Newcal Industries v. Ikon Office Solution

• Decision Date: 23 January 2008
• Docket Number: No. 05-16208.,05-16208.
• Parties: NEWCAL INDUSTRIES, INC., a California Corporation; CPO. LTD., a California Corporation; Pinnacle Document Systems, Inc., a California Corporation; Kearns Business Solution, Inc., a South Carolina Corporation, Plaintiffs-Appellants, v. IKON OFFICE SOLUTION; General Electric Corporation, a Delaware Corporation, Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

513 F.3d 1038

NEWCAL INDUSTRIES, INC., a California Corporation; CPO. LTD., a California Corporation; Pinnacle Document Systems, Inc., a California Corporation; Kearns Business Solution, Inc., a South Carolina Corporation, Plaintiffs-Appellants, v. IKON OFFICE SOLUTION; General Electric Corporation, a Delaware Corporation, Defendants-Appellees.

No. 05-16208.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted April 19, 2007.

Filed January 23, 2008.

Maxwell M. Blecher, James Robert Noblin, Matthew E. Hess, Blecher & Collins, Los Angeles, CA; and James A. Hennefer, Hennefer & Wood, San Francisco, CA, for the plaintiffs-appellants.

Brad D. Brian and Joseph D. Lee, Munger, Tolles & Olson LLP, Los Angeles, CA; for defendant-appellee, General Electric Corporation.

Alfred C. Pfeiffer, Jr., Holly A. House, Tyler B. Theis, Brian C. Rocca, Rachel Sommovilla, Bingham McCutchen LLP, San Francisco, CA, for defendant-appellee, IKON Office Solutions, Inc.

Appeal from the United States District Court for the Northern District of California; Fern M. Smith, District Judge, Presiding. D.C. No. CV-04-02776-FMS.

Before: ANDREW J. KLEINFELD and SIDNEY R. THOMAS, Circuit Judges, and TIMOTHY M. BURGESS,^* District Judge.

THOMAS, Circuit Judge:

Five lessors of copier equipment (collectively "Newcal") appeal the dismissal of their complaint for failure to state viable Sherman Act antitrust, Lanham Act, and RICO claims against Defendant IKON.¹ We reverse.

I

Newcal and IKON compete to lease name-brand copier equipment to commercial customers.² They also compete to provide service contracts for the maintenance of that equipment during the term of the lease. When a lease approaches the end of its term, a new competition begins for the lease of upgrade equipment. Similarly, when a service contract approaches the end of its term, a new competition begins to buy out the service contract and to provide lease-end services.

Newcal alleges that IKON engaged in an ongoing scheme to defraud IKON customers by amending those customers' lease agreements and service contracts without disclosing that the amendments would lengthen the term of the original agreement. The purpose of extending the contracts was to shield IKON customers from competition in the aftermarkets for upgrade equipment and for lease-end services. That is, by extending the term of the original contract, IKON was able to raise the contract's value, which in turn raised the price to Newcal and other competitors of buying out that contract in the aftermarkets for equipment upgrades and lease-end services.

IKON, it is alleged, obtained lease extensions from its customers without disclosing that the contract amendments the customers signed would result in an extension on the term of the original lease or service agreement. In fact, IKON allegedly deliberately misled its customers to believe that the contract amendments would not affect the original contract's term.

Newcal, which competes with IKON both in the primary market for equipment leases and in the aftermarket for equipment upgrades, brought claims under the Sherman Act, alleging antitrust violations, under the Lanham Act, alleging false advertising, and under RICO, alleging racketeering activity predicated on mail and wire fraud. Newcal also requested a declaration under the Declaratory Judgment Act, 28 U.S.C. § 2201, that IKON's fraudulently procured contracts were invalid.

On December 24, 2004, the district court dismissed the declaratory complaint and denied Newcal's request for leave to amend that complaint. The district court held that Newcal lacked standing to request a declaration of third parties' contractual rights, and it concluded that amendments to the declaratory complaint would be futile. In the same order, the district court dismissed all other claims under Rule 12(b)(6), but it granted Newcal's request for leave to amend those claims.

Newcal filed a first amended complaint, pleading its fraud allegations with greater specificity and adding greater detail to its antitrust and Lanham Act claims. IKON again moved to dismiss under Rule 12(b)(6), and the district court granted the motion, holding that Newcal had failed to allege a legally cognizable "relevant market" under the Sherman Act, that it had failed to allege any false statement of fact under the Lanham Act, and that it had failed to meet RICO standing requirements. The district court dismissed the complaint with prejudice. This timely appeal followed.

II

A

The first question we must address is whether Newcal's antitrust claims allege any legally cognizable "relevant market." We conclude that they do, and we therefore remand those claims to the district court.

