Opinion ID: 4076467
Heading Depth: 3
Heading Rank: 2

Heading: it can price discriminate by

Text: identifying and overcharging only unsophisticated users and thus assuring competitive ... prices for new, sophisticated customers. 93 more typically, high aftermarket prices are explained as an offset to more intense competition in the foremarket good.” Id. at 5-103. In that scholarly view, then, Kodak identified a pair of possible conditions in which primary market competition will not discipline aftermarket prices, but it should not be read as embracing any broader economic theory of tying liability. We have not read Kodak quite so narrowly. The Supreme Court emphasized that “[l]egal presumptions that rest on formalistic distinctions rather than actual market realities are generally disfavored in antitrust law” and that Unless one of these conditions is satisfied, the defendant without power in the [primary] market also lacks the power to charge supracompetitive prices for unique [aftermarket products]. Areeda & Hovenkamp, Fundamentals, supra, § 5.12, at 5-102 to 103. In a companion treatise, those scholars suggest going even further to limit the reach of Kodak in circumstances of competitive primary markets: Kodak does not foreclose a rebuttable presumption that lack of power in the relevant primary market (such as equipment) implies a lack of substantial power in derivative markets (such as parts or service). Indeed, Kodak may even allow a conclusive presumption to this effect in order to simplify administration of the antitrust laws. Phillip E. Areeda & Herbert Hovenkamp, 10 Antitrust Law ¶ 1740, at 133 (3d ed. 2011). 94 antitrust claims should be resolved “on a case-by-case basis, focusing on the particular facts disclosed by the record.” Kodak, 504 U.S. at 466-67 (citations and internal quotation marks omitted) (quoting Maple Flooring Mfrs. Ass’n v. United States, 268 U.S. 563, 579 (1925)). In Harrison Aire, we declined to read Kodak as applying narrowly to only cases involving “[a]n aftermarket policy change,” because Kodak mandated that courts look at “several relevant factors.” Harrison Aire, 423 F.3d at 384. The test is more broad: a plaintiff pursuing a Kodak-style claim must present evidence to support a plausible economic explanation that competition in the primary market is “dissociat[ed] ... from conditions in the aftermarket.” Id. Showing exploitation of locked-in customers, as detailed in Kodak, is one way to satisfy that burden, but our own case law prevents us from concluding in the abstract that it is the only way to do so. Therefore, we interpret Kodak as standing for two propositions: (1) that firms operating in a competitive primary market are not thereby categorically insulated from antitrust liability for their conduct in related aftermarkets; and (2) that exploitation of locked-in customers is one theory that courts will recognize to justify such liability. Kodak identified factors to evaluate alleged anticompetitive aftermarket behavior, and it is possible that those factors may support a theory of antitrust liability that is not necessarily predicated on lock-in exploitation. But any such alternative theory must satisfy the more general rule that an antitrust theory needs to “make[] ... economic sense” and be supported by the evidence. Matsushita, 475 U.S. at 587. Having laid out the applicable principles of law for Kodak-style tying and monopolization claims, we turn to their 95 application in the two surviving antitrust counterclaims in this case.49 2. PBX Attempted Monopolization Claim Avaya argues that we should reverse the PBX attempted monopolization judgment on two grounds. First, it says that, once it introduced contract language in 2008 that made clear to customers that they would not be able to use ISPs, no Kodak claim could lie as a matter of law. Second, it asserts that, as a matter of law, TLI’s evidence of predatory conduct is insufficient to support a § 2 attempted monopolization claim. We agree that Avaya cannot be liable for PBX systems sold after the 2008 contracts were introduced, but we cannot conclude that there was insufficient evidence to support a verdict of liability for the pre-2008 period. 49 As a reminder, those surviving antitrust counterclaims are for attempted monopolization in the PBX maintenance services market, in violation of § 2 of the Sherman Act; and tying PDS software patches to maintenance services, in violation of §1 of the Sherman Act. Given the arguments before us, ours is not to reason why the jury found those particular counterclaims compelling while rejecting the rest. “We exercise plenary review” over a district court’s decision on whether to grant judgment as a matter of law against a jury verdict, but we “must not weigh evidence, engage in credibility determinations, or substitute [our] version of the facts for the jury’s.” Pitts v. Delaware, 646 F.3d 151, 155 (3d Cir. 2011). 96
