|
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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__________________________________________ | | | |
| UNITED STATES OF AMERICA, | ) |
| | | | ) | | |
| Plaintiff, | ) | |
| | | ) | Civil
Action
| | | v. | ) |
No. 72-344 (AGS)
| | | | ) | | |
| INTERNATIONAL BUSINESS MACHINES | ) | | |
| CORPORATION, | ) |
| | | | ) | | |
| Defendant. | ) | |
| |
__________________________________________ | ) |
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UNITED STATES' MEMORANDUM IN
SUPPORT
OF ITS MOTION TO COMPEL
DISCOVERY
N.
Scott Sacks (NS-6689)
Kent Brown (KB-5429) James J. Tierney (JT-7842)
Ian
Simmons (IS-7468)
Weeun Wang (WW-8178)
U.S.
Department Of Justice
Antitrust Division
600
E Street, N.W.
Suite
9500
Washington, D.C. 20530
(202)
307-6200
Attorneys for the United States
May 24, 1996
.
TABLE OF CONTENTS
I. BACKGROUND................................................................................................................. 1
II. THE GENERAL STANDARD OF
RELEVANCE............................................................. 4
III. IBM SHOULD BE ORDERED
TO PRODUCE INFORMATION AND
DOCUMENTS RELEVANT TO MARKET ANALYSIS
AND OTHER
EQUITABLE CONSIDERATIONS ESSENTIAL TO
DISPOSITION OF
IBM'S MOTION TO TERMINATE THE
DECREE.......................................................... 5
A. Whether IBM Possesses Market Power In Properly Defined
Markets Is Relevant
To The Disposition Of IBM's Motion
And Thus Discoverable.............................. 7
B. The Government's Discovery Is Relevant To Equitable Issues
Raised By IBM's
Motion.................................................................................................................... 11
IV. IBM SHOULD BE ORDERED TO
PRODUCE REQUESTED INFORMATION AND
DOCUMENTS RELATING TO OPERATING SYSTEMS
SOFTWARE...................... 12
A. The Decree Applies To Operating System
Software............................................. 13
B. The Decree Prohibits IBM From Implementing Operating System
Licensing Or
Maintenance Practices That Would
Allow IBM To Avoid Its Decree
Obligations............................................................................................................. 16
V. IBM SHOULD BE ORDERED TO COMPLY WITH REQUESTS
RELATING TO
IBM'S DISCLOSURES OF INTERFACE
INFORMATION........................................... 18
VI. IBM SHOULD BE ORDERED TO
PRODUCE RESPONSIVE INFORMATION AND
DOCUMENTS LOCATED OUTSIDE THE UNITED
STATES..................................... 20
VII. IBM SHOULD BE ORDERED TO PRODUCE PREVIOUSLY
DEFERRED
INFORMATION AND
DOCUMENTS............................................................................
22
VIII. CONCLUSION.................................................................................................................. 24
.
Page 3
TABLE OF AUTHORITIES
Cases
Allen-Myland, Inc. v. IBM, 746 F. Supp. 520, 544 (E.D. Pa.
1990), vacated 33 F.3d
194 (3d. Cir.
1994)................................................................................................................... 15,
16
Berkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d 263, 268
(2d Cir. 1979), cert. denied, 444
U.S. 1093
(1980).............................................................................................................................. 9
Daval Steel Products v. M/V Fakredine, 951 F.2d 1357, 1367
(2d Cir. 1991)................................ 4
Fletcher v. Atex, Inc., 156 F.R.D. 45, 48
(S.D.N.Y. 1994)............................................................ 10
Hickman v. Taylor, 329 U.S. 495, 501
(1947)................................................................................. 5
Jones v. Boeing, Co., 163 F.R.D. 15, 16
(D. Kan. 1995)................................................................. 9
Maresco v. Evans Chemetics, Div. 964
F.2d 106, 114 (2d Cir. 1992)............................................. 5
Martin v. Valley National Bank of Arizona,
140 F.R.D. 291, 300-01 (S.D.N.Y. 1991)................ 10
Morse/Diesel, Inc. v. Fidelity & Deposit
Co., 122 F.R.D. 447, 449 (S.D.N.Y. 1988).................... 5
Oppenheimer Fund, Inc. v. Sanders, 437
U.S. 340, 351 (1978)...................................................... 4
Paper Corp. of the United States v. Schoeller
Tech. Papers, 759 F. Supp. 1039,
1048 (S.D.N.Y.
1991)...................................................................................................................... 5
Rufo v. Inmates of Suffolk County Jail, 502 U.S. 367
(1992).......................................................... 8
See United States v. American Cyanamid,
719 F.2d 558, 567 (2d Cir. 1983),
cert. denied, 465 U.S. 1101
(1984)................................................................................................ 12
United States v. Eastman Kodak Co., 63 F.3d 95 (2d Cir.
