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Berkey Photo Inc. v. Eastman Kodak Co.

decided: June 25, 1979.

BERKEY PHOTO, INC., PLAINTIFF-APPELLEE-CROSS APPELLANT,
v.
EASTMAN KODAK COMPANY, DEFENDANT-APPELLANT-CROSS APPELLEE.



Appeal and cross-appeal from a judgment of the United States District Court for the Southern District of New York, Marvin E. Frankel, District Judge. The district court upheld certain jury verdicts in this private antitrust action; set aside others; entered judgment for plaintiff in the amount of $87,091,309.47, comprising attorneys' fees, costs, and treble damages; and decreed certain equitable relief. Affirmed in part, reversed in part, and remanded for further proceedings.

Before Kaufman, Chief Judge, and Smith and Mulligan, Circuit Judges.

Author: Kaufman

INTRODUCTION

To millions of Americans, the name Kodak is virtually synonymous with photography. Founded over a century ago by George Eastman, the Eastman Kodak Company has long been the preeminent firm in the amateur photographic industry. It provides products and services covering every step in the creation of an enduring photographic record from an evanescent image. Snapshots may be taken with a Kodak camera on Kodak film, developed by Kodak's Color Print and Processing Laboratories, and printed on Kodak photographic paper. The firm has rivals at each stage of this process, but in many of them it stands, and has long stood, dominant. It is one of the giants of American enterprise, with international sales of nearly $6 billion in 1977 and pre-tax profits in excess of.$1.2 billion.

This action, one of the largest and most significant private antitrust suits in history, was brought by Berkey Photo, Inc., a far smaller but still prominent participant in the industry. Berkey competes with Kodak in providing photofinishing services the conversion of exposed film into finished prints, slides, or movies. Until 1978, Berkey sold cameras as well. It does not manufacture film, but it does purchase Kodak film for resale to its customers, and it also buys photofinishing equipment and supplies, including color print paper, from Kodak.

The two firms thus stand in a complex, multifaceted relationship, for Kodak has been Berkey's competitor in some markets and its supplier in others. In this action, Berkey claims that every aspect of the association has been infected by Kodak's monopoly power in the film, color print paper, and camera markets, willfully acquired, maintained, and exercised in violation of § 2 of the Sherman Act, 15 U.S.C. § 2. It also charges that Kodak conspired with flashlamp manufacturers in violation of § 1 of the Act, 15 U.S.C. § 1. Berkey alleges that these violations caused it to lose sales in the camera and photofinishing markets and to pay excessive prices to Kodak for film, color print paper, and photofinishing equipment.*fn1 A number of the charges arise from Kodak's 1972 introduction of the 110 photographic system, featuring a "Pocket Instamatic" camera and a new color print film, Kodacolor II, but the case is not limited to that episode. It embraces many of Kodak's activities for the last decade and, indeed, from preceding years as well.

After more than four years of pretrial maneuvering, the trial got under way in July 1977 before Judge Marvin E. Frankel of the Southern District of New York. Despite the daunting complexity of the case the exhibits numbered in the thousands Kodak demanded a jury. Accordingly, the trial was conducted in two parts, one to determine liability and the other to measure damages. It ran continuously, except for a one-month hiatus between the two segments, until the final verdict was rendered on March 22, 1978. The liability phase of the trial by itself consumed more than six months, and the damages aspect required approximately another month. Except for a few specific questions relating primarily to market definitions, the jury was asked to render what was essentially a general verdict on each count.

After deliberating for eight days on liability and five on damages, the jury found for Berkey on virtually every point, awarding damages totalling $37,620,130. Judge Frankel upheld verdicts aggregating $27,154,700 for lost camera and photofinishing sales and for excessive prices on film and photofinishing equipment, but he entered judgment n. o. v. for Kodak on the remainder. Trebled and supplemented by attorneys' fees and costs pursuant to § 4 of the Clayton Act, 15 U.S.C. § 15, Berkey's judgment reached a grand total of $87,091,309.47, with interest, of course, continuing to accrue.

Kodak now appeals this judgment, as well as the two forms of equitable relief that we shall discuss below. It challenges virtually every aspect of the district court proceedings, from the theories of liability and damages presented to the jury to the sufficiency of the evidence to sustain them. It argues, furthermore, that Judge Frankel committed prejudicial error in the conduct of the trial. For its part, Berkey contends that the trial judge erred in not entering judgment on the full amount of the jury's verdict and in computing improperly the costs and fees that Berkey should recover.

Resolution of these competing claims requires us to settle a number of important and novel issues concerning § 2 of the Sherman Act. We believe that the district court committed several significant errors as it charted its course through the complexities of this case, and we are therefore compelled to reverse the judgment below in certain major respects. But we cannot accept Kodak's contention that a properly charged jury could not find monopolization of any of the relevant markets and resulting damage to Berkey. Accordingly, we remand for a new trial on several of the claims.

I. THE AMATEUR PHOTOGRAPHIC INDUSTRY

Before plunging into the welter of issues raised in this appeal, we must understand the industry out of which the litigation arose. It is, of course, a basic principle in the law of monopolization that the first step in a court's analysis must be a definition of the relevant markets. See, e. g., United States v. E. I. du Pont de Nemours & Co., 351 U.S. 377, 391-93, 76 S. Ct. 994, 100 L. Ed. 1264 (1956). Although Kodak does not now challenge the jury's delineation of the markets, a survey of this terrain remains essential. The jury found monopolization or other anticompetitive conduct in no fewer than five distinct markets within the amateur photographic industry, and in several instances Kodak was held to have misused its control over one market to disadvantage rivals in another. Accordingly, to evaluate the verdicts, it is necessary to describe not only the individual markets but also the interrelationships among them.

