The Fall of the Kodak Aftermarket Doctrine

8/11/2019 The Fall of the Kodak Aftermarket Doctrine

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THE FALL OF THE KODAK AFTERMARKET

DOCTRINE: DY ING A SLOW DEATH

IN THE LOWER COURTS

David A.J. Goldfine*Kenneth M. Vorrasi**

I. INTRODUCTION

The Supreme Courts 1992 decision in Eastman Kodak Co. v. ImageTechnical Services, Inc. (Kodak)1 is now slightly more than a decade old.It has generated hundreds of law review articles and no doubt hundredsof millions of dollars in litigation costs. In antitrust iconography, Kodakhascome to stand forthe proposition that summaryjudgment is generallyinappropriate in antitrust aftermarket cases because competition in theprimary market, as a matter of law, does not necessarily preclude thepossibility of market power (and anticompetitive conduct) in the after-

markets for parts and service. In Kodak itself, it was the possibility ofsuch market imperfections as switching and information costs and lock-in effectswhich prevented consumers from switching to substituteproducts in the primary marketthat ultimately led to the SupremeCourts reversal of summary judgment.

After thoroughly surveying the subsequent case law, we have foundfew cases in which the plaintiff has survived summary judgment involvingKodak-style lock-in claims. ButKodakwas supposed to result in fewer, notmore, summary judgments for antitrust defendants. What happened?The reality in the trenches is that federal district courts and federalcourts of appeal have bent over backwards to construeKodakas narrowlyas possible. In our view, it can fairly be said that the Supreme Courtdecision inKodakhas been narrowed to the point where it is simply nolonger an effective weapon for antitrust plaintiffs.

* Member of the District of Columbia and Pennsylvania Bars.

** Law Clerk, District of Columbia.The authors acknowledge with great appreciation the substantial contribution and

invaluable guidance they received from Robert A. Skitol throughout the drafting andcompletion of this article.

1 504 U.S. 451 (1992).

209

72 Antitrust Law Journal No. 1 (2004). Copyright 2004 American Bar Association. Reproduced by permission. All rights reserved.This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or storedin an electronic database or retrieval system without the express written consent of the American Bar Association.


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[Vol. 72Antitrust Law Journal210

This article proceeds as follows: Part II offers a brief overview of theSupreme Courts Kodakdecision. Part III then examines Kodak lock-intheory. Part IV provides a comprehensive survey of lower courts treat-ment of Kodakin the eleven years following the Supreme Courts deci-sion. This survey reveals that because courts have strictly construed Kodak,defendants have prevailed on summary judgment in almost every singlecase in which a plaintiff has asserted a Kodak-style lock-in claim.

II. THE SUPREME COURTS DECISION IN KODAK

A. Background of the Case

Eastman Kodak Company manufactured, sold, and serviced high-volume photocopiers and micrographic equipment. Kodaks photocop-ier and micrographic products faced direct competition from variouscompanies. Kodak also sold and installed replacement parts for its photo-copiers and micrographic equipment through annual or multi-year ser-vice contracts that it entered into with its customers. Because its partswere unique and not interchangeable with other manufacturers prod-ucts, Kodak did not compete with the other manufacturers to serviceKodak machinery; instead, Kodak competed only with independent ser-vice organizations (ISOs). Kodak dominated the service market for itsown products at least until the early 1980s, repairing at least 80 percentof the machines it manufactured.

In the early 1980s, ISOs began servicing Kodak equipment and sellingreconditioned Kodak equipment. Although the ISOs were apparentlyable to purchase some parts on a limited basis from Kodak, most of theparts used by the ISOs were purchased from other sources, primarilythe firms that produced parts that Kodak did not produce itself. Becausethe entering ISOs soon established the ability to provide cheaper, andoften better, service than Kodak, they threatened Kodak with genuinecompetition in the service market. In response, Kodak changed its policyand refused to sell its photocopier and micrographic parts to ISOs. Kodakannounced that it would sellreplacement parts only to equipment ownersthat bought repair service from it or provided their own service. Kodaktook additional steps to prevent ISOs from acquiring parts from other

sources, such as manufacturers that made and supplied the parts toKodak.

In response, the ISOs sued Kodak, claiming that its restrictive partspolicy violated Sections 1 and 2 of the Sherman Act. The district courtgranted summary judgment for Kodak. The Ninth Circuit reversed andremanded the case to the district court for further proceedings, and theSupreme Court affirmed.



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2004] KodakAftermarket Doctrine 211

B. Holding and Rationale

As the Supreme Court explained, Kodak was theoretically able tocharge monopoly aftermarket prices for replacement parts because cus-tomers that had already purchased Kodak photocopiers were lockedinto their machines and thus could avoid purchasing Kodaks aftermar-ket parts only by enduring the high switching costsof changing to adifferent brand of photocopier.2 Even if customers obtained informationabout long-term costs of ownership, including subsequent repair costs,Kodak might have changed its pricing policies subsequent to their pur-chase.3 In an imperfectly competitive market, Kodak would not lose allsales in response to an aftermarket price increase. Rather, it would sellfewer new photocopiers, and would have to trade the loss of new sales(from customers that refused to purchase after considering the higherrepairs costs) from the gains resulting from higher priced parts andservice sold to the installed base of customers.4 Because the question ofwhether this tradeoff would be profitable was a matter of fact, theSupreme Court agreed with the Ninth Circuit that the district court haderred by entering summary judgment for Kodak.5

In the Supreme Court, Kodak argued that it could not charge monopo-listic prices in the aftermarket for parts and service because consumerswould factor the higher aftermarket prices over the life of the photocop-ier into their purchasing decisions. The Court rejected this argument,

observing that lack of information could preventunsophisticatedcon-sumers from factoring the higher aftermarket prices into their originalpurchasing decisions.6 Purchasers that did not anticipate high-pricedservice and parts would have to pay such prices because their investmentwould prevent easy switchinggiving Kodak market power in the after-market for service and parts.7

Alternatively, Kodak argued that many of its customers were large,corporate,sophisticated purchasersthat could undertake comparativestudies and demand competitive life- cycle prices. Sophisticated consum-ers, Kodak claimed, would not buy original equipment at supracompeti-tive life-cycle prices. Further, Kodak argued that the behavior ofsophisticated consumers would bring unduly high aftermarket costs to

the attention of unsophisticated consumers. In the end, none of this

2 Id. at 476.3 Id. at 47475.4 Id. at 47576.5 Id. at 477.6 Id. at 47576.7 Id. at 477.



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was convincing to the Supreme Court. Although the high court acceptedthe idea that well-informed consumers did not need antitrust protectionfrom information-driven market imperfections, it concluded that Kodakmight be able to overcharge unsophisticatedconsumers, thereby stillreaping monopoly profits in the aftermarket.8 The Court also suggestedthat Kodak might forgo sales to sophisticated buyers to soak unsophisti-cated buyers.9 The Supreme Court particularly emphasized that thiswas entirely possible because Kodak had changed its approach to partsdistribution onlyafterconsumers had purchased Kodak equipment andwere locked in.10

