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UNITED STATES v. EASTMAN KODAK CO.

May 20, 1994

UNITED STATES OF AMERICA, Plaintiff,
v.
EASTMAN KODAK COMPANY, Defendants. UNITED STATES OF AMERICA, Petitioner, v. EASTMAN KODAK COMPANY, A CORPORATION OF NEW JERSEY, AND EASTMAN KODAK COMPANY, A CORPORATION OF NEW YORK, AND OTHERS, Defendants.



The opinion of the court was delivered by: MICHAEL A. TELESCA

 INTRODUCTION

 Therefore, the central issue presented is whether the change of circumstances since 1921 and 1954 warrant either modification or termination of both decrees. The Government, voicing the arguments of various competitors in the photographic industry, objects to any major modification of either decree. The consistent theme of that objection is that, notwithstanding an increased competitive atmosphere in the photographic industry, Kodak's dominance is still directly related to the economic advantage it gained prior to the enactment of both decrees and, therefore, the restraints of both decrees should remain in place. To accept that argument would require me to ignore critical historical changes of the past 73 years, both economic and legal. For the reasons set forth herein, I hold that dramatic changes have taken place in the development of the photographic industry, the global economy and in legal precedent which warrant termination of both the 1921 and 1954 decrees.

 BACKGROUND

 On August 24, 1915, the Honorable John R. Hazel, a member of this Court, issued a decision after an extensive trial, which produced more than 3,000 printed pages of testimony and three volumes of exhibits. That decision found that George Eastman and the Eastman Kodak Company had monopolized the amateur photography industry between 1895 and 1910. United States v. Eastman Kodak Co., 226 F. 62 (W.D.N.Y. 1915) appeal dismissed 255 U.S. 578, 41 S. Ct. 321, 65 L. Ed. 795 (1921). Judge Hazel described the history of the industry and the conduct which he found had violated the antitrust laws. Certain aspects of those findings require restatement.

 1. Eastman's Early Innovations

 In 1878, George Eastman entered the field of photography by selling collodion plates, commonly known as wet plates, which were used to make photographic negatives. Soon afterward in 1881, he organized the Eastman Dry Plate Company and began producing dry plates, a process which involved suspending photosensitive silver halides in gelatin and applying the suspension to a glass plate. While continuing to produce dry plates, Eastman researched more manageable and inexpensive media to support the photosensitive emulsions.

 In 1884 and 1885, Eastman and a partner, William H. Walker, completed research into, and were granted patents for, a system which used a roll of paper to support the photosensitive emulsions and a mechanism to hold that roll within the camera. Although Eastman hoped that this system would gain immediate public acceptance, it was not until 1888 when Eastman produced a camera -- the "Kodak" -- which was commercially successful.

 Although the Kodak camera finally brought photography into the amateur realm, the paper roll was difficult to process, because the paper needed to be detached from the back of the photographic emulsion before the positive image could be transferred to photographic paper. Eastman attempted to produce a transparent negative film that required neither glass nor paper to support the emulsions. Eastman originated the first commercially successful nitrocellulose roll film system by borrowing from and refining the ideas of Rev. Hannibal Goodwin. Eastman and one of his employees, Henry Reichenbach, received patents for this system in 1892. The implementation of celluloid roll film was a major advance in the film industry because it simplified the use of the camera, made processing easier, and finally made photography fully accessible to the general public. The amateur photographic industry was born.

 2. Eastman Kodak's Antitrust Violations

 Eastman's success with the roll film camera and the the general public's increasing demand for the product inevitably brought competition. In the 1890s, competitors began to produce cameras implementing refinements to the film and the camera apparatus developed by Eastman. In addition to improving its cameras and films, Eastman Kodak also worked to enhance the marketing of its products, making them more available to consumers by encouraging drug stores to carry them as a side line. Innovative refinements and increased competition resulted in lowered prices which brought new consumers into the amateur photography market.

 Kodak then began to acquire its camera and film competitors. The Boston Camera Company was acquired in 1895, the American Camera Manufacturing Company in 1898, and the Blair Camera Company in 1899. In his decision of 1915, Judge Hazel found nothing unlawful in the acquisitions of these three companies, although he found that they were the "nucleus from which arose the intention to bring other companies manufacturing and dealing in photographic supplies under its control." 226 F. at 70.