The principal markets relevant here, each nationwide in scope, are amateur conventional still cameras, conventional photographic film, photofinishing services, photofinishing equipment, and color print paper. The numerous technological interactions among the products and services constituting these markets are manifest. To take an obvious example, not only are both camera and film required to produce a snapshot, but the two must be in compatible "formats." This means that the film must be cut to the right size and spooled in a roll or cartridge that will fit the camera mechanism. Berkey charges that Kodak refused to supply on economical terms film usable with camera formats designed by other manufacturers, thereby exploiting its film monopoly to obstruct its rivals in the camera market. Similarly, Berkey contends, since the emulsions and other constituents of a film determine the chemicals and processes required to develop it, Kodak was able to project its power over film into the photofinishing market as well.

These and other market interactions will be discussed in depth as we analyze the verdicts and rulings below. First, however, we must describe in detail the individual markets themselves.

A. The Camera Market

The "amateur conventional still camera" market now consists almost entirely of the so-called 110 and 126 instant-loading cameras. These are the direct descendants of the popular "box" cameras, the best-known of which was Kodak's so-called "Brownie." Small, simple, and relatively inexpensive, cameras of this type are designed for the mass market rather than for the serious photographer.*fn2

Kodak has long been the dominant firm in the market thus defined. Between 1954 and 1973 it never enjoyed less than 61% Of the annual unit sales, nor less than 64% Of the dollar volume, and in the peak year of 1964, Kodak cameras accounted for 90% Of market revenues. Much of this success is no doubt due to the firm's history of innovation. In 1963 Kodak first marketed the 126 "Instamatic" instant-loading camera,*fn3 and in 1972 it came out with the much smaller 110 "Pocket Instamatic." Not only are these cameras small and light, but they employ film packaged in cartridges that can simply be dropped in the back of the camera, thus obviating the need to load and position a roll manually. Their introduction triggered successive revolutions in the industry. Annual amateur still camera sales in the United States averaged 3.9 million units between 1954 and 1963, with little annual variation. In the first full year after Kodak's introduction of the 126, industry sales leaped 22%, and they took an even larger quantum jump when the 110 came to market. Other camera manufacturers, including Berkey, copied both these inventions but for several months after each introduction anyone desiring to purchase a camera in the new format was perforce remitted to Kodak.

Berkey has been a camera manufacturer since its 1966 acquisition of the Keystone Camera Company, a producer of movie cameras and equipment.*fn4 In 1968 Berkey began to sell amateur still cameras made by other firms, and the following year the Keystone Division commenced manufacturing such cameras itself. From 1970 to 1977, Berkey accounted for 8.2% Of the sales in the camera market in the United States,*fn5 reaching a peak of 10.2% In 1976. In 1978, Berkey sold its camera division and thus abandoned this market.

B. The Film Market

The relevant market for photographic film comprises color print, color slide, color movie, and black-and-white film.*fn6 Kodak's grip on this market is even stronger than its hold on cameras. Since 1952, its annual sales have always exceeded 82% Of the nationwide volume on a unit basis, and 88% In revenues. Foreign competition has recently made some inroads into Kodak's monopoly, but the Rochester firm concedes that it dominated film sales throughout the period relevant to this case. Indeed, in his summation, Kodak's trial counsel told the jury that "the film market . . . has been a market where there has not been price competition and where Kodak has been able to price its products pretty much without regard to the products of competitors."

Kodak's monopoly in the film market is particularly important to this case, because the jury accepted Berkey's contention, noted above, that it had been used to disadvantage rivals in cameras, photofinishing, photofinishing equipment, and other markets. Of special relevance to this finding is the color print film segment of the industry, which Kodak has dominated since it introduced "Kodacolor," the first amateur color print film, in 1942.*fn7 In 1963, when Kodak announced the 126 Instamatic camera, it also brought out a new, faster color print film Kodacolor X which was initially available to amateur photographers only in the 126 format.*fn8 Nine years later, Kodak repeated this pattern with the simultaneous introduction of the 110 Pocket Instamatic and Kodacolor II film. For more than a year, Kodacolor II was made only for 110 cameras, and Kodak has never made any other color print film in the 110 size.

C. Photofinishing Services and Photofinishing Equipment

Before 1954, Kodak's Color Print and Processing Laboratories (CP&P) had a nearly absolute monopoly of color photofinishing maintained by a variety of practices. Accounting for over 95% Of color film sales, Kodak sold every roll with an advance charge for processing included. Consumers had little choice but to purchase Kodak film, and in so doing they acquired the right to have that film developed and printed by CP&P at no further charge. Since few customers would duplicate their costs to procure the services of a non-Kodak photofinisher, Kodak was able to parlay its film monopoly to achieve equivalent market power in photofinishing.*fn9

This film/processing "tie-in" attracted the attention of the Justice Department, and in 1954 a consent decree changed the structure of the color photofinishing market drastically. Kodak was forbidden to link photofinishing to film sales, and it agreed to make its processing technology, chemicals, and paper available to rivals at reasonable rates. As a result, CP&P's share of the market plummeted from 96% In 1954 to 69% Two years later, and it has declined sharply ever since. In 1970, CP&P accounted for but 17% Of the market, and by 1976 its share reached a low of 10%. There are now approximately 600 independent photofinishers in the United States.

