FOREWORD - Fujifilm€¦ · d. Fujifilm's tokuyakuten are independent businesses not under...
Transcript of FOREWORD - Fujifilm€¦ · d. Fujifilm's tokuyakuten are independent businesses not under...
i
FOREWORD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - I -
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I
EXECUTIVE SUMMARY: KODAK REWRITING HISTORY . . . . . . . . . . . . . . . . . . . . . iii
A. "Privatizing Protection": Fiction Based On Mistaken Facts, MisleadingFacts, Or No Facts At All . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41. The consultant's report: wrong, wrong, and wrong again . . . . . . . . . . . 52. Retailer complaints as evidence of collusion and conspiracy . . . . . . . . 53. Mischaracterizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64. Allegations with no support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
B. Fujifilm In Japan: No Systematic Anticompetitive Activities . . . . . . . . . . . . 71. The alleged core distribution system . . . . . . . . . . . . . . . . . . . . . . . . . . . 82. The Asanuma non-incident . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93. The remarkably unremarkable rebates . . . . . . . . . . . . . . . . . . . . . . . . . 104. The paper distribution "bottleneck" theory . . . . . . . . . . . . . . . . . . . . . 125. The alleged exclusionary practices . . . . . . . . . . . . . . . . . . . . . . . . . . . 136. The pricing paradox . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
C. Government Of Japan: No Encouragement Or Toleration Of SystematicAnticompetitive Behavior . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151. MITI did not encourage anticompetitive conduct . . . . . . . . . . . . . . . . 152. The JFTC has strictly enforced the Antimonopoly Act with respect to
Fujifilm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163. Fujifilm and its tokuyakuten are not part of the Mitsui keiretsu . . . . . 18
D. Kodak In Japan: Limited Market Share As The Expected Consequence ofInsufficient Investment, Inadequate Attention, And Ineffective Marketing 191. The mirror image problem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192. The profit sanctuary myth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203. Kodak shut the "window" opened by liberalization . . . . . . . . . . . . . . 214. Missed opportunities and missing products:
Kodak from 1985 to the p . . . . . . . . . . . . . . . . . . . . . . . 215. Too little, too late . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
E. Treaty Violations: Old Allegations Do Not Improve With Age . . . . . . . . . . 24F. Kodak In The U.S. Market: A Critical Benchmark Against Which To Judge
Kodak's Allegations About Fujifilm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241. Historical context: Kodak's century-long entanglement
with antitrust law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 252. Old habits that never change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
a. Kodak's exclusive dealing arrangements . . . . . . . . . . . . . . . . . 27
ii
b. Kodak's exclusionary practices have been very successful . . . 283. Kodak has used its leverage in the film market to dominate
photofinishing and color paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 294. U.S. Government toleration: inexplicable non-enforcement of the
antitrust consent decrees restricting Kodak . . . . . . . . . . . . . . . . . . . . . 325. Fujifilm's enormous efforts in the U.S. market far exceed Kodak's
commitment in Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 326. Kodak urges the U.S. Government to apply double standard . . . . . . . 34
CONCLUSION: THROUGH A LOOKING-GLASS . . . . . . . . . . . . . . . . . . . . . . 35
I. KODAK'S ALLEGATIONS ARE BASED ON FACTUAL MISSTATEMENTS,MISCHARACTERIZATIONS, AND MISLEADING OMISSIONS . . . . . . . . . . xxxviA. The Distribution System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36B. Rebate Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43C. Price Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45D. MITI Involvement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48E. JFTC Enforcement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53F. Kodak's Market Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57G. The Profit Sanctuary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58H. Liberalization Countermeasures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59I. Kodak's Efforts To Compete . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61J. The Past Decade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
II. FUJIFILM HAS NOT ENGAGED IN SYSTEMATIC ANTI-COMPETITIVEACTIVITIES IN THE JAPANESE MARKET . . . . . . . . . . . . . . . . . . . . . . . . . . . . lxivA. Fujifilm Has Not Created An Exclusionary Market Structure, Either Through
Its Distribution System Or Through Its Rebates . . . . . . . . . . . . . . . . . . . . . . . 651. Fujifilm's use of independent single-brand distributors is not
anticompetitive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67a. The development of Fujifilm's current distribution system was
unrelated to alleged efforts to block Kodak's access to the market. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
b. The move toward single-brand distribution was a generalindustry trend, not led by Fujifilm . . . . . . . . . . . . . . . . . . . . . . 71(1) Kodak/Nagase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72(2) Konica . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74(3) Camera manufacturers . . . . . . . . . . . . . . . . . . . . . . . 75
iii
c. Kodak's claim that lack of access to Fujifilm's tokuyakuten hascrippled its efforts in Japan is disingenuous . . . . . . . . . . . . . . . 76
d. Fujifilm's tokuyakuten are independent businesses not underFujifilm's control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78(1) Fujifilm's tokuyakuten compete with each other . . 79(2) Fujifilm's tokuyakuten are reasonably profitable by
industry standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80e. Kodak has completely mischaracterized the leverage exerted by
Fujifilm's tokuyakuten . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82f. Secondary dealers offer unimpeded access to small retail outlets
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 842. Fujifilm's rebate programs are not exclusionary . . . . . . . . . . . . . . . . . 86
a. Fujifilm's use of progressive target volume rebates has been verylimited for at least 20 years, and was substantially reducedrecently . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86(1) Rebates to tokuyakuten . . . . . . . . . . . . . . . . . . . . . . . 87(2) Rebates to retailers . . . . . . . . . . . . . . . . . . . . . . . . . . . 88(3) Color paper rebates . . . . . . . . . . . . . . . . . . . . . . . . . . 90
b. Fujifilm does not manipulate rebates to restore tokuyakuten to profitability at the end of the fiscal year . . . . . . . . . . . . . . . . . . 90
3. There is no distribution bottleneck for color film . . . . . . . . . . . . . . . . 91a. The examples of major Tokyo retailers show that Kodak's
market share is not a function of access to consumers . . . . . . . . . . . . . . . 92
b. The rise of gray market imports and private label brands showsthat there is no distribution bottleneck . . . . . . . . . . . . . . . . . . . 93
c. The only segment of the market in which Kodak's access may belimited is small shops with insufficient shelf space to carrymultiple brands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
4. There is no distribution bottleneck for color paper . . . . . . . . . . . . . . . 975. The allegedly exclusionary practices complained about by Kodak are
normal competitive practices worldwide . . . . . . . . . . . . . . . . . . . . . . . 99a. Single-brand or direct distribution of film is the worldwide norm
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99b. Forward integration into photofinishing is the worldwide norm
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100B. Fujifilm Has Not Suppressed Price Competition . . . . . . . . . . . . . . . . . . . . . 102
1. Market trends show that the Japanese market is increasingly sensitive toprice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
iv
a. The level, trend, and distribution of retail prices are inconsistent with the existence of resale price maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
b. The rise of discount stores, gray market imports, and privatelabel brands demonstrates that the market responds to price . 107
2. Kodak's conspiracy theories are based on misstatements and factualdistortions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108
3. Fujifilm does not monitor resale prices in order to control them . . . . . . . . . . . . . . . . . . . . . . . . . . 112
4. Fujifilm's rebate programs do not inhibit price competition . . . . . . . 113
III. THERE HAS BEEN NO GOVERNMENT TOLERATION OF SYSTEMATICANTICOMPETITIVE CONDUCT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115A. The Japanese Government Did Not Encourage The Creation Of An
Exclusionary Market Structure To Block Kodak . . . . . . . . . . . . . . . . . . . . . 1161. MITI's distribution guidelines were irrelevant to the development of
Fujifilm's distribution system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117a. MITI did not encourage tokuyakuten to deal only with Fujifilm
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118b. MITI did not encourage expanded use of rebates . . . . . . . . . 120c. MITI did not encourage the creation of a bottleneck . . . . . . . 121
2. The Japanese Government had no involvement in investments by Mitsuientities in Fujifilm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121a. Fujifilm and its tokuyakuten are not part of the Mitsui Group
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122b. Government support for the stock market had nothing to do with
investments by Mitsui entities in Fujifilm . . . . . . . . . . . . . . . 123c. The issue of cross-shareholding between Fujifilm and financial
institutions is completely irrelevant to Kodak's performance inthe Japanese market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
B. The JFTC Actively Enforces The Japanese Antimonopoly Act, And HasSubjected Fujifilm To Particular Scrutiny . . . . . . . . . . . . . . . . . . . . . . . . . . . 1251. The JFTC uses a variety of formal and informal methods to enforce the
Antimonopoly Act strictly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125a. A complete history shows the Antimonopoly Act has been
strengthened significantly over time . . . . . . . . . . . . . . . . . . . 126(1) JFTC enforcement of the Antimonopoly Act became
much more aggressive in the 1970s . . . . . . . . . . . . . . 126(2) The Oil Cartel Cases demonstrate JFTC independence
from MITI, and the primacy of the Antimonopoly Actover MITI guidance . . . . . . . . . . . . . . . . . . . . . . . . . . 128
v
(3) Amendments in 1977 significantly strengthened the JFTCability to enforce the Antimonopoly Act . . . . . . . . . . 129
(4) The Structural Impediments Initiative (SII) furtherstrengthened the Antimonopoly Act . . . . . . . . . . . . . . 133
b. Kodak's complaint that the JFTC has not enforced theAntimonopoly Act properly is disingenuous . . . . . . . . . . . . . 135(1) The current level of antitrust enforcement in Japan is
similar to the U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136(2) The JFTC must investigate outside complaints, an option
which Kodak has never pursued . . . . . . . . . . . . . . . . . 141c. The Japanese approach to enforcing competition policy may be
different from the U.S. system, but is not necessarily inferior. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142
2. Contrary to Kodak's allegations, the JFTC has vigorously scrutinizedFujifilm's conduct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144a. 1970 -- Study of Film Industry Pricing . . . . . . . . . . . . . . . . . 144b. 1977 -- Monitoring Under Article 2(7) . . . . . . . . . . . . . . . . . 149c. 1980 -- Report on Parallel Price Increase . . . . . . . . . . . . . . . . 150d. 1981 -- X-Ray Film Case . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150e. 1984 -- Report on Parallel Price Increases . . . . . . . . . . . . . . . 152f. 1987 -- Study of Rebates . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152g. 1992 -- Study of Oligopolistic Industries . . . . . . . . . . . . . . . . 154h. 1993 -- Investigation of Copy Paper . . . . . . . . . . . . . . . . . . . 155
3. Fujifilm has made its own efforts to comply strictly with theAntimonopoly Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155
4. Kodak has mischaracterized the Premiums Law as smokescreen forprice collusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158a. The Premiums Law serves legitimate governmental purposes to
protect consumers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158b. The Premiums Law does not exclude other types of JFTC
enforcement activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159c. There is no Fair Competition Code for photographic film or
paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159d. Kodak's allegation about JFTC actions against gray market film
distorts the nature of the JFTC actions . . . . . . . . . . . . . . . . . . 160C. Once Kodak's Factual Errors Have Been Corrected, It Becomes Clear There
Have Been No Violations Of The Antimonopoly Act . . . . . . . . . . . . . . . . . 162
IV. KODAK'S LIMITED MARKET SHARE IN JAPAN IS DUE TO INSUFFICIENTINVESTMENT, INADEQUATE ATTENTION, AND INEFFECTIVE MARKETING
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163
vi
A. The Market Share Statistics Cited By Kodak Do Not Demonstrate That TheJapanese Market Is Closed To Kodak . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1631. The "home team advantage" is real for both Fujifilm and Kodak in their
respective domestic markets and explains Kodak's low penetration ofthe Japanese market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164
3. Economic literature supports the conclusion that there is a "home Teamadvantage" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170
B. Kodak's Allegation That Fujifilm Has A "Profit Sanctuary" In Japan Is A Myth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172
1. Kodak's operations have generated more profits than Fujifilm'soperations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172
2. Kodak has in fact "spent" much of its profit through excessive dividendsand restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175
C. Kodak Shut The "Window" Opened By Liberalization (1971-1984) . . . . . . 178D. Kodak Has Failed To Take The Steps Necessary To Gain Share In The
Japanese Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1831. Kodak failed to adopt an aggressive strategy to take advantage of the
liberalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1832. Kodak did not take advantage of liberalization until 1985 . . . . . . . . 1853. Kodak's investments in Japan have been insufficient to create
reasonable expectation of a significantly greater market share . . . . . 189a. The error of relying on Nagase . . . . . . . . . . . . . . . . . . . . . . . 190b. Even after taking over Nagase, Kodak's operations faced
difficulties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1944. Kodak has not competed aggressively on price . . . . . . . . . . . . . . . . . 1965. Kodak has lagged behind Fujifilm in the introduction of products which
have captured significant shares of the Japanese market . . . . . . . . . . 1996. Kodak's sales, advertising, and public relations efforts have been
insufficient to create any expectation that it could gain market share inJapan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205
E. Missed Opportunities And Missing Product: Kodak From 1985 To The Present. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208
V. KODAK'S CLAIMS OF ACTIONABLE VIOLATIONS OF THE FRIENDSHIP,COMMERCE AND NAVIGATION TREATY AND THE OECD CAPITAL CODECAN BE DISMISSED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212A. The U.S. Government Would Be Barred By The Doctrine Of Laches From
Making A Claim Of Treaty Violations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212B. Kodak Has Only Alleged Past Violations Of The Treaties, Which Are Not
Actionable Under Section 301 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215
vii
1. Even Kodak admits it alleges only past violations that have long sincebeen corrected . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215
2. Only current violations of trade agreements are actionable under Section301 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 216
C. Even If Timely, Kodak's Claims Of Treaty Violations Are Wrong And Invalid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 219
1. Japan did not violate the OECD Capital Code . . . . . . . . . . . . . . . . . . 219a. Japan has never violated the OECD Capital Code . . . . . . . . . 220b. Japan did not violate the spirit of the OECD Capital Code . . 221
2. Japan did not violate the FCN Treaty . . . . . . . . . . . . . . . . . . . . . . . . 222a. Under the FCN Treaty, Japan's very low level of monetary
reserves allowed Japan to restrict foreign direct investment . 222b. Japan foreign investment restrictions are not a violation of the
FCN Treaty because the U.S. Government acquiesced in Japan'srestrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224
c. Because Kodak did not exahaust its remedies in natioanal courts,its claim is invalid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 226
D. Should USTR Decide To Proceed With Kodak's Treaty Violation Claims, ItMust Utilize The Dispute Resolution Provision In Each Treaty . . . . . . . . . . 229
VI. EXAMINATION OF KODAK'S BEHAVIOR IN THE U.S MARKET PROVIDES ACRITICAL BENCHMARK AGAINST WHICH TO JUDGE KODAK'SALLEGATIONS ABOUT FUJIFILM'S BEHAVIOR IN THE JAPANESE MARKET
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 231A. The U.S. Market Has Been Shaped By Kodak's Long History Of Domination In
All Photographic Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2331. The early years: Kodak acquires its dominant position through
acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2342. The 1921 Consent Decree: The U.S. Government attempts to rein
Kodak in . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2353. The 1954 Consent Decree: The U.S. Government must stop Kodak
again . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2374. Kodak's practices cause multiple allegations of misconduct from its
competitors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2375. U.S. Government opposes Kodak's attempt to terminate the Consent
Decrees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240B. Kodak Continues To Do Whatever It Takes To Maintain Its Dominance . . 242
1. Kodak's practices in the color film market . . . . . . . . . . . . . . . . . . . . 242a. Kodak's exclusive dealing arrangements . . . . . . . . . . . . . . . . 242b. Kodak's efforts to limit Fuji film display visibility . . . . . . . . 244c. Kodak's exclusionary practices have been very successful . . 244
viii
2. Kodak's practices in the photofinishing and color paper markets . . . 248a. Kodak recaptures the market . . . . . . . . . . . . . . . . . . . . . . . . . 248
(1) Kodak's campaign to acquire its color paper customers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250
(2) Kodak's Colorwatch program, along with Kodak's specialpackaging that bundles film and photofinishing, ensureand maintain exclusivity across all photographic products
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255(3) Kodak favors bundling and offers of free equipment to
land and maintain color paper accounts . . . . . . . . . . . 259b. Kodak reacts aggressively against Fujifilm's attempts to enter the
photofinishing market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2613. The U.S. Government toleration; inexplicable lack of enforcement of
the antitrust consent decrees restricting Kodak . . . . . . . . . . . . . . . . . 263a. The 1921 Consent Decree . . . . . . . . . . . . . . . . . . . . . . . . . . . 263b. The 1954 Consent Decree . . . . . . . . . . . . . . . . . . . . . . . . . . . 265c. Despite the fact that these Kodak practices were well known in
the industry, the U.S. Government did not seek to enforce theConsent Decrees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 266
C. Fujifilm Has Achieved Only Limited Success In The U.S. Market Despite ItsEnormous Commitment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2671. Fujifilm starts its U.S. presence with a commitment to produce products
for local market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2672. Fuji-USA quickly realizes the importance of managing its own
distribution, rather than relying on third party distributors . . . . . . . . 2683. Fuji-USA develops new channels of distribution for its products not
occupied by incumbent for its products . . . . . . . . . . . . . . . . . . . . . . . 2694. Fujifilm gains increasing acceptance by offering innovative products
and sponsoring local events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2705. Fujifilm offers a superior color paper product . . . . . . . . . . . . . . . . . . 2716. Fujifilm significantly increases its capital commitment to U.S. market
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2747. Fujifilm's efforts in the United States are in sharp contrast to Kodak's
efforts in Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 274D. Kodak Has Urged The U.S. Government To Apply A Double Standard . . . 276
1. Existence of market power: market definition . . . . . . . . . . . . . . . . . . 2762. Competitive behavior and practices . . . . . . . . . . . . . . . . . . . . . . . . . . 2783. Home team advantage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 280
i
FOREWORDby
Mr. Minoru OhnishiPresident
Fuji Photo Film Co., Ltd.
On reading the nearly three hundred pages of allegations prepared by Kodak
for its Section 301 petition, someone with no knowledge of the photographic materials
industry or the facts would walk away with the impression that everything in the
petition was true. After all, the allegations are being made by a respected company.
No one could be faulted for assuming that, even if they are not entirely true, the
majority have some basis in fact.
If, however, one begins to examine the alleged facts and purported sources
upon which Kodak bases its claims, it becomes clear that they are complete
fabrications. In addition, anyone who has even the slightest knowledge of the
photographic materials industry will readily see the parallels between Kodak's
allegations regarding Fujifilm and the practices which Kodak itself pioneered and
continues to use to this day to secure its position in the marketplace. In short, it
becomes clear how utterly misdirected these accusations are.
Over the past several weeks, Fujifilm has concentrated its resources on
showing that Kodak's claims are untrue, irresponsible and self-serving. We have been
concerned that allowing these groundless accusations to remain unanswered for too
long will give them credibility. On the other hand, we have realized that Kodak's
"Privatizing Protection" does not rely on facts, but on attempting to establish guilt
through association, innuendo, and mischaracterization of facts. We have, therefore,
ii
attempted to be careful that our response to these allegations does not rely on anything
but facts. It has taken time to review almost thirty years of history in this industry.
We are confident, however, that the time we have taken to develop the real facts will
be time well spent.
Fujifilm and Kodak are engaged in an intense competition for world markets.
Up until now, we have considered Kodak to be a company with a proud history and
tradition, a company that rightly deserves a strong reputation both in terms of its
ability to develop products and to market those products. Indeed, we have had great
respect for Kodak as a rival. While we have, from time-to-time, been disturbed by the
extremes to which Kodak will go in order to protect its position in the photographic
materials market, we have attributed these to aggressive sales policies that have
inadvertently crossed the line between zealous competition and questionable practices.
But this time, Kodak has violated all the standards of business ethics. It has
shamelessly made false allegations against Fujifilm in a self-serving attempt to use
political pressure to accomplish what its own lack of managerial effort and failed
marketing strategies have not been able to accomplish. What is most troubling about
Kodak's action is not that it attempts to tarnish Fujifilm with false allegations of
anticompetitive practices, but that it attempts to exploit growing tensions between the
U.S. and Japan on trade issues to the detriment of a crucial bilateral relationship.
Fujifilm has no desire or intention to contribute to the deterioration of what many
commentators deem the most important bilateral relationship in the world. Kodak's
management, however, seems to view the bilateral tensions as an opportunity for
Kodak to gain through the political process what it has been unable to gain through the
competitive process.
iii
We strongly urge the U.S. Trade Representative, in its investigation of Kodak's
complaint, to carefully study our documentation and verify its accuracy, rather than to
simply cooperate with Kodak and accept its irresponsible petition as the truth.
Fujifilm has no need to conceal or distort the facts. We are confident that the
facts will speak for themselves and make it clear to all that it is not Fujifilm nor MITI
nor the JFTC, but Kodak, itself, that has been and continues to be in control of its fate
in the Japanese market.
We hope that both Americans and Japanese will look at the facts. We hope that
the U.S. Trade Representative will look at the facts. Finally, we hope that the media
will look at the facts. If the facts are examined closely, there is no merit to Kodak's
petition.
INTRODUCTION
In a public relations blitz with the intensity usually reserved for introducing a major
new product, Eastman Kodak Co. (“Kodak”) has launched an assault on Fuji Photo Film Co.,
Ltd. ("Fujifilm"), its principal competitor throughout the world. The assault is unusual in that
it does not rely on normal commercial practices to attain its objectives. Kodak is not trying to
price its way into the Japanese market. Kodak is not trying to gain consumer awareness and
loyalty by advertising or promoting its product. Kodak is not attempting to introduce new and
innovative products into the Japanese market to obtain a commercial advantage over Fujifilm,
or to convert consumers from Fuji brand film to Kodak film. Rather, the public relations blitz
is intended to convert U.S. Government decisionmakers to its cause so that Kodak will not
have to undertake any of the commercial initiatives that are usually required to penetrate a
foreign market, particularly one with a well established, financially strong, technologically
sophisticated, and consumer oriented indigenous competitor.
Kodak seeks to convince decisionmakers that its poor performance in Japan is not the
predictable result of its inadequate efforts, but is the result of the exclusionary practices of its
principal competitor, Fujifilm. Kodak alleges these practices were designed by Japan's
Ministry of International Trade and Industry and overlooked by the Japan Fair Trade
Commission. In making these claims, Kodak distorts, contradicts, and conveniently omits the
relevant facts. Kodak's "Privatizing Protection" is pure fiction -- an attempt to rewrite history
to suit Kodak's present purposes. It is a "good read" for those disposed to blame any and all
of American corporations' problems in Japan on real or imagined barriers to trade. But the
approach of "Privatizing Protection" -- guilt by association, innuendo, anecdote, and
misrepresentation -- should require anyone interested in fact-based determinations to reject
the allegations completely.
2
Fujifilm's memorandum in opposition to Kodak's petition under Section 301 of the
Trade Act of 1974 is intended to set the record straight. To accomplish this objective, we
have analyzed each factual allegation made by Kodak and prepared a detailed point-by-point
rebuttal of Kodak's allegations and analysis. In addition, we have reviewed all sources of
information concerning what transpired in the Japanese consumer photographic film and
paper markets over the past 30 years and reconstructed the events based on the actual facts.
Our approach provides a fact-based history of the Kodak story in Japan and identifies the
source of Kodak's failure in the Japanese market.
Finally, in an effort to provide a benchmark for evaluating the existence of
anticompetitive behavior in the Japanese market, we have also provided the facts describing
Kodak's behavior in protecting its own profit sanctuary in the United States.
At the risk of introducing facts and legal standards into what Kodak clearly hopes will
be a battle resolved by public relations and political posturing, we state unequivocally that the
facts demonstrate that Kodak has failed to provide any evidence which would permit action
under Section 301. At the end of this process, we are confident that impartial fact-finders will
conclude that Kodak's revisionism is like so many other conspiracy theories: superficially
appealing but ultimately full of holes.
3
EXECUTIVE SUMMARY: KODAK REWRITING HISTORY
By all appearances, the Kodak Section 301 complaint has its roots in the succession of
Mr. George Fisher to the position as Kodak's President. While the events alleged to have
occurred in the petition mostly took place in the 1960s, 1970s, or 1980s, Kodak officials
never bothered to raise them at the time. Despite the fact that Japan is the most prominently
featured country in the annual USTR publication of "The National Trade Estimate Report on
Foreign Trade Barriers," there has never been any mention in any of these reports of barriers
to entry into the Japanese consumer photographic color film and color paper markets, until
1994 when Kodak was beginning to prepare its Section 301 petition. Despite the fact that the
U.S. Government has been pursuing bilateral trade negotiations focusing on both sector-
specific and structural problems for many years -- the most recent being the Structural
Impediments Initiative and the Framework negotiations -- consumer photographic color film
and color paper have never surfaced as an issue in any of these discussions and negotiations.
Despite the fact that the Japanese Government has provided avenues for foreign companies to
have their complaints about anticompetitive practices and trade barriers addressed in Japan --
by both the Japan Fair Trade Commission (“JFTC”) and the Office of the Trade Ombudsman
-- the Japanese Government has never received complaints from Kodak.
The reason no one has heard Kodak's complaints is that before Mr. Fisher, Kodak had
no complaints. In 1988 Dr. Albert Sieg, then Kodak Japan President, clearly and
unequivocally states: "We really aren't saddled with any barriers . . . If you have a good
product and you persevere, and you have a head office that is not looking for results week by
week but is willing to support you through over the long-term, you can succeed." He
continued by saying "the glaring mistake {Kodak made} was waiting so long to take
aggressive action in this market." Dr. Sieg did not lay the blame for Kodak's modest success
in the Japanese market on Fujifilm or the Japanese Government, but rather on the too modest
efforts taken by Kodak to penetrate that market.
Similarly, Kodak's then Chairman, Kay Whitmore, recognized that Kodak had no one
to blame for its lack of success in Japan but Kodak itself.
4
I think there is no further barrier in the Japanese market forKodak to proceed with its business in Japan. If there shouldbe something, it would be only due to Kodak's owninsufficient effort in the Japanese market.
In making allegations that market barriers constructed by Fujifilm are the source of its
problems in penetrating the Japanese market, Kodak and Mr. Fisher are attempting to rewrite
the history of Kodak's experience in Japan. Although this rewrite may be commendable as a
public relations strategy and necessary as a legal strategy, Kodak's allegations are contrary to
the statements made by the Kodak executives in office during most of the period covered by
the petition. The allegations are also without factual support.
A. "Privatizing Protection": Fiction Based On MistakenFacts, Misleading Facts, Or No Facts At All
"Privatizing Protection" is little more than an artfully crafted series of conclusory
statements based on a combination of anecdotes and mischaracterized facts. Often, no
support is provided for either the facts represented or the conclusions drawn from those facts.
In other cases, the source is a "Consultant's Report," which is neither included in the materials
nor otherwise identified in terms of its content, its purpose, its author, or its sources of
information. The most common sources -- industry publications such as the "Zenren Tsuho"
and the "Nihon Shashin Kogyo Tsushin" -- are frequently misquoted or taken out of context.
Finally, in virtually every case, readily available facts which contradict the proposition being
put forward by Kodak are left out of the description.
An Appendix to this submission addresses the specific factual allegations made by
Kodak, the source of the allegations, the accuracy of Kodak's statements concerning the facts,
the accuracy of the translation, the context, and other facts related to the allegation. This
Appendix and the narrative discussion of the factual allegations throughout Fujifilm's
memorandum demonstrate conclusively the absence of any factual basis for Kodak's
allegations. The following are a few examples of the devices used to make Kodak's
"Privatizing Protection" appear credible.
5
1. The consultant's report: wrong, wrong, and wrong again
The only cite supporting an allegation fundamental to Kodak's claim that a
"distribution bottleneck" exists in the Japanese market -- the existence of highly progressive
rebates made by Fujifilm -- is a "Consultant's Report, 1994." The consultant is not identified,
the source of the consultant's information is not identified, and the time period examined by
the consultant is not identified. Given the fact that the consultant's report is almost always
wrong, it appears that this source was used whenever no other source was available. The
consultant's description of Fujifilm's rebate programs bears absolutely no relationship to
reality.
2. Retailer complaints as evidence of collusion and conspiracy
Throughout its complaint, Kodak has elevated a retailer's complaints about supplier or
competitor pricing to the level of proof of collusion and conspiracy to maintain retail prices or
to put pressure on competitors to cease discounting. An example is the supposed conspiracy
to stop Nihon Jumbo from discounting prices of color prints. "Privatizing Protection" states:
"In 1994 at the Zenren Board meeting, Vice Director Suzuki called for concrete price
measures from Zenren to somehow counter the low prices of prints being offered by Nihon
Jumbo." Even if the statement were true, Kodak fails to mention that Nihon Jumbo never
raised its price; to the contrary, Nihon Jumbo's price decreased from the 9 yen complained of
when Mr. Suzuki made his remarks in 1994 to 4 yen per print today.
Kodak also fails even to provide an accurate rendition of the article. Although the
retailers undoubtedly discussed the problem of low print prices, the article quotes Mr. Suzuki
as follows:
Stores with high prices provide quick and high quality {service}. Stores with low prices require longer days {for processing}.
Zenren Tsuho, April 1994, 11-13.1
6
Therefore, I do not think that {Nihon Jumbo's price} will putmuch pressure on retail prices.1
In effect, Mr. Suzuki dismissed the problem and the Zenren members were left looking for
means to attract customers without discounting prices. Kodak, however, represents it as part
of a concerted effort to force Nihon Jumbo to raise its prices.
3. Mischaracterizations
A favorite device is to cite an article for a proposition for which that article does not
stand. For example, "Privatizing Protection," in reference to the Zenlaboren (All Japan
Federation of Color Labs Association), states that the organization has "served as a forum for
coordinated efforts by photoprocessing laboratories to raise the price of photoprocessing
services and prints to Japanese consumers." In fact the article cited provides no support for
this statement. First, the article relates to events which occurred at a Zenren (All Japan
Federation of Photo Dealers) not Zenlaboren (color lab association) meeting. Second, the
focus of the meeting was not about efforts to raise prices; rather, the retailers were
complaining about price increases they were receiving from the photofinishers (i.e., they were
asking how to counter these price increases). Third, the specific complaint was about the
difficulty for small retailers in competing with large retailers because of the difference in print
prices charged to each.
4. Allegations with no support
In closing their conspiratorial picture, the authors often were confronted by an absence
of facts supporting their position. When there is no retailer complaining in a Zenren meeting,
or the unidentified authors of the "Consultant's Report" have apparently failed to address an
issue, the authors simply make a statement without any support. For example, Kodak's
memorandum states: "Fujifilm's affiliated retailers are pressured by Fujifilm and its
wholesalers to refrain from price discounting beyond certain defined limits." There is no
7
source for this statement. Indeed, Fujifilm did not even know that it had "affiliated retailers"
to pressure. Fujifilm deals with many, if not most, of the major discounters. In fact, the
leader of the discount movement in Japan, Daiei, is a large Fujifilm customer. Finally,
Fujifilm does not have the resources or information to "pressure" hundreds of thousands of
individual retailers into maintaining prices.
While these various devices used to fabricate a conspiratorial web to keep Kodak out
of the Japanese market make good reading, they also are pure fiction.
B. Fujifilm In Japan: No Systematic AnticompetitiveActivities
The core of Kodak's allegation is the charge that Fujifilm, over a period of more than
25 years, has created and perpetuated an exclusionary and anticompetitive market structure in
the Japanese color film and paper markets. Although Kodak attempts to amplify these alleged
exclusionary and anticompetitive practices into a broader conspiracy involving "liberalization
countermeasures" and nonenforcement of the Antimonopoly Act, the foundation of the
complaint depends ultimately on the existence of the alleged exclusionary and anticompetitive
market structure. In attempting to portray the existing market structure as being exclusionary
and anticompetitive, Kodak has rewritten history.
The essence of Kodak's allegations is that Fujifilm has created an exclusionary market
structure that it maintains through elaborate rebate programs that ensure loyalty to Fujifilm.
At the heart of this allegedly exclusionary structure are the four "tokuyakuten" or primary
wholesalers that allegedly became single-brand distributors under pressure from Fujifilm and
now allegedly collude with Fujifilm to maintain the structure further down the sales chain.
These tokuyakuten allegedly constitute an "essential facility" to obtain access to the Japanese
market.
8
1. The alleged core distribution system
To portray Fujifilm's actions as anticompetitive, Kodak has concocted a fictional "core
distribution system." It then charges that Fujifilm excluded Kodak from this system in order
to block its access to the market. In fact, however, there never was a core distribution system,
and Fujifilm did not take it over.
Until the 1960s, most participants in the photographic market, including the camera
manufacturers, sold through a combination of single-brand and multi-brand wholesalers.
Generally, the camera business constituted the mainstay of these wholesalers' revenues and
profits. In the mid-1960s, the camera manufacturers, led by Olympus and Canon, began
eliminating the wholesalers and creating their own distribution systems. This move by the
camera manufacturers occurred simultaneously with a decade-long consolidation of the
wholesale functions in the photographic industry. Konica bought its distributors and
constructed its own direct distribution network selling directly to retailers and secondary
dealers. Kodak's agent in Japan, Nagase, followed this lead and acquired one of its principal
distributors, Kuwada, in 1967. Kuwada terminated its relationship with Fujifilm when it
became part of the Kodak distribution system. Of the film and paper manufacturers, Fujifilm
was the only one not to acquire any of its tokuyakuten and to continue to sell through this
distribution channel rather than through direct distribution.
The remaining tokuyakuten, in effect, became competitors with the direct distribution
channels of the other suppliers of film and cameras. Those that decided to remain multi-brand
distributors, unable to compete with direct distribution by the film and camera manufacturers,
became secondary dealers. Because Fujifilm did not have its own direct distribution system,
its tokuyakuten gradually dropped distribution of other brands of film in which they were
competing with the manufacturers' direct distribution. Of Fujifilm's four primary
tokuyakuten, three terminated their relationships with other manufacturers in the 1960s. Two
of Fujifilm's principal tokuyakuten never carried Kodak film in the postwar era and had
terminated their relationships with Konica by 1964. The third, which had carried all brands,
became a single-brand distributor for Fuji brand film in 1968. The fourth remained a multi-
brand distributor until the so-called "Asanuma incident" in 1975.
9
2. The Asanuma non-incident
A large portion of "Privatizing Protection" focuses on the events surrounding the
termination of Nagase by Asanuma in 1975. Kodak portrays this as the critical event in
blocking its access to the allegedly essential facility for film distribution in Japan. Kodak tells
only a portion of the story.
Prior to Kodak's choice of Nagase as its sole agent in Japan in 1960, Asanuma had
dealt directly with Kodak as one of its import agents in Japan. When Nagase became Kodak's
sole agent, Asanuma was cut off from direct access to Kodak and placed in the position of
being a wholesaler for Nagase's Kodak products. When Nagase acquired a tokuyakuten and
began direct distribution, Asanuma was placed in the position of competing with Nagase's
tokuyakuten. As a result, after liberalization began, and in anticipation that Kodak might
change the structure of its Japanese distribution to accommodate Asanuma, Asanuma's top
management visited Rochester to meet with Kodak's executives in 1973. During the visit,
Asanuma expressed its desire to reestablish direct dealings with Kodak in Japan. Kodak
rebuffed Asanuma's approach. Its answer was that it had no intention of changing the
structure of its distribution in Japan and that Asanuma would have to continue dealing with
Nagase if it wanted access to Kodak products. Given the opportunity of continued access to
this "essential facility" -- Asanuma -- and the possibility of even strengthening this
relationship, Kodak chose to risk the relationship. Not surprisingly, two years later Asanuma
stopped handling Kodak's products.
Kodak was not alone in the mid-1970s in not considering Asanuma to be an essential
facility for its access to the Japanese market. Nagase downplayed the termination by
Asanuma and went to work constructing a replacement, the so-called DKP (“Distributors of
Kodak Products”) network. Nagase recruited 33 distributors and dealers into the network,
including the distribution operations of two camera manufacturers and Mitsubishi paper.
When the DKP network was established, Nagase declared that its coverage in the Japanese
market was improved over the coverage it had with Asanuma. During four of the first six
10
years after the Asanuma termination, Kodak's sales and market share in Japan increased,
reaching an all-time high in 1981.
What is clear from the Asanuma incident is that Kodak's characterization of the
tokuyakuten as an "essential facility" is nothing more than a post hoc invention by Kodak's
lawyers; it is not a market reality. It was Kodak's inaction that ultimately led to the rupturing
of the relationship with Asanuma. Nagase, presumably more in touch with the realities of the
Japanese market than Kodak, did not characterize the termination of Asanuma as anything
more than a passing problem, and proceeded to construct alternative channels that it
subsequently declared improved its position in the market. The ultimate proof that Kodak did
not consider this channel to be an "essential facility" is Kodak's failure to approach Asanuma
or any of the other tokuyakuten in the past 20 years to make a commercially attractive offer
for them to handle Kodak.
3. The remarkably unremarkable rebates
The second element crucial to Kodak's exclusionary theory is its allegation that
Fujifilm has used a variety of rebates as the central element to control its distribution system
and exclude Kodak. Indeed, Kodak states: "Fujifilm's use of rebates is quite possibly the
single most important control mechanism in its distribution system." The alleged rebates
include "remarkably progressive rebates" to discourage the tokuyakuten or retailers from
handling products from competing suppliers, year-end rebates that keep the tokuyakuten at
just the break-even profit level, and rebates based on resale amount used as an instrument of
resale price maintenance. This fanciful package of rebates is substantiated by the unidentified
expert source, the "Consultant's Report." All three of these allegations are false. The "single
most important" element of Kodak's exclusionary theory is demonstrably a fantasy.
The purpose and effect of Fujifilm's rebates is to respond quickly to changing prices in
the market, and to provide incentives to promote specific products. Contrary to Kodak's
assertions, rebate programs based on target sales or purchase volumes are exceptional in
Fujifilm's overall rebate system. Furthermore, progressivity for target volume rebates has
always been very limited, and in recent years virtually eliminated. During most of the post-
11
liberalization period, Fujifilm's target volume rebate program to the tokuyakuten was mildly
progressive with several rebate steps based on achieving all or a portion of the target. The
maximum rebate rate was less than 2.7 percent, with increments between each of the steps
averaging less than 0.3 percent.
Fujifilm also had a moderately progressive target volume rebate provided to retailers.
The maximum rebate rate was around 3 percent, with increments between the two steps
averaging less than 0.3 percent.
Neither program can be characterized as "remarkably progressive" or exclusionary. In
any event, both programs have been terminated. Beginning in 1987, the Japan Fair Trade
Commission (JFTC) undertook a study of the distribution system in photographic film and
received details from Fujifilm regarding its rebate system. Based on discussion in the JFTC
study and the draft Distribution Guidelines issued by the JFTC at that time, Fujifilm decided
to change its rebate programs in 1990 to eliminate progressive elements which even had the
appearance of encouraging exclusivity. The retailer target rebate has been eliminated entirely.
The tokuyakuten target rebate has been changed into a regional target rebate program (i.e.,
sales office by sales office) with reduced progressivity. The difference between the top and
bottom rate which any tokuyakuten sales office may receive is less than 0.6 percent.
To portray the tokuyakuten as "vassals" under the control of Fujifilm, Kodak also
alleges that Fujifilm manipulates rebates to ensure that its tokuyakutens' financial
performance hovers around a break-even level. In particular, Kodak alleges that "Fuji rebates
are often after the fact; they are not necessarily paid during the normal course of business as
part of the invoice for a particular transaction; rather, the rebate amount is determined and
paid at the end of each year." Again, Kodak's allegations are totally false.
Rebate rates and (when applicable) rebate targets are never determined after the fact.
Rates and targets are always fixed at the outset of a period (generally 6 months, never a full
year). Accordingly, the tokuyakuten are always able to determine how much in rebates they
will earn during a given period based on their own performance. The provision of year-end
rebates calculated to push distributors from the red just into the black does not occur.
12
Finally, the allegation that resale price maintenance is encouraged by basing the rebate
amounts on the value of the resale is also totally incorrect. Fujifilm has no rebates which are
based on resale amount. All rebates are determined either on the unit volume of sales, on the
price paid to the manufacturer, or on the applicable suggested price. Maintaining a certain
price level is neither a criterion for qualifying for rebates nor a factor in determining the
amount of rebate to be received.
4. The paper distribution "bottleneck" theory
The only significant allegation of anticompetitive conduct specific to color negative
photographic paper is the charge that Fujifilm has created a "captive market" for color paper
in Japan by building a network of affiliated photofinishing labs. Kodak has argued that it is
precluded from selling paper to the large segment of the market which, in effect, has been
bought by Fujifilm.
Again, Kodak has attempted to recast a general industry trend into a nefarious Fujifilm
plot. Forward integration into photofinishing is the norm in the photographic paper industry.
Fujifilm began investing in labs in the early 1960s. Kodak, for its part, has been involved in
photofinishing in Japan for 40 years. Konica, Oriental, and Mitsubishi all have a substantial
photofinishing presence in Japan. Fujifilm simply responded to this general industry trend.
5. The alleged exclusionary practices
Kodak's wordsmiths have done a masterful job of dressing up standard industry
practices in sinister sounding language -- "tokuyakuten bottleneck," "Asanuma incident," and
"remarkably progressive rebates." What actually happened in Japan, however, is no more
than the normal, market-driven evolution of distribution structures along lines similar to those
used in the United States and other countries.
Single-brand distribution is the norm in Japan, for Kodak and Konica as well as for
Fujifilm. Fujifilm's only distinction is that it has not bought its distributors, which are
therefore free to entertain offers from Fujifilm's competitors. Direct distribution, the modus
operandi of Kodak and Konica in the Japanese market, is also used in the U.S. market as the
13
predominate method of distribution; Kodak, Fujifilm, Konica, Agfa, and 3M all sell directly
to large accounts in the United States. There were no tokuyakuten to do Fujifilm's
distribution in the United States or for Fujifilm to buy to create a direct distribution system.
Direct distribution is similarly the norm in most major markets in the world. Although as
Kodak claims "building a parallel distribution system in Japan is enormously expensive,"
Kodak has built such a system almost everywhere else in the world. Fujifilm has invested
enormous resources in building such a system in the United States.
Similarly, forward integration into photofinishing is the worldwide norm in the
photographic paper industry. Kodak's Qualex subsidiary in the U.S. is the largest wholesale
photofinisher in the world and controls approximately 70 percent of the U.S. wholesale
photofinishing market. To compete in the U.S. market, Fujifilm built its own wholesale
photofinishing network, Fuji Trucolor. Both Kodak and Fujifilm also own photofinishers in
Europe and other markets.
6. The pricing paradox
In addition to its allegations of a distribution bottleneck, Kodak charges that Fujifilm,
in league with its tokuyakuten and with retailers, has conspired for decades to maintain
artificially high prices for color film in Japan. How this charge relates to Kodak's
performance in Japan is unclear, since artificially high prices should present Kodak with a
competitive opportunity to underprice the competition and thereby gain market share. Indeed,
the charge of artificially high prices is especially ironic for Kodak to make, because Kodak's
then President, Mr. Kay Whitmore, announced unequivocally in 1986 that Kodak would not
compete in Japan on the basis of price:
The President ruled out the possibility of the company passing onexchange gains from the yen's appreciation against the U.S. dollarto Japanese consumers in the form of lower product prices. He saidKodak is not a price leader in Japan and has no intention oflowering its prices to win in competition with its Japanese rivals.
Putting aside this basic problem with Kodak's argument, Kodak has presented nothing more
than a few press articles quoting retailers complaining about a competitor's price to support
14
this allegation. Complaining about competitors' prices is what retailers do, in every industry
in every market around the world.
The available evidence demonstrates that the Japanese market is sensitive to price.
Private label entrants have come into the market based on price. Gray market imports have
come into the market based on price. Indeed, the Photographic Consumer Price Index
indicates a ten year trend of falling prices for both film and photofinishing in Japan.
Furthermore, prices vary among retailers. Fujifilm's own surveys of 32 stores in the Tokyo
and Osaka areas reveal a substantial and sustained variation in prices among the stores
surveyed. Small retailers get squeezed by larger retailers and complain. Large retailers get
squeezed by discounters and complain. Private label and gray market sales squeeze everyone
and everyone complains. This situation does not indicate suppression of price competition.
Rather, such pricing patterns occur only if there is in fact vigorous price competition.
What is most curious about Kodak's pricing allegations is that as recently as 1993,
Kodak Japan indicated publicly it could not lower its prices in Japan for fear of gray market
re-exports to the U.S. and other markets, with consequences for Kodak's price structure in
those markets. Indeed, even with the yen at 85 per dollar, the prices in the Japanese market
are still quite competitive with those in the U.S. and Europe. Kodak's efforts to portray the
Japanese film market as a high-priced market sustained by Fujifilm's control over pricing
simply fails when the facts are examined.
C. Government Of Japan: No Encouragement Or TolerationOf Systematic Anticompetitive Behavior
Kodak argues that MITI encouraged and the JFTC tolerated anticompetitive conduct,
but neither of these charges survives careful scrutiny.
1. MITI did not encourage anticompetitive conduct
With respect to MITI, Kodak identifies the "Distribution Guidelines for the
Photosensitive Materials Sector" released in 1970 as the centerpiece of the MITI liberalization
15
countermeasures. Yet what did these guidelines provide? More importantly, what actually
happened in the market? The contrast between Kodak's claims and reality are striking.
Claim: Bringing Wholesalers into the Fujifilm Keiretsu.
Fact: The Guidelines say nothing about bringing wholesalers into Fujifilm's control,
or that of any other manufacturer. Moreover, most of the pairing up of manufacturers and
wholesalers had already taken place when the alleged plan was drafted. Kodak never explains
how a 1970 MITI master plan could encourage what had already happened. The only shift
away from Kodak that occurred after the 1970 Guidelines involved Asanuma, a story which
has already been told, and which has nothing to do with MITI.
Claim: Encouraging the Expanded Use of Rebates.
Fact: The Guidelines in fact say that the excessive use of rebates could violate the
Antimonopoly Act, and indicate that the "use should be limited to a minimum." Yet Kodak
somehow interprets this language as really meaning that MITI encouraged the expanded use
of rebates. In a burst of what should be labeled Kodakian logic, MITI's failure to condemn
the use of any rebate under any circumstance somehow becomes administrative guidance to
expand the use of rebates.
Claim: Creation of a Distribution Bottleneck.
Fact: Once again, the Guidelines say nothing on this issue. Indeed, this portion of
Kodak's argument makes not one mention of MITI, other than to note that MITI wanted to use
a film-camera linkage to block Kodak. A quote from a trade association newsletter
referencing this supposedly MITI-sponsored film-camera conspiracy is, in fact, featured on
the inside cover of "Privatizing Protection". This emphasis is ironic, since before the
Guidelines were issued in 1970 the camera manufacturers and other film manufacturers had
begun their own direct distribution, and were not ending their reliance on the tokuyakuten for
distribution. To the extent MITI actually had this idea, it was a flawed idea. More
importantly, if MITI did have this idea, the idea had no impact. The film and camera
16
industries continued their largely independent development. Fujifilm manufactures cameras,
but other prominent companies -- Canon, Minolta, Nikon, and others -- dominate the camera
industry. There is no bottleneck.
2. The JFTC has strictly enforced the Antimonopoly Act withrespect to Fujifilm
Finally, Kodak makes strenuous arguments about the JFTC's lack of enforcement. Of
all of Kodak's claims, this claim is superficially the most appealing. After all, "everybody
knows" that the JFTC is a paper tiger. Yet this claim is in fact utterly baseless. Kodak
ignores important changes in enforcement activity by the JFTC. Recent statistics show that
JFTC enforcement efforts are in fact comparable to governmental efforts to enforce the U.S.
antitrust laws.
More fundamentally, Kodak ignores and distorts the history of the JFTC's strict
scrutiny of Fujifilm and its activities:
JFTC did not find any price fixing in its 1970 Report on FilmIndustry Pricing. The report simply noted that Konica pricingfollowed that of the industry leader, Fujifilm. Such a pattern isquite common and prevails in many other industries, includingmany U.S. industries, when there are only a few producers. Itdoes not mean price fixing, and the JFTC found none.
The JFTC has been subjecting the photographic materialsindustry, including Fujifilm, to particularly strict scrutiny. Bothcolor film and color paper have been identified as "monopolisticsituations" and are therefore subjected to particularly carefulscrutiny and additional reporting requirements under theAntimonopoly Act.
When Fujifilm and other manufacturers raised their prices due tothe "silver shock," the JFTC exercised its authority under theAntimonopoly Act and requested explanations. The JFTCaccepted the Fujifilm explanation, and found no violations.
In another product, x-ray film, the JFTC found problems andrequested Fujifilm to make changes. Because the JFTC did notpublicly mention other products, Kodak assumes that nothinghappened for other products. In fact, at that time Fujifilm
17
voluntarily reviewed other contracts and madesimilar changes for other products, including colorfilm. The issues Kodak has claimed as problemswere resolved 15 years ago.
Kodak commits the same error about rebates. Kodak repeatedlyinvokes "remarkably progressive" rebates. But they do not exist,never have, and never will in light of the strict JFTC scrutiny ofFujifilm. Fujifilm once had mildly progressive rebates. Eventhese rebates were changed after a JFTC study in the late 1980sof the distribution system for photographic film. Again, theproblem identified by Kodak has already been resolved.
There are other examples of JFTC enforcement and monitoring efforts directed at
Fujifilm, but these examples illustrate the point. Two conclusions are inescapable. First, the
JFTC has been subjecting Fujifilm to strict scrutiny. Few, if any, Japanese companies have
been subject to as much scrutiny as Fujifilm. Second, Kodak ignores the important part of
JFTC enforcement that takes place in ways other than formal investigations. Using these
alternative mechanisms, the JFTC has long since resolved the potential problems that Kodak
identifies. The theoretical debate over whether these contractual provisions and rebates
actually violate the Japanese Antimonopoly Act does not matter. To avoid even the
appearance of a problem, Fujifilm has already made voluntary changes to its practices to
comply fully with all JFTC requirements. There is nothing left to Kodak's complaints.
Furthermore, to ensure ongoing compliance with the Antimonopoly Act, Fujifilm has
instituted an active compliance program. In 1991, Fujifilm developed its Antimonopoly Act
Compliance Manual to emphasize to all employees the need for strict compliance. In 1992,
Fujifilm prepared and circulated a comprehensive "Don'ts for the Antimonopoly Act" for the
sales force, both to underscore its commitment to strict compliance and to facilitate such
compliance.
18
3. Fujifilm and its tokuyakuten are not part of the Mitsui keiretsu
Kodak also alleges that Fujifilm and its tokuyakuten are part of the Mitsui keiretsu.
These claims are absurd. No one else believes that Fujifilm is part of the Mitsui keiretsu --
not one of the independent sources that we checked. Many other companies are listed, but not
Fujifilm. The limited cross-shareholding shows nothing. Virtually all Japanese companies
have financial institutions as shareholders; these financial institutions are passive
shareholders. The patterns of bank relationships described by Kodak have nothing to do with
forming a keiretsu relationship, even if Kodak had its facts straight. Fujifilm has never asked
Mitsui Group banks to lend to the tokuyakuten and the Japanese Government has never
guided Mitsui Group banks to invest in Fujifilm.
The error of Kodak's analysis is best illustrated by the claim that the Mitsui Group
banks are the "main bank" of Asanuma. The reality is that Daiichi Kangyo Bank is the main
bank for Asanuma. In fact, a managing director and an auditor of Asanuma are both from
Daiichi Kangyo Bank. No one has ever accused Daiichi Kangyo Bank of being a member of
the Mitsui Group.
D. Kodak In Japan: Limited Market Share As The ExpectedConsequence of Insufficient Investment, InadequateAttention, And Ineffective Marketing
1. The mirror image problem
Kodak attempts to contrast its market share elsewhere in the world with its market
share in Japan. Based on these statistics, Kodak concludes that "its low share {in Japan}
reflects the continuing presence of significant market barriers in the two highest volume
photographic materials markets -- consumer photographic film and paper." Although Kodak's
logic may be superficially attractive, the fact that its performance in the Japan market is the
mirror image of Fujifilm's performance in the U.S. market raises serious questions about the
validity of this approach. The fact that Fujifilm and Kodak have nearly identical market
shares worldwide, when their respective home markets are excluded, makes Kodak's
conclusion laughable, unless one also concludes that Fujifilm's low share in the United States
19
reflects the continuing presence of significant market barriers in the U.S. market.
What is at work is not market barriers but market forces. In their respective markets,
Kodak and Fujifilm are both viewed as pioneering firms with the significant advantages of
incumbency. In the U.S. market, 50 percent of consumers will not buy any film other than
Kodak, and another 40 percent prefer Kodak. Kodak has extremely strong brand
identification and brand loyalty. Similarly, in the Japanese market Fujifilm is perceived as
providing higher quality film and there is a strong consumer preference for Fujifilm brand
film. These phenomena have nothing to do with market barriers. They have to do with
consumer preferences for the incumbent brand.
2. The profit sanctuary myth
As alleged proof that market barriers exist blocking Kodak's access to Japan, Kodak
points to Fujifilm's $10 billion cash surplus, which supposedly results from a protected profit
sanctuary. As with virtually all of the Kodak allegations, this one is long on rhetoric and short
on facts.
In fact, the operating results of Fujifilm and Kodak over the last twenty years have
been virtually identical. Fujifilm's annual operating income has averaged 15.2 percent of
sales (or 15.5 percent on a cumulative basis); Kodak's has averaged 14.4 percent of sales (or
13 percent on a cumulative basis). How then did Fujifilm, a company with significantly less
total sales revenues, manage to accumulate $10 billion, while Kodak did not? Or perhaps
better, how could the larger Kodak fail to accumulate a comparable amount? The answer is
quite simple and unrelated to relative operating performance or size. In the last ten years,
Kodak had $5.5 billion in extraordinary charges against earnings. These charges included
multiple restructurings, the payment of damages to Polaroid in the instant film litigation, and
the costs of withdrawal from the instant film market. In addition, to prop up its stock price in
the face of deteriorating net income, Kodak has been overly generous in paying dividends. In
the past 20 years it has paid out an average of nearly 80 percent of its net earnings in
dividends, including six years when dividends actually exceeded net earnings for the year.
The combination of management mistakes and a dividend policy designed to insulate Kodak's
20
stock price from those mistakes fully account for the difference in Fujifilm's and Kodak's cash
reserves.
3. Kodak shut the "window" opened by liberalization
Between the beginning of liberalization in 1971 and 1979, the initial period when the
liberalization countermeasures are alleged to have come into effect, Kodak's share of the color
film market more than doubled. Kodak's share was then flat between 1979 and 1980, before
rising in 1981 to nearly 18 percent of the market, a full 10 percentage point increase above the
1971 level. The increase in Kodak's market share is directly attributable to three factors: (1)
liberalization and the decline in import duties; (2) the introduction of the 110 format film two
years ahead of Fujifilm; and (3) a decision not to raise prices in response to the increased cost
of silver in 1980 resulting in a wider gap between Kodak's price and Fujifilm's price. At the
end of 1983, Kodak appeared to be a well established player in the market with a growing
market share. There was no evidence of the alleged liberalization countermeasures.
This situation began to change at the beginning of 1984. By the end of 1983, Kodak
had raised the prices it charged its agent in Japan three times. Having resisted increasing
prices after the first two Kodak price increases, Nagase announced a price increase after the
third. Nagase eliminated its price advantage in the market and in 1984 Kodak's market share
began to fall. With a limited, albeit stable, market for 110 film and higher prices, Kodak shut
its own "window." The window had obviously been open: Kodak more than doubled its
market share between the onset of liberalization and 1984. It did it the old-fashioned way,
using a combination of product innovation and aggressive pricing.
4. Missed opportunities and missing products: Kodak from 1985 to the present
In 1985, Kodak was presented with a different opportunity: the appreciation of the
yen. In the years after 1985, the yen continued appreciating, providing Kodak with a rare
opportunity to maintain its dollar profits while lowering its prices to become more competitive
in the Japanese market. Kodak did not take advantage of the opportunity.
21
While Kodak was maximizing its profits from the appreciating yen, Fujifilm was
launching the first of two products introduced in the late 1980s that would radically change
the color film market: the single-use camera. Fujifilm introduced a 110 format single-use
camera in July 1986; Fujifilm followed a year later by introducing the world's first 35mm
single-use camera. By the time Kodak had a competing product in 1988, Fujifilm was selling
more than 10 million single-use cameras annually. Second, in 1989, Fujifilm introduced high
resolution, high speed ISO 400 film. This product was the first high speed film with
resolution equivalent to that of the slower speed ISO 100 film. Again, Kodak had no
competitive product for Fujifilm's ISO 400 for two years. By the time that Kodak introduced
a competitive product in 1991, Fujifilm's ISO 400 film had claimed nearly 40 percent of the
market.
In short, having failed to compete aggressively in the Japanese market based on price,
Kodak was also unable to compete in the late 1980s and early 1990s based on product
innovation. Fujifilm introduced two innovative products -- each introduced two years in
advance of competing Kodak products -- which quickly claimed significant shares of the film
market. Meanwhile, Kodak was focusing its marketing on its disc film and camera system,
which was almost immediately a failure, and on increasing ISO 200 film sales, an effort
which also failed. Fujifilm's innovations enhanced its image and strengthened its market
position. Kodak's strategic mistakes left it playing catch-up with Fujifilm. Liberalization
countermeasures did not frustrate Kodak's efforts to achieve a more significant share of the
Japanese market. Kodak itself was responsible for the failure. The appreciating yen
presented it with the choice between bigger profits or a bigger market; Kodak chose profits.
Fujifilm introduced new products which altered the marketplace and Kodak had no products
with which to respond.
