Full Text of the Document

FOREWORD ...... - I -

INTRODUCTION ...... I

EXECUTIVE SUMMARY: KODAK REWRITING HISTORY ...... iii

A. "Privatizing Protection": Fiction Based On Mistaken Facts, Misleading Facts, Or No Facts At All ...... 4 1. The consultant's report: wrong, wrong, and wrong again ...... 5 2. Retailer complaints as evidence of collusion and conspiracy ...... 5 3. Mischaracterizations ...... 6 4. Allegations with no support ...... 7 B. Fujifilm In Japan: No Systematic Anticompetitive Activities ...... 7 1. The alleged core distribution system ...... 8 2. The Asanuma non-incident ...... 9 3. The remarkably unremarkable rebates ...... 10 4. The paper distribution "bottleneck" theory ...... 12 5. The alleged exclusionary practices ...... 13 6. The pricing paradox ...... 14 C. Government Of Japan: No Encouragement Or Toleration Of Systematic Anticompetitive Behavior ...... 15 1. MITI did not encourage anticompetitive conduct ...... 15 2. The JFTC has strictly enforced the Antimonopoly Act with respect to Fujifilm ...... 16 3. Fujifilm and its tokuyakuten are not part of the Mitsui keiretsu .....18 D. Kodak In Japan: Limited Market Share As The Expected Consequence of Insufficient Investment, Inadequate Attention, And Ineffective Marketing 19 1. The mirror image problem ...... 19 2. The profit sanctuary myth ...... 20 3. Kodak shut the "window" opened by liberalization ...... 21 4. Missed opportunities and missing products: Kodak from 1985 to the p ...... 21 5. Too little, too late ...... 23 E. Treaty Violations: Old Allegations Do Not Improve With Age ...... 24 F. Kodak In The U.S. Market: A Critical Benchmark Against Which To Judge Kodak's Allegations About Fujifilm ...... 24 1. Historical context: Kodak's century-long entanglement with antitrust law ...... 25 2. Old habits that never change ...... 27 a. Kodak's exclusive dealing arrangements ...... 27

i b. Kodak's exclusionary practices have been very successful ...28 3. Kodak has used its leverage in the film market to dominate photofinishing and color paper ...... 29 4. U.S. Government toleration: inexplicable non-enforcement of the antitrust consent decrees restricting Kodak ...... 32 5. Fujifilm's enormous efforts in the U.S. market far exceed Kodak's commitment in Japan ...... 32 6. 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 ...... xxxvi A. The Distribution System ...... 36 B. Rebate Programs ...... 43 C. Price Competition ...... 45 D. MITI Involvement ...... 48 E. JFTC Enforcement ...... 53 F. Kodak's Market Share ...... 57 G. The Profit Sanctuary ...... 58 H. Liberalization Countermeasures ...... 59 I. Kodak's Efforts To Compete ...... 61 J. The Past Decade ...... 62

II. FUJIFILM HAS NOT ENGAGED IN SYSTEMATIC ANTI-COMPETITIVE ACTIVITIES IN THE JAPANESE MARKET ...... lxiv A. Fujifilm Has Not Created An Exclusionary Market Structure, Either Through Its Distribution System Or Through Its Rebates ...... 65 1. Fujifilm's use of independent single-brand distributors is not anticompetitive ...... 67 a. 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 general industry trend, not led by Fujifilm ...... 71 (1) Kodak/Nagase ...... 72 (2) Konica ...... 74 (3) Camera manufacturers ...... 75

ii c. Kodak's claim that lack of access to Fujifilm's tokuyakuten has crippled its efforts in Japan is disingenuous ...... 76 d. Fujifilm's tokuyakuten are independent businesses not under Fujifilm's control ...... 78 (1) Fujifilm's tokuyakuten compete with each other ..79 (2) Fujifilm's tokuyakuten are reasonably profitable by industry standards ...... 80 e. Kodak has completely mischaracterized the leverage exerted by Fujifilm's tokuyakuten ...... 82 f. Secondary dealers offer unimpeded access to small retail outlets ...... 84 2. Fujifilm's rebate programs are not exclusionary ...... 86 a. Fujifilm's use of progressive target volume rebates has been very limited for at least 20 years, and was substantially reduced recently ...... 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 ...... 91 a. 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 shows that there is no distribution bottleneck ...... 93 c. The only segment of the market in which Kodak's access may be limited is small shops with insufficient shelf space to carry multiple brands ...... 94 4. There is no distribution bottleneck for color paper ...... 97 5. The allegedly exclusionary practices complained about by Kodak are normal competitive practices worldwide ...... 99 a. Single-brand or direct distribution of film is the worldwide norm ...... 99 b. Forward integration into photofinishing is the worldwide norm ...... 100 B. Fujifilm Has Not Suppressed Price Competition ...... 102 1. Market trends show that the Japanese market is increasingly sensitive to price ...... 103

iii 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 private label brands demonstrates that the market responds to price .107 2. Kodak's conspiracy theories are based on misstatements and factual distortions ...... 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 SYSTEMATIC ANTICOMPETITIVE CONDUCT ...... 115 A. The Japanese Government Did Not Encourage The Creation Of An Exclusionary Market Structure To Block Kodak ...... 116 1. MITI's distribution guidelines were irrelevant to the development of Fujifilm's distribution system ...... 117 a. MITI did not encourage tokuyakuten to deal only with Fujifilm ...... 118 b. MITI did not encourage expanded use of rebates ...... 120 c. MITI did not encourage the creation of a bottleneck ...... 121 2. The Japanese Government had no involvement in investments by Mitsui entities in Fujifilm ...... 121 a. Fujifilm and its tokuyakuten are not part of the Mitsui Group ...... 122 b. Government support for the stock market had nothing to do with investments by Mitsui entities in Fujifilm ...... 123 c. The issue of cross-shareholding between Fujifilm and financial institutions is completely irrelevant to Kodak's performance in the Japanese market ...... 124 B. The JFTC Actively Enforces The Japanese Antimonopoly Act, And Has Subjected Fujifilm To Particular Scrutiny ...... 125 1. The JFTC uses a variety of formal and informal methods to enforce the Antimonopoly Act strictly ...... 125 a. 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 Act over MITI guidance ...... 128

iv (3) Amendments in 1977 significantly strengthened the JFTC ability to enforce the Antimonopoly Act ...... 129 (4) The Structural Impediments Initiative (SII) further strengthened the Antimonopoly Act ...... 133 b. Kodak's complaint that the JFTC has not enforced the Antimonopoly 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 ...... 141 c. 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 scrutinized Fujifilm's conduct ...... 144 a. 1970 -- Study of Film Industry Pricing ...... 144 b. 1977 -- Monitoring Under Article 2(7) ...... 149 c. 1980 -- Report on Parallel Price Increase ...... 150 d. 1981 -- X-Ray Film Case ...... 150 e. 1984 -- Report on Parallel Price Increases ...... 152 f. 1987 -- Study of Rebates ...... 152 g. 1992 -- Study of Oligopolistic Industries ...... 154 h. 1993 -- Investigation of Copy Paper ...... 155 3. Fujifilm has made its own efforts to comply strictly with the Antimonopoly Act ...... 155 4. Kodak has mischaracterized the Premiums Law as smokescreen for price collusion ...... 158 a. The Premiums Law serves legitimate governmental purposes to protect consumers ...... 158 b. The Premiums Law does not exclude other types of JFTC enforcement activities ...... 159 c. There is no Fair Competition Code for photographic film or paper ...... 159 d. Kodak's allegation about JFTC actions against gray market film distorts the nature of the JFTC actions ...... 160 C. 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 INSUFFICIENT INVESTMENT, INADEQUATE ATTENTION, AND INEFFECTIVE MARKETING ...... 163

v A. The Market Share Statistics Cited By Kodak Do Not Demonstrate That The Japanese Market Is Closed To Kodak ...... 163 1. The "home team advantage" is real for both Fujifilm and Kodak in their respective domestic markets and explains Kodak's low penetration of the Japanese market ...... 164 3. Economic literature supports the conclusion that there is a "home Team advantage" ...... 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's operations ...... 172 2. Kodak has in fact "spent" much of its profit through excessive dividends and restructuring charges ...... 175 C. Kodak Shut The "Window" Opened By Liberalization (1971-1984) ...... 178 D. Kodak Has Failed To Take The Steps Necessary To Gain Share In The Japanese Market ...... 183 1. Kodak failed to adopt an aggressive strategy to take advantage of the liberalization ...... 183 2. Kodak did not take advantage of liberalization until 1985 ...... 185 3. Kodak's investments in Japan have been insufficient to create reasonable expectation of a significantly greater market share .....189 a. The error of relying on Nagase ...... 190 b. Even after taking over Nagase, Kodak's operations faced difficulties ...... 194 4. Kodak has not competed aggressively on price ...... 196 5. Kodak has lagged behind Fujifilm in the introduction of products which have captured significant shares of the Japanese market ...... 199 6. Kodak's sales, advertising, and public relations efforts have been insufficient to create any expectation that it could gain market share in Japan ...... 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 CODE CAN BE DISMISSED ...... 212 A. The U.S. Government Would Be Barred By The Doctrine Of Laches From Making A Claim Of Treaty Violations ...... 212 B. Kodak Has Only Alleged Past Violations Of The Treaties, Which Are Not Actionable Under Section 301 ...... 215

vi 1. Even Kodak admits it alleges only past violations that have long since been corrected ...... 215 2. Only current violations of trade agreements are actionable under Section 301 ...... 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 ...... 219 a. Japan has never violated the OECD Capital Code ...... 220 b. Japan did not violate the spirit of the OECD Capital Code ..221 2. Japan did not violate the FCN Treaty ...... 222 a. Under the FCN Treaty, Japan's very low level of monetary reserves allowed Japan to restrict foreign direct investment .222 b. Japan foreign investment restrictions are not a violation of the FCN Treaty because the U.S. Government acquiesced in Japan's restrictions ...... 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, It Must Utilize The Dispute Resolution Provision In Each Treaty ...... 229

VI. EXAMINATION OF KODAK'S BEHAVIOR IN THE U.S MARKET PROVIDES A CRITICAL BENCHMARK AGAINST WHICH TO JUDGE KODAK'S ALLEGATIONS ABOUT FUJIFILM'S BEHAVIOR IN THE JAPANESE MARKET ...... 231 A. The U.S. Market Has Been Shaped By Kodak's Long History Of Domination In All Photographic Products ...... 233 1. The early years: Kodak acquires its dominant position through acquisitions ...... 234 2. The 1921 Consent Decree: The U.S. Government attempts to rein Kodak in ...... 235 3. The 1954 Consent Decree: The U.S. Government must stop Kodak again ...... 237 4. Kodak's practices cause multiple allegations of misconduct from its competitors ...... 237 5. U.S. Government opposes Kodak's attempt to terminate the Consent Decrees ...... 240 B. Kodak Continues To Do Whatever It Takes To Maintain Its Dominance ..242 1. Kodak's practices in the color film market ...... 242 a. Kodak's exclusive dealing arrangements ...... 242 b. Kodak's efforts to limit Fuji film display visibility ...... 244 c. Kodak's exclusionary practices have been very successful ..244

vii 2. Kodak's practices in the photofinishing and color paper markets ...248 a. 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 special packaging that bundles film and photofinishing, ensure and maintain exclusivity across all photographic products ...... 255 (3) Kodak favors bundling and offers of free equipment to land and maintain color paper accounts ...... 259 b. Kodak reacts aggressively against Fujifilm's attempts to enter the photofinishing market ...... 261 3. The U.S. Government toleration; inexplicable lack of enforcement of the antitrust consent decrees restricting Kodak ...... 263 a. The 1921 Consent Decree ...... 263 b. The 1954 Consent Decree ...... 265 c. Despite the fact that these Kodak practices were well known in the industry, the U.S. Government did not seek to enforce the Consent Decrees ...... 266 C. Fujifilm Has Achieved Only Limited Success In The U.S. Market Despite Its Enormous Commitment ...... 267 1. Fujifilm starts its U.S. presence with a commitment to produce products for local market ...... 267 2. Fuji-USA quickly realizes the importance of managing its own distribution, rather than relying on third party distributors ...... 268 3. Fuji-USA develops new channels of distribution for its products not occupied by incumbent for its products ...... 269 4. Fujifilm gains increasing acceptance by offering innovative products and sponsoring local events ...... 270 5. Fujifilm offers a superior color paper product ...... 271 6. Fujifilm significantly increases its capital commitment to U.S. market ...... 274 7. Fujifilm's efforts in the United States are in sharp contrast to Kodak's efforts in Japan ...... 274 D. Kodak Has Urged The U.S. Government To Apply A Double Standard ...276 1. Existence of market power: market definition ...... 276 2. Competitive behavior and practices ...... 278 3. Home team advantage ...... 280

viii FOREWORD by Mr. Minoru Ohnishi President 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,

i 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.

ii 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.

iii 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. 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.

2 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.

3 I think there is no further barrier in the Japanese market for Kodak to proceed with its business in Japan. If there should be something, it would be only due to Kodak's own insufficient 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 Mistaken Facts, 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.

4 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}.

5 Therefore, I do not think that {Nihon Jumbo's price} will put much 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

1 Zenren Tsuho, April 1994, 11-13.

6 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 Anticompetitive Activities

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.

7 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 multibrand distributor until the so-called "Asanuma incident" in 1975.

8 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

9 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-

10 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.

11 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

12 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

The President ruled out the possibility of the company passing on exchange gains from the yen's appreciation against the U.S. dollar to Japanese consumers in the form of lower product prices. He said Kodak is not a price leader in Japan and has no intention of lowering 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

13 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 Toleration Of 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

14 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

15 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 with respect 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 Film Industry Pricing. The report simply noted that Konica pricing followed that of the industry leader, Fujifilm. Such a pattern is quite common and prevails in many other industries, including many U.S. industries, when there are only a few producers. It does not mean price fixing, and the JFTC found none.

The JFTC has been subjecting the photographic materials industry, including Fujifilm, to particularly strict scrutiny. Both color film and color paper have been identified as "monopolistic situations" and are therefore subjected to particularly careful scrutiny and additional reporting requirements under the Antimonopoly Act.

When Fujifilm and other manufacturers raised their prices due to the "silver shock," the JFTC exercised its authority under the Antimonopoly Act and requested explanations. The JFTC accepted the Fujifilm explanation, and found no violations.

In another product, x-ray film, the JFTC found problems and requested Fujifilm to make changes. Because the JFTC did not publicly mention other products, Kodak assumes that nothing happened for other products. In fact, at that time Fujifilm

16 voluntarily reviewed other contracts and made similar changes for other products, including color film. The issues Kodak has claimed as problems were resolved 15 years ago.

Kodak commits the same error about rebates. Kodak repeatedly invokes "remarkably progressive" rebates. But they do not exist, never have, and never will in light of the strict JFTC scrutiny of Fujifilm. Fujifilm once had mildly progressive rebates. Even these rebates were changed after a JFTC study in the late 1980s of the distribution system for photographic film. Again, the problem 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.

17 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 Expected Consequence of Insufficient Investment, Inadequate Attention, 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

18 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

19 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.

20 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

21 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 With Age

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.

22 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 Against Which 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.

23 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 with antitrust 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

24 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

25 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

26 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 very successful

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 the southeast and southwest regions of the United States, Eckerd has refused to carry Fuji film for the past 20 years. Eckerd is very tight- lipped regarding its reason for refusing to sell Fuji film; buyers simply say 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 on Publix shelves due to the VIP rebate program, other ties to Kodak, and incentives provided on photofinishing by Qualex.

K-MART: Kodak recently offered K-Mart a direct payment of $8 million dollars to exclude Focal brand film (manufactured by 3M) from K-Mart stores.

BRADLEES: A chain of 130 stores, Bradlees has entered into an exclusive arrangement with Kodak to offer only Kodak brand film 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

27 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 dominate photofinishing 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

28 900 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

29 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 of the 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 exceed Kodak'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

30 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 of distribution 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 its film.

Developing new channels of distribution not occupied by the domestic incumbent In Japan, Kodak continually relied on established channels of distribution and made no attempt to break new ground.

In the U.S. market, Fujifilm conceived of, developed, and nurtured the grocery store 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 different tastes of the Japanese consumer until 1989, 16 years after a Japanese wholesaler informed Kodak of this problem.

From the start of its entry into the U.S. market, Fujifilm studied local tastes and has modified its products accordingly.

Introducing innovative new products

In the Japanese market, Kodak has consistently lagged behind Fujifilm; it was two years behind in introducing ISO 400 film and single-use cameras.

In the U.S. market, Fujifilm has been a leader in innovation, introducing a 35mm single-use camera when Kodak only had a lower quality 110 model. In the color paper market, Fujifilm's new RA-4 color paper was determined by experts to preserve the photo image much longer than Kodak's color paper.

31 Committing significant resources

In the Japanese market Kodak has invested only limited resources, and has made no investment in local manufacturing of consumer photographic products.

In the U.S. market Fujifilm has invested over 1.5 billion dollars in the last ten years 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.

32 33 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.

34 I. KODAK'S ALLEGATIONS ARE BASED ON FACTUAL MISSTATEMENTS, MISCHARACTERIZATIONS, AND MISLEADING 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

35 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 were well underway long before liberalization of the market. Two of Fujifilm's tokuyakuten, Kashimura and Ohmiya, have not carried Kodak products since World War II. Kashimura became a single-brand dealer for Fujifilm in 1963, Ohmiya the following year. (II.A.1.a.)

Misuzu terminated Konica and Nagase (Kodak's importer and main distributor) in 1968, when tariff rates were still 40 percent. Only Asanuma switched to a single-brand relationship with Fujifilm during the 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 its own single-brand distribution network, cementing relationships with Honjo in 1960, Chiyoda in the mid 1960s, Sanwa in 1967, and acquiring Kuwada in 1967. The acquisition of Kuwada led to Kuwada's decision to terminate Fujifilm. Konica also built up a single-brand distribution system in the 1960s and '70s, largely through acquisitions. (II.A.1.b.)

Nagase's and Konica's initiatives in establishing single-brand distribution systems created strong incentives for the remaining major multibrand wholesalers to strengthen their relationships with the market leader, Fujifilm. Accordingly, the decisions by Kashimura, Ohmiya, Misuzu, and Asanuma to become single-brand Fujifilm distributors represented a logical business strategy in the face of market developments. (II.A.1.b.)

36 The incentives facing Fujifilm's tokuyakuten were strengthened by the simultaneous trend among camera manufacturers to develop direct distribution and abandon primary reliance on independent wholesalers. The sale of cameras and camera accessories was formerly the core of the tokuyakuten's business. With decreasing access to this product line, it was all the more important for the tokuyakuten to consolidate their relationships 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 "essential facility" during the period in question. After all, Nagase bought one distributor, and recruited other distributors into single-brand relationships. In the case of its acquisition of Kuwada, Nagase was able to persuade a distributor to terminate dealings with Fujifilm. (II.A.1.b.)