 At approximately the same time, Kodak began to purchase photographic paper suppliers. Kodak purchased at least nine paper companies between 1894 and 1898, and consolidated most of these companies into the General Aristo Company, which remained a subsidiary of Kodak.

 Far more significant in Judge Hazel's decision, however, was the 1898 agreement between Kodak and the General Paper Company of Brussels (which was, at the time, the principal supplier of raw stock for photography paper for the entire world) that, in essence, gave Kodak control of all paper imported into the United States by the General Paper Company. Ultimately and by 1908, Kodak quickly came to control the raw paper industry in the United States.

 Kodak also purchased and consolidated several dry plate manufacturers, stock houses engaged in selling photographic supplies, and plate camera manufacturers between 1890 and 1905. Judge Hazel found that these acquisitions were made with the intent to monopolize. Based upon this finding, Judge Hazel ordered that an antitrust decree be entered remedying Kodak's violation of the antitrust laws.

 3. The 1921 Decree

 Judge Hazel considered all available remedies under the antitrust laws and decided that the relief should forbid future violations of the antitrust laws and also abrogate the illegal monopoly which he had found that Kodak had acquired. Judge Hazel entered a final decree on January 20, 1916, which Kodak thereafter appealed to the Supreme Court. In 1921, Kodak withdrew its appeal and agreed with the Government on the terms of the consent decree which ultimately was issued by Judge Hazel on February 1, 1921 ("the 1921 decree").

 The decree, as drawn, had two essential functions. The first function, which has been satisfied, was short-term relief. Kodak was ordered to sell portions of businesses that it had acquired between 1890 and 1910. These terms of the 1921 decree were satisfied decades ago, and subsequent amendments to the decree reflect Kodak's full compliance.

 4. The 1954 Decree

 The 1954 Consent Decree differs from the 1921 Consent Decree in that it was entered, without an adjudication of facts or law. Although the United States filed a Complaint in the matter, charging Kodak with violating the Sherman Act by its practices relating to the sale of color film throughout the country, the case settled immediately and the consent decree was entered by the Honorable John Knight, another member of this Court.

 The 1954 decree is similar to the 1921 decree in its two functions: first, it mandated short-term action, which required Kodak to introduce Ektachrome-brand slide film, and second, it provided for long-term regulation, which forbade, among other things, "tying or otherwise connecting in any manner the sale of [Kodak's] color film to the processing thereof."

 The transcript of the hearing at which the 1954 decree was adopted reflects an understanding on the part of Kodak, which went unchallenged by the Government, that the decree might be subject to revision in the future. At the hearing, Kodak counsel noted that:

 
The decree is the best that the Government and the company could devise. However, we have both realized that we cannot foresee how the business of processing colored film will develop over the ensuing years. In consenting Eastman Kodak has advised the Government that it may in the future have to appeal to this Court for relief, either on the one hand pursuant to these special provisions contained in the decree, or, secondly, pursuant to the general retention of jurisdiction by this Court which is specifically provided for by Section 17 of the decree, and, third, pursuant to the authority granted to this Court by Rule 60-B of the Rules of Civil Procedure which rule gives the Court broad powers to modify the decree when it is no longer equitable or for any other justifiable relief.

 Kodak argues that the restrictions of the 1954 decree should be removed because circumstances have changed since 1954 and "it is no longer equitable" for them to remain in place.

 5. Decree Modifications

 Both decrees have been modified by this Court in the past. The 1921 decree has been modified four times: on May 8, 1924, May 13, 1926, January 10, 1929, and June 19, 1935. All of these modifications were relatively minor. The 1954 decree was modified once, in 1961, when this Court found that Kodak had satisfied several provisions of that decree. No modification to either decree has been attempted since 1961.

