Unpublished Disposition, 874 F.2d 815 (9th Cir. 1989)

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U.S. Court of Appeals for the Ninth Circuit - 874 F.2d 815 (9th Cir. 1989)

DELTA SYSTEMS, INC. Plaintiff-Appellant,v.TRW, Defendant-Appellee.

No. 87-4014.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Jan. 12, 1989.Decided April 21, 1989.

Before EUGENE A. WRIGHT, TANG and WIGGINS, Circuit Judges.


MEMORANDUM* 

Appellant Delta Systems, Inc. ("Delta") timely appeals a summary judgment dismissing its claim under section 2 of the Sherman Act. 15 U.S.C. § 2 (1982). For the reasons explained below we believe Delta failed to present material issues of fact sufficient to withstand TRW's motion for summary judgment. It is therefore important to note at the outset that this case is not the one we have been waiting for since Catlin v. Washington Energy Co., 791 F.2d 1343 (9th Cir. 1986), in which we stated that the "issue of whether leveraging is an independent section 2 offense" is "reserve [d] for a case in which decision of the question is necessary." Id. at 1346.

* BACKGROUND

At its core this litigation involves separate enterprises that were created to support the "System Ten" computer, a specially designed "point-of-sale" system that eased the multiple data entry otherwise required of retail stores. TRW inherited the original manufacturer's maintenance organization after the manufacturer exited the computer industry. Like its predecessor, TRW offered its customers two options for obtaining service for their System Tens: They could opt for regular maintenance for a flat monthly fee, or they could obtain service as needed on a time-and-material basis. System Ten owners were free to maintain their System Tens either themselves or through competing maintenance organizations. The System Ten also generated a separate industry in the manufacturing of "enhancements," which were devices designed to improve the speed and capacity of the computer. Delta competed in this industry with two products, "Jac the FAC Whipper" and the "Kore Kracker." Apparently concerned about how enhancements would affect its service contracts, TRW instructed its sales agents to inform System Ten users that installation of "unauthorized" enhancements would jeopardize their service contracts. TRW never "authorized" Delta's enhancements.

Sometime in 1982 Delta filed a complaint in federal court alleging that TRW's business practice violated section 2 of the Sherman Act. In essence, Delta alleged that TRW unlawfully exercised its monopoly power in the System Ten maintenance market to discourage consumers from purchasing Delta's products in the System Ten enhancement market. In early 1987 TRW moved for summary judgment. The district court granted the motion, reasoning that Delta failed to show evidence of "primary" and "secondary" markets, evidence of TRW's monopoly power in the primary market, and evidence of an antitrust injury caused by TRW's business practice. Although TRW's counterclaims under section 1 and section 2 of the Sherman Act remained unresolved, the district court found no just reason for delaying Delta's appeal of the dismissal of its section 2 claim and therefore entered a certification order pursuant to Fed. R. Civ. P. 54(b). This appeal followed and we have jurisdiction pursuant to 28 U.S.C. § 1291 (1982).

II

STANDARD OF REVIEW

An appellate court reviews the grant of summary judgment de novo. Richards v. Neilsen Freight Lines, 810 F.2d 898, 902 (9th Cir. 1987). The appellate court must determine, viewing the evidence in the light most favorable to the nonmoving party, whether there are any genuine issues of material fact and whether the district court correctly applied the relevant substantive law. Ashton v. Cory, 780 F.2d 816, 818 (9th Cir. 1986). The moving party bears the initial burden to show the absence of a material fact; the burden then shifts to the opposing party, who must present significant probative evidence tending to support its claim. Richards, 810 F.2d at 902. Any inferences that the opposing party draws from the record in support of its claim are to be evaluated in the context of the controlling substantive law. Id. In the context of the law of antitrust, a claim that does not make "economic sense" must be supported by "further persuasive evidence." Id. (citing Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986)); accord Ferguson v. Greater Pocatello Chamber of Commerce, 848 F.2d 976, 979 (9th Cir. 1988).