Although Kodak now portrays the loss of Asanuma as a catastrophe, it did not act that way at the time. In fact, Kodak directly rebuffed the company. Before 1960, Kodak had exported directly to Asanuma and other companies, before selecting Nagase as its exclusive importer. This decision had upset Asanuma, which did not like having to go through Nagase to get to Kodak. In 1973, Asanuma officials visited Rochester to ask Kodak to reestablish direct dealings. Kodak refused. After Asanuma terminated Nagase in 1975, Kodak made no special effort to reverse the decision. Indeed, Nagase was confident that its alternative distribution network was sufficient to compensate for the loss 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 in the 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 all photographic products, as Kodak has argued. Since camera manufacturers have moved to direct distribution, the tokuyakuten have become predominantly distributors of Fujifilm products. The sale of

37 Fujifilm products accounts for approximately 80 percent of these companies' revenues. Any of the other photographic products distributed by the tokuyakuten can easily be purchased from other sources. (II.A.1.e.)

Kodak's claimed inability to build its own direct distribution system in Japan is baseless. Kodak has built direct distribution systems in the United 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 less exclusionary than Kodak's U.S. direct distribution network. At least Kodak has a chance to make a deal with (or acquire) one or more of Fujifilm's tokuyakuten. On the other hand, there is no possibility that Fujifilm would be able to utilize Kodak's powerful in-house distribution system in the United States. (II.A.5.a.)

Aside from direct distribution, Kodak can reach retail shops through secondary dealers. In addition, both Kodak and Agfa have begun to offer color film on an OEM basis to Japanese retailers. Kodak distorts the current Japanese distribution system. Consider the following diagram:

38 COLOR FILM DISTRIBUTION STRUCTURE IN JAPAN

As this chart shows, Kodak has access to the same distribution options as other manufacturers: selling directly to large retailers, or selling to secondary dealers or photofinishing labs to reach smaller retailer outlets. (We have excluded Mitsubishi, a smaller participant which uses the same distribution structure to sell color film manufactured by Konica.) (II.A.1.)

Of the significant secondary dealers, approximately 90 carry multiple brands including Kodak. Only one carries only Fuji brand color film. Secondary dealers currently account for about 30 percent of the film market, and specialize in selling to the smaller stores that Kodak says are especially difficult to reach. (II.A.1.f.)

39 • • •

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 established by the early 1960s, and thus precedes the changes in the distribution system about which Kodak complains. Although Kodak was hindered by import protection at the time, Konica was not. Control over the distribution system was clearly irrelevant to Fujifilm's ability to overtake Konica as market leader. (II.A.1.)

Kodak does not sell well in Japan even when it is available and prominently displayed. For example, Camera no Kimura, one of the largest camera store chains in Tokyo, offers Kodak and gives it essentially equal billing along with Fujifilm and Konica. Yet even under these conditions Fujifilm outsells Kodak 7 to 1. Kodak's problem is 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 gray market imports. These imports nearly quadrupled between 1991 and 1994 and have now overtaken Kodak in market share. Yet these imports are not distributed by Fujifilm's tokuyakuten. The success of these imports has not been hampered in the least by the inability to utilize 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. Agfa has used the private label route, manufacturing on an OEM basis for Daiei, to increase its sales from 3 million rolls in 1993 to 14 million rolls in 1994, moving up to roughly 60 percent of Kodak's market share in just one year. Lack of access to Fujifilm's tokuyakuten has not prevented Agfa from achieving this rapid growth. (II.B.1.b.)

• • •

40 Kodak Rewriting History:

Fujifilm's tokuyakuten are no longer truly independent businesses. They are controlled and manipulated by Fujifilm. "Privatizing Protection" at 90-112, 151.

Facts:

The four tokuyakuten carry only Fuji brand film as an independent business decision. They are under no contractual obligation to be single-brand distributors. The fact is that Kodak has not made them an offer to carry Kodak color film in 20 years. (II.A.1.c.)

Contrary to Kodak's assertions, the four tokuyakuten compete vigorously with one another. Most of Fujifilm's larger customers source their film from two or more tokuyakuten to play them off against each other. One of the major reasons Fujifilm continues to rely on independent wholesalers is this vigorous intrabrand competition to expand 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 of Japanese wholesalers. Return on capital has been attractive for the wholesalers -- in excess of 5 percent -- and comparable to other Japanese wholesalers. (II.A.1.d.2.)

• • •

Kodak Rewriting History:

Fujifilm has created an anticompetitive market structure in color paper by acquiring a network of photofinishing labs and in effect creating a "captive market." "Privatizing Protection" at 40-42 and 88-90.

Facts:

Forward integration by film manufacturers into photofinishing is a normal business practice around the world. It was a normal outgrowth of the advent of color photography; given the technical complexities of color photoprocessing, film manufacturers invested in photofinishing facilities to ensure a ready market for color film and guarantee quality in color prints. (II.A.5.b.)

41 Accordingly, film and paper producers began investing in photofinishing long ago. Fujifilm and other manufacturers had already established a large network by the early 1960s. Toyo, a subsidiary of Nagase, started the first Eastman Kodak color photofinishing lab in Japan in 1952. (II.A.4.)

A similar situation currently exists in the U.S. market: both Kodak and Fujifilm 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 strong incentives not to switch suppliers. "Privatizing Protection" at 53.

Facts:

Rebate programs to Fujifilm's tokuyakuten based on target volumes are the exception, not the rule. Most rebate programs are not contingent upon attaining a certain level of sales or purchases. Accordingly, most programs have no exclusionary impact whatsoever. (II.A.2.a.1.)

The only target volume program in recent years has never had any more than modest progressivity in its rate structure. The difference between each step averaged less than 0.3 percent and the maximum rebate was less than 3 percent. These increments were hardly "remarkably progressive." (II.A.2.a.1.)

In 1991 this program was overhauled to virtually eliminate any progressivity. The rebates are now based on regional targets for each

42 tokuyakuten and the difference between the minimum rebate amount 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 to retailers in recent years. Only one had even a slightly progressive rate structure. This program was eliminated in 1990. (II.A.2.a.2.)

• • •

Kodak Rewriting History:

Rebates are used to manipulate the tokuyakutens' financial performance. They are often determined after the end of the year to tip the tokuyakuten just barely back into the black. "Privatizing Protection" at 95-100.

Fact:

All rebate rates and (if applicable) targets are set at the outset of a rebate period. There is no after-the-fact manipulation; a tokuyakuten is always able to determine in advance whether it will receive a rebate and how much 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 and retailers to keep prices high to maximize their profits. "Privatizing Protection" at 154- 160.

Fact:

No Fujifilm rebate is based upon resale amount. All programs are calculated either as a certain yen amount per unit purchased or sold, or as a certain percentage of purchase amount. Accordingly, Fujifilm's rebates have no effect to raise resale prices. (II.B.4.)

43 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 boost retail prices. "Privatizing Protection" at 154-155.

Facts:

This claim is inconsistent with the data. Vigorous price competition has led to falling prices for film for several years. From 1989 to 1994, retail prices have fallen almost 9 percent. When adjusted for inflation, the decline 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 price of over 50 percent. (II.B.1.a.)

• • •

2 "Privatizing Protection" at 107-109.

44 Kodak Rewriting History:

Fujifilm has actively engaged in conspiracies with distributors, labs, and retailers to maintain resale prices. "Privatizing Protection" at 108-112.

Facts:

Kodak refers repeatedly to the "Supermarket Chain A Crisis" in 1974, in which Kodak alleges that retailers and laboratories colluded to increase their prices in response to discounted color prints offered by Chain A. Yet the articles cited by Kodak show that the retailers' response was to demand lower prices from the laboratories in order to meet the competition by Chain A. The articles also quote an official for Fujifilm Color Trading who stated that nothing could be done about the discounting, and advised smaller stores to compete on the basis of quality and service. (II.B.2.)

The JFTC investigated the matter and found a violation by Chubu Laboratories and Tohuku Laboratories. Fujifilm, contrary to Kodak's insinuation, had no part in any collusion. (II.B.2.)

Kodak points out that in 1983 Zenren complained to the Japan Fair Trade Commission about a promotional campaign by Kodak featuring its VR film series. In focusing on price, Kodak ignores the deceptive manner of its advertising, which was potentially misleading to consumers -- namely, that Kodak was offering a package of different speed films including VR1000, which was unusable in most Japanese cameras of the time. Nagase did not dispute the matter, and agreed to cancel its planned television advertising while it continued the basic campaign. (II.B.2.)

Kodak refers to Zenren reaction to discount lab Nihon Jumbo's offer of 9 yen color prints in 1993. In fact, Zenren's position was that shops offering quicker and better service could compete with Nihon Jumbo on that basis without having to match the discount price. Furthermore, no action was taken to force Nihon Jumbo to retract its price cut. In fact, Nihon Jumbo -- now number two in total photofinishing income behind only Fuji Color Service -- currently offers 4 yen prints. (II.B.2.)

Fujifilm's price lists carry clear disclaimers that suggested retail prices are only for reference and that customers are free to set their own prices. (III.B.3.)

45 Fujifilm has instituted a detailed Antimonopoly Act compliance program with strict prohibitions on activities that could be construed as resale price maintenance. Fujifilm has conducted extensive internal seminars to familiarize relevant personnel with proper procedures. (III.B.3.)

• • •

Kodak Rewriting History:

Fujifilm maintains an enormous monitoring program, complete with legions of housewives 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 32 retail storefronts in Tokyo and Osaka. Such limited data are gathered purely to monitor competitors' pricing; they are clearly inadequate as an instrument for controlling prices at some 280,000 retail outlets. Kodak has 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 addresses consumer preferences and perceptions, not prices. Fujifilm does not use postmen to gather information of any kind. (II.B.3.)

Fujifilm receives no price reports from its tokuyakuten or from labs. The reports 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.

46 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. "Privatizing Protection" at 81-82, 181.

Facts:

Kodak provides no evidence for this claim. Kodak cites only general statements that MITI encouraged the increase in the number of stable shareholders. (III.A.2.b.)

The Mitsui Group companies that hold Fujifilm shares are financial services companies -- banks and trust companies. Yet MITI does not have jurisdiction over financial services companies. Even if it wanted to do so, MITI could not pressure financial services companies to take such action. (III.A.2.b.)

The Mitsui Group companies that increased their shareholding in Fujifilm cite unrelated business reasons for doing so -- the desire to win Fujifilm's financial business and to make attractive investments -- not the 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 of the 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 are from Daiichi; it is laughable that such a situation would occur within the Mitsui keiretsu. (III.A.2.a.)

• • •

47 Kodak Rewriting History:

MITI actively guided restructuring of the distribution system to block Kodak from the market, by encouraging rebates, by urging wholesalers to join Fujifilm's keiretsu, and by 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 Materials Sector" released in 1970, the alleged master plan for countermeasures, were not liberalization countermeasures at all. They were efforts to improve the efficiency of the distribution sector for this industry. (III.A.1.)

Rather than encouraging the use of rebates, the Guidelines in fact urged that the "use should be limited to a minimum" because of concerns that the rebates could have anticompetitive effects. (III.A.1.b.)

The Guidelines say nothing about wholesalers aligning themselves with manufacturers. Since virtually all of the major wholesalers had already aligned with manufacturers, it is hard to see how the 1970 Guidelines could encourage actions that had already happened. (III.A.1.a.)

The Guidelines also say nothing even suggesting the creation of a distribution bottleneck. (III.A.1.c.)

• • •

Kodak Rewriting History:

The distribution bottleneck also occurred by linking film and cameras, because Japan had only a few camera makers, who also used the same tokuyakuten for "virtually all of their distribution in Japan." "Privatizing Protection" at 101-102. See also 183, 201, 207.

Facts:

Long before the alleged countermeasures, the camera manufacturers had begun their own direct distribution, greatly reducing their reliance on the tokuyakuten for distribution. Therefore the tokuyakuten did not handle "virtually all" of the distribution of photographic products. (II.A.1.b.3.)

48 There is no evidence that the film-camera bottleneck ever occurred. In fact, the evidence is to the contrary. Rather than becoming intertwined, the color film and camera industries pursued different paths of distribution. (II.A.1.b.3.)

Moreover, there is no evidence of any MITI involvement. Kodak cites a 1973 article describing MITI's alleged interest in a camera-film linkage. Yet Kodak does not even allege any subsequent act by MITI to create the linkage. (II.A.1.e.)

• • •

Kodak Rewriting History:

MITI used administrative guidance to encourage Fujifilm to adopt shorter payment terms to tighten control over the wholesalers. "Privatizing Protection" at 96, 182, 203.

Facts:

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. (III.A.1.a.)

The Guidelines focus on the need to avoid partial payments, and instead to fully settle accounts with either cash or promissory notes. (III.A.1.a.)

Fujifilm had independent business reasons to adopt stricter payment terms. (III.A.1.a.)

• • •

Kodak Rewriting History:

MITI provided financing to help Japanese manufacturers strengthen their grip on the distribution system. "Privatizing Protection" at 94-95, 183.

49 Facts:

The Japan Development Bank is an independent entity. The Bank must be 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 cites no 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 them because they simply represented the continuation of practices associated with the market structure MITI created through the liberalization countermeasures." "Privatizing Protection" at 232.

Facts:

Kodak does not provide a single piece of evidence for this claim, not even the usual cite to a trade association magazine article.

The statement presupposes the existence of MITI-sponsored liberalization countermeasures. As explained above, this assumption does not have any factual basis. The alleged 1970 Distribution Guidelines "masterplan" does not corroborate any of Kodak's specific claims. (III.A.1.)

MITI's 1970 study of photographic film prices 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. (III.B.2.a.)

• • •

50 Kodak Rewriting History:

MITI defended the film industry against prosecution by the JFTC. "Privatizing Protection" at 183, 229.

Facts:

There was nothing to defend against. The allegation of a JFTC finding of "price fixing" in 1970 is wrong. The JFTC was merely studying price 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 officials specifically deny that their study was a finding of price fixing. (III.B.2.a.)

Kodak takes characterizations that may have been appropriate in the 1950s, and then applies them to the 1970s. The JFTC relationship with MITI changed fundamentally in the 1970s. In fact, the JFTC criminally prosecuted a price fixing cartel in the oil industry in direct conflict with MITI 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.

51 Kodak Rewriting History:

The JFTC did not enforce the Antimonopoly Act with respect to photographic products. "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. Kodak describes some of these enforcement activities, but misinterprets them. After its review of the relevant facts, the JFTC decided there were no violations of the Antimonopoly Act concerning color film and color paper. 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 the Antimonopoly 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." "Privatizing Protection" at 79.

Facts:

The 1970 Report did not find price fixing. The report was a study of the industry, not a document that stated any legal conclusions. (III.B.2.a.)

Kodak relies on a seriously flawed translation. Although the Japanese original refers to "oligopolistic situation," Kodak then concludes that the JFTC found "price fixing," an unsupported and misleading conclusion. (III.B.2.a.)

The Report noted that pricing by the smaller company followed that of the industry leader, a pattern that is quite common in oligopolistic industries. (III.B.2.a.)

The Report actually notes that during this period Fujifilm and Konica followed the price leadership of Kodak. (III.B.2.a.)

52 • • •

Kodak Rewriting History:

The JFTC failed to take enforcement action against Fujifilm's use of anticompetitive rebates. "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 there was no violation of the Antimonopoly Act. (II.B.2.f.)

In fact, Fujifilm has abolished and restructured even its mildly progressive rebates. The rebates were never "remarkably progressive," and thus never anticompetitive; whatever they were, the mildly progressive 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 on oligopolistic industries. "Privatizing Protection" at 223.

Facts:

In Kodak's own words, the AML study group recommended that "the

JFTC Ustrictly monitorU the film industry and to vigorously enforce the AML if a company engages in violative conduct." "Privatizing Protection" 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.)

• • •

53 Kodak Rewriting History:

The Fair Competition Code on Camera Related Products (“Camera Code”) is enforced with respect to color film, and thus limits marketing practices in an anticompetitive way. "Privatizing Protection" at 224, 227.

Facts:

Given the nature of Kodak's allegation, one would expect numerous citations for Kodak's proposition that the Camera Code is enforced against color film. (III.B.4.)

Kodak cites only two instances to support its allegation that the Camera Code 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" for purchasers of specific cameras. In the instance noted, the film is considered a premium related to the sale of a camera. Thus, it falls squarely within the scope of the Code. (Appendix)

The other instance cited by Kodak involves advertisements that offered Korean "Lotte" film as Fuji film 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. (III.D.4.d. and Appendix)

Kodak also mischaracterizes this last instance as a prohibition against comparisons between the price of re-imported film and domestic suggested retail prices. The article cited does not support Kodak's interpretation. Moreover, ads comparing the price of re-imports to the domestic suggested retail prices are widespread in Japan, and are not considered 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

54 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's dominant position in the Japanese market cannot be explained by a "home team advantage." "Privatizing Protection" at 1-3.

Facts:

Outside of their respective home markets, Fujifilm and Kodak enjoy almost equal market shares. If the U.S. and Japan are excluded, Kodak has 36 percent of 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 market share is higher than Fujifilm's is that Kodak's home market is larger than Fujifilm's. (IV.A.1.)

In their home markets, Fujifilm and Kodak perform almost identically. Each has approximately 70 percent of its respective home market in color film. Kodak has 58 percent of the U.S. market for color paper, compared with Fujifilm's 49 percent of the Japanese market. (IV.A.1.)

Neither Kodak's dominant position in the U.S. market nor Fujifilm's in the Japanese market can be explained other than by the existence of a "home team advantage." Indeed, Kodak supported this notion in the U.S. District Court's consent decree proceedings. Consumer preference for the "home team" is demonstrated by surveys and actual buying patterns in both markets. Economic literature also supports the conclusion that a "home team advantage" exists. (IV.A.1.)

55 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 the Japanese 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 than Fujifilm over the past 20 years. If the performance of the two is compared on an equivalent basis using operating profits as a percentage of sales, Fujifilm's and Kodak's performances have been virtually identical -- Kodak's annual operating profits as a percent of sales have averaged 14.4 percent and Fujifilm's have averaged 15.2 percent of sales. (IV.B.1.)

Kodak's annual financial statements demonstrate that most of Kodak's profits over the past 20 years have been generated by its imaging division, the division which includes consumer photographic color film and color paper, and most of these profits have been generated in the United States. Between 1975 and 1990, Kodak's sales of film in the U.S. accounted for less than 10 percent of total sales, but generated 25 percent of total earnings by the company. If a profit 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 to or greater than Fujifilm's if it had not depleted its cash to make up for management mistakes. Between 1985 and 1994, Kodak had extraordinary charges against earnings of $5.5 billion resulting from its violation of Polaroid's instant film patent, the costs of withdrawing from the instant film market, and repeated restructurings. The extraordinary charges against earnings reduced net income to such a degree that Kodak, in order to prop up its stock, had to

56 pay out dividends at more than one and one-half times the average rate of the other 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 the Japanese market after the trade and capital liberalization and were successful in realizing this objective. "Privatizing Protection" at 76-103.

Facts:

By Kodak's own admission, its market share in Japan more than doubled during the 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 a combination 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 its underselling of Fujifilm by not raising its prices in response to the "silver shock," its market share continued to rise. When the 110 format peaked in Japan and Kodak raised prices and narrowed the margin of underselling of Fujifilm in 1984, its market share began to decline. (IV.C.)

57 Although Kodak attributes the increase in its market share to Fujifilm's withholding of product from the market to support the higher prices necessitated by the "silver shock," the evidence demonstrates the contrary. Fujifilm increased shipments each year during the period when it was allegedly withholding product from the market, in fact, the growth in its shipments during 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 it used normal competitive means to compete -- product innovation and price. Kodak itself shut the "window" on its newly achieved market share by raising prices 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 this market. Rather, the distribution bottleneck allegedly created by the liberalization countermeasures has frustrated Kodak's efforts. "Privatizing Protection" at 3-9.

