Case Study:
Newcal Industries, Inc. v. Ikon Office Solutions
United States Court of Appeals, Ninth Circuit
Newcal Industries (Plaintiff-Appellant) and Ikon Office Solutions (IKON) Defendant-Respondent) compete in the brand-name copier equipment-leasing market for commercial customers and in the provision of service.
When a lease approaches its term, these companies compete for the lease of upgraded copier equipment. When a service contract approaches its term, these companies also compete to buy out the service contract in order to provide another one. Newcal alleged that IKON “tricked” its customers by amending its lease agreements and service contracts without disclosing that such amendments would lengthen the terms of the original agreements. The purpose of these contract extensions was to shield IKON customers from competition in the aftermarkets for upgraded copier equipment and service agreements. When IKON succeeded in extending the terms of the original contract, it was able to raise that contract’s value. Consequently, Newcal and other competitors had to pay higher prices to buy out such contracts in the aftermarkets for upgraded equipment and services. Newcal brought claims under the Sherman Act, alleging antitrust violations. The district court held that Newcal had failed to allege a legally recognizable “relevant market” under the Sherman Act. Newcal appealed.
Justice Thomas
First and foremost, the relevant market must be a product market. The consumers do not define the boundaries of the market; the products or producers do. Second, the market must encompass the product at issue as well as all economic substitutes for the product. As the Supreme Court has instructed, “The outer boundaries of a product market are determined by the reasonable interchangeability of use between the product itself and substitutes for it.” As such, the relevant market must include all economic substitutes; it is legally permissible to premise antitrust allegations on a submarket. That is, an antitrust claim may, under certain circumstances, allege restraints of trade within or monopolization of a small part of the general market of substitutable products. In order to establish the existence of a legally cognizable submarket, the plaintiff must be able to show (but need not necessarily establish in the complaint) that the alleged submarket is economically distinct from the general product market. In [another case], the Supreme Court listed several “practical indicia” of an economically distinct submarket: “industry or public recognition of the submarket as a separate economic entity the product’s peculiar characteristics and uses, unique production facilities, distinct customers, distinct prices, sensitivity to price changes and specialized vendors.”
First, the law permits an antitrust claimant to restrict the relevant market to a single brand of the product at issue. Second, the law prohibits an antitrust claimant from resting on market power that arises solely from contractual rights that consumers knowingly and voluntarily gave to the defendant. Third, in determining whether the defendant’s market power falls in the category of contractually-created market power or in the category of economic market power, the law permits an inquiry into whether a consumer’s selection of a particular brand in the competitive market is the functional equivalent of a contractual commitment, giving that brand an agreed-upon right to monopolize its consumers in an aftermarket. The law permits an inquiry into whether consumers entered into such “contracts” knowing that they were agreeing to such a commitment.
The relevance of this point to the legal viability of Newcal’s market definition may not be intuitively obvious, but it is nevertheless significant. IKON has a contractuallycreated monopoly over services provided under original IKON contracts. That contractually-created monopoly then gives IKON a unique relationship with those consumers, and the contractual relationship gives IKON a unique position in the wholly derivative aftermarket for replacement equipment and lease-end services. The allegation here is that IKON is exploiting its unique position—its unique contractual relationship—to gain monopoly power in a derivative aftermarket in which its power is not contractually mandated.
This case is not a case in which the alleged market power flows from contractual exclusivity. IKON is not simply enforcing a contractual provision that gives it the exclusive right to provide replacement equipment and lease-end services. Rather, it is leveraging a special relationship with its contracting partners to restrain trade in a wholly derivative aftermarket. We therefore reverse the district court’s holding that Newcal’s complaint is legally invalid.
That holding, however, does not quite end the matter. In considering the legal validity of Newcal’s alleged market, we must also determine whether IKON customers constitute a cognizable subset of the aftermarket, such that they qualify as a submarket. That is, we have thus far concluded only that there is no per se rule against recognizing contractually-created submarkets and that such submarkets are potentially viable when the market at issue is a wholly derivative aftermarket. A submarket must bear the “practical indicia” [indicators] of an independent economic entity in order to qualify as a cognizable submarket. In this case, Newcal’s complaint sufficiently alleges that IKON customers constitute a submarket according to all of those practical indicia.
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