 THE MOTION TO MODIFY OR TERMINATE AND HEARING

 On May 20, 1993, after protracted negotiations failed to produce a result acceptable to both parties, Kodak filed a motion for modification or termination of both the 1921 and 1954 decrees. The Government requested more time to complete its investigation concerning whether the modification or termination of some or all of the provisions of the decrees was appropriate. The Government was granted this time and Kodak's application was held in place. Thereafter, the Government, in a letter to Kodak's counsel concluded that it was their position that termination of Sections VI, VII, and X of the 1921 decree, and Section V of the 1954 decree would be inappropriate. By this, the Government essentially served notice that it intended to oppose the termination of those critical sections of both decrees and a hearing became necessary.

 An order was issued on November 29, 1993, which scheduled the hearing for March 14, 1993. It also required that a notice be published stating the basis of Kodak's request and soliciting comments from the public for a sixty-day period prior to the hearing. Many comments were sent to the Court from politicians, competitors, manufacturer's organizations, and members of the public, expressing positions on both decrees. These comments were filed and have become part of the record.

 PRE-TRIAL MOTIONS

 Kodak filed two additional motions prior to the commencement of the hearing. The first was a motion for summary adjudication of the legal standard to be applied. The second was a motion for summary judgment on Sections VI and VII of the 1921 decree. In a decision issued February 17, 1994, the decision on the motion for summary adjudication was reserved until the conclusion of the hearing on the merits and Kodak's motion for partial summary judgment was denied on the ground that genuine issues of material fact existed.

 PUBLIC COMMENTS

 Through notices in various newspapers, periodicals and the Federal Register, see 58 Fed. Reg. 65398 (Dec. 14, 1993), the public was notified of the hearing on Kodak's motion to vacate the 1921 and 1954 Consent Decrees and was invited to submit relevant comments to this Court. *fn1" The Court received a total of 47 comments in letter and memoranda form from private citizens, politicians, trade associations and corporate rivals of Kodak (some of whom testified against Kodak in this hearing). The comments are divided into two categories -- pro-Kodak and pro-Government -- and a summary of each category is discussed below.

 1. Pro-Kodak

 Not surprisingly, the comments received in favor of vacating the 1921 and 1954 decrees were unanimous in their opinion that the decrees are obsolete and no longer reflect market realities.

 The majority of the comments emphasized that the relevant geographic market for film is global, not national, and that Kodak presently competes at a disadvantage in the domestic film market. Some commentators stated that as the only domestic manufacturer of color negative film, Kodak's hands should be untied and it should be allowed to compete on a "level playing field" with its competitors, most of which are major and highly capitalized foreign corporations. One commentator stated that Kodak is disadvantaged because foreign competition in the domestic film market is government subsidized. Another commentator stressed the unfairness of decrees that favor foreign competition in the United States while domestic corporations are restrained from freely entering foreign markets, e.g., Japan, on equal footing. These commentators believe that Kodak's competitors can now compete in their own right and do not need government protection. It was also expressed that freeing Kodak from the decrees' constraints will permit the consumer to decide which competitors produce the superior product and thus establish market preference.

 Comments were also received from trade associations representing areas in California, Colorado, Ohio, Massachusetts and New York. These comments stressed that recision of the decrees would promote the continued vitality of Kodak and, therefore, is essential to the economic well-being of their states and the nation. Moreover, these commentators were concerned that maintenance of the decrees would cost jobs because it is not likely that Kodak would be able to create new jobs if its business operations were unduly restricted.

 One commentator favored vacating the 1954 decree because he feels photofinishing quality has dropped since the decree was entered. Another felt that consumers were inconvenienced by not being able to purchase film and processing for one price. Another favored vacating the decrees to help Kodak extricate itself from present financial difficulty. Still others argued that retention of the decrees will result in a loss of American jobs and increased taxpayer costs to enforce the decrees.

 2. Pro-Government

 The majority of comments received in favor of retaining the consent decrees were submitted principally by independent photofinishers. One feared that in seeking removal of the 1954 decree, Kodak intends to vertically and horizontally dominate the photofinishing industry. The commentator stated that Qualex's acquisition and/or absorption of the majority of photofinishers in the United States along with Kodak's marketing of the Colorwatch system demonstrates Kodak's tendency to seek a monopoly of photofinishing services. There was a concern that Kodak has marketed the Colorwatch system to minilabs in such a way so as to guarantee itself a greater share of the color paper market. If Kodak is permitted to tie its Colorwatch processing to film sales, it will close out photofinishing competition. The commentator also stated that Qualex now seek to install micro mini labs in stores which would directly compete with current stand-alone minilabs.

