Competitors of a copier equipment provider, IKON Office Solution ("IKON") alleged that defendant IKON used "fraudulent practices" to secure and lengthen its customer contracts, and thus reducing the ability of competing copier equipment providers to contest for "aftermarket" business.  The district court granted a motion to dismiss pursuant to FRCP 12(b)(6), on the ground that IKON did not have market power over a "unique" product or service, and that any control that it had acquired over its customers was a function of contract, and not market power.  The district court distinguished Eastman Kodak Co. v. Image Technical Services, Inc.,[1] and relied on the decision of the Third Circuit in Queen City Pizza, Inc. v. Domino’s Pizza, Inc.[2]  The court held that the parties copier equipment was interchangeable, and thus within the same relevant market.  It was only the defendant’s customer contracts that prevented plaintiffs from attempting to gain aftermarket business from defendant’s customers.

[1] 504 U.S. 451 (1992)

[2] 124 F.3d 430 (3d Cir. 1997).

The Ninth Circuit reversed, and held that pursuant to Kodak, the allegations of market imperfections, and IKON’s alleged conduct of fraudulently inducing customers to extend their contracts through amendments, which they could not have reasonably foreseen or perceived, was a closer factual analogy to Kodak, rather than Queen City Pizza.  Thus, there was a genuine issue of fact whether the alleged market power flowed from the contractual terms between defendant and its customers, or from traditional acts of exclusionary conduct, that differentiated the single product market from a broader market of interchangeable, competing products.  Newcal Industries, Inc. v. IKON Office Solution, No. 05-16208, January 23, 2008 (9th Cir. 2008).

In a first amended complaint, Newcal listed four product markets, which included (1) replacement copier equipment for IKON and GE customers, with "flexed IKON contracts", (2) copier service for these contracts, (3) copier service for Cannon and RICOH brand copier equipment, and (4) copier equipment.  While the court found the latter two markets were implausible, because Newcal did not allege that IKON held market power in the nationwide market for copier equipment leases, it nevertheless stated a claim upon which relief could be granted in replacement copier equipment for IKON and GE flexed IKON contracts, and copier service on these contracts.  In essence, the fraudulent acts that extended the agreements were "Kodak" changes that mutated the relevant market from a competitive product and services market, to a monopolistic aftermarket.  The court held that the first amended complaint properly alleged a relevant market consisting of a derivative aftermarket for replacement equipment.  In Queen City Pizza, the court adapted the Klein & Saft analysis that the relevant market must be viewed as of the time of the formation of a franchise contract, and that the relevant market must therefore include all plausibly foreseeable economic franchise opportunities available to the potential franchisee.[1]  While the relevant market analysis set forth in Queen City Pizza has been widely followed in franchise antitrust cases, there is a window of a "Kodak moment" where the factual allegations of a complaint are on "all fours" with Kodak and where there are proper allegations of post contract formation "opportunism", that were not reasonably foreseeable or in contemplation at the time of formation.[2]  Here, the allegations of aftermarket opportunism led the Ninth Circuit to conclude that the case read on Kodak, and not on Queen City Pizza.[3]  And here, there were purchase and service contracts, but no "franchise."[4]

In an enigmatic and somewhat metaphysical analysis, the court held that allegations of fraudulent contract opportunism warranted the conclusion that the defendant’s market power was a function of market imperfection and the lack of substitutability, rather than from a contract itself.  Noting that the new lease on life for the complaint may be somewhat fleeting, the court noted that nothing in its decision, guaranties that – or even speaks of whether – Newcal’s complaint will "survive" summary judgment.  Thus, the application of Kodak may indeed be a "Kodak moment."  An issue that may be decided on summary judgment is whether the contract opportunism allegations are such that they could not have been anticipated at the time of formation.  We will see.[5]

Authored by:

Don T. Hibner, Jr.


[1] See Benjamin Klein & Lester F. Saft, "The Law and Economics of Franchise Tying Contracts", 28 J.L. & Econ. 345 (1985).  See also, Mozart Co. v. Mercedes-Benz of North America, 833 F.2d 1342 (9th Cir. 1987), and Tominaga v. Shepherd, 682 F.Supp 1489 (C.D. Cal. 1988).

[2] See, e.g., Westerfield v. The Quizno’s Franchise Co., LLC, 2007-2 Trade Law (CCH) ¶ 75942, (ED Wis. 2007).  See also, David A.J. Goldfine & Kenneth M. Vorrasi, "The Fall of the Kodak Aftermarket Doctrine:  Dying a Slow Death in the Lower Courts," 72 Antitrust LJ 209 (2004).

[3] The court also held that there were proper allegations of a "submarket" according to the "practical indicia" of an independent economic entity, pursuant to Brown Shoe Co. v. United States, 370 US 294, 325 (1962).

[4]  See, e.g., Exxon Corp. v. Superior Court, 51 Cal. App. 4th 1672 (1997).

[5] It is intuitive, that at some point every contract must end, and that there will be a period of "aftermarket opportunism", that will then be availing to the supplier.  Based upon the analysis of Klein & Saft, and the line of cases that have held that relevant market determinations are to be evaluated at the pre-contract stage, absent evidence of a change of position by the contract supplier, contracts, and not antitrust principles should apply.  As Justice Brandeis observed 90 years ago in Chicago Board of Trade, "every agreement concerning trade…restrains.  [It] is of their very essence."  Chicago Board of Trade v. United States, 246 U.S. 231, 239 (1918).  It should also be noted that "fraud in the inducement" is introduced to law students in an introductory "Contract Remedies" course, generally before a law school course in antitrust law.