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Fujifilm's views on Kodak's procedure under the section 301 petition

LEGAL BRIEFS

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TABLE OF CONTENTS

I. INTRODUCTION...............1

(A) Kodak's Substantive Legal Claims Are Fatally Flawed...............1

(B) Procedural Considerations Render Any USTR Action Premature And Inappropriate............... 4

II. THE JAPANESE GOVERNMENT HAS VIOLATED NO TREATIES IN ITS ALLEGED TOLERATION OF FUJI ANTICOMPETITIVE ACTIVITIES............... 10

III. FUJIFILM'S BUSINESS PRACTICES IN THE JAPANESE MARKET ARE NOT ANTICOMPETITIVE............... 12

(A) Kodak's Allegations Of Systematic Anticompetitive Practices Suffer From Fundamental Analytical Defects............... 13

1.Market definition............... 13

2.Resale price maintenance............... 21

 

(B) Fujifilm's Business Practices Do Not Violate The Japanese Antimonopoly Act Or U.S. Antitrust Law, And Are Less Exclusionary Than Kodak's U.S. Practices............... 22

1.Fujifilm's relationships with distributors are not anticompetitive............... 25

a. Japanese law............... 26
b. U.S. law............... 30
i. Kodak has not been denied access to an essential facility............... 31
ii. Fujifilm has not engaged in unlawfully exclusive dealing............... 35
c. Comparison to Kodak............... 36
i. Kodak's arrangements with wholesale distributors are exclusionary............... 37
ii. Kodak's arrangements with major retailers are exclusionary............... 38
iii. Kodak has vigorously defended its exclusive arrangements as procompetitive...............40

2.Fujifilm's rebate programs are not anticompetitive............... 42

a. Japanese law............... 43
b. U.S. law............... 47
c. Comparison to Kodak............... 48

3.There is no evidence that resale price maintenance exists in Japan............... 50

a. Japanese law............... 50
b. U.S. law............... 55
c. Comparison with Kodak............... 57

4.Fujifilm's relationships with photofinishers are not anticompetitive............... 58

a. Japanese law............... 58
b. U.S. law............... 60
c. Comparison to Kodak............... 62

IV. THE JAPANESE GOVERNMENT HAS NEITHER ENCOURAGED NOR TOLERATED ANTICOMPETITIVE PRACTICES IN THE FILM OR PAPER MARKETS...............64

(A) The JFTC Is Already Enforcing The Antimonopoly Act, Particularly With Respect To Fujifilm And The Rest Of The Consumer Photographic Materials Industry...............65

(B) MITI Has Not Encouraged The Creation Of An Anticompetitive Market Structure...............69

(C) If Kodak Wants The Japanese Government To Address Its Specific Allegations, It Should Have Filed A Complaint...............70

V. THE ALLEGED ANTICOMPETITIVE PRACTICES HAVE NEITHER BURDENED NOR RESTRICTED U.S. COMMERCE...............71

(A) Fujifilm's Relationship With Single-Brand Distributors Does Not Burden Or Restrict U.S. Commerce...............72

(B) Fujifilm's Rebates Do Not Burden Or Restrict U.S. Commerce...............74

(C) If Fujifilm's Alleged Resale Price Maintenance Existed, It Would Actually Benefit Kodak And Would Not Be Consistent With Recent Pricing Patterns...............74

(D) Fujifilm's Relationship With Photofinishing Labs Does Not Burden Or Restrict U.S. Commerce...............75

(E) Kodak's Problems In Japan Are Attributable To Fujifilm's Home Team Advantage And Kodak's Own Missteps In Japan...............76

1.The "home team advantage" doctrine is partially responsible for Kodak's difficulties in Japan, not any alleged anticompetitive conduct...............76

2.Kodak's own missteps are also to blame for its difficulties in Japan...............77

VI. CONCLUSION...............79

I. INTRODUCTION

On July 31, 1995, Fujifilm submitted to USTR and the general public a nearly 600-page document entitled "Rewriting History: Kodak's Revisionist Account of the Japanese Consumer Photographic Market." In that document, Fujifilm revealed the numerous errors, mischaracterizations, and omissions that form the "factual" basis of Kodak's Section 301 petition. The purpose of today's submission is to address the equally flawed legal basis of Kodak's complaint.