5. Too little, too late
Ultimately, Kodak's failure to gain a significant position in the film and paper markets
after liberalization was a reflection of the efforts it made to compete. It chose not to compete
based on price, except during the brief "window" of the early 1980s. It foreclosed itself from
22
important segments of the market -- single-use cameras and high resolution ISO 400 film --
first because it had no competing product, and subsequently because its versions of these
products arrived late.
These, however, were not the only problems Kodak created for itself.
Notwithstanding the first stage of capital liberalization in 1971 which permitted Kodak to
enter into 50-50 joint ventures, Kodak made no investment in Japan and left its fate to its
agent, Nagase. Notwithstanding the completion of capital liberalization in 1976, Kodak again
made no investment in Japan. Despite the fact that Kodak was using direct distribution
through a subsidiary in every other important market in the world, it was not until 1984 that
Kodak decided to take control of its own distribution in Japan.
Similarly, Kodak did not aggressively pursue efforts to increase brand identification
and brand loyalty in Japan. Fujifilm's use of blimps in the U.S. market did precipitate a
countermeasure by Kodak in Japan -- blimps over Tokyo. It did not, however, convince
Kodak to make the kind of effort in Japan necessary to improve its position in the market.
Between 1986 and 1988, Fujifilm outspent Kodak on advertising by 10 to 1; Konica outspent
Kodak by 8 to 1. Kodak's modest efforts to create a stronger image in Japan were largely
offset by the adverse publicity that accompanied scaling down its R&D facility and laying off
technicians, canceling the employment of new graduates, and other layoffs in 1992 and 1993.
The last avenue of attack for Kodak disappeared amidst rhetoric about an aggressive new
effort in Japan. The aggressive new effort never materialized.
E. Treaty Violations: Old Allegations Do Not Improve WithAge
In an effort to find some violation of some international agreement, Kodak resurrects
old academic debates about whether Japan complied with its OECD and FCN treaty
obligations. Even Kodak concedes, however, that such academic debates became moot in
1975, when Japan completed its capital liberalization.
23
Section 301 is not designed to address past violations. The statute is written in the
present tense. Policy consideration also calls for a focus on ending present violations, not
revisiting violations long since ended.
Kodak's effort to invoke the other prong of Section 301 -- its focus on allegedly
"unreasonable" acts -- also fails. This argument is predicated on a version of the past and
present that cannot be reconciled with the facts. When the alleged facts prove to be wrong,
the legal basis for invoking Section 301 collapses.
F. Kodak In The U.S. Market: A Critical Benchmark AgainstWhich To Judge Kodak's Allegations About Fujifilm
Examination of the U.S. market for photographic products, and specifically Kodak's
behavior in its home market, places Kodak's petition in a very different light. Kodak argues
that something must be wrong in Japan because Kodak's share in Japan is substantially less
than Kodak's share in other national markets. Kodak alleges that Fujifilm's high market share
in Japan (70 percent) must be the result of allegedly anticompetitive Fujifilm practices. Yet,
Kodak has an identical market share (70 percent) in the United States, its home market. In
addition, the Fujifilm practices that Kodak alleges hindered its success in Japan -- practices
Kodak terms "anticompetitive" -- have parallels in Kodak's practices in the U.S. market.
Indeed, Kodak protects its towering position in the U.S. market through aggressive business
practices far more overtly exclusionary than anything it even accuses Fujifilm of doing.
Kodak dominates all aspects of the U.S. market for photographic products. Kodak has:
70 percent of the color film market;
70 percent of wholesale photofinishing market;
60 percent of the color paper market.
In contrast, in the 25 years since its entry into the U.S. market, Fujifilm has attained around a
10 percent share in the color film market, a 15 percent share of the wholesale photofinishing
market, and a 17 percent share of the color paper market.
24
With this submission, Fujifilm pulls back the curtain to reveal the inner workings of
Kodak's dominance of the U.S. marketplace. Kodak maintains its dominant position in the
U.S. market by the use of exclusive agreements, tying, bundling, and other practices that are
specifically designed to foreclose competitors' access to shelf space or market participation,
and to lock in retailers to Kodak's products and services at every stage of the photo-imaging
process. Accordingly, an examination of Kodak's behavior in the U.S market not only
highlights the sheer duplicity of Kodak's petition, but also provides a critical benchmark
against which to judge Kodak's allegations about Fujifilm's behavior in the Japanese market
and Kodak's level of commitment to the Japanese market.
1. Historical context: Kodak's century-long entanglement withantitrust law
The U.S. market has been shaped by Kodak's long history as the target of antitrust
litigation, as both Kodak's competitors and the U.S. Government have at various times sued to
stop Kodak's anticompetitive practices.
Since its founding in 1878, Kodak has attempted to dominate the photographic
industry in the United States. The central theme in Kodak's long history has been its
persistent attempts to leverage its market power in the film industry to all aspects of the
photographic industry. Kodak's strategies have included price discrimination, horizontal and
vertical integration, and tying. As a result of its practices in the United States, Kodak has
continuously faced private or government litigation and has spent the greater part of this
century subject to government-imposed consent decrees enjoining it from various allegedly
anticompetitive practices.
The most prominent of the many lawsuits against Kodak alleging anticompetitive
conduct are the actions brought by the U.S. Government. In 1915 the United States brought
suit against Kodak to enjoin the company from engaging in a variety of anticompetitive
practices, including fixing resale prices and forbidding dealers from handling or selling
competitors' goods, and acquiring no fewer than 20 competitors which were afterwards
dissolved and dismantled. In 1921, Kodak entered into a consent decree under which Kodak
25
was ordered to refrain from engaging in retail price maintenance, enjoined from monopolizing
downstream distribution businesses, and enjoined from marketing "fighting brands."
In 1954, the United States added further claims to its original 1915 suit in an attempt
to restrict Kodak's market behavior. Throughout the 1940s and 1950s, with the advent of
color film, Kodak engaged in a practice of tying its film sales to its photofinishing services.
Film was sold at a minimum unit price, set by Kodak, that included the cost of photofinishing.
At the time, Kodak occupied a 95 percent monopoly position with respect to color film. By
bundling the cost of film and processing, Kodak effectively monopolized the photo
processing industry as well. Consequently, Kodak was subjected to another consent decree in
an attempt to restrict Kodak's domination of photofinishing.
Both antitrust consent decrees remained in effect until 1994, when a federal court
terminated the decrees in response to Kodak's request. The U.S. Department of Justice
opposed termination of the consent decrees and has appealed the court's decision. According
to the Department of Justice, Kodak still retains market power in the United States that can be
traced to the illegal activities that gave rise to the 1921 and 1954 Consent Decrees. Although
the District Court judge in Rochester accepted Kodak's argument, the matter is pending before
the Court of Appeals.
2. Old habits that never change
Kodak's reputation for doing whatever it takes to maintain its dominant position in the
market has, if anything, been enhanced in recent years. In each of the principal markets -- the
color film market, the photofinishing market, and the color paper market -- Kodak continues
to employ practices designed to exclude or limit competition from its rivals.
a. Kodak's exclusive dealing arrangements
Over the years, and particularly in recent years, Kodak has consistently solicited and
obtained exclusive arrangements with retailers of color film. There are three principal ways
in which Kodak obtains exclusive arrangements. First, Kodak makes direct payments to those
26
retailers that agree to purchase only Kodak color film. Under this practice Kodak makes a
huge lump sum payment to retailers who remove Fujicolor film from their shelves.
Second, Kodak has used a rebate under its volume incentive program (VIP Rebate) to
obtain exclusive agreements with retailers. Under the VIP Rebate, retailers receive a 4
percent rebate if they purchase a volume of Kodak film that is at least equal to the volume
purchased by that retailer during the previous year. In most instances, retailers who
participate in the rebate are forced to purchase such a high volume of Kodak film to meet
their VIP-required levels of sales that they cannot risk selling non-Kodak film. Since retailers
are not entitled to a rebate if they do not reach their purchase targets, the VIP Rebate provides
a strong incentive for the retailer to emphasize Kodak sales and exclude other brands. In the
event that the retailer cannot attain the level of sales needed to earn the full four percent
rebate, Kodak's practice has been to continue to grant the retailer the full 4 percent rebate on
the condition that the retailer agrees not to sell competing brands of film in ensuing years.
Either way Kodak is able to block the sale of Fuji film to the retailer.
Third, Kodak induces retailers to enter exclusive agreements by offering the retailer
dedicated packaging in conjunction with huge cross-promotional discounts for photofinishing
provided by Qualex, Kodak's subsidiary. With its dominance in the color film market, Kodak
exploits the retailer's desire for cross-merchandising. Indeed, a major part of Kodak's pitch to
be a retailer's photofinisher is not only participation in the Colorwatch program but also the
attractively designed retailer-dedicated promotional packaging -- all conditioned on the
retailer's agreement either to eliminate Fuji brand film outright from the store or to limit
Fujifilm's display visibility. The special packaging typically is a special Kodak film box that
provides a coupon for processing the Kodak film provided that the film is returned to the
retailer (whose name appears on the Kodak box) for processing by Qualex or a photofinisher
required to use Kodak paper and chemistry. Kodak has offered photoprocessing discounts
through exclusive dealers for as much as $20, roughly double the price of the film itself.
For Fujifilm, persuading a customer to carry its film is only half the battle. Upon
gaining entry to the store, Fujifilm must then confront Kodak's extensive efforts to limit
Fujifilm's display visibility. When Fujifilm and Kodak appear in the same stores, it is rare
27
that Fujifilm's display is as prominent as Kodak's. Indeed, as with the exclusivity
arrangements, Kodak often pays extraordinary placement fees that Fujifilm is simply unable
to match. This situation is especially true with respect to the all important check-out counter.
(Since the majority of film sales are "impulse purchases," the check-out counter is the most
desirable display location.) At several major retailers, Fujifilm has been told that Kodak will
pay whatever it takes to keep Fuji brand film away from the check-out counter.
b. Kodak's exclusionary practices have been verysuccessful
Through direct payments to retailers or by use of its VIP rebate, Kodak has attempted,
and often succeeded, in achieving exclusive dealing arrangements with important large
volume retailers, and thereby has prevented Fuji brand film and other brands from reaching
the consumer. Just a few of Kodak's successes include the following:
ECKERD DRUG: A chain of over 1,700 drug stores throughout thesoutheast and southwest regions of the United States, Eckerd hasrefused to carry Fuji film for the past 20 years. Eckerd is very tight-lipped regarding its reason for refusing to sell Fuji film; buyers simplysay they are constrained by "contractual" obligations with Kodak.
PUBLIX SUPERMARKETS: Publix is a chain of 470 grocery stores throughout Florida. Fujifilm has never been able to place its film onPublix shelves due to the VIP rebate program, other ties to Kodak, andincentives provided on photofinishing by Qualex.
K-MART: Kodak recently offered K-Mart a direct payment of $8million dollars to exclude Focal brand film (manufactured by 3M) fromK-Mart stores.
BRADLEES: A chain of 130 stores, Bradlees has entered intoan exclusive arrangement with Kodak to offer only Kodak brandfilm in exchange for a cash payment "in the high six figures."
We note that the above evidence demonstrates Kodak's actual or attempted exclusion
of its rivals from the marketplace at the retail level. If Kodak's competitors are not on the
shelf, consumers will not buy them. As a result, when Kodak has all the shelf space in a
28
particular retail chain, it eliminates its competitors' access not only to those outlets but also to
the customers of those outlets. Kodak's exclusive dealing arrangement are therefore
extremely successful because its rivals are denied access to consumers.
3. Kodak has used its leverage in the film market to dominatephotofinishing and color paper
In 1954, prior to the consent decree, Kodak had a nearly absolute monopoly in color
photofinishing, maintained by leveraging its 95 percent share of total color film sales into
photofinishing by selling film with an advance processing charge. The 1954 Consent Decree
dramatically changed the structure of the color photofinishing market. Pursuant to the
Consent Decree, Kodak was enjoined from linking photofinishing to film sales and was
required to
make processing technology and materials available at reasonable rates. As a result, Kodak's
share of the photofinishing market plummeted from 95 percent in 1954 to 10 percent in 1976,
at which time there were more than 600 independent photofinishers in the United States.
The success of the Consent Decree was only temporary. Kodak has now recaptured
more than 70 percent of the wholesale photofinishing market. Not surprisingly, Kodak's share
of the color paper market has also improved.
Kodak's dramatic recovery of market dominance in photoprocessing has been
achieved principally by: (a) embarking on an aggressive campaign to acquire most of the
once numerous independent photofinishers that had come into existence following the 1954
Consent Decree, and (b) using its traditional dominance in color film as leverage to induce
retailers to accept Kodak's Colorwatch program, which offers discounts and advertising
dollars conditioned on exclusive use of a photofinisher that only utilizes Kodak color paper
and
color chemistry.
In the mid-1980s Kodak decided to change the photofinishing market. From 1986 to
1994 Kodak embarked on a massive campaign to acquire wholesale photofinishers. As a
result of the numerous acquisitions, the U.S. photofinishing market underwent a rapid and
dramatic consolidation. Although in 1981 there were 690 wholesale photofinishers operating
29
900 labs, by mid-1994 there were only 55 wholesale photofinishers operating 140 labs.
Kodak, through its now wholly-owned subsidiary Qualex, was the dominant player. As a
result of this buying spree, Kodak/Qualex has become the world's largest photofinisher. In
the United States, Kodak is by far the dominant force. Kodak/Qualex owns 40 percent of all
the wholesale photofinishing labs in the United States. With respect to volume of business,
Kodak/Qualex control 70 percent of all wholesale photofinishing done in the United States.
In addition to acquiring many of its and everyone else's color paper customers (i.e.,
photofinishers), Kodak has maintained its dominance in photofinishing and color paper
through its Colorwatch program. Kodak's Colorwatch program is a powerful strategy adopted
by Kodak to leverage its dominance of the color film market into the photofinishing and color
paper markets. Under the Colorwatch program, participating retailers must sign an agreement
pledging that they will use the services of Qualex or other Kodak-authorized photofinishers
(which are required to use only Kodak suppliers). Alternatively, if they process film
themselves, retailers must use only Kodak paper and chemicals in their own photofinishing
operations. In return, participating retailers are permitted to use Kodak Colorwatch signs
and other promotional materials and to take advantage of the enormous Colorwatch
advertising budget.
There is no question that Kodak uses its strong dominance in the industry to convince
photofinishers to accept the Colorwatch program. Fujifilm presented evidence to the U.S.
Department of Justice that one wholesale photofinisher was threatened with the loss of a
major account (a participating retailer) when it considered using substantially less expensive
non-Kodak chemicals.
There is also no question that Kodak/Qualex looms over the U.S. market as the
dominant photofinisher. Kodak/Qualex has used and continues to use its size and market
power to prevent Fuji Trucolor from establishing a credible presence in the market. As
Fujifilm has attempted to assemble a national network of photofinishers to compete with
Kodak/Qualex, Kodak/Qualex has reacted aggressively. Using a combination of its size and
deep pockets, as a photofinisher Kodak/Qualex has the reputation of doing whatever is
30
necessary to capture (or keep) an account away from Fujifilm, including buying away the
account with huge amounts of up-front money.
For example, in the winter of 1992, Eagle Food, a grocery chain with approximately
100 stores located in Illinois and Iowa, entertained bids from the major photofinishers,
including Fuji Trucolor and Qualex. All the photofinishers knew that the account had a value
in the range of $1 million to $1.25 million per year. Despite an extremely attractive offer,
Fujifilm lost the account to Qualex. Fujifilm was told later that Qualex had given Eagle
Foods $900,000 cash and 10 minilabs to get the business. In essence, Qualex offered to
provide a 100-store chain with free photofinishing for a whole year.
4. In the past decade there has been no apparent enforcement ofthe antitrust consent decrees restricting Kodak
As noted above, on two separate occasions in 1921 and again in 1954, court-ordered
restrictions were imposed on Kodak’s marketing practices in the sale of color film,
photofinishing and other markets. There is significant evidence that Kodak’s practices over
the past decade, including exclusionary practices and the tying of film sales to photofinishing,
have not been in compliance with the Consent Decrees. The only action taken by the Justice
Department, however, has been to oppose the termination of the Decrees.
5. Fujifilm's enormous efforts in the U.S. market far exceedKodak's commitment in Japan
Kodak complains that its supposedly major investment in the Japanese market has not
been properly rewarded with increases in market share. It then jumps to the conclusion that
some foul play must be blocking it. Yet Fujifilm has invested far more in the U.S. market
than Kodak has in Japan, and still has only approximately 10 percent of the U.S. market. If
the combination of high investment and low market share proves that a market is blocked by
anticompetitive practices, then Fujifilm's case against Kodak is much stronger than the
31
reverse. Alternatively, Fujifilm's U.S. experience simply shows how difficult it is for a
foreign challenger to take on an entrenched domestic incumbent on its own turf.
Fujifilm's only limited success has not been the result of a lack of effort. Fuji-USA
has made considerable efforts to penetrate the U.S. market. Indeed, Fujifilm's efforts in the
United States are in sharp contrast to Kodak's efforts in Japan. Consider the following:
Assuming responsibility for distribution
In the Japanese market, Kodak waited nearly 15 years to take control ofdistribution from an independent distributor.
In the U.S. market, Fujifilm assumed complete control of film distribution,including establishing its own sales force, within three years of introducing itsfilm.
Developing new channels of distribution not occupied by thedomestic incumbent In Japan, Kodak continually relied on established channels of distribution andmade no attempt to break new ground.
In the U.S. market, Fujifilm conceived of, developed, and nurtured the grocerystore as a new distribution channel for film.
Adapting products to local market tastes
In the Japanese market, Kodak made no attempt to adapt its film to the differenttastes of the Japanese consumer until 1989, 16 years after a Japanesewholesaler informed Kodak of this problem.
From the start of its entry into the U.S. market, Fujifilm studied local tastes andhas modified its products accordingly.
Introducing innovative new products
In the Japanese market, Kodak has consistently lagged behind Fujifilm; it wastwo years behind in introducing ISO 400 film and single-use cameras.
In the U.S. market, Fujifilm has been a leader in innovation, introducing a35mm single-use camera when Kodak only had a lower quality 110 model. Inthe color paper market, Fujifilm's new RA-4 color paper was determined byexperts to preserve the photo image much longer than Kodak's color paper.
32
Committing significant resources
In the Japanese market Kodak has invested only limited resources, and hasmade no investment in local manufacturing of consumer photographicproducts.
In the U.S. market Fujifilm has invested over 1.5 billion dollars in the last tenyears alone, including several local manufacturing facilities.
6. Kodak urges the U.S. Government to apply double standard
Kodak's legal analysis urges the U.S. Government to apply an inconsistent double
standard. In its Section 301 petition Kodak has requested USTR to focus its analysis solely
on the Japanese market. Kodak's principal claim is that as a result of Fujifilm's nefarious
anticompetitive practices, Fujifilm has a high 70 percent market share in the Japanese market.
Indeed, Kodak's and Fujifilm's respective market positions in the Japanese market are the sine
qua non of Kodak's entire case.
When Kodak's own allegedly anticompetitive practices were examined in the Consent
Decree proceedings, however, Kodak argued vigorously that the relevant geographic market
was not domestic, but worldwide. Kodak argued that the court should ignore Kodak's own 70
percent share in the U.S. market (compared to Fujifilm's 11 percent share) because the market
for color film is now a world market. Kodak reasoned that it must compete against
"multibillion dollar, multinational corporations, most of which sell film worldwide, both
under well-known brands and through a variety of private label arrangements," and that "{i}n
light of the size and financial strength of . . . film competitors" driving them from the market
would be "untenable." Therefore, Kodak concluded, only a world market share analysis is
appropriate. Kodak then claimed that its world market share was too small for Kodak to
possess market power. According to the 1993-1994 International Photo Processing Report,
Kodak has 41 percent of the world market, compared to 32 percent for Fujifilm.
The USTR must reject Kodak's blatant attempt "to have its cake and eat it, too." If a
world market share analysis is appropriate for judging whether Kodak's market share is too
high, then it must be equally appropriate for judging Fujifilm's.
33
34
CONCLUSION: THROUGH A LOOKING-GLASS
Kodak's petition purports to undertake a "closer examination" of the market for
film and color paper in Japan. Deliberately, however, Kodak has filtered out much of
the true picture.
Fujifilm has not in any way restricted Kodak's access to the Japanese market.
Fujifilm's dominance in its own market is a result of market preference, similar to the market
preference enjoyed by Kodak in the United States. The Japanese market is open to Kodak,
but Kodak's pricing, marketing, and product innovations have not been up to the task.
Nor have agencies of the Japanese Government "tolerated" or encouraged opposition
to Kodak in Japan. Fujifilm has been under close and active scrutiny by the Japanese
Government, but the Japanese Government has not found anticompetitive activities. In
contrast, Kodak in the United States has been allowed to engage in widespread and aggressive
exclusionary anticompetitive activities without even serious investigation in recent years.
Outside of Japan and the United States, Kodak and Fujifilm are almost equal. Within
each company's home market, each enjoys a natural market preference. Yet Kodak now asks
the U.S. Government to do more: it asks the government to impose a greater presence in the
Japanese market than market forces would allow. While accusing the Japanese Government
of "privatizing protection," what Kodak seeks to do is to "governmentalize dominance." The
consumers of Japan, and the citizens of the United States, deserve better.
35
I. KODAK'S ALLEGATIONS ARE BASED ON FACTUALMISSTATEMENTS, MISCHARACTERIZATIONS, ANDMISLEADING OMISSIONS
Kodak's "Privatizing Protection" is in essence an elaborate bluff. With its sheer bulk,
multitudinous footnotes, and eye-catching color charts, it creates the impression of
irrefutability. Kodak hopes that in the Section 301 process (with its limited resources for
independent fact-finding) and in the court of public opinion (with its limited attention to
detail), this impression will be sufficient to carry the day. Thus far, Kodak's argument-by-
page-count has been a resounding success. Most U.S. media reports to date have gushed over
the strength of Kodak's "evidence." But so far, Kodak has had the stage to itself.
Fujifilm is now calling Kodak's bluff. In this submission, Fujifilm presents
incontrovertible evidence that Kodak's impressive-looking "facts" are anything but facts.
Subjected to critical scrutiny, Kodak's case collapses into a collection of embarrassing
misstatements, egregious mischaracterizations, and credibility-wrecking omissions. The
conclusion is inescapable: Kodak has consciously tried to mislead USTR and the public at
large.
Presented in this section are a summary of the major factual distortions that permeate
Kodak's argument. In light of this clear record of distortion, "Privatizing Protection" cannot
be viewed as an accurate or credible account of events in the Japanese color film and paper
markets. It stands revealed, rather, as a disingenuous attempt to rewrite history, to pin the
blame on Fujifilm for Kodak's own past errors.
A. The Distribution System
According to "Privatizing Protection", Kodak's fundamental competitive problem in
the Japanese market is lack of access to an "essential facility" -- namely, the four main
wholesalers, or tokuyakuten, that carry Fujifilm products on a single brand basis. Without
access to these wholesalers, Kodak argues it cannot gain access to the retail store shelf, and
thus the Japanese consumer. Consumers do not have a choice. In Kodak's story, Fujifilm
36
purposely cut off its competitors from the four tokuyakuten as a "liberalization countermeasure."
As shown below, Kodak's story bears no relation to what actually happened. The
central charge in Kodak's Section 301 complaint -- that Fujifilm created an anticompetitive
market structure to block Kodak -- is demonstrably false. Kodak has access to the same
distribution channels as other manufacturers.
Kodak Rewriting History:
Fujifilm excluded competitors from relationships with its major tokuyakuten as a"liberalization countermeasure." "Privatizing Protection" at 90-94.
Facts:
The changes in Fujifilm's relationships with its major wholesalers werewell underway long before liberalization of the market. Two ofFujifilm's tokuyakuten, Kashimura and Ohmiya, have not carried Kodakproducts since World War II. Kashimura became a single-brand dealerfor Fujifilm in 1963, Ohmiya the following year. (II.A.1.a.)
Misuzu terminated Konica and Nagase (Kodak's importer and maindistributor) in 1968, when tariff rates were still 40 percent. OnlyAsanuma switched to a single-brand relationship with Fujifilm duringthe period of liberalization. (II.A.1.a.)
The move toward single-brand distributors was not initiated by Fujifilm;rather, it was a general industry trend. Nagase began building up itsown single-brand distribution network, cementing relationships withHonjo in 1960, Chiyoda in the mid 1960s, Sanwa in 1967, andacquiring Kuwada in 1967. The acquisition of Kuwada led to Kuwada'sdecision to terminate Fujifilm. Konica also built up a single-branddistribution system in the 1960s and '70s, largely through acquisitions. (II.A.1.b.)
Nagase's and Konica's initiatives in establishing single-branddistribution systems created strong incentives for the remaining majormultibrand wholesalers to strengthen their relationships with the marketleader, Fujifilm. Accordingly, the decisions by Kashimura, Ohmiya,Misuzu, and Asanuma to become single-brand Fujifilm distributorsrepresented a logical business strategy in the face of marketdevelopments. (II.A.1.b.)
37
The incentives facing Fujifilm's tokuyakuten were strengthened by thesimultaneous trend among camera manufacturers to develop directdistribution and abandon primary reliance on independent wholesalers. The sale of cameras and camera accessories was formerly the core ofthe tokuyakuten's business. With decreasing access to this product line,it was all the more important for the tokuyakuten to consolidate theirrelationships with a film manufacturer. (II.A.1.b.3.)
• • •
Kodak Rewriting History:
Fujifilm's tokuyakuten are an "essential facility" for reaching the retail store shelf. "Privatizing Protection" at 151-153.
Facts:
Kodak certainly did not regard Fujifilm's tokuyakuten as an "essentialfacility" during the period in question. After all, Nagase bought onedistributor, and recruited other distributors into single-brandrelationships. In the case of its acquisition of Kuwada, Nagase was ableto persuade a distributor to terminate dealings with Fujifilm. (II.A.1.b.)
Although Kodak now portrays the loss of Asanuma as a catastrophe, itdid not act that way at the time. In fact, Kodak directly rebuffed thecompany. Before 1960, Kodak had exported directly to Asanuma andother companies, before selecting Nagase as its exclusive importer. This decision had upset Asanuma, which did not like having to gothrough Nagase to get to Kodak. In 1973, Asanuma officials visitedRochester to ask Kodak to reestablish direct dealings. Kodak refused. After Asanuma terminated Nagase in 1975, Kodak made no specialeffort to reverse the decision. Indeed, Nagase was confident that itsalternative distribution network was sufficient to compensate for theloss of Asanuma. (II.A.1.b.)
Kodak's lack of interest in Fujifilm's tokuyakuten has been ongoing. Kodak has not approached any of Fujifilm's four major tokuyakuten inthe past 20 years with an offer for the sale of Kodak film. (II.A.1.c.)
Fujifilm's tokuyakuten are not the core distribution system for allphotographic products, as Kodak has argued. Since cameramanufacturers have moved to direct distribution, the tokuyakuten havebecome predominantly distributors of Fujifilm products. The sale of
38
Fujifilm products accounts for approximately 80 percent ofthese companies' revenues. Any of the other photographicproducts distributed by the tokuyakuten can easily be purchasedfrom other sources. (II.A.1.e.)
Kodak's claimed inability to build its own direct distribution system inJapan is baseless. Kodak has built direct distribution systems in theUnited States, Canada, France, the United Kingdom, Spain, Sweden,Switzerland, Taiwan, Singapore, Indonesia, Thailand, Chile, Peru,Australia, New Zealand, and elsewhere. (II.A.5.a.)
Fujifilm's reliance on independent single-brand distributors is lessexclusionary than Kodak's U.S. direct distribution network. At leastKodak has a chance to make a deal with (or acquire) one or more ofFujifilm's tokuyakuten. On the other hand, there is no possibility thatFujifilm would be able to utilize Kodak's powerful in-house distributionsystem in the United States. (II.A.5.a.)
Aside from direct distribution, Kodak can reach retail shops throughsecondary dealers. In addition, both Kodak and Agfa have begun tooffer color film on an OEM basis to Japanese retailers. Kodak distortsthe current Japanese distribution system. Consider the followingdiagram:
39
COLOR FILM DISTRIBUTION STRUCTURE IN JAPAN
As this chart shows, Kodak has access to the same distribution options as othermanufacturers: selling directly to large retailers, or selling to secondary dealersor photofinishing labs to reach smaller retailer outlets. (We have excludedMitsubishi, a smaller participant which uses the same distribution structure tosell color film manufactured by Konica.) (II.A.1.)
Of the significant secondary dealers, approximately 90 carry multiple brandsincluding Kodak. Only one carries only Fuji brand color film. Secondarydealers currently account for about 30 percent of the film market, andspecialize in selling to the smaller stores that Kodak says are especially difficultto reach. (II.A.1.f.)
40
• • •
Kodak Rewriting History:
Kodak's low market share is due to lack of access to Fujifilm's tokuyakuten. "Privatizing Protection" at 165.
Facts:
Fujifilm's leading position in the Japanese film market was establishedby the early 1960s, and thus precedes the changes in the distributionsystem about which Kodak complains. Although Kodak was hinderedby import protection at the time, Konica was not. Control over thedistribution system was clearly irrelevant to Fujifilm's ability to overtakeKonica as market leader. (II.A.1.)
Kodak does not sell well in Japan even when it is available andprominently displayed. For example, Camera no Kimura, one of thelargest camera store chains in Tokyo, offers Kodak and gives itessentially equal billing along with Fujifilm and Konica. Yet evenunder these conditions Fujifilm outsells Kodak 7 to 1. Kodak's problemis not lack of distribution, but rather lack of consumer interest. (II.A.3.a.)
In recent years, there has been an enormous surge in low-priced graymarket imports. These imports nearly quadrupled between 1991 and1994 and have now overtaken Kodak in market share. Yet theseimports are not distributed by Fujifilm's tokuyakuten. The success ofthese imports has not been hampered in the least by the inability toutilize the so-called "essential facility" of Fujifilm's distribution system. (II.B.1.b.)
The spectacular rise of private label film proves the same point. Agfahas used the private label route, manufacturing on an OEM basis forDaiei, to increase its sales from 3 million rolls in 1993 to 14 millionrolls in 1994, moving up to roughly 60 percent of Kodak's market sharein just one year. Lack of access to Fujifilm's tokuyakuten has notprevented Agfa from achieving this rapid growth. (II.B.1.b.)
• • •
41
Kodak Rewriting History:
Fujifilm's tokuyakuten are no longer truly independent businesses. They arecontrolled and manipulated by Fujifilm. "Privatizing Protection" at 90-112, 151.
Facts:
The four tokuyakuten carry only Fuji brand film as an independentbusiness decision. They are under no contractual obligation to besingle-brand distributors. The fact is that Kodak has not made them anoffer to carry Kodak color film in 20 years. (II.A.1.c.)
Contrary to Kodak's assertions, the four tokuyakuten competevigorously with one another. Most of Fujifilm's larger customers sourcetheir film from two or more tokuyakuten to play them off against eachother. One of the major reasons Fujifilm continues to rely onindependent wholesalers is this vigorous intrabrand competition toexpand and strengthen Fujifilm's business. (II.A.1.d.1.)
Although Fujifilm's tokuyakuten show low profit margins as a percentage of sales, in fact their financial performance is typical ofJapanese wholesalers. Return on capital has been attractive for thewholesalers -- in excess of 5 percent -- and comparable to otherJapanese wholesalers. (II.A.1.d.2.)
• • •
Kodak Rewriting History:
Fujifilm has created an anticompetitive market structure in color paper by acquiring anetwork of photofinishing labs and in effect creating a "captive market." "PrivatizingProtection" at 40-42 and 88-90.
Facts:
Forward integration by film manufacturers into photofinishing is anormal business practice around the world. It was a normal outgrowthof the advent of color photography; given the technical complexities ofcolor photoprocessing, film manufacturers invested in photofinishingfacilities to ensure a ready market for color film and guarantee quality incolor prints. (II.A.5.b.)
42
Accordingly, film and paper producers began investing inphotofinishing long ago. Fujifilm and other manufacturers had alreadyestablished a large network by the early 1960s. Toyo, a subsidiary ofNagase, started the first Eastman Kodak color photofinishing lab inJapan in 1952. (II.A.4.)
A similar situation currently exists in the U.S. market: both Kodak andFujifilm have integrated into photofinishing. (II.A.5.b.)
B. Rebate Programs
In Kodak's version of events, Fujifilm is able to maintain an anticompetitive market
structure for color film and paper through the ingenious manipulation of its rebate programs.
According to Kodak, Fujifilm's rebates work not only to keep Kodak out, but also to keep
Fujifilm's prices -- and profits -- artificially high.
Kodak has totally mischaracterized Fujifilm's rebate programs. Notwithstanding the
efforts of an unnamed "consultant," none of Kodak's fundamental assertions regarding those
programs is true.
Kodak Rewriting History:
Fujifilm's rebates to distributors are "remarkably progressive," providing strongincentives not to switch suppliers. "Privatizing Protection" at 53.
Facts:
Rebate programs to Fujifilm's tokuyakuten based on target volumes arethe exception, not the rule. Most rebate programs are not contingentupon attaining a certain level of sales or purchases. Accordingly, mostprograms have no exclusionary impact whatsoever. (II.A.2.a.1.)
The only target volume program in recent years has never had any morethan modest progressivity in its rate structure. The difference betweeneach step averaged less than 0.3 percent and the maximum rebate wasless than 3 percent. These increments were hardly "remarkablyprogressive." (II.A.2.a.1.)
In 1991 this program was overhauled to virtually eliminate anyprogressivity. The rebates are now based on regional targets for each
43
tokuyakuten and the difference between the minimum rebateamount and the maximum is less than 0.6 percent. (II.A.2.a.1.)
A number of target volume rebates have been offered by Fujifilm toretailers in recent years. Only one had even a slightly progressive ratestructure. This program was eliminated in 1990. (II.A.2.a.2.)
• • •
Kodak Rewriting History:
Rebates are used to manipulate the tokuyakutens' financial performance. They areoften determined after the end of the year to tip the tokuyakuten just barely back intothe black. "Privatizing Protection" at 95-100.
Fact:
All rebate rates and (if applicable) targets are set at the outset of a rebateperiod. There is no after-the-fact manipulation; a tokuyakuten is alwaysable to determine in advance whether it will receive a rebate and howmuch it will receive based on its own performance. (II.A.2.b.)
• • •
Kodak Rewriting History:
Fujifilm's rebates are based on resale revenue. This encourages distributors andretailers to keep prices high to maximize their profits. "Privatizing Protection" at 154-160.
Fact:
No Fujifilm rebate is based upon resale amount. All programs arecalculated either as a certain yen amount per unit purchased or sold, oras a certain percentage of purchase amount. Accordingly, Fujifilm'srebates have no effect to raise resale prices. (II.B.4.)
"Privatizing Protection" at 107-109.2
44
C. Price Competition
Kodak claims that Fujifilm has employed its anticompetitive control of the Japanese
film market to rig prices at inflated levels. Specifically, Fujifilm is alleged to have conspired
with Zenren (a retailers' trade association), Zenlaboren (a trade association of photofinishing
labs), and other groups to maintain resale prices.2
The allegation raises a fundamental analytical problem for Kodak's case, since high
prices should be an invitation, not an obstacle, for imported film. Beyond that, the fact is that
price competition in the Japanese market is healthy and indeed increasing in intensity. As to
the alleged collusion, Kodak has taken predictable retailer complaints about price wars and
twisted them to suit its conspiracy theories.
Kodak Rewriting History:
Price competition in the Japanese market is restricted to prevent discounting and boostretail prices. "Privatizing Protection" at 154-155.
Facts:
This claim is inconsistent with the data. Vigorous price competition hasled to falling prices for film for several years. From 1989 to 1994, retailprices have fallen almost 9 percent. When adjusted for inflation, thedecline is an even more dramatic 16 percent. (II.B.1.a.)
The spread in retail prices shows no evidence of manufacturer control. Retail prices range widely, with spreads between the high and low priceof over 50 percent. (II.B.1.a.)
• • •
45
Kodak Rewriting History:
Fujifilm has actively engaged in conspiracies with distributors, labs, and retailers tomaintain resale prices. "Privatizing Protection" at 108-112.
Facts:
Kodak refers repeatedly to the "Supermarket Chain A Crisis" in 1974, inwhich Kodak alleges that retailers and laboratories colluded to increasetheir prices in response to discounted color prints offered by Chain A. Yet the articles cited by Kodak show that the retailers' response was todemand lower prices from the laboratories in order to meet thecompetition by Chain A. The articles also quote an official for FujifilmColor Trading who stated that nothing could be done about thediscounting, and advised smaller stores to compete on the basis ofquality and service. (II.B.2.)
The JFTC investigated the matter and found a violation by ChubuLaboratories and Tohuku Laboratories. Fujifilm, contrary to Kodak'sinsinuation, had no part in any collusion. (II.B.2.)
Kodak points out that in 1983 Zenren complained to the Japan FairTrade Commission about a promotional campaign by Kodak featuringits VR film series. In focusing on price, Kodak ignores the deceptivemanner of its advertising, which was potentially misleading toconsumers -- namely, that Kodak was offering a package of differentspeed films including VR1000, which was unusable in most Japanesecameras of the time. Nagase did not dispute the matter, and agreed tocancel its planned television advertising while it continued the basiccampaign. (II.B.2.)
Kodak refers to Zenren reaction to discount lab Nihon Jumbo's offer of9 yen color prints in 1993. In fact, Zenren's position was that shopsoffering quicker and better service could compete with Nihon Jumbo onthat basis without having to match the discount price. Furthermore, noaction was taken to force Nihon Jumbo to retract its price cut. In fact,Nihon Jumbo -- now number two in total photofinishing income behindonly Fuji Color Service -- currently offers 4 yen prints. (II.B.2.)
Fujifilm's price lists carry clear disclaimers that suggested retail pricesare only for reference and that customers are free to set their own prices. (III.B.3.)
46
Fujifilm has instituted a detailed Antimonopoly Act complianceprogram with strict prohibitions on activities that could be construed asresale price maintenance. Fujifilm has conducted extensive internalseminars to familiarize relevant personnel with proper procedures. (III.B.3.)
• • •
Kodak Rewriting History:
Fujifilm maintains an enormous monitoring program, complete with legions ofhousewives and postmen as informants, to ensure that prices are not being discounted. "Privatizing Protection" at 55.
Facts:
Fujifilm's retail price monitoring is limited to a monthly survey of 32retail storefronts in Tokyo and Osaka. Such limited data are gatheredpurely to monitor competitors' pricing; they are clearly inadequate as aninstrument for controlling prices at some 280,000 retail outlets. Kodakhas access to much more detailed retail price information in the U.S.from Nielsen surveys. (II.B.3.)
The survey conducted for Fujifilm by using part-time workers addressesconsumer preferences and perceptions, not prices. Fujifilm does not usepostmen to gather information of any kind. (II.B.3.)
Fujifilm receives no price reports from its tokuyakuten or from labs. Thereports discuss only sales volume information. (II.B.3.)
D. MITI Involvement
Every story needs a villain. In Kodak's story, MITI plays this role. Kodak hopes
readers will recognize MITI as the villain from many other stories, and reach conclusions
without bothering to consider the underlying facts.
47
The facts provide no credible support for Kodak's version of history. Kodak
exaggerates MITI's role and draws conclusions without any supporting evidence. Kodak even
draws conclusions when the underlying facts support just the opposite.
Kodak Rewriting History:
MITI encouraged the increase of Mitsui Group shareholding in Fujifilm. "PrivatizingProtection" at 81-82, 181.
Facts:
Kodak provides no evidence for this claim. Kodak cites only generalstatements that MITI encouraged the increase in the number of stableshareholders. (III.A.2.b.)
The Mitsui Group companies that hold Fujifilm shares are financialservices companies -- banks and trust companies. Yet MITI does nothave jurisdiction over financial services companies. Even if it wantedto do so, MITI could not pressure financial services companies to takesuch action. (III.A.2.b.)
The Mitsui Group companies that increased their shareholding inFujifilm cite unrelated business reasons for doing so -- the desire to winFujifilm's financial business and to make attractive investments -- notthe desire to block Kodak. (III.A.2.b.)
Neither Fujifilm nor its tokuyakuten are members of the Mitsui keiretsu. No listing of Mitsui keiretsu members shows any of these companies. Fujifilm's largest shareholder is Nippon Life, a well-known member ofthe Sanwa Group. Fujifilm shares no directors with Mitsui banks. (III.A.2.a.)
In fact, Fujifilm has no current borrowing with Mitsui banks. Ownership by Mitsui banks in the four tokuyakuten is very limited. With regard to Asanuma, both its managing director and auditors arefrom Daiichi; it is laughable that such a situation would occur within theMitsui keiretsu. (III.A.2.a.)
• • •
48
Kodak Rewriting History:
MITI actively guided restructuring of the distribution system to block Kodak from themarket, by encouraging rebates, by urging wholesalers to join Fujifilm's keiretsu, andby fostering the creation of a distribution bottleneck. "Privatizing Protection" at 77-78, 84-85, 91, 98, 182.
Facts:
The MITI "Distribution Guidelines for the Photosensitive MaterialsSector" released in 1970, the alleged master plan for countermeasures,were not liberalization countermeasures at all. They were efforts toimprove the efficiency of the distribution sector for this industry. (III.A.1.)
Rather than encouraging the use of rebates, the Guidelines in fact urgedthat the "use should be limited to a minimum" because of concerns thatthe rebates could have anticompetitive effects. (III.A.1.b.)
The Guidelines say nothing about wholesalers aligning themselves withmanufacturers. Since virtually all of the major wholesalers had alreadyaligned with manufacturers, it is hard to see how the 1970 Guidelinescould encourage actions that had already happened. (III.A.1.a.)
The Guidelines also say nothing even suggesting the creation of adistribution bottleneck. (III.A.1.c.)
• • •
Kodak Rewriting History:
The distribution bottleneck also occurred by linking film and cameras, because Japanhad only a few camera makers, who also used the same tokuyakuten for "virtually allof their distribution in Japan." "Privatizing Protection" at 101-102. See also 183, 201,207.
Facts:
Long before the alleged countermeasures, the camera manufacturers hadbegun their own direct distribution, greatly reducing their reliance onthe tokuyakuten for distribution. Therefore the tokuyakuten did nothandle "virtually all" of the distribution of photographic products. (II.A.1.b.3.)
49
There is no evidence that the film-camera bottleneck ever occurred. Infact, the evidence is to the contrary. Rather than becoming intertwined,the color film and camera industries pursued different paths ofdistribution. (II.A.1.b.3.)
Moreover, there is no evidence of any MITI involvement. Kodak citesa 1973 article describing MITI's alleged interest in a camera-filmlinkage. Yet Kodak does not even allege any subsequent act by MITI tocreate the linkage. (II.A.1.e.)
• • •
Kodak Rewriting History:
MITI used administrative guidance to encourage Fujifilm to adopt shorter paymentterms to tighten control over the wholesalers. "Privatizing Protection" at 96, 182, 203.
Facts:
The 1970 Distribution Guidelines say nothing about shortening paymentterms. The claim that the Guidelines "strongly recommended againstlong payment periods" ("Privatizing Protection" at 96) is just wrong. (III.A.1.a.)
The Guidelines focus on the need to avoid partial payments, and insteadto fully settle accounts with either cash or promissory notes. (III.A.1.a.)
Fujifilm had independent business reasons to adopt stricter paymentterms. (III.A.1.a.)
• • •
Kodak Rewriting History:
MITI provided financing to help Japanese manufacturers strengthen their grip on thedistribution system. "Privatizing Protection" at 94-95, 183.
50
Facts:
The Japan Development Bank is an independent entity. The Bank mustbe able to provide a financially sound basis for its lending decisions. (III.A.1.a.)
The only loans cited by Kodak were some loans to Konica. Kodak citesno loans to Fujifilm. In fact, there were no such loans to Fujifilm. (III.A.1.a.)
• • •
Kodak Rewriting History:
Later in time "MITI was aware of these anticompetitive practices but tolerated thembecause they simply represented the continuation of practices associated with themarket structure MITI created through the liberalization countermeasures." "Privatizing Protection" at 232.
Facts:
Kodak does not provide a single piece of evidence for this claim, noteven the usual cite to a trade association magazine article.
The statement presupposes the existence of MITI-sponsoredliberalization countermeasures. As explained above, this assumptiondoes not have any factual basis. The alleged 1970 DistributionGuidelines "masterplan" does not corroborate any of Kodak's specificclaims. (III.A.1.)
MITI's 1970 study of photographic film prices proposed specificmeasures to address the "oligopolistic situation" in thephotographic products industry. MITI's study concluded thatKodak was the price leader in the industry, and that access byKodak should be enhanced by specific market openingmeasures. Specifically, MITI's study endorsed a reduction intariffs, abolition of quantitative restraints on film imports, andthe monitoring of price movements in the industry. (III.B.2.a.)
• • •
51
Kodak Rewriting History:
MITI defended the film industry against prosecution by the JFTC. "PrivatizingProtection" at 183, 229.
Facts:
There was nothing to defend against. The allegation of a JFTC findingof "price fixing" in 1970 is wrong. The JFTC was merely studyingprice trends, and in no way concluded there was price fixing. (III.B.2.a.)
MITI's 1970 study was noted for agreeing with the JFTC's finding of an"oligopolistic situation." In the articles cited by Kodak, MITI officialsspecifically deny that their study was a finding of price fixing. (III.B.2.a.)
Kodak takes characterizations that may have been appropriate in the1950s, and then applies them to the 1970s. The JFTC relationship withMITI changed fundamentally in the 1970s. In fact, the JFTC criminallyprosecuted a price fixing cartel in the oil industry in direct conflict withMITI policies. (III.B.1.a.)
E. JFTC Enforcement
Kodak claims the JFTC has tolerated anticompetitive conduct, and has not enforced
the Antimonopoly Act. These claims reflect, at best, a profound misunderstanding of the
nature of JFTC enforcement activities. In fact, the JFTC has continually and aggressively
monitored this oligopolistic industry. Where the JFTC believed the facts warranted, formal
actions were taken. Even where the facts did not warrant formal action, less formal actions
were taken. Whether formal or informal, JFTC actions resulted in changes in corporate
behavior that have eliminated even gray areas of concern under the Antimonopoly Act.
52
Kodak Rewriting History:
The JFTC did not enforce the Antimonopoly Act with respect to photographicproducts. "Privatizing Protection" at 234.
Facts:
Kodak assumes that there are anticompetitive acts that require action. As explained in Section II, Kodak's allegations are either wrong,misleading, or both. (III.B.)
The JFTC has in fact carefully scrutinized Fujifilm's conduct. Kodakdescribes some of these enforcement activities, but misinterprets them. After its review of the relevant facts, the JFTC decided there were noviolations of the Antimonopoly Act concerning color film and colorpaper. The JFTC has reached this conclusion many times. (III.B.2.)
The price fixing among photofinishers has nothing to do with Fujifilm. Moreover, this action shows that when actual violations of theAntimonopoly Act occur, the JFTC takes action. (III.B.2.)
• • •
Kodak Rewriting History:
The JFTC found Fujifilm and Konica guilty of "fixing the price of film." "PrivatizingProtection" at 79.
Facts:
The 1970 Report did not find price fixing. The report was a study of theindustry, not a document that stated any legal conclusions. (III.B.2.a.)
Kodak relies on a seriously flawed translation. Although the Japaneseoriginal refers to "oligopolistic situation," Kodak then concludes thatthe JFTC found "price fixing," an unsupported and misleadingconclusion. (III.B.2.a.)
The Report noted that pricing by the smaller company followed that ofthe industry leader, a pattern that is quite common in oligopolisticindustries. (III.B.2.a.)
The Report actually notes that during this period Fujifilm and Konicafollowed the price leadership of Kodak. (III.B.2.a.)
53
• • •
Kodak Rewriting History:
The JFTC failed to take enforcement action against Fujifilm's use of anticompetitiverebates. "Privatizing Protection" at 223.
Facts:
As shown in Section II, Fujifilm's rebates are not anticompetitive. There was no need for the JFTC to take enforcement action, since therewas no violation of the Antimonopoly Act. (II.B.2.f.)
In fact, Fujifilm has abolished and restructured even its mildlyprogressive rebates. The rebates were never "remarkably progressive,"and thus never anticompetitive; whatever they were, the mildlyprogressive rebates have been abolished or restructured. (III.B.2.f.)
• • •
Kodak Rewriting History:
The JFTC failed to enforce the recommendations of the 1992 AML study group onoligopolistic industries. "Privatizing Protection" at 223.
Facts:
In Kodak's own words, the AML study group recommended that "theJFTC Ustrictly monitorU the film industry and to vigorously enforce theAML if a company engages in violative conduct." "PrivatizingProtection" at 223. (III.B.2.g.)
Since the JFTC never found conduct violating the Antimonopoly Act,the JFTC never had the need to take any enforcement action. (III.B.2.h.)
• • •
54
Kodak Rewriting History:
The Fair Competition Code on Camera Related Products (“Camera Code”) is enforcedwith respect to color film, and thus limits marketing practices in an anticompetitiveway. "Privatizing Protection" at 224, 227.
Facts:
Given the nature of Kodak's allegation, one would expect numerouscitations for Kodak's proposition that the Camera Code is enforcedagainst color film. (III.B.4.)
Kodak cites only two instances to support its allegation that the CameraCode is enforced against color film. In each instance Kodak is wrong.(III.B.4.)
One instance cited by Kodak is an offer of "free film forever" forpurchasers of specific cameras. In the instance noted, the film isconsidered a premium related to the sale of a camera. Thus, it fallssquarely within the scope of the Code. (Appendix)
The other instance cited by Kodak involves advertisements that offeredKorean "Lotte" film as Fuji film and/or referencing a nonexistentdomestic suggested retail price for "Lotte" film. The ads were deemedby the JFTC to violate the Premiums Law, not the Fair CompetitionCode on Camera Related Products. (III.D.4.d. and Appendix)
Kodak also mischaracterizes this last instance as a prohibition againstcomparisons between the price of re-imported film and domesticsuggested retail prices. The article cited does not support Kodak'sinterpretation. Moreover, ads comparing the price of re-imports to thedomestic suggested retail prices are widespread in Japan, and are notconsidered to violate the Premiums Law. (Appendix)
F. Kodak's Market Share
Kodak attempts to rely on market share statistics to support its allegation that the
Japanese market is closed. Specifically, Kodak claims that comparing its market share
elsewhere in the world with its share in Japan demonstrates the presence of significant market
barriers. Kodak's arguments conveniently ignore the fact that the same arguments and
55
conclusions follow from an analysis of Fujifilm's relative market share elsewhere in the world
and in the U.S. market. At best, Kodak's argument shows that both the U.S. and Japanese
markets have significant barriers to entry. More realistically, the argument demonstrates
nothing but the existence of a "home team advantage" for Kodak in the United States and
Fujifilm in Japan.
Kodak Rewriting History:
Kodak's market share outside of Japan is significantly higher than its share in Japan,demonstrating that there must be market barriers in Japan. The extent of Fujifilm'sdominant position in the Japanese market cannot be explained by a "home teamadvantage." "Privatizing Protection" at 1-3.
Facts:
Outside of their respective home markets, Fujifilm and Kodak enjoy almostequal market shares. If the U.S. and Japan are excluded, Kodak has 36 percentof the worldwide film market compared to 33 percent for Fujifilm; similarly,Kodak has 32 percent of the color paper market outside of the U.S. and Japan,compared with 27 percent for Fujifilm. The only reason Kodak's global marketshare is higher than Fujifilm's is that Kodak's home market is larger thanFujifilm's. (IV.A.1.)
In their home markets, Fujifilm and Kodak perform almost identically. Eachhas approximately 70 percent of its respective home market in color film. Kodak has 58 percent of the U.S. market for color paper, compared withFujifilm's 49 percent of the Japanese market. (IV.A.1.)
Neither Kodak's dominant position in the U.S. market nor Fujifilm's in theJapanese market can be explained other than by the existence of a "home teamadvantage." Indeed, Kodak supported this notion in the U.S. District Court'sconsent decree proceedings. Consumer preference for the "home team" isdemonstrated by surveys and actual buying patterns in both markets. Economic literature also supports the conclusion that a "home team advantage"exists. (IV.A.1.)
56
G. The Profit Sanctuary
Kodak alleges that Fujifilm has a "profit sanctuary" in Japan. According to Kodak,
this "sanctuary" proves that Fujifilm is protected from competition in its home market. The
profits from the sanctuary allegedly provide Fujifilm a global advantage over Kodak.
Kodak's "profit sanctuary" in the U.S. market, however, is at least equivalent to any sanctuary
that Fujifilm has in Japan. Indeed, if Kodak had not made management decisions that
depleted the Kodak profits generated in the U.S. consumer photographic market, Kodak's
cash surplus would be as large as, if not larger than Fujifilm's.
Kodak Rewriting History:
Kodak claims that Fujifilm's large cash surplus supports the conclusion that theJapanese market is a profit sanctuary where Fujifilm is protected from competition."Privatizing Protection" at 16, 17 and 149.
Facts:
Because it is larger than Fujifilm, Kodak has in fact generated more profits thanFujifilm over the past 20 years. If the performance of the two is compared onan equivalent basis using operating profits as a percentage of sales, Fujifilm'sand Kodak's performances have been virtually identical -- Kodak's annualoperating profits as a percent of sales have averaged 14.4 percent and Fujifilm'shave averaged 15.2 percent of sales. (IV.B.1.)
Kodak's annual financial statements demonstrate that most of Kodak's profitsover the past 20 years have been generated by its imaging division, the divisionwhich includes consumer photographic color film and color paper, and most ofthese profits have been generated in the United States. Between 1975 and1990, Kodak's sales of film in the U.S. accounted for less than 10 percent oftotal sales, but generated 25 percent of total earnings by the company. If aprofit sanctuary exists, it is Kodak's and it is in the United States. (IV.B.2.)
In the past 10 years, Kodak would have generated a cash surplus equivalent toor greater than Fujifilm's if it had not depleted its cash to make up formanagement mistakes. Between 1985 and 1994, Kodak had extraordinarycharges against earnings of $5.5 billion resulting from its violation of Polaroid'sinstant film patent, the costs of withdrawing from the instant film market, andrepeated restructurings. The extraordinary charges against earnings reducednet income to such a degree that Kodak, in order to prop up its stock, had to
57
pay out dividends at more than one and one-half times the average rate of theother 29 companies listed in the Dow Jones Industrials. (IV.B.2.)
H. Liberalization Countermeasures
Kodak claims that alleged "liberalization countermeasures" implemented in the mid-
1970s acted as a market barrier preventing its success in the Japanese market.
Notwithstanding the supposed existence of these countermeasures, Kodak's market share in
Japan increased dramatically both in the initial period of liberalization and after liberalization.
By 1983, according to Kodak's own statistics, its market share increased to 18 percent.
Kodak attempts to explain this inconvenient increase by alleging that Fujifilm withheld
product from the market to support high prices. In fact, there is no evidence to support this
allegation. The alleged countermeasures played no role in hindering Kodak's increase in
market share or in the reversal which began in 1984. Kodak caused its own problem when it
raised its prices.
Kodak Rewriting History:
The "liberalization countermeasures" were put in place to frustrate Kodak's entry in theJapanese market after the trade and capital liberalization and were successful inrealizing this objective. "Privatizing Protection" at 76-103.
Facts:
By Kodak's own admission, its market share in Japan more than doubled duringthe period of liberalization and the eight years immediately after liberalization. Kodak achieved almost 18 percent of the market share in Japan by 1983. (IV.C.)
Kodak achieved its increased market share "the old fashioned way." It used acombination of product innovation and aggressive pricing to gain market share. When Kodak introduced the 110 format film in advance of Fujifilm in 1973,its market share immediately increased; when it increased the margin of itsunderselling of Fujifilm by not raising its prices in response to the "silvershock," its market share continued to rise. When the 110 format peaked inJapan and Kodak raised prices and narrowed the margin of underselling ofFujifilm in 1984, its market share began to decline. (IV.C.)
58
Although Kodak attributes the increase in its market share to Fujifilm'swithholding of product from the market to support the higher pricesnecessitated by the "silver shock," the evidence demonstrates the contrary. Fujifilm increased shipments each year during the period when it was allegedlywithholding product from the market, in fact, the growth in its shipmentsduring this period was faster than the growth of the market as a whole. (IV.C.)
There is no evidence that the countermeasures had any effect on Kodak when itused normal competitive means to compete -- product innovation and price. Kodak itself shut the "window" on its newly achieved market share by raisingprices in 1984. (IV.C.)
I. Kodak's Efforts To Compete
Kodak alleges that the liberalization countermeasures and the distribution bottleneck
are responsible for its failure to gain a larger share of the Japanese market. Kodak claims that
it has made a sufficient commitment to the Japanese market to have been more successful,
and that it is competitive in that market.
In fact, Kodak's lack of success is directly attributable to four factors, none of which is
related to the alleged liberalization countermeasures or distribution bottleneck. First, Kodak
waited over 15 years after the onset of liberalization to establish control over its pricing and
distribution in Japan. Second, relative to its competitors, Kodak did not invest sufficient
resources in Japan. Third, with the exception of a brief period in the early 1980s, Kodak
refused to price aggressively to increase its market share. Finally, Kodak lagged behind
Fujifilm in the introduction of products which today account for nearly two-thirds of the
Japanese film market (ISO 400 film and single-use cameras) and a significant share of the
paper market (minilab paper).
Kodak Rewriting History:
Kodak's efforts to compete in Japan are not responsible for its lack of success in thismarket. Rather, the distribution bottleneck allegedly created by the liberalizationcountermeasures has frustrated Kodak's efforts. "Privatizing Protection" at 3-9.
59
Facts:
Kodak did not take advantage of liberalization. It left its agent, Nagase, incontrol of its fate in the Japanese market. While it now claims that thetokuyakuten are an essential facility for access to the Japanese market, in 1973it rebuffed Asanuma's initiative to reestablish direct relations with Kodak. Similarly, Nagase downplayed the termination of Asanuma as a channel forKodak products and claimed its DKP network provided Kodak broadercoverage in Japan. Kodak's commitment to Japan was negligible in the post-liberalization period; it waited 15 years after liberalization to establish controlover distribution of its products in Japan. (IV.D.3.a.)
When Kodak finally took control of its operations in Japan, it did not make thenecessary investments to compete effectively. It claims an investment of $750million in the past ten years. In comparison, Fujifilm has invested more than$1.5 billion in the U.S. market, a level of commitment which has still onlysucceeded in allowing Fujifilm to capture 12 percent of that market. Kodakalso claims that it undertook extensive advertising, citing expenses of 5.3billion yen between 1986 and 1988. In comparison, Fujifilm spent 10 timesthis amount in the same period. (IV.D.3.b.)
With the exception of a brief period in the early 1980s, Kodak has notattempted to gain access to the Japanese market by aggressively pricing itsproducts. Kodak's own executives have stated that they do not intend to useprice -- the ultimate competitive weapon -- as a means to gain market in Japan. Kodak's executives have also expressed concerns that competitive pricing inJapan by Kodak could make Japan the source of gray market exports of Kodakfilm, which would undermine Kodak's worldwide price structure. (IV.D.4.)
Kodak has also failed to compete by introducing innovative products; it haslagged behind Fujifilm in introducing new products which have capturedsignificant shares of the Japanese market. Kodak's primary innovations were110 format film and disc film. The former never achieved significant marketpenetration; the latter was a failure from the time it was introduced in themarket. In contrast, Fujifilm introduced both high resolution ISO 400 film twoyears ahead of Kodak, and also offered technologically superior single-usecameras two years ahead of Kodak. Both had claimed substantial shares of themarket (nearly 40 percent for ISO 400 film and 10 percent for the single-usecamera) by the time that Kodak had a comparable product in the market. (IV.D.5.)
60
J. The Past Decade
Kodak claims that during the mid- and late 1980s Fujifilm shifted its early
1980s strategy of maximizing profits in the market by withholding product -- a fiction already
addressed -- to renewed efforts in the domestic market. The result, according to Kodak, was
that its early 1980s success in capturing market share in Fujifilm's market was again frustrated
by the distribution bottleneck. In fact, two factors prevented Kodak from continuing its
success in gaining market share: (1) its refusal to compete on price, and (2) its inability to
match Fujifilm's new product innovations in a timely manner.
Kodak Rewriting History:
The appreciating yen caused Fujifilm to redirect its attention to the domestic market. It also opened up a market for gray market imports. Kodak was squeezed betweenFujifilm's new aggressive attention to the domestic market and low-priced gray marketimports. "Privatizing Protection" at 139.
Facts:
Fujifilm did not cut back on exports and redirect its production to the domesticmarket as the yen appreciated. For example, between 1985 and 1987, Fujifilm's domestic shipments increased only 10 percent, consistent with thegrowth in the market. Thus, the facts belie any redirection by Fujifilm toreclaiming market share. Rather, the decline in Kodak's market share was dueto its unwillingness to price aggressively, a policy confirmed in publicannouncements by Kodak executives, and by the successive and successfulnew innovative products introduced by Fujifilm. (IV.E.)
During the four years in the late 1980s when the yen appreciated dramatically,Kodak chose to increase its profits rather than its market share. During thisperiod, prices were also at historic highs. (IV.E.)
The increase of non-Kodak imports in the 1990s may well have squeezedKodak because these imports, most importantly Agfa's, were willing tocompete in the Japanese market using aggressive pricing. Kodak was not. (IV.E.)
61
II. FUJIFILM HAS NOT ENGAGED IN SYSTEMATIC ANTICOMPETITIVE ACTIVITIES IN THE JAPANESE MARKET
At the core of Kodak's allegations is the charge that Fujifilm, over a period of more
than 25 years, has created and perpetuated an exclusionary and anticompetitive market
structure in the Japanese color film and paper markets. Kodak's entire case rests on this
fundamental factual assertion.
To transform what is essentially an antitrust complaint into a Section 301 case, Kodak
had to allege, in addition to private misconduct, some kind of governmental action.
Accordingly, it embellished its allegation against Fujifilm by accusing the Japanese
government of acquiescing in, and even aiding, Fujifilm's anticompetitive master plan.
This elaborate argument, however, depends ultimately on Kodak's ability to
demonstrate anticompetitive practices by Fujifilm. Without that factual foundation, all the
allegations of "liberalization countermeasures" and nonenforcement of the Antimonopoly Act,
and all the calculations of lost revenues and market share, come to nothing.
As demonstrated below, Kodak's central charge that the Japanese color film and paper
markets are exclusionary and uncompetitive is without factual foundation. Specifically, this
central charge may be divided into two broad subparts. First, Kodak alleges that Fujifilm's
control over its distribution system has created a "distribution bottleneck" that prevents Kodak
from reaching consumers. Second, Kodak argues that Fujifilm has conspired with distributors
and retailers to maintain high resale prices that perpetuate Fujifilm's control over the market.
A full examination of the facts, however, reveals that there is no distribution bottleneck, and
that Fujifilm does not control resale prices. In other words, the Japanese market is open and
competitive, and all the rest of Kodak's allegations are therefore meaningless.
Taking on Japan at 36 (emphasis added).3
J. Abegglen and G. Stalk, Jr., Kaisha: The Japanese Corporation, (1985) 4
at 239-240 (emphasis added).
62
A. Fujifilm Has Not Created An Exclusionary MarketStructure, Either Through Its Distribution System OrThrough Its Rebates
Prior to the filing of its Section 301 petition, Kodak regarded establishment of a direct
distribution system as necessary to its competitiveness in Japan. As Dr. Albert Sieg, President
of Kodak Japan, stated in an interview published in 1988:
From the 50s until three or four years ago we sold almost all of ourproducts through two distributors. It was a reasonably successful kind ofoperation, although by selling through distributors without the directsupport of the manufacturer we certainly had some difficulties.
Our current history begins in 1977, when we reestablished the companycalled Kodak Japan to provide marketing and technical support for ourdistributors. It continued that way until 1983, when we decided we neededto be much more aggressive in the Japanese marketplace. . . . Since then wehave, through a number of processes, basically reacquired the distributionand sales rights to our products and brought them back under our own directcontrol.3
Indeed, outside observers have been highly critical of Kodak's tardiness in establishing
direct distribution. Well-known consultants James Abegglen and George Stalk, Jr. issued this
withering analysis in 1985:
The case of Eastman Kodak is especially instructive, and from anAmerican point of view, especially painful. . . . The urgent prospect thatone of America's leading companies might be outpaced by a once-insignificant Japanese competitor is the result of Eastman Kodak's delayin responding to the competitive challenge. Although Eastman Kodak hasbeen in business in Japan for more than sixty-five years, it does not yethave manufacturing or research and development facilities in Japan. . . .{I}t sold exclusively through an agent, maintaining a liaison office with nodirect sales force or sales management, and only indirect influence onpricing and promotion.4
"Privatizing Protection" at 151.5
"Privatizing Protection" at 153.6
63
Kodak's "Privatizing Protection" omits all of this inconvenient history. This omission
was entirely intentional: Kodak's Section 301 petition represents an attempt to rewrite history,
where this time Kodak's failures are not its own fault, but can be blamed instead on a
malignant Japanese conspiracy.
Accordingly, in this revised history direct distribution is no longer a competitive
necessity, and reliance on independent distributors is no longer a liability. Now, independent
distributors -- Fujifilm's four major tokuyakuten -- have become the key to cracking the
Japanese market. According to Kodak today, Fujifilm's distribution network is "an essential
facility for reaching the Japanese consumer." The fact that Kodak uses direct distribution is5
now portrayed as a terrible handicap:
{T}here are not multiple distribution channels from which a potentialentrant can choose to bring a specific product to the Japanese consumer. If access to the relevant distribution channel is denied, then access to theconsumer is effectively denied.6
An in-depth analysis of Fujifilm's distribution system reveals that Kodak's revisionist
account is transparently false. Fujifilm's use of independent single-brand distributors is a
normal competitive practice and is in no way anticompetitive. Moreover, Fujifilm's rebate
programs, which Kodak egregiously mischaracterizes, do not block Kodak's access to the
retail store shelf. In sum, there is no distribution bottleneck. Kodak has open access to the
Japanese consumer; Kodak's low market share is a function of consumer preference and
Kodak's own competitive ineffectiveness, not nefarious plots.
1. Fujifilm's use of independent single-brand distributors is notanticompetitive
"Privatizing Protection" at 9-11, 90-94, 100-103.7
"Privatizing Protection" at 11.8
"Privatizing Protection" at 12-14.9
By 1960, Fujifilm's share of the Japanese film market had surpassed 50 percent.10
64
Kodak portrays Fujifilm's four major tokuyakuten -- Asanuma, Kashimura, Misuzu,
and Ohmiya -- as the basic distribution system for color film in Japan. Once open to all,7
according to Kodak's account Fujifilm gradually increased its power over these companies
and denied its competitors access to them. By 1975, when Asanuma terminated its business
relationship with Nagase (Kodak's importer at the time), Fujifilm had allegedly reduced the
tokuyakuten "to a state of utter financial and operational subservience" and transformed them8
all into its own single-brand distributors. All other competitors (including Kodak), denied
access to the core distribution system, were shunted off into the "residual market," where in
effect they compete for the scraps that fall from Fujifilm's table.9
It is a gripping story, but utterly untrue. Changes in the distribution system do not
explain Fujifilm's strong position in the Japanese film market; Fujifilm was the market leader
before the relevant changes took place. Moreover, Fujifilm did not create a distribution
bottleneck by forcing the major distributors to buy only from it. Rather, a general industry-
wide trend toward direct distribution created incentives for some major distributors to become
single-brand distributors of Fujifilm products.
Here is what really happened. By the early 1960s, before any of Fujifilm's major
tokuyakuten became single-brand wholesalers, Fujifilm was already the largest supplier in the
Japanese film market. It is true that Kodak was hampered at the time by import barriers, but10
Konica was not. Yet before Fujifilm's alleged takeover of the distribution system, Fujifilm
had already overtaken Konica, which had once been Japan's leading film manufacturer.
In the 1960s all market participants sold through a combination of single-brand
wholesalers and multibrand wholesalers. Most were full line photographic distributors, with
cameras and related equipment accounting for a large percentage of turnover. Fujifilm's
competitors, most notably Konica and Kodak (operating through Nagase), started buying up
Fujifilm holds a 17.8 percent equity position in Kashimura and a 15 percent stake in11
Misuzu. Fujifilm has no equity holdings in either Asanuma or Ohmiya.
65
distributors and constructing direct distribution networks that would allow them to compete
more effectively. The new direct distribution systems were single brand operations. At the
same time, camera manufacturers, led by Canon and Olympus, began to move to direct
distribution. Thus, the distribution arrangements of the entire photographic industry were
undergoing a process of consolidation. As a response, some of the formerly multibrand color
film distributors -- i.e., Fujifilm's current tokuyakuten -- decided to carry only Fujifilm
products. All the rest remained multibrand operations: these are what Kodak refers to as the
"secondary dealers." These differing paths reflected two basically different business
strategies to cope with Konica's, Nagase's, and the camera manufacturers' moves to direct
distribution. Some wholesalers -- i.e., Fujifilm's major tokuyakuten -- decided to strengthen
their market position by consolidating their relationships with Fujifilm. Others -- the
secondary dealers -- sought security in access to a full product line without regard to direct
relationships with manufacturers. They also tended to service particular local areas by
offering an entire range of products.
At the end of this consolidation process (i.e., by the mid-1970s), all market
participants reached their major retail accounts through single-brand distributors. For all
participants except Fujifilm, these single-brand distributors were subsidiaries; Fujifilm alone
maintained its reliance on independent major wholesalers. To reach smaller customers, all11
participants continued to use secondary dealers that typically handle multiple brands.
In the preceding section, we provided a diagram illustrating the color film distribution
structure. The basic point of the diagram should be reiterated: all of the manufacturers have
access to the same three routes to the retail outlets. All manufacturers have single-brand
wholesalers, all manufacturers have access to multibrand secondary dealers, and all
manufacturers have access to photofinishing labs that sell film along with finished prints.
This consolidation process was not initiated by Fujifilm. Konica and Nagase
underwent it as well, and in fact went further than Fujifilm by actually acquiring distributors
(including one that formerly bought from Fujifilm) and incorporating them into a direct
The last three were not identified by Kodak, and indeed are very small in size. Ueda12
operates in the Kansai region, Okinawa sells only in Okinawa prefecture, and Shikishimadoes not offer full nationwide distribution. The remainder of this analysis will focus on themajor four, which are all national in scope.
66
distribution network. For those wholesalers not targeted for acquisition by Konica or Nagase,
it is not surprising that some chose to strengthen their own market position by entering into
single-brand relationships with the remaining, and largest, supplier: Fujifilm.
Thus, there never was a core distribution system, and Fujifilm did not take it over.
Moreover, taking over an "essential facility" does not explain Fujifilm's competitive
leadership; Fujifilm was the market leader before any changes in the distribution system took
place. As has happened in most other markets around the world for color film, including the
United States, a normal market process led most color film to be distributed in the Japanese
market primarily through single-brand channels. The only difference between Fujifilm and its
competitors in Japan is that Fujifilm did not choose to turn its single-brand distributors into
subsidiaries.
a. The development of Fujifilm's current distributionsystem was unrelated to alleged efforts to blockKodak's access to the market
Fujifilm currently sells to seven tokuyakuten: Asanuma, Kashimura, Misuzu, Ohmiya,
Okinawa Fuji Film, Shikishima, and Ueda. Of the major four, two -- Kashimura and12
Ohmiya -- have not carried Kodak film since the end of World War II. Both, however, did
carry Konica products; Kashimura terminated that relationship in 1963, and Ohmiya did the
same the following year. Thus, these two distributors -- which today account for slightly less
than half of Fujifilm's color film sales made through tokuyakuten, have been single-brand
Fujifilm dealers for more than three decades. Misuzu carried multiple brands -- including
Fuji, Kodak, Konica, Agfa, and the English brand Ilford -- until 1968, when it became a
single-brand distributor of Fujifilm's products and withdrew from all other brands. Misuzu
has been a single-brand distributor of the Fuji brand for 27 years. Thus, by 1968 two-thirds of
Fujifilm's sales through tokuyakuten were already handled by single-brand distributors.
At the time Misuzu terminated Kodak, the Japanese tariff rate for imported color film13
was 40 percent; that rate did not fall below 15 percent for another 10 years.
67
Asanuma originally carried Fuji, Konica, and Kodak brands. It formerly imported
directly from Kodak, but was forced to buy through Nagase when Kodak made Nagase its
exclusive importer in 1960. Asanuma terminated Konica in 1968, and after a failed attempt to
reestablish direct ties with Kodak, it stopped carrying Kodak film in 1975.
The above chronology, standing alone, decisively refutes Kodak's claim that the
development of Fujifilm's current distribution system was a ploy to keep Kodak out of the
Japanese market. Kodak's conspiracy theory simply does not jibe with the actual timing of
events. Kodak has never sold to two of Fujifilm's four major tokuyakuten during the postwar
era; it lost its business with a third while the market was still heavily protected and there was
no need for subterfuge to hamper Kodak. There is absolutely no correlation between13
Fujifilm's establishment of single-brand distributorship arrangements and the liberalization of
the Japanese color film market.
b. The move toward single-brand distribution was ageneral industry trend, not led by Fujifilm
Kodak's claim that Fujifilm "privatized protection" by taking over the core distribution
system as market barriers were falling is belied by the timing of Fujifilm's exclusive
relationships. The falsity of this claim is further underscored by an examination of what
Kodak/Nagase and Konica were doing in the market during the 1960s and '70s. The fact is
that they began acquiring distributors to build up their own direct distribution systems and
limit their reliance on independent multibrand dealers. The decisions by Kashimura and
Ohmiya to terminate Konica, and by Misuzu and Asanuma to terminate Konica and Nagase,
were at least partially in response to Konica's and Nagase's initiatives.
Furthermore, it is necessary to take into account another important market
development that is omitted from Kodak's artfully crafted story. Namely, during this same
time period camera manufacturers began to establish their own direct distribution systems and
limit their reliance on independent dealers. This was a major blow to photographic products
Kodak attempts to argue that it was required by the Japanese government to select an14
exclusive importer to facilitate administration of import quotas. "Privatizing Protection" at68. It then implies that the initiative was originally Nagase's idea. "Privatizing Protection" at68, n. 122. The notion that Kodak was a reluctant participant, however, does not jibe with itssubsequent rejection of Asanuma's entreaties to reestablish its relationship as a directimporter, detailed later in this section.
Why, however, Kodak continued to leave its fate in the Japanese market in Nagase's15
hands for the next 25 years -- long after liberalization had opened up other alternatives --remains a mystery. See Section IV.D.3.a.
Kodak even admits this fact. "Privatizing Protection" at 68.16
68
wholesalers: generally speaking, cameras and camera accessories were the mainstays of their
business, while color film was only a sidelight. As the camera business started to evaporate, it
made sense to strengthen ties with a film manufacturer.
(1) Kodak/Nagase
Prior to 1960, Kodak exported directly to several Japanese importers, including
Asanuma. In 1960, however, Kodak chose to make Nagase its exclusive importer. It is
uncertain why Kodak chose to use an exclusive importer, but why it chose Nagase is clear. 14
Unlike Kodak's other importers, which handled only consumer products, Nagase was a
distributor of industrial products. As of 1960 the Japanese consumer photographic market
was tiny, not to mention heavily protected; accordingly it made sense to continue dealing
directly with Nagase, which already handled the vast bulk of Kodak's Japanese sales.15
Nagase then resold film to multibrand wholesalers, which in turn distributed Kodak
products to retailers and through secondary dealers. Understandably, distributors that
formerly dealt directly with Kodak rankled at having to go through Nagase. Moreover, in16
the late 1960s Nagase began to build up its own direct distribution capacity through
acquisition. Specifically, in 1967 Nagase acquired Kuwada, formerly a multibrand distributor
that handled, among other things, Fuji brand film. In 1969, however, Kuwada terminated
See Exhibit 1 for a chart depicting the history of Kodak's distribution system in Japan.17
Asanuma also informed Kodak that Japanese consumers preferred brighter, more vivid18
colors than those provided by Kodak film. It took Kodak 16 years to follow Asanuma'sadvice and adapt its film to Japanese tastes.
Interview with Mr. Takenosuke Katsuoka, President of Asanuma. Mr. Katsuoka was19
in charge of the financial section of Asanuma at the time and accompanied the then presidenton his trip to Rochester.
69
Fujifilm and became a wholly-owned single-brand distributor of Kodak products for
Nagase.17
Thus, six years before the so-called "Asanuma incident" in which Asanuma terminated
Nagase, Nagase caused a distributor to terminate Fujifilm; moreover, it did so through
outright acquisition. Unsurprisingly, the "Kuwada incident" goes unmentioned in Kodak's
revisionist history.
Furthermore, while Kodak would now have the world believe that its relationship with
Asanuma was vital to its prospects for success, at the time Kodak displayed no such solicitous
attitude. In 1973, Asanuma officials traveled to Rochester to meet with top Kodak executives.
During this visit Asanuma conveyed its desire to reestablish direct dealings with Kodak;18
Kodak, however, stated that it was satisfied with the job Nagase was doing and that Asanuma
would have to continue going through Nagase if it wanted access to Kodak products. With19
this rebuff, it is hardly surprising that Asanuma ultimately chose to enter into a single-brand
relationship with Fujifilm. Once again, a crucial episode is missing from Kodak's tendentious
retelling of events.
Furthermore, after Asanuma stopped carrying Kodak products, Nagase made no
special efforts to bring Asanuma back into the fold. Instead, Nagase recruited its so-called
DKP network (Distributors of Kodak Products) of 33 dealers -- camera distributors, two of
Mitsubishi's tokuyakuten, secondary dealers, and photofinishers -- to replace Asanuma. In
1977, Nagase, far from mourning Asanuma's loss, said that the DKP network had expanded
Kodak Introduces 24 Exposure Color Film, Nihon Shashin Kogyo Sushin, February 1,20
1977, at 10.
In 1973 Sakura Shoji was merged into Konishiroku Shoji, which in turn became21
Konica Shoji in 1977.
See Exhibit 2 for a chart depicting the history of Konica's distribution system in Japan.22
The combination of a labor strike that interrupted Konica's ability to supply film and a23
film quality problem together hurt Konica's competitiveness during this period.
70
the availability of Kodak products. The story of the DKP network, though, has been omitted20
from Kodak's revisionist account.
(2) Konica
Konica distributed film in eastern Japan through affiliated companies from at least the
early 1960s. Two entities -- Hinomaru-ya, in which Konica had some equity holdings, and
Rokuwa, which was a Konica subsidiary -- were merged in 1965 into Cherry Shoji, a Konica
subsidiary. In western Japan, Konica used two independent wholesalers, Koryo Shokai and
Miyazaki Shokai. These were merged in 1970 into Sakura Shoji, another subsidiary of
Konica. Finally, in 1977 two other independent single-brand wholesalers, Haruna Shokai21
and Daiwa Shokai, were merged into Konishiroku Shoji. Along the way, Konica lost its22
relationships with Kashimura, Ohmiya, Asanuma, and Misuzu.
After having lost market preeminence to Fujifilm in the 1950s, Konica sought to23
build up a distinctly brand-specific distribution system using wholly-owned single-brand
distributors. It clearly did not regard Asanuma, Kashimura, Misuzu, and Ohmiya as an
"essential facility" for distributing its products; otherwise presumably it would have either
included them in its new distribution system or not embarked on constructing the system.
Meanwhile, the fact that these four companies decided over time to terminate their
dealings with Konica is understandable. With Konica's growing commitment to affiliated
distributors, the role of multibrand independent wholesalers in distributing Konica products
was becoming marginalized. It was a logical response to turn to suppliers from which they
could expect a stronger commitment.
71
(3) Camera manufacturers
In the 1960s, the wholesalers used by film manufacturers to distribute their products
were also relied upon by camera manufacturers. Indeed, for these wholesalers the camera
business was far more important than dealing in film. Asanuma's example is characteristic:
in 1964 camera and camera accessories sales accounted for the majority of its business, as
compared to only 30 percent for film.
This situation began to change around 1960, when both Olympus and Canon
established their own direct distribution networks and ended their primary reliance on
independent wholesalers. Those two were followed by Minolta around 1980, Asahi Pentax
around 1985, and Nikon around 1990. At present, Fujifilm's four major tokuyakuten -- which
Kodak attempts to characterize as the core distribution system for the entire photographic
products industry -- no longer distribute primarily cameras, and instead are predominantly
distributors of Fuji brand products.
As this process began unfolding in the 1960s, additional incentives arose for major
wholesalers to solidify their relationships with film manufacturers, i.e., through becoming
distributors of a single-brand. Fujifilm had nothing to do with camera manufacturers'
decisions to develop direct distribution and abandon the tokuyakuten, just as it had nothing to
do with Konica's and Nagase's decisions to do the same. These independent decisions created
incentives for Asanuma, Kashimura, Misuzu, and Ohmiya to strengthen their weakening
market position by consolidating their relationships with Fujifilm. There was nothing sinister
or anticompetitive about it -- just the pursuit of a sound and familiar business strategy in the
face of market developments.
c. Kodak's claim that lack of access to Fujifilm'stokuyakuten has crippled its efforts in Japan isdisingenuous
Kodak now claims that loss of access to Fujifilm's tokuyakuten has doomed it to a
perpetually marginal presence in the Japanese market. Yet, as shown above, the actual facts
show Kodak's position to be entirely disingenuous. First, two of Fujifilm's four major
Nagase also had another tokuyakuten, Chiyoda, which later terminated its operation.24
It is our understanding from talking with former and present company officials at25
Asanuma, Misuzu, and Nagase that Nagase did not approach either tokuyakuten with anykind of special offer to convince them to reverse their decisions to terminate. It is telling inthis regard that Kodak did not attempt to argue that such special efforts were made.
Asanuma and Kashimura do carry Kodak slide projectors. Furthermore, in March and26
April of this year, low-level Kodak salespeople did approach Asanuma and Kashimuraregarding the sale of photo CDS. (Interestingly, Kodak also broached with Kashimura thepossibility of buying Fuji film. Apparently some of Kodak's minilab customers haverequested that Kodak supply them with Fuji film.) These overtures had not advanced farbefore they were interrupted by Kodak's filing of its Section 301 petition. With these limitedexceptions, though, Kodak has made no effort whatsoever to crack into this supposedly coredistribution system for film. Interviews with Asanuma and Kashimura management.
72
tokuyakuten have never carried Kodak film in the postwar era. Kodak never lost access to
them, because it never had access to them. Second, Kodak directly rebuffed Asanuma's
attempt to establish closer ties. When it really mattered, it is clear that Kodak did not consider
Asanuma to be the linchpin of its Japanese strategy. Third, Nagase did acquire one
tokuyakuten, Kuwada, forcing it to terminate dealings with Fujifilm. If Kodak had thought24
it vital to ensure access to some or all of these other four tokuyakuten, it could have taken
similar action regarding them as well.
Moreover, there is no record of Kodak's making any special effort to reestablish
business with Misuzu or Asanuma after they terminated dealings with Nagase. Instead,25
Nagase went forward with construction of its apparently successful DKP network. Kodak's
actual conduct at the time is much more persuasive than its calculated handwringing today on
the question of just how "essential" a "facility" these four wholesalers really are.
Indeed, Kodak's apathy regarding Fujifilm's four major tokuyakuten has been
continuous for at least two decades. From the time Asanuma terminated Nagase in 1975 until
the present day, Kodak has never once attempted to contact any of the four tokuyakuten to
offer terms for the sale of color film or paper to them.26
Nothing, other than Kodak's lack of interest, has stopped Kodak from making such
overtures. Asanuma, Kashimura, Misuzu, and Ohmiya are under no contractual obligation to
Kodak's allegation that Fujifilm mandates that distributors handle only its products is27
thus flatly erroneous. See "Privatizing Protection" at 202.
Fujifilm's old basic distributor agreements with the four tokuyakuten did containprovisions requiring the companies to obtain Fujifilm's consent before carrying anothersupplier's products. These provisions were never exercised, as evidenced by the fact thatAsanuma continued to carry Kodak products while this old agreement was in effect. At anyrate, Fujifilm changed its basic distributor agreements for consumer products in 1981 toremove these provisions. See Section III.B.2.d below for a full discussion of the JFTC's X-ray film investigation.
It should be noted that Kodak's past words as well as past actions conflict with its28
current story. Kodak Japan's former president is on the record that reliance on independentdealers was a hindrance, not a competitive necessity. See Section IV.D.3. below.
73
serve as single-brand distributors for Fuji film. They have carried other brands of film in the27
past, and they could do so in the future. Fujifilm does not require them not to deal with other
suppliers, and would not terminate a dealer that carried other brands of film. This is not to
say that any offer from Kodak would be snapped up: the terms would have to be sufficiently
favorable to induce a wholesaler to commit scarce resources to pushing what has been a slow-
moving product. The point is, though, that Kodak has not even tried.
Actions speak louder than words, and Kodak's past actions (or lack thereof) over the
past two decades or more make clear that its current words cannot be trusted. Kodak's present
self-serving rewriting of history does not square with what the company actually did, or failed
to do, in the marketplace. Looking at Kodak's actual track record, it is clear that the notion
that Fujifilm's four major tokuyakuten are an "essential facility" is merely a lawyer's post hoc
invention, not a market reality.28
d. Fujifilm's tokuyakuten are independent businesses notunder Fujifilm's control
In Kodak's version of events, Fujifilm's takeover of the tokuyakuten "essential facility"
has ultimately reduced Asanuma, Kashimura, Misuzu, and Ohmiya into a "feudal
"Privatizing Protection" at 11.29
"Privatizing Protection" at 39.30
"Privatizing Protection" at 48 ("Over time, however, measures have been taken to31
mitigate this competition {between tokuyakuten}. For example, although all of thetokuyakuten handle Fuji film, they have segmented their sales by product category to largeraccounts so that they do not compete with each other at accounts which they jointly serve.")
See "Privatizing Protection" at 48, 153.32
74
relationship" in which they are "totally subservient to Fuji." Fujifilm prevents them from29 30
competing with each other; it extracts all profits from them and leaves them tottering on the
brink of financial ruin. With this total domination of the alleged distribution bottleneck,
Fujifilm thus commands the strategic heights over the entire distribution system.
Yet again, Kodak's flair for the dramatic is at loggerheads with the facts. Competition
between the tokuyakuten is not stifled; Fujifilm considers the intense competition between its
primary distributors as one of the main advantages of relying on independent wholesalers
rather than adopting a direct distribution approach. And the attempt to portray the
tokuyakuten's profitability as abnormally low -- and hence evidence of manipulation by
Fujifilm -- ignores the relevant standards for financial performance that prevail in the
industry.
(1) Fujifilm's tokuyakuten compete with each other
According to Kodak, Fujifilm uses its control over its tokuyakuten to prevent them
from competing with each other for retail accounts. This limitation of competition31
supposedly accomplishes two objectives. First, it maximizes the leverage a tokuyakuten has
over its retailer, since that retailer has no alternative sources of supply. Second, it inhibits
price competition and thus maintains the allegedly inflated price structure for Fujifilm's
products. 32
In support of its argument, Kodak cites the example of Yodobashi Camera, a large
discount camera store chain in Tokyo:
"Privatizing Protection" at 152, Figure 28.33
Fujifilm shipment information from tokuyakuten. See Firm Control of Distribution,34
Nikkei Business, 28 June 1993, at 16 ("They {the four main tokuyakuten} do not dividemarketing areas by region. For this reason they cannot help but compete in sales with oneanother. Some of the large mass merchandisers do business with more than one wholesaler.")
Confirmed in an interview with Mr. Michio Kimura, president of Camera no Kimura, a35
large camera store chain in Tokyo. Camera no Kimura buys Fuji brand film from Kashimuraand Ohmiya.
75
Although Yodobashi purchases from each of the four major distributors,these distributors specialize in the product lines each sells to Yodobashi. In other words, there is no intra-band competition at this level.33
Kodak has, once again, combined factual sloppiness and analytical confusion. The
fact is that most retailers that buy film directly from Fujifilm's tokuyakuten engage in multiple
sourcing. Of the 100 largest such retailers, over 60 customers buy film from two or more34
tokuyakuten. They do this not only to ensure deliveries on short notice, but also to play the
tokuyakuten against each other. Indeed, one of the major reasons Fujifilm continues to rely35
on independent wholesalers is its belief that competition between the tokuyakuten stimulates a
greater sales and marketing effort than could be achieved through direct distribution.
It is true that some large retailers, for example Yodobashi Camera, do choose to buy
Fuji brand film from only one tokuyakuten. The idea, though, that this was arranged by
Fujifilm, or that this situation increases the leverage of the tokuyakuten over the retailer, is
ludicrous. Retailers like Yodobashi single-source film pursuant to their own business
strategies, and often do so in order to maximize their leverage over the distributor. As
indicated above, most large retailers increase their leverage by multiple-sourcing and playing
the tokuyakuten against each other. Some very large retailers like Yodobashi, though, choose
to concentrate all their considerable film purchases with one distributor, and then use the
implicit threat of removing that large volume of business to keep the distributor in line.
Kodak has thus gotten the basic facts wrong, and where its factual assertions are
correct it has gotten their meaning precisely backwards. There is no plot to keep the
tokuyakuten from competing with each other; indeed, Fujifilm's whole distribution strategy is
"Privatizing Protection" at 35.36
Kodak also leaves unanswered the question of how Fujifilm can expect the strong37
sales effort needed for a consumer product from distributors that it supposedly treats soshabbily. A product like film, whose sales are so linked to brand image, requires constantmarketing and promotion to maintain its share of the market. It would be an exceedinglystrange strategy for Fujifilm to attempt to coax the necessary commitment from its distributorsby first reducing them to penury.
See Exhibit 3.38
76
premised on such competition.
(2) Fujifilm's tokuyakuten are reasonably profitable byindustry standards
Kodak cites the tokuyakuten's low profit margins (expressed as a percentage of sales)
as evidence of Fujifilm's anticompetitive control of the distribution system. Fujifilm36
supposedly manipulates the tokuyakuten into a marginal financial position, increasing the
tokuyakuten's dependency on Fujifilm and thus their reluctance to carry other brands against
Fujifilm's wishes.
Even on its own terms, Kodak's argument does not make much sense. After all, if the
tokuyakuten are mistreated as Kodak alleges, that should increase their willingness to add or
switch to other suppliers. Thus, the allegedly poor condition of the tokuyakuten should under
normal circumstances represent a competitive opportunity for Kodak, not a market barrier.
Kodak apparently assumes that the worse the tokuyakuten are treated, the more difficult it is
for them to leave.37
In any event, the factual premise for this strange argument is mistaken. It is true that
the four tokuyakuten's average ordinary income expressed as a percentage of sales tends to
around 0.5 percent in 1990. It by no means follows, however, that these wholesalers are in a38
perilous financial state.
The four tokuyakuten's performance is comparable to the experience of Japanese
wholesalers generally. It is important to remember that, in whatever country, wholesalers
For example, the average ordinary return on sales for Japanese wholesalers in 199039
was 1.10 percent, compared to 0.54 percent for the tokuyakuten.
As one accounting text notes: "Thus, a supermarket chain will be content with a net40
profit margin of 1 percent or less because it has a high rate of turnover due to a relatively lowinvestment in assets and a high proportion of leased assets (such as stores and fixtures). Similarly, a discount store will accept a low profit margin in order to obtain a high rate ofasset turnover (primarily of inventories). On the other hand, capital intensive industries, suchas steels, chemicals and autos, which have heavy investment in assets and resulting low assetturnover rates, must achieve high net profit margins in order to offer investors a reasonablereturn on capital." L. Bernstein, Analysis of Financial Statements (1978) at 212.
See Exhibit 3. Even this analysis, however, may still understate how well the41
tokuyakuten are actually doing. It must be remembered that these wholesalers are privatelyheld companies, and therefore must be subject to a different type of financial analysis toreflect the fact that the owners also draw a salary. Such owner withdrawals can causemeasured profits to systematically understate financial performance. See, e.g., G. Stigler,Capital and Rates of Return in Manufacturing Industries (1963) at 59.
77
typically experience very low returns on sales; nevertheless, since they generally are not39
capital intensive, they can use high turnover to earn a healthy return on assets or capital. For
this reason return on sales tends to be a deceptive indicator of financial performance for
wholesalers; it is preferable to assess profitability for such companies in terms of some
balance sheet measure (e.g., assets or capital).40
In this light, the tokuyakuten's performance looks very respectable. Again, using 1990
as an example, Fuji's four tokuyakuten in that year averaged a 5.19 net income as a percent of
capital, compared to a 8.16 net income as a percent of capital for all Japanese wholesalers.41
Accordingly, the tokuyakuten are not ailing as Kodak has alleged. If their returns are
short of spectacular, it is likely due to the fact that they are engaged in bruising, head-to-head
competition with one another -- yet another fact inconsistent with Kodak's story.
e. Kodak has completely mischaracterized the leverageexerted by Fujifilm's tokuyakuten
Kodak argues that the power of Fujifilm's major tokuyakuten derives in large part from
the leverage created by the breadth of their product lines:
"Privatizing Protection" at 40.42
"Privatizing Protection" at 101.43
This quotation is repeated in "Privatizing Protection" at 102.44
78
The tokuyakuten also distribute a full line of cameras, camera accessories, and other photographic products, so that a rupture in relations with a tokuyakuten supplier means a loss not only of a supply of Fuji film, but of all photographic supplies as well.42
According to Kodak, the exploitation of this leverage has been central to the master
conspiracy to keep Kodak out of the market:
In Japanese industry discussions of how to counteract Kodak, one of themost important concepts discussed was the idea of linking the sales ofvarious consumer photographic products (cameras, accessories, film) so asto prevent foreign firms from achieving a significant penetration in any ofthe linked product markets. This could not be readily done at themanufacturer level because different firms made film (Fuji, Konica) andcameras (Nikon, Canon, Pentax). However, it was noted that wholesalerswere in a position to offer an entire line of photographic products --cameras, accessories, film -- to retailers, and that a camera store thatprocured one item (such as film) from an outside source (e.g., Kodak)would by so doing jeopardize its supply of all photographic products fromthe wholesaler offering Fuji or Konica film. This linkage was made morefeasible by the fact that Japan had only a few camera makers, and theseused the same tokuyakuten as Fuji for virtually all of their distributionwithin Japan.43
Indeed, Kodak ascribes such central importance to this camera-film bottleneck theory
that it includes on one of the cover pages of "Privatizing Protection" an extended quotation
from a newspaper article in which the key line is: "MITI believes that if Japan also
systematically intertwines the camera and film industries, the country will not easily yield to
Kodak's global strategy."44
Once again, however, Kodak has gotten the facts wrong. As mentioned above,
beginning in the mid-1960s camera manufacturers began establishing their own distribution
networks and ending their reliance on independent wholesalers like Fujifilm's tokuyakuten.
For example, Kashimura carries Nikon, Pentax, and Mamiya cameras, and several45
other brands and product lines.
Nippon Kodak is currently owned 70 percent by Kodak and 30 percent by Nagase46
Sangyo. It is the successor to Kodak-Nagase, a 50/50 joint venture between Kodak andNagase in Nagase's former Kodak Products Division.
See Section II.A.3.a. below for a discussion of Kodak's availability and sales47
performance at Camera no Kimura and Koide Camera, two of the largest camera retail chainsin Tokyo.
See "Privatizing Protection" at 146.48
79
Contrary to Kodak's "smoking gun" quotation, MITI did not mastermind "liberalization
countermeasures" based on the linkage of cameras and film. Over the relevant period, the
trend was actually in the opposite direction: a delinkage of cameras and film was occurring.
Thus today, Fujifilm's major tokuyakuten are predominantly dealers of Fuji brand
products. Fuji products (including film, paper, cameras, camcorders, etc.) currently account
for approximately 80 percent of Asanuma's, Kashimura's, Misuzu's, and Ohmiya's total sales.
It is true that Fujifilm's tokuyakuten carry other brands of photographic equipment; however,45
they are not the primary distributors of these brands. If a camera store chose not to buy Fuji
film from a tokuyakuten, it could easily supply its other photographic product needs from
other sources, including the direct distributors for the camera manufacturers or secondary
dealers.
f. Secondary dealers offer unimpeded access to smallretail outlets
Kodak can and does sell directly to large retail accounts through its subsidiary, Nippon
Kodak. Its wide availability in large camera stores and its private label deal with Coop46 47
Stores demonstrate that Kodak does not need the intercession of Fujifilm's tokuyakuten to48
reach large retailers.
As to smaller retailers, Kodak is able to reach them, to the extent it attempts to do so,
through secondary dealers. These secondary dealers are multibrand wholesalers that
generally sell to smaller customers; Fujifilm estimates that approximately 30 percent of all
Some of this film is sold to secondary dealers who then sell the film on a retail basis.49
See Exhibit 4. While Kodak claims that there are over 300 secondary dealers50
("Privatizing Protection" at 11 and 33), there are really only about 90 of any consequence. The rest are more accurately described as retailers that also do limited amounts ofwholesaling.
See Exhibit 4 (the first ten distributors listed in Exhibit 4 are the largest).51
Fujifilm estimates that 60 percent of Nippon Kodak's sales are direct to retail accounts,52
and another 15 percent are to secondary dealers. The remaining 25 percent goes to Kodak-affiliated photofinishing labs, which also act as secondary dealers. These labs provideanother important channel, directly under Kodak's control, for sale to smaller retail customers.
"Privatizing Protection" at 52.53
80
color film sold in Japan goes through this channel.49
Kodak claims that Fujifilm's tokuyakuten strongarm secondary dealers into not
carrying other brands. This is not true. Of the approximately 90 largest secondary dealers
identified by Fujifilm, only one of them carries only Fuji brand color film. All of the ten50
largest secondary dealers, which collectively account for nearly 50 percent of secondary
dealer color film sales, carry Kodak film. Kodak thus has unimpeded access to smaller51
retailers through the secondary dealer channel. 52
2. Fujifilm's rebate programs are not exclusionary
Kodak claims that Fujifilm's rebate programs are vital to Fujifilm's ability to maintain
the anticompetitive market structure it has allegedly created. Indeed, Kodak states: "Fuji's
use of rebates is quite possibly the single most important control mechanism in its distribution
system."53
In support of its attack on Fujifilm's rebates, Kodak makes a number of specific factual
assertions about them. In particular, it levels three basic allegations:
Fujifilm offers "remarkably progressive rebates" to its tokuyakuten todiscourage them from purchasing from other suppliers.
Fujifilm manipulates rebates to its tokuyakuten to keep them at justbreak-even profit levels.
This allegation will be discussed in Section II.B.4. below in relation to Kodak's54
charges that Fujifilm suppresses price competition and engages in resale price maintenance.
These programs, and similar programs aimed at retailers that are described below, are55
designed to encourage sales of Fujifilm's newer, more sophisticated, higher-priced products.
81
Fujifilm bases rebates on resale amount as an instrument of resale pricemaintenance.54
All three of these basic allegations are false. It is this simple: for all its impressive
graphs and citations to its authoritative-sounding "consultant's report" (whose author, as noted
above, is never identified), Kodak just plain got the facts wrong. As a result, the "single most
important" element of Kodak's conspiracy theory is demonstrably a fantasy.
a. Fujifilm's use of progressive target volume rebates hasbeen very limited for at least 20 years, and wassubstantially reduced recently
Contrary to Kodak's assertions, rebate programs based on target sales or purchase
volumes are exceptional in Fujifilm's overall rebate system. Furthermore, progressivity for
target volume rebates has always been very limited, and in recent years has been substantially
reduced. An examination of Fujifilm's color film rebate programs for tokuyakuten and
retailers, as well as its programs for color paper, demonstrate the inaccuracy of Kodak's
characterizations. Once Fujifilm's rebate programs have been adequately described, it is
apparent that their exclusionary impact has always been minimal, and could easily be offset
by modest price cuts or counter-rebates by Kodak.
(1) Rebates to tokuyakuten
Over the past two decades or more Fujifilm has offered several different rebate
programs to the tokuyakuten. Some have provided rebates based on a straight percentage of
purchase amount; some have been based on the percentage of certain types of film purchased
(without regard to the total amount of all kinds of film purchased); some have been based on55
amounts paid in cash; only one has been based on a target sales volumes. Only rebates based
These programs are also offered to secondary dealers.56
Not all of these programs operated at the same time.57
82
on target volumes can potentially have the exclusionary incentives about which Kodak
complains.
Fujifilm's target volume rebate program for tokuyakuten has changed over time. In its
original variant (in effect from 1976 to 1990) the tokuyakuten would set a rebate percentage
on its sales to each retailer which achieved a corresponding target level for the retailer rebate.
For example, if the retailer achieved a target level qualifying for a 2 percent rebate, the
corresponding tokuyakuten rebate was 2.2 percent. The increments between each step of the
tokuyakuten rebate averaged less than 0.3 percent and the maximum rebate was 2.7 percent.
Moreover, this rebate program was overhauled in 1991. The progressivity in the
program has now been substantially reduced. The program is now based on targets for sales
by each tokuyakuten office. The tokuyakuten offices qualify for a minimum rebate rate
regardless of whether they meet the target. The difference between the minimum and
maximum rebate each tokuyakuten office receives is less than 0.6 percent -- hardly a
remarkably progressive rate structure. Because qualification for the higher rates is based on
achieving regional rather than customer specific targets, the progressive nature of the program
is further diluted.
In sum, Kodak's description of Fujifilm's rebate programs for its tokuyakuten is a gross
mischaracterization. It is, in addition, completely disingenuous. Kodak complains that
remarkably progressive sales target rebates discourage Fujifilm's tokuyakuten from using
other suppliers. Yet for the past 20 years or more, Kodak has never once approached any of
Fujifilm's major tokuyakuten with an offer for the sale of Kodak color film. Kodak cannot
complain that the door is closed if it has never even knocked.
(2) Retailer Rebates56
In addition to the rebates provided to the tokuyakuten based on their sales
performance, Fujifilm has also provided rebates to stimulate purchases by retailers. Of the57
83
various retailer oriented rebates in existence over the past several years, only four have had a
target volume element.
Only one of these has had a progressive rate structure. Until 1990, the basic target
volume rebate program for retailers provided a modestly progressive rebate rate structure
whereby the rebate amount increased based on the semiannual volumes purchased by each
retailer. The maximum rate was 3 percent, with step increases averaging less than 0.3 percent
between each target level. This program was totally eliminated in 1990.
Of the three other programs, one provided a rebate if individual retailers met growth
targets based on the projected semiannual growth in the market. The other two provided a
rebate if individual retailers achieved a certain percentage of ISO 400 and 800 sales out of
total film purchases or a specified increase in the percentage of ISO 400 or 800 purchases.
The latter two programs had no progressivity, providing only a modest rebate amount if the
ISO 400 and 800 target was met. The former provided two rebate steps, with a top rebate
rate of 2 percent.
Because the progressivity in the basic rebate program was extremely modest (0.1
percent to 0.3 percent) it is difficult to see how this program could have had any exclusionary
effect. With respect to the ISO 400 and 800 rebates, these were targeted at encouraging
retailers to shift from lower value to higher value films within the volume of Fuji brand film
sold. The essential element of these programs was the share of Fuji brand ISO 400 and 800
film purchased relative to total purchases of Fuji brand film.
Fujifilm has now terminated all of these programs and maintains a single program with
any element of target volumes. This program is intended to continue Fujifilm's emphasis on
increasing purchases by retailers of higher value ISO 400 and 800 film. It provides a single
small fixed percentage rebate if a certain specified portion of the total film purchased by a
retailer during a six month period is ISO 400 or 800 film. If, in addition to meeting the
specified ISO 400/800 percentage target, a retailer also maintains total film purchases at the
same level as the corresponding semiannual period in the prior year, the amount of the rebate
is doubled. The elements of the program are not at all progressive -- i.e., a single rate is
applicable to each qualifying element. The program is intended to stimulate sales of higher
"Privatizing Protection" at 35.58
"Privatizing Protection" at 55 (emphasis in original).59
When a rebate is made contingent on some kind of purchase or sales target, the rebate60
periods are generally six months because shorter target periods are considered impracticable.
84
value films. The additional rebate for achieving prior year aggregate purchase levels is
intended to encourage the shift to the higher value film without an overall decline in the total
units sold.
(3) Color paper rebates
Fujifilm does not offer sales or purchase target rebates on its sale of color paper.
Rebate rates are generally higher for larger customers, but this is merely a mechanism for
offering favorable prices to valued customers. Within any given period the rebate structure
does not establish incentives not to purchase from another supplier. Moreover, since color
paper customers almost uniformly engage in single-sourcing for their color paper needs, such
exclusionary incentives would be irrelevant in any case.
b. Fujifilm does not manipulate rebates to restoretokuyakuten to profitability at the end of the fiscal year
Kodak charges that Fujifilm manipulates rebates to ensure that its tokuyakuten's
financial performance hovers around the break-even level: "excess profits are extracted for
Fuji's benefit, and losses are made good by Fuji, usually in the form of rebates." In this58
regard, Kodak states: "Fuji rebates are often after-the-fact; they are not necessarily paid
during the normal course of business as part of the invoice for a particular transaction; rather,
the rebate amount is determined and paid at the end of each year."59
In fact, rebate rates and (when applicable) rebate targets are never determined after the
fact. Rates and targets are always fixed at the outset of a period (generally six months, never
a full year). Accordingly, the tokuyakuten are always able to determine how much in60
rebates they will earn during a given period based on performance. The provision of year-end
"Privatizing Protection" at 151-167.61
85
rebates calculated at that time to push distributors from the red just into the black simply does
not occur.
3. There is no distribution bottleneck for color film
In Kodak's revisionist account, Fujifilm created an exclusionary market structure in
color film by locking out competitors from the core distribution system for photographic
products, i.e., Asanuma, Kashimura, Misuzu, and Ohmiya. Further, Fujifilm maintains its
control over this "essential facility" through its rebate programs. The result, allegedly, is a
distribution bottleneck in which Kodak is blocked from reaching the retail store shelf and thus
the Japanese consumer.61
As shown above, the facts are otherwise. There was no takeover of the distribution
system; there was instead a general industry-wide consolidation process in which different
wholesalers migrated into single-brand relationships with manufacturers. The only difference
between Fujifilm's actions and those of Konica and Kodak/Nagase is that Konica and
Kodak/Nagase actually bought up their distributors. As to Fujifilm's rebate programs, they
are not "remarkably progressive," nor are they manipulated to suspend the tokuyakuten
between profit and loss. They are clearly not designed to keep Kodak away from the
tokuyakuten (which Kodak has ignored for 20 years or more) or to keep Kodak out of retail
outlets.
In sum, there has been no master plan and there is no ongoing mechanism to create a
distribution bottleneck. As detailed below, Kodak's access to the Japanese consumer is
unimpeded.
a. The examples of major Tokyo retailers show thatKodak's market share is not a function of access to consumers
If Kodak's low market share in Japan were truly due to a distribution bottleneck, then
one would expect Kodak to sell very well wherever it is available. Such a sales pattern -- a
See Exhibit 5.62
When asked why Kodak is so prominently displayed if its sales are so poor, Mr.63
Michio Kimura, Chairman of Camera no Kimura, stated that he gets a larger gross margin onKodak products and therefore is willing to push them. Interestingly, Mr. Kimura waschairman of the Zenren, the photo retailers' trade association, from 1980-89. In Kodak'saccount, the Zenren coordinated a decades-long conspiracy with Fujifilm to maintain highresale prices and punish discounters. How odd that the organization was chaired during therelevant period by the founder of a large camera store chain that offers Kodak film soprominently. It should also be noted that Mr. Kimura owns minilabs that use Kodak colorpaper, and he formerly owned a wholesale lab which used Kodak paper.
86
general lack of availability, but brisk sales wherever Kodak is offered -- would confirm that
Kodak's poor performance reflects not consumer preference, but the preclusion of consumer
preference by Fujifilm's effectively keeping Kodak off the store shelf.
In fact, however, even when Kodak is on the store shelf and prominently displayed, it
does not sell well. Specifically, photographs attached in the exhibits show the display of62
color film at two of the largest camera stores in Tokyo: Camera no Kimura and Koide
Camera. As the photographs show, Kodak's logo appears prominently, and Kodak yellow
boxes are displayed with equal prominence (and approximately equal shelf space) alongside
Fujifilm's green boxes and Konica's blue boxes. Not only has Kodak made it to the store
shelf, but it appears there as a full equal of Fujifilm and Konica.
Despite this prominent display and equal billing, Kodak's actual sales are nonetheless
low. The percentage breakdowns of sales by film brand for these two stores are as follows:
Retailer Fujifilm Konica Kodak
Kimura 70 20 10
Koide 68 20 12
Thus, Kodak's market share at these large retail stores is not far from its overall
national market share. This result is perfectly consistent with the consumer preference63
theory of Kodak's poor showing in Japan. Kodak's problem is not getting in front of the
Kodak recognizes the gray market phenomenon. "Privatizing Protection" at 140, 144. 64
Kodak, however, looks only at gray market imports during the 1980s.
See Exhibit 6.65
"Privatizing Protection" at 144.66
Import statistics from the Japan Ministry of Finance.67
87
consumer; it is getting the consumer to choose Kodak. In other words, consumer preference
is not being precluded, it is being exercised -- in favor predominantly of Fujifilm.
b. The rise of gray market imports and private labelbrands shows that there is no distribution bottleneck
"Gray market" imports of color negative film (i.e., re-imports or reverse imports of
exported or foreign-produced Fuji and Konica brand film) and imports of private label brands
of color film have been surging in the Japanese market. Between 1991 and 1994, these low64
priced imports grew from an estimated 0.17 million square meters per year to approximately
1.19 million square meters. 65
As Kodak itself notes, however, gray market Fuji brand imports are not handled by
Fujifilm's tokuyakuten. Likewise, Konica's direct distribution system does not handle66
Konica gray products. If indeed there were a distribution bottleneck, the growth of gray
market imports would have been limited. The example of gray market goods shows that
attractively priced film can get distribution, and win sales, in the Japanese market. Fujifilm's
tokuyakuten are therefore not an "essential facility" for the gray market.
The growth of the private label market, also noted by Kodak, further belies the
distribution bottleneck theory. Agfa, which has led the way in developing this market niche,
saw its 35mm color film sales explode in a single year from approximately 3 million rolls in
1993 to 14 million rolls in 1994 -- now nearly 60 percent of Kodak's total. Such growth is67
completely inconsistent with the notion that Fujifilm exerts a chokehold over the Japanese
film distribution system. It is consistent, however, with a picture of the Japanese film market
as open to attractively priced, innovatively marketed products.
See "Privatizing Protection" at 5.68
See generally in M. Levy & B. Weitz, Retailing Management at 419-444 ("Assortment69
Planning and Control," Chapter 12); Rao & McLaughlin, Modeling the Decision to Add NewProducts By Channel Intermediaries, Journal of Marketing, Vol. 53, No. 1, at 81 ("Retailersoften are attracted to new products by the lure of additional profit opportunities, butsubstantial costs are associated with the addition of new products.”)
Cairns, Suppliers, Retailers, and Shelf Space, Journal of Marketing, Vol. 26, No. 870
(July 1962) at 34-36 ("To induce a retailer to sell him space, a supplier must offer a price (orgross profit) for a unit of space which exceeds the "opportunity cost" of this space. Thisopportunity cost of a unit of retail space is the gross profit the retailer can obtain by allocatingthis space to the most profitable item not now in his assortment, or to the most profitable
(continued...)
88
c. The only segment of the market in which Kodak'saccess may be limited is small shops with insufficientshelf space to carry multiple brands
Kodak claims to experience particular difficulties in selling to smaller retail outlets in
the Japanese market. Fujifilm has the same difficulty in the U.S. market. In both markets,68
small retailers are more likely to carry only a single-brand of film, and that single-brand will,
all else being equal, be the leading brand: Kodak in the United States, and Fuji in Japan.
This phenomenon does not, however, indicate the existence of anticompetitive business
practices; rather it reflects basic economics. Given constraints on shelf space, a small retailer
will be inclined to carry only the fastest moving items.
In the first place, stocking multiple brands requires a retailer to incur certain fixed
costs. These include costs associated with evaluating the merit of a product, estimating its
likely sales, displacing other products, establishing relationships with the manufacturer or a
wholesaler, and so forth. For a large retailer, these fixed costs can be spread over a69
relatively large volume of sales, even in the case of a slow-moving product. For a small
retailer, with low volume, such fixed costs may prove a significant deterrent to stocking more
than one brand of a given product.
A retailer must also factor in the opportunity cost of stocking a second brand -- the
foregone income that could have been earned on an alternative brand. Again, a large retailer70
(...continued)70
combination of items already stocked."); M. Levy & B. Weitz, Retailing Management, (1992)at 426. ("Retailers are ultimately constrained by two factors: money to invest in merchandiseand space to put the merchandise in. Thus, to add a category . . . a reduction must be madeelsewhere.")
Indeed, specialization in limited lines of high-turnover goods is one of the defining71
characteristics of convenience stores. See P. Kotler & G. Armstrong, Marketing: AnIntroduction, (3d ed. 1993) at 351 ("Convenience stores are small stores that carry a limitedline of high-turnover convenience goods.").
If I compared Japan with the U.S. or France, it's going to be very differentbecause most stores in Japan buy in very small volumes. You know, if youwalk down a street in Osaka or Tokyo, they're all hole-in-the-wall shops. That's one of the reasons the distribution costs are so high.
Testimony of Professor Hausman, Consent Decree Trial Transcript at 790-792.
89
has greater flexibility in making stocking decisions. Shelf space is not as constrained, and a
slower moving product may nonetheless be made more profitable by, for example, using it as
the basis of a special promotion that increases traffic and thereby the sale of other products.
For a small retailer, on the other hand, shelf space is at a premium, and the scope for using
"loss leaders" is much narrower. Accordingly, a small retailer will be inclined to stock the
brand that guarantees him the most productive use of his limited shelf space, i.e., the highest
turnover.71
These factors help to explain why Fujifilm is generally unavailable in U.S. outlets with
more limited shelf space for film. Likewise, it explains why tiny mom-and-pop stores and
kiosks in Japan, which may only stock one row of each film speed on the shelf, will choose
the market leader. These outcomes are not the result of massive conspiracies; they are a
function of supply and demand.72
There are two basic ways a manufacturer of a second brand can overcome the
reluctance of small retailers to stock its products. First, it can offer higher margins to the
retailer by lowering wholesale prices or offering sales support; second, it can increase
consumer interest in the brand through advertising or new product innovations. Increasing
the margin raises the retailer's incentive to "push" the brand relative to others, and reduces the
For a discussion of push and pull strategies of promotion and marketing, see, e.g.,73
P. Kotler & G. Armstrong, Principles of Marketing (5th ed. 1991) at 433-436.
See "Privatizing Protection" at 40-42.74
Kodak erroneously asserts that Fuji's acquisitions of photofinishing labs took place in75
the 1970s and '80s. "Privatizing Protection" at 40. The implication is that this move was a"liberalization countermeasure," rather than a normal market development in the color filmand paper industries.
90
turnover needed to generate profits. Increasing consumer interest in the product creates
consumer "pull" and raises turnover. As explained in detail in Section IV, Kodak has73
neither pushed nor pulled with particular vigor in the Japanese market. Its poor performance
in small outlets is therefore unsurprising.
4. There is no distribution bottleneck for color paper
Although Kodak's Section 301 complaint covers both color film and color paper,
actual allegations regarding anticompetitive activities in the color paper market are almost
nonexistent. All of Kodak's intricate conspiracy theories about the tokuyakuten "essential
facility" and the machinations of Fujifilm's rebate programs are irrelevant to color paper. It
appears that Kodak's strategy is to make its case on color film and then implicate color paper
with guilt by association.
The only substantial allegation of anticompetitive conduct specific to color paper is the
charge that Fujifilm has created a "captive market" for color paper in Japan by building up a
network of affiliated photofinishing labs. Kodak argues that it is precluded from selling74
paper to the large segment of the market that has in effect been bought up by Fujifilm.
Again, Kodak has attempted to recast a general industry trend into a nefarious Fujifilm
plot. Forward integration into photofinishing labs by film manufacturers is as old as color
photography. Fujifilm began investing in labs in the early 1960s, just as the color film market
in Japan was beginning to take off. The other Japanese color paper producers -- Konica,75
Mitsubishi, and Oriental -- also have longstanding networks of affiliated photofinishers that
began in the early 1960s. Kodak, for its part, has had a photofinishing presence in Japan for
Akira Ueno, The Story of Kodak, (1989) at 144. Toyo later became Imagica, a part of76
which was subsequently spun off into Kodak Imagica.
91
over 40 years; Toyo Genzosyo, a subsidiary of Nagase, first began developing Kodak color
film in Japan in 1952.76
The difference between Fujifilm's lab network and Kodak/Nagase's is structural.
Fujifilm began its photofinishing network by entering into joint ventures with local camera
shop retailers. This linkage with local retailers helped to strengthen Fujifilm's position in
smaller regional markets. Kodak, by contrast, established central labs in Tokyo and Osaka
with regional branches. This centralized system was less advantageous in assisting Kodak's
market penetration.
Nothing prevented Toyo, later Imagica, from acquiring more labs. As of 1971, when
capital controls were relaxed, Kodak could have entered directly into 50/50 photofinishing
joint ventures, just as Fujifilm had done, but it chose not to. As of 1976, when remaining
capital controls were eliminated, Kodak could have invested directly in wholly-owned labs,
but it chose not to. Not until 1987 did Kodak finally invest directly in photofinishing, taking
a 51 percent stake in Imagica to form Kodak Imagica. Toyo's overcentralized strategy and
Kodak's 16-year delay, not anticompetitive acts, are the reasons for Kodak's lack of
competitive success in color paper.
5. The allegedly exclusionary practices complained about byKodak are normal competitive practices worldwide
"Tokuyakuten bottleneck." The "Asanuma incident." "Remarkably progressive"
rebates. "Locking up" the color paper market. Kodak's wordsmiths have done a masterful job
of dressing up standard industry practices in sinister-sounding language -- reminiscent of the
long-ago Senate candidate from Florida who accused his opponent of masticating in public
and having a thespian sister.
Kodak has attempted to portray developments in the Japanese market as a
government-industry conspiracy to keep out Kodak. What actually happened is far less
As in Japan, independent wholesalers are used to reach smaller customers.77
The economic efficiencies of integrating manufacturing and distribution -- whether78
through ownership or contractual relationships -- are well known. Integration facilitatesgreater flexibility in responding to changing market conditions; reduces incentives foropportunistic behavior between manufacturer and distributor; allows for better informationalflows through the distribution pipeline; and generally ensures greater focus and effort indistribution. See, e.g., R. Blair & D. Kaserman, Law and Economics of Vertical Integrationand Control, (1983) at 11-27; Waterson, Vertical Integration and Vertical Restraints, OxfordReview of Economic Policy 9(2), (Summary 1993) at 41-57.
Fujifilm reaches all the markets listed above either through direct distribution or79
exclusive distributors.
92
dramatic: the normal, market-driven evolution of distribution structures along lines similar to
the paths taken in the United States and other countries.
a. Single-brand or direct distribution of film is theworldwide norm
As explained above, single-brand distribution of color film is the rule in Japan:
Fujifilm does it, Konica does it, and Kodak does it. Fujifilm is distinctive only because its
competitors have actually bought their single-brand distributors, i.e., they have constructed
their own direct distribution systems.
Direct distribution is likewise the modus operandi in the U.S. market. Most film is
sold directly by Eastman Kodak to large retail accounts; likewise, Fuji Photo Film U.S.A.
sells directly to retail customers. Kodak's distribution system in the United States is thus far77
more exclusionary than Fujifilm's in Japan. Kodak at least has the chance (if it would so
choose) to make an offer to Fujifilm's tokuyakuten to carry Kodak film; by contrast, it is
utterly inconceivable that Fujifilm could utilize Kodak's powerful U.S. distribution network.
Direct distribution of color film is the norm not only in Japan and the United States,
but around the world. Kodak has built up direct distribution systems in Canada, France, the78
United Kingdom, Spain, Sweden, Switzerland, Taiwan, Singapore, Indonesia, Thailand,
Chile, Peru, Australia, and New Zealand, among others.79
"Privatizing Protection" at 160.80
93
Kodak's statement that "building a parallel distribution system in Japan is enormously
expensive for any company" is unpersuasive. Kodak has built distribution systems all over80
the planet. With its enormous size and financial resources, it could certainly improve its
system in Japan. That Kodak has not cared to spend the money is not Fujifilm's fault.
b. Forward integration into photofinishing is theworldwide norm
Integration of color film and color paper manufacturing with photofinishing services is
the rule in Japan: Fujifilm, Konica, Mitsubishi, Oriental, and Kodak all do it. Kodak has had
a photofinishing presence in Japan through Toyo since 1952.
Such integration is common around the world. We simply cite the 1993-1994
International Photo Industry Report:
The major sensitized materials manufacturers continue to buyphotofinishing facilities, probably to maintain market share of their colorpaper. Kodak has established itself as the world's largest photofinisher. Although it closed down its photofinishing operations in New Zealand inlate-1989, it set up a joint venture wholesale business again at the end of1992, following the defection of Viko to Fuji paper. In Australia it is thedominant wholesaler (90% + market share), although small regionalwholesalers are again springing up. Throughout the past three years, ithas continued to aggressively buy photofinishers around the world. Through its U.S. subsidiary, Qualex Inc., which engaged in a veryaggressive acquisition campaign throughout 1992 and into 1993 and 1994,it controls about 70% of the wholesale market. In the United Kingdom,Kodak's photofinishing group lost the SupaSnaps business back toColourCare, but took over most of ColourCare's Boots business, andeventually almost all of its minilabs, when ColourCare was sold to NexusPhoto, a group led by management. The combination of LLA and KodakPathe controls about 30% of the photofinishing market in France. InNorway, Kodak controls more than 20% of the market with main- andmini-/micro-labs. In Austria, purchases have given it a significant of themarket, and 50% share of the professional business. It has purchased aminority share (49%) in IMAGICA, the Japanese photofinishing groupthat has an estimated 11% share of the market. Kodak's prominence in
1993-1994 International Photo Processing Industry Report at 7-2 (emphasis added).81
How this technological dynamic led to Kodak's early domination of photofinishing in82
the United States is described in United States v. Eastman Kodak, 853 F. Supp. 1454, 1480-81(W.D.N.Y. 1994).
94
the European market can be seen in Table 7-19. In South America,Kodak is the dominant photofinisher in Argentina and Brazil, and has astrong presence in Mexico. It also operates labs in Asia and Africa.
To maintain some share of the U.S. color photographic paper market, FujiPhoto Film established a photofinishing group Fuji TruColor Photo in1992. With 16 labs at the end of 1994, it holds about 15% of the marketand is the second national photofinisher (behind Qualex). Fuji holds astrong position in Europe, with Bac Color (75% owned by Fuji) thedominant photofinisher in the Netherlands, Kungsfoto a major participantin Sweden, Photex with an 8% position in the German market, and FujiFrance with a significant position. It also holds a commanding lead inminilab installations in Eastern Europe. It dominates the Japanesemarket through Fujicolor Service and other affiliated companies,controlling an estimated 65% of the market and is strengthening itsposition in Thailand and other Southeast Asian countries. In SouthAmerica, it operates a plant in Buenos Aires, Argentina and Montevideo,Uruguay.
In the U.S., Konica owns Konica Quality Photo Service, which provideswholesale photofinishing in the Northeast, Midwest and West, andrepresents a strong third semi-national photofinisher. It has the secondlargest photofinishing presence in Japan.81
The integration of manufacturing and photofinishing was originally impelled by
technological considerations. The new color photofinishing process was much more complex
than black-and-white processing, requiring heavy capital investment and significant technical
expertise. Color film and paper manufacturers thus made investments in photofinishing to
facilitate the market for their new products and ensure the quality of the final consumer
product: color prints.82
Manufacturers also derive significant marketing advantages from integration. They
assure a ready market for color paper; in addition, affiliated labs, with their close daily contact
"Privatizing Protection" at 195-196.83
If retail prices are raised artificially, sellers of other brands can readily gain. Dealers84
selling the price-maintained brand will favor it over other brands only if their margins aresufficiently greater on the price-maintained brand to compensate for any loss in volume. Infact, dealers can have a greater incentive to sell other brands if the wholesale price they payfor these brands is low enough for the dealers to earn greater total profits on increased sales ofthese brands while selling them below the artificially raised price-maintained brand.
See Section III.B.3. for a full discussion of Fujifilm's Antimonopoly Act compliance85
program.
95
with retailers, are a significant marketing tool for color film. From the consumer's
perspective, integration of manufacturing and photofinishing offers the prospect of product
improvements through greater R&D, not to mention the present price benefits to be gained
from more muscular competition.
B. Fujifilm Has Not Suppressed Price Competition
In addition to its allegations of a distribution bottleneck, Kodak charges that Fujifilm,
in league with its tokuyakuten and with retailers, has conspired for decades to maintain
artificially high retail prices for color film. How this charge relates to Kodak's poor83
performance is unclear. After all, artificially high prices should present Kodak with a
competitive opportunity to underprice the competition and thereby gain market share.84
Putting aside this basic analytical problem, Kodak once again has the facts wrong.
The evidence is incontrovertible that price competition is alive and well in the Japanese color
film market. The most that Kodak is able to do is to stir up dust with speculative press
clippings from decades ago; when that dust settles, it is clear that price competition at every
level of distribution has been vigorous for many years and is continually getting more so.
Kodak's specific charges of Fujifilm's complicity in resale price maintenance have no
factual basis. Fujifilm does not monitor resale prices as Kodak suggests; indeed, Fujifilm
goes to great lengths to make clear that its suggested retail prices are nothing but
suggestions. Moreover, Fujifilm's rebate programs are in no way structured to inflate resale85
prices.
See, e.g., Not Everybody Loves Wal-Mart's Low Prices: Three small retailers are86
leading a legal charge against the giant retailer, Business Week (Oct. 12, 1992) at 36-38.
Kodak has attempted to confuse international price differences for color film with87
those for color paper. As to the latter, prices in Japan have been significantly higher than(continued...)
96
As has already been demonstrated, there is no artificial barrier blocking Kodak's
access to the retail store shelf. Likewise, nothing is impeding Kodak from competing on price
if it chooses to. Kodak's performance in the Japanese market is ultimately up to Kodak.
1. Market trends show that the Japanese market is increasinglysensitive to price
It is all very well for Kodak to cite press articles in which some retailer is complaining
about a competitor's price cuts. That is what retailers do, in every industry in every country
around the world. Search under "Wal-Mart" in Nexis and you will find no shortage of
complaints by local shopkeepers about "unfairly" low prices.86
What matters is not that such complaints are voiced; what matters is whether they are
acted upon in some collusive way. A review of price trends and market developments in the
Japanese film market demonstrates that no one has been able to keep price competition from
becoming increasingly aggressive. If Kodak wants to join in the fray, there is nothing to stop
it.
a. The level, trend, and distribution of retail prices are inconsistent with the existence of resale price maintenance
If Kodak's theory were correct, and resale prices were really determined by collusion
rather than competition, then retail prices should be (1) abnormally high, (2) stable over time,
and (3) tightly bunched around a retail price point. Kodak's theory fails all three of these
factual tests.
Contrary to Kodak's assertion, color film prices in Japan are comparable to prices in
other markets. Indeed, depending on the exchange rate used, prices in Japan may actually87
(...continued)87
those in the United States. This is due not to anticompetitive practices, but to the relativelygreater bargaining power of U.S. color paper purchasers. A significant part of the U.S. colorpaper market consists of very large retailer owned "captive" labs. For example, Wal-Mart, thesingle largest retailer for photofinishing, has its own "captive" labs which perform thephotoprocessing for nearly all of Wal-Mart's stores. In Japan there are no large retailer-owned photofinishing labs; i.e., there are no "Wal-Marts." The existence of such largevolume customers, which have no equivalent in Japan, exerts strong downward pressure on U.S. price levels. This downward pressure is largely absent in color film, however, since brand recognition (which is not a major factor for color paper) allows Kodak to command asignificant price premium for film that affects the price structure for other brands as well.
A purchasing power parity exchange rate is an estimated equilibrium exchange rate88
based on relative price differences between different currencies over the long term. For adiscussion of the purchasing power parity concept, see R. Dornbusch, Purchasing PowerParity, New Palgrave Dictionary of Economics, Vol. III, (J. Eatwell, et al. eds., 1987) at1075-1085.
"Purchasing Power Parity Cost of Living Survey," Economic Planning Agency (May89
1995) (Study as of November 1994).
Indeed, Kodak has publicly confirmed the equivalence of Japanese and U.S. color film90
prices. A Kodak Japan official stated for the record that if Kodak were to lower prices inJapan, gray market re-exports from Japan would threaten Kodak's worldwide price structure. See Section IV.D.4 below.
97
be lower than U.S. prices. Exhibit 7 provides June 1995 retail prices of ISO 400 single pack
color film in Tokyo, New York, and Los Angeles. Using the June 1995 exchange rate of 85
yen per dollar, retail prices of Fuji brand film in Japan ranged from 6.7 percent higher than in
the United States to 18.8 percent lower; similarly retail prices of Kodak brand film in Japan
ranged from 3.9 percent higher to 26.3 percent lower. Color film prices in the two markets
are thus basically equivalent even at the yen’s current high level.
Indeed, if the exchange rate is adjusted to reflect purchasing power parity, prices in88
Japan are actually substantially lower than U.S. prices. Using a purchasing power parity
exchange rate of 155 yen per dollar, retail prices of Fuji brand film were between 70.2 and89
116.6 percent lower in Japan than in the United States in June 1995. There is thus no
evidence that prices in Japan are somehow abnormally high.90
Indeed, the above analysis understates the true extent to which color film prices have91
declined in Japan, since it does not reflect the growing popularity of multipacks. Film sold inmultipacks has a lower price than the single-pack format. For example, in November 1994Yodobashi Camera's price for single-pack ISO 100 film was 335 yen, while the price forthree-packs was 735 yen, or 245 yen per roll. See Exhibit 8. The share of total ISO 100 filmsold in multipacks has increased rapidly, climbing from 3 percent in 1989 to 29 percent in1994. See Exhibit 9. Separate analysis of single-pack and multipack film cannot show theeffect of this development on per-roll prices.
98
Furthermore, retail prices in Japan have been falling for the past several years. Exhibit
8 shows average retail prices for Fuji brand film sold at Yodobashi Camera, Kimura Camera,
and Koide Camera (three large Tokyo camera store chains) during the period from November
1989 through May 1995. For single pack ISO 100 film, from November 1989 to November
1994 average prices dropped from 436 yen to 398 yen -- an 8.7 percent decline. When these
prices are adjusted for inflation, the real decline in prices increases to 16.4 percent. For three-
pack film, average retail prices fell over the same period from 1040 yen to 777 yen. Here the
decline was even sharper than for single-pack film: 25.3 percent in nominal terms, and 31.9
percent in real terms. These falling retail prices make it amply clear that Fujifilm is not
maintaining inflated prices. 91
The existence of resale price maintenance is further refuted by the distribution of retail
prices. Exhibit 10 shows the distribution of average retail prices in May 1995 at 32 Tokyo
and Osaka storefronts for Fuji brand and Kodak film. Prices of single-pack Fuji brand ISO
100 film ranged from 320 to 529 yen (a spread of 65 percent), while three-pack prices ranged
from 705 to 1,088 yen (a spread of 54 percent). By comparison, Fujifilm's suggested retail
price is 529 yen for the single pack, and 1,471 yen for the three-pack. These suggested retail
prices are obviously being roundly ignored. Retail prices are set by retailers, not Fujifilm.
Kodak's conspiracy theory is thus inconsistent with the level of retail prices in Japan,
the trend of those prices over time, and the distribution of those prices at any given time. The
objective evidence is overwhelming: Fujifilm has no control over retail prices.
"Privatizing Protection" at 163, 164.92
Photo Market 1995, at 130-31.93
Id.94
See, e.g., "Privatizing Protection" at 4-5; 1993-94 International Photo Processing95
Industry Report at 4-10.
99
b. The rise of discount stores, gray market imports, andprivate label brands demonstrates that the marketresponds to price
Kodak itself has recognized the emergence of "nontraditional outlets" for color film --
e.g., discounters, supermarkets, convenience stores -- and the consequent "growing price
sensitivity on the part of Japanese consumers." Indeed, since 1985 supermarkets and92
convenience stores have risen from 3 percent of the color film market to 7 percent in 1994,
and supermarkets (including department stores) have grown from 19 percent to 23 percent. 93
The share for traditionally dominant camera stores has dropped from 60 percent to 50
percent.94
Furthermore, the increasing prominence of private label brands and gray market
imports has already been discussed. This merchandise is priced substantially below
traditionally marketed film.
This growth of aggressive discounting is completely inconsistent with Kodak's theory
that Fujifilm has squelched price competition in the Japanese market. The implication,
presumably, is that price competition is restricted to the so-called "residual market," while the
Fujifilm-dominated traditional outlets remain immune. As shown above, however, this
implication is belied by the facts. Fujifilm's response to vigorous price competition has been
to compete right back with a steady drop in its per-roll prices.
More vigorous price competition has also come to photofinishing. Kodak goes on at
great length regarding the supposedly conspiratorial reaction to the decision by the discount
lab Nihon Jumbo to offer a 9 yen print in 1993. What Kodak fails to mention is that despite95
Nihon Shashin Kogyo Tsushin, January 10, 1995, 1096
A comprehensive, point-by-point analysis of Kodak's factual allegations (and97
"support" thereto) is provided in the Appendix.
100
(or perhaps because of) complaints by competitors, Nihon Jumbo has further lowered its print
price first to 5 yen, and currently to 4 yen.96
2. Kodak's conspiracy theories are based on misstatements andfactual distortions
Kodak's primary "evidence" of resale price maintenance consists of citations to trade
journal articles over the past 20 years. In particular, Kodak alleges three major "incidents" in
which there was supposedly some collusive reaction to beat back discounts and maintain high
prices. A closer look at the articles that Kodak has cited shows that these "incidents" are
decidedly less than meets the eye.97
The first incident is referred to by Kodak with melodramatic flair as the "Supermarket
Chain A crisis." The mysterious "Supermarket Chain A" is merely the Daiei supermarket
chain. In 1974, in the face of increased costs for paper and chemicals, Daiei cut its margins in
order to minimize the increase in print prices to consumers. Thus, in the face of significant
cost increases, Daiei increased its print prices a mere 3 yen, from 35 yen to 38 yen.
This move by Daiei caused dismay among competing small retailers who had
concluded negotiations with their laboratories in the expectation that Daiei would pass on the
full cost to consumers. Daiei's move thus caused a great deal of complaining by retailers at
their association meetings. The small retailers had accepted the increased costs on the
assumption that the increases were a general industry phenomenon occasioned by increases in
costs at the manufacturing level in the aftermath of the 1973 oil crisis. As a result, the
retailers suspected that somehow Daiei did not face the same increase in costs that they did.
In this context, the trade journals report statements by small retailers proposing various
conspiracy theories on how Daiei could offer such low prices. In their meetings, desperate
small retailers accused manufacturers, laboratories, and their own association heads of
betraying them, and vented their anger at having to compete with the "super stores."
Nihon Shashin Kogyo Tsushin, April 10, 1974, 20.98
Nihon Shashin Kogyo Tsushin, April 10, 1974, 28.99
101
Association heads reported that their efforts to gain assistance from manufacturers to affect
the Daiei price were summarily rebuffed. In the end, the small retailers concluded that they
should re-open negotiations with their laboratories to demand lower photofinishing prices to
enable them to compete with the super stores.
Kodak limits itself to reporting the conspiracy theories of the retailers, without
reporting the decision that retailers sought to renegotiate with the labs. Kodak also omits98
that the retailers' conspiracy theory about the laboratories resulted in massive raids by the
JFTC at individual labs and lab association headquarters. Without connecting the events,
Kodak characterizes the JFTC's investigation of the laboratories, which resulted in orders to
abrogate concerted price increases by labs in two separate regions, as "quiescence" by the
JFTC. Kodak also omits the manufacturers' rebuffs of the retailers' request for assistance to
affect the Daiei price. According to one of the articles cited by Kodak, one of the association
heads described this rebuff as follows:
After the April 2nd board meeting {of Zenren}, Chairman Koide,Managing Director Akima, and myself made a request to film makers. However, their response was that they only provide paper, and that pricesetting is done by the laboratories.99
Fujifilm had nothing to do with the collusive dreams of the retailers. This is made
exceedingly clear in the articles cited by Kodak. Kodak charges that "Fuji and Konica acted
to enforce price discipline within their own distribution networks," and cites an April 10, 1974
article in Nihon Shashin Kogyo Tsushin. Kodak fails to mention that this article reports the
following statement by Mr. Kamigori of Fujicolor Trading:
I have no intention to send specific instructions to chain laboratoriesnow. Sales price is an issue which each laboratory must deal withindividually. . . . Daiei {Supermarket Chain A} price may be indeed a
Nihon Shashin Kogyo Tsushin, April 10, 1974, 20.100
Nihon Shashin Kogyo Tsushin, June 20, 1983, 21.101
"Privatizing Protection" at 137, citing a June 20, 1983 article in Nihon Shashin Kogyo102
Tsushin.
102
shock, there is nothing that can be done except that each person conductshis or her business with confidence.100
Kodak has once again left out the facts that do not fit its story.
The second incident involved a 1983 promotional campaign by Nagase featuring
Kodak's VR film series. Zenren, the retailers' trade association, complained about Nagase's
promotion to the JFTC. Zenren did complain that Nagase's prices were unfairly low; in
addition, however, it complained about the potentially misleading nature of the promotion.
Specifically, the promotion consisted of sales of packages of different film speeds, including
ISO 1000, which was unusable in most Japanese cameras at the time. Since Nagase did not
dispute that the offer may have been confusing to consumers, it agreed not to use television
ads, but the promotion itself continued. The JFTC's involvement did not aid price collusion; it
only regulated potentially deceptive advertising.101
Kodak tries to drag Fujifilm into this story, stating that "{a}n industry journal . . .
speculated about the possible reaction of Fuji and Konica, with reference to a Japanese
proverb: 'One must extinguish any flames that come into one's way.'" The implication is102
that Fujifilm would attempt to "extinguish" Kodak's "flames" by interfering with its discount
and promotion initiative.
However, Kodak neglects to mention the sentence immediately following, which states
that Japanese manufacturers would not be likely to follow such advice. The article continues
as follows:
At the moment, two of Japanese manufacturers are observing thedevelopments, and have not announced any specific counter-action yet. Itseems that they will compete with VR by the normal countermeasure ofintensifying advertisement in regular summer campaign. . . . It is veryunderstandable that retailers have concern. However no matter how they
Nihon Shashin Kogyo Tsushin, June 20, 1983, 8.103
Zenren Tsuho, April 1994, 12.104
Id.105
Nihon Shashin Kogyo Tsushin, January 10, 1995, 10.106
103
are worried, they have no means to avoid price competition under theprinciple of "free competition."103
The third incident concerned discount lab Nihon Jumbo's 1993 offer of 9 yen color
prints. Citing an April 1994 article in Zenren Tsuho, Kodak states: "In 1994 at the Zenren
Board Meeting, Vice Director Suzuki called for concrete price measures from Zenren to
somehow counter the low prices being offered by Nihon Jumbo."
Kodak has simply misquoted the article. What Mr. Suzuki actually said was:Stores with high prices provide quick and high quality {service}. Storeswith low prices require longer days {for processing}. Therefore, I do notthink there is so much pressure for lower price. 104
The article makes it clear that Zenren could not come up with any way to counteract the low
prices. Managing Director Ueno was quoted as saying that "prices will go down sooner or
later." In fact, the Zenren Board Meeting ultimately decided to pursue non-price105
promotional efforts directed at end-users.
Kodak also failed to tell what has actually happened. If anyone really did try to
"counter" Nihon Jumbo's discounting, the effort was a complete failure. Since 1993 Nihon
Jumbo has dropped its prices even further, first to 5 yen and then to 4 yen. Kodak's106
evidence of a 20-year conspiracy to maintain high prices is nonexistent.
"Privatizing Protection" at 55-57.107
Kodak has access to much more detailed information in the U.S. market via Nielsen108
survey data.
Kodak's allegation that Fujifilm uses postmen to gather sales data is a pure fabrication. 109
Kodak's allegation that Fujifilm uses its affiliated labs to collect price information is110
thus untrue. See "Privatizing Protection" at 56, 198.
104
3. Fujifilm does not monitor resale prices in order to control them
Kodak alleges that Fujifilm has constructed an intricate system of "monitoring and
discipline" to exert control over final retail prices. In fact, the only retail price information107
systematically collected by Fujifilm is a monthly survey by Nippon Research Center of 20
Tokyo and 12 Osaka retail storefronts. The survey covers two or three stores representing
each type of business in each region. Clearly, this limited volume of information is
inadequate for purposes of monitoring resale price maintenance, and is consistent with
ordinary market research and business practices in both the United States and Japan. By108
contrast, the part-time workers' survey, also conducted by Nippon Research Center, targets a
much larger number of retail outlets, but it gathers primarily information on retailer attitudes
and preferences. The only price data collected involves the price of single pack film. The
product range of this survey is too narrow -- excluding the three pack and four pack products
-- for purposes of monitoring resale prices. 109
Other sources also do not provide systematic retail prices. From its tokuyakuten
Fujifilm receives monthly information of sales volumes, but not prices. From its labs Fujifilm
receives monthly information on the total number of prints processed. Again, however, no
regular price information is provided. 110
In sum, Fujifilm simply does not have at its disposal the information necessary to
mastermind a resale price conspiracy -- especially not among approximately 280,000 retail
outlets. Fujifilm collects data to keep abreast of market developments -- not to control them.
"Privatizing Protection" at 53.111
"Privatizing Protection" at 154 (emphasis in original).112
105
4. Fujifilm's rebate programs do not inhibit price competition
According to Kodak, "Fuji's rebates are paid on the basis of the distributor's or
retailer's own revenues rather than unit volume of the amount purchased, reducing the
incentive to enhance sales by cutting prices."111
By paying rebates based on resale amount, Fujifilm supposedly transforms its rebate
programs into another instrument of resale price maintenance:
{D}istributors risk financial crisis if they fail to meet a fixed, pre-determined level of revenue from (not purchases of) sales of Fuji film. Thisnot only discourages inter-brand competition, but also discourageswholesalers from selling to discount-retailers at low prices: lower salesprices reduce the distributor's revenue, thereby raising the risk of fallingshort of the sales target and, even if the target is met, reducing the size ofthe rebate itself. The net effect is to maintain retail prices.112
It would indeed be a clever scheme, if only it were true. In fact, however, none of
Fujifilm's rebate programs are based on resale amount. All rebates are calculated either as a
certain yen amount per roll purchased or sold, or as a certain percentage of the amount
purchased. Kodak's characterization of Fujifilm's rebate programs, elaborated at great length,
is blatantly wrong. The price-maintaining effect of Fujifilm's rebates is nil.
106
III. THERE HAS BEEN NO GOVERNMENT TOLERATION OFSYSTEMATIC ANTICOMPETITIVE CONDUCT
Central to Kodak's legal claim under Section 301 is the charge that MITI encouraged
and the JFTC tolerated anticompetitive conduct. Neither claim is true. Kodak's inconsistent
treatment of actions by the two agencies of the Japanese Government is quite striking. If a
MITI report urges that the use of rebates be kept to a minimum, but declines to completely
repudiate all uses of rebates, Kodak concludes that MITI has encouraged the expanded use of
rebates. Yet, if the JFTC conducts a thorough factual investigation, but finds no violation of
the Antimonopoly Act, Kodak concludes that the JFTC has consciously ignored
anticompetitive conduct. Kodak reads too much into MITI actions and statements, and yet
refuses to acknowledge JFTC actions. Neither of Kodak's characterizations survives careful
scrutiny.
By some press accounts, all Kodak really wants is proper enforcement of the
Antimonopoly Act. If so, then Kodak is asking for what already exists. At present Japanese
Government enforcement of Japanese competition law is comparable to -- and in some
respects exceeds -- U.S. Government enforcement of U.S. antitrust law. The data on
enforcement show that governmental efforts are comparable.
Enforcement already exists for the photographic products industries. The JFTC
carefully monitors all oligopolistic industries, including the color film and color paper
industries. There is no need for Kodak to call for enforcement. The JFTC has already taken
action to monitor these industries.
Kodak is simply unwilling to accept the reality: there have been no violations of the
Antimonopoly Act. It is critical to keep in mind that the JFTC does not and should not base
its enforcement decisions on Kodak's retelling of trade associations' retelling of alleged facts.
The JFTC bases its decisions on real facts. Since the facts show there has been no violation
of the Antimonopoly Act, Kodak's allegation of government toleration ultimately fails.
J. Vestal, Planning for Change: Industrial Policy and Japanese Economic113
Development 1945-1990 (1993) at 46.
Kodak has relied almost exclusively on a Chalmers Johnson's view of the world. See114
generally C. Johnson, MITI and the Japanese Miracle: The Growth of Industrial Policy,1925-1975 (1982). Although Johnson's work was pathbreaking at the time, subsequent
(continued...)
107
A. The Japanese Government Did Not Encourage TheCreation Of An Exclusionary Market Structure To BlockKodak
Like so many other parts of "Privatizing Protection," the discussion of MITI and its
role in the photographic industry is exaggerated and distorted. Kodak identifies certain
government actions, but completely distorts the motives, the context, and the impact of those
actions. Where parts of the history are inconveniently contrary to Kodak's view of the past,
those parts are conveniently left out of the story. What purports to be history is in fact
nothing more than polemic.
Although Kodak does go on at some length about the general history of MITI
initiatives in this era, Kodak never bothers to mention that some of MITI's key initiatives were
in fact rebuffed. For example, in 1963 MITI proposed the Special Measures Law for the
Promotion of Designated Industries to give the agency broad powers to help industries that
would suffer because of the impending capital liberalization. Yet the business opposition to
giving MITI these powers was so great that the Japanese Diet rejected the proposal. As one
commentator has noted:
However, advocates of autonomous adjustment, mainlybusinessmen, saw little need for state input in responding totrade liberalization. By exerting pressure on politicians, thisgroup managed to ensure that MITI's new legislation nevercame to a vote.113
Kodak has exaggerated the role of MITI as the master of the Japanese economy.114
(...continued)114
scholarship has demonstrated that Johnson's view of MITI ignores important complexities ofJapanese public policy formulation. See J. Haley, Authority Without Power: Law and theJapanese Paradox (1979) at 155 ("Even at the height of bureaucratic influence in the mid-1950s, the elite economic ministries did not exercise political or economic control. As manyscholars have begun to recognize, the formulation and implementation of economic policy inJapan involved complex interrelationships within individual firms and industries as well asamong the various bureaucracies and political institutions at each level of government."). Seegenerally, K. Calder, Strategic Capitalism: Private Business and Public Purpose in JapaneseIndustrial Finance (1993); D. Okimoto, Between MITI and the Market: Japanese IndustrialPolicy for High Technology (1989).
"Privatizing Protection" at 78115
108
Kodak makes broad claims, but provides little documentation. The alleged
"documentation" is little more than cites to trade publications that have been mistranslated or
misused. These distortions are addressed in detail in the Appendix to this document. Kodak
devotes so much space to general history because it has so little evidence of actual MITI
actions that had any impact on the market.
1. MITI's distribution guidelines were irrelevant to thedevelopment of Fujifilm's distribution system
Aside from the lack of documentation, there is a fundamental disconnect between
Kodak's allegations and MITI's actions during this period. Kodak makes much of the
"Distribution Guidelines for the Photosensitive Materials Sector" released in 1970, one of the
linchpins of its allegations about MITI. This document is such a critical part of Kodak's
allegations, Exhibit 11 provides a translation of the full text of the document.
Kodak recognizes that "on their face, the MITI Guidelines appeared to be little more
than a set of recommendations about payment terms, rebates, and distribution practices." 115
But Kodak then jumps to the conclusion that MITI was somehow validating and promoting
Others do not share Kodak's cynical view of MITI's relationship to the distribution116
sector. See Vestal, supra, at 47 ("Although pro-growth industrial policy was largelyunchanged, the disappearance of surplus labor in the Japanese economy in the early 1960shad a substantial impact on policy to support employment. Industrial policy towards smalland medium enterprises and towards the distribution sector became much more positive,promoting rather than blocking competition and modernization.").
"Privatizing Protection" at 84117
"Privatizing Protection" at 85.118
MITI'S 1970 Distribution Guidelines for the PSM Sector, June 24, 1970, at 1119
(hereinafter "1970 Distribution Guidelines").
109
Fujifilm's business practices to the detriment of Kodak's market access. Kodak claims that116
"MITI's active support for the consolidation of the distribution sector around Fuji was
therefore critical." In Kodak's view, this alleged MITI-sponsored "consolidation" had three117
major elements: (1) bringing distributors into the Fujifilm keiretsu, (2) expanding the use of
rebates, and (3) creating a so-called tokuyakuten bottleneck. It is instructive to compare the118
actual MITI documents and actions against each of these three elements. The Distribution
Guidelines themselves speak of "attempting to update the terms of trade as part of the
modernization of the distribution system." Nowhere do the Guidelines support Kodak's119
interpretation of MITI's role.
a. MITI did not encourage tokuyakuten to deal only withFujifilm
The 1970 Distribution Guidelines say nothing about bringing distributors into the
alleged Fujifilm keiretsu. Not a word. Thus the document that is the centerpiece of the
alleged MITI-sponsored "consolidation," the document that represents MITI's alleged "master
Since the 1970 Distribution Guidelines do not address this issue at all, Kodak had to120
search for some other source. Kodak cites a November 12, 1970 MITI report. See"Privatizing Protection" at 91. This document is a MITI description of what is happening inthe industry, not a recommendation for action. This document therefore does not even rise tothe level of administrative guidance. Kodak has also mischaracterized this study. See SectionIII.B.2.a. below.
See Section II.A.1.b.121
See "Privatizing Protection" at 96, 182, 203.122
See item 3 of 1970 Distribution Guidelines ("However, retailers are making partial123
payments, leaving the balance on credit. This will make the financial condition on thepayment due date unstable.")
110
plan" for restructuring the distribution system in this industry, says nothing about the alleged
key element of the consolidation. 120
Even more telling is the timing of actual events in the marketplace. By the time of the
1970 Distribution Guidelines, virtually all of the tokuyakuten had already become aligned
with particular manufacturers. Three out of four Fujifilm tokuyakuten had already become
single-brand distributors, handling Fuji film. Nagase, Kodak's exclusive agent, had already
acquired Kuwada in 1967. It is hard to see how MITI Distribution Guidelines could have121
caused what had already happened. The only tokuyakuten to abandon Kodak and shift to
handling only Fuji brand film after the 1970 Distribution Guidelines -- Asanuma -- did so for
other reasons unrelated to any guidance from MITI. These reasons are described in detail in
Section II.A.1.b.
The only tangential link Kodak identifies involves shortening of payment terms. But122
Kodak overlooks the point that the 1970 Distribution Guidelines say nothing about shortening
payment terms. The claim that the Guidelines "strongly recommended against long payment
periods" ("Privatizing Protection" at 96) is just wrong. The Guidelines focus on the need to
avoid partial payments, and instead to settle accounts completely with either cash or
promissory notes. Moreover, Fujifilm had independent business reasons to adopt stricter123
"Privatizing Protection" at 94-95.124
"Privatizing Protection" at 85.125
1970 Distribution Guidelines, at 2-4. Even Kodak's translation notes this point. See126
"Privatizing Protection" at 98-99 (". . . the significance of rebates existing to pay asupplementary role for other price polices is recognized, but this must stop at the minimumlevel.")
111
payment terms, and in fact had begun to shorten the payment terms even before MITI
released its Guidelines.
Kodak also cites the existence of Japan Development Bank ("JDB") loans in search of
a linkage to the government. At best, JDB loans are a very weak link. JDB loans were124
granted to firms in dozens of industries to modernize and improve their efficiency. JDB must
be able to provide a commercial justification for the loans it provides. But even assuming
there is some link, the cited JDB loans were financing Konica. Fujifilm received no JDB
loans to invest in distribution systems. It is hard to see how such financing for Konica
strengthens the consolidation of the system around Fujifilm, which is the heart of Kodak's
allegations.
b. MITI did not encourage expanded use of rebates
With respect to rebates, the 1970 Distribution Guidelines directly contradict Kodak's
claim. Kodak's description of the alleged countermeasure is to "enhance the use of
rebates," yet the Guidelines say that excessive use of rebates might violate the125
Antimonopoly Act and say that their "use should be limited to a minimum." In an amazing126
twist of logic, Kodak somehow turns MITI's unwillingness to abolish rebates completely into
a MITI measure to "enhance the use of rebates."
"Privatizing Protection" at 102.127
See Section II.A.1.b.3.128
"Privatizing Protection" at 101-02.129
"Privatizing Protection" at 80-83.130
112
c. MITI did not encourage the creation of a bottleneck
With respect to the tokuyakuten bottleneck, the 1970 Guidelines again say nothing.
Indeed, this portion of Kodak's report has no discussion of MITI involvement at all, not even
through the use of the trade association publications. The only mention of MITI is a claim
that MITI wanted to promote a film-camera linkage to stop Kodak. Yet Kodak cites only a127
1973 article describing MITI's alleged interest in this linkage. Kodak does not allege or prove
any subsequent action by MITI to create this linkage.
This claim is particularly absurd, since by the mid-1970s camera manufacturers had
begun their own direct distribution, and no longer relied on the tokuyakuten to provide
distribution. Contrary to Kodak's claim, these camera companies did not rely on the128
tokuyakuten for "virtually all of their distribution in Japan." Rather than becoming129
intertwined, the two industries in fact had grown apart and were using different paths of
distribution.
2. The Japanese Government had no involvement ininvestments by Mitsui entities in Fujifilm
A keiretsu is such a convenient scapegoat that Kodak just had to find a way of
squeezing this provocative concept into its plot. Having identified the expansion of cross-
shareholding as an example of countermeasures used in other industries, Kodak could not130
resist including this element in its story. But Kodak faced a problem: Fujifilm is not part of
any keiretsu. Kodak's crack team of investigators solved this problem quickly by enrolling
"Privatizing Protection" at 35.131
K. Miyashita & D. Russell, Keiretsu: Inside the Hidden Japanese Conglomerates132
(1994) at 84; M. Gerlach, Alliance Capitalism: The Social Organization of JapaneseBusiness (1992) at 168. The same conclusion is found in Japanese materials. For example,the July 1994 JFTC report on corporate groups did not list Fujifilm as part of the MitsuiGroup, or any other corporate group.
Interview with Mr. Takenosuke Katsuoka, President of Asanuma.133
113
Fujifilm in the Mitsui keiretsu. An easy solution, but one that ignores extensive evidence to131
the contrary.
a. Fujifilm and its tokuyakuten are not part of the Mitsui Group
Fujifilm does not consider itself to be part of the Mitsui group. Fujifilm was in fact
quite surprised to see this allegation. It had never occurred to Fujifilm that it might be
considered to be part of the Mitsui group. In fact, Fujifilm's largest current shareholder is
Nippon Life Insurance, a member of the Sanwa Group.
Fujifilm is not alone in this perception. Although the Mitsui group has been the
subject of extensive investigation and commentary, we could not find a single published
description of the Mitsui group that included Fujifilm. Exhibit 12 provides an example of132
one such description. Fujifilm's surprise, it seems, must be shared by every Western Scholar
of Japanese keiretsu groupings. Kodak conveniently omits facts that undermine this alleged
link between the tokuyakuten and the Mitsui Group. For example, a managing director of
Asanuma is a former official of Daiichi Kangyo Bank. Not surprisingly, Daiichi Kangyo
Bank is Asanuma's main bank. It is hard to see how Asanuma can be part of the Mitsui133
Group, when its main bank is part of the Daiichi Kangyo Group.
The absurdity of Kodak's logic -- using shareholding to identify group affiliation -- is
illustrated by reference to yet another tokuyakuten, Ohmiya. Sumitomo Marine Insurance is
the largest shareholder in Ohmiya and Sumitomo Bank is the company's main bank.
"Privatizing Protection" at 83, n.157134
"Privatizing Protection" at 83.135
114
Similarly, the two largest shareholders in Nagase Sangyo, Kodak's exclusive agent in Japan
until 1986, and now its partner, are Sumitomo Bank and Sumitomo Trust. The latter is also
Nagase's primary bank. According to Kodak's logic of what constitutes a keiretsu
relationship, Kodak, through its affiliation with Nagase, is a member of the same keiretsu as
Ohmiya. Although this conclusion makes no sense, it is the conclusion compelled by Kodak's
logic.
b. Government support for the stock market had nothingto do with investments by Mitsui entities in Fujifilm
Kodak misinterprets the new investment in Fujifilm during this period of time.
Although Kodak describes the events in a footnote, noting that the real purpose of the134
creation of Nippon Kyodo Shoken and Nippon Shoken Hoyu Kumiai was to support a
slumping stock market, Kodak then ignores its own facts. Kodak jumps to the conclusion that
stocks were "resold to companies related to the issuers, producing increased mutual
stockholding within each keiretsu," without any support at all.135
The absence of any evidence is not surprising, since MITI does not even have
jurisdiction over companies in the financial services sector. The Ministry of Finance has that
authority. The notion that MITI was somehow behind the specific decisions of Mitsui Group
financial services companies to invest in Fujifilm is simply not credible, even as an allegation.
Each of these investors had its own business reasons for buying Fujifilm stock. For
example, Mitsui Trust and Nippon Life, two major Fujifilm shareholders, were each
competing for the overall management of Fujifilm's pension investments. Mitsui Trust
decided to expand its Fujifilm shareholding as part of its competitive strategy to win this
financial services business. More fundamentally, Kodak ignores the fact that Fujifilm was
"Privatizing Protection" at 36, Figure 14136
115
perceived as a blue-chip investment. Many institutional shareholders were quite happy to add
Fujifilm shares to their investment portfolios.
c. The issue of cross-shareholding between Fujifilm andfinancial institutions is completely irrelevant to Kodak'sperformance in the Japanese market
As explained above, neither Fujifilm nor neutral scholars or commentators consider
Fujifilm to be part of the Mitsui Group. None of the other aspects of keiretsu membership
exist -- or are even alleged. Fujifilm does not borrow predominately from the Mitsui Group
companies. Fujifilm does not exchange managers with Mitsui Group companies. Fujifilm
does not participate in the President's Council of the Mitsui Group. Other than the
coincidence of some shareholding, there is no connection between Fujifilm and Mitsui Group.
Kodak appears determined to allege this link between the Mitsui Group and Fujifilm
largely because Kodak has identified some lending patterns between Mitsui Group companies
and the tokuyakuten. Yet in only one instance does Kodak even allege that the majority of136
lending comes from the Mitsui Group. By definition, some other set of companies control the
majority of financing for the other three tokuyakuten. It is hard to see how this pattern gives
the lenders controlling the minority of outstanding loans "control" over the destiny of the
tokuyakuten.
Ultimately, the alleged keiretsu linkages are a red herring, designed to distract
attention from the more important issues that explain Kodak's performance in the Japanese
market. Kodak makes much of the fact that several of the financial institutions holding
Fujifilm stock belong to the Mitsui Group. But since there is no evidence that Fujifilm itself
is part of the Mitsui Group -- indeed, the evidence is to the contrary -- the common tie among
the institutional shareholders proves nothing. Kodak takes a coincidence, and turns it into a
conspiracy.
Fuji Challenges Kodak Case on Film Market, Financial Times (July 14, 1995) at 4137
("{L}awyers for Kodak maintain they are not seeking market share targets or sanctions butpushing for enforcement of Japan's competition laws.").
116
B. The JFTC Actively Enforces The Japanese AntimonopolyAct, And Has Subjected Fujifilm To Particular Scrutiny
Kodak relies heavily on the argument that Antimonopoly Act enforcement in Japan
simply does not exist. In fact, in some recent press reports, Kodak claims all it really wants is
Japanese enforcement of its competition law.137
The argument that there is no Antimonopoly Act enforced in Japan is demonstrably
wrong in two important respects. First, whatever limitations might have existed on
Antimonopoly Act enforcement in the 1950s, JFTC enforcement efforts since the 1960s have
been increasingly proactive. JFTC enforcement at present is comparable to enforcement by
U.S. Government agencies. Second, the JFTC has been particularly aggressive in policing the
photographic products industry. Over the past twenty years, Fujifilm has been subject to
repeated JFTC inquiries and investigations.
1. The JFTC uses a variety of formal and informal methods toenforce the Antimonopoly Act strictly
Kodak seems unable to accept a basic truism: the JFTC cannot take any formal
enforcement action unless there is concrete evidence of a possible Antimonopoly Act
violation. Kodak starts with a premise that there must be some anticompetitive conduct, and
therefore must be some Antimonopoly Act violation. Yet the JFTC has been carefully
reviewing this industry for years and has found no violations. Unlike the U.S. authorities, the
JFTC has a number of unique statutory mechanisms to subject oligopolistic industries to
careful scrutiny. After reviewing actual facts, hard facts obtained from its monitoring of the
industry, the JFTC reached its conclusion. After reviewing some back issues of trade
association magazines, Kodak drew its conclusion.
See H. First, Antitrust Enforcement in Japan (unpublished paper, 1995) at 31. 138
See generally H. Iyori & Uesugi, The Antimonopoly Acts and Policies of Japan (3d ed. 1994) at 19-30.
117
Kodak may not have known about some developments. Kodak may have
conveniently ignored other developments. Whatever the reason for Kodak's omissions, JFTC
actions over the past twenty years speak for themselves. Once we show the parts of Kodak's
picture that have been conveniently cropped away, the complete picture shows that Kodak's
argument about JFTC non-enforcement has no credible basis in fact.
a. A complete history shows the Antimonopoly Act hasbeen strengthened significantly over time
Kodak's view of the JFTC seems trapped in the 1950s and 1960s. Kodak describes,
but does not seem to appreciate the significance of dramatic changes in JFTC enforcement in
the 1970s and 1980s. Kodak makes much of MITI as the "guardian angel," blocking JFTC
enforcement efforts. Yet during the 1970s, when this MITI activity allegedly took place, the
JFTC was challenging MITI-encouraged conduct in court, and successfully obtaining civil
and criminal penalties against oil industry executives. JFTC successful prosecution of the oil
cartel cases shatters Kodak's picture of the JFTC as a powerless, passive enforcer of the
Antimonopoly Act. As we shall see, the increased enforcement efforts made further progress
in the 1980s and 1990s.
(1) JFTC enforcement of the Antimonopoly Act becamemuch more aggressive in the 1970s
The development and enforcement of Japanese antitrust laws have gained momentum
over time, after a somewhat turbulent beginning. In the early days of the Antimonopoly Act,
the JFTC case volume was high, even exceeding that of the United States by some
measures. In the 1950s, however, the JFTC met with increased resistance from MITI and138
private industry, which sought to promote industrial development. To promote Japanese
See generally H. Iyori & A. Uesugi, at 24-40.139
Id. at 213-214 (showing sharp decline after 1953 amendments).140
See id. at 41-55.141
Id. at 42.142
118
industrial development during this period, MITI persuaded the Japanese Diet to amend the
Antimonopoly Act in 1953 to allow for approval of output limitation cartels. Most139
commentators view the 1950s as a low point of JFTC enforcement activity, a view supported
by the statistical evidence of enforcement activity.140
Starting in the 1960s, however, enforcement activity improved. Inflationary141
pressures in the early 1960s led the Economic Planning Agency in 1963 to publish a Report
on the Recent Price Problems, which noted:
Recently, price increases by cartel agreements among smalland medium enterprises and downward inflexibility of pricesby the large enterprises sector have become conspicuous,and therefore, it is considered necessary to strengthen theenforcement of the Antimonopoly Act on price fixingagreements. . . .142
A 1964 cabinet decision reaffirmed the need for stricter enforcement of the Antimonopoly
Act. This new attitude led the JFTC to increase its enforcement activity against price fixing
and resale price maintenance.
The timing of this shifting perception is important. Kodak's chronology says the
"window" opened in 1971, with the elimination of quotas and reduction in tariffs. Yet even
before the window opened, the JFTC had already begun to strengthen its enforcement efforts.
The bulk of Kodak's allegations came after 1971, long after the period of weak JFTC
enforcement in the 1950s. Kodak's view of a weak JFTC during the 1970s is at best
misleading, and often just wrong.
See generally id. at 250-53.143
See id. at 250-53.144
See Oil Cartel Case, Judgment of the Second Sub-Court of the Supreme Court of145
Feb. 24, 1984, 38 Keishu 1287. See generally J. Ramseyer, Japanese Antitrust Enforcementafter the Oil Embargo, 31 Am. J. Comp. Law 395 (1983).
119
(2) The Oil Cartel Cases demonstrate JFTCindependence from MITI, and the primacy of theAntimonopoly Act over MITI guidance
The 1970s were a dramatic turning point in the history of Antimonopoly Act
enforcement. In July 1971 the JFTC filed an initial complaint alleging price fixing in the oil
industry. The oil companies had consulted with MITI to comply with MITI's policy of143
examining in advance the prices to be charged by oil companies. The companies not only
consulted with MITI regarding the price, but also agreed on the level of overall price
increases on oil products, which MITI accepted. In 1974, the JFTC reached its formal
decision, finding price fixing by the major oil companies and their officers.144
Notwithstanding MITI involvement, the JFTC filed its complaint and pursued its
investigation. In 1973, the JFTC began a second investigation. After completing this second
investigation and issuing a cease and desist order, the JFTC issued its decision and then filed
accusations with the Prosecuting Authority, which subsequently filed indictments against the
companies and their officers. After several years of litigation, the Japanese Supreme Court
eventually affirmed the convictions of 10 out of 12 of the oil companies and 13 out of 14 of
the individual defendants, resulting in significant fines and prison sentences.145
Even though these cases involved a different industry, they nevertheless have
important implications for Kodak's view of JFTC-MITI relations. Kodak asserts that MITI
dominated the JFTC. MITI was the "guardian angel." Yet in the 1970s, JFTC was
prosecuting companies in direct conflict with MITI policies. As Professor Frank Upham has
explained:
F. Upham, Law and Social Change in Postwar Japan (1987) at 188.146
In fact, the JFTC had taken this position much earlier. The Oil Cartel cases were a147
dramatic reaffirmation of this point. See M. Matsushita, Introduction to JapaneseAntimonopoly Act (1990) at 47 ("There have been several cases in which cartels based onadministrative guidance were challenged, in all of which the FTC ruled that cartels wereunlawful under the Antimonopoly Act even if they were based on administrative guidance.").
See H. Iyori & A. Uesugi, at 52-53; M. Matsushita, supra, at 4-5.148
See id. at 53.149
120
. . . the Oil Cartel cases, particularly Japan v. SekiyuRenmei, threatened the very foundation of the historicalmodel by discrediting the informal cooperation amongindustry members, their trade association, and MITI thatwas at its core. After 1980, MITI's efforts to persuade orcoerce reluctant firms to follow the consensus developed bythe Ministry and industry leaders faced the potentialargument that compliance might mean criminalprosecution.146
Thus more than two decades ago, the JFTC won a critical legal battle, and reaffirmed the
basic legal point that the Antimonopoly Act applies regardless of MITI involvement. 147
Ironically, this watershed event occurred at the same time Kodak argues the JFTC was
backing down in the face of MITI pressure.
(3) Amendments in 1977 significantly strengthened theJFTC ability to enforce the Antimonopoly Act
The 1977 amendments to the Antimonopoly Act strengthened the law and enhanced
the JFTC's Antimonopoly Act enforcement power. These amendments resulted from a public
outcry about the oil industry cartels, and a growing conviction in the 1970s that the tools
given to the JFTC should be strengthened. The new JFTC powers covered a wide range of148
areas: 149
the ability to order the payment of surcharges against cartel participants
Id. at 262.150
Using 1991 exchange rate of 134.59 yen/dollar.151
H. Iyori & A. Uesugi, at 262 (reporting data through 1992); Fair Trade No. 534-95-4152
(including data through 1994).
121
(sec. 7(2)),
to order divesture of part of a business when a monopolistic situation is found to exist (sec. 8(4)),
to order filing of reports when parallel price increases occurred in oligopolisticindustries (sec. 18-2),
to impose restrictions on aggregated total stockholdings by giant companies(sec. 9(2)),
to restrict stockholdings by financial companies to 5 percent (sec. 11),
to take remedial measures against past violations (sec. 7(2)),
to take broader measures against unfair trade practices (sec. 20), and
to enforce new procedural requirements (sec. 45(3)).
One of the most effective provisions of the 1977 amendments has been the ability of
the JFTC to order payment of surcharges against cartel participants. With its new surcharge
provision power, the JFTC has levied significant surcharges on cartel participants, with the
aggregate surcharge amounts increasing over time. For example, in 1990 the JFTC imposed
11.2 billion yen in surcharges against twelve firms involved in a cement cartel. It is hard to150
dismiss over $80 million in surcharges for one case as lack of enforcement. Over the last151
ten years, the JFTC has collected approximately 28.4 billion yen, or over $220 million, in
surcharges from cartel participants:152
Converted using annual average exchange rates for 1985 through 1994 as reported in153
the Federal Reserve Bulletin.
Converted using a 1994 average exchange rate of 102.18 yen/dollar.154
122
JFTC Surcharges Against Anticompetitive Conduct
Year CasesNumber ofBusinesses
SurchargeAmount(¥1000)
SurchargeAmount
(US $1000 )153
1985 4 38 407,470 1,709
1986 4 32 275,540 1,637
1987 6 54 147,580 1,021
1988 3 84 418,990 3,269
1989 6 54 803,490 5,819
1990 11 175 12,562,140 86,635
1991 10 101 1,971,690 14,650
1992 17 135 2,681,570 21,151
1993 22 406 3,553,210 31,988
1994 26 512 5,668,290 55,474
Total 109 1,591 28,489,970 223,353
This table shows that however measured -- number of cases, number of sanctioned
companies, or penalty amounts -- the enforcement activity has been increasing significantly
and consistently. The amounts being assessed are significant -- for example, over $55 million
in 1994 alone. Moreover, the increased policy support for enforcement of the154
Antimonopoly Act reflected in the adoption of the 1977 amendments also encouraged stricter
enforcement of the pre-1977 provisions.
"The Final Report on Japan-U.S. Structural Impediments Initiative Talks" (May 22155
1991), reprinted in H. Iyori & A. Uesugi, Appendix 1.
See id. at 219-20. When the JFTC finds a violation of the Antimonopoly Act, the156
JFTC issues a "recommendation" that the party take appropriate remedial action. This actiononly occurs when the JFTC believes it has proven a violation. When the party concernedaccepts the "recommendation," the JFTC will issue a cease and desist order to the party, andwill avoid hearing procedures. See Article 48 of Antimonopoly Act.
See H. Iyori & A. Uesugi, at 217.157
Recommendations reflect a JFTC judgement it has proven a violation. Warnings158
occur when the JFTC cannot prove a violation, but nevertheless believes a problem may exist. See id. at 64, 246-55.
123
(4) The Structural Impediments Initiative (SII) furtherstrengthened the Antimonopoly Act
The Structural Impediments Initiative ("SII"), with its final report in 1990, further
increased the enforcement mechanisms of the Antimonopoly Act. The SII provided for, inter
alia, increasing the following: formal JFTC enforcement actions, transparency of JFTC
enforcement, budgetary allocation for the JFTC, surcharges against cartels, utilization of
criminal penalties, and the strength of the JFTC functions.155
Several factors indicate the increased level of Antimonopoly Act enforcement due to
the SII. First, the number of cease and desist orders issued increased from 10 in fiscal year156
1989 to 37 in fiscal year 1992. This increase in formal cases does not include other less157
formal types of JFTC action, which would increase the figures even more.
Second, beginning in October 1990, almost all warning cases were released to the
press. Although formal actions such as "recommendations" and surcharge payment orders
had always been made public, this policy was extended to less formal "warnings." Within a158
Japanese cultural context, this publicity creates an additional strong deterrent effect.
See id.159
JFTC 1991 Annual Report at 46-47.160
H. Iyori & A. Uesugi, at 254.161
See id. at 53-54. The guidelines are provided as Appendix H of the Iyori & Uesugi162
treatise.
124
Third, the JFTC has started to use criminal accusation powers in appropriate cases. 159
This U.S. Government request has lead to increased use of criminal penalties, and the threat
of such penalties. On June 20, 1990 the JFTC announced its new policy statement on
criminal enforcement.160
Fourth, penalties increased in frequency and amount. The Diet's amendment to the
Antimonopoly Act in 1991 increased the amount of the surcharge from 1.5 percent of sales to
6 percent of sales in principle. In addition, the maximum criminal fine increased from 5
million yen to 100 million yen. At these levels, the potential penalties have a much greater161
deterrent impact.
