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From Antitrust Law Daily, April 18, 2014

Failure to prove relevant market dooms resin maker’s antitrust claims

By Jody Coultas, J.D.

The U.S. Court of Appeals for the Federal Circuit affirmed the federal district court in Chicago’s ruling that 3D Systems, Inc. did not engage in attempted monopolization or an unreasonable restraint of trade in the stereolithography machines or aftermarket resins markets through its contracting and licensing practices (DSM Desotech Inc. v. 3D Systems Corporation, April 18, 2014, Schall, A.). The plaintiff, DSM Desotech, failed to establish a relevant market in which competition was harmed or to present sufficient evidence to exclude the possibility that 3D’s conduct was as consistent with competition as with illegal conduct.

Stereolithography (SL) is an additive process for producing parts, also known as rapid prototyping, in which a physical object such as a model is created layer by layer from liquid “resins” solidified into shape with a laser. 3D manufactures SL machines and is the sole supplier of those machines in the United States. DSM Desotech manufactures aftermarket resins used in the SL machines, and had produced resin under a 3D private label until 3D entered into that aftermarket.

To ensure that customers use only approved resins, 3D embedded software into the machines that cause them to shut down if it detects an unapproved resin. Two of DSM Desotech’s resins were approved, but negotiations broke down regarding additional approvals and DSM Desotech filed the antitrust claims. Desotech argued that 3D tied sales of resin to sales of SL machines via contracts and the embedded software, and that this constituted an unreasonable restraint of trade and an illegal attempt at monopolization.

The district court held that DSM Desotech was unable to present a relevant market in which competition was harmed or to present sufficient evidence to exclude the possibility that 3D’s conduct was as consistent with competition as with illegal conduct. DSM Desotech argued on appeal that genuine issues of material fact should have precluded summary judgment.

Relevant market - SL Machines. To state a claim, DSM Desotech was required to show that either SL machines or SL resins constituted independent product markets for antitrust purposes. A relevant product market consists of all products that are “reasonably interchangeable by consumers for the same purposes.” This requires economic evidence concerning whether products are good substitutes. Courts have also recognized submarkets, which may on their own form the basis for antitrust liability. In the case of submarkets, courts consider “(1) the industry or public recognition of the submarket as a separate economic entity, (2) the product’s peculiar characteristics and uses, (3) unique production facilities, (4) distinct customers, (5) distinct prices, (6) sensitivity to price changes, and (7) specialized vendors.”

Because a reasonable jury could not find an independent market for SL machines, the court upheld the district court’s finding that DSM Desotech failed to present a relevant market. DSM Desotech argued that the district court erred in weighing the evidence and improperly relied on certain DSM Desotech internal marketing documents written by lay businesspeople rather than economists. However, DSM Desotech failed to present any economic evidence. Some circuits accept the use of the practical indicia presented by DSM Desotech to prove a market in the absence of economic evidence. However, the Seventh Circuit requires economic evidence. This alone was sufficient to uphold the court’s summary judgment order.

Nonetheless, the court considered, and rejected, DSM Desotech’s practical indicia. DSM Desotech noted (1) distinct prices between SL machines and other rapid-prototyping products; (2) SL’s peculiar characteristics and uses; (3) industry or public recognition of the submarket as a separate economic entity; and (4) sensitivity to price changes as indicators of a relevant market. However, SL machines do not have distinct prices in relation to all other rapid-prototyping technologies, the “peculiar characteristics and uses” DSM Desotech alleged were tenuous, SL machines and other rapid-prototyping technologies are differentiated products, and DSM Desotech’s sampling of customers regarding price sensitivity was too small to draw any reasonable conclusions.

Relevant market - SL Resin. A court may conclude that an aftermarket is the relevant market for antitrust analysis only if the evidence supports an inference of monopoly power in the aftermarket that competition in the primary market appears unable to check.

DSM Desotech was unable to show that the SL Resin aftermarket was a relevant market for antitrust purposes, according to the court. The basis of DSM Desotech’s lock in theory was that customers who purchased very expensive SL machine were locked in to using that machine and the accompanying resins rather than being able to switch to alternative technologies. The high cost of switching equipment, which locks customers into using specific aftermarket parts or service, may form the basis for antitrust liability. Also, a substantial number of customers must be locked in for a party to be able to exert market power. This theory only applies to customers who learned about the “lock” after purchasing their equipment. Potential SL machine customers that find the cost of 3D’s resin too high can choose to purchase a different type of machine and are not locked in by high switching costs. Only seven out of 268 customers purchased their equipment before learning of the software lock. Seven out of 268 was not substantial, according to the court.

State Unfair Trade Practice Claim. The court also rejected DSM Desotech’s Illinois Uniform Deceptive Trade Practices Act (UDTPA) claims based on 3D’s creation of confusion as to the qualification of resins available for use in its machines and disparagement DSM’s resins. The allegedly wrongful statements all relate to 3D’s licensing and approval policy. General statements that a company “does not have a license or authorization” to use another company’s product do not violate the UDTPA.

3D was also properly granted summary judgment on DSM’s claim of tortious interference with prospective economic advantage.

The case is No. 2013-1298.

Attorneys: Michele L. Odorizzi (Mayer Brown LLP) for DSM Desotech Inc. Paula W. Render (Jones Day) for 3D Systems Corporation and 3D Systems, Inc.

Companies: DSM Desotech Inc.; 3D Systems Corporation; 3D Systems, Inc.

MainStory: TopStory Antitrust StateUnfairTradePractices

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