III. UNDERSTANDINGKODAKLOCK-IN THEORY

Alock-in,as described in Kodak,11 is also known as installed basedopportunismthe ability of primary market competitors to chargesupracompetitive prices for their aftermarket parts or services.12Antitrustconcerns arise in this context because consumers become locked into paying higher than competitive prices for aftermarket goods or servicesby virtue of their original investment in the primary market. Consumerswho are unable to switch to other primary competitors are generallyforced to pay higher aftermarket prices because of their sunk investmentin the primary market. In addition to facing high switching costs,locked-in consumers (the installed base) are typically confronted withinformation asymmetries when initially purchasing in the primary mar-ket. If consumers are unable accurately to assess the life-cycle cost ofowning the primary good, then the ability of the manufacturer to chargesupracompetitive prices is significantly enhanced. Conversely, well-informed consumers will consider the aftermarket cost of ownership andthus the manufacturer will be unable to realize aftermarket monopolyprices. Customers that face a sunk investment in the primary market(switching costs) and are sufficiently uninformed (prior to the primarypurchase) to engage in life-cycle pricing (information costs) create an

8 Id.9 Id.

10 Id.11 Id. at 47677.12 See, e.g., Herbert Hovenkamp,Post-Chicago Antitrust: A Review and Critique, 2001 Colum.

Bus. L. Rev. 257, 28485 (2001); Warren S. Grimes,Antitrust and the Systematic Bias AgainstSmall Business:Kodak, Strategic Conduct, and Leverage Theory, 52Case W. Res. L. Rev. 231,249 (2001); see alsoSteven C. Salop, The First Principles Approach to Antitrust, Kodak, andAntitrust at the Millennium, 68Antitrust L.J. 187 (2000); David McGowan, Free Contracting,

Fair Competition, and Article 2B: Some Reflections on Federal Competition Policy, InformationTransactions, and Aggressive Neutrality,13 Berkeley Tech. L.J. 1173, 1208 (1998).



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installed base of consumers that is susceptible to opportunistic aftermar-ket conduct by the manufacturer.13

For antitrust liability to arise, it is not enough merely to establish thatan installed base of consumers is burdened by significant switching andinformation costs. By definition, installed-base opportunism requires themanufacturer to exploit locked-in consumers by employing some typeof opportunistic conduct. Once the consumer base is installed, manufac-turers must capitalize on these market imperfections and exploit consum-ers by, for example, raising aftermarket prices. If there is no subsequentopportunistic conduct, then manufacturers are not unlawfully exploitingaftermarket consumers because of the lock-in. Most lower federal courtshave deemed such post-lock-in change in behavior an essential elementof a Kodak-style lock-in claim.

After reviewing lower court decisions applying and interpretingKodakand its lock-in theory, it is clear that a defendant manufacturer can befound to have sufficient market power in an aftermarket only if thefollowing conditions are established: (1) consumers face high switchingcosts; (2) consumers lack the necessary information before sale to engagein life-cycle pricing to determine the total cost of owning the primarygood; and (3) once plaintiffs are locked in, the manufacturer undertakesa post-sale change in policy or other form of opportunistic conduct toexploit the installed base of consumers. In short, if the plaintiff cannot

create a genuine factual issue on each of these three conditions, summaryjudgment dismissing the claim is the almost inevitable result.

A. Switching Costs

Switching costs are the additional costs over market price that consum-ers incur if they elect to abandon their investment and switch to anotherproduct. The costs of switching increase when consumers are unable torecover the useful life of their investment in a product if they chooseto shift to another brand. That is, the more a consumers investment ina product is realized, the fewer switching costs there are to lock theconsumer in. In Kodak, the Supreme Court observed thatif the cost ofswitching is high, consumers who already have purchased the equipment,

and are thus locked in will tolerate some level of . . . price increases [in

13 See10 Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law: An Analysisof Antitrust Principles and their Application 1740(a) (2002 ed.) (market imper-fections in the form of information and switching costs create the lock-in); Grimes,supranote 12, at 250 (The equipment buyers difficulty in computing a life cycle price incombination with the substantial switching costs associated with abandoning an installed-base product leave the buyer vulnerable to opportunistic pricing for aftermarket partsthat are manufactured or controlled by the seller.).



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the aftermarket] before changing equipment brands.14 As a result, aseller profitably could maintain supracompetitive prices in the aftermar-ket if the switching costs were high relative to the increase in serviceprices, and the number of locked-in customers was high relative to thenumber of new purchasers.15 Consumers facing high switching costsare vulnerable to aftermarket exploitation because they are unwilling andunable to shift to another brand to avoid supracompetitive aftermarketprices. When switching costs are insubstantial or insignificant, consumersare able to shift to competing brands and there remains no installedbase of consumers for the manufacturer to exploit.

B. Information Costs

Information costs are costs that prevent consumers from obtainingrelevant information about the benefits and burdens of owning a productat the time of purchase. Well-informed customers do not face substantialinformation costs because they are able accurately to assess the life-cyclecost of owning the primary good. In doing so, sophisticated customersare insulated from aftermarket exploitation because they engage in life-cycle pricing.16 No installed-base opportunism is possible when consum-ers life-cycle price because well-informed consumers are sophisticatedenough to account for the total cost of ownership (both the primary andaftermarket investment) at the time of purchase. In short, knowledgeable

consumers cannot be exploited by high aftermarket prices because theyunderstand the consequences of owning the primary product and areaware of the costs of aftermarket ownership before they enter the pri-mary market.

Antitrust concerns arise, however, when a substantial number of con-sumers are unable to engage in life-cycle pricing and thus are unableto determine the total cost of ownership at the time of purchase. 17 InKodak, the Supreme Court observed that many consumers face substantialinformation costs because information about, for example, a productsquality, longevity, performance, and maintenance is prohibitively costlyto obtain.18 When the cost of obtaining the relevant information for

14 Kodak, 504 U.S. at 476.15 Id.16 Life-cycle pricing is the ability of sophisticated consumers toinform themselves of

the total cost of thepackageequipment, service, and partsat the time of purchase.Id.at 473.

17 See10 Areeda & Hovenkamp, supranote 13, 1740(d).18With respect to the costs of information, the Court stated:

Life-cycle pricing of complex, durable equipment is difficult and costly. Inorder to arrive at an accurateprice, a consumer mustacquire a substantialamount



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accurate life- cycle pricing is high, locked-in consumers are more vulner-able to opportunistic behavior. The lack of information precludes con-sumers from anticipating the risk of exploitation and, consequently,uninformed consumers are unable to protect themselves at the time ofpurchase when negotiating price with the manufacturer. When theseinformation asymmetries arise, coupled with substantial informationcosts, the installed base of consumers is sufficiently locked in to beexploited by aftermarket opportunism.