Fifth, the JFTC adopted extensive distribution guidelines covering exclusionary
practices, distribution restraints, and sole distributorship agreements. The new distribution
guidelines further stimulated JFTC enforcement, particularly in the area of resale price
maintenance and rebates. Extensive enforcement in the resale price maintenance area was
encouraged due to its direct benefit to consumers in the form of lower prices. 162
Sixth, the JFTC began taking more formal enforcement actions to increase
transparency of the enforcement process and to provide a greater deterrent effect. The JFTC
investigated "overt cartels, with large market shares, for overt price-fixing, and imposed large
Id. at 58-59.163
See id.164
H. First, at 69.165
125
surcharges for violations." Such legalistic sanctions provided a significant deterrent effect163
and encouraged businesses to adopt antitrust compliance programs.164
The collective effect of the pre-SII changes and the SII changes resulted in
significantly improved enforcement. As Professor Harry First of New York University noted
in a recent article:
At least by the measure of cases brought and sanctions imposed, governmentenforcement in Japan during that period {post SII} has been quite close to thelevel of government antitrust enforcement in the United States.165
Kodak's refusal to raise its complaints with the JFTC should be evaluated in light of current
JFTC enforcement philosophy.
b. Kodak's complaint that the JFTC has not enforced theAntimonopoly Act properly is disingenuous
Although Kodak would like everyone to believe that the JFTC never enforces
anything, the evidence shows the contrary. Even more relevant than decades-old history is
the current state of enforcement. Recent governmental enforcement trends have been
comparable in the U.S. and Japan; if Japan's level of activity is deemed "inaction," then the
U.S. Government's current level of activity should also be deemed "inaction."
126
(1) The current level of antitrust enforcement in Japan issimilar to the U.S.
Kodak is noticeably silent about current JFTC enforcement. Kodak seems to hope that
readers of "Privatizing Protection" will remember its misleading version of the past and forget
to ask about the present. Once again, the oversight is quite convenient. The facts
demonstrate that over the past few years the JFTC has enforced the Antimonopoly Act at least
as strictly as the U.S. authorities have enforced U.S. antitrust laws.
This comparability can be seen in several ways. As demonstrated in the graph below,
a comparison of the penalties imposed by the United States and Japan against cartels shows
that in recent years (1990-93) the JFTC surcharges have increased to a level that closely
tracked or exceeded the U.S. fines.
127
Sources: Department of Justice -- Antitrust Division Workload Statistics; JFTC -- Concerningthe Circumstances of Recent Investigations and Cases (July 14, 1992); Exchange Rates --Federal Reserve, IMF. (Reprinted from First, at 39)
H. First, at 38.166
Using the Gross Domestic Product to reflect the difference in the sizes of the167
economies, the level of the Japanese government antitrust enforcement is very similar to thelevel of U.S. government antitrust enforcement. The adjustment factor takes the ratio of U.S.GDP to Japan GDP as a multiplier for Japanese enforcement. See id. at 40.
128
As Professor First has recently noted:
This comparison shows that the stepped-up level ofenforcement against cartels in Japan has resulted in a levelof administrative fines that has been either roughlycomparable to, or, at times, has exceed U.S. fines. This is sodespite the fact that the number of criminal cases brought inthe United States has become four to six times greater thanthe number of cartel cases brought in Japan.166
This comparability is a recent phenomenon, but the recent increases underscore the point that
Japanese enforcement efforts have increased.
Further, the number of cases brought in Japan versus the United States are
comparable, once adjusted for the size of the economy. It is misleading just to compare the
number of cases. This comparison is demonstrated in the graph below. Once again, the lag167
in enforcement in the 1980s ended with a significant increase in the 1990s. Although the
details of any such comparison may be subject to debate, the basic conclusion remains the
same -- the JFTC is demonstrably not a "paper tiger."
129
(2) The JFTC must investigate outside complaints, anoption which Kodak has never pursued
To ensure that the JFTC is properly enforcing the Antimonopoly Act, any person may
bring a suspected violation to the attention of the JFTC. Section 45 of the Antimonopoly Act
requires that the JFTC investigate any Antimonopoly Act violation reported by any person.
The JFTC must also inform the person reporting such a violation in writing whether the JFTC
decided to take, or not to take, appropriate measures. The JFTC may also investigate
potential violations of the Antimonopoly Act and take measures on its own authority. These
safeguards ensure that the JFTC is properly enforcing the Antimonopoly Act.
For all of the bluster in its Section 301 documentation, Kodak has never taken
advantage of this opportunity. If, as Kodak seems to believe, the evidence of anticompetitive
conduct is so clear, why has Kodak never used this option? Even if Kodak believes that the
JFTC was once part of the problem (a claim with which we disagree), that belief does not
explain a refusal even to attempt to take advantage of post-SII enforcement mechanisms.
In particular Kodak has made no effort to use the Antimonopoly Act Guidelines
Concerning Distribution System and Business Practices, released July 11, 1991. This policy
statement covers virtually all of the problem areas Kodak has identified: refusals to deal,
See H. First, at 10.168
130
exclusionary conduct, resale price maintenance, rebates, and other areas. This post-SII
clarification of JFTC enforcement views provided a clear basis for Kodak complaints, and
reflects a strong JFTC interest in these issues. Yet Kodak has not used these guidelines,
except to document its Section 301 case. Again, the explanation appears to be Kodak's fear of
the facts or at least a fear of the real facts.
c. The Japanese approach to enforcing competition policymay be different from the U.S. system, but is notnecessarily inferior
Given the different cultural contexts, it is not surprising that there are differences
between U.S. and Japanese approaches to competition law enforcement. The Japanese
enforcement of competition policy uses informal administrative measures in cases where such
measures are more appropriate to remedy potentially anti-competitive situations. The U.S.
approach, on the other hand, tends to be more formal, where specific rulings are made. Both
countries use both approaches, but the relative emphasis is different. These differences
between the Japanese and U.S. enforcement methods stem from the fact that the regulatory
culture in Japan relies more on administrative procedures while the regulatory culture in the
U.S. relies more on legalistic procedures.168
The Japanese enforcement of competition policy is not inherently inferior. First,
although there are differences in emphasis, the basic approaches used in each country are
similar. The JFTC, like its U.S. counterparts, does not litigate every case. Agencies in both
countries look for less formal mechanisms to influence and change corporate behavior.
Second, the JFTC in fact has enforcement tools available that do not exist in the
United States. In particular, the JFTC can formally monitor oligopolistic industries pursuant
to Article 2(7) and can formally request specific companies to submit justifications for parallel
price increases pursuant to Article 18-2. Although the result of such requests is a study, the
In 1994, the JFTC increased its number of officers to 506 and had an annual budget of169
¥4,527,383,000.
See H. Iyori & A. Uesugi, at 215-220.170
Id. at 216-19.171
Alan Wolff, Remarks at WITA Sponsored Conference: Kodak: Japan Exposed? (July172
12, 1995).
131
process of the study serves the very important function of allowing the JFTC to collect
concrete facts from the companies being studied. If the JFTC identifies an Antimonopoly Act
violation, it can begin formal proceedings. Even absent evidence of a violation, the JFTC can
identify problem areas and issue warnings, cautions, or other types of administrative
guidance.
Third, administrative procedures allow the JFTC to handle many more cases with its
limited personnel. In fact, a review of the number of cases disposed of by the JFTC169
indicates that the JFTC antitrust enforcement workload has been very heavy.
"Recommendations," which allow for a company to accept the JFTC remedial proposal
without further proceedings, comprise the vast majority of the JFTC decisions.170
Fourth, formal recommendations are just the tip of the JFTC's enforcement activity.
Much enforcement comes in various forms of informal guidance. The JFTC also issues
"warnings" and "cautions" when the available evidence and other circumstances do not justify
more formal action. These types of administrative actions are tracked by the JFTC and171
reported in the annual reports. When the JFTC identifies areas of possible concern, even if
those situations do not represent legal violations, the JFTC will suggest the company modify
its policies. The published JFTC statistics cited above do not include these other actions.
It is ironic that Kodak complains about the JFTC "being part of the problem," just172
when the JFTC has begun to act more and more like the U.S. enforcement authorities. After
the SII discussions, JFTC practices in a number of areas changed to respond to U.S. concerns.
Yet even after these changes, Kodak refused even to try to resolve its issues by turning
132
to the JFTC.
2. Contrary to Kodak's allegations, the JFTC has vigorouslyscrutinized Fujifilm's conduct
Kodak charges that JFTC enforcement has been lax with respect to the photographic
products industry in general, and Fujifilm in particular. Yet this industry and this company
have in fact been the subject of extensive JFTC scrutiny over the past two decades.
Notwithstanding this fact, Kodak somehow draws from this history the conclusion that the
JFTC has been tolerating anticompetitive conduct. The history of JFTC shows the opposite --
that the JFTC has been closely monitoring and, when necessary, investigating Fuji to ensure
strict compliance with the Antimonopoly Act. Kodak's unwillingness to recognize its own
failures in the Japanese market (see Section IV) leads them to assume that some improper or
unfair competition must be taking place. Kodak cannot seem to accept the idea that it just has
not competed effectively in Japan. Kodak therefore must assume that there must be
something sinister at work.
The reality concerning JFTC enforcement is quite different. Fujifilm has been
repeatedly scrutinized by the JFTC. In most instances, Fujifilm has been found to have
complied fully with the Antimonopoly Act. In those few areas where the JFTC has noted
some area of concern, Fujifilm has promptly responded to those concerns and made whatever
changes were suggested by the JFTC. Kodak may not like the facts, but the facts are that the
JFTC has enforced the Antimonopoly Act strictly with respect to Fujifilm.
We provide below a summary of JFTC activities with respect to Fuji over the past
twenty-five years.
"Privatizing Protection" at 187. Kodak also makes much of alleged conspiracies173
among photofinishers. The Appendix discusses the specifics of various alleged "facts," andprovides Fujifilm's response. Here we simply note that such downstream industries havenothing to do with JFTC enforcement of the Antimonopoly Act with respect to Fujifilm.
Exhibit 13, at 17. See also p. 20 (discussing price leader-price follower).174
Id. at 18.175
133
a. 1970 -- Study of Film Industry Pricing
Kodak alleges that the JFTC found Fujifilm and Konica guilty of price fixing in a 1970
report. Kodak relies heavily on this allegation. In the legal section of its lengthy
memorandum, this single fact about Fujifilm becomes the heart of the claim of government
toleration of anticompetitive conduct. Kodak goes on to cite this same fact repeatedly173
throughout its report.
The JFTC did not find price fixing. The report is primarily an overview of market
structure and competitive dynamics in the film industry. Exhibit 13 provides a translation of
the actual text of the JFTC report, which was completed on December 16, 1969 and released
in January 1970. It is a descriptive document, not a summary of legal conclusions. The
report does not conclude that Fuji and Konica have been fixing prices. Rather the report
notes:
Furthermore, considering price change announcements andother things, it seems that it is often the case that the largermanufacturer has taken the role of price leader.174
Interestingly, the report goes on to note the role of Kodak itself:
as for color film, it is thought that the domesticmanufacturers' sale prices are determined taking the priceof the imported goods, especially the Kodak price intoconsideration.175
There is nothing at all surprising about this pattern of pricing behavior; it is a well-
recognized phenomenon in oligopolistic industries. Economics teaches that in markets where
F. Scherer & D. Ross, Industrial Market Structure and Economic Performance (3d ed.176
1990) at 347. A second pricing mechanism in oligopolistic industries is a phenomenonreferred to as "conscious parallelism," in which no clear leader is recognized. This refers topricing behavior in which each firm sets its price according to how it thinks its rivals willrespond. Pricing patterns of this nature are not necessarily indicative of collusion or otheranticompetitive behavior: "When sellers are few in number . . . this result follows from thevery structure of the industry. No formal collusion or agreement is necessary. Each firm canmake its own price and output decisions without consulting the others. For the monopolyprice to emerge, it is essential only that the firms recognize their mutual interdependence andtheir mutual interest in a high price. Indeed, . . . it would be unreasonable to expect membersof a highly concentrated industry to behave otherwise. . . ." F. Scherer, Industrial MarketStructure and Economic Performance (1970) at 135-36.
134
a few competing firms sell a relatively homogeneous product, prices are often identical and
move together, and do so with no anticompetitive practices of the sort complained of by
Kodak. One such pricing mechanism is the "dominant firm price leadership" phenomenon.
In this case, one of the companies is recognized by its rivals as the dominant firm. Conceding
that they cannot effectively compete strategically with the rival firm for substantial gains in
market share, the other smaller rivals do not price-compete with the dominant firm. Thus,
prices move together with no anticompetitive practices whatsoever. Under U.S. antitrust law,
. . . price leadership is not apt to be found contrary to theantitrust laws unless the leader attempts to coerce otherproducers into following its lead, or unless there is evidenceof an agreement among industry members to use theleadership device as the basis of a price-fixing scheme.176
Such industry structure may merit close monitoring, but the pattern of prices alone proves
nothing.
Like so many other Kodak allegations, this allegation does not become any more
credible with repetition, and does not withstand critical scrutiny. When making its core
allegation of "price fixing," Kodak appears to have relied on a professor's commentary on the
report several years after the fact, and not on the text of the report itself. Since the professor's
characterization better served Kodak's purposes, it is not surprising Kodak conveniently
"Privatizing Protection" at 229. Here, Kodak correctly acknowledges the report is177
simply a survey.
The JFTC report used the phrase "2 sha fukusen no jyotai ni aru." Exhibit 13, at 28. 178
Correctly translated this Japanese phrase means "is in a 2 company oligopolistic situation."
"Privatizing Protection," at 79, 87, 217.179
The "shared monopoly" theory -- under which a group of firms that collectively180
possess monopoly power could be found liable for joint monopolization -- has generally beenrejected by the courts. See ABA Antitrust Section, Antitrust Law Developments (3d ed.1992) at 195; F. Scherer & D. Ross, Industrial Market Structure and Economic Performance,(3d ed. 1990) at 339-346.
135
ignored the report itself. More surprising is the fact that later in its document, Kodak uses the
actual text of the report for other purposes. 177
This 1970 study also illustrates Kodak's misleading translations. The Japanese text,
upon which Kodak relies, uses the word "oligopolistic situation." Yet Kodak then178
concludes there was "price fixing." It is inexcusable to jump from a general description of179
"oligopolistic situation" to a legal conclusion of "price fixing."
Moreover, Kodak is oblivious to the more important significance of the report. The
report shows that as early as 1969 the JFTC was in fact closely monitoring the film industry
for possible competitive problems. It is important to keep in mind that this study of the film
industry took place prior to the 1977 amendments to the Antimonopoly Act. Even before it
received enhanced statutory authority to monitor structural monopolies, the JFTC was
carefully studying such industries. Unlike the U.S. authorities, which have largely ignored
the problem of parallel pricing for oligopolies, the Japanese authorities were carefully180
studying the problem. After conducting its study, the JFTC did not have any evidence of
Antimonopoly Act violations; if it had any evidence of violations, it would have pursued
them.
"Privatizing Protection" at 79.181
See H. Iyori & A. Uesugi, at 43 ("Under these circumstances, the FTC enforcement182
activities obtained policy support at the Cabinet level, and the FTC issues many decisionsagainst price-fixing cartels and resale price maintenance practices."); M. Matsushita, at 4("From about 1960, the Antimonopoly Act was more strictly enforced....It was thought thatthe Antimonopoly Act should be vigorously applied against price cartels and illegal resaleprice maintenance.")
136
Contrary to Kodak allegations, there was no need for MITI to intervene somehow to181
stop JFTC action. The JFTC had not drawn any conclusions that MITI would have needed to
block. In fact, MITI's 1970 Study proposed specific measures to address the "oligopolistic
situation" in the photographic products industry. MITI's study concluded that Kodak was the
price leader in the industry, and that access by Kodak should be enhanced by specific market
opening measures. Specifically, MITI's study endorsed a reduction in tariffs, abolition of
quantitative restraints on film imports, and the monitoring of price movements in the industry.
MITI's 1970 Study agreed with the JFTC's finding of an "oligopolistic situation," but in the
articles cited by Kodak MITI officials specifically deny that their study was a finding of price
fixing.
Kodak's innuendo that the JFTC somehow was ignoring and covering up an
Antimonopoly Act violation is simply not credible. At this stage in its history, the JFTC had
already begun establishing its reputation for policing horizontal agreements on price and other
efforts to cartelize industries. It may have been unclear at this stage what actions JFTC182
would take against vertical restrictions, but its approach to horizontal restrictions, especially
restrictions on price, was quite clear. Had the JFTC found any credible evidence of price
fixing, it would have acted; finding no such evidence, it noted the potential problems arising
from the oligopolistic structure of the industry, and made clear it was watching carefully.
Kodak uses the term "watch list," but this term does not appear in the statute or any183
official JFTC materials.
By 1993, the market situation for color paper reached the point where this product also184
fell within the definition of "monopolistic situation" and was therefore added to the watch list. Again, the JFTC enforcement mechanism is working as expected.
"Privatizing Protection" at 219.185
137
b. 1977 -- Monitoring Under Article 2(7)
In 1977 the JFTC received new statutory authority to monitor oligopolistic industries.
The JFTC closely monitors industries that meet the structural condition of "monopolistic
situations" under Article 2(7) of the Antimonopoly Act -- including industries in which any
two companies represent 75 percent or more of the market. Further evidence of the scrutiny
came in November 1977, when the JFTC initiated monitoring under Article 2(7). This183
designation reinforced the JFTC's message that the color film industry would be closely
scrutinized. The JFTC received new powers, and began using them immediately.184
Kodak tries to dismiss this enhanced JFTC scrutiny with the claim that the agency was
somehow asleep at the wheel. This claim is inconsistent with the pattern of JFTC actions185
discussed below. Kodak refuses to acknowledge even the possibility that the JFTC was
watching the industry closely, but the agency did not find any violations of the law. Unlike
Kodak, the JFTC believes it must have at least evidence suggesting possible Antimonopoly
Act violations before it begins formal proceedings.
Even more seriously, Kodak conveniently ignores the point that Japan actually has a
more aggressive approach to oligopolistic industries than the United States. The U.S. has no
mechanism that parallels Article 2(7). The U.S. color film industry would meet the criteria
for enhanced monitoring under Japanese law. Yet U.S. law provides no such mechanism to
subject Kodak to the constant scrutiny that Fujifilm has faced on color film since 1977.
"Privatizing Protection" at 218.186
138
c. 1980 -- Report on Parallel Price Increases
The 1977 amendments had also given the JFTC new authority to request explanations
of parallel price increases. Since the JFTC was closely watching the photographic products
industry, it quickly became aware of noticeable price changes.
In May 1980, the JFTC requested pursuant to Article 18-2 of the Antimonopoly Act
that Fujifilm and other manufacturers submit a report on the price increase of photographic
films and papers. In response, Fujifilm prepared a detailed explanation of why changes in
raw material prices and R&D costs required Fujifilm to increase its prices. The report issued
by the JFTC found that Fujifilm had complied fully with the requirements of the
Antimonopoly Act. This conclusion is not surprising, since cost increases clearly justified
increases in the price of finished goods.
This mechanism of JFTC monitoring represents another example of the stricter
Japanese approach. U.S. law provides no counterpart to Article 18-2. When Kodak
announces a parallel price increase in the U.S. market, U.S. authorities have no such
mechanism to demand an explanation.
d. 1981 -- X-Ray Film Case
Kodak is simply too quick to jump to conclusions, even when it has no factual basis
for doing so. Consider Kodak's use of the well known X-Ray Film case involving Fuji. Kodak
asserts:
during this investigation the JFTC must have had access toevidence that suggested questionable practices in consumerphotographic film and photographic paper sectors as well. Yet, the JFTC did not use this information, if any, to takeenforcement actions with respect to film and paper.186
139
Yet Kodak ignores the very real spill-over benefits from enforcement activities targeting even
a single product. Although the JFTC investigation focused on X-ray film, Fujifilm realized
the concerns identified by the JFTC for this product could apply to other products. Therefore,
Fujifilm voluntarily undertook a broad-based internal effort to modify its other contracts --
including those relating to color film -- to reflect the JFTC concerns. In particular, Fujifilm
eliminated provisions requiring tokuyakuten to: (1) obtain Fujifilm's consent before handling
other brands; and (2) make efforts to maintain orderly prices. The tokuyakuten were in fact
handling other brands already. Each of the tokuyakuten handled multiple brands of cameras,
not just Fujifilm cameras. Nevertheless, Fujifilm promptly changed these contract provisions
to avoid any possible concerns under the Antimonopoly Act. Fujifilm made clear to each
tokuyakuten that it was under no restriction against handling competing brands.
Kodak's narrative misses two important points about this case. First, the JFTC was
doing exactly what Kodak claims it should have been doing. In its effort to minimize JFTC
enforcement concerning color film, Kodak misses the point that the JFTC did take action
against another product. It does not matter whether the practices discussed in the X-ray Film
case did or did not violate the Antimonopoly Act; Fujifilm agreed to change its practices.
Similarly, it does not matter whether the JFTC took further action against color film or not;
Fujifilm voluntary changed its practices with respect to this other product. Second, fifteen
years ago Fujifilm modified the contractual relationship with its tokuyakuten and resolved
any gray areas under the Antimonopoly Act. Any problems claimed by Kodak have long
since ended.
e. 1984 -- Report on Parallel Price Increases
In 1984, the JFTC again asked Fujifilm to submit a report on its price increase under
Article 18-2. Again, the resulting reports show that the JFTC found Fujifilm's explanation
completely justified.
Consider the pattern in the first several years after the 1977 amendments. The JFTC
immediately added color film to its list of structural monopolies under Article 2(7). Each time
"Privatizing Protection" at 188.187
Kodak also implicitly concedes there are no problems with color paper rebates. These188
rebates were described in detail in the public versions of the questionnaire responses to theCommerce Department antidumping investigation of color paper. Yet after reviewing thesedocuments (they were cited elsewhere for other propositions), Kodak largely ignored thisissue.
140
parallel price increases occurred -- in 1980 and 1984 -- the JFTC exercised its new powers
under Article 18-2 to require detailed explanations of the price increases. Kodak tries to
downplay the significance of these actions, but in doing so Kodak creates a major distortion.
The JFTC has used the full extent of its statutory powers to subject Fujifilm to very careful
scrutiny and monitoring. To read Kodak's rhetoric of government toleration, one would think
Fujifilm had never been subject to any JFTC actions.
f. 1987 -- Study of Rebates
Much of Kodak's argument rests on allegations about "remarkably progressive"
rebates. Yet Kodak is attacking what does not exist. Fujifilm's rebates were never
"remarkably progressive." More importantly, the JFTC has already reviewed these Fujifilm
rebates and Fujifilm has made voluntary charges to eliminate any possible problems. Even
the moderately progressive rebates have been either eliminated or substantially reduced.
Much JFTC activity takes place through studies. Kodak acknowledges this point in
this citation to Professor Murakami, and the importance of "drafting and issuing guidelines
and related materials." From 1987 to 1988 the JFTC undertook a study of oligopolistic187
industries. From 1988 to 1989 the JFTC undertook a study of distribution systems.
As part of these two ongoing studies, the JFTC requested information from many
companies, including Fujifilm. In response to JFTC requests for information, Fujifilm
provided a detailed discussion of its various rebate programs and pricing practices. The JFTC
then decided to focus on the color film rebates. Fujifilm therefore provided additional188
information to the JFTC concerning the color film rebates. In the end, after reviewing
Section II.A.2. describes the current Fujifilm rebate programs.189
See Section III.B.3. below.190
141
detailed information about Fujifilm rebates, the JFTC found no violations of Japanese
Antimonopoly Act. This legal conclusion is not surprising, since the rebates were never
"remarkably progressive," and thus not illegal under Japanese standards.
Nevertheless, the JFTC study process identified points of discussion about Fujifilm's
color film rebates. Although Fujifilm's rebates were never very progressive, Fujifilm
voluntarily modified its rebates to avoid any potential problems under the Antimonopoly
Act. During this process, Fujifilm consulted with the JFTC to identify safe-harbors in189
which the rebate program would not cause any Antimonopoly Act problems. Fujifilm then
modified its rebates accordingly, and also eliminated some of its rebates with retailers.
The JFTC study process also identified areas where Fujifilm's pricing policies could be
clarified. The JFTC found no evidence of resale price maintenance, or any other
Antimonopoly Act violation. The JFTC nevertheless felt Fujifilm could do a better job of
clarifying the freedom of downstream customers to set their own resale prices. Fujifilm
promptly clarified its policy on manufacturers' suggested prices to make these
improvements. 190
This JFTC study process is broadly similar to the "business review letter" process
under U.S. law, whereby a company concerned about possible problem areas under U.S.
antitrust law can seek guidance from the U.S. authorities. By identifying and clarifying
potential issues under the Antimonopoly Act, the JFTC study process helps companies initiate
voluntary improvements to avoid later problems.
This process highlights a number of important points. First, contrary to Kodak
allegations, the JFTC is actively policing potential problems in this industry. Even mildly
progressive rebates and lack of clarity in pricing policies are attracting attention and being
eliminated and improved.
"Privatizing Protection" at 218.191
142
Second, Kodak has exaggerated the nature of the problem. Even after reviewing
Fujifilm's rebate in detail, the JFTC found no Antimonopoly Act violations. Since rebates are
quite normal competitive tools, this JFTC legal conclusion is not at all surprising.
Third, Fujifilm has already changed much of what Kodak alleges is anticompetitive.
Kodak apparently is not knowledgeable enough about the market even to realize what has
already occurred.
g. 1992 -- Study of Oligopolistic Industries
As part of its overall enforcement strategy, the JFTC closely monitors oligopolistic
industries. The JFTC undertakes detailed surveys of the market structure and competitive
situation in oligopolistic industries. If the JFTC discovers any potential problems, it takes
appropriate measures to correct these problems. In 1992, the JFTC's study group for
economic research released such a study that covered ten different products, including color
film.
This report is noteworthy in two respects. First, it underscores the JFTC's commitment
to scrutinize the color film industry very carefully. Second, the report did not find any
problem areas. Building on its prior knowledge of this industry, the JFTC collected further
information. The study again notes, like the 1969 study, the parallel pricing pattern, with
Fujifilm, Konica, and Kodak all following similar suggested retail prices. But as noted
previously, such parallel pricing is not unusual in oligopolistic industries.
h. 1993 -- Investigation of Copy Paper
Kodak notes this investigation of an alleged cartel among five manufacturers,
including Fujifilm, to raise the price of carbon-less copy paper. Kodak then notes that the
JFTC found no violation after its year-long investigation.191
143
3. Fujifilm has made its own efforts to complystrictly with the Antimonopoly Act
As a matter of corporate policy, Fujifilm makes every effort to comply with the
requirements of the Antimonopoly Act. Like many Japanese corporations, Fujifilm has
adopted internal compliance guidelines to help ensure strict adherence to the legal
requirements of the Antimonopoly Act. These guidelines were not required by the JFTC, but
were a voluntary act by Fujifilm to reflect top management's commitment to vigorous but fair
competition. This corporate activity further underscores the current level of JFTC
enforcement. Corporations would not be going to this trouble unless they were concerned
about Antimonopoly Act problems and JFTC enforcement.
In August 1991, Fujifilm established its Antimonopoly Act Compliance Manual. In a
memorandum announcing this manual, distributed to senior company officials, President
Minoru Ohnishi explained:
the basic philosophy of our company activities is "fair andfree competition." Fuji Photo Film, which has manyproducts with high market shares, must, through effortsinvolving all directors and employees, assess our own actionsmore rigorously. This is a vital part of our company'sbusiness management policy.
See Exhibit 14. This manual was subsequently revised in May 1992, and redistributed to all
relevant Fujifilm personnel, including company sales and marketing personnel.
These internal manuals establish very strict guidelines to guard against conduct that
may be construed by the JFTC as resale price maintenance. Provided below is an excerpt
from the company's Antimonopoly Act Compliance Manual:
The following actions constitute resale price maintenance, and thus we prohibit such
actions:
(A) To agree with a distributor on a resale price, regardless ofwhether such agreement is written or verbal
144
(B) To attempt to maintain a resale price through actions asillustrated in the following examples:
(1) To imply a shipment cancellation or reduction ofrebate if a distributor does not observe the directedresale price or offer a discount;
(2) To provide a rebate on condition that the resaleprice is maintained;
(3) To carry out monitoring of the resale price bycollecting reports on the resale price, monitoringstorefronts, or dispatching a sales clerk to dosurveillance;
(4) To identify a sales channel by placing secretnumbers, etc. and request a wholesaler to stopbusiness with a discount seller;
(5) To buy up discounted products;
(6) To forward complaints of a neighboringdistributor about discount sales to a discount sellerand request the discount seller to stop makingdiscount sales;
(7) To prohibit traders' transactions (diversion ofproducts) without just cause (such as the necessityto maintain quality);
(8) To prohibit discount sales advertising;
(9) To indicate a resale price which has theimpression of a directive, such as a "fixed price"and "proper price."
For manufacturers to issue suggested retail prices is a standard business practice
around the world. Such suggested prices offer at least a starting point for retailers in their
pricing decisions; at the same time, they can help consumers avoid gouging. Explicit
Exhibit 15 (including letter from Mr. Masayuki Muneyuki, July 1992, at 2).192
145
company policy dictates that Fujifilm's suggested retail prices not be misused to inhibit the
freedom of retailers to set their own prices. The evidence shows that this policy is followed.
To underscore this management commitment to strict compliance, Fujifilm also has
prepared a more readable "dos and don'ts" for the sales force entitled "Don'ts for the Anti-
Monopoly Act -- the Marketing Unit." This manual is provided, in both English and Japanese
and English translation, at Exhibit 15. In the letter distributing this document, Senior
Managing Director Masayuki Muneyuki explained that:
Fuji Photo Film, which has many high-share productsincluding color film, must govern its own actions even morevigorously, and respect the spirit of the Antimonopoly Law. This is a vital part of our company's business managementpolicy. . . . It is my hope that you will fully understand itscontent, put it to good use in your work, and exercisesufficient care so that illegal activities will under nocircumstances occur.192
Fujifilm recognizes that it operates in a concentrated market, and is subject to constant
and careful scrutiny by the JFTC. Top management has made corporate policy crystal clear
on more than one occasion. The Legal Department counsels members of the sales and
marketing departments and other Fuji managers and staff about the requirements and
restrictions of the Antimonopoly Act. Fujifilm thus has in place an internal compliance
mechanism every bit as strict as Kodak's own compliance efforts.
4. Kodak has mischaracterized the Premiums Law assmokescreen for price collusion
Kodak characterizes the Premiums Law as a tool to suppress price competition.
Notwithstanding strongly made claims, Kodak provides only weak evidence. Careful scrutiny
shows that even this weak evidence collapses.
Section 1, Act Against Unjustifiable Premiums and Misleading Representations, Act193
No. 134 of May 15, 1962, amended by Act No. 44 of May 30, 1977 (referred to herein as"Premiums Law").
146
a. The Premiums Law serves legitimate governmentalpurposes to protect consumers
The Premiums Law serves valid governmental purposes. The Act itself best expresses
it purpose as:
to prevent inducement of customers by means ofunjustifiable premiums and misleading representations inconnection with transactions regarding a commodity orservice, and thereby to maintain fair competition as well asto protect the interest of consumers in general.193
The best way to appreciate these valid purposes is to note the widespread presence of such
legal requirements in other countries. The United States of course has specific legal
restrictions to protect consumers from misrepresentations. Moreover, numerous other
countries also have similar legal requirements. Exhibit 16 provides a list of other countries
with laws governing either premiums/promotions or misleading representations. Japan's laws
on this subject are by no means unique.
b. The Premiums Law does not exclude other types ofJFTC enforcement activities
Kodak claims that most JFTC enforcement involves the Premiums Law, and not other
Antimonopoly Act violations. It is not clear what Kodak means to show with the graph on
page 228 of "Privatizing Protection". A similar graph for the United States would
undoubtedly show the same thing, with state level enforcement of consumer protection
statutes exceeding by a wide margin the number of cases filed at the national level.
Kodak's implicit claim of JFTC inactivity is misleading. First, the graphs mix apples
and oranges. If the goal is to measure JFTC enforcement priorities, it makes no sense to add
"Privatizing Protection" at 218.194
In fact, the Fair Competition Code is a measure to promote fair competition in the use195
of premiums.
147
the activities of another government entity, such as the local officials who can also enforce the
Premiums Law. Kodak's comparison is analytically flawed.
Second, even within the JFTC, the comparison is flawed. The different statutes deal
with different problems. Under the Premiums Law, the standards are more clear, and are
easier to enforce. Other JFTC enforcement is more fact-specific, more time-consuming, and
less mechanical. It should come as no surprise that the number of Premiums Law cases
exceed other types of cases under the Antimonopoly Act.
c. There is no Fair Competition Code for photographicfilm or paper
Given how much time Kodak spent criticizing the Fair Competition Codes, it must
have been disappointing to have to acknowledge that color film is not covered by a Fair
Competition Code. Kodak is so busy trying to establish a linkage between the Fair Trade194
Code for cameras and color film that is does not think through the implications of the absence
of such a code for color film. If the JFTC is truly ignoring the photographic industry, if there
truly is some Fujifilm-controlled conspiracy to fix prices, and if fair competition codes
facilitate price fixing, why would the film industry not have adopted such a code? Under195
Kodak's theory of competitive dynamics in the film industry, would not such a code be a very
easy way to help strengthen control over prices? Yet there is no such code for color film.
The most obvious tool, a tool Kodak alleges is used to limit competition, is not being used --
an inconvenient point that Kodak tries to obscure by linking color film to the Fair
Competition Code on Cameras Related Products.
This absence of a Fair Competition Code for film is quite important. Many of Kodak's
arguments are directed at the wrong target. Whatever problems may exist in other industries,
"Privatizing Protection" at 227.196
Reprinted in Appendix B of the H. Iyori & A. Uesugi treatise.197
148
or perhaps even in the camera industry, are not relevant to the issue of photographic films and
papers.
d. Kodak's allegation about JFTC actions against graymarket film distorts the nature of the JFTC actions
The heart of Kodak's allegations about the Premiums Law involves an instance where
the JFTC took action against misleading advertisement of Korean "Lotte" films displayed as
discount Fuji brand film. Kodak's version of this story is misleading in two respects.196
First, Kodak makes much of the fact that although color film is not formally covered
by the Fair Competition Code on Cameras Related Products ("Camera Code"), in practice the
Camera Code was applied to color film. This claim is not true. Kodak seems to assume that
since the JFTC took some action, it must have been treating color film under the Camera
Code. Yet Kodak apparently has forgotten that the Fair Competition Codes are in fact efforts
to implement more basic principles under the Antimonopoly Act. There was no need for the
JFTC to invoke the Camera Code. First, the JFTC could apply the Premiums Law provisions
on deceptive advertising applicable to those types of practices. Second, the JFTC could rely
on the more basic legal prohibitions against "unfair trade practices." Kodak's conclusion
proceeds from a false premise that the JFTC had no other basis for action.
Article 19 of the Antimonopoly Act prohibits all "unfair trade practices." The JFTC
has expanded on the definition of unfair trade practices provided in Article 2(9) of the
Antimonopoly Act in Fair Trade Commission Notification No. 15 (June 18, 1982). Item 8197
of this notice clearly provides that unfair trade practices include:
unjustly inducing customers of a competitor to deal withoneself by causing them to misunderstand that the substanceof a commodity or service supplied by oneself, or terms ofthe transaction....
"Privatizing Protection" at 189-214.198
149
This provision provides a clear legal basis for the JFTC to take action, with or without any
Fair Competition Code.
Second, Kodak conveniently ignores the unfair element that the JFTC was attacking
with its action. The JFTC attached the advertisements that offered Korean "Lotte" film as
Fujifilm and/or referencing a nonexistent domestic suggested retail price for "Lotte" film.
The ads were deemed by the JFTC to violate the Premiums Law, not the Fair Competition
Code on Camera Related Products. Had the store advertised accurately what product was
being offered and why it was different, the JFTC would have had no objection.
Kodak distorted the facts, but even if Kodak's facts were correct, what would they
show? That retailers do not like price discounting? Such attitudes at the retail level are
prevalent in all countries. Even if problems actually occur at the retail level, they say nothing
about JFTC enforcement efforts directed toward color film manufacturers.
C. Once Kodak's Factual Errors Have Been Corrected, ItBecomes Clear There Have Been No Violations Of TheAntimonopoly Act
Kodak devotes a long section of "Privatizing Protection" to alleged Fujifilm violations
of the Japanese Antimonopoly Act. This argument has been presented in a strange forum. 198
If Kodak had any confidence in the merits of its argument, it could have raised its concerns
with the JFTC. Perhaps Kodak feared the need to meet a real legal standard of proof.
Perhaps Kodak feared the JFTC would ignore an argument based on factual allegations 10 to
20 years old, with virtually nothing from more recent periods. Or perhaps Kodak just knew
its facts would not survive serious scrutiny.
Whatever its reason for not pursuing its complaint with the JFTC, Kodak has not
established any violation of the Antimonopoly Act. Accordingly, it has not established
We do not mean to endorse Kodak's statement of Japanese legal principles. Since199
Kodak's facts are so fundamentally flawed, it is premature and unnecessary to discuss thespecific details of Japanese legal standards.
150
government toleration of violations. Kodak's legal analysis collapses because it is based on
mistaken and misleading facts. Section II demonstrates the error of Kodak's factual claims. 199
The legal arguments collapse for the same reasons.
"Privatizing Protection" at 21.200
151
IV. KODAK'S LIMITED MARKET SHARE IN JAPAN IS DUE TOINSUFFICIENT INVESTMENT, INADEQUATE ATTENTION, ANDINEFFECTIVE MARKETING
As demonstrated in Sections II and III above, Kodak's direct "evidence" that it has
been blocked in Japan by an anticompetitive conspiracy boils down to nothing more than a
prolonged series of factual errors and distortions. Similarly, Kodak's circumstantial evidence
of market barriers -- i.e., the disparity between its U.S. and Japanese market shares, and the
supposed existence of a "profit sanctuary" for Fujifilm in Japan -- are also unpersuasive. The
liberalization of the Japanese market in the early 1970s was real, and it afforded Kodak a real
competitive opportunity. Kodak, however, has failed to take advantage of that opportunity.
That failure -- not anti-Kodak plots -- explains Kodak's low share of the Japanese market
today.
A. The Market Share Statistics Cited By Kodak Do NotDemonstrate That The Japanese Market Is Closed ToKodak
Kodak attempts to rely on market share statistics to provide a foundation for its
allegation that the Japanese market is closed. Specifically, Kodak contrasts its market share
elsewhere in the world with its market share in Japan and, based on these statistics, concludes
that "Kodak's low share reflects the continuing presence of significant market barriers in the
two highest volume photographic material markets -- consumer photographic film and
paper."200
As shown below, properly analyzed market share statistics provide no support for
Kodak's theory of a closed Japanese market. Kodak dismisses all of the true reasons for its
limited market share, and instead jumps to the conclusion that market barriers must be the
problem. Kodak's effort, however, is ultimately unpersuasive.
Id. at 21.201
152
1. The "home team advantage" is real for both Fujifilm andKodak in their respective domestic markets and explainsKodak's low penetration of the Japanese market
Kodak attempts to anticipate the argument that its low market share in Japan, like
Fujifilm's low share in the U.S. market, is due to the significant advantages that a domestic
"incumbent" enjoys over a foreign "challenger" in its home market. Kodak summarily
dismisses the existence of a "home team advantage" by saying that it "cannot explain the
extent of Fujifilm's dominant position in the Japanese market, especially given its
performance relative to Kodak in other world markets." In dismissing the "home team201
advantage", however, Kodak does not address why, if this advantage does not explain
Kodak's relatively modest share of the Japanese market, Fujifilm's market share in the U.S. is
similarly modest in relation to its market share in virtually every other market in the world.
153
The statistics on market share do, in fact, demonstrate that there is a substantial “home
team advantage.” But for the fact that Kodak's home market, the United States, is larger than
Fujifilm's home market, Kodak and Fujifilm would have virtually identical market shares in
both color negative film and color negative paper worldwide. As is evident from Exhibit 17,
Fujifilm's market share in film outside the U.S. and Japan is 33 percent, while Kodak's is 36
percent. Similarly, Fujifilm's market share in color paper outside the U.S. and Japan is 27
percent, while Kodak's is 32 percent. Thus, in markets where neither Fujifilm nor Kodak has
the advantage of incumbency, the market shares of Fujifilm and Kodak are essentially
identical.
See 1993-94 International Photo Processing Industry Report; The Sixth Annual202
Robinson Report: The U.S. Consumer Imaging Market in 1993 with Forecasts for 1998; andFujifilm internal information.
1993-94 International Photo Processing Industry Report, Table 6-8, at 6-15.203
154
The "home team advantage" is further demonstrated by a comparison of Fujifilm's and
Kodak's performance in their respective home markets. In film, Fujifilm has historically had
a 71 percent share of the Japanese market, a share which is essentially identical to Kodak's
share of the U.S. market. Fujifilm's share of the U.S. film market, which has fluctuated
between 9 percent and 13 percent, is comparable to Kodak's share of the Japanese market,
which has fluctuated between 7 percent and 12 percent. Thus, both companies are minor202
players in their principal competitor's home market, with market shares fluctuating around 10
percent of the market.
Although the advantages of incumbency are less important in color paper, primarily
because the Kodak and Fuji brand names are less important in selling a non-consumer
product, the advantages of incumbency nevertheless remain obvious. In color paper, Kodak
has a larger share of the U.S. market -- 58 percent -- than Fujifilm has of the Japanese market
-- 49 percent. The "home team advantage" for each is clear in color paper as well as in203
film.
"Privatizing Protection" at 3.204
We note that when Kodak's own dominant share of its home market was under205
examination -- in the Consent Decree proceedings -- Kodak wholeheartedly embraced the"home team advantage" concept. Testimony of Professor Hausman, Consent Decree Trial
(continued...)
155
It is disingenuous for Kodak to simply dismiss the "home team advantage" issue by
arguing that the "extent of Fujifilm's dominant position in the Japanese market" is so great
that it cannot be explained by this advantage. The fact is that Kodak is equally, if not more204
dominant in the United States. If Fujifilm's position in Japan cannot be explained by a "home
team advantage," neither can Kodak's position in the United States.205
(...continued)205
Transcript at 508.
United States v. Eastman Kodak Company, 853 F. Supp. 1454, 1475 (W.D.N.Y.206
1994)
Id. at 1475. 207
"Annual Report on Consumer Image Survey," prepared for Fujifilm by Japan208
Marketing Research.
156
2. Consumer preference, as demonstrated in surveys andbuying patterns, demonstrates that Fujifilm's "home teamadvantage" in Japan is comparable to Kodak's "home teamadvantage" in the U.S.
Kodak's own surveys provide clear evidence of its "home team advantage" in the
United States. These surveys show that 50 percent of U.S. consumers will buy only Kodak
film regardless of price, and that an additional 40 percent prefer Kodak. Furthermore,206
Kodak is able to charge a premium over other films in the U.S. market without losing its
market share. If Kodak had no "home team advantage," its market share for color film207
outside of the United States would presumably be at least 50 percent (i.e., the percentage of
U.S. consumers that will buy only Kodak film); since Kodak's market share outside the United
States is well below 50 percent, it follows that Kodak has a substantial "home team
advantage" in the United States when compared to the rest of the world.
Fujifilm's position in Japan provides similar support for the conclusion that there is a
"home team advantage" for the incumbent local producer. In Japan, Fujifilm's own surveys
consistently show that consumers perceive Fuji brand film to be of a higher quality and thus
prefer it over other brands. Fuji brand film is consistently ranked by consumers substantially
higher than Kodak on all of the qualitative measures surveyed, with as much as a 5 to 1
advantage in consumer perceptions of certain characteristics. As Kodak is able to do in the208
United States, Fujifilm is able to charge a premium over the price of other film brands sold in
Japan.
Fujifilm estimates, confirmed in interview with Chairman of Camera no Kimura.209
See Section II.A.3.a. above.210
853 F. Supp. at 1477.211
157
The clearest test of brand loyalty is to look at what consumers choose when two or
more brands of merchandise are equally available. Based on this measure, Fujifilm has an
equal advantage in consumer preference in Japan when compared with Kodak's advantage in
the United States. For example, notwithstanding that Fujifilm's prices are at a premium above
Kodak's prices and that Kodak and Fujifilm are equally displayed in the more than four dozen
outlets of Camera no Kimura in Japan, Fujifilm's share of color film sales in Camera no
Kimura is nearly 70 percent, while Kodak's share hovers around 10 percent. Similar209
displays and relative pricing in other large chain camera stores in Japan yield similar
results. Thus, consumers in Japan buy seven times more Fuji color film than Kodak color210
film when both are equally displayed, notwithstanding the fact that the Fujifilm brand sells at
a premium over the Kodak price.
The Kodak "home team advantage" in the United States in those situations where
consumers have equal access to both Kodak and Fuji color film is similar. In those mass
merchandisers where Fuji film is available on a basis which approaches equality with Kodak,
Fuji film accounts for between 20 percent and 40 percent of the retailer's film sales. One211
can speculate on whether Fujifilm's better performance in the United States (when compared
with Kodak's in Japan) is because United States consumers are more inclined to purchase
based on price, or because Fujifilm has invested sufficiently in new product development and
advertising to develop brand loyalty in the U.S. market. For whatever reason, the evidence
suggests that at least when film brands are equally available, Fujifilm actually performs better
in the U.S. than Kodak does in Japan.
What is evident is that both Kodak's market share in Japan and Fujifilm's market share
in the United States are consistent with consumer preferences. If anything, Fuji brand film
This problem is discussed at length in Section VI below.212
Robinson, Gurumurthy and Urban, First-Mover Advantages from Pioneering New213
Markets: A Survey of Empirical Evidence, 9 Review of Industrial Organization, at 1-2 (1994).
158
may have a stronger brand image for consumers in the United States than Kodak does in
Japan. The evidence suggests that the primary distinction between Fujifilm's market share in
the United States and in the rest of the world -- excluding the United States and Japan -- is the
result of two factors: (1) the absence of Fuji brand color film in many retail establishments;
and (2) when Fujifilm is present at retail, it almost always gets less favorable and less
abundant shelf space than does Kodak. Otherwise, based on Fujifilm's share in retail212
establishments offering Fuji and Kodak film on an equivalent basis, Fujifilm's market share in
the United States would be significantly higher.
3. Economic literature supports the conclusion that there is a"home team advantage"
The advantages of "incumbency" or "first mover" status are clearly recognized in
economic literature and business journals. The concept may be referred to as the incumbent
advantage, the advantage of the market pioneer, or the first-mover advantage.
Notwithstanding Kodak's early history in Japan, Fujifilm has been the first mover or pioneer
in the Japanese market during the postwar period, particularly beginning in the 1960s and
1970s when amateur photography began its rapid growth in Japan. This pioneer status
provided Fujifilm with the advantages which one commentator has described as follows: ". . .
market pioneers tend to maintain share advantages over later entrants . . . market pioneers also
tend to have higher profitability." Kodak has a similar status in the U.S. market.213
The phenomenon of a pioneering brand and its strong claim on a market results from
the fact that:
{c}onsumer {t}rial should be higher for market pioneersthan for later entrants. . . . {E}ven for identical products, therisk of an unfavorable experience motivates rational
Id. at 7-8.214
M. Porter, Competitive Strategy: Techniques for Analyzing Industries & Competitors,215
(1980) at 9.
Id. at 349-350.216
With respect to Kodak, one commentator made the following comment: "It is striking217
how many firms that were first movers have remained leaders for decades. In consumergoods, for example, such leading brands as . . . Kodak were leaders by the 1920's." M. Porter,Competitive Advantage: Creating and Sustaining Superior Performance, (1985) at 188.
159
consumers to continue buying the pioneering brand. . . . Repeat purchase should also be higher for pioneeringbrands . . . because of their longer time on the market. . . . Judgments held with conviction are persistent over time andresistant to competitor's activities.214
A similar explanation is offered by another commentator in discussing barriers to entry:
Product differentiation means that established firms havebrand identification and customer loyalties, which stem frompast advertising, customer service, product differences, orsimply being first into the industry. Differentiation creates abarrier to entry by forcing entrants to spend heavily toovercome existing customer loyalties.215
Commentators suggest that the incumbent advantage may be overcome by the introduction of
a truly superior product, advertising more frequently or creatively than the incumbent in order
to be noticed by the consumer, or by a price reduction to persuade consumers to try to learn
about the product. Based on the continued domination of their respective incumbent216
markets by Fujifilm and Kodak, it does not appear that either has succeeded in overcoming
the advantage which the other derives in its home market from being perceived as the
firstmover or pioneer.217
"Privatizing Protection" at 16-17 and Figure 6.218
See Exhibit 18, Table 1.219
160
B. Kodak's Allegation That Fujifilm Has A "Profit Sanctuary" In Japan Is A Myth
Kodak attempts to characterize Fujifilm's consumer photographic operations in Japan
as a "cash cow" which has enabled Fujifilm to generate a $10 billion cash surplus with which
to battle Kodak globally. According to Kodak, Fujifilm's cash surplus circumstantially218
supports a conclusion that the Japanese market is protected. Furthermore, Kodak argues that
this large cash surplus gives Fujifilm an unfair advantage in other markets. However, the
facts do not support the conclusion that Fujifilm's cash surplus is in any way abnormal or that
it is indicative of a protected home market. Kodak has an equivalent "profit sanctuary" in the
United States. The only difference is that Fujifilm retained its earnings while Kodak either
distributed them to shareholders or wasted them on mismanagement and poor investments.
1. Kodak's operations have generated more profits thanFujifilm's operations
The most appropriate basis for determining whether Fujifilm's cash surplus is
abnormal or indicative of a protected home market is a comparison between Fujifilm's and
Kodak's performance over the relevant time period: 1975-1994. As would be expected
because of Kodak's larger size, Kodak outperformed Fujifilm in terms of cash generation and
earnings during this period. In terms of operating margins, Kodak and Fujifilm had almost
identical performances. Kodak's operating income as a percent of sales averaged 14.4 percent
annually (13.0 percent cumulatively) between 1975 and 1994 Fujifilm's averaged 15.2 percent
annually (15.5 percent cumulatively). Thus, the discrepancy between Fujifilm's and219
Kodak's cash surplus is unrelated to the relative success of their operations.
While Kodak alleges that Fujifilm has a profit sanctuary in Japan, the evidence again
indicates that Fujifilm's operations in Japan are no more a "cash cow" than Kodak's U.S.
See Exhibit 18, Table 2.220
See Exhibit 18, Table 3.221
161
operations in color film and color paper. Consumer imaging (the segment which includes and
most nearly corresponds to consumer film and color paper) has been by far the most
profitable segment of Kodak's operations, and its U.S. earnings have been substantially higher
than its earnings in other markets. It would also appear that Kodak has used the cash flow
from its consumer imaging operations to finance its capital expenditures in other segments of
its operations.
Kodak's financial statements provide a compelling picture of a company sustained by
its consumer imaging operations and, in particular, those operations in the United States.
Consider the following:
(1) Consumer imaging earnings from operations were
a. 76.1 percent of earnings from operations in 1992 when consumerimaging accounted for only 41.7 percent of total sales;
b. 74.6 percent of earnings from operations in 1993 when consumerimaging accounted for only 41.8 percent of total sales;
c. 67.1 percent of earnings from operations in 1994 when consumerimaging accounted for only 43.7 percent of total sales.220
(2) U.S. earnings from operations were
a. 67.8 percent of earnings from operations in 1992 when U.S. salesaccounted for only 47.5 percent of total sales;
b. 80.7 percent of earnings from operations in 1993 when U.S. salesaccounted for only 47.7 percent of total sales;
c. 67.5 percent of earnings from operations in 1994 when U.S. salesaccounted for only 47.5 percent of total sales.221
See Exhibit 18, Table 4.222
Id.223
162
(3) Between 1992 and 1994, capital expenditures on consumer imaging rangedbetween 26.3 percent and 34.5 percent of total capital expenditures whenearnings from consumer imaging operations accounted for between 67.1percent and 76.1 percent of earnings.
These conclusions are also supported by estimates of Kodak's domestic amateur film
sales and profitability prepared by an industry analyst. Between 1975 and 1990, Kodak's
estimated domestic amateur film operating margin ranged between 39.4 and 60.5 percent of
sales, averaging 49.8 percent of sales. By comparison, Kodak's worldwide consolidated
operating margin ranged from 10.1 to 23.5 percent of sales, averaging 16.1 percent of sales.
In 1990, Kodak's domestic amateur film operating margin was estimated to be 54.9 percent
when the company's overall operating margin was 15.0 percent. Thus, the operating margin
for Kodak's domestic amateur film business is estimated to be much higher than the
company's overall operating margin.222
Kodak's domestic amateur film business is estimated to provide a disproportionate
share of the company's operating profits. Between 1975 and 1990, estimated domestic
amateur film sales equaled 6.7 to 10.0 percent of total sales, averaging 8.3 percent of total
sales; estimated domestic amateur film operating profits, however, equaled 19.7 to 44.8
percent of total operating profits, averaging 25.6 percent of total operating profits. In 1990,
estimated domestic amateur film sales were 6.7 percent of total sales, while estimated
domestic amateur film operating profits were 24.6 percent of total operating profits. Thus,
between 1975 and 1990 Kodak's domestic amateur film business provided more than
one-fourth of Kodak's operating profits while accounting for less than one-tenth of Kodak's
sales.223
In fact, cash and cash equivalents, the appropriate measure, stood at $7.4 billion and224
working capital, the net of current assets to current liabilities, at $5.6 billion, both moreappropriate measures of a surplus. Moreover, Kodak exaggerated the size of Fujifilm's cashsurplus by using current exchange rates and applying them back in time. More than one thirdof the dollar amount identified by Kodak results solely from the appreciation of the yen overthis period.
See Exhibit 18, Table 1.225
See Exhibit 18, Table 1.226
These charges are discussed in more detail in Section IV.B below.227
163
2. Kodak has in fact "spent" much of its profit throughexcessive dividends and restructuring charges
It would be entirely proper to contest Kodak's allegation that Fujifilm had generated a
cash surplus of $10 billion by the end of fiscal 1994. Nevertheless, regardless of how the224
surplus is determined, any difference between Fujifilm's position and Kodak's position at the
end of 1994 was due essentially to two factors: (1) extraordinary charges on net earnings
before taxes made by Kodak totaling $5.5 billion in the last decade; and, (2) overly generous
dividend policies by Kodak to support its stock price in the face of the poor financial
performance resulting from these extraordinary charges.
During the period 1975-1994, Kodak's operations generated greater total profits than
Fujifilm's. Even after restructuring costs, litigation judgments, and changes in accounting
methods, Kodak earned a total net income of $13.572 billion over this period compared to
$7.267 billion earned by Fujifilm. Both generated almost identical operating income as a225
percent of sales. The question then is how the smaller Fujifilm could generate a larger cash226
surplus than Kodak.
First of all, Kodak consumed $5.5 billion over the past decade in extraordinary
charges. Furthermore, during the period 1975-1994 Kodak's payout ratio (dividends227
divided by net earnings) averaged 79.3 percent, including six years during this time when
Kodak paid dividends in excess of its net earnings. If Kodak had distributed dividends on228
(...continued)228
See Exhibit 18, Table 5.228
Kodak has had sufficient net income over the past 20 years to achieve retained229
earnings significantly greater than the amount of Fujifilm's retained earnings had it chosen adividend distribution policy equal to the dividend policies of other Dow Jones companies. See Exhibit 18, Table 6.
See Kodak Focuses on the Future; Company Responds to Japanese Electronic230
Challenge by Developing CD Technology, Washington Post, Sept. 15, 1991, at H7.
U.S. dividends are typically higher than dividends in Japan. Raghuram and Zingales,231
"What Do We Know About Capital Structure? Some Evidence from International Data,"National Bureau of Economic Research Working Paper No. 4875, October 1994, Table V. Kodak's dividends were also high by U.S. standards. In comparison with the averagedividend payout ratio of the other companies listed in the Dow Jones Industrials, between1975 and 1994 Kodak's payout ratio was nearly one and one-half times the average.
164
the basis of a more conservative payout ratio, its net earnings were sufficient to generate
retained earnings equal to or greater than Fujifilm's.229
Thus, the difference between the cash or cash equivalents positions of Fujifilm and
Kodak does not relate to any difference in operating income. Notwithstanding Kodak
management decisions which have dramatically reduced net income in the past decade,
Kodak was still in a position to achieve a healthy cash surplus if it pursued a conservative
dividend policy. However, with net income fluctuating between a high of 8.9 percent of sales
and a loss of 9.3 percent of sales, Kodak was forced to pay high dividends to maintain
shareholder confidence. While differences in business culture between Japan and the230
United States may account for some difference in dividends between Kodak and Fujifilm,
these differences were magnified by Kodak's overly generous policies. Furthermore,231
assuming comparable operating performances, this aspect of business culture is simply not
relevant to the issue of a closed market.
In fact, but for sustained extraordinary charges on net earnings before taxes made by
Kodak during the 1985-1994 period, Kodak could have amassed a large cash surplus without
See Exhibit 18, Table 7.232
See Exhibit 18, Table 8.233
165
even a conservative dividend policy. Between 1985 and 1994, cumulative charges related to
Kodak's withdrawal from the instant photography business, its payment of the judgment from
the Polaroid patent infringement case, and restructuring costs totaled $5.5 billion. Absent232
these extraordinary charges, Kodak's net earnings would have been 136 percent of Fujifilm's
net earnings during the same 10 year period. Even if Kodak had pursued its generous
dividend policy, its retained earnings would have been $10.4 billion at the end of 1992 and
$7.7 billion at the end of 1994 after the spin-off of the chemical business.233
The combination of Kodak's generous dividend policy and the $5.5 billion in
extraordinary charges account for any differences between the surplus cash which Fujifilm
had at the end of 1994 and Kodak's surplus cash. Kodak would have one believe that the
difference reflects a difference in operating results accounted for by the alleged profit
sanctuary for consumer photographic products in Japan. However, a comparison of Kodak's
and Fujifilm's performance, excluding the effects of dividend policies (i.e., how each
company chooses to use or distribute its earnings) and extraordinary charges, demonstrates
that Kodak's operating performance generated a comparable cash surplus to Fujifilm's.
Finally, Kodak's financial statements demonstrate that Kodak's earnings from U.S. consumer
imaging operations accounted for the bulk of profits and cash flow, indicating that Kodak has
its own U.S. profit sanctuary. Kodak allowed the surplus to disappear by providing overly
generous dividends and by incurring extraordinary liabilities which ultimately were charged
against earnings. Kodak has no one but itself to blame for the fact that its cash surplus is
substantially lower than Fujifilm's.
See "Privatizing Protection", Appendix A.234
"Privatizing Protection" at 124.235
166
C. Kodak Shut The "Window" Opened By Liberalization(1971-1984)
Kodak argues that the so-called "liberalization countermeasures" were put in place to
frustrate Kodak's entry into the Japanese market after the trade and capital liberalization, and
that they were successful in realizing this objective. However, Kodak's theory has a gaping
hole in it. Kodak's market share in Japan showed large and sustained increases -- more than
doubling from its pre-liberalization level -- during the period of liberalization, the period of234
the "liberalization countermeasures", and for nearly a decade after Kodak alleges the
countermeasures were completed. Kodak first tries to avoid these inconvenient facts by using
a graph that stops at 1978, even though 1981 and 1983 were Kodak's peak years. It then tries
to explain away the surge by alleging it resulted from Fujifilm's creation of an artificial
shortage in the market. Ignoring these basic facts is not going to work, and neither is235
Kodak's cooked-up explanation of them.
167
Between the beginning of the liberalization in 1971 and 1979 -- the initial period when
the liberalization countermeasures were supposedly taking effect and before Fujifilm's alleged
efforts to withhold supply to support prices -- Kodak's share of the color film market in Japan
increased by 75 percent. Kodak received a boost not only from falling tariffs, but also from
the 1973 introduction of its 110 system. This product innovation led to an immediate jump in
market share of 4 to 5 percentage points.
The increase in Kodak's share had slowed by 1979 and 1980, when the "silver shock"
precipitated higher prices in the market as silver prices doubled. By 1981, however, Kodak's
share of the color film market resumed its strong upward trend, peaking at a full 10
percentage points above its 1971 level. It reached 18 percent of the Japanese market. Thus,
the "liberalization countermeasures" -- supposing they existed -- were a manifest failure.
In an effort to patch this hole in its grand conspiracy theory, Kodak invents a new
conspiracy. Kodak claims that its sharp increase in market share was an aberration, caused by
"Privatizing Protection" at 124-130. The silver shock occurred when silver prices236
more than doubled between 1979 and 1980, increasing the cost of the most important rawmaterial used in film and color paper production.
Both of these increases were explained and found reasonable by the JFTC. See237
Section III above.
Fujifilm's domestic shipment records for 1979-1981.238
168
Fujifilm's decision in 1980 and 1981 to create a shortage in the marketplace to sustain the
price increases resulting from the "silver shock." In essence, Kodak argues that the236
countermeasures were in place but that Fujifilm decided for other reasons to keep them in
temporary abeyance.
During 1980, Fujifilm did indeed raise its prices to cover the increased costs of silver.
In February, Fujifilm instituted an increase of 7.5 percent; in April, a further increase of 14
percent was added. Fujifilm did not, however, restrain production or shipments to create an237
artificial shortage to sustain these prices. During the semiannual period when the two price
increases took place, Fujifilm shipped nearly 51 million rolls of film, a level which was 5.2
percent above budget projections and 13.4 percent above the shipments in the same period of
fiscal 1979. During the full year 1980, Fujifilm's shipments increased 3.8 percent, while total
shipments of color negative film in the Japanese market, reflecting the weak Japanese
economy at the time, increased only 0.2 percent. Thus, Fujifilm increased shipments between
1979 and 1980 at a faster pace than the increase in consumption in the market. As the market
recovered in 1981 and total shipments grew by 7.9 percent, Fujifilm shipments grew by only
5.7 percent, reflecting the fact that it had increased shipments in 1980 faster than consumption
increased and distributor inventories were being adjusted.238
Relying on fact rather than Kodak's fiction, it is clear what happened between 1979
and 1980. Both Fujifilm and Konica increased their prices to cover the additional costs of the
silver shock, while Kodak, or at least Nagase, took advantage of these price increases to
restrain its prices and thereby gain market share. While retailers may have complained, as
"Privatizing Protection" at 124-130.239
169
Kodak has alleged, about the reduced availability of film from the manufacturers, Fujifilm's
increased shipment levels to the market clearly demonstrate that Fujifilm was not restraining
production to support the price increases. More likely, because of uncertainty about future
silver prices and therefore film prices, distributors rushed to secure film inventories and
created an appearance of market scarcity. This is the likely explanation given that Fujifilm
increased shipments from 1979 to 1980 faster than the growth of consumption in Japan.
Obviously, the fact that Kodak's market share experienced large and sustained
increases in the aftermath of liberalization raises serious questions about Kodak's claims that
the liberalization countermeasures kept Kodak from being a significant player in the Japanese
market. To address this issue, Kodak has fabricated a supply shortage created by Fujifilm to
maintain the price increases resulting from the "silver shock." The facts simply do not
support such a conclusion.
What is evident from the facts is that in 1980 and 1981, Kodak and/or Nagase chose to
compete more aggressively based on price. As Kodak has admitted, Nagase took advantage
of Fujifilm's price increases by not raising its prices and thereby increased the gap between
Kodak and Fujifilm. The result was predicable: Kodak continued the gains that it had239
experienced since liberalization and by the end of 1981 had more than doubled its market
share in Japan since the beginning of liberalization. The liberalization countermeasures
clearly had no effect on Kodak. What did have an effect on Kodak was what happened next.
Kodak, having gained substantial market share by increasing the gap between its
prices and Fujifilm's price, decided to increase its own prices. Its newly won market share
was just too much of a good thing. Kodak increased the prices to Nagase by 7 percent in
January 1982 and by a further 4 percent in January 1983. While Nagase resisted increasing
its prices to its customers, Kodak raised its prices to Nagase again in late 1983. Nagase
followed with price increases to its customers, and in 1984 Kodak's market share began its
See Reason Lacking Credibility - VR100 Price Increase, Nihon Kogyo Junpo,240
November 20, 1983.
170
downward trend. It was not a conspiracy that throttled Kodak in Japan -- it was supply and240
demand.
Contrary to Kodak's assertion that the "window" slammed shut in the mid-1970s, it
opened wide. The 1971-1983 period clearly illustrates that, notwithstanding the alleged
countermeasures, Kodak could achieve significant gains in the Japanese market if it chose to
use the normal weapons of competition: price decreases and product innovations. During
this period, the increase in Kodak's market in Japan resulted from a combination of aggressive
pricing and product innovation (the 110 system). The "window" was open.
Two events, however, conspired to reverse Kodak's fortunes. First, the 110 format --
despite the fact that it was embraced by Fujifilm -- ultimately failed in Japan. In 1981, 110
format sales peaked at about 10 percent of the Japanese market, declining slightly in 1982 and
1983. In 1984, the decline accelerated. Second, after repeated Kodak price increases to
Nagase, Nagase finally raised its prices on Kodak film. The result was a sharp decline in
Kodak's market share in 1984.
Thus, the evidence demonstrates that when Kodak chose to price aggressively and
introduced an innovative product in advance of Fujifilm, it was able to substantially increase
its market share. Between the introduction of 110 format film in 1973 and the "silver shock,"
Kodak's market share doubled, according to both Kodak's and Fujifilm's statistics. Kodak's
aggressive pricing led to a further 25 to 30 percent increase by 1983. These gains, however,
were reversed when Nagase raised its prices in 1984 and Kodak's share reverted to the pre-
"silver shock" levels. Kodak shut the "window." Fujifilm didn't. MITI didn't. The
tokuyakuten didn't. JFTC neglect didn't. Kodak did.
R. Christopher, Second to None: American Companies in Japan, (1986) at 72.241
171
D. Kodak Has Failed To Take The Steps Necessary To GainShare In The Japanese Market
Kodak claims that it has tried hard to succeed in Japan and, therefore, only foul play
can explain its poor performance. It is this claim that most strains credulity. For years,
neutral commentators and even Kodak's own officials have used Kodak as an example of a
company that made serious strategic and tactical mistakes in Japan. Kodak's success in the
U.S. market blinded Kodak for years, and led to serious failures in the Japanese market. This
culture of arrogance began years ago. As one commentator notes, quoting Albert Sieg:
A Japanese chemical company asked George Eastman tobuild a film manufacturing plant in Japan in a kind of jointventure. On the advice of his engineers, who argued thatJapan's high humidity would make it hard to dry the filmbase, Eastman rejected the proposal -- whereupon theJapanese, undeterred, established what has since becomeFuji Photo Film, one of Kodak's strongest worldwidecompetitors.241
1. Kodak failed to adopt an aggressive strategy to take advantageof the liberalization
In their 1985 book, Kaisha: The Japanese Corporation, well-known business
consultants James Abegglen and George Stalk, Jr. describe the mistakes that Kodak made in
the Japanese market:
In the playing out of the competitive game in photographicfilm and equipment, the end game turns out to be similar tothat in a number of industries. Eastman Kodak now has onesignificant competitor in the world, the Japanese Fuji PhotoFilm. Fuji is now as profitable as Eastman Kodak, muchfaster growing, fully competitive in conventionalphotographic film and equipment technology, and leadingEastman Kodak in the electronically driven technologies that
J. Abegglen and G. Stalk Jr., Kaisha: The Japanese Corporation, (1985) at 239-240. 242
See also R. Christopher, supra, at 23.
Can Kodak Hold On To Its Share In A Rapidly Changing Market? Executive Changes243
and a Niche Strategy Are a Part of a Plan to Fight Fuji, Adweek, Jan. 1, 1990, at 18.
172
seem likely soon to make conventional imaging productsobsolete.
The urgent prospect that one of America's leadingcompanies might be outpaced by a once-insignificantJapanese company is the result of Eastman Kodak's delay inresponding to Fuji's competitive challenge. AlthoughEastman Kodak has been in business in Japan for more thansixty-five years, it does not yet have manufacturing orresearch and development facilities in Japan. Until recentlyit had no control over its sales in Japan. Before 1985 it soldexclusively through an agent, maintaining a liaison officewith no direct sales force or sales management, and onlyindirect influence on pricing and promotion.242
The inference is that Kodak did not take Fujifilm seriously and did not wake up to the
Fujifilm challenge until 1985, 14 years after the liberalization. Between the initial phase of
the liberalization in 1971 and 1985, when Kodak began to realize that Fujifilm was a serious
competitor, Fujifilm had gone from being one-tenth of Kodak's size to being nearly one-third
of Kodak's size. More importantly, Fujifilm had begun to move aggressively into the U.S.
market with the sponsorship of the 1984 Los Angeles Olympics, building on its already
aggressive and focused marketing, especially to the grocery store segment it pioneered. The
timing of Kodak's interest in Japan does not appear to be random. Until Fujifilm made a
serious move into Kodak's home territory, Kodak essentially ignored the Japanese market.
Fujifilm's move into the U.S. market, as symbolized by its sponsorship of the 1984 Olympics,
was a wake-up call for Kodak.243
While undeniably the pre-liberalization environment constrained Kodak, the post-
liberalization behavior of Kodak evidenced no intention to meet the challenge presented by
How Kodak Is Trying To Move Mount Fuji, Business Week, Dec. 2, 1985, at 62.244
"Privatizing Protection" at 6.245
173
Fujifilm in Fujifilm's own market or to make a serious effort to establish a strong presence in
Japan. To overcome Fujifilm's advantage as the incumbent market leader in Japan, an
aggressive strategy was required. Kodak needed to gain direct control of its pricing, rather
than leave it in the hands of an agent. Large expenditures on establishing its brand reputation,
aggressive marketing and pricing, and substantial investments were required. Kodak
undertook none of the necessary steps to position itself to compete with Fujifilm in Fujifilm's
home market. Instead, Kodak allowed Fujifilm an additional 14 years before developing any
apparent strategy for the Japanese market and then appears to have adopted a strategy244
which was poorly executed.
2. Kodak did not take advantage of liberalization until 1985
Although Kodak seeks to blame its failures in Japan in part on barriers which were
eliminated nearly 25 years ago, it makes no mention of the fact that Kodak itself did not take
advantage of the disappearance of the barriers. In August 1971, capital liberalization
permitted Kodak to establish a joint venture with 50 percent ownership. Subsequently, in
May 1976, the last phase of liberalization permitted Kodak to form wholly-owned subsidiaries
in Japan. While Kodak did establish a subsidiary to oversee Kodak's commercial interests in
Japan in 1977, this was a small operation staffed by a handful of people and intended as little
more than a liaison office. As shown below, between the onset of liberalization and 1985,245
Kodak did not take the crucial steps necessary to establish a competitive operation in Japan:
Kodak rebuffed Asanuma's 1973 initiative to re-establish a relationshipwith Kodak, and consequently later lost its distribution support;
Kodak did not establish an operating region to serve the Japanesephotographic market directly until 1984, eight years afterfull capital liberalization, and attempted instead to supply
Eastman Kodak 1982 Annual Report at 6.246
174
Japan from the United States;
Kodak neither established its own sales and distribution capacity inJapan nor undertook to create a joint venture with Nagase until 1986 --15 years after such a venture was permitted, eleven years after thesupposedly crucial loss of Asanuma, and ten years after full capitalliberalization.
Kodak did not open its first photographic products manufacturingfacility in Japan until 1988, a facility unrelated to consumerphotographic products.
Kodak's inaction in Japan was inconsistent with both its stated philosophy about
penetrating overseas markets and the actions it had taken or was taking in other overseas
markets. In its 1982 annual report, Kodak noted the following four points in connection with
penetrating overseas markets:
(1) That to survive, its marketing must be swiftly responsive;
(2) That to thrive, its marketing must be aggressively active;
(3) That it must be able to select the right blend of elements to meet customerneeds in specific situations; and
(4) That regional units must customize their approaches to best respond to theneeds of the region.246
Kodak took no steps in Japan between 1971 and 1985 to ensure that it was even minimally
prepared to meet these requirements.
While Kodak was doing nothing in Japan, it was expanding and strengthening its
operations elsewhere around the world. Here are the highlights:
Eastman Kodak 1969 Annual Report at 28.247
Eastman Kodak 1970 Annual Report at 29.248
Eastman Kodak 1971 Annual Report at 27.249
Eastman Kodak 1972 Annual Report at 26.250
Eastman Kodak 1973 Annual Report at 26.251
Eastman Kodak 1976 Annual Report at 27.252
Eastman Kodak 1977 Annual Report at 12.253
Eastman Kodak 1977 Annual Report at 12. Note that beginning in its 1978 report,254
(continued...)
175
1969: construction and expansion of facilities in England, France, West Germany,Canada, Australia, Mexico, Brazil, Argentina, Belgium, Denmark, the Netherlands,Spain, and Venezuela.247
1970: expansion of marketing and distribution facilities in Sweden, Belgium,Switzerland, Spain, Argentina, Italy, Singapore, and Denmark.248
1971: construction and expansion of facilities in Denmark, Hong Kong, Belgium,West Germany, Kenya, and Zambia.249
1972: construction and expansion of marketing facilities in Argentina, Italy, Australia,Hong Kong, The Netherlands, Spain, Finland, Venezuela, Malaysia, the Philippines,and Singapore.250
1973: completion of marketing and distribution facilities in England, Germany,Finland, the Netherlands, Switzerland, Spain, Italy, Australia, the Philippines,Lebanon, and Singapore.251
1976: improvement of marketing and distribution facilities in Austria, Denmark,Norway, Sweden, Switzerland, and Germany.252
1977: improvement of marketing and distribution facilities in Chile and creation of253
a company in Iran to market and service Kodak products and a new distributionfacility in Dubai.254
(...continued)254
Kodak stopped providing such detail in its annual reports.
How Kodak Is Trying To Move Mount Fuji, supra, at 62.255
See R. Christopher, Second to None: American Companies in Japan, at 23.256
"Privatizing Protection" at 5-7. 257
176
With the exception of noting the establishment in 1977 of a subsidiary in Japan to act
as liaison with Nagase, there is no mention in Kodak's annual reports of any steps taken by
Kodak from the late 1960s until 1984 to improve its presence or marketing ability in Japan.
Finally, in 1984, Kodak announced the creation of an operating region for Japan to directly
serve the Japanese photographic marketplace. With the passage of 13 years after the onset of
liberalization, Japan had at last been "elevated in status and management attention."255
While Kodak was aggressively improving its marketing and distribution structures in
virtually all of the other world markets, Kodak did nothing in Japan in the late 1960s and
early 1970s in anticipation of liberalization, nothing between 1971 and 1976 in response to
partial liberalization, and nothing for at least eight years after full liberalization. This inaction
by Kodak in Japan has been admitted repeatedly by Kodak's own executives. For Kodak to256
attempt to rewrite the history of its experience in Japan in the 1970s and the first half of the
1980s by placing the blame for Kodak's failures on Fujifilm and the Japanese Government is
simply absurd and without factual support. Kodak's own inaction granted Fujifilm a safe
haven in Japan for more than a decade after liberalization.
3. Kodak's investments in Japan have been insufficient to createreasonable expectation of a significantly greater market share
Kodak claims that its commitment to the Japanese market, both in terms of investment
in the market and personnel, is sufficient to warrant a larger market share than it presently
enjoys. Fujifilm could make an identical claim with respect to the U.S. market, where it has257
invested substantially more than Kodak has in Japan but has yet to achieve a market share
See discussion below in Section VI. 258
Kodak Joins Japan Assault, The Financial Post, June 1, 1995, § 1, at 7.259
177
approaching the share which it enjoys in other markets outside Japan. While Kodak's258
claimed investment in the Japanese market may appear large ($750 million over the past ten
years), in terms of results it should be measured relative to the investments made by its259
principal competitor in Japan and in the United States. When measured against the competing
efforts of Fujifilm, Kodak's efforts in Japan appear meager and consistent with its market
share.
Although it is unclear what the $750 million figure "invested" by Kodak over the past
ten years encompasses, it apparently includes substantially more than capital investment (i.e.,
acquisition of Nagase's Kodak division, and acquisition or expansion of its photofinishing
network), since these investments clearly would be only a small fraction of this amount.
Kodak may also be including its advertising and promotional expenses, as well as its selling
expenses.
In evaluating Kodak's investments in Japan, it is instrumental to compare them with
Fujifilm's investments in the U.S. film and color paper industries. In terms of capital
expenditures, Fujifilm has invested or is in the process of completing investments totaling
more than $500 million, all connected with amateur photography. When capital expenditures,
advertising and promotional expenses, and other selling expenses for the 1985-1995 period
are aggregated, Fujifilm has invested over $1.5 billion in the U.S. amateur photography
market, substantially more than Kodak in Japan. These greater efforts by Fujifilm in a market
which is generally perceived as less costly to enter than Japan reflect Fujifilm's realization that
gaining market share from the entrenched incumbent requires an aggressive advertising and
selling effort.
In terms of Kodak's efforts in Japan relative to Fujifilm, based on Kodak's stated
advertising expenses for 1986-1988, Fujifilm was outspending Kodak 10 to 1. Although
J. Huddleston, Jr., Gaijin Kaisha: Running a Foreign Business in Japan (1990) at 218.260
178
Fujifilm does not have information about Kodak's broader spending, we suspect the ratio
would be comparable if all selling, advertising and promotional expenses were compared.
a. The error of relying on Nagase
While one can, as "Privatizing Protection" does, speculate on why Kodak surrendered
its charter to operate in Japan and subsequently made Nagase its exclusive agent in Japan over
30 years ago, it is clear that this is of little relevance today. What is relevant is that in making
Nagase its exclusive agent in Japan, Kodak was making a serious strategic mistake. As one
commentator has noted:
One simply must control the distribution to control one'sdestiny. This was Kodak's problem. As long as it let Nagaseand Kusuda be its agents, it had no control over itscompetitive position in Japan.260
It is amazing that Kodak took so long to realize this mistake.
Until 1986, Kodak put its color film sales in Japan in the hands of an unprepared
company. Nagase specialized in handling chemical products sold primarily to industrial
users, not consumer photographic products marketed to retailers. Moreover, as a general
trading company, Nagase was accustomed to the marketing and promotion of commodity-
type products with stable margins rather than consumer products which require more flexible
and creative sales approaches. More important, Kodak's decision to make Nagase its
exclusive agent in Japan cut off the tokuyakuten -- companies specializing in photographic
products -- from direct dealings with Kodak and, in effect, established Nagase as a competitor
to the tokuyakuten. When the other film, color paper, and camera companies similarly
entered into competition with the tokuyakuten by adopting direct distribution, ties with the
See Section II.A.1.b above.261
Interview with Mr. Takenosuke Katsuoka, President of Asanuma.262
"Privatizing Protection" at Appendix B and 116-120.263
179
tokuyakuten were severed. Similarly, when the same occurred with Kodak/Nagase, the
tokuyakuten were pushed out of the Kodak system.
Although Nagase eventually acquired some photographic sales and marketing
expertise in 1967 when it acquired a tokuyakuten, Kuwada Shokai, this move served
primarily to reinforce a perception of Nagase as a competitor of the tokuyakuten, rather than a
distributor to them. It appeared that Kodak was following the same path as had been taken by
the camera companies and by Konica and Mitsubishi in creating direct distribution and
eliminating or reducing the role of the tokuyakuten.261
While Asanuma continued to carry Kodak after the first phase of the liberalization, it
was frustrated with its inability to deal directly with Kodak itself. Kodak made no moves to
invest in either Nagase or another channel of distribution once it was permitted to enter into
50-50 joint ventures in 1971. Nevertheless, Asanuma approached Kodak directly in 1973 in
an effort to ascertain whether Kodak was contemplating any change in the relationship with
Nagase that would allow Asanuma to deal directly with Kodak. Asanuma's top management
went to Rochester to meet directly with Kodak, air its grievances against Nagase, and open
the door to stronger and direct ties between Asanuma and Kodak. Kodak indicated no
willingness or intention to change the manner in which it distributed its products in Japan.262
With the benefit of hindsight and rewritten history, Kodak now maintains that
Asanuma was an essential part of its ability to penetrate the Japanese market. Yet when263
approached directly by Asanuma, after the first phase of the capital liberalization and on the
eve of the second and final phase, Kodak made no effort to strengthen its ties with the
company. Rather, fully aware that Asanuma was not content with dealing through Nagase,
Kodak ignored Asanuma. Whatever the details of Asanuma's final rupture with Kodak and
"Privatizing Protection" at 116-118.264
Kodak Tries to Restructure Sales Channels to Supplement Asanuma, Nihon Shashin265
Kogyo Tshushin, June 20, 1975, at 10.
Kodak Introduces 24 Exposure Color Film, Nihon Shashin Kogyo Tsushin, February266
1, 1977, at 10.
180
Nagase two years later, Kodak made a decision in 1973 that it would leave its fate in the
Japanese market up to Nagase. Kodak imposed the requirement that Asanuma transact its
business through Nagase and this ultimately led to Asanuma's abandoning Kodak.264
Indeed, press accounts at the time of the Asanuma termination contradict Kodak's
story. Nagase still had four tokuyakuten: Kuwada (which it had absorbed) Chiyoda, Honjo,
and Sanwa Shashin. In addition, Nagase recruited its DKP network (Distributors of Kodak265
Products) of 33 dealers to replace Asanuma. In 1977, Nagase said that the DKP network had
expanded Kodak's availability. If the Fujifilm tokuyakuten, and in particular Asanuma,266
were so critical to Kodak's ability to compete in Japan, Kodak's behavior at the time and press
statements by Nagase provide no hint of it.
For more than a decade after Asanuma stopped carrying Kodak consumer
photographic products, there was no apparent movement by either Kodak or Nagase to
strengthen the Kodak presence in the Japanese market other than the apparently successful
creation of the DKP network to replace Asanuma. There was no attempt to acquire additional
tokuyakuten, there was no attempt to sell to the existing tokuyakuten, and there was no
attempt by Kodak to enter directly into the Japanese market and to exercise control over its
operations in that market. Similar inaction by Kodak was evident in photofinishing prior to
1986.
Kodak's lack of action before the mid-1980s was confirmed by then President of
Kodak Japan Albert Sieg, in the 1988 book entitled Taking on Japan:
The glaring mistake was waiting so long to take aggressiveaction in this market. We should have been here with this
Taking on Japan, (1988) at 38.267
Id. at 36 (emphasis added).268
Kodak markets directly through in-country subsidiaries in virtually every significant269
market in the world, including the U.S., the U.K., Germany, Canada, Brazil, France, Italy,Mexico, and many others. This is true today and has been true historically.
181
approach ten years ago. Clearly, the momentum of our localcompetitors got a strong forward thrust, and our task will bemuch, much more difficult.267
Dr. Sieg offered a more detailed history of Kodak's operation in Japan:
Our current history begins in 1977, when we reestablishedthe company called Kodak Japan to provide marketing andtechnical support for our distributors. It continued that wayuntil 1983, when we decided we needed to be much moreaggressive in the Japanese marketplace. We created what wecall the Japanese "region," and moved the managementteam from Rochester, N.Y. to Tokyo. Since then we have,through a number of processes, basically reacquired thedistribution and sales rights to our products and broughtthem back under our own direct control.268
Kodak thus explicitly recognized that it had to control its destiny, and that it had made a
serious mistake.
Notwithstanding Kodak's current efforts to rewrite history, it is clear from Kodak's
contemporaneous explanations of its failures in Japan that these failures did not relate to
Fujifilm's actions, MITI's actions, or inaction by the JFTC. Kodak saw clearly the self-
inflicted nature of its wounds. The Kodak structure in Japan was unlike its structure in
virtually any other market and certainly unlike the structure in any other market where it had a
serious local competitor. In Dr. Sieg's own words, Kodak did not provide the "marketing269
Id. at 36.270
Eastman Kodak 1986 Annual Report at 36.271
Eastman Kodak 1985 Annual Report at 2, 8.272
Eastman Kodak 1987 Annual Report at 1-2.273
Eastman Kodak 1989 Annual Report at 1.274
Eastman Kodak 1991 Annual Report at 33, 35.275
Eastman Kodak 1992 Annual Report at 33, 35, 1993 Annual Report at 25, and 1994276
(continued...)
182
and technical support" for its distributors, "needed to be much more aggressive in the
Japanese marketplace," and needed a management team in Tokyo.270
b. Even after taking over Nagase, Kodak's operationsfaced difficulties
Unfortunately, a variety of factors, all unrelated to Fujifilm and the Japanese
Government, proceeded to undermine Kodak's new and belated aggressiveness in the
Japanese market. In 1986, Kodak consolidated manufacturing operations, thinned
management, reduced employment, and placed costs under tighter controls, resulting in
charges against earnings of $373 million. This came on the heels of a $494 million charge271
against earnings arising out of the Polaroid patent litigation and Kodak's subsequent
withdrawal from the instant film and camera markets. It was followed, in 1988, by Kodak's272
diversification move in acquiring Sterling Drug for $5.1 billion, acquiring IBM's copier
service business, and creating Qualex. Further restructuring in 1989 resulted in charges of273
$875 million. In 1991, additional restructuring costs involved charges of $1.6 billion,274
including nearly $800 million for restructuring the imaging division. Further restructuring275
costs of over $220 million in 1992, $538 million in 1993, and $340 million in 1994
followed. An additional after-tax charge of $2.17 billion in 1993 was made for accounting276
(...continued)276
Annual Report at 25.
Eastman Kodak 1993 Annual Report at 25.277
"Kodak Petitions U.S. Government Under Section 301 of Trade Law," Kodak Press278
Release, May 18, 1995; See also Kodak Joins Japan Assault, The Financial Post, June 1,1995, § 1 at 7.
183
purposes. The environment within Kodak was clearly hostile to supporting expenditures for277
the kind of aggressive effort needed in the Japanese market. More importantly, top
management attention was clearly "focused" almost everywhere but on Japan.
Over the past ten years, Kodak invested a total of $750 million in the Japanese market
for consumer color film and paper. While Kodak characterizes this as a substantial278
commitment to the market, the measure of the commitment should be in relation to the
objectives which Kodak was seeking to realize. Fujifilm was an already-established
competitor with significant financial resources and technological sophistication. Fujifilm had
numerous strategic assets: (1) strong brand loyalty in the Japanese market; (2) a well
established network of photofinishers throughout Japan; (3) a large and experienced sales
force of its own; (4) strong sales support from the tokuyakuten; (5) an enormous
manufacturing base in Japan; (6) products which had been tailored to Japanese consumers'
tastes; (7) a growing reputation for innovative product development; and (8) an advertising
budget much larger than Kodak's in Japan. The market which Kodak sought belatedly to
penetrate was a market with enormous challenges -- Fujifilm's established position in
hundreds of thousands of retail outlets -- and huge opportunities -- 100 million consumers and
billions of dollars in annual color film and paper sales.
To tackle this challenge, Kodak invested $750 million and hoped that an overly
centralized photofinishing network, an advertising budget approximately one-fifteenth the
size of Fujifilm's, and a sales operation one-quarter the size of second-place Konica would
allow it to gain ground on Fujifilm. While Kodak's intention may have been to pursue the
"Photographic Consumer Price Index," in Photo Market 1995, at 252.279
See Exhibit 20.280
184
Japanese market aggressively, it simply did not commit the kind of resources necessary to
develop the brand loyalty, marketing and sales force, or photofinishing network necessary to
become a significant player in the market.
4. Kodak has not competed aggressively on price
Kodak's decision to become more aggressive in the Japanese market certainly came at
a fortuitous time. Between 1985 and 1986, the yen appreciated by nearly 30 percent,
providing Kodak an opportunity to use price, increased promotion, or both as a weapon to
gain market share. The yen continued its appreciation through 1988, providing Kodak with a
four-year period during which it presumably became increasingly competitive. During this
same period, the yen price of color film was at historically high levels.279
Unbelievably, Kodak did not use the growing cost advantage resulting from the
appreciating yen to lower prices and increase market share. Rather, during the period of the
appreciating yen, Kodak in Rochester was continuously increasing its dollar prices to Kodak
in Japan, with average unit prices of imports increasing more than 25 percent between 1985
and 1988. While the increase in transfer prices from the U.S. parent accounted for only280
about half of the yen appreciation, given Kodak Japan's failure to aggressively lower prices to
gain market share, it appears that the escalating dollar transfer prices were simply an effort to
split increased profits resulting from the appreciating yen between Kodak Japan and its U.S.
parent. Indeed, Kodak's president clearly stated in 1986 that Kodak had no intention of
competing on price:
The President ruled out the possibility of the companypassing on exchange gains from the yen's appreciationagainst the U.S. dollar to Japanese consumers, in the term oflower product prices. He said Kodak is not a price leader in
Kodak Intends To Establish Stronghold in Japan, Jiji Press Ticker Service, August 26,281
1986.
Id.282
See Exhibit 6.283
Id.284
Id.285
185
Japan and has no intention of lowering its prices to win incompetition with its Japanese rivals.281
As prices declined in the Japanese market and the yen depreciated in 1989 and 1990,
the average unit values of Kodak's imports were adjusted downward to maintain the profit
split between the parent and subsidiary, but began their upward climb again in 1991 as the
yen appreciated further. Kodak again chose to realize almost all of the benefits of the282
appreciating yen in the form of additional profits, rather than seeking a sustained expansion of
its market share by aggressively reducing its prices in Japan.
As the 1990s began, other suppliers of film and paper took the opportunity to use price
as a mechanism to gain market share in Japan. Between 1991 and 1994, Agfa went from
virtually no presence in Japan to nearly 5 percent of the market. Gray market imports283
became an increasingly large factor. The new sources sold film on the basis of price and284
did not have access to the distribution systems of Fujifilm, Konica, or Kodak. Nevertheless,
they were able to capture market share from the branded products.285
During this period, with Kodak raising its prices in the U.S. annually and the yen still
well above 100 per dollar, Kodak chose not to drop its prices to meet the competitive threat or
to become part of the threat to Fujifilm. Kodak Japan was quoted as saying:
If we would sell film at even cheaper prices than the currentprice, this cheaper film would be reverse exported back to
Nikkei Business, June 28, 1993 at 18.286
186
the U.S. or other markets and end up destroying the globalprice structure of Kodak products.286
Thus, having missed the opportunity to use price as a mechanism to expand its market in
Japan presented by the convergence of historically high prices and an appreciating yen in the
latter half of the 1980s, as prices declined in the early 1990s, Kodak was constrained from
responding to pricing pressures from other sources by its fear of creating a source of gray
market imports into the United States from Japan. Kodak's ability to use price as a weapon of
competition in Japan was frustrated by its own desire to maintain its high pricing structure in
the United States and in third countries. There could be no more eloquent evidence of
Kodak's price premium in the United States than the fact that it has to worry about gray
market imports from Japan.
Even after Kodak woke up to the necessity of aggressively competing in Japan, it
refused to compete based on price. As the yen appreciated after 1985, it sought to capture the
increased profits from the appreciation rather than to use this advantage to lower prices and
increase its market share. Its pricing strategy was more appropriate to the U.S. market, where
it could command a premium, than the Japanese market where it required aggressive pricing
if it hoped to increase its market share. When presented the opportunity again in the 1990s,
Kodak was constrained by concerns of gray market re-exports and their effects on Kodak's
worldwide price structure.
5. Kodak has lagged behind Fujifilm in the introduction of productswhich have captured significant shares of the Japanese market
Perhaps the most important factor in relegating Kodak to a small market share in Japan
during the past 10 years has been Kodak's inability to compete with Fujifilm in introducing
new and innovative products. In particular, introduction of the single-use camera stimulated
the market and Fujifilm's high resolution ISO 400 film shifted the color film market in Japan
While Kodak did introduce some niche products -- the single-use panorama and287
underwater cameras -- before Fujifilm, these products have never been significant factors inthe market.
See Nikkei Sangyo Shinbun, January 24, 1989, at 19 (announcing introduction of288
Fujifilm's new ISO 400 film and projecting a 30-40 percent market share); and Nihon ShashinKogyo Tsushin, March 20, 1989, at 14 (retailer reactions to quality of Fujifilm's new ISO 400film).
See Exhibit 21. Photo Market 1995, at 98.289
187
from one dominated by ISO 100 to one where ISO 100 and ISO 400 have equal shares.
Kodak was two years behind Fujifilm in introducing both of these products, thereby initially
foreclosing itself from the fastest growing areas of the market. The fact that Kodak was
behind Fujifilm reinforced not only Fujifilm's image as the perceived market leader, but also
Kodak's image in Japan as being the less sophisticated company.287
In 1976, Fujifilm demonstrated its growing technological prowess by introducing high
speed ISO 400 film a full year ahead of Kodak. Neither the initial Fujifilm ISO 400 nor the
Kodak version had resolution approaching that of ISO 100 film and, as a result, ISO 400 did
not capture a large share of the film market despite the advantages of higher speed film. In
1989, however, Fujifilm introduced an ISO 400 film with equivalent resolution to ISO 100,
providing consumers the advantages of higher speed without sacrificing the ultimate quality
of the image. In the first year after its introduction in 1989, the new SHG400 film tripled288
Fujifilm's sales of ISO 400 film from 10 percent of total sales to 30 percent of sales. By 1991,
when Kodak finally introduced its own improved resolution ISO 400 film, New Gold 400,
Fujifilm's SHG400 sales accounted for nearly 40 percent of its film sales and a substantial
portion of all of the ISO 400 sales in the market. By 1994, ISO 400 sales were 289
W. Hyer and K. Stocker, Fujifilm Photo Film Company, Ltd.: QuickSnap, in New290
Product Success Stories: Lessons from Leading Innovators, (R. Thomas, ed. 1995), at 272.
188
47.5 percent of the Japanese market, with Fujifilm maintaining the advantage that it had
obtained by introducing the high resolution product two years in advance of Kodak.290
In all of Kodak's smoke-and-mirrors attempts to blame its failures in Japan on
Fujifilm, it nowhere mentions that for a two-year period Kodak had no competitive product
offering in a category, ISO 400, that accounted for nearly 40 percent of the color film sales in
Japan. It nowhere considers what the effect of the absence from the growth sector of the color
film market for a period of two years did to Kodak's reputation, particularly when Fujifilm
See R. Thomas, New Product Success Stories, (1995) at 267-279.291
See Exhibit 22. Photo Market 1995, at 98.292
189
already has the strongest brand identification in the market. Finally, it nowhere considers
what its failure to offer a competitive product in the fastest growing segment of the market for
two years does to a retailer's desire to commit shelf space and promotional efforts to Kodak.
Kodak was similarly behind Fujifilm in the introduction of the other innovative
product which has captured a significant share of the Japanese film market: the single-use
camera. Fujifilm introduced the first single-use camera, with 110 film, in July 1986, and a
35mm version in July 1987. Kodak did not introduce any single-use camera in Japan until291
August 1988, more than two years after Fujifilm's introduction of the 110 version and more
than one year after the introduction of Fujifilm's 35mm single-use camera. The 35mm single-
use camera, in particular, has been an important factor in expanding total demand in the
market. Once again, Kodak was in a position of having totally foreclosed itself from an
important market segment for a period of more than two years, a segment which has now
grown to roughly 15 percent of the total color film market in Japan. Once again, Kodak put292
itself in the position of playing catch-up with the innovative market leader.
W. Hyer and K. Stocker, Fuji Photo Film Company, Ltd.: QuickSnap, in New Product293
Success Stories: Lessons from Leading Innovators, (R. Thomas, ed. 1995), at 272.
190
A recent account of Fujifilm's pioneering introduction of the "QuickSnap" single-use
camera noted Fujifilm's innovative strength and close contact with markets:
Fuji's core competitive strengths are its competence inmeasuring and addressing consumer needs and its ability todevelop and introduce new products faster than itscompetitors. The company created the first magnetic tapeproduct in 1960 and produced the world's fastest colornegative film in 1976. It was the first company to developthe plastic 35mm lens, and was able to draw on itsexperience in mass producing video cartridges to speeddevelopment of the inner plastic casings for the single-usecamera.293
Id. at 273.294
See Shashin Kogyo Junpo, October 10, 1983, at 12, Shashin Kogyo Junpo, June 10,295
1984 at 1; and Nihon Shashin Kogyo Tsushin, February 1, 1984, at 11.
See Disc-Film Cameras Falter in Sales After Brief Boom, Nihon Keizai Shimbun, Nov.296
29, 1983, at 9; Kodak Suspends Production of Its Disk Camera, New York Times, Feb. 2,1988, at D-2.
See Photo Market 1995, at 98.297
See Exhibit 23, Table 1.298
Comparison of total minilabs installed (Exhibit 23, Table 2) with shipments of Fujifilm299
minilabs.
191
Further commenting on the reasons for Fujifilm's success, this analysis notes that Fujifilm
closely coordinates product development and R&D expenditures, and works to strengthen
relationships with distribution channels.294
In contrast, during this period Kodak was expending its marketing efforts on products
which failed in the market: disc film and ISO 200 film. Disc film was an almost instant295
worldwide failure. ISO 200 film, which Fujifilm also sells, peaked in its introductory year,296
1983, and currently accounts for 1.2 percent of the 35mm film market. 297
The color paper story is similar to the color film story, except that in paper Kodak has
not responded at all to Fujifilm's innovation in the fastest growing segment of the market:
quick loading and magazine color paper for use in minilabs. Minilabs represent the fastest
growing segment of the Japanese market, now accounting for 50 percent of total color paper
consumption in Japan. Fujifilm minilabs account for nearly 45 percent of all minilabs298
installed in Japan as of the end of 1994. Retailers in Japan tend to use the color paper of the299
minilab vendor (most of the paper manufacturers other than Fujifilm and Konica -- which
also produces a minilab model -- purchase minilabs from Noritsu or other suppliers on an
OEM basis and resell them under their own brand name). Fujifilm has reinforced this
tendency by providing quick-loading color paper and color paper in magazines for its
"Privatizing Protection" at 6. 300
192
minilabs. Kodak has no comparable product to offer either for its own OEM minilabs,
similarly configured Noritsu minilabs offered on an OEM basis by other paper manufacturers,
or for retailers with Fujifilm minilabs. The absence of such a Kodak product effectively
forecloses Kodak from nearly 25 percent of the color paper market or, at a minimum, puts it
at a serious competitive disadvantage in this important and fast-growing segment of the
market.
Kodak may argue that Fujifilm's quick loading and magazine type color paper for
minilabs was a failure in the U.S. market. The point would be accurate, but irrelevant.
Fujifilm is neither the leading supplier of color film and paper in the U.S. market nor the
primary vendor of minilabs. Furthermore, in the U.S. the tendency to purchase color paper
from the vendor of the minilab is far less pronounced than in Japan. What succeeds when one
is the leading supplier of color film and paper and the largest supplier of minilabs in one
market may not succeed when one is a relatively small supplier of both photographic
materials and minilabs in another market. The point is quite simple. When, as is the case
with Kodak, you are playing catch-up on someone else's home turf, failure to respond to
market preferences and innovations will not allow you to close the gap with your competition.
6. Kodak's sales, advertising, and public relations efforts havebeen insufficient to create any expectation that it could gainmarket share in Japan
As it does throughout "Privatizing Protection", Kodak plays fast and loose with the
facts concerning its commitment to the Japanese market. For example, as an illustration of
that commitment Kodak states that by 1992 "Kodak had over 3,000 employees in Japan" and
had opened an R&D facility in Yokohama and a technical center in Tokyo. While Kodak300
implies that it had 3,000 employees by 1992 dedicated to its penetration of the Japanese color
film and paper markets, in fact this number likely represents the total number of Kodak
Taking on Japan, at 37. 301
Although Fujifilm does not have precise information on the number of sales people,302
Fujifilm believes Kodak has fewer salespeople then Konica.
"Privatizing Protection" at 6.303
Yuryoku Kigyo no Kokoku-Senden-Hi, (Advertising Expenses of Major Companies),304
Nikkei Kokoku Kenkyusho, Dec. 1974-Sept. 1994.
193
employees in Japan, including headquarters personnel, sales subsidiaries, photofinishing
laboratories, R&D, and even part-time workers. The implication that Kodak has 3,000
employees working to penetrate the Japanese color film and paper markets is a vast
overstatement of Kodak's commitment of human resources.
Similarly, the R&D Center in Yokohama has nothing to do with film or paper.
According to former Kodak Japan President Sieg, the Center conducts research on materials
for semiconductors.301
Kodak has clearly failed to dedicate sufficient human resources to the penetration of
the Japanese market. It is unrealistic for Kodak -- particularly in a market where personal
relationships and personal attention are characteristic of good salesmanship and where there
are hundreds of thousands of retail outlets which must be physically supplied with and
encouraged to carry Kodak film -- to expect that it can increase its market share without a
sales force which is at least as large as that of its next larger competitor.302
Similarly, while Kodak cites its 5.3 billion yen expenditures on advertising between
1986 and 1989 as evidence of its aggressive efforts to penetrate the Japanese market, during303
the same period Fujifilm spent ten times (and Konica eight times) as much on advertising as
Kodak. In fact, Kodak's advertising budget during this period was not even proportional to304
its market share when compared to the combined expenditures on film and paper advertising
in Japan of Fujifilm, Konica, and Kodak. It is difficult to make up ground when your already
established competitors are spending more in advertising for each percent of the market than
See Nikkei Ryutsu Shinbun, December 12, 1992, at 1; Nikkei Sangyo Shinbun, June 4,305
1992, at 6; and Nikkei Sangyo Shinbun, February 12, 1992, at 8.
See Asahi Shinbun, August 30, 1987, at 3 and September 12, 1987, at 2; Nihon Keizai306
Shinbun, August 3, 1987, at 27 and September 12, 1987, at 31; Yomiuri Shinbun, August 30,1987, at 7 and September 12, 1987, at 7; Mainichi Shinbun, August 30, 1987, at 3, andSeptember 12, 1987, at 3; Sankei Shinbun, August 30, 1987, at 22; and Tokyo ShinbunAugust 30, 1987, at 3.
See Nihon Keizai Shinbun, March 16, 1993, at 5; February 2, 1993, at 1; February 3,307
1993, at 10; and July 11, 1992, at 9.
See Nihon Keizai Shinbun March 16 1993, at 5; February 2, 1993, at 1; February 3,308
1993, at 10; and July 11, 1992, at 9.
See Nihon Keizai Shinbun, March 16, 1993, at 5, and Nikkei Sangyo Shinbun January309
27, 1993, at 31.
194
you are. It is even more difficult when your largest competitor, Fujifilm, is consistently
ranked by consumers as having among the best quality advertisements.305
Finally, Kodak made a number of public relations blunders during the 1980s which
tarnished its image. In the late 1980s, Kodak received a great deal of negative publicity in
Japan for its success in blocking a Fujifilm employee from attending the University of
Rochester. The employee was hoping to study for a business degree, not even a degree in a306
technical area where Kodak's contributions might have been relevant.
In another public relations gaffe, Kodak ignored the most basic rule of business culture
in Japan -- lifetime employment. In 1992 and 1993, despite having attempted to appear to
operate as a Japanese company, Kodak had repeated and well publicized layoffs in Japan. 307
In 1993, it also cancelled the employment of new college graduates that had been promised
jobs. Furthermore, Kodak scaled down its newly established R&D facility in the early308
1990s and laid off technicians that had just been hired. While each of these missteps was309
relatively minor in isolation, taken together they bring into question Kodak's commitment to
the Japanese market and its image in Japan.
"Privatizing Protection" at 9-12.310
W. Hyer and K. Stocker, Fuji Photo Film Company, Ltd.: Quicksnap, in New Product311
Success Stories: Lessons from Leading Innovators, (R. Thomas, ed. 1995), at 278.
See Section IV.D.312
195
E. Missed Opportunities And Missing Product: Kodak From 1985 To The Present
It is difficult to see why Kodak must explain its relatively small market share in Japan
by invoking the dark imagery of feudalism, vassals, governmental connivance, and predatory
tactics, when simple marketing realities rule. Outside observers with no vested interest310
have attributed the symmetrical differences in market share positions of Fujifilm and Kodak
primarily to consumer familiarity. Consider this:
Cultural familiarity and loyalty to a brand explain thesignificant difference in market share {of single-use cameras}between Fuji and Kodak in Japan and the United States. Each new product performed exceedingly well in its homemarket, where consumers were comfortable with the brandnames, and poorly in its competitor's market.311
This same logic applies generally to photographic film.
Having jeopardized its dramatic gains in market share during the liberalization and
post-liberalization periods with three price increases in 1983 and 1984, and faced with a
declining asset in 110 film, Kodak took no action in 1985 or thereafter to reverse its312
fortunes in Japan. With the yen beginning to appreciate in 1985, Kodak could have easily
renewed the aggressive pricing which was largely responsible for its earlier market share
gains. Instead, Kodak followed the market and did not compete aggressively on price.
Having succeeded in boosting its market share in the 1970s with a market-leading product
introduction (the 110 system), one could have expected Kodak to use this avenue to improve
its position. However, no significant innovative products were introduced by Kodak. Instead,
"Privatizing Protection" at 6-7.313
196
Kodak lagged behind Fujifilm in the development of successful new products. Kodak's only
response, despite having articulated its intention to pursue growth in Japan aggressively, was
to replace Nagase with Kodak as the principal shareholder in its distribution system, to fly
blimps over the skies of Tokyo, and to flash neon lights advertising Kodak in Japan's major
cities.313
In contrast to Kodak's less than aggressive efforts, Fujifilm seized the initiative. In
1986 it brought to market the single-use camera, a product which Kodak did not introduce
until years later. When Kodak did introduce its own single-use camera in 1988, Fujifilm
barely gave Kodak time to catch its breath. In 1989 it introduced high resolution ISO 400
film. Again, Kodak was beaten to the punch by two years. By the time Kodak reacted,
Fujifilm sales of these two products accounted for more than 40 percent of the total film
market. Kodak is still playing catch-up in segments of the market -- high resolution ISO 400
film and single-use cameras -- which today account for approximately two-thirds of the
Japanese market.
Fujifilm has been waiting for Kodak's countermeasures to its success with these
products. Fujifilm expected to see new innovative products from Kodak, aggressive pricing
from Kodak, or at least increased and sustained advertising by Kodak to improve its brand
identification and brand loyalty in Japan. None of this has materialized. Rather than compete
on product and product innovation, price, or sales efforts, Kodak's countermeasure has come
in the form of a plea to the U.S. Government to do by fiat under Section 301 what Kodak has
been unwilling to do by its own efforts.
197
EVOLUTION OF KODAK'S MARKET SHARE IN JAPAN(1971-1994)
Source: "Privatizing Protection", Appendix A, Table 2.
Mackall v. Casilear, 137 U.S. 556, 566 (1890).314
198
V. KODAK'S CLAIMS OF ACTIONABLE VIOLATIONS OF THEFRIENDSHIP, COMMERCE AND NAVIGATION TREATY ANDTHE OECD CAPITAL CODE CAN BE DISMISSED
In an effort to find some violation of some international agreement, Kodak resurrects
old academic debates about whether Japan complied with its treaty obligations. Even Kodak
concedes, however, that such academic debates became moot in 1975, when Japan completed
its capital liberalization. Kodak's argument that supposed violations of the Friendship,
Commerce and Navigation ("FCN") Treaty and the OECD Capital Code that ended twenty
years ago (if they existed at all) legally require USTR to take action under Section 301 is
fundamentally flawed and should be rejected.
A. The U.S. Government Would Be Barred By The Doctrine OfLaches From Making A Claim Of Treaty Violations
In its petition, Kodak claims that the Government of Japan violated its obligations
under the FCN Treaty and the OECD Capital Code. Under the doctrine of laches, however,
such claims can no longer be brought. The alleged violations occurred between 1953 and
1976, too long ago to be considered today.
The doctrine of laches provides that claims brought too long after their occurrence will
not be heard. This basic principle of law is designed to promote justice by preventing
surprises created by the revival of claims that have been allowed to sit for too long a period.
The underlying policy rationale is that even if one has a just claim, it is fundamentally unfair
not to put the adversary on notice to defend within a certain time period. The right to be free
of stale claims prevails over the right to prosecute them. As the Supreme Court has written,
"{t}he doctrine of laches is based upon grounds of public policy, which require for the peace
of society the discouragement of stale demands."314
The U.S. Government itself has invoked the doctrine of laches on numerous occasions.
One area in which the government has frequently argued that the doctrine should be applied is
See, e.g., Yerxa v. United States, 11 Cl. Ct. 110 (1986); Cornetta v. United States,315
851 F. 2d 1372 (1988); Mai v. United States, 22 Cl. Ct. 664 (1991).
Yerxa, 11 Cl. Ct. at 113.316
The Gentini case defines prescription as follows: "When a right of action becomes317
extinguished because the person entitled thereto neglects to exercise it after a period of time,this extinction of the right is called prescription of action", cited in Bin Cheng, GeneralPrinciples of Law, as Applied by International Courts and Tribunals (1953) at 373.
Athanassios Vamvoukos, Termination of Treaties in International Law (1985) at 296.318
Id. at 296.319
Cited in Jackson Ralston, The Law of Procedure of International Tribunals,320
Supplement (1936) at 185 (hereinafter Ralston (1936)).
199
with regard to claims by military officers for back pay after involuntary discharge from the
service. For example, in Yerxa v. United States the government argued that the plaintiff's315
failure to assert his claims for a period of almost six years was sufficiently unreasonable,
inexcusable, and prejudicial so as to favor a bar to plaintiff's claims.316
The principle of laches has also been upheld in international law, where it is often
referred to as "prescription." As one scholar has noted, "{t}he lapse of time in presentation317
may bar an international claim in spite of the fact that no rule of international law lays down a
time limit," and this doctrine "is widely accepted by writers and in arbitral jurisprudence." 318 319
In the case of Sarropoulos v. Bulgaria, a tribunal explained that "prescription, an integral and
necessary part of every system of law, must be admitted in international law."320
The policy reasons for the existence of the rule have been set out by various scholars
and courts over the years. A report to the Institute of International Law in 1925 stated:
{p}ractical considerations of order, of stability and of peace, long acceptedin arbitral jurisprudence, should include the limitation of actions forobligations between states among the general principles of law recognized
Cited in Jackson Ralston, The Law of Procedure of International Tribunals (1926) at321
383 (hereinafter Ralston (1926)).
Vamvoukos, supra, at 296-7.322
Case Concerning the Temple of Preah Vihear, 1962 I.C.J. 6, 40 (Separate opinion of323
Vice-President Alfaro).
In the Mossman case, the Mexican-American Claims Commission ruled that: "{i}t324
seems unfair that the {Mexican government} should be first informed of the alleged(continued...)
200
by civilized nations, which international tribunals are called upon toapply.321
More recently, Vamvoukos has written that "{i}f a claim is not made or prosecuted within the
available framework of machinery it is presumed not to be meritorious. The longer the delay
the more intensified does this presumption become."322
The International Court of Justice (“ICJ”) has also upheld the prescription doctrine,
stating that prescription is essential to preserve the stability of the international legal system.
As the ICJ put it in the Case Concerning the Temple of Preah Vihear, prescription
... is an essential requirement of stability - a requirementeven more important in the international than in otherspheres; it is a precept of fair dealing inasmuch as it preventsstates from playing fast and loose with situations affectingothers; and it is in accordance with equity inasmuch as itprotects a state from the contingency of incurringresponsibilities and expense, in reliance on the apparentacquiescence of others, and being subsequently confrontedwith a challenge on the part of those very states.323
By investigating alleged violations that occurred over 19 years ago, the U.S.
Government is directly contradicting basic principles for which it has argued in the past. The
United States itself previously argued that a claim less than six years old was barred by the
doctrine of laches. In the international sphere, tribunals have ruled that a lapse of 15 years
was long enough to bar a claim under the corollary doctrine of prescription. Kodak's claim324
(...continued)324
misconduct of its inferior authorities more than fifteen years after the date of the actscomplained of. The umpire cannot under this circumstance consider that the Mexicangovernment can be called upon to give compensation for a very doubtful injury, and hetherefore awards that the claim be disallowed." Cited in Ralston (1926) at 375.
"Privatizing Protection" at 174.325
"Privatizing Protection" at 14.326
201
that Japan violated its treaty obligations between 1953 and 1976 should be barred based on
the doctrine of laches.
B. Kodak Has Only Alleged Past Violations Of The Treaties,Which Are Not Actionable Under Section 301
1. Even Kodak admits it alleges only past violations that havelong since been corrected
In an attempt to force the USTR to take some action, Kodak alleges that the Japanese
Government has violated its commitments under the Friendship, Commerce and Navigation
("FCN") Treaty and the OECD Capital Code. With respect to the FCN Treaty, Kodak alleges
that Japan's prohibition on foreign investment, "which prevented Kodak from establishing a
local subsidiary until 1976, was a clear breach of the FCN Treaty commitment by Japan to
permit U.S. firms 'to organize companies under the general company laws of the other Party,'
to 'control and manage enterprises,' and to 'establish and maintain . . . establishments
appropriate to the conduct of their business." With respect to the OECD Capital Code,325
Kodak alleges that "Japan's formal restrictions on inward investment were maintained until
1976 in breach of its commitments under ... the OECD Code of Liberalization of Capital
Movements." As indicated, both alleged treaty violations reference the same formal326
restrictions on foreign investment.
Japan's prohibition on foreign investment, however, was terminated nearly 20 years
ago in 1976. As even Kodak admits, "whatever inconsistencies may have existed between
"Privatizing Protection" at 181.327
Madison Galleries, Ltd. v. United States, 870 F.2d 627, 629 (Fed. Cir. 1989) (citing328
Bethesda Hospital Ass'n v. Bowen, 108 S.Ct 1255, 1258 (1988)).
Id.329
202
Japan's legal restrictions on investment and its international commitments have long since
been reconciled." Notwithstanding this historical fact, Kodak argues that USTR should327
take mandatory action because there has been a breach of Japan's international obligations
toward the United States. Once again, Kodak has missed the mark. Kodak's allegations do
not require USTR to take "mandatory action" under the statute.
2. Only current violations of trade agreements are actionableunder Section 301
"The starting point in every case involving statutory construction is the language
itself." Absent a clear cut legislative intent contrary to the statutory language, the statutory328
language is ordinarily regarded as conclusive.329
The language of Section 301 is quite clear. Section 301 only addresses current alleged
violations of a trade agreement or some other international obligation. With respect to
"mandatory action" under Section 301, every relevant provision speaks in the present tense:
(1) If the United States Trade Representative determines . . . that
(A) the rights of the United States under any trade agreement arebeing denied;
(B) an act, policy, or practice of a foreign country--
(I) violates, or is inconsistent with, the provisions of, orotherwise denies benefits to the United States under, any tradeagreement, or
19 U.S.C. § 2411.330
19 U.S.C. § 2414 (emphasis added).331
Rep. 100-40, Part 1, 100th Cong. 1st.332
203
(ii) is unjustifiable and burdens or restricts United Statescommerce330
• • •
(1) On the basis of the investigation initiated . . . the Trade Representative shall--
(A) determine whether--
(I) the rights to which the United States is entitled underany trade agreement are being denied . . .331
That the statute speaks only of current violations of trade agreements is consistent with
the very purpose of Section 301. Section 301 does not provide a private right of action.