A. Kodak's Substantive Legal Claims Are Fatally Flawed

With exquisite timing, a major event last Friday in Kodak's other main legal arena highlights the utter fatuousness of its current position. Specifically, on August 4, 1995 the U.S. Court of Appeals for the Second Circuit issued its decision approving Kodak's release from both of its decades-old antitrust consent decrees. (*1) This decision was premised upon the finding, strenuously argued for by Kodak, that the relevant market for color film is not national, but worldwide.

Kodak's Section 301 complaint is premised upon applying a national market definition to the business practices of Fujifilm. In other words, Kodak wants its competitor's actions judged by a much stricter standard than that by which its own actions are judged. Seeking to benefit from a double standard is nothing new in legal annals, but Kodak's shamelessness in adopting diametrically opposed positions in simultaneous proceedings is truly remarkable. Indeed, as will be discussed later in this submission, if Section 301 investigations were conducted in a U.S. court of law, Kodak would be legally barred from taking the position on which its Section 301 case now rests. (*2)

As exemplified by this glaring flaw, the substance of Kodak's legal analysis is unrelievedly shoddy. First, Kodak claims that USTR action is mandatory under Section 301(a) (*3) because of practices that are allegedly inconsistent with either trade agreements or U.S. international legal rights. Yet regarding the agreements in question -- the U.S.-Japan Friendship, Commerce and Navigation ("FCN") Treaty and the OECD Capital Code -- any alleged violations ended some 20 years ago. Kodak's absurd argument that USTR is required to act now against supposed violations that ended two decades ago is addressed in Section II of this submission.

After Kodak's alleged treaty violations are dispensed with, the remaining legal hook for relief is Kodak's claim that certain practices are "unreasonable" under Section 301(b).(*4) Kodak alleges that the actions of Fujifilm and the Japanese Government are unreasonable under Section 301(d)(3)(B)(i)(IV), i.e., that their practices combine to constitute "the toleration by a foreign government of systematic anticompetitive activities . . .that have the effect of restricting . . . access of United States goods or services to a foreign market." (*5) Section III of this submission analyzes whether there have been systematic anticompetitive activities committed by Fujifilm. First, we demonstrate that Fujifilm's business practices have not violated the Japanese Antimonopoly Act. (*6)Next, although U.S. law is arguably irrelevant to this inquiry, (*7) we show that Fujifilm's activities have been consistent with the requirements of U.S. antitrust law, the second standard that Kodak urges to be applied in this investigation. Finally, we show that when measured against Kodak's own practices in the U.S. market, the acts of Fujifilm and the Japanese Government are not unreasonable.

Although the analysis in Section III is lethal to Kodak's case, we kick Kodak's dead horse for two additional sections: first, in Section IV, to demonstrate that the Japanese Government has not tolerated any anticompetitive activity; and finally, in Section V, to show that even if -- against all evidence -- unreasonable acts were found to exist, there has been no resulting brden to or restriction of U.S. commerce. (*8)