A recent district court decision,ID Security Systems Canada v. Checkpoint

Systems,19

illustrates the point. The defendant manufactured electronicsurveillance systems used by stores to track items by attaching tags tothe merchandise. The plaintiffs, which competed in the aftermarket fortags to be used in defendants surveillance system, alleged, inter alia,that the defendant had attempted to monopolize the aftermarket forsurveillance tags by interfering with the plaintiffs transactions.20 Thedistrict court concluded that although consumers of the defendantssurveillance systems faced substantial switching costs, these costs weresignificantly counterbalanced by information costs so low as to be almostnonexistent.21 The court reached that conclusion because purchasershad knowledge before sale of the extent of their future costs and commit-ment in the aftermarket for surveillance tags, as well as about the incom-patibility of the defendants tags with the competing manufacturer.22

This availability of information at the time of purchase, coupled withthe sophistication of most surveillance system purchasers, led the courtto conclude that consumers were not locked in to the defendants after-market for surveillance tags, thereby precluding a finding of liabilityunder the antitrust laws.23

of raw data and undertake sophisticated analysis. The necessary informationwould include data on price, quality, and availability of products needed tooperate, upgrade, or enhance the initial equipment, as well as service and repaircosts, including estimates of breakdown frequency, nature of repairs, price ofservice and parts, length of downtime,and losses incurred from downtime

Much of this information is difficultsome of it impossibleto acquire at thetime of purchase. During the life of a product, companies may change the serviceand parts prices, and develop products with more advanced features, a decreasedneed for repair, or new warranties. In addition, the information is likely to be

customer-specific; lifecycle costs will vary from customer to customer with thetype of equipment, degrees of equipment use, and costs of downtime.

Kodak, 504 U.S. at 47374.19 249 F. Supp. 2d 622 (E.D. Pa. 2003).20 See id. at 63233.21 Id. at 643.22 See id. at 64344.23 See id. at 650.



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C. Post-Sale Opportunistic Behavior

After consumers have been locked in as a result of substantial switchingand information costs, and can thus be exploited, manufacturers will beliable under a Kodak-style lock-in theory only if the plaintiff establishesthat the defendant has employed some form of opportunistic behaviorto the detriment of the installed base of consumers. Although the major-ity in Kodakdid not definitively state whether Kodaks post-lock-in changein policy of tying the parts for its copiers to its maintenance servicewas dispositive in establishing a lock-in claim, subsequent circuit courts

applying Kodak have required a change in policy post-lock-in.24

Thisinterpretation of Kodak is consistent with principles that underlie anti-trust laws concern over installed-base opportunism. The theory ofinstalled-based opportunism is that consumers can be exploited whenthey are forced to remain in (are locked into) an installed base becauseof market imperfections.25 But antitrust concerns do not arise until themanufacturer takes advantage of the installed basethat is, when themanufacturer exploits vulnerable owners by engaging in opportunisticconduct. Even though consumers may be locked in, they are no worseoff because of the manufacturers market power as long as the manufac-turer does not choose to exploit them by exercising it.26

Installed-base opportunistic conduct exists in different forms. A post-lock-in change in policy, as seen in Kodak, is the more common type ofopportunism. For example,a manufacturer that suddenly raises aftermar-ket prices to supracompetitive levels is engaging in opportunistic behav-ior in the form of a change in pricing policy. Eastman Kodak did notdirectly increase price; instead, it adopted a post-lock-in policy of tyingreplacement parts to maintenance services in order to suppress aftermar-ket competition. This non-price change in policy is equally opportunistic.

24 See, e.g., SMS Sys. Maintenance Servs. Inc. v. Digital Equip. Corp., 188 F.3d 11 (1stCir. 1999); Alcatel USA, Inc. v. DGI Techs., Inc., 166 F.3d 772 (5th Cir. 1999); QueenCity Pizza, Inc. v. Dominos Pizza, Inc., 124 F.3d 430 (3d Cir. 1997); PSI Repair Servs.,Inc. v. Honeywell, Inc., 104 F.3d 811 (6th Cir. 1997); Digital Equip. Corp. v. Uniq DigitalTechs., Inc., 73 F.3d 756 (7th Cir. 1996); Lee v. Life Ins. Co. of N. Am., 23 F.3d 14 (1stCir. 1994).

25 See10Areeda&Hovenkamp,supranote 13,1740(a) (discussing how market imper-fections in the form of information and switching costs create an installed base of consum-ers). Professors Areeda and Hovenkamp argue that market imperfections are necessarybut insufficient conditions to establish a lock-in claim, and conclude thatcourts shouldnotinfersubstantial market power simplyfrom informationimperfections that arecommonin the worlds numerous product-differentiated markets.Id.

26 SeeHerbert Hovenkamp et al., IP and Antitrust 21.4 (2002) ([I]n the absenceof evidence of . . . a rationale for a change in aftermarket pricing policy, there is no basisfor a general conclusion that a producer of a durable good has significant market powerover sales of its aftermarket parts or services.).



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Another example of installed-base opportunism is the use of price dis-crimination between sophisticated consumers that can engage in life-cycle pricing and those that are less informed and unable to protectthemselves at the time of purchase.27 The Court in Kodak recognizedexploitation in which [a] seller could easily price discriminate by varyingthe equipment/parts/service package, developing different warranties,or offering price discounts on different components.28 Thus, manufac-turers can exploit uninformed consumers by charging them higher priceswhile maintaining lower prices for those informed consumers that areable to account for differences in prices. In this respect, price discrimina-

tion allows the manufacturer to capitalize on unknowledgeable consum-ers while not losing any business from informed consumers that wouldbe sensitive to such exploitation because of their ability to engage inlife-cycle pricing. As far as we can tell, despite the Supreme Courtsobservation in Kodak about price discrimination as opportunistic con-duct, there has yet to be a lower court case in which the plaintiff hassurvived summary judgment with a lock-in claimbasedon a price discrimi-nation theory.

D. Additional Considerations

Even when all three lock-in conditions discussed above are established,courts may still enter summary judgment for the defendant based on

one or more of the additional considerations discussed below.1. Non-Interchangeability of Aftermarket Products

If the aftermarket goods are interchangeable with other aftermarketsubstitutes, then the plaintiff is not locked in. Because the availabilityof aftermarket substitutes creates competition that precludes aftermarketexploitation of installed consumers. Conversely, if aftermarket productsare unique and non-interchangeable, the potential for installed-baseopportunism remains. But although the non-interchangeability of after-market products is necessary for a lock-in to occur, it is not dispositivein determining whether the consumers were locked in. That is to say,uniqueness of a manufacturers aftermarket goods does not necessarilyconfer market power in the aftermarket.29 If uniqueness alone were

sufficient, then every producer of non-interchangeable aftermarketgoods would havemonopolypower in the aftermarket.

27 See10 Areeda& Hovenkamp,supranote 13,1740(e) (If the defendant can chargelocked-in customers more for parts or service than new knowledgeable buyers . . ., [themanufacturer] can exploit the former without repelling the latter.).