Some authorities suggest that the leveraging theory of antitrust liability makes economic sense in only a few circumstances, for example, where the monopolist cannot realize monopoly profits in a regulated primary market. See Olympia Equip. Leasing Co. v. Western Union Tel. Co., 797 F.2d 370, 374 (7th Cir. 1986), cert. denied, 480 U.S. 934 (1987); cf. Mozart Co. v. Mercedes-Benz of N. Am., Inc., 833 F.2d 1342, 1345 n. 3 (9th Cir. 1987) (" [M]odern economic thought seems to indicate that all available monopoly profits could be obtained from the tying product alone without the use of a tie-in."), cert. denied, 109 S. Ct. 179 (1988). We believe that the leveraging theory makes no economic sense in the context of this case. The crux of Delta's claim is that TRW used its alleged monopoly power in the System Ten computer "maintenance" market to destroy competition in the System Ten computer "enhancement" market. But quite unlike the typical leveraging claim, Delta does not assert that TRW's motive was to introduce products into the enhancement market so that it could exact its monopoly profits there. Delta asserts instead that TRW's motive was to give System Ten computer users no alternative other than to invest in additional older equipment, with the effect of increasing TRW's alleged profits in the maintenance market. This conduct, if true, is consistent only with that of a monopolist whose goal is to sustain an existing monopoly; such conduct does not exhibit the intentions of a monopolist whose aim is to gain an unwarranted competitive advantage in a secondary market--the benchmark of the leveraging theory. See Berkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d 263, 275-76 (2d Cir. 1979), cert. denied, 444 U.S. 1093 (1980). Therefore, absent "further persuasive evidence" we believe that such conduct provides little basis for establishing antitrust liability on a leveraging theory.

III

DISCUSSION

The monopoly leveraging theory, if it exists at all, requires a showing of the following elements:

(1) monopoly power in a relevant market; (2) challenged activities in a defined second market, distinct from the first (monopoly) market; (3) "use of ... monopoly power rather than mere employment of other advantages that [the monopolist] enjoys by virtue of size, integration, etc.,"; (4) "unwarranted competitive advantage" in the leveraged market; and (5) causal antitrust injury.

Catlin, 791 F.2d at 1349 (quoting Grason Elec. Co. v. Sacramento Mun. Util. Dist., 571 F. Supp. 1504, 1518-19 (E.D. Cal. 1983)). With the exception of the first of the five Catlin elements, Delta has failed to present any material issues of fact sufficient to withstand summary judgment. We discuss the five Catlin elements.

"Monopoly power is the power to control prices or exclude competition." United States v. E.I. du Pont de Nemours & Co., 351 U.S. 377, 391 (1956) (footnote omitted). The beginning point for establishing whether a business possesses such power is "by ascertaining the relevant market," Grason Elec. Co., 571 F. Supp. at 1519-20, whose "dimensions include the product involved, the geographical limits within which it functions, and the appropriate time frame," General Business Sys. v. North Am. Philips Corp., 699 F.2d 965, 972 (9th Cir. 1983). Delta and TRW initially disagree about whether System Ten computers were so unique during the relevant time period that there were no other substitute systems. If the System Ten had no practical substitute, maintenance of Systems Tens possibly comprised a relevant "submarket." See Brown Shoe Co. v. United States, 370 U.S. 294, 325 (1962). TRW argues that the System Ten was nothing other than an all purpose general computer system; Delta argues that the System Ten, unlike other general business computers, was a uniquely designed point-of-sale system. These contentions obviously rest on disputed issues of fact that are entirely inappropriate for resolution by summary judgment.

Delta and TRW also disagree about whether the geographical market was local or national in scope. TRW relies on affidavits presented by its experts stating that System Ten users would look to maintenance organizations located in their local area if their System Ten needed repair; Delta points to evidence that large institutional users of System Tens, such as Sears, Roebuck & Co., employed only one maintenance company to service their entire national network of computers. These contentions, too, raise questions of fact inappropriate for resolution by summary judgment. See Oahu Gas Serv., Inc. v. Pacific Resources, Inc., 838 F.2d 360, 363 (9th Cir.) (market definition is a question of fact), cert. denied, 109 S. Ct. 180 (1988); see also C.E. Servs., Inc. v. Control Data Corp., 759 F.2d 1241, 1246 (5th Cir.) (question of fact whether third-party maintenance firms constituted a relevant submarket for the maintenance of IBM 360 and 370 computer systems), cert. denied, 474 U.S. 1037 (1985).

