kodak does. Some customers found that the ISO service was of higher quality.

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 addition to the OEMs, other sources of Kodak parts include (1) brokers who would buy parts from Kodak, or strip used Kodak equipment to obtain the useful parts and resell them, (2) customers who buy parts from Kodak and make them available to ISOs, and (3) used equipment to be stripped for parts.)

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, 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.

In 1987, the ISOs filed the present action in the district court, alleging, inter alia, that Kodak had unlawfully tied the sale of service for Kodak machines to the sale of parts, in violation of § 1 of the Sherman Act, and had unlawfully monopolized and attempted to monopolize the sale of service for Kodak machines, in violation of § 2 of that Act.

Kodak filed a motion for summary judgment before respondents had initiated discovery. The district court permitted respondents to file one set of interrogatories and one set of requests for production of documents, and to take six depositions. Without a hearing, the district court granted summary judgment in favor of Kodak.

As to the § 1 claim, the court found that respondents had provided no evidence of a tying arrangement between Kodak equipment and service or parts. The court, however, did not address respondents' § 1 claim that is at issue here. Respondents allege a tying arrangement not between Kodak equipment and service, but between Kodak parts and service. As to the § 2 claim, the district court concluded that although Kodak had a “natural monopoly over the market for parts it sells under its name,” a unilateral refusal to sell those parts to ISOs did not violate § 2.

The Ninth Circuit, by a divided vote, reversed. With respect to the § 1 claim, the court of appeals first found that whether service and parts were distinct markets and whether a tying arrangement existed between them were disputed issues of fact. Having found that a tying arrangement might exist, the court of appeals considered a question not decided by the district court: Was there “an issue of material fact as to whether Kodak has sufficient economic power in the tying product market [parts] to restrain competition appreciably in the tied product market service.” The court agreed with Kodak that competition in the equipment market might prevent Kodak from possessing power in the parts market, but refused to uphold the district court's grant of summary judgment “on this theoretical basis” because “market imperfections can keep economic theories about how consumers will act from mirroring reality.” Noting that the district court had not considered the market power issue, and that the record was not fully developed through discovery, the court declined to require respondents to conduct market analysis or to pinpoint specific imperfections in order to withstand summary judgment: “It is enough that respondents have presented evidence of actual events from which a reasonable trier of fact could conclude competition in the [equipment] market does not, in reality, curb Kodak's power in the parts market.”

The court then considered the three business justifications Kodak proffered for its restrictive parts policy: (1) to guard against inadequate service, (2) to lower inventory costs, and (3) to prevent ISOs from free-riding on Kodak's investment in the copier and micrographic industry. The court concluded that the trier of fact might find the product quality and inventory reasons to be pretextual and that there was a less restrictive alternative for achieving Kodak's quality-related goals. The court also found Kodak's third justification, preventing ISOs from profiting on Kodak's investments in the equipment markets, legally insufficient.

As to the § 2 claim, the court of appeals concluded that sufficient evidence existed to support a finding that Kodak's implementation of its parts policy was “anticompetitive” and “exclusionary” and “involved a specific intent to monopolize.” It held that the ISOs had come forward with sufficient evidence, for summary judgment purposes, to disprove Kodak's business justifications.

The dissent in the court of appeals with respect to the § 1 claim, accepted Kodak's argument that evidence of competition in the equipment market “necessarily precludes power in the derivative market.” 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.”

Tie-Ins

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. 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.

Kodak did not dispute that its arrangement affects a substantial volume of interstate commerce. It, however, did challenge whether its activities constituted a “tying arrangement” and whether Kodak exercised “appreciable economic power” in the tying market. We consider these issues in turn.

A. Existence of Tie-In

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. 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.

Kodak insists that because there is no demand for parts separate from service, there cannot be separate markets for service and parts. By that logic, we would be forced to conclude that there can never be separate markets, for example, for cameras and film, computers and software, or automobiles and tires. That is an assumption we are unwilling to make. We have often found arrangements involving functionally linked products at least one of which is useless without the other to be prohibited tying devices.

Kodak's assertion also appears to be incorrect as a factual matter. At least some consumers would purchase service without parts, because some service does not require parts, and some consumers, those who self-service for example, would purchase parts without service. Enough doubt is cast on Kodak's claim of a unified market that it should be resolved by the trier of fact.

Finally, respondents have presented sufficient evidence of a tie between service and parts. The record indicates that Kodak would sell parts to third parties only if they agreed not to buy service from ISOs. (Kodak contends that this practice is only a unilateral refusal to deal, which does not violate the antitrust laws. Assuming, arguendo, that Kodak's refusal to sell parts to any company providing service can be characterized as a unilateral refusal to deal, its alleged sale of parts to third parties on condition that they buy service from Kodak is not.)

B. Market Power in Tying Market

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. It has been defined as the ability of a single seller to raise price and restrict output. The existence of such power ordinarily is inferred from the seller's possession of a predominant share of the market.

Respondents contend that Kodak has more than sufficient power in the parts market to force unwanted purchases of the tied market, service. Respondents provide evidence that certain parts are available exclusively through Kodak. Respondents also assert that Kodak has control over the availability of parts it does not manufacture. According to respondents' evidence, Kodak has prohibited independent manufacturers from selling Kodak parts to ISOs, pressured Kodak equipment owners and independent parts distributors to deny ISOs the purchase of Kodak parts, and taken steps to restrict the availability of used machines.

Respondents also allege that Kodak's control over the parts market has excluded service competition, boosted service prices, and forced unwilling consumption of Kodak service. Respondents offer evidence that consumers have switched to Kodak service even though they preferred ISO service, that Kodak service was of higher price and lower quality than the preferred ISO service, and that ISOs were driven out of business by Kodak's policies. Under our prior precedents, this evidence would be sufficient to entitle respondents to a trial on their claim of market power.

Kodak counters that even if it concedes monopoly share of the relevant parts market, it cannot actually exercise the necessary market power for a Sherman Act violation. This is so, according to Kodak, because competition exists in the equipment market. Kodak argues that it could not have the ability 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 be offset by a corresponding loss in profits from lower equipment sales as consumers began purchasing equipment with more attractive service costs.

Kodak does not present any actual data on the equipment, service, or parts markets. Instead, it urges the adoption of a substantive legal rule that “equipment competition precludes any finding of monopoly power in derivative aftermarkets.” Kodak argues that such a rule would satisfy its burden as the moving party of showing that there is no genuine issue as to any material fact on the market power issue.

Legal presumptions that rest on formalistic distinctions rather than actual market realities are generally disfavored in antitrust law. This Court has preferred to resolve antitrust claims on a case-by-case basis, focusing on the particular facts disclosed by the record. In determining the existence of market power, and specifically the responsiveness of the sales of one product to price changes of the other, this Court has examined closely the economic reality of the market at issue.

Kodak contends that there is no need to examine the facts when the issue is market power in the aftermarkets. A legal presumption against a finding of market power is warranted in this situation, according to Kodak, because 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.

Kodak analogizes this case to Matsushita where a group of American corporations that manufactured or sold consumer electronic products alleged that their 21 Japanese counterparts were engaging in a 20-year conspiracy to price below cost in the United States in the hope of expanding their market share sometime in the future. After several years of detailed discovery, the defendants moved for summary judgment. Because the defendants had every incentive not to engage in the alleged conduct which required them to sustain losses for decades with no foreseeable profits, the Court found an “absence of any rational motive to conspire.” In that context, the Court determined that the plaintiffs' theory of predatory pricing makes no practical sense, was “speculative” and was not “reasonable.” Accordingly, the Court held that a reasonable jury could not return a verdict for the plaintiffs and that summary judgment would be appropriate against them unless they came forward with more persuasive evidence to support their theory.

The Court's 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 party's inferences be reasonable in order to reach the jury, a requirement that was not invented, but merely articulated, in that decision. If the plaintiff's theory is economically senseless, no reasonable jury could find in its favor, and summary judgment should be granted.

Kodak, then, bears a substantial burden in showing that it is entitled to summary judgment. It must show that despite evidence of increased prices and excluded competition, an inference of market power is unreasonable. To determine whether Kodak has met that burden, we must unravel the factual assumptions underlying its proposed rule that lack of power in the equipment market necessarily precludes power in the aftermarkets.

The extent to which one market prevents exploitation of another market depends on the extent to which consumers will change their consumption of one product in response to a price change in another, i.e., the cross-elasticity of demand. Kodak's proposed rule rests on a factual assumption about the cross-elasticity of demand in the equipment and aftermarkets:

If Kodak raised its parts or service prices above competitive levels, potential customers would simply stop buying Kodak equipment. Perhaps Kodak would be able to increase short term profits through such a strategy, but at a devastating cost to its long term interests.

Kodak argues that the Court should accept, as a matter of law, this “basic economic reality,” that competition in the equipment market necessarily prevents market power in the aftermarkets. (The United States as amicus curiae in support of Kodak echoes this argument:

The ISOs' claims are implausible because Kodak lacks market power in the markets for its copier and micrographic equipment. Buyers of such equipment regard an increase in the price of parts or service as an increase in the price of the equipment, and sellers recognize that the revenues from sales of parts and service are attributable to sales of the equipment. In such circumstances, it is not apparent how an equipment manufacturer such as Kodak could exercise power in the aftermarkets for parts and service.

It is clearly true, as the United States claims, that Kodak “cannot set service or parts prices without regard to the impact on the market for equipment.” The fact that the cross-elasticity of demand is not zero proves nothing; the disputed issue is how much of an impact an increase in parts and service prices has on equipment sales and on Kodak's profits.)

Even if Kodak could not raise the price of service and parts one cent without losing equipment sales, that fact would not disprove market power in the aftermarkets. The sales of even a monopolist are reduced when it sells goods at a monopoly price, but the higher price more than compensates for the loss in sales. Kodak's claim that charging more for service and parts would be a “short-run game,” is based on the false dichotomy that there are only two prices that can be charged — a competitive price or a ruinous one. But there could easily be a middle, optimum price at which the increased revenues from the higher-priced sales of service and parts would more than compensate for the lower revenues from lost equipment sales. The fact that the equipment market imposes a restraint on prices in the aftermarkets by no means disproves the existence of power in those markets. Thus, contrary to Kodak's assertion, there is no immutable physical law — no basic “economic reality” — insisting that competition in the equipment market cannot coexist with market power in the aftermarkets.

