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ID SEC. SYSTEMS CANADA v. CHECKPOINT SYSTEMS
April 24, 2002
ID SECURITY SYSTEMS CANADA, INC., PLAINTIFF
CHECKPOINT SYSTEMS, INC., DEFENDANT.
The opinion of the court was delivered by: Eduardo C. Robreno, United States District Judge
Plaintiff, ID Security Systems Canada, Inc. ("ID Security"), brought
this federal antitrust and state law action against Checkpoint Systems,
Inc. ("Checkpoint"). ID Security contends that Checkpoint has engaged in
illegal monopolization and attempted monopolization and has conspired to
restrain commerce in violation of the Sherman Antitrust Act with respect
to electronic article surveillance ("EAS") tags. Additionally, ID
Security contends that under Pennsylvania law Checkpoint interfered with
its contract with a manufacturer of EAS tags, Tokai Electronics, Ltd.
("Tokai"), engaged in unfair competition and misappropriated its trade
The parties have filed a host of motions in limine concerning the
admissibility of expert testimony and other evidentiary issues. Under the
teachings of Daubert v. Merrell DOW Pharmaceuticals, Inc., 509 U.S. 579,
113 S.Ct. 2786, 125 L.Ed.2d 469 (1993), the court held two days of
hearings and heard oral argument. This memorandum addresses all the
issues raised by the parties seriatim.
I. Standard for Admissibility of Expert
Federal Rule of Evidence 702 governs the admissibility of expert
testimony. Rule 702 provides:
If scientific, technical or other specialized
knowledge will assist the trier of fact to understand
the evidence or to determine a fact in issue, a
witness qualified as an expert by knowledge, skill,
experience, training or education, may testify thereto
in the form of an opinion or otherwise, if (1) the
testimony is based upon sufficient facts or data, (2)
the testimony is the product of reliable principles
and methods, and (3) the witness has applied the
principles and methods reliably to the facts of the
The Supreme Court in Daubert imposed upon district courts the role of a
gatekeeper, in order to "ensure that any and all
scientific testimony or evidence is not only relevant, but reliable."
Id. at 589, 113 S.Ct. 2786. When "faced with a proffer of expert
scientific testimony . . . the trial judge must determine at the outset,
pursuant to Rule 104(a), whether the expert is proposing to testify to (1)
scientific knowledge that (2) will assist the trier of fact to understand
or determine a fact in issue." 509 U.S. at 592, 113 S.Ct. 2786. This
gatekeeping function of the district court extends beyond scientific
testimony to "testimony based on . . . `technical' and `other
specialized' knowledge." Kumho Tire Co. v. Carmichael, 526 U.S. 137, 141,
119 S.Ct. 1167, 1171, 143 L.Ed.2d 238 (1999).
Federal Rule of Evidence 702 provides "three distinct substantive
restrictions on the admission of expert testimony: qualifications,
reliability and fit." Elcock v. Kmart Corp., 233 F.3d 734, 741 (3d Cir.
2000). The party offering the expert testimony has the burden of
establishing that the proffered testimony meets each of the three
requirements by a preponderance of the evidence. See Padillas v.
Stork—Gamco, Inc., 186 F.3d 412, 418 (3d Cir. 1999).
The first requirement, whether the witness is qualified as an expert,
has been interpreted liberally to encompass "a broad range of knowledge,
skills, and training." In re Paoli R.R. Yard PCB Litigation, 35 F.3d 717,
741 (3d Cir. 1994).
The second requirement provides that the expert's testimony is
reliable. When the expert testifies to "scientific knowledge," the
expert's opinions must be based on the "methods and procedures of
science' rather than on `subjective belief or unsupported speculation';
the expert must have `good grounds' for his or her belief." In re Paoli,
35 F.3d at 742 (citing Daubert, 509 U.S. at 590, 113 S.Ct. 2786). In
considering whether there are "good grounds" for the expert's opinions,
district courts should look at a series of factors:
(1) whether a method consists of a testable
hypothesis; (2) whether the method has been subject to
peer review; (3) the known or potential rate of
error; (4) the existence and maintenance of standards
controlling the technique's operation; (5) whether the
method is generally accepted; (6) the relationship of
the technique to methods which have been established
to be reliable; (7) the qualifications of the expert
witness testifying based on the methodology; and (8)
the non-judicial uses to which the method has been
In re Paoli, 35 F.3d at 742 n. 8.
