Following the Federal Trade Commission’s 2021 publication of “Nixing the Fix: An FTC Report to Congress on Repair Restrictions,” private “right to repair” cases have multiplied against companies that leverage their market power in a “primary equipment market” (e.g., tractors) to force their customers also to purchase their offerings in “aftermarkets” (e.g., tractor repairs) that otherwise would be competitive. Daniel McCuaig argues that the application of the 1992 Supreme Court decision in Eastman Kodak Co. v. Image Technical Services, Inc. to these cases misunderstands that case and improperly shields monopolists from competitive pressures, including in Epic’s recent case against Apple.
Right To Repair
In its 2021 report to Congress on potentially anticompetitive repair restrictions that some manufacturers impose on purchasers of their equipment, “Nixing the Fix,” the Federal Trade Commission noted that “[m]any consumer products have become harder to fix and maintain” because “[r]epairs today often require specialized tools, difficult-to-obtain parts, and access to proprietary diagnostic software” that manufacturers withhold from both their own customers and independent repair companies. The FTC pledged to redouble its own efforts to root out such restrictions where they served no legitimate purpose and instead simply protected the “primary equipment” manufacturer of, for example, tractors from competition that otherwise would exist in an “aftermarket” for tractor parts or repairs. Private plaintiffs—both excluded independent repair companies and gouged customers—have taken up the charge as well. One thus would expect the “right to repair” to be having a moment. The misapplication by some lower courts of the Supreme Court’s Eastman Kodak Co. v. Image Technical Services, Inc. rubric to cases where the defendant possesses market power in the primary equipment market, however, threatens to foreclose meritorious lawsuits and allow such defendants to leverage dominant positions in the primary equipment market (typically earned by innovation and/or business acumen) into similarly dominant (but unearned) positions in aftermarkets, through which they can extract (unearned and anticompetitive) monopoly rents from their customers.
Ties That Extend Monopolies into Competitive Markets Are Unlawful
In 1947, the Supreme Court upheld an injunction prohibiting the International Salt Company from requiring customers of its patented “Lixator” and “Saltomat” salt-dissolver and salt-injector machines to purchase only International Salt’s rock salt and salt tablets. The Court explained that International Salt’s “patents confer a limited monopoly of the invention they reward. . . . 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.” It thus has been settled law for three quarters of a century that a company with a lawful monopoly in one market may not force customers of that product also to purchase related offerings that otherwise would be subject to competition.
This basic rule was left undisturbed 45 years later when, in Kodak, the Supreme Court addressed for the first time the analytically distinct question “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.”
Indeed, the Kodak Court both favorably cited International Salt’s treatment of “tying in derivative aftermarkets by manufacturers” and expressly reaffirmed “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.”
Kodak Is a Pathway, Not a Barrier
Kodak went beyond the easy case of a monopolist leveraging its position in the primary equipment market into dominance in derivative aftermarkets and explained how tying cases can be meritorious even when the defendant lacks market power in the primary equipment market and instead must compete on the merits for equipment sales. While acknowledging its “intuitive[] appeal[],” the Court rejected Kodak’s argument that, because consumers could purchase photocopiers (i.e., the primary equipment) from some other manufacturer in the competitive market for such machines—and by so doing, avoid the need ever to purchase replacement parts or repair services for a Kodak photocopier (i.e., the aftermarkets)—Kodak should be free to engage in whatever tactics it likes to ensure it dominates the aftermarkets that derive from sales of its photocopiers.
The Court found instead that competition in the primary equipment market cannot discipline behavior in derivative aftermarkets if consumers lack sufficient visibility into aftermarket behavior and pricing until after they’ve committed to their primary equipment purchase. Thus, single-brand derivative aftermarkets can be subject to unlawful ties—even when the primary equipment market is competitive—when consumers are unable to engage in reasonably informed “life-cycle pricing” of the “package” of “equipment, service, and parts” at the time they commit to the durable equipment purchase in the primary equipment market. Some later courts have framed this inquiry as whether consumers are “generally unaware” of the defendant’s restraints in the aftermarkets at the time they make their primary equipment purchases.
Kodak thus established a pathway for challenging anticompetitive ties by companies that lack market power in the primary equipment market; it did not impose new burdens on plaintiffs challenging ties by primary equipment monopolists.
