Kodak’s Pricing Policy For Printer Parts & Ink Gets Jammed By US Court

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Kodak’s Pricing Policy For Printer Parts & Ink Gets Jammed By US Court

 news 2015-05-14 at 11:39:44 am Views: 135
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    Kodak’s Pricing Policy For Printer Parts & Ink Gets Jammed By US Courts
    Kodak’s pricing policy for printer parts and ink gets jammed by the Sixth Circuit
    By Irving Scher.


    On March 16, 2015, in Collins Inkjet Corp. v. Eastman Kodak Co.,1  the Sixth Circuit became the first court of appeals to adopt a cost-based test for determining when a supplier’s differential pricing policy for joint sales of two products constitutes an “economic” tying claim that violates Section 1 of the Sherman Act.

    Tying Arrangements

    A tying arrangement generally refers to a supplier’s policy “to sell one product … 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.”2  Such a conditioned sale is unlawful when the supplier has “appreciable economic power” in the market for the desired or “tying” product, and the arrangement “affects a substantial volume of commerce” in the market for the “tied” product the buyer would have preferred to buy elsewhere.3  While tying is usually accomplished via an explicit requirement, in some cases, economic or “non-explicit” tying has been found when a pricing policy makes it unreasonably costly for the customer to buy the tying product without also buying the tied product.4  This is akin to the proverbial “offer you can’t refuse.” Determining exactly where that line has been crossed between lawful packaged sales and an unlawful economic tie was the issue before the Sixth Circuit in Collins.

    Factual Background

    Defendant Kodak Corporation (Kodak) manufactured Versamark printing systems, which are large and costly devices that have a life span of 10-20 years and are primarily used by commercial printers. Users of Versamark printing systems from time to time need to purchase refurbished printer components known as “printheads,”which are available only from Kodak, as well as ink specially made for the Versamark printers. Kodak competed with plaintiff Collins Inkjet Corp. (Collins) on sales of Versamark ink.5

    In 2013, Kodak adopted a new pricing policy under which customers paid different prices for refurbished printheads based on the brand of ink the customer purchased. Customers who purchased Kodak ink would thereafter pay much lower prices for printheads than customers who purchased Collins ink. Collins filed suit, alleging that Kodak’s differential pricing policy violated Section 1 of the Sherman Act, and sought to enjoin Kodak from “charging Collins ink customers higher prices for refurbished printheads.”6

    The Sixth Circuit Decision

    The district court granted the preliminary injunction sought by Collins, relying on Virtual Maintenance v. Prime Computer,7  in which the Sixth Circuit had declared that a non-explicit tying arrangement was unlawful if the individual price for the tying product was so high that “all rational buyers” would purchase the tied product along with it. The Sixth Circuit affirmed the district court’s injunction, but implicitly rejected its earlier “all rational buyers” test, noting that it had not actually adopted that standard in Virtual Maintenance, but had used the phrase only in dicta.8

    The Sixth Circuit observed that differential pricing of the nature challenged by Collins is usually pro-competitive, because “competitive sellers generally aim to make their products significantly cheaper than their competitors’ and there is nothing inherently wrong with doing so via differential pricing.”9  The relevant concern, according to the Sixth Circuit in Collins, is whether the defendant was using its market power in the tying product to drive out efficient competitors in the tied product market.10  To avoid such a result, the court declared that a differential pricing policy is not unlawful “unless the differential pricing is the economic equivalent of selling the tied product below the defendant’s cost.”11

    To make that determination, the Sixth Circuit panel adopted the “discount attribution” standard established by the Ninth Circuit in Cascade Health Solutions v. PeaceHealth12  for Section 2 monopolization claims involving bundled discounts. Under that test, the full amount of the discounts in a bundle of products is attributed to the competitive product – in Collins, the allegedly “tied” product. If the resulting price is below the defendant’s average variable – or “incremental” – cost for the tied product, then the arrangement is unlawful.13  Although there apparently was no evidence of Kodak’s incremental costs in the district court record, Kodak had stated that its profits decreased when a customer switched from non-Kodak to Kodak ink. This suggested to the court that Kodak’s price for the ink was below its incremental cost of producing the ink, if the full amount of the printhead discount was attributed to the price Kodak charged for the ink.14  Accordingly, the pricing program failed the discount attribution standard, and the Court determined that Collins demonstrated a likelihood of success on its tying claim.

    The Sixth Circuit then ruled that the other preliminary injunction factors also favored Collins. Although lost profits would seem to be compensable by money damages, the court concluded that in this instance, lost sales and market share could damage Collins’ goodwill and competitive position in ways that would be difficult to quantify, and thus it faced the prospect of irreparable harm. Moreover, according to the Sixth Circuit, the injunction would not harm Kodak because it would not prevent it from competing with Collins “on a fair playing field.”15


    Collins is notable as apparently the first time a court of appeals has articulated a “cost-based” standard for determining whether a differential pricing policy is sufficiently coercive to constitute unlawful tying. It remains to be seen whether courts outside the Sixth Circuit will follow its ruling. There is little doubt that the “all rational buyers” test previously adopted by the Sixth Circuit creates subjectivity as to what a hypothetical “rational” buyer would do. The cost-based approach adopted by the Sixth Circuit is a more objective standard, although it is more akin to a predatory pricing analysis than to a traditional tying analysis, which typically focuses on whether the customers were “coerced” into buying the tied product. Like the Ninth Circuit in PeaceHealth (in the context of a Section 2 claim), the Sixth Circuit did not add a requirement that the defendant would likely be able to recoup its losses after it discontinues the challenged policy, a requirement the Supreme Court has imposed in predatory pricing cases. Although individual competitors may be harmed by below-cost pricing when monopoly power is not present, consumers could benefit from the lower prices and overall competition may not be unreasonably restrained.16

    It also is unclear whether the Sixth Circuit properly applied the discount attribution standard adopted in PeaceHealth, which used “average variable cost” in making its determination. Although the Sixth Circuit in Collins stated that “incremental” cost is the relevant cost to be considered, it commented that the record before it suggested that Kodak failed the PeaceHealth test because it made less profit when it sold the two products jointly. However, profit typically is measured on the basis of total cost, not average variable cost.

    Finally, it should be noted that the Ninth Circuit actually did consider a tying claim based on non-explicit economic coercion in PeaceHealth, but did not apply the “discount attribution” standard to that claim. Instead, it only considered whether there was sufficient factual evidence of coercion in the record to grant summary judgment on the tying claim.17  The Sixth Circuit thus may have broken new ground by becoming the first court of appeals to harmonize the analysis of tying and discounted bundling claims, and it remains to be seen whether other courts will follow suit.