Xerox Corp. v. Media Sciences, Inc.Xerox Corp. v. Media Sciences, Inc.
MEMORANDUM OPINION AND ORDER
This litigаtion involves solid ink sticks used in plaintiff-counterclaim defendant Xerox Corp.’s phase change color printers. In the principal action, Xerox asserted a single claim against defendant-counterclaim plaintiff Media Sciences Inc. (“MSI”) for MSI’s alleged infringement of patents relating to Xerox’s ink sticks and printer feed chutes. MSI manufactures generic ink sticks for Xerox’s color printers and sells them in direct competition with Xerox. It asserted a number of counterclaims, including antitrust claims for actual and attempted monopolization in violation of § 2 of the Sherman Act. For reasons discussed below, the Court previously dismissed most of the antitrust claims without prejudice. Xerox now moves for summary judgment on MSI’s remaining counterclaims, which allege that Xerox has monopoly power in the aftermarket for rеplacement ink sticks and has illegally maintained that power by making frequent and unnecessary changes to the design of its ink sticks and its printers’ feed channels. For the reasons that follow, the motion will be granted.
I. BACKGROUND
Unless otherwise noted, the following facts are undisputed.
A. The Market for Color Workgroup Printers and Ink Sticks
Xerox manufactures a variety of work-group printers, including laser printers, phase change color printers, and multifunction devices — devices that scan and copy as well as print. Xerox’s phase change color printers use solid, waxy ink to produce an image on paper. The ink is sold in a solid form that looks and feels like a crayon. {See Kerr Rep. ¶ 22-23, Herbert Decl. Ex. 9, July 7, 2008.)
As is true of other printers manufacturers, Xerox generally sells its printers at a low margin or a loss, hoping to earn a profit through later sales of high-margin ink. (Kerr Rep. ¶ 32; see generally Richard B. McKenzie, Why Popcorn Costs So Much at the Movies and Other Pricing Puzzles, cp. 7 (2008); Claudia H. Deutsch, In a Switch, Charging More for Printers and Less for Ink, N.Y. Times, Sept. 24, 2007, at C3.) Thus while Xerox’s price-to-cost margin for ink is approximately ninety percent (Kerr Rep. ¶ 71; Economides Rep. ¶ 37, Herbert Decl. Ex. 4), its combined gross margin on phase change printers and supplies is approximately thirty-seven percent (Kerr Rep. ¶ 75 & Ex. 20). This business model invites competition; because of the gap between the price of ink and its marginal cost of production, there is an obvious opportunity for a competitor to undercut Xerox’s ink prices and take away a portion of the ink-stick market. In the United States, MSI provides just such competition. It manufactures generic ink sticks for Xerox’s printers and sells them at a substantial discount off Xerox’s prices. (Economides Rep. ¶ 7; see Kerr Rep. ¶ 38.)
Certain facts concerning the markets in which Xerox and MSI compete are undisputed. In the “primary” market for printers, Xerox competеs with a number of original equipment manufacturers, including Hewlett Packard (“HP”), Lexmark,
Conditions are different in the “aftermarket” for ink sticks for Xerox’s printers. The parties quibble over precise numbers, but Xerox controls at least ninety percent, and may control up to ninety-seven percent, of ink-stick sales for its color work-group printers. (Xerox’s Resps. to MSI’s R. 56.1 Stmt. ¶ 37.) MSI claims that Xerox’s position as the dominant ink supplier for its printers is not accidental. In addition to its natural advantage as an original equipment manufacturer, Xerox changes the design of its printers’ feed chutes with each new generation of printer, which has the effect of making it more difficult for non-Xerox ink sticks to function properly. (Id. ¶ 101.) Xerox contends that these design changes improve the efficiency and quality of its printers’ output and are necessary to block incompatible ink sticks, including ink sticks that it manufactured for other models of its printers. (Id.) MSI contends that the principal purpose of the design changes is to make non-Xerox ink sticks function less reliably. (Id.)
The parties draw different conclusions about the significance of the competitive nature of the primary market for printers in analyzing the nature of competition in the secondary market for ink sticks. MSI’s expert, Professor Nicholas Economides, views the primary and secondary markets as worlds apart, each having little or no impact on the other. He opines that “ink for each particular Xerox printer model” is a distinct antitrust market within which Xerox possesses monopoly power, 1. e., “the power to control prices or exclude competition.” (Economides Rep. ¶ 35;
see United States v. E.I. du Pont de Nemours & Co.,
MSI sees other signs that Xerox possesses monopoly power in the ink-stick aftermarket. Xerox has raised its ink prices three times since 2000: in 2003, by an average of 4.03%; in 2006, by an average of 5.35%; and in 2007, by an average of 4.87%.