58 Facts:

Kodak did not take advantage of liberalization. It left its agent, Nagase, in control of its fate in the Japanese market. While it now claims that the tokuyakuten are an essential facility for access to the Japanese market, in 1973 it rebuffed Asanuma's initiative to reestablish direct relations with Kodak. Similarly, Nagase downplayed the termination of Asanuma as a channel for Kodak products and claimed its DKP network provided Kodak broader coverage in Japan. Kodak's commitment to Japan was negligible in the post- liberalization period; it waited 15 years after liberalization to establish control over distribution of its products in Japan. (IV.D.3.a.)

When Kodak finally took control of its operations in Japan, it did not make the necessary investments to compete effectively. It claims an investment of $750 million 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 only succeeded in allowing Fujifilm to capture 12 percent of that market. Kodak also claims that it undertook extensive advertising, citing expenses of 5.3 billion yen between 1986 and 1988. In comparison, Fujifilm spent 10 times this amount in the same period. (IV.D.3.b.)

With the exception of a brief period in the early 1980s, Kodak has not attempted to gain access to the Japanese market by aggressively pricing its products. Kodak's own executives have stated that they do not intend to use price -- the ultimate competitive weapon -- as a means to gain market in Japan. Kodak's executives have also expressed concerns that competitive pricing in Japan by Kodak could make Japan the source of gray market exports of Kodak film, which would undermine Kodak's worldwide price structure. (IV.D.4.)

Kodak has also failed to compete by introducing innovative products; it has lagged behind Fujifilm in introducing new products which have captured significant shares of the Japanese market. Kodak's primary innovations were 110 format film and disc film. The former never achieved significant market penetration; the latter was a failure from the time it was introduced in the market. In contrast, Fujifilm introduced both high resolution ISO 400 film two years ahead of Kodak, and also offered technologically superior single-use cameras two years ahead of Kodak. Both had claimed substantial shares of the market (nearly 40 percent for ISO 400 film and 10 percent for the single-use camera) by the time that Kodak had a comparable product in the market. (IV.D.5.)

59 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 between Fujifilm's new aggressive attention to the domestic market and low-priced gray market imports. "Privatizing Protection" at 139.

Facts:

Fujifilm did not cut back on exports and redirect its production to the domestic market as the yen appreciated. For example, between 1985 and 1987, Fujifilm's domestic shipments increased only 10 percent, consistent with the growth in the market. Thus, the facts belie any redirection by Fujifilm to reclaiming market share. Rather, the decline in Kodak's market share was due to its unwillingness to price aggressively, a policy confirmed in public announcements by Kodak executives, and by the successive and successful new 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 this period, prices were also at historic highs. (IV.E.)

The increase of non-Kodak imports in the 1990s may well have squeezed Kodak because these imports, most importantly Agfa's, were willing to compete in the Japanese market using aggressive pricing. Kodak was not. (IV.E.)

60 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.

61 A. Fujifilm Has Not Created An Exclusionary Market Structure, Either Through Its Distribution System Or Through 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 our products through two distributors. It was a reasonably successful kind of operation, although by selling through distributors without the direct support of the manufacturer we certainly had some difficulties.

Our current history begins in 1977, when we reestablished the company called Kodak Japan to provide marketing and technical support for our distributors. It continued that way until 1983, when we decided we needed to be much more aggressive in the Japanese marketplace. . . . Since then we have, through a number of processes, basically reacquired the distribution and sales rights to our products and brought them back under our own direct control.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 an American point of view, especially painful. . . . The urgent prospect that one of America's leading companies might be outpaced by a once- insignificant Japanese competitor is the result of Eastman Kodak's delay in responding to the competitive challenge. Although Eastman Kodak has been in business in Japan for more than sixty-five years, it does not yet have manufacturing or research and development facilities in Japan. . . . {I}t sold exclusively through an agent, maintaining a liaison office with no direct sales force or sales management, and only indirect influence on pricing and promotion.4

3 Taking on Japan at 36 (emphasis added).

4 J. Abegglen and G. Stalk, Jr., Kaisha: The Japanese Corporation, (1985) at 239-240 (emphasis added).

62 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."5 The fact that Kodak uses direct distribution is now portrayed as a terrible handicap:

{T}here are not multiple distribution channels from which a potential entrant can choose to bring a specific product to the Japanese consumer. If access to the relevant distribution channel is denied, then access to the consumer 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 not anticompetitive

5 "Privatizing Protection" at 151.

6 "Privatizing Protection" at 153.

63 Kodak portrays Fujifilm's four major tokuyakuten -- Asanuma, Kashimura, Misuzu, and Ohmiya -- as the basic distribution system for color film in Japan.7 Once open to all, 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"8 and transformed them 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.10 It is true that Kodak was hampered at the time by import barriers, but 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

7 "Privatizing Protection" at 9-11, 90-94, 100-103.

8 "Privatizing Protection" at 11.

9 "Privatizing Protection" at 12-14.

10 By 1960, Fujifilm's share of the Japanese film market had surpassed 50 percent.

64 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.11 To reach smaller customers, all 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

11 Fujifilm holds a 17.8 percent equity position in Kashimura and a 15 percent stake in Misuzu. Fujifilm has no equity holdings in either Asanuma or Ohmiya.

65 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 distribution system was unrelated to alleged efforts to block Kodak's access to the market

Fujifilm currently sells to seven tokuyakuten: Asanuma, Kashimura, Misuzu, Ohmiya, Okinawa Fuji Film, Shikishima, and Ueda.12 Of the major four, two -- Kashimura and 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.

12 The last three were not identified by Kodak, and indeed are very small in size. Ueda operates in the Kansai region, Okinawa sells only in Okinawa prefecture, and Shikishima does not offer full nationwide distribution. The remainder of this analysis will focus on the major four, which are all national in scope.

66 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.13 There is absolutely no correlation between 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 a general 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

13 At the time Misuzu terminated Kodak, the Japanese tariff rate for imported color film was 40 percent; that rate did not fall below 15 percent for another 10 years.

67 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,14 but why it chose Nagase is clear. 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.16 Moreover, in 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

14 Kodak attempts to argue that it was required by the Japanese government to select an exclusive importer to facilitate administration of import quotas. "Privatizing Protection" at 68. It then implies that the initiative was originally Nagase's idea. "Privatizing Protection" at 68, n. 122. The notion that Kodak was a reluctant participant, however, does not jibe with its subsequent rejection of Asanuma's entreaties to reestablish its relationship as a direct importer, detailed later in this section.

15 Why, however, Kodak continued to leave its fate in the Japanese market in Nagase's hands for the next 25 years -- long after liberalization had opened up other alternatives -- remains a mystery. See Section IV.D.3.a.

16 Kodak even admits this fact. "Privatizing Protection" at 68.

68 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.19 With 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

17 See Exhibit 1 for a chart depicting the history of Kodak's distribution system in Japan.

18 Asanuma also informed Kodak that Japanese consumers preferred brighter, more vivid colors than those provided by Kodak film. It took Kodak 16 years to follow Asanuma's advice and adapt its film to Japanese tastes.

19 Interview with Mr. Takenosuke Katsuoka, President of Asanuma. Mr. Katsuoka was in charge of the financial section of Asanuma at the time and accompanied the then president on his trip to Rochester.

69 the availability of Kodak products.20 The story of the DKP network, though, has been omitted 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.21 Finally, in 1977 two other independent single-brand wholesalers, Haruna Shokai and Daiwa Shokai, were merged into Konishiroku Shoji.22 Along the way, Konica lost its relationships with Kashimura, Ohmiya, Asanuma, and Misuzu. After having lost market preeminence to Fujifilm in the 1950s,23 Konica sought to 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.

20 Kodak Introduces 24 Exposure Color Film, Nihon Shashin Kogyo Sushin, February 1, 1977, at 10.

21 In 1973 Sakura Shoji was merged into Konishiroku Shoji, which in turn became Konica Shoji in 1977.

22 See Exhibit 2 for a chart depicting the history of Konica's distribution system in Japan.

23 The combination of a labor strike that interrupted Konica's ability to supply film and a film quality problem together hurt Konica's competitiveness during this period.

70 (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's tokuyakuten has crippled its efforts in Japan is disingenuous

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

71 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.24 If Kodak had thought 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.25 Instead, 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

24 Nagase also had another tokuyakuten, Chiyoda, which later terminated its operation.

25 It is our understanding from talking with former and present company officials at Asanuma, Misuzu, and Nagase that Nagase did not approach either tokuyakuten with any kind of special offer to convince them to reverse their decisions to terminate. It is telling in this regard that Kodak did not attempt to argue that such special efforts were made.

26 Asanuma and Kashimura do carry Kodak slide projectors. Furthermore, in March and April of this year, low-level Kodak salespeople did approach Asanuma and Kashimura regarding the sale of photo CDS. (Interestingly, Kodak also broached with Kashimura the possibility of buying Fuji film. Apparently some of Kodak's minilab customers have requested that Kodak supply them with Fuji film.) These overtures had not advanced far before they were interrupted by Kodak's filing of its Section 301 petition. With these limited exceptions, though, Kodak has made no effort whatsoever to crack into this supposedly core distribution system for film. Interviews with Asanuma and Kashimura management.

72 serve as single-brand distributors for Fuji film.27 They have carried other brands of film in the 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 not under 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

27 Kodak's allegation that Fujifilm mandates that distributors handle only its products is thus flatly erroneous. See "Privatizing Protection" at 202.

Fujifilm's old basic distributor agreements with the four tokuyakuten did contain provisions requiring the companies to obtain Fujifilm's consent before carrying another supplier's products. These provisions were never exercised, as evidenced by the fact that Asanuma continued to carry Kodak products while this old agreement was in effect. At any rate, Fujifilm changed its basic distributor agreements for consumer products in 1981 to remove these provisions. See Section III.B.2.d below for a full discussion of the JFTC's X- ray film investigation.

28 It should be noted that Kodak's past words as well as past actions conflict with its current story. Kodak Japan's former president is on the record that reliance on independent dealers was a hindrance, not a competitive necessity. See Section IV.D.3. below.

73 relationship"29 in which they are "totally subservient to Fuji."30 Fujifilm prevents them from 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.31 This limitation of competition 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:

29 "Privatizing Protection" at 11.

30 "Privatizing Protection" at 39.

31 "Privatizing Protection" at 48 ("Over time, however, measures have been taken to mitigate this competition {between tokuyakuten}. For example, although all of the tokuyakuten handle Fuji film, they have segmented their sales by product category to larger accounts so that they do not compete with each other at accounts which they jointly serve.")

32 See "Privatizing Protection" at 48, 153.

74 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.34 Of the 100 largest such retailers, over 60 customers buy film from two or more tokuyakuten. They do this not only to ensure deliveries on short notice, but also to play the tokuyakuten against each other.35 Indeed, one of the major reasons Fujifilm continues to rely 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

33 "Privatizing Protection" at 152, Figure 28.

34 Fujifilm shipment information from tokuyakuten. See Firm Control of Distribution, Nikkei Business, 28 June 1993, at 16 ("They {the four main tokuyakuten} do not divide marketing areas by region. For this reason they cannot help but compete in sales with one another. Some of the large mass merchandisers do business with more than one wholesaler.")

35 Confirmed in an interview with Mr. Michio Kimura, president of Camera no Kimura, a large camera store chain in Tokyo. Camera no Kimura buys Fuji brand film from Kashimura and Ohmiya.

75 premised on such competition.

(2) Fujifilm's tokuyakuten are reasonably profitable by industry 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.36 Fujifilm 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 1990.38 It by no means follows, however, that these wholesalers are in a 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

36 "Privatizing Protection" at 35.

37 Kodak also leaves unanswered the question of how Fujifilm can expect the strong sales effort needed for a consumer product from distributors that it supposedly treats so shabbily. A product like film, whose sales are so linked to brand image, requires constant marketing and promotion to maintain its share of the market. It would be an exceedingly strange strategy for Fujifilm to attempt to coax the necessary commitment from its distributors by first reducing them to penury.

38 See Exhibit 3.

76 typically experience very low returns on sales;39 nevertheless, since they generally are not 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 leverage exerted 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:

39 For example, the average ordinary return on sales for Japanese wholesalers in 1990 was 1.10 percent, compared to 0.54 percent for the tokuyakuten.

40 As one accounting text notes: "Thus, a supermarket chain will be content with a net profit margin of 1 percent or less because it has a high rate of turnover due to a relatively low investment 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 of asset turnover (primarily of inventories). On the other hand, capital intensive industries, such as steels, chemicals and autos, which have heavy investment in assets and resulting low asset turnover rates, must achieve high net profit margins in order to offer investors a reasonable return on capital." L. Bernstein, Analysis of Financial Statements (1978) at 212.

41 See Exhibit 3. Even this analysis, however, may still understate how well the tokuyakuten are actually doing. It must be remembered that these wholesalers are privately held companies, and therefore must be subject to a different type of financial analysis to reflect the fact that the owners also draw a salary. Such owner withdrawals can cause measured profits to systematically understate financial performance. See, e.g., G. Stigler, Capital and Rates of Return in Manufacturing Industries (1963) at 59.

77 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 the most important concepts discussed was the idea of linking the sales of various consumer photographic products (cameras, accessories, film) so as to prevent foreign firms from achieving a significant penetration in any of the linked product markets. This could not be readily done at the manufacturer level because different firms made film (Fuji, Konica) and cameras (Nikon, Canon, Pentax). However, it was noted that wholesalers were in a position to offer an entire line of photographic products -- cameras, accessories, film -- to retailers, and that a camera store that procured one item (such as film) from an outside source (e.g., Kodak) would by so doing jeopardize its supply of all photographic products from the wholesaler offering Fuji or Konica film. This linkage was made more feasible by the fact that Japan had only a few camera makers, and these used the same tokuyakuten as Fuji for virtually all of their distribution within 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.

42 "Privatizing Protection" at 40.

43 "Privatizing Protection" at 101.

44 This quotation is repeated in "Privatizing Protection" at 102.

78 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;45 however, 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 small retail outlets

Kodak can and does sell directly to large retail accounts through its subsidiary, Nippon Kodak.46 Its wide availability in large camera stores47 and its private label deal with Coop Stores48 demonstrate that Kodak does not need the intercession of Fujifilm's tokuyakuten to 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

45 For example, Kashimura carries Nikon, Pentax, and Mamiya cameras, and several other brands and product lines.

46 Nippon Kodak is currently owned 70 percent by Kodak and 30 percent by Nagase Sangyo. It is the successor to Kodak-Nagase, a 50/50 joint venture between Kodak and Nagase in Nagase's former Kodak Products Division.

47 See Section II.A.3.a. below for a discussion of Kodak's availability and sales performance at Camera no Kimura and Koide Camera, two of the largest camera retail chains in Tokyo.

48 See "Privatizing Protection" at 146.

79 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,50 only one of them carries only Fuji brand color film. All of the ten largest secondary dealers, which collectively account for nearly 50 percent of secondary dealer color film sales, carry Kodak film.51 Kodak thus has unimpeded access to smaller 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 to discourage them from purchasing from other suppliers.

Fujifilm manipulates rebates to its tokuyakuten to keep them at just break-even profit levels.

49 Some of this film is sold to secondary dealers who then sell the film on a retail basis.

50 See Exhibit 4. While Kodak claims that there are over 300 secondary dealers ("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 of wholesaling.

51 See Exhibit 4 (the first ten distributors listed in Exhibit 4 are the largest).

52 Fujifilm estimates that 60 percent of Nippon Kodak's sales are direct to retail accounts, 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 provide another important channel, directly under Kodak's control, for sale to smaller retail customers.

53 "Privatizing Protection" at 52.

80 Fujifilm bases rebates on resale amount as an instrument of resale price maintenance.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 has been very limited for at least 20 years, and was substantially 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);55 some have been based on amounts paid in cash; only one has been based on a target sales volumes. Only rebates based

54 This allegation will be discussed in Section II.B.4. below in relation to Kodak's charges that Fujifilm suppresses price competition and engages in resale price maintenance.

55 These programs, and similar programs aimed at retailers that are described below, are designed to encourage sales of Fujifilm's newer, more sophisticated, higher-priced products.

81 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.57 Of the

56 These programs are also offered to secondary dealers.

57 Not all of these programs operated at the same time.

82 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

83 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 restore tokuyakuten 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."58 In this 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).60 Accordingly, the tokuyakuten are always able to determine how much in rebates they will earn during a given period based on performance. The provision of year-end

58 "Privatizing Protection" at 35.

59 "Privatizing Protection" at 55 (emphasis in original).

60 When a rebate is made contingent on some kind of purchase or sales target, the rebate periods are generally six months because shorter target periods are considered impracticable.

84 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 that Kodak'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

61 "Privatizing Protection" at 151-167.

85 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 exhibits62 show the display of 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.63 This result is perfectly consistent with the consumer preference theory of Kodak's poor showing in Japan. Kodak's problem is not getting in front of the

62 See Exhibit 5.

63 When asked why Kodak is so prominently displayed if its sales are so poor, Mr. Michio Kimura, Chairman of Camera no Kimura, stated that he gets a larger gross margin on Kodak products and therefore is willing to push them. Interestingly, Mr. Kimura was chairman of the Zenren, the photo retailers' trade association, from 1980-89. In Kodak's account, the Zenren coordinated a decades-long conspiracy with Fujifilm to maintain high resale prices and punish discounters. How odd that the organization was chaired during the relevant period by the founder of a large camera store chain that offers Kodak film so prominently. It should also be noted that Mr. Kimura owns minilabs that use Kodak color paper, and he formerly owned a wholesale lab which used Kodak paper.

86 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 label brands 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.64 Between 1991 and 1994, these low 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.66 Likewise, Konica's direct distribution system does not handle 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.67 Such growth is 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.

64 Kodak recognizes the gray market phenomenon. "Privatizing Protection" at 140, 144. Kodak, however, looks only at gray market imports during the 1980s.

65 See Exhibit 6.

66 "Privatizing Protection" at 144.

67 Import statistics from the Japan Ministry of Finance.

87 c. The only segment of the market in which Kodak's access may be limited is small shops with insufficient shelf space to carry multiple brands

Kodak claims to experience particular difficulties in selling to smaller retail outlets in the Japanese market.68 Fujifilm has the same difficulty in the U.S. market. In both markets, 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.69 For a large retailer, these fixed costs can be spread over a 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.70 Again, a large retailer

68 See "Privatizing Protection" at 5.

69 See generally in M. Levy & B. Weitz, Retailing Management at 419-444 ("Assortment Planning and Control," Chapter 12); Rao & McLaughlin, Modeling the Decision to Add New Products By Channel Intermediaries, Journal of Marketing, Vol. 53, No. 1, at 81 ("Retailers often are attracted to new products by the lure of additional profit opportunities, but substantial costs are associated with the addition of new products.”)

70 Cairns, Suppliers, Retailers, and Shelf Space, Journal of Marketing, Vol. 26, No. 8 (July 1962) at 34-36 ("To induce a retailer to sell him space, a supplier must offer a price (or gross profit) for a unit of space which exceeds the "opportunity cost" of this space. This opportunity cost of a unit of retail space is the gross profit the retailer can obtain by allocating this space to the most profitable item not now in his assortment, or to the most profitable (continued...)

88 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

70(...continued) 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 merchandise and space to put the merchandise in. Thus, to add a category . . . a reduction must be made elsewhere.")