1995)......................................... 7- 10, 21
United States v. Eastman Kodak Co., 853
F. Supp. 1454, 1467, 1483-85
(W.D.N.Y.
1994)............................................................................................................................. 8
United States v. United Shoe Mach. Corp., 391 U.S. 244
(1968).................................................... 8
United States v. Western Elec. Co., 894
F.2d 1387, 1394 (D.C. Cir. 1990).................................. 15
Page 4 . . . .
Walker Process Equip., Inc. v. Food Mach. & Chem. Corp.,
382 U.S. 172, 177 (1965)................ 9
Federal Rules
Fed. R. Civ. P.
26(b)(1)............................................................................................................ 4,
5, 9
Fed. R. Civ. P.
26(b)........................................................................................................................ 5
Fed. R. Civ. P.
60(b)(5).................................................................................................................. 11
.
Page 1
UNITED STATES' MEMORANDUM IN SUPPORT
OF ITS MOTION TO COMPEL
DISCOVERY
Pursuant to Rule 37(a) of the Federal Rules of Civil Procedure, the
United States of
America (the "Government") respectfully submits this
Memorandum in support of its motion to
compel International Business Machines Corporation ("IBM") to
produce information and
documents responsive to the Government's August 4, 1995,
Interrogatories and Requests for
Production of Documents.
1
I. Background
This proceeding commenced on June 13, 1994, when IBM filed a
motion to terminate the
Final Judgment ("decree") in this action. IBM also moved to
disqualify the presiding judge,
David N. Edelstein, so the motion for termination was held in
abeyance pending resolution of the
disqualification motion. Judge Edelstein denied the
disqualification motion on July 28, 1994,
and IBM petitioned the Court of Appeals for a writ of mandamus.
On January 17, 1995, the
Court of Appeals issued a writ of mandamus directing Judge
Edelstein to recuse himself, and on
February 2, 1995, the case was reassigned to Judge Schwartz.
At a March 1, 1995 hearing, the Court asked the parties to submit
memoranda setting
forth the issues raised by IBM's motion. IBM filed its
Preliminary Statement of Issues ("IBM
Prelim.") on June 6, 1995 (tab 2) and the Government filed its
Preliminary Statement of Issues
("U.S. Prelim.") on July 19, 1995 (tab 4). In its filing, the
Government expressed its tentative
decision to join IBM's motion as to certain decree provisions and
certain IBM products. (Id. at
Page 2
2.) For the remaining decree provisions and the remaining
products -- IBM's S/360. . . 390
mainframe and AS/400 mid-range families of computer products
and services -- the Government
requested and was permitted a period in which to investigate the
issues raised by IBM's motion
in order to determine whether to join or oppose IBM's motion.
On April 19, 1996, the Government advised the Court that we
would agree, after an
appropriate sunset period, to terminate the decree as it applies to
the AS/400 products and
services. On June 28, 1996, the Government will advise the Court
on its view as to an
appropriate sunset period for the AS/400 and it will inform the
Court of its position on the merits
of decree termination as it applies to IBM's S/360. . . 390 family of
products and services.
Absent resolution of the remaining AS/400 and S/360. . . 390
issues by consent of the parties, a
hearing on IBM's motion to terminate the decree is to commence
on March 24, 1997. (See
Proposed Scheduling Order (dated May 1, 1996), tab 7;
Stipulation and Order (dated May 22,
1996), tab 5.)
On August 4, 1995, in furtherance of our investigation as to the
AS/400 and S/360. . . 390
products and services, the Government served upon IBM
Interrogatories and Requests for the
Production of Documents. IBM initially refused to respond to the
Government's requests, but on
January 16, 1996, it agreed to produce some readily responsive
information and some high level
planning documents located at IBM's headquarters. (See
Tierney decl., ¶8.) The Government
accepted IBM's partial responses but expressly reserved the right to
seek more complete
responses as necessary to complete our investigation, and absent a
consensual resolution of this
matter, to prepare for litigation of IBM's motion. (Id. ¶¶30,
32.) Pursuant to the Court's
Scheduling Order of May 1, 1996, motions to compel discovery
must be filed by May 24, 1996.
Page 3
To date, IBM has only partially complied with a number of
requests and it has continued
to refuse to comply with several others. Asserting lack of
relevance, IBM has broadly objected to
requests for information and documents it construes to be "related
to the presence or absence of
monopoly or market power in any ‘markets' or ‘sub-markets' for
electronic data processing
machines." (IBM Objections to Plaintiff's Interrogatories and
Document Requests ("IBM May
10, 1996 Objections") (dated May 10, 1996), tab 13, ¶5.)
IBM also refuses, on grounds of
relevance, to comply with discovery requests that seek information
relating to operating system
software, information relating to IBM disclosures of interface
information, and information from
IBM's operations outside the United States. (Tierney decl.,
¶12.) In addition, the Government
and IBM have not been able to agree upon a mechanism to preserve
the Government's right to
seek additional responses to outstanding requests beyond the May
24 deadline for motions to
compel set forth in the May 1, 1996 Scheduling Order.