2
There is no evidence, however,
Xerox denies that it possesses monopoly power in any relevant market. Its expert, Dr. William Kerr, does not dispute that Xerox sells most of the ink sticks used in its printers. But he believes this is not probative of Xerox’s alleged monopoly power, because “[t]he relevant market in which to consider the competitive effects of Xerox’s ... product design activities, is the market for workgroup color printing,” i.e., the integrated market for color printers and ink sticks. (Kerr Rep. ¶ 27.)
Dr. Kerr further contends that even if ink sticks for Xerox printers are considered a separate product market, there is no reason to conclude that Xerox possesses monopoly power in that market. Printers generally have a three-year life span, and large customers are likely to be purchasing printers “all the time.” (¶¶ 69, 70.) In addition, Xerox and other OEMs (“original equipment manufacturers”) market their printers on a “cost per page” basis and thus explicitly encourage customers to consider the lifecycle costs of a printer purchase. (¶ 23; see, e.g., ConsumerReports.org, Buying Advice: Printers (June 20, 2008) (“Consider supply costs as well as a printer’s price.”), Ko Decl. Ex. 48, June 20, 2008.) Dr. Kerr therefore infers a market dynamic whereby competition in the primary printer market constrains Xerox’s ability to chargе supracompetitive prices for ink sticks. If Xerox were to charge supracompetitive prices, it would be punished with reduced sales in the primary printer market. (Kerr Rep. ¶ 58.)
Aside from these general features of the printer and ink-stick markets, Dr. Kerr contends that Xerox’s actual pricing practices contradict the suggestion that it has the power to control prices or exclude competition. When a new printer model is introduced, Xerox determines the price it charges for ink by reference to the market prices for toner used in its competitors’ color laser printers. (Kerr. Rep. ¶ 56.) Janel Draz, a Xerox marketing manager, submitted a sworn declaration in which she avers that when Xerox considers changing the price of ink after a particular model of printer is introduced, it aims to stay competitive with the prices HP and Lexmark charge for color toner. (Draz Decl ¶ 4, Apr. 28, 2008.) Contemporaneous internal documents are consistent with Ms. Draz’s account. (See id. Exs. I, L, O.)
B. Procedural History
As noted, Xerox filed its complaint on June 23, 2006. The complaint asserted a single claim based on MSI’s alleged infringement of patents relating to the design of Xerox’s ink sticks and printer feed chutes. (Compl. ¶¶ 9-17.) MSI responded by filing a number of counterclaims, including counterclaims alleging that Xerox’s efforts to deter third-parties from manufacturing ink sticks for its printers violated § 2 of the Sherman Act, 15 U.S.C. § 2 (2006).
By memorandum opinion and order dated September 14, 2007,
At the close of discovery, Xerox moved for summary judgment on MSI’s § 2 claims on two separate grounds. Xerox first argued that claims based on changes to Xerox’s loyalty rebate program fell within the scope of a prior settlement agreement in which MSI covenanted not to assert any claims against Xerox for conditioning rebates on a reseller or distributor not selling MSI ink, provided that Xerox had a good faith belief that MSI’s ink was causing printer failures.
See Xerox Corp. v. Media Sciences, Inc.,
II. DISCUSSION
Federal Rule of Civil Procedure 56 provides that “[a] party claiming relief may move, with or without supporting affidavits, for summary judgment on all or part of the claim.” Fed.R.Civ.P. 56(a). A defendant may satisfy its burden of produсtion under the rule simply by pointing out the lack of evidence supporting a material element of a non-moving plaintiffs claim.
Celotex Corp. v. Catrett,
A. Monopoly Power in a Single-Brand Aftermarket: Kodak-type Claims
Section 2 of the Sherman Act declares it unlawful to “monopolize” or “attempt to monopolize” “any part of the trade or commerce among the several States.” 15 U.S.C. § 2. To demonstrate monopolization of a “part of trade or commerce,” a plaintiff must prove “(1) the possession of monopoly power in the relevant market and (2) the willful acquisition оr maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.”
Unit
“Monopоly power is the power to control prices or exclude competition.”
E. I. du Pont,
In the context of § 2, a “relevant market” has two dimensions: the geographic market and the product market.
See Brown Shoe Co. v. United States,
As the Supreme Court has instructed, the application of these general principles is informed by additional factors in cases involving the market for parts or services for a durable good — a phenomenon referred to as a “single-brand aftermarket.”
Eastman Kodak Co. v. Image Technical Servs., Inc.,
In
Kodak,
this interesting issue of monopoly power involved the aftermarket for parts and service for copying and micro-graphic equipment manufactured by the Eastman Kodak Co.
