XII Tie ins involving patents and intellectual property

A. Development of Per Se Rule and Market Power

(1) Tie in generally: International Business Mach. v. U.S. 298 U.S. 131, 56 S.Ct. 701, 80 L.Ed. 1085 (1936)

(2) Recognition of Market Power: International Salt v. U.S. 332 U.S. 392; 68 S.Ct. 12; 92 L.Ed. 20; 75 U.S.P.Q. 184 (1947)

(3) Presumption of Market Power: U.S. v. Paramount Pictures, Inc. 334 U.S. 131; 68 S. Ct. 915; 92 L. Ed. 1260; 77 U.S.P.Q. 243 (1948)

(4) Express Presumption of Market Power: U.S. v. Loew's, Inc. 371 U.S. 38; 83 S.Ct. 97; 9 L.Ed. 2d 11; 135 U.S.P.Q. 201 (1962)

B. Single Products, No Coercion & Market Definition

(1) Single Product and Service mark: Bernard Susser et al. v. Carvel Corporation 332 F.2d 505; 141 U.S.P.Q. 609; 1964 Trade Cas. 71,103 (2d Cir, 1964)

(2) Single Product Market and/or No Coercion: Jefferson Parish Hospital District No. 2 v. Hyde, 466 U.S. 2, 16, 104 S. Ct. 1551; 80 L. Ed. 2d 2; 1984-1 Trade Cas. 65,908 (1984)

(3) Real World Rather Than Academic Economic Factors: Eastman Kodak Co. v. Image Tech. Serv. Inc. 504 US 451, 112 S Ct 2072, 119 L. Ed 2d 265 (1992)



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International Business Machines Corp. v. United States
298 U.S. 131, 56 S.Ct. 701, 80 L.Ed. 1085
(1936)

Stone, J. This is an appeal * * * from so much of a decree of a District Court for Southern New York as enjoins the appellant from leasing its tabulating and other machines upon the condition that the lessees shall use with such machines only tabulating cards manufactured by appellant, as a violation of 3 of the Clayton Act, 38 Stat. 731, 15 U. S. C. 14.

The Government brought the suit against appellant and three other corporations, all manufacturers of machines performing substantially the same functions as appellant's, to restrain the use by each of the defendants of a specified type of lease of their machines as a violation of the Clayton Act, and to declare void under the Sherman Act a contract into which they had entered, by which each agreed to use that type of lease, and not to solicit the lessees of machines of the others to purchase tabulating cards which it manufactures. The case was tried upon the pleadings and a stipulation of facts, in which the defendants consented to a decree cancelling their agreement with each other. Two of the defendants have been eliminated from the suit, one by dissolution and the other by merger with appellant. A third defendant, Remington Rand, Inc., has stipulated that the decree to be entered against it shall conform to that entered against appellant upon this appeal.

Appellant's machines and those of Remington Rand, Inc., are now the only ones on the market which perform certain mechanical tabulations and computations, without any intervening manual operation, by the use in them of cards upon which are recorded data which are the subject of tabulation or computation. Appellant manufactures three types of machines, known as punching machines, sorters and tabulators. The punching machines are used to perforate cards, called tabulating cards, in such manner that the positions of the perforations indicate numerical or other data. When the cards are passed through the sorter or tabulator, control of its mechanism is effected by electrical circuits established by contacts through the perforations. The cards are thus made permanent records of information, and by the perforations are given such form that they may be used, as often as required, to control the function of the machines through which they are passed. The sorting machines are used to sort the perforated cards so as to classify them by the selection and segregation, in the desired manner, of those signifying any particular type of information. The tabulating machines are used to record the information denoted by the perforated cards or to make computations based upon it. In the Remington Rand machines the control is not electrical, but is accomplished by the use of cards which admit of the movement, into the perforations, of small pins which, by linkage, guide the mechanical operation of the machine so as to effect the desired result.

To insure satisfactory performance by appellant's machines it is necessary that the cards used in them conform to precise specifications as to size and thickness, and that they be free from defects due to slime or carbon spots, which cause unintended electrical contacts and consequent inaccurate results. The cards manufactured by appellant are electrically tested for such defects.

Appellant leases its machines for a specified rental and period, upon condition that the lease shall terminate in case any cards not manufactured by the lessor are used in the leased machine. A special form of lease has been granted to the Government by which it is permitted to use cards of its own manufacture upon paying a 15% increase in the rental of the leased machines, but upon condition that the lease shall be terminable if the Government uses such cards without payment of the additional rental.

Appellant insists that the condition of its leases is not within the prohibition of the Clayton Act, and it has assigned as error the conclusion of the district court that the condition tends to create monopoly. But its principal contentions are that its leases are lawful because the protection secured by the condition does not extend beyond the monopoly which it has acquired by patents on the cards and on the machines in which they are used, and that in any case the condition is permissible under 3 of the Clayton Act because its purpose and effect are only to preserve to appellant the good will of its patrons by preventing the use of unsuitable cards which would interfere with the successful performance of its machines.

1. Section 3 of the Clayton Act, so far as it is applicable to the present case, provides that

"It shall be unlawful for any person engaged in commerce, in the course of such commerce, to lease . . . machinery . . . whether patented or unpatented, for use . . . within the United States . . . on the condition . . . that the lessee . . . shall not use . . . supplies or other commodities of a competitor . . . , where the effect of such lease . . . or such condition . . . may be to substantially lessen competition or tend to create a monopoly in any line of commerce."

The statute thus in precise terms makes unlawful a condition that the lessee shall not use the supplies or commodities of a competitor of the lessor if the effect of the condition "may be" to lessen competition substantially, or if it tends to create a monopoly.

Little need be said of the contention that the condition of appellant's leases does not infringe these prohibitions. It is true that the condition is not in so many words against the use of the cards of a competitor, but is affirmative in form, that the lessee shall use only appellant's cards in the leased machines. But as the lessee can make no use of the cards except with the leased machines, and the specified use of appellant's cards precludes the use of the cards of any competitor, the condition operates in the manner forbidden by the statute. See United Shoe Machinery Co. v. United States, 258 U.S. 451, 457, 458; compare Federal Trade Comm'n v. Sinclair Refining Co., 261 U.S. 463, 474. A different question is presented from that in the Sinclair case, where a wholesale distributor of gasoline leased gasoline pumps to retail dealers with the stipulation that they should not be used for the pumping of gasoline of the lessor's competitors. As the only use made of the gasoline was to sell it, and as there was no restraint upon the purchase and sale of competing gasoline, there was no violation of the Clayton Act.

The conclusion of the trial court that appellant's leases infringe the monopoly provisions of the section does not want for support in the record. The agreed use of the "tying clause" by appellant and its only competitors, and the agreement by each of them to restrict its competition in the sale of cards to the lessees of the others, have operated to prevent competition and to create a monopoly in the production and sale of tabulating cards suitable for appellant's machines, as the district court found. The commerce in tabulating cards is substantial. Appellant makes and sells 3,000,000,000 cards annually, 81% of the total, indicating that the sales by the Remington Rand company, its only competitor, representing the remaining 19%, are approximately 600,000,000. It is stipulated that appellant derives a "substantial" profit from its card sales. The gross receipts from its machines during the past ten years have averaged $ 9,710,389 a year, and an average of $ 3,192,700 has been derived annually from the sale of its cards. These facts, and others, which we do not stop to enumerate, can leave no doubt that the effect of the condition in appellant's leases "may be to substantially lessen competition," and that it tends to create monopoly, and has in fact been an important and effective step in the creation of monopoly.

2. On the trial appellant offered to prove its ownership of patents which, it asserts, give it a monopoly of the right to manufacture, use and vend the cards, separately, and in combination with its sorting and tabulating machines, of which, it insists, they are a part. It argues that the condition of its leases is lawful because it does not enlarge the monopoly secured by the patents, and that the trial court erred in refusing to consider appellant's patent monopoly as a defense to the suit.

Appellant's patents appear to extend only to the cards when perforated, and to have no application to those which the lessees purchase before they are punched. The contention is thus reduced to the dubious claim that the sale of the un-punched cards is a contributory infringement of the patents covering the use of perforated cards separately and in combination with the machines. See Carbice Corp. v. American Patents Development Corp., 283 U.S. 27; Motion Picture Patents Co. v. Universal Film Mfg. Co., 243 U.S. 502; McGrath Holding Corp. v. Anzell, 58 F.2d 205; cf. Leeds & Catlin Co. v. Victor Talking Machine Co., 213 U.S. 325.

But we do not place our decision on this narrow ground. We rest it rather on the language of 3 of the Clayton Act which expressly makes tying clauses unlawful, whether the machine leased is "patented or unpatented." The section does not purport to curtail the patent monopoly of the lessor or to restrict its protection by suit for infringement. But it does in terms deny to the lessor of a patented, as well as of an unpatented machine, the benefit of any condition or agreement that the lessee shall not use the supplies of a competitor. The only purpose or effect of the tying clause, so far as it could be effectively applied to patented articles, is either to prevent the use, by a lessee, of the product of a competitor of the lessor, where the lessor's patent, prima facie, embraces that product, and thus avoid judicial review of the patent, or else to compel its examination in every suit brought to set aside the tying clause, although the suit could usually result in no binding adjudication as to the validity of the patent, since infringement would not be in issue. The phrase "whether patented or unpatented" would seem well chosen to foreclose the possibility of either alternative.

When Congress had before it the bill which became 3 of the Clayton Act, it was familiar with the decision of this Court in Henry v. A. B. Dick Co., 224 U.S. 1, and with the contentions made in United States v. United Shoe Machinery Co., 247 U.S. 33, then pending before this Court -- cases in which it was held that a tying clause could lawfully be extended to unpatented supplies for a leased patented machine. Cong. Rec., Vol. 51, Part 14, 63rd Cong., 2d Sess., 14,089 ff.; see Henderson, The Federal Trade Commission, 30. One purpose of 3 undoubtedly was to prevent such use of the tying clause. United Shoe Machinery Co. v. United States, 258 U.S. 451. But the debates on 3, on the floor of the Senate, disclose that it was well known to that body that one of the contentions in the pending cause, United States v. United Shoe Machinery Co., 247 U.S. 33, was that it was permissible, in any circumstances, for a lessor to tie several patented articles together. They show that the proponents of the bill were as much concerned that that practice should be prohibited as that the tying of non-patented to patented articles should be ended. Cong. Rec., Vol. 51, Part 14, 63rd Cong., 3d Sess., 14275. The phrase, "whether patented or unpatented" as used in 3 is as applicable to the one practice as to the other. It would fail of the purpose which it plainly expresses if it did not operate to preclude the possibility of both, and to make the validity of the tying clause a matter to be determined independently of the protection afforded by any monopoly of the lessor. Such, we think, must be taken to be the effect of the section unless its language and history are to be disregarded. Under its provisions the lawfulness of the tying clause must be ascertained by applying to it the standards prescribed by 3 as though the leased article and its parts were unpatented.

3. Despite the plain language of 3, making unlawful the tying clause when it tends to create a monopoly, appellant insists that it does not forbid tying clauses whose purpose and effect are to protect the good will of the lessor in the leased machines, even though monopoly ensues. In support of this contention appellant places great emphasis on the admitted fact that it is essential to the successful performance of the leased machines that the cards used in them conform, with relatively minute tolerances, to specifications as to size, thickness and freedom from defects which would affect adversely the electrical circuits indispensable to the proper operation of the machines. The point is stressed that failure, even though occasional, to conform to these requirements, causes inaccuracies in the functioning of the machine, serious in their consequences and difficult to trace to their source, with consequent injury to the reputation of the machines and the good will of the lessors. There is no contention that others than appellant cannot meet these requirements. It affirmatively appears, by stipulation, that others are capable of manufacturing cards suitable for use in appellant's machines, and that paper required for that purpose may be obtained from the manufacturers who supply appellant. The Remington Rand Co. manufactures cards suitable for its own machines, but since it has been barred by the agreement with appellant from selling its cards for use in appellant's machines, its cards are not electrically tested. The Government, under the provisions of its lease, following its own methods, has made large quantities of the cards, which are in successful use with appellant's machines. The suggestion that without the tying clause an adequate supply of cards would not be forthcoming from competitive sources is not supported by the evidence.

"The very existence of such restrictions suggests that in its absence a competing article of equal or better quality would be offered at the same or at a lower price."

Carbice Corp. v. American Patents Development Corp., supra, 32, Note 2, quoting Vaughan, Economics of Our Patent System, 125, 127. Appellant's sales of cards return a substantial profit and the Government's payment of 15% increase in rental to secure the privilege of making its own cards is profitable only if it produces the cards at a cost less than 55% of the price charged by appellant.

Appellant is not prevented from proclaiming the virtues of its own cards or warning against the danger of using, in its machines, cards which do not conform to the necessary specifications, or even from making its leases conditional upon the use of cards which conform to them. For aught that appears such measures would protect its good will, without the creation of monopoly or resort to the suppression of competition.

The Clayton Act names no exception to its prohibition of monopolistic tying clauses. Even if we are free to make an exception to its unambiguous command, see United States v. United Shoe Machinery Co., 264 Fed. 138, 167; Auto Acetylene Light Co. v. Prest-O-Lite Co., 276 Fed. 537; Pick Mfg. Co. v. General Motors Corp., 80 F.2d 641; cf. Radio Corporation v. Lord, 28 F.2d 257, we can perceive no tenable basis for an exception in favor of a condition whose substantial benefit to the lessor is the elimination of business competition and the creation of monopoly, rather than the protection of its good will, and where it does not appear that the latter can not be achieved by methods which do not tend to monopoly and are not otherwise unlawful.

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International Salt Co., Inc. v. United States

332 U.S. 392, 92 L. Ed 20, 68 S. Ct. 12, 75 U.S.P.Q. 184

(1947)

Mr. Justice Jackson: The Government brought this civil action to enjoin the International Salt Company, appellant here, from carrying out provisions of the leases of its patented machines to the effect that lessees would use therein only International's salt products. The restriction is alleged to violate 1 of the Sherman Act and 3 of the Clayton Act. Upon appellant's answer and admissions of fact, the Government moved for summary judgment under Rule 56 of the Rules of Civil Procedure, upon the ground that no issue as to a material fact was presented and that, on the admissions, judgment followed as matter of law. Neither party submitted affidavits. Judgment was granted and appeal was taken directly to this Court.

It was established by pleadings or admissions that the International Salt Company is engaged in interstate commerce in salt, of which it is the country's largest producer for industrial uses. It also owns patents on two machines for utilization of salt products. One, the "Lixator," dissolves rock salt into a brine used in various industrial processes. The other, the "Saltomat," injects salt, in tablet form, into canned products during the canning process. The principal distribution of each of these machines is under leases which, among other things, require the lessees to purchase from appellant all unpatented salt and salt tablets consumed in the leased machines.

Appellant had outstanding 790 leases of an equal number of "Lixators," all of which leases were on appellant's standard form containing the tying clause and other standard provisions; of 50 other leases which somewhat varied the terms, all but 4 contained the tying clause. It also had in effect 73 leases of 96 "Saltomats," all containing the restrictive clause. In 1944, appellant sold approximately 119,000 tons of salt, for about $500,000, for use in these machines.

The appellant's patents confer a limited monopoly of the invention they reward. From them appellant derives a right to restrain others from making, vending or using the patented machines. But the patents confer no right to restrain use of, or trade in, unpatented salt. By contracting to close this market for salt against competition, International has engaged in a restraint of trade for which its patents afford no immunity from the antitrust laws. Morton Salt Co. v. G. S. Suppiger Co., 314 U.S. 488; Mercoid Corp. v. Mid-Continent Investment Co., 320 U.S. 661; Mercoid Corp. v. Minneapolis Honeywell Regulator Co., 320 U.S. 680, 64 S.Ct. 278, 88 L.Ed. 396.

Appellant contends, however, that summary judgment was unauthorized because it precluded trial of alleged issues of fact as to whether the restraint was unreasonable within the Sherman Act or substantially lessened competition or tended to create a monopoly in salt within the Clayton Act. We think the admitted facts left no genuine issue. Not only is price-fixing unreasonable, per se, United States v. Socony-Vacuum Oil Co., 310 U.S. 150; United States v. Trenton Potteries Co., 273 U.S. 392, but also it is unreasonable, per se, to foreclose competitors from any substantial market. Fashion Originators Guild v. Federal Trade Commission, 114 F. 2d 80, affirmed, 312 U.S. 457. The volume of business affected by these contracts cannot be said to be insignificant or insubstantial and the tendency of the arrangement to accomplishment of monopoly seems obvious. Under the law, agreements are forbidden which "tend to create a monopoly," and it is immaterial that the tendency is a creeping one rather than one that proceeds at full gallop; nor does the law await arrival at the goal before condemning the direction of the movement.

Appellant contends, however, that the "Lixator" contracts are saved from unreasonableness and from the tendency to monopoly because they provided that if any competitor offered salt of equal grade at a lower price, the lessee should be free to buy in the open market, unless appellant would furnish the salt at an equal price; and the "Saltomat" agreements provided that the lessee was entitled to the benefit of any general price reduction in lessor's salt tablets. The "Lixator" provision does, of course, afford a measure of protection to the lessee, but it does not avoid the stifling effect of the agreement on competition. The appellant had at all times a priority on the business at equal prices. A competitor would have to undercut appellant's price to have any hope of capturing the market, while appellant could hold that market by merely meeting competition. We do not think this concession relieves the contract of being a restraint of trade, albeit a less harsh one than would result in the absence of such a provision. The "Saltomat" provision obviously has no effect of legal significance since it gives the lessee nothing more than a right to buy appellant's salt tablets at appellant's going price. All purchases must in any event be of appellant's product.

Appellant also urges that since under the leases it remained under an obligation to repair and maintain the machines, it was reasonable to confine their use to its own salt because its high quality assured satisfactory functioning and low maintenance cost. The appellant's rock salt is alleged to have an average sodium chloride content of 98.2%. Rock salt of other producers, it is said, "does not run consistent in sodium chloride content and in many instances runs as low as 95% of sodium chloride." This greater percentage of insoluble impurities allegedly disturbs the functioning of the "Lixator" machine. A somewhat similar claim is pleaded as to the "Saltomat."

Of course, a lessor may impose on a lessee reasonable restrictions designed in good faith to minimize maintenance burdens and to assure satisfactory operation. We may assume, as matter of argument, that if the "Lixator" functions best on rock salt of average sodium chloride content of 98.2%, the lessee might be required to use only salt meeting such a specification of quality. But it is not pleaded, nor is it argued, that the machine is allergic to salt of equal quality produced by anyone except International. If others cannot produce salt equal to reasonable specifications for machine use, it is one thing; but it is admitted that, at times, at least, competitors do offer such a product. They are, however, shut out of the market by a provision that limits it, not in terms of quality, but in terms of a particular vendor. Rules for use of leased machinery must not be disguised restraints of free competition, though they may set reasonable standards which all suppliers must meet. Cf. International Business Machines Corp. v. United States, 298 U.S. 131.

Appellant urges other objections to the summary judgment. The tying clause has not been insisted upon in all leases, nor has it always been enforced when it was included. But these facts do not justify the general use of the restriction which has been admitted here.

The appellant also strongly objects to the provisions of the sixth paragraph of the decree. Appellant denies the necessity for such provision and it is true that the record discloses no threat to discriminate after the judgment of the court is pronounced. It also suggests that we modify the judgment to accept a proposed alternative provision similar to one it says it urged upon the District Court, which rejected it. The record does not show what proceedings were had between rendering of the court's opinion and signing of the decree.

The specific ground of objection raised by appellant to paragraph six is that International may find it necessary in some sections of the country to reduce the rental rates of the machines in order that its machines may compete with those of others. Of course, the Clayton Act itself permits one charged with price discrimination to show that he lowered his price in good faith to meet competition. Obviously, the District Court was not intending to prevent competition or to disable the appellant from meeting or offering it. The Government, too, says it would not oppose permitting a lower price to meet, in good faith, the equally low price of a competitor if the need arose.

The short of the contention is that since the company never has threatened to violate any decree entered in this case to restrain future use of the illegal leases, it feels that the provision invalidating the objectionable leases should end the matter and that, as to any additional provisions, appellant is entitled to stand before the court in the same position as one who has never violated the law at all - that the injunction should go no farther than the violation or threat of violation. We cannot agree that the consequences of proved violations are so limited. The fact is established that the appellant already has wedged itself into this salt market by methods forbidden by law. The District Court is not obliged to assume, contrary to common experience, that a violator of the antitrust laws will relinquish the fruits of his violation more completely than the court requires him to do. And advantages already in hand may be held by methods more subtle and informed, and more difficult to prove, than those which, in the first place, win a market. When the purpose to restrain trade appears from a clear violation of law, it is not necessary that all of the untraveled roads to that end be left open and that only the worn one be closed. The usual ways to the prohibited goal may be blocked against the proven transgressor and the burden put upon him to bring any proper claims for relief to the court's attention. And it is desirable, in the interests of the court and of both litigants, that the decree be as specific as possible, not only in the core of its relief, but in its outward limits, so that parties may know their duties and unintended contempts may not occur.

* * *

Judgment affirmed.

Mr. Justice Frankfurter, whom Mr. Justice Reed and Mr. Justice Burton join, dissenting in part.

Agreeing wholeheartedly with the Court's opinion on the main issue, I am left unpersuaded by its justification for retaining Paragraph VI in the judgment.

Inasmuch as the holder of patents on machines is not obliged to dispose of them to all comers or to do so at a uniform price, Paragraph VI in and of itself undoubtedly deprives appellant of a legal right.It is not merely a theoretical right. Practical considerations may make it important for appellant to act upon its legal right not to have a uniform price for all its customers. It was conceded at the bar that competition may require this. No doubt, when a court condemns practices as violative of the Sherman Law and the Clayton Act, it has the duty so to fashion its decree as to put an effective stop to that which is condemned. But the law also respects the wisdom of not burning even part of a house in order to roast a pig. Ordinarily, therefore, when acts are found to have been done in violation of antitrust legislation, restraint of such acts in the future is the adequate relief. See New York, New Haven & Hartford R. Co. v. Interstate Commerce Commission, 200 U.S. 361, 404; Standard Oil Co. v. United States, 221 U.S. 1, 77; Labor Board v. Express Publishing Company, 312 U.S. 426, 435-37. Reflecting the dictates of fairness, equity does not put under ban that which is intrinsically legitimate unless for all practical purposes it is tied with the illegitimate, or the circumstances of the case make it reasonable to assume that pursuit of what is legitimate would be a cover for doing what is forbidden.

* * *

But the molding of decrees in Sherman Law cases is normally the business of district courts. They have a scope of discretion which should not unduly be cut off by a recasting of the decree on appeal here. * * * And so I would remand the case to the District Court. It has been suggested that Paragraph VI is merely a roundabout way of saying that the appellant should not discriminate in the price of its patented machines in favor of a purchaser of its salt. If such was the intention of Paragraph VI, the District Court will want to convey such meaning less ambiguously.

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United States v. Paramount Pictures, Inc. et al

334 U.S. 131, 68 S. Ct. 915, 92 L. Ed. 1260, 77 U.S.P.Q. 243

(1948)

Douglas, J: These cases are here on appeal from a judgment of a three-judge District Court holding that the defendants had violated 1 and 2 of the Sherman Act, 26 Stat. 209, as amended, 50 Stat. 693, 15 U.S.C. 1, 2, and granting an injunction and other relief. 66 F. Supp. 323; 70 F.Supp. 53.

The suit was instituted by the United States under 4 of the Sherman Act to prevent and restrain violations of it. The defendants fall into three groups:

(1) Paramount Pictures, Inc., Loew's, Incorporated, Radio -Keith-Orpheum Corporation, Warner Bros. Pictures, Inc., Twentieth Century-Fox Film Corporation, which produce motion pictures, and their respective subsidiaries or affiliates which distribute and exhibit films. These are known as the five major defendants or exhibitor-defendants.

(2) Columbia Pictures Corporation and Universal Corporation, which produce motion pictures, and their subsidiaries which distribute films.

(3) United Artists Corporation, which is engaged only in the distribution of motion pictures.

The five majors, through their subsidiaries or affiliates, own or control theatres; the other defendants do not.

First. Restraint of Trade --

(1) Price Fixing.