(Id.)
IBM's refusal to produce the requested information and documents
will seriously
undermine the Court's ability to make an informed decision on the
merits of IBM's motion.
IBM's refusal to comply with what it deems to be "market-related"
discovery is based on the
erroneous proposition that a market analysis is not necessary to the
Court's disposition of IBM's
motion to terminate the decree. (Id. ¶18.) As we
previously have explained and will reiterate in
this memorandum, IBM's position is contrary to governing law that
requires the assessment of
market power in properly defined markets as a general predicate to
the disposition of a motion to
terminate an antitrust decree. IBM's other relevance objections
with respect to discovery relating
to operating system software, IBM's disclosure of interface
information, and information from its
foreign locations are equally misplaced, as we discuss below.
Finally, we explain why IBM
Page 4
should be ordered to produce certain information and documents
that up until now the
Government has permitted IBM to defer from its responses.
In addition to the unsustainable relevance objections, IBM objects
to the Government's
discovery requests due to generalized claims of vagueness,
ambiguity, overbreadth, and
burdensomeness. The Government has had several discussions
with IBM in an effort to address
comprehensively IBM's objections in order to forestall this motion
to compel. IBM has
expressed a preference to resolve the issues of relevance in the first
instance, and to the extent
these issues are resolved in favor of discovery, the parties will
attempt to work out any remaining
questions as to burden before seeking any further consideration by
the Court. (Id. ¶13.) The
Government does not object to this approach.
II. The General Standard Of Relevance
Before we show why IBM's relevance objections are
unfounded, we briefly review the
standard of relevance under the Federal Rules of Civil Procedure.
In pertinent part, Fed. R. Civ.
P. 26(b)(1) states that "[p]arties may obtain discovery regarding any
matter, not privileged, which
is relevant to the subject matter involved in the pending action . . .
." Information is relevant so
long as it is reasonably calculated to lead to the discovery of
admissible evidence. See Daval
Steel Products v. M/V Fakredine, 951 F.2d 1357, 1367 (2d Cir.
1991). It is not grounds for an
objection that the information sought will be inadmissible at trial so
long as the requested
material could lead to other information that may be relevant to the
subject matter of the action
and "[t]his obviously broad rule is liberally construed." Id.
(citing Oppenheimer Fund, Inc. v.
Sanders, 437 U.S. 340, 351 (1978) (relevance under rule
26(b)(1) is broadly construed "to
encompass any matter that bears on, or that reasonably could lead
to other matter that could bear
Page 5 . . . . . . .
on, any issue that is or may be in the case")
(emphasis added). Accord Maresco v. Evans
Chemetics, Div. 964 F.2d 106, 114 (2d Cir. 1992) ("the scope
of discovery under Fed. R. Civ. P.
26(b) is very broad"); Paper Corp. of the United States v.
Schoeller Tech. Papers, 759 F. Supp.
1039, 1048 (S.D.N.Y. 1991) ("the phrase ‘relevant to any subject
matter involved in the pending
action' has been construed broadly to ‘encompass any matter that
bears on, or that reasonably
could lead to other matter that could bear on, any issue that is or
may be in the case'") (quoting
Hickman v. Taylor, 329 U.S. 495, 501 (1947));
Morse/Diesel, Inc. v. Fidelity & Deposit Co., 122
F.R.D. 447, 449 (S.D.N.Y. 1988) (term "reasonably calculated"
means "any possibility that the
information sought may be relevant to the subject matter of the
action.").
As we discuss below, the issues towards which the Government's
discovery is directed
are at the core of this proceeding.
III. IBM Should Be Ordered To
Produce Information And Documents
Relevant To Market Analysis And Other Equitable
Considerations
Essential To Disposition Of IBM's Motion To Terminate The
Decree
The Government's discovery is aimed at obtaining evidence about
IBM's ability to
exercise market power, which is, consistent with Fed. R. Civ. P.
26(b)(1), a "matter . . . relevant
to the subject matter" at issue. A market analysis is necessary to
determine whether termination
would further the public interest in competition, or to the contrary,
whether it would undermine
the public interest by freeing IBM from the decree's constraints on
its ability to exercise market
power in properly defined markets. The same evidence is
relevant to determine whether
eliminating the decree is equitable to consumers and other entities
that have relied on the
marketplace conditions and practices that the decree long ago
established. IBM disputes the
Government's position as to whether a market power inquiry is
necessitated by IBM's motion.
Page 6
The parties already have extensively briefed the issue and the
matter is before the Court. 2
Pending the Court's decision on the need for market analysis, IBM
generally has refused
to comply with the Government's discovery requests as to
"market-related" evidence:
on the grounds that they are not reasonably calculated to lead to
the discovery of
admissible evidence markets" for electronic data processing machines.
(IBM May 10, 1996 Objections, tab 11, ