On April 18, 2014, the Federal Circuit ruled that a restriction that required purchasers of one company’s printer to use approved resin – the “ink” – in the high-end physical-object printing market (colloquially known as “3D-printing”) was not an actionable tying arrangement. DSM Desotech Inc. v. 3D Systems Corp., No. 2013-1298.1

The lawsuit was brought by DSM Desotech (Desotech), which manufactures resin used by stereolithography (SL) printing machines. Desotech accused 3D Systems, a manufacturer of SL machines and of SL resin, of improperly preventing its customers from using Desotech’s resin.2The court affirmed the District Court’s finding that Desotech could not ultimately prove that 3-D Systems’ printing machines constituted a product market separate from the overall SL printing machine market. It also rejected Desotech’s argument that 3D Systems’ customers were improperly “locked-in” to purchasing approved resin products for as long as they used their printers, declaring that customers’ awareness of 3D Systems’ aftermarket requirements precluded such an argument.

Background

A tying arrangement occurs when a seller conditions the sale of a product or service (the “tying” product) to the purchase of a separate product or service (the “tied” product). Tying arrangements imposed by suppliers with market power have been considered per se unlawful for more than 50 years.3 To establish a per se unlawful tying arrangement, a plaintiff must show, inter alia, 1) that the tying product and tied product are, in fact, two separate and distinct products; 2) that the seller conditioned its sale of the tying product on the buyer’s purchase of the tied product; 3) that the seller possesses sufficient economic power in the tying product to restrain competition in the tied product; and 4) that competition in the tied product is adversely affected by the tying arrangement.4

The third factor, market power, is a threshold issue common to most antitrust claims challenging vertical restrictions.5 As applied in tying claims, the plaintiff must first establish the relevant product market (i.e. the market that includes the tying product and its reasonably interchangeable products), and then show that the defendant has market power in that market; otherwise, it would not have the ability to force sales of the tied product.6

The Federal Circuit Decision

The parties in DSM Desotech vigorously disputed which machines were in the relevant market. 3D Systems was the only manufacturer of SL machines, which “use lasers to create solid parts or objects” from resins.7 SL is a type of “rapid-prototyping technology” used to create or manufacture products through an “additive” or a “subtractive” process. SL is one of many additive processes, which create parts by “building layer upon layer with materials such as plastics, metals, or ceramics,” while subtractive processes start “with a mass of material and remove portions to create a part.”8 At issue in DSM Desotech was whether SL machines were a distinct product market (i.e. a submarket of rapid-prototyping technologies), as Desotech argued, or if machines using other rapid-prototyping technology were “reasonably interchangeable by consumers for the same purposes.”9 The Supreme Court has offered several “practical indicia” to determine the boundaries of a particular market, including (1) whether the products had distinct prices; (2) the product’s peculiar characteristics and uses; (3) industry or public recognition of the market as a separate economic entity; and (4) sensitivity to price changes.10  Interestingly, the Federal Circuit began by noting that the Seventh Circuit requires economic evidence to prove which products “are ‘good substitutes’ and therefore in the same market.”11 Because Desotech did not offer economic analysis (which “might reveal whether customers switch between SL machines and other rapid-prototyping technologies,”) the Federal Circuit held that “the district court properly granted summary judgment on Desotech’s antitrust claims.”12

The court went on to address evidence concerning the four “practical indicia,” concluding that while two of the four factors “weigh in Desotech’s favor,” Desotech could not survive summary judgment “[g]iven the limited and tenuous nature of the evidence.”13 Specifically, it declared that testimony offered by Desotech established that SL machines had “peculiar characteristics and uses,” and that there was “industry or public recognition of the [SL machine] submarket as a separate economic entity.”14  This, though, did not establish that SL machines and other rapid-prototyping technologies “are in separate markets;” only that there was a “potential distinct market.”15

To finally determine if there was an actual distinct product market, the Federal Circuit panel reviewed Desotech’s evidence that “customers are insensitive to price changes in SL machines.”16 Desotech had argued that the testimony of four customers, who indicated they would “still buy an SL machine if faced with a 5-10% price increase,” raised a sufficient question of fact about the existence of a submarket to survive summary judgment.17 The Federal Circuit panel disagreed. It found that “such a small sampling (four) from only a single category of customer” was insufficient to show that all of 3D Systems’ customers were indifferent to a SL machine price change, particularly where the testimony was offered “without regard to the broad range of price points of the various SL models.” 18

The court then addressed Desotech’s remaining tying argument, that a “distinct product market exists for SL resin” that customers are locked into purchasing.19 This argument relied on the Supreme Court’s decision in Eastman Kodak Co. v. Image Tech. Servs., Inc.,20 in which Kodak,inter alia, implemented a policy, well after first selling copiers, of limiting or preventing sales of replacement copier parts to companies that serviced its copiers.21 According to the plaintiffs in that case, in the after-market for its copiers, Kodak, as a result of its policy, controlled “nearly 100% of the parts market and 80% to 95% of the service market for its copiers, with no readily available substitutes,” while it only had 23% of the original equipment market for copiers.22 The Supreme Court ruled that despite not having market power in the original equipment market for copiers, it engaged in an unlawful tying arrangement in the after-market for the purchase and servicing of Kodak copiers, because customers were “locked-in” to using and servicing the expensive Kodak copiers they had purchased. The cost of switching to a competitive copying machine was too high for most customers, although they would “tolerate some level of service-price increases before changing equipment brands.”23 In his dissent in that case, Justice Scalia suggested that Kodak could have avoided antitrust risks “had Kodak—from the date of its market entry— consistently pursued an announced policy of limiting parts sales … so that customers bought with the knowledge that aftermarket support could be obtained only from Kodak.”24 Numerous lower courts have since applied Justice Scalia’s hypothetical by ruling that sellers can avoid tying arrangement illegality by making aftermarket policies known to customers when they purchase the allegedly tying product.25

Desotech argued that 3D Systems’ policy failed to meet the Scalia test to avoid illegality. 3D Systems began selling SL machines in 1988, and did not activate its technological lock until 2007.26 The machines cost “hundreds of thousands of dollars,” and only worked with resin made for SL machines.27 The Federal Circuit panel disagreed, however, because there were only 268 purchasers of SL resin-- the tied product --and only seven of them purchased their SL machines before learning of the technological “lock-in.”  Because a “substantial number of customers” were not locked in, the appellate court affirmed the District Court’s grant of summary judgment for 3D Systems. 

Conclusion

The Federal Circuit’s 3D Systems decision is a further illustration of the fact that the lower courts have adopted the view expressed by Justice Scalia in his dissent in Eastman Kodak Co. v. Image Tech. Servs., Inc.  Sellers can defeat “lock-in” tying claims in cases involving after-markets by announcing a restrictive after-market policy prior to the original purchasing decision by customers.  Courts also have adopted the view in franchising cases—no antitrust violation exists if the franchisor’s restrictions are announced up-front to prospective franchisees.28  It also demonstrates that such a claim can likely be avoided when an insignificant number of purchasers are harmed by the policy, even if it is announced after the original purchasing decision.