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For Large Computer Vendors, Reports of Antitrust’s Demise Prove Overstated

July 1990

It is common wisdom that antitrust enforcement in the U.S. has lost its bite, and we live in a new age of “anti-antitrust.” Certain industry practices, however, still attract legal action reminiscent of the 1960’s and 1970’s. One such “hot spot” pits large technology vendors against suppliers and independent service organizations (“ISOs”) who market to the vendors’ after-market customer base. A number of cases presently in litigation — in which vendors are accused of monopolization — show the struggle taking place in this arena.

In the first case, a federal court of appeals has held that Eastman Kodak Co.’s policy of refusing to sell replacement parts for Kodak’s copier and micrographic equipment directly to ISOs, or to Kodak customers unless they will agree not to use ISO’s, may constitute a “tying arrangement.” A tying arrangement arises where a seller agrees to sell one product, but only on the condition that the buyer agrees to purchase a second product from the seller, or not to buy the second product from anyone else. This practice is illegal if the seller has “market power” in the market for the first product. The ISOs claim that Kodak is illegally “tying” the purchase of Kodak replacement parts to the purchase of Kodak service.

The court held that the 18 ISOs who have joined together to bring this suit must be permitted to attempt to prove at trail that Kodak’s practice is a tying arrangement, and that Kodak has market power in the parts market. The court also held that ISOs should be permitted to attempt to prove that Kodak’s refusal to sell parts to them constitutes illegal monopolization or attempted monopolization.

In the second case, Digital sued System Industries, Inc., alleging that certain Digital-compatible peripheral storage devices sold by SI infringe patents held by Digital. SI has counterclaimed on antitrust grounds, asserting that Digital has sought to control the market for Digital-compatible peripherals in violation of anti-monopoly laws by expanding its use of non-standard interfaces, canceling its policy of pre-disclosure of interface technology, refusing to provide SI with technical information and falsely disparaging SI’s products.

The federal court hearing this case has refused to dismiss SI’s counterclaims, stating that if proven, they may state a valid antitrust claim against Digital.

In the third case, Data General is in litigation with Service and Training, Inc., an ISO that provides maintenance and repairs on DG equipment. STI claims that DG has illegally attempted to monopolize the service market for DG computers by making DG’s highly valuable diagnostic software virtually impossible for third party maintenance companies to obtain, thereby putting them at a disadvantage in servicing DG customers. The federal court hearing this case, although expressing some doubt as to the merit of STI’s claim, has refused to dismiss it, and is permitting STI to conduct discovery to develop evidence of its claim of monopolization.

TLB Comment : In the battle for the after-market in the technology industries, third-party providers and ISOs compete by being more responsive and less expensive than the large vendors who create these markets. However, as the Kodak, Digital and Data General cases illustrate, the large vendors have an arsenal of strategic and legal weapons to use to force the ISOs off the playing field. We will keep you informed as to the effectiveness of the ISOs’ antitrust counter-offensive.

Postscript: The Kodak decision was affirmed by the U.S. Supreme Court. It proceeded to trial, resulting in a $70 million jury verdict in September 1995.