Image Technical Service, Inc. v. Eastman Kodak Co.

• Decision Date: 01 May 1990
• Docket Number: J-E-S-P,No. 88-2686,88-2686
• Citation: 903 F.2d 612
• Parties: , 1990-1 Trade Cases 69,013 IMAGE TECHNICAL SERVICE, INC., a California corporation;Company, Inc., a New Jersey corporation; Shields Business Machines, Inc., a Pennsylvania corporation; Micrographic Services, Inc., a Missouri corporation; Micro Maintenance, Inc., an Illinois corporation; Atlanta General Microfilm Co., Inc., a Georgia corporation; Roger Katona, doing business as G. & S. Electronics; Amtech Equipment Maintenance, Inc., a Minnesota corporation; Advanced Systems Services, Inc., a Colorado corporation; B.C.S. Technical Services, Inc., a Colorado corporation; Bob Ingle, Inc., a Missouri corporation; Data Prox Equipment Co., a New Jersey corporation; Fisher Micrographics, Inc., a Missouri corporation; I.O.A. Data Corp., a New York corporation; Searle Enterprises, doing business as Micro Image, Inc.; Midwest Microfilm Equipment & Service, Inc., a Minnesota corporation; Omin Micrographic Services, Inc.; and CPO, Ltd., a California corporation, Plaintiffs-Appellants, v. EASTMAN KODAK CO., a New Jersey corporation, Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 612

903 F.2d 612

58 USLW 2665, 1990-1 Trade Cases 69,013

IMAGE TECHNICAL SERVICE, INC., a California corporation J-E-S-P Company, Inc., a New Jersey corporation; Shields Business Machines, Inc., a Pennsylvania corporation Micrographic Services, Inc., a Missouri corporation; Micro Maintenance, Inc., an Illinois corporation; Atlanta General Microfilm Co., Inc., a Georgia corporation; Roger Katona doing business as G. & S. Electronics; Amtech Equipment Maintenance, Inc., a Minnesota corporation; Advanced Systems Services, Inc., a Colorado corporation; B.C.S Technical Services, Inc., a Colorado corporation; Bob Ingle, Inc., a Missouri corporation; Data Prox Equipment Co., a New Jersey corporation; Fisher Micrographics, Inc., a Missouri corporation; I.O.A. Data Corp., a New York corporation; Searle Enterprises, doing business as Micro Image, Inc.; Midwest Microfilm Equipment & Service, Inc., a Minnesota corporation; Omin Micrographic Services, Inc.; and CPO, Ltd., a California corporation, Plaintiffs-Appellants, v. EASTMAN KODAK CO., a New Jersey corporation, Defendant-Appellee.

No. 88-2686.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted April 10, 1989.

Decided May 1, 1990.

James A. Hennefer, Law Offices of James A. Hennefer, San Francisco, Cal., for plaintiffs-appellants.

Donn P. Pickett, McCutchen, Doyle, Brown & Enersen, San Francisco, Cal., for defendant-appellee.

Appeal from the United States District Court for the Northern District of California.

Before CHAMBERS, WALLACE and WIGGINS, Circuit Judges.

WIGGINS, Circuit Judge:

Appellants are independent service organizations, or ISOs, that service copier and micrographic equipment manufactured by appellee Eastman Kodak Co. They appeal summary judgment dismissing their antitrust claims against Kodak. We reverse and remand.

At the heart of this case are two of Kodak's business policies: First, Kodak will not sell replacement parts for its equipment to Kodak equipment owners unless they agree not to use ISOs. Second, Kodak will not knowingly sell replacement parts to ISOs. Kodak admits that the purpose of these policies is to prevent ISOs from competing with Kodak's own service organization for the repair of Kodak equipment.

On appeal, appellants argue that they raised triable issues concerning: (1) whether Kodak's refusal to sell parts to equipment owners unless they agree not to use ISOs constitutes a tying arrangement violative of Section 1 of the Sherman Act; and (2) whether Kodak's refusal to sell parts to ISOs is an act of monopolization violative of Section 2 of the Sherman Act.

We have jurisdiction under 28 U.S.C. Sec. 1291 (1982). We review the district court's grant of summary judgment de novo. Richards v. Neilsen Freight Lines, 810 F.2d 898, 902 (9th Cir.1987). We must determine, viewing the evidence in the light most favorable to appellants, whether issues of material fact exist and whether the district court correctly applied the relevant substantive law. Ashton v. Cory, 780 F.2d 816, 818 (9th Cir.1986).

Viewed in the light most favorable to appellants, the facts are as follows: Prior to 1982, Kodak serviced almost all of its micrographic and copier equipment. Kodak would sell replacement parts (at a profit) to any party who intended to use them to repair Kodak equipment. ISOs generally do not manufacture the replacement parts they use in providing equipment service. ISOs do, however, maintain regular inventories of such parts. In reliance on Kodak's practice of freely selling replacement parts, ISOs developed and began to compete significantly with Kodak in 1984 and 1985. ISOs offered service for as little as half of Kodak's price. To better compete, Kodak in some cases cut its price for service. Some customers found ISO service superior to Kodak service.