28 Kodak, 504 U.S. at 475.29 SeeHovenkamp et al., supranote 26, 21.4.



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Tarrant Service Agency v. American Standardis illustrative.30 The plaintiff,Tarrant, sold genuine and duplicator parts for the service and repair ofthe defendants commercial HVAC equipment. Tarrant claimed thatthe defendant monopolized the distribution of parts for repair of thedefendants equipment in violation of Section 2 of the Sherman Act byrefusing to sell genuine parts to Tarrant. The Sixth Circuit determinedthat the plaintiff failed to establish a lock-in claim under Kodakbecauseof the existence of aftermarket substitutes for the defendants parts. Thecourt of appeals emphasized that duplicator and generic parts wereavailable alternatives to the defendants products. Accordingly, the Sixth

Circuit concluded that the defendant manufacturer was unable to controlaftermarket prices.31

2. Independence of Primary and Aftermarket Decisions

Consumers are locked in because a prior choice in the primary marketeliminates later options of the consumer in the aftermarket. 32 Kodakslock-in theory is applicable when consumers make the decision to pur-chase in the primary market independent and apart from their aftermar-ket decision. If consumers purchase in the primary market at the sametime as the aftermarket, no lock-in results because consumers are notforced to pay high aftermarket prices due to their prior decision topurchase in the primary market.33 In these instances, the primary andaftermarket obligations arise concurrently. A consumer cannot be locked

in when both the primary and aftermarket goods are purchased simulta-neously because the consumer already has sufficient information aboutits obligations in the aftermarket at the time of purchase. Such availabilityof information precludes recovery under a lock-in theory.

This situation is especially relevant when the primary and aftermarketgoods are integrated into the same contract.34 For example, franchise

30 12 F.3d 609 (6th Cir. 1993).31 See id. at 615.32 See10 Areeda & Hovenkamp, supranote 13, 1740(c).33 See E. Thomas Sullivan & Herbert Hovenkamp, Antitrust Law, Policy and

Procedure 37 38 (Supp. 1997). Even if the basiclock-in thesis is plausible, it appliesonly to situations where the consumer buys the original product at time T1, and then is

caught by surprise when required to pay a high price for a repair part or aftermarketcomponent at time T2.It has no application whatsoever when both products are purchased at thesame time. (emphasis added).

34 For a more detailed discussion of contract power and lock-in, as well as lock-in asapplied to franchise arrangements, see 2A Areeda & Hovenkamp, supranote 13, 519;see also Roger B. Blair & Jill B. Herndon, The Misapplication of Kodak in Franchise TyingSuits, 14 J. Bus. Venturing 397 (1999); Benjamin Klein, Market Power in Franchise Casesin the Wake of Kodak: Applying Post-Contract Hold-Up Analysis to Vertical Relationships, 67



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and dealership arrangements generally do not give rise to lock-in becausethe primary and aftermarket obligations are accepted simultaneously.Franchisee or dealership plaintiffs frequently attempt to utilize the lock-in argument to nullify their subsequent contract obligations. But thisuse of lock-in is misplaced. If a franchisee does not like the aftermarketterms of a franchise agreement, the franchisee is free to reject thecontract and is not forced to fulfill undesired contractual obligations.In this respect, the franchisee has information available to him at thetime of contracting, which defeats a Kodak-style lock-in claim. To put itanother way, the fact that in contract claims the decision to enter the

aftermarket is made simultaneously with the primary market decisionundermines any lock-in claim because the plaintiff is on notice of theextent of its aftermarket obligations at the time of contracting. A lock-in claim cannot succeed if the plaintiff was aware of what the obligationswere and then agreed to them.

The Third Circuit reached this exact conclusion in Queen City Pizza, Inc.v. Dominos Pizza, Inc.35 InQueen City, a group of independent franchiseesbrought suit against Dominos Pizza because the franchise agreementrequired franchisees to purchase pizza dough from Dominos. The plain-tiffs claimed that they were locked in due to the terms of the franchiseagreement with Dominos that limited their ability to purchase cheaperdough of similar quality. The Third Circuit affirmed the dismissal of the

plaintiffslock-in theory because the Dominos franchisees were able toassess the costs of having to purchase pizza supplies directly from Domi-nos at the time they signed the franchise agreement.36 The court distin-guished its facts from Kodak and concluded that franchisees mustpurchase products from Dominos Pizza not because of Dominos marketpower over a unique product, but because they are bound by contractto do so. If Dominos Pizza acted unreasonably when, under the franchiseagreement, it restricted plaintiffsability to purchase supplies from othersources, plaintiffsremedy, if any, is in contract, not under the antitrustlaws.37 Queen Cityand similar case law38 stand for the proposition that

Antitrust L.J. 283 (1999); Alan Silberman, Mythsof FranchiseMarket Power,65AntitrustL.J.81 (1996).

35

124 F.3d 430 (3d Cir. 1997).36 See id. at 440.37 Id. at 441.38 See, e.g., Maris Distrib. Co. v. Anheuser-Busch, Inc., 302 F.3d 1207 (11th Cir. 2002);

United Farmers Agents Assn v. Farmers Ins. Exch., 89 F.3d 233 (5th Cir. 1996); Chawlav. Shell Oil Co., 75 F. Supp. 2d 626 (S.D. Tex. 1999); Litt le Caesar Enters., Inc. v. Smith,34 F. Supp. 2d 459 (E.D. Mich. 1998); Wilson v. Mobil Oil Corp., 984 F. Supp. 450 (E.D.La. 1997).



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unfavorable obligations agreed to in a contractual setting are not thetype oflock-inthe antitrust laws are designed to protect against.39

IV. KODAKIN THE LOWER COURTS

After the Supreme Court decidedKodak, some in the antitrust commu-nity predicted thatKodakwould result in far fewer summary judgmentsfor defendants on a wide array of lock-in inspired antitrust claims. Butthat has not turned out to be the case. In fact, just the opposite is true.Summary judgment has been awarded to the defendant in almost every

single Kodak-style lock-in case. We have surveyed the decisions by thelower federal courts interpreting and applying Kodaks lock-in theory.We have included in our survey any case in which the plaintiff explicitlyutilized Kodakto assert a lock-in claim against the defendant.40

Circuit-by-circuit analysis of how lower courts have approached andresolvedKodak-style lock-in claims demonstrates that, on the whole, fed-eral courts have severely limited Kodaks scope so that it is no longer aviable weapon for antitrust plaintiffs.41 We will discuss the circuit caselaw in detail below.

