Opinion ID: 4076467
Heading Depth: 4
Heading Rank: 2

Heading: Third Circuit Elaboration of

Text: Kodak Since Kodak, our Court has had the opportunity to develop that case’s theory of antitrust liability, most notably in a pair of cases called Queen City Pizza, Inc. v. Domino’s Pizza, Inc., 124 F.3d 430 (3d Cir. 1997), and Harrison Aire, Inc. v. Aerostar International, Inc., 423 F.3d 374 (3d Cir. 2005). In Queen City Pizza, we considered a Kodak-style claim by a group of franchisees against Domino’s Pizza, alleging that Domino’s had used its monopoly power over the market for franchise rights and proprietary pizza dough to restrain trade in the market for approved pizza supplies. 124 F.3d at 434. We affirmed the district court’s dismissal of the claims under Federal Rule of Civil Procedure 12(b)(6) because we did not consider the contractual requirement for franchisees to purchase pizza ingredients from Domino’s to implicate the concerns raised in Kodak. Id. at 444. We observed “that Domino’s approved supplies and ingredients 87 are fully interchangeable in all relevant respects with other pizza supplies” so that they were not unique in the way that Kodak parts were. Id. at 440. The plaintiffs were not, therefore, forced to purchase approved supplies because of the uniqueness of any Domino’s goods, but instead only “because they [were] bound by contract to do so.” Id. at 441. In distinguishing that contractual obligation from the Kodak situation, we explained that, where the defendant’s forcing power “stems not from the market, but from plaintiffs’ contractual agreement ..., no claim will lie.”46 Id. at 443. “If 46 In Queen City Pizza, we talked, in part, of the defendant forcing “plaintiffs to purchase the ... tying product.” 124 F.3d at 443 (emphasis added). That language was a result of the idiosyncratic nature of one of the tying theories alleged in that case. Under that theory, the primary market was for restaurant franchise agreements, which in turn contractually bound franchisees to purchase the alleged “tying” product, fresh dough. The franchisees contended that Domino’s “refused to sell fresh dough to [them] unless [they] purchased other ingredients and supplies from Domino’s,” id. at 434, so that the “other ingredients and supplies” were the “tied” product. The analogy here would be an argument that the primary market was for PBX systems, which “forced” the purchase of ODMCs and MSPs as the “tying” products, which were in turn allegedly used to force purchase of maintenance as the “tied” service. No matter how many intermediate steps are alleged, however, in the end our concern is whether the defendant forced purchases of a tied product using power in some distinct market. Jefferson Parish, 466 U.S. at 12. Queen City Pizza stands for the proposition that if the supposed forcing is entirely the result 88 Domino’s ... acted unreasonably when ... it restricted plaintiffs’ ability to purchase supplies from other sources, plaintiffs’ remedy, if any, is in contract, not under the antitrust laws.” Id. at 441. We also emphasized in Queen City Pizza that “[t]he Kodak case arose out of concerns about unilateral changes in Kodak’s parts and repairs policies.” Id. at 440. Because Kodak’s change in policy against independent maintenance providers “was not foreseen at the time of sale, buyers had no ability to calculate these higher costs at the time of purchase and incorporate them into their purchase decision.” Id. The Domino’s franchisees, on the other hand, “knew that Domino’s Pizza retained significant power over their ability to purchase cheaper supplies from alternative sources because that authority was spelled out in ... the ... franchise agreement,” so the “franchisees could assess the potential costs and economic risks at the time they signed the franchise agreement.” Id. If the franchisees found the contractual requirements “overly burdensome or risky at the time they were proposed, [they] could have purchased a different form of restaurant, or made some alternative investment,” id. at 441, so that the transaction was “subjected to competition at the pre-contract stage,” id. at 440. We thus characterized Kodak as concerned largely with the threat of unfair surprise for customers in the aftermarket, a threat ameliorated if the aftermarket terms were made clear in a primary market contract. of a transparent contractual agreement, then that is not the concern of the antitrust laws. A plaintiff cannot avoid that outcome merely by crafting a complaint to allege intermediate steps. 89 In Harrison Aire, our Court’s second major case elaborating Kodak, we affirmed summary judgment against the Kodak-style claims of a hot air balloon operator that alleged that the balloon manufacturer had monopolized the aftermarket for replacement balloon fabric by tying the purchase of its own branded fabric to its balloons. 423 F.3d at 379, 386. We explained that, in general, “[i]f the primary market is competitive, a firm exploiting its aftermarket customers ordinarily is engaged in a short-run game – for when buyers evaluate the ‘lifecycle’ cost of the product, the cost of the product over its full service life, they will shop elsewhere.” Id. at 382. The Kodak case is an exception to that general rule, based on a “market failure” in which “lifecycle pricing information is particularly difficult or impossible for primary market customers to acquire, as in the case of a unilateral change in aftermarket policy targeting ‘locked in’ customers.” Id. We emphasized that “Kodak does not transform every firm with a dominant share of the relevant aftermarket into a monopolist,” and that a Kodakstyle “plaintiff must produce ‘hard evidence dissociating the competitive situation in the aftermarket from activities occurring in the primary market.’” Id. at 383 (quoting SMS Sys. Maint. Servs., Inc. v. Digital Equip. Corp., 188 F.3d 11, 17 (1st Cir. 1999)). In evaluating the evidence in Harrison Aire, we cautioned that, although “[o]ne important consideration is whether a unilateral change in aftermarket policy exploits locked-in customers,” id. at 383, “an ‘aftermarket policy change’ is not the sine qua non of a Kodak claim,” id. at 384. Other factors to consider include “evidence of (1) supracompetitive pricing, (2) [the seller’s] dominant share of the relevant aftermarket, (3) significant information costs that 90 prevent[] lifecycle pricing, and (4) high ‘switching costs’ that serve[] to ‘lock in’ [the seller’s] aftermarket customers.” Id. Applying those factors to the specific circumstances of the Harrison Aire case, we concluded that “[n]either information costs nor a unilateral change in aftermarket policy prevented [the plaintiff] from shopping for competitive lifecycle balloon prices when it purchased the ... balloon at issue.” Id. at 38485. Without “other evidence dissociating competitive conditions in the primary balloon market from conditions in the aftermarket for replacement fabric,” it was “clear that [the plaintiff] got precisely the balloon and the aftermarket fabric that it bargained for in the competitive primary market.” Id. at 385. Therefore, summary judgment against the monopolization claim was appropriate.47