 The Court also received comments from mail-order, wholesale and mini lab photofinishers stating that their ability to remain competitive would be impaired should the 1921 and 1954 decrees be vacated. One commentator fears that elimination of the decrees will allow Kodak to sell film, paper and chemicals under exclusive arrangements which would drive out of business smaller concerns who are unable to carry a full line of products. In addition, independent photofinishers fear that, if Kodak is allowed to tie film sales and photoprocessing, they will be foreclosed from processing new Kodak film lines and ultimately will be driven out of business.

 The Court also received lengthy submissions in the form of legal memoranda (in addition to those submitted at the hearing) from some of Kodak's competitors, including Agfa, Konica United States and Fuji Photo Film U.S.A., Inc. They argue that Kodak already has substantial market power in the film and photoprocessing industries and the termination of the decrees will allow Kodak to ultimately monopolize these industries. Konica and Fuji also argue that Kodak has monopoly power in the color paper and photographic chemical markets and oppose termination of that portion of the 1921 decree pertaining to the sale of these items. (The Government does not oppose recision of the decree as to these markets and, therefore, these concerns are not properly before the Court.) The commentators argue that maintenance of the decrees are essential to the economic health of the marketplace.

 These concerns for the most part were also expressed through the testimony of witnesses and introduction of documents from both sides and, therefore, are dealt with in the body of this decision under various headings.

 THE HEARING

 The hearing began on March 14, 1994. Kodak presented several witnesses from inside the company. George Fisher, Kodak's current Chief Executive Officer, testified about the negative effect of the decrees upon Kodak's ability to innovate and compete in a global market. Colby Chandler, an engineer and former CEO of Kodak before retiring in 1990, testified about Kodak's position in the color film and processing market at the time of the entry of the 1954 decree, its attempts to satisfy both decrees, and its current position in the color film processing market. Thomas Busch, General Manager of photofinishing Sales, and David Biehn, Vice president of Consumer Imaging, both testified about Kodak's inability to innovate new products for the market because of the outdated oppressive restrictions of both decrees.

 Three experts in the photographic industry also testified in Kodak's behalf. Herbert Keppler, Publishing Director for Popular Photography and American Photo testified that film tests conducted by his magazine revealed that there were no significant quality differences between Kodak's film and any of its top three competitors -- Fuji, Konica, and Agfa. He also testified that film produced by the Minnesota Mining and Manufacturing Co. ("3M") was of slightly lower quality but at a price point that was significantly lower than its four competitors. Peter Krause, who formerly worked for Agfa and is now a consultant and publisher of industry reports, testified concerning the nature of the film and photofinishing market in general, and specifically the degree of competition present in the film and photofinishing market today. Finally, Donald Becker, a photographic industry consultant and former president of Fox photo, Inc., testified about the historical changes in the photofinishing market from the time he entered the market in 1949 to the present.

 Kodak also presented testimony from two photofinishing providers, Scott Sims and Neil Cohen. Sims, the owner of Scott's Photo, Inc., in Rochester, New York, runs a specialty camera store and minilab at a single location. Cohen is the president of District photo, Inc., which is one of the nation's largest mail-order photofinishers and which also operates mini lab retail outlets in the District of Columbia area.

 The Government principally presented witnesses from Kodak and Qualex's competitors. These included Stephen Logsdon, vice-president of Polaroid's conventional imaging division, Joseph Warren, vice-president of imaging systems for 3M and Paul Hudak, vice-president of photographic markets for Fuju Photo Film, USA. These witnesses testified about their companies' positions in the film industry and stated that relieving Kodak from the constraints of the 1921 decree would adversely impact their ability to compete in the film business.

 Similarly, Margaret A. Weston, CEO of Konica Quality Photo East and David McEowen, president of Fuji TruColor, Indiana, both testified that allowing Kodak to bundle film and photofinishing in ways now prohibited by the 1954 decree would inhibit their ability to compete in the photofinishing market.