* * *

No film is sold to an exhibitor in the distribution of motion pictures. The right to exhibit under copyright is licensed. The District Court found that the defendants in the licenses they issued fixed minimum admission prices which the exhibitors agreed to charge, whether the rental of the film was a flat amount or a percentage of the receipts. It found that substantially uniform minimum prices had been established in the licenses of all defendants. Minimum prices were established in master agreements or franchises which were made between various defendants as distributors and various defendants as exhibitors and in joint operating agreements made by the five majors with each other and with independent theatre owners covering the operation of certain theatres. By these later contracts minimum admission prices were often fixed for dozens of theatres owned by a particular defendant in a given area of the United States. Minimum prices were fixed in licenses of each of the five major defendants. The other three defendants made the same requirement in licenses granted to the exhibitor-defendants. We do not stop to elaborate on these findings. They are adequately detailed by the District Court in its opinion. See 66 F.Supp. 334-339.

The District Court found that two price-fixing conspiracies existed -- a horizontal one between all the defendants; a vertical one between each distributor-defendant and its licensees. The latter was based on express agreements and was plainly established. The former was inferred from the pattern of price-fixing disclosed in the record. We think there was adequate foundation for it too. It is not necessary to find an express agreement in order to find a conspiracy. It is enough that a concert of action is contemplated and that the defendants conformed to the arrangement. Interstate Circuit v. United States, 306 U.S. 208, 226-227; United States v. Masonite Corp., 316 U.S. 265, 275. That was shown here.

On this phase of the case the main attack is on the decree which enjoins the defendants and their affiliates from granting any license, except to their own theatres, in which minimum prices for admission to a theatre are fixed in any manner or by any means. The argument runs as follows: United States v. General Electric Co., 272 U.S. 476, held that an owner of a patent could, without violating the Sherman Act, grant a license to manufacture and vend, and could fix the price at which the licensee could sell the patented article. It is pointed out that defendants do not sell the films to exhibitors, but only license them and that the Copyright Act (35 Stat. 1075, 1088, 17 U.S.C. 1), like the patent statutes, grants the owner exclusive rights. And it is argued that if the patentee can fix the price at which his licensee may sell the patented article, the owner of the copyright should be allowed the same privilege. It is maintained that such a privilege is essential to protect the value of the copyrighted films.

We start, of course, from the premise that so far as the Sherman Act is concerned, a price-fixing combination is illegal per se. United States v. Socony-Vacuum Oil Co., 310 U.S. 150; United States v. Masonite Corporation, supra. We recently held in United States v. Gypsum Co., 333 U.S. 364, 400, that even patentees could not regiment an entire industry by licenses containing price-fixing agreements. What was said there is adequate to bar defendants, through their horizontal conspiracy, from fixing prices for the exhibition of films in the movie industry. Certainly the rights of the copyright owner are no greater than those of the patentee.

Nor can the result be different when we come to the vertical conspiracy between each distributor-defendant and his licensees. The District Court stated in its findings:



"In agreeing to maintain a stipulated minimum admission price, each exhibitor thereby consents to the minimum price level at which it will compete against other licensees of the same distributor whether they exhibit on the same run or not. The total effect is that through the separate contracts between the distributor and its licensees a price structure is erected which regulates the licensees' ability to compete against one another in admission prices."

That consequence seems to us to be incontestable. We stated in United States v. Gypsum Co., supra, p. 401, that



"The rewards which flow to the patentee and his licensees from the suppression of competition through the regulation of an industry are not reasonably and normally adapted to secure pecuniary reward for the patentee's monopoly."

The same is true of the rewards of the copyright owners and their licensees in the present case. For here too the licenses are but a part of the general plan to suppress competition. The case where a distributor fixes admission prices to be charged by a single independent exhibitor, no other licensees or exhibitors being in contemplation, seems to be wholly academic, as the District Court pointed out. It is, therefore, plain that United States v. General Electric Co., supra, as applied in the patent cases, affords no haven to the defendants in this case. For a copyright may no more be used than a patent to deter competition between rivals in the exploitation of their licenses. See Interstate Circuit v. United States, supra.


(2) Clearances and Runs.

Clearances are designed to protect a particular run of a film against a subsequent run. The District Court found that all of the distributor- defendants used clearance provisions and that they were stated in several different ways or in combinations: in terms of a given period between designated runs; in terms of admission prices charged by competing theatres; in terms of a given period of clearance over specifically named theatres; in terms of so many days' clearance over specified areas or towns; or in terms of clearances as fixed by other distributors.

* * *

The District Court held that in determining whether a clearance is unreasonable, the following factors are relevant:



(1) The admission prices of the theatres involved, as set by the exhibitors;

(2) The character and location of the theatres involved, including size, type of entertainment, appointments, transit facilities, etc.;

(3) The policy of operation of the theatres involved, such as the showing of double features, gift nights, give-aways, premiums, cut-rate tickets, lotteries, etc.;

(4) The rental terms and license fees paid by the theatres involved and the revenues derived by the distributor-defendant from such theatres;

(5) The extent to which the theatres involved compete with each other for patronage;

(6) The fact that a theatre involved is affiliated with a defendant-distributor or with an independent circuit of theatres should be disregarded; and

(7) There should be no clearance between theatres not in substantial competition.

It reviewed the evidence in light of these standards and concluded that many of the clearances granted by the defendants were unreasonable. We do not stop to retrace those steps. The evidence is ample to show, as the District Court plainly demonstrated, see 66 F.Supp. pp. 343-346, that many clearances had no relation to the competitive factors which alone could justify them. The clearances which were in vogue had, indeed, acquired a fixed and uniform character and were made applicable to situations without regard to the special circumstances which are necessary to sustain them as reasonable restraints of trade. The evidence is ample * * *

(3) Pooling Agreements;

Joint Ownership.

The District Court found the exhibitor -defendants had agreements with each other and their affiliates by which theatres of two or more of them, normally competitive, were operated as a unit or managed by a joint committee or by one of the exhibitors, the profits being shared according to prearranged percentages. Some of these agreements provided that the parties might not acquire other competitive theatres without first offering them for inclusion in the pool. The court concluded that the result of these agreements was to eliminate competition pro tanto both in exhibition and in distribution of features, since the parties would naturally direct the films to the theatres in whose earnings they were interested.

The District Court also found that the exhibitor-defendants had like agreements with certain independent exhibitors. Those alliances had, in its view, the effect of nullifying competition between the allied theatres and of making more effective the competition of the group against theatres not members of the pool. The court found that in some cases the operating agreements were achieved through leases of theatres, the rentals being measured by a percentage of profits earned by the theatres in the pool. The District Court required the dissolution of existing pooling agreements and enjoined any future arrangement of that character.

These provisions of the decree will stand. The practices were bald efforts to substitute monopoly for competition and to strengthen the hold of the exhibitor-defendants on the industry by alignment of competitors on their side. Clearer restraints of trade are difficult to imagine.

There was another type of business arrangement that the District Court found to have the same effect as the pooling agreements just mentioned. Many theatres are owned jointly by two or more exhibitor-defendants or by an exhibitor-defendant and an independent. The result is, according to the District Court, that the theatres are operated "collectively, rather than competitively." And where the joint owners are an exhibitor-defendant and an independent the effect is, according to the District Court, the elimination by the exhibitor- defendant of

The District Court found these joint ownerships of theatres to be unreasonable restraints of trade within the meaning of the Sherman Act.

The District Court ordered the exhibitor -defendants to disaffiliate by terminating their joint ownership of theatres; and it enjoined future acquisitions of such interests. One is authorized to buy out the other if it shows to the satisfaction of the District Court and that court first finds that such acquisition "will not unduly restrain competition in the exhibition of feature motion pictures." This dissolution and prohibition of joint ownership as between exhibitor-defendants was plainly warranted. To the extent that they have joint interests in the outlets for their films each in practical effect grants the other a priority for the exhibition of its films. For in this situation, as in the case where theatres are jointly managed, the natural gravitation of films is to the theatres in whose earnings the distributors have an interest. Joint ownership between exhibitor -defendants then becomes a device for strengthening their competitive position as exhibitors by forming an alliance as distributors. An express agreement to grant each other the preference would be a most effective weapon to stifle competition. A working arrangement or business device that has that necessary consequence gathers no immunity because of its subtlety. Each is a restraint of trade condemned by the Sherman Act.

The District Court also ordered disaffiliation in those instances where theatres were jointly owned by an exhibitor-defendant and an independent, and where the interest of the exhibitor-defendant was "greater than five per cent unless such interest shall be ninety-five per cent or more," an independent being defined for this part of the decree as "any former, present or putative motion picture theatre operator which is not owned or controlled by the defendant holding the interest in question." The exhibitor-defendants are authorized to acquire existing interests of the independents in these theatres if they establish, and if the District Court first finds, that the acquisition "will not unduly restrain competition in the exhibition of feature motion pictures." All other acquisitions of such joint interests were enjoined.

* * *

It is conceded that the District Court made no inquiry into the circumstances under which a particular interest had been acquired. It treated all relationships alike, insofar as the disaffiliation provision of the decree is concerned. In this we think it erred.

We have gone into the record far enough to be confident that at least some of these acquisitions by the exhibitor-defendants were the products of the unlawful practices which the defendants have inflicted on the industry. To the extent that these acquisitions were the fruits of monopolistic practices or restraints of trade, they should be divested. And no permission to buy out the other owner should be given a defendant. United States v. Crescent Amusement Co., supra, Schine Chain Theatres, Inc. v. United States, ante, Moreover, even if lawfully acquired, they may have been utilized as part of the conspiracy to eliminate or suppress competition in furtherance of the ends of the conspiracy. In that event divestiture would likewise be justified. United States v. Crescent Amusement Co., supra, In that situation permission to acquire the interest of the independent would have the unlawful effect of permitting the defendants to complete their plan to eliminate him.

* * *

(4) Formula Deals, Master Agreements,

and Franchises.

A formula deal is a licensing agreement with a circuit of theatres in which the license fee of a given feature is measured, for the theatres covered by the agreement, by a specified percentage of the feature's national gross. The District Court found that Paramount and RKO had made formula deals with independent and affiliated circuits. The circuit was allowed to allocate playing time and film rentals among the various theatres as it saw fit. The inclusion of theatres of a circuit into a single agreement gives no opportunity for other theatre owners to bid for the feature in their respective areas and, in the view of the District Court, is therefore an unreasonable restraint of trade. The District Court found some master agreements open to the same objection. Those are the master agreements that cover exhibition in two or more theatres in a particular circuit and allow the exhibitor to allocate the film rental paid among the theatres as it sees fit and to exhibit the features upon such playing time as it deems best, and leaves other terms to the discretion of the circuit. The District Court enjoined the making or further performance of any formula deal of the type described above. It also enjoined the making or further performance of any master agreement covering the exhibition of features in a number of theatres.

The findings of the District Court in these respects are supported by facts, its conclusion that the formula deals and master agreements constitute restraint of trade is valid, and the relief is proper. The formula deals and master agreements are unlawful restraints of trade in two respects. In the first place, they eliminate the possibility of bidding for films theatre by theatre. In that way they eliminate the opportunity for the small competitor to obtain the choice first runs, and put a premium on the size of the circuit. They are, therefore, devices for stifling competition and diverting the cream of the business to the large operators. In the second place, the pooling of the purchasing power of an entire circuit in bidding for films is a misuse of monopoly power insofar as it combines the theatres in closed towns with competitive situations. The reasons have been stated in United States v. Griffith, ante, and Schine Chain Theatres, Inc. v. United States, ante, and need not be repeated here. It is hardly necessary to add that distributors who join in such arrangements by exhibitors are active participants in effectuating a restraint of trade and a monopolistic practice. See United States v. Crescent Amusement Co., supra.

* * *

We do not take that course in the case of formula deals and master agreements, for the findings in these instances seem to stand on their own bottom and apparently have no necessary dependency on the provision for competitive bidding.


(5) Block-Booking.

Block-booking is the practice of licensing, or offering for license, one feature or group of features on condition that the exhibitor will also license another feature or group of features released by the distributors during a given period. The films are licensed in blocks before they are actually produced. All the defendants, except United Artists, have engaged in the practice. Block-booking prevents competitors from bidding for single features on their individual merits. The District Court held it illegal for that reason and for the reason that it "adds to the monopoly of a single copyrighted picture that of another copyrighted picture which must be taken and exhibited in order to secure the first." That enlargement of the monopoly of the copyright was condemned below in reliance on the principle which forbids the owner of a patent to condition its use on the purchase or use of patented or unpatented materials. See Ethyl Gasoline Corp. v. United States, 309 U.S. 436, 459 , Morton Salt Co. v. G. S. Suppiger Co., 314 U.S. 488, 491; Mercoid Corp. v. Mid-Continent Investment Co., 320 U.S. 661, 665. The court enjoined defendants from performing or entering into any license in which the right to exhibit one feature is conditioned upon the licensee's taking one or more other features.

We approve that restriction. The copyright law, like the patent statutes, makes reward to the owner a secondary consideration. In Fox Film Corp. v. Doyal, 286 U.S. 123, 127, Chief Justice Hughes spoke as follows respecting the copyright monopoly granted by Congress, "The sole interest of the United States and the primary object in conferring the monopoly lie in the general benefits derived by the public from the labors of authors." It is said that reward to the author or artist serves to induce release to the public of the products of his creative genius. But the reward does not serve its public purpose if it is not related to the quality of the copyright. Where a high quality film greatly desired is licensed only if an inferior one is taken, the latter borrows quality from the former and strengthens its monopoly by drawing on the other. The practice tends to equalize rather than differentiate the reward for the individual copyrights. Even where all the films included in the package are of equal quality, the requirement that all be taken if one is desired increases the market for some. Each stands not on its own footing but in whole or in part on the appeal which another film may have. As the District Court said, the result is to add to the monopoly of the copyright in violation of the principle of the patent cases involving tying clauses.

It is argued that Transparent-Wrap Mach. Corp. v. Stokes & Smith Co., 329 U.S. 637, points to a contrary result. That case held that the inclusion in a patent license of a condition requiring the licensee to assign improvement patents was not per se illegal. But that decision, confined to improvement patents, was greatly influenced by the federal statute governing assignments of patents. It therefore has no controlling significance here.

Columbia Pictures makes an earnest argument that enforcement of the restriction as to block-booking will be very disadvantageous to it and will greatly impair its ability to operate profitably. But the policy of the anti-trust laws is not qualified or conditioned by the convenience of those whose conduct is regulated. Nor can a vested interest in a practice which contravenes the policy of the anti-trust laws receive judicial sanction.

We do not suggest that films may not be sold in blocks or groups, when there is no requirement, express or implied, for the purchase of more than one film. All we hold to be illegal is a refusal to license one or more copyrights unless another copyright is accepted.

(6) Discrimination.

The District Court found that defendants had discriminated against small independent exhibitors and in favor of large affiliated and unaffiliated circuits through various kinds of contract provisions. These included suspension of the terms of a contract if a circuit theatre remained closed for more than eight weeks with reinstatement without liability on reopening; allowing large privileges in the selection and elimination of films; allowing deductions in film rentals if double bills are played; granting move overs and extended runs; granting road show privileges; allowing overage and underage; granting unlimited playing time; excluding foreign pictures and those of independent producers; and granting rights to question the classification of features for rental purposes. The District Court found that the competitive advantages of these provisions were so great that their inclusion in contracts with the larger circuits and their exclusion from contracts with the small independents constituted an unreasonable discrimination against the latter. Each discriminatory contract constituted a conspiracy between licensor and licensee. Hence the District Court deemed it unnecessary to decide whether the defendants had conspired among themselves to make these discriminations. No provision of the decree specifically enjoins these discriminatory practices because they were thought to be impossible under the system of competitive bidding adopted by the District Court.

These findings are amply supported by the evidence. We concur in the conclusion that these discriminatory practices are included among the restraints of trade which the Sherman Act condemns. See Interstate Circuit v. United States, supra, United States v. Crescent Amusement Co., supra. It will be for the District Court on remand of these cases to provide effective relief against their continuance, as our elimination of the provision for competitive bidding leaves this phase of the cases unguarded.

* * *

Second -- Competitive Bidding.


The District Court concluded that the only way competition could be introduced into the existing system of fixed prices, clearances and runs was to require that films be licensed on a competitive bidding basis. Film are to be offered to all exhibitors in each competitive area. The license for the desired run is to be granted to the highest responsible bidder, unless the distributor rejects all offers. The licenses are to be offered and taken theatre by theatre and picture by picture. Licenses to show films in theatres in which the licensor owns directly or indirectly an interest of ninety-five per cent or more are excluded from the requirement for competitive bidding.

Paramount is the only one of the five majors who opposes the competitive bidding system. Columbia Pictures, Universal, and United Artists oppose it. The intervenors representing certain independents oppose it. And the Department of Justice, which apparently proposed the system originally, speaks strongly against it here.

At first blush there is much to commend the system of competitive bidding. The trade victims of this conspiracy have in large measure been the small independent operators. They are the ones that have felt most keenly the discriminatory practices and predatory activities in which defendants have freely indulged. They have been the victims of the massed purchasing power of the larger units in the industry. It is largely out of the ruins of the small operators that the large empires of exhibitors have been built. Thus it would appear to be a great boon to them to substitute open bidding for the private deals and favors on which the large operators have thrived. But after reflection we have concluded that competitive bidding involves the judiciary so deeply in the daily operation of this nation-wide business and promises such dubious benefits that it should not be undertaken.

* * *

We mention these matters merely to indicate the character of the job of supervising such a competitive bidding system. It would involve the judiciary in the administration of intricate and detailed rules governing priority, period of clearance, length of run, competitive areas, reasonable return, and the like. The system would be apt to require as close a supervision as a continuous receivership, unless the defendants were to be entrusted with vast discretion. The judiciary is unsuited to affairs of business management; and control through the power of contempt is crude and clumsy and lacking in the flexibility necessary to make continuous and detailed supervision effective. Yet delegation of the management of the system to the discretion of those who had the genius to conceive the present conspiracy and to execute it with the subtlety which this record reveals, could be done only with the greatest reluctance. At least such choices should not be faced unless the need for the system is great and its benefits plain.

* * *

Our doubts concerning the competitive bidding system are increased by the fact that defendants who own theatres are allowed to pre-empt their own features. They thus start with an inventory which all other exhibitors lack. The latter have no prospect of assured runs except what they get by competitive bidding. The proposed system does not offset in any way the advantages which the exhibitor-defendants have by way of theatre ownership. It would seem in fact to increase them. For the independents are deprived of the stability which flows from established business relationships. Under the proposed system they can get features only if they are the highest responsible bidders. They can no longer depend on their private sources of supply which their ingenuity has created. Those sources, built perhaps on private relationships and representing important items of good will, are banned, even though they are free of any taint of illegality.

* * *

The competitive bidding system was perhaps the central arch of the decree designed by the District Court. Its elimination may affect the cases in ways other than those which we expressly mention. Hence on remand of the cases the freedom of the District Court to reconsider the adequacy of decree is not limited to those parts we have specifically indicated.

Third. Monopoly, Expansion of Theatre Holdings, Divestiture.

There is a suggestion that the hold the defendants have on the industry is so great that a problem under the First Amendment is raised. Cf. Associated Press v. United States, 326 U.S. 1. We have no doubt that moving pictures, like newspapers and radio, are included in the press whose freedom is guaranteed by the First Amendment. That issue would be focused here if we had any question concerning monopoly in the production of moving pictures. But monopoly in production was eliminated as an issue in these cases, as we have noted. The chief argument at the bar is phrased in terms of monopoly of exhibition, restraints on exhibition, and the like. Actually, the issue is even narrower than that. The main contest is over the cream of the exhibition business -- that of the first-run theatres. By defining the issue so narrowly we do not intend to belittle its importance. It shows, however, that the question here is not what the public will see or if the public will be permitted to see certain features. It is clear that under the existing system the public will be denied access to none. If the public cannot see the features on the first-run, it may do so on the second, third, fourth, or later run. The central problem presented by these cases is which exhibitors get the highly profitable first-run business. That problem has important aspects under the Sherman Act. But it bears only remotely, if at all, on any question of freedom of the press, save only as timeliness of release may be a factor of importance in specific situations.

The controversy over monopoly relates to monopoly in exhibition and more particularly monopoly in the first-run phase of the exhibition business.

The five majors in 1945 had interests in somewhat over 17 per cent of the theatres in the United States -- 3,137 out of 18,076. Those theatres paid 45 per cent of the total domestic film rental received by all eight defendants.

In the 92 cities of the country with populations over 100,000 at least 70 per cent of all the first-run theatres are affiliated with one or more of the five majors. In 4 of those cities the five majors have no theatres. In 38 of those cities there are no independent first-run theatres. In none of the remaining 50 cities did less than three of the distributor -defendants license their product on first run to theatres of the five majors. In 19 of the 50 cities less than three of the distributor-defendants licensed their product on first run to independent theatres. In a majority of the 50 cities the greater share of all of the features of defendants were licensed for first-run exhibition in the theatres of the five majors.

In about 60 per cent of the 92 cities having populations of over 100,000, independent theatres compete with those of the five majors in first-run exhibition. In about 91 per cent of the 92 cities there is competition between independent theatres and the theatres of the five majors or between theatres of the five majors themselves for first-run exhibition. In all of the 92 cities there is always competition in some run even where there is no competition in first runs.

In cities between 25,000 and 100,000 populations the five majors have interests in 577 of a total of 978 first-run theatres or about 60 per cent. In about 300 additional towns, mostly under 25,000, an operator affiliated with one of the five majors has all of the theatres in the town.

The District Court held that the five majors could not be treated collectively so as to establish claims of general monopolization in exhibition. It found that none of them was organized or had been maintained "for the purpose of achieving a national monopoly" in exhibition. It found that the five majors by their present theatre holdings "alone" (which aggregate a little more than one-sixth of all the theatres in the United States), "do not and cannot collectively or individually, have a monopoly of exhibition." The District Court also found that where a single defendant owns all of the first-run theatres in a town, there is no sufficient proof that the acquisition was for the purpose of creating a monopoly. It found rather that such consequence resulted from the inertness of competitors, their lack of financial ability to build theatres comparable to those of the five majors, or the preference of the public for the best-equipped theatres. And the percentage of features on the market which any of the five majors could play in its own theatres was found to be relatively small and in nowise to approximate a monopoly of film exhibition.

Even in respect of the theatres jointly owned or jointly operated by the defendants with each other or with independents, the District Court found no monopoly or attempt to monopolize. Those joint agreements or ownership were found only to be unreasonable restraints of trade. The District Court, indeed, found no monopoly on any phase of the cases, although it did find an attempt to monopolize in the fixing of prices, the granting of unreasonable clearances, block-booking and the other unlawful restraints of trade we have already discussed. The "root of the difficulties," according to the District Court, lay not in theatre ownership but in those unlawful practices.

The District Court did, however, enjoin the five majors from expanding their present theatre holdings in any manner. It refused to grant the request of the Department of Justice for total divestiture by the five majors of their theatre holdings. It found that total divestiture would be injurious to the five majors and damaging to the public. Its thought on the latter score was that the new set of theatre owners who would take the place of the five majors would be unlikely for some years to give the public as good service as those they supplanted "in view of the latter's demonstrated experience and skill in operating what must be regarded as in general the largest and best equipped theatres." Divestiture was, it thought, too harsh a remedy where there was available the alternative of competitive bidding. It accordingly concluded that divestiture was unnecessary "at least until the efficiency of that system has been tried and found wanting."

It is clear, so far as the five majors are concerned, that the aim of the conspiracy was exclusionary, i. e. it was designed to strengthen their hold on the exhibition field. In other words, the conspiracy had monopoly in exhibition for one of its goals, as the District Court held. Price, clearance, and run are interdependent. The clearance and run provisions of the licenses fixed the relative playing positions of all theatres in a certain area; the minimum price provisions were based on playing position -- the first-run theatres being required to charge the highest prices, the second-run theatres the next highest, and so on. As the District Court found,

It is, therefore, not enough in determining the need for divestiture to conclude with the District Court that none of the defendants was organized or has been maintained for the purpose of achieving a "national monopoly," nor that the five majors through their present theatre holdings "alone" do not and cannot collectively or individually have a monopoly of exhibition. For when the starting point is a conspiracy to effect a monopoly through restraints of trade, it is relevant to determine what the results of the conspiracy were even if they fell short of monopoly.

An example will illustrate the problem. In the popular sense there is a monopoly if one person owns the only theatre in town. That usually does not, however, constitute a violation of the Sherman Act. But as we noted in United States v. Griffith, ante, and see Schine Chain Theatres, Inc. v. United States, ante, even such an ownership is vulnerable in a suit by the United States under the Sherman Act if the property was acquired, or its strategic position maintained, as a result of practices which constitute unreasonable restraints of trade. Otherwise, there would be reward from the conspiracy through retention of its fruits. Hence the problem of the District Court does not end with enjoining continuance of the unlawful restraints nor with dissolving the combination which launched the conspiracy. Its function includes undoing what the conspiracy achieved. As we have discussed in Schine Chain Theatres, Inc. v. United States, ante, the requirement that the defendants restore what they unlawfully obtained is no more punishment than the familiar remedy of restitution. What findings would be warranted after such an inquiry in the present cases, we do not know. For the findings of the District Court do not cover this point beyond stating that monopoly was an objective of the several restraints of trade that stand condemned.

Moreover, the problem under the Sherman Act is not solved merely by measuring monopoly in terms of size or extent of holdings or by concluding that single ownerships were not obtained "for the purpose of achieving a national monopoly." It is the relationship of the unreasonable restraints of trade to the position of the defendants in the exhibition field (and more particularly in the first-run phase of that business) that is of first importance on the divestiture phase of these cases. That is the position we have taken in Schine Chain Theatres, Inc. v. United States, ante, in dealing with a projection of the same conspiracy through certain large circuits. Parity of treatment of the unaffiliated and the affiliated circuits requires the same approach here. For the fruits of the conspiracy which are denied the independents must also be denied the five majors. In this connection there is a suggestion that one result of the conspiracy was a geographical division of territory among the five majors. We mention it not to intimate that it is true but only to indicate the appropriate extent of the inquiry concerning the effect of the conspiracy in theatre ownership by the five majors.

The findings of the District Court are deficient on that score and obscure on another. The District Court in its findings speaks of the absence of a "purpose" on the part of any of the five majors to achieve a "national monopoly" in the exhibition of motion pictures. First, there is no finding as to the presence or absence of monopoly on the part of the five majors in the first-run field for the entire country, in the first-run field in the 92 largest cities of the country, or in the first-run field in separate localities. Yet the first-run field, which constitutes the cream of the exhibition business, is the core of the present cases. Section 1 of the Sherman Act outlaws unreasonable restraints irrespective of the amount of trade or commerce involved (United States v. Socony- Vacuum Oil Co., 310 U.S. 150, 224, 225, n. 59), and 2 condemns monopoly of "any part" of trade or commerce. "Any part" is construed to mean an appreciable part of interstate or foreign trade or commerce. United States v. Yellow Cab Co., 332 U.S. 218, 225. Second, we pointed out in United States v. Griffith, ante, that "specific intent" is not necessary to establish a "purpose or intent" to create a monopoly but that the requisite "purpose or intent" is present if monopoly results as a necessary consequence of what was done. The findings of the District Court on this phase of the cases are not clear, though we take them to mean by the absence of "purpose" the absence of a specific intent. So construed they are inconclusive. In any event they are ambiguous and must be recast on remand of the cases. Third, monopoly power, whether lawfully or unlawfully acquired, may violate 2 of the Sherman Act though it remains unexercised (United States v. Griffith, ante), for as we stated in American Tobacco Co. v. United States, 328 U.S. 781, 809, 811, the existence of power "to exclude competition when it is desired to do so" is itself a violation of 2, provided it is coupled with the purpose or intent to exercise that power. The District Court, being primarily concerned with the number and extent of the theatre holdings of defendants, did not address itself to this phase of the monopoly`problem. Here also, parity of treatment as between independents and the five majors as theatre owners, who were tied into the same general conspiracy, necessitates consideration of this question.

Exploration of these phases of the cases would not be necessary if, as the Department of Justice argues, vertical integration of producing, distributing and exhibiting motion pictures is illegal per se. But the majority of the Court does not take that view. In the opinion of the majority the legality of vertical integration under the Sherman Act turns on (1) the purpose or intent with which it was conceived, or (2) the power it creates and the attendant purpose or intent. First, it runs afoul of the Sherman Act if it was a calculated scheme to gain control over an appreciable segment of the market and to restrain or suppress competition, rather than an expansion to meet legitimate business needs. United States v. Reading Co., 253 U.S. 26, 57; United States v. Lehigh Valley R. Co., 254 U.S. 255, 269-270. Second, a vertically integrated enterprise, like other aggregations of business units (United States v. Aluminum Co. of America, 148 F.2d 416), will constitute monopoly which, though unexercised, violates the Sherman Act provided a power to exclude competition is coupled with a purpose or intent to do so. As we pointed out in United States v. Griffith, ante, size is itself an earmark of monopoly power. For size carries with it an opportunity for abuse. And the fact that the power created by size was utilized in the past to crush or prevent competition is potent evidence that the requisite purpose or intent attends the presence of monopoly power. See United States v. Swift & Co., 286 U.S. 106, 116; United States v. Aluminum Co. of America, supra. Likewise bearing on the question whether monopoly power is created by the vertical integration, is the nature of the market to be served (United States v. Aluminum Co. of America, supra), and the leverage on the market which the particular vertical integration creates or makes possible.

These matters were not considered by the District Court. For that reason, as well as the others we have mentioned, the findings on monopoly and divestiture which we have discussed in this part of the opinion will be set aside. There is an independent reason for doing that. As we have seen, the District Court considered competitive bidding as an alternative to divestiture in the sense that it concluded that further consideration of divestiture should not be had until competitive bidding had been tried and found wanting. Since we eliminate from the decree the provisions for competitive bidding, it is necessary to set aside the findings on divestiture so that a new start on this phase of the cases may be made on their remand.

* * *

The judgment in these cases is affirmed in part and reversed in part, and the cases are remanded to the District Court for proceedings in conformity with this opinion.

So ordered.

Frankfurter, J. dissenting in part: The framing of decrees should take place in the District rather than in Appellate Courts. They are invested with large discretion to model their judgments to fit the exigencies of the particular case." On this guiding consideration, the Court earlier this Term sustained a Sherman Law decree, which was not the outcome of a long trial involving complicated and contested facts and their significance, but the formulation of a summary judgment on the bare bones of pleadings. International Salt Co. v. United States, 332 U.S. 392, 400-401. The record in this case bespeaks more compelling respect for the decree fashioned by the District Court of three judges to put an end to violations of the Sherman Law and to prevent the recurrence, than that which led this Court not to find abuse of discretion in the decree by a single district judge in the International Salt case.

This Court has both the authority and duty to consider whether a decree is well calculated to undo, as far as is possible, the result of transactions forbidden by the Sherman Law and to guard against their repetition. But it is not the function of this Court, and it would ill discharge it, to displace the district courts and write decrees de novo. We are, after all, an appellate tribunal even in Sherman Law cases. It could not be fairly claimed that this Court possesses greater experience, understanding and prophetic insight in relation to the movie industry, and is therefore better equipped to formulate a decree for the movie industry than was the District Court in this case, presided over as it was by one of the wisest of judges.

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United States v. Loew's Incorporated

371 U.S. 38, 83 S. Ct. 97, 9 L. Ed. 2d 11, 135 U.S.P.Q. 201 (1962)



Goldberg, J. These consolidated appeals present as a key question the validity under 1 of the Sherman Act of block booking of copyrighted feature motion pictures for television exhibition. We hold that the tying agreements here are illegal and in violation of the Act.

The United States brought separate civil antitrust actions in the Southern District of New York in 1957 against six major distributors of pre-1948 copyrighted motion picture feature films for television exhibition, alleging that each defendant had engaged in block booking in violation of 1 of the Sherman Act. The complaints asserted that the defendants had, in selling to television stations, conditioned the license or sale of one or more feature films upon the acceptance by the station of a package or block containing one or more unwanted or inferior films. No combination or conspiracy among the distributors was alleged; nor was any monopolization or attempt to monopolize under 2 of the Sherman Act averred. The sole claim of illegality rested on the manner in which each defendant had marketed its product. The successful pressure applied to television station customers to accept inferior films along with desirable pictures was the gravamen of the complaint.

After a lengthy consolidated trial, the district judge filed exhaustive findings of fact, conclusions of law, and a carefully reasoned opinion, 189 F.Supp. 373, in which he found that the actions of the defendants constituted violations of 1 of the Sherman Act. The conclusional finding of fact and law was that

". . . the several defendants have each, from time to time and to the extent set forth in the specific findings of fact, licensed or offered to license one or more feature films to television stations on condition that the licensee also license one or more other such feature films, and have, from time to time and to the extent set forth in the specific findings of fact, refused, expressly or impliedly, to license feature films to television stations unless one or more other such feature films were accepted by the licensee."

189 F.Supp., at 397-398.

The judge recognized that there was keen competition between the defendant distributors, and therefore rested his conclusion solely on the individual behavior of each in engaging in block booking. In reaching his decision he carefully considered the evidence relating to each of the 68 licensing agreements that the Government had contended involved block booking. He concluded that only 25 of the contracts were illegally entered into. Nine of these belonged to defendant C & C Super Corp., which had an admitted policy of insisting on block booking that it sought to justify on special grounds.

Of the others, defendant Loew's, Incorporated, had in two negotiations that resulted in licensing agreements declined to furnish stations KWTV of Oklahoma City and WBRE of Wilkes- Barre with individual film prices and had refused their requests for permission to select among the films in the groups. Loew's exacted from KWTV a contract for the entire Loew's library of 723 films, involving payments of $ 314,725.20. The WBRE agreement was for a block of 100 films, payments to total $ 15,000.

Defendant Screen Gems, Inc., was also found to have block booked two contracts, both with WTOP of Washington, D. C., one calling for a package of 26 films and payments of $ 20,800 and the other for 52 films and payments of $ 40,000. The judge accepted the testimony of station officials that they had requested the right to select films and that their requests were refused.

Associated Artists Productions, Inc., negotiated four contracts that were found to be block booked. Station WTOP was to pay $ 118,800 for the license of 99 pictures, which were divided into three groups of 33 films, based on differences in quality. To get "Treasure of the Sierra Madre," "Casablanca," "Johnny Belinda," "Sergeant York," and "The Man Who Came to Dinner," among others, WTOP also had to take such films as "Nancy Drew Troubleshooter," "Tugboat Annie Sails Again," "Kid Nightingale," "Gorilla Man," and "Tear Gas Squad." A similar contract for 100 pictures, involving a license fee of $ 140,000, was entered into by WMAR of Baltimore. Triangle Publications, owner and operator of five stations, was refused the right to select among Associated's packages, and ultimately purchased the entire library of 754 films for a price of $ 2,262,000 plus 10% of gross receipts. Station WJAR of Providence, which licensed a package of 58 features for a fee of $ 25,230, had asked first if certain films it considered undesirable could be dropped from the offered packages and was told that the packages could not be split.

Defendant National Telefilm Associates was found to have entered into five block booked contracts. Station WMAR wanted only 10 Selznick films, but was told that it could not have them unless it also bought 24 inferior films from the "TNT" package and 12 unwanted "Fabulous 40's." It bought all of these, for a total of $ 62,240. Station WBRE, before buying the "Fox 52" package in its entirety for $ 7,358.50, requested and was refused the right to eliminate undesirable features. Station WWLP of Springfield, Massachusetts, inquired about the possibility of splitting two of the packages, was told this was not possible, and then bought a total of 59 films in two packages for $ 8,850. A full package contract for National's "Rocket 86" group of 86 films was entered into by KPIX of San Francisco, payments to total $ 232,200, after KPIX requested and was denied permission to eliminate undesirable films from the package. Station WJAR wanted to drop 10 or 12 British films from this defendant's "Champagne 58" package, was told that none could be deleted, and then bought the block for $ 31,000.

The judge found that defendant United Artists Corporation had in three consummated negotiations conditioned the sale of films on the purchase of an entire package. The "Top 39" were licensed by WAAM of Baltimore for $ 40,000 only after receipt of a refusal to sell 13 of the 39 films in the package. Station WHTN of Huntington, West Virginia, purchased "Award 52" for $ 16,900 after United Artists refused to deal on any basis other than purchase of the entire 52 films. Thirty-nine films were purchased by WWLP for $ 5,850 after an initial inquiry about selection of titles was refused.

Since defendant C & C was found to have had an overall policy of block booking, the court did not analyze the particular circumstances of the nine negotiations which had resulted in the licensing of packages of films. C & C's policies resulted in at least one station having to take a package in which "certain of the films were unplayable since they had a foreign language sound track." 189 F.Supp., at 389.

The court entered separate final judgments against the defendants, wherein each was enjoined

* * *

I.

This case raises the recurring question of whether specific tying arrangements violate 1 of the Sherman Act. This Court has recognized that "tying agreements serve hardly any purpose beyond the suppression of competition," Standard Oil Co. of California v. United States, 337 U.S. 293, 305-306. They are an object of anti-trust concern for two reasons -- they may force buyers into giving up the purchase of substitutes for the tied product, see Times-Picayune Pub. Co. v. United States, 345 U.S. 594, 605, and they may destroy the free access of competing suppliers of the tied product to the consuming market, see International Salt Co. v. United States, 332 U.S. 392, 396. A tie-in contract may have one or both of these undesirable effects when the seller, by virtue of his position in the market for the tying product, has economic leverage sufficient to induce his customers to take the tied product along with the tying item. The standard of illegality is that the seller must have "sufficient economic power with respect to the tying product to appreciably restrain free competition in the market for the tied product . . . ." Northern Pacific R. Co. v. United States, 356 U.S. 1, 6. Market dominance -- some power to control price and to exclude competition -- is by no means the only test of whether the seller has the requisite economic power. Even absent a showing of market dominance, the crucial economic power may be inferred from the tying product's desirability to consumers or from uniqueness in its attributes.

[In footnote 4, the court stated:

Since the requisite economic power may be found on the basis of either uniqueness or consumer appeal, and since market dominance in the present context does not necessitate a demonstration of market power in the sense of 2 of the Sherman Act, it should seldom be necessary in a tie-in sale case to embark upon a full-scale factual inquiry into the scope of the relevant market for the tying product and into the corollary problem of the seller's percentage share in that market. This is even more obviously true when the tying product is patented or copyrighted, in which case, as appears in greater detail below, sufficiency of economic power is presumed. Appellants' reliance on United States v. E. I. du Pont de Nemours & Co., 351 U.S. 377, is therefore misplaced.]

The requisite economic power is presumed when the tying product is patented or copyrighted, International Salt Co. v. United States, 332 U.S. 392; United States v. Paramount Pictures, Inc., 334 U.S. 131. This principle grew out of a long line of patent cases which had eventuated in the doctrine that a patentee who utilized tying arrangements would be denied all relief against infringements of his patent. Motion Picture Patents Co. v. Universal Film Mfg. Co., 243 U.S. 502; Carbice Corp. v. American Patents Dev. Corp.., 283 U.S. 27; Leitch Mfg. Co. v. Barber Co., 302 U.S. 458; Ethyl Corp. v US, 309 U.S. 436; Morton Salt Co. v. G. S. Suppiger Co., 314 U.S. 488; Mercoid Corp. v. Mid-Continent Inv. Co., 320 U.S. 661. These cases reflect a hostility to use of the statutorily granted patent monopoly to extend the patentee's economic control to unpatented products. The patentee is protected as to his invention, but may not use his patent rights to exact tribute for other articles.

Since one of the objectives of the patent laws is to reward uniqueness, the principle of these cases was carried over into antitrust law on the theory that the existence of a valid patent on the tying product, without more, establishes a distinctiveness sufficient to conclude that any tying arrangement involving the patented product would have anticompetitive consequences. E. g., International Salt Co. v. United States, 332 U.S. 392. In United States v. Paramount Pictures, Inc., 334 U.S. 131, 156-159, the principle of the patent cases was applied to copyrighted feature films which had been block booked into movie theaters. The Court reasoned that

334 U.S., at 158.

Appellants attempt to distinguish the Paramount decision in its relation to the present facts: the block booked sale of copyrighted feature films to exhibitors in a new medium -- television. Not challenging the District Court's finding that they did engage in block booking, they contend that the uniqueness attributable to a copyrighted feature film, though relevant in the movie-theater context, is lost when the film is being sold for television use. Feature films, they point out, constitute less than 8% of television programming, and they assert that films are "reasonably interchangeable" with other types of programming material and with other feature films as well. Thus they argue that their behavior is not to be judged by the principle of the patent cases, as applied to copyrighted materials in Paramount Pictures, but by the general principles which govern the validity of tying arrangements of nonpatented products, e. g., Northern Pacific R. Co. v. United States, 356 U.S. 1, 6, 11. They say that the Government's proof did not establish their "sufficient economic power" in the sense contemplated for nonpatented products.

Appellants cannot escape the applicability of Paramount Pictures. A copyrighted feature film does not lose its legal or economic uniqueness because it is shown on a television rather than a movie screen.

The district judge found that each copyrighted film block booked by appellants for television use "was in itself a unique product"; that feature films "varied in theme, in artistic performance, in stars, in audience appeal, etc.," and were not fungible; and that since each defendant by reason of its copyright had a "monopolistic" position as to each tying product, "sufficient economic power" to impose an appreciable restraint on free competition in the tied product was present, as demanded by the Northern Pacific decision. 189 F.Supp., at 381. We agree. These findings of the district judge, supported by the record, confirm the presumption of uniqueness resulting from the existence of the copyright itself.

Moreover, there can be no question in this case of the adverse effects on free competition resulting from appellants' illegal block booking contracts. Television stations forced by appellants to take unwanted films were denied access to films marketed by other distributors who, in turn, were foreclosed from selling to the stations. Nor can there be any question as to the substantiality of the commerce involved. The 25 contracts found to have been illegally block booked involved payments to appellants ranging from $ 60,800 in the case of Screen Gems to over $ 2,500,000 in the case of Associated Artists. A substantial portion of the licensing fees represented the cost of the inferior films which the stations were required to accept. These anticompetitive consequences are an apt illustration of the reasons underlying our recognition that the mere presence of competing substitutes for the tying product, here taking the form of other programming material as well as other feature films, is insufficient to destroy the legal, and indeed the economic, distinctiveness of the copyrighted product. Standard Oil Co. of California v. United States, 337 U.S. 293, 307; Times-Picayune Pub. Co. v. United States, 345 U.S. 594, 611 and n. 30. By the same token, the distinctiveness of the copyrighted tied product is not inconsistent with the fact of competition, in the form of other programming material and other films, which is suppressed by the tying arrangements.

It is therefore clear that the tying arrangements here both by their "inherent nature" and by their "effect" injuriously restrained trade. United States v. American Tobacco Co., 221 U.S. 106, 179. Accommodation between the statutorily dispensed monopoly in the combination of contents in the patented or copyrighted product and the statutory principles of free competition demands that extension of the patent or copyright monopoly by the use of tying agreements be strictly confined. There may be rare circumstances in which the doctrine we have enunciated under 1 of the Sherman Act prohibiting tying arrangements involving patented or copyrighted tying products is inapplicable. However, we find it difficult to conceive of such a case, and the present case is clearly not one.

The principles underlying our Paramount Pictures decision have general application to tying arrangements involving copyrighted products, and govern here. Applicability of Paramount Pictures brings with it a meeting of the test of Northern Pacific, since Paramount Pictures is but a particularized application of the general doctrine as reaffirmed in Northern Pacific. Enforced block booking of films is a vice in both the motion picture and television industries, and that the sin is more serious (in dollar amount) in one than the other does not expiate the guilt for either. Appellants' block booked contracts are covered by the flat holding in Paramount Pictures, 334 U.S., at 159, that "a refusal to license one or more copyrights unless another copyright is accepted" is "illegal."

* * *

[vacated and remanded]



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Electric Pipe Line, Inc. v. Fluid Systems, Incorporated

231 F.2d 370, 1956 Trade Cas. 68,300, 109 U.S.P.Q. 24

(2d Cir 1956)

Plaintiff appeals from a judgment dismissing its complaint and granting the relief prayed in defendant's counterclaim, to the effect that defendant's patent No. 2,224,403 is valid and infringed by plaintiff. Opinion below not reported. Affirmed.

Medina, J.: Plaintiff and defendant are competitors in the business of furnishing plans, drawings, parts and instructions for the installation of heating systems for schools, industrial plants, churches, public buildings and the like. As defendant claimed that plaintiff was a direct and contributory infringer of its Lines Patent No. 2,224,403, issued to Harold A. Lines of West Haven, Connecticut, on December 10, 1940, and had warned plaintiff and its customers that legal action would be instituted if unauthorized use was made of the patented system, plaintiff took the initiative and brought this suit for a judgent declaring the patent invalid and not infringed. Defendant's counterclaim was sustained in all respects. The Lines Patent was adjudged valid, an injunction issued against further use by plaintiff of its system, which was held to be a mere copy of defendant's patented system, with a few minor differences, and plaintiff's contention that defendant had misused its patent in violation of the anti-trust laws was rejected. From this judgment plaintiff appeals.

As the heating systems of schools and similar large buildings are commonly out of operation for considerable periods, and as they use heavy grades of fuel oil, such as No. 5 or No. 6, sometimes described as Bunker C, it is essential, as a matter of economy and convenience, that oil of such viscosity be heated before it reaches the burners. Prior to the Lines invention, the conventional method was the use of immersion or spot heaters, served by steam or hot water, and coils inside the supply tank. The "Lines Thermal Electric System" solved the problem of eliminating these unsatisfactory conditions by heating the oil as it passes through electrically charged pipes, between the supply tank and the burner, and heating t e entire quantity of oil in the tank is avoided by a novel and ingenious arrangement by which the excess of oil delivered to the burner is returned to the tank by a "return pipe" so placed in conjunction with the "supply pipe" that "the heated oil is again drawn into the suction (supply) pipe with new oil without being diffused through the cold oil in the tank." The claims in issue are 4, 14 and 15. The first is a process or method claim and the others "disclose a unitary system or combination to achieve a specific result."

The whole matter of validity and infringement is so thoroughly discussed in Judge Anderson's excellent opinion that we see no occasion for further comment. Moreover, the patent was adjudged valid by the Court of Appeals of the Sixth Circuit in Great Lakes Equipment Co. v. Fluid Systems, Inc., 6 Cir., 217 F.2d 613, where the principal patents here relied upon as constituting anticipation were thoroughly considered. Such others as were placed in evidence at the trial now under review, and on the motion for a new trial, add nothing of importance.

Plaintiff at first tried to palm off on the public a system identical with the "Lines Thermal Electric System," and then, after protest and warning from defendant, made the changes which Judge Anderson held to be minor. We cannot disturb his finding that the significant features of plaintiff's system "are substantially the equivalents of the defendant's patented system; it fulfills the same function and cannot be differentiated in principle." Moreover, while plaintiff only sold component parts and instruction drawings, perhaps with a certain amount of inspection and testing, its companion company M. & T. Engineering Co. actually installed the system. Accordingly, plaintiff was both a direct and a contributory infringer.

We turn to the anti-trust feature of the case. Plaintiff's claim is that defendant misused the Lines combination patent by

"attempting to bring unpatented components within the protection of said Letters Patent and to control competition in the unpatented components contrary to public policy and in violation of the anti-trust laws."

These components include electrical transformers, thermostats, tank heaters, fuel oil heaters, panel boxes, insulated couplings and insulated flanges. While these component parts are unpatented and in a sense old and well-known, those sold by defendant are especially modified or designed for use with the "Lines Thermal Electric System." Judge Anderson found that defendant had no intention of preventing the sale of these items for use outside of its patented oil transportation system. We see no reason to disturb this finding.

Plaintiff's complaint, on this phase of the case, is that defendant will not sell these component parts, which are designed and manufactured according to defendant's specifications, except in connection with defendant's "Lines Thermal Electric System." The question thus arises whether it is a misuse of the monopoly conferred by the Lines combination patent for defendant to insist that its oil transportation system only be used where the unpatented component parts are procured from it.

In Mercoid Corp. v. Mid-Continent Investment Co., 320 U.S. 661, the Supreme Court held that it was a misuse of a combination patent covering a domestic heating system for Minneapolis-Honeywell Co., the exclusive licensee, to grant rights under the patent only when unpatented stoker switches manufactured by Minneapolis- Honeywell were purchased for use in the heating system. Minneapolis- Honeywell did not install or manufacture the heating system covered by the patent. In addition, the royalties paid under the exclusive licensing agreement were based on the number of stocker switches sold for use in the system. The method of exploiting the Lines patent employed by defendant is different from the practice proscribed by the Mercoid decision. Although Fluid does not install or manufacture its oil transportation system, it does much more than just sell "unpatented components." Fluid designs the oil transportation system to meet the individualized needs of the customer; where necessary it designs and modifies the components of the system according to its own specifications; instructions are furnished for installation; the final installation is inspected by Fluid; and a performance guarantee that the system will work is given.

In this case, the sale of unpatented components is incidental to the sale of the system as a whole, even though Fluid's revenue is derived from the sale of the components. Where the owner of a combination patent designs the installation and guarantees its performance, it is not an unreasonable use of the patent to insist that the components of the patented system be obtained from it. See Great Lakes Equip. Co. v. Fluid Systems, Inc., supra, at p. 619.