Berkey is one of the largest of these processors. It has been a photofinisher since 1933, but until 1954 its principal business was developing and printing black-and-white film.*fn10 In addition, Berkey purchased Kodak black-and-white film, which was sold without a processing tie-in, for resale to its photofinishing customers. After the 1954 decree, Berkey applied to Kodak for the appropriate licenses and in 1956 began to process significant amounts of color film. It now finishes more 126 and 110 color print film than does Kodak.

A variety of equipment is used to process film, and the Kodak Apparatus Division (KAD) designs and produces most of the machinery used by CP&P. Kodak also sells some equipment to other photofinishers, but this is an insignificant portion of its business; indeed, until the introduction of the 110 system, Kodak made still film processing equipment for its own use only. Several other firms supply photofinishing equipment to the rival processors, and Berkey does not contend that Kodak monopolized or attempted to monopolize this market.

D. The Color Paper Market

The market for color paper that is, paper specially treated so that images from color film may be printed on it effectively came into being after entry of the 1954 consent decree. Before then, Kodak was for all practical purposes the only color photofinisher, and its requirements for color paper were met entirely by the paper division of Kodak Park Works in Rochester. The remaining processors, who dealt with non-Kodak color film and used non-Kodak paper, occupied only four percent of the color photofinishing market. Consequently, the vertical foreclosure created by CP&P's lock on photofinishing and its exclusive use of Kodak color paper was virtually complete.

Although the 1954 decree steadily loosened Kodak's grip in photofinishing, it did not immediately affect the firm's control of color paper. For more than a decade, the independent photofinishers that sprang up after the decree was entered looked only to Kodak for their paper supplies. Indeed, although entry by both foreign and domestic paper manufacturers has reduced Kodak's share substantially, to a low of 60% In 1976, the firm's color paper operations have remained remarkably profitable. Between 1968 and 1975, while its market share was falling from 94% To 67%, Kodak's earnings from operations as a percentage of sales remained virtually constant, averaging 60% For the period. Moreover, the most recent telling event in the market has not been entry but exit: GAF Corporation announced in 1977 that it was abandoning its effort to sell color paper, leaving Kodak with only one domestic and two foreign competitors.

Kodak, then, is indeed a titan in its field, and accordingly has almost inevitably invited attack under § 2 of the Sherman Act. Few, if any, cases have presented so many diverse and difficult problems of § 2 analysis. It is appropriate, therefore, to elucidate some fundamental principles of law relating to that statutory provision.

II. § 2 OF THE SHERMAN ACT

The Sherman Antitrust Act of 1890 has been characterized as "a charter of freedom, " Appalachian Coals, Inc. v. United States, 288 U.S. 344, 359, 53 S. Ct. 471, 77 L. Ed. 825 (1933). For nearly ninety years it has engraved in law a firm national policy that the norm for commercial activity must be robust competition. The most frequently invoked section of the Act is the first, which forbids contracts, combinations, or conspiracies in restraint of trade. But the prohibition of § 1 is incomplete, Standard Oil Co. of New Jersey v. United States, 221 U.S. 1, 60-61, 31 S. Ct. 502, 55 L. Ed. 619 (1911), for it only applies to conduct by two or more actors. If sufficiently powerful, however, a single economic entity may also stifle competition. 1 R. Callmann, The Law of Unfair Competition, Trademarks, and Monopolies 341-42 (3d ed. 1967). Accordingly, in § 2 of the Sherman Act, Congress made it unlawful to "monopolize, or attempt to monopolize, or combine or conspire . . . to monopolize" any part of interstate or foreign commerce. It is § 2 to which we give our principal attention in analyzing this case.

In passing the Sherman Act, Congress recognized that it could not enumerate all the activities that would constitute monopolization. Section 2, therefore, in effect conferred upon the federal courts "a new jurisdiction to apply a "common law' against monopolizing." 3 P. Areeda & D. Turner, Antitrust Law 40 (1978). In performing that task, the courts have enunciated certain principles that by now seem almost elementary to any student of antitrust law. But, because § 2 must reconcile divergent and sometimes conflicting policies, it has been difficult to synthesize the parts into a coherent and consistent whole. To provide a framework for deciding the issues presented by this case, therefore, we begin by stating what we conceive to be the fundamental doctrines of § 2.

A. Monopoly Power as the Essence of the § 2 Violation

The gravamen of a charge under § 1 of the Sherman Act is conduct in restraint of trade; no fundamental alteration of market structure is necessary. Thus, certain restrictive practices among competitors, such as price fixing, are illegal Per se. That the conspirators lack the market power to affect prices is immaterial. United States v. Socony-Vacuum Oil Co., 310 U.S. 150, 224 n.59, 60 S. Ct. 811, 84 L. Ed. 1129 (1940). Section 2, by contrast, is aimed primarily not at improper conduct but at a pernicious market structure in which the concentration of power saps the salubrious influence of competition.