 The Government also called Thomas Froom, who is a merchandise manager for the Army and Air Force Exchange Service ("AAFES"). Froom testified that Kodak offered AAFES a premium to stock Kodak film exclusively, and also testified regarding Kodak's Volume Incentive Program ("VIP"), which rewards retail outlets that sell large volumes of Kodak film.

 JURISDICTION

 Jurisdiction over the decrees, and the modification or termination thereof, was expressly reserved by this Court by the terms of Section XVII of the 1954 decree, and by the decision which led to the 1921 decree. See United States v. Eastman Kodak Co., 226 F. at 81. Even without such an express reservation, this Court would still have such power "by force of principles inherent in the jurisdiction of the chancery[, for a] continuing decree of injunction directed to events to come is subject always to adaptation as events may shape the need." United States v. Swift & Co., 286 U.S. 106, 114, 52 S. Ct. 460, 462, 76 L. Ed. 999 (1932).

 THE APPLICABLE STANDARD

 The United States maintains that the applicable standard is set forth in United States v. Swift & Co., 286 U.S. at 119, 52 S. Ct. at 464 which provides that "nothing less than a clear showing of grievous wrong evoked by new and unforeseen conditions" permits modification or termination of an antitrust decree without the government's consent. This standard was further explained in United States v. United Shoe Machinery Corp., 391 U.S. 244, 88 S. Ct. 1496, 20 L. Ed. 2d 562 (1968). The Government argues that no case has explicitly overruled the applicability of Swift to the modification of antitrust decrees and that the recent decision in Rufo v. Inmates of Suffolk County Jail, U.S. , 112 S. Ct. 748 (1992) applies only to decrees in cases involving vindication of public rights, and does not apply to a decree entered against a private entity in an antitrust action.

 Kodak argues that the "less stringent and more flexible" standard stated in Rufo applies, allowing a party to be relieved from a decree when it is no longer equitable for it to have prospective application. It also argues that later decisions have limited the Swift holding, almost to its facts and further that the two-part standard set forth in Rufo should be applied. That standard requires the party seeking modification to "establish[] that a significant change in circumstances warrants revision of the decree." If that standard is met, "the court should consider whether the proposed modification is suitably tailored to the changed circumstances." Rufo, 112 S. Ct. at 760.

 The standard for relief from a consent decree is not the rigid Swift standard that the Government urges, but is instead a more flexible standard that allows a party to be relieved from a decree when it is no longer equitable to enforce that decree. Several sources support this view. The first is Federal Rule of Civil Procedure 60(b). That rule states that:

 
On motion and upon such terms as are just, the court may relieve a party from a judgment order or proceeding for the following reasons:
 
* * *
 
(5) the judgment has been satisfied, released, or discharged, or a prior judgment upon which it is based has been reversed or otherwise vacated, or it is no longer equitable that the judgment should have prospective application; or (6) any other reason justifying relief from the operation of the judgment.
 
(Emphasis added.)

 The Rule is only the starting point for the inquiry, however. Supreme Court and Second Circuit precedents strongly support the proposition that the Swift standard is not to be applied mechanically or stringently.

 In United Shoe, 391 U.S. at 248, 88 S. Ct. at 1499, for example, the Supreme Court emphasized the unique facts of Swift, and particularly the situation which created the need for the decree. The Court emphasized that "the [Swift] decree must, of course, be read in light of this context." Id. The Court noted that the market conditions which existed at the time of the Swift decree were relatively unchanged and that there was still a danger of unlawful restraint of trade.

 Examination of the particular facts of Swift reveals that the defendants in that case were a closely-aligned group of major meat packers who had controlled the market for meat and groceries through horizontal agreements and control of the rail transportation of groceries. These defendants used a variety of means to attempt to circumvent the decrees while they were in place, and even succeeded to the extent that they managed to convince the Supreme Court of California to stay the decree pending further litigation for nearly four of those ten years. This stay was overturned by the Supreme Court about one year before the defendants brought the motion to terminate that was the subject of the Swift decision. United States v. California Cooperative Canneries, 279 U.S. 553, 49 S. Ct. 423, 73 L. Ed. 838 (1929). It was in this context that the Supreme Court examined the equities of decree termination, and the strong language used by the Supreme Court to maintain the decree had its source, at least in part, in the repeated attempts by the defendants to circumvent or overturn the decree.