Section 301 is not intended to allow a private company to seek monetary damages for some
alleged wrong in the past. Rather, Section 301 simply provides a mechanism by which the
U.S. Government can investigate, inter alia, alleged current violations of a trade agreement.
If a violation is found, the United States can then request that the foreign country take action
to eliminate the violation. If the alleged violation of a trade agreement has already been
corrected, then there is no action needed under Section 301 with respect to that violation.
The legislative history of Section 301 supports the conclusion that only a current
existing violation can be considered an "unjustifiable" act requiring mandatory action. Since
its creation in 1974, Section 301 has always served two purposes: (1) to deter other nations
from violating their trade commitments to the United States and (2) to obtain the elimination
of foreign unfair trade practices that burden or restrict U.S. commerce. In fact, the332
legislative history of the most recent amendments reiterates Section 301's primary function:
1994 U.S.Code Cong. and Adm. News at 3909.333
19 U.S.C. § 2411(a)(2)(B)(ii)(I) (1994).334
Rep. 100-40, Part 1, 100th Cong. 1st.335
We note that although Kodak alleges that the liberalization countermeasures, instituted336
after formal restrictions were lifted, "created a structure" that is inconsistent with Japan'sobligations under the agreements, Kodak never argues that the countermeasures themselvesconstitute violations of the FCN Treaty or OECD Capital Code. Kodak pointedly does makesuch a claim directly. Therefore, USTR must assume that Kodak does not believe that theliberalization countermeasures are current violations or impairing any benefits.
204
The Committee wishes to ensure that Section 301 authority remains a strong andeffective means for the United States to enforce its rights under trade agreementsand to deal with other foreign unfair trade practices.333
Although Congress intended Section 301 to be used to enforce U.S. trade agreements,
it specifically recognized that retaliation should not be required when the foreign country has
agreed to eliminate the practice. The House of Representatives Report behind the Omnibus334
Trade and Competitiveness Act of 1988, the legislation which created this exception to
"mandatory" retaliation, specifically states:
the Committee recognizes that retaliation in the form of import restrictions is notthe preferred outcome of a dispute and should not be required if the foreigncountry has agreed to eliminate or phase-out the practice in a satisfactorymanner or, while preserving the practice, has removed or otherwise solved theburdensome effect on U.S. commerce.335
This specific exception to "mandatory retaliation" demonstrates that Congress intended
Section 301 to be used only to address foreign country practices that are currently violating a
trade agreement. In other words, Kodak cannot argue that Japan's policies are both
unjustifiable and no longer in existence. Unjustifiable acts require mandatory action. Acts or
policies that have been eliminated are not actionable. Therefore, even if Kodak can prove that
Japan has violated the FCN or the OECD Capital Code in the past, the fact that the policy has
been eliminated or phased out precludes a finding that the practice is "unjustifiable."336
Kodak's claim under Section 301(b) fails for a different reason. As detailed at length337
in this submission, Kodak has not identified any unreasonable practices that burden Kodak. Kodak is itself responsible for its limited success to date in the Japanese market.
205
The legislative history makes clear that Section 301(b) -- discretionary action for
unreasonable practices -- was promulgated for a reason: to provide a mechanism for
companies to seek relief when no violation of a trade agreement or other international
obligation can be found. Indeed, the very need for Section 301(b) arises precisely because
mandatory action is reserved only for those government practices that are found to be
currently violating a trade agreement or other international obligation.337
C. Even If Timely, Kodak's Claims Of Treaty Violations Are Wrong And Invalid
Even if Kodak's treaty violation argument were to be considered, they should
be dismissed. Both substantively and procedurally, Kodak's argument is meritless.
1. Japan did not violate the OECD Capital Code
The objective of the OECD is to assist member nations in promoting the liberalization
of international trade in goods and services and the progressive freedom of capital movement.
The last element, capital liberalization, is promoted under the OECD Code of Liberalization
of Capital Movements (hereinafter OECD Capital Code). This Code provides for, inter alia,
liberalization of foreign direct investment through the abolition of restrictions on capital
movements.
In its petition, Kodak claims that Japan has violated its obligations under the OECD
Code of Liberalization of Capital Movements in two ways. First, Kodak alleges that Japan
directly breached its commitments under the Code. Kodak states that "Japan's formal
restrictions on inward investment were maintained until 1976 in breach of its commitments
"Privatizing Protection" at 14.338
Id. at 178.339
OECD, Memorandum of Understanding between the Organization for Economic Co-340
operation and Development and the Government of Japan Concerning the Assumption by theGovernment of Japan of the Obligations of Membership of the Organization, July 26, 1963,Doc. No. C(63)112. Under the OECD Capital Code, Member Countries may makereservations to certain provisions. Through these reservations, Members may abstain fromconforming to the provisions in question.
206
under ... the OECD Code of Liberalization of Capital Movements," and that "Japan's policy338
measures in photographic materials are inconsistent with the commitments it has made under
the OECD Code of Liberalization of Capital Movements."339
Second, Kodak implies that Japan has violated the "spirit" of the Code. Kodak alleges
that Japan cited 18 "reservations" to the OECD Codes, including one on foreign direct
investment, "making Japan the only OECD country to lodge a reservation against direct
investment." Kodak implies that because Japan "delayed full commitment to the OECD
Capital Code for over a decade by maintaining certain reservations" it somehow violated the
"spirit" of the agreement.
As explained below, these claims are completely false and unsubstantiated. Japan was
in compliance with its OECD obligations at all times, and Kodak cites no evidence to support
its allegations.
a. Japan has never violated the OECD Capital Code
Kodak does not provide any evidence whatsoever to support its allegation that Japan
has violated its commitments under the OECD Capital Code with respect to direct investment.
The complete lack of evidence is not surprising.
Japan joined the OECD in 1964, and agreed to assume all of its obligations under the
OECD Capital Code, with the exception of those areas in which it took specific
reservations. Direct investment was one such area. At no time was Japan in violation of340 341
(...continued)341
Dan Fenno Henderson, Foreign Enterprise in Japan (1973) at 284.341
Henderson, supra, at 285.342
"Privatizing Protection" at 177-179.343
"Privatizing Protection" at 178.344
(continued...)
207
its OECD Capital Code commitments. As Dan Henderson concludes, "{t}here is no case
against Japan for violating legally enforceable obligations to liberalize under the OECD
Capital Code. This is because she is entitled to lodge reservations and has no legal
obligations to withdraw any of them."342
Given the fact that the Japanese Government exercised its undeniable right to lodge
reservations to the OECD Capital Code, Kodak's claim that Japan breached its commitments
is completely without basis in fact. Indeed, in apparent recognition of this conclusion, no
actual violation is alleged in Kodak's petition. Instead Kodak's petition simply alleges a
violation, without identifying the violation. In short, Kodak has alleged that Japan "breached
its commitments" under the OECD, an allegation which, if true, would clearly constitute a343
violation of the OECD Convention. However, Kodak has not told us just what this alleged
breach might be.
b. Japan did not violate the spirit of the OECD Capital Code
Failing to demonstrate that Japan breached its OECD commitments, Kodak goes on to
state that "Japan {was} the only OECD country to lodge a reservation against direct
investment." Again, we are at a loss as to the legal meaning of this statement. Fortunately,344
we need not dwell on the point, since this statement is completely false. Japan was not the
only country to lodge such a reservation. In fact, the United States itself, as well as others,
lodged reservations in this area. In 1961, when the OECD Capital Code was initiated, the
United States did not make a reservation, but it specifically reserved the right to make a
reservation to the capital code at a later date. Then, in 1964, the United States did make a345
(...continued)345
OECD, Decision of the Council regarding Canadian and United States Reservations345
to the Codes of Liberalization of Current Invisible Operations and of Capital Movements,December 12, 1961, Doc. No. OECD/C(61)85.
OECD, Decision of the Council Amending the Code of Liberalization of Capital346
Movements, July 28, 1964, Doc. No. C(64)85 Final.
OECD, Code of Liberalization of Capital Movements, Annex B, 1992.347
OECD, Introduction to the Codes of Liberalization, (1987) at 14.348
Id.349
208
reservation to the direct investment provisions of the Code. As of 1992, the United States,346
Japan and all other OECD Member Countries maintained reservations on direct investment.347
Kodak further implies that by making reservations to its commitments Japan somehow
violated the spirit of the agreement. Such reservations, however, are an essential part of the
liberalization process under the OECD. As the OECD itself has stated, "{a}s the achievement
of full liberalization is a goal to be achieved progressively over time, Members unable to
liberalize immediately are permitted to lodge a 'reservation' on the items concerned." In348
addition, the OECD notes that
{t}he reservation ... procedure should not be thought of asweakening the force of the Codes in their promotion ofprogressive liberalization. On the contrary, they provide anorderly regime for easing the burden when necessary so thatall Members are able, over sometimes long and difficultperiods, to continue to accept the Codes' obligations.349
Essentially, Kodak accuses the Japanese government of taking actions that are
specifically allowed, even encouraged, by the OECD. Kodak's first claim consisted of an
alleged violation without any specific action. Kodak's second claim contains just the
opposite: it alleges an act, Japan's making reservations, but no violation.
Japan has in fact upheld all of its commitments under the OECD agreement. Japan
made reservations with regard to the OECD Capital Code provisions on direct foreign
U.S.-Japan FCN Treaty, Protocol 6 and article XII(2).350
"Privatizing Protection" at 177.351
209
investment upon its entry into the OECD. As the Japanese economy matured it withdrew
these reservations. By 1976 investment in the Japanese film market was completely
liberalized. Japan's reservations under the OECD Capital Code were used exactly the way
reservations should be -- to help a country make the transition to full compliance with a new
agreement.
2. Japan did not violate the FCN Treaty
a. Under the FCN Treaty, Japan's very low level ofmonetary reserves allowed Japan to restrict foreigndirect investment
Identical to its argument with respect to the OECD Code, Kodak argues that Japan's
foreign investment restrictions, which were in place until 1976, violated the FCN Treaty
between Japan and the United States. However, Japan did not violate the FCN treaty because
the restrictions fell within an explicit exception set forth in the FCN Treaty. Under Article
XXII of the FCN Treaty, a party to the agreement can restrict foreign direct investment "to
prevent monetary reserves from falling to a very low level or to effect a moderate increase in
very low monetary reserves." 350
Kodak attempts to overcome this explicit exception by alleging that Japan's reserves
were not "very low," and thus, Japan could not invoke the exchange restrictions exception of
Article XXII of the FCN Treaty. In support of its allegation, Kodak cites Professor351
Henderson's book on Foreign Enterprise in Japan, and argues that Japan's level of reserves
Id.352
Henderson, supra, at 280.353
Yasuhiro Fujita, Does Japan's Restrictions on Foreign Capital Entries Violate Her354
Treaties?, 3 Law in Japan (1969) at 168.
Fujita, supra, at 168.355
210
was not very low. Henderson claims that by 1973, Japan's reserves were approximately352
$18 billion and consequently could not be considered as a very low level of reserves. 353
There are several problems with Henderson's argument. First, Henderson examined
Japan's reserve level in the abstract without any comparison to what the level of reserves was
in other countries comparable to Japan. As demonstrated by Professor Fujita, whose article
Henderson was attempting to rebut, the Ministry of Finance statistics prove that Japan's level
of reserves was lower than any other industrialized nation in 1966. Thus, when analyzed354
relative to other countries, Japan's level of reserves was in fact very low.
Second, Japan's level of reserves was not just very low in 1966 but was consistently
low between 1959 and 1966, hovering only at around $2 billion each year. In addition, the
Ministry of Finance provided the following comment regarding the level of reserve statistics:
International balance of payments generally explains why Japan has had to lodgeso many reservations relating to the obligations under the OECD Code ofLiberalization of Capital Movements. Our foreign currency reserves have beenremaining for years at the two billion dollar level making no substantial progress,while the quantity of our imports has increased remarkably year by yearresulting in the disequilibrium between foreign currency reserves and imports. There is no room for optimism as regards Japan's monetary reserves in thefuture.355
Third, Henderson's statement that the level of reserves in 1973 was certainly not very
low is not properly substantiated. In an unfair attempt to rebut Fujita's article, Henderson
conveniently fails to provide any comparison for the level of reserves of other countries in
1973, the year Henderson maintains that Japan could not credibly argue that Japan's reserves
Keidanren Pamphlet No. 87, February 1966, cited in Michida, Capital Liberalization356
as a Treaty Question, 2 Law in Japan 13 (1968).
211
were low. The 1973 statistics provided by Henderson appeared, of course, after the data
provided by Fujita in 1969. In addition, Henderson notes himself that the yen was revalued in
1971, but Henderson fails to make any adjustment for the reserve levels he quotes after 1971.
Consequently, Kodak's reliance on Henderson is misplaced. Just because Henderson's
article was in response to Fujita does not make Henderson the authoritative source on the
subject. As thoroughly demonstrated by Fujita, when evaluated on a proper basis, it is clear
that Japan's reserves were not only very low but also the lowest of the main industrialized
nations.
b. Japan foreign investment restrictions are not a violationof the FCN Treaty because the U.S. Governmentacquiesced in Japan's restrictions
When the FCN Treaty was signed in 1953, restrictions on foreign investment in Japan
were already in place. These restrictions continued until 1964 in the form of exceptions to the
Treaty based on Japan's low level of monetary reserves. At this time, Japan joined the OECD
and made an explicit reservation for direct investment under the OECD Capital Code.
In 1965, the U.S. acknowledged the existence of the Japanese restrictions it felt
violated the FCN Treaty, but explicitly stated that no legal action would be brought.
Secretary of Commerce Conner and Secretary of Treasury Fowler made the following
statements:
such restrictions {on inward foreign investment} by Japan ...are considered to be incompatible with the nationaltreatment provisions of the Japan-U.S. Treaty of Commerceand Navigation' .... The United States Government considersthat {Japan's} screening system contravenes article 7(national treatment of business activities of the Treaty) ...,but there appears to be no intention at present of making alegal issue of the question.356
Black's Law Dictionary, at 22.357
Case Concerning the Territorial Dispute, 1994 I.C.J. 6, 55-9 (Separate opinion of358
Judge Ajibola).
Anglo-Norwegian Fisheries, in D.W. Bowett, Estoppel before International Tribunals359
and its Relation to Acquiescence, 33 Brit. Y.B.I.L. 176 (1957), at 199.
Id.360
212
At no time subsequent to this report did the United States bring a claim with regard to this
issue.
The United States' failure to bring an action in support of its claim that Japan has
violated the FCN Treaty means that under basic principles of law the United States has
acquiesced in the Japanese measures. Acquiescence arises "where a person who knows he is
entitled to impeach a transaction or enforce a right neglects to do so for such a length of time
that, under the circumstances of the case, the other party may fairly infer that he has waived
or abandoned his right." Thus, acquiescence acts as an estoppel to the bringing of a claim.357
The concept of acquiescence is applicable in the international as well as the domestic
arena. The ICJ has consistently recognized the principle of international estoppel or
prescription where a party has acquiesced in or recognized the actions of another state. 358
Specifically, in the Anglo-Norwegian Fisheries case, the ICJ stressed the importance of the
absence of protest against the Norwegian claims:
The notoriety of the facts, the general toleration of the internationalcommunity, Great Britain's position in the North Sea, her own interest inthe question, and her prolonged abstention would in any case warrantNorway's enforcement of her system against the United Kingdom.359
With respect to the Norwegian case, Bowett states that "though not in express terms, this is
almost like raising the acquiescence of Great Britain as an estoppel against her." When a360
Id. at 200-201.361
Interhandel Case (Switzerland v. United States), 1959 I.C.J. 6, 27.362
C.F. Amerasinghe, Local Remedies in International Law 359 (1990).363
213
state "proceeds with full knowledge of another state's conflicting right or interest, the inaction
or silence of the latter may afford a basis for the acquisition of a title by prescription."361
In sum, the United States is estopped from bringing a claim against Japan for its
alleged violations. By failing to bring a claim even though the U.S. Government
acknowledged the existence of the violations, the U.S. Government has acquiesced in the
Japanese measures.
c. Because Kodak did not exahaust its remedies innational courts, its claim is invalid
A well-established rule of customary international law is that a state seeking remedies
for denial of rights to its nationals must exhaust remedies in national courts and administrative
agencies before instituting international proceedings. The purpose of the local remedies362
rule is to allow the state where a violation has occurred an opportunity to adjudicate the
matter through its own court system prior to invocation of international remedies. Moreover,
this rule preserves the sovereignty of states and prevents disputes from unnecessarily
disrupting relations between states.363
The International Court of Justice has, in fact, recently recognized the customary
international law rule of local remedies in an ICJ case involving the FCN treaty between the
United States and Italy. In that case, the United States argued that the exhaustion of local
remedies rule did not apply to a case brought under the FCN Treaty because the Treaty
granted jurisdiction to the Court without any reference to the local remedies rule. Although
the Court acknowledged that parties to a treaty can state in the treaty whether the local
remedies rule will apply or not, the parties in this case had not made any reference to the local
remedies rule in the FCN Treaty. Without specific language qualifying or dispensing with the
Case Concerning Elettronica Sicula S.p.A. (ELSI) (United States of America v. Italy),364
1989 I.C.J. 15 at para. 50.
United States-Italy FCN Treaty Article XXVI reads: "Any dispute between the High365
Contracting Parties as to the interpretation or the application of this Treaty, which the HighContracting Parties shall not satisfactorily adjust by diplomacy, shall be submitted to theInternational Court of Justice, unless the High Contracting Parties shall agree to settlement bysome other pacific means." 63 Stat. 2255 (Feb. 2, 1948).
United States-Japan FCN Treaty Article XXIV reads: "Any dispute between theParties as to the interpretation or application of the present Treaty, not satisfactorily adjustedby diplomacy, shall be submitted to the International Court of Justice, unless the Parties agreeto settlement by some other pacific means." 4 U.S.T. 2064; TIAS 2863 (Apr. 2, 1953).
"Privatizing Protection" at 175.366
214
local remedies rule, the Court was "unable to accept that an important principle of customary
international law {the local remedies rule} should be held to have been tacitly dispensed with,
in the absence of any words making clear an intention to do so." Consequently, the Court364
dismissed the United States' argument that the local remedies rule did not apply.
The FCN treaty between the United States and Japan, raised as an issue in Kodak's
complaint, is in substance the same as the FCN Treaty between the United States and Italy. 365
Just like the United States-Italy FCN Treaty, the United States-Japan FCN Treaty Article
XXIV, which requires that disputes shall be handled by the ICJ, does not qualify the
applicability of the local remedies rule. Consequently, as indicated by the ICJ in the Case
Concerning Elettronica Sicula S.p.A., the customary international law rule of local remedies
applies absent language limiting the applicability of the rule.
Kodak dismisses its need to exhaust local remedies in Japan by arguing that such local
remedies would be futile, given the alleged "practical impossibility of a U.S. company
obtaining relief in Japan." The Finnish Ships Arbitration addressed the concept of futility366
and what could constitute an ineffective remedy. Although the arbitration panel found that a
party is not compelled to appeal his case to the highest court, whatever the circumstances, it
was not sufficient that the remedy merely appeared to be futile. The test of futility, as
Claim of Finnish Shipowners (Finland v. Great Britain), 3 U.N. Rep. Int'l Arbitral367
Awards, 1479, 1495, 1504.
Electronica Sicula S.p.A. (ELSI), 1989 I.C.J. at 47.368
"Privatizing Protection" at 175 citing Henderson, Foreign Enterprise in Japan, at 286.369
Id. at 194 citing Michita, Capital Liberalization as a Treaty Question, 2 Law in Japan370
18 (1968).
215
clarified by the Finnish Ships Arbitration, is obvious futility or manifest ineffectiveness. The
test of obvious futility requires more than the probability of failure or the improbability of
success. The test requires evidence that the remedy would be manifestly ineffective.367 368
Kodak cites in support of its futility claim one author arguing that "no businessman
has wanted to squander his time, money and good will in a long legal contest in the Japanese
courts to establish the fact that the Foreign Investment Law restrictions were inconsistent with
the FCN Treaty rights." In contradiction, Kodak cites another author arguing that "because369
any Japanese action that violates a treaty is unconstitutional, U.S. investors could challenge
the investment restrictions in Japanese court and win:
{T}here is hardly any chance that the Japanese Government's argument{that the capital restrictions could be reconciled with the Treaty} willprevail."370
Kodak's reliance is misplaced. First, a claim that Kodak would not want to squander
its time, money, or good will does not demonstrate that the local remedies in Japan would be
obviously futile or manifestly ineffective. Second, Kodak specifically cites authority for the
fact that a U.S. investor challenging Japan's alleged investment restrictions would win in
Japanese court. Such evidence demonstrates that exhaustion of local remedies is obviously
not futile and thus is required under customary international law.
19 U.S.C. § 2413(a)(2) (1994); see also 15 C.F.R. § 2006.6.371
Rep. 100-40, Part I, 100th cong. 1st (emphasis added). See also USTR's regulations,372
15 C.F.R. § 2006.6.
Treaty of Friendship, Commerce and Navigation, Apr. 2, 1953, U.S. - Japan, art.373
XXIV, par. 2.
216
D. Should USTR Decide To Proceed With Kodak's TreatyViolation Claims, It Must Utilize The Dispute ResolutionProvision In Each Treaty
Under Section 301, if the disputed governmental action involves a matter covered by a
"trade agreement," USTR is first required to exhaust the dispute settlement procedures
provided in such agreement. The legislative history of Section 301 is quite clear on this371
point. The principal House of Representatives Report regarding the Omnibus Trade and
Competitiveness Act of 1988, the statute which substantially overhauled Section 301, states:
Section 303 of the Trade Act requires the use of international procedures toproceed in parallel with the domestic investigation in order to seek resolution ofthe issues. . . If the issues are covered by a trade agreement and are not resolvedduring the consultation period, if any, specified in that trade agreement then theUSTR must promptly request formal dispute settlement proceedings.372
Both the FCN Treaty and the OECD Capital Code contain dispute settlement
provisions. The FCN Treaty has an express dispute resolution provision. Article XXIV of the
FCN states:
Any dispute between the Parties as to the interpretation or application of thepresent Treaty, not satisfactorily adjusted by diplomacy, shall be submitted to theInternational Court of Justice, unless the Parties agree to settlement by someother pacific means.373
Consequently, any dispute involving the FCN Treaty is governed by the International Court of
Justice statutes and its procedures.
The OECD Capital Code also contains specific provisions for dispute resolution. If a
Member country believes another Member is violating its obligations, the first member may
“Privatizing Protection” at 172-173. Specifically, Kodak notes the "the FCN Treaty374
provides guarantees with respect to a broad range of activities involving international trade,including the importation and exportation of products from the territory of each party, the useof quantitative import and export restrictions, most-favored nation treatment with respect toimports and exports, customs duties, carriage of goods, and the imposition of importrestrictions for balance of payment problems." See also Charles R. Johnston, Jr., “ActionsAgainst Foreign Government Trade and Investment Practices: Section 301 of the Trade Act of1974, as Amended”, in Law and Practice of United States Regulation of International Trade,Booklet 4, 26-28 (1995).
217
bring a formal complaint to the OECD itself. Under Article 16 of the OECD Capital Code, if
a Member feels that the liberalization measures taken or maintained by another Member are
frustrated by "internal arrangements" it may "refer to the Organization," that is, to the OECD.
If the OECD finds that the internal arrangements do frustrate the liberalization measures, it
may "make suitable suggestions with regard to the removal or modification of such
arrangements." Similarly, under Article 17, if a Member feels that another Member has
retained, introduced or reintroduced restrictions on capital movements contrary to the
provisions of the Code, it may make the same reference.
Kodak admits that the FCN Treaty and the OECD Capital Code are "trade
agreement{s}" for the purposes of Section 301. Consequently, because both the FCN374
Treaty and the OECD Capital Code contain express dispute resolution provisions, USTR must
exhaust these procedures before taking action.
Berkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d 263 (2d Cir. 1979) cert. denied,375
444 U.S. 1093 (1980) (emphasis added).
The Sixth Annual Robinson Report: The U.S. Consumer Imaging Market in 1993376
with Forecasts for 1998, Table 3-9 (hereinafter "1993 Robinson Report"); IndustrialMarketing Research, Inc., Continuing Consumer Survey, Copyrighted Report on 35mmCamera Film, 1994 (hereinafter "1994 Industrial Marketing Research"). We note that thesmall difference between Kodak's color film market share figures reported here and thosecited by Kodak in the Consent Decree proceeding (67 percent by volume) consists of graymarket imports. In the Consent Decree proceeding Kodak based its figures solely on its U.S.shipments, conveniently ignoring the fact that a demand for "gray market" Kodak film --Kodak film manufactured/sold overseas and imported and distributed in the U.S. by someoneother than Kodak -- does exist in the U.S. market. Kodak gray market imports account forabout 3 percentage points of U.S. volume. (Robinson Report, Table 3-9.) Testimony ofProfessor Hausman, Consent Decree Trial Transcript at 510-11. Testimony of StephenLogsdon, Consent Decree Trial Transcript at 942.
218
VI. EXAMINATION OF KODAK'S BEHAVIOR IN THE U.S. MARKETPROVIDES A CRITICAL BENCHMARK AGAINST WHICH TOJUDGE KODAK'S ALLEGATIONS ABOUT FUJIFILM'SBEHAVIOR IN THE JAPANESE MARKET
The pot calling the kettle black. People who live in glasshouses shouldn't throw stones.
Kodak's behavior in its home market reveals just how apt old cliches can be. Kodak
dominates all aspects of the U.S. market for photographic products. As a United States Court
of Appeals has observed:
{Kodak} provides products and services covering every step in thecreation of an enduring photographic record from an evanescent image. Snapshots may be taken with a Kodak camera on Kodak film, developedby Kodak's color print and processing laboratories, and printed on Kodakphotographic paper. The firm has rivals at each stage of the process, butin many of them it stands, and has long stood, dominant.375
Kodak currently has:
70 percent of the color film market (75 percent by value) ;376
See 1993-1994 International Photo Processing Report at 7-2; Affidavit of Margaret377
Weston, dated June 22, 1992, submitted to U.S. District Court Western District of New York.
1993-1994 International Photo Processing Report at 6-15.378
1994 Industrial Marketing Research; 1993 Robinson Report, Table 3-9.379
We note that the difficulty of competing against Kodak's market power in the U.S. isnot limited to foreigners. Take the example of Polaroid. When Polaroid decided to enter theamateur film market it declined to do so as a manufacturer and instead decided to purchasefilm from the 3M Company and to market it as Polaroid film. In the four years since Polaroidhas entered the market as a distributor only, and despite its very high name recognition in theU.S. market, it has attained merely a 2.2 percent share of the market, with a major portion ofthis share resulting from Wal-Mart's marketing of Polaroid film. See Testimony of StephenLogsdon Consent Decree Trial Transcript at 914-916, 933.
GAF, another U.S. firm with a long history in amateur film and other photographicproducts, was unable to compete against Kodak at all; it left the photographic business in
(continued...)
219
70 percent of wholesale photofinishing ;377
60 percent of the color paper market ;378
An examination of the competitive dynamics in the U.S. market demonstrates that
Kodak employs a panoply of practices to maintain its dominance and keep its competitors out
of the market. As detailed below, Kodak maintains its dominant position in the U.S. market
through exclusive agreements, tying, bundling and other practices that are specifically
designed to foreclose competitors' access to shelf space or market participation and lock in
retailers to Kodak's products and services at every stage of the photo-imaging process.
Fujifilm's experience in the U.S. market illustrates the difficulty in establishing a
distribution and marketing network in the face of Kodak's dominant position and the practices
Kodak employs to maintain that position. Fuji Photo Film U.S.A., Inc. was incorporated in
1965 and commenced distribution in competition with Kodak in 1970. In the 25 years since
Fujifilm's entry into the U.S. amateur film market, Fujifilm has only gained a 10-12 percent
market share.379
(...continued)379
1977. Brock, "Market Control in The Amateur Conventional Photography Industry," Ph.D.Dissertation (Michigan State University, 1981).
As explained in much detail in Sections I and II, Kodak in fact misrepresents and380
misunderstands Fujifilm practices in Japan. Consequently, we do not agree with Kodak'sallegation that any of Fuji's practices are anticompetitive.
220
An examination of Kodak's behavior in the U.S market not only highlights the utter
duplicity of Kodak's petition, but also provides a critical benchmark against which to judge
both Kodak's allegations about Fujifilm's behavior in the Japanese market and the actual
strength of Kodak's commitment to Japan. Kodak argues that something must be wrong in
Japan because Kodak's share in Japan is substantially less than Kodak's share in other regional
markets. Kodak alleges that Fujifilm's high market share in Japan (70 percent) must be the
result of allegedly anticompetitive Fujifilm practices. Yet, as noted above, Kodak has an
identical market share (70 percent) in the United States, its home market. In addition, the
Fujifilm practices that Kodak alleges hindered Kodak's success in Japan -- practices380
Kodak terms "anticompetitive" -- have parallels in Kodak's practices in the U.S. market.
Indeed, as detailed below, Kodak's practices in the U.S. market are more exclusionary.
In short, an examination of Kodak's behavior in the U.S. market provides a valuable
reality check on Kodak's charges. Ultimately, USTR cannot avoid the following question:
Should the U.S. Government condemn Fujifilm competitive practices in Japan that are much
less exclusionary than Kodak's practices in the U.S. market?
Phototron Corp. v. Eastman Kodak Co., 687 F. Supp. 1061, 1070 (N.D. Tex.), rev'd381
on other grounds, 842 F.2d 95 (5th Cir.), cert. denied, 486 U.S. 1023 (1988).
221
A. The U.S. Market Has Been Shaped By Kodak's LongHistory Of Domination In All Photographic Products
{T}he Court cannot ignore Kodak's long historyof anticompetitive behavior.381
Kodak is the dominant player in the U.S. photographic industry. Kodak's history
spans over a century. Throughout these many years Kodak has often been entangled in
antitrust litigation, as both Kodak's competitors and the U.S. Government have at various
times sued to stop Kodak's anticompetitive practices. Accordingly, to the extent that the
historical perspective included in the Kodak petition has any relevance when assessing current
Fujifilm behavior in Japan, a proper understanding of the current U.S. photographic market is
not possible without considering Kodak's century-long efforts to dominate the market for all
photographic products.
1. The early years: Kodak acquires its dominant positionthrough acquisitions
Since its founding in 1878, Kodak has dominated the photographic industry in the
United States. The central theme in Kodak's checkered history has been its persistent attempts
to leverage its market power in the film industry to control all aspects of the photographic
industry. Kodak's strategies have included price discrimination, horizontal and vertical
integration, and tying. As a result of its dominant position, as well as its aggressive efforts to
extend its market power in film into control of other industries, Kodak has -- nearly
continuously since its founding -- been entangled in private or government litigation. Indeed,
Kodak has spent the greater part of this century subject to government-imposed consent
decrees enjoining it from various anticompetitive practices.
Kodak's anticompetitive practices date back to the early 1900s. George Eastman's goal
of monopolizing the markets for film, paper, cameras and other supplies took off between
United States v. Eastman Kodak, 226 F.62, 63 (W.D.N.Y. 1915), appeal dismissed,382
255 U.S. 578 (1921).
Id. at 74-75.383
222
1902 and 1908. During this time, he acquired, at times under coercive conditions, no fewer
than 20 competitors that were afterwards dissolved and dismantled. Companies were often382
acquired on the condition that their officers not engage in competing businesses for 20-year
periods. Concurrently, Kodak monopolized the supply of paper by acquiring the exclusive
right to sell in the United States and Canada raw paper stock from European paper mills.
Kodak controlled the resale markets by fixing resale prices and forbidding dealers from
handling or selling competitors' goods. These restrictions were enforced by the payment of
special discounts to dealers that observed them. The special discounts were discontinued in
1908 but were replaced by exclusive dealership agreements, which among other things,
provided that dealers could only carry Kodak products. By 1915, 98 percent of all dealers
dealt exclusively in Kodak products. Kodak's acquisitions, coupled with its restrictive
covenants, created perpetual barriers to the entry of others into the trade.383
2. The 1921 Consent Decree: The U.S. Government attempts to rein Kodak in
The United States brought suit against Kodak to enjoin these anticompetitive practices.
The district court, in reviewing the panoply of restrictive trade practices engaged in by Kodak,
commented that:
Id. at 75.384
United States v. Eastman Kodak Co., No. A-51, Slip op. (W.D.N.Y. 1921).385
The consent decree was modified several times. In 1924 it was modified so as to386
include Defender Photo Supply company as a defendant upon its purchase of Kodak's brandof photographic paper. See United States v. Eastman Kodak Co., No. A-51 at 2(W.D.N.Y. May 8, 1924). The decree was again modified in 1926 so as to permit certainsales of Kodak companies to related entities. See United States v. Eastman Kodak Co., No.A-51, Slip op. at 4 (W.D.N.Y. 1926).
FTC v. Eastman Kodak Co., 274 U.S. 619, 620-621 (1927) (on appeal, the circuit387
court held that the FTC did not have authority to order divestiture).
223
{i}t is difficult to avoid the conclusion that the acquisition of variouscompanies was for the purpose of suppressing competition and infurtherance of an intention to form an illegal monopoly....{I}n viewof the fact that a majority of the plants were dismantled and thebusiness concentrated...it is evident that they were not actuallyrequired by {Kodak} in carrying on their business, but wereacquired with an idea of monopolizing trade.384
In 1921, following appeals through the United States Supreme Court, Kodak entered
into a consent decree (the "1921 Consent Decree") which, among other things, required
Kodak to divest itself of a number of factories, a photographic paper supply company, and a
dry plate company. Kodak was ordered to refrain from engaging in resale price maintenance
or employing "terms of sale." Kodak was also enjoined from monopolizing through385
mergers and acquisitions, purchasing downstream distribution businesses without disclosure,
and from marketing "fighting brands."386
During the 1920s the Federal Trade Commission took important enforcement actions
to force Kodak's divestiture of a manufacturer of cinematographic film. To counteract the
subsequent decline in share, Kodak acquired several laboratories to manufacture motion
picture prints, whose combined capacity exceeded that of all of the laboratories east of
Chicago.387
Eastman Kodak Co. v. Southern Photo Materials, 273 U.S. 359, 375 (1927). See also388
generally, K. Glazer and A. Lipsky, Unilateral Refusals To Deal Under Section 2 of theSherman Act, 63 Antitrust L.J. (Spring 1995).
Complaint, United States v. Eastman Kodak Co., No. 6450 (W.D.N.Y. Dec. 21,389
1954), at 2.
Id. at 7.390
224
In 1923, Kodak was sued by Southern Photo Material Company The plaintiff in that
case owned a retail photography store in Atlanta. Kodak acquired control of several
competing Atlanta retailers but failed to acquire the plaintiff's business. Kodak ultimately
refused to sell its goods to the plaintiff at the customary dealer's discount and would no longer
furnish Southern with goods except at retail prices. In other words, Kodak decided to
vertically integrate into retailing in Atlanta and refused to give wholesale terms to a retailer
who refused to sell out. The Supreme Court affirmed a jury verdict of monopolization
because "it could not be held as a matter of law that the defendant was actuated by innocent
motives rather than by an intention and desire to perpetuate a monopoly."388
3. The 1954 Consent Decree: The U.S. Government must stop Kodak again
Throughout the 1940s and 1950s Kodak engaged in a practice of tying its film sales to
its photofinishing services. Film was sold at a minimum unit price, set by Kodak, that
included the cost of photofinishing. At the time, Kodak occupied a 95 percent monopoly
position with respect to color film (both print and slide). By bundling the cost of film and389
processing, Kodak effectively monopolized the photo processing industry as well. Moreover,
Kodak's practice of setting minimum prices was alleged to constitute retail price maintenance
and therefore violate the 1921 Consent Decree.390
Thus, again in 1954, the United States was forced to add additional claims to its
original 1915 suit in an attempt to restrict Kodak's market behavior. Kodak entered into
another Consent Decree (the "1954 Consent Decree") prohibiting resale price maintenance
United States v. Eastman Kodak Co., 1954 Trade Cas. (CCH ¶ 67, 920 (W.D.N.Y.391
1954).
Revere Camera Co. v. Eastman Kodak Co., 81 F. Supp. 325, 327 (N.D. Ill. 1948).392
J. Sidak, Debunking Predatory Innovation, 83 Colum. L. Rev. 1139 n.64 (1983).393
See Berkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d 263 (2d Cir. 1979); 394
Foremost Pro Color, Inc. v. Eastman Kodak Co., 703 F.2d 534 (9th Cir. 1983), cert. denied65 U.S. 1038 (1984); H.A.B. Chem. Co. v. Eastman Kodak Co., 198-1 Trade Cas. (CCH)¶ 63, 912 at 75, 746 (C.D. Cal 1980); GAF Corp. v. Eastman Kodak, Co., 519 F. Supp. 1203(S.D.N.Y. 1981).
225
and tying. The decree required Kodak to divest itself of a portion of its photofinishing labs
and to affirmatively assist others in processing color film subject to a royalty. This measure
sought to compensate the industry for decades of monopolization of the processing
industry.391
4. Kodak's practices cause multiple allegations of misconductfrom its competitors
Beginning in the 1940s and continuing at least through the 1970s, Kodak attempted to
monopolize the motion picture film equipment and supplies industry. Its practices in
targeting this industry resulted in a number of private suits. In 1948, the Revere Camera
Company charged Kodak with discriminatory pricing and breach of a contract to supply
Revere with film for use in the Revere Camera. In 1973, Bell & Howell claimed that392
Kodak had monopolized the market for movie and still cameras by a long series of
anticompetitive acquisitions. To settle the suit, Kodak agreed to pre-disclose film and
cartridge specifications to Bell & Howell as least 18 months prior to the introduction of new
products.393
A number of suits in the late 1970s and 1980s alleged that Kodak monopolized
camera, supplies, and photofinishing markets by leveraging its monopoly in the film
industry. Perhaps the most notable was Berkey Photo, Inc. v. Eastman Kodak Co. In 1973,394
Berkey Photo sued Kodak for a wide variety of antitrust violations alleging that "every aspect
Berkey Photo, 603 F.2d at 267.395
Id.396
Berkey Photo, 603 F.2d at 267. The Court noted that Kodak and Berkey "stand in a397
complex multifaceted relationship, for Kodak has been Berkey's competitor in some marketsand its supplier in others." Id.
Id. at 268.398
Id. at 309.399
The court held that no anticompetitive conduct occurred by introducing a new film400
format simultaneously with new film. Id.
226
of {its relationship/association with Kodak} has been infected by Kodak's monopoly power in
the film, color print paper, and camera markets, willfully acquired, maintained, and exercised
in violation of § 2 of the Sherman Act." In particular, in some of its claims, Berkey alleged395
that Kodak had leveraged its monopoly power from the film market into the camera market
and into the photofinishing market, and that Kodak entered into secret agreements with
certain flash manufacturers that prevented other camera makers from competing in the
production of cameras. The Court of Appeals noted that Berkey's lawsuit was "one of the396
largest and most significant private antitrust suits in history." After more than four years of397
pretrial maneuvering, the trial got under way in July 1977. "Despite the daunting complexity
of the case -- the exhibits numbered in the thousands -- Kodak demanded a jury." The398
trial ran almost continuously for more than eight months. The "jury found for Berkey on
virtually every point," awarding damages totalling more than $37.6 million before trebling.
The Court of Appeals affirmed the conspiracy claims, upholding the jury's verdict. 399
With respect to the leveraging claims, the court remanded for new trials, except on the camera
market claim which it dismissed. In commenting on Kodak's broad attack on the trial, the400
Court of Appeals stated "we cannot accept Kodak's contention that a properly charged jury
Id. at 268. "The jury found monopolization or other anticompetitive conduct in no401
fewer than five distinct markets within amateur photographic industry, and in severalinstances Kodak was held to have misused its control in one market to disadvantage rivals inanother." Id. at 269.
Id. at 270.402
Id. at 271. Kodak sold its color film with photofinishing charges included. Id. at 270. 403
Kodak kept a "grip" on reprints by refusing to sell paper or chemicals to rival photofinishers. Id. at 270, n.9.
Id. at 270.404
Id. at 306.405
227
could not find monopolization of any of the relevant markets and resulting damage to
Berkey."401
Most interesting are the Court of Appeals findings in Berkey with respect to the
competitive dynamics of the market for photographic products. The Court of Appeals noted
that in 1942, Kodak introduced the first amateur color film, and from then on dominated color
film. The Court of Appeals further pointed out that until the 1954 decree broke Kodak's402
lock on photofinishing, which Kodak had tied to film on which it had market power, Kodak's
vertical integration had prevented the development of a market for color paper.403
In affirming the jury's finding that Kodak still retained market power in various facets
of the photographic business, including film and color paper, the Court noted that Kodak
essentially admitted during the trial that, even as late as the 1970s, "the film market . . . has
been a market where there has not been price competition and where Kodak has been able to
price its products pretty much without regard to the products of competitors." The Court404
also noted that in a written report, Kodak's own expert in the Berkey case, Professor Merton J.
Peck, a former chairman of the Yale Economics Department, had "conceded that the
anticompetitive conduct found in the court's opinion {in 1915} could not be ruled out as at
least a partial explanation of Kodak's present market position."405
Eastman Kodak Co. v. Image Technical, Inc., 504 U.S. 451, 481 (1992).406
Id.407
See Letter from U.S. Justice Department to David Lascell, Esq. dated November 4,408
1993. See also Government's Memorandum in Opposition to Motion to Terminate ConsentDecree dated June 24, 1993.
228
In 1992, Image Technical Services and a number of independent service organizations
("ISO") sued Kodak for its refusal to sell products to ISO's and its refusal to sell parts to
owners of Kodak equipment unless they agreed not to use ISO's to service their equipment. 406
The action proceeded to the U.S. Supreme Court which agreed with the Ninth Circuit that the
refusal to sell parts to owners constituted illegal tying and that Kodak had engaged in a
monopoly by refusing to sell parts to ISO's. Kodak had failed to prove a legitimate407
business reason for its exclusionary practices.
5. U.S. Government opposes Kodak's attempt to terminate the Consent Decrees
In May 1993, Kodak filed a motion in the U.S. District Court in Rochester seeking
termination of the 1921 and 1954 Consent Decrees. In its motion Kodak argued that the
restraints imposed by the Consent Decrees had become obsolete given various changes that
had occurred in the photographic industry. The U.S. Government opposed Kodak's motion,
arguing that, notwithstanding the increased competitive atmosphere in the photographic
industry, Kodak's dominance was still directly related to the economic advantage it gained
prior to the enactment of both Consent Decrees. The U.S. Government argued that the
Consent Decrees should therefore remain in place.408
United States v. Eastman Kodak Company, 853 F.Supp 1454 (W.D. N.Y. 1994). In409
his opinion, Judge Telesca agreed with Kodak's argument that the relevant market for filmwas worldwide. Given Kodak's worldwide share of 36 percent, and the technologicalinnovativeness of all the major competitors, Judge Telesca found that Kodak did not havemarket power. (By a similar test, Fujifilm, with a 34 percent share of worldwide film sales,does not have market power.) Judge Telesca also considered whether Kodak had marketpower if the relevant market were limited to the U.S. where Kodak's share is much higher (70percent). He found that Kodak does not possess monopoly power in the U.S. because of twofactors: (1) consumers are price sensitive (based on an econometric study of consumerpurchases in food and discount stores) and (2) other suppliers can increase their capacity ifKodak restricted output or raised its prices. As discussed in Part D of this section, Kodak hasnot applied these tests to its study of Fujifilm's market power in Japan. If it did, it wouldlikely find that Fujifilm does not have market power. To cite just one example, the evidenceshows that when import prices fell relative to Japanese domestic prices in 1980 and 1981,Kodak's share increased. "Privatizing Protection" at 143-144.
229
In 1994, after a trial, Judge Telesca sided with Kodak and terminated both Consent
Decrees. The U.S. Department of Justice has appealed Judge Telesca's decision to the409
Court of Appeals for the Second Circuit, where it is still pending.
Upon reviewing its long history, there is no question that Kodak's enormous size and
dominant market position in the United States is a result, in part, of its innovative technical
advances over the years. Kodak's success story, however, is replete with exclusionary,
discriminatory, and monopolistic practices that cannot be justified by legitimate business
concerns. Kodak's conduct over the past century has been at best aggressive, and at worst
anticompetitive and illegal under the prevailing law of the United States. Its practices have all
but excluded any true competition in the United States for film, photoprocessing, and
supplies.
B. Kodak Continues To Do Whatever It Takes To Maintain Its Dominance
Kodak's history has not been left in the past. Its reputation for doing whatever it takes
to maintain its dominant position in the market has if anything been enhanced in recent years.
See Testimony of Stephen Logsdon of Polaroid Corporation, Consent Decree Trial410
Transcript at 922-23.
Transcript of Proceeding International Trade Commission, Staff Conference,411
September 22, 1993 at 123 (emphasis added).
See United States v. Eastman Kodak Company, 853 F.Supp. 1462 (1994) (Thomas412
Froom, merchandise manager for the Army and Air Force Exchange Service "testified thatKodak offered AAFES a premium to stock Kodak film exclusively, and also testifiedregarding Kodak's Volume Incentive Program ("VIP Rebate"), which rewards retail outletsthat sell large volumes of Kodak film.").
230
In each of the principal photographic markets -- color film, color paper, and photofinishing --
Kodak continues to employ practices designed to exclude or limit competition from its rivals.
1. Kodak's practices in the color film market
a. Kodak's exclusive dealing arrangements
Over the years, and particularly in recent years, Kodak has consistently solicited and
obtained exclusive arrangements with retailers of color film. There are three principal ways
Kodak obtains exclusive arrangements. First, Kodak makes direct payments to those retailers
who agree to purchase only Kodak brand color film. In addition to the Consent Decree410
trial, public evidence of this practice was presented at a hearing before the International Trade
Commission in September 1993. Dave Reynolds, the Vice President of Photo Merchandising
at Genovese Drug Stores, testified:
Indeed I remember a few years ago I sent out to all paper suppliers ourrequirements. Kodak's response was to propose a deal in which allproducts would be bundled together. The proposed deal was that wewould purchase from Kodak all our paper needs, all our chemistry needs,and that we would agree to offer in our stores only Kodak branded film,batteries and video tape. In exchange Kodak offered us a fair amount ofmoney for advertising as well as favorable equipment loans.411
Second, Kodak has developed and used a volume incentive rebate program ("VIP
Rebate") to obtain exclusive agreements with retailers. Under the VIP Rebate, retailers are412
See Kodak's Trade Circular, January 1993 (explaining Kodak's Volume Incentive413
Plan) provided in Exhibit 24. See also Testimony of Stephen Logsdon of PolaroidCorporation, Consent Decree Trial Transcript at 919-923.
Testimony of Stephen Logsdon of Polaroid Corporation, Consent Decree Trial414
Transcript at 920-922.
Testimony of Thomas Froom of the Army and Air Force Exchange Service, Consent415
Decree Trial Transcript at 1083-88;Testimony of Paul Hudak of Fuji Photo Film U.S.A.,Consent Decree Trial Transcript at 1094-95, 1271-73.
Testimony of Margaret Weston of Konica, Consent Decree Trial Transcript at 1154.416
See Exhibit 25, which provides promotional packages and stuffers purchased at Caldor417
on June 17, 1993, with photofinishing coupons for the purchase of Kodak film and Eckerdadvertisement for free photo processing.
231
awarded a 4 percent rebate if they purchase 100 percent of the unit volume they purchased the
previous year. In a stagnant market, such as the market throughout the 1990s, retailers413
cannot easily meet their prior year's sales level. In some instances, retailers who participate in
the VIP Rebate are forced to sell such a high volume of Kodak film to meet their VIP-
required levels of sales that they cannot risk selling non-Kodak film. In the event that the414
retailer cannot attain the level of sales needed to earn the 4 percent rebate, Kodak's practice
has been still to grant the retailer the rebate on the condition that the retailer agrees not to sell
competing brands of film in ensuing years. Either way, by utilizing such programs, Kodak415
has effectively excluded competitors from many of the largest national retailers.
Third, Kodak induces retailers to enter exclusive agreements by offering the retailer
dedicated packaging in conjunction with huge cross-promotional discounts for Qualex-
furnished photofinishing. The packaging includes special bonus and value multipacks of416
film containing, inter alia, significant discounts on color film processing for Kodak film.
Recent discounts offered in Kodak "three packs" through exclusive retailers include as much
as $20 worth of discount coupons, roughly double the value of the film itself, as well as "free"
"Colorwatch" photofinishing with the purchase of Kodak multipacks.417
We note that the list provided here is just a sampling. Additional information and418
examples will be provided in confidence to USTR. Most of these retail outlets are among thetop supermarket, drug, and discount chains in the U.S. (See Fortune, May 15, 1995, at F51-F53).
232
b. Kodak's efforts to limit Fuji film display visibility
For Fujifilm, persuading a customer to carry its film is only half the battle. Upon
gaining entry to the store, Fujifilm must then confront Kodak's extensive efforts to limit
Fujifilm's display visibility. When Fujifilm and Kodak appear in the same stores, it is rare
that Fujifilm's display is as prominent as Kodak's. Indeed, as with the exclusivity
arrangements discussed above (and identified below), Kodak often pays extraordinary
placement fees that Fujifilm is simply unable to match.
This is especially true with respect to check-out counters. Film is considered an
"impulse item," i.e., most people purchase film while shopping for something else. Therefore,
the check-out counter is among the most desirable display locations. With respect to several
major retailers, Fujifilm's repeated attempts for placement at the check-out counter have been
rebuffed. Fuji film is relegated to a far less prominent location. Fuji-USA salespeople have
been informed that Kodak was willing to pay anything to block Fujifilm's access to the check-
out counter.
c. Kodak's exclusionary practices have been very successful
Through direct payments to retailers or by use of its VIP Rebate, Kodak has often
succeeded in achieving exclusive dealing arrangements with important large volume retailers,
and thereby has prevented Fuji brand film from reaching the consumer. Kodak's successes
include the following:418
ECKERD DRUG: A chain of over 1,700 drug stores throughout the southeast andsouthwest regions of the United States, Eckerd has refused to carry Fuji film for thepast 20 years. Eckerd is very tight-lipped regarding its reason for refusing to sell Fuji
Supporting documentation will be provided in confidence to USTR.419
Supporting documentation will be provided in confidence to USTR.420
Supporting documentation will be provided in confidence to USTR.421
Supporting documentation will be provided in confidence to USTR.422
Testimony of Joseph Warren of 3M Co., Consent Decree Trial Transcript at 1005-423
1006.
Testimony of Paul Hudak of Fuji Photo Film U.S.A., Consent Decree Trial Transcript424
at 1289, lines 14-16. Disney theme parks account for about five percent of all snapshots. (continued...)
233
film; buyers simply say they are constrained by "contractual" obligations withKodak.419
CALDOR: A discount store chain popular in New England, Caldor consists of174 outlets. Caldor representatives have told Fujifilm sales people for the lastnine years that they are unwilling to carry Fuji film, in part because they havedecided only to carry one brand product and one low-cost product. Caldor'slow-cost "fighting brand" happens to be manufactured by Kodak (Kodak's"VR" film), which insists on exclusivity as a condition for carrying its low-costfilm.420
PUBLIX SUPERMARKETS: Publix is a chain of 470 grocery storesthroughout Florida. Fujifilm has never been able get its film on Publix shelvesdue to the VIP rebate program, other ties to Kodak, and incentives provided onphotofinishing by Qualex.421
BRADLEES: Bradlees is a chain of 130 stores. Fujifilm salespeople recentlylearned that Bradlees has entered into an exclusive arrangement with Kodak tooffer only Kodak branded film in exchange for a cash payment "in the high sixfigures."422
K-MART: Kodak recently offered K-Mart a direct payment of $8 million to excludeFocal brand film (manufactured by 3M) from K-Mart stores.423
THEME PARKS: Fujifilm has been rejected in all of the major theme parks,including Disney World, Disney Land, Sea World, Busch Gardens, andUniversal Studios. In at least one instance Fujifilm has been told that the424
(...continued)424
Clare Ansberry, Kodak and Disney Mutual-Exclusivity 15-Year Pact Set, The Wall StreetJournal, April 20, 1989.
Supporting documentation will be provided in confidence to USTR.425
Testimony of Mr. Thomas Froom of the Army and Air Force Exchange Service,426
Consent Decree Trial Transcript at 947, 1083-1095.
Supporting documentation will be provided to USTR in confidence. See427
Announcement of Hospitality Franchise Systems Inc., July 5, 1995 ("Hospitality FranchiseSystems Inc. ("HFS"), the world's largest hotel franchisor, has entered into a co-marketingagreement with Eastman Kodak Co. the five year agreement will allow hotel guests topurchase Kodak products while staying at participating HFS brand hotels: Days Inn, HowardJohnson, Park Inn International, Ramada, Super 8 and Villager Lodge.")
234
theme park has an exclusive contract with Kodak based on a $1.55 millionpayment every three years.425
ARMY AND AIR FORCE EXCHANGE SERVICE (AAFES): AAFES receivesrebates equalling $1.1 million to $2.7 million per year under Kodak's VIP rebateprogram based on the volume of Kodak film purchased by AAFES only if AAFESsold Kodak brand film exclusively.426
AIRPORT HOTEL CONCESSIONAIRES: Kodak has successfully obtainedexclusivity at many of the major hotels across the country, including all Marriott/Hosthotels and W.H. Smith hotels.427
These are not the only large accounts from which Kodak has excluded Fujifilm over the
years. Others include Ames (308 stores), Wegmans (48 stores), Kerr Drugs (98 stores), and
Perry Drug (130 stores), just to name a few.
We note that in procuring these exclusive dealing (or display-limiting) arrangements,
Kodak does not lower the per-unit price of its film products to the retailer. Rather, it buys the
exclusivity through lump sum payments to the retailer. As a practical matter, many retailers
will still attempt to obtain their usual mark-up over unit costs. Thus, the receipt of substantial
rebates does not directly lead to lower prices to consumers under Kodak's practice.
Testimony of Stephen Logsdon of Polaroid Corporation, Consent Decree Trial428
Transcript at 922.
Testimony of Joseph Warren of 3M Co., Consent Decree Trial Transcript at 987-988.429
Testimony of Margaret Weston of Konica, Consent Decree Trial Transcript at 1163-430
1164.
Testimony of Paul Hudak of Fuji Photo Film U.S.A., Consent Decree Trial Transcript431
at 1290-1293.
Kodak has tremendous brand loyalty. As noted by the District Court, Kodak's own432
research shows that 50 percent of all Americans will only buy Kodak film, while an additional40 percent prefer Kodak film. United States v. Eastman Kodak Co., 853 F. Supp. at 1475. Consequently, it is completely impossible for any other brand to replace Kodak film on theshelf. If a U.S. retailer is going to sell film, it must, at a minimum, have Kodak brand film
(continued...)
235
Additionally, Kodak's control of 70 percent of the market and the sheer volume of film
Kodak sells enable it to offer these payments at levels that its competitors cannot match.
Kodak has the volume -- the large base of sales -- over which to spread its incentive
payments. Kodak's competitors do not. As Mr. Logsdon of Polaroid testified in 1994 in
District Court:
Question: Why can't you simply match the amount of whatever Kodak isoffering for exclusivity?
Answer: I think it's -- it's a factor if we were able -- if we had to matchthat amount of money with the limited share of volume that wehave, we would be in a philanthropic business which obviouslywe're not in. We don't have the margin generated to spend likethat.428
Similar testimony was offered by 3M, Konica, and Fujifilm. Kodak thus forces its429 430 431
rivals, if they hope to maintain the status quo, to match or exceed the absolute size of Kodak's
payments to the targeted retailer, even though every one of Kodak's rivals will have only a
fraction of the sales volume enjoyed by Kodak at that retailer from which to recoup its
matching payment. In short, when Kodak, with its dominant share, "competes" for432
(...continued)432
on the shelf.
In contrast, at the very most, Kodak alleges limited access to wholesalers/distributors433
in Japan.
Testimony of Paul Hudak of Fuji Photo Film U.S.A., Consent Decree Trial Transcript434
at 1355.
See Berkey Photo, 603 F.2d at 268-271.435
236
exclusiveness on the basis of lump sum payments, the competition is quickly over. The rival
cannot justify spreading an equivalent size payment over its much smaller volume of
business.
We also note that the above evidence demonstrates Kodak's actual or attempted
exclusion of its rivals from the marketplace at the retail level. Kodak's competitors in the
U.S. market do not have strong consumer brand loyalty. If they are not on the shelf,
consumers will not buy them. As a result, when Kodak has exclusivity in a particular retail
chain, it eliminates its competitors' access not only to those outlets but also to the customers
of those outlets. Kodak's exclusive dealing arrangements are, therefore, extremely433
successful because its rivals are directly denied access to consumers. As Mr. Hudak of Fuji-
USA testified in court: "The step between us and the consumer is the dealer . . . That's the
channel of distribution for film. And to the extent that someone prevents us from penetrating
that channel, we have no hope of ever getting to the consumer."434
2. Kodak's practices in the photofinishing and color paper markets
a. Kodak recaptures the market
In 1954, prior to the Consent Decree, Kodak had "a nearly absolute monopoly in color
photofinishing, maintained by leveraging its 95 percent share of total color film sales into
photofinishing by selling film with an advance processing charge." As the Court of435
Appeals for the Second Circuit has noted, Kodak's ability to parlay its film monopoly into
Id. at 270.436
Id. at 271.437
We note that Court of Appeals for the Second Circuit concluded that in 1979 Kodak's438
control of the color film and color paper markets "clearly reached the level of monopoly." Berkey Photo, 603 F.2d at 273.