TRW also contends that there is no evidence that it had market "power" in the purported national System Ten maintenance market. Specifically, TRW refers to evidence that its price levels during the relevant period barely kept pace with the rate of inflation and, further, that it acquiesced to customers' demands when they balked at a proposed price increase. Delta, on the other hand, refers to evidence that TRW had maintenance contracts on approximately 75% of the System Tens nationwide. Evidence of a market share this great, according to Delta, is sufficient for a court to infer evidence of monopoly power. See United States v. Grinnell Corp., 384 U.S. 563, 571 (1966). As before, we believe the parties' contentions rest on disputed issues of fact. We conclude, therefore, that based solely on the first of the five Catlin elements, summary judgment was erroneously granted. Nevertheless, because Delta must prevail on each of the five elements, this conclusion is not dispositive and we proceed to analyze Delta's claim under the remaining four elements.

B. Defined Second Market, Distinct from the First Market

" [P]roof of the existence of two separate product ... markets is [a] necessary" element of a monopoly leveraging claim. M.A.P. Oil Co. v. Texaco Inc., 691 F.2d 1303, 1306 (9th Cir. 1982). Delta does not contend that there is a separate System Ten enhancement market and, indeed, would find it impossible to do so in light of our decision in General Business Systems, 699 F.2d at 972 ("the market for mlcs [magnetic ledger cards] cannot be separated from the general market for small business computer systems"). Instead, Delta merely assumes that its monopoly leveraging claim depends on evidence that the secondary market, whatever its form, is a "distinct" market from the relevant primary market. Delta concludes that it has presented sufficient facts to withstand summary judgment based on this element because System Ten enhancements cannot "replace" System Ten maintenance and therefore the primary and secondary markets are "distinct."

We find this argument unpersuasive. We are aware of no case brought under a monopoly leveraging theory in which the secondary market has not been defined to the same extent as the primary market. E.g., Catlin, 791 F.2d at 1346; M.A.P., 691 F.2d at 1306; cf. Berkey Photo, Inc., 603 F.2d at 270-71 (describing the secondary market). Market definition in the secondary market is at least as important as the definition of the primary market, for without it the fact finder is unable to determine whether the alleged unlawful activities harmed "competition." See Grason Elec. Co., 571 F. Supp. at 1518 ("the fundamental inquiry ... is whether the defendant's practices have a significant effect on competition in each of those markets" (emphasis in original)); cf. Ralph C. Wilson Indus. v. Chronicle Broadcasting Co., 794 F.2d 1359, 1363 (9th Cir. 1986) ("To determine whether competition has been harmed, the relevant market must be defined.") (Sherman Act Sec. 1 Claim). We thus believe that to succeed on a monopoly leveraging theory the antitrust plaintiff must define the product and geographic components of both the primary and secondary markets. See St. Jude Medical, Inc. v. Intermedics, Inc., 623 F. Supp. 1294, 1298 (D. Minn. 1984) ("courts have required that plaintiffs define not only the market in which monopoly power is allegedly held, but also the separate markets in which the leveraging has allegedly taken place" (citing M.A.P., 691 F.2d at 1305-08, and Grason Elec. Co., 571 F. Supp. at 1504)). Delta has failed even to begin to meet this requirement. TRW is entitled to summary judgment on this basis.

Evidence before the district court indicated that it was TRW's practice to honor its service contracts unless machine failure was attributable to an unauthorized enhancement, in which case TRW would offer time-and-material repair service. The district court concluded that this practice, rather than an "abuse" of monopoly power, simply was a practical business response to new products being introduced into machines that TRW was otherwise contractually obligated to repair. Delta contends that this conclusion erroneously resolves disputed issues of fact by ignoring Delta's assertions that TRW had instructed its agents to attribute every machine failure to enhancements. But Delta has not drawn our attention to any fact that supports this contention, thus failing to satisfy its summary judgment burden under Richards and Matsushita. TRW is entitled to summary judgment on this basis.

The fourth element of the leveraging claim requires evidence of unwarranted competitive advantage, that is, that TRW's conduct amounted to an "unreasonable restraint of competition." Grason Elec. Co., 571 F. Supp. at 1519. Delta argues the fact that it was unable to sell its "superior product" in the marketplace is sufficient evidence that TRW's business practice had an anticompetitive effect. This argument, however, misses the point of our repeated admonition that " [i]t is not enough for [an antitrust plaintiff] merely to show that it was harmed in its capacity as a competitor." Ralph C. Wilson Indus., 794 F.2d at 1363. We are unwilling to hold on this evidence alone that TRW's business practice unreasonably restrained competition in an effort to obtain an unwarranted competitive advantage. Instead, we require further persuasive evidence, which is absent from the record. TRW is entitled to summary judgment on this basis.

