Image Technical Services, Inc. v. Eastman Kodak Co., J-E-S-P

• Decision Date: 26 August 1997
• Docket Number: J-E-S-P,Nos. 96-15293,96-15296,s. 96-15293
• Citation: 125 F.3d 1195,44 USPQ2d 1065
• Parties: 1997-2 Trade Cases P 71,908, 44 U.S.P.Q.2d 1065, 97 Cal. Daily Op. Serv. 7197 IMAGE TECHNICAL SERVICES, INC.;Company, Inc.; Shields Business Machines, Inc.; Micro-Graphic Services, Inc.; Omni Micro-Graphic Services, Inc.; Atlanta General Microfilm Co., Inc.; Datek Ltd; B.C.S. Technical Services, Inc.; CPO Ltd, Inc.; Advanced Systems Service, Inc.; Amtech Equipment Maintenance, Inc., Plaintiffs-Appellees, v. EASTMAN KODAK CO., Defendant-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1195

125 F.3d 1195

1997-2 Trade Cases P 71,908, 44 U.S.P.Q.2d 1065,

97 Cal. Daily Op. Serv. 7197

IMAGE TECHNICAL SERVICES, INC.; J-E-S-P Company, Inc.;

Shields Business Machines, Inc.; Micro-Graphic Services,

Inc.; Omni Micro-Graphic Services, Inc.; Atlanta General

Microfilm Co., Inc.; Datek Ltd; B.C.S. Technical Services,

Inc.; CPO Ltd, Inc.; Advanced Systems Service, Inc.;

Amtech Equipment Maintenance, Inc., Plaintiffs-Appellees, v. EASTMAN KODAK CO., Defendant-Appellant.

Nos. 96-15293, 96-15296.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Sept. 19, 1996.

Decided Aug. 26, 1997.

Donn P. Pickett and Daniel M. Wall, McCutchen, Doyle, Brown & Enersen, San Francisco, CA, for defendant-appellant.

Maxwell M. Blecher, Blecher & Collins, Los Angeles, CA, for plaintiffs-appellees.

Appeal from the United States District Court for the Northern District of California; A. Wallace Tashima, District Judge, Presiding. D.C. No. CV-87-01686-AWT.

Before: BEEZER and THOMPSON, Circuit Judges, GILLMOR, District Judge. ^*

Opinion by Judge BEEZER; Partial Concurrence and Partial Dissent by Judge GILLMOR.

BEEZER, Circuit Judge:

Plaintiffs-Appellees Image Technical Services, and ten other independent service organizations ("ISOs") that service Kodak photocopiers and micrographic equipment sued the Eastman Kodak Co. ("Kodak") for violations of the Sherman Act. The ISOs alleged that Kodak used its monopoly in the market for Kodak photocopier and micrographic parts to create a second monopoly in the equipment service markets. A jury verdict awarded treble damages totaling $71.8 million. The district court denied Kodak's post trial motions and entered a ten year permanent injunction requiring Kodak to sell "all parts" to ISOs. Kodak filed a timely appeal, challenging the jury's verdict, the ISOs' evidence, the jury instructions, the damage awards and the permanent injunction. Kodak also seeks reversal on the basis of an alleged biased juror.

This appeal raises questions relating to the application of antitrust principles upon a finding that a monopolist unilaterally refused to deal with competitors. We also address overlapping patent and copyright issues and their significance in the antitrust context.

We have jurisdiction pursuant to 28 U.S.C § 1291 and we affirm in part, reverse in part and remand with instructions to amend the injunction.

I

Kodak manufactures, sells and services high volume photocopiers and micrographic (or microfilm) equipment. Competition in these markets is strong. In the photocopier market Kodak's competitors include Xerox, IBM and Canon. Kodak's competitors in the micrographics market include Minolta, Bell & Howell and 3M. Despite comparable products in these markets, Kodak's equipment is distinctive. Although Kodak equipment may perform similar functions to that of its competitors, Kodak's parts are not interchangeable with parts used in other manufacturers' equipment.

Kodak sells and installs replacement parts for its equipment. Kodak competes with ISOs in these markets. Kodak has ready access to all parts necessary for repair services because it manufactures many of the parts used in its equipment and purchases the remaining necessary parts from independent original-equipment manufacturers. In the service market, Kodak repairs at least 80% of the machines it manufactures. ISOs began servicing Kodak equipment in the early 1980's, and have provided cheaper and better service at times, according to some customers. ISOs obtain parts for repair service from a variety of sources, including, at one time, Kodak.

As ISOs grew more competitive, Kodak began restricting access to its photocopier and micrographic parts. In 1985, Kodak stopped selling copier parts to ISOs, and in 1986, Kodak halted sales of micrographic parts to ISOs. Additionally, Kodak secured agreements from their contracted original-equipment manufacturers not to sell parts to ISOs. These parts restrictions limited the ISOs' ability to compete in the service market for Kodak machines. Competition in the service market requires that service providers have ready access to all parts.

Kodak offers annual or multi-year service contracts to its customers. Service providers generally contract with equipment owners through multi-year service contracts. ISOs claim that they were unable to provide similar contracts because they lack a reliable supply of parts. Some ISOs contend that the parts shortage forced them out of business.

