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Slide 1

Kodak logo medium

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

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

Surgeons reviewing x-rays Satellite image of man-made structure A butterfly on two screens Yellow square Little girl in water Film strips
Yellow square Man in office retrieving pages from a printer Colorful brochures Lobster with garnish on a plate Woman standing at Kodak photo processing terminal Yellow square

February 13, 2007


Slide 2

Kodak and Section 2 of the Sherman Act

Kodak and Section 2 of the Sherman Act Timeline

[D]


Slide 3

Kodak Business Model Evolution

Undated vintage newspaper advertisement for the Brownie cameraUndated vintage magazine advertisement for the Kodak Instamatic camera. A man and woman reviewing a color print in front of a work station and printer Kodak color photo printer Kodak photo kiosk
Box of Kodak MAX film Commercial photo processing workstation Microchip
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
Kodak digital camera

Large red arrow pointing right
1880s-1970s     1970s-1990s     2000s-?


Slide 4

Critical Success Factors to Digital Model

Speed of innovation and technology development

Cross licensing of intellectual property

Ability to sell solutions

Kodak color photo printer and paper packagesKODAK EASYSHARE Photo Frame Dock


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


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


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

 


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


Slide 9

Impact of Section 2 Uncertainty on Digital Model

Uncertainty and risk:
Hypothetical Transactions

Kodak photo kiosk

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?

Kodak digital camera

Digital Camera IP

  • Can Kodak refuse to license digital camera patents to competitors?

  • Can licenses be bundled with discounted Kodak software?

Kodak Easy Share Gallery logo

On-line Photo Service

  • Can Kodak Gallery offer discounts on photo fulfillment services to customers who store a fixed number images on our servers?

Unified Woekflow Solutions logo

Graphics Solution

  • Can Kodak Graphic Communications offer a workflow solution that combines digital equipment, software, consumables and consulting services at a bundled price?


Slide 10

Kodak logo large
Surgeons reviewing x-rays Satellite image of man-made structure A butterfly on two screens Yellow square Little girl in water Film strips
Yellow square 	Man in office retrieving pages from a printer Colorful brochures Lobster with garnish on a plate Woman standing at Kodak photo processing terminal Yellow square