Defendant contends that even if its method of doing business be condemned by Mercoid, it is protected by 35 U.S.C. 271(d), which was enacted after the Mercoid decision.

"(d) No patent owner otherwise entitled to relief for infringement or contributory infringement of a patent shall be denied relief or deemed guilty of misuse or illegal extension of the patent right by reason of his having done one or more of the following: (1) derived revenue from acts which if performed by another without his consent would constitute contributory infringement of the patent; (2) licensed or authorized another to perform acts which if performed without his consent would constitute contributory infringement of the patent; (3) sought to enforce his patent rights against infringement or contributory infringement."

The argument runs as follows: had another attempted to design or sell components for use in the system covered by the Lines patent, it would have been guilty of contributory infringement (as we have already held with respect to plaintiff); therefore, defendant's conduct of its business in the very same manner does not constitute misuse of its patent monopoly. Although this argument has some merit, we need not here determine its validity, since we have decided that defendant's method of doing business is not proscribed by Mercoid.

Affirmed.

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Bernard Susser et al. v. Carvel Corporation

332 F.2d 505, 141 U.S.P.Q. 609, 1964 Trade Cas. 71,103

(2d Cir, 1964)

Lumbard, J.: The plaintiffs in nine actions which were tried together in the Southern District of New York appeal from the dismissal of their complaints which alleged violations of the antitrust laws and sought treble damages from the Carvel Corporation, a New York corporation which manufactures dairy and primarily soft ice cream products, its subsidiary organizations, certain of its individual officers and attorneys, and a number of its suppliers. The plaintiffs, former and present individual operators of Carvel franchise outlets in Massachusetts, Connecticut and Pennsylvania, also charged the Carvel defendants with fraudulent misrepresentations in the franchise negotiations.

After a separate trial of the fraud charges Judge Dawson, sitting without a jury, dismissed the complaints as to these charges on February 7, 1962. The issue of liability on the antitrust causes of action was tried separately before Judge Dawson without a jury. The plaintiffs alleged that Carvel had unlawfully fixed the prices of the retail products sold at the franchise stores and that the franchise agreements embodied tying and exclusive dealing arrangements violative of the Sherman and Clayton acts. The complaints also charged that the contracts between Carvel and the supplier defendants embodied concerted refusals to deal with the plaintiffs violative of the antitrust laws. In a pre-trial order the plaintiffs stipulated that they would rely solely upon "per se" violations of the antitrust laws as shown in certain written agreements and other documents. From a judgment which, with one exception, dismissed the complaints against all the defendants on the ground that the plaintiffs had failed to prove violations of the antitrust laws, 206 F.Supp. 636 (SDNY 1963), the plaintiffs appeal.

The Carvel Franchise System

Although the franchise operators conduct their stores as independent businessmen, through provisions in the franchise agreement Carvel is able to maintain a chain of 400 stores uniform in appearance as well as in operation. The dealer is obligated to conduct his business in accordance with a Standard Operating Procedure Manual (Manual) which governs in great detail the general operation of the store, including the types of products which may be offered for sale, the recipes for their preparation, the nature and placement of advertising displays in the store, the color of the employees' uniforms, and the hours when the store lights must be turned on. The stores are identical in design, each featuring the Carvel crown and cone trademark on a flat slanting roof, glass walls at its front, and the name "Carvel" on its sides in neon lights. This distinctive design is protected by a design patent. The ice cream, which is processed from a mix prepared from a secret formula, is dispensed from a patented machine which bears the Carvel name or trademark. The paper containers, ice cream cones, and spoons all bear the Carvel name and in some instances are unique in design.

The Carvel chain of franchise stores has grown from approximately 180 in 1954 to approximately 400 at the time of trial in 1962. The stores are presently located throughout the eastern portion of the United States from Maine to Florida and as far west as Wisconsin. Their annual gross sales are from six to eight million dollars. Carvel's sales to the stores of supplies, equipment, and machinery reached a high point of $5,532,396 in 1957 and in 1960 totaled $4,460,689.

Special counsel retained by Carvel in 1955 for that purpose drafted a new form of the franchise agreement. The plaintiffs in four of the actions entered into franchise agreements prior to 1955; the plaintiffs in the remaining actions became franchisees after 1955. Both agreements and the corresponding Manuals must therefore be scrutinized. The new agreement effected two important changes. First, whereas under the earlier agreement the franchise dealer was obligated to sell Carvel products at prices fixed by the parent organization, the new agreement explicitly provides that the dealer has the right to fix his own prices. Second, under the earlier agreement the dealer was obliged to purchase his entire requirements of supplies, machinery, equipment, and paper goods from Carvel or Carvel approved sources. The new agreement requires the purchase from Carvel or Carvel approved sources only of those supplies which are a part of the end product sold to the public and permits the dealer to purchase machinery, equipment, and paper goods from independent sources so long as his store is maintained in accordance with the Manual specifications.

Price-Fixing

It is undisputed that the pre-1955 Manual established "standard selling prices" to which the dealers were obligated to adhere. The pre-1955 franchise required the dealers

"To maintain prices on products designated in, and as per Carvel Standard Operating Procedure and not to conduct any reduced price sales of these items without written consent from Carvel."

Judge Dawson held that these price-fixing provisions were illegal and that the four plaintiffs who had entered into the earlier franchise were entitled to a trial on the issue of damages. No appeal was taken from this aspect of the judgment below.

The revised franchise provides:

"The dealer shall have the right to sell Carvel's Frozen Dairy Product and/or other items authorized for sale by him under the terms of this agreement at any price that the dealer determines. Wherever Carvel recommends a retail price, such recommendation is based upon Carvel's experience concerning all factors that enter into a proper price, but such recommendation is in no manner binding upon the dealer."

The appellants contend that notwithstanding this provision Carvel effectively continued to fix prices at which Carvel products were sold to the public and that Judge Dawson's finding to the contrary is clearly erroneous.

Even in the absence of express contractual provisions which evidence an unlawful scheme, a charge of unlawful price-fixing may be substantiated by proof of a course of conduct by which the seller or licensor effectively maintains control of the ultimate retail price at which a product is sold. Federal Trade Commission v. Beech-Nut Packing Co ., 257 U.S. 441 (1922). The appellants direct our attention to the fact that six pages of the revised Manual continued to refer to "Standard selling price"; that in letters to several dealers Carvel emphasized that only 10 and 20 cones were prescribed by the Manual and that the minimum portions prescribed by the Manual were mandatory; that Carvel sought to have dealers report to it any deviation by other dealers from the requirements of the Manual; and that Carvel suggested that dealers seek its permission before conducting a sale at prices other than those established in the Manual. Moreover, the appellants emphasize the existence of a board of governors consisting of various dealers appointed by Carvel, the function of which is to make recommendations concerning the suggested retail selling price of Carvel products.

As Judge Dawson noted, the mere existence of a means whereby retail price levels are recommended is not sufficient to establish a violation of the Sherman Act, unless there is a showing of an attempt to enforce a price structure upon the retail tradesmen. See Maple Flooring Mfrs. Ass'n v. United States, 268 U.S. 563 (1925); Cement Mfrs. Protective Ass'n v. United States, 268 U.S. 588 (1925). Here, the franchise provisions explicitly reserved to the individual dealer the right to set whatever price he desired. And, by contrast with the letters to which the appellants referred, Carvel introduced in evidence bulletins circulated to all the dealers as well as letters sent to several emphasizing that Carvel had changed its prior pricing policy and that each dealer now had the right to set his own prices, although Carvel did indicate that its suggested retail prices were based upon its own broad experience in customer sales.

Fred Vettel, Carvel's general manager since 1955, testified that the board of governors operated primarily as a medium for the interchange of ideas among a representative group of individual franchise dealers. He further stated that since sometime in 1957 Carvel had made available to the dealers advertising displays which left blank spaces for those dealers who wished to insert prices other than those suggested by the Carvel organization, although the appellants adduced evidence that on some occasions requests for such posters were refused.

In short, the evidence was contradictory on the question whether Carvel attempted to impose a binding price structure on the retail dealers. It is not the duty of this court to consider de novo the conflicting evidence and resolve this factual issue; rather, we must review the determination of the district court to determine whether or not it is clearly erroneous. See Ruby v. American Airlines, Inc., 2d Cir., Dkt No. 28473, February 14, 1964, pp. 998-1002; United States v. National Ass'n of Real Estate Boards, 339 U.S. 485, 494-96 (1950). There is much evidence to support Judge Dawson's finding of fact that Carvel did not engage in an unlawful price-fixing scheme, and we cannot say that Judge Dawson's conclusion was clearly erroneous.

Exclusive Dealing and Tying Arrangements

The appellants maintain that the franchise agreements embody violations of Sherman and Clayton acts insofar as they require the dealer to refrain from selling any non-Carvel product and insofar as they obligate the dealer to purchase directly from Carvel or from a source approved by Carvel his supply not only of the basic Carvel ice cream mix, prepared under a secret formula, but also certain other products used in either the preparation or sale of the end product offered to the public. The requirement that the dealer sell solely Carvel products would, if taken alone, present an example of an exclusive dealing arrangement; the requirement that the dealer purchase not only Carvel mix but also certain other products would, if taken alone, present an example of a tying arrangement. Inasmuch as the Supreme Court has erected a much more stringent test of legality with which to measure tying arrangements than that which is applied to exclusive dealerships, we consider first the appropriate standard to be applied where both provisions are embodied in a single contractual relationship.

We can find no justification for treating the tying aspects of an agreement which embodies exclusive dealing aspects as well any differently than we would treat a tying arrangement alone. The fundamental economic evil in a tying arrangement deemed unlawful under the antitrust laws lies in the ability of a producer who possesses market dominance in one particular product to impose upon his vendee the obligation to purchase other products as to which the producer possesses no market dominance and the consequent foreclosure to other producers of the nondominant products of such markets for their merchandise. Certainly the economic impact of such an arrangement is in no respect diluted by inclusion of provisions which restrict the vendee solely to the use or sale of the producer's products. We shall therefore measure the tying aspects of the Carvel franchise by the more stringent standard of legality established by the Supreme Court and the exclusive dealing aspects by the more liberal standard.

As noted above, the pre-1955 franchise obligated the dealer to "purchase and use only standard Carvel approved printed paper goods, napkins, cones, extracts, spoons, and all other Carvel products at standard market prices." The post-1955 franchise requires the dealer to purchase from Carvel or approved sources his entire requirements of all items sold as a part of the retail product but permits the dealer to purchase machinery, equipment, and paper goods from sources other than Carvel so long as the operation is maintained in accordance with the Manual specifications.

The Tying Arrangements

Tying arrangements have been given short shrift under the antitrust laws. International Business Machine Corp. v. United States, 298 U.S. 131 (1936); International Salt Co. v. United States, 332 U.S. 392 (1947); Times-Picayune Publishing Co. v. United States, 345 U.S. 594 (1953); Northern Pacific Railway Co. v. United States, 356 U.S. 1 (1958); United States v. Loew's, Inc. 371 U.S. 38 (1962). See generally Turner, The Validity of Tying Arrangements Under the Anti-trust Laws, 72 Harv. L. Rev. 50 (1958). Yet it seems clear that in compelling circumstances the protection of goodwill, as embodied for example in a valuable trademark, may justify an otherwise invalid tying arrangement. But

Standard Oil Co. v. United States, 337 U.S. 293, 306 (1949). The threshold question is thus whether the Carvel franchise embodies a tying arrangement and, if so, whether that arrangement can be justified as necessary for the protection of Carvel's goodwill.

A tying arrangement may be defined as an agreement under which the vendor will sell one product only if the purchaser agrees to buy another independent product as well. Two types of economic injury haracteristically arise from such an arrangement: first, foreclosure to the vendee of alternate sources of supply for the second, or tied, product; and second, foreclosure of possible market outlets to other competing suppliers of the tied product. The source of this injury - and the fundamental element which requires that such arrangements be deemed illegal - lies in the vendor's "sufficient economic power with respect to the tying product to appreciably restrain free competition in the market for the tied product." Northern Pacific Railway Co. v. United States, supra, at p. 6. Such power may be found either in the vendor's dominance of the market in the tying product or in its uniqueness or particular appeal to the consumer. United States v. Loew's, Inc., supra, at p. 45.

My brothers would affirm the judgment of the district court in all respects. With regard to the allegations of unlawful tying arrangements, they reason that the plaintiffs limited themselves by pre-trial stipulation to reliance solely on "per se" violations of the antitrust laws and since they failed to establish Carvel's market dominance and that a substantial amount of commerce is affected they have failed as well to make out a per se violation of the antitrust laws. I cannot agree.

The stipulation, in relevant part, states only that the plaintiffs will rely on per se violations and that their proofs will be limited to the written franchise agreements, other documents supplementary thereto, and the testimony of two individuals taken prior to trial, one of whom was Fred Vettel, Carvel's general manager. The effect of this stipulation seems clear to me. The plaintiffs agreed that they would go no further than the documentary evidence alluded to in attempting to make out their claims of antitrust violation. The only question is whether the plaintiffs in fact introduced sufficient evidence to make out an antitrust violation by the Carvel defendants. I think they did. The nature of their stipulation and the label they gave it is wholly immaterial to that question. I cannot see what can possibly turn on the fact that the plaintiffs limited themselves to what the stipulation termed "per se violations."

The court's focus must be entirely on the state of the record. The crucial question is whether the record satisfies the requirements of proof of an antitrust violation. Each element of a tying arrangement must be considered in turn.

Does Carvel possess the requisite economic leverage? Despite the absence in the record of substantial economic data, in the light of the Supreme Court's decision in United States v. Loew's, Inc., supra, I believe that such power may be presumed from the use of the Carvel trademark as the principal feature of the Carvel franchise system. In Loew's, the Court declared that "when the tying product is patented or copyrighted . . . sufficiency of economic power is presumed." 371 U.S. at 45 n. 4. I can find little reason to distinguish, in determining the legality of an allegedly unlawful tying arrangement, between the economic power generated by a patent or copyright on the one hand and that generated by a trademark on the other. In all three cases, the Congress has granted a statutory monopoly which places in the hands of the owner the right, within the limitations of federal law, to do as he will with the protected product. The value of the patent, copyright or trademark is, of course, directly proportionate to the consumer desirability of the protected product.

I can find no reason not to extend this presumption of economic power to trademarks. In any event, the claims which Carvel itself proffers lend added weight to the presumption, for Carvel's claim of economic justification is founded upon the substantial value of its trademark and the necessity for contractual restraints upon its dealers to protect that value. No doubt the recent growth of the Carvel chain from 180 to 400 stores has been attributable in great measure to the increasing value of the Carvel trademark in terms of consumer appeal and the concomitant increase in economic power generated by that trademark. The essential element in the Carvel franchise is the trademark license agreement which permits the dealer to display, label and sell its retail products as "Carvel" products. To reinforce its basic trademark Carvel also possesses some nine design patents covering its building structure, advertising displays, freezers and other apparatus, three patents covering machinery and some twenty trademarks in varying forms for use with the wide variety of products which are merchandised at the franchise stores. It is the lease or license of the trademark itself, buttressed by this array of patents and subsidiary trademarks, to which are tied the other products.

Having concluded that the Carvel trademark presumptively generates sufficient economic power, we must consider two arguments advanced to support the proposition that the Carvel franchise in any event does not embody an unlawful tying arrangement within the provisions of the Clayton Act. First, it is contended that section 3 of that act condemns only agreements which obligate the purchaser not to "use or deal in the goods . . . of a competitor or competitors of the lessor or seller," and that since Carvel does not compete with suppliers of cones, toppings, extracts, ice cream mix and so forth there has been no improper foreclosure of competition. Generally, Carvel's suppliers accept orders directly from the dealers, bill the dealers and deliver directly to them rather than to Carvel. However, the transaction is cast in the form of a sale directly to Carvel which in turn resells the items to the individual dealers, the suppliers acting as Carvel's agents for payment and delivery. Carvel sets the prices at which these items are sold to the dealers. From the point of view of the legal form adopted, then, it is clear that Carvel does compete with other suppliers of these products. Moreover, there is little difference in economic impact between Carvel's purchasing and reselling these supplies and Carvel's production of these items in the first instance.

With regard to the foreclosure to other suppliers of the Carvel franchise stores as possible market outlets, it must be conceded that vigorous competition would probably exist among such suppliers to secure the initial contract with the Carvel organization. Nevertheless, the nature of this competition must be substantially different from that which would otherwise prevail. In view of the leverage which the Carvel corporation wields in supervising the supplying of some 400 retail outlets, competition will most likely take the form of substantial price concessions and the concomitant inability of smaller suppliers effectively to compete with larger producers who are capable of meeting Carvel's price and service demands.

Of equal significance is the economic impact of the prevailing arrangement in terms of foreclosure to the individual franchise stores of the opportunity to deal with individual suppliers. While under the franchise the dealer may enjoy lower prices on some items, Carvel undoubtedly reaps some economic benefit from its status as an intermediary. There is no indication whether or not the dealers, either individually or in combination, could secure lower prices and better service from local producers of the same products. In short, in order to secure the benefits of employing the Carvel name on his retail products, the dealer has been forced to surrender his right to negotiate with suppliers of his own choice on matters such as price, delivery and other aspects of a contract of sale. Where such a surrender may be traced to the economic leverage of the other party, arising from its trademark, the elements of an unlawful tying arrangement have been established. Certainly the amount of commerce here involved is not insubstantial, in light of Carvel's sales to the franchise dealers in 1960 alone of $3,965,923 in ingredients and other supplies.

The second argument advanced in support of the proposition that the Carvel franchise does not embody a tying arrangement is that we are dealing not with a series of individual products tied together for purposes of sale, but rather with one unified product, that is the Carvel product which is ultimately consumed by the public. I do not agree. Carvel sells supplies as distinct items in large quantities - for example, ten gallons of mix, ten gallons of chocolate syrup, and so forth. Carvel itself purchases these supplies as distinct items from a wide variety of suppliers who in turn make individual deliveries to the franchise outlets. By their very nature it seems clear that there is no reason to treat these separate products as one unified product although to the ultimate consumer of an ice cream cone or a sundae they would seem to be one.

The plaintiffs having proved the essentials of a tying arrangement proscribed by the Clayton Act, the burden fell upon Carvel to justify the arrangement as reasonably necessary to protect its trademark. While it is clear that some quality control is essential for the protection of Carvel's good-will - if not required by law for a proper trademark licensing agreement, see E.I. du Pont de Nemours & Co. v. Celanese Corp. of America, 167 F.2d 484 (Ct. of Cust. and Pat. App. 1948); Arthur Murray, Inc. v. Horst, 110 F.Supp. 678 (D. Mass. 1953); Morse- Starrett Prod. Co. v. Steccone, 86 F.Supp. 796 (N.D. Calif. 1949) - the justification for this control requires proof that the specifications for products to substitute for those offered by Carvel would be so complex and detailed as to make it impracticable for Carvel to establish such specifications. See Standard Oil Co. v. United States, supra, at 306.

I find the record with respect to justification of Carvel's control to be unsatisfactory and inconclusive. The evidence before Judge Dawson was for the most part documentary. With the exception of the self-serving statement in the franchise agreement that the dealer's obligation to purchase only from Carvel those items which are part of the end product is necessary "in order to safeguard the integrity of Carvel's trademarks," the documents are of little value on the issue of trademark justification. Vettel, Carvel's general manager, testified that the various toppings and other garnishments are made by the suppliers to Carvel's specifications, although not under a secret formula as is the basic ice cream mix. Vettel stated that it would be "impossible" to police the individual stores; yet he conceded, as did a representative of H. P. Hood & Sons, a supplier to Carvel of ice cream mix, that the toppings and garnishments sold by Carvel to the dealers could be purchased elsewhere on the market.

In light of this sparse showing, I am unable to find sufficient support for Judge Dawson's conclusion that the tying arrangement was justified by the necessity for Carvel to establish quality controls to protect its trademark. My brothers suggest the difficulty of

"controlling something so insusceptible of precise verbalization as the desired texture and taste of an ice cream cone or sundae."

Yet, since Carvel itself manufactures none of the ingredients sold to the dealers, it has itself apparently surmounted the difficulty of verbalizing the recipes for the proper preparation of its ingredients. It is especially noteworthy that in Engbrecht v. Dairy Queen Co ., 203 F.Supp. 714 (D. Kans. 1962), it was established that Dairy Queen, which operates a nationwide chain of some 3,400 soft ice cream franchise stores quite similar to Carvel's, does not require that its dealers purchase mix, toppings, or other garnishments directly from it or from approved sources, but instead it establishes specifications to govern such items and enforces these by means of periodic inspection of its franchise stores. This fact is by no means conclusive of the ability of Carvel, a somewhat smaller chain, to maintain its own standards of quality through similar controls, since the circumstances may differ, but it negates the proposition that it is logical and reasonable to infer - in the absence of proof more compelling than the mere self-serving statement of Carvel's own general manager - that it was reasonable and necessary for Carvel to embody a tying arrangement into its franchise agreement. Dairy Queen poses in striking contrast the insufficiency of the evidence adduced by Carvel to support its claim.

The antitrust aspects of the plaintiffs' claims were tried more or less as the aftermath of the far more lengthy fraud and deceit aspects of the case. Apparently because of all the time already spent in litigating the other issues, counsel were urged by the district court to limit their proofs in the antitrust phase of the case essentially to documentary evidence, and this may explain as well the plaintiffs' reliance solely on "per se" violations of the antitrust laws. With the case in this posture, I would think it best to remand the cause to the district court for a further hearing limited to the issue of justification. If Carvel could establish its claim the result ultimately would be the same. If Carvel were unable to do so the plaintiffs would have sufficiently established all the elements of an unlawful tying arrangement.

The Exclusive Dealing Arrangements

As we have noted, our application of the stricter standard of legality established by the Supreme Court to the tying aspects of the Carvel franchise does not preclude us from applying the more flexible standard established by the Court for exclusive dealing arrangements to the requirement in the franchise that the dealer sell at retail only Carvel or Carvel approved products. The plaintiffs maintain that this provision erects an unlawful exclusive dealership violative of the antitrust laws. We do not agree.

In Tampa Electric Co. v. Nashville Co., 365 U.S. 320 (1961), the Supreme Court held valid a contract between Tampa, a public utility, and Nashville, a medium sized coal company, which obligated Nashville to supply Tampa's entire requirements of coal over a twenty-year period - one form of an exclusive dealing arrangement. After discussing the necessity of delineating the relevant line of commerce and the geographical market, the Court noted that requirements contracts "have not been declared illegal per se" and stated that in determining whether or not the contract in issue would substantially lessen competition the courts must take into account

"the relative strength of the parties, the proportionate volume of commerce involved in relation to the total volume of commerce in the relevant market area, and the probable immediate and future effects which pre-emption of that share of the market might have on effective competition therein."

365 U.S. at 329. The Court further emphasized the significance of the possible economic justification for the accused arrangement, in light of the legitimate reasons for employing such a device.

Lacking economic data sufficient to meet the standard thus established in Tampa Electric, the appellants here urge that the Supreme Court's decision in Standard Oil Co. v. United States, supra, is controlling and that they need prove only that "competition has been foreclosed in a substantial share of the line of commerce affected." 337 U.S. at 314. We need not comment on whether the appellants could sustain their allegations under the doctrine enunciated in Standard Oil, for it seems indisputable that in Tampa Electric the Court deviated from the more rigorous and inflexible rule it had established in Standard Oil and erected criteria which demand close scrutiny of the economic ramifications of an exclusive dealing arrangement in order to determine the probable anti-competitive effects of such a device. See Bok, The Tampa Electric Case and the Problem of Exclusive Arrangements Under the Clayton Act, 1961 Sup. Ct. Rev. 267, 281-85. We find it plain that the appellants have failed to bear this burden. Instead of introducing evidence to establish the economic effects of the Carvel franchise structure, they merely protest that anti-competitive effects may be inferred solely from the existence of such a network of exclusive dealerships. But the whole tenor of Tampa Electric does not permit adherence to such a stringent standard of legality.

In any event, we need not rely solely upon the appellants' failure to adduce concrete evidence concerning the relevant line of commerce and geographical market and the probable anticompetitive effects of the Carvel arrangement. For in terms of at least one factor which the Supreme Court deemed significant in Tampa Electric - that of economic justification - the Carvel exclusive dealership arrangement withstands any attack on its legality.