In order to state a valid claim under the Sherman Act, a plaintiff must allege that the defendant has market power within a "relevant market." That is, the plaintiff must allege both that a "relevant market" exists and that the defendant has power within that market.³

There is no requirement that these elements of the antitrust claim be pled with specificity. See Cost Management Services, Inc. v. Washington Natural Gas Co., 99 F.3d 937, 950 (9th Cir.1996). An antitrust complaint therefore survives a Rule 12(b)(6) motion unless it is apparent from the face of the complaint that the alleged market suffers a fatal legal defect. And since the validity of the "relevant market" is typically a factual element rather than a legal element, alleged markets may survive scrutiny under Rule 12(b)(6) subject to factual testing by summary judgment or trial. See High Technology Careers v. San Jose Mercury News, 996 F.2d 987, 990 (9th Cir.1993) (holding that the market definition depends on "a factual inquiry into the `commercial realities' faced by consumers") (quotations omitted).

There are, however, some legal principles that govern the definition of an antitrust "relevant market," and a complaint may be dismissed under Rule 12(b)(6) if the complaint's "relevant market" definition is facially unsustainable. See Queen City Pizza, Inc. v. Domino's Pizza, Inc., 124 F.3d 430, 436-37 (3d Cir.1997).

First and foremost, the relevant market must be a product market.⁴ The consumers do not define the boundaries of the market; the products or producers do. Brown Shoe v. United States, 370 U.S. 294, 325, 82 S.Ct. 1502, 8 L.Ed.2d 510 (1962). Second, the market must encompass the product at issue as well as all economic substitutes for the product. Id. As the Supreme Court has instructed, "The outer boundaries of a product market are determined by the reasonable interchangeability of use or the cross-elasticity of demand between the product itself and substitutes for it." Id. As such, the relevant market must include "the group or groups of sellers or producers who have actual or potential ability to deprive each other of significant levels of business," Thurman Industries, Inc. v. Pay `N Pak Stores, Inc., 875 F.2d 1369, 1374 (9th Cir. 1989).

Third, although the general market must include all economic substitutes, it is legally permissible to premise antitrust allegations on a submarket. That is, an antitrust claim may, under certain circumstances, allege restraints of trade within or monopolization of a small part of the general market of substitutable products. In order to establish the existence of a legally cognizable submarket, the plaintiff must be able to show (but need not necessarily establish in the complaint) that the alleged submarket is economically distinct from the general product market. In Brown Shoe, the Supreme Court listed several "practical indicia" of an economically distinct submarket: "industry or public recognition of the submarket as a separate economic entity, the product's peculiar characteristics and uses, unique production facilities, distinct customers, distinct prices, sensitivity to price changes, and specialized vendors." 370 U.S. at 325, 82 S.Ct. 1502.

In its first amended complaint, Newcal listed four product markets: (1) "replacement Copier Equipment for IKON and GE customers with Flexed IKON Contracts," (2) "Copier Service for IKON and GE customers with Flexed IKON Contracts," (3) "Copier Service for Canon and Ricoh brand Copier Equipment," and (4) "Copier Equipment."

The district court held that the last two of those markets failed to support Newcal's claims because Newcal nowhere alleged that IKON holds market power in the nationwide market for copier equipment leases or in the nationwide market for Canon and Ricoh-brand copier equipment service. We agree with that conclusion. Newcal does not allege that IKON holds power within those markets.

The district court also concluded that the first two markets were not legally cognizable, finding that the boundaries of those markets impermissibly depended on a contractually-created group of consumers. Relying primarily on the Third Circuit's opinion in Queen City Pizza, Inc. v. Domino's Pizza, Inc., 124 F.3d 430 (3d Cir.1997), and secondarily on this court's opinion in Forsyth v. Humana, Inc., 114 F.3d 1467 (9th Cir.1997), the district court held that such a contractually-created group cannot constitute a "relevant market" for antitrust purposes.

Newcal responds to the district court's analysis by arguing that Queen City Pizza and Forsyth are inapposite to its claims and that the more analogous case is Eastman Kodak Co. v. Image Technical Services, Inc., 504 U.S. 451, 112 S.Ct. 2072, 119 L.Ed.2d 265 (1992), which permitted an antitrust plaintiff to restrict its alleged market to consumers of Kodak-brand products.

We agree with Newcal. Under Eastman Kodak, Newcal's market definition does not fail as a matter of law, at least on a Rule 12(b)(6) motion.

In Queen City Pizza, the Third Circuit confronted an antitrust complaint against Domino's Pizza, brought by a group of Domino's franchisees. 124 F.3d at 433-34. As part of their franchise contract, the franchisees had specifically agreed to make their...