Although Kodak repeatedly relies on Continental T.V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36 (1977), as support for its factual assertion that the equipment market will prevent exploitation of the service and parts markets, the case is inapposite. In Continental T.V., the Court found that a manufacturer's policy restricting the number of retailers that were permitted to sell its product could have a procompetitive effect. The Court also noted that any negative effect of exploitation of the intrabrand market (the competition between retailers of the same product) would be checked by competition in the interbrand market (competition over the same generic product) because consumers would substitute a different brand of the same product. Unlike Continental T.V., this case does not concern vertical relationships between parties on different levels of the same distribution chain. In the relevant market, service, Kodak and the ISOs are direct competitors; their relationship is horizontal. The interbrand competition at issue here is competition over the provision of service. Despite petitioner's best effort, repeating the mantra “interbrand competition” does not transform this case into one over an agreement the manufacturer has with its dealers that would fall under the rubric of Continental T.V.

We next consider the more narrowly drawn question: Does Kodak's theory describe actual market behavior so accurately that respondents' assertion of Kodak market power in the aftermarkets, if not impossible, is at least unreasonable?

To review Kodak's theory, it contends that higher service prices will lead to a disastrous drop in equipment sales. Presumably, the theory's corollary is to the effect that low service prices lead to a dramatic increase in equipment sales. According to the theory, one would have expected Kodak to take advantage of lower-priced ISO service as an opportunity to expand equipment sales. Instead, Kodak adopted a restrictive sales policy consciously designed to eliminate the lower-priced ISO service, an act that would be expected to devastate either Kodak's equipment sales or Kodak's faith in its theory. Yet, according to the record, it has done neither. Service prices have risen for Kodak customers, but there is no evidence or assertion that Kodak equipment sales have dropped.

Kodak and the United States as amicus curiae attempt to reconcile Kodak's theory with the contrary actual results by describing a “marketing strategy of spreading over time the total cost to the buyer of Kodak equipment.” In other words, Kodak could charge subcompetitive prices for equipment and make up the difference with supracompetitive prices for service, resulting in an overall competitive price. This pricing strategy would provide an explanation for the theory's descriptive failings—if Kodak in fact had adopted it. But Kodak never has asserted that it prices its equipment or parts subcompetitively and recoups its profits through service. Instead, it claims that it prices its equipment comparably to its competitors, and intends that both its equipment sales and service divisions be profitable. Moreover, this hypothetical pricing strategy is inconsistent with Kodak's policy toward its self-service customers. If Kodak were underpricing its equipment, hoping to lock in customers and recover its losses in the service market, it could not afford to sell customers parts without service. In sum, Kodak's theory does not explain the actual market behavior revealed in the record.

Respondents offer a forceful reason why Kodak's theory, although perhaps intuitively appealing, may not accurately explain the behavior of the primary and derivative markets for complex durable goods: the existence of significant information and switching costs. These costs could create a less responsive connection between service and parts prices and equipment sales.

For the service-market price to affect equipment demand, consumers must inform themselves of the total cost of the “package” — equipment, service and parts — at the time of purchase; that is, consumers must engage in accurate lifecycle pricing. Lifecycle pricing of complex, durable equipment is difficult and costly. In order to arrive at an accurate price, a consumer must acquire a substantial amount of raw data and undertake sophisticated analysis. The necessary information would include data on price, quality, and availability of products needed to operate, upgrade, or enhance the initial equipment, as well as service and repair costs, including estimates of breakdown frequency, nature of repairs, price of service and parts, length of “down-time” and losses incurred from down-time. (In addition, of course, in order to price accurately the equipment, a consumer would need initial purchase information such as prices, features, quality, and available warranties, for different machinery with different capabilities, and residual value information such as the longevity of product use and its potential resale or trade-in value.)

Much of this information is difficult — some of it impossible — to acquire at the time of purchase. During the life of a product, companies may change the service and parts prices, and develop products with more advanced features, a decreased need for repair, or new warranties. In addition, the information is likely to be customer-specific; lifecycle costs will vary from customer to customer with the type of equipment, degrees of equipment use, and costs of downtime.

Kodak acknowledges the cost of information, but suggests, again without evidentiary support, that customer information needs will be satisfied by competitors in the equipment markets. It is a question of fact, however, whether competitors would provide the necessary information. A competitor in the equipment market may not have reliable information about the lifecycle costs of complex equipment it does not service or the needs of customers it does not serve. Even if competitors had the relevant information, it is not clear that their interests would be advanced by providing such information to consumers.

Moreover, even if consumers were capable of acquiring and processing the complex body of information, they may choose not to do so. Acquiring the information is expensive. If the costs of service are small relative to the equipment price, or if consumers are more concerned about equipment capabilities than service costs, they may not find it cost-efficient to compile the information. Similarly, some consumers, such as the Federal Government, have purchasing systems that make it difficult to consider the complete cost of the “package” at the time of purchase. State and local governments often treat service as an operating expense and equipment as a capital expense, delegating each to a different department. These governmental entities do not lifecycle price, but rather choose the lowest price in each market.

As Kodak notes, there likely will be some large-volume, sophisticated purchasers who will undertake the comparative studies and insist, in return for their patronage, that Kodak charge them competitive lifecycle prices. Kodak contends that these knowledgeable customers will hold down the package price for all other customers. There are reasons, however, to doubt that sophisticated purchasers will ensure that competitive prices are charged to unsophisticated purchasers, too. As an initial matter, if the number of sophisticated customers is relatively small, the amount of profits to be gained by supracompetitive pricing in the service market could make it profitable to let the knowledgeable consumers take their business elsewhere. More importantly, if a company is able to price-discriminate between sophisticated and unsophisticated consumers, the sophisticated will be unable to prevent the exploitation of the uninformed. A seller could easily price-discriminate by varying the equipment/parts/service package, developing different warranties, or offering price discounts on different components.

Given the potentially high cost of information and the possibility a seller may be able to price-discriminate between knowledgeable and unsophisticated consumers, it makes little sense to assume, in the absence of any evidentiary support, that equipment-purchasing decisions are based on an accurate assessment of the total cost of equipment, service, and parts over the lifetime of the machine.

Indeed, respondents have presented evidence that Kodak practices price-discrimination by selling parts to customers who service their own equipment, but refusing to sell parts to customers who hire third-party service companies. Companies that have their own service staff are likely to be high-volume users, the same companies for whom it is most likely to be economically worthwhile to acquire the complex information needed for comparative lifecycle pricing.

A second factor undermining Kodak's claim that supracompetitive prices in the service market lead to ruinous losses in equipment sales is the cost to current owners of switching to a different product. If the cost of switching is high, consumers who already have purchased the equipment, and are thus “locked-in,” will tolerate some level of service-price increases before changing equipment brands. Under this scenario, a seller profitably could maintain supracompetitive prices in the aftermarket if the switching costs were high relative to the increase in service prices, and the number of locked-in customers were high relative to the number of new purchasers.

Moreover, if the seller can price-discriminate between its locked-in customers and potential new customers, this strategy is even more likely to prove profitable. The seller could simply charge new customers below-marginal cost on the equipment and recoup the charges in service, or offer packages with life-time warranties or long-term service agreements that are not available to locked-in customers.

Respondents have offered evidence that the heavy initial outlay for Kodak equipment, combined with the required support material that works only with Kodak equipment, makes switching costs very high for existing Kodak customers. And Kodak's own evidence confirms that it varies the package price of equipment/parts/service for different customers.

In sum, there is a question of fact whether information costs and switching costs foil the simple assumption that the equipment and service markets act as pure complements to one another.

We conclude, then, 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 aftermarkets, since respondents offer direct evidence that Kodak did so. It is also plausible, as discussed above, to infer that Kodak chose to gain immediate profits by exerting that market power where locked-in customers, high information costs, and discriminatory pricing limited and perhaps eliminated any long-term loss. Viewing the evidence in the light most favorable to respondents, their allegations of market power make economic sense.

Nor are we persuaded by Kodak's contention that it is entitled to a legal presumption on the lack of market power because, as in Matsushita, there is a significant risk of deterring procompetitive conduct. Plaintiffs in Matsushita attempted to prove the antitrust conspiracy through evidence of rebates and other price-cutting activities. Because cutting prices to increase business is “the very essence of competition,” the Court was concerned that mistaken inferences would be “especially costly,” and would “chill the very conduct the antitrust laws are designed to protect.” But the facts in this case are just the opposite. The alleged conduct — higher service prices and market foreclosure — is facially anticompetitive and exactly the harm that antitrust laws aim to prevent. In this situation, Matsushita does not create any presumption in favor of summary judgment for the defendant.

Kodak contends that, despite the appearance of anticompetitiveness, its behavior actually favors competition because its ability to pursue innovative marketing plans will allow it to compete more effectively in the equipment market. A pricing strategy based on lower equipment prices and higher aftermarket prices could enhance equipment sales by making it easier for the buyer to finance the initial purchase. It is undisputed that competition is enhanced when a firm is able to offer various marketing options, including bundling of support and maintenance service with the sale of equipment. Nor do such actions run afoul of the antitrust laws. But the procompetitive effect of the specific conduct challenged here, eliminating all consumer parts and service options, is far less clear.

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, and therefore to warrant a legal presumption without any evidence of its actual economic impact. In this case, when we weigh the risk of deterring procompetitive behavior by proceeding to trial against the risk that illegal behavior go unpunished, the balance tips against summary judgment.

For the foregoing reasons, we hold that Kodak has not met the requirements of FRCP 56(c). We therefore affirm the denial of summary judgment on respondents' § 1 claim.

Monopolization

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 that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.

A. Monopoly Power

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 markets, and that Kodak has the power to control prices or exclude competition in service and parts. Monopoly power under § 2 requires, of course, something greater than market power under § 1. Respondents' evidence that Kodak controls nearly 100% of the parts market and 80% to 95% of the service market, with no readily available substitutes, is, however, sufficient to survive summary judgment under the more stringent monopoly standard of § 2.

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. 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. This Court's prior cases support the proposition that in some instances one brand of a product can constitute a separate market. The proper market definition in this case can be determined only after a factual inquiry into the commercial realities faced by consumers.