This list of factors "is non-exclusive and . . . each factor need not
be applied in every case." Elcock, 233 F.3d at 746. As the Supreme Court
in Kumho Tire noted, the district court "must have considerable leeway in
deciding in a particular case how to go about determining whether
particular expert testimony is reliable. That is to say, a trial court
should consider the specific factors identified in Daubert where they are
reasonable measures of the reliability of expert testimony." 526 U.S. at
152, 119 S.Ct. 1167. Because these factors were developed in the context
of testing the reliability of scientific methods, they may not be easily
applied when testing opinions concerning complicated business transactions
and antitrust matters. See ProtoComm Corp. v. Novell Advanced Serv.,
Inc., 171 F. Supp.2d 473, 477 (E.D.Pa. 2001). Accordingly, "relevant
reliability concerns may focus upon personal knowledge or experience," as
opposed to "scientific foundations." Kumho Tire, 526 U.S. at 150, 119
S.Ct. 1167; ProtoComm, 171 F. Supp.2d at 478-79.
The final prong requires that the expert testimony "fit" by assisting
of fact. See Oddi v. Ford Motor Co., 234 F.3d 136, 145 (3d Cir. 2000).
"Admissibility thus depends in part upon `the proffered connection
between the scientific research or test result to be presented and
particular disputed factual issues in the case.'" Id. (quoting In re
Paoli, 35 F.3d at 743). The "fit" standard does not require plaintiffs to
"prove their case twice." Id. They need not "demonstrate to the judge by a
preponderance of evidence that the assessments of their experts are
correct, they only have to demonstrate by a preponderance of evidence
that they are reliable." In re Paoli, 35 F.3d at 744. Thus, the test does
not require that the opinion have "the best foundation" or be
"demonstrably correct," but only that the "`particular opinion is based
on valid reasoning and reliable methodology.'" Oddi, 234 F.3d at 146
(quoting Kannankeril v. Terminix Int'l, Inc., 128 F.3d 802, 806 (3d Cir.
II. The Challenged Experts
A. Liability Testimony of Martin A.
ID Security intends to call Martin A. Asher, Ph.D., to testify as an
expert in antitrust economics. Dr. Asher will testify to the relevant
product and geographic market, Checkpoint's alleged monopoly power and
injury to competition. Checkpoint does not dispute the qualifications or
reliability of Dr. Asher, but contends that Dr. Asher's opinions fail the
third prong of the Third Circuit's test, as they do not "fit" the facts
of the case required Rule 702.
The dispute over "fit" revolves primarily around the relevant product
market and the prices charged for tags by Checkpoint and ID Security. In
the EAS industry, there are two types of products, acousto-magnetic
("AM") tags and radio frequency ("RF") tags. AM tags are exclusively
produced by Sensormagic Electronics Corporation ("Sensormagic").
Checkpoint and ID Security both use RF technology. Both AM and RF systems
require an initial investment of hardware and repeated purchases of
tags. AM and RF tags, however, are not interchangeable, and thus once an
individual customer purchases an RF system, the customer must purchase RF
tags to use in that system.
Dr. Asher limits the relevant product market to RF tags because once an
individual installs RF hardware, an RF tag is the only compatible tag
with that system. Thus, when a customer purchases an RF system, it must
necessarily purchase RF tags. It is unlikely, contends Dr. Asher, that
customers would switch from an RF system to an AM system because of the
large capital expenditures involved in purchasing the system's hardware.
Dr. Asher concludes that once a customer purchases an RF system, that
customer is "locked in" to purchasing RF tags.
Dr. Asher rebuts the argument that there is competition between AM and
RF tags and thus that the relevant product market is that of the overall
EAS system.*fn1 First, Dr. Asher concludes that there is no price
competition between Checkpoint and Sensormagic on tags because, although
their prices are the same—both charge $.035 per tag—the costs
of manufacturing the tags are different. Checkpoint, Dr. Asher notes,
produces its tags for a lower price than Sensormagic. If Checkpoint and
Sensormagic were in competition, argues Dr. Asher, "that's a fight that
Checkpoint could have won by undercutting the price of Sensormagic." Hr'g
Tr., 3/7/02, at 117.
Second, Dr. Asher notes that consumers purchase the RF and AM systems
for reasons other than price. Dr. Asher contends that the "primary
drivers" in the market for EAS systems are "product characteristics,
store characteristics, and technology." Id. at 120. Dr. Asher opines that
supermarkets and drugstores, for example, are well suited for RF
technology because RF technology provides integrated scan deactivation,
allowing for easier and faster input in the check-out process. AM tags,
in contrast, are deactivated by making contact with the tag and manually
rubbing the label, which adds time to customer check-out.