71 Indeed, specialization in limited lines of high-turnover goods is one of the defining characteristics of convenience stores. See P. Kotler & G. Armstrong, Marketing: An Introduction, (3d ed. 1993) at 351 ("Convenience stores are small stores that carry a limited line of high-turnover convenience goods.").

If I compared Japan with the U.S. or France, it's going to be very different because most stores in Japan buy in very small volumes. You know, if you walk 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 turnover needed to generate profits. Increasing consumer interest in the product creates consumer "pull" and raises turnover.73 As explained in detail in Section IV, Kodak has 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.74 Kodak argues that it is precluded from selling 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.75 The other Japanese color paper producers -- Konica, 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

73 For a discussion of push and pull strategies of promotion and marketing, see, e.g., P. Kotler & G. Armstrong, Principles of Marketing (5th ed. 1991) at 433-436.

74 See "Privatizing Protection" at 40-42.

75 Kodak erroneously asserts that Fuji's acquisitions of photofinishing labs took place in 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 film and paper industries.

90 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 by Kodak 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

76 Akira Ueno, The Story of Kodak, (1989) at 144. Toyo later became Imagica, a part of which was subsequently spun off into Kodak Imagica.

91 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 the worldwide 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.77 Kodak's distribution system in the United States is thus far 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.78 Kodak has built up direct distribution systems in Canada, France, the United Kingdom, Spain, Sweden, Switzerland, Taiwan, Singapore, Indonesia, Thailand, Chile, Peru, Australia, and New Zealand, among others.79

77 As in Japan, independent wholesalers are used to reach smaller customers.

78 The economic efficiencies of integrating manufacturing and distribution -- whether through ownership or contractual relationships -- are well known. Integration facilitates greater flexibility in responding to changing market conditions; reduces incentives for opportunistic behavior between manufacturer and distributor; allows for better informational flows through the distribution pipeline; and generally ensures greater focus and effort in distribution. See, e.g., R. Blair & D. Kaserman, Law and Economics of Vertical Integration and Control, (1983) at 11-27; Waterson, Vertical Integration and Vertical Restraints, Oxford Review of Economic Policy 9(2), (Summary 1993) at 41-57.

79 Fujifilm reaches all the markets listed above either through direct distribution or exclusive distributors.

92 Kodak's statement that "building a parallel distribution system in Japan is enormously expensive for any company"80 is unpersuasive. Kodak has built distribution systems all over 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 the worldwide 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 buy photofinishing facilities, probably to maintain market share of their color paper. Kodak has established itself as the world's largest photofinisher. Although it closed down its photofinishing operations in New Zealand in late-1989, it set up a joint venture wholesale business again at the end of 1992, following the defection of Viko to Fuji paper. In Australia it is the dominant wholesaler (90% + market share), although small regional wholesalers are again springing up. Throughout the past three years, it has continued to aggressively buy photofinishers around the world. Through its U.S. subsidiary, Qualex Inc., which engaged in a very aggressive 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 to ColourCare, but took over most of ColourCare's Boots business, and eventually almost all of its minilabs, when ColourCare was sold to Nexus Photo, a group led by management. The combination of LLA and Kodak Pathe controls about 30% of the photofinishing market in France. In Norway, Kodak controls more than 20% of the market with main- and mini-/micro-labs. In Austria, purchases have given it a significant of the market, and 50% share of the professional business. It has purchased a minority share (49%) in IMAGICA, the Japanese photofinishing group that has an estimated 11% share of the market. Kodak's prominence in

80 "Privatizing Protection" at 160.

93 the European market can be seen in Table 7-19. In South America, Kodak is the dominant photofinisher in Argentina and Brazil, and has a strong presence in Mexico. It also operates labs in Asia and Africa.

To maintain some share of the U.S. color photographic paper market, Fuji Photo Film established a photofinishing group Fuji TruColor Photo in 1992. With 16 labs at the end of 1994, it holds about 15% of the market and is the second national photofinisher (behind Qualex). Fuji holds a strong position in Europe, with Bac Color (75% owned by Fuji) the dominant photofinisher in the Netherlands, Kungsfoto a major participant in Sweden, Photex with an 8% position in the German market, and Fuji France with a significant position. It also holds a commanding lead in minilab installations in Eastern Europe. It dominates the Japanese market through Fujicolor Service and other affiliated companies, controlling an estimated 65% of the market and is strengthening its position in Thailand and other Southeast Asian countries. In South America, it operates a plant in Buenos Aires, Argentina and Montevideo, Uruguay.

In the U.S., Konica owns Konica Quality Photo Service, which provides wholesale photofinishing in the Northeast, Midwest and West, and represents a strong third semi-national photofinisher. It has the second largest 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

81 1993-1994 International Photo Processing Industry Report at 7-2 (emphasis added).

82 How this technological dynamic led to Kodak's early domination of photofinishing in the United States is described in United States v. Eastman Kodak, 853 F. Supp. 1454, 1480-81 (W.D.N.Y. 1994).

94 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.83 How this charge relates to Kodak's poor 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.85 Moreover, Fujifilm's rebate programs are in no way structured to inflate resale prices.

83 "Privatizing Protection" at 195-196.

84 If retail prices are raised artificially, sellers of other brands can readily gain. Dealers selling the price-maintained brand will favor it over other brands only if their margins are sufficiently greater on the price-maintained brand to compensate for any loss in volume. In fact, dealers can have a greater incentive to sell other brands if the wholesale price they pay for these brands is low enough for the dealers to earn greater total profits on increased sales of these brands while selling them below the artificially raised price-maintained brand.

85 See Section III.B.3. for a full discussion of Fujifilm's Antimonopoly Act compliance program.

95 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 increasingly sensitive 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.87 Indeed, depending on the exchange rate used, prices in Japan may actually

86 See, e.g., Not Everybody Loves Wal-Mart's Low Prices: Three small retailers are leading a legal charge against the giant retailer, Business Week (Oct. 12, 1992) at 36-38.

87 Kodak has attempted to confuse international price differences for color film with those for color paper. As to the latter, prices in Japan have been significantly higher than (continued...)

96 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,88 prices in Japan are actually substantially lower than U.S. prices. Using a purchasing power parity exchange rate of 155 yen per dollar,89 retail prices of Fuji brand film were between 70.2 and 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

87(...continued) those in the United States. This is due not to anticompetitive practices, but to the relatively greater bargaining power of U.S. color paper purchasers. A significant part of the U.S. color paper market consists of very large retailer owned "captive" labs. For example, Wal-Mart, the single largest retailer for photofinishing, has its own "captive" labs which perform the photoprocessing 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 large volume 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 a significant price premium for film that affects the price structure for other brands as well.

88 A purchasing power parity exchange rate is an estimated equilibrium exchange rate based on relative price differences between different currencies over the long term. For a discussion of the purchasing power parity concept, see R. Dornbusch, Purchasing Power Parity, New Palgrave Dictionary of Economics, Vol. III, (J. Eatwell, et al. eds., 1987) at 1075-1085.

89 "Purchasing Power Parity Cost of Living Survey," Economic Planning Agency (May 1995) (Study as of November 1994).

90 Indeed, Kodak has publicly confirmed the equivalence of Japanese and U.S. color film prices. A Kodak Japan official stated for the record that if Kodak were to lower prices in Japan, gray market re-exports from Japan would threaten Kodak's worldwide price structure. See Section IV.D.4 below.

97 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.

91 Indeed, the above analysis understates the true extent to which color film prices have declined in Japan, since it does not reflect the growing popularity of multipacks. Film sold in multipacks has a lower price than the single-pack format. For example, in November 1994 Yodobashi Camera's price for single-pack ISO 100 film was 335 yen, while the price for three-packs was 735 yen, or 245 yen per roll. See Exhibit 8. The share of total ISO 100 film sold in multipacks has increased rapidly, climbing from 3 percent in 1989 to 29 percent in 1994. See Exhibit 9. Separate analysis of single-pack and multipack film cannot show the effect of this development on per-roll prices.

98 b. The rise of discount stores, gray market imports, and private label brands demonstrates that the market responds 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."92 Indeed, since 1985 supermarkets and 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 1993.95 What Kodak fails to mention is that despite

92 "Privatizing Protection" at 163, 164.

93 Photo Market 1995, at 130-31.

94 Id.

95 See, e.g., "Privatizing Protection" at 4-5; 1993-94 International Photo Processing Industry Report at 4-10.

99 (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 and factual 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."

96 Nihon Shashin Kogyo Tsushin, January 10, 1995, 10

97 A comprehensive, point-by-point analysis of Kodak's factual allegations (and "support" thereto) is provided in the Appendix.

100 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.98 Kodak also omits 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 price setting 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 laboratories now. Sales price is an issue which each laboratory must deal with individually. . . . Daiei {Supermarket Chain A} price may be indeed a

98 Nihon Shashin Kogyo Tsushin, April 10, 1974, 20.

99 Nihon Shashin Kogyo Tsushin, April 10, 1974, 28.

101 shock, there is nothing that can be done except that each person conducts his 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.'"102 The implication is 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 the developments, and have not announced any specific counter-action yet. It seems that they will compete with VR by the normal countermeasure of intensifying advertisement in regular summer campaign. . . . It is very understandable that retailers have concern. However no matter how they

100 Nihon Shashin Kogyo Tsushin, April 10, 1974, 20.

101 Nihon Shashin Kogyo Tsushin, June 20, 1983, 21.

102 "Privatizing Protection" at 137, citing a June 20, 1983 article in Nihon Shashin Kogyo Tsushin.

102 are worried, they have no means to avoid price competition under the principle 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}. Stores with low prices require longer days {for processing}. Therefore, I do not think 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."105 In fact, the Zenren Board Meeting ultimately decided to pursue non-price 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.106 Kodak's evidence of a 20-year conspiracy to maintain high prices is nonexistent.

103 Nihon Shashin Kogyo Tsushin, June 20, 1983, 8.

104 Zenren Tsuho, April 1994, 12.

105 Id.

106 Nihon Shashin Kogyo Tsushin, January 10, 1995, 10.

103 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.107 In fact, the only retail price information 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.108 By 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.

107 "Privatizing Protection" at 55-57.

108 Kodak has access to much more detailed information in the U.S. market via Nielsen survey data.

109 Kodak's allegation that Fujifilm uses postmen to gather sales data is a pure fabrication.

110 Kodak's allegation that Fujifilm uses its affiliated labs to collect price information is thus untrue. See "Privatizing Protection" at 56, 198.

104 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. This not only discourages inter-brand competition, but also discourages wholesalers from selling to discount-retailers at low prices: lower sales prices reduce the distributor's revenue, thereby raising the risk of falling short of the sales target and, even if the target is met, reducing the size of the 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.

111 "Privatizing Protection" at 53.

112 "Privatizing Protection" at 154 (emphasis in original).

105 III. THERE HAS BEEN NO GOVERNMENT TOLERATION OF SYSTEMATIC 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.

106 A. The Japanese Government Did Not Encourage The Creation Of An Exclusionary Market Structure To Block Kodak

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, mainly businessmen, saw little need for state input in responding to trade liberalization. By exerting pressure on politicians, this group managed to ensure that MITI's new legislation never came to a vote.113

Kodak has exaggerated the role of MITI as the master of the Japanese economy.114

113 J. Vestal, Planning for Change: Industrial Policy and Japanese Economic Development 1945-1990 (1993) at 46.

114 Kodak has relied almost exclusively on a Chalmers Johnson's view of the world. See 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 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 the development 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

114(...continued) scholarship has demonstrated that Johnson's view of MITI ignores important complexities of Japanese public policy formulation. See J. Haley, Authority Without Power: Law and the Japanese 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 many scholars have begun to recognize, the formulation and implementation of economic policy in Japan involved complex interrelationships within individual firms and industries as well as among the various bureaucracies and political institutions at each level of government."). See generally, K. Calder, Strategic Capitalism: Private Business and Public Purpose in Japanese Industrial Finance (1993); D. Okimoto, Between MITI and the Market: Japanese Industrial Policy for High Technology (1989).

115 "Privatizing Protection" at 78

108 Fujifilm's business practices to the detriment of Kodak's market access.116 Kodak claims that "MITI's active support for the consolidation of the distribution sector around Fuji was therefore critical."117 In Kodak's view, this alleged MITI-sponsored "consolidation" had three major elements: (1) bringing distributors into the Fujifilm keiretsu, (2) expanding the use of rebates, and (3) creating a so-called tokuyakuten bottleneck.118 It is instructive to compare the 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."119 Nowhere do the Guidelines support Kodak's interpretation of MITI's role.

a. MITI did not encourage tokuyakuten to deal only with Fujifilm

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

116 Others do not share Kodak's cynical view of MITI's relationship to the distribution sector. See Vestal, supra, at 47 ("Although pro-growth industrial policy was largely unchanged, the disappearance of surplus labor in the Japanese economy in the early 1960s had a substantial impact on policy to support employment. Industrial policy towards small and medium enterprises and towards the distribution sector became much more positive, promoting rather than blocking competition and modernization.").

117 "Privatizing Protection" at 84

118 "Privatizing Protection" at 85.

119 MITI'S 1970 Distribution Guidelines for the PSM Sector, June 24, 1970, at 1 (hereinafter "1970 Distribution Guidelines").

109 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 1967.121 It is hard to see how MITI Distribution Guidelines could have 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.122 But 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.123 Moreover, Fujifilm had independent business reasons to adopt stricter

120 Since the 1970 Distribution Guidelines do not address this issue at all, Kodak had to 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 in the industry, not a recommendation for action. This document therefore does not even rise to the level of administrative guidance. Kodak has also mischaracterized this study. See Section III.B.2.a. below.

121 See Section II.A.1.b.

122 See "Privatizing Protection" at 96, 182, 203.

123 See item 3 of 1970 Distribution Guidelines ("However, retailers are making partial payments, leaving the balance on credit. This will make the financial condition on the payment due date unstable.")

110 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.124 At best, JDB loans are a very weak link. JDB loans were 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,"125 yet the Guidelines say that excessive use of rebates might violate the Antimonopoly Act and say that their "use should be limited to a minimum."126 In an amazing twist of logic, Kodak somehow turns MITI's unwillingness to abolish rebates completely into a MITI measure to "enhance the use of rebates."

124 "Privatizing Protection" at 94-95.

125 "Privatizing Protection" at 85.

126 1970 Distribution Guidelines, at 2-4. Even Kodak's translation notes this point. See "Privatizing Protection" at 98-99 (". . . the significance of rebates existing to pay a supplementary role for other price polices is recognized, but this must stop at the minimum level.")

111 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.127 Yet Kodak cites only a 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.128 Contrary to Kodak's claim, these camera companies did not rely on the tokuyakuten for "virtually all of their distribution in Japan."129 Rather than becoming intertwined, the two industries in fact had grown apart and were using different paths of distribution.

2. The Japanese Government had no involvement in investments 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,130 Kodak could not 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

127 "Privatizing Protection" at 102.

128 See Section II.A.1.b.3.

129 "Privatizing Protection" at 101-02.

130 "Privatizing Protection" at 80-83.

112 Fujifilm in the Mitsui keiretsu.131 An easy solution, but one that ignores extensive evidence to 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.132 Exhibit 12 provides an example of 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.133 It is hard to see how Asanuma can be part of the Mitsui 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.

131 "Privatizing Protection" at 35.

132 K. Miyashita & D. Russell, Keiretsu: Inside the Hidden Japanese Conglomerates (1994) at 84; M. Gerlach, Alliance Capitalism: The Social Organization of Japanese Business (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 Mitsui Group, or any other corporate group.

133 Interview with Mr. Takenosuke Katsuoka, President of Asanuma.

113 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 nothing to 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,134 noting that the real purpose of the 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,"135 without any support at all. 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

134 "Privatizing Protection" at 83, n.157

135 "Privatizing Protection" at 83.

114 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 and financial institutions is completely irrelevant to Kodak's performance 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.136 Yet in only one instance does Kodak even allege that the majority of 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.

136 "Privatizing Protection" at 36, Figure 14

115 B. The JFTC Actively Enforces The Japanese Antimonopoly Act, 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 to enforce 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.

137 Fuji Challenges Kodak Case on Film Market, Financial Times (July 14, 1995) at 4 ("{L}awyers for Kodak maintain they are not seeking market share targets or sanctions but pushing for enforcement of Japan's competition laws.").

116 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 has been 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 became much 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.138 In the 1950s, however, the JFTC met with increased resistance from MITI and private industry, which sought to promote industrial development. To promote Japanese

138 See H. First, Antitrust Enforcement in Japan (unpublished paper, 1995) at 31. See generally H. Iyori & Uesugi, The Antimonopoly Acts and Policies of Japan (3d ed. 1994) at 19-30.

117 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.139 Most 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.141 Inflationary 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 small and medium enterprises and downward inflexibility of prices by the large enterprises sector have become conspicuous, and therefore, it is considered necessary to strengthen the enforcement of the Antimonopoly Act on price fixing agreements. . . .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.

139 See generally H. Iyori & A. Uesugi, at 24-40.

140 Id. at 213-214 (showing sharp decline after 1953 amendments).

141 See id. at 41-55.

142 Id. at 42.

118 (2) The Oil Cartel Cases demonstrate JFTC independence from MITI, and the primacy of the Antimonopoly 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.143 The oil companies had consulted with MITI to comply with MITI's policy of 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:

143 See generally id. at 250-53.

144 See id. at 250-53.

145 See Oil Cartel Case, Judgment of the Second Sub-Court of the Supreme Court of Feb. 24, 1984, 38 Keishu 1287. See generally J. Ramseyer, Japanese Antitrust Enforcement after the Oil Embargo, 31 Am. J. Comp. Law 395 (1983).

119 . . . the Oil Cartel cases, particularly Japan v. Sekiyu Renmei, threatened the very foundation of the historical model by discrediting the informal cooperation among industry members, their trade association, and MITI that was at its core. After 1980, MITI's efforts to persuade or coerce reluctant firms to follow the consensus developed by the Ministry and industry leaders faced the potential argument that compliance might mean criminal prosecution.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 the JFTC 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.148 The new JFTC powers covered a wide range of areas:149 the ability to order the payment of surcharges against cartel participants

146 F. Upham, Law and Social Change in Postwar Japan (1987) at 188.

147 In fact, the JFTC had taken this position much earlier. The Oil Cartel cases were a dramatic reaffirmation of this point. See M. Matsushita, Introduction to Japanese Antimonopoly Act (1990) at 47 ("There have been several cases in which cartels based on administrative guidance were challenged, in all of which the FTC ruled that cartels were unlawful under the Antimonopoly Act even if they were based on administrative guidance.").

148 See H. Iyori & A. Uesugi, at 52-53; M. Matsushita, supra, at 4-5.

149 See id. at 53.

120 (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 oligopolistic industries (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.150 It is hard to dismiss over $80 million in surcharges for one case as lack of enforcement.151 Over the last ten years, the JFTC has collected approximately 28.4 billion yen, or over $220 million, in surcharges from cartel participants:152

150 Id. at 262.

151 Using 1991 exchange rate of 134.59 yen/dollar.

152 H. Iyori & A. Uesugi, at 262 (reporting data through 1992); Fair Trade No. 534-95-4 (including data through 1994).

121 JFTC Surcharges Against Anticompetitive Conduct

Number of Surcharge Surcharge Year Cases Businesses Amount Amount (¥1000) (US $1000153) 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.154 Moreover, the increased policy support for enforcement of the Antimonopoly Act reflected in the adoption of the 1977 amendments also encouraged stricter enforcement of the pre-1977 provisions.

