Phototron Corp. v. Eastman Kodak Co., 88-1128

• Citation: 842 F.2d 95
• Decision Date: 28 March 1988
• Docket Number: No. 88-1128,88-1128
• Parties: , 1988-1 Trade Cases 67,951 PHOTOTRON CORPORATION, Plaintiff-Appellee, v. EASTMAN KODAK COMPANY, Fuqua Industries, Inc., and Colorcraft Corporation, Defendants-Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 95

842 F.2d 95

56 USLW 2541, 1988-1 Trade Cases 67,951

PHOTOTRON CORPORATION, Plaintiff-Appellee, v. EASTMAN KODAK COMPANY, Fuqua Industries, Inc., and Colorcraft Corporation, Defendants-Appellants.

No. 88-1128.

United States Court of Appeals Fifth Circuit.

March 28, 1988.

Marvin Sloman, Carrington, Coleman, Sloman & Blumenthal, Tyler A. Baker, Dallas, Tex., for Eastman Kodak Co.

Charles E. Koob, Simpson, Thacker & Bartlett, New York City, for defendants-appellants.

Joseph M. Alioto, Alioto & Alioto, San Francisco, Cal., Quentin R. Wittrock, Richard G. Braman, Daniel R. Shulman, David M. Coyne, Minneapolis, Minn., Richard L. Brown, S. Gary Werley, Fort Worth Tex., for plaintiff-appellee.

Appeals from the United States District Court for the Northern District of Texas.

Before BROWN, GEE and GARWOOD, Circuit Judges.

GEE, Circuit Judge:

Eastman Kodak Company ("Kodak") Fuqua Industrial and Colorcraft Corp. appeal the granting of a preliminary injunction against Kodak's merger with Colorcraft Corporation, a subsidiary of Fuqua Industries, Inc. After reviewing the record and carefully considering the arguments presented by the parties, we reverse the order of the district court.

Facts

The defendants in this action, Colorcraft and Kodak, have reached an agreement to combine their photofinishing facilities throughout the United States. Colorcraft operates forty-one film processing plants, and Kodak has fifty such labs. The plaintiff in this suit, Phototron, processes film at nine plants in the southern and western United States.

These plants provide processing for amateurs' photographic film; Colorcraft, Kodak and Phototron have accounts with large and small retailers who receive film directly from the public. More than ten years ago, the photo processing market offered consumers two choices: either give film to a retailer who would then send the film to a wholesale processor, or use a mail-order service. The recent appearances of photo minilabs and of a trend toward vertical integration by large retailers such as Eckerd Drugs and Wal-Mart have significantly changed market relationships. Although the parties dispute the proper definition of the relevant market for this antitrust action, certainly many consumers--enjoying the wider range of options brought by advancing technology--have altered the manner in which they have their film processed. The more impatient customers for example, pay extra for the convenience of having their film back in an hour. In 1980, there were few minilabs in operation; today there are over 12,000. As affidavits in the record show, by 1986 minilabs accounted for thirty percent of the entire value and twenty-two percent of the volume of photofinishing services.

Wholesale labs have had to adapt to these changing market circumstances. Colorcraft now processes most of its orders overnight. Some large general retailers have chosen to integrate by installing minilabs on their premises. Many customers are no longer willing to wait a week for their pictures. Against this backdrop, Kodak and Colorcraft have agreed to merge their photofinishing facilities.

Proceedings

Phototron Corporation brought this action seeking, in part, to enjoin the merger of Kodak's and Colorcraft's photofinishing labs. ¹ The district court granted a hearing in early February to consider Phototron's application for a preliminary injunction. At the request of the district court, the merger was postponed until February 23, 1988; and on February 22 the district court granted a preliminary injunction.

The record before the district court consisted of affidavits filed by the parties and the oral arguments heard in early February. In his Memorandum Opinion, Judge Mahon found that:

(1) Phototron has standing to challenge the merger;

(2) wholesale photofinishing is the relevant market;

(3) the merger may substantially lessen competition in the relevant market;

(4) the grant of preliminary injunction is appropriate given the threat of loss and damages Phototron may suffer.

Issues

Kodak challenges the district court's rulings on standing and the relevant market. Our decision on the standing issue, however, forecloses the need to take up the more difficult relevant market issue.