See Kodak,
As a theory, Kodak’s argument was not without persuasive force. While a manufacturer can be expected to have a dominant share of the market for service or replacement parts for its products, it would be short-sighted in the extreme to price-gouge aftermarket customers, at least in situations where the primary market is competitive and dissatisfied customers cаn switch to a competitor’s product. The economically rational firm concerned with the long term “cannot afford to bite the hands that feed them.”
SMS,
Nevertheless, the Supreme Court rejected Kodak’s invitation to decide the case on the basis of “formalistic distinctions rather than actual market realities,” and found that the plaintiff ISOs had introduced sufficient evidence of Kodak’s monopoly power in the parts and services aftermarket to withstand summary judgment.
Kodak,
Since the Supreme Court decided
Kodak,
the Courts of Appeals have unanimously held that to prevail on a
Kodak-type
claim, a plaintiff must make an evidentiary showing similar to that made by the plaintiff ISOs.
See, e.g., Harrison Aire,
Procedurally, the plaintiffs in
Kodak
introduced substantial evidence of a distinct market for parts and services that was unconstrained by competition in the primary equipment market.
See supra
pp. 544-45. Thus, the Court’s statement that Kodak bore “a substantial burden” in showing that it was entitled to summary judgment,
As a question of antitrust policy, “courts have been careful to avoid constructions of § 2 which might chill competition rather than foster it.”
Spectrum Sports,
The burden a plaintiff must shoulder to prevail on a
Kodak-type
claim is illustrated by the Third Circuit’s careful opinion in
Harrison Aire,
Construing the summary judgment record in the light most favorable to the plaintiff, the court initially held that the relevant market was that for replacement fabric for the defendant manufacturer’s balloons. Id. at 383. The defendant, however, did not possess monopoly power in this market. Although it appears to have been the dominant manufacturer of replacement fabric for its balloons, see id. at 379, this did not support a reasonable inference of monopoly power, because balloons and fabric are “linked by consumer demand such that competition in the foremarket may discipline behavior in the aftermarket.” Id. at 383. And, in contrast to Kodak, the plaintiff failed to produce evidence of information costs that prevented knowledgeable customers from engaging lifeсycle pricing, of a change in aftermarket policy targeting locked-in customers, of supracompetitive pricing, or of dominant aftermarket share. See id. at 384. Thus, the court found that summary judgment for the defendant was proper.
A similar result obtained in
Alcatel,
The Fifth Circuit held, reversing a jury’s verdict, that the plaintiff failed to demonstrate monopoly power in a relevant market. In contrast to
Kodak,
prices for most of the defendant’s expansion cards were established at the time a customer purchased a switch.
Id.
at 783. Hence many consumers “factored] in not only the purchase price of the equipment, but also the post-acquisition costs of operation, maintenance, and expansion at the time of purchase.”
Id.
In addition, the defendant had long maintained restrictive policies prohibiting the use of third-party expansion cards.
Id.
Thus, the plaintiff could not demonstrate that the defendant “changed its policy after locking-in some of its customers.”
Id.
(quoting
PSI Repair Servs.,
While the Court reads
Kodak
to mandate a flexible inquiry into whether market imperfections allow an alleged mo
B. MSI Has Failed to Meet its Burden Under Kodak
Turning to this case, it is helpful to begin by noting a point of similarity with
Kodak.
Like Kodak, Xerox sells durable goods in a competitive primary market (printers) and is the dominant supplier of aftermarket supplies (solid ink sticks) for those goods. Furthermore, “[s]olid ink sticks are, literally and technically, not interchangeable with other consumables.”
Xerox I,
As noted above, however, “[c]ases involving aftermarkets are sui generis.”
SMS,
Beginning with the logically antecedent question of lock-in, the record contains no evidence of a substantial lock-in effect arising from the cost of migrating to a non-Xerox printer. MSI relies on the $3,100 price of certain Xerox printers, and a survey response, described above, in which a single user complains that he was “stuck” with a Xerox printer that “died within three weeks after receipt.” (MSI Mem. 9-10;
see
Iburg Dep. Ex. 2, at 5.) But on its own, this evidence is not probative of whether Xerox has the ability to set ink-stick prices without regard to competitive consequences. The significance of the $3,100 price tag depends entirely on individual users’ cost structures. All other things being equal, an economically rational user will switch to an alternate printer in response to changes in the cost of supplies if the savings from the alternate printer’s cheaper supplies outweigh the additional cost of a new equipment purchase.
See Parts & Elec. Motors,
With regards to whether information costs prevent potential Xerox customers from engaging in lifecycle pricing, the evidence cited by MSI is, again, minimally probative. A product’s “lifecycle” cost refers to the cost of operating the product over its useful life. In
Kodak,
the Court reasoned that competition in the primary equipment market might not discipline Kodak’s pricing decisions in the aftermarket, because customers required “a substantial amount of raw data” to engage in lifecycle pricing,
This evidence is insufficient to establish the type of market failure critical to a
Turning to whether Xerox charged supracompetitive prices to locked-in customers, Xerox has introduced substantial uncontested evidence that its ink-stick prices have decreased on a cost-per-page basis, and that the supply of color workgroup printers and aftermarket supplies increased markedly between 2000 and 2007.