153 Converted using annual average exchange rates for 1985 through 1994 as reported in the Federal Reserve Bulletin.

154 Converted using a 1994 average exchange rate of 102.18 yen/dollar.

122 (4) The Structural Impediments Initiative (SII) further strengthened 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 issued156 increased from 10 in fiscal year 1989 to 37 in fiscal year 1992.157 This increase in formal cases does not include other less 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."158 Within a Japanese cultural context, this publicity creates an additional strong deterrent effect.

155 "The Final Report on Japan-U.S. Structural Impediments Initiative Talks" (May 22 1991), reprinted in H. Iyori & A. Uesugi, Appendix 1.

156 See id. at 219-20. When the JFTC finds a violation of the Antimonopoly Act, the JFTC issues a "recommendation" that the party take appropriate remedial action. This action only occurs when the JFTC believes it has proven a violation. When the party concerned accepts the "recommendation," the JFTC will issue a cease and desist order to the party, and will avoid hearing procedures. See Article 48 of Antimonopoly Act.

157 See H. Iyori & A. Uesugi, at 217.

158 Recommendations reflect a JFTC judgement it has proven a violation. Warnings occur when the JFTC cannot prove a violation, but nevertheless believes a problem may exist. See id. at 64, 246-55.

123 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.161 At these levels, the potential penalties have a much greater 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

159 See id.

160 JFTC 1991 Annual Report at 46-47.

161 H. Iyori & A. Uesugi, at 254.

162 See id. at 53-54. The guidelines are provided as Appendix H of the Iyori & Uesugi treatise.

124 surcharges for violations."163 Such legalistic sanctions provided a significant deterrent effect 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, government enforcement in Japan during that period {post SII} has been quite close to the level 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 the Antimonopoly 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."

163 Id. at 58-59.

164 See id.

165 H. First, at 69.

125 (1) The current level of antitrust enforcement in Japan is similar 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.

126 Sources: Department of Justice -- Antitrust Division Workload Statistics; JFTC -- Concerning the Circumstances of Recent Investigations and Cases (July 14, 1992); Exchange Rates -- Federal Reserve, IMF. (Reprinted from First, at 39)

127 As Professor First has recently noted:

This comparison shows that the stepped-up level of enforcement against cartels in Japan has resulted in a level of administrative fines that has been either roughly comparable to, or, at times, has exceed U.S. fines. This is so despite the fact that the number of criminal cases brought in the United States has become four to six times greater than the 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.167 This comparison is demonstrated in the graph below. Once again, the lag 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."

166 H. First, at 38.

167 Using the Gross Domestic Product to reflect the difference in the sizes of the economies, the level of the Japanese government antitrust enforcement is very similar to the level 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 (2) The JFTC must investigate outside complaints, an option 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,

129 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 policy may be different from the U.S. system, but is not necessarily 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

168 See H. First, at 10.

130 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.169 In fact, a review of the number of cases disposed of by the JFTC 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.171 These types of administrative actions are tracked by the JFTC and 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,"172 just 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

169 In 1994, the JFTC increased its number of officers to 506 and had an annual budget of ¥4,527,383,000.

170 See H. Iyori & A. Uesugi, at 215-220.

171 Id. at 216-19.

172 Alan Wolff, Remarks at WITA Sponsored Conference: Kodak: Japan Exposed? (July 12, 1995).

131 to the JFTC.

2. Contrary to Kodak's allegations, the JFTC has vigorously scrutinized 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.

132 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.173 Kodak goes on to cite this same fact repeatedly 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 and other things, it seems that it is often the case that the larger manufacturer 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 domestic manufacturers' sale prices are determined taking the price of the imported goods, especially the Kodak price into consideration.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

173 "Privatizing Protection" at 187. Kodak also makes much of alleged conspiracies among photofinishers. The Appendix discusses the specifics of various alleged "facts," and provides Fujifilm's response. Here we simply note that such downstream industries have nothing to do with JFTC enforcement of the Antimonopoly Act with respect to Fujifilm.

174 Exhibit 13, at 17. See also p. 20 (discussing price leader-price follower).

175 Id. at 18.

133 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 the antitrust laws unless the leader attempts to coerce other producers into following its lead, or unless there is evidence of an agreement among industry members to use the leadership 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

176 F. Scherer & D. Ross, Industrial Market Structure and Economic Performance (3d ed. 1990) at 347. A second pricing mechanism in oligopolistic industries is a phenomenon referred to as "conscious parallelism," in which no clear leader is recognized. This refers to pricing behavior in which each firm sets its price according to how it thinks its rivals will respond. Pricing patterns of this nature are not necessarily indicative of collusion or other anticompetitive behavior: "When sellers are few in number . . . this result follows from the very structure of the industry. No formal collusion or agreement is necessary. Each firm can make its own price and output decisions without consulting the others. For the monopoly price to emerge, it is essential only that the firms recognize their mutual interdependence and their mutual interest in a high price. Indeed, . . . it would be unreasonable to expect members of a highly concentrated industry to behave otherwise. . . ." F. Scherer, Industrial Market Structure and Economic Performance (1970) at 135-36.

134 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."178 Yet Kodak then concludes there was "price fixing."179 It is inexcusable to jump from a general description of "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,180 the Japanese authorities were carefully 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.

177 "Privatizing Protection" at 229. Here, Kodak correctly acknowledges the report is simply a survey.

178 The JFTC report used the phrase "2 sha fukusen no jyotai ni aru." Exhibit 13, at 28. Correctly translated this Japanese phrase means "is in a 2 company oligopolistic situation."

179 "Privatizing Protection," at 79, 87, 217.

180 The "shared monopoly" theory -- under which a group of firms that collectively possess monopoly power could be found liable for joint monopolization -- has generally been rejected 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 Contrary to Kodak allegations,181 there was no need for MITI to intervene somehow to 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.182 It may have been unclear at this stage what actions JFTC 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.

181 "Privatizing Protection" at 79.

182 See H. Iyori & A. Uesugi, at 43 ("Under these circumstances, the FTC enforcement activities obtained policy support at the Cabinet level, and the FTC issues many decisions against 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 that the Antimonopoly Act should be vigorously applied against price cartels and illegal resale price maintenance.")

136 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).183 This designation reinforced the JFTC's message that the color film industry would be closely scrutinized.184 The JFTC received new powers, and began using them immediately. Kodak tries to dismiss this enhanced JFTC scrutiny with the claim that the agency was somehow asleep at the wheel.185 This claim is inconsistent with the pattern of JFTC actions 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.

183 Kodak uses the term "watch list," but this term does not appear in the statute or any official JFTC materials.

184 By 1993, the market situation for color paper reached the point where this product also fell within the definition of "monopolistic situation" and was therefore added to the watch list. Again, the JFTC enforcement mechanism is working as expected.

185 "Privatizing Protection" at 219.

137 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 to evidence that suggested questionable practices in consumer photographic film and photographic paper sectors as well. Yet, the JFTC did not use this information, if any, to take enforcement actions with respect to film and paper.186

186 "Privatizing Protection" at 218.

138 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

139 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."187 From 1987 to 1988 the JFTC undertook a study of oligopolistic 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.188 Fujifilm therefore provided additional information to the JFTC concerning the color film rebates. In the end, after reviewing

187 "Privatizing Protection" at 188.

188 Kodak also implicitly concedes there are no problems with color paper rebates. These rebates were described in detail in the public versions of the questionnaire responses to the Commerce Department antidumping investigation of color paper. Yet after reviewing these documents (they were cited elsewhere for other propositions), Kodak largely ignored this issue.

140 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.189 During this process, Fujifilm consulted with the JFTC to identify safe-harbors in 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.

189 Section II.A.2. describes the current Fujifilm rebate programs.

190 See Section III.B.3. below.

141 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

191 "Privatizing Protection" at 218.

142 3. Fujifilm has made its own efforts to comply strictly 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 and free competition." Fuji Photo Film, which has many products with high market shares, must, through efforts involving all directors and employees, assess our own actions more rigorously. This is a vital part of our company's business 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 of whether such agreement is written or verbal

143 (B) To attempt to maintain a resale price through actions as illustrated in the following examples:

(1) To imply a shipment cancellation or reduction of rebate if a distributor does not observe the directed resale price or offer a discount;

(2) To provide a rebate on condition that the resale price is maintained;

(3) To carry out monitoring of the resale price by collecting reports on the resale price, monitoring storefronts, or dispatching a sales clerk to do surveillance;

(4) To identify a sales channel by placing secret numbers, etc. and request a wholesaler to stop business with a discount seller;

(5) To buy up discounted products;

(6) To forward complaints of a neighboring distributor about discount sales to a discount seller and request the discount seller to stop making discount sales;

(7) To prohibit traders' transactions (diversion of products) without just cause (such as the necessity to maintain quality);

(8) To prohibit discount sales advertising;

(9) To indicate a resale price which has the impression 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

144 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 products including color film, must govern its own actions even more vigorously, and respect the spirit of the Antimonopoly Law. This is a vital part of our company's business management policy. . . . It is my hope that you will fully understand its content, put it to good use in your work, and exercise sufficient care so that illegal activities will under no circumstances 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 as smokescreen 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.

192 Exhibit 15 (including letter from Mr. Masayuki Muneyuki, July 1992, at 2).

145 a. The Premiums Law serves legitimate governmental purposes 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 of unjustifiable premiums and misleading representations in connection with transactions regarding a commodity or service, and thereby to maintain fair competition as well as to 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 of JFTC 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

193 Section 1, Act Against Unjustifiable Premiums and Misleading Representations, Act No. 134 of May 15, 1962, amended by Act No. 44 of May 30, 1977 (referred to herein as "Premiums Law").

146 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 photographic film 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.194 Kodak is so busy trying to establish a linkage between the Fair Trade 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,195 why would the film industry not have adopted such a code? Under 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,

194 "Privatizing Protection" at 218.

195 In fact, the Fair Competition Code is a measure to promote fair competition in the use of premiums.

147 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 gray market 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.196 Kodak's version of this story is misleading in two respects. 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).197 Item 8 of this notice clearly provides that unfair trade practices include:

unjustly inducing customers of a competitor to deal with oneself by causing them to misunderstand that the substance of a commodity or service supplied by oneself, or terms of the transaction....

196 "Privatizing Protection" at 227.

197 Reprinted in Appendix B of the H. Iyori & A. Uesugi treatise.

148 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, It Becomes Clear There Have Been No Violations Of The Antimonopoly Act

Kodak devotes a long section of "Privatizing Protection" to alleged Fujifilm violations of the Japanese Antimonopoly Act.198 This argument has been presented in a strange forum. 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

198 "Privatizing Protection" at 189-214.

149 government toleration of violations. Kodak's legal analysis collapses because it is based on mistaken and misleading facts. 199 Section II demonstrates the error of Kodak's factual claims. The legal arguments collapse for the same reasons.

199 We do not mean to endorse Kodak's statement of Japanese legal principles. Since Kodak's facts are so fundamentally flawed, it is premature and unnecessary to discuss the specific details of Japanese legal standards.

150 IV. KODAK'S LIMITED MARKET SHARE IN JAPAN IS DUE TO INSUFFICIENT INVESTMENT, INADEQUATE ATTENTION, AND INEFFECTIVE 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 Not Demonstrate That The Japanese Market Is Closed To Kodak

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.

200 "Privatizing Protection" at 21.

151 1. The "home team advantage" is real for both Fujifilm and Kodak in their respective domestic markets and explains Kodak'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."201 In dismissing the "home team 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.

201 Id. at 21.

152 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.

153 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.202 Thus, both companies are minor 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.203 The "home team advantage" for each is clear in color paper as well as in film.

202 See 1993-94 International Photo Processing Industry Report; The Sixth Annual Robinson Report: The U.S. Consumer Imaging Market in 1993 with Forecasts for 1998; and Fujifilm internal information.

203 1993-94 International Photo Processing Industry Report, Table 6-8, at 6-15.

154 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.204 The fact is that Kodak is equally, if not more 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

204 "Privatizing Protection" at 3.

205 We note that when Kodak's own dominant share of its home market was under examination -- in the Consent Decree proceedings -- Kodak wholeheartedly embraced the "home team advantage" concept. Testimony of Professor Hausman, Consent Decree Trial (continued...)

155 2. Consumer preference, as demonstrated in surveys and buying patterns, demonstrates that Fujifilm's "home team advantage" in Japan is comparable to Kodak's "home team advantage" 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.206 Furthermore, Kodak is able to charge a premium over other films in the U.S. market without losing its market share.207 If Kodak had no "home team advantage," its market share for color film 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.208 As Kodak is able to do in the United States, Fujifilm is able to charge a premium over the price of other film brands sold in Japan.

205(...continued) Transcript at 508.

206 United States v. Eastman Kodak Company, 853 F. Supp. 1454, 1475 (W.D.N.Y. 1994)

207 Id. at 1475.

208 "Annual Report on Consumer Image Survey," prepared for Fujifilm by Japan Marketing Research.

156 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.209 Similar displays and relative pricing in other large chain camera stores in Japan yield similar results.210 Thus, consumers in Japan buy seven times more Fuji color film than Kodak color 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.211 One 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

209 Fujifilm estimates, confirmed in interview with Chairman of Camera no Kimura.

210 See Section II.A.3.a. above.

211 853 F. Supp. at 1477.

157 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.212 Otherwise, based on Fujifilm's share in retail 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."213 Kodak has a similar status in the U.S. market. 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 pioneers than for later entrants. . . . {E}ven for identical products, the risk of an unfavorable experience motivates rational

212 This problem is discussed at length in Section VI below.

213 Robinson, Gurumurthy and Urban, First-Mover Advantages from Pioneering New Markets: A Survey of Empirical Evidence, 9 Review of Industrial Organization, at 1-2 (1994).

158 consumers to continue buying the pioneering brand. . . . Repeat purchase should also be higher for pioneering brands . . . because of their longer time on the market. . . . Judgments held with conviction are persistent over time and resistant to competitor's activities.214

A similar explanation is offered by another commentator in discussing barriers to entry:

Product differentiation means that established firms have brand identification and customer loyalties, which stem from past advertising, customer service, product differences, or simply being first into the industry. Differentiation creates a barrier to entry by forcing entrants to spend heavily to overcome 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.216 Based on the continued domination of their respective incumbent 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

214 Id. at 7-8.

215 M. Porter, Competitive Strategy: Techniques for Analyzing Industries & Competitors, (1980) at 9.

216 Id. at 349-350.

217 With respect to Kodak, one commentator made the following comment: "It is striking how many firms that were first movers have remained leaders for decades. In consumer goods, 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 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.218 According to Kodak, Fujifilm's cash surplus circumstantially 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 than Fujifilm'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).219 Thus, the discrepancy between Fujifilm's and 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.

218 "Privatizing Protection" at 16-17 and Figure 6.

219 See Exhibit 18, Table 1.

160 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 consumer imaging accounted for only 41.7 percent of total sales;

b. 74.6 percent of earnings from operations in 1993 when consumer imaging accounted for only 41.8 percent of total sales;

c. 67.1 percent of earnings from operations in 1994 when consumer imaging 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. sales accounted for only 47.5 percent of total sales;

b. 80.7 percent of earnings from operations in 1993 when U.S. sales accounted for only 47.7 percent of total sales;

c. 67.5 percent of earnings from operations in 1994 when U.S. sales accounted for only 47.5 percent of total sales.221

220 See Exhibit 18, Table 2.

221 See Exhibit 18, Table 3.

161 (3) Between 1992 and 1994, capital expenditures on consumer imaging ranged between 26.3 percent and 34.5 percent of total capital expenditures when earnings from consumer imaging operations accounted for between 67.1 percent 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

222 See Exhibit 18, Table 4.

223 Id.

162 2. Kodak has in fact "spent" much of its profit through excessive 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 1994.224 Nevertheless, regardless of how the 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.225 Both generated almost identical operating income as a percent of sales.226 The question then is how the smaller Fujifilm could generate a larger cash surplus than Kodak. First of all, Kodak consumed $5.5 billion over the past decade in extraordinary charges.227 Furthermore, during the period 1975-1994 Kodak's payout ratio (dividends divided by net earnings) averaged 79.3 percent, including six years during this time when Kodak paid dividends in excess of its net earnings.228 If Kodak had distributed dividends on

224 In fact, cash and cash equivalents, the appropriate measure, stood at $7.4 billion and working capital, the net of current assets to current liabilities, at $5.6 billion, both more appropriate measures of a surplus. Moreover, Kodak exaggerated the size of Fujifilm's cash surplus by using current exchange rates and applying them back in time. More than one third of the dollar amount identified by Kodak results solely from the appreciation of the yen over this period.

225 See Exhibit 18, Table 1.

226 See Exhibit 18, Table 1.

227 These charges are discussed in more detail in Section IV.B below.

163 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.230 While differences in business culture between Japan and the United States may account for some difference in dividends between Kodak and Fujifilm, these differences were magnified by Kodak's overly generous policies.231 Furthermore, 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

228(...continued) 228 See Exhibit 18, Table 5.

229 Kodak has had sufficient net income over the past 20 years to achieve retained earnings significantly greater than the amount of Fujifilm's retained earnings had it chosen a dividend distribution policy equal to the dividend policies of other Dow Jones companies. See Exhibit 18, Table 6.

230 See Kodak Focuses on the Future; Company Responds to Japanese Electronic Challenge by Developing CD Technology, Washington Post, Sept. 15, 1991, at H7.

231 U.S. dividends are typically higher than dividends in Japan. Raghuram and Zingales, "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 average dividend payout ratio of the other companies listed in the Dow Jones Industrials, between 1975 and 1994 Kodak's payout ratio was nearly one and one-half times the average.

164 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.232 Absent 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.

232 See Exhibit 18, Table 7.

233 See Exhibit 18, Table 8.

165 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 level234 -- during the period of liberalization, the period of 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.235 Ignoring these basic facts is not going to work, and neither is Kodak's cooked-up explanation of them.

234 See "Privatizing Protection", Appendix A.

235 "Privatizing Protection" at 124.

166 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

167 Fujifilm's decision in 1980 and 1981 to create a shortage in the marketplace to sustain the price increases resulting from the "silver shock."236 In essence, Kodak argues that the 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.237 Fujifilm did not, however, restrain production or shipments to create an 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

236 "Privatizing Protection" at 124-130. The silver shock occurred when silver prices more than doubled between 1979 and 1980, increasing the cost of the most important raw material used in film and color paper production.

237 Both of these increases were explained and found reasonable by the JFTC. See Section III above.

238 Fujifilm's domestic shipment records for 1979-1981.

168 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.239 The result was predicable: Kodak continued the gains that it had 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

239 "Privatizing Protection" at 124-130.

169 downward trend.240 It was not a conspiracy that throttled Kodak in Japan -- it was supply and 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.

