Court Opinion

ID: 8980621
Source: CourtListenerOpinion
Date Created: 2022-11-27 11:18:32.866979+00
Date Added: 2024-06-11T17:10:39.096975
License: Public Domain

WALLACE, Circuit Judge,
dissenting:
I cannot agree with the conclusions reached by the majority. I would affirm the judgment of the district court on both the tying and the attempted monopolization claims. On the first claim, Image Technical Services (Image Tech) has failed to raise any genuine issues of material fact with regard to Kodak’s market power in the market for replacement parts. On the second claim, the record shows that Kodak has a legitimate business reason for its allegedly monopolistic behavior. Therefore, summary judgment was proper on both claims.
I
I agree with the majority that Image Tech has raised triable issues as to whether Kodak’s business practices constitute a tying arrangement. However, not all ties are proscribed by the antitrust laws. Rather, to establish a violation of section 1 of the Sherman Act, Image Tech must show that Kodak possesses sufficient power in the market for the tying product (parts) to appreciably restrain competition in the market for the tied product (service).
Image Tech does not contest that Kodak lacks market power in the interbrand market for copiers. Further, it is uncontested that purchasers of copiers consider costs of maintenance and repair in deciding which brand to buy. Therefore, I do not see how Kodak could have any market power in the market for replacement parts. If Kodak attempts to increase the price of replacement parts above the competitive level, new buyers will increase their estimates of the total price (including parts and service) of a Kodak copier. If some current Kodak owners are unwilling to scrap their copiers and buy new ones from other manufacturers, Kodak will gain short-run profits from the sale of parts. However, as new buyers switch brands, Kodak will lose market share in the sales of new copiers, to its long-term disadvantage.
I find persuasive Judge Posner’s reasoning in the closely analogous case of Parts & Electric Motors, Inc. v. Sterling Electric, Inc., 866 F.2d 228 (7th Cir.1988) (Posner, J., dissenting) (Sterling). In that case, Sterling tied replacement parts to purchases of new Sterling motors. The majority did not reach the question of the legality of the tie. Judge Posner did so, and concluded that Sterling’s lack of power in the interbrand market for motors pre-*622eluded a finding of market power in the derivative market for replacement parts:
[Plaintiff] argues that Sterling has a monopoly of replacement parts for Sterling motors. This is true in the trivial sense that only Sterling manufactures parts usable in those motors. But it would be absurd to infer from this ... that Sterling has market power, that is, power to raise the price of its parts above the price that a competitive market would charge, without losing so many sales as to make the price increase unprofit-able_ Sterling could in principle exploit its “monopoly” by setting its price for replacement parts just below the point at which owners of Sterling motors would decide to scrap the motors rather than pay an exorbitant price for the parts necessary to keep them in service. But this would be a short-run game, since as soon as word got out no one would buy Sterling motors.
Id. at 236 (Posner, J., dissenting).
We accepted a similar argument in General Business Systems v. North American Philips Co., 699 F.2d 965 (9th Cir.1983) (General Business Systems). There, Philips, a computer manufacturer, was accused of illegally tying service and warranty protection (the tying service) to parts (the tied product). Philips lacked market power in the primary interbrand small business computer market. We held that as a result, Philips could not have had any market power in the derivative markets for service and warranty protection. In affirming summary judgment for Philips, we stated: “To have attempted to impose significant pressure to buy [the tied product] by use of the tying service only would have hastened the date on which Philips surrendered to its competitors in the small business computer market.” Id. at 977.