According to Avaya, by May 2008, all purchasers of new PBX systems were on notice that they were contractually barred from using ISPs, so that there could be no antitrust aftermarket for maintenance. It points out that the sales agreement that accompanied PBX systems at that point expressly provided for “[l]icense [r]estrictions” that made it clear to purchasers – sophisticated and unsophisticated alike – that they could not use ISPs for maintenance. (J.A. 7283.) Specifically, § 6.2 of the sales agreement provided that the Customer agrees not to ... allow any service provider or other third party, with the exception of Avaya’s ... resellers and their designated employees ... to use or execute any software commands that cause the software to perform functions that facilitate the maintenance or repair of any Product except ... those software commands that ... would operate if ... [MSPs] were not enabled or activated[.] (Id.) Even TLI’s CEO, Douglas Graham, testified that when Avaya introduced that version of the sales contract for its new PBX systems, it was “making it clear that ... part of buying [a PBX] is the customer giving up the ability to access an [ISP].” (J.A. 2746.) In its post-trial opinion granting TLI’s request for an injunction, the District Court endorsed that view, even quoting Graham’s language. Accordingly, it limited the 97 injunction against Avaya’s restraints on ISPs to cover only those PBX systems purchased prior to May 2008.50 We agree that no antitrust liability for a Kodak-style attempted monopolization claim could lie after May 2008 when customers were put on clear notice that purchasing an Avaya PBX precluded use of ISP maintenance. As we explained in Queen City Pizza, when the defendant’s power “stems not from the market, but from plaintiffs’ contractual agreement,” then “no claim will lie.” 124 F.3d at 443. By May 2008, PBX customers were on clear notice that Avaya “retained significant power over their ability to purchase cheaper [maintenance] from alternative sources because that authority was spelled out in detail in section [6.2] of the standard [customer] agreement.” Id. at 440. If the customers viewed those terms as “overly burdensome ... at the time they were proposed, [they] could have purchased a different [brand] of [PBX].” Id. at 441. Avaya was therefore “subjected to competition at the pre-contract stage” in the primary market, id. at 440, which was undeniably competitive. Absent a new and compelling economic theory to justify antitrust liability that reaches beyond Kodak – 50 TLI seeks to downplay the effect of the post-2008 customer agreements by arguing that they were “boilerplate” and “ambiguous” (Answering Br. at 36), and by arguing that there was “no evidence that any post-May 2008 Avaya PBX purchasers signed the form contracts” (id. at 38). We conclude that there is no reason to disturb the District Court’s factual findings or legal conclusion on this point. The contractual language is unambiguous, and TLI’s own CEO acknowledged the language’s clarity and its use beginning with the new PBX systems introduced in 2008. 98 which TLI has not provided – Avaya cannot be liable under the antitrust laws for enforcing a transparent contract freely agreed to in a competitive market. “The purpose of the [Sherman] Act is not to protect businesses from the working of the market; it is to protect the public from the failure of the market.” Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 458 (1993). For PBX systems sold after May 2008, TLI could not credibly claim that Avaya was abusing its market power over locked-in customers. Instead, TLI’s complaint was with its potential customers, who had agreed to Avaya’s terms forbidding ISP maintenance in a competitive market. TLI may wish that the PBX customers had demanded access to ISPs when negotiating with Avaya, but that is not a complaint cognizable under the antitrust laws. Therefore, any PBX systems sold during and after May 2008 cannot be a basis for holding Avaya liable for attempted monopolization.