240 See Reason Lacking Credibility - VR100 Price Increase, Nihon Kogyo Junpo, November 20, 1983.

170 D. Kodak Has Failed To Take The Steps Necessary To Gain Share 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 to build a film manufacturing plant in Japan in a kind of joint venture. On the advice of his engineers, who argued that Japan's high humidity would make it hard to dry the film base, Eastman rejected the proposal -- whereupon the Japanese, undeterred, established what has since become Fuji Photo Film, one of Kodak's strongest worldwide competitors.241

1. Kodak failed to adopt an aggressive strategy to take advantage of 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 photographic film and equipment, the end game turns out to be similar to that in a number of industries. Eastman Kodak now has one significant competitor in the world, the Japanese Fuji Photo Film. Fuji is now as profitable as Eastman Kodak, much faster growing, fully competitive in conventional photographic film and equipment technology, and leading Eastman Kodak in the electronically driven technologies that

241 R. Christopher, Second to None: American Companies in Japan, (1986) at 72.

171 seem likely soon to make conventional imaging products obsolete.

The urgent prospect that one of America's leading companies might be outpaced by a once-insignificant Japanese company is the result of Eastman Kodak's delay in responding to Fuji's competitive challenge. Although Eastman Kodak has been in business in Japan for more than sixty-five years, it does not yet have manufacturing or research and development facilities in Japan. Until recently it had no control over its sales in Japan. Before 1985 it sold exclusively through an agent, maintaining a liaison office with no direct sales force or sales management, and only indirect 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

242 J. Abegglen and G. Stalk Jr., Kaisha: The Japanese Corporation, (1985) at 239-240. See also R. Christopher, supra, at 23.

243 Can Kodak Hold On To Its Share In A Rapidly Changing Market? Executive Changes and a Niche Strategy Are a Part of a Plan to Fight Fuji, Adweek, Jan. 1, 1990, at 18.

172 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 market244 and then appears to have adopted a strategy 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.245 As shown below, between the onset of liberalization and 1985, 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 relationship with Kodak, and consequently later lost its distribution support;

Kodak did not establish an operating region to serve the Japanese photographic market directly until 1984, eight years after full capital liberalization, and attempted instead to supply

244 How Kodak Is Trying To Move Mount Fuji, Business Week, Dec. 2, 1985, at 62.

245 "Privatizing Protection" at 6.

173 Japan from the United States;

Kodak neither established its own sales and distribution capacity in Japan nor undertook to create a joint venture with Nagase until 1986 -- 15 years after such a venture was permitted, eleven years after the supposedly crucial loss of Asanuma, and ten years after full capital liberalization.

Kodak did not open its first photographic products manufacturing facility in Japan until 1988, a facility unrelated to consumer photographic 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 customer needs in specific situations; and

(4) That regional units must customize their approaches to best respond to the needs 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:

246 Eastman Kodak 1982 Annual Report at 6.

174 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 Chile253 and creation of a company in Iran to market and service Kodak products and a new distribution facility in Dubai.254

247 Eastman Kodak 1969 Annual Report at 28.

248 Eastman Kodak 1970 Annual Report at 29.

249 Eastman Kodak 1971 Annual Report at 27.

250 Eastman Kodak 1972 Annual Report at 26.

251 Eastman Kodak 1973 Annual Report at 26.

252 Eastman Kodak 1976 Annual Report at 27.

253 Eastman Kodak 1977 Annual Report at 12.

254 Eastman Kodak 1977 Annual Report at 12. Note that beginning in its 1978 report, (continued...)

175 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.256 For Kodak to 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 create reasonable 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.257 Fujifilm could make an identical claim with respect to the U.S. market, where it has invested substantially more than Kodak has in Japan but has yet to achieve a market share

254(...continued) Kodak stopped providing such detail in its annual reports.

255 How Kodak Is Trying To Move Mount Fuji, supra, at 62.

256 See R. Christopher, Second to None: American Companies in Japan, at 23.

257 "Privatizing Protection" at 5-7.

176 approaching the share which it enjoys in other markets outside Japan.258 While Kodak's claimed investment in the Japanese market may appear large ($750 million over the past ten years),259 in terms of results it should be measured relative to the investments made by its 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

258 See discussion below in Section VI.

259 Kodak Joins Japan Assault, The Financial Post, June 1, 1995, § 1, at 7.

177 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's destiny. This was Kodak's problem. As long as it let Nagase and Kusuda be its agents, it had no control over its competitive 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

260 J. Huddleston, Jr., Gaijin Kaisha: Running a Foreign Business in Japan (1990) at 218.

178 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.263 Yet when 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

261 See Section II.A.1.b above.

262 Interview with Mr. Takenosuke Katsuoka, President of Asanuma.

263 "Privatizing Protection" at Appendix B and 116-120.

179 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.265 In addition, Nagase recruited its DKP network (Distributors of Kodak Products) of 33 dealers to replace Asanuma. In 1977, Nagase said that the DKP network had expanded Kodak's availability.266 If the Fujifilm tokuyakuten, and in particular Asanuma, 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 aggressive action in this market. We should have been here with this

264 "Privatizing Protection" at 116-118.

265 Kodak Tries to Restructure Sales Channels to Supplement Asanuma, Nihon Shashin Kogyo Tshushin, June 20, 1975, at 10.

266 Kodak Introduces 24 Exposure Color Film, Nihon Shashin Kogyo Tsushin, February 1, 1977, at 10.

180 approach ten years ago. Clearly, the momentum of our local competitors got a strong forward thrust, and our task will be much, 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 reestablished the company called Kodak Japan to provide marketing and technical support for our distributors. It continued that way until 1983, when we decided we needed to be much more aggressive in the Japanese marketplace. We created what we call the Japanese "region," and moved the management team from Rochester, N.Y. to Tokyo. Since then we have, through a number of processes, basically reacquired the distribution and sales rights to our products and brought them 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.269 In Dr. Sieg's own words, Kodak did not provide the "marketing

267 Taking on Japan, (1988) at 38.

268 Id. at 36 (emphasis added).

269 Kodak markets directly through in-country subsidiaries in virtually every significant 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 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 operations faced 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.271 This came on the heels of a $494 million charge against earnings arising out of the Polaroid patent litigation and Kodak's subsequent withdrawal from the instant film and camera markets.272 It was followed, in 1988, by Kodak's diversification move in acquiring Sterling Drug for $5.1 billion, acquiring IBM's copier service business, and creating Qualex.273 Further restructuring in 1989 resulted in charges of $875 million.274 In 1991, additional restructuring costs involved charges of $1.6 billion, including nearly $800 million for restructuring the imaging division.275 Further restructuring costs of over $220 million in 1992, $538 million in 1993, and $340 million in 1994 followed.276 An additional after-tax charge of $2.17 billion in 1993 was made for accounting

270 Id. at 36.

271 Eastman Kodak 1986 Annual Report at 36.

272 Eastman Kodak 1985 Annual Report at 2, 8.

273 Eastman Kodak 1987 Annual Report at 1-2.

274 Eastman Kodak 1989 Annual Report at 1.

275 Eastman Kodak 1991 Annual Report at 33, 35.

276 Eastman Kodak 1992 Annual Report at 33, 35, 1993 Annual Report at 25, and 1994 (continued...)

182 purposes.277 The environment within Kodak was clearly hostile to supporting expenditures for 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.278 While Kodak characterizes this as a substantial 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

276(...continued) Annual Report at 25.

277 Eastman Kodak 1993 Annual Report at 25.

278 "Kodak Petitions U.S. Government Under Section 301 of Trade Law," Kodak Press Release, May 18, 1995; See also Kodak Joins Japan Assault, The Financial Post, June 1, 1995, § 1 at 7.

183 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 1988.280 While the increase in transfer prices from the U.S. parent accounted for only 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 company passing on exchange gains from the yen's appreciation against the U.S. dollar to Japanese consumers, in the term of lower product prices. He said Kodak is not a price leader in

279 "Photographic Consumer Price Index," in Photo Market 1995, at 252.

280 See Exhibit 20.

184 Japan and has no intention of lowering its prices to win in competition 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.282 Kodak again chose to realize almost all of the benefits of the 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.283 Gray market imports became an increasingly large factor.284 The new sources sold film on the basis of price and 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 current price, this cheaper film would be reverse exported back to

281 Kodak Intends To Establish Stronghold in Japan, Jiji Press Ticker Service, August 26, 1986.

282 Id.

283 See Exhibit 6.

284 Id.

285 Id.

185 the U.S. or other markets and end up destroying the global price 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 products which 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

286 Nikkei Business, June 28, 1993 at 18.

186 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.288 In the first year after its introduction in 1989, the new SHG400 film tripled 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.289 By 1994, ISO 400 sales were

287 While Kodak did introduce some niche products -- the single-use panorama and underwater cameras -- before Fujifilm, these products have never been significant factors in the market.

288 See Nikkei Sangyo Shinbun, January 24, 1989, at 19 (announcing introduction of Fujifilm's new ISO 400 film and projecting a 30-40 percent market share); and Nihon Shashin Kogyo Tsushin, March 20, 1989, at 14 (retailer reactions to quality of Fujifilm's new ISO 400 film).

289 See Exhibit 21. Photo Market 1995, at 98.

187 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

290 W. Hyer and K. Stocker, Fujifilm Photo Film Company, Ltd.: QuickSnap, in New Product Success Stories: Lessons from Leading Innovators, (R. Thomas, ed. 1995), at 272.

188 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 1987.291 Kodak did not introduce any single-use camera in Japan until 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.292 Once again, Kodak put itself in the position of playing catch-up with the innovative market leader.

291 See R. Thomas, New Product Success Stories, (1995) at 267-279.

292 See Exhibit 22. Photo Market 1995, at 98.

189 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 in measuring and addressing consumer needs and its ability to develop and introduce new products faster than its competitors. The company created the first magnetic tape product in 1960 and produced the world's fastest color negative film in 1976. It was the first company to develop the plastic 35mm lens, and was able to draw on its experience in mass producing video cartridges to speed development of the inner plastic casings for the single-use camera.293

293 W. Hyer and K. Stocker, Fuji Photo Film Company, Ltd.: QuickSnap, in New Product Success Stories: Lessons from Leading Innovators, (R. Thomas, ed. 1995), at 272.

190 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.295 Disc film was an almost instant worldwide failure.296 ISO 200 film, which Fujifilm also sells, peaked in its introductory year, 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.298 Fujifilm minilabs account for nearly 45 percent of all minilabs installed in Japan as of the end of 1994.299 Retailers in Japan tend to use the color paper of the 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

294 Id. at 273.

295 See Shashin Kogyo Junpo, October 10, 1983, at 12, Shashin Kogyo Junpo, June 10, 1984 at 1; and Nihon Shashin Kogyo Tsushin, February 1, 1984, at 11.

296 See Disc-Film Cameras Falter in Sales After Brief Boom, Nihon Keizai Shimbun, Nov. 29, 1983, at 9; Kodak Suspends Production of Its Disk Camera, New York Times, Feb. 2, 1988, at D-2.

297 See Photo Market 1995, at 98.

298 See Exhibit 23, Table 1.

299 Comparison of total minilabs installed (Exhibit 23, Table 2) with shipments of Fujifilm minilabs.

191 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 have been insufficient to create any expectation that it could gain market 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.300 While Kodak 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

300 "Privatizing Protection" at 6.

192 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,303 during the same period Fujifilm spent ten times (and Konica eight times) as much on advertising as Kodak.304 In fact, Kodak's advertising budget during this period was not even proportional to 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

301 Taking on Japan, at 37.

302 Although Fujifilm does not have precise information on the number of sales people, Fujifilm believes Kodak has fewer salespeople then Konica.

303 "Privatizing Protection" at 6.

304 Yuryoku Kigyo no Kokoku-Senden-Hi, (Advertising Expenses of Major Companies), Nikkei Kokoku Kenkyusho, Dec. 1974-Sept. 1994.

193 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.306 The employee was hoping to study for a business degree, not even a degree in a 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.308 Furthermore, Kodak scaled down its newly established R&D facility in the early 1990s and laid off technicians that had just been hired.309 While each of these missteps was relatively minor in isolation, taken together they bring into question Kodak's commitment to the Japanese market and its image in Japan.

305 See Nikkei Ryutsu Shinbun, December 12, 1992, at 1; Nikkei Sangyo Shinbun, June 4, 1992, at 6; and Nikkei Sangyo Shinbun, February 12, 1992, at 8.

306 See Asahi Shinbun, August 30, 1987, at 3 and September 12, 1987, at 2; Nihon Keizai 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, and September 12, 1987, at 3; Sankei Shinbun, August 30, 1987, at 22; and Tokyo Shinbun August 30, 1987, at 3.

307 See Nihon Keizai Shinbun, March 16, 1993, at 5; February 2, 1993, at 1; February 3, 1993, at 10; and July 11, 1992, at 9.

308 See Nihon Keizai Shinbun March 16 1993, at 5; February 2, 1993, at 1; February 3, 1993, at 10; and July 11, 1992, at 9.

309 See Nihon Keizai Shinbun, March 16, 1993, at 5, and Nikkei Sangyo Shinbun January 27, 1993, at 31.

194 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.310 Outside observers with no vested interest 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 the significant 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 home market, where consumers were comfortable with the brand names, 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,312 Kodak took no action in 1985 or thereafter to reverse its 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,

310 "Privatizing Protection" at 9-12.

311 W. Hyer and K. Stocker, Fuji Photo Film Company, Ltd.: Quicksnap, in New Product Success Stories: Lessons from Leading Innovators, (R. Thomas, ed. 1995), at 278.

312 See Section IV.D.

195 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.

313 "Privatizing Protection" at 6-7.

196 EVOLUTION OF KODAK'S MARKET SHARE IN JAPAN (1971-1994)

Source: "Privatizing Protection", Appendix A, Table 2.

197 V. KODAK'S CLAIMS OF ACTIONABLE VIOLATIONS OF THE FRIENDSHIP, COMMERCE AND NAVIGATION TREATY AND THE 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 Of Laches 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

314 Mackall v. Casilear, 137 U.S. 556, 566 (1890).

198 with regard to claims by military officers for back pay after involuntary discharge from the service.315 For example, in Yerxa v. United States the government argued that the plaintiff's 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."317 As one scholar has noted, "{t}he lapse of time in presentation may bar an international claim in spite of the fact that no rule of international law lays down a time limit,"318 and this doctrine "is widely accepted by writers and in arbitral jurisprudence."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 accepted in arbitral jurisprudence, should include the limitation of actions for obligations between states among the general principles of law recognized

315 See, e.g., Yerxa v. United States, 11 Cl. Ct. 110 (1986); Cornetta v. United States, 851 F. 2d 1372 (1988); Mai v. United States, 22 Cl. Ct. 664 (1991).

316 Yerxa, 11 Cl. Ct. at 113.

317 The Gentini case defines prescription as follows: "When a right of action becomes 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, General Principles of Law, as Applied by International Courts and Tribunals (1953) at 373.

318 Athanassios Vamvoukos, Termination of Treaties in International Law (1985) at 296.

319 Id. at 296.

320 Cited in Jackson Ralston, The Law of Procedure of International Tribunals, Supplement (1936) at 185 (hereinafter Ralston (1936)).

199 by civilized nations, which international tribunals are called upon to apply.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 requirement even more important in the international than in other spheres; it is a precept of fair dealing inasmuch as it prevents states from playing fast and loose with situations affecting others; and it is in accordance with equity inasmuch as it protects a state from the contingency of incurring responsibilities and expense, in reliance on the apparent acquiescence of others, and being subsequently confronted with 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.324 Kodak's claim

321 Cited in Jackson Ralston, The Law of Procedure of International Tribunals (1926) at 383 (hereinafter Ralston (1926)).

322 Vamvoukos, supra, at 296-7.

323 Case Concerning the Temple of Preah Vihear, 1962 I.C.J. 6, 40 (Separate opinion of Vice-President Alfaro).

324 In the Mossman case, the Mexican-American Claims Commission ruled that: "{i}t seems unfair that the {Mexican government} should be first informed of the alleged (continued...)

200 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 have long 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."325 With respect to the OECD Capital Code, 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."326 As indicated, both alleged treaty violations reference the same formal 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

324(...continued) misconduct of its inferior authorities more than fifteen years after the date of the acts complained of. The umpire cannot under this circumstance consider that the Mexican government can be called upon to give compensation for a very doubtful injury, and he therefore awards that the claim be disallowed." Cited in Ralston (1926) at 375.

325 "Privatizing Protection" at 174.

326 "Privatizing Protection" at 14.

201 Japan's legal restrictions on investment and its international commitments have long since been reconciled."327 Notwithstanding this historical fact, Kodak argues that USTR should 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 actionable under Section 301

"The starting point in every case involving statutory construction is the language itself."328 Absent a clear cut legislative intent contrary to the statutory language, the statutory 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 are being denied;

(B) an act, policy, or practice of a foreign country--

(I) violates, or is inconsistent with, the provisions of, or otherwise denies benefits to the United States under, any trade agreement, or

327 "Privatizing Protection" at 181.

328 Madison Galleries, Ltd. v. United States, 870 F.2d 627, 629 (Fed. Cir. 1989) (citing Bethesda Hospital Ass'n v. Bowen, 108 S.Ct 1255, 1258 (1988)).

329 Id.

202 (ii) is unjustifiable and burdens or restricts United States commerce330

• • •

(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 under any 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.332 In fact, the legislative history of the most recent amendments reiterates Section 301's primary function:

330 19 U.S.C. § 2411.

331 19 U.S.C. § 2414 (emphasis added).

332 Rep. 100-40, Part 1, 100th Cong. 1st.

203 The Committee wishes to ensure that Section 301 authority remains a strong and effective means for the United States to enforce its rights under trade agreements and 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.334 The House of Representatives Report behind the Omnibus 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 not the preferred outcome of a dispute and should not be required if the foreign country has agreed to eliminate or phase-out the practice in a satisfactory manner or, while preserving the practice, has removed or otherwise solved the burdensome 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

333 1994 U.S.Code Cong. and Adm. News at 3909.

334 19 U.S.C. § 2411(a)(2)(B)(ii)(I) (1994).

335 Rep. 100-40, Part 1, 100th Cong. 1st.

336 We note that although Kodak alleges that the liberalization countermeasures, instituted after formal restrictions were lifted, "created a structure" that is inconsistent with Japan's obligations under the agreements, Kodak never argues that the countermeasures themselves constitute violations of the FCN Treaty or OECD Capital Code. Kodak pointedly does make such a claim directly. Therefore, USTR must assume that Kodak does not believe that the liberalization countermeasures are current violations or impairing any benefits.

204 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

337 Kodak's claim under Section 301(b) fails for a different reason. As detailed at length 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 under ... the OECD Code of Liberalization of Capital Movements,"338 and that "Japan's policy 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.340 Direct investment was one such area.341 At no time was Japan in violation of

338 "Privatizing Protection" at 14.

339 Id. at 178.

340 OECD, Memorandum of Understanding between the Organization for Economic Co- operation and Development and the Government of Japan Concerning the Assumption by the Government 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 make reservations to certain provisions. Through these reservations, Members may abstain from conforming to the provisions in question.

206 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,343 an allegation which, if true, would clearly constitute a 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."344 Again, we are at a loss as to the legal meaning of this statement. Fortunately, 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.345 Then, in 1964, the United States did make a

341(...continued) 341 Dan Fenno Henderson, Foreign Enterprise in Japan (1973) at 284.

342 Henderson, supra, at 285.

343 "Privatizing Protection" at 177-179.

344 "Privatizing Protection" at 178. (continued...)

207 reservation to the direct investment provisions of the Code.346 As of 1992, the United States, 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."348 In addition, the OECD notes that

{t}he reservation ... procedure should not be thought of as weakening the force of the Codes in their promotion of progressive liberalization. On the contrary, they provide an orderly regime for easing the burden when necessary so that all Members are able, over sometimes long and difficult periods, 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

345(...continued) 345 OECD, Decision of the Council regarding Canadian and United States Reservations to the Codes of Liberalization of Current Invisible Operations and of Capital Movements, December 12, 1961, Doc. No. OECD/C(61)85.