Courts essentially have limited Kodakin two ways.First, most courtshavelimited Kodakto the situation in which the manufacturer has changed apolicy, causing injury because customers are locked in. One of the plain-tiffs complaints inKodakwas that Kodak had changed its policy concern-ing the availability of spare parts. Courts subsequently have concludedthat, as long as the manufacturer keeps its policy constant, purchasersare able rationally to calculate life-cycle prices for durable goods. Asthe Seventh Circuit observed in Digital Equipment Corp. v. Uniq DigitalTechnologies, Inc. :

39 SeeHovenkamp et al., supranote 26, 21.4(c) (To turn [franchise contracts] intoan antitrust problem is basically to invite antitrust into all situations where people negotiateunfavorable contracts that result in payment of excessive prices. . . . [T]he negotiation ofa contract whose terms measured ex post turn out to be disadvantageous to one party isnot a problem of monopoly.).

40 The survey of cases we examined totaled 33 circuit and district court opinions inwhich the plaintiffs expressly asserted aKodaklock-in theory of antitrust liability.

41 The circuits not discussed in this section either did not meaningfully treat lock-intheory or factually distinguishedKodaks holding and rejected the plaintiffs claims. See,e.g., Hack v. President & Fellows of Yale College, 237 F.3d 81 (2d Cir. 2000) (decliningto extend Kodakto undergraduateeducation);Brokerage Concepts, Inc. v. U.S. Healthcare,Inc., 140 F.3d 494 (3d Cir. 1998) (adopting a broad market definition and rejectingplaintiffs claim that the aftermarket is a relevant market for antirust purposes); UnitedFarmers Agents Assn v. Farmers Ins. Exch., 89 F.3d 233 (5th Cir. 1996) (same); see alsoMaris Distrib. Co. v. Anheuser-Busch, Inc., 302 F.3d 1207 (11th Cir. 2002) (distinguishingcontract power from market power in the distributor context).



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The [Supreme] Court did not doubt in Kodakthat if spare parts hadbeen bundled with Kodaks copiers from the outset, or Kodak hadinformed customersabout its policies before they had bought machines,purchasers could have shopped around for competitive life-cycle prices.The material dispute that called for trial was whether the change inpolicy enabled Kodak to extract supra-competitive prices from custom-ers who had already purchased its machines.42

In other words, these courts have restricted Kodakto situations wherethe manufacturer originally dealt with independents and later cut themoff. Those courts hold that only a surprise change in policy after somecustomers have already been locked in can justifyfinding separate after-markets that can be monopolized when the primary market is competi-tive. Under this narrowreading, the Kodakmajority did not reject Kodaksgeneral theory that competition in the interbrand primary market canprotect customers from exploitation in the aftermarket. The theory wasrejected only where the change in policy is unanticipated by purchaserswho now are locked in by the high costs of switching to another brand.Only the surprise restriction of competition from independent servicerskept those customers from accurately calculating the life-cycle costs ofthe equipment when making the initial purchase.

The second way that lower courts have restrictedKodakis reflected inthose decisions focusing on relevant market definition. The First Circuitsdecision inSMS Systems Maintenance Services, Inc. v. Digital Equipment Corp.

illustrates the point.43 In SMS, the plaintiff brought a Kodak-type claimasserting that the defendants inclusion of a three-year warranty on itscomputer systems violated Section 2 of the Sherman Act. In upholdingthe district courts grant of summary judgment for the defendant, theFirst Circuit concluded that the relevant market was the competitiveforemarketthe market for computer systemsand not the aftermar-ketthe market for service of that equipment. The First Circuit stated:

[A] litigant who envisions the aftermarket as the relevant marketmust advance hard evidence dissociating the competitive situation inthe aftermarket from activities occurring in the primary market. . . . Putanother way, a court may conclude that the aftermarket is the relevantmarket for antitrust analysis only if the evidence supports an inferenceof monopoly power in the aftermarket that competition in the primary

market appears unable to check.We summarize succinctly. In any market with some degree of product

differentiation, goods of a single brand will enjoy a certain degree ofuniqueness. . . . While that uniqueness may account for a manufacturerhaving a large market share in the services aftermarket for its own

42 73 F.3d 756, 763 (7th Cir. 1996).43 188 F.3d 11 (1st Cir. 1999).



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brand, that fact, without more, does not suffice to establish that themanufacturer enjoys monopoly power in that market. Unless the evi-dence shows the manufacturer can exert raw power in the aftermarket

without regard for commercial consequences in the foremarket, theaftermarket is not the relevant market.44

The First Circuit inSMSconcluded that the plaintiff had failed to intro-duce such evidence and, on that basis, entered summary judgment forthe defendant.45

A. Kodakin the First, Fifth, Sixth, and Seventh Circuits

To state aKodak-style lock-in claim, the First, Fifth, Sixth, and SeventhCircuits require plaintiffs to establish that the defendant implementeda post-sale change in policy in order to exploit the installed base ofconsumers. In these four circuits, merely proving that consumers areconfronted with substantial switching and information costs is insuffi-cient.46 To date, no plaintiff has produced evidence sufficient to prevailunder a Kodak-like lock-in theory.47

The Seventh Circuits decision inDigital Equipment v. Uniq Digital Tech-nologiesillustrates the approach in these circuits.48 In rejecting the plain-tiff-distributors claim that consumers were locked in to using thedefendants equipment under Kodaks theory, the court of appealsobserved that post-lock-in opportunisticconductis critical:

44 Id. at 17.45 Id. at 18.46 See, e.g., SMS Sys. Maint. Servs. v. Digital Equip. Corp., 188 F.3d 11 (1st Cir. 1999);

Alcatel USA, Inc. v. DGI Techs., Inc., 166 F.3d 772 (5th Cir. 1999); Queen City Pizza, Inc.v. Dominos Pizza, Inc., 124 F.3d 430 (3d Cir. 1997); PSI Repair Servs. v. Honeywell, Inc.,104 F.3d 811 (6th Cir. 1997); Digital Equip. Corp. v. Uniq Digital Techs. Inc., 73 F.3d756 (7th Cir. 1996); Lee v. Life Ins. Co. of N. Am., 23 F.3d 14 (1st Cir. 1994); ID Sec.Sys. Can., Inc. v. Checkpoint Sys., Inc., 249 F. Supp. 2d 622 (E.D. Pa. 2003); Wilson v.Mobil Oil Corp., 984 F. Supp. 450 (E.D. La. 1997); see also Metzler v. Bear Auto. Serv.Equip. Co., 19 F. Supp. 2d 1345 (S.D. Fla. 1998).

47A district court case in the First CircuitGeorge Lussier Enters. v. Subaru of New England,Inc., 1999 U.S. Dist. LEXIS 19769 (D.N.H. 1999), denied summary judgment based on alock-in theory. But this case is distinguishable because it arose in the contract setting andinappropriately applied Kodak. As we argue below, Kodak-like lock-in claims can neverexist in the franchise and dealership context for two reasons. First, there cannot be a lock-in to the aftermarket when the decision to enter the aftermarket is made concurrently withthe consumers decision to enter the primary market. Second, parties who are protected bycontract have sufficient information at the time of bargaining to inquire into the totalcost of owning the primary good and consequently are not constrained by substantialinformation costs.

