Tuesday, January 29, 2008

Copier Equipment Lessors Alleged Restraint In Aftermarkets

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

Lessors of copier equipment adequately alleged that a competitor violated the antitrust laws by restraining competition in the aftermarkets for equipment upgrades and lease-end services, the U.S. Court of Appeals in San Francisco has ruled. Dismissal of the antitrust claims, as well as Lanham Act, false advertising claims (2005-1 Trade Cases ¶74,682), was reversed, and the case was remanded.

The complaining lessors claimed that the competitor engaged in an ongoing scheme to defraud its customers by extending their lease agreements and service contracts. The purpose of extending the contracts, according to the complaining lessors, was to shield the competitor's customers from competition in the aftermarkets for equipment upgrades and for lease-end services.

By extending the term of the original contract, the competitor was purportedly able to raise the contract's value, which in turn raised the price to the complaining lessors of buying out that contract.

Relevant Market

The central issue was whether the antitrust claims alleged any legally cognizable "relevant market." The district court rejected the proposed markets on the ground that they were not legally cognizable, finding that the boundaries of the markets impermissibly depended on a contractually-created group of consumers. The appellate court concluded, however, that the relevant market did not fail as a matter of law, at least on a Rule 12(b)(6) motion to dismiss.

There was no per se rule against contractually-created submarkets, according to the appellate court. Such submarkets were potentially viable when the market at issue was a wholly derivative aftermarket.

The complaint alleged the existence of two separate but related markets in intrabrand copier equipment and service. The first market was an initial market for copier leases and copier service, which was a competitive market in which the competitor had no significant market power. The second market was a derivative aftermarket for replacement equipment, which included markets for lease "buy outs" and for "lease-end service."

The aftermarket was wholly derivative from and dependent on the primary market. The complaining lessors alleged that market imperfections, as well as the competitor's fraud and deceit, prevented consumers from realizing that their choice in the initial market would impact their freedom to shop in the aftermarket. A factual question remained as to whether the alleged aftermarket actually existed.

False Advertising Claims

For purposes of the complaining lessors' Lanham Act claims, the district court's conclusions with respect to four of the five challenged statements rested on factual findings rather than legal conclusions. Thus, the Lanham Act claims were remanded, as well.

The defending copier equipment lessor's allegedly false statements that it would "deliver 95 percent up-time service" on its contracts and that it intended its contracts to be for a fixed term of 60 months could constitute false advertising actionable under Sec. 43(a) of the Lanham Act, the court ruled. However, alleged statements that the defending lessor would provide its customers "low costs" and "flexibility" were puffery and thus could not constitute false advertising under the Lanham Act.

The January 23 decision is Newcal Industries, Inc. v. Ikon Office Solution, No. 05-16208, 2008-1 Trade Cases ¶76,010.

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