B. Conduct

The second element of a § 2 claim is the use of monopoly power to foreclose competition, to gain a competitive advantage, or to destroy a competitor. If Kodak adopted its parts and service policies as part of a scheme of willful acquisition or maintenance of monopoly power, it will have violated § 2. (It is true that as a general matter a firm can refuse to deal with its competitors. But such a right is not absolute; it exists only if there are legitimate competitive reasons for the refusal.)

As recounted at length above, respondents have presented evidence that Kodak took exclusionary action to maintain its parts monopoly and used its control over parts to strengthen its monopoly share of the Kodak service market. Liability turns, then, on whether valid business reasons can explain Kodak's actions. Kodak contends that it has three valid business justifications for its actions:

(1) to promote interbrand equipment competition by allowing Kodak to stress the quality of its service; (2) to improve asset management by reducing Kodak's inventory costs; and (3) to prevent isos from free riding on Kodak's capital investment in equipment, parts and service.

Factual questions exist, however, about the validity and sufficiency of each claimed justification, making summary judgment inappropriate.

Kodak first asserts that by preventing customers from using isos, “it can best maintain high quality service for its sophisticated equipment” and avoid being “blamed for an equipment malfunction, even if the problem is the result of improper diagnosis, maintenance or repair by an iso.” Respondents have offered evidence that isos provide quality service and are preferred by some Kodak equipment owners. This is sufficient to raise a genuine issue of fact.

Moreover, there are other reasons to question Kodak's proffered motive of commitment to quality service; its quality justification appears inconsistent with its thesis that consumers are knowledgeable enough to lifecycle price, and its self-service policy. Kodak claims the exclusive-service contract is warranted because customers would otherwise blame Kodak equipment for breakdowns resulting from inferior iso service. Thus, Kodak simultaneously claims that its customers are sophisticated enough to make complex and subtle lifecycle-pricing decisions, and yet too obtuse to distinguish which breakdowns are due to bad equipment and which are due to bad service. Kodak has failed to offer any reason why informational sophistication should be present in one circumstance and absent in the other. In addition, because self-service customers are just as likely as others to blame Kodak equipment for breakdowns resulting from (their own) inferior service, Kodak's willingness to allow self-service casts doubt on its quality claim. In sum, we agree with the court of appeals that respondents have presented evidence from which a reasonable trier of fact could conclude that Kodak's first reason is pretextual.

There is also a triable issue of fact on Kodak's second justification — controlling inventory costs. As respondents argue, Kodak's actions appear inconsistent with any need to control inventory costs. Presumably, the inventory of parts needed to repair Kodak machines turns only on breakdown rates, and those rates should be the same whether Kodak or isos perform the repair. More importantly, the justification fails to explain respondents' evidence that Kodak forced oems, equipment owners, and parts brokers not to sell parts to isos, actions that would have no effect on Kodak's inventory costs.

Nor does Kodak's final justification entitle it to summary judgment on respondents' § 2 claim. Kodak claims that its policies prevent isos from “exploiting the investment Kodak has made in product development, manufacturing and equipment sales in order to take away Kodak's service revenues.” Kodak does not dispute that respondents invest substantially in the service market, with training of repair workers and investment in parts inventory. Instead, according to Kodak, the isos are free-riding because they have failed to enter the equipment and parts markets. This understanding of free-riding has no support in our case law. To the contrary, as the court of appeals noted, one of the evils proscribed by the antitrust laws is the creation of entry barriers to potential competitors by requiring them to enter two markets simultaneously.

None of Kodak's asserted business justifications, then, are sufficient to prove that Kodak is “entitled to a judgment as a matter of law” on respondents' § 2 claim.

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 anticompetitive 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.


Justice Scalia, with whom Justices O'Connor and Thomas join, dissenting.

This is not, as the Court describes it, just “another case that concerns the standard for summary judgment in an antitrust controversy.” Rather, the case presents a very narrow — but extremely important — question of substantive antitrust law: Whether, for purposes of applying our per se rule condemning ties, and for purposes of applying our exacting rules governing the behavior of would-be monopolists, a manufacturer's conceded lack of power in the interbrand market for its equipment is somehow consistent with its possession of “market,” or even “monopoly,” power in wholly deriva- tive aftermarkets for that equipment. In my view, the Court supplies an erroneous answer to this question, and I dissent.

By permitting antitrust plaintiffs to invoke § 2 simply upon the unexceptional demonstration that a manufacturer controls the supplies of its single-branded merchandise, the Court transforms § 2 from a specialized mechanism for responding to extraordinary agglomerations (or threatened agglomerations) of economic power to an all-purpose remedy against run-of-the-mill business torts.

In my view, if the interbrand market is vibrant, it is simply not necessary to enlist § 2's machinery to police a seller's intrabrand restraints. In such circumstances, the interbrand market functions as an infinitely more efficient and more precise corrective to such behavior, rewarding the seller whose intrabrand restraints enhance consumer welfare while punishing the seller whose control of the aftermarkets is viewed unfavorably by interbrand consumers. Because this case comes to us on the assumption that Kodak is without such interbrand power, I believe we are compelled to reverse the judgment of the court of appeals. I respectfully dissent.

Virtual Maintenance, Inc. v. Prime Computer, Inc.
United States Court of Appeals for the Sixth Circuit
11 F.3d 660 (6th Cir. 1993) (Virtual II)

Suhrheinrich, Circuit Judge.

In our original decision in this case, 957 F.2d 1318 (6th Cir. 1992) (Virtual I), we reversed the judgment of the trial court, which implemented the jury's general verdict in favor of plaintiff and overruled defendant's motion for judgment notwithstanding the verdict (j.n.o.v.). We did so upon our conclusion that each of three alternative legal theories of anticompetitive conduct that were presented to the jury were erroneous as a matter of law. We then vacated the award of damages and the injunction issued by the trial court and remanded with instructions to enter judgment in favor of the defendant. The Supreme Court directed us to reconsider our original decision in light of Eastman Kodak Co. v. Image Technical Serv. Inc., 504 U.S. 451 (1992), in which the Supreme Court held that the existence of competition in a primary equipment market does not preclude, as a matter of law, a finding of market or monopoly power in derivative aftermarkets.

I. Background

The opinion only briefly revisits the relevant facts. Defendant Prime Computer, Inc. (Prime) manufactures and markets computer systems, and provides maintenance services for those systems. Of significance to this lawsuit is one of its hardware lines, the 50 Series minicomputer, and one of its applications software products, the so-called Computer-Aided Design/Computer-Aided Manufacturing system (CAD/CAM), which can be used with the 50 Series minicomputers.

Ford Motor Company (Ford) created and owns a CAD/CAM software design program for use in designing automobiles. Ford's CAD/CAM program is called Product Design Graphic System (PDGS). Ford frequently revises the software program, and requires the automotive design companies with which it does business to use the most recent version of Ford's PDGS in order to facilitate the transmission of design specifications through CAD/CAM software.

Ford licenses defendant Prime as the exclusive distributor of Ford's version of PDGS under a year-to-year contract. Ford's version of PDGS runs only in Prime's 50 Series minicomputers, but can be translated to other systems at a higher cost.

Prime also distributes software support (i.e., revisions, modifications, updates, and support services) for PDGS software. Prime offers this software support to Ford's design companies as part of a package that includes hardware maintenance on the Prime 50 Series minicomputers. PDGS revisions may be purchased separately from the hardware maintenance, but only at a prohibitive expense. In contrast, the general contract to purchase PDGS does not contain a hardware maintenance requirement.

Plaintiff Virtual Maintenance, Inc. (Virtual) brought this antitrust action after unsuccessfully attempting to enter into hardware maintenance contracts with owners of Prime 50 Series computers. Virtual contended that Prime's package constituted an illegal tying arrangement in violation of § 1 of the Sherman Act by conditioning the purchase of software support required by Ford to hardware maintenance from Prime (the tying product).

Virtual's case was presented to the jury on three alternative theories of liability based on the alleged tie of hardware maintenance services to PDGS updates: (1) a per se claim based on a tying market of all CAD/CAM software; (2) a per se claim based on a tying product market of Ford-required PDGS; and (3) a rule of reason claim alleging that the clause in Prime's software maintenance package contract requiring the customer to use Prime's hardware maintenance services created unreasonable and anticompetitive effects in the market for maintaining Prime's 50 Series computer systems. The jury returned a general verdict in favor of Virtual. The district court denied Prime's motion for j.n.o.v. and entered judgment in favor of Virtual.

On appeal, we rejected each of Virtual's theories, and reversed the judgment of the district court with instructions to enter judgment in favor of Prime. In accordance with the Supreme Court's directive, we will consider whether any of these prior rulings are impacted by Eastman Kodak.

II. Analysis

A. Ruling in Kodak

In Eastman Kodak, the antitrust plaintiffs were a group of independent service organizations (ISOs) that had been servicing Kodak copying and micrographic equipment since the early 1980s. They brought suit after Kodak began restricting the sale of replacement parts for its photocopiers and micrographic equipment to only those buyers who also purchased Kodak service or repaired their own machines. Kodak equipment is unique; its parts are not compatible with its competitors' machines. Because of Kodak's restrictive policy, the ISOs were unable to obtain suitable parts and many were forced out of business. The plaintiffs also offered evidence that some customers who preferred the plaintiffs' service were forced, as a result of Kodak's practice, to switch to Kodak's service. Plaintiffs alleged, inter alia, that Kodak had tied the sale of service to the sale of parts in violation of § 1 of the Sherman Act.

Before the Supreme Court, Kodak did not offer any actual data on the proposed markets, but rather urged the adoption of a substantive legal rule that interbrand competition foreclosed finding of monopoly power in derivative aftermarkets as a matter of law. The Supreme Court framed the issue as whether a defendant's lack of market power in the primary equipment market precludes, as a matter of law, the possibility of market power in derivative aftermarkets. Starting with the assumption that Kodak lacked market power in the equipment market, the Supreme Court nonetheless refused to accept on faith Kodak's proposed rule absent evidence to support it. Thus, contrary to Kodak's assertion, there was no immutable physical law, no basic economic reality, insisting that competition in the equipment market cannot coexist with market power in the aftermarkets.

The Court found that the plaintiffs had offered a forceful reason why Kodak's theory might not accurately explain the behavior of the primary and derivative markets for complex and durable goods: the existence of significant information and switching costs. Regarding information costs, the Court observed that in order for the service-market price to affect equipment demand, consumers must engage in accurate lifecycle pricing, that is, they must inform themselves of the total cost of the package at the time of purchase. Lifecycle pricing, however, is difficult to perform.