Delta contends that there is a disputed issue of fact concerning whether it suffered an antitrust injury. Delta cites four examples of specific injury, which, it asserts, present interpretations of fact that are inappropriate for summary judgment. In the case of "T.B. Woods," Delta asserts that the delay in purchasing an enhancement by two years indicates the loss of immediate income. In the case of "Dodd, Visse," Delta argues that it was injured because as a condition to the purchase of its enhancement Delta was "required" to inherit TRW's maintenance obligations. In the case of "L'Eggs, Inc.," Delta contends that the district court ignored evidence that the loss of the sale was due in part to TRW's refusal to maintain System Tens. And finally, with respect to "Smith Home Furnishings," Delta contends that a one-year delay in completing the sale was due to TRW's business practice. According to Delta, each of these examples raise questions of fact whether TRW caused Delta to suffer an antitrust injury. We disagree.

Each example simply illustrates that the sale of enhancement products, like those of any other computer products, necessarily requires businesses to consider consequences that may be wholly unrelated to the quality of the product. Cf. General Business Sys., 699 F.2d at 974 ("the rational purchaser of a computer system must consider the cost, availability, and reliability of mlcs [magnetic ledger cards] when deciding which system to purchase"). Here, the costs of maintaining the main computer system and the enhancement product were legitimate concerns of the consumers. That each customer carefully considered the full effect of the purchase of the product by either delaying the ultimate purchase, opting to purchase other products, or requiring Delta to assume maintenance obligations is insufficient "persuasive evidence" to establish an antitrust injury under Richards and Matsushita.

Delta contends alternatively that the district court prohibited it from marshalling further persuasive evidence of any antitrust injury by disallowing it from interviewing 1000 System Ten users. The district court's order limiting further discovery is permitted by Fed. R. Civ. P. 16(e), which gives trial courts "broad discretion in supervising the pre-trial phase of litigation" for the purpose of "sifting the issues in order that the suit will go to trial only on questions involving honest disputes of fact or law." Campbell Indus. v. M/V Gemini, 619 F.2d 24, 27 (9th Cir. 1980) (quoting FDIC v. Glickman, 450 F.2d 416, 419 (9th Cir. 1971)). We realize that district courts ordinarily should permit "amendments of pre-trial orders," at least "when 'no substantial injury will be occasioned to the opposing party, the refusal to allow the amendment might result in injustice to the movant, and the inconvenience to the court is slight.' " Id. at 27-28 (quoting Angle v. Sky Chef, Inc., 535 F.2d 492, 495 (9th Cir. 1976)). But where, as here, a party cannot offer any justification for his delay in seeking introduction of additional evidence, the "injustice resulting from [the] exclusion ... comes from [the defaulting party's] own failure properly to present his case." United States v. Lummi Indian Tribe, 841 F.2d 317, 320 (9th Cir. 1988) (quoting Colvin v. United States, 549 F.2d 1338, 1340 (9th Cir. 1977)). A showing of prejudice is not necessary in such cases because otherwise the parties could "frustrate the salutary purposes of pretrial conferences and excuse parties who disregard court orders." Id. at 321.

The district court's ruling here was issued only after the case had languished in the district court for several years. Also, Delta's attempt to obtain additional discovery of System Ten users preceded the discovery cut-off date only by an unreasonably short period. In explaining the delay to the district court Delta's counsel admitted that the failure to interview System Ten users earlier was due mainly to the client's lack of cooperation. We hold that under circumstances such as these a district court does not abuse its broad discretion in disallowing further discovery.

IV

CONCLUSION

There are no material issues of disputed fact regarding all but one of the elements needed to establish a leveraging claim. TRW is entitled to judgment as a matter of law. Accordingly, the judgment of the district court is AFFIRMED.

 *

This disposition is not appropriate for publication and may not be cited to or by the courts of this circuit except as provided by 9th Cir.R. 36-3