Predatory Conduct The Supreme Court has established that [t]he offense of monopoly under § 2 of the Sherman Act has two elements: (1) the possession of monopoly power in the relevant market and (2) the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident. 99 Grinnell, 384 U.S. at 570-71. The purpose of that twoelement test for monopolization is to avoid imposing liability when a firm has come to possess a dominant market position in procompetitive fashion by simply out-competing its rivals with a superior product or service. Therefore, even a firm with dominant market share will be liable only when its actions are predatory or anticompetitive in nature. More specifically, a § 2 claim will lie only when “(1) ... the defendant has engaged in predatory or anticompetitive conduct with (2) a specific intent to monopolize and (3) a dangerous probability of achieving monopoly power.” Spectrum Sports, 506 U.S. at 456. Phrased another way, the would-be monopolist must make “use of monopoly power ‘to foreclose competition, to gain a competitive advantage, or to destroy a competitor.’” Kodak, 504 U.S. at 482-83 (quoting Griffith, 334 U.S. at 107). Avaya argues that, as a matter of law, there was insufficient evidence of predatory conduct to sustain the conclusion that the second element of a § 2 claim had been proven. According to Avaya, the allegedly predatory acts – e.g., terminating dealings with TLI; sending “fear, doubt, and uncertainty” letters to TLI’s maintenance customers; and trespassing and spying on TLI’s customers – cannot support a verdict of antitrust liability. We find some merit to Avaya’s arguments that those individual acts may be justifiable and not anticompetitive, but we need not resolve this particular argument because it misses the forest for the trees. It is true that, in a traditional § 2 claim, a plaintiff would have to point to specific, egregious conduct that evinced a predatory motivation and a specific intent to monopolize. See Spectrum Sports, 506 U.S. at 456. But in 100 the context of a Kodak claim, any proof that the primary market and the aftermarket are separate for antitrust purposes will necessarily include substantial evidence of predatory conduct. The basis of a prototypical Kodak claim is that through some combination of price discrimination and postsale surprise in the aftermarket, the defendant has managed to dissociate a competitive primary market from an aftermarket that the defendant dominates. In Kodak, that domination was through control over proprietary parts; here, it is alleged to exist through control of proprietary software. If a Kodak defendant has managed to create a relevant antitrust aftermarket, then, it has necessarily acted to “foreclose competition,” Griffith, 334 U.S. at 107, or to achieve the “willful acquisition ... of monopoly power,” Kodak, 504 U.S. at 483. In this case, there is no question that Avaya dominates the market for maintenance services on its system, or that control over the maintenance market was the express intent of its efforts to exclude ISPs. Its every action giving rise to this litigation evinces an intent to dominate the maintenance market. The central antitrust question, then, is whether that market is dissociated from the primary PBX market in a way that makes such domination anticompetitive. Without itself resolving whether a Kodak claim will necessarily include significant evidence of predation, the Supreme Court’s analysis in Kodak suggested that our approach is the right one. In considering the predation prong of § 2 claims, the Court in Kodak merely incorporated its prior analysis of market separation to conclude that the plaintiffs had “presented evidence that Kodak took exclusionary action to maintain its parts monopoly and used its control over parts to strengthen its monopoly share of the Kodak service market.” Id. If we substitute “Avaya” for 101 “Kodak” and “ODMCs/MSPs” for “parts,” we can write the same sentence in this case. Rather than requiring some proof of additional predatory conduct in the maintenance market, that portion of the Kodak opinion focused instead on Kodak’s affirmative defense that “‘valid business reasons’ [could] explain [its] actions.” Id. (quoting Aspen Skiing, 472 U.S. at 605). We apply the same analysis here. The evidence that convinced the jury that Avaya has dissociated the primary market from the aftermarket is sufficient to show exclusionary conduct for purposes of § 2. For that reason, we reject Avaya’s request for judgment as a matter of law because it asks for proof of additional predatory conduct that is unnecessary in a case like this.51