In 1987, the ISOs filed this action against Kodak, seeking damages and injunctive relief for violations of the Sherman Act. The ISOs claimed that Kodak both: (1) unlawfully tied the sale of service for Kodak machines with the sale of parts in violation of § 1 of the Sherman Act, and (2) monopolized or attempted to monopolize the sale of service for Kodak machines in violation of § 2 of the Sherman Act.

Kodak moved for summary judgment prior to discovery. The district court allowed brief discovery and then granted summary judgment in Kodak's favor. Image Technical Serv., Inc. v. Eastman Kodak Co., 1988 WL 156332 (N.D.Cal.). We reversed. Image Technical Serv., Inc. v. Eastman Kodak Co., 903 F.2d 612 (9th Cir.1990).

Kodak appealed to the Supreme Court, which affirmed the denial of summary judgment. The Court held that the record disclosed sufficient factual disputes to survive summary judgment on both the § 1 and § 2 claims. Eastman Kodak Co. v. Image Technical Serv., Inc., 504 U.S. 451, 112 S.Ct. 2072, 119 L.Ed.2d 265 (1992). The Supreme Court also held that Kodak's lack of market power in the market for high volume photocopiers and micrographic equipment did not preclude, as a matter of law, the possibility of market power in the derivative aftermarkets for parts and service. Id. at 477, 112 S.Ct. at 2087. The Court recognized that resolution of other key issues required a more complete record. The Court concluded:

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.

504 U.S. at 486, 112 S.Ct. at 2092.

After remand, the case proceeded to trial in the district court. Before closing arguments, the ISOs withdrew their § 1 tying and conspiracy claims. The remaining § 2 attempted monopolization and monopolization claims were submitted to the jury. A unanimous verdict awarded damages to the ISO's totaling $71.8 million after trebling. ¹ Ten ISOs were awarded damages covering lost service profits in the amount of $12,172,900 (before trebling) and six ISOs were awarded damages covering lost profits for used equipment sales totaling $11,775,400 (before trebling).

After accepting the verdict, the district court crafted a ten year injunction requiring Kodak to sell all parts to ISOs on "reasonable and nondiscriminatory terms and prices." The injunction required Kodak to sell: (1) all parts for Kodak equipment; (2) all parts described in Kodak's Parts Lists; (3) all parts of supply items that are field replaceable by Kodak technicians; (4) all service manuals and price lists; and (5) all tools or devices "essential to servicing Kodak equipment."

II

Section 2 of the Sherman Act prohibits monopolies, attempts to form monopolies, as well as combinations and conspiracies to do so. 15 U.S.C. § 2. ² The ISOs presented evidence in support of two § 2 theories: attempted monopolization and monopolization. They alleged, and the jury concluded, that Kodak used its monopoly over Kodak photocopier and micrographic parts to attempt to create and actually create a second monopoly over the service markets.

To prevail on a § 2 attempt claim, the ISOs were required to establish: "(1) a specific intent to control prices or destroy competition; (2) predatory or anticompetitive conduct directed at accomplishing that purpose; (3) a dangerous probability of achieving 'monopoly power,' and (4) causal antitrust injury." Rebel Oil Co., Inc. v. Atlantic Richfield, Co., 51 F.3d 1421, 1434 (9th Cir.) (citing McGlinchy v. Shell Chem. Co., 845 F.2d 802, 811 (9th Cir.1988)), cert. denied, --- U.S. ----, 116 S.Ct. 515, 133 L.Ed.2d 424 (1995). The requirements of a § 2 monopolization claim are similar, differing primarily in the requisite intent and the necessary level of monopoly power. See California Computer Products, Inc. v. International Business Machines Corp., 613 F.2d 727, 736-37 (9th Cir.1979). To prevail on a § 2 monopoly claim the ISOs were required to prove that Kodak: (1) possessed monopoly power in the relevant market and (2) willfully acquired or maintained that power. Kodak, 504 U.S. at 481, 112 S.Ct. at 2089-90 (citing United States v. Grinnell Corp., 384 U.S. 563, 570-71, 86 S.Ct. 1698, 1703-04, 16 L.Ed.2d 778 (1966)). Section 2 plaintiffs must also establish antitrust injury. See Cost Management Services, Inc. v. Washington Natural Gas Co., 99 F.3d 937, 949 (9th Cir.1996).

Kodak primarily attacks the ISOs' monopoly claim because success would likely upset the "attempt" verdict as well. We now address Kodak's appeal against the background of the Supreme Court's opinion in Kodak and the extensive record developed at trial.

A. Market Power

Kodak first attacks the ISOs' monopoly power theory and its supporting evidence. Monopoly power is "the power to control prices or exclude competition." Grinnell, 384 U.S. at 571, 86 S.Ct. at 1704 (quoting United States v. E.I. du Pont de Nemours & Co., 351 U.S. 377, 391, 76 S.Ct. 994, 1005, 100 L.Ed. 1264 (1956)). As noted, § 2 monopoly claims require a showing of monopoly power, commonly referred to as market power. See Cost Management Services, 99 F.3d at 950 n. 15. Market power can...