Indeed, there is little argument over the principle that existence of monopoly power "the power to control prices or exclude competition," E. I. du Pont de Nemours & Co., supra, 351 U.S. at 391, 76 S. Ct. at 1005 is "the primary requisite to a finding of monopolization." 1 M. Handler, Twenty-five Years of Antitrust 691 (1973). The Supreme Court has informed us that "monopoly power, whether lawfully or unlawfully acquired, may itself constitute an evil and stand condemned under § 2 even though it remains unexercised." United States v. Griffith, 334 U.S. 100, 107, 68 S. Ct. 941, 945, 92 L. Ed. 1236 (1948).

This tenet is well grounded in economic analysis. There is little disagreement that a profit-maximizing monopolist will maintain his prices higher and his output lower and the socially optimal levels that would prevail in a purely competitive market. E. g., F. Scherer, Industrial Market Structure and Economic Performance 13-19 (1970). The price excess represents not a reasonable return on investment but the spoils of the monopolist's power. E.g., L. Sullivan, Handbook of the Law of Antitrust 25-26 (1977); 2 P. Areeda & D. Turner, Supra, at 323-34.

It is not a defense to liability under § 2 that monopoly power has not been used to charge more than a competitive price or extract greater than a reasonable profit. Learned Hand stated the rationale in the Alcoa case, United States v. Aluminum Co. of America, 148 F.2d 416, 427 (2d Cir. 1945). He said in his incisive manner that the Sherman Act is based on the belief:

that possession of unchallenged economic power deadens initiative, discourages thrift and depresses energy; that immunity from competition is a narcotic, and rivalry is a stimulant, to industrial progress; that the spur of constant stress is necessary to counteract an inevitable disposition to let well enough alone.

Judge Hand explained, in addition, that Congress was not "actuated by economic motives alone" in enacting § 2. Id. Considerations of political and social policy form a major part of our aversion to monopolies, for concentration of power in the hands of a few obstructs opportunities for the rest.

Because, like all power, it is laden with the possibility of abuse; because it encourages sloth rather than the active quest for excellence; and because it tends to damage the very fabric of our economy and our society, monopoly power is "inherently evil." United States v. United Shoe Machinery Corp., 110 F. Supp. 295, 345 (D.Mass.1953), Aff'd per curiam, 347 U.S. 521, 74 S. Ct. 699, 98 L. Ed. 910 (1954); See United States v. Grinnell Corp., 236 F. Supp. 244, 258 (D.R.I. 1964), Aff'd in part, 384 U.S. 563, 86 S. Ct. 1698, 16 L. Ed. 2d 778 (1966). If a finding of monopoly power were all that were necessary to complete a violation of § 2, our task in this case would be considerably lightened. Kodak's control of the film and color paper markets clearly reached the level of a monopoly. And, while the issue is a much closer one, it appears that the evidence was sufficient for the jury to find that Kodak possessed such power in the camera market as well.*fn11 But our inquiry into Kodak's liability cannot end there.

B. The Requirement of Anticompetitive Conduct

Despite the generally recognized evils of monopoly power, it is "well settled," See J. von Kalinowski, Antitrust Laws & Trade Regulation P 802(3), at 8-41 (1979), that § 2 does not prohibit monopoly Simpliciter or, as the Supreme Court phrased it in the early landmark case of Standard Oil Co. of New Jersey, supra, 221 U.S. at 62, 31 S. Ct. 502, "monopoly in the concrete."

Thus, while proclaiming vigorously that monopoly power is the evil at which § 2 is aimed, courts have declined to take what would have appeared to be the next logical step declaring monopolies unlawful Per se unless specifically authorized by law. To understand the reason for this, one must comprehend the fundamental tension one might almost say the paradox that is near the heart of § 2. This tension creates much of the confusion surrounding § 2. It makes the cryptic Alcoa opinion a litigant's wishing well, into which, it sometimes seems, one may peer and find nearly anything he wishes.

The conundrum was indicated in characteristically striking prose by Judge Hand, who was not able to resolve it. Having stated that Congress "did not condone "good trusts' and condemn "bad' ones; it forbad all," Alcoa, supra, 148 F.2d at 427, he declared with equal force, "The successful competitor, having been urged to compete, must not be turned upon when he wins," Id. at 430. Hand, therefore, told us that it would be inherently unfair to condemn success when the Sherman Act itself mandates competition. Such a wooden rule, it was feared, might also deprive the leading firm in an industry of the incentive to exert its best efforts. Further success would yield not rewards but legal castigation. The antitrust laws would thus compel the very sloth they were intended to prevent. We must always be mindful lest the Sherman Act be invoked perversely in favor of those who seek protection against the rigors of competition. E.g., Buffalo Courier-Express, Inc. v. Buffalo Evening News, Inc., 601 F.2d 48 (2d Cir. 1979).

In Alcoa the crosscurrents and pulls and tugs of § 2 law were reconciled by noting that, although the firm controlled the aluminum ingot market, "it may not have achieved monopoly; monopoly may have been thrust upon it." 148 F.2d at 429. In examining this language, which would condemn a monopolist unless it is "the passive beneficiary of a monopoly," Id. at 430, we perceive Hand the philosopher. As an operative rule of law, however, the "thrust upon" phrase does not suffice. It has been criticized by scholars, 3 P. Areeda & D. Turner, Supra, at 20; L. Sullivan, Supra, at 96-97; Handler, Some Unresolved Problems of Antitrust, 62 Colum.L.Rev. 930, 934 (1962), and the Supreme Court appears to have abandoned it. See United States v. Grinnell Corp., 384 U.S. 563, 570-71, 86 S. Ct. 1698, 16 L. Ed. 2d 778 (1966); 1 M. Handler, Supra, at 692. Grinnell instructs that after possession of monopoly power is found, the second element of the § 2 offense is "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." 384 U.S. at 570-71, 86 S. Ct. at 1704.

