Advance Business Systems & Supply Co. v. SCM Corporation

• Decision Date: 11 July 1968
• Docket Number: Civ. No. 18259.
• Citation: 287 F. Supp. 143
• Parties: ADVANCE BUSINESS SYSTEMS & SUPPLY COMPANY, a body corporate of the State of Maryland, v. S C M CORPORATION, a body corporate of the State of New York.
• Court: U.S. District Court — District of Maryland

287 F. Supp. 143

ADVANCE BUSINESS SYSTEMS & SUPPLY COMPANY, a body corporate of the State of Maryland, v. S C M CORPORATION, a body corporate of the State of New York.

Civ. No. 18259.

United States District Court D. Maryland.

June 20, 1968.

Supplemental Opinion July 11, 1968.

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Robert G. Levy, Lawrence F. Rodowsky, Berryl A. Speert, Robert S. Paye, and Frank, Bernstein, Conaway & Goldman, Baltimore, Md., for plaintiff.

William E. Willis, J. Marshall Wellborn, Jr., and Sullivan & Cromwell, New York City, and Arthur W. Machen, Jr., Alan Yarbro, and Venable, Baetjer & Howard, Baltimore, Md., for defendant.

THOMSEN, Chief Judge.

This is a private antitrust action tried before the Court without a jury, in which plaintiff seeks to recover treble damages and other relief for alleged violations by defendant of sections 1 and 2 of the Sherman Act (15 U.S.C.A. §§ 1, 2) and section 3 of the Clayton Act (15 U.S.C.A. § 14).

Defendant (SCM) manufactures and sells many products, including office copying machines which use the electrostatic process described below, and sells paper and other supplies for use in those machines.

Plaintiff is engaged in the distribution and sale in Maryland of paper and other supplies for use in SCM and other office copying machines; it is a franchised dealer for Nashua Corporation (Nashua), which manufactures and distributes such paper and other supplies on a nationwide basis.

Briefly, plaintiff contends that SCM has engaged in various unfair and restrictive practices in unreasonable restraint of trade; has attempted to monopolize interstate trade and commerce in the manufacture, sale and distribution of paper for its electrostatic copying machines; has conspired with its customers, the users of such machines, to monopolize such trade and commerce; has tied-in sales of its electrostatic copying paper and other supplies to its machines, to its service contracts and to its warranties; and at one time tied-in sales of its paper to other necessary supplies.¹

Copying Machines

Until recently, the reproduction, duplicating, blueprinting or photostating of documents was usually done by separate business concerns or by specialized units of large organizations. In this decade, however, following the success of the original Xerox copiers, many copying machines designed to produce low-cost copies in relatively small volume have made their appearance, and since 1965 several manufacturers have introduced copier/duplicators, which are much faster than the early copiers.²

SCM manufactures and sells under its name and trademark office copying machines which use the electrostatic process under license from Xerox Corporation, the owner of the basic patent.³ Xerox makes the only copying machines which use the "indirect" electrostatic process.⁴ The SCM machines (like those of several other manufacturers) use the "direct" electrostatic process. Light is reflected from the original onto a coated paper which has been electrically charged. The image is formed on the coated paper by a liquid "toner" and the copy is dried in the machine.

In 1962 SCM introduced its first copying machine, Model 33, a desk top model, capable of making only one copy at a time. Model 44, introduced about 1964, is also a desk top model, but can make multiple copies. Models 66 and 88, introduced in 1967, are similar to Models 33 and 44, but faster.⁵ In early 1966, SCM commenced distribution of its Model 55, a console machine which, unlike the other SCM models, is capable of copying from three dimensional objects such as pages of books.⁶

Methods of Distribution

Copying machines are generally available on several bases: (1) purchase from the manufacturer or an authorized distributor; (2) lease, involving a sale by the manufacturer to a leasing concern, and a lease or a conditional sale by the leasing concern to the user; (3) rental from the manufacturer, which may be on: (a) the "machine click" basis, used by Xerox, i. e., a charge for each use of the machine to make a copy, the paper and toner being bought separately from Xerox or others; or (b) the "copy service" basis, used by SCM for its Model 55, i. e., a charge for each use of the machine, including paper and toner, which are supplied by SCM as needed.

Competition—Machines

The manufacturers and distributors of office copying machines are in active competition with each other. The competition continues even after one of the manufacturers or distributors has rented or sold a machine to a customer, because the customer can often be persuaded to rent a different type of machine or to trade-in a machine which he owns.

