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Xerox Corp. v. Media Sciences

September 30, 2009


The opinion of the court was delivered by: Richard J. Holwell, District Judge



This litigation 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 replacement 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.


Unless otherwise noted, the following facts are undisputed.

A.The Market for Color Workgroup Printers and Ink Sticks

Xerox manufactures a variety of workgroup printers, including laser printers, phase change color printers, and multi-function 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 competes with a number of original equipment manufacturers, including Hewlett Packard ("HP"), Lexmark, and Okidata. (Kerr Rep. ¶ 28.)*fn1 Xerox's share of total revenues in this market is approximately twenty-four percent. (Kerr Report Ex. 7.) MSI has conceded, and the record overwhelmingly suggests, that "Xerox lacks market power in the primary market for color printers . . . ." (MSI Resps. to Pl.'s Second Set of Interrogs. ¶ 22; see also MSICountercls. ¶ 44; Kerr Rep. ¶¶ 30, 50.)

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 workgroup 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, i.e., "the power to control prices or exclude competition." (Economides Rep. ¶ 35; see United States v. E. I. du Pont de Nemours & Co., 351 U.S. 377, 391 (1956).) Professor Economides notes that printers and ink are not substitutes; a consumer shopping for a printer obviously would not buy ink in its place. (Economides Rep. ¶ 33.) In addition, the purchase of a printer requires a sizeable expenditure-up to $3,100, for a multi-function device. (See ¶ 35.) Thus, Professor Economides opines that a consumer who has purchased a Xerox printer is "locked-in" "in the sense that [she] cannot easily and costlessly change printers if the realized prices of post-printer-purchase ink are high or higher than expected" (id.), and that Xerox can and does exact monopoly rents from such consumers (see ¶ 38). MSI contends that a survey response produced from Xerox's files provides compelling evidence of Xerox's monopoly power. (See MSI Mem. 9-10.) In this document, a customer complains that although he is dissatisfied with the print quality of his Xerox printer, there is little he can do because he does not want to forfeit his upfront investment. (Iburg Dep. Ex. 2, at 5.)

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%.*fn2 There is no evidence, however, of any corresponding drop in printer sales. (Economides Rep. ¶ 50; Iburg Dep. 67-68, Herbert Decl. Exs. 5, 6; Draz Decl. 2-5, Apr. 28, 2009.) In MSI's view, this indicates that the ink-stick and printer markets are not integrated, and that the alleged competition in the printer market fails to discipline Xerox's pricing decisions in the ink-stick market. MSI also disputes Xerox's claim that consumers are able to calculate the lifecycle costs of purchasing and operating a color printer. (Economides Rep. ¶ 45.) MSI contends that in the absence of such information, Xerox is better able to maintain monopolistic ink-stick prices.

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.,, 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 charge 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. ΒΆ 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 ...

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