This formulation appears to square with the understanding of the draftsmen of the Sherman Act that § 2 does not condemn one "who merely by superior skill and intelligence . . . got the whole business because nobody could do it as well." United Shoe Machinery Corp., supra, 110 F. Supp. at 341 (quoting legislative history). Thus the statement in Alcoa that even well-behaved monopolies are forbidden by § 2 must be read carefully in context. Its rightful meaning is that, if monopoly power has been acquired or maintained through improper means, the fact that the power has not been used to extract improper benefits provides no succor to the monopolist.

But the law's hostility to monopoly power extends beyond the means of its acquisition. Even if that power has been legitimately acquired, the monopolist may not wield it to prevent or impede competition. Once a firm gains a measure of monopoly power, whether by its own superior competitive skill or because of such actions as restrictive combinations with others, it may discover that the power is capable of being maintained and augmented merely by using it. E. g., Lorain Journal Co. v. United States, 342 U.S. 143, 72 S. Ct. 181, 96 L. Ed. 162 (1951). That is, a firm that has achieved dominance of a market might find its control sufficient to preserve and even extend its market share by excluding or preventing competition. A variety of techniques may be employed to achieve this end predatory pricing, lease-only policies, and exclusive buying arrangements, to list a few.

Even if the origin of the monopoly power was innocent, therefore, the Grinnell rule recognizes that maintaining or extending market control by the exercise of that power is sufficient to complete a violation of § 2. As we have explained, only considerations of fairness and the need to preserve proper economic incentives prevent the condemnation of § 2 from extending even to one who has gained his power by purely competitive means. The district court judge correctly indicated that such a monopolist is tolerated but not cherished. Thus, the rule of Grinnell must be read together with the teaching of Griffith, that the mere existence of monopoly power "whether lawfully or unlawfully acquired," is in itself violative of § 2, "provided it is coupled with the purpose or intent to exercise that power." 334 U.S. at 107, 68 S. Ct. at 945.

The key to analysis, it must be stressed, is the concept of market power. Although power may be derived from size, E. g., United States v. Swift & Co., 286 U.S. 106, 116, 52 S. Ct. 460, 76 L. Ed. 999 (1932), the two are not identical. F. Scherer, Supra, at 352. A firm that has lawfully acquired a monopoly position is not barred from taking advantage of scale economies by constructing, for example, a large and efficient factory. These benefits are a consequence of size and not an exercise of power over the market.*fn12 Nevertheless, many anticompetitive actions are possible or effective only if taken by a firm that dominates its smaller rivals. See Telex Corp. v. International Business Machines Corp., 510 F.2d 894, 925-26 (10th Cir.), Cert. dismissed, 423 U.S. 802, 96 S. Ct. 8, 46 L. Ed. 2d 244 (1975). A classic illustration is an insistence that those who wish to secure a firm's services cease dealing with its competitors. See, e. g., Lorain Journal Co., supra. Such conduct is illegal when taken by a monopolist because it tends to destroy competition, although in the hands of a smaller market participant it might be considered harmless, or even "honestly industrial." Alcoa, supra, 148 F.2d at 431.

In sum, although the principles announced by the § 2 cases often appear to conflict, this much is clear. The mere possession of monopoly power does not Ipso facto condemn a market participant. But, to avoid the proscriptions of § 2, the firm must refrain at all times from conduct directed at smothering competition. This doctrine has two branches. Unlawfully acquired power remains anathema even when kept dormant. And it is no less true that a firm with a legitimately achieved monopoly may not wield the resulting power to tighten its hold on the market.

C. Monopoly Power as a Lever in Other Markets

It is clear that a firm may not employ its market position as a lever to create or attempt to create a monopoly in another market. See, e. g., Griffith, supra; Smith-Kline Corp. v. Eli Lilly & Co., 575 F.2d 1056 (3d Cir.), Cert. denied, 439 U.S. 838, 99 S. Ct. 123, 58 L. Ed. 2d 134 (1978). Kodak, in the period relevant to this suit, was never close to gaining control of the markets for photofinishing equipment or services and could not be held to have attempted to monopolize them.*fn13 Berkey nevertheless contends that Kodak illicitly gained an advantage in these areas by leveraging its power over film and cameras. Accordingly, we must determine whether a firm violates § 2 by using its monopoly power in one market to gain a competitive advantage in another, albeit without an attempt to monopolize the second market. We hold, as did the lower court, that it does.

This conclusion appears to be an inexorable interpretation of the antitrust laws. We tolerate the existence of monopoly power, we repeat, only insofar as necessary to preserve competitive incentives and to be fair to the firm that has attained its position innocently. There is no reason to allow the exercise of such power to the detriment of competition, in either the controlled market or any other. That the competition in the leveraged market may not be destroyed but merely distorted does not make it more palatable. Social and economic effects of an extension of monopoly power militate against such conduct.