As Judge Dawson found, "the cornerstone of a franchise system must be the trademark or trade name of a product." The fundamental device in the Carvel franchise agreement itself is the licensing to the individual dealer of the right to employ the Carvel name in his advertising displays, on the products he sells, and on the store itself. The stores are uniform in design as well as in the public display of the ice cream machinery employed, the placement of advertising displays, and the products offered for sale. The requirement that only Carvel products be sold at Carvel outlets derives from the desirability that the public identify each Carvel outlet as one of a chain which offers identical products at a uniform standard of quality. The antitrust laws certainly do not require that the licensor of a trademark permit his licensees to associate with that trademark other products unrelated to those customarily sold under the mark. It is in the public interest that products sold under one particular trademark should be subject to the control of the trademark owner. See E.I. du Pont de Nemours & Co. v. Celanese Corp. of America, supra; Arthur Murray, Inc. v. Horst, supra; Morse-Starrett Prod. Co. v. Steccone, supra . Carvel was not required to accede to the requests of one or another of the dealers that they be permitted to sell Christmas trees or hamburgers, for example, which would have thrust upon Carvel the obligation to acquaint itself with the production and sale of these items so as to establish reasonable quality controls.

Nor do the antitrust laws proscribe a trademark owner from establishing a chain of outlets uniform in appearance and operation. Trademark licensing agreements requiring the sole use of the trademarked item have withstood attack under the antitrust laws where deemed reasonably necessary to protect the goodwill interest of the trademark owner, see Denison Mattress Factory v. The Spring-Air Co ., 308 F.2d 403 (5 Cir. 1962); Pick Mfg. Co. v. General Motors Corp ., 80 F.2d 641 (7 Cir. 1935), and such agreements certainly are not unlawful per se under the antitrust laws. Bascom Launder Corp. v. Telecoin Corp ., 204 F.2d 331 (2 Cir. 1953). Judge Dawson was fully warranted in concluding that in the context of the entire Carvel franchise system the requirement that no non-Carvel products be sold at the retail level is reasonably necessary for the protection of Carvel's goodwill.

The Supplier Contracts

The appellants maintain that the agreements between Carvel and its various suppliers of ice cream mix, cones, and paper products are violative of the antitrust laws insofar as they obligate the suppliers not to deal directly with the individual dealers but solely with Carvel and not to sell to the dealers any merchandise other than that approved by Carvel. We disagree.

With regard to Carvel's contracts with Hood and Rakestraw, which produced Carvel ice cream mix in accordance with a secret formula which they pledged not to divulge, it seems perfectly clear that as the possessor of a secret formula for its ice cream mix Carvel enjoyed the right to sell it to whomever it chose, and this right was not diluted by its agreement with Hood and Rakestraw to produce the mix. Carvel was free to insist that Hood and Rakestraw produce the mix solely for Carvel and subject to Carvel's wishes as to its disposition.

As for the provision in the contracts between Carvel and Hood, Rakestraw, Eagle, a cone manufacturer, and Mohawk, a manufacturer of paper products, that the suppliers would not sell non-Carvel products to the individual dealers, we find no merit in the plaintiffs' claims. Carvel cannot be considered in competition with these suppliers from whom it purchases Carvel supplies, and such an agreement not to deal, even if established, when effected by non-competing enterprises is not illegal. See, e.g., Packard Motor Car Co. v. Webster Motor Car Co ., 243 F.2d 418 (D.C. Cir.), cert. denied, 355 U.S. 822 (1957). Moreover, the plaintiffs failed to prove that they were foreclosed from alternate sources of supply or indeed that the supplier defendants themselves had been requested to make sales to the dealers and had refused.

Accordingly, the judgments of the district court are affirmed.

Friendly and Medina, concurring: Concurring with most of Chief Judge Lumbard's opinion, Judge Medina and I do not consider a remand as to the claim with respect to the "tied" purchases of flavoring, toppings and cones is either required or warranted in the light of the pre-trial order to which plaintiffs agreed.

* * *

It could hardly be plainer that plaintiffs were confining themselves to claims of violation of the antitrust laws which, as they thought, could be sustained without other market data than the meager amount contained in the documents offered.

In agreeing to the pre-trial order, plaintiffs may have been relying on the inclusion of tying arrangements in the list of per se violations in Northern Pacific Ry. v. United States, 356 U.S. 1, 5 (1958). But, as that opinion makes clear, not every tying arrangement is illegal per se. Tying arrangements "are unreasonable in and of themselves whenever a party has sufficient economic power with respect to the tying product to appreciably restrain free competition in the market for the tied product and a 'not insubstantial' amount of commerce is affected." 356 U.S. at 6. See also Times-Picayune Publishing Co. v. United States, 345 U.S. 594, 608-09 (1953). More recently the Court has said that tying arrangements "may fall" in the category of per se violations, "though not necessarily so." White Motor Co. v. United States, 372 U.S. 253, 262 (1963).

Here the facts to which plaintiffs were limited by the pre-trial order showed neither that Carvel had "sufficient economic power with respect to the tying product to appreciably restrain free competition in the market for the tied product" nor that "a not insubstantial amount of commerce is affected." Indeed, such figures as exist would prove the contrary. In 1960 there were in New York, Connecticut and Massachusetts, 250 Carvel dealers out of a total of 125,000 outlets where ice cream cones could be purchased - amounting to one fifth of one per cent of the outlets and apparently doing about one per cent of the business. The other large Carvel states are New Jersey and Pennsylvania; the balance of a 1960 total of 400 Carvel dealers were scattered at one time over as many as 8 or 9 states from Maine to Florida and as far west as Wisconsin. These dealers competed not only with similar chains - Dairy Queen, Tastee Freez, Dari-Delite, King Kone, Dari-Isle, and others, with chains and independents utilizing mobile units, with chain stores and operations such as Howard Johnson, and with the ubiquitous corner drug-store. Although Carvel's aggregate sales are "not insubstantial," the totals shed no light on the amount of the "tied" sales here complained of, which common sense tells us must be a minor part. The figures in footnotes 1 and 2 give some indication of the "insubstantiality" of the commerce affected even under the rather narrow test indicated by dictum in Brown Shoe Co. v. United States, 370 U.S. 294, 330 (1962), especially with reference to the cones, whose tie-in was hardest to justify in terms of quality control. Not only was the amount of commerce in these not consequential, but any damage to the plaintiffs was even less so. Eagle Cone's billings to Carvel averaged $460 per dealer per year, and Carvel's mark-up was slightly over 5% or about $25 per dealer; whether the dealers suffered even that much damage is questionable since the price Carvel charged them was less than they could have obtained if they bought in smaller quantities than Carvel, see fn. 7 to Chief Judge Lumbard's opinion. And, of course, it remained open to competing suppliers to bid for the Carvel business by soliciting that company - in itself an important contrast with cases where the tied item is produced by the seller.

Our brother Lumbard thinks the first of the deficiencies in proof as to economic power was remedied by Carvel's license of a package of trade-marks, design patents relating to the shape of the building etc., and a patented freezing and dispensing machine. We cannot agree. In the first place, the patented items cannot realistically be considered the "tying product" or the focus of the arrangement. Whatever has been said about the evils of "ties" to patented or copyrighted items is meaningful only in the situation where the desirability of the patented item is what motivates the purchaser to make further commitments or to give up some liberty of choice as to other products. See, e. g., United States v. Loew's, Inc. 371 U.S. 38, 45 (1962). In this case, the patented items appear to have been virtually without motivating significance in bringing about the agreement. The true tying item was rather the Carvel trademark, whose growing repute was intended to help the little band of Carvel dealers swim a bit faster than their numerous rivals up the highly competitive stream. There may, of course, be cases where a trade-mark has acquired such prominence that the coupling of some further item to its license would constitute a per se violation; but such a trade-mark would satisfy the market dominance test of Times- Picayune and Northern Pacific. The figures show that Carvel is not such a mark.

Tying arrangements differ from other per se violations, such as price-fixing, United States v. Trenton Potteries Co ., 273 U.S. 392 (1927), in that they can be justified on occasion, as by proof that "the protection of goodwill may necessitate" their use "where specifications for a substitute would be so detailed that they could not practicably be supplied," Standard Oil Co. of Calif. v. United States, 337 U.S. 293, 306 (1949). Since the value of a trade-mark depends solely on the public image it conveys, its holder must exercise controls to assure himself that the mark is not shown in a derogatory light. The record affords no sufficient basis for upsetting the finding of the District Judge that

"To require Carvel to limit itself to advance specifications of standards for all the various types of accessory products used in connection with the mix would impose an impractical and unreasonable burden of formulation . . ."

Although instances of impossibility of control through specification may indeed be rare in cases involving the proper functioning of mechanical elements of a machine, seeInternational Business Machines Corp. v. United States 298 U.S. 131, 139 (1936); International Salt Co. v. United States, 332 U.S. 392, 397-98 (1947); Turner, The Validity of Tying Arrangements under the Antitrust Laws, 72 Harv. L. Rev. 50 (1958); but see Dehydrating Process Co. v. A.O. Smith Corp ., 292 F.2d 653 (1 Cir.), cert. denied, 368 U.S. 931 (1961); United States v. Jerrold Electronics Corp. 187 F.Supp. 545 (E.D. Pa. 1960), aff'd per curiam, 365 U.S. 567 (1961), such cases are scarcely relevant to the problem of controlling something so insusceptible of precise verbalization as the desired texture and taste of an ice cream cone or sundae; that Carvel was able to specify this to its source of supply, whose product is regularly checked, does not show that administration could be confided to 400 dealers. Furthermore in most states Carvel would risk liability to anyone injured by a foreign substance in the frozen mix, see ALI, Restatement (Second), Torts 402A (Tent. Draft No. 7, 1962); although it might not be so with respect to ingredients purchased from suppliers of the dealer's own choosing, the difficulties of proof are such that it is entitled to insist on products in which it has complete confidence. Vettel's testimony that the success of the enterprise required distinctive flavorings of uniform quality and that he considered it impracticable to handle the problem by specification and policing was sufficiently reasonable and persuasive that the judge was entitled to credit it, whether or not one of us would agree. We see little force in the fact that a competitor, which licenses only freezing machines and the trade-mark and does not sell a mix made by a secret formula, is satisfied with less exacting provisions. See Engbrecht v. Dairy Queen Co ., 203 F.Supp. 714 (D. Kan. 1962). Moreover, as Vettel also explained, by packing the flavoring in tins or bags that contain exactly the amount required for a 10-gallon can of mix, Carvel encouraged the dealers to use an adequate quantity and provided an automatic control. Finally there is a limit to the amount of inspecting feasible when each dealer purchases an average of less than $12,000 a year of Carvel products (including equipment) and sells in 10 and 20 units.

Even were we to consider the patented machines and design patents to be a relevant part of the tying arrangement, the Northern Pacific opinion ruled out the idea, thought by some to have been implicit in earlier opinions, that proof of the license of a patented device sufficed semper et ubique to show the market dominance required to render a tying arrangement a per se violation. In doing so it appropriately recognized the facts of business life. The society of patents is not egalitarian. As had been well said three years earlier, although with some dissent, in the Report of the Attorney General's Committee to Study the Antitrust Laws (1955), 238:

"The patent may be broad and basic, in which event the economic power incident to the patent makes the tying clause illegal. On the other hand, the patent may be narrow and unimportant, in which event it may confer virtually no real market power. Accordingly, where the tying product is patented, the patentee should be permitted to show that in the entire factual setting, including the scope of the patent in relation to other patented or unpatented products, the patent does not create the market power requisite to illegality of the tying clause."

Indeed, the statement in Northern Pacific had been anticipated by the remark in Standard Oil Co. of Calif. v. United States supra, at 307, that a patent is "prima facie evidence" of market control - evidence which was clearly rebutted here. Although there is language in United States v. Loew's, Inc., supra, at 44-48 which lends support to a theory that the mere existence of a patent of any description is not merely prima facie but irrebutable evidence of market control, we find it hard to believe that the Court would thus have obliquely reversed the position taken in Northern Pacific, a position underscored by Mr. Justice Harlan's remarks in dissent, 356 U.S. at 17-19; the language rather must be read in the context of the Court's previous proscription of block-booking of motion picture films in United States v. Paramount Pictures, Inc. 334 U.S. 131, 156-59 (1948), see 371 U.S. at 48. There is scant analogy between unique "hit" movies, or the tabulating and computing machines in International Business Machines Corp. v. United States supra, as to which the defendant had but one smaller competitor, or the salt-processing machines in International Salt Co. v. United States, 322 U.S. 392 (1947), and Carvel's dispensing machine by which, along with the rest of its package of distinctive devices, it had gained only 1% of the ice cream cone market in the area of its heaviest concentration.

The triviality of whatever financial hardships the plaintiffs may have suffered as a result of these allegedly illegal contracts explains why they were willing to limit themselves to per se violations rather than incur the expense of assembling market data to gain what at best would be a negligible recovery. They have had two trials, one in which they were defeated in their claim of fraud, with a transcript of nearly 4,000 pages; we see no sufficient reason to order a third.

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Jefferson Parish Hospital District No. 2 v. Hyde


466 U.S. 2, 104 S. Ct. 1551, 80 L. Ed. 2d 2;
1984-1 Trade Cas. 65,908
(1984)

Stevens, J.: At issue in this case is the validity of an exclusive contract between a hospital and a firm of anesthesiologists. We must decide whether the contract gives rise to a per se violation of 1 of the Sherman Act because every patient undergoing surgery at the hospital must use the services of one firm of anesthesiologists, and, if not, whether the contract is nevertheless illegal because it unreasonably restrains competition among anesthesiologists.

In July 1977, respondent Edwin G. Hyde, a board-certified anesthesiologist, applied for admission to the medical staff of East Jefferson Hospital. The credentials committee and the medical staff executive committee recommended approval, but the hospital board denied the application because the hospital was a party to a contract providing that all anesthesiological services required by the hospital's patients would be performed by Roux & Associates, a professional medical corporation. Respondent then commenced this action seeking a declaratory judgment that the contract is unlawful and an injunction ordering petitioners to appoint him to the hospital staff. After trial, the District Court denied relief, finding that the anticompetitive consequences of the Roux contract were minimal and outweighed by benefits in the form of improved patient care. 513 F.Supp. 532 (ED La. 1981). The Court of Appeals reversed because it was persuaded that the contract was illegal "per se." 686 F.2d 286 (CA5 1982). We granted certiorari, 460 U.S. 1021 (1983), and now reverse.

I

In February 1971, shortly before East Jefferson Hospital opened, it entered into an "Anesthesiology Agreement" with Roux & Associates (Roux), a firm that had recently been organized by Dr. Kermit Roux. The contract provided that any anesthesiologist designated by Roux would be admitted to the hospital's medical staff. The hospital agreed to provide the space, equipment, maintenance, and other supporting services necessary to operate the anesthesiology department. It also agreed to purchase all necessary drugs and other supplies. All nursing personnel required by the anesthesia department were to be supplied by the hospital, but Roux had the right to approve their selection and retention. The hospital agreed to

"restrict the use of its anesthesia department to Roux & Associates and [that] no other persons, parties or entities shall perform such services within the Hospital for the [term] of this contract."

The 1971 contract provided for a 1-year term automatically renewable for successive 1-year periods unless either party elected to terminate. In 1976, a second written contract was executed containing most of the provisions of the 1971 agreement. Its term was five years and the clause excluding other anesthesiologists from the hospital was deleted; the hospital nevertheless continued to regard itself as committed to a closed anesthesiology department. Only Roux was permitted to practice anesthesiology at the hospital. At the time of trial the department included four anesthesiologists. The hospital usually employed 13 or 14 certified registered nurse anesthetists.

The exclusive contract had an impact on two different segments of the economy: consumers of medical services, and providers of anesthesiological services. Any consumer of medical services who elects to have an operation performed at East Jefferson Hospital may not employ any anesthesiologist not associated with Roux. No anesthesiologists except those employed by Roux may practice at East Jefferson.

There are at least 20 hospitals in the New Orleans metropolitan area and about 70 percent of the patients living in Jefferson Parish go to hospitals other than East Jefferson. Because it regarded the entire New Orleans metropolitan area as the relevant geographic market in which hospitals compete, this evidence convinced the District Court that East Jefferson does not possess any significant "market power"; therefore it concluded that petitioners could not use the Roux contract to anticompetitive ends. The same evidence led the Court of Appeals to draw a different conclusion. Noting that 30 percent of the residents of the parish go to East Jefferson Hospital, and that in fact "patients tend to choose hospitals by location rather than price or quality," the Court of Appeals concluded that the relevant geographic market was the East Bank of Jefferson Parish. 686 F.2d, at 290. The conclusion that East Jefferson Hospital possessed market power in that area was buttressed by the facts that the prevalence of health insurance eliminates a patient's incentive to compare costs, that the patient is not sufficiently informed to compare quality, and that family convenience tends to magnify the importance of location.

The Court of Appeals held that the case involves a "tying arrangement" because the

"users of the hospital's operating rooms (the tying product) are also compelled to purchase the hospital's chosen anesthesia service (the tied product)."

Id., at 289. Having defined the relevant geographic market for the tying product as the East Bank of Jefferson Parish, the court held that the hospital possessed "sufficient market power in the tying market to coerce purchasers of the tied product." Id., at 291. Since the purchase of the tied product constituted a "not insubstantial amount of interstate commerce," under the Court of Appeals' reading of our decision in Northern Pacific R. Co. v. United States, 356 U.S. 1, 11 (1958), the tying arrangement was therefore illegal "per se."

II

Certain types of contractual arrangements are deemed unreasonable as a matter of law. The character of the restraint produced by such an arrangement is considered a sufficient basis for presuming unreasonableness without the necessity of any analysis of the market context in which the arrangement may be found. A price-fixing agreement between competitors is the classic example of such an arrangement. Arizona v. Maricopa County Medical Society, 457 U.S. 332, 343-348 (1982). It is far too late in the history of our antitrust jurisprudence to question the proposition that certain tying arrangements pose an unacceptable risk of stifling competition and therefore are unreasonable "per se." The rule was first enunciated in International Salt Co. v. United States, 332 U.S. 392, 396 (1947), and has been endorsed by this Court many times since. The rule also reflects congressional policies underlying the antitrust laws. In enacting 3 of the Clayton Act, 38 Stat. 731, 15 U. S. C. 14, Congress expressed great concern about the anticompetitive character of tying arrangements. See H. R. Rep. No. 627, 63d Cong., 2d Sess., 10-13 (1914); S. Rep. No. 698, 63d Cong., 2d Sess., 6-9 (1914). While this case does not arise under the Clayton Act, the congressional finding made therein concerning the competitive consequences of tying is illuminating, and must be respected.

It is clear, however, that not every refusal to sell two products separately can be said to restrain competition. If each of the products may be purchased separately in a competitive market, one seller's decision to sell the two in a single package imposes no unreasonable restraint on either market, particularly if competing suppliers are free to sell either the entire package or its several parts. For example, we have written that

Northern Pacific R. Co. v. United States, 356 U.S., at 7. Buyers often find package sales attractive; a seller's decision to offer such packages can merely be an attempt to compete effectively -- conduct that is entirely consistent with the Sherman Act. See Fortner Enterprises v. United States Steel Corp., 394 U.S. 495, 517-518 (1969) (Fortner I) (White, J. dissenting); id., at 524-525 (Fortas, J., dissenting).

Our cases have concluded that the essential characteristic of an invalid tying arrangement lies in the seller's exploitation of its control over the tying product to force the buyer into the purchase of a tied product that the buyer either did not want at all, or might have preferred to purchase elsewhere on different terms. When such "forcing" is present, competition on the merits in the market for the tied item is restrained and the Sherman Act is violated.

Times-Picayune Publishing Co. v. United States, 345 U.S. 594, 605 (1953).

Accordingly, we have condemned tying arrangements when the seller has some special ability -- usually called "market power" -- to force a purchaser to do something that he would not do in a competitive market. See United States Steel Corp. v. Fortner Enterprises, 429 U.S. 610, 620 (1977) (Fortner II); Fortner I, 394 U.S., at 503-504; United States v. Loew's, Inc., 371 U.S. 38, 45, 48, n. 5 (1962); Northern Pacific R. Co. v. United States, 356 U.S., at 6-7. When "forcing" occurs, our cases have found the tying arrangement to be unlawful.

Thus, the law draws a distinction between the exploitation of market power by merely enhancing the price of the tying product, on the one hand, and by attempting to impose restraints on competition in the market for a tied product, on the other. When the seller's power is just used to maximize its return in the tying product market, where presumably its product enjoys some justifiable advantage over its competitors, the competitive ideal of the Sherman Act is not necessarily compromised. But if that power is used to impair competition on the merits in another market, a potentially inferior product may be insulated from competitive pressures. This impairment could either harm existing competitors or create barriers to entry of new competitors in the market for the tied product, Fortner I, 394 U.S., at 509, and can increase the social costs of market power by facilitating price discrimination, thereby increasing monopoly profits over what they would be absent the tie, Fortner II, 429 U.S., at 617. And from the standpoint of the consumer -- whose interests the statute was especially intended to serve -- the freedom to select the best bargain in the second market is impaired by his need to purchase the tying product, and perhaps by an inability to evaluate the true cost of either product when they are available only as a package. In sum, to permit restraint of competition on the merits through tying arrangements would be, as we observed in Fortner II, to condone "the existence of power that a free market would not tolerate." 429 U.S., at 617

Per se condemnation -- condemnation without inquiry into actual market conditions -- is only appropriate if the existence of forcing is probable. Thus, application of the per se rule focuses on the probability of anticompetitive consequences. Of course, as a threshold matter there must be a substantial potential for impact on competition in order to justify per se condemnation. If only a single purchaser were "forced" with respect to the purchase of a tied item, the resultant impact on competition would not be sufficient to warrant the concern of antitrust law. It is for this reason that we have refused to condemn tying arrangements unless a substantial volume of commerce is foreclosed thereby. See Fortner I, 394 U.S., at 501-502; Northern Pacific R. Co. v. United States, 356 U.S., at 6-7; Times-Picayune, 345 U.S., at 608-610; International Salt, 332 U.S., at 396. Similarly, when a purchaser is "forced" to buy a product he would not have otherwise bought even from another seller in the tied-product market, there can be no adverse impact on competition because no portion of the market which would otherwise have been available to other sellers has been foreclosed.

Once this threshold is surmounted, per se prohibition is appropriate if anticompetitive forcing is likely. For example, if the Government has granted the seller a patent or similar monopoly over a product, it is fair to presume that the inability to buy the product elsewhere gives the seller market power. United States v. Loew's, Inc. 371 U.S., at 45-47. Any effort to enlarge the scope of the patent monopoly by using the market power it confers to restrain competition in the market for a second product will undermine competition on the merits in that second market. Thus, the sale or lease of a patented item on condition that the buyer make all his purchases of a separate tied product from the patentee is unlawful. See United States v. Paramount Pictures, Inc. 334 U.S. 131, 156-159 (1948); International Salt, 332 U.S., 395-396; International Business Machines Corp. v. United States 298 U.S. 131 (1936).

The same strict rule is appropriate in other situations in which the existence of market power is probable. When the seller's share of the market is high, see Times-Picayune Publishing Co. v. United States, 345 U.S., at 611-613, or when the seller offers a unique product that competitors are not able to offer, see Fortner I, 394 U.S., at 504-506, and n. 2, the Court has held that the likelihood that market power exists and is being used to restrain competition in a separate market is sufficient to make per se condemnation appropriate. Thus, in Northern Pacific R. Co. v. United States, 356 U.S. 1 (1958), we held that the railroad's control over vast tracts of western real estate, although not itself unlawful, gave the railroad a unique kind of bargaining power that enabled it to tie the sales of that land to exclusive, long-term commitments that fenced out competition in the transportation market over a protracted period. When, however, the seller does not have either the degree or the kind of market power that enables him to force customers to purchase a second, unwanted product in order to obtain the tying product, an antitrust violation can be established only by evidence of an unreasonable restraint on competition in the relevant market. See Fortner I, 394 U.S., at 499-500; Times-Picayune Publishing Co. v. United States, 345 U.S., at 614-615.

In sum, any inquiry into the validity of a tying arrangement must focus on the market or markets in which the two products are sold, for that is where the anticompetitive forcing has its impact. Thus, in this case our analysis of the tying issue must focus on the hospital's sale of services to its patients, rather than its contractual arrangements with the providers of anesthesiological services. In making that analysis, we must consider whether petitioners are selling two separate products that may be tied together, and, if so, whether they have used their market power to force their patients to accept the tying arrangement.

III

The hospital has provided its patients with a package that includes the range of facilities and services required for a variety of surgical operations. At East Jefferson Hospital the package includes the services of the anesthesiologist. Petitioners argue that the package does not involve a tying arrangement at all -- that they are merely providing a functionally integrated package of services. Therefore, petitioners contend that it is inappropriate to apply principles concerning tying arrangements to this case.