The several machines have various advantages and disadvantages. Xerox has been the leader. SCM has never acquired more than 3 or 4 percent of the office copying business, whether measured by the number of machines sold or rented, or by the total annual number of copies made on the several brands of machines.⁷

Competition—Paper and Replenisher

The sale of supplies, particularly paper, for use with their copying machines, is an important source of profit to the several manufacturers, often exceeding the profit from the machines themselves.⁸

The copying machines which operate on the direct electrostatic process (SCM, Bruning, Apeco, Dennison and a few others) utilize a specially coated paper. Most of those manufacturers produce or purchase and sell paper, which, although designed particularly for their own machines, may be used with generally satisfactory results in other machines employing the direct electrostatic process. Several paper manufacturers, including Nashua, also produce coated paper suitable for use in these machines.

The desirable qualities for such paper, including paper for use in SCM machines, are numerous and to some extent antithetical; e. g., for storage and other purposes, the lighter and thinner the paper the better, but if it is too light or thin, it is likely to cause paper jams in the machines. Among the characteristics for which SCM tests paper are thinness, stiffness, tackiness, adhesion and conductivity.⁹ All usable papers are the result of some design compromises.

From the time it introduced its first machines until 1967, SCM purchased all the coated paper which it sold.¹⁰ During 1965 and 1966, SCM purchased some paper from Nashua for sale in Canada.

Although some coated paper sold by others has not been suitable for use in SCM machines, the paper manufactured by Nashua and sold by it and by plaintiff has always been at least as suitable as SCM paper for use in SCM machines, and often has been better for many purposes than SCM paper, although for copying certain kinds of originals SCM paper has been better. Nashua paper has been no more likely to cause jams than SCM paper and is not likely to damage the SCM machines because of flakiness or for any other reason.

The solution containing positively charged carbon particles which adhere to the electrostatic copying paper to form a legible image is generally referred to as "replenisher".¹¹ In 1961 the Microstatics Division of SCM developed a formula for replenisher, which was manufactured for SCM by a contractor until early 1967, when SCM itself began to produce replenisher. Nashua purchases from other suppliers the replenisher which plaintiff sells. That replenisher will not harm SCM machines.

In 1965 SCM sold about 80% of the supplies (paper and replenisher) used in SCM machines; in 1966, including the Model 55, about 75%; and in 1967, about 70%.

Restrictive Policies and Practices

In 1962, when SCM introduced its first copying machine, it sold its paper and replenisher separately. In late 1963 and early 1964, however, competitive brands of electrostatic copying paper began to appear and to threaten the natural monopoly which SCM had theretofore enjoyed in the sale of paper for its own machines. In early 1964 SCM instituted certain practices, primarily to meet that competition.

Replenisher. In February 1964, SCM adopted a policy that replenisher should be purchased only with SCM paper; one cartridge of replenisher was furnished with each 5,000 sheets of paper. Previously SCM had sold replenisher at a price of $1.75 per cartridge. In April 1964 the policy was again changed. Replenisher could be purchased separately at $45.00 per half-pint cartridge or $85.00 per pint, but was provided without additional charge when SCM paper was purchased. Sometime in 1964 other toners appeared on the market. In March 1965 the price of replenisher was cut in half, to $22.50 per half-pint cartridge, and was reduced to $7.50 per half-pint in the summer of 1967.

Sale of Machines. SCM has continually sought to prevent sales of its copiers directly or indirectly to "paper merchants", such as plaintiff, who need them in order to compete more effectively with SCM in the sale of paper for use in SCM machines.¹²

Parts. SCM has always supplied or sold parts in connection with SCM service to the owners or renters of machines, but when plaintiff has attempted to purchase parts for use on the SCM machines which it was servicing for its customers it has from time to time been subjected to delays which forced it to purchase several second-hand SCM machines and dismantle them in order to obtain parts, although plaintiff was able to purchase some parts from Nashua.¹³ Plaintiff's difficulty in obtaining parts was used as a sales tool by SCM supply salesmen.

Service. A customer is given service by SCM without additional charge under SCM's rental and copy service programs. One who purchases a machine from SCM is given free service in accordance with the terms of SCM's guarantees. For customers who have either purchased their machines or leased them from a leasing company, SCM provides service on either a time-material basis or under a "service agreement". In its service agreement SCM undertakes, on the basis of a single annual...