Third, Dr. Asher notes that even if competition exists between
Sensormagic and Checkpoint, both have an incentive to keep tag prices
high because of the existence of large installed customer bases. See id.
at 121-22. Checkpoint, who has sold over 350,000 RF systems, can keep tag
prices high because it has a customer base that would incur significant
capital costs to switch to an AM system. In a similar argument, Dr. Asher
notes that although Checkpoint charges the same amount to both new and
old customers—with the former apparently having a choice between AM
and RF tags and the latter presumably "locked in" to an RF
system—it can charge supracompetitive prices to all customers and
risk losing some new business prices because the extent of the locked in
Dr. Asher points to failed attempts by several companies to enter the
RF tag market and Checkpoint's reaction to their attempted entry to
support his conclusion that Checkpoint, who has a 90% share in the RF tag
market, charges supracompetitive prices. Dr. Asher states, "[t]here isn't
entry into a market unless there are economic profits or excess profits;
that is, prices above competitive levels." Id. at 109. In this case, Dr.
Asher argues that, although the supracompetitive prices attract
competitors into the market, the new entrants have been promptly
eliminated from the market by Checkpoint's anticompetitive acquisition
practices. As a result of Checkpoint's practices of quickly acquiring new
entrants, these new competitors never had the opportunity to force a
reduction of Checkpoint's supracompetitive prices.
Dr. Asher further opines that Checkpoint's prices are supracompetitive
because Checkpoint's price per tag of $.035
was higher than the price per tag of $.03 offered by ID Security. He
first notes that ID Security's tag, manufactured by Tokai, was a higher
quality tag than Checkpoint's because it did not reactivate after being
deactivated. Notwithstanding the alleged higher quality tag, Dr. Asher
contends that "it makes perfect economic sense to charge the going price
and then from that point with the extra competition, the price would fall
from that level." Id. at 111. Dr. Asher states that ID Security was
enticed to enter the market at the price of $.03 per tag, which it
thought was the existing market price. ID Security, he notes, actually
entered $.005 below the market price as charged by Checkpoint. Dr. Asher
opines that ID Security's entry into the market at $.03 per tag
"demonstrates again that what [ID Security President Peter Murdoch]
thought was plenty to entice him into entering this market was a price at
3 cents, not 3 1/2, and again, this is strong support that the price of 3
1/2 cents that Checkpoint was charging at the time was supracompetitive."
Id. at 112. Checkpoint, however, points to contradictory evidence that ID
Security actually sold its tags at higher than $.03, and that the only
reference to a price at that level was an introductory flier noting a
"special offer" of $.0295.
The standard for determining whether a witness may offer expert
testimony does not require the proponent of the testimony to prove, with
absolute precision, that the expert's opinion is correct. The court must
determine only that the opinion is reliable. See In re Paoli, 35 F.3d at
744. The court finds that Dr. Asher has grounded his opinion on a
reliable factual basis. His opinions are based on an economic model that
considered the price variance between ID Security's tags and
Checkpoint's, the technological differences between RF and AM systems,
the switching costs between AM and RF systems, and the EAS industry in
general. The court concludes that Dr. Asher's testimony fits the facts of
the case and that his testimony relating to Checkpoint's alleged
antitrust liability should not be excluded.
B. Liability Testimony of Peter R.
ID Security challenges Checkpoint's expert on liability, Mr. Peter R.
Greenhalgh. Like Dr. Asher, Greenhalgh has reviewed the record of the
case, including depositions and documents from both ID Security and
Checkpoint, analyzed the prices for both ID Security's and Checkpoint's
tags, and studied the general EAS market. Greenhalgh's conclusions,
however, are directly opposite to those of Dr. Asher. Greenhalgh opines
that the relevant product market is the entire market for EAS systems.
Furthermore, Greenhalgh concludes that within that market, Checkpoint's
price is constrained by competition with Sensormagic, and thus its price
per tag cannot be deemed to be supracompetitive. The court finds that
although Dr. Asher and Greenhalgh reach different conclusions, both
experts have grounded their opinions on a reliable factual basis. This
quintessential battle of experts will need to be decided by the jury. See
Bracy v. Waste Mngmt. of Pa. Inc., Civ.A. No. 99-1189, 2001 U.S. Dist.
LEXIS 5504, at *910, 2001 WL 877582, at *3 (E.D. Pa. April 17, 2001).
Greenhalgh notes that the high switching costs between AM and RF
systems and the incompatibility of the two systems do not alone mean that
the RF tag market is the relevant product market in this case.