The Griffith case confirms this view. There, a chain of motion picture exhibitors operated the only theaters in a number of towns, and used its concomitant buying power to extract from distributors certain exclusive rights in other localities where it faced challengers. The Court held that monopoly power had been illegally used "to beget monopoly," 334 U.S. at 108, 68 S. Ct. 941. Its rationale swept more broadly, however, for it admonished that "the use of monopoly power, however lawfully acquired, to foreclose competition, to gain a competitive advantage, or to destroy a competitor, is unlawful." Id. at 107, 68 S. Ct. at 945.

This rule is linked to the prohibition against tying arrangements in the sale of goods and services. See 3 P. Areeda & D. Turner, Supra, at 223-24. Indeed, in Northern Pacific Railway v. United States, 356 U.S. 1, 11, 78 S. Ct. 514, 2 L. Ed. 2d 545 (1958), the Supreme Court described the "vice" of ties in language evocative of Griffith: "the use of economic power in one market to restrict competition on the merits in another." And to condemn a tie, the market for the tied product need not be monopolized. It suffices that a "substantial" amount of competition is foreclosed. Times-Picayune Publishing Co. v. United States, 345 U.S. 594, 608-09, 73 S. Ct. 872, 97 L. Ed. 1277 (1953); International Salt Co. v. United States, 332 U.S. 392, 396, 68 S. Ct. 12, 92 L. Ed. 20 (1947).

We need not rely solely on policy considerations or an analysis of the Griffith dictum to support the view asserted here. Indeed, whatever problems of murkiness may plague the Alcoa opinion, on this point it is pellucid. The defendant had employed its monopoly power in the ingot market to impose a price squeeze on the manufacturers of aluminum sheet.*fn14 Although this court expressly noted that there was no attempt to monopolize the sheet market, it held the challenged practice to be "an unlawful exercise of "Alcoa's' power." 148 F.2d at 438. A more recent case arriving at the same conclusion is Sargent-Welch Scientific Co. v. Ventron Corp., 567 F.2d 701, 711-13 (7th Cir.), Cert. denied, 439 U.S. 822, 99 S. Ct. 87, 58 L. Ed. 2d 113 (1978). There a manufacturer of precision scientific instruments with a monopoly in the market for electromagnetic microbalances allegedly threatened to refuse to sell these devices to retailers who did not stock its millibalances as well. The court ruled that this practice would violate § 2, even though Ventron did not seek or gain a monopoly in the market for millibalances.*fn15

Accordingly, the use of monopoly power attained in one market to gain a competitive advantage in another is a violation of § 2, even if there has not been an attempt to monopolize the second market. It is the use of economic power that creates the liability. But, as we have indicated, a large firm does not violate § 2 simply by reaping the competitive rewards attributable to its efficient size, nor does an integrated business offend the Sherman Act whenever one of its departments benefits from association with a division possessing a monopoly in its own market. So long as we allow a firm to compete in several fields, we must expect it to seek the competitive advantages of its broad-based activity more efficient production, greater ability to develop complementary products, reduced transaction costs, and so forth. These are gains that accrue to any integrated firm, regardless of its market share, and they cannot by themselves be considered uses of monopoly power.

We shall now apply to the case at bar the principles we have set forth above.

III. THE 110 SYSTEM

We turn now to the events surrounding Kodak's introduction of the 110 photographic system in 1972. In many respects, the factors present here are representative of the case as a whole. They involve four of the five principal markets and provide the basis for several of the damages verdicts upheld by the district court, including the largest, an award of $15,250,000, before trebling, for lost camera sales.

We commented earlier on the camera revolution sparked by Kodak's introduction of the 126 Instamatic in 1963. Ben Berkey, chairman of Berkey Photo, described the camera's cartridge-loading feature as "foolproof" and remarked that the new simple system gave the industry "a great boost." Even before the 126 was introduced, however, Kodak had set its sights on a new, smaller line of Instamatic cameras. The aim of Kodak's Project 30, or P-30, as it was often called, was a camera barely one inch thick but capable of producing photographs as clear and large as its bulkier cousins.

Kodak's desire to produce large, high-quality snapshots from a small camera created successive ripples in a number of ponds. As camera size decreases, so does the area of film exposed when the shutter is opened. Thus the negative must be substantially enlarged to produce a print, and the P-30 group was concerned that the Kodak color print film then in use, Kodacolor X, might not be equal to the task. There was fear that it was too "grainy" that full-size photographs printed from tiny Kodacolor X negatives would have an unacceptably speckled, pebbly appearance, reflecting the extreme magnification of the small light-sensitive grains constituting the film.

The early view at P-30 had been that despite this problem Kodacolor X would prove "quite adequate" for the new format. By 1966, however, the Kodacolor Future System Committee, considering Kodak's film sales in the 126 size as well as in the format being created by Project 30, began actively to consider the possibility of developing a new type of Kodacolor film. This engendered the second set of ripples, for the committee realized that basic changes in the film would require a new photofinishing process, conducted at temperatures higher than those used in the so-called C-22 method by which prints were made from Kodacolor X. Some committee members, therefore, expressed concern about the effect that a new process might have on independent photofinishers, who developed Kodak film and were purchasers of Kodak equipment and supplies. These concerns were shared by a number of Kodak scientists, such as D. M. Zwick, who feared an "unethical" attempt to create a "deliberate . . . incompatibility with systems other than Kodacolor."*fn16

Nevertheless, on May 10, 1967, the committee recommended that Kodak proceed with the development of the new film and finishing process, tentatively labeled P-118. This recommendation was adopted at a meeting of the Kodak management on September 20. Although management believed that many of the film improvements were desirable "without regard to the P-30 program," it decided that Kodak should consider marketing the new film in the P-30 size for approximately one year before introducing it in the 126 format. A firm date was not set at that time for introduction of P-118, but by 1969 Kodak decided that P-118 should be used to help launch the P-30 camera system in March 1972. This decision appears to have been influenced by the views of those Kodak officers who believed that

(without) a new film, the (camera) program is not a new advertisable system. Without the film, our splicer and processors (for the new high-temperature photofinishing process) are not required.

To meet this self-imposed deadline for P-118, Kodak was required to act in great haste. Indeed, the minutes of a Film Process Subcommittee meeting of August 29, 1969, noted that the decision for a 1972 release date required a "crash program" by all participating divisions. Development schedules were altered and some tests eliminated altogether. Not surprisingly, then, as the target date approached, Kodak realized that its new film was plagued by a number of difficulties.

Shortly after initial production runs began in October 1971, Kodak recognized that "several product deficiencies" would exist in the film, now called Kodacolor II, at the time of introduction. Indeed, just eight days before the joint announcement of the new camera, film, and photofinishing process, a technical committee listed eleven "presently identified" problems that could affect "the customer's ultimate quality." Not only did Kodacolor II have a significantly shorter shelf life than had been anticipated, but it also proved grainier than Kodak had originally hoped. This problem was highly significant, of course, because low graininess was supposedly the quality that made Kodacolor II especially suitable for the Pocket Instamatic cameras.*fn17

Despite these deficiencies, Kodak proceeded with its plans for introduction of the 110 system, of which Kodacolor II had become an integral part. On March 16, 1972, amid great fanfare, the system was announced. Finally, said Kodak, there was a "little camera that takes big pictures." Kodacolor II was "a remarkable new film" indeed, the best color negative film Kodak had ever manufactured. There had long been other small cameras, Kodak explained:

But they weren't like these. Now there are films fine enough, and sharp enough, to give you big, sharp pictures from a very small negative.

In accord with Kodak's 1967 plan, Kodacolor II was sold only in the 110 format for eighteen months after introduction. It remains the only 110-size color print film Kodak has ever sold.*fn18

As Kodak had hoped, the 110 system proved to be a dramatic success. In 1972 the system's first year the company sold 2,984,000 Pocket Instamatics, more than 50% Of its sales in the amateur conventional still camera market. The new camera thus accounted in large part for a sharp increase in total market sales, from 6.2 million units in 1971 to 8.2 million in 1972. Rival manufacturers hastened to market their own 110 cameras, but Kodak stood alone until Argus made its first shipment of the "Carefree 110" around Christmas 1972. The next year, although Kodak's competitors sold over 800,000 110 cameras, Kodak retained a firm lead with 5.1 million. Its share of 110 sales did not fall below 50% Until 1976. Meanwhile, by 1973 the 110 had taken over most of the amateur market from the 126, and three years later it accounted for nearly four-fifths of all sales.

Berkey's Keystone division was a late entrant in the 110 sweepstakes, joining the competition only in late 1973. Moreover, because of hasty design, the original models suffered from latent defects, and sales that year were a paltry 42,000. With interest in the 126 dwindling, Keystone thus suffered a net decline of 118,000 unit sales in 1973. The following year, however, it recovered strongly, in large part because improvements in its pocket cameras helped it sell 406,000 units, 7% Of all 110s sold that year.

Berkey contends that the introduction of the 110 system was both an attempt to monopolize and actual monopolization of the camera market. It also alleges that the marketing of the new camera constituted an impermissible leveraging of Kodak's film monopoly into the two photofinishing markets, services and equipment.*fn19

Because the jury returned what amounted to general verdicts for the plaintiff on each of these charges, we are bound in the following discussion to construe the evidence and the possible inferences in the light most favorable to Berkey. See, e. g., Continental Ore Co. v. Union Carbide & Carbon Corp., 370 U.S. 690, 696 & n.6, 82 S. Ct. 1404, 8 L. Ed. 2d 777 (1962). We note En passant, however, that in large and complex cases such as this, involving many novel legal issues, the better practice would have been to require special verdicts or the submission of interrogatories to the jury pursuant to Fed.R.Civ.P. 49. In that way the right to a jury trial of all factual issues is preserved*fn20 while the probability of a laborious and expensive retrial is reduced. See SCM Corp. v. Xerox Corp., 463 F. Supp. 983, 988-90 & nn.13, 15 (D.Conn.1978), Remanded on other grounds, 599 F.2d 32 (2d Cir.1979). Certainly the already difficult task of reviewing a case of this magnitude would have been eased somewhat for this court if we knew precisely what the jury's findings were on several specific factual issues.

A. Attempt to Monopolize and Monopolization of the Camera Market

There is little doubt that the evidence supports the jury's implicit finding that Kodak had monopoly power in cameras.*fn21 The principal issues presented to us regarding the effect of the 110 introduction in the camera market are whether Kodak engaged in anticompetitive conduct and, if so, whether that conduct caused injury to Berkey.