See 1993-1994 International Photo Processing Industry Report, at 7-2.439
237
equivalent power in photofinishing, by selling film with an advance processing charge,
worked because "few customers would duplicate their costs to procure the services of a non-
Kodak finisher." Not surprisingly Kodak also controlled 95 percent of the photofinishing436
and color paper markets.
The 1954 Antitrust Consent Decree dramatically changed the structure of the color
photofinishing market. Pursuant to the Consent Decree, Kodak was enjoined from linking
photofinishing to film sales and was required to make processing technology and materials
available at reasonable rates. Indeed, as Kodak introduced new photoprocessing technology
over the years (i.e., photoprocessing for the 126 system in 1963, computerized automated
printing in 1973), independent photoprocessors were able to acquire the new technology and
(because of the prohibition against tying and photofinishing) have the volume to use it. As a
result, Kodak's share of the photofinishing market plummeted from 96 percent in 1954 to 10
percent in 1976, at which time there were more than 600 independent photofinishers in the
United States. Kodak's share of the color paper market was also reduced, to 69 percent in437
1975, but only to a low of 55 percent in 1983. 438
The success of the Consent Decree was fleeting. Kodak has now recaptured an
overwhelming majority of the wholesale photofinishing market, to the point Kodak now
controls more than 70 percent. Not surprisingly, Kodak's share of the color paper market439
has also improved. (Indeed, the prevailing thought in the industry is that Kodak initiated its
See 1993-1994 International Photo Processing Industry Report, at 7-2 ("The major440
sensitized materials manufacturers continue to buy photofinishing facilities, probably tomaintain market share for their color paper. Kodak has established itself as the world's largestphotofinisher.").
Testimony of Margaret Weston of Konica, Consent Decree Trial Transcript at 1142.441
See Photo Opportunity, Inc. (December 1987).442
238
campaign to acquire dominance in photofinishing to capture and maintain dominance in the
color paper market.)440
Kodak's dramatic recovery of market dominance has been achieved principally
through three strategies. First, Kodak waged an aggressive campaign to acquire most of the
once numerous independent photofinishers established after the 1954 Consent Decree.
Second, Kodak used its traditional dominance in color film as leverage to pressure retailers to
accept Kodak's Colorwatch program, which offers discounts and advertising dollars
conditioned on exclusive use of a photofinisher that only utilizes Kodak color paper and color
chemistry. Third, Kodak offered free equipment and other non-price incentives to land or
maintain color paper accounts. We discuss each of these market developments below.
(1) Kodak's campaign to acquire its color papercustomers
Kodak's campaign to become the dominant photofinisher really began in 1982. In that
year, Steve Bostic's American Photo Group (APG), a new photofinisher, started to execute a
simple strategy: bring together the best regional photofinishers to create a national
photofinishing company with attendant economies of scale. With very little of its own441
money, APG acquired ten photofinishing firms in rapid succession, assembling in five short
years a network of 20 photofinishing labs servicing retailers in every state but Hawaii. 442
The photofinishing industry was stunned. How could APG, a relatively new entrant
with limited capital, become such a major player in the industry? The answer came in 1987
Testimony of Margaret Weston of Konica, Consent Decree Trial Transcript at 1142.443
Interview with J. R. Algrin, former Senior Vice President for Operations at American444
Photo Group.
Interview with J. R. Algrin, former Senior Vice President for Operations at American445
Photo Group.
"Selling APG to Kodak had been a strong possibility from the beginning, admitted446
Bostic after the sale." Photo Opportunity, Inc. (December 1987).
See Photo Opportunity, Inc. (December 1987).447
Testimony of Margaret Weston of Konica, Consent Decree Trial Transcript at 1142.448
239
when APG was "sold" to Kodak: Kodak had essentially financed APG's acquisitions. The443
industry learned that all of APG's acquisitions had followed the same script. Following the
acquisition, APG would ensure that Kodak was the sole supplier of color paper to the new lab
and a principal source for new equipment. Kodak shipped the equipment and all of the lab's
color paper needs, and sent the bill to APG. APG, however, did not pay its color paper and
equipment bills. At the end of its five-year acquisition spree, APG had amassed more than444
25 million dollars of debt to Kodak. APG had no choice but to sell to Kodak.445 446
(Interestingly, Kodak "assisted" APG's decision-making process by acquiring the Fox
photofinishing network earlier in the year. Roughly the same size, Fox Photo was one of
APG's principal competitors. Within two months of becoming part of Kodak, Fox had taken
$2 million in sales from APG. APG then knew its days as an independent company were
numbered.)447
In 1988, following its acquisitions of APG and Fox, Kodak acquired an interest in
Colorcraft Corporation, then a subsidiary of Fuqua Industries. At that time, Kodak already448
operated 50 film processing plants and Colorcraft operated 41 such labs. Kodak and Fuqua
industries merged all their photoprocessing labs together in a joint venture known as "Qualex,
Inc." In a feeble attempt to hide behind a corporate veil, Kodak structured the deal so that it
owned only 49 percent of the voting rights of Qualex (Fuqua Industries owned the other 51
See Phototron Corp. v. Eastman Kodak, 842 F.2d 95 (5th Cir.), cert. denied, 486 U.S.449
1023 (1988).
Fuqua Seeking Stable Prices in Photofinishing, Atlanta Constitution, June 9, 1988.450
240
percent). The fine print, however, left no doubt who was in control. Fuqua's 1991 Form 10-
K filed with the Securities and Exchange Commission described the nature of the
Kodak/Qualex relationship as follows: (a) Kodak owned 50 percent of the equity in Qualex,
and 49 percent of the voting rights; and (b) Kodak not only had three directors on Qualex's
board but also stipulated that "certain decisions regarding Qualex's operation are to be
approved by a majority of the board, including at least one of Kodak's representatives."
Moreover, under the terms of its agreement with Fuqua, Kodak had the contractual option to
gain a veto over all of Qualex's corporate decisions and to deny Fuqua the right to consolidate
Qualex's operations on Fuqua's balance sheet. Finally, Kodak ensured that Peter Fitzgerald, a
former Kodak executive, served as Qualex's CEO. In any event, in 1994 even Kodak gave up
the pretense of the corporate veil as it purchased from Fuqua the remaining interest in Qualex.
The proposed joint venture was controversial enough to be challenged in court. 449
Although initially an injunction against the merger was granted, it was subsequently lifted by
the Court of Appeals for the Fifth Circuit. Kodak swiftly completed the merger and,
ironically, later resolved the Phototron litigation by acquiring Phototron as well.
The merged entity, Qualex, Inc., became the first truly national photofinishing network
since Kodak's pre-1954 system. As reported in the press at the time:
Qualex combined the nation's two biggest wholesale photofinishers. With5 billion prints processed per year and projected annual sales of $600million, Druham, N.C.-based Qualex holds one fourth of the U.S.photofinishing market and three-fourths of the wholesale photofinishingmarket. Five of the six biggest wholesale photofinishers of 1985 are nowpart of Qualex.450
From 1989 through 1994 Kodak/Qualex continued its spate of acquisitions of major
photofinishers. Indeed, from 1986-1994 Kodak/Qualex acquired more than 122
Testimony of David McEowen of Fuji Trucolor, Consent Decree Transcript at 1232-451
1233.
241
photofinishing labs. As importantly, Kodak's campaign was not about simple growth, but
rather complete control. In many instances, once Kodak/Qualex acquired a photofinisher and
its vital customer list, it simply shut the plant down, dismissed the employees, and took it out
of business. Indeed, most of the photofinishers that ended up being acquired by Fujifilm451
only did so because they did not want to see their plants shut down. The experiences of
McJon's Photo in Indiana and Elko Photo in Kansas City are telling.
McJon Photo was started by H. D. McEowen in 1964. Mr. McEowen became
involved in photography as a lab technician developing x-rays on a hospital ship during
World War II. Following the war, Mr. McEowen developed black and white photos for a
camera store in Fort Wayne. Following the 1954 Consent Decree, Mr. McEowen managed a
wholesale photofinishing lab for the camera store until 1964 when he purchased color
photoprocessing equipment and opened his own wholesale photofinishing lab, McJon. Over
the years, McJon Photo began servicing more and more camera and drug stores, and the
business grew. At the time Mr. McEowen's son, David McEowen, took over the business in
1977, McJon had become one of the area's largest photofinishers. By 1984, with David
McEowen at the helm, McJon had become one of the largest independent wholesale
photofinishers in the Midwest, with 200 employees. Notwithstanding its success, a few years
later David McEowen knew McJon would not be able to continue as an independent. As Mr.
McEowen testified in 1993:
I sold McJon Photo to Fuji Film in 1992. At the time we were one of thefew remaining independents. For many years I had resisted the trend. Ivalued my independence, but eventually I could not ignore thefundamental change taking place. As Qualex became larger and larger, itbecame more and more apparent that smaller independent wholesalerswould not be able to compete effectively in the long term.
Qualex's volume was too large and its photofinishing pricing tooaggressive for us to compete. The only way to survive was to link up with
Transcript of Proceeding, Staff Conference of International Trade Commission,452
September 22, 1993 at 116-117.
Interview with Kenneth W. Kurz.453
242
one of the manufacturers. The question was not whether to link up, butonly with whom and when?
I could have sold to Qualex. They tried to buy McJon Photo. But Iultimately chose Fuji. One of the main reasons was jobs. I had just seenQualex buy up wholesale operations in our area just to close them down,eliminate the local competition, and consolidate the photo finishing intoone of their other operations in the same area.
I was certain that Qualex would close down McJon Photo as well. I alsofelt certain that Fuji would continue the operations and save those jobs. For me, the choice was simple.452
Elko Photo had a similar experience. Elko Photo was established in 1918 in Kansas
City as a basement photo processing laboratory, by Carl Kurz Sr., and was subsequently
managed by three generations of Kurz's. In 1992 Carl Kurz Jr. (CEO) and Kenneth W. Kurz
(President) concluded that the era of the independent photoprocessor was coming to a close.
Elko Photo received bids of purchase from both Qualex and Fujifilm. There was absolutely
no doubt that Qualex intended to shut down the lab, as Qualex already had a Kansas City lab;
the issue was discussed openly. Indeed, "Qualex specifically requested Elko Photo to
terminate all employees, prior to the sale closing, so Qualex wouldn't have to." Although
Qualex was willing "to pay whatever it took," the Kurz's accepted Fujifilm's proposal that
would continue the photofinishing operations. 453
The eight Trucolor labs in California and the Southwest and Union Photo in New
Jersey all had the same experience. In each case the choice between selling to Kodak or
selling to Fujifilm was not hard. Selling to Kodak meant decades of a family owned and
managed business would be wiped off the map. Selling to Kodak meant hundreds of
employees would be thrown out into the street. In contrast, selling to Fujifilm meant saving
jobs.
See 1993-1994 International Photo Processing Industry Report, at 2-9. We note that454
although the 1993-1994 Photo Processing Industry Report states that there are 55 U.S.companies providing wholesale photofinishing services, at the Consent Decree trial MargaretWeston, president of Konica Quality Photo East, estimated that, in fact, there are only 30companies of any significant size.
See 1993-1994 International Photo Processing Report, at 7-13.455
Id.456
See Letter from Gary Christophersen, Seattle Film Works, submitted to U.S. District457
Court, Western District of New York ("Here in the Pacific Northwest, only Qualex haswholesale labs within 300 miles of those companies which purchase wholesale
243
Overall, the consolidation of wholesale photofinishers has been rapid and dramatic. In
1981 there were 690 wholesale photofinishers operating 900 labs; by mid-1994 there were
only 55 wholesale photofinishers operating 140 labs. 454
When the need for the Qualex charade ended with Judge Telesca's decision in May
1994 terminating the Consent Decrees, Kodak quickly exercised its option to purchase the
remaining interest in Qualex. Now all of Qualex's photofinishing labs are wholly owned by
Kodak. With the acquisition, Kodak is now the world's largest photofinisher. In the U.S.
market, Kodak is the absolute dominant force. Kodak/Qualex owns nearly 42 percent of all
(140) the wholesale photofinishing labs in the United States. Kodak/Qualex's 52 plants455
dwarf Fuji Trucolor's 16 plants. 456
To appreciate the extent of Kodak/Qualex's presence in the market, however, one must
also consider geographic coverage. Kodak/Qualex, for example, provides far greater
coverage than either Konica or FujiTrucolor, the next largest wholesale finishers. Exhibit 26
provides the estimated geographic location of each wholesale photofinishing plant of
Kodak/Qualex and FujiTrucolor and the geographic range of each -- about 200 miles.
Whereas Kodak/Qualex has at least one plant in every geographical area in which Fuji
Trucolor is located, many of Kodak/Qualex's plants are in geographic areas not at all served
by FujiTrucolor and thus do not compete with FujiTrucolor.457
(...continued)457
photofinishing.").
See Participant Agreement Form For Kodak Colorwatch System provided in458
Exhibit 27. See also Letter from Nick Takton, President of Sundance Photo Inc., datedJune 23, 1993 submitted to U.S. District Court for the Western District of New York;Affidavit of John R. Mapley, President of Nashua Photo, dated June 23, 1993, submitted toU.S. District Court for Western District of New York.
See Exhibit 27, Participant Agreement Form For Kodak Colorwatch System.459
See Exhibit 28, "A Word About Technet Center" in Colorwatch brochure.460
244
(2) Kodak's Colorwatch program, along with Kodak'sspecial packaging that bundles film andphotofinishing, ensure and maintain exclusivity acrossall photographic products
Kodak's Colorwatch program is a powerful marketing strategy adopted by Kodak to
leverage its dominance of the color film market into the photofinishing and color paper
markets. Under the Colorwatch program, participating retailers are required to sign an
agreement pledging that they will use the services of Qualex or other Kodak-authorized
photofinishers (which are required to use only Kodak suppliers). Alternatively, if they
process film themselves, the retailers pledge to use only Kodak paper and chemicals in their
own photofinishing operations. In addition, all Colorwatch participants must agree to458
install Kodak's Technet computer management software, which often links the lab's
operations directly to Kodak. The software provides a benefit to the photofinisher customer459
by allowing the photofinisher "access to Kodak's Central Computer Service" to obtain460
quantitative comparative measurements for quality control, and provides a benefit to Kodak
by allowing Kodak to keep tabs on its customer's operation.
In return, participating retailers are permitted to use Kodak Colorwatch signs and other
promotional materials and to take advantage of the enormous Colorwatch advertising budget.
Participating retailers also receive various in-store promotional aids such as retailer-dedicated
See, e.g., Testimony of David McEowen of Fuji Trucolor, Consent Decree Trial461
Transcript at 1217 (Fuji TruColor lost Target as a customer due to Target's participation inColorwatch).
245
packaging and special value packs with photofinishing coupons redeemable only with the
specified retailer. Fujifilm also believes that participating retailers receive additional
monetary inducements such as market development funds or direct payments.
A significant part of Kodak's Colorwatch program is a very intensive media campaign
to convince the ultimate consumer that the benefits of using quality Kodak film will be lost
unless the consumer insists that the pictures are printed on Kodak color paper after the film is
developed by a Kodak photofinisher. The media campaign promoting the Colorwatch
program has been massive. There are probably very few consumers in the United States who
have not seen the Bill Cosby ads promoting Colorwatch and Kodak. The media campaign
attempts to convince the ultimate customer to select photofinishers on the basis of whether
Kodak
paper is used.
The Colorwatch program has been very successful for Kodak. The direct goal of the
media campaign for the Colorwatch program, convincing the ultimate consumer to patronize
only photofinishers who use Kodak color paper and chemistry, may not have had the success
hoped for by Kodak. Fuji-USA sales personnel have found, however, that the Colorwatch
campaign has been quite successful in promoting Kodak photofinishing and color paper sales.
Very simply, although Kodak may not have been successful in selling many of the ultimate
consumers, Kodak has been successful in convincing the executives at the retailer level who
purchase photofinishing services that they are taking a risk if they are not part of the
Colorwatch program. Indeed, in 1988 Guardian Photo (the second largest photofinisher at461
that time after Qualex) was able to take much of K-Mart's business away from Konica by
switching from Agfa to Kodak color paper and chemistry and thereby becoming a Colorwatch
member. Guardian Photo knew that the K-Mart executives were very enamored of the
Colorwatch program.
Retailers benefit from the need of a photofinishing customer to visit the store twice;462
once to drop off the film for processing and the other to pick it up. Each visit creates theopportunity to sell the consumer other products.
246
Due to the significant Kodak brand recognition at the consumer level, Kodak's
extensive advertising campaign, and the retailer's desire to promote store visits by
photofinishing clientele, retailers are naturally attracted to the Kodak Colorwatch program. 462
It does not matter that other brands of color paper and chemistry may be of equal or superior
quality and may be sold at similar or lower prices. With respect to wholesale photofinishers,
the danger is that their refusal to participate in the Kodak Colorwatch program may cause
them to lose current and future business from retailers who do elect to participate in the
program.
There is no question that Kodak (and Qualex) have used and continue to use their
dominant position in the industry to convince photofinishers to accept the Colorwatch
program. Fujifilm presented evidence to the Department of Justice that one wholesale
photofinisher was threatened with the loss of a major account (a participating retailer) when it
considered using lower cost non-Kodak chemicals.
There is also little doubt that the photofinishing business plays a very important role in
generating film sales. Indeed, a maxim in the industry is "photofinishing drives film sales."
Retailers are now very interested in "cross merchandising": the ability of film sales to promote
photofinishing by the retailer and of photofinishing to increase film sales at the retailer.
Consequently, Fuji Trucolor's ability to become a retailer's photofinisher often impacts how
much Fuji film is sold at the retailer.
This fact was made all too clear during recent Fuji Trucolor negotiations for a grocery
chain account with approximately 100 stores. In the winter of 1992, the retailer decided to
entertain bids from various photofinishers including FujiTrucolor, Kodak (Qualex), and
Sundance. During the negotiations, the store's representative was blunt and to the point: "you
realize that whoever we decide upon, their film will receive preferential treatment, and the
other will be phased out."
See Exhibit 25 which include numerous examples of Kodak promotional packages,463
advertisements and stuffers, all offering coupons for discounted photoprocessing.
See Exhibit 29.464
See Exhibit 30.465
See Prehearing Staff Report of International Trade Commission, Investigation Nos.466
(continued...)
247
With its dominance in the color film market, Kodak exploits the retailer's desire for
cross-merchandising. Indeed, a major part of Kodak's pitch to be a retailer's photofinisher is
not only the Colorwatch program but also attractive retailer-dedicated promotional
packaging, all conditioned on the retailer's either eliminating Fuji brand film outright from the
store or limiting Fujifilm display visibility. The special packaging typically is a special
Kodak film box that provides a coupon for processing the Kodak film provided that the film is
returned to the retailer (whose name appears on the Kodak box) for processing by Qualex or a
photofinisher required to use Kodak paper and chemistry. Kodak has offered
photoprocessing discounts through exclusive dealers for as much as $20, roughly double the
price of the film itself. Another example is the Kodak packaging at Eckerd Drugs which463
provides the consumer with "free" photofinishing at Eckerd's own labs. Since Eckerd is a464
member of the Colorwatch system for its own (captive) wholesale labs, a consumer
purchasing Eckerd's multipack with all of its coupons has, in essence, paid to have a roll of
film photofinished on Kodak paper with Kodak chemistry. Finally, it is clear from
Kodak/Qualex presentations made to retailers that Kodak/Qualex would subsidize the free
film and discount photofinishing promotions to be offered with the Kodak film.465
(3) Kodak favors bundling and offers of free equipmentto land and maintain color paper accounts
During its investigation of the U.S. color negative photographic paper industry, the
staff of the International Trade Commission found that it was common for color paper
manufacturers to bundle color paper with a variety of other photographic products. Kodak466
(...continued)466
731-TA-661-662, August 12, 1994 (Public Version) (hereinafter "ITC Staff Report") at I-82("Pricing for CNPP {color negative photographic paper} depends primarily on the overallvolume of CNPP purchased and/or other products that may be bundled with CNPP and notnecessarily the specific CNPP products purchased.")
Transcript of Proceedings, International Trade Commission Staff Conference,467
September 22, 1993 at 136.
248
especially favors this approach. Kodak often offers free equipment to land a color paper
account away from its competitors. The size of the account does not seem to matter.
Consider the September 1993 testimony of Ernest Materazzi of Fuji Hunt, which handles
Fujifilm's U.S. color paper business for smaller accounts:
Let me give you a few examples of what we are facing. These examples arefrom large accounts, accounts which are normally not subject to the samepackage of discounts, rebates, equipment incentives and so forth as largecustomers.
One customer, a $50,000 a year account, was provided a $60,000 creativeprint machine to change from Fuji {color paper} to Kodak {color paper}. A $60,000 machine for a $50,000 account.
A similar deal was made by Kodak in even a smaller account, a $20,000 ayear color paper account.467
Other examples of small accounts include:
Stanford, Studios, CA: Kodak offered a free Noritsu minilab and a free black and whiteprocessor to have customer switch off Fujifilm paper to Kodakpaper. Fujifilm lost the account.
K&S - Chicago: Kodak gave K&S free use of a Kodak Premier ElectronicImaging System. As a result, Fujifilm lost the display materialbusiness and Konica lost the paper business.
Meteor - Detroit: In exchange for a free Premier system, Meteor agreed to be 100percent Kodak.
Create-A-Print machines are do-it-yourself enlargers for the end use customer. 468
Minilab operators contend that these enlargers are necessary to compete in the market. OnlyKodak color paper can be used in these machines. See ITC Staff Report at I-85.
249
Luck Color Lab, TN Fujifilm lost the account when Kodak offered to give thecustomer an ISIS System (Integrated Scanner and ImagingStation, an electronic film handling system) for long roll filmused with the Accudata system.
Barry's Camera, Dallas Fujifilm lost the account when Kodak gave away two Create-A-Print machines.468
BJ's One Hour Photo, TX Kodak provided five-year financing on Noritsu equipment totake the account.
Needless to say, large accounts also receive their share of free equipment from Kodak. For
example, Kodak was able to sweeten the deal for CPI Photo, and thereby maintain the
account, by its offer to retrofit all Noritsu minilab equipment found in CPI's numerous stores
with a scanner.
The limited success Fujifilm has had in color paper has resulted in significant part
from the simple fact that Fujifilm's color paper is a better product. As detailed below in
Section C, Fujifilm's new RA-4 color paper has much better dye stability than Kodak's RA-4
color paper, and therefore the photo image will last longer on Fujifilm color paper than on
Kodak color paper.
b. Kodak reacts aggressively against Fujifilm's attempts toenter the photofinishing market
There is no question that Kodak/Qualex now looms over the U.S. market as the
dominant photofinisher. There is also little doubt that Kodak/Qualex desires complete and
total domination of the U.S. photofinishing industry. Indeed, such desire and ambition were
reflected in the first days of the creation of Qualex. In 1988 Lawrence Klaymon, President
and Chief Operating Officer of Fuqua Industries, commented that Qualex's hold on the
wholesale market would give it desired leverage with the big retailers: "They will have less
Fuqua Seeking Stable Prices in Photofinishing, Atlanta Constitution, June 9, 1988.469
Interview with Robert Gregory, former Regional Manager, Eastern United States,470
Guardian Photo.
250
people to play off one another. We're not the only game in town, but we are six times bigger
than our nearest competitor." Noting that in recent years there had been a substantial drop in
the per-print revenues that wholesale photofinishers received, Mr. Klaymon also noted the
benefit of Qualex' enormous size: "I don't know whether it's feasible, possible or likely that
we could raise prices . . . but if we could, we could increase our margins."469
Even more telling, of course, are Kodak/Qualex's actions. One of the prime examples
is Kodak/Qualex's acquisition of Guardian Photo in 1991. At that time Guardian Photo was
the second largest photofinisher after Qualex. Guardian Photo had eight large regional labs
around the country. Guardian Photo's biggest account, by far, was K-Mart. Guardian Photo
serviced approximately 40 percent of K-Mart's total national needs, business worth
approximating $40 million. Shortly after its formation Qualex set its sights on the K-Mart
business. In 1990 when Guardian Photo's annual contract with K-Mart was up for renewal,
Qualex offered K-Mart a staggering up-front cash payment of $25 million to take all of
Guardian Photo's business. Guardian Photo was not able to match the figure and lost a
substantial part of the K-Mart business. After that, Guardian Photo had no choice but to put
itself up for sale. Kodak/Qualex purchased Guardian Photo in 1991. 470
The somewhat bizarre twist in the story, and the evidence that Kodak/Qualex wants
nothing less than complete domination of the photofinishing market, is that Guardian Photo
was a full-fledged Colorwatch member and therefore used only Kodak color paper and
chemistry in its labs. Kodak/Qualex was so intent on dominating the photofinishing market
that it was even acquiring those customers already locked into Kodak products through
Colorwatch.
Kodak/Qualex intensified its aggressive practices when Fujifilm entered the
photofinishing market in the early 1990s. Kodak/Qualex does everything it can to prevent
Fuji Trucolor from establishing a credible presence in the market. As Fujifilm has attempted
As noted below, to avoid being left behind as the U.S. photofinishing industry471
consolidated, Fuji-USA acquired 16 photofinishing labs in the early 1990s.
251
to piece together a national network of photofinishers to compete with Kodak/Qualex,
Kodak/Qualex has reacted aggressively. In most cases, Kodak/Qualex reacted before the471
ink was even dry on Fujifilm's purchase of a photofinisher. Using a combination of its size,
market power, and deep pockets, Kodak/Qualex has the reputation of doing whatever is
necessary to capture (or keep) an account away from Fujifilm, including buying away the
account with huge amounts of up-front money. The following examples are illustrative:
As Fujifilm finalized the purchase of the New Jersey lab, Qualex beganan aggressive campaign to capture that operation's customers andprevent it from expanding its customer base. For example, Qualexoffered $8.5 million for a three year contract with Shop Rite worth $35-40 million in sales.
Fuji-New Jersey lost Azzolino Foodtown in 1992, a three-year $275,000contract, when Qualex offered $100,000 in up-front money.
Fuji-New Jersey lost Kelly Photo when Qualex offered $250,000 peryear in up-front payments on a $1.3 million contract. In one instance,New Jersey TruColor's own up-front money was even returned with theaccusation that compared to Qualex, Fujifilm was "cheap."
In the winter of 1992, Eagle Food, a grocery chain with approximately100 stores located in Illinois and Iowa, entertained bids from the majorphotofinishers including Fuji Trucolor and Qualex. All thephotofinishers knew that the account had a value in the $1 million to$1.25 million range per year. Despite an extremely attractive offer,Fujifilm lost the account to Qualex. Fujifilm was told later that Qualexhad given Eagle Foods $900,000 cash and 10 minilabs to get thebusiness. In essence, Qualex offered to provide a 100 store chain withfree photofinishing for a whole year.
Fuji Trucolor is struggling to establish a credible presence in a market dominated by
Kodak/Qualex. Any time Kodak/Qualex decides it really wants a particular customer,
Kodak/Qualex takes the business. With few exceptions, Fuji TruColor is often forced to rely
As noted above, these decrees remained in effect until 1994 when the a U.S. District472
Court in Rochester terminated them. The termination has been challenged by the JusticeDepartment in the Court of Appeals.
252
on smaller accounts which Kodak/Qualex is less interested in servicing or retailers that are
concerned about their ability to compete with other retailers serviced by Kodak/Qualex.
3. In the past decade there has been no apparent enforcement ofthe antitrust consent decrees restricting Kodak
As noted above, on two separate occasions, in 1921 and again in 1954, federal courts
imposed restrictions on Kodak's marketing practices in the sale of color film, photofinishing,
and other markets. There is significant evidence that Kodak's practices over the past472
decade, including exclusionary practices and the tying of film sales to photofinishing, have
not been in compliance with the Consent Decrees. The only action taken by the Department
of Justice, however, has been to oppose termination of the Decrees.
a. The 1921 Consent Decree
The 1921 Consent Decree was comprehensive and served both short- and long-term
functions. Kodak was ordered to divest portions of its recently acquired businesses and
enjoined from engaging in practices it had used to monopolize the markets for photographic
supplies. Most significantly, sections VI, VII, and X enjoined Kodak from:
{VI} making "any agreement in any form preventing dealers in{its} products . . . from freely selling goods produced bycompetitors;"
{VII} "refusing, preventing or hindering {its} products . . . frombeing sold freely by dealers;" and
{X} selling "fighting brands."
Under the specific terms of the 1921 Consent Decree, a violation does not require that
Kodak use coercion to achieve its goals. Rather, the 1921 Decree prohibits Kodak from
United States v. Eastman Kodak Co., 1954 Trade Cas. (CCH) ¶ 67,920 (W.D. N.Y.473
1954) (emphasis added).
253
entering into any agreement with any retailer or distributor which prevents it from freely
selling competitors' goods, regardless of how that agreement is negotiated.
By paying retailers to remove non-Kodak film from their shelves, Kodak arguably
violated this prohibition. Kodak's payments to retailers for exclusive rights are
unquestionably intended to prevent, and have prevented, the sale of Fujifilm and other non-
Kodak film by those retailers. These payments assure that, for reasons other than product
quality, price, or other characteristics, the consumers who shop at these retail stores will
purchase only Kodak film. Aspects of the VIP program have much the same effect.
Furthermore, Section VI of the 1921 Decree was arguably sufficiently broad to
encompass the Colorwatch Program. This provision of the decree prohibited Kodak from
using "any agreement in any form" which would prevent the free sale of goods of
competitors. The Colorwatch Program is specifically conditioned upon the photofinisher's
written agreement to use only Kodak supplies within each plant; accordingly, it prevents the
free sale of competitors' paper and chemicals. The Colorwatch Program also has the effect of
foreclosing photofinishers from using Fujifilm's and other competitors' paper and chemicals
for reasons having nothing to do with price or quality.
b. The 1954 Consent Decree
In 1954, the Department of Justice filed a complaint alleging that Kodak had a near
absolute monopoly in the sale of amateur film in the United States, which it then used to
create and maintain market power in the color photofinishing market. The resulting 1954
Consent Decree prohibited Kodak from "tying or otherwise connecting in any manner the sale
of {Kodak's} color film to the processing thereof." 473
Statements by Kodak executives make clear that Kodak was well aware of the
meaning and extent of this prohibition. In an affidavit dated May 19, 1993, Kodak's
Alexander Wasilov stated that Kodak could not package its "film with an offer or coupon to
Affidavit of Alexander Wasilou, Kodak's General Manager of Marketing and474
Divisional VP, dated May 19, 1993 at ¶ 5 ("Entering into promotion with our own processinglabs or with independent photofinishers which had the effect of requiring or encouragingconsumers to return their exposed film to a designated source for photofinishing"). Affidavitof Colby H. Chandler, retired Chairman and Chief Executive Officer of Kodak, dated May19, 1993, at ¶ 5 (this prohibition is broad enough to preclude "joint promotions orrelationships with vertically integrated retailers"). Affidavit of Thomas F. Busch, Kodak'sGeneral Manager of Photofinishing Sales, Consumer Imaging Division, dated May 17, 1993at ¶ 6 ("This prohibited connection . . . is broad enough to include joint promotions orrelationships with independent photofinishers or vertically integrated retailers").
See Promotional packages and stuffers purchased at Caldor on June 17, 1993,475
provided in Exhibit 25.
254
induce the customer to have the film processed by a specific photofinisher." However, this474
is precisely what Kodak did.
Prior to the termination of the Consent Decree, Kodak offered its exclusive film
retailers specially designed, retailer-dedicated promotional packaging. This Kodak packaging
included coupons for substantial discounts provided that the Kodak film was returned to the
retailer for processing by Qualex or a qualified Colorwatch photofinisher. For example, a
customer at a Caldor store had a single choice -- Kodak. The Kodak film purchased included
a discount coupon, containing discounts and promotions worth as much as $20 (roughly
double the value of the film itself) as well as "free" "Colorwatch" photofinishing, intended to
entice the customer to return the film to Caldor for developing. Caldor, as a result of its475
participation in the Colorwatch Program, then either sent the film to a participating
photofinisher or used Kodak paper and chemicals for its own in-house photofinishing. These
cross-promotional discounts were inconsistent with the 1954 Decree prohibition against tying
or "connecting in any way" the sale of color film to photofinishing, as well as the 1921
Decree prohibition against inducing exclusive agreements.
There are numerous other examples of Kodak's discounting and promotional activities
that were apparently inconsistent with the film/photofinishing tying proscription of the 1954
Consent Decree. In all these instances, Kodak provided color film boxes that offered
discounts on Qualex or Colorwatch photofinishing services, and thereby tied its sale of film to
See Exhibit 25 for examples of Kodak tying film sales to photofinishing.476
A copy of the VIP Rebates brochure is provided in Exhibit 24.477
255
its sale of photofinishing. 476
c. Despite the fact that these Kodak practices were wellknown in the industry, the U.S. Government did notseek to enforce the Consent Decrees
The practices identified above were no secret in the industry or to the public. Kodak
itself distributed a brochure about its VIP Rebate. Kodak's Colorwatch system was the477
focus of a massive media advertising campaign. Film boxes and hang tags in the store aisles
boasted of the cross-promotional values of Kodak film and Qualex processing. Finally, in
such a concentrated industry all of the players are extremely aware of each other's practices,
and thus even the slightest investigation should have disclosed the massive exclusivity
payments that Kodak made.
Notwithstanding the openness of Kodak's exclusionary practices, the U.S. Department
of Justice made no attempt to determine whether these practices were in compliance with the
Consent Decrees. Even after it obtained direct hard evidence during the Consent Decree
proceedings of (1) Kodak's exclusionary practices and (2) the tying of film sales to
photofinishing, the Department of Justice took no action other than to oppose Kodak's efforts
to remove the Consent Decrees.
C. Fujifilm Has Achieved Only Limited Success In The U.S.Market Despite Its Enormous Commitment
Kodak complains that its supposedly major investment in the Japanese market has not
been properly rewarded with market share increases. It then jumps to the conclusion that
some foul play must be blocking it. Yet Fujifilm has invested far more in the U.S. market
than Kodak has in Japan, and still has only 11 percent of the U.S. market. If the combination
of high investment and low market share proves that a market is blocked by anticompetitive
256
practices, then Fujifilm's case against Kodak is much stronger than the reverse. Alternatively,
Fujifilm's U.S. experience simply shows how difficult it is for a foreign challenger to take on
an entrenched domestic incumbent on its own turf.
Fujifilm's limited success was not the result of a lack of effort. Fuji-USA has made
considerable efforts to penetrate the U.S. market.
1. Fujifilm starts its U.S. presence with a commitment toproduce products for local market
In 1958 Fujifilm opened a one-person office and began the daunting task of breaking
into the U.S. photographic industry. Fujifilm knew the hurdles were enormous. At that time,
a scant four years after the 1954 Consent Decree, Kodak completely dominated all markets
for photographic products. During these early years, Fujifilm studied the market. In 1965
Fujifilm established a U.S. subsidiary, Fuji Photo Film U.S.A., Inc. ("Fuji-USA"). Fuji-USA
consisted of six people in a small office in the Empire State building.
During Fuji U.S.A.'s first years of operation, all Fujifilm products were marketed in
the U.S. by American distributors. Fujifilm lens/shutter still cameras and single-8 movie
cameras were marketed by Ehrenreich Photo Optical Industries (EPOI), the well known U.S.
distributor of Nikon cameras; Fujifilm X-ray products were marketed by Pyne X-Ray; graphic
arts products were marketed by Roberts and Porter; and micrographic products were marketed
by Ideax Corp. and later by U.S. Microfilm Sales Corp. Black and white motion picture film
was the only Fujifilm product to be sold directly by Fuji-USA.
In the late 1960s a decision was made that would have a profound effect on Fuji-USA:
the decision to create an amateur film system compatible with the C-22 processing system
then in use for Kodak films. (Until that time Fujifilm only produced and sold its own, non-
compatible film chemistry and equipment in Japan.)
In 1970, Fujicolor N-100, a color print film completely compatible with Kodak's C-22
processing system, was introduced into the United States. In 1972 Fujifilm introduced
Fujifilm color paper in the United States.
257
2. Fuji-USA quickly realizes the importance of managing its owndistribution, rather than relying on third party distributors
Originally, Fuji film was marketed and sold through a special division of EPOI (the
camera and optical distributor) established for this purpose. After a couple of years, however,
Fuji-USA realized that a camera and optical distributor was not the most effective way to
market and sell film. Fuji-USA found that its affiliation with EPOI was hampering its sales.
As a distributor of Nikon cameras, EPOI sold Fuji film almost exclusively through camera
specialty stores. While the Fujifilm name was thereby recognized among professional
photographers who utilized such camera stores, Fuji film was largely unknown by most
consumers in the United States during this time.
Fujifilm therefore set out to build its own independent sales and distribution network.
By 1973, upon formation of a national sales force, Fujifilm assumed from EPOI complete
sales responsibility for all products that EPOI has previously sold. In addition, in 1973 Fuji-
USA discontinued using public warehouses and opened the first Fujifilm distribution center in
Carlstadt, New Jersey. Over the years, four additional distribution centers would be opened.
3. Fuji-USA develops new channels of distribution for itsproducts not occupied by incumbent
In 1974, Fuji-USA became the first film company to follow Kodak's new C-41 color
print film process with Fujicolor F-II film. In 1976, Fuji-USA introduced the very first high
speed color print film, Fujicolor F-II 400. That same year Fuji-USA formed a separate sales
force for color paper.
In the early years most of Fujifilm's film sales came from camera specialty retailers,
principally because Fujifilm already had a presence there with Fujifilm's optical products.
Initially, this was desirable because specialty camera stores had the credibility that the
consumer was looking for. By the late 1970s, though, Fuji-USA determined it needed to
increase distribution. As Fuji-USA (with its own sales force and distribution centers) was
able by that time to service larger accounts, Fuji-USA decided to approach the drug chain
industry. At that time, drug stores accounted for the majority of film sales. What Fuji-USA
258
found, however, was that the drug store industry was fiercely loyal to Kodak. Despite Fuji-
USA's efforts, most refused to carry Fuji film. When a store agreed to buy from Fuji-USA
(e.g., Skaggs and Longs Drug), the store's promotion of the Fujifilm name was limited.
Fuji-USA was well aware that in order to grow its film business, Fuji-USA needed
retailers who would promote, market, and advertise Fujifilm products. Finding itself rejected
at drug stores, Fuji-USA decided to look at the grocery store/supermarket industry. Grocery
stores were just beginning to sell general merchandise -- a significant switch from their
previous food-only policy. Consequently, the grocery store industry was relatively new to the
film business. What Fujifilm found was that while Kodak did sell some products to these
accounts, it paid very little attention to them. Fuji-USA decided that this was the market
which Fuji-USA would use to gain increased distribution.
Fuji-USA started going to food shows and participating in local food retail and
wholesale shows. Fuji-USA was able to land the King Sooper's account, and other grocery
store chains across the country became interested in Fuji film. The food industry embraced
Fuji film, and Fuji-USA's business started to flourish. Fuji-USA prepared for this business by
hiring food brokers throughout the country. Business continued to increase. Food retailers
were advertising Fujifilm's products, and more and more consumers were trying Fujifilm's
products and liking the results. By the end of the 1970s, sales had grown by more than 12
times and personnel increased by 15 times to 250 employees. Compared to Kodak, however,
Fujifilm was still a tiny player. In 1980 Fujifilm's market share reached less than 4 percent.
4. Fujifilm gains increasing acceptance by offering innovativeproducts and sponsoring local events
The 1980s represented something of a watershed for Fujifilm. Having noticed
Fujifilm's presence in grocery stores and realizing that Fujifilm might represent a missed
opportunity, the drug chains became interested in Fuji film. People's Drug agreed to carry
Fuji film in 1982 and offered special promotions on photofinishing. Other drug stores --
including Reed, Lanes, Dart, and Kinney -- also started to carry Fuji film.
Industrial Marketing Research, Inc., data.478
259
Fujifilm's limited strides in film sales in the early 1980s were accompanied and
bolstered by other significant events. It achieved a first in the industry: 12 exposure 35mm
film, introduced in the early 1980s, called by Fuji-USA the "short story film." During this
period, Fuji-USA sold many other new optical products, thereby enhancing consumer
awareness and credibility to the retailer. Fuji-USA also made great efforts to demonstrate
commitment. When Fuji-USA opened a new account, Fuji-USA strived to help the retailer
grow the business.
Public awareness increased. In 1982 Fujifilm won an Emmy and an Oscar for A-250
motion picture film, and in 1981 Fuji-USA became the "Official Film" of the NBA. In 1981
the announcement that the Fuji Film Company had been designated an Official Sponsor of the
1984 Los Angeles Olympics and the United States Olympic Team for film and other
sensitized products sent a jolt through the trade. The Olympic sponsorship increased
Fujifilm's brand name recognition considerably. Fuji-USA took full advantage and provided
incentives to dealers including free Olympic merchandise. Consumers began to specifically
request Fuji film, thus putting pressure on retailers to carry Fuji film. Fuji-USA was able to
open new accounts in areas Fujifilm had never been before. By 1984, Fujifilm's market share
climbed to 9 percent -- a share, however, from which Fuji-USA would not increase for478
more than eight years.
Fujifilm continued to forge ahead. The 1980s saw the advent of minilabs and
Fujifilm's entry into wholesale photofinishing. In 1982 Fujifilm opened a photofinishing lab
in Anaheim, California. Fujifilm realized that its success in the film market ultimately would
be tied to the availability of photofinishing alliances. Fujifilm's minilab, introduced for the
first time in 1982, increased Fujifilm's presence in those stores doing their own
photofinishing.
Fujifilm also continued to focus on surpassing Kodak in product development. Efforts
were realized in 1987. That year the industry was abuzz with the expectation of single-use
260
cameras. In early 1987 Fuji-USA was to announce its single-use camera to the U.S. market.
On the very eve of Fuji-USA's announcement, with great fanfare Kodak attempted to trump
Fujifilm with its own announcement of the introduction of Kodak's first single-use camera,
the Fling, a 110 film single-use camera. The next day, however, Fuji-USA announced the
world's first 35mm single-use camera. It would take Kodak almost a whole year to introduce
its own 35mm single-use camera.
Fujifilm beat Kodak to the punch again in 1989. For years Kodak had talked about
high speed color negative film, but nothing came. In 1989 Fujifilm announced the
introduction of the first high resolution, high speed ISO 400 color film. It was a great
success, and opened up many new accounts for Fuji-USA.
5. Fujifilm offers a superior color paper product
Fujifilm's limited success in the color paper market has resulted, in significant part,
from the fact that Fujifilm's color paper has been judged by experts to be a superior product.
In the late 1980s Kodak introduced a new photoprocessing method, the RA-4 process, which
required new compatible paper, RA-4 color paper. All the manufacturers quickly followed
suit, developing their own RA-4 color papers.
It was soon discovered that Fujifilm's RA-4 color paper was (and still is) superior to
the Kodak product. Fujifilm's RA-4 color paper has much better dye stability, and therefore
the photo image is much less likely to fade over time. This fact was particularly important to
"people labs" -- those photofinishers specializing in weddings, school pictures, and custom
portraits. Fujifilm's superior RA-4 color paper was able to make some inroads in this segment
of the market. A particular noteworthy example is the experience of Wayne Haub, President
and founder of H & H Color Labs.
At the International Trade Commission Staff Conference in September 1993, Mr.
Haub testified as to why, after nearly two decades, he decided to switch from Kodak to Fuji
color paper:
261
A little over three years ago, I switched from Kodak to Fuji for the vastmajority of my paper needs. The decision to switch was not easy. Weundertook a painstaking process of evaluation and customer consultationbefore we decided.
The decision to switch stemmed from problems we were experiencing withKodak's relatively new professional paper designed for the new RA4process, which, at that time, was called Portra I.
My recollection is that in approximately 1989, Kodak introduced the RA4process to the professional people lab market and informed the world thatthe previous EP2 process would be phased out.
We were one of the first people labs to utilize the RA4 process that wasintroduced in 1990. We immediately noticed that the visible image withthe new RA4 process on Kodak's color paper was not as good as the EP2process.
When our customers started complaining, we began investigating how wecould solve the problem.
•• •• ••
Kodak was not able to solve the problem, despite customer complaints. Out of both frustration and desperation, I called several of the other papermanufacturers, Fuji, Konica, and Agfa, to be specific. Konica and Agfastated that they did not have a people lab paper to offer to us for use in theRA4 process.
Fuji stated they had some new professional paper coming out in a monththat we might try. Fuji sent me two rolls for trial. The results weredramatic. As soon as the prints came out, I could tell instantly that thevisual image was greatly improved over the Kodak paper and I knew mycustomers would be happy with that image.
I noticed immediately that the shadow detail, flesh tone and colorsaturations that we and our customers had come to expect were againpresent. In addition, about this same time, an article appeared in PopularPhotography, June 1990, that reported an expert's finding that Fuji colorpaper had a much better dye stability than the Kodak paper and thereforecould last nearly twice as long as the Kodak paper before fading.
Transcript of Proceedings, Staff Conference of International Trade Commission,479
September 1993, at 138-141 (emphasis added). A copy of the June 1990 PopularPhotography issue is provided in Exhibit 31. Mr. Wilhelm's findings are published in ThePermanence and Care of Color Photographs, (1993).
262
This was quite significant. A substantial part of our customer's business isin the professional portrait and wedding business. In this area ofphotography, the stability of a color print is of extreme importance to thecustomer.
I decided to visit the expert who made the findings, Henry Wilhelm. Aftermeeting with Mr. Wilhelm and examining his facilities and afterconvincing myself that Mr. Wilhelm was in no way connected to Fuji, Isatisfied myself that his findings were legitimate.
During that time, we were conducting our own unscientific tests to verifythat Mr. Wilhelm -- to verify what Mr. Wilhelm had proved in thelaboratory. Even our own unscientific tests yielded the obvious conclusion,that the dye stability of the Kodak paper was not as permanent as the dyestability of the Fuji paper. 479
Once again, Fujifilm's product development had beaten Kodak to the punch.
6. Fujifilm significantly increases its capital commitment to U.S. market
In the late 1980s the photofinishing industry went through a rapid consolidation as
Kodak's campaign to dominate wholesale photofinishing moved into high gear. To avoid
being left behind, Fuji-USA attempted to follow suit, albeit at a much less aggressive pace.
From 1991-1993 Fuji-USA acquired nine photofinishers for a total of 17 photofinishing labs.
In 1989 Fujifilm established a presence in the U.S. photographic chemistry market by
acquiring the photochemical business of Olin-Hunt, including Olin-Hunt's U.S.
photochemical manufacturing and sales operations.
In August 1994 Fujifilm broke ground on the construction of a new manufacturing
plant for the production of color paper. The new plant, which will begin operations in the
second half of 1995, will produce 100 million square feet of color photographic paper per
Comments of Alan Wolff, Counsel to Kodak, at the National Press Club, July 12, 1995480
("In terms of value, the market in Japan is about equal to ours.").
Fuji's Japanese-based competitor, Konica, has been more successful in Japan than481
Kodak's U.S.-based competitor, 3M, has been in the U.S. According to Kodak's "PrivatizingProtection" (at 30), Konica has a 17 percent share. 3M's share (which includes its brandedsales plus private label sales) is 11 percent. The Sixth Annual Robinson Report: The U.S.Consumer Imaging Market in 1993 with Forecasts for 1998, Table 3-9 and 3-10.
263
month. The investment in the new plant will be well over $260 million. And in June 1995
Fujifilm completed construction on a new U.S. factory for its Fujicolor Quicksnap single-use
cameras. Fujifilm's investment in the Quicksnap factory was $50 million.
In short, Fujifilm's limited success in the U.S. market during this period did not come
without considerable cost. Indeed, Fujifilm has spent considerably more in the United States
than Kodak has in Japan, a market Kodak states is roughly comparable to the U.S. market.
For the last ten years alone, Fujifilm's total operating and investment expenditures for the U.S.
market for film, color paper and photofinishing alone were more than $1.5 billion. In contrast
to Kodak, Fujifilm has made a real commitment to developing its presence.
7. Fujifilm's efforts in the United States are in sharp contrast toKodak's efforts in Japan
Kodak has claimed that Japan's photographic market is roughly comparable in size to
the U.S. market. In addition, both the U.S. and Japanese markets have a dominant local480
manufacturer with very strong brand loyalty and, accordingly, strong market presence
(Kodak-US; Fujifilm-Japan). Accordingly, it is instructive to examine not only the481
competitive practices of each manufacturer in its home market, but also the efforts each
manufacturer has undertaken in the other's market. Such an analysis unquestionably
demonstrates that Fujifilm has made a much more serious effort in the U.S. market than
Kodak has in the Japan market.
Consider the following:
(1) Assuming responsibility for distribution
264
In the Japanese market, Kodak waited 10 years to take control of distributionfrom its exclusive distributor.
In the U.S. market, Fujifilm assumed complete control of film distribution,including establishing its own sales force, within three years of introducing itsfilm.
(2) Developing new channels of distribution not occupied by thedomestic incumbent
In Japan, Kodak continually relied on established channels of distribution andmade no attempt to break new ground.
In the U.S. market, Fujifilm developed and nurtured the grocery store as a newdistribution channel for film.
(3) Adapt products to local market tastes
In the Japanese market, Kodak made no attempt to adapt its film to the differenttastes of the Japanese consumer until 1989, 16 years after being advised to doso by Asanuma.
From the start of its entry into the U.S. market, Fujifilm studied local tastes andhas modified its products accordingly.
(4) Introduce innovative new products
In the Japanese market, Kodak has lagged two years behind Fujifilm inintroducing both single-use cameras and high resolution ISO 400 film.
In the U.S. market, Fujifilm has been a leader in innovation, introducing a35mm single-use camera when Kodak only had a lower quality 110 single-usecamera.
(5) Commitment of significant resources
In the Japanese market, Kodak has invested only limited resources, and hasmade no investment in local manufacturing of photographic products.
In the U.S. market, Fujifilm has invested over $1.5 billion in the last ten yearsalone, including several local manufacturing facilities.
Technically, Kodak's expert argued that the relevant market definition included the482
U.S., western Europe and Japan. However, in later submissions to the Court, Kodakessentially admitted that there was little distinction between identifying the market on aworld-wide basis and identifying the market as the U.S., Western Europe and Japan. (Although we note that this geographical difference could account for the fact that the Courtcites different "world" market share figures (i.e., 36 percent for Kodak) from the world marketshare figure used in Kodak's paper (42 percent)).
Eastman Kodak Company's Post-Trial Memorandum, April 8, 1994.483
265
D. Kodak Has Urged The U.S. Government To Apply ADouble Standard
Kodak's legal analysis urges the U.S. Government to apply an inconsistent double
standard to its Section 301 petition. Kodak's double standard applies to several critical points
of its overall claim.
1. Existence of market power: market definition
In its Section 301 petition Kodak has requested USTR to focus its analysis solely on
the Japanese market. Kodak's principal claim is that as a result of Fujifilm's allegedly
anticompetitive practices, Fujifilm has a high (70 percent) market share in the Japanese
market. Indeed, Kodak's and Fujifilm's respective market positions in the Japanese market are
the sine qua non of Kodak's entire case.
However, in the recent Consent Decree proceedings in which Kodak's own practices
were being examined, Kodak argued vigorously that the relevant geographic market was not
national, but rather worldwide. Kodak argued that the Department of Justice and the Court482
should ignore Kodak's own 70 percent share in the U.S. (compared to Fujifilm's 10-12 percent
share) because the market for color film is now a world market. Kodak cited five significant
facts in support:483
Memorandum in Support of Eastman Kodak's Motion For Summary Judgment On The484
1921 Decree, dated January 18, 1994, at 12.
Kodak's Reply To Government's Opposition, dated July 2, 1993, at 4 (emphasis485
added).
United States v. Eastman Kodak, 853 F. Supp. at 1470-1471.486
Kodak's estimate appears correct. The 1993-1994 International Photo Processing487
Report at 6-32 (stating that Kodak has 41 percent of the world market, compared to Fuji's 32percent).
266
There are only five companies that manufacture amateur colorphotographic film: Kodak, Fujifilm, Agfa, Konica, and 3M.
Each of these companies is a multinational corporation.
Each company has billions of dollars in assets.
With the exception of 3M, which sells primarily in the U.S. andEurope, all companies sell color film on a worldwide basis.
Because the production of photographic products is capitalintensive, all world markets are supplied by a relatively smallnumber of plants.
According to Kodak, "{i}n light of the size and financial strength of . . . film competitors"
driving them from the market would be "untenable." Therefore, Kodak argued, the only484
appropriate market in which to analyze respective color film shares is a worldwide market:
Kodak's share in the world market is approximately 42 percent on a unitbasis, and this geographic market definition is more appropriate for thisCourt's analysis.485
Kodak's facts and argument convinced the District Court. The Court concluded that
"{t}he evidence proffered by Kodak shows that the area of effective competition between the
five film manufacturers is the entire world. . ." 486
Kodak then claimed that its share of the world market, 42 percent, was too small for487
Kodak to possess market power. Recognizing that it had the largest share of the world market
Kodak's Reply to Government's Opposition at 4 (emphasis added).488
"Privatizing Protection" at 149.489
267
(Fujifilm's share was 32 percent), Kodak argued that the vigorous competition that exists in
the world market meant that none of manufacturers had market power:
Vigorous competition now exists in {the photographic} marketcharacterized by intense marketing efforts and downward pressure onprice. Market conditions make it virtually impossible for Kodak or anymanufacturer to exercise market power, that is the ability to control price atany level, or to exclude competitors.488
USTR must reject Kodak's blatant attempt to have its cake and eat it, too. If a world
market share analysis is appropriate for judging whether Kodak's market share is sufficiently
high to indicate market power, then it must be equally appropriate for judging Fujifilm's
market share. By Kodak's own admission, Fujifilm's 32 percent of the world market
represents insufficient market power to hinder Kodak's competitive position. Kodak should
be held to its admission.
2. Competitive behavior and practices
Many of Kodak's core allegations concerning Fujifilm's anticompetitive behavior in
the Japanese market bear a striking resemblance to practices defended as lawful by Kodak in
the United States. When called upon to answer recent claims of its own alleged
anticompetitive activity in the United States, Kodak went to great lengths to demonstrate the
pro-competitive nature of these common photographic industry practices. That is, Kodak
wishes to attack in Japan the same types of practices it has engaged in and defended within
the United States.
One of Kodak's principal attacks on Fujifilm's conduct is that Fujifilm's practices "can
be classified as . . . anti-competitive non-price vertical restraints." Kodak asserts that489
"Privatizing Protection" at 25.490
268
exclusive dealing arrangements "clearly have the 'tendency to impede competition' and make
it extremely difficult to secure alternative distribution channels for Kodak." 490
However, when defending its own exclusive dealing arrangements in the United
States, Kodak advocated a much different analysis. Kodak's antitrust expert made the
following statements concerning exclusive arrangements:
Question: In your view would consumers be better off or worse off ifKodak were permitted to use non-price vertical restraints?
Prof. Hausman: Well, here again, economists have been saying for thirty(Kodak expert) or forty years that typically non-price vertical restraints are good
for consumers.
Question: Okay. Let's look at that, sir. Assume with me for the momentthe case where a firm has market power and where in youropinion it would be anticompetitive for it to have people agreewith it to deal only with that firm exclusive.
Are you with me so far?
Prof. Hausman Yes.
Question: Now, in that case if that firm with market power got these otherpeople to agree to deal with it exclusively by virtue of offeringthem inducements and discounts, would that be anticompetitive?
Prof. Hausman: No. It would always -- almost always be pro-competitive.
The discounts they would give to get the agreement would bepassed on to consumers so long as the retailers are competitivewhich they usually are.
Testimony of Professor Hausman, Consent Decree Trial Transcript at 651-53491
(emphasis added).
"Privatizing Protection" at 3.492
Testimony of Professor Hausman, Consent Decree Trial Transcript at 508 (emphasis493
added).
269
In that situation in all cases I can think of pretty much it wouldbe pro-competitive.491
Applying Professor Hausman's analysis, Fujifilm's lack of global market power
renders any exclusive arrangements it may have inherently pro-competitive.
3. Home team advantage
In discussing Fujifilm's market share in its home market, Japan, Kodak completely
dismisses the well known economic phenomenon known as "home team advantage." Kodak
states that home team advantage "cannot explain the extent of Fujifilm's dominant position in
the Japanese market."492
Again, Kodak sang a different tune when its own dominant (70 percent) share of its
home market was under examination. At the Consent Decree trial, Kodak made the following
comments concerning home team advantage:
Prof. Hausman: Let me answer the only way I know how to answer. That is, (Kodak's expert) the United States -- Eastman Kodak Company is a company that
was born and raised in the United States and its heritage is here. Other companies were born and raised in other parts of the worldand their heritages are there; in Japan, Germany, et cetera. Ihappen to believe that -- and I think the market in the localcountries where these companies are will bear that out -- that fora lot of different reasons over a long period of time a companytends to do better in its home market than it does in marketsother than that.493
270
Question: Sir, if the decrees are having that effect why is Kodak's share somuch higher in the only country - major region, if you will - inthe world where the decrees bind Kodak?
Prof. Hausman Well, I think the main reason is that Kodak's the home playerhere; that people know that Kodak is the American, and they aregoing to buy it so long as Kodak has high quality and areasonable price.
• • •
Kodak has a higher share here. Agfa, good product, has a highershare in Germany. That's very typical in international trade andeconomics.
In short, in March 1994 when its own dominant market share and practices were under
examination, Kodak wholeheartedly embraced the economic concept of home team
advantage. Now, a scant year later, when Kodak is the one hurling the allegations, the same
economic concept is discarded. Kodak's duplicity could not be more self-evident.