U.S. v. Eastman Kodak Co.

Decision Date04 August 1995
Docket NumberD,No. 1364,1364
Citation63 F.3d 95
Parties, 1995-2 Trade Cases P 71,078 UNITED STATES of America, Plaintiff-Appellant, v. EASTMAN KODAK CO., A Corporation of New Jersey, and Eastman Kodak Co., A Corporation of New York, Defendants-Appellees. ocket 94-6190.
CourtU.S. Court of Appeals — Second Circuit

Diane P. Wood, Deputy Asst. Atty. Gen., Washington, DC (Anne K. Bingaman, Asst. Atty. Gen., Catherine G. O'Sullivan, Robert B. Nicholson, Robert J. Wiggers, Dept. of Justice, Washington, DC, of counsel) for plaintiff-appellant.

David M. Lascell, Rochester, NY (Hallenbeck, Lascell, Norris & Zorn, Rochester, NY, Robert B. Bell, Wiley, Rein & Fielding, Washington, DC, of counsel) for defendants-appellees.

Before MINER and JACOBS, Circuit Judges, and CEDARBAUM, District Judge. *

MINER, Circuit Judge:

Plaintiff-appellant, the United States of America, appeals from an order entered on May 20, 1994 in the United States District Court for the Western District of New York (Telesca, Chief Judge ) granting a motion made by defendant-appellee Eastman Kodak Co. ("Kodak") to terminate two antitrust consent decrees. The first decree was entered in 1921 ("the 1921 Decree") after a finding by the district court that Kodak had monopolized the sale of cameras and photographic supplies. The 1921 Decree continues to impose a variety of restrictions on Kodak's business practices. Most notably, Section X of the 1921 Decree prevents Kodak from selling "private label" film, which is film marketed under a brand name other than Kodak's, typically that of a retail outlet. The second decree was entered in 1954 ("the 1954 Decree") without any adjudication of law or facts. Section V of the 1954 Decree continues to prevent Kodak from selling its film in a "bundle" with its photofinishing services.

After a nine-day evidentiary hearing, the district court granted Kodak's motion to terminate both decrees. See United States v. Eastman Kodak Co., 853 F.Supp. 1454, 1487-88 (W.D.N.Y.1994). In deciding to terminate the 1921 Decree, the district court relied on its findings that Kodak no longer possesses market power over the sale of film and that the elimination of the decree's remaining provisions would benefit consumers. With respect to the 1954 Decree, the district court found that the purpose of the decree--the

creation of a competitive photofinishing market--had been accomplished, that neither Kodak nor its affiliates had market power in the photofinishing or film markets, and that allowing Kodak to sell film and photofinishing as a bundle would enhance competition. For the reasons that follow, we affirm the order of the district court terminating both the 1921 and the 1954 Decrees.

BACKGROUND
1. The Consent Decrees
a. The 1921 Decree

The 1921 Decree arose out of antitrust enforcement proceedings initiated by the government more than 80 years ago. These proceedings led to a finding by the district court in 1915 that Kodak had monopolized the amateur camera, film, and photofinishing industries through acquisitions and a variety of exclusionary practices. See United States v. Eastman Kodak Co., 226 F. 62, 79-80 (W.D.N.Y.1915), appeal dismissed, 255 U.S. 578, 41 S.Ct. 321, 65 L.Ed. 795 (1921). Six years later, while its appeal of the district court's decision still was pending in the Supreme Court, Kodak entered into the 1921 Decree with the government and withdrew its appeal.

The 1921 Decree imposed both short- and long-term obligations on Kodak. In the short term, the decree required Kodak to divest itself of many of its acquisitions so as to "effectually dissolve the combination found to exist in violation of the [antitrust] statute." Id. at 81. These provisions were satisfied long ago. In the longer term, the consent decree proscribed certain sales and distribution practices that the government believed to be anti-competitive. A number of these restrictions remain in force today. Section X of the decree prevents Kodak from selling private-label film by requiring its products to "be labeled in such manner as to show clearly that the [product] is manufactured by [Kodak]." Sections VI and VII of the decree enjoin Kodak from entering into exclusive dealing contracts and from imposing other restraints on its dealers.

b. The 1954 Decree

The 1954 Decree concerned Kodak's practice of tying its photographic film and photofinishing services. Until the 1954 Decree, the sales price of Kodak color film included Kodak photofinishing. Since Kodak sold approximately 90 percent of the color film in the United States during that time, this practice allowed Kodak to maintain a 90-percent share of the photofinishing market as well. The government filed suit to stop this practice, and, prior to trial, Kodak and the government entered into the 1954 Decree. The decree principally required Kodak to make its color photofinishing technology available to competitors. Kodak fully complied with this requirement. The only provision of the 1954 Decree that remains operative today is Section V, which prevents Kodak from "[t]ying or otherwise connecting in any manner the sale of its color film to the processing thereof." The broad language of Section V precludes Kodak from engaging in the otherwise lawful practice of bundling its film and photofinishing services.