It will be useful at the outset to present the arguments on which Berkey asks us to uphold its verdict:

(1) Kodak, a film and camera monopolist, was in a position to set industry standards. Rivals could not compete effectively without offering products similar to Kodak's. Moreover, Kodak persistently refused to make film available for most formats other than those in which it made cameras. Since cameras are worthless without film, this policy effectively prevented other manufacturers from introducing cameras in new formats. Because of its dominant position astride two markets, and by use of its film monopoly to distort the camera market, Kodak forfeited its own right to reap profits from such innovations without providing its rivals with sufficient advance information to enable them to enter the market with copies of the new product on the day of Kodak's introduction. This is one of several "predisclosure" arguments Berkey has advanced in the course of this litigation.

(2) The simultaneous introduction of the 110 camera and Kodacolor II film, together with a campaign advertising the two jointly, enabled Kodak to garner more camera sales than if it had merely scaled down Kodacolor X to fit the new camera. The jury could conclude that Kodacolor II was an inferior product and not technologically necessary for the success of the 110. In any event, Kodak's film monopoly prevented any other camera manufacturer from marketing such a film-camera "system" and the joint introduction was therefore anticompetitive.

(3) For eighteen months after its introduction, Kodacolor II was available only in the 110 format. Thus it followed that any consumer wishing to use Kodak's "remarkable new film" had to buy a 110 camera. Since Kodak was the leading and at first the only manufacturer of such devices, its camera sales were boosted at the expense of its competitors.

For the reasons explained below, we do not believe any of these contentions is sufficient on the facts of this case to justify an award of damages to Berkey. We therefore reverse this portion of the judgment.

1. Predisclosure

Through the 1960s, Kodak followed a checkered pattern of predisclosing innovations to various segments of the industry. Its purpose on these occasions evidently was to ensure that the industry would be able to meet consumers' demand for the complementary goods and services they would need to enjoy the new Kodak products. But predisclosure would quite obviously also diminish Kodak's share of the auxiliary markets. It was therefore, in the words of Walter Fallon, Kodak's chief executive officer, "a matter of judgment on each and every occasion" whether predisclosure would be for or against Kodak's self-interest. Thus, well before the 1965 introduction of Super-8 movie films, Kodak, which had a relatively small share of the movie camera market, provided sufficient information to companies such as Keystone and Bell & Howell to enable them to make cameras to use the new film. It also released processing information so that photofinishers could develop the film. But in 1963, when Kodak came out with Kodacolor X and the 126 Instamatic, it kept its own counsel until the date of introduction.

As early as 1968, some Kodak employees urged that advance warning of the P-30 system would be needed, at least to film processors and manufacturers of photofinishing equipment, to give them time to prepare for Kodacolor II and the new high-temperature finishing process, which was eventually labeled C-41. One memorandum noted that "P-30 will require more changes in photofinishing techniques than were required for P-13 (the 126 system). These differences . . . seem to indicate a minimum 6 month advance disclosure to other firms."*fn22 Nevertheless, Kodak decided not to release advance information about the new film and format. The decision was evidently based on the perception of Dr. Louis K. Eilers, Kodak's chief executive officer at that time, that Kodak would gain more from being first on the market for the sale of all goods and services related to the 110 system than it would lose from the inability of other photofinishers to process Kodacolor II. An important factor in Eilers's thinking may have been that Kodak had already decided to manufacture the new film initially in the 110 format only. Since Kodacolor II could not be used in any pre-existing cameras, the demand for photofinishing services and equipment in the first several months would be within the capacities of CP&P and KAD.

Although Kodak had most seriously considered divulging advance information of the 110 system to processors and equipment manufacturers, it was a rival camera maker that forced a small breach in its wall of secrecy. In the summer of 1971, Bell & Howell, implicitly threatening legal action, began to pressure Kodak "to notify photographic equipment manufacturers in advance of its introduction of new films or film formats which require changes in equipment design." Harmer Brereton, Kodak's general counsel, insisted in letters to Bell & Howell that such predisclosure was not necessary and would raise legal problems of its own. Nevertheless, afraid that the two companies "were getting ready to get into the ring," Kodak determined to avoid litigation if it could, and it proposed an experimental predisclosure arrangement with the 110 system. On January 3, 1972, Brereton informed Bell & Howell that Kodak would soon introduce "a new cartridge-loading still camera and (slide) projector to accommodate a new film format." More information, Brereton explained, would be forthcoming only for a fee, necessary to compensate Kodak for its "very considerable research and development expenses" and to represent the value of such knowledge to the recipient.

Brereton's letter made clear that the information would be available to other camera makers "on a nondiscriminatory basis," and within the next two weeks Kodak explained the offer to Berkey. For a fee of $10,000 Kodak would provide a general description of the new film format and cartridge, a view of the cartridge and sample prints and slides, the anticipated dates of announcement and commercial introduction, and an outline of the terms on which Kodak would further disclose "such information as we believe will enable you to design and manufacture cameras to accept our new cartridge and film format." Berkey paid the $10,000 fee and also the supplemental fees, totalling $50,000 for eleven sheets of specifications and notes. For the $60,000 Berkey gained somewhat less than two months advance knowledge of information it needed to compete with Kodak in the sale of 110 cameras. The jury could unquestionably conclude that this was far from adequate to permit Berkey to be "at the starting line" when the 110 was introduced.

Judge Frankel did not decide that Kodak should have disclosed the details of the 110 to other camera manufacturers prior to introduction. Instead, he left the ...


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