"Formalistic Line Drawing": Exclusion of Unauthorized Servicers from Single Brand Aftermarkers under Kodak and Sylvania

By Arthur, Thomas C. | Journal of Corporation Law, Spring 1999 | Go to article overview

"Formalistic Line Drawing": Exclusion of Unauthorized Servicers from Single Brand Aftermarkers under Kodak and Sylvania


Arthur, Thomas C., Journal of Corporation Law


I. INTRODUCTION

In Eastman Kodak Co. v. Image Technical Services, Inc.1 the Supreme Court held that a seller of complex durable equipment that possessed only a modest market share may nevertheless be considered a monopolist in the parts and service "aftermarkets" for its brand.2 Kodak subjects such sellers to the affirmative duty to deal with competitors placed upon monopolists by the Court's precedents under Section 2 of the Sherman Act.3

As most recently articulated by the court in Aspen Skiing Co. v. Aspen Highlands Skiing Corp.,4 and in Kodak itself,5 a monopolist may be liable for declining to deal with a rival unless it can persuade a jury that it had a "valid business justification" for doing so. On remand, Kodak was unable to satisfy a jury that its decision not to sell repair parts to independent servicers was motivated by such a business reason, and thus incurred a judgment, after trebling, in excess of seventy million dollars, which was affirmed in most particulars by the Ninth Circuit.6

Many commentators, including this author, have criticized the Court's use of nonstructural market imperfections to extend the antitrust concept of market power in Kodak, fearing that it could lead to a costly expansion of antitrust regulation across its entire range of prohibitions.7 It is still too early to determine the effect Kodak may have on market power determinations generally, and others have written on its effects in tying cases.8 Other than tying cases, Kodak's greatest impact to date has been its expansion of the scope of Aspen's affirmative duty into decisions by self-distributing equipment manufacturers not to sell parts to independents competing with them for service customers.

The extension of this duty to deal, which is questionable even as to real monopolists,9 to firms without interbrand market power cannot be justified. It creates a formalistic distinction between complete and partial vertical integration by manufacturers into distribution. In the over twenty years since the seminal decision in Continental T. V., Inc. v. GTE Sylvania Inc.,10 manufacturers, even those with interbrand market power, have been permitted to eliminate intrabrand competition among their distributors and even between their distributors and themselves, to market more effectively in the primary, interbrand market.ll Sylvania and its progeny specifically recognize the importance of ensuring adequate, high quality aftermarket service and give manufacturers using distributors virtually a free hand to restrict the availability of repair parts to unaffiliated, completely independent servicers, like the plaintiffs in Kodak, that wish to compete with authorized servicers and the manufacturer itself.l2 Self-distributing manufacturers, like Kodak, have exactly the same interest in ensuring adequate, high quality service.l3 Yet Kodak incurred a treble damage award of over seventy million dollars for declining to sell parts to unaffiliated servicers.l4 And Kodak has been ordered to sell repair parts to all servicers so long as it continues to offer service itself.15

There is no functional difference between the elimination of independent servicers by a self-distributing, vertically integrated manufacturer that refuses to supply them with parts, and elimination of independent servicers by a partially integrated manufacturer that forbids its distributors to supply them. To treat like cases alike, the Court must either return to its discredited pre-Sylvania hostility towards intrabrand distributional restraints or jettison Kodak and give self-distributing manufacturers that same ability to control the marketing of their products that Sylvania gives those that employ distributors.

Part I of this Article sets out the confused, self-contradictory law on monopolists' affirmative duty to deal with rivals absent a "valid business justification," focusing on the Court's general formulation of the duty in Aspen and the Court's extension of the duty to aftermarket "monopolists" in Kodak. …

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