Concerned with ISO competition, Kodak reviewed its replacement parts policies in 1985 and developed its current policies of not selling replacement parts to ISOs or to customers who use ISOs. Kodak exempted micrographic equipment manufactured before 1985 from these new policies. Since 1985, Kodak has had difficulty identifying ISOs and customers who use ISOs. Kodak, therefore, unknowingly sold parts to ISOs and customers who use them since it implemented the 1985 policies. Kodak is currently attempting to enforce more effectively its policies.

I. The Tying Claim

Section 1 of the Sherman Act declares illegal "[e]very contract, combination ..., or conspiracy, in restraint of trade or commerce." 15 U.S.C. Sec. 1 (1982). The Supreme Court has consistently interpreted this provision to prohibit only unreasonable restraints of trade. Business Elec. Corp. v. Sharp Elec. Corp., 485 U.S. 717, 108 S.Ct. 1515, 1519, 99 L.Ed.2d 808 (1988). Appellants contend that they have presented genuine issues for trial as to whether Kodak's refusal to sell spare parts to equipment owners unless they agree not to use ISOs constitutes a tying arrangement per se unreasonable under this section. ¹

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, or at least agrees that he will not purchase that product from any other supplier." Northern Pac. Ry. Co. v. United States, 356 U.S. 1, 5-6, 78 S.Ct. 514, 518, 2 L.Ed.2d 545 (1958) (emphasis added, footnote omitted). A tying arrangement is per se unreasonable if the defendant has sufficient economic power in the tying product market to restrain competition appreciably in the tied product market and if the arrangement affects more than an insubstantial volume of interstate commerce in the tied product. ² Fortner Enterprises, Inc. v. U.S. Steel Corp., 394 U.S. 495, 499, 89 S.Ct. 1252, 1256, 22 L.Ed.2d 495 (1969); Mozart Co. v. Mercedes-Benz of N. Am., Inc., 833 F.2d 1342, 1345 (9th Cir.1987), cert. denied, --- U.S. ----, 109 S.Ct. 179, 102 L.Ed.2d 148 (1988); General Business Systems v. North American Philips Corp., 699 F.2d 965, 977 (9th Cir.1983).

The district court held that appellants failed to show evidence of a tying arrangement, noting that Kodak does not "condition the sale of one product on the buyer's purchase of another product" since a "Kodak customer can buy equipment without having to buy parts; and he can buy parts if he simply owns Kodak equipment." Image Technical Services, Inc. v. Eastman Kodak Co., No. C-87-1686-WWS, at 5, 1988 WL 156332 (N.D.Cal. Apr. 18, 1988) (Memorandum of Opinion and Order Granting Summary Judgment). Appellants argue that the district court misconstrued one of their theories, explicitly presented in their memorandum in opposition to Kodak's motion for summary judgment. This theory is that Kodak has tied parts to service, not equipment to parts or parts to equipment.

Kodak responds that even viewed as appellants suggest, its policy is not a tying arrangement. First, Kodak points out, it does not force owners to buy service in order to receive parts; Kodak only requires owners not to buy ISO service to receive parts. Kodak will sell parts to owners who agree to self-service their machines. Kodak, however, misconceives the nature of tying agreements. As we stated above, 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, or at least agrees that he will not purchase that product from any other supplier." Northern, 356 U.S. at 5-6, 78 S.Ct. at 518 (emphasis added; footnote omitted).

Second, Kodak argues that its policy is not a tying arrangement because parts and service form a single product market, and without two distinct markets there can be no tying arrangement. See Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 21, 104 S.Ct. 1551, 1562, 80 L.Ed.2d 2 (1984). The critical question in determining whether two distinct product markets exist is whether it is economically efficient to offer two products separately. Id. at 21-22, 104 S.Ct. at 1562-63. That, in turn, depends on whether the demand for each can be separated. Id. Kodak contends that there is no separate demand for parts and service. Indeed, Kodak contends, they are useless without each other. Consequently they are economically inseparable.

Kodak's argument presents, at best, a disputed issue of fact. That products must be used together does not eliminate the possibility that they form distinct markets. "We have often found arrangements involving functionally linked products at least one of which is useless without the other to be prohibited tying devices." Id. at 19 n. 30, 104 S.Ct. at 1562 n. 30 (citing cases). Kodak's policy of allowing customers to purchase parts on condition that they agree to service their own machines suggests that the demand for parts can be separated from the demand for service. Kodak does not dispute appellants' claim that some equipment owners have (perhaps surreptitiously) bought service from ISOs and parts from Kodak. Nor does Kodak dispute appellants claim that other equipment owners would have contracted with ISOs for service if they could have obtained parts separately. Cf. Dimidowich v. Bell & Howell, 803 F.2d 1473, 1480 n. 3 (9th Cir.1986) (applying California law) (noting that for some products, such as automobiles, the parts market is distinct from the service market), modified 810 F.2d 1517 (9th Cir.1987); Digidyne Corp. v. Data General Corp., 734 F.2d 1336, 1339 (9th Cir.1984), cert. denied, 473 U.S. 908, 105 S.Ct. 3534, 87 L.Ed.2d 657 (1985) (holding that separate markets existed for computer central processing unit and computer operating system).

Having established that a tying arrangement might exist, we next consider whether, assuming that such a tying arrangement exists, there is an issue of material fact as to whether Kodak has sufficient economic power in the tying product market to restrain competition appreciably in the tied product market. To determine such market power, courts...