Before setting forth the strict standing requirements, we remind ourselves of a well established principle: a preliminary injunction can be granted only when the district court has found "a substantial likelihood that plaintiff will prevail on the merits." Canal Authority v. Callaway, 489 F.2d 567, 572 (5th Cir.1974). One of the merits issues that must be decided at trial is whether Phototron has suffered an antitrust injury, for without such an injury, Phototron lacks standing to sue. Cargill, Inc. v. Monfort of Colorado, Inc., 479 U.S. ----, ----, 107 S.Ct. 484, 491, 93 L.Ed.2d 427, 438 (1986). The district court therefore erred in handing down a preliminary injunction without first finding that Phototron had demonstrated a substantial likelihood of suffering an antitrust injury. The district court correctly noted that no rigorous proof of antitrust injury was necessary at this early stage of consideration. ² Given the onerous effects of granting a preliminary injunction, however, more than mere pleading is necessary to establish standing even at this stage. Because the district court determined that the pleadings sufficed standing alone, ³ we must, at the least remand the case for a determination whether there is a substantial likelihood that Phototron will be able to prove antitrust injury at trial. Given the need for us to render a final decision on this issue, we look beyond a remand and review the record to determine whether we can make the "substantial likelihood" determination ourselves.

In Cargill, the Supreme Court decided that a competitor could obtain a permanent injunction against a merger by meeting the same standing requirement that the Court articulated earlier in Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 97 S.Ct. 690, 50 L.Ed.2d 701 (1977). Brunswick allows treble damage recovery under Section 7 of the Clayton Act only when plaintiffs have shown antitrust injury:

Plaintiffs must prove antitrust injury, which is to say injury of the type the antitrust laws were intended to prevent and that flows from that which makes the defendants' acts unlawful.

429 U.S. at 489, 97 S.Ct. at 697.

This burden on the private plaintiff is a significant one, and the Supreme Court's decision to make it such was aptly noted in Justice Stevens' dissent in Cargill:

This case presents the question of whether the antitrust laws provide a remedy for a private party that challenges a horizontal merger between two of its largest competitors. The issue may be approached along two fundamentally different paths. First, the Court might focus its attention entirely on the post merger conduct of the merging firms and deny relief unless the plaintiff can prove a violation of the Sherman Act. Second, the Court might concentrate on the merger itself and grant relief if there is a significant probability that the merger will adversely affect competition in the market in which the plaintiff must compete. Today the Court takes a step down the former path.

479 U.S. at ----, 107 S.Ct. at 496, 93 L.Ed.2d at 443-44. Bound by precedent, we follow the Supreme Court's tracks.

Under Cargill, a competitor of two merging entities has standing to challenge the merger if an allegation and proof of predatory pricing is made. In its complaint, Phototron alleges that Kodak and Colorcraft have provided photofinishing services at below cost; specifically, the complaint asserts that the companies have been operating their wholesale labs "unprofitably or at substantially reduced profit margins for at least the short term, until plaintiff is forced to go out of business or sell to defendants or their surrogates." "Operating ... at substantially reduced profit margins," however, is not equivalent to pricing in a predatory manner; it is simply pricing in a competitive manner. An allegation that one is operating "unprofitably" comes close to alleging predatory pricing. ⁴ We withhold a determination of how precisely predatory pricing must be alleged in order to assert an antitrust injury, turning instead to the easier conclusion that Phototron has not demonstrated a substantial likelihood of prevailing on its allegation at trial.

Phototron alleges carefully that Kodak and Colorcraft were operating unprofitably because they "have charged prices for photofinishing services to actual and potential retail customers of plaintiff that are substantially below the prices plaintiff can charge and still operate profitably" (emphasis added). The sentence's conclusion does not, of course, necessarily follow from its stated premises. To satisfy the "substantial likelihood" requirement for preliminary injunctive relief, Phototron must present some evidence that Kodak or Colorcraft has sold photofinishing services below its cost. In his affidavit, the president of Phototron asserts that Kodak and Colorcraft have been able to undercut the price Phototron offers retailers by "operating at a loss, or [ ] receiving discounts from Kodak on color print paper or chemicals." This "evidence"--sufficient in form for this matter in limine--merely restates the allegation. It affords no showing that Kodak or Colorcraft are actually doing that which Phototron suspects they are doing. To the contrary, Phototron offered evidence of Colorcraft's profitability in 1986, and the price of developing through Kodak labs is among the highest in the industry. ⁵ We see no likelihood that Phototron would prevail on the merits of its predatory pricing allegation; much evidence, however, suggests that it would not. Accordingly, Phototron has failed to establish standing under a predatory pricing theory.

Phototron argues that other evidence of predatory behavior by Kodak and Colorcraft...