The Ninth Circuit’s Misapplication of Kodak in Epic v. Apple (the “Fortnite Case”)
In Epic v. Apple, Epic, which wanted to avoid paying Apple a 30% commission on all in-app sales made to customers using iPhones and iPads to play Epic’s blockbuster “Fortnite” game, challenged Apple’s policies of restricting app distribution to its own App Store and in-app payment processing to its own payment processor. Epic alleged that those restraints permitted Apple to anticompetitively leverage the market power its iOS devices possess into dominance in the derivative aftermarkets for app distribution and in-app payment processing through unlawful ties. Following a bench trial, the district court rejected Epic’s proposed derivative aftermarkets and also rejected Apple’s proposed “all video game transactions” market, unexpectedly adopting instead a relevant market of its own creation: “mobile-game transactions.” That determination effectively doomed Epic’s Sherman Act claims.
On appeal, the Ninth Circuit was faced with a district court opinion that included a fair few surprising twists and turns, and did a solid job of straightening out most of it. On the question of market definition, though, the Ninth Circuit, applying the deferential “clear error” standard of review (and possibly wishing to avoid finding that the district court answered every doctrinal question incorrectly), upheld the district court’s “mobile-game transactions” relevant market. In rejecting Epic’s proposed derivative aftermarkets, the Ninth Circuit imposed the “general unawareness” requirement from Kodak even though Apple’s control of approximately half of the smartphone and tablet sales in the U.S. easily would support a finding of market power in the primary equipment market—taking the case outside of Kodak’s ambit and positioning it much closer to International Salt.
Even worse, Apple’s only real competitor in the primary equipment market, Google, which owns the Android operating system, also forces its customers into an equivalent walled garden where Google’s app store and its in-app payment processor are the only “choices” for Android phone and tablet users. That smartphone and tablet purchasers are going into one walled garden or the other regardless of their “awareness” of that fact when they purchase their device highlights how silly it is to graft Kodak’s “general unawareness” requirement onto this situation and find it to be the bar to recovery. The notion that competition in the primary equipment market will discipline aftermarket behavior simply cannot hold true when there is no daylight between the aftermarket behavior of a pair of duopolists.
Nor can it hold true, obviously, if the defendant faces no effective constraint on its monopoly power in the primary equipment market. Some district courts recently have gotten this right, such as in Surgical Instrument Serv. Co. v. Intuitive Surgical, Inc., where Judge Chhabria identified that Intuitive’s alleged “monopoly in the [primary equipment] market for surgical robots” meant that its “ability to forbid health care providers from purchasing [derivative aftermarket] refurbishment services from other suppliers flows not from a voluntary choice by health care providers in a competitive [primary equipment] market, but from Intuitive Surgical’s monopoly power [in that market].”
But other courts, such as in Lambrix v. Tesla, Inc., have incorrectly imposed a “general unawareness” requirement notwithstanding plausible allegations of monopoly power. Even In re Deere & Company Repair Service Antitrust Litigation, which correctly rejected Deere’s argument that consumer “unawareness” could be shown only by a change in the defendant’s behavior in the aftermarket (i.e., tractor repairs) after the consumer had purchased the durable equipment (i.e., a tractor), incorrectly imposed that “unawareness” requirement despite finding both that “Deere already has market power in the primary market” and that “Deere’s ‘main competitors’ similarly restrict access to their repair services, so farmers ‘cannot simply purchase new equipment from another manufacturer to avoid these issues.’”
Epic v. Google Will Offer the Ninth Circuit the Opportunity To “Clarify” Epic v. Apple
Fortunately, the Epic v. Google jury wasted little time in finding derivative aftermarkets for app distribution and in-app payment processing analogous to those rejected in Epic v. Apple—and in finding Google liable for violating the Sherman Act. That decision surely will be before the Ninth Circuit shortly. And while the “clear error” standard of review likely will offer the court a path to ignore the tension with Epic v. Apple even as it affirms the jury’s decision holding Google liable for anticompetitive behavior that Apple got away with, it also surely will offer the Ninth Circuit the opportunity to take a mulligan and explain that Kodak’s “general unawareness” requirement is sensible—and thus applies—only when the defendant does not possess market power in the primary equipment market.
Author Disclosure: The author represents a putative class of Intuitive Surgical’s customers in In re da Vinci Surgical Robot Antitrust Litigation, Lead Case No. 3:21-CV-03825-VC, which has been consolidated for purposes of discovery with Surgical Instrument Serv. Co. v. Intuitive Surgical, Inc. and makes similar challenges to the limitations Intuitive Surgical imposes on its customers’ right to repair.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