Furthermore, the cost of switching products may be high, and consumers who have already purchased the equipment will tolerate some level of service-price increase before switching equipment brands. Under this scenario, a seller profitably could maintain supra-competitive prices in the aftermarket if the switching costs were high relative to the increase in service prices, and the number of locked-in customers were high relative to the number of new purchases.

Also critical to the Court's conclusion that summary judgment on the ISOs' claims was improper was evidence presented by the plaintiffs that certain parts were available exclusively through Kodak, that Kodak had control over the availability of parts it didn't manufacture, and that Kodak's control over its parts market had excluded service competition, boosted service prices, and forced unwilling consumption of Kodak service when plaintiffs' service would have been preferred. The Court stated that under existing precedents, the foregoing evidence would be sufficient to entitle the plaintiffs to a trial on their claim of market power. The Supreme Court affirmed the decision of the appellate court reversing the district court's grant of summary judgment to Kodak.

B. Virtual's Various Legal Theories

1. Rule of Reason

Eastman Kodak did not involve a rule of reason theory of liability, and we see no reason to alter our conclusion that there was insufficient evidence to support a jury verdict under the rule of reason. Even with Ford-required software support as the tying product market, Virtual failed to demonstrate a substantial threat that Prime would acquire market power in the most narrowly defined tied product market of hardware maintenance of Prime 50 Series systems. We concluded that the foreclosure of at most the 400 50 Series systems out of thousands of systems capable of using PDGS is insignificant as a matter of law. Given Virtual's failure of proof under the most restrictive definition of tied product market, we do not think our ruling on this issue is affected by Eastman Kodak.

2. Per Se Claim—All CAD/CAM

Under Virtual's first per se claim, the district court defined the relevant market as the sale of software revisions and support for the CAD/CAM industry in general. We found no error in the legal adequacy of the district court's definition, but concluded that Prime possessed at most an 11% share of the market, which is insufficient as a matter of law to confer market power. We find nothing in Eastman Kodak which requires us to alter this analysis. We therefore hold that a per se tying violation could not be established under Virtual's first per se theory because Prime lacks market power in the general CAD/CAM product market, for the reasons stated here and in section II.B.1. of our decision in Virtual I.

3. Ford–Required Software

Our ruling regarding Virtual's second per se claim requires much closer scrutiny. The other market that Virtual urged was defined as the sale of software revisions and support of software necessary to do business with Ford Motor Company. Prime argued that this instruction defined the tying product market too narrowly as a matter of law, and we agreed. We found that market definition defective as a matter of law because it was based solely on one customer's requirements, which this court has held does not create a separate product market.

In response to Virtual's contention that Ford is not the only customer of Prime's products, but that all of Ford's design suppliers made up the customer market for Ford-required CAD/CAM, we stated:

Virtual seeks to distinguish these cases by pointing out that Ford is not the only customer of Prime's products; rather, all of Ford's design suppliers make up the customer market for Ford-required CAD/CAM. This ignores the fact that Ford requires its suppliers to purchase the software updates for Ford's benefit. Ford is ultimately the single consumer of its specialized design software because Ford's requirements define the demand for the software and the updates. But defining the market by Ford's requirements creates the appearance of market power based only upon the demand side of the market. Defining a market, or submarket, on the basis of demand considerations alone is erroneous because such an approach fails to consider the supply side of the market. The relevant product market cannot be determined without considering the cross-elasticity of supply.

Virtual countered that Prime has no supply side competition because of its exclusive license for PDGS. We rejected this argument as confusing the tying product (software support for PDGS) with the interbrand market relevant for antitrust analysis, and ruled that the relevant tying market is comprised of all CAD/CAM software reasonably interchangeable with PDGS. Critical to this analysis was the view that PDGS software support is an intrabrand submarket:

Prime has market power in the trivial sense that no one else makes PDGS. But true market power—power sufficient to change and sustain anticompetitive prices—cannot be inferred from this because were Prime to charge exorbitant prices for its software support, its customers would simply switch to some other manufacturer of PDGS-type software. Prime's lack of market power over the general market for CAD/CAM software thus prevents Prime from controlling the submarket for PDGS software.

Upon refusing to view Ford-required PDGS software support as a separate tying product market, we rejected Virtual's lock-in and switching costs arguments as a matter of law:

Virtual responds that Ford and its design suppliers cannot switch to a new supplier of software support because they are locked-in to Prime as the sole supplier due to their substantial investments in Prime 50 Series computers and other hardware. While Ford might believe it is locked-in, this is due in large part to its own decision to purchase Prime's software and invest in Prime's computer systems. But a customer's initial purchase of a particular manufacturer's product does not justify a limited market definition. Defining the market by customer demand after the customer has chosen a single supplier fails to take into account that the supplier (here Prime) must compete with other similar suppliers to be designated the sole source in the first place.

Under Eastman Kodak, our rejection of Virtual's second per se claim based on a tying product of Ford-required software support was misguided. That Ford had many competitors to choose from when it made its initial decision to grant the exclusive license to Prime cannot, after Eastman Kodak, preclude as a matter of law Virtual's proposed theory of market power because it ignores information costs. It follows that our rejection of Virtual's lock-in argument, on the basis of an interbrand competitive market in the initial purchase of Prime's software package and Prime 50 Series minicomputers, was also in error.

Eastman Kodak also requires us to rethink our characterization of the tying product market here as merely the preference of one customer. Unlike Eastman Kodak, the initial decision to purchase Prime equipment and software was made by a single consumer, Ford. However, by shifting the focus to the derivative aftermarket of software support, there is not a single consumer, but numerous automotive design companies doing business with Ford. The automotive design companies in the present case are independent companies, not a part of Ford. The present case does not involve merely an arrangement between a single consumer and a single supplier. Thus, the market in this case is not defined by Ford, as a customer of Prime, but by Ford's requirements that affect the choice of Prime's other customers, Ford suppliers.

The similarities between this case and Eastman Kodak are apparent. As in Eastman Kodak, the alleged tie is not between equipment and parts, where interbrand competition would defeat market power and a per se tying claim. Rather, the alleged tie is in the derivative aftermarkets. Like Kodak, Prime is able to exercise control over the sale of software support because of its exclusive distribution license from Ford, and Ford's requirement that its automotive design suppliers use the most current version of Prime's software support. Thus, it can be argued that Prime enjoys a significant advantage in the Ford-required software support market by virtue of Ford's license and the requirement Ford places on the automotive design companies to use the most current version of PDGS. In other words, there is evidence to make the argument that Prime's tying arrangement bears that essential characteristic of an illegal tying arrangement, the ability to exploit control over the tying product to force the buyer to purchase an unwanted tied product.

Like the ISOs in Eastman Kodak, Virtual presented evidence of price manipulation. An expert for Virtual testified that although Prime offered software support for sale separately, repurchase of software to obtain updates would cost as much as 900% more than if purchased in the software support/hardware maintenance package. There was also evidence that Prime does not treat all customers equally. Prime apparently allows one customer, Ford Aerospace, to continue to receive software support without purchasing hardware maintenance from Prime. Virtual also offered proof that customers would have preferred Virtual's service to Prime's, but were effectively precluded by the tie.

Virtual offered expert testimony concerning lock-in and switching costs. Virtual's industry experts testified that customers were locked-in to the hardware maintenance by the substantial cost incurred for hardware, maintenance, and training, most of which would be substantially worthless if the customer switched to another manufacturer's system. A Ford employee, called by Prime, testified that Ford itself felt locked-in to Prime, stating that Ford could not change from Prime's computer system and remain economically viable in the automotive industry. Virtual's expert also opined that Prime could substantially raise its maintenance prices before customers would abandon their investment.

Finally, Virtual made a showing that a not insubstantial amount of commerce was affected in that it stood to lose significant profits over a five-year period. Thus, under Eastman Kodak, we conclude that Virtual's second definition of tying product market was not improper.

C. Result

Eastman Kodak dictates that we vacate our holding as to Virtual's second definition of tying product market on a per se tying claim. All other aspects of our holdings in Virtual I are reaffirmed and reinstated. Because the general jury verdict in the first trial provides no indication of the jury's reliance on this theory in support of the original verdict, we are obligated to reverse the verdict and remand for a new trial. On remand, the district court is instructed to conduct a new trial on the sole theory of a per se claim based on a tying product market of Ford-required PDGS software support.

Tricom, Inc. v. Electronic Data Systems Corp.
United States District Court
902 F.Supp. 741 (E.D. Mich. 1995)

Edmunds, District Judge.

Facts

Plaintiff, Tricom Inc., brought this antitrust action against Electronic Data Systems Corporation (“EDS”), a wholly-owned subsidiary of General Motors Corporation (“GM”). Both Tricom and EDS sell computer hardware, software, data processing services, and support services. Tricom and EDS provide these products and services to customers, including engineering companies that do computer assisted design and computer assisted manufacturing. Their engineering customers provide design work for manufacturers of automobiles, aircraft, and other products.

There are hundreds of software programs available for use by engineering and design companies. Three are at issue in this case: CGS, CATIA, and CADAM. These software products are part of a category of software known as “CAD/CAM/CAE” products. The acronym stands for computer–assisted design, computer–assisted manufacturing, and computer–assisted engineering.

CGS (an acronym for Corporate Graphics System) is software developed and owned by GM and EDS, and EDS is the exclusive supplier of CGS software. On some of its projects, GM requires outside engineering and design vendors to use the CGS software. CGS is used primarily for body surface design.

There are three ways engineering or design companies seeking to use CGS can obtain access to that software from EDS. First, a customer can have computer terminals which are able to access the mainframes at the EDS Information Processing Center installed at its own site (referred to as “mainframe CGS”). Second, a customer can go to an EDS Design Center and use the computers there on an hourly basis. Third, a customer can license a “workstation” version of CGS to be installed on computers at the customer's office. Workstation CGS did not become available until the second quarter of 1991.