2. Today's Markets for Film and Photofinishing
a. Film

The marketplace for film has changed considerably in the last 80 years. Today, five companies manufacture all of the amateur color negative film (hereinafter "film") sold in the United States: Kodak, Fuji, Konica, Agfa, and 3M. All five are "well-financed, billion-dollar, multinational corporations selling film all over the world." 853 F.Supp. at 1471. On a world-wide basis, Kodak is the leading seller of film, with a 36-percent market share, followed closely by Fuji, which has 34 percent of the market. Id. at 1471 & n. 10. Konica has a 16-percent share of the world-wide market, followed by Agfa, with ten percent, and 3M, which has a four-percent market share.

In the United States, Kodak is far and away the leading seller of film with 67 percent of the market. Id. at 1472. It is followed by Fuji, which has between eleven and twelve percent of the United States market. When market share is measured in dollar Notwithstanding Kodak's success in the United States, photographic experts agree that there is very little difference in quality among the various brands of film. Kodak and Fuji films are both considered excellent, and "[i]t would be very hard for any one to tell a good Fuji print from a good Kodak print." Konica and Agfa film, while slightly coarser-grained, also produce very good photographs. While 3M film is of slightly lower quality than the four other brands, it still is of acceptable quality to most consumers.

                terms, rather than in unit sales, Kodak's market share in the United States is even more impressive.  Kodak accounts for 75 percent of United States film sales in dollar terms. 1  Id.   Part of Kodak's high market share in the United States is attributable to the large number of retail outlets that carry its products.  Almost all retail outlets that sell film carry Kodak film.  Only thirty percent of retail outlets carry Fuji film.  However, Fuji film tends to be carried by mass-merchandisers, such as K-Mart and Wal-Mart, which account for between 45 and 50 percent of all film sales.  Id. at 1474
                
b. Photofinishing

Today, there are three principal types of photofinishers: mail-order macrolabs, wholesale and captive macrolabs, and minilabs. See 853 F.Supp. at 1482-84. Mail-order photofinishers operate large film processing labs ("macrolabs") and often have the lowest prices, but with the disadvantage of a longer turn-around time. Construction of a macrolab requires a several million dollar investment and takes six to nine months. Wholesale or "captive" macrolabs process film dropped off at retailers, such as drug stores. 2 Wholesale labs tend to process film in two or three days, but also can provide overnight service at an additional price. Minilabs, the third and newest type of photofinisher, are installed at retail locations, such as supermarkets, to provide on-site photofinishing. A new minilab can be purchased for as little as $40,000 and can provide one-hour film developing. However, minilabs have a somewhat higher per-print cost and cannot handle the volume of work required by large retail customers. In 1992, minilabs and wholesale labs each processed 36 percent of the film in the United States, captive labs processed 21 percent, and mail-order labs processed only 7 percent.

In the last ten years, Kodak has reclaimed a large share of the photofinishing market through acquisitions. The most important was a joint venture to establish Qualex, Inc., a company that accounts for approximately 30 percent of the overall United States photofinishing business. Id. at 1486. In the United States, Qualex is the largest wholesale photofinisher, with more than 70 percent of the wholesale market, and the second largest operator of minilabs.

3. Proceedings Below

After a nine-day evidentiary hearing, the district court granted Kodak's motion to terminate both the 1921 and 1954 Consent Decrees in their entireties. See 853 F.Supp. at 1487-88. The first issue addressed in the district court's comprehensive opinion was the legal standard under which to evaluate Kodak's request to terminate or modify the consent decrees. The district court decided that the "flexible" standard that the Supreme Court recently set forth in Rufo v. Inmates of Suffolk County Jail, 502 U.S. 367, 112 S.Ct. 748, 116 L.Ed.2d 867 (1992), should be applied. See 853 F.Supp. at 1465. Applying Rufo, the district court reasoned that the consent decrees could be modified or terminated on the basis of significant changes in market conditions. See id. at 1487-88.

With respect to the 1921 Decree, the district court first...

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