  • (*1)United States v. Eastman Kodak Co., ___ F.3d ___, No. 1364 (2d Cir., August 4, 1995), affirming United States v. Eastman Kodak Co., 853 F. Supp. 1454 (W.D.N.Y. 1994).
  • (*2)We note that Kodak's recent statements implying that the Court of Appeals' decision absolves it of allegations of anticompetitive activity misses the mark. The court's decision removes the very basis of Kodak's Section 301 case. If the court's decision gives Kodak a clean bill of health, as Kodak maintains, because the relevant market for color film is now worldwide (and, therefore, its exclusionary practices cannot be anticompetitive), then just as assuredly the same decision makes it impossible for Kodak to label Fujifilm's allegedly exclusionary practices anticompetitive. Fujifilm has the same clean bill of health under the standard applied by the Court of Appeals.
  • (*3)19 U.S.C., 2411(a).
  • (*4)19 U.S.C., 2411(b).
  • (*5)19 U.S.C., 2411(d)(3)(B)(i)(IV).
  • (*6)Both the Statement of Administrative Action accompanying the 1994 Uruguay Round Trade Agreements Act (which included an amendment to this part of Section 301) and the legislative history accompanying the 1988 Omnibus Trade and Competitiveness Act state that the foreign country's own laws should be taken into account in determining whether the criteria of the anticompetitive activities provision are met. Statement of Administrative Action, H.R. Doc., No. 103-316, 103d Cong., 2d Sess. 656-895 (1994) at 367 (hereinafter "SAA"); H.R. Conf. Rep. No. 100-576, 100th Cong., 2d Sess 570 (1988).
  • (*7)See H.R. Conf. Rep. No. 100-576, 100th Cong., 2d Sess 570 (1988) (stating that USTR should take into account "whether the anticompetitive foreign private activities are inconsistent with local (not U.S.) law" (emphasis added).
  • (*8)This is an essential condition of relief under Section 301 regardless of whether acts are found to be "unjustifiable," "unreasonable," or "discriminatory." 19 U.S.C., 2411(a)(1)(B)(ii) and 死キ烝爾 2411(b)(1).
B. Procedural Considerations Render Any USTR Action Premature And Inappropriate

In addition to its pervasive substantive failings, Kodak's case suffers from a threshold procedural defect that should result in the termination of this investigation before matters of substance are ever reached. Specifically, Kodak has chosen the wrong forum in which to broach its allegations against Fujifilm. As noted in our June 27, 1995 letter, Kodak has come forward with what amounts to a private antitrust complaint. But Kodak purposely chose not to take its complaint to the governmental authorities in either Japan or the United States that normally handle such matters. Instead, Kodak has gone as a first resort to USTR, a part of the Executive Office of the President, whose competence lies in the formulation of policy and the conduct of negotiations -- not the independent investigation of highly complex factual issues.

Already, at this early stage of the proceeding, Kodak has provided USTR with nearly 300 pages of factual allegations and Fujifilm has answered with nearly 600 pages of factual rebuttal. USTR has neither the staff nor the investigative tools to sort through this volume of contested factual detail in a comprehensive and objective manner. If USTR proceeds with this investigation -- if it pretends it can do with a handful of staff in a few months what dozens of Department of Justice or Federal Trade Commission antitrust experts take years to do -- it will be biting off far more than it can chew.

We are not suggesting that USTR refuse to enforce the provision of Section 301 dealing with government toleration of anticompetitive activities. Rather, we are saying that USTR should require issues arising under this provision to be framed in a proper manner. In this particular case, USTR should not proceed with its investigation because Kodak has not availed itself of available remedies in Japan. Unless such remedies have been pursued, there cannot be a governmental "act, policy, or practice" that is sufficiently crystallized for USTR to be able to evaluate. Otherwise, USTR would be stuck in the wholly unsuited role of amateur antitrust agency.

To allow Kodak to use Section 301 without having first resorted to available remedies in Japan would create an almost insurmountable burden for USTR. USTR would have to undertake extensive fact gathering, define the issues being decided, define the standards to be applied, evaluate the evidence in light of those standards, all before it could decide whether the criteria permitting or mandating USTR action under Section 301 had been met. It would have to do all of this with no established means or staff for voluminous fact gathering, no precedent relevant to the legal standards to be applied, no apparent standard of proof, no procedural or evidentiary standards, and no mechanism ensuring objectivity. Section 301 is not intended as a substitute for the established competition policy agencies in the United States or foreign countries; it is intended as a mechanism to encourage a negotiated solution to identifiable trade barriers. Where alternative mechanisms exist for identifying, investigating, and resolving alleged trade barriers, USTR should not pursue an investigation or negotiations when such mechanisms have been ignored.

