Datagate, Inc. v. Hewlett-Packard Co.

Decision Date27 July 1995
Docket NumberNo. 93-17276,HEWLETT-PACKARD,93-17276
Citation60 F.3d 1421
Parties1995-2 Trade Cases P 71,070, 95 Cal. Daily Op. Serv. 5863, 95 Daily Journal D.A.R. 10,037 DATAGATE, INC., Plaintiff-Appellant, v.CO., Defendant-Appellee.
CourtU.S. Court of Appeals — Ninth Circuit

W. Ruel Walker, San Francisco, CA, and Francis O. Scarpulla, San Francisco, CA, for plaintiff-appellant.

Kurt W. Melchior, Alison S. Hightower, Nossaman, Guthner, Knox & Elliot, San Francisco, CA, and Robert A. Skitol, James A. Myers, Penelope M. Lister Farano, Drinker Biddle & Reath, Washington, DC, for defendant-appellee.

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

Before: GOODWIN, SCHROEDER and BEEZER, Circuit Judges.

BEEZER, Circuit Judge:

We consider whether a tying arrangement foreclosing a single customer can ever affect a "not insubstantial" volume of commerce and so be illegal per se under the Sherman Act, Sec. 1 (15 U.S.C. Sec. 1). Datagate, Inc. appeals the district court's order granting summary judgment in favor of Hewlett-Packard Company ("HP") on Datagate's claim that HP imposed illegal tying arrangements on its customers. The district court held that Datagate had presented evidence sufficient to establish a material issue of fact as to only a single tying arrangement, affecting one customer, and that this was insufficient as a matter of law to affect a "not insubstantial" amount of commerce under Jefferson Parish Hospital District No. 2 v. Hyde, 466 U.S. 2, 16, 104 S.Ct. 1551, 1560, 80 L.Ed.2d 2 (1984). We have jurisdiction over Datagate's timely appeal, 28 U.S.C. Sec. 1291, and we reverse.

I

Datagate is an independent service organization ("ISO") which engages in the maintenance and repair of HP computer equipment ("hardware service"). HP competes with Datagate and other ISOs in the market for the provision of hardware service. HP also provides support services for the proprietary operating systems and applications software which are necessary to operate its computer equipment ("software service"). The provision of software service requires the use of HP's proprietary materials.

Datagate sued HP alleging numerous violations of the antitrust laws arising from HP's conduct in the hardware service market. The district court granted summary judgment for HP on all Datagate's claims. We affirmed in part, reversed in part and remanded. Datagate, Inc. v. Hewlett-Packard Co., 941 F.2d 864 (9th Cir.1991) ("Datagate I "), cert. denied, 503 U.S. 984, 112 S.Ct. 1667, 118 L.Ed.2d 388 (1992). We remanded two of Datagate's claims to the district court: One alleging that HP had illegally imposed tying arrangements on its customers, in violation of the Sherman Act, Sec. 1, by refusing to provide software service unless the customers also purchased hardware service from HP, and a second claim for injunctive relief under the Clayton Act, Sec. 16 (15 U.S.C. Sec. 26).

On remand, Datagate abandoned the claim for injunctive relief. HP again moved for summary judgment on the tie-in claim, and Datagate requested and received two continuances for further discovery on that claim. For the purposes of the summary judgment motion, the parties entered into the following stipulation: "assuming arguendo the existence of separate markets for software service and hardware service for HP minicomputers, defendant [HP] had market power in the tying product (software service) and there was a substantial volume of commerce in the tied product (hardware service)." The district court then granted summary judgment for HP.

The district court determined that the uncontroverted evidence in the record was sufficient to create a triable issue of fact as to whether HP had imposed a tying arrangement on Rockwell International ("Rockwell"), one of its customers. The court further determined that Datagate's evidence failed to establish a triable issue of fact as to the existence of any additional tying arrangements allegedly imposed by HP. Quoting from Jefferson Parish, the district court held that a tying arrangement imposed on only a single customer was insufficient as a matter of law to support Datagate's tie-in claim: "If only a single purchaser were 'forced' with respect to the purchase of a tied item, the resultant impact on competition would not be sufficient to warrant the concern of antitrust law." Jefferson Parish, 466 U.S. at 16, 104 S.Ct. at 1560.

Datagate appeals.

II

We review de novo the district court's order granting summary judgment. Rebel Oil Co. v. Atlantic Richfield Co., 51 F.3d 1421, 1432 (9th Cir.1995).

III

The district court interpreted Jefferson Parish to mean that, as a matter of law, a tying arrangement imposed on a single customer is always de minimis, and not of concern to the antitrust laws. The district court read Jefferson Parish too broadly.

A

A tying arrangement is a device used by a competitor with market power in one market (for the "tying" product) to extend its market power into an entirely distinct market (for the "tied" product). To accomplish this, the competitor agrees to sell the tying product (here software service) only on the condition that its customers also purchase the tied product (in this case hardware service). The competitor thus uses its market power in the tying product to coerce the customer into purchasing the tied product. This is one of the few practices that the Supreme Court has determined to be illegal per se under the Sherman Act, Sec. 1. See Jefferson Parish, 466 U.S. at 9-10, 104 S.Ct. at 1556-57.

Three elements must be satisfied to establish that a tying arrangement is illegal per se: (1) a tie-in between two products or services sold in different markets, (2) market power in the tying product, and (3) the tying arrangement affects a not insubstantial volume of commerce. Bhan v. NME Hosps. Inc., 929 F.2d 1404, 1411 (9th Cir.), cert. denied, 502 U.S. 994, 112 S.Ct. 617, 116 L.Ed.2d 639 (1991). For the purposes of the summary judgment motion, the parties unquestionably stipulated to the second element: HP's market power in the tying product.

The parties dispute exactly which of the other elements is at issue in this appeal. Datagate argues that the third element is at issue: whether a "not insubstantial" volume of commerce was affected by HP's single alleged tying arrangement. While continuing to press its argument under Jefferson Parish, HP contends that the parties stipulated to the third element, and that the Jefferson Parish analysis either goes to the first element of whether HP imposed a tie-in at all, or creates a fourth requirement of multiple tying arrangements.

First, the parties did not stipulate to the third element. Although the district court stated that the parties stipulated that "a tying arrangement imposed by HP would affect a substantial volume of commerce in the tied market," that is not what the parties' stipulation says. The parties simply stipulated that there was a substantial volume of commerce in the tied market, not that any tie-in by HP would affect a substantial volume. At oral argument, HP declined to concede that any tying arrangement it might have imposed would have affected a not insubstantial amount of commerce. Thus, the parties' stipulation establishes only the second element.

Second, the crucial language from Jefferson Parish goes to the "not insubstantial" requirement, rather than bearing in some way on the first element, or creating an entirely new element, as HP urges. The dispositive issue in Jefferson Parish was whether the defendant had market power, and thus whether it could effectively impose a tying arrangement. See 466 U.S. at 26, 104 S.Ct. at 1565-66. The "single purchaser" language relied upon by the district court and HP appeared in a section of the opinion discussing the background of per se liability for tie-ins:

Of course, as a threshold matter there must be a substantial potential for impact on competition in order to justify per se condemnation. If only a single purchaser were "forced" with respect to the purchase of a tied item, the resultant impact on competition would not be sufficient to warrant the concern of antitrust law. It is for this reason that we have refused to condemn tying arrangements unless a substantial volume of commerce is foreclosed thereby. (citing cases)

Jefferson Parish, 466 U.S. at 16, 104 S.Ct. at 1560. One of the cases the Court cited in the above passage was Fortner Enterprises, Inc. v. United States Steel Corp., 394 U.S. 495, 501-02, 89 S.Ct. 1252, 1257-58, 22 L.Ed.2d 495 (1969) ("Fortner I "). The cited pages from Fortner I concern only the meaning of the "not insubstantial" requirement. Id. In context, it cannot seriously be questioned that the Jefferson Parish Court was discussing the same requirement.

We must determine whether Datagate brought forth enough evidence to create a disputed issue of material fact regarding the first and third elements.

B

Whichever element is involved, HP argues that a tying arrangement foreclosing only one purchaser can never be per se illegal. Construing HP's argument to be that a tying arrangement affecting only a single purchaser is insubstantial as a matter of law, we disagree.

We agree with Datagate that the Supreme Court did not intend the above-quoted language from Jefferson Parish to create a "single purchaser" rule of general applicability. The Court's statement must be read in conjunction with the facts of the case, which involved the market for anesthesiology services. See Jefferson Parish, 466 U.S. at 22, 104 S.Ct. at 1563. The foreclosure of a single purchaser in that market (i.e. one patient in a single surgical procedure) would involve only several hundred dollars. Again, the Court's citation to Fortner I is helpful. In that case, the Court explained at some length the meaning of the "not insubstantial" requirement:

The requirement that a "not insubstantial" amount of...

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