The majority acknowledges the force of this reasoning, but finds that it is too “theoretical” to serve as a basis for summary judgment. Maj. op. at 616-17. The majority’s principal argument is that Image Tech has presented evidence suggesting that Kodak is exercising market power in the parts market. Moreover, the majority observes that the district court allowed only incomplete discovery on this issue, so that summary judgment would be inappropriate given the underdeveloped record.1
I think the majority has misconstrued the nature of Kodak’s argument. Applying Judge Posner’s analysis in Sterling, competition in the interbrand market dictates a simple choice: Kodak may either price parts competitively and maintain its inter-brand market share, or it may price parts supercompetitively — yielding a short-term gain but over the long term destroying its share of the interbrand market. In either case Kodak is not harming competition: if it adopts the latter strategy, competitive forces will exact a heavy toll in the inter-brand market, and profits gained from the short-term parts mark-ups will quickly be eclipsed. The result would be “a brief perturbation in competitive conditions — not the sort of thing the antitrust laws do or should worry about.” Sterling, 866 F.2d at 236 (Posner, J., dissenting).
That Image Tech presents some evidence suggesting that Kodak is not pricing parts competitively, or that Image Tech might be able to do so given additional discovery, should not be sufficient to defeat summary judgment. At best, this would be evidence that Kodak is pursuing a self-destructive pricing strategy which lacks long-term effects upon competition. It is not evidence of true market power. Rather, because lack of power in the interbrand market necessarily precludes power in the derivative market, Image Tech must raise allegations that Kodak has interbrand market power. No amount of evidence of pricing in the derivative market can overcome this requirement.
The majority attempts to distinguish General Business Systems on its facts. The majority correctly points out that in General Business Systems, there was *623some factual evidence supporting a finding that Philips lacked market power in the derivative market: the higher price for the tied product was attributable to the product’s greater reliability, and Philips was not the exclusive source of the tying product. General Business Systems, 699 F.2d at 977-78. However, we did not indicate that such evidence was necessary to the holding. Rather, we were persuaded by the theoretical argument — which the majority declines to accept — that any attempt to exercise power in the tying market would prove fatal in the long run; we then pointed out the factual evidence as additional support for our conclusion. See id. at 977.
I am puzzled by the majority’s argument that General Business Systems is also distinguishable because Kodak has a 25 percent share of the interbrand market, whereas Philips’s share was small and declining. Maj. op. at 616. The majority does not suggest why this provides a meaningful distinction. Image Tech concedes that Kodak lacks interbrand market power. Therefore, the majority’s holding is tenable only if power in the interbrand market is not relevant to power in the derivative market. I cannot see how the magnitude of Kodak’s interbrand market share — once it is conceded that it does not amount to market power — is relevant to any theory of this case. Although the majority states that Kodak’s market share, when combined with (unspecified) “other factors,” could produce power in the derivative market, maj. op. at 618, no analysis is provided to support this contention.
General Business Systems cannot be so readily distinguished. Nor can the economic logic of Kodak’s position be overcome. The majority purports to reject reliance upon theoretical bases in considering the tying claim. However, a theoretical question is necessarily presented: is it possible to have power in the derivative market for replacement parts without possessing power in the primary interbrand market for copiers? The majority answers in the affirmative. However, it does so without analysis or explanation, and without argument from economic principles or legal precedents. In essence, the majority simply ignores the reasoning of General Business Systems and Judge Posner’s opinion in Sterling. No one — neither Image Tech nor the majority — offers a reason why these analyses should be disregarded.
Because I am convinced that power in the primary interbrand market is a prerequisite to power in the derivative market for replacement parts, I conclude that market power has not been demonstrated and would affirm the summary judgment on the section 1 claim.
II
I also believe that summary judgment was appropriate on the attempt-to-monopolize claim under section 2 of the Sherman Act. Kodak’s policies cannot give rise to section 2 liability if they have a legitimate business justification. Oahu Gas Service, Inc. v. Pacific Resources Inc., 838 F.2d 360, 368 (9th Cir.) (Oahu Gas), cert. denied, — U.S. -, 109 S.Ct. 180, 102 L.Ed.2d 149 (1988); see Aspen Skiing Co. v. Aspen Highlands Skiing Co., 472 U.S. 585, 608, 105 S.Ct. 2847, 2860, 86 L.Ed.2d 467 (1985). The burden of proof is on the plaintiff to show that there is no such legitimate justification. Calculators Hawaii, Inc. v. Brandt, Inc., 724 F.2d 1332, 1339 (9th Cir.1983).