Our cases indicate, however, that the answer to the question whether one or two products are involved turns not on the functional relation between them, but rather on the character of the demand for the two items. In Times-Picayune Publishing Co. v. United States, 345 U.S. 594 (1953), the Court held that a tying arrangement was not present because the arrangement did not link two distinct markets for products that were distinguishable in the eyes of buyers. In Fortner I, the Court concluded that a sale involving two independent transactions, separately priced and purchased from the buyer's perspective, was a tying arrangement. These cases make it clear that a tying arrangement cannot exist unless two separate product markets have been linked.

[The court noted the functional linking of accused tying and tied products in footnote 30:

30. The fact that anesthesiological services are functionally linked to the other services provided by the hospital is not in itself sufficient to remove the Roux contract from the realm of tying arrangements. We have often found arrangements involving functionally linked products at least one of which is useless without the other to be prohibited tying devices. See Mercoid Corp. v. Mid-Continent Co., 320 U.S. 661 (1944) (heating system and stoker switch); Morton Salt Co. v. G. S. Suppiger Co., 314 U.S. 488 (1942) (salt machine and salt); International Salt Co. v. United States, 332 U.S. 392 (1947) (same); Leitch Mfg. Co. v. Barber Co., 302 U.S. 458 (1938) (process patent and material used in the patented process); International Business Machines Corp. v. United States, 298 U.S. 131 (1936) (tabulators and tabulating punch cards); Carbice Corp. v. American Patents Development Corp., 283 U.S. 27 (1931) (ice cream transportation package and coolant); FTC v. Sinclair Refining Co., 261 U.S. 463 (1923) (gasoline and underground tanks and pumps); United Shoe Machinery Co. v. United States, 258 U.S. 451 (1922) (shoe machinery and supplies, maintenance, and peripheral machinery); United States v. Jerrold Electronics Corp. 187 F.Supp. 545, 558-560 (ED Pa. 1960) (components of television antennas), aff'd, 365 U.S. 567 (1961) (per curiam). In fact, in some situations the functional link between the two items may enable the seller to maximize its monopoly return on the tying item as a means of charging a higher rent or purchase price to a larger user of the tying item. ]

The requirement that two distinguishable product markets be involved follows from the underlying rationale of the rule against tying. The definitional question depends on whether the arrangement may have the type of competitive consequences addressed by the rule. The answer to the question whether petitioners have utilized a tying arrangement must be based on whether there is a possibility that the economic effect of the arrangement is that condemned by the rule against tying -- that petitioners have foreclosed competition on the merits in a product market distinct from the market for the tying item. Thus, in this case no tying arrangement can exist unless there is a sufficient demand for the purchase of anesthesiological services separate from hospital services to identify a distinct product market in which it is efficient to offer anesthesiological services separately from hospital services.

Unquestionably, the anesthesiological component of the package offered by the hospital could be provided separately and could be selected either by the individual patient or by one of the patient's doctors if the hospital did not insist on including anesthesiological services in the package it offers to its customers. As a matter of actual practice, anesthesiological services are billed separately from the hospital services petitioners provide. There was ample and uncontroverted testimony that patients or surgeons often request specific anesthesiologists to come to a hospital and provide anesthesia, and that the choice of an individual anesthesiologist separate from the choice of a hospital is particularly frequent in respondent's specialty, obstetric anesthesiology. The District Court found that "[the] provision of anesthesia services is a medical service separate from the other services provided by the hospital." 513 F.Supp., at 540. The Court of Appeals agreed with this finding, and went on to observe:

"[An] anesthesiologist is normally selected by the surgeon, rather than the patient, based on familiarity gained through a working relationship. Obviously, the surgeons who practice at East Jefferson Hospital do not gain familiarity with any anesthesiologists other than Roux and Associates."

686 F.2d, at 291. The record amply supports the conclusion that consumers differentiate between anesthesiological services and the other hospital services provided by petitioners.

Thus, the hospital's requirement that its patients obtain necessary anesthesiological services from Roux combined the purchase of two distinguishable services in a single transaction. Nevertheless, the fact that this case involves a required purchase of two services that would otherwise be purchased separately does not make the Roux contract illegal. As noted above, there is nothing inherently anticompetitive about packaged sales. Only if patients are forced to purchase Roux's services as a result of the hospital's market power would the arrangement have anticompetitive consequences. If no forcing is present, patients are free to enter a competing hospital and to use another anesthesiologist instead of Roux. The fact that petitioners' patients are required to purc ase two separate items is only the beginning of the appropriate inquiry.

IV

The question remains whether this arrangement involves the use of market power to force patients to buy services they would not otherwise purchase. Respondent's only basis for invoking the per se rule against tying and thereby avoiding analysis of actual market conditions is by relying on the preference of persons residing in Jefferson Parish to go to East Jefferson, the closest hospital. A preference of this kind, however, is not necessarily probative of significant market power.

Seventy percent of the patients residing in Jefferson Parish enter hospitals other than East Jefferson. 513 F.Supp., at 539. Thus East Jefferson's "dominance" over persons residing in Jefferson Parish is far from overwhelming.

* * *

Tying arrangements need only be condemned if they restrain competition on the merits by forcing purchases that would not otherwise be made. A lack of price or quality competition does not create this type of forcing. If consumers lack price consciousness, that fact will not force them to take an anesthesiologist whose services they do not want -- their indifference to price will have no impact on their willingness or ability to go to another hospital where they can utilize the services of the anesthesiologist of their choice. Similarly, if consumers cannot evaluate the quality of anesthesiological services, it follows that they are indifferent between certified anesthesiologists even in the absence of a tying arrangement -- such an arrangement cannot be said to have foreclosed a choice that would have otherwise been made "on the merits."

Thus, neither of the "market imperfections" relied upon by the Court of Appeals forces consumers to take anesthesiological services they would not select in the absence of a tie. It is safe to assume that every patient undergoing a surgical operation needs the services of an anesthesiologist; at least this record contains no evidence that the hospital "forced" any such services on unwilling patients.

* * *

V

In order to prevail in the absence of per se liability, respondent has the burden of proving that the Roux contract violated the Sherman Act because it unreasonably restrained competition. That burden necessarily involves an inquiry into the actual effect of the exclusive contract on competition among anesthesiologists. This competition takes place in a market that has not been defined. The market is not necessarily the same as the market in which hospitals compete in offering services to patients; it may encompass competition among anesthesiologists for exclusive contracts such as the Roux contract and might be statewide or merely local. There is, however, insufficient evidence in this record to provide a basis for finding that the Roux contract, as it actually operates in the market, has unreasonably restrained competition. The record sheds little light on how this arrangement affected consumer demand for separate arrangements with a specific anesthesiologist. The evidence indicates that some surgeons and patients preferred respondent's services to those of Roux, but there is no evidence that any patient who was sophisticated enough to know the difference between two anesthesiologists was not also able to go to a hospital that would provide him with the anesthesiologist of his choice.

In sum, all that the record establishes is that the choice of anesthesiologists at East Jefferson has been limited to one of the four doctors who are associated with Roux and therefore have staff privileges. Even if Roux did not have an exclusive contract, the range of alternatives open to the patient would be severely limited by the nature of the transaction and the hospital's unquestioned right to exercise some control over the identity and the number of doctors to whom it accords staff privileges. If respondent is admitted to the staff of East Jefferson, the range of choice will be enlarged from four to five doctors, but the most significant restraints on the patient's freedom to select a specific anesthesiologist will nevertheless remain. Without a showing of actual adverse effect on competition, respondent cannot make out a case under the antitrust laws, and no such showing has been made.

VI

Petitioners' closed policy may raise questions of medical ethics, and may have inconvenienced some patients who would prefer to have their anesthesia administered by someone other than a member of Roux & Associates, but it does not have the obviously unreasonable impact on purchasers that has characterized the tying arrangements that this Court has branded unlawful. There is no evidence that the price, the quality, or the supply or demand for either the "tying product" or the "tied product" involved in this case has been adversely affected by the exclusive contract between Roux and the hospital. It may well be true that the contract made it necessary for Dr. Hyde and others to practice elsewhere, rather than at East Jefferson. But there has been no showing that the market as a whole has been affected at all by the contract. Indeed, as we previously noted, the record tells us very little about the market for the services of anesthesiologists. Yet that is the market in which the exclusive contract has had its principal impact. There is simply no showing here of the kind of restraint on competition that is prohibited by the Sherman Act. Accordingly, the judgment of the Court of Appeals is reversed, and the case is remanded to that court for further proceedings consistent with this opinion.

Brennan, J. Concurring: As the opinion for the Court demonstrates, we have long held that tying arrangements are subject to evaluation for per se illegality under 1 of the Sherman Act. Whatever merit the policy arguments against this longstanding construction of the Act might have, Congress, presumably aware of our decisions, has never changed the rule by amending the Act. In such circumstances, our practice usually has been to stand by a settled statutory interpretation and leave the task of modifying the statute's reach to Congress. See Monsanto Co. v. Spray-Rite Service Corp., 465 U.S. 752, 769 (1984) I see no reason to depart from that principle in this case and therefore join the opinion and judgment of the Court.

O'Connor, J. Concurring in result:

East Jefferson Hospital, a public hospital governed by petitioners, requires patients to use the anesthesiological services provided by Roux &

Associates, as they are the only doctors authorized to administer anesthesia to patients in the hospital. The Court of Appeals found that this arrangement was a tie-in illegal under the Sherman Act. 686 F.2d 286 (5th Cir 1982). I concur in the Court's decision to reverse but write separately to explain why I believe the hospital-Roux contract, whether treated as effecting a tie between services provided to patients, or as an exclusive dealing arrangement between the hospital and certain anesthesiologists, is properly analyzed under the rule of reason.

* * *

Some of our earlier cases did indeed declare that tying arrangements serve "hardly any purpose beyond the suppression of competition." Standard Oil Co. of California v. United States, 337 U.S. 293, 305-306 (1949) (dictum). However, this declaration was not taken literally even by the cases that purported to rely upon it. In practice, a tie has been illegal only if the seller is shown to have "sufficient economic power with respect to the tying product to appreciably restrain free competition in the market for the tied product. . . . Northern Pacific R. Co., 356 U.S., at 6. Without "control or dominance over the tying product," the seller could not use the tying product as "an effectual weapon to pressure buyers into taking the tied item," so that any restraint of trade would be "insignificant." Ibid. The Court has never been willing to say of tying arrangements, as it has of price fixing, division of markets, and other agreements subject to per se analysis, that they are always illegal, without proof of market power or anticompetitive effect.

The "per se" doctrine in tying cases has thus always required an elaborate inquiry into the economic effects of the tying arrangement. As a result, tying doctrine incurs the costs of a rule-of-reason approach without achieving its benefits: the doctrine calls for the extensive and time-consuming economic analysis characteristic of the rule of reason, but then may be interpreted to prohibit arrangements that economic analysis would show to be beneficial.

* * *

The time has therefore come to abandon the "per se" label and refocus the inquiry on the adverse economic effects, and the potential economic benefits, that the tie may have. The law of tie-ins will thus be brought into accord with the law applicable to all other allegedly anticompetitive economic arrangements, except those few horizontal or quasi-horizontal restraints that can be said to have no economic justification whatsoever. This change will rationalize rather than abandon tie-in doctrine as it is already applied.

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Eastman Kodak Co. v. Image Technical Services, Inc.

112 S. Ct. 2072, 119 L. Ed. 2d 265,1992-1 Trade Cas. 69,839

(1992)

Blackmun, J., This is yet another case that concerns the standard for summary judgment in an antitrust controversy. The principal issue here is whether a defendant's lack of market power in the primary equipment market precludes -- as a matter of law -- the possibility of market power in derivative aftermarkets.

Petitioner Eastman Kodak Company manufactures and sells photocopiers and micrographic equipment. Kodak also sells service and replacement parts for its equipment. Respondents are 18 independent service organizations (ISOs) that in the early 1980s began servicing Kodak copcing and micrographic equipment. Kodak subsequently adopted policies to limit the availability of parts to ISOs and to make it more difficult for ISOs to compete with Kodak in servicing Kodak equipment.

Respondents instituted this action in the United States District Court for the Northern District of California alleging that Kodak's policies were unlawful under both 1 and 2 of the Sherman Act, 15 U.S.C. 1 and 2. After truncated discovery, the District Court granted summary judgment for Kodak. The Court of Appeals for the Ninth Circuit reversed. The appellate court found that respondents had presented sufficient evidence to raise a genuine issue concerning Kodak's market power in the service and parts markets. It rejected Kodak's contention that lack of market power in service and parts must be assumed when such power is absent in the equipment market. Because of the importance of the issue, we granted certiorari. ___ U.S. ___ (1991).

I

A

Because this case comes to us on petitioner Kodak's motion for summary judgment, "the evidence of [respondents] is to be believed, and all justifiable inferences are to be drawn in [their] favor." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986); Matsushita Electric Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). Mindful that respondents' version of any disputed issue of fact thus is presumed correct, we begin with the factual basis of respondents' claims. See Arizona v. Maricopa County Medical Society, 457 U.S. 332, 339 (1982).

Kodak manufactures and sells complex business machines -- as relevant here, high-volume photocopier and micrographics equipment. Kodak equipment is unique; micrographic software programs that operate on Kodak machines, for example, are not compatible with competitors' machines. See App. 424-425, 487-489, 537. Kodak parts are not compatible with other manufacturers' equipment, and vice versa. See id., at 432, 413-415. Kodak equipment, although expensive when new, has little resale value. See id., at 358-359, 424-425, 427-428, 467, 505-506, 519-521.

Kodak provides service and parts for its machines to its customers. It produces some of the parts itself; the rest are made to order for Kodak by independent original-equipment manufacturers (OEMs). See id., at 429, 465, 490, 496. Kodak does not sell a complete system of original equipment, lifetime service, and lifetime parts for a single price. Instead, Kodak provides service after the initial warranty period either through annual service contracts, which include all necessary parts, or on a per-call basis. See id., at 98-99; Brief for Petitioner 3. It charges, through negotiations and bidding, different prices for equipment, service, and parts for different customers. See App., at 420-421, 536. Kodak provides 80% to 95% of the service for Kodak machines. See id., at 430.

Beginning in the early 1980s, ISOs began repairing and servicing Kodak equipment. They also sold parts and reconditioned and sold used Kodak equipment. Their customers were federal, state, and local government agencies, banks, insurance companies, industrial enterprises, and providers of specialized copy and microfilming services. ISOs provide service at a price substantially lower than Kodak does. Some customers found that the ISO service was of higher quality.

Some of the ISOs' customers purchase their own parts and hire ISOs only for service. Others choose ISOs to supply both service and parts. ISOs keep an inventory of parts, purchased from Kodak or other sources, primarily the OEMs.

In 1985 and 1986, Kodak implemented a policy of selling replacement parts for micrographic and copying machines only to buyers of Kodak equipment who use Kodak service or repair their own machines.

As part of the same policy, Kodak sought to limit ISO access to other sources of Kodak parts. Kodak and the OEMs agreed that the OEMs would not sell parts that fit Kodak equipment to anyone other than Kodak. Kodak also pressured Kodak equipment owners and independent parts distributors not to sell Kodak parts to ISOs. In addition, Kodak took steps to restrict the availability of used machines.

Kodak intended, through these policies, to make it more difficult for ISOs to sell service for Kodak machines. It succeeded. ISOs were unable to obtain parts from reliable sources, and many were forced out of business, while others lost substantial revenue. Customers were forced to switch to Kodak service even though they preferred ISO service.

B

In 1987, the ISOs filed the present action in the District Court, alleging, inter alia, that Kodak had unlawfully tied the sale of service for Kodak machines to the sale of parts, in violation of 1 of the Sherman Act, and had unlawfully monopolized and attempted to monopolize the sale of service for Kodak machines, in violation of 2 of that Act.

Kodak filed a motion for summary judgment before respondents had initiated discovery. The District Court permitted respondents to file one set of interrogatories and one set of requests for production of documents, and to take six depositions. Without a hearing, the District Court granted summary judgment in favor of Kodak.

As to the 1 claim, the court found that respondents had provided no evidence of a tying arrangement between Kodak equipment and service or parts. The court, however, did not address respondents' 1 claim that is at issue here. Respondents allege a tying arrangement not between Kodak equipment and service, but between Kodak parts and service. As to the 2 claim, the District Court concluded that although Kodak had a "natural monopoly over the market for parts it sells under its name," a unilateral refusal to sell those parts to ISOs did not violate 2 .

The Court of Appeals for the Ninth Circuit, by a divided vote, reversed. 903 F.2d 612 (1990). With respect to the 1 claim, the court first found that whether service and parts were distinct markets and whether a tying arrangement existed between them were disputed issues of fact. Having found that a tying arrangement might exist, the Court of Appeals considered a question not decided by the District Court: was there "an issue of material fact as to whether Kodak has sufficient economic power in the tying product market [parts] to restrain competition appreciably in the tied product market service." The court agreed with Kodak that competition in the equipment market might prevent Kodak from possessing power in the parts market, but refused to uphold the District Court's grant of summary judgment "on this theoretical basis" because "market imperfections can keep economic theories about how consumers will act from mirroring reality." Id., at 617. Noting that the District Court had not considered the market power issue, and that the record was not fully developed through discovery, the court declined to require respondents to conduct market analysis or to pinpoint specific imperfections in order to withstand summary judgment. "It is enough that [respondents] have presented evidence of actual events from which a reasonable trier of fact could conclude that . . . competition in the [equipment] market does not, in reality, curb Kodak's power in the parts market." Ibid.

The court then considered the three business justifications Kodak proffered for its restrictive parts policy: (1) to guard against inadequate service, (2) to lower inventory costs, and (3) to prevent ISOs from free-riding on Kodak's investment in the copier and micrographic industry. The court concluded that the trier of fact might find the product quality and inventory reasons to be pretextual and that there was a less restrictive alternative for achieving Kodak's quality-related goals. Id., at 618-619. The court also found Kodak's third justification, preventing ISOs from profiting on Kodak's investments in the equipment markets, legally insufficient. Id., at 619.

As to the 2 claim, the Court of Appeals concluded that sufficient evidence existed to support a finding that Kodak's implementation of its parts policy was "anticompetitive" and "exclusionary" and "involved a specific intent to monopolize." Id., at 620. It held that the ISOs had come forward with sufficient evidence, for summary judgment purposes, to disprove Kodak's business justifications. Ibid.

The dissent in the Court of Appeals, with respect to the 1 claim, accepted Kodak's argument that evidence of competition in the equipment market "necessarily precludes power in the derivative market." Id., at 622 (emphasis in original). With respect to the 2 monopolization claim, the dissent concluded that, entirely apart from market power considerations, Kodak was entitled to summary judgment on the basis of its first business justification because it had "submitted extensive and undisputed evidence of a marketing strategy based on high-quality service." Id., at 623.

II

A tying arrangement is "an agreement by a party to sell one product but only on the condition that the buyer also purchases a different (or tied) product, or at least agrees that he will not purchase that product from any other supplier." Northern Pacific R. Co. v. United States, 356 U.S. 1, 5-6 (1958). Such an arrangement violates 1 of the Sherman Act if the seller has "appreciable economic power" in the tying product market and if the arrangement affects a substantial volume of commerce in the tied market. Fortner Enterprises, Inc. v. United States Steel Corp., 394 U.S. 495, 503 (1969).

Kodak did not dispute that its arrangement affects a substantial volume of interstate commerce. It, however, did challenge whether its activities constituted a "tying arrangement" and whether Kodak exercised "appreciable economic power" in the tying market. We consider these issues in turn.

A

For the respondents to defeat a motion for summary judgment on their claim of a tying arrangement, a reasonable trier of fact must be able to find, first, that service and parts are two distinct products, and, second, that Kodak has tied the sale of the two products.

For service and parts to be considered two distinct products, there must be sufficient consumer demand so that it is efficient for a firm to provide service separately from parts. Jefferson Parish Hospital District No. 2 v. Hyde 466 U.S. 2, 21-22 (1984). Evidence in the record indicates that service and parts have been sold separately in the past and still are sold separately to self-service equipment owners. Indeed, the development of the entire high-technology service industry is evidence of the efficiency of a separate market for service.

Kodak insists that because there is no demand for parts separate from service, there cannot be separate markets for service and parts. Brief for Petitioner 15, n. 3. By that logic, we would be forced to conclude that there can never be separate markets, for example, for cameras and film, computers and software, or automobiles and tires. That is an assumption we are unwilling to make.

"We have often found arrangements involving functionally linked products at least one of which is useless without the other to be prohibited tying devices."

Jefferson Parish, 466 U.S., at 19, n. 30.

Kodak's assertion also appears to be incorrect as a factual matter. At least some consumers would purchase service without parts, because some service does not require parts, and some consumers, those who self-service for example, would purchase parts without service. Enough doubt is cast on Kodak's claim of a unified market that it should be resolved by the trier of fact.

Finally, respondents have presented sufficient evidence of a tie between service and parts. The record indicates that Kodak would sell parts to third parties only if they agreed not to buy service from ISOs.

B

Having found sufficient evidence of a tying arrangement, we consider the other necessary feature of an illegal tying arrangement: appreciable economic power in the tying market. Market power is the power "to force a purchaser to do something that he would not do in a competitive market." Jefferson Parish, 466 U.S., at 14. It has been defined as "the ability of a single seller to raise price and restrict output." Fortner Inc., 394 U.S., at 503; United States v. E.I. du Pont de Nemours & Co., 351 U.S. 377, 391 (1956). The existence of such power ordinarily is inferred from the seller's possession of a predominant share of the market. Jefferson Parish, 466 U.S., at 17; United States v. Grinnell Corp., 384 U.S. 563, 571 (1966); Times-Picayune Publishing Co. v. United States, 345 U.S. 594, 611-613 (1953).

1

Respondents contend that Kodak has more than sufficient power in the parts market to force unwanted purchases of the tied market, service. Respondents provide evidence that certain parts are available exclusively through Kodak. Respondents also assert that Kodak has control over the availability of parts it does not manufacture. According to respondents' evidence, Kodak has prohibited independent manufacturers from selling Kodak parts to ISOs, pressured Kodak equipment owners and independent parts distributors to deny ISOs the purchase of Kodak parts, and taken steps to restrict the availability of used machines.

Respondents also allege that Kodak's control over the parts market has excluded service competition, boosted service prices, and forced unwilling consumption of Kodak service. Respondents offer evidence that consumers have switched to Kodak service even though they preferred ISO service, that Kodak service was of higher price and lower quality than the preferred ISO service, and that ISOs were driven out of business by Kodak's policies. Under our prior precedents, this evidence would be sufficient to entitle respondents to a trial on their claim of market power.

2

Kodak counters that even if in concedes monopoly share of the relevant parts market, it cannot actually exercise the necessary market power for a Sherman Act violation. This is so, according to Kodak, because competition exists in the equipment market. Kodak argues that it could not have the ability to raise prices of service and parts above the level that would be charged in a competitive market because any increase in profits from a higher price in the aftermarkets at least would be offset by a corresponding loss in profits from lower equipment sales as consumers began purchasing equipment with more attractive service costs.

Kodak does not present any actual data on the equipment, service, or parts markets. Instead, it urges the adoption of a substantive legal rule that "equipment competition precludes any finding of monopoly power in derivative aftermarkets." Brief for Petitioner 33. Kodak argues that such a rule would satisfy its burden as the moving party of showing "that there is no genuine issue as to any material frct" on the market power issue. See Fed. R. Civ. P. 56(c).

Legal presumptions that rest on formalistic distinctions rather than actual market realities are generally disfavored in antitrust law. This Court has preferred to resolve antitrust claims on a case-by-case basis, focusing on the "particular facts disclosed by the record." Maple Flooring Mfrs. Assn. v. United States, 268 U.S. 563, 579 (1925); du Pont, 351 U.S., at 395, n. 22; Continental T.V., Inc. v. GTE Sylvania, Inc. 433 U.S. 36, 70 (1977) (White, J., concurring in judgment). In determining the existence of market power, and specifically the "responsiveness of the sales of one product to price changes of the other," du Pont, 351 U.S., at 400; see also id., at 394-395, and 400-401, this Court has examined closely the economic reality of the market at issue.

Kodak contends that there is no need to examine the facts when the issue is market power in the aftermarkets. A legal presumption against a finding of market power is warranted in this situation, according to Kodak, because the existence of market power in the service and parts markets absent power in the equipment market "simply makes no economic sense," and the absence of a legal presumption would deter procompetitive behavior. Matsushita, 475 U.S., at 587; id., at 594-595.