TriCom alleges antitrust violations by EDS as follows:

1. Illegal tying in violation of § 1 of the Sherman Act, 15 U.S.C. § 1;

2. Illegal tying in violation of § 3 of the Clayton Act, 15 U.S.C. § 15;

3. Illegal monopolization in violation of § 2 of the Sherman Act, 15 U.S.C. § 2; and

4. Illegal attempted monopolization in violation of § 2 of the Sherman Act, 15 U.S.C. § 2.

TriCom alleges that EDS conditions the leasing of its CGS software upon the lease or purchase of certain tied products, thereby depriving TriCom of the opportunity to compete in the lease or sale of the tied products. Tricom further alleges that “EDS used its monopoly power over CGS to engage in various anti-competitive acts.

In Counts I and II of the Complaint, Tricom alleges that EDS engaged in an illegal restraint of trade under § 1 of the Sherman Act and § 3 of the Clayton Act by virtue of certain tying arrangements. A tying arrangement is an agreement by a seller to sell one product [the tying product] only on the condition that the buyer also purchase a different product [the tied product]. Tricom alleges that EDS leases CGS in a package that requires the lessee to also lease or purchase of the following tied products:

1) CATIA software;

2) CADAM software;

3) telecommunications lines linking the customer to the EDS mainframe computer facility;

4) computer hardware such as graphics terminals, keyboards, monitors, multiplexors, and graphics controllers and associated peripheral devices; and

5) CPU time (time sharing) of 40 hours per week for 50 weeks regardless of whether the time is actually used.

In this motion for partial summary judgment or in the alternative to exclude certain damage claims, EDS contends that Tricom improperly asserts a refusal to deal claim, that such a claim grossly inflates Tricom's damages, and that the court should grant partial summary judgment and should dismiss such a claim or, in the alternative, that the court should exclude Tricom's damage study allegedly based on such a claim.

Analysis

Part of the parties’ dispute centers around whether Tricom actually is asserting a refusal to deal claim. According to EDS, Tricom claims that EDS should be required to license its CGS software to Tricom and to third parties.

Assuming that Tricom asserts a claim that EDS should be compelled to license CGS to Tricom and to third parties, EDS is entitled to summary judgment on such a claim. Under patent and copyright law, EDS may not be compelled to license its proprietary software to anyone. Genentech, Inc. v. Eli Lilly and Co., 998 F.2d 931, 949 (Fed. Cir. 1993), cert. denied, 114 S.Ct. 1126 (1994) (university was free to grant licenses on an exclusive or nonexclusive basis; decision to withhold license alone did not form the basis of antitrust claim); SCM Corp. v. Xerox Corp., 645 F.2d 1195 (2d Cir. 1981), cert. denied, 455 U.S. 1016 (1982) (Xerox's refusal to license its photocopying patent is permissible under patent laws); Data General Corp. v. Grumman Systems Support Corp., 36 F.3d 1147 (1st Cir. 1994) (refusal to license copyrighted software is valid business justification; antitrust claim dismissed). Thus, partial summary judgment is granted, and Tricom's claim that EDS should be compelled to license CGS to Tricom and to third parties is dismissed.

The dispute between the parties, however, is more complex. Tricom claims that EDS impermissibly ties the sale of CGS software to the sale of CPU time on EDS's mainframe computer. Tricom is a competitor in the market for sale of CPU time on a mainframe. Thus, Tricom implies that it should be permitted to run on Tricom's mainframe CGS software licensed or otherwise sold to designers.

EDS misconstrues this claim as either (1) a claim that EDS must grant Tricom a license to use CGS or (2) a claim that EDS must grant third parties a license to use CGS on Tricom's mainframe, with the result that Tricom would run CGS as an “indirect licensee.” Tricom's claim is that when EDS chooses to permit the use of CGS software, it should not be permitted to limit which mainframe the software is used on. Tricom wants to compete in the market which provides CPU time to CGS software users. Tricom does not seek to “use” CGS software or to resell it to designers.

EDS further claims if it were forced to license CGS, it would be permitted to place reasonable restrictions on its use, thereby prohibiting its use on the Tricom mainframe. The issue of what use restrictions would be reasonable is not an issue currently before the court. Moreover, EDS may not use patent or copyright law to support a tie over unpatented or uncopyrighted products. A patent or copyright holder may impose only legitimate restrictions on the use of a patent or copyright which do not enforce a tie.

The Supreme Court has also emphasized that there are limits on the control a patent holder may exercise over his licensee. Among other restrictions, he may not condition the right to use his patent on the licensee's agreement to purchase, use, or sell or not to purchase, use or sell another article of commerce not within the scope of his patent monopoly.

At oral argument on this motion, EDS claimed that Tricom may not operate CGS software on its mainframe without violating EDS's copyright because in order to operate the CGS software, Tricom must load it onto the mainframe. This constitutes “copying” under copyright law. MAI Systems Corp. v. Peak Computer, Inc., 991 F.2d 511 (9th Cir. 1993), cert. dismissed, 114 S.Ct. 671 (1994) (copying for purposes of copyright law occurs when computer program is transferred from permanent storage device to computer's random access memory). Accord, Advanced Computer Services of Mich., Inc. v. MAI Systems Corp., 845 F. Supp. 356 (E.D. Va. 1994). EDS overlooks the fact that, as discussed above, a copyright holder's right to enforce its copyright is limited by antitrust laws, like the laws against tying.* A copyright owner may not enforce its copyright to violate the antitrust laws or indeed use it in any “manner violative of the public policy embodied in the grant of a copyright.” Lasercomb Am., Inc. v. Reynolds, 911 F.2d 970, 978 (4th Cir. 1990). Again, a copyright holder, like EDS, may impose only legitimate restrictions on the use of the copyright which do not enforce a tie.

*     This issue may come up at trial in the context of whether EDS has a business justification for tying its software to its mainframe and whether the tie is the least restrictive means for achieving its business purposes. See Mozart Co. v. Mercedes-Benz of N. Am., Inc., 833 F.2d 1342 (9th Cir. 1987), cert. denied, 488 U.S. 870 (1988)(business justification is defense only if there was no less restrictive means to satisfy the legitimate business objective).

Tricom alleges that EDS improperly extends its allowed monopoly power under copyright law over its software to CPU time sharing on its mainframe, a market where EDS does not have permissible monopoly power.** Under antitrust law, EDS may not condition the right to use CGS software on the purchase of CPU time from EDS.

**     It should also be noted that Tricom does not seek to deprive EDS the value of its copyright. If EDS chooses to license its software to a designer, EDS sets the price for the license. Tricom merely claims that it should be able to compete with EDS in selling CPU time to the designer to enable the designer to use the software. Every designer who comes to Tricom wishing to use CGS on Tricom's mainframe would have to obtain the right to use the CGS software from EDS.

EDS also claims that Tricom lacks standing because it has not suffered an antitrust injury due to the fact that Tricom is not a competitor in the software licensing market. EDS points out that Tricom does not have a right to obtain CGS so that it can resell it to its own customers. EDS further argues that Tricom lacks standing because it is not a design vendor.

Tricom's claim is not based on a right to compete in licensing CGS to designers. Nor is Tricom's claim based on a right to use CGS as a designer. Tricom claims that it is a competitor in the market for providing mainframe CPU time sharing, telecommunications lines, related hardware, and access to CATIA and CADAM software. Its antitrust injury lies there.

EDS also contends that Tricom is not a competitor in time sharing services for CGS users because EDS monopolizes this market. This contention obviously begs the question. Tricom seeks to compete in this market. Its antitrust injury results from EDS's tying of CGS software to CPU time sharing.

Conclusion

Tricom's claim that EDS should be compelled to license CGS to Tricom and to third parties is dismissed. Tricom's claim that EDS impermissibly ties the sale of CGS software to the sale of CPU time on EDS's mainframe computer, implying that it should be permitted to run CGS licensed or otherwise sold to designers on Tricom's mainframe, remains.

Professional Real Estate Investors, Inc. v. Columbia Pictures Industries, Inc.
United States Supreme Court
508 U.S. 49 (1993)

Justice Thomas delivered the opinion of the Court.

This case requires us to define the “sham” exception to the doctrine of antitrust immunity first identified in Eastern R.R. Presidents Conference v. Noerr Motor Freight, Inc., 365 U.S. 127 (1961), as that doctrine applies in the litigation context. Under the sham exception, activity “ostensibly directed toward influencing governmental action” does not qualify for Noerr immunity if it “is a mere sham to cover...an attempt to interfere directly with the business relationships of a competitor.” We hold that litigation cannot be deprived of immunity as a sham unless the litigation is objectively baseless. The Court of Appeals for the Ninth Circuit refused to characterize as sham a lawsuit that the antitrust defendant admittedly had probable cause to institute. We affirm.

I.

Petitioners Professional Real Estate Investors, Inc., and Kenneth F. Irwin (collectively, PRE) operated a resort hotel in Palm Springs, California. Having installed videodisc players in the resort's hotel rooms and assembled a library of more than 200 motion picture titles, PRE rented videodiscs to guests for in-room viewing. PRE also sought to develop a market for the sale of videodisc players to other hotels wishing to offer in-room viewing of prerecorded material. Respondents, Columbia Pictures Industries, Inc., and seven other major motion picture studios (collectively, Columbia), held copyrights to the motion pictures recorded on the videodiscs that PRE purchased. Columbia also licensed the transmission of copyrighted motion pictures to hotel rooms through a wired cable system called Spectradyne. PRE therefore competed with Columbia not only for the viewing market at La Mancha but also for the broader market for in-room entertainment services in hotels.

In 1983, Columbia sued PRE for alleged copyright infringement through the rental of videodiscs for viewing in hotel rooms. PRE counterclaimed, charging Columbia with violations of §§ 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1-2, and various state-law infractions. In particular, PRE alleged that Columbia's copyright action was a mere sham that cloaked underlying acts of monopolization and conspiracy to restrain trade.

The parties filed cross-motions for summary judgment on Columbia's copyright claim and postponed further discovery on PRE's antitrust counterclaims. Columbia did not dispute that PRE could freely sell or lease lawfully purchased videodiscs under the Copyright Act's “first sale” doctrine, see 17 U.S.C. § 109(a), and PRE conceded that the playing of videodiscs constituted “performance” of motion pictures. As a result, summary judgment depended solely on whether rental of videodiscs for in-room viewing infringed Columbia's exclusive right to “perform the copyrighted work[s] publicly.” 17 U.S.C. § 106(4). Ruling that such rental did not constitute public performance, the district court entered summary judgment for PRE. The court of appeals affirmed on the grounds that a hotel room was not a “public place” and that PRE did not “transmit or otherwise communicate” Columbia's motion pictures.

