Northern District Of California Rules That A Relevant Market Cannot Be Defined Based Solely On Contractually Obligated Customers Of The Supplier Of A Non-Unique Product

In Newcal Indus., Inc. v. IKON Office Solutions, Inc., 2004 U.S. Dist. LEXIS 26229 (N.D. Cal. December 23, 2004), plaintiff suppliers and service providers of copiers alleged that defendant IKON, also a supplier and service provider of copiers, fraudulently obtains amendments to its existing contracts with customers that extend the period of time that these customers are under contract with IKON. According to the plaintiffs, these fraudulently obtained contract extensions reduced the ability of plaintiffs to make deals with IKON customers to replace IKON copier equipment. Such a foreclosure of competition for the business of IKON customers, the plaintiffs contended, violated Sections 1 and 2 of the Sherman Act. IKON moved for dismissal for failure to state a claim, arguing that the plaintiffs failed to allege a legally sufficient market.

In considering IKON’s motion, Judge Fern Smith of the District Court first noted that plaintiffs asserting claims under Sections 1 and 2 of the Sherman Act must show that the defendant has market power in the relevant product market. The court also took notice of the long-recognized principle that products are in the same market if there is reasonable interchangeability of use between the products. The plaintiffs in this case proposed four relevant markets: (1) the interbrand market for copier equipment; (2) the market for the sale and financing of additional copier equipment with customers for whom IKON has similar equipment placed; (3) the market for the sale and financing of replacement copier equipment previously placed, serviced, financed, and administered by IKON pursuant to a multi-year IKON contract; and (4) the markets for parts, service and supplies for each brand of copier equipment placed, serviced, financed, and administered by IKON pursuant to a multi-year IKON contract.

With respect to the plaintiffs’ first proposed market, Judge Smith noted that the plaintiffs’ complaint failed to allege that IKON had market power in the interbrand market for copier equipment. The court also observed that plaintiffs’ allegations were actually based on the second, third and fourth markets proposed by the plaintiffs. As such, plaintiffs’ allegation of an interbrand market for copier equipment was not sufficient to defeat a motion to dismiss for failure to state a claim.

The remaining proposed markets were all limited to customers that have contracts with IKON. The court rejected these proposed markets, citing Queen City Pizza, Inc. v. Domino’s Pizza, Inc., 124 F.3d 430 (3rd Cir. 1997), for the proposition that “[a] court making a relevant market determination looks not to the contractual constraints assumed by a particular plaintiff when determining whether a product is interchangeable, but to the uses to which the product is put by consumers in general.” Judge Smith observed that the copier equipment and services offered by IKON’s competitors were reasonably interchangeable with the copier equipment and services provided by IKON to its customers. Since customers of IKON could have chosen any one of several competing companies to contract with for copier equipment and the only restraints on their ability to contract with other companies are the contractual obligations they elected to undertake with IKON, the relevant market must include IKON’s competitors and cannot be defined based only on customers who are under contract with IKON.

The plaintiffs cited Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 451 (1992), for the proposition that a relevant market may be defined by the customers of a single company. The court, however, distinguished that case, observing that a separate market may have existed for replacement parts of Kodak-brand copier machines because the replacement parts were unique whereas the copier equipment and services provided by IKON are interchangeable with the copier equipment and services of other companies. In other words, unlike the situation in Eastman Kodak, it is only the contract itself that requires IKON’s customers to purchase from IKON, not the market power over a unique, non-substitutable product enjoyed by Kodak.

The plaintiffs also argued that IKON customers, like Kodak’s customers, do not have sufficient information to assess the lifetime cost of buying and servicing equipment sold by IKON because of the fraudulent way in which IKON extends the terms of customer contracts and face high switching costs once they become contractually bound as a result of IKON’s fraud. Judge Smith dismissed this argument by citing Queen City Pizza’s observation that switching and information costs alone do not create market power; rather, it is the lack of a competitive market that gives a company market power. To the extent IKON obtained the contractual rights that prevent its customers from purchasing from other copier companies through fraud, Judge Smith observed, the proper remedy is in contract law.

Finally, the court added that other circuits besides the Third Circuit have rejected attempts to define relevant markets in terms of customers under contract. In Forsyth v. Humana, Inc., 114 F.3d 1467 (9th cir. 1997), for example, the Ninth Circuit rejected the plaintiffs’ attempt to limit the relevant market to acute care hospitals that the insureds used because of contractual restrictions in their policies. Similarly, in Hack v. Yale College, 237 F.3d 81 (2nd Cir. 2000), the Second Circuit rejected a market definition based on “a contractually created class of customers: unmarried freshmen and sophomores below the age of 21.”

Authored by:

Carlton A. Varner

213-617-4146

cvarner@sheppardmullin.com