Kodak analogizes this case to Matsushita where a group of American corporations that manufactured or sold consumer electronic products alleged that their 21 Japanese counterparts were engaging in a 20-year conspiracy to price below cost in the United States in the hope of expanding their market share sometime in the future. After several years of detailed discovery, the defendants moved for summary judgment. 475 U.S., at 577-582. Because the defendants had every incentive not to engage in the alleged conduct which required them to sustain losses for decades with no foreseeable profits, the Court found an "absence of any rational motive to conspire." Id., at 597. In that context, the Court determined that the plaintiffs' theory of predatory pricing makes no practical sense, was "speculative" and was not "reasonable." Id., at 588, 590, 593, 595, 597. Accordingly, the Court held that a reasonable jury could not return a verdict for the plaintiffs and that summary judgment would be appropriate against them unless they came forward with more persuasive evidence to support their theory. Id., at 587-588, 595-598.

The Court's requirement in Matsushita that the plaintiffs' claims make economic sense did not introduce a special burden on plaintiffs facing summary judgment in antitrust cases. The Court did not hold that if the moving party enunciates any economic theory supporting its behavior, regardless of its accuracy in reflecting the actual market, it is entitled to summary judgment. Matsushita demands only that the nonmoving party's inferences be reasonable in order to reach the jury, a requirement that was not invented, but merely articulated, in that decision. If the plaintiff's theory is economically senseless, no reasonable jury could find in its favor, and summary judgment should be granted.

Kodak, then, bears a substantial burden in showing that it is entitled to summary judgment. It must show that despite evidence of increased prices and excluded competition, an inference of market power is unreasonable. To determine whether Kodak has met that burden, we must unravel the factual assumptions underlying its proposed rule that lack of power in the equipment market necessarily precludes power in the aftermarkets.

The extent to which one market prevents exploitation of another market depends on the extent to which consumers will change their consumption of one product in response to a price change in another, i.e., the "cross-elasticity of demand." See du Pont, 351 U.S., at 400; P. Areeda & L. Kaplow, Antitrust Analysis para. 342(c) (4th ed. 1988). Kodak's proposed rule rests on a factual assumption about the cross-elasticity of demand in the equipment and aftermarkets: "If Kodak raised its parts or service prices above competitive levels, potential customers would simply stop buying Kodak equipment. Perhaps Kodak would be able to increase short term profits through such a strategy, but at a devastating cost to its long term interests." Brief for Petitioner 12. Kodak argues that the Court should accept, as a matter of law, this "basic economic reality," id., at 24, that competition in the equipment market necessarily prevents market power in the aftermarkets.

Even if Kodak could not raise the price of service and parts one cent without losing equipment sales, that fact would not disprove market power in the aftermarkets. The sales of even a monopolist are reduced when it sells goods at a monopoly price, but the higher price more than compensates for the loss in sales. Areeda & Kaplow, at para. para. 112 and 340(a). Kodak's claim that charging more for service and parts would be a "short-run game," Brief for Petitioner 26, is based on the false dichotomy that there are only two prices that can be charged -- a competitive price or a ruinous one. But there could easily be a middle, optimum price at which the increased revenues from the higher-priced sales of service and parts would more than compensate for the lower revenues from lost equipment sales. The fact that the equipment market imposes a restraint on prices in the aftermarkets by no means disproves the existence of power in those markets. See Areeda & Kaplow, at para. 340(b) ("The existence of significant substitution in the event of further price increases or even at the current price does not tell us whether the defendant already exercises significant market power") (emphasis in original). Thus, contrary to Kodak's assertion, there is no immutable physical law -- no "basic economic reality" -- insisting that competition in the equipment market cannot coexist with market power in the aftermarkets.

We next consider the more narrowly drawn question: Does Kodak's theory describe actual market behavior so accurately that respondents' assertion of Kodak market power in the aftermarkets, if not impossible, is at least unreasonable? Cf. Matsushita, supra.

A footnote of the court makes short work of Kodak's argument that the tie-in was procompetitive, astating, inter alia (footnote 18):

. . . Unlike Continental T.V., this case does not concern vertical relationships between parties on different levels of the same distribution chain. In the relevant market, service, Kodak and the ISOs are direct competitors; their relationship is horizontal. The interbrand competition at issue here is competition over the provision of service. Despite petitioner's best effort, repeating the mantra "interbrand competition" does not transform this case into one over an agreement the manufacturer has with its dealers that would fall under the rubric of Continental T.V.

To review Kodak's theory, it contends that higher service prices will lead to a disastrous drop in equipment sales. Presumably, the theory's corollary is to the effect that low service prices lead to a dramatic increase in equipment sales. According to the theory, one would have expected Kodak to take advantage of lower-priced ISO service as an opportunity to expand equipment sales. Instead, Kodak adopted a restrictive sales policy consciously designed to eliminate the lower-priced ISO service, an act that would be expected to devastate either Kodak's equipment sales or Kodak's faith in its theory. Yet, according to the record, it has done neither. Service prices have risen for Kodak customers, but there is no evidence or assertion that Kodak equipment sales have dropped.

Kodak and the United States attempt to reconcile Kodak's theory with the contrary actual results by describing a "marketing strategy of spreading over time the total cost to the buyer of Kodak equipment." Brief for United States as Amicus Curiae 18; see also Brief for Petitioner 18. In other words, Kodak could charge subcompetitive prices for equipment and make up the difference with supracompetitive prices for service, resulting in an overall competitive price. This pricing strategy would provide an explanation for the theory's descriptive failings -- if Kodak in fact had adopted it. But Kodak never has asserted that it prices its equipment or parts subcompetitively and recoups its profits through service. Instead, it claims that it prices its equipment comparably to its competitors, and intends that both its equipment sales and service divisions be profitable. See App. 159-161, 170, 178, 188. Moreover, this hypothetical pricing strategy is inconsistent with Kodak's policy toward its self-service customers. If Kodak were underpricing its equipment, hoping to lock in customers and recover its losses in the service market, it could not afford to sell customers parts without service. In sum, Kodak's theory does not explain the actual market behavior revealed in the record.

Respondents offer a forceful reason why Kodak's theory, although perhaps intuitively appealing, may not accurately explain the behavior of the primary and derivative markets for complex durable goods: the existence of significant information and switching costs. These costs could create a less responsive connection between service and parts prices and equipment sales.

For the service-market price to affect equipment demand, consumers must inform themselves of the total cost of the "package" -- equipment, service and parts -- at the time of purchase; that is, consumers must engage in accurate lifecycle pricing. Lifecycle pricing of complex, durable equipment is difficult and costly. In order to arrive at an accurate price, a consumer must acquire a substantial amount of raw data and undertake sophisticated analysis. The necessary information would include data on price, quality, and availability of products needed to operate, upgrade, or enhance the initial equipment, as well as service and repair costs, including estimates of breakdown frequency, nature of repairs, price of service and parts, length of "down-time" and losses incurred from down-time.

Much of this information is difficult -- some of it impossible -- to acquire at the time of purchase. During the life of a product, companies may change the service and parts prices, and develop products with more advanced features, a decreased need for repair, or new warranties. In addition, the information is likely to be customer-specific; lifecycle costs will vary from customer to customer with the type of equipment, degrees of equipment use, and costs of downtime.

Kodak acknowledges the cost of information, but suggests, again without evidentiary support, that customer information needs will be satisfied by competitors in the equipment markets. Brief for Petitioner 26, n. 11. It is a question of fact, however, whether competitors would provide the necessary information. A competitor in the equipment market may not have reliable information about the lifecycle costs of complex equipment it does not service or the needs of customers it does not serve. Even if competitors had the relevant information, it is not clear that their interests would be advanced by providing such information to consumers. See 2 P. Areeda & D. Turner, Antitrust Law, para. 404b1 (1978).

Moreover, even if consumers were capable of acquiring and processing the complex body of information, they may choose not to do so. Acquiring the information is expensive. If the costs of service are small relative to the equipment price, or if consumers are more concerned about equipment capabilities than service costs, they may not find it cost-efficient to compile the information. Similarly, some consumers, such as the Federal Government, have purchasing systems that make it difficult to consider the complete cost of the "package" at the time of purchase. State and local governments often treat service as an operating expense and equipment as a capital expense, delegating each to a different department. These governmental entities do not lifecycle price, but rather choose the lowest price in each market. See Brief for National Association of State Purchasing Officials et al., as Amici Curiae; Brief for State of Ohio et al., as Amici Curiae; App. 429-430.

As Kodak notes, there likely will be some large-volume, sophisticated purchasers who will undertake the comparative studies and insist, in return for their patronage, that Kodak charge them competitive lifecycle prices. Kodak contends that these knowledgeable customers will hold down the package price for all other customers. Brief for Petitioner 23, n. 9. There are reasons, however, to doubt that sophisticated purchasers will ensure that competitive prices are charged to unsophisticated purchasers, too. As an initial matter, if the number of sophisticated customers is relatively small, the amount of profits to be gained by supracompetitive pricing in the service market could make it profitable to let the knowledgeable consumers take their business elsewhere.

More importantly, if a company is able to price-discriminate between sophisticated and unsophisticated consumers, the sophisticated will be unable to prevent the exploitation of the uninformed. A seller could easily price-discriminate by varying the equipment/ parts/service package, developing different warranties, or offering price discounts on different components.

Given the potentially high cost of information and the possibility a seller may be able to price-discriminate between knowledgeable and unsophisticated consumers, it makes little sense to assume, in the absence of any evidentiary support, that equipment-purchasing decisions are based on an accurate assessment of the total cost of equipment, service, and parts over the lifetime of the machine.

Indeed, respondents have presented evidence that Kodak practices price-discrimination by selling parts to customers who service their own equipment, but refusing to sell parts to customers who hire third-party service companies. Companies that have their own service staff are likely to be high-volume users, the same companies for whom it is most likely to be economically worthwhile to acquire the complex information needed for comparative lifecycle pricing.

A second factor undermining Kodak's claim that supracompetitive prices in the service market lead to ruinous losses in equipment sales is the cost to current owners of switching to a different product. See Areeda & Turner, at para. 519a. If the cost of switching is high, consumers who already have purchased the equipment, and are thus "locked-in," will tolerate some level of service-price increases before changing equipment brands. Under this scenario, a seller profitably could maintain supracompetitive prices in the aftermarket if the switching costs were high relative to the increase in service prices, and the number of locked-in customers were high relative to the number of new purchasers.

Moreover, if the seller can price-discriminate between its locked-in customers and potential new customers, this strategy is even more likely to prove profitable. The seller could simply charge new customers below-marginal cost on the equipment and recoup the charges in service, or offer packages with life-time warranties or long-term service agreements that are not available to locked-in customers.

Respondents have offered evidence that the heavy initial outlay for Kodak equipment, combined with the required support material that works only with Kodak equipment, makes switching costs very high for existing Kodak customers. And Kodak's own evidence confirms that it varies the package price of equipment/ parts/service for different customers.

In sum, there is a question of fact whether information costs and switching costs foil the simple assumption that the equipment and service markets act as pure complements to one another.

We conclude, then, that Kodak has failed to demonstrate that respondents' inference of market power in the service and parts markets is unreasonable, and that, consequently, Kodak is entitled to summary judgment. It is clearly reasonable to infer that Kodak has market power to raise prices and drive out competition in the aftermarkets, since respondents offer direct evidence that Kodak did so. It is also plausible, as discussed above, to infer that Kodak chose to gain immediate profits by exerting that market power where locked-in customers, high information costs, and discriminatory pricing limited and perhaps eliminated any long-term loss. Viewing the evidence in the light most favorable to respondents, their allegations of market power "make . . . economic sense." Cf. Matsushita, 475 U.S., at 587.

Nor are we persuaded by Kodak's contention that it is entitled to a legal presumption on the lack of market power because, as in Matsushita, there is a significant risk of deterring procompetitive conduct. Plaintiffs in Matsushita attempted to prove the antitrust conspiracy "through evidence of rebates and other price-cutting activities." Id., at 594. Because cutting prices to increase business is "the very essence of competition," the Court was concerned that mistaken inferences would be "especially costly," and would "chill the very conduct the antitrust laws are designed to protect." Ibid. See also Monsanto Co. v. Spray-Rite Service Corp., 465 U.S. 752, 763 (1984) (permitting inference of concerted action would "deter or penalize perfectly legitimate conduct"). But the facts in this case are just the opposite. The alleged conduct -- higher service prices and market foreclosure -- is facially anticompetitive and exactly the harm that antitrust laws aim to prevent. In this situation, Matsushita does not create any presumption in favor of summary judgment for the defendant.

Kodak contends that, despite the appearance of anticompetitiveness, its behavior actually favors competition because its ability to pursue innovative marketing plans will allow it to compete more effectively in the equipment market. A pricing strategy based on lower equipment prices and higher aftermarket prices could enhance equipment sales by making it easier for the buyer to finance the initial purchase. It is undisputed that competition is enhanced when a firm is able to offer various marketing options, including bundling of support and maintenance service with the sale of equipment. Nor do such actions run afoul of the antitrust laws. But the procompetitive effect of the specific conduct challenged here, eliminating all consumer parts and service options, is far less clear.

We need not decide whether Kodak's behavior has any procompetitive effects and, if so, whether they outweigh the anticompetitive effects. We note only that Kodak's service and parts policy is simply not one that appears always or almost always to enhance competition, and therefore to warrant a legal presumption without any evidence of its actual economic impact. In this case, when we weigh the risk of deterring procompetitive behavior by proceeding to trial against the risk that illegal behavior go unpunished, the balance tips against summary judgment. Cf. Matsushita, 475 U.S., at 594-595.

For the foregoing reasons, we hold that Kodak has not met the requirements of Fed. Rule Civ. Proc. 56(c). We therefore affirm the denial of summary judgment on respondents' 1 claim.

[In footnote 29 the court left the door open for the theory that a manufacturer's own goods (micrographic equipment) could define a market for services which could be monopolized:

29. The dissent urges a radical departure in this Court's antitrust law. It argues that because Kodak has only an "inherent" monopoly in parts for its equipment, post, at 4, the antitrust laws do not apply to its efforts to expand that power into other markets. The dissent's proposal to grant per se immunity to manufacturers competing in the service market would exempt a vast and growing sector of the economy from antitrust laws. Leaving aside the question whether the Court has the authority to make such a policy decision, there is no support for it in our jurisprudence or the evidence in this case.

Even assuming, despite the absence of any proof from the dissent, that all manufacturers possess some inherent market power in the parts market, it is not clear why that should immunize them from the antitrust laws in another market. The Court has held many times that power gained through some natural and legal advantage such as a patent, copyright, or business acumen can give rise to liability if "a seller exploits his dominant position in one market to expand his empire into the next." Times-Picayune Publishing Co. v. United States, 345 U.S. 594, 611 (1953); see, e.g., Northern Pacific R. Co. v. United States 356 U.S. 1 (1958); United States v. Paramount Pictures, Inc., 334 U.S. 131 (1948); Leitch Mfg. Co. v. Barber Co., 302 U.S. 458, 463 (1938). Moreover, on the occasions when the Court has considered tying in derivative aftermarkets by manufacturers, it has not adopted any exception to the usual antitrust analysis, treating derivative aftermarkets as it has every other separate market. See International Salt Co. v. United States, 332 U.S. 392 (1947); International Business Machines Corp. v. United States, 298 U.S. 131 (1936); United Shoe Machinery Co. v. United States, 258 U.S. 451 (1922). Our past decisions are reason enough to reject the dissent's proposal. See Patterson v. McLean Credit Union, 491 U.S. 164, 172-173 (1989) ("Considerations of stare decisis have special force in the area of statutory interpretation, for here, unlike in the context of constitutional interpretation, the legislative power is implicated, and Congress remains free to alter what we have done").

Nor does the record in this case support the dissent's proposed exemption for aftermarkets. The dissent urges its exemption because the tie here "does not permit the manufacturer to project power over a class of consumers distinct from that which it is already able to exploit (and fully) without the inconvenience of the tie." Post, at 13-14. Beyond the dissent's obvious difficulty in explaining why Kodak would adopt this expensive tying policy if it could achieve the same profits more conveniently through some other means, respondents offer an alternative theory, supported by the record, that suggests Kodak is able to exploit some customers who in the absence of the tie would be protected from increases in parts prices by knowledgeable customers. See supra, at 22-23.

At bottom, whatever the ultimate merits of the dissent's theory, at this point it is mere conjecture. Neither Kodak nor the dissent have provided any evidence refuting respondents' theory of forced unwanted purchases at higher prices and price discrimination. While it may be, as the dissent predicts, that the equipment market will prevent any harms to consumers in the aftermarkets, the dissent never makes plain why the Court should accept that theory on faith rather than requiring the usual evidence needed to win a summary judgment motion.]

III

Respondents also claim that they have presented genuine issues for trial as to whether Kodak has monopolized or attempted to monopolize the service and parts markets in violation of 2 of the Sherman Act.

"The 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."

United States v. Grinnell Corp., 384 U.S., at 570-571.

A

The existence of the first element, possession of monopoly power, is easily resolved. As has been noted, respondents have presented a triable claim that service and parts are separate markets, and that Kodak has the "power to control prices or exclude competition" in service and parts. du Pont, 351 U.S., at 391. Monopoly power under 2 requires, of course, something greater than market power under 1. See Fortner, 394 U.S., at 502. Respondents' evidence that Kodak controls nearly 100% of the parts market and 80% to 95% of the service market, with no readily available substitutes, is, however, sufficient to survive summary judgment under the more stringent monopoly standard of 2 . See National Collegiate Athletic Assn. v. Board of Regents of Univ. of Okla., 468 U.S. 85, 112 (1984). Cf. United States v. Grinnell Corp., 384 U.S., at 571 (87% of the market is a monopoly); American Tobacco Co. v. United States, 328 U.S. 781, 797 (1946) (over 2/3 of the market is a monopoly).

Kodak also contends that, as a matter of law, a single brand of a product or service can never be a relevant market under the Sherman Act. We disagree. The relevant market for antitrust purposes is determined by the choices available to Kodak equipment owners. See Jefferson Parish, 466 U.S., at 19. Because service and parts for Kodak equipment are not interchangeable with other manufacturers' service and parts, the relevant market from the Kodak-equipment owner's perspective is composed of only those companies that service Kodak machines. See du Pont, 351 U.S., at 404 (the "market is composed of products that have reasonable interchangeability"). This Court's prior cases support the proposition that in some instances one brand of a product can constitute a separate market. See National Collegiate Athletic Assn., 468 U.S., at 101-102, 111-112 (1984); International Boxing Club of New York, Inc. v. United States, 358 U.S. 242, 249-252 (1959); International Business Machines Corp. v. United States, 298 U.S. 131 (1936).

[footnote by the court: Other courts have limited the market to parts for a particular brand of equipment. See e.g., International Logistics Group, Ltd. v. Chrysler Corp., 884 F.2d 904, 905, 908 (CA6 1989) (parts for Chrysler cars is the relevant market), cert. denied, 494 U.S. 1066 (1990); Dimidowich v. Bell & Howell, 803 F.2d 1473, 1480-1481, n. 3 (CA9 1986), modified, 810 F.2d 1517 (1987) (service for Bell & Howell equipment is the relevant market); In re General Motors Corp., 99 F.T.C 464, 554, 584 (1982) (crash parts for General Motors cars is the relevant market; Heatransfer Corp. v. Volkswagenwerk A.G., 553 F.2d 964 (CA5 1977), cert. denied, 434 U.S. 1087 (1978) (air conditioners for Volkswagens is the relevant market).]

The proper market definition in this case can be determined only after a factual inquiry into the "commercial realities" faced by consumers. United States v. Grinnell Corp., 384 U.S., at 572.

B

The second element of a 2 claim is the use of monopoly power "to foreclose competition, to gain a competitive advantage, or to destroy a competitor." United States v. Griffith, 334 U.S. 100, 107 (1948). If Kodak adopted its parts and service policies as part of a scheme of willful acquisition or maintenance of monopoly power, it will have violated 2. Grinnell Corp., 384 U.S., at 570-571; United States v. Aluminum Co. of America, 148 F.2d 416, 432 (CA2 1945); Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585, 600-605 (1985).

As recounted at length above, respondents have 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. Liability turns, then, on whether "valid business reasons" can explain Kodak's actions. Aspen Skiing Co., 472 U.S., at 605; United States v. Aluminum Co. of America, 148 F.2d, at 432. Kodak contends that it has three valid business justifications for its actions: "(1) to promote interbrand equipment competition by allowing Kodak to stress the quality of its service; (2) to improve asset management by reducing Kodak's inventory costs; and (3) to prevent ISOs from free riding on Kodak's capital investment in equipment, parts and service." Factual questions exist, however, about the validity and sufficiency of each claimed justification, making summary judgment inappropriate.

Kodak first asserts that by preventing customers from using ISOs, "it [can] best maintain high quality service for its sophisticated equipment" and avoid being "blamed for an equipment malfunction, even if the problem is the result of improper diagnosis, maintenance or repair by an ISO." Id., at 6-7. Respondents have offered evidence that ISOs provide quality service and are preferred by some Kodak equipment owners. This is sufficient to raise a genuine issue of fact. See International Business Machines Corp. v. United States, 298 U.S., at 139-140 (rejecting IBM's claim that it had to control the cards used in its machines to avoid "injury to the reputation of the machines and the good will of" IBM in the absence of proof that other companies could not make quality cards); International Salt Co. v. United States, 332 U.S. 392, 397-398 (1947) (rejecting International Salt's claim that it had to control the supply of salt to protect its leased machines in the absence of proof that competitors could not supply salt of equal quality).

Moreover, there are other reasons to question Kodak's proffered motive of commitment to quality service; its quality justification appears inconsistent with its thesis that consumers are knowledgeable enough to lifecycle price, and its self-service policy. Kodak claims the exclusive-service contract is warranted because customers would otherwise blame Kodak equipment for breakdowns resulting from inferior ISO service. Thus, Kodak simultaneously claims that its customers are sophisticated enough to make complex and subtle lifecycle-pricing decisions, and yet too obtuse to distinguish which breakdowns are due to bad equipment and which are due to bad service. Kodak has failed to offer any reason why informational sophistication should be present in one circumstance and absent in the other. In addition, because self-service customers are just as likely as others to blame Kodak equipment for breakdowns resulting from (their own) inferior service, Kodak's willingness to allow self-service casts doubt on its quality claim. In sum, we agree with the Court of Appeals that respondents "have presented evidence from which a reasonable trier of fact could conclude that Kodak's first reason is pretextual." 903 F.2d, at 618.

There is also a triable issue of fact on Kodak's second justification -- controlling inventory costs. As respondents argue, Kodak's actions appear inconsistent with any need to control inventory costs. Presumably, the inventory of parts needed to repair Kodak machines turns only on breakdown rates, and those rates should be the same whether Kodak or ISOs perform the repair. More importantly, the justification fails to explain respondents' evidence that Kodak forced OEMs, equipment owners, and parts brokers not to sell parts to ISOs, actions that would have no effect on Kodak's inventory costs.

Nor does Kodak's final justification entitle it to summary judgment on respondents' 2 claim. Kodak claims that its policies prevent ISOs from "exploiting the investment Kodak has made in product development, manufacturing and equipment sales in order to take away Kodak's service revenues." Brief for Petitioner 7-8. Kodak does not dispute that respondents invest substantially in the service market, with training of repair workers and investment in parts inventory. Instead, according to Kodak, the ISOs are free-riding because they have failed to enter the equipment and parts markets. This understanding of free-riding has no support in our caselaw. n33 To the contrary, as the Court of Appeals noted, one of the evils proscribed by the antitrust laws is the creation of entry barriers to potential competitors by requiring them to enter two markets simultaneously. Jefferson Parish, 466 U.S., at 14; Fortner, 394 U.S., at 509.

None of Kodak's asserted business justifications, then, are sufficient to prove that Kodak is "entitled to a judgment as a matter of law" on respondents' 2 claim. Fed. Rule. Civ. Proc. 56(c).

IV

In the end, of course, Kodak's arguments may prove to be correct. It may be that its 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 anticompetitive effects of Kodak's behavior are outweighed by its competitive effects. But we cannot reach these conclusions as a matter of law on a record this sparse. Accordingly, the judgment of the Court of Appeals denying summary judgment is affirmed.

It is so ordered.

Justice Scalia, with whom Justices O'Connor and Thomas join, dissenting.

This is not, as the Court describes it, just "another case that concerns the standard for summary judgment in an antitrust controversy." Ante, at 1. Rather, the case presents a very narrow -- but extremely important -- question of substantive antitrust law: Whether, for purposes of applying our per se rule condemning "ties," and for purposes of applying our exacting rules governing the behavior of would-be monopolists, a manufacturer's conceded lack of power in the interbrand market for its equipment is somehow consistent with its possession of "market," or even "monopoly," power in wholly derivative aftermarkets for that equipment. In my view, the Court supplies an erroneous answer to this question, and I dissenl.

