Advance Business Systems & Supply Co. v. SCM Corporation

Decision Date18 August 1969
Docket Number12902.,No. 12901,12901
Citation415 F.2d 55
PartiesADVANCE BUSINESS SYSTEMS AND SUPPLY COMPANY, Appellee, v. SCM CORPORATION, Appellant. ADVANCE BUSINESS SYSTEMS AND SUPPLY COMPANY, Appellant, v. SCM CORPORATION, Appellee.
CourtU.S. Court of Appeals — Fourth Circuit

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Robert G. Levy and Robert S. Paye, Baltimore, Md. (Berryl A. Speert and Frank, Bernstein, Conaway & Goldman, Baltimore, Md., on brief), for Advance Business Systems & Supply Co.

William E. Willis, New York City (Arthur W. Machen, Jr., Baltimore, Md., J. Marshall Wellborn, New York City, and Alan D. Yarbro, Baltimore, Md., Venable, Baetjer & Howard, Baltimore, Md., and Sullivan & Cromwell, New York City, on brief), for SCM Corp.

Before SOBELOFF, BRYAN and BUTZNER, Circuit Judges.

SOBELOFF, Circuit Judge:

This private antitrust action involves alleged violations by the defendant, SCM Corporation, of sections 1 and 2 of the Sherman Act and section 3 of the Clayton Act. After a non-jury trial, the District Court granted the plaintiff, Advance Business Systems and Supply Company, both treble damages of $50,142 and injunctive relief based on certain of the claimed antitrust violations. SCM appeals from the judgment of liability and in addition challenges as excessive the award of attorneys' fees of $35,875. Advance cross-appeals, contending that the District Court erred in failing to find additional antitrust violations and in failing to award damages claimed by the plaintiff in respect to them. Because both parties are appealing from the judgment of the District Court, they will, for clarity, be referred to in the opinion as plaintiff and defendant.

Defendant SCM is a New York corporation which manufactures and sells, among other products, office copying machines and the paper and other supplies used in the machines. Advance, the plaintiff, is a Maryland corporation formed in 1964 to distribute paper and supplies for copy machines, primarily in the Baltimore area. It is a franchised dealer for Nashua Corporation, a manufacturer and distributor of such paper and supplies on a nationwide basis.

As the findings of the District Court indicate, the office copying machine market is actively competitive, with customers changing readily from one copier to another. Manufacturers and distributors supply many different models of copy machines using a variety of copying processes. Xerox Corporation, the industry leader, markets the only machines using the "indirect electrostatic process";1 in 1967 it controlled approximately 60% of the office copying market in the United States. SCM, utilizing the direct electrostatic process in its copiers, has about 3% of the market, measured either by the number of machines sold or rented or by the total number of copies made annually on the several brands of machines.

Since the sale of supplies, particularly paper, is often more profitable than the sale or rental of the machines themselves, competition is especially sharp in this branch of the copying industry. SCM copiers, employing the direct electrostatic process, will make copies only on special coated paper, sold by SCM and other manufacturers and distributors, including the plaintiff. In 1967, SCM sold about 13% of all copies made on direct electrostatic machines; a number of other manufacturers of direct electrostatic copying equipment, including Dennison and Bruning, had larger shares of the market. SCM's share of the market has been shrinking since 1964, when it sold approximately 37% of all direct electrostatic copies.

SCM and other manufacturers make copy machines available on three alternative bases: purchase, rental, or lease from an independent leasing company. Customers who rent machines generally pay on a "machine click" or "copy service" basis, the rental varying with the number of copies actually made on the particular machine. Copying supplies for use with the machines are sold both by machine manufacturers and by paper manufacturers which, like Nashua Corporation, produce coated paper designed for use in the various machines.

SCM sells most of the supplies used with SCM copiers, but since 1965 it has faced increasing competition in this area, particularly from Nashua Corporation and its dealers, including the plaintiff. The District Court found that approximately 90% of the competition SCM encountered in the sale of electrostatic paper in Maryland was from Nashua.

In the present litigation, Advance challenges a number of SCM's practices in the copy supply market as forbidden under the antitrust laws. The complaint alleged that SCM by various actions unreasonably restrained trade; that it attempted to monopolize and conspired to monopolize trade in the manufacture and sale of electrostatic copying supplies; and that it impermissibly tied sales of its electrostatic copying paper to its machines, other supplies, service contracts, and warranties. The District Court found that SCM had violated the antitrust laws in three respects, all involving tying arrangements made illegal either by section 3 of the Clayton Act or by section 1 of the Sherman Act. SCM contests that judgment here.