For similar reasons, a district court case in the Eleventh Circuit that denied summaryjudgment is not a defensible lock-in case because it arose in the franchise context. SeeCollins v. Intl Dairy Queen, 59 F. Supp. 2d 1312 (M.D. Ga. 1999) (franchise).

48 73 F.3d 756 (7th Cir. 1996).



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The [Supreme] Court did not doubt in Kodakthat if spare parts hadbeen bundled with Kodaks copiers from the outset, or Kodak hadinformed customers about its policies before they bought its machines,purchasers could have shopped around for competitive life-cycle prices.The material dispute that called for a trial was whether the change inpolicy enabled Kodak to extract supra-competitive prices from custom-ers who had already purchased its machines.49

In the end, the Seventh Circuit granted summary judgment for thedefendant because consumers were aware of the defendants policy ofincluding an operating system with its computers at the time of purchase.Thus, plaintiffs failed to establish a post-lock-in change in policy.50

Another example is PSI Repair Services Inc. v. Honeywell Inc.51 Honeywellmanufactured industrial control equipment used in various refineriesand factories.52 A vital component of the functioning of Honeywellsequipment was printed circuit boards, which would periodically malfunc-tion, causing the industrial equipment to fail. Honeywell replaced defec-tive components with refurbished boards so long as purchasers of theirindustrial equipment returned the defective board.53 Although most ofthe parts used to manufacture the boards were readily available, Honey-well maintained restrictive agreements with manufacturers of a few ofthe board components under which the manufacturers agreed not tosell select parts to Honeywell equipment purchasers or independentcircuit board service providers.54 PSI Repair was one such competing

service provider that offered circuit board repair services for purchasersof industrial equipment, including Honeywell equipment.55 Because PSIRepair could not obtain the necessary parts to service defective Honeywellcircuitboards, it effectivelycould not compete in themarket for repairingHoneywell industrial equipment.

PSI Repair assertedan illegal tying claim under Section 1 and a monop-olization claim under Section 2 of the Sherman Act. In particular, PSIcontended that Honeywell illegally tied circuit board parts to its circuitboard repair services through its restrictive parts policy.56 The districtcourt granted summary judgment for Honeywell. The Sixth Circuitaffirmed. In doing so, the Sixth Circuit emphasized that a post-sale

49 Id. at 763.50 See id.51 104 F.3d 811 (6th Cir. 1997).52 See id. at 813.53 See id.54 See id.55 See id.56 See id. at 81415.



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change in policy was thecrucial factorin the Supreme Courts decisioninKodakbecause an unanticipated change in policy creates informationasymmetries for consumers who are already locked in.57 The Sixth Circuitconcluded that because Honeywell did not change its parts policy afterpurchase and also engaged in informative discussion with purchasersbefore sale, summary judgment was appropriate. The court stated thatan antitrust plaintiff cannot succeed on a Kodak-type theory when thedefendant has not changed its policy after locking in some of its custom-ers, and the defendant has been otherwise forthcoming about its pricingstructure and service policies.58

PSI Repairand Digital Equipmentare good examples of how a majorityof the circuits have interpreted Kodak to require a post-sale change inpolicy in order for a plaintiffs lock-in theory to prevail.

B. Kodakin the Third Circuit

For tying and monopolization claims brought under Sections 1 and 2of the Sherman Act, plaintiffs must establish, at a minimum, that thedefendant maintained market power in a relevant market.59As explainedabove, most lower courts presented with lock-in claims after Kodakhaveentered summary judgment for the defendant on the grounds that thedefendant lacks market power in the derivative aftermarket. The Third

Circuit, however, has taken a slightly different approach, awarding sum-mary judgment on the grounds that the aftermarket simply is not arelevant market for antitrust purposes. Under this approach, a courtneed not even reach the issue of market power.

Illustrative of the Third Circuits approach is Brokerage Concepts, Inc.v. U.S. Healthcare.60 The plaintiffs brought a tying claim against defendantU.S. Healthcare under Section 1 of the Sherman Act. The Third Circuitaffirmed the district courts summary judgment for U.S. Healthcare onthe tying claim, concluding that the plaintiffs had failed to establish thatthe derivative aftermarket was a relevant market. In so doing, the courtof appeals cautioned that all that Kodakestablishes [is] that a singlebrand market may be considered the relevant market where a legitimate

class of consumers is locked in to purchasing a non-interchangeabletying product in a derivative market due to high switching costs in the

57 See id. at 820.58 Id.59 See, e.g., Kodak, 504 U.S. at 462 (tying arrangement); id. at 481 (monopolization);

Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 556 (1993) (attempted monopolization).60 140 F.3d 494 (3d Cir. 1998).



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primary market.61 But where there is no such evidence, then, in theview of the Third Circuit as expressed in Brokerage Concepts, the plaintiffcannot establish that the aftermarket is a relevant market and the caseshould be dismissed.62

Another example is the Third Circuits decision in Queen City Pizza,Inc. v. Dominos Pizza, Inc.63 In that case, the Third Circuit affirmedthe district courts 12(b)(6) dismissal of plaintiffs tying and attemptedmonopolization claims. The Third Circuit concluded that plaintiffs couldnot establish as a matter of law that the derivative aftermarket constituteda relevant market:

Plaintiffs contend that they face information and switching costs thatlock them in to their position as Dominos franchisees, making iteconomically impracticable for them to abandon the Dominos systemand enter a different line of business. They argue that under Kodak,the fact that they arelocked insupports their claim that an aftermar-ket for Dominos-approved supplies is a relevant market for antitrustpurposes. We believe plaintiffs misread Kodak. . . .

Kodak, we believe, held that a plaintiffs proposed relevant market ina unique and non-interchangeable derivative product or service cannotbe defeated on summary judgment by a defendants assertion that theproposed derivative market is cross-elastic with the primary market, ifthere is a reasonable possibility that the defendants assertion aboutcross-elasticity is factually incorrect. ButKodakdoes not hold that theexistence of information and switching costs alone, such as those faced

by the Dominos franchisees, renders an otherwise invalid relevant mar-ket valid. InKodak, the repair parts and service were unique and therewas a question of fact about cross-elasticity. Judgment as a matter of lawwas therefore inappropriate. Here, it is uncontroverted that Dominosapproved supplies and ingredients are fully interchangeable in all rele-

vant respects with other pizza supplies outside the proposed relevant

61 Id. at 515.62 In reaching its conclusion that the plaintiffs inBrokerage Conceptshad not proven that

the aftermarket was a relevant market, the Third Circuit observed:

On appeal, [the plaintiffs] argue that U.S. Healthcare members arelocked into U.S. Healthcare and, by extension, to the pharmacies in its provider network.We doubt that this argument is factually correct, for wefind no evidence suggest-ing that U.S. Healthcare members who wish to switch HMOs face switching costssignificant enough to constitute a lock in. But even if it is, the argument ismisplaced since Kodakis concerned with the situation where the victims of the

alleged tiein that case, the purchasers of Kodak copiersare faced with highswitching costs and thus are locked in to the market for the tying product.Under [plaintiffs] theory of the case, Garys is the purchaser of the tying productwhich is U.S. Healthcare members who purchase prescription drugs. Thus inorder to fall withinKodaks concept of lock in, BCI needed to, at a minimum,provide evidence that Garysnot U.S. Healthcare memberswas locked intothe U.S. Healthcare network. That it did not do.