Greenhalgh's approach looks to the market definition paradigm adopted by
the Antitrust Division of the United States Department of Justice, which
describes a relevant product market "as a product or group of products
such that a hypothetical profit-maximizing monopolist in the sale of such
product(s) would likely impose a small, non-transitory increase in prices
above competitive levels." Expert Report of Mr. Greenhalgh, at 5 (quoting
Dep. of Justice and Fed. Trade Comm'n Horizontal Merger Guidelines
(issued April 2, 1992, revised April 8, 1997), at § 1.1). To
demonstrate that the market is broader than simply that of RF tags, and
that there are market forces that constrain Checkpoint from charging
supracompetitive prices on its RF tags, Greenhalgh points to the
competition between Checkpoint and Sensormagic, the manufacturer and
distributor of AM tags.
Greenhalgh argues that when consumers make the initial decision to
purchase an EAS system, they factor into consideration the price of the
entire system, including tags. See Hr'g Tr., 3/8/02, at 8-10. Greenhalgh
relies on an interview with a former sales manager at Checkpoint, who
indicated that customers are provided cost estimates for the price of
tags and told how those prices relate to the cost of stolen merchandise.
Greenhalgh suggests that customers are placed on notice that they must
continually purchase tags and that the tags will cost $.035. Thus, when a
customer considers whether to purchase an AM or RF system, the customer
is aware of the future tag costs and makes his decision accordingly.
Greenhalgh notes that there is evidence of this competition in the
respective prices of tags by Sensormagic and Checkpoint. Both companies
sell their tags for $.035 per tag. Greenhalgh argues that this is not an
arbitrary price, but the result of two firms competing on price and of
customers considering the price of tags over the life of their EAS
Greenhalgh also notes that new tag sales consist of only 23% of
Checkpoint's revenues for EAS products. Id. at 7. Greenhalgh argues,
then, that tag sales are not the driving force of Checkpoint's profit
maximizing efforts, but rather that "[i]t's the new system sales that are
driving the company." Id. In order to attract new customers and compete
with Sensormagic on hardware, Greenhalgh opines that Checkpoint must keep
its tag prices on a competitive level with Sensormagic. Thus, Greenhalgh
concludes, the market for hardware constrains Checkpoint from raising its
prices on tags.
Greenhalgh further argues that Checkpoint's prices are not
supracompetitive in comparison to ID Security's price. Since ID Security
intended to enter the market at a higher price than Checkpoint's,
Checkpoint's price could not have been supracompetitive. Though his
conclusion is different from Dr. Asher on this point, both experts look
to the same set of reliable facts to draw informed and reasonable
conclusions. Additionally, Greenhalgh states that one customer, a
purchaser from Avery Dennison, noted that ID Security offered higher
prices than Checkpoint. Finally, Greenhalgh disputes ID Security's price
of $.0295 as noting that it was merely an introductory price.
ID Security raises a two-pronged challenge to Mr. Greenhalgh. First, ID
Security argues that Greenhalgh's methodology is flawed because he does
not base his conclusion with respect to the relevant product market on
the appropriate legal standard. Specifically, ID Security argues that
Greenhalgh's analysis of the relevant product market is contrary to the
Supreme Court's decision in Eastman Kodak v. Image Technical Servs.,
Inc., 504 U.S. 451, 112 S.Ct. 2072, 119 L.Ed.2d 265 (1992), and therefore
must be excluded as being based on a faulty methodology. Secondly, ID
Security contends that Greenhalgh has not provided sufficient reliable
facts, as required
by Kodak, to demonstrate that the relevant product market is the overall
market for EAS systems. ID Security notes that the methodology must be
guided by the controlling legal principle, and to the extent that the
expert ignores that principle, the expert's testimony fails Danbert's
test of a reliable methodology.
In Kodak, the Supreme Court confronted the issue of "whether a
defendant's lack of market power in the primary equipment market
precludes—as a matter of law—the possibility of market power
in the derivative aftermarket." Id. at 455. Kodak involved claims under
both §§ 1 and 2 of the Sherman Act.*fn3 There, the plaintiff alleged
that even though Kodak faced competition in the market for equipment, its
primary market, it wielded monopoly power in the derivative, or secondary
market for parts and services, where it controlled an 85-90% share of
that market. The Court rejected Kodak's argument that the aftermarket for
parts and services could not be a relevant product market in which to
assess plaintiffs § 2 claim. Id. at 481, 112 S.Ct. 2072. The Court
determined that the relevant product market must be determined by the
choices available to Kodak equipment owners. The Court noted that
"because service and parts for Kodak equipment are not interchangeable
with other manufacturers' service and parts, the relevant market from the
Kodak equipment owner's perspective is composed only of those companies
that service Kodak machines." Id. at 481-82, 112 S.Ct. 2072. Indeed, the
Court suggested that the relevant product market may constitute only one
brand of a product. Id. The Court concluded, however, that "the proper
market definition can be determined only after a factual inquiry into the
`commercial realities' faced by consumers." Id. at 482, 112 S.Ct. 2072
(citing United States u. Grinnell Corp., 384 U.S. 563, 572, 86 S.Ct.