Kodak submitted extensive and undisputed evidence of a marketing strategy based on high-quality service. Kodak alleges that independent service organizations (ISOs) such as Image Tech may provide low-quality service, which will reflect negatively on Kodak and undermine its quality-of-service strategy. According to Kodak, the tying of replacement parts to service is used to police against poor-quality service by the ISOs. To defeat a motion for summary judgment, Image Tech, as the party with the burden of proof, was required to present evidence to refute these allegations. Celotex Corp. v. Catrett, 477 U.S. 317, 322-24, 106 S.Ct. 2548, 2552-53, 91 L.Ed.2d 265 (1986). It failed to do so.
In Mozart Co. v. Mercedes-Benz of North America, Inc., 833 F.2d 1342, 1350-51, 1352 (9th Cir.1987) (Mozart), cert. de*624nied, — U.S. -, 109 S.Ct. 179, 102 L.Ed.2d 148 (1988), we held that an almost identical argument was sufficient to defeat liability under section 2. There, Mercedes based its reputation in part on the quality of its replacement parts. Mercedes refused to supply dealers with new cars unless the dealer purchased parts from Mercedes. Id. at 1344, 1351. Mercedes argued that this policy was used to maintain the high quality of replacement parts. We held that this tying arrangement was permissible due to the legitimate business justification of quality control. Id. at 1351, 1352; see also Drinkwine v. Federated Publications, Inc., 780 F.2d 735, 740 (9th Cir.) (“desire to control quality” held a legitimate business justification for a tying arrangement sufficient to support summary judgment on a section 2 claim), cert. denied, 475 U.S. 1087, 106 S.Ct. 1471, 89 L.Ed.2d 727 (1986).
Image Tech argues, and the majority agrees, that summary judgment is not appropriate because Kodak’s policies may in part be motivated by a desire to exclude the ISOs. However, the mere presence of monopolistic motivations is insufficient to establish liability. “Where a monopolist’s [activity] is based partially on a desire to restrict competition, we determine antitrust liability by asking whether there was a legitimate'business justification for the monopolist’s conduct.... [T]he desire to maintain market power — even a monopolists’ market power — cannot create antitrust liability if there was a legitimate business justification for [the challenged action].” Oahu Gas, 838 F.2d at 368-69.
Image Tech also argues that Kodak’s proposed justification is insufficient because strategies are available to accomplish the same objectives that pose a lesser injury to competition. A defendant’s proposed business rationale cannot serve as a defense to a section 1 tying claim unless the challenged practice is the least restrictive alternative for achieving the stated goal. Mozart, 833 F.2d at 1349. Thus, the majority rightly rejects Kodak’s use of the quality-control defense in the context of the section 1 claim. Maj. op. at 618. However, no such requirement exists under section 2. Any business justification — whether or not it is the least restrictive — will defeat an attempt-to-monopolize claim. Oahu Gas, 838 F.2d at 368-69 (A monopolist’s duties under section 2 “arise only when there is no justification for refusing to aid a competitor.” (emphasis added)); see also Mozart, 833 F.2d at 1352. Thus, the majority’s suggestion — that because the quality-control defense failed under section 1, it must also fail under section 2 — misconstrues the section 2 test. There is no less-restrictive alternative requirement here.
Image Tech has raised no genuine issue of material fact showing Kodak’s policy to be unsupported by legitimate business judgment. While the policy may not be the least restrictive alternative, and while it may also involve in part a desire to enhance Kodak’s market share in service, such circumstances are insufficient to establish liability under section 2. I would affirm the summary judgment on this claim as well.

. The majority also suggests that the theory outlined in Sterling and General Business Systems may not reflect the reality in this case because of "market imperfections.” No evidence of market imperfections has been presented, and the majority does not identify any specific imperfections which might invalidate the theory.