On remand, Columbia sought summary judgment on PRE's antitrust claims, arguing that the original copyright infringement action was no sham and was therefore entitled to immunity under Noerr. Reasoning that the infringement action “was clearly a legitimate effort and therefore not a sham,” the district court granted the motion:

It was clear from the manner in which the case was presented that [Columbia was] seeking and expecting a favorable judgment. Although I decided against [Columbia], the case was far from easy to resolve, and it was evident from the opinion affirming my order that the court of appeals had trouble with it as well. I find that there was probable cause for bringing the action, regardless of whether the issue was considered a question of fact or of law.

The court of appeals affirmed. After rejecting PRE's other allegations of anticompetitive conduct, the court focused on PRE's contention that the copyright action was indeed sham and that Columbia could not claim Noerr immunity. The court of appeals characterized “sham” litigation as one of two types of “abuse of ... judicial processes”: either misrepresentations in the adjudicatory process or the pursuit of a pattern of baseless, repetitive claims instituted without probable cause, and regardless of the merits. PRE opposed summary judgment solely by arguing that “the copyright infringement lawsuit [was] a sham because [Columbia] did not honestly believe that the infringement claim was meritorious.”

II.

PRE contends that “the Ninth Circuit erred in holding that an antitrust plaintiff must, as a threshold prerequisite establish that a sham lawsuit is baseless as a matter of law.” It invites us to adopt an approach under which either “indifference to outcome” or failure to prove that a petition for redress of grievances would have been brought but for a predatory motive would expose a defendant to antitrust liability under the sham exception. We decline PRE's invitation.

Those who petition government for redress are generally immune from antitrust liability. We first recognized in Noerr that “the Sherman Act does not prohibit persons from associating together in an attempt to persuade the legislature or the executive to take particular action with respect to a law that would produce a restraint or a monopoly.” In light of the government's “power to act in [its] representative capacity” and “to take actions...that operate to restrain trade,” we reasoned that the Sherman Act does not punish “political activity” through which “the people ... freely inform the government of their wishes.” Nor did we “impute to Congress an intent to invade” the First Amendment right to petition.

Noerr, however, withheld immunity from “sham” activities because “application of the Sherman Act would be justified” when petitioning activity, “ostensibly directed toward influencing governmental action, is a mere sham to cover...an attempt to interfere directly with the business relationships of a competitor.” In Noerr itself, we found that a publicity campaign by railroads seeking legislation harmful to truckers was no sham in that the “effort to influence legislation” was “not only genuine but also highly successful.”

In California Motor Transport Co. v. Trucking Unlimited, 404 U.S. 508 (1972), we elaborated on Noerr in two relevant respects. First, we extended Noerr to “the approach of citizens ... to administrative agencies...and to courts.” Second, we held that the complaint showed a sham not entitled to immunity when it contained allegations that one group of highway carriers “sought to bar ... competitors from meaningful access to adjudicatory tribunals and so to usurp that decision making process” by “institut[ing]...proceedings and actions...with or without probable cause, and regardless of the merits of the cases.” We left unresolved the question presented by this case — whether litigation may be sham merely because a subjective expectation of success does not motivate the litigant. We now answer this question in the negative and hold that an objectively reasonable effort to litigate cannot be sham regardless of subjective intent.

Our original formulation of antitrust petitioning immunity required that unprotected activity lack objective reasonableness. Noerr rejected the contention that an attempt “to influence the passage and enforcement of laws” might lose immunity merely because the lobbyists’ “sole purpose...was to destroy [their] competitors.” Nor were we persuaded by a showing that a publicity campaign “was intended to and did in fact injure [competitors] in their relationships with the public and with their customers,” since such “direct injury” was merely “an incidental effect of the...campaign to influence governmental action.” We reasoned that “[t]he right of the people to inform their representatives in government of their desires with respect to the passage or enforcement of laws cannot properly be made to depend upon their intent in doing so.” In short, “Noerr shields from the Sherman Act a concerted effort to influence public officials regardless of intent or purpose.

Nothing in California Motor Transport retreated from these principles. Indeed, we recognized that recourse to agencies and courts should not be condemned as sham until a reviewing court has “discern[ed] and draw[n]” the “difficult line” separating objectively reasonable claims from “a pattern of baseless, repetitive claims...which leads the factfinder to conclude that the administrative and judicial processes have been abused.” Our recognition of a sham in that case signifies that the institution of legal proceedings “without probable cause” will give rise to a sham if such activity effectively “bar[s]...competitors from meaningful access to adjudicatory tribunals and so...usurp[s] th[e] decisionmaking process.”

Since California Motor Transport, we have consistently assumed that the sham exception contains an indispensable objective component. We have described a sham as “evidenced by repetitive lawsuits carrying the hallmark of insubstantial claims.” Id., at 512, 92 S.Ct., at 612. Otter Tail Power Co. v. United States, 410 U.S. 366, 380 (1973) (emphasis added). We regard as sham “private action that is not genuinely aimed at procuring favorable government action,” as opposed to “a valid effort to influence government action.” Allied Tube & Conduit Corp. v. Indian Head, Inc., 486 U.S. 492, 500, n.4 (1988). And we have explicitly observed that a successful “effort to influence governmental action ... certainly cannot be characterized as a sham.” Id. We have repeatedly reaffirmed that evidence of anticompetitive intent or purpose alone cannot transform otherwise legitimate activity into a sham. Our decisions therefore establish that the legality of objectively reasonable petitioning “directed toward obtaining governmental action” is “not at all affected by any anticompetitive purpose [the actor] may have had.” Noerr.

Fidelity to precedent compels us to reject a purely subjective definition of “sham.” The sham exception so construed would undermine, if not vitiate, Noerr. And despite whatever “superficial certainty” it might provide, a subjective standard would utterly fail to supply “real intelligible guidance.” Allied Tube.

III.

We now outline a two-part definition of “sham” litigation. First, the lawsuit must be objectively baseless in the sense that no reasonable litigant could realistically expect success on the merits. If an objective litigant could conclude that the suit is reasonably calculated to elicit a favorable outcome, the suit is immunized under Noerr, and an antitrust claim premised on the sham exception must fail. Only if challenged litigation is objectively meritless may a court examine the litigant's subjective motivation. Under this second part of our definition of sham, the court should focus on whether the baseless lawsuit conceals “an attempt to interfere directly with the business relationships of a competitor,” Noerr, through the use of the governmental process — as opposed to the outcome of that process — as an anticompetitive weapon. This two-tiered process requires the plaintiff to disprove the challenged lawsuit's legal viability before the court will entertain evidence of the suit's economic viability. Of course, even a plaintiff who defeats the defendant's claim to Noerr immunity by demonstrating both the objective and the subjective components of a sham must still prove a substantive antitrust violation. Proof of a sham merely deprives the defendant of immunity; it does not relieve the plaintiff of the obligation to establish all other elements of his claim.

Some of the apparent confusion over the meaning of “sham” may stem from our use of the word “genuine” to denote the opposite of “sham.” The word “genuine” has both objective and subjective connotations. On one hand, “genuine” means “actually having the reputed or apparent qualities or character.” Webster's Third New International Dictionary 948 (1986). “Genuine” in this sense governs FRCP 56, under which a “genuine issue” is one that properly can be resolved only by a finder of fact because it may reasonably be resolved in favor of either party. On the other hand, “genuine” also means “sincerely and honestly felt or experienced.” Webster's Dictionary. To be sham, therefore, litigation must fail to be “genuine” in both senses of the word.

V.

We conclude that the court of appeals properly affirmed summary judgment for Columbia on PRE's antitrust counterclaim. Under the objective prong of the sham exception, the court of appeals correctly held that sham litigation must constitute the pursuit of claims so baseless that no reasonable litigant could realistically expect to secure favorable relief.

The existence of probable cause to institute legal proceedings precludes a finding that an antitrust defendant has engaged in sham litigation. The notion of probable cause, as understood and applied in the common–law tort of wrongful civil proceedings, requires the plaintiff to prove that the defendant lacked probable cause to institute an unsuccessful civil lawsuit and that the defendant pressed the action for an improper, malicious purpose. Probable cause to institute civil proceedings requires no more than a reasonable belief that there is a chance that a claim may be held valid upon adjudication. Because the absence of probable cause is an essential element of the tort, the existence of probable cause is an absolute defense. Just as evidence of anticompetitive intent cannot affect the objective prong of Noerr's sham exception, a showing of malice alone will neither entitle the wrongful civil proceedings plaintiff to prevail nor permit the factfinder to infer the absence of probable cause. When a court has found that an antitrust defendant claiming Noerr immunity had probable cause to sue, that finding compels the conclusion that a reasonable litigant in the defendant's position could realistically expect success on the merits of the challenged lawsuit. Under our decision today, therefore, a proper probable cause determination irrefutably demonstrates that an antitrust plaintiff has not proved the objective prong of the sham exception and that the defendant is accordingly entitled to Noerr immunity.

The district court and the court of appeals correctly found that Columbia had probable cause to sue PRE for copyright infringement. Where, as here, there is no dispute over the predicate facts of the underlying legal proceeding, a court may decide probable cause as a matter of law. Columbia enjoyed the exclusive right to perform its copyrighted motion pictures “publicly.” 17 U.S.C. § 106(4). Regardless of whether it intended any monopolistic or predatory use, Columbia acquired this statutory right for motion pictures as original audiovisual works. Indeed, to condition a copyright upon a demonstrated lack of anticompetitive intent would upset the notion of copyright as a “limited grant” of “monopoly privileges” intended simultaneously “to motivate the creative activity of authors” and “to give the public appropriate access to their work product.” Sony Corp. of America v. Universal City Studios, Inc., 464 U.S. 417, 429 (1984).