A readily available mechanism exists to ensure that the Japanese Government is properly enforcing the Antimonopoly Act. Any person may bring a suspected violation to the attention of the Japan Fair Trade Commission ("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 has decided to take, or not to take, appropriate measures. Kodak, in all its alleged quarter-century of victimization, has never taken advantage of this opportunity. (*9)

If Kodak brought its complaint to the Japanese authorities, and those authorities failed to investigate, the USTR would have specific facts available to it to determine whether the failure to investigate was "unreasonable" under Section 301. If the Japanese authorities did investigate, but did not take remedial measures, or the measures taken were considered insufficient, the scope of the issues for investigation and negotiation by the USTR would be adequately defined. Finally, if the Japanese authorities took remedial measures that met with Kodak's approval, this Section 301 case would be moot.

Because Kodak rushed first to USTR, it failed to take steps that would have crystallized the governmental action that is the subject of all Section 301 investigations. It failed to take steps that would have clarified the issues in this case or made the case unnecessary altogether. As a result, it is now asking USTR to venture far beyond its institutional competence and delve into factual disputes that USTR cannot hope to adjudicate fairly and accurately.

The policy implications of letting Kodak get away with its end-run around existing remedies extend far beyond this case. If USTR proceeds now, it is sending a signal to every U.S. company involved in a commercial dispute overseas, or even just nursing a grudge, to bypass normal mechanisms and go for a Section 301 home run. The ensuing mayhem would embroil USTR in no end of needless controversy. And, in particular, if setting agreed-upon international standards of competition policy is a long-term U.S. negotiating objective, it is hard to think of a worse way to go about building international support for it.

USTR should feel constrained not only by policy considerations, but also well established legal considerations. Namely, the broadly accepted concept of "exhaustion" militates against USTR's taking action if Kodak has not first exhausted its remedies in Japan.

The requirement that local remedies must be exhausted is a "well-established rule of customary international law. . . . {I}t has been considered necessary that the State where the violation occurred should have an opportunity to redress it by its own means, within the framework of its own domestic legal system." (*10) Prior USTR officials have specifically stated that such a requirement would likely be applied in cases involving a foreign government's failure to apply its own law. (*11)

This rule applies directly to Kodak's Section 301 complaint because, in essence, Kodak is requesting the U.S. Government to take up its private injury claim directly with the Japanese Government. The Restatement of Foreign Relations Law states specifically that:

Under international law, ordinarily a state is not required to consider a claim by another state for an injury to its national until that person has exhausted domestic remedies, unless such remedies are clearly sham or inadequate, or their application is unreasonably prolonged. (*12)

There is nothing in the legislative history of Section 301 to suggest that Congress intended the USTR to ignore customary international law in its application of this provision. (*13)

The doctrine of exhaustion of available remedies is also widely recognized elsewhere in U.S. law. (*14) The exhaustion requirement serves two policy goals that are particularly relevant to Kodak's case: it ensures that complex facts are adequately investigated and compiled, (*15)and it ensures that agencies having expertise have the opportunity to apply that expertise. (*16 ) As discussed above, absent a record of investigation of Kodak's complaints by a Japanese government agency, USTR simply does not have the staff or procedures to sort through the mountain of facts required to decide this case competently and fairly. Moreover, the USTR does not have the necessary expertise to apply the standards of Japanese law required to be applied by Section 301. (*17)

This is a case of first impression. There are many uncertainties, and the chances of taking actions that have unexpected consequences are correspondingly high. USTR should therefore tread carefully. There is no need to rush to judgment in this case -- after all, Kodak took 25 years to get around to complaining. USTR should decline further action because Kodak has not availed itself of the normal investigative and remedial mechanisms available.