Id.63 124 F.3d 430 (3d Cir. 1997).



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market. For this reason, dismissal of the plaintiffsclaim as a matter oflaw is appropriate.64

In any event, no matter how courts characterize the lock-in argument,either as an issue of relevant market or market power, the analysis shouldessentially be the same. In fact, the Supreme Courts decision in Kodakmade this clear. The Court stated:

Because market power is often inferred from market share, marketdefinition generally determines the result of the case. Kodak chose tofocus on market power directly rather than arguing that the relationshipbetween equipment and service and parts is such that the three shouldbe included in the same market definition. Whether considered in theconceptual category ofmarket definitionormarket power,the ultimate inquiryis the samewhether competition in the equipment market will signifi-cantly restrain power in the service and parts markets.65

For consumers to be locked in, they must face substantial informationand switching costs. If the lock-in issue is characterized as one of relevantmarket, a single-brand aftermarket becomes distinct from the primarymarket when switching and information costs are sufficiently high toexpose a number of consumers to exploitation. In that event, the after-market is the relevant market for the antirust inquiry. Similarly, undera market power characterization, market power cannot be inferred unlessa manufacturer exploits an installed base of consumers that face signifi-

cant switching and information costs. In the end, these two modes ofanalysis focus on the same antitrust inquiry: whether there is a significantnumber of locked-in consumers that a manufacturer can exploit as aresult of their prior decisions to purchase in the primary market.

C. Kodakin the Ninth Circuit

The Ninth Circuit offers by far the most favorable jurisdiction forplaintiffs bringing Kodak-style lock-in claims. In fact, the Ninth Circuithas strongly suggested that theplaintiff need not prove a post-sale changein policy so long as the plaintiff has shown switching and informationcosts. One district court in the Ninth Circuit has expressly held that apost-sale change in policy is not required for surviving summary judgment

under aKodak-style lock-in theory.66

For now, at least, antitrust plaintiffsbringing Kodaklock-in claims may look to the Ninth Circuit as their lastand only refuge.

64 Id. at 525.65 Kodak, 504 U.S. at 470 n.15 (emphasis added).66 SeeRed Lion Med. Safety, Inc. v. Ohmeda, Inc., 63 F. Supp. 2d 1218, 1232 (E.D.

Cal. 1999).



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Consider the Ninth Circuits decision in Virtual Maintenance, Inc. v.Prime Computer, Inc.67 In that case, Ford Motor Company created its ownsoftware design program to be used in designing automobiles. Ford oftenmodified the program and required the automotive design companieswith which it did business to use the most recent version of Fords designsoftware.68 Ford licensed the defendant, Prime, both to distribute theprogram and to provide software support for those doing business withFord. Prime decided to offer this software support as part of a packagethat included hardware services on its own computers, which were oneof only a few computer systems that were able to run the Ford design

software.69

Virtual Maintenance, a hardware service provider for Prime computers,sued Prime alleging that Prime unlawfully tied the hardware service forits computers to the software support services for Fords design program.Virtual argued that Ford and its suppliers were unable to switch toanother software service provider because they were locked in toPrimes services.

The district court entered summary judgment for Prime. The NinthCircuit reversed and remanded Virtuals tying claim to the districtcourt. In the Ninth Circuits view, there was sufficient evidence thatPrime might enjoy market power in the aftermarket for the servicingof Fords design software because of Fords license to Prime and theneed for Fords business partners to use the most recent version ofFords software. The Ninth Circuit also found evidence in the recordthat Ford and its software customers were locked in to Prime be-cause of expert testimony that suggested Prime could substantiallyraise its maintenance prices before customers would abandon theirinvestment.70

Virtual Maintenanceis important for one major reason. By not requiringthe plaintiffs to prove that Prime made a post-sale change in policy onceconsumers were locked in to the software aftermarket, theNinth Circuitsdecision goes against the overwhelming weight of authority from theother circuits discussed above, all of which require a post-sale changein policy for a plaintiff to survive summary judgment.71

67 11 F.3d 660 (9th Cir. 1994).68 See id. at 662.69 See id.70 Id. at 667.71 Note that the outcome inVirtual Maintenanceis consistent with the consideration that

if the aftermarket product is unique and non-interchangeable, there is an increasedpotential for installed base opportunistic conduct.See supra Part II.D.1.



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A California district courts decision in Red Lion Medical Safety, Inc. v.Ohmeda, Inc.72 also is noteworthy because it expressly held what the NinthCircuit in Virtual Maintenanceimplied, namely that no post-sale changein policy is required to state a Kodak-style lock-in claim. In Red Lion,Ohmeda manufactured medical anesthesia equipment for hospitals.73

Ohmeda maintained a restrictive parts policy under which it would sellreplacement parts for its equipment only if the consumer had in-houseOhmeda-trained services, or if the consumer signed a waiver letter dis-charging Ohmeda from any liabilities arising out of subsequent equip-ment use that was not repaired by the manufacturer.74 The plaintiffs were

a group of independent service organizations that provided maintenanceservices for anesthesia equipment. They sued Ohmeda, alleging that themanufacturer had unlawfully monopolized the market for service onOhmeda equipment in violation of Section 2 of the Sherman Act. 75

Ohmeda responded by arguing, as Eastman Kodak did in the Kodakcase, that it was unable to charge supracompetitive prices in the aftermar-ket for parts and services because any gain would be offset by reducedconsumption in the primary market for equipment. Rejecting Ohmedasargument, the district court in Red Lion unequivocally stated that theSupreme Courts decision in Kodakrequired no such post-sale changein policy for consumers to be locked in.76 TheRed Lioncourt explained:

The policy change [in Kodak] did not create the lock-in; instead,the existence of lock-inhigh switching costsmade it both possibleand economically desirable for Kodak to change its policy and exploitaftermarket consumers. Thus, the policy change did not create monop-oly power; it was merely persuasive evidence that Kodak had marketpower in parts and engaged in monopolistic conduct in the aftermarketdespite competition in the equipment market. To insist on a showingof a policy change confuses a symptom of market power and a lack ofcross elasticity with the underlying condition itself.77

The court concluded that because the plaintiffs offered sufficient evi-dence of significant switching costs and an inability to engage in life-cycle pricing to assess the long-term ownership costs, summary judgmentwas inappropriate, even without a post-sale change in policy.78

72 63 F. Supp. 2d 1218 (E.D. Cal. 1999).73 See id. at 1221.74 See id. at 1222.75 See id. at 122223.76 See id. at 1230.77 Id.78 See id. at 123233.



