The Supreme Court ruled yesterday that equipment manufacturers that also sell parts and services for their products can be held liable under the antitrust laws for trying to dominate the parts and service market even if they face fierce competition in their basic business.
The court, ruling 6 to 3, cleared the way for trial of an antitrust lawsuit brought against Eastman Kodak Co. by competitors, known as independent service organizations, who repaired Kodak photocopiers and other business equipment.
The competitors said Kodak violated the antitrust laws and attempted to drive them out of the service business by refusing to sell them replacement parts for the equipment and taking other steps to dry up their supply of spare parts.
The case was closely watched by a broad array of businesses -- including automakers, computer companies and the electronics industry -- that also take part in the lucrative business of providing parts and services for their goods. On the other side were service dealers, consumer groups and insurance companies, who said manufacturers should not be allowed to seek to dampen competition for servicing their products. The Bush administration supported Kodak's position.
Both sides in the case said a ruling on their behalf was essential to promoting vigorous competition.
The manufacturers said that exposing them to the threat of triple damages under the antitrust laws for attempts to insure high-quality service would inhibit their ability to compete with other manufacturers of their products and would stifle incentive to develop new products in service-intensive businesses.
The service dealers and others said that letting manufacturers refuse to sell replacement parts to competitors in the fast-growing field of equipment services ultimately would drive the competitors out of business, leaving consumers with lower quality and higher prices.
Kodak accounts for 23 percent of the market in high-volume photocopiers and less than 20 percent of the market in micrographics equipment such as microfilm and electronic scanners. It also provides parts and services for its machines, accounting for up to 95 percent of the service for Kodak machines.
Starting in the early 1980s, Kodak began to face competition in that part of its business from the independent service organizations. In 1985 and 1986, it adopted a policy of selling replacement parts only to buyers of Kodak equipment who use Kodak service or who do their own repairs. It also told companies that manufacture parts for Kodak not to sell the parts to anyone other than Kodak, and took other steps to keep the servicers from having access to Kodak parts.
The service organizations filed an antitrust lawsuit against Kodak. They accused the company of violating the antitrust laws by tying the sale of service for Kodak machines to the sale of parts. They also said Kodak was guilty of attempting to monopolize the sale of service for its machines.
The major legal issue in the case was whether Kodak could be held liable for its actions in the parts and service area despite the fact that it faces extensive competition in its basic market, which is selling the equipment itself.
The court has said that certain practices, such as tying arrangements, are only illegal if a company has "market power," the ability to raise prices above the level that would be charged in a competitive situation.
Kodak contended that its competitive situation in the equipment market meant that it could not have "market power" in the parts market because customers facing high prices for parts and service would simply begin buying competitors' equipment with lower service costs.
In his opinion for the court, Justice Harry A. Blackmun disagreed with the company's argument that it should not even have to face trial on the antitrust claims.
The evidence may turn out to show, he said, that Kodak's "parts, service, and equipment are components of one unified market, or that the equipment market does discipline the aftermarkets so that all three are priced competitively overall, or that any anti-competitive effects of Kodak's behavior are outweighed by its competitive effects."
But, Blackmun said, the court "cannot reach these conclusions as a matter of law on a record this sparse" and that the case should be allowed to proceed to trial.
Justice Antonin Scalia, joined by Justices Sandra Day O'Connor and Clarence Thomas, dissented in the case, Eastman Kodak Co. v. Image Technical Services Inc.
They said the ruling "makes no economic sense" and "threatens to release a torrent of litigation and a flood of commercial intimidation that will do much more harm than good to enforcement of the antitrust laws and to genuine competition."