1698, 1704, 16 L.Ed.2d 778 (1966)).
Based on its reading of Kodak, ID Security argues that Greenhalgh
failed to consider the Supreme Court's direction concerning relevant
product markets by concluding that the relevant product market in this
case consists of the market for EAS systems. As Checkpoint notes,
however, the Supreme Court did not conclude that the secondary market
must always be the relevant product market; rather, the Court determined
only that, although as a matter of law the secondary market was not
precluded from being considered the relevant product market in all cases,
whether it was or not was a question of fact. The Third Circuit, applying
Kodak, has noted that in situations involving primary and secondary
markets, "in most cases, proper market definition can be determined only
after a factual inquiry into the commercial realties faced by consumers."
Queen City Pizza, Inc. v. Domino's Pizza, Inc., 124 F.3d 430, 440 (3d
Cir. 1997). See also Allen—Myland, Inc. v. Int'l Bas. Machs.
Corp., 33 F.3d 194, 208 a. 16 (3d Cir. 1994) (noting that the "true
inquiry" in determining relevant product market is a factual one of
whether a company is constrained by the prices of one product when
pricing a secondary product). Whether the secondary market in this case
constitutes the relevant product market under Kodak is a question of fact
that the jury must determine after considering the "commercial realities
faced by consumers" in the EAS industry.
ID Security also contends that Greenhalgh's conclusions are not
reliable as he has failed to make the appropriate factual inquiry. In
looking at the relationship between the primary and the derivative, or
secondary markets, the Supreme Court suggests that there are two factors
that help explain the behavior of the primary and derivative markets for
goods: information and switching costs. ID Security contends that
Greenhalgh failed to investigate these factors adequately, rendering his
With respect to information costs, the Court notes that "for the
service-market price to affect equipment demand, consumers must inform
themselves of the total costs of the `package'—equipment, service
and parts—at the time of the purchase; that is, consumers must
engage in accurate lifestyle pricing." Id. at 473, 112 S.Ct. 2072. With
regard to the second factor, switching costs, the Court states that "[i]f
the costs of switching is high, consumers who already have purchased the
equipment, and are thus `locked in,' will tolerate some level of service
price increases before changing equipment brands." Id. at 476, 112 S.Ct.
2072. The Court explains this scenario, noting that "a seller profitably
could maintain supracompetitive prices in the aftermarket if the
switching costs were high relative to the increase in service prices, and
the number of locked-in customers were high relative to the number of new
Despite ID Security's assertions to the contrary, Greenhalgh addresses
both switching and information costs in his analysis. With respect to
information costs, Greenhalgh explains that customers are aware that they
will incur tag costs throughout the life of the system. During the
Daubert hearing, Greenhalgh testified:
Yes, when they're buying these new systems they are
given cost benefit analyses that show the profile of
purchases like the profile over time and that they
will be buying tags. So they're clearly on notice that
they will be—to use these systems they've got to
keep buying tags. And in response, many customers ask
for a contract that establishes the price of that.
Hr'g Tr., 3/8/02, at 9-10. Thus, Greenhalgh contends that customers are
not deceived by the costs of these tags, but are fully aware that they
will need to purchase tags throughout the life of their RF system.
Furthermore, Greenhalgh notes that Checkpoint's prices, for both old and
new customers, have remained constant. These customers have not been
subject to an initial price quote and then increased prices subsequent to
the purchase of the hardware. Greenhalgh explains why such a tactic by
Checkpoint, which would appear to be economically advantageous because of
the high number of existing customers, would be economically irrational:
If they established a reputation that as soon as you
bought [the hardware] they started gouging you on
tags, what would do—what would that do to their
success in selling new systems? In essence, the market
doesn't allow them to do that. If they're going to
sell new systems and preserve the reputation in the
competition with Sensormagic they are not—the
market doesn't allow them to price those tags higher
than what they allow—what they price for new
Thus, the court concludes that Mr. Greenhalgh has considered the
factors suggested in Kodak, and has based his conclusions on reliable
information. Mr. Greenhalgh shall be permitted to ...