  • (*9)Neither has Kodak complained to the Office of the Trade Ombudsman ("OTO"), a mechanism specifically established to address market access problems such as those raised by Kodak.
  • (*10)Interhandel Case (Switzerland v. United States), 1959 I.C.J. 6, 27 (Judgment of March 21).
  • (*11)See Bronckers, Marco C.E.J., Private Response to Foreign Unfair Trade Practices -- United States and EEC Complaint Procedures, 6 J. Intl. L. Bus. 651, 658 (citing Interview with Jeanne S. Archibald, Chairman of the Section 301 Committee, and Associate General Counsel, Office of United States Trade Representative (Nov. 1, 1984); also citing S. Rep. No. 308, 98th Cong., 1st Sess. 46 (1983) (in which the Senate Finance Committee insists, in connection with Section 301 complaints, that a key factor in the USTR's determination of whether to initiate an investigation should be "a consideration of the appropriate legal action available to, or taken by, the aggrieved United States party to defend its rights in the subject country.").
  • (*12)Restatement of the Law, Third, Foreign Relations 死キ烝爾 713 Remedies for Injury to Nationals of Other States, comment f.
  • (*13)This requirement applies especially in actions such as this one involving competition law. See Council Recommendation Concerning Cooperation Between Member Countries on Restrictive Business Practices Affecting International Trade, 25 September 1979, reprinted in OECD, Competition Law Enforcement 80-81 (1984).
  • (*14)See, e.g., Moore v. East Cleveland, 431 U.S. 494, 523-531, 52 L. Ed. 2d 531, 552-557 (1977) (requiring exhaustion of state or local remedies prior to appeal on constitutional basis from actions by city zoning board); Budd Co., Wheel & Brake Div. v. United States, 773 F. Supp. 1549, 1554-56, 15 CIT 446, 452-454 (1991) (requiring exhaustion of administrative remedies in appeal from final determination by the U.S. Department of Commerce).
  • (*15)See, e.g., Moore v. East Cleveland, 431 U.S. 494, 523-531, 52 L. Ed. 2d 531, 552-557 (1977) ("review may be seriously hampered if the appropriate agency has no chance to . . . make a factual record reflecting all aspects of the problem.")
  • (*16)See, e.g., McKart v. United States, 395 U.S. 185, 194, 23 L. Ed. 2d 194, 203 (1969) ("since agency decisions . . . frequently require expertise, the agency should be given the first opportunity . . . to apply that expertise.").
  • (*17)Under international law, exhaustion of local remedies is excused if resort to local remedies would be futile. See Claim of Finnish Shipowners (Finland v. Great Britain), 3 U.N. Rep. Int'l Arbitral Awards, 1479, 1495, 1504. However, this exception applies in very limited circumstances, for example, when there exists no provision of law permitting redress of the claims or when the remedial process available is corrupt and inefficient and has already denied justice in the "broadest sense." See Elettronica Sicula S.p.A. (ELSI) (United States v. Italy), 1989 I.C.J. at 47 (declining to require exhaustion because no provision for redress existed absent precedent for the proposition that provisions of the U.S.-Italy FCN Treaty were "self-executing."); D. Greig, International Law (2d ed. 1976) at 583-589 (stating that the exception would be available when denial of justice includes "imprisonment for an overlong time, or in barbarous conditions," etc.). The futility exception clearly does not apply in this case. Specific standards regarding anticompetitive activities are provided for in Japan's Antimonopoly Act. Section 45 of the Antimonopoly Act requires the JFTC to investigate any Antimonopoly Act violation reported by any person. Moreover, the JFTC has enforced the Antimonopoly Act in the photographic materials industry and in other Japanese industries and has succeeded in prompting changes in business practices even when it has not found clear-cut violations of the Antimonopoly Act. The OTO has also investigated and resolved numerous market access problems in a variety of industries. Kodak's allegations fail to bring its claim under this limited exception. See, e.g., "Privatizing Protection" at 217-218.

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