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Red Lionis the only case to date that has expressly rejected the interpre-tation ofKodakrequiring a post-sale change in policy. WhenRed Lionisread in conjunction with the rationale offered in Virtual Maintenance,the Ninth Circuit offers hope for plaintiffs asserting Kodak-style lock-inclaims. It may only be a matter of time, however, before the Ninth Circuitis brought into line with the rest of the circuits that require a post-salechange in policy.

D. Kodakin the Eleventh Circuit

Besides the Ninth Circuit case law discussed above, the only otherreported case in which a plaintiff has survived summary judgment on aKodak-stylelock-in claim is Telecomm Technical Services, Inc. v. Siemens RolmCommunications, Inc.79 To date, the Florida district courts decision inTelecomm is the only case law in the Eleventh Circuit addressing theviability of Kodak-style lock-in claims.

In Telecomm, the defendant Rolm manufactured PBX switches thatenabled businesses with multiple phone lines to send and receive phonecalls.80Although manyfirms competed in the switch market, each productrequired unique parts and software that typically were protected byintellectual property rights, including Rolms.81 As a result, Rolm alsoprovided maintenance and software services to its customers. The plain-tiffs were independent service organizations that serviced Rolm switches

and brought suit against Rolm under Section 1 and 2 of the ShermanAct for utilizing its control over its parts and software to monopolize theswitch service market.82

Rolm defended on the ground that it was unable to charge supracom-petitive prices for maintenance and software services because there wassignificant competition in the primary market for switches and thatconsumers would take into account any increases in maintenance costswhen considering from which switch manufacturer they should buy.83

Rolm further argued thatunless a plaintiff presents evidence that infor-mation costs and switching costs are high and that the consumers becamelocked-into their purchases of a durable good, summary judgment isappropriate in a case brought by ISOs against a manufacturer that faces

competition in the sale of its goods.84 In rejecting Rolms interpretation

79 66 F. Supp. 2d 1306 (N.D. Ga. 1998).80 See id. at 1310.81 See id.82 See id. at 1311.83 See id. at 1317.84 Id.



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ofKodakand denying summary judgment, the district court stated thatinformation and switching costs were not the onlyfactors that shouldbe considered in evaluatinga lock-in claim.85 Instead, the court optedfor a more holistic approach and examined the commercial realitiesfaced by consumers.The district court concluded that the plaintiffs hadproduced sufficient evidence that Rolms aftermarket prices were 3060percent higher than the plaintiffsprices and that Rolm employed strate-gies designed to undercut plaintiffs ability to compete.86

Although the plaintiffs in Telecomm initially survived summary judg-ment,87 the district courts decision might well be used by defendants towin summary judgment in future cases. In its discussion of informationand switching costs, buried in a footnote, the court observed that Rolmhad formerly sold parts to ISOs but later stopped doing so.88 The courtthen remarked that this evidence demonstrated that issues of materialfact remained about whether the consumers were locked in.89All of thismay allow defendants in the Eleventh Circuit to argue successfully thatthe district court in Telecommconsidered the defendants post-sale changein policy to be a requirement of the plaintiffsKodak-style lock-in claim.Viewed in this light, the Telecomm Court followed the overwhelmingmajority of other courts that require the plaintiff to demonstrate a post-sale change in policy to survive summary judgment.

V. CONCLUSIONIn a recent law review article, Professor Hovenkamp urged the

Supreme Court to overrule its Kodakdecision.90 His central conclusionis that the Supreme Courts controversialKodakdecision has done moreharm than good and should be overruled.91 In our view, however, thereis no need for the Supreme Court to take this drastic step. Because thelower courts have so narrowly interpreted Kodak, resulting in an almost

85 Id. at 1318.86 See id. at 131718.87

After initially denying summary judgment, the district court granted summary judg-ment to Rolm because the parts Rolm refused to sell were protected by patents. SeeTelecomm Tech. Servs., Inc. v. Siemens Rolm Communications, Inc., 150 F. Supp. 2d at1365 (N.D. Ga. 2000).

88 See Telecomm, 66 F. Supp. 2d at 1317 n.11.89 See id.90 See Herbert Hovenkamp, Post-Chicago Antitrust: A Review and Critique, 2001 Colum.

Bus. L. Rev. 257 (2001).91 Id. at 282.



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unbroken string of summary judgments for the defendant, there is notrue need for the Supreme Court to act. The lower courts, in effect,have overruled Kodakby pulling its teeth.92

92 On remand from the Supreme Court in Kodak, the case was retried in Californiadistrict court. The main issue at trial was entirely different from the issue before theSupreme Court in Kodak. In the Ninth Circuits decision on remand, Image TechnicalServices, Inc. v. Eastman Kodak Co., 125 F.3d 1195 (9th Cir. 1997) (Kodak II) the issue was

Kodaks refusal to sell patented replacement parts to the ISOs. Kodak argued that a refusalto license or sell patented goods was not an antitrust violation, and sought a juryinstructionto that effect. The district court refused to give that instruction, and the jury on remandentered a trebled damage award of $71 million against Kodak. The Ninth Circuitaffirmed. Id.

The Ninth Circuit inKodak IIreasoned that, although the district court erred by refusingto give the jury instruction requested by Kodak, it was harmless error under the specificcircumstances of that case. In so doing, the Ninth Circuit inKodak IIstated the rule thatthere is a rebuttable presumption that a desire to protect ones intellectual propertyrights is a legitimate business justification.Id. at 1218. The Ninth Circuit explained that thispresumption can be rebutted by demonstrating that the defendants asserted intellectualproperty justification is pretextual.Id. Applying this rebuttable presumption standard, thecourt rejected Kodaks argument that its refusal to deal was based upon a desire to protectits intellectual property rights. Instead, the Ninth Circuit concluded that it was moreprobable than not that the jury would have found Kodaks proffered business justificationpretextual.Id.

In contrast with the Ninth Circuits decision in Kodak II, the Federal Circuit, in In re

Independent Service Organizations Antitrust Litigation v. Xerox Corp. , 203 F.3d 1322 (Fed. Cir.2000), held that a patent holders mere unilateral refusal to license a valid, enforceable,and lawfully obtained patent, or to sell items covered by such a patent, is not actionableunder the antitrust laws, regardless of the patent owners reason or motivation for therefusal. The Federal Circuit noted that absentillegal tying, fraud . . . or sham litigation,the patent holder may enforce the statutory right to exclude . . . free from liability underthe antitrust laws.Id. at 1324. The Federal Circuit expressly rejected the Ninth Circuitsadoption of a pretext standard, set out in Kodak II, which permits inquiry into theintellectualproperty holders subjective intentin refusing to deal with a competitor seekingintellectual property or products embodying it.Id. at 1328.

72 Antitrust Law Journal No 1 (2004) Copyright 2004 American Bar Association Reproduced by permission All rights reserved

The Fall of the Kodak Aftermarket Doctrine

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