I

Per se rules of antitrust illegality are reserved for those situations where logic and experience show that the risk of injury to competition from the defendant's behavior is so pronounced that it is needless and wasteful to conduct the usual judicial inquiry into the balance between the behavior's procompetitive benefits and its anticompetitive costs. See, e. g., Arizona v. Maricopa County Medical Society, 457 U.S. 332, 350-351 (1982).

"The character of the restraint produced by [behavior to which a per se rule applies] is considered a sufficient basis for presuming unreasonableness without the necessity of any analysis of the market context in which the [behavior] may be found."

Jefferson Parish Hospital District No. 2 v. Hyde, 466 U.S. 2, 9 (1984). The per se rule against tying is just such a rule: Where the conditions precedent to application of the rule are met, i.e., where the tying arrangement is backed up by the defendant's market power in the "tying" product, the arrangement is adjudged in violation of 1 of the Sherman Act, 15 U.S.C. 1, without any inquiry into the practice's actual effect on competition and consumer welfare. But see United States v. Jerrold Electronics Corp. 187 F. Supp. 545, 560 (ED Pa. 1960), aff'd per curiam, 365 U.S. 567 (1961) (accepting affirmative defense to per se tying allegation).

Despite intense criticism of the tying doctrine in academic circles, see, e. g., R. Bork, The Antitrust Paradox 365-381 (1978), the stated rationale for our per se rule has varied little over the years. When the defendant has genuine "market power" in the tying product -- the power to raise price by reducing output -- the tie potentially enables him to extend that power into a second distinct market, enhancing barriers to entry in each. In addition:

"Tying arrangements may be used to evade price control in the tying product through clandestine transfer of the profit to the tied product; they may be used as a counting device to effect price discrimination; and they may be used to force a full line of products on the customer so as to extract more easily from him a monopoly return on one unique product in the line."

Fortner Enterprises, Inc. v. United States Steel Corp., 394 U.S. 495, 513-514 (1969) (Fortner I) (White, J., dissenting) (footnotes omitted).

For these reasons, as we explained in Jefferson Parish , "the law draws a distinction between the exploitation of market power by merely enhancing the price of the tying product, on the one hand, and by attempting to impose restraints on competition in the market for a tied product, on the other." 466 U.S., at 14.

Our Section 2 monopolization doctrines are similarly directed to discrete situations in which a defendant's possession of substantial market power, combined with his exclusionary or anticompetitive behavior, threatens to defeat or forestall the corrective forces of competition and thereby sustain or extend the defendant's agglomeration of power. See United States v. Grinnell Corp., 384 U.S. 563, 570-571 (1966). Where a defendant maintains substantial market power, his activities are examined through a special lens: Behavior that might otherwise not be of concern to the antitrust laws -- or that might even be viewed as procompetitive -- can take on exclusionary connotations when practiced by a monopolist. 3 P. Areeda & D. Turner, Antitrust Law para. 813, pp. 300-302 (1978) (hereinafter 3 Areeda & Turner).

The concerns, however, that have led the courts to heightened scrutiny both of the "exclusionary conduct" practiced by a monopolist and of tying arrangements subject to per se prohibition, are completely without force when the participants lack market power. As to the former, "the [very] definition of exclusionary conduct," as practiced by a monopolist, ". . . [is] predicated on the existence of substantial market power." Id., at para. 813, p. 301 (1978); see, e. g., Walker Process Equip., Inc. v. Food Machinery & Chemical Corp. 382 U.S. 172, 177-178 (1965) (fraudulent patent procurement); Standard Oil Co. of N.J. v. United States, 221 U.S. 1, 75 (1911) (acquisition of competitors); 3 Areeda and Turner para. 724, at 195-197 (vertical integration). And with respect to tying, we have recognized that bundling arrangements not coerced by the heavy hand of market power can serve the procompetitive functions of facilitating new entry into certain markets, see, e. g., Brown Shoe Co. v. United States, 370 U.S. 294, 330 (1962), permitting "clandestine price cutting in products which otherwise would have no price competition at all because of fear of retaliation from the few other producers dealing in the market," Fortner I, supra, at 514, n. 9 (White, J., dissenting), assuring quality control, see, e. g., Standard Oil Co. of Cal. v. United States, 337 U.S. 293, 306 (1949), and, where "the tied and tying products are functionally related, . . . reducing costs through economies of joint production and distribution." Fortner I, supra, at 514, n. 9 (White, J., dissenting). "Accordingly, we have [only] condemned tying arrangements [under the per se rule] when the seller has some special ability -- usually called market power' -- to force a purchaser to do something that he would not do in a competitive market." Jefferson Parish , supra, at 13-14.

The Court today finds in the typical manufacturer's inherent power over its own brand of equipment -- over the sale of distinctive repair parts for that equipment, for example -- the sort of "monopoly power" sufficient to bring the sledgehammer of 2 into play. And, not surprisingly in light of that insight, it readily labels single-brand power over aftermarket products "market power" sufficient to permit an antitrust plaintiff to invoke the per se rule against tying. In my opinion, this makes no economic sense. The holding that market power can be found on the present record causes these venerable rules of selective proscription to extend well beyond the point where the reasoning that supports them leaves off. Moreover, because the sort of power condemned by the Court today is possessed by every manufacturer of durable goods with distinctive parts, the Court's opinion 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. I shall explain, in Parts II and III, respectively, how neither logic nor experience suggests, let alone compels, application of the per se tying prohibition and monopolization doctrine to a seller's behavior in its single-brand aftermarkets, when that seller is without power at the interbrand level.

II

On appeal in the Ninth Circuit, respondents, having waived their "rule of reason" claim, were limited to arguing that the record, construed in the light most favorable to them, Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986), supported application of the per se tying prohibition to Kodak's restrictive parts and service policy. See Image Technical Services, Inc. v. Eastman Kodak Co., 903 F. 2d 612, 615, n. 1 (CA9 1990). As the Court observes, in order to survive Kodak's motion for summary judgment on this claim, respondents bore the burden of proffering evidence on which a reasonable trier of fact could conclude that Kodak possesses power in the market for the alleged "tying" product. See ante, at 10; Jefferson Parish Hospital Dist. No. 2 v. Hyde 466 U.S., at 13-14.

A

We must assume, for purposes of deciding this case, that petitioner is without market, much less monopoly, power in the interbrand markets for its micrographics and photocopying equipment. See ante, at 11-12, n. 10; Oklahoma City v. Tuttle, 471 U.S. 808, 816 (1985). In the District Court, respondents did, in fact, include in their complaint an allegation which posited the interbrand equipment markets as the relevant markets; in particular, they alleged a 1 "tie" of micrographics and photocopying equipment to the parts and service for those machines. 1 App. 22-23. Though this allegation was apparently abandoned in pursuit of 1 and 2 claims focused exclusively on the parts and service aftermarkets (about which more later), I think it helpful to analyze how that claim would have fared under the per se rule.

Had Kodak -- from the date of its entry into the micrographic and photocopying equipment markets -- included a lifetime parts and service warranty with all original equipment, or required consumers to purchase a lifetime parts and service contract with each machine, that bundling of equipment, parts and service would no doubt constitute a tie under the tests enunciated in Jefferson Parish Hospital Dist. No. 2 v. Hyde, supra. Nevertheless, it would be immune from per se scrutiny under the antitrust laws because the tying product would be equipment, a market in which (we assume) Kodak has no power to influence price or quantity. See Jefferson Parish, supra, at 13-14; United States Steel Corp. v. Fortner Enterprises, Inc., 429 U.S. 610, 620 (1977) (Fortner II); Northern Pacific R. Co. v. United States, 356 U.S. 1, 6-7 (1958). The same result would obtain, I think, had Kodak -- from the date of its market entry -- consistently pursued an announced policy of limiting parts sales in the manner alleged in this case, so that customers bought with the knowledge that aftermarket support could be obtained only from Kodak. The foreclosure of respondents from the business of servicing Kodak's micrographics and photocopying machines in these illustrations would be undeniably complete -- as complete as the foreclosure described in respondents' complaint. Nonetheless, we would inquire no further than to ask whether Kodak's market power in the equipment market effectively forced consumers to purchase Kodak micrographics or photocopying machines subject to the company's restrictive aftermarket practices. If not, that would end the case insofar as the per se rule was concerned. See Jefferson Parish, supra, at 13-14; 9 P. Areeda, Antitrust Law para. 1709c5, pp. 101-102 (1991); Klein & Saft, The Law and Economics of Franchise Tying Contracts, 28 J. Law & Econ. 345, 356 (1985). The evils against which the tying prohibition is directed would simply not be presented. Interbrand competition would render Kodak powerless to gain economic power over an additional class of consumers, to price discriminate by charging each customer a "system" price equal to the system's economic value to that customer, or to raise barriers to entry in the interbrand equipment markets. See 3 Areeda and Turner para. 829d, at 331-332.

I have described these illustrations as hypothetical, but in fact they are not far removed from this case. The record below is consistent -- in large part -- with just this sort of bundling of equipment on the one hand, with parts and service on the other. The restrictive parts policy, with respect to micrographics equipment at least, was not even alleged to be anything but prospective. See 1 App. 17. As respondents summarized their factual proffer below:

"Under this policy, Kodak cut off parts on new products to Kodak micrographics ISOs. The effect of this, of course, was that as customers of Kodak micrographics ISOs obtained new equipment, the ISOs were unable to service the equipment for that customer, and, service for these customers was lost by the Kodak ISOs. Additionally, as equipment became obsolete, and the equipment population became all "new equipment" (post April 1985 models), Kodak micrographics ISOs would be able to service no equipment at all."

2 id., at 360.

As to Kodak copiers, Kodak's restrictive parts policy had a broader foundation: Considered in the light most favorable to respondents, see Anderson, supra, at 255, the record suggests that, from its inception, the policy was applied to new and existing copier customers alike. But at least all post-1985 purchasers of micrographics equipment, like all post-1985 purchasers of new Kodak copiers, could have been aware of Kodak's parts practices. The only thing lacking to bring all of these purchasers (accounting for the vast bulk of the commerce at issue here) squarely within the hypotheticals we have described is concrete evidence that the restrictive parts policy was announced or generally known.

Thus, under the court's approach the existence vel non of such evidence is determinative of the legal standard (the per se rule versus the rule of reason) under which the alleged tie is examined. In my judgment, this makes no sense. It is quite simply anomalous that a manufacturer functioning in a competitive equipment market should be exempt from the per se rule when it bundles equipment with parts-and-service, but not when it bundles parts with service. This vast difference in the treatment of what will ordinarily be economically similar phenomena is alone enough to call today's decision into question.

B

In the Court of Appeals, respondents sought to sidestep the impediment posed by interbrand competition to their invocation of the per se tying rule by zeroing in on the parts and service "aftermarkets" for Kodak equipment. By alleging a tie of parts to service, rather than of equipment to parts-and-service, they identified a tying product in which Kodak unquestionably held a near-monopoly share: the parts uniquely associated with Kodak's brand of machines. See Jefferson Parish, 466 U.S., at 17. The Court today holds that such a facial showing of market share in a single-brand aftermarket is sufficient to invoke the per se rule. The existence of even vibrant interbrand competition is no defense. See ante, at 17-18.

I find this a curious form of market power on which to premise the application of a per se proscription. It is enjoyed by virtually every manufacturer of durable goods requiring aftermarket support with unique, or relatively unique, goods. See P. Areeda & H. Hovenkamp, Antitrust Law para. 525.1, p. 563 (Supp. 1991). "Such reasoning makes every maker of unique parts for its own product a holder of market power no matter how unimportant its product might be in the market." Ibid. (emphasis added). Under the Court's analysis, the per se rule may now be applied to single-brand ties effected by the most insignificant players in fully competitive interbrand markets, as long as the arrangement forecloses aftermarket competitors from more than a de minimis amount of business, Fortner I, 394 U.S., at 501. This seems to me quite wrong. A tying arrangement "forced" through the exercise of such power no more implicates the leveraging and price discrimination concerns behind the per se tying prohibition than does a tie of the foremarket brand to its aftermarket derivatives, which -- as I have explained -- would not be subject to per se condemnation. As implemented, the Kodak arrangement challenged in this case may have implicated truth-in-advertising or other consumer protection concerns, but those concerns do not alone suggest an antitrust prohibition. See, e.g., Town Sound and Custom Tops, Inc. v. Chrysler Motors Corp., 959 F.2d 468 (CA3 1992) (en banc).

In the absence of interbrand power, a seller's predominant or monopoly share of its single-brand derivative markets does not connote the power to raise derivative market prices generally by reducing quantity. As Kodak and its principal amicus, the United States, point out, a rational consumer considering the purchase of Kodak equipment will inevitably factor into his purchasing decision the expected cost of aftermarket support.

"Both the price of the equipment and the price of parts and service over the life of the equipment are expenditures that are necessary to obtain copying and micrographic services."

Brief for United States as Amicus Curiae 13. If Kodak set generally supracompetitive prices for either spare parts or repair services without making an offsetting reduction in the price of its machines, rational consumers would simply turn to Kodak's competitors for photocopying and micrographic systems. See, e. g., Grappone, Inc. v. Subaru of New England, Inc., 858 F. 2d 792, 796-798 (CA1 1988). True, there are -- as the Court notes, see ante, at 21--the occasional irrational consumers that consider only the hardware cost at the time of purchase (a category that regrettably includes the Federal Government, whose "purchasing system," we are told, assigns foremarket purchases and aftermarket purchases to different entities). But we have never before premised the application of antitrust doctrine on the lowest common denominator of consumer.

The Court attempts to counter this theoretical point with theory of its own. It says that there are "information costs" -- the costs and inconvenience to the consumer of acquiring and processing life-cycle pricing data for Kodak machines -- that "could create a less responsive connection between service and parts prices and equipment sales." Ante, at 19. But this truism about the functioning of markets for sophisticated equipment cannot create "market power" of concern to the antitrust laws where otherwise there is none. "Information costs," or, more accurately, gaps in the availability and quality of consumer information pervade real-world markets; and because consumers generally make do with "rough cut" judgments about price in such circumstances, in virtually any market there are zones within which otherwise competitive suppliers may overprice their products without losing appreciable market share. We have never suggested that the principal players in a market with such commonplace informational deficiencies (and, thus, bands of apparent consumer pricing indifference) exercise market power in any sense relevant to the antitrust laws. "While [such] factors may generate market power' in some abstract sense, they do not generate the kind of market power that justifies condemnation of tying." Jefferson Parish Hospital District No. 2 v. Hyde, 466 U.S., at 27; see, e.g., Town Sound and Custom Tops, Inc. v. Chrysler Motors Corp., supra.

Respondents suggest that, even if the existence of interbrand competition prevents Kodak from raising prices generally in its single-brand aftermarkets, there remain certain consumers who are necessarily subject to abusive Kodak pricing behavior by reason of their being "locked in" to their investments in Kodak machines. The Court agrees; indeed, it goes further by suggesting that even a general policy of supracompetitive aftermarket prices might be profitable over the long run because of the "lock-in" phenomenon. "[A] seller profitably could maintain supracompetitive prices in the aftermarket," the Court explains, "if the switching costs were high relative to the increase in service prices, and the number of locked-in customers were high relative to the number of new purchasers." Ante, at 23. In speculating about this latter possibility, the Court is essentially repudiating the assumption on which we are bound to decide this case, viz., Kodak's lack of any power whatsoever in the interbrand market. If Kodak's general increase in aftermarket prices were to bring the total "system" price above competitive levels in the interbrand market, Kodak would be wholly unable to make further foremarket sales -- and would find itself exploiting an ever-dwindling aftermarket, as those Kodak micrographic and photocopying machines already in circulation passed into disuse.

The Court's narrower point, howeverd is undeniably true. There will be consumers who, because of their capital investment in Kodak equipment, "will tolerate some level of service-price increases before changing equipment brands," ante, at 23; this is necessarily true for "every maker of unique parts for its own product." Areeda & Hovenkamp, Antitrust Law para. 525.1b, at 563. But this "circumstantial" leverage created by consumer investment regularly crops up in smoothly functioning, even perfectly competitive, markets, and in most -- if not all -- of its manifestations, it is of no concern to the antitrust laws. The leverage held by the manufacturer of a malfunctioning refrigerator (which is measured by the consumer's reluctance to walk away from his initial investment in that device) is no different in kind or degree from the leverage held by the swimming pool contractor when he discovers a 5-ton boulder in his customer's backyard and demands an additional sum of money to remove it; or the leverage held by an airplane manufacturer over an airline that has "standardized" its fleet around the manufacturer's models; or the leverage held by a drill press manufacturer whose customers have built their production lines around the manufacturer's particular style of drill press; the leverage held by an insurance company over its independent sales force that has invested in company-specific paraphernalia; or the leverage held by a mobile home park owner over his tenants, who are unable to transfer their homes to a different park except at great expense, see generally Yee v. Escondido, 503 U.S. (1992). Leverage, in the form of circumstantial power, plays a role in each of these relationships; but in none of them is the leverage attributable to the dominant party's market power in any rele ant sense. Though that power can plainly work to the injury of certain consumers, it produces only "a brief perturbation in competitive conditions -- not the sort of thing the antitrust laws do or should worry about." Parts & Elec. Motors, Inc. v. Sterling Elec., Inc., 866 F. 2d 228, 236 (CA7 1988) (Posner, J., dissenting).

The Court correctly observes that the antitrust laws do not permit even a natural monopolist to project its monopoly power into another market, i.e., to "exploit his dominant position in one market to expand his empire into the next.'" Ante, at 27, n. 29 (quoting Times-Picayune Publishing Co. v. United States, 345 U.S. 594, 611 (1953)). However, when a manufacturer uses its control over single-branded parts to acquire influence in single-branded service, the monopoly "leverage" is almost invariably of no practical conseqeence, because of perfect identity between the consumers in each of the subject aftermarkets (those who need replacement parts for Kodak equipment, and those who need servicing of Kodak equipment). When that condition exists, the tie does not permit the manufacturer to project power over a class of consumers distinct from that which it is already able to exploit (and fully) without the inconvenience of the tie. Cf., e.g., Bowman, Tying Arrangements and the Leverage Problem, 67 Yale L. J. 19, 21-27 (1957).

We have never before accepted the thesis the Court today embraces: that a seller's inherent control over the unique parts for its own brand amounts to "market power" of a character sufficient to permit invocation of the per se rule against tying. As the Court observes, ante, at 27, n. 29, we have applied the per se rule to manufacturer ties of foremarket equipment to aftermarket derivatives -- but only when the manufacturer's monopoly power in the equipment, coupled with the use of derivative sales as "counting devices" to measure the intensity of customer equipment usage, enabled the manufacturer to engage in price discrimination, and thereby more fully exploit its interbrand power. See International Salt Co. v. United States, 332 U.S. 392 (1947); International Business Machines Corp. v. United States 298 U.S. 131 (1936); United Shoe Machinery Corp. v. United States, 258 U.S. 451 (1922). That sort of enduring opportunity to engage in price discrimination is unavailable to a manufacturer -- like Kodak -- that lacks power at the interbrand level. A tie between two aftermarket derivatives does next to nothing to improve a competitive manufacturer's ability to extract monopoly rents from its consumers.

Nor has any court of appeals (save for the Ninth Circuit panel below) recognized single-branded aftermarket power as a basis for invoking the per se tying prohibition. See Virtual Maintenance, Inc. v. Prime Computer, Inc., 957 F.2d 1318, 1328 (CA6 1992) ("Defining the market by customer demand after the customer has chosen a single supplier fails to take into account that the supplier . . . must compete with other similar suppliers to be designated the sole source in the first place"); Grappone, Inc. v. Subaru of New England, Inc., 858 F. 2d 792, 798 (CA1 1988) ("We do not see how such dealer investment [in facilities to sell Subaru products] . . . could easily translate into Subaru market power of a kind that, through tying, could ultimately lead to higher than competitive prices for consumers"); A.I. Root Co. v. Computer/ Dynamics, Inc., 806 F. 2d 673, 675-677, and n. 3 (6th Cir 1986) (competition at "small business computer" level precluded assertion of computer manufacturer's power over software designed for use only with manufacturer's brand of computer); General Business Systems v. North American Philips Corp., 699 F. 2d 965, 977 (CA9 1983) ("To have attempted to impose significant pressure to buy [aftermarket hardware] 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"). See also Parts & Elec. Motors, Inc. v. Sterling Elec., Inc., 866 F. 2d, at 233 (law-of-the-case doctrine compelled finding of market power in replacement parts for single-brand engine).

We have recognized in closely related contexts that the deterrent effect of interbrand competition on the exploitation of intrabrand market power should make courts exceedingly reluctant to apply rules of per se illegality to intrabrand restraints. For instance, we have refused to apply a rule of per se illegality to vertical nonprice restraints "because of their potential for a simultaneous reduction of intrabrand competition and stimulation of interbrand competition," Continental T.V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36, 51-52 (1977), the latter of which we described as "the primary concern of antitrust law." Id., at 52, n. 19. We noted, for instance, that "new manufacturers and manufacturers entering new markets can use the restrictions in order to induce competent and aggressive retailers to make the kind of investment of capital and labor that is often required in the distribution of products unknown to the consumer," and that "established manufacturers can use them to induce retailers to engage in promotional activities or to provide service and repair facilities necessary to the efficient marketing of their products." Id., at 55. See also Business Electronics Corp. v. Sharp Electronics Corp., 485 U.S. 717, 726 (1988). The same assumptions, in my opinion, should govern our analysis of ties alleged to have been "forced" solely through intrabrand market power. In the absence of interbrand power, a manufacturer's bundling of aftermarket products may serve a multitude of legitimate purposes: It may facilitate manufacturer efforts to ensure that the equipment remains operable and thus protect the seller's business reputation, see United States v. Jerrold Electronics Corp. 187 F. Supp., at 560, aff'd per curiam, 365 U.S. 567 (1961); it may create the conditions for implicit consumer financing of the acquisition cost of the tying equipment through supracompetitively priced aftermarket purchases,

see, e. g., A. Oxenfeldt, Industrial Pricing and Market Practices 378 (1951); and it may, through the resultant manufacturer control of aftermarket activity, "yield valuable information about component or design weaknesses that will materially contribute to product improvement," 3 Areeda & Turner para. 733c, at 258-259; see also id. para. 829d, at 331-332. Because the interbrand market will generally punish intrabrand restraints that consumers do not find in their interest, we should not -- under the guise of a per se rule -- condemn such potentially procompetitive arrangements simply because of the antitrust defendant's inherent power over the unique parts for its own brand.

I would instead evaluate the aftermarket tie alleged in this case under the rule of reason, where the tie's actual anticompetitive effect in the tied product market, together with its potential economic benefits, can be fully captured in the analysis, see, e.g., Jefferson Parish Hospital District No. 2 v. Hyde, 466 U.S., at 41 (O'Connor, J., concurring in judgment). Disposition of this case does not require such an examination, however, as respondents apparently waived any rule-of-reason claim they may have had in the District Court. I would thus reverse the Ninth Circuit's judgment on the tying claim outright.

III

These considerations apply equally to respondents' 2 claims. An antitrust defendant lacking relevant "market power" sufficient to permit invocation of the per se prohibition against tying a fortiori lacks the monopoly power that warrants heightened scrutiny of his allegedly exclusionary behavior. Without even so much as asking whether the purposes of 2 are implicated here, the Court points to Kodak's control of "100% of the parts market and 80% to 95% of the service market," markets with "no readily available substitutes," ante, at 28, and finds that the proffer of such statistics is sufficient to fend off summary judgment. But this showing could easily be made, as I have explained, with respect to virtually any manufacturer of differentiated products requiring aftermarket support. By permitting antitrust plaintiffs to invoke 2 simply upon the unexceptional demonstration that a manufacturer controls the supplies of its single-branded merchandise, the Court transforms 2 from a specialized mechanism for responding to extraordinary agglomerations (or threatened agglomerations) of economic power to an all-purpose remedy against run-of-the-mill business torts.

In my view, if the interbrand market is vibrant, it is simply not necessary to enlist 2's machinery to police a seller's intrabrand restraints. In such circumstances, the interbrand market functions as an infinitely more efficient and more precise corrective to such behavior, rewarding the seller whose intrabrand restraints enhance consumer welfare while punishing the seller whose control of the aftermarkets is viewed unfavorably by interbrand consumers. See Business Electronics Corp., supra, at 725; Continental T.V., supra, at 52, n. 19, 54. Because this case comes to us on the assumption that Kodak is without such interbrand power, I believe we are compelled to reverse the judgment of the Court of Appeals. I respectfully dissent.