346 OECD, Decision of the Council Amending the Code of Liberalization of Capital Movements, July 28, 1964, Doc. No. C(64)85 Final.

347 OECD, Code of Liberalization of Capital Movements, Annex B, 1992.

348 OECD, Introduction to the Codes of Liberalization, (1987) at 14.

349 Id.

208 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 of monetary reserves allowed Japan to restrict foreign direct 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.351 In support of its allegation, Kodak cites Professor Henderson's book on Foreign Enterprise in Japan, and argues that Japan's level of reserves

350 U.S.-Japan FCN Treaty, Protocol 6 and article XII(2).

351 "Privatizing Protection" at 177.

209 was not very low.352 Henderson claims that by 1973, Japan's reserves were approximately $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 1966.354 Thus, when analyzed 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 lodge so many reservations relating to the obligations under the OECD Code of Liberalization of Capital Movements. Our foreign currency reserves have been remaining for years at the two billion dollar level making no substantial progress, while the quantity of our imports has increased remarkably year by year resulting in the disequilibrium between foreign currency reserves and imports. There is no room for optimism as regards Japan's monetary reserves in the future.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

352 Id.

353 Henderson, supra, at 280.

354 Yasuhiro Fujita, Does Japan's Restrictions on Foreign Capital Entries Violate Her Treaties?, 3 Law in Japan (1969) at 168.

355 Fujita, supra, at 168.

210 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 violation of the FCN Treaty because the U.S. Government acquiesced 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 national treatment provisions of the Japan-U.S. Treaty of Commerce and Navigation' .... The United States Government considers that {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 a legal issue of the question.356

356 Keidanren Pamphlet No. 87, February 1966, cited in Michida, Capital Liberalization as a Treaty Question, 2 Law in Japan 13 (1968).

211 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."357 Thus, acquiescence acts as an estoppel to the bringing of a claim. 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 international community, Great Britain's position in the North Sea, her own interest in the question, and her prolonged abstention would in any case warrant Norway'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."360 When a

357 Black's Law Dictionary, at 22.

358 Case Concerning the Territorial Dispute, 1994 I.C.J. 6, 55-9 (Separate opinion of Judge Ajibola).

359 Anglo-Norwegian Fisheries, in D.W. Bowett, Estoppel before International Tribunals and its Relation to Acquiescence, 33 Brit. Y.B.I.L. 176 (1957), at 199.

360 Id.

212 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 in national 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.362 The purpose of the local remedies 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

361 Id. at 200-201.

362 Interhandel Case (Switzerland v. United States), 1959 I.C.J. 6, 27.

363 C.F. Amerasinghe, Local Remedies in International Law 359 (1990).

213 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."364 Consequently, the Court 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."366 The Finnish Ships Arbitration addressed the concept of futility 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

364 Case Concerning Elettronica Sicula S.p.A. (ELSI) (United States of America v. Italy), 1989 I.C.J. 15 at para. 50.

365 United States-Italy FCN Treaty Article XXVI reads: "Any dispute between the High Contracting Parties as to the interpretation or the application of this Treaty, which the High Contracting Parties shall not satisfactorily adjust by diplomacy, shall be submitted to the International Court of Justice, unless the High Contracting Parties shall agree to settlement by some other pacific means." 63 Stat. 2255 (Feb. 2, 1948).

United States-Japan FCN Treaty Article XXIV reads: "Any dispute between the Parties as to the interpretation or application of the present Treaty, not satisfactorily adjusted by diplomacy, shall be submitted to the International Court of Justice, unless the Parties agree to settlement by some other pacific means." 4 U.S.T. 2064; TIAS 2863 (Apr. 2, 1953).

366 "Privatizing Protection" at 175.

214 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.367 The test requires evidence that the remedy would be manifestly ineffective.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."369 In contradiction, Kodak cites another author arguing that "because 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} will prevail."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.

367 Claim of Finnish Shipowners (Finland v. Great Britain), 3 U.N. Rep. Int'l Arbitral Awards, 1479, 1495, 1504.

368 Electronica Sicula S.p.A. (ELSI), 1989 I.C.J. at 47.

369 "Privatizing Protection" at 175 citing Henderson, Foreign Enterprise in Japan, at 286.

370 Id. at 194 citing Michita, Capital Liberalization as a Treaty Question, 2 Law in Japan 18 (1968).

215 D. Should USTR Decide To Proceed With Kodak's Treaty Violation Claims, It Must Utilize The Dispute Resolution Provision 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.371 The legislative history of Section 301 is quite clear on this 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 to proceed in parallel with the domestic investigation in order to seek resolution of the issues. . . If the issues are covered by a trade agreement and are not resolved during the consultation period, if any, specified in that trade agreement then the USTR 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 the present Treaty, not satisfactorily adjusted by diplomacy, shall be submitted to the International Court of Justice, unless the Parties agree to settlement by some other 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

371 19 U.S.C. § 2413(a)(2) (1994); see also 15 C.F.R. § 2006.6.

372 Rep. 100-40, Part I, 100th cong. 1st (emphasis added). See also USTR's regulations, 15 C.F.R. § 2006.6.

373 Treaty of Friendship, Commerce and Navigation, Apr. 2, 1953, U.S. - Japan, art. XXIV, par. 2.

216 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 301.374 Consequently, because both the FCN Treaty and the OECD Capital Code contain express dispute resolution provisions, USTR must exhaust these procedures before taking action.

374 “Privatizing Protection” at 172-173. Specifically, Kodak notes the "the FCN Treaty 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 use of quantitative import and export restrictions, most-favored nation treatment with respect to imports and exports, customs duties, carriage of goods, and the imposition of import restrictions for balance of payment problems." See also Charles R. Johnston, Jr., “Actions Against Foreign Government Trade and Investment Practices: Section 301 of the Trade Act of 1974, as Amended”, in Law and Practice of United States Regulation of International Trade, Booklet 4, 26-28 (1995).

217 VI. EXAMINATION OF KODAK'S BEHAVIOR IN THE U.S. MARKET PROVIDES A CRITICAL BENCHMARK AGAINST WHICH TO JUDGE KODAK'S ALLEGATIONS ABOUT FUJIFILM'S BEHAVIOR IN THE JAPANESE MARKET

The pot calling the kettle black. People who live in glass houses 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 the creation of an enduring photographic record from an evanescent image. Snapshots may be taken with a Kodak camera on Kodak film, developed by Kodak's color print and processing laboratories, and printed on Kodak photographic paper. The firm has rivals at each stage of the process, but in 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;

375 Berkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d 263 (2d Cir. 1979) cert. denied, 444 U.S. 1093 (1980) (emphasis added).

376 The Sixth Annual Robinson Report: The U.S. Consumer Imaging Market in 1993 with Forecasts for 1998, Table 3-9 (hereinafter "1993 Robinson Report"); Industrial Marketing Research, Inc., Continuing Consumer Survey, Copyrighted Report on 35mm Camera Film, 1994 (hereinafter "1994 Industrial Marketing Research"). We note that the small difference between Kodak's color film market share figures reported here and those cited by Kodak in the Consent Decree proceeding (67 percent by volume) consists of gray market 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 someone other than Kodak -- does exist in the U.S. market. Kodak gray market imports account for about 3 percentage points of U.S. volume. (Robinson Report, Table 3-9.) Testimony of Professor Hausman, Consent Decree Trial Transcript at 510-11. Testimony of Stephen Logsdon, Consent Decree Trial Transcript at 942.

218 70 percent of wholesale photofinishing377;

60 percent of the color paper market378;

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

377 See 1993-1994 International Photo Processing Report at 7-2; Affidavit of Margaret Weston, dated June 22, 1992, submitted to U.S. District Court Western District of New York.

378 1993-1994 International Photo Processing Report at 6-15.

379 1994 Industrial Marketing Research; 1993 Robinson Report, Table 3-9.

We note that the difficulty of competing against Kodak's market power in the U.S. is not limited to foreigners. Take the example of Polaroid. When Polaroid decided to enter the amateur film market it declined to do so as a manufacturer and instead decided to purchase film from the 3M Company and to market it as Polaroid film. In the four years since Polaroid has entered the market as a distributor only, and despite its very high name recognition in the U.S. market, it has attained merely a 2.2 percent share of the market, with a major portion of this share resulting from Wal-Mart's marketing of Polaroid film. See Testimony of Stephen Logsdon Consent Decree Trial Transcript at 914-916, 933.

GAF, another U.S. firm with a long history in amateur film and other photographic products, was unable to compete against Kodak at all; it left the photographic business in (continued...)

219 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 Japan380 -- practices 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?

379(...continued) 1977. Brock, "Market Control in The Amateur Conventional Photography Industry," Ph.D. Dissertation (Michigan State University, 1981).

380 As explained in much detail in Sections I and II, Kodak in fact misrepresents and misunderstands Fujifilm practices in Japan. Consequently, we do not agree with Kodak's allegation that any of Fuji's practices are anticompetitive.

220 A. The U.S. Market Has Been Shaped By Kodak's Long History Of Domination In All Photographic Products

{T}he Court cannot ignore Kodak's long history of 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 position through 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

381 Phototron Corp. v. Eastman Kodak Co., 687 F. Supp. 1061, 1070 (N.D. Tex.), rev'd on other grounds, 842 F.2d 95 (5th Cir.), cert. denied, 486 U.S. 1023 (1988).

221 1902 and 1908. During this time, he acquired, at times under coercive conditions, no fewer than 20 competitors that were afterwards dissolved and dismantled.382 Companies were often 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:

382 United States v. Eastman Kodak, 226 F.62, 63 (W.D.N.Y. 1915), appeal dismissed, 255 U.S. 578 (1921).

383 Id. at 74-75.

222 {i}t is difficult to avoid the conclusion that the acquisition of various companies was for the purpose of suppressing competition and in furtherance of an intention to form an illegal monopoly....{I}n view of the fact that a majority of the plants were dismantled and the business concentrated...it is evident that they were not actually required by {Kodak} in carrying on their business, but were acquired 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."385 Kodak was also enjoined from monopolizing through 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

384 Id. at 75.

385 United States v. Eastman Kodak Co., No. A-51, Slip op. (W.D.N.Y. 1921).

386 The consent decree was modified several times. In 1924 it was modified so as to include Defender Photo Supply company as a defendant upon its purchase of Kodak's brand of 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 certain sales 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).

387 FTC v. Eastman Kodak Co., 274 U.S. 619, 620-621 (1927) (on appeal, the circuit court held that the FTC did not have authority to order divestiture).

223 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).389 By bundling the cost of film and 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

388 Eastman Kodak Co. v. Southern Photo Materials, 273 U.S. 359, 375 (1927). See also generally, K. Glazer and A. Lipsky, Unilateral Refusals To Deal Under Section 2 of the Sherman Act, 63 Antitrust L.J. (Spring 1995).

389 Complaint, United States v. Eastman Kodak Co., No. 6450 (W.D.N.Y. Dec. 21, 1954), at 2.

390 Id. at 7.

224 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 misconduct from 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.392 In 1973, Bell & Howell claimed that 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.394 Perhaps the most notable was Berkey Photo, Inc. v. Eastman Kodak Co. In 1973, Berkey Photo sued Kodak for a wide variety of antitrust violations alleging that "every aspect

391 United States v. Eastman Kodak Co., 1954 Trade Cas. (CCH ¶ 67, 920 (W.D.N.Y. 1954).

392 Revere Camera Co. v. Eastman Kodak Co., 81 F. Supp. 325, 327 (N.D. Ill. 1948).

393 J. Sidak, Debunking Predatory Innovation, 83 Colum. L. Rev. 1139 n.64 (1983).

394 See Berkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d 263 (2d Cir. 1979); Foremost Pro Color, Inc. v. Eastman Kodak Co., 703 F.2d 534 (9th Cir. 1983), cert. denied 65 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 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."395 In particular, in some of its claims, Berkey alleged 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.396 The Court of Appeals noted that Berkey's lawsuit was "one of the largest and most significant private antitrust suits in history."397 After more than four years of 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."398 The 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.400 In commenting on Kodak's broad attack on the trial, the Court of Appeals stated "we cannot accept Kodak's contention that a properly charged jury

395 Berkey Photo, 603 F.2d at 267.

396 Id.

397 Berkey Photo, 603 F.2d at 267. The Court noted that Kodak and Berkey "stand in a complex multifaceted relationship, for Kodak has been Berkey's competitor in some markets and its supplier in others." Id.

398 Id. at 268.

399 Id. at 309.

400 The court held that no anticompetitive conduct occurred by introducing a new film format simultaneously with new film. Id.

226 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.402 The Court of Appeals further pointed out that until the 1954 decree broke Kodak's 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."404 The Court 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

401 Id. at 268. "The jury found monopolization or other anticompetitive conduct in no fewer than five distinct markets within amateur photographic industry, and in several instances Kodak was held to have misused its control in one market to disadvantage rivals in another." Id. at 269.

402 Id. at 270.

403 Id. at 271. Kodak sold its color film with photofinishing charges included. Id. at 270. Kodak kept a "grip" on reprints by refusing to sell paper or chemicals to rival photofinishers. Id. at 270, n.9.

404 Id. at 270.

405 Id. at 306.

227 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.407 Kodak had failed to prove a legitimate 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

406 Eastman Kodak Co. v. Image Technical, Inc., 504 U.S. 451, 481 (1992).

407 Id.

408 See Letter from U.S. Justice Department to David Lascell, Esq. dated November 4, 1993. See also Government's Memorandum in Opposition to Motion to Terminate Consent Decree dated June 24, 1993.

228 In 1994, after a trial, Judge Telesca sided with Kodak and terminated both Consent Decrees.409 The U.S. Department of Justice has appealed Judge Telesca's decision to the 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.

409 United States v. Eastman Kodak Company, 853 F.Supp 1454 (W.D. N.Y. 1994). In his opinion, Judge Telesca agreed with Kodak's argument that the relevant market for film was worldwide. Given Kodak's worldwide share of 36 percent, and the technological innovativeness of all the major competitors, Judge Telesca found that Kodak did not have market 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 market power if the relevant market were limited to the U.S. where Kodak's share is much higher (70 percent). He found that Kodak does not possess monopoly power in the U.S. because of two factors: (1) consumers are price sensitive (based on an econometric study of consumer purchases in food and discount stores) and (2) other suppliers can increase their capacity if Kodak restricted output or raised its prices. As discussed in Part D of this section, Kodak has not applied these tests to its study of Fujifilm's market power in Japan. If it did, it would likely find that Fujifilm does not have market power. To cite just one example, the evidence shows 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 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.410 In addition to the Consent Decree 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 our requirements. Kodak's response was to propose a deal in which all products would be bundled together. The proposed deal was that we would 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 of money 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.412 Under the VIP Rebate, retailers are

410 See Testimony of Stephen Logsdon of Polaroid Corporation, Consent Decree Trial Transcript at 922-23.

411 Transcript of Proceeding International Trade Commission, Staff Conference, September 22, 1993 at 123 (emphasis added).

412 See United States v. Eastman Kodak Company, 853 F.Supp. 1462 (1994) (Thomas Froom, merchandise manager for the Army and Air Force Exchange Service "testified that Kodak offered AAFES a premium to stock Kodak film exclusively, and also testified regarding Kodak's Volume Incentive Program ("VIP Rebate"), which rewards retail outlets that sell large volumes of Kodak film.").

230 awarded a 4 percent rebate if they purchase 100 percent of the unit volume they purchased the previous year.413 In a stagnant market, such as the market throughout the 1990s, retailers 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.414 In the event that the 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.415 Either way, by utilizing such programs, Kodak 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.416 The packaging includes special bonus and value multipacks of 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

413 See Kodak's Trade Circular, January 1993 (explaining Kodak's Volume Incentive Plan) provided in Exhibit 24. See also Testimony of Stephen Logsdon of Polaroid Corporation, Consent Decree Trial Transcript at 919-923.

414 Testimony of Stephen Logsdon of Polaroid Corporation, Consent Decree Trial Transcript at 920-922.

415 Testimony of Thomas Froom of the Army and Air Force Exchange Service, Consent 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.

416 Testimony of Margaret Weston of Konica, Consent Decree Trial Transcript at 1154.

417 See Exhibit 25, which provides promotional packages and stuffers purchased at Caldor on June 17, 1993, with photofinishing coupons for the purchase of Kodak film and Eckerd advertisement for free photo processing.

231 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 and southwest regions of the United States, Eckerd has refused to carry Fuji film for the past 20 years. Eckerd is very tight-lipped regarding its reason for refusing to sell Fuji

418 We note that the list provided here is just a sampling. Additional information and examples will be provided in confidence to USTR. Most of these retail outlets are among the top supermarket, drug, and discount chains in the U.S. (See Fortune, May 15, 1995, at F51- F53).

232 film; buyers simply say they are constrained by "contractual" obligations with Kodak.419

CALDOR: A discount store chain popular in New England, Caldor consists of 174 outlets. Caldor representatives have told Fujifilm sales people for the last nine years that they are unwilling to carry Fuji film, in part because they have decided only to carry one brand product and one low-cost product. Caldor's low-cost "fighting brand" happens to be manufactured by Kodak (Kodak's "VR" film), which insists on exclusivity as a condition for carrying its low-cost film.420

PUBLIX SUPERMARKETS: Publix is a chain of 470 grocery stores throughout Florida. Fujifilm has never been able get its film on Publix shelves due to the VIP rebate program, other ties to Kodak, and incentives provided on photofinishing by Qualex.421

BRADLEES: Bradlees is a chain of 130 stores. Fujifilm salespeople recently learned that Bradlees has entered into an exclusive arrangement with Kodak to offer only Kodak branded film in exchange for a cash payment "in the high six figures."422

K-MART: Kodak recently offered K-Mart a direct payment of $8 million to exclude Focal 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, and Universal Studios.424 In at least one instance Fujifilm has been told that the

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 Supporting documentation will be provided in confidence to USTR.

423 Testimony of Joseph Warren of 3M Co., Consent Decree Trial Transcript at 1005- 1006.

424 Testimony of Paul Hudak of Fuji Photo Film U.S.A., Consent Decree Trial Transcript at 1289, lines 14-16. Disney theme parks account for about five percent of all snapshots. (continued...)

233 theme park has an exclusive contract with Kodak based on a $1.55 million payment every three years.425

ARMY AND AIR FORCE EXCHANGE SERVICE (AAFES): AAFES receives rebates equalling $1.1 million to $2.7 million per year under Kodak's VIP rebate program based on the volume of Kodak film purchased by AAFES only if AAFES sold Kodak brand film exclusively.426

AIRPORT HOTEL CONCESSIONAIRES: Kodak has successfully obtained exclusivity at many of the major hotels across the country, including all Marriott/Host hotels 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.

424(...continued) Clare Ansberry, Kodak and Disney Mutual-Exclusivity 15-Year Pact Set, The Wall Street Journal, April 20, 1989.

425 Supporting documentation will be provided in confidence to USTR.

426 Testimony of Mr. Thomas Froom of the Army and Air Force Exchange Service, Consent Decree Trial Transcript at 947, 1083-1095.