I. Tying Arrangements

Tying arrangements may be defined as agreements under which the vendor will sell one product only if the purchaser agrees to buy another product as well. As a result, competition is curbed in two ways. First, the buyer is prevented from seeking alternative sources of supply for the tied product; second, competing suppliers of the tied product are foreclosed from that part of the market which is subject to the tying arrangement. Whenever a tie-in is successful, competition is inevitably curtailed; moreover, tie-ins can rarely be justified for they "serve hardly any purpose beyond the suppression of competition." Standard Oil Company of Cal. & Standard Stations v. United States, 337 U.S. 293, 305-306, 69 S.Ct. 1051, 1058, 93 L.Ed. 1371 (1949).

For these reasons, tie-ins have been held illegal under both section 3 of the Clayton Act2 and section 1 of the Sherman Act. Northern Pacific Ry. v. United States, 356 U.S. 1, 78 S.Ct. 514, 2 L.Ed. 2d 545 (1958) (§ 1); International Salt Co. v. United States, 332 U.S. 392, 68 S.Ct. 12, 92 L.Ed. 20 (1947) (§§ 1 and 3); International Business Machines Corp. v. United States, 298 U.S. 131, 56 S.Ct. 701, 80 L.Ed. 1085 (1936) (§ 3). The standards of illegality under the two statutes are not identical, however, and therefore the tying practices of SCM found illegal by the District Court must be examined separately in light of the particular statute applicable to each specific arrangement.

Two of the three challenged practices to be discussed involve tie-ins between rented SCM machines and SCM supplies and are therefore covered by the Clayton Act, which applies only to tie-ins involving "goods, wares, merchandise, machinery, supplies, or other commodities." 15 U.S.C. § 14. In the third arrangement, however the sale of SCM paper is tied to SCM service contracts, which do not come within the terms of the Clayton Act. To establish liability, the latter practice must, therefore, be shown to be "unreasonable" under section 1 of the Sherman Act.3

A. The Clayton Act

In section 3 of the Clayton Act, Congress singled out tying arrangements and "authoritatively determined that those practices are detrimental where their effect may be to lessen competition." Standard Oil Co. of Cal. & Standard Stations v. United States, 337 U.S. 293 at 311, 69 S.Ct. 1051 at 1060. If a transaction may be characterized as a tie-in between items covered by the Clayton Act, therefore, it is automatically illegal under section 3 whenever "a substantial volume of commerce in the `tied' product is restrained." Times-Picayune Publishing Co. v. United States, 345 U.S. 594, 608, 73 S.Ct. 872, 97 L.Ed. 1277 (1953).

1. The Model 55

The first antitrust violation found by the District Court in the present case involved SCM's practice of marketing its Model 55 copier solely on a "copy service" basis. Under this plan, the customer pays a single charge based on the number of copies run on the machine as recorded by a meter, and supplies and service are included in the single charge. Since the plan forecloses all competition for supplies to be used with Model 55, the District Court concluded that it was illegal "unless and until Model 55 is also offered for rental on a reasonable basis without the requirement that SCM paper be purchased."

On appeal, SCM urges that this conclusion is erroneous in four respects. First, it contends that the "copy service" plan is not illegal because each of its components — machine and paper — is separately available, and "where the buyer is free to take either product by itself there is no tying problem even though the seller may also offer the two items as a unit at a single price." Northern Pacific Ry. v. United States, 356 U.S. 1, 6, 78 S.Ct. 514, 518, n. 4 (1958).

Although Model 55 was originally distributed only on a copy service basis, the District Court found that since March 1, 1967, the machine has also been offered separately for sale and lease.4 Purchase of a copying machine for $4250, however, is clearly not the economic equivalent of rental at a charge of approximately $.035 per copy. The lease arrangement which SCM suggests as a theoretical alternative to rental (there is no indication in the record that a Model 55 has in fact ever been leased) envisages an intermediate sale of the machine by SCM to an independent leasing company, which in turn leases the machine to the customer. The record is devoid of evidence that such a leasing arrangement represents a reasonable alternative to direct rental by SCM to the user of Model 55, in respect to price, machine maintenance and service, or practical availability. Consequently, Model 55 and SCM supplies cannot realistically be regarded as...

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