Sixth Circuit Holds that Differential Pricing May Constitute Tying

Practical Law Legal Update 9-606-5750 (Approx. 3 pages)

Sixth Circuit Holds that Differential Pricing May Constitute Tying

by Practical Law Antitrust

Published on 27 Mar 2015 • USA (National/Federal)

The US Court of Appeals for the Sixth Circuit held in Collins Inkjet Corp. v. Eastman Kodak Co. that Kodak's differential pricing for customers purchasing both its ink and its refurbished printer components was unlawful tying when the price differential discounted the ink to below cost.

On March 25, 2015, the US Court of Appeals for the Sixth Circuit held in Collins Inkjet Corp. v. Eastman Kodak Co. that Kodak's differential pricing policy, in which Kodak gave a discount to customers that bought Kodak's refurbished Versamark printer components as well as Kodak's Versamark ink, was likely non-explicit, unlawful tying if the policy led to Kodak selling the ink below cost (No. 13-cv-00664 (6th Cir. Mar. 25, 2015)). The court upheld a preliminary injunction issued by the US District Court for the Southern District of Ohio prohibiting Kodak from continuing its differential pricing policy.

To be granted a preliminary injunction, a plaintiff must show:

Its likelihood of success on the merits.
The balance of the equities favors a preliminary injunction.

Plaintiffs alleged Kodak was offering different pricing to customers based on whether they bought Kodak's ink in addition to its refurbished printer components, an unlawful tying arrangement in violation of Section 1 of the Sherman Act. Under the policy, customers purchasing both the refurbished printer components (the tying product) and the ink (the tied product) would receive a discount, whereas prices on refurbished printer components were higher for customers purchasing only components and no ink. Collins, Kodak's competitor in the Versamark ink market, alleged that Kodak was using the differential pricing policy and its 100% market share in the refurbished printer component market to coerce customers to buy its ink and ultimately achieve a monopoly in the Versamark ink market. The district court held that because Kodak's policy made it likely that most or all refurbished printer parts customers would switch to Kodak's Versamark ink, the policy constituted unlawful tying in violation of Section 1 and issued a preliminary injunction prohibiting Kodak from maintaining the policy. Kodak appealed.

The Sixth Circuit held that Collins could likely prove that Kodak's pricing policy constituted unlawful tying, and the preliminary injunction was not an abuse of discretion. The court reasoned that Collins was likely to prove that Kodak's differential pricing policy was unlawful tying by showing:

Kodak's market power in the tying product market.
Kodak coerced customers buying the tying product to buy the tied product.

Market Power

The court held that Collins would likely be able to prove Kodak had sufficient market power in the refurbished Versamark printer components market to maintain a tying arrangement with its Versamark ink. Though Kodak admitted it had 100% market share in that market, it argued that it lacked market power because customers could to switch to other printing brands if it raised its prices. However, the court noted that Kodak did likely have market power because:

Information on aftermarket pricing (refurbished parts) was not available to customers when they purchase the primary product (the Versamark printer).
Switching costs are high, sometimes in excess of $2 million.

Coercion

The court held that Collins would also likely be able to prove Kodak's pricing policy coerced tying product buyers to buy the tied product. However, the court held that the standard applied by the district court to determine if Kodak's pricing policy was coercive was incorrect. The district court assessed whether Kodak's policy made it likely that most or all of its customers would switch to Kodak's Versamark ink. The Sixth Circuit noted that differential pricing may be lawfully employed if the tied good is available elsewhere at a price that offsets the discount a customer would have received on the tying product had it purchased the two together.

The court reasoned that the correct standard to determine whether the policy constituted coercive, unlawful tying is whether the differential pricing resulted in Kodak selling the tied product below its cost. When selling a tied item below cost makes it unreasonably difficult or costly for the customer to buy the tying product without also buying the tied product, the seller's actions are coercive.

The court found that Collins will likely be able to prove that Kodak's discount brings the price of its Versamark ink to below cost. The court based its decision in part on Kodak's admission in its appellate brief that it would be more profitable for Kodak if customers bought their ink from Collins and undiscounted refurbished printer components from Kodak, which suggests that Kodak's pricing policy puts its ink price below cost and is therefore coercive.

Other Preliminary Injunction Factors

The court held that, in addition to a strong likelihood that Collins could prove unlawful tying, balancing the equities also supports a preliminary injunction against Kodak's pricing policy. The court reasoned that:

Collins faces the prospect of irreparable harm to its goodwill and competitive position absent an injunction.
An injunction poses little threat to Kodak, as Kodak is still able to compete with Collins on an equal playing field.
An injunction is procompetitive and in the public interest.

For more information on tying, see Practice Note, Customer Loyalty Programs in the US.

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