 The Second Circuit, recognizing that Swift was limited to the unique facts of that case, has consistently leaned toward implementing a more flexible standard. This standard was set forth in King-Seeley Thermos Co. v. Aladdin Industries, Inc., 418 F.2d 31 (2d Cir. 1969) and New York State Ass'n for Retarded Children v. Carey, 706 F.2d 956 (2d Cir.), cert. denied, 464 U.S. 915, 78 L. Ed. 2d 257, 104 S. Ct. 277 (1983). In King-Seeley, Judge Friendly held that a court was "free to grant relief" if "modification was necessary to achieve the results intended, even though this would take the form of reducing the restrictions imposed upon [the defendant]." King-Seeley, 418 F.2d at 35.

 The most compelling reason for adopting the flexible standard, however, arises from the recent Supreme Court decision in Rufo v. Inmates of Suffolk County Jail, U.S. , 112 S. Ct. 748 (1992). The Court in Rufo noted once again that Swift must be read in the context of the situation that gave rise to the case, and emphasized that although some conditions in the market affected by the decree in Swift had changed, the defendants were "positioned to manipulate . . . prices in 1930, just as they had been in 1920." Rufo, U.S. , 112 S. Ct. at 757. After quoting the "grievous wrong" standard, the Rufo court stated that "read out of context, this language suggests a 'hardening' of the traditional flexible standard for modification of consent decrees, [but] that conclusion does not follow when the standard is read in context." Id. at 757-58. The Court elaborated that "our decisions since Swift reinforce the conclusion that the 'grievous wrong' language of Swift was not intended to take on a talismanic quality, warding off virtually all efforts to modify consent decrees." Id. at 758. The Court then set out what Kodak argues is the appropriate standard to apply in this case: "[A] party seeking modification of a consent decree bears the burden of establishing that a significant change in circumstances warrants revision of the decree. If the moving party meets this standard, the court should consider whether the proposed modification is suitably tailored to the changed circumstances." Id. at 760.

 While Rufo was primarily aimed at institutional reform decrees, the Second Circuit has applied the Rufo test broadly. It has held that Rufo applies not only in institutional litigation against government entities, but in other cases where equitable relief is applied. In Still's Pharmacy v. Cuomo, for example, the Second Circuit applied Rufo to a modification of a settlement agreement concerning the method of calculating state Medicaid reimbursements to pharmacists.

 More recently, in Patterson v. Newspaper & Mail Deliverers' Union, 13 F.3d 33 (2d Cir. 1993), the Second Circuit approved the use of Rufo in a motion to terminate a consent decree in a civil rights action. In that decision, Chief Judge Newman examined Rufo and the cases which interpreted it, and concluded that:

 
The flexible standard outlined in . . . Rufo is not limited to cases in which institutional reform is achieved in litigation brought directly against a governmental entity. The "institution" sought to be reformed need not be an instrumentality of government. If a decree seeks pervasive change in long-established practices affecting a large number of people, and the changes are sought to vindicate significant rights of a public nature, it is appropriate to apply a flexible standard in determining when modification or termination should be ordered in light of either changed circumstances or substantial attainment of the decree's objective.

 Patterson, 13 F.3d at 38.

 The Seventh Circuit has gone even further -- flatly declaring that Rufo gave the "coup de grace " to Swift and that Rufo's flexible standard is "no less suitable to other types of equitable case." In re Hendrix, 986 F.2d 195, 198 (7th Cir. 1993).

 Two recent district court decisions also support the conclusion that Rufo's "flexible standard" applies to modification of antitrust decrees. First, in United States v. Agri-Mark, Inc., 1994-1 Trade Cas. P 70,512, 1994 WL 88979 (D. Vt. 1994), which involved the modification of an antitrust decree entered pursuant to the Clayton Act, Judge Billings rejected the Government's argument that the Swift standard should ...


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