(See
Kerr. Rep. ¶¶ 23, 46-51.) Against this backdrop, the evidence cited by MSI fails to support a reasonable interference of supracompetitivе pricing. MSI notes that Xerox has raised ink-stick prices three times, yet cannot point to any changes in its cost structure that would justify such an increase. (MSI Mem. 14.) But Xerox’s inability to offer a cost justification for its price increases is only tangentially relevant to whether its prices are competitive. While an abnormally high price-cost margin may signal the absence of competition under perfect market conditions,
see Geneva Pharms.,
Lastly, it is notable that with the exception of three price increases that actually failed to keep pace with inflation, MSI has not produced evidence of a сhange in policy by Xerox that exploited loeked-in customers.
See PSI Repair Servs.,
Considering these factors together, MSI has not met its summary judgment burden. Although Xerox sells most of the ink for its printers, “[a]dditional factors are relevant in the aftermarket context.”
Harrison Aire,
C. MSI’s Remaining Arguments
Two of MSI’s responses to this line of analysis deserve a brief response. First, MSI contends that the premise of the Court’s analysis, that the market for color workgroup printers is competitive, is erroneous. Specifically, MSI notes that according to figures produced by Dr. Kerr, the Herfindahl-Hirschman Index (a measure of market concentration) for the color workgroup printer market is a relatively high 3,982, and that Xerox has waffled over whether data showing that it has a twenty-four percent share of the work-group printer market improperly includes sales of low-end color inkjet printers. (MSI Mem. 11-12.) MSI, however, conceded in its pleadings and discovery responses that Xerox lacks market power in the primary market (MSI Countercls. ¶ 43; MSI Resps. to Pl.’s Second Set of Interrogs. ¶ 22), and never alleged in the alternative that Xerox possesses monopoly power in that market,
see
Fed.R.Civ.P. 8(d)(2). In the Court’s view, Xerox was entitled to rely on MSI’s concession, which defined the scope of subsequent discovery and motion practice.
See Gibbs ex rel. Estate of Gibbs v. CIGNA Corp.,
MSI has also moved to strike most of the evidence submitted by Xerox in connection with this motion on the ground, among others, that an attorney who submitted the evidence as attach-
MSI also urges the Court to order Xerox to show cause why it should not be sanctioned because of irregularities in the signature page of a declaration submitted by Christopher Iburg. (Id. at 9-10.) Having reviewed the challenged declaration, the Court sees no cause for concern. MSI’s sophisticated attorneys doubtless know that it is commonplace to attach a scanned signature page to an electronically produced document. And the discrepancies between the signature page and the rest of the declaration — a missing page number and a pagination error — hardly support a reasonable inference that Mr. Iburg did not read or sign the declaration.
III. CONCLUSION
MSI has failed to set out specific facts showing a genuine issue for trial as to Xerox’s monopoly power. Accordingly, Xerox’s motion for summary judgment on MSI’s monopolization counterclaims [101] is granted. The Court did not consider evidence related tо Xerox’s loyalty rebate programs in its disposition of this motion, thus this decision and order should not be interpreted as superseding or modifying the Court’s March 30, 2009, decision and order in Xerox II.
SO ORDERED.
Notes
. The parties distinguish "workgroup” color printers — those intended for higher-volume business use — from lower-cost color ink-jet printers.
. Total inflation during this period was approximately 13%.
(See
Bureau of Labor Statistics, Inflation Calculator, http://www.bls.
. Consistent with the terms of the settlement agreement, the Court did not consider evidence related to Xerox's loyalty rebate programs in deciding this motion.
. One such response provides a real-world example of the economic theory advanced by petitioner-defendant in Kodak. It reads: "The phaser is one of the biggest mistakes in equipment purchasing I’ve ever made. It makes strange noises all the time, is unreliablе, and the ink sticks are far too expensive. I would NEVER buy one again or recommend one to anyone else.” (Iburg Dep. Ex. 2, at 5 (emphasis in original).)
In addition to the evidence discussed in the text, Dr. Economides opines that "Xerox printer owners are locked-in because (a) of high switching costs of buying a new printer; and (b) of the long useful life of printers.” (Economides Rep. ¶ 45.) As this assertion is unsupported by data or analysis, it fails to create a genuine issue for trial.
See Major League Baseball Props., Inc. v. Salvino, Inc.,
. In view of this conclusion, the Court does not reach the question of whether Xerox willfully acquired or maintained monopoly power through changes to the design of its printers and ink sticks.