Joint FTC-DoJ Hearings On Section 2 Of The Sherman Act

Slide 1

Joint FTC-DoJ Hearings
on Section 2 of the Sherman Act

Testimony of Patrick M. Sheller
Chief Compliance Officer
Eastman Kodak Company

February 13, 2007

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Slide 2

Kodak and Section 2 of the Sherman Act

[D]

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Slide 3

Kodak Business Model Evolution
 

Focus on Consumables Cameras + Film, Paper & Chemicals	Hardware + Service Copiers/Micrographics units + Aftermarket Service	Solution Sales Printers + Media/Ink + Sensors + Software + Professional Services + Aftermarket Service

1880s-1970s     1970s-1990s     2000s-?

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Slide 4

Critical Success Factors to Digital Model

Speed of innovation and technology development

Cross licensing of intellectual property

Ability to sell solutions

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Slide 5

Potential Section 2 Impediments

Delayed recognition of market changes

Line between tying and bundling has blurred

• LePagesv. 3M

Obstacles to IP protection and licensing

• ITS v. Kodak (9thCircuit)
• European Commission precedent
  • Compulsory licensing

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Slide 6

Uncertainty in the Wake of LePages

Above cost bundled discounts can be exclusionary under Section 2

• BrookeGroup does not apply
• Exclusionary effect = harm to "one significant competitor"

Clearly permissible discounting practices?

• Single product volume discounts

At risk:

• Discounts linking products across multiple markets
• Discounts linking products within a single line
  • E.g. branded and private label tape

No Coherent Standard to Evaluate Bundled Pricing

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Slide 7

Alternative Approaches to Bundling

Concord Boat (8thCircuit)

• Above cost single-product discounts are not exclusionary (apply Brooke Group)

Ortho Diagnostic Systems (S.D.N.Y.)

• Could an equally efficient competitor to the monopolist profitably match its bundled discounts?

To prohibit above-cost discounting creates “intolerable risks of chilling legitimate price-cutting.”Brooke Group

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Slide 8

Split Among the Circuits on IP Rights

9thCircuit in ITS v. Kodak (1997)

• Presumptively valid business justification for refusing to license/sell IP rights can be rebutted by evidence that justification was a pretext for anticompetitive motives

Federal Circuit in Xerox v. CSU(2001)

• Absent tying, fraud or sham litigation, "we will not inquire into the patentee's motivations for asserting his statutory right to exclude."
• Same rationale extended to refusals to license copyright protected works

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Slide 9

Impact of Section 2 Uncertainty on Digital Model

Uncertainty and risk:

Hypothetical Transactions	Photo Kiosks	Can Kodak offer retailers bundled discounts on kiosks, media and service? Can we include digital camera discounts in bundle? Can Kodak refuse to license patented parts, diagnostic software, service manuals to ISOs?
	Digital Camera IP	Can Kodak refuse to license digital camera patents to competitors? Can licenses be bundled with discounted Kodak software?
	On-line Photo Service	Can Kodak Gallery offer discounts on photo fulfillment services to customers who store a fixed number images on our servers?
	Graphics Solution	Can Kodak Graphic Communications offer a workflow solution that combines digital equipment, software, consumables and consulting services at a bundled price?

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Slide 10