427 Supporting documentation will be provided to USTR in confidence. See Announcement of Hospitality Franchise Systems Inc., July 5, 1995 ("Hospitality Franchise Systems Inc. ("HFS"), the world's largest hotel franchisor, has entered into a co-marketing agreement with Eastman Kodak Co. the five year agreement will allow hotel guests to purchase Kodak products while staying at participating HFS brand hotels: Days Inn, Howard Johnson, Park Inn International, Ramada, Super 8 and Villager Lodge.")

234 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 is offering for exclusivity?

Answer: I think it's -- it's a factor if we were able -- if we had to match that amount of money with the limited share of volume that we have, we would be in a philanthropic business which obviously we're not in. We don't have the margin generated to spend like that.428

Similar testimony was offered by 3M,429 Konica,430 and Fujifilm.431 Kodak thus forces its 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.432 In short, when Kodak, with its dominant share, "competes" for

428 Testimony of Stephen Logsdon of Polaroid Corporation, Consent Decree Trial Transcript at 922.

429 Testimony of Joseph Warren of 3M Co., Consent Decree Trial Transcript at 987-988.

430 Testimony of Margaret Weston of Konica, Consent Decree Trial Transcript at 1163- 1164.

431 Testimony of Paul Hudak of Fuji Photo Film U.S.A., Consent Decree Trial Transcript at 1290-1293.

432 Kodak has tremendous brand loyalty. As noted by the District Court, Kodak's own research shows that 50 percent of all Americans will only buy Kodak film, while an additional 40 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 the shelf. If a U.S. retailer is going to sell film, it must, at a minimum, have Kodak brand film (continued...)

235 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.433 Kodak's exclusive dealing arrangements are, therefore, extremely 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."435 As the Court of Appeals for the Second Circuit has noted, Kodak's ability to parlay its film monopoly into

432(...continued) on the shelf.

433 In contrast, at the very most, Kodak alleges limited access to wholesalers/distributors in Japan.

434 Testimony of Paul Hudak of Fuji Photo Film U.S.A., Consent Decree Trial Transcript at 1355.

435 See Berkey Photo, 603 F.2d at 268-271.

236 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."436 Not surprisingly Kodak also controlled 95 percent of the photofinishing 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.437 Kodak's share of the color paper market was also reduced, to 69 percent in 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.439 Not surprisingly, Kodak's share of the color paper market has also improved. (Indeed, the prevailing thought in the industry is that Kodak initiated its

436 Id. at 270.

437 Id. at 271.

438 We note that Court of Appeals for the Second Circuit concluded that in 1979 Kodak's control of the color film and color paper markets "clearly reached the level of monopoly." Berkey Photo, 603 F.2d at 273.

439 See 1993-1994 International Photo Processing Industry Report, at 7-2.

237 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 paper customers

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.441 With very little of its own 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

440 See 1993-1994 International Photo Processing Industry Report, at 7-2 ("The major sensitized materials manufacturers continue to buy photofinishing facilities, probably to maintain market share for their color paper. Kodak has established itself as the world's largest photofinisher.").

441 Testimony of Margaret Weston of Konica, Consent Decree Trial Transcript at 1142.

442 See Photo Opportunity, Inc. (December 1987).

238 when APG was "sold" to Kodak:443 Kodak had essentially financed APG's acquisitions. The 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.444 At the end of its five-year acquisition spree, APG had amassed more than 25 million dollars of debt to Kodak.445 APG had no choice but to sell to Kodak.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.448 At that time, Kodak already 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

443 Testimony of Margaret Weston of Konica, Consent Decree Trial Transcript at 1142.

444 Interview with J. R. Algrin, former Senior Vice President for Operations at American Photo Group.

445 Interview with J. R. Algrin, former Senior Vice President for Operations at American Photo Group.

446 "Selling APG to Kodak had been a strong possibility from the beginning, admitted Bostic after the sale." Photo Opportunity, Inc. (December 1987).

447 See Photo Opportunity, Inc. (December 1987).

448 Testimony of Margaret Weston of Konica, Consent Decree Trial Transcript at 1142.

239 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. With 5 billion prints processed per year and projected annual sales of $600 million, Druham, N.C.-based Qualex holds one fourth of the U.S. photofinishing market and three-fourths of the wholesale photofinishing market. Five of the six biggest wholesale photofinishers of 1985 are now part 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

449 See Phototron Corp. v. Eastman Kodak, 842 F.2d 95 (5th Cir.), cert. denied, 486 U.S. 1023 (1988).

450 Fuqua Seeking Stable Prices in Photofinishing, Atlanta Constitution, June 9, 1988.

240 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.451 Indeed, most of the photofinishers that ended up being acquired by Fujifilm 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 the few remaining independents. For many years I had resisted the trend. I valued my independence, but eventually I could not ignore the fundamental change taking place. As Qualex became larger and larger, it became more and more apparent that smaller independent wholesalers would not be able to compete effectively in the long term.

Qualex's volume was too large and its photofinishing pricing too aggressive for us to compete. The only way to survive was to link up with

451 Testimony of David McEowen of Fuji Trucolor, Consent Decree Transcript at 1232- 1233.

241 one of the manufacturers. The question was not whether to link up, but only with whom and when?

I could have sold to Qualex. They tried to buy McJon Photo. But I ultimately chose Fuji. One of the main reasons was jobs. I had just seen Qualex buy up wholesale operations in our area just to close them down, eliminate the local competition, and consolidate the photo finishing into one of their other operations in the same area.

I was certain that Qualex would close down McJon Photo as well. I also felt 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.

452 Transcript of Proceeding, Staff Conference of International Trade Commission, September 22, 1993 at 116-117.

453 Interview with Kenneth W. Kurz.

242 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.455 Kodak/Qualex's 52 plants 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

454 See 1993-1994 International Photo Processing Industry Report, at 2-9. We note that 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 Margaret Weston, president of Konica Quality Photo East, estimated that, in fact, there are only 30 companies of any significant size.

455 See 1993-1994 International Photo Processing Report, at 7-13.

456 Id.

457 See Letter from Gary Christophersen, Seattle Film Works, submitted to U.S. District Court, Western District of New York ("Here in the Pacific Northwest, only Qualex has wholesale labs within 300 miles of those companies which purchase wholesale

243 (2) Kodak's Colorwatch program, along with Kodak's special packaging that bundles film and photofinishing, ensure and maintain exclusivity across all 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.458 In addition, all Colorwatch participants must agree to install Kodak's Technet computer management software, which often links the lab's operations directly to Kodak.459 The software provides a benefit to the photofinisher customer by allowing the photofinisher "access to Kodak's Central Computer Service"460 to obtain 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

457(...continued) photofinishing.").

458 See Participant Agreement Form For Kodak Colorwatch System provided in Exhibit 27. See also Letter from Nick Takton, President of Sundance Photo Inc., dated June 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 to U.S. District Court for Western District of New York.

459 See Exhibit 27, Participant Agreement Form For Kodak Colorwatch System.

460 See Exhibit 28, "A Word About Technet Center" in Colorwatch brochure.

244 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.461 Indeed, in 1988 Guardian Photo (the second largest photofinisher at 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.

461 See, e.g., Testimony of David McEowen of Fuji Trucolor, Consent Decree Trial Transcript at 1217 (Fuji TruColor lost Target as a customer due to Target's participation in Colorwatch).

245 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,462 retailers are naturally attracted to the Kodak Colorwatch program. 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."

462 Retailers benefit from the need of a photofinishing customer to visit the store twice; once to drop off the film for processing and the other to pick it up. Each visit creates the opportunity to sell the consumer other products.

246 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.463 Another example is the Kodak packaging at Eckerd Drugs which provides the consumer with "free" photofinishing at Eckerd's own labs.464 Since Eckerd is a 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 equipment to 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.466 Kodak

463 See Exhibit 25 which include numerous examples of Kodak promotional packages, advertisements and stuffers, all offering coupons for discounted photoprocessing.

464 See Exhibit 29.

465 See Exhibit 30.

466 See Prehearing Staff Report of International Trade Commission, Investigation Nos. (continued...)

247 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 are from large accounts, accounts which are normally not subject to the same package of discounts, rebates, equipment incentives and so forth as large customers.

One customer, a $50,000 a year account, was provided a $60,000 creative print 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 a year color paper account.467

Other examples of small accounts include:

Stanford, Studios, CA: Kodak offered a free Noritsu minilab and a free black and white processor to have customer switch off Fujifilm paper to Kodak paper. Fujifilm lost the account.

K&S - Chicago: Kodak gave K&S free use of a Kodak Premier Electronic Imaging System. As a result, Fujifilm lost the display material business and Konica lost the paper business.

Meteor - Detroit: In exchange for a free Premier system, Meteor agreed to be 100 percent Kodak.

466(...continued) 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 overall volume of CNPP purchased and/or other products that may be bundled with CNPP and not necessarily the specific CNPP products purchased.")

467 Transcript of Proceedings, International Trade Commission Staff Conference, September 22, 1993 at 136.

248 Luck Color Lab, TN Fujifilm lost the account when Kodak offered to give the customer an ISIS System (Integrated Scanner and Imaging Station, an electronic film handling system) for long roll film used 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 to take 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 to enter 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

468 Create-A-Print machines are do-it-yourself enlargers for the end use customer. Minilab operators contend that these enlargers are necessary to compete in the market. Only Kodak color paper can be used in these machines. See ITC Staff Report at I-85.

249 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

469 Fuqua Seeking Stable Prices in Photofinishing, Atlanta Constitution, June 9, 1988.

470 Interview with Robert Gregory, former Regional Manager, Eastern United States, Guardian Photo.

250 to piece together a national network of photofinishers to compete with Kodak/Qualex, Kodak/Qualex has reacted aggressively.471 In most cases, Kodak/Qualex reacted before the 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 began an aggressive campaign to capture that operation's customers and prevent it from expanding its customer base. For example, Qualex offered $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 $275,000 contract, when Qualex offered $100,000 in up-front money.

Fuji-New Jersey lost Kelly Photo when Qualex offered $250,000 per year 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 the accusation that compared to Qualex, Fujifilm was "cheap."

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 $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 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.

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

471 As noted below, to avoid being left behind as the U.S. photofinishing industry consolidated, Fuji-USA acquired 16 photofinishing labs in the early 1990s.

251 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 of the 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.472 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 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 by competitors;"

{VII} "refusing, preventing or hindering {its} products . . . from being 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

472 As noted above, these decrees remained in effect until 1994 when the a U.S. District Court in Rochester terminated them. The termination has been challenged by the Justice Department in the Court of Appeals.

252 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

473 United States v. Eastman Kodak Co., 1954 Trade Cas. (CCH) ¶ 67,920 (W.D. N.Y. 1954) (emphasis added).

253 induce the customer to have the film processed by a specific photofinisher."474 However, this 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.475 Caldor, as a result of its 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

474 Affidavit of Alexander Wasilou, Kodak's General Manager of Marketing and Divisional VP, dated May 19, 1993 at ¶ 5 ("Entering into promotion with our own processing labs or with independent photofinishers which had the effect of requiring or encouraging consumers to return their exposed film to a designated source for photofinishing"). Affidavit of Colby H. Chandler, retired Chairman and Chief Executive Officer of Kodak, dated May 19, 1993, at ¶ 5 (this prohibition is broad enough to preclude "joint promotions or relationships with vertically integrated retailers"). Affidavit of Thomas F. Busch, Kodak's General Manager of Photofinishing Sales, Consumer Imaging Division, dated May 17, 1993 at ¶ 6 ("This prohibited connection . . . is broad enough to include joint promotions or relationships with independent photofinishers or vertically integrated retailers").

475 See Promotional packages and stuffers purchased at Caldor on June 17, 1993, provided in Exhibit 25.

254 its sale of photofinishing.476

c. Despite the fact that these Kodak practices were well known in the industry, the U.S. Government did not seek 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.477 Kodak's Colorwatch system was the 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

476 See Exhibit 25 for examples of Kodak tying film sales to photofinishing.

477 A copy of the VIP Rebates brochure is provided in Exhibit 24.

255 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 to produce 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.

256 2. Fuji-USA quickly realizes the importance of managing its own distribution, 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 its products 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

257 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 innovative products 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.

258 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 percent478 -- a share, however, from which Fuji-USA would not increase for 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

478 Industrial Marketing Research, Inc., data.

259 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:

260 A little over three years ago, I switched from Kodak to Fuji for the vast majority of my paper needs. The decision to switch was not easy. We undertook a painstaking process of evaluation and customer consultation before we decided.

The decision to switch stemmed from problems we were experiencing with Kodak's relatively new professional paper designed for the new RA4 process, which, at that time, was called Portra I.

My recollection is that in approximately 1989, Kodak introduced the RA4 process to the professional people lab market and informed the world that the previous EP2 process would be phased out.

We were one of the first people labs to utilize the RA4 process that was introduced in 1990. We immediately noticed that the visible image with the new RA4 process on Kodak's color paper was not as good as the EP2 process.

When our customers started complaining, we began investigating how we could 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 paper manufacturers, Fuji, Konica, and Agfa, to be specific. Konica and Agfa stated that they did not have a people lab paper to offer to us for use in the RA4 process.

Fuji stated they had some new professional paper coming out in a month that we might try. Fuji sent me two rolls for trial. The results were dramatic. As soon as the prints came out, I could tell instantly that the visual image was greatly improved over the Kodak paper and I knew my customers would be happy with that image.

I noticed immediately that the shadow detail, flesh tone and color saturations that we and our customers had come to expect were again present. In addition, about this same time, an article appeared in Popular Photography, June 1990, that reported an expert's finding that Fuji color paper had a much better dye stability than the Kodak paper and therefore could last nearly twice as long as the Kodak paper before fading.

261 This was quite significant. A substantial part of our customer's business is in the professional portrait and wedding business. In this area of photography, the stability of a color print is of extreme importance to the customer.

I decided to visit the expert who made the findings, Henry Wilhelm. After meeting with Mr. Wilhelm and examining his facilities and after convincing myself that Mr. Wilhelm was in no way connected to Fuji, I satisfied myself that his findings were legitimate.

During that time, we were conducting our own unscientific tests to verify that Mr. Wilhelm -- to verify what Mr. Wilhelm had proved in the laboratory. Even our own unscientific tests yielded the obvious conclusion, that the dye stability of the Kodak paper was not as permanent as the dye stability 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

479 Transcript of Proceedings, Staff Conference of International Trade Commission, September 1993, at 138-141 (emphasis added). A copy of the June 1990 Popular Photography issue is provided in Exhibit 31. Mr. Wilhelm's findings are published in The Permanence and Care of Color Photographs, (1993).

262 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 to Kodak's efforts in Japan

Kodak has claimed that Japan's photographic market is roughly comparable in size to the U.S. market.480 In addition, both the U.S. and Japanese markets have a dominant local manufacturer with very strong brand loyalty and, accordingly, strong market presence (Kodak-US; Fujifilm-Japan).481 Accordingly, it is instructive to examine not only the 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

480 Comments of Alan Wolff, Counsel to Kodak, at the National Press Club, July 12, 1995 ("In terms of value, the market in Japan is about equal to ours.").

481 Fuji's Japanese-based competitor, Konica, has been more successful in Japan than Kodak's U.S.-based competitor, 3M, has been in the U.S. According to Kodak's "Privatizing Protection" (at 30), Konica has a 17 percent share. 3M's share (which includes its branded sales 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 In the Japanese market, Kodak waited 10 years to take control of distribution from 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 its film.

(2) Developing new channels of distribution not occupied by the domestic incumbent

In Japan, Kodak continually relied on established channels of distribution and made no attempt to break new ground.

In the U.S. market, Fujifilm developed and nurtured the grocery store as a new distribution channel for film.

(3) Adapt products to local market tastes

In the Japanese market, Kodak made no attempt to adapt its film to the different tastes of the Japanese consumer until 1989, 16 years after being advised to do so by Asanuma.

From the start of its entry into the U.S. market, Fujifilm studied local tastes and has modified its products accordingly.

(4) Introduce innovative new products

In the Japanese market, Kodak has lagged two years behind Fujifilm in introducing both single-use cameras and high resolution ISO 400 film.

In the U.S. market, Fujifilm has been a leader in innovation, introducing a 35mm single-use camera when Kodak only had a lower quality 110 single-use camera.

(5) Commitment of significant resources

In the Japanese market, Kodak has invested only limited resources, and has made no investment in local manufacturing of photographic products.

In the U.S. market, Fujifilm has invested over $1.5 billion in the last ten years alone, including several local manufacturing facilities.

264 D. Kodak Has Urged The U.S. Government To Apply A Double 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.482 Kodak argued that the Department of Justice and the Court 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

482 Technically, Kodak's expert argued that the relevant market definition included the U.S., western Europe and Japan. However, in later submissions to the Court, Kodak essentially admitted that there was little distinction between identifying the market on a world-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 Court cites different "world" market share figures (i.e., 36 percent for Kodak) from the world market share figure used in Kodak's paper (42 percent)).

483 Eastman Kodak Company's Post-Trial Memorandum, April 8, 1994.

265 There are only five companies that manufacture amateur color photographic 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. and Europe, all companies sell color film on a worldwide basis.

Because the production of photographic products is capital intensive, all world markets are supplied by a relatively small number 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."484 Therefore, Kodak argued, the only 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 unit basis, and this geographic market definition is more appropriate for this Court'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,487 was too small for Kodak to possess market power. Recognizing that it had the largest share of the world market

484 Memorandum in Support of Eastman Kodak's Motion For Summary Judgment On The 1921 Decree, dated January 18, 1994, at 12.

485 Kodak's Reply To Government's Opposition, dated July 2, 1993, at 4 (emphasis added).

486 United States v. Eastman Kodak, 853 F. Supp. at 1470-1471.

487 Kodak's estimate appears correct. The 1993-1994 International Photo Processing Report at 6-32 (stating that Kodak has 41 percent of the world market, compared to Fuji's 32 percent).

266 (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} market characterized by intense marketing efforts and downward pressure on price. Market conditions make it virtually impossible for Kodak or any manufacturer to exercise market power, that is the ability to control price at any 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."489 Kodak asserts that

488 Kodak's Reply to Government's Opposition at 4 (emphasis added).

489 "Privatizing Protection" at 149.

267 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 if Kodak 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 moment the case where a firm has market power and where in your opinion it would be anticompetitive for it to have people agree with 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 other people to agree to deal with it exclusively by virtue of offering them 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 be passed on to consumers so long as the retailers are competitive which they usually are.

490 "Privatizing Protection" at 25.

268 In that situation in all cases I can think of pretty much it would be 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 world and their heritages are there; in Japan, Germany, et cetera. I happen to believe that -- and I think the market in the local countries where these companies are will bear that out -- that for a lot of different reasons over a long period of time a company tends to do better in its home market than it does in markets other than that.493

491 Testimony of Professor Hausman, Consent Decree Trial Transcript at 651-53 (emphasis added).

492 "Privatizing Protection" at 3.

493 Testimony of Professor Hausman, Consent Decree Trial Transcript at 508 (emphasis added).

269 Question: Sir, if the decrees are having that effect why is Kodak's share so much higher in the only country - major region, if you will - in the world where the decrees bind Kodak?

Prof. Hausman Well, I think the main reason is that Kodak's the home player here; that people know that Kodak is the American, and they are going to buy it so long as Kodak has high quality and a reasonable price.

• • •

Kodak has a higher share here. Agfa, good product, has a higher share in Germany. That's very typical in international trade and economics.

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.

270