When the district court entered summary judgment for PRE on Columbia's copyright claim in 1986, it was by no means clear whether PRE's videodisc rental activities intruded on Columbia's copyrights. At that time, the Third Circuit and a district court within the Third Circuit had held that the rental of video cassettes for viewing in on-site, private screening rooms infringed on the copyright owner's right of public performance. Columbia Pictures Industries, Inc. v. Redd Horne, Inc., 749 F.2d 154 (1984); Columbia Pictures Industries, Inc. v. Aveco, Inc., 612 F.Supp. 315 (M.D. Pa. 1985), aff'd, 800 F.2d 59 (CA3 1986). Although the district court and the Ninth Circuit distinguished these decisions by reasoning that hotel rooms offered a degree of privacy more akin to the home than to a video rental store, copyright scholars criticized both the reasoning and the outcome of the Ninth Circuit's decision. The Seventh Circuit expressly “decline[d] to follow” the Ninth Circuit and adopted instead the Third Circuit's definition of a “public place.” Video Views, Inc. v. Studio 21, Ltd., 925 F.2d 1010, 1020, cert. denied, 112 S.Ct. 181 (1991). In light of the unsettled condition of the law, Columbia plainly had probable cause to sue.

Any reasonable copyright owner in Columbia's position could have believed that it had some chance of winning an infringement suit against PRE. Even though it did not survive PRE's motion for summary judgment, Columbia's copyright action was arguably “warranted by existing law” or at the very least was based on an objectively “good faith argument for the extension, modification, or reversal of existing law.” FRCP 11. By the time the Ninth Circuit had reviewed all claims in this litigation, it became apparent that Columbia might have won its copyright suit in either the Third or the Seventh Circuit. Even in the absence of supporting authority, Columbia would have been entitled to press a novel copyright claim as long as a similarly situated reasonable litigant could have perceived some likelihood of success. A court could reasonably conclude that Columbia's infringement action was an objectively plausible effort to enforce rights. Accordingly, we conclude that PRE failed to establish the objective prong of Noerr s sham exception.

Thus, the district court had no occasion to inquire whether Columbia was indifferent to the outcome on the merits of the copyright suit, whether any damages for infringement would be too low to justify Columbia's investment in the suit, or whether Columbia had decided to sue primarily for the benefit of collateral injuries inflicted through the use of legal process. Contra, Grip-Pak, Inc. v. Illinois Tool Works, Inc., 694 F.2d 466, 472 (CA7 1982), cert. denied, 461 U.S. 958 (1983). Such matters concern Columbia's economic motivations in bringing suit, which were rendered irrelevant by the objective legal reasonableness of the litigation. The existence of probable cause eliminated any “genuine issue as to any material fact,” FRCP 56(c), and summary judgment properly issued.


Justice Souter, concurring.

The Court holds today that a person cannot incur antitrust liability merely by bringing a lawsuit as long as the suit is not “objectively baseless in the sense that no reasonable litigant could realistically expect success on the merits.” The Court assumes that the district court and the court of appeals were finding this very test satisfied when they concluded that Columbia's suit against PRE for copyright infringement was supported by “probable cause,” a standard which, as the Court explains it in this case, requires a “reasonable belief that there is a chance that a claim may be held valid upon adjudication.” I agree that this term, so defined, is rightly read as expressing the same test that the Court announces today; the expectation of a reasonable litigant can be dubbed a “reasonable belief,” and realistic expectation of success on the merits can be paraphrased as “a chance of being held valid upon adjudication.”

Having established this identity of meaning, however, the Court proceeds to discuss the particular facts of this case, not in terms of its own formulation of objective baselessness, but in terms of “probable cause.” Up to a point, this is understandable; the Court of Appeals used the term “probable cause” to represent objective reasonableness, and it seems natural to use the same term when reviewing that court's conclusions. Yet as the Court acknowledges, since there is no dispute over the facts underlying the suit at issue here, the question whether that suit was objectively baseless is purely one of law, which we are obliged to consider de novo. There is therefore no need to frame the question in the court of appeals's terms. Accordingly, I would prefer to put the question in our own terms, and to conclude simply that, on the undisputed facts and the law as it stood when Columbia filed its suit, a reasonable litigant could realistically have expected success on the merits.

My preference stems from a concern that other courts could read today's opinion as transplanting every substantive nuance and procedural quirk of the common-law tort of wrongful civil proceedings into federal antitrust law. I do not understand the Court to mean anything of the sort, however, any more than I understand its citation of FRCP 11 to signal the importation of every jot and tittle of the law of attorney sanctions. Rather, I take the Court's use of the term “probable cause” merely as shorthand for a reasonable litigant's realistic expectation of success on the merits, and on that understanding, I join the Court's opinion.


Justice Stevens, with whom Justice O'Connor joins, concurring in the judgment.

While I agree with the Court's disposition of this case and with its holding “that an objectively reasonable effort to litigate cannot be sham regardless of subjective intent,” I write separately to disassociate myself from some of the unnecessarily broad dicta in the Court's opinion. Specifically, I disagree with the Court's equation of “objectively baseless” with the answer to the question whether any “reasonable litigant could realistically expect success on the merits.” There might well be lawsuits that fit the latter definition but can be shown to be objectively unreasonable, and thus shams. It might not be objectively reasonable to bring a lawsuit just because some form of success on the merits—no matter how insignificant — could be expected. With that possibility in mind, the Court should avoid an unnecessarily broad holding that it might regret when confronted with a more complicated case.

As the Court recently explained, a “sham” is the use of “the governmental process — as opposed to the outcome of that process — as an anticompetitive weapon.” The distinction between abusing the judicial process to restrain competition, and prosecuting a lawsuit that, if successful, will restrain competition, must guide any court's decision whether a particular filing, or series of filings, is a sham. The label “sham” is appropriately applied to a case, or series of cases, in which the plaintiff is indifferent to the outcome of the litigation itself, but has nevertheless sought to impose a collateral harm on the defendant by, for example, impairing his credit, abusing the discovery process, or interfering with his access to governmental agencies. It might also apply to a plaintiff who had some reason to expect success on the merits but because of its tremendous cost would not bother to achieve that result without the benefit of collateral injuries imposed on its competitor by the legal process alone. Litigation filed or pursued for such collateral purposes is fundamentally different from a case in which the relief sought in the litigation itself would give the plaintiff a competitive advantage or, perhaps, exclude a potential competitor from entering a market with a product that either infringes the plaintiff's patent or copyright or violates an exclusive franchise granted by a governmental body.

The case before us today is in the latter, obviously legitimate, category. There was no unethical or other improper use of the judicial system; instead, respondents invoked the federal court's jurisdiction to determine whether they could lawfully restrain competition with petitioners. The relief they sought in their original action, if granted, would have had the anticompetitive consequences authorized by federal copyright law. Given that the original copyright infringement action was objectively reasonable—and the district court, the court of appeals, and this Court all agree that it was — neither the respondents’ own measure of their chances of success nor an alleged goal of harming petitioners provides a sufficient basis for treating it as a sham. We may presume that every litigant intends harm to his adversary; moreover, uncertainty about the possible resolution of unsettled questions of law is characteristic of the adversary process. Access to the courts is far too precious a right for us to infer wrongdoing from nothing more than using the judicial process to seek a competitive advantage in a doubtful case. Thus, the Court's disposition of this case is unquestionably correct.

I am persuaded, however, that all, or virtually all, of the courts of appeals that have reviewed similar claims (involving a single action seeking to enforce a property right) would have reached the same conclusion. To an unnecessary degree, therefore, the Court has set up a straw man to justify its elaboration of a two-part test describing all potential shams.

Even in this Court, more complicated cases, in which, for example, the alleged competitive injury has involved something more than the threat of an adverse outcome in a single lawsuit, have produced less definite rules. Repetitive filings, some of which are successful and some unsuccessful, may support an inference that the process is being misused. California Motor Transport Co. In such a case, a rule that a single meritorious action can never constitute a sham cannot be dispositive. Moreover, a simple rule may be hard to apply when there is evidence that the judicial process has been used as part of a larger program to control a market and to interfere with a potential competitor's financing without any interest in the outcome of the lawsuit itself, see Otter Tail Power Co. It is in more complex cases that courts have required a more sophisticated analysis — one going beyond a mere evaluation of the merits of a single claim.

In one such case Judge Posner made the following observations about the subtle distinction between suing a competitor to get damages and filing a lawsuit only in the hope that the expense and burden of defending it will make the defendant abandon its competitive behavior:

But we are not prepared to rule that the difficulty of distinguishing lawful from unlawful purpose in litigation between competitors is so acute that such litigation can never be considered an actionable restraint of trade, provided it has some, though perhaps only threadbare, basis in law. Many claims not wholly groundless would never be sued on for their own sake; the stakes, discounted by the probability of winning, would be too low to repay the investment in litigation. Suppose a monopolist brought a tort action against its single, tiny competitor; the action had a colorable basis in law; but in fact the monopolist would never have brought the suit — its chances of winning, or the damages it could hope to get if it did win, were too small compared to what it would have to spend on the litigation — except that it wanted to use pretrial discovery to discover its competitor's trade secrets; or hoped that the competitor would be required to make public disclosure of its potential liability in the suit and that this disclosure would increase the interest rate that the competitor had to pay for bank financing; or just wanted to impose heavy legal costs on the competitor in the hope of deterring entry by other firms. In these examples the plaintiff wants to hurt a competitor not by getting a judgment against him, which would be a proper objective, but just by the maintenance of the suit, regardless of its outcome.

We think it is premature to hold that litigation, unless malicious in the tort sense, can never be actionable under the antitrust laws. The existence of a tort of abuse of process shows that it has long been thought that litigation could be used for improper purposes even when there is probable cause for the litigation; and if the improper purpose is to use litigation as a tool for suppressing competition in its antitrust sense, it becomes a matter of antitrust concern.

Grip-Pak, Inc. v. Illinois Tool Works, Inc., 694 F.2d 466, 472 (1982).

It is important to remember that the distinction between “sham” litigation and genuine litigation is not always, or only, the difference between lawful and unlawful conduct; objectively reasonable lawsuits may still break the law. For example, a manufacturer's successful action enforcing resale price maintenance agreements, restrictive provisions in a license to use a patent or a trademark, or an equipment lease, may evidence, or even constitute, violations of the antitrust laws. On the other hand, just because a sham lawsuit has grievously harmed a competitor does not necessarily mean that it has violated the Sherman Act. The rare plaintiff who successfully proves a sham must still satisfy the exacting elements of an antitrust demand. [Ed. Note: Such as market power or likelihood of anticompetitive effect.]

In sum, in this case I agree with the Court's explanation of why respondents’ copyright infringement action was not “objectively baseless,” and why allegations of improper subjective motivation do not make such a lawsuit a “sham.” I would not, however, use this easy case as a vehicle for announcing a rule that may govern the decision of difficult cases, some of which may involve abuse of the judicial process. Accordingly, I concur in the Court's judgment but not in its opinion.

Notes

1. If Columbia had brought this copyright infringement case in the Third or Seventh Circuits, it probably would have won. The Court's comment that “Columbia might have won its copyright suit in either the Third or the Seventh Circuit” greatly understates the strength of Columbia's copyright claim. In the circumstances, does this case provide an appropriate occasion for the Court to rule that the general standard in abusive infringement litigation cases is that the infringement plaintiff/abusive litigation defendant need only have “a reasonable belief that there is a chance that a claim may be held valid upon adjudication” and that the accused infringer must prove that “no reasonable litigant could realistically expect to secure favorable relief”?

2. What is the difference between how Justices Souter and Stevens respectively address the language of the majority opinion? What difference in long–term consequences is there between spin doctoring and dissenting?

3. Is the PREI opinion based on statutory construction of the Sherman Act — original intent of Senator Sherman and all that? On what? To what extent is Congress free to overturn the decision? To what extent does PREI apply to other, non–antitrust remedies against abusive litigation? To state law claims, such as unfair trade practices and unfair competition? See Whelan v. Abell, 48 F.3d 1247 (D.C. Cir. 1995) (intentional misrepresentations to state securities law officials, giving rise to claims for tortious interference with prospective advantage, abuse of process, malicious prosecution). In Whelan, the D.C. Circuit said:

As Noerr-Pennington rests on the conclusion that the filing of claims in court or before administrative agencies is part of the protected right to petition, it is hard to see any reason why, as an abstract matter, the common law torts of malicious prosecution and abuse of process might not in some of their applications be found to violate the First Amendment.

It added that “there is nothing inherently sacrosanct about common law torts.” However, since the conduct challenged was making deliberate false statements to the Maryland securities agency, there was not “even a potential for collision between the common law tort and the First Amendment.” The reason was that “[h]owever broad the First Amendment right to petition may be, it cannot be stretched to cover petitions based on known falsehoods,” citing California Motor Transport.

Does PREI or Noerr apply to state tort actions? Tortious interference?

Lemelson v. Wang Laboratories, Inc.
United States District Court
874 F.Supp. 430 (D. Mass. 1994)

Stearns, District Judge.

Lemelson's Amended Complaint alleges that Wang Laboratories, Inc. (“Wang”), Data General Corporation (“DG”) and Apollo Computer, Inc. (“Apollo”) have infringed four of his many U.S. patents. Defendant DG by way of a RICO counterclaim asserts that Lemelson and his agents have, through acts of mail and wire fraud, unlawfully exploited the U.S. patent system by using it to extort money through threat of legal action.1 Lemelson seeks dismissal of DG's RICO claims.

1.     Lemelson holds nearly 500 patents. Many of Lemelson's patent applications were filed in the period from late 1950 to early 1970. DG argues that it is significant that Lemelson has never used a patent to create an invention.

Background

The Amended Complaint specifies a number of the defendants’ products that allegedly incorporate technology protected by one or more of Lemelson's patents. In mid-1990, this action was stayed pending PTO reexamination proceedings. After the PTO's rescission of the stay, Wang and Apollo settled with the plaintiff.

Under FRCP 12(b)(6), in reviewing a motion to dismiss the court accepts all well-pled factual averments as true, and draws all reasonable inferences in the nonmovant's favor. While the plaintiff is obligated to set forth in the complaint “factual allegations, either direct or inferential, respecting each material element necessary to sustain recovery under some actionable legal theory,” the court should dismiss the claim only if no set of alleged facts would entitle the plaintiff to recovery.

To state a civil RICO claim, the plaintiff must allege:

• an injury to its business or property
  
  
• proximately caused by the defendant's involvement in
  
  
• an enterprise
  
  
• engaged in a pattern of racketeering activity or the collection of an unlawful debt.

1. Injury. DG alleges that there were unwarranted delays in issuing Lemelson's patents because of a scheme devised by Lemelson to continuously revise his patent applications by generalizing their technological concepts and enlarging their scope of application. By deliberately prolonging the “filing to approval” process, DG contends that Lemelson empowered himself with patent claims against many large manufacturing companies that adapted to various products the general technology recited in his patents. DG alleges that Lemelson has used litigation of these claims to extort millions of dollars from U.S. and international companies. DG claims that its injury stems from the investigations it has been forced to undertake to determine the validity of Lemelson's claims, and the costs of defending itself against Lemelson's extortionate litigation.

The United States Supreme Court has held that a RICO injury must be proximately caused by a RICO violation. See Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 496-497 (1985). Persuasive authority holds that where legal fees are expended as an intended consequence of a defendant's racketeering activities, those fees may constitute RICO damages. In the cases cited by plaintiff, litigation (or its threat) was neither an instrument of the racketeering activity nor a harm intended to the victim. By contrast, DG alleges that the taxing of victims with the prospects of vexatious litigation is an integral component of the racketeering scheme. Where, as here, the institution of a lawsuit is alleged to be an instrument of racketeering activity, I hold that the costs incurred in investigating and defending that litigation are a sufficient RICO injury to satisfy the indulgent pleading requirements of Rule 12(b)(6).

2. Enterprise. RICO broadly defines enterprise to “include any individual, partnership, corporation, association, or other legal entity, and union or group of individuals associated in fact although not a legal entity.” 18 U.S.C. § 1961(4). The Supreme Court has given the term “association” a broad definition. It embraces both legitimate and illegitimate enterprises. The unlawful enterprise must, however, be an entity distinct from the defendants charged with the conduct of its affairs. DG alleges in its counterclaim that Lemelson, his agents, his attorneys, the corporate entities under his control, and others, constitute an enterprise associated for the purpose of coercive patent enforcement through a pattern of frivolous lawsuits. For the purposes of FRCP 12(b)(6), this association-in-fact satisfies the specifications regarding a RICO “enterprise.”

3. Pattern of Racketeering Activity. In Sedima, the Supreme Court gave definition to what constitutes a “pattern” of activity for purposes of a civil RICO violation. The Court stated that “sporadic activity” was not the target of RICO. “The infiltration of legitimate business normally requires more than one ‘racketeering activity’ and the threat of continuing activity to be effective. It is this factor of continuity plus relationship which combines to produce a pattern.” Four years later the Court amplified the Sedima definition: “Congress envisioned that no more than two predicate acts would be necessary to establish a pattern of racketeering, however, while two acts are necessary, they may not be sufficient....liability depends on whether the threat of continuity is demonstrated.”

DG contends that the plaintiff has extorted millions of dollars in settlement monies through a pattern of litigation involving infringement claims based on fraudulently obtained patents. DG alleges that the predicate acts are the enterprise's repeated and continuing use of the United States mails and the interstate use of the telephone wires to further of this extortionate scheme. DG's RICO counterclaim meets the threshold requirements of FRCP 12(b)(6) and the plaintiff's motion to dismiss will be denied.

Notes

1. Does PREI apply to this RICO claim? Is it a fair interpretation of congressional intent under RICO to hold that PREI applies to a RICO claim based on abusive enforcement of patent rights? Would RICO violate the First Amendment if not so construed?

2. What would it mean for PREI to apply to a RICO claim based on abusive enforcement of patent rights? What would a RICO claimant have to allege and prove to satisfy PREI in such a case?

a. Must the RICO claimant prove that the patent infringement suits were objectively baseless (no reasonable chance of success)? All of them? Just one? Assume that the patentee sued on several different patents, of different respective strengths.

b. Would it suffice that the patents sued on were procured by fraud? All? Just one?

c. What result under RICO and PREI if Lemelson sued DG under four patents with the following results at trial. DG shows that one patent was procured by fraud and that a second was not even colorably infringed. On a third patent, DG wins on a non–infringement basis but the claim was not utterly baseless. As for the fourth patent, Lemelson shows that DG infringed a valid patent.

3. Can the issues of the preceding paragraphs be determined without interpreting the patent laws, even though the only claim asserted in the case is one made under RICO? Does that affect appellate jurisdiction over the case? (Ordinarily, the instant case would have to be appealed to the First Circuit, since it began in Massachusetts district court. Would the Federal Circuit have exclusive appellate jurisdiction instead?)

4. If PREI applies to the claim that DG asserts here against Lemelson, is PREI satisfied by DG's allegations? (Assume that FRCP 12(b) supplies the standard.)

Even assuming DG's ability to surmount a FRCP 12(b) challenge based on PREI, how likely is it to be able to obtain a judgment of RICO violation?

5. From a tactical standpoint, what advantages does a RICO claim based on abusive enforcement of patent rights have over an antitrust claim so based? What disadvantages?

6. Compare patent infringement and copyright infringement claims in regard to meeting the requirements of PREI if the infringement claim is contested as a RICO or antitrust violation. Is PREI more problematical for one or the other of the claims? Consider the question in the context of a computer program, such as on a business method, where the proprietor of the computer program asserts both types of claim against an alleged infringer.

Concluding Note on Limitations and Abusive Enforcement

This chapter began with cases in which the owner of intellectual property rights, usually a patentee, sought to enforce some restriction by an infringement suit. For example, the patentee sought to require use of ink or film that it supplied when an end user of a patented machine used the machine. After a considerable amount of thesis and antithesis, the courts eventually held that it was not infringement to disobey or foil the patentee's scheme. Hence, no injunction would issue to compel obedience (or stop contributory infringement) nor would courts award damages for the infringement. Yet, Mallinckrodt indicates continued tension or instability in the field. The interplay of thesis and antithesis is surely not over.

Although not addressed in any detail here, patentees also sought to enforce such restrictions by recourse to state contract law. As the Court indicated in Lear, in a preceding chapter, state contract law conflicting with federal patent policy would not be upheld. (However, compare Vault with ProCD.)

Cases such as Digidyne and Virtual Maintenance show parties' assertion of improper enforcement of intellectual property rights as a treble damages sword rather than simply a shield against infringement suits. Much of the litigation illustrating these developments involves efforts by computer vendors to prevent independent service organizations from competing in the maintenance, repair, and enhancement of systems that the vendor originally provided.

The PREI case reflects a possible reaction in the other direction, as did Virtual I in a different way. Finally, the Lemelson case indicates a reaction against the tendency shown in Virtual I, and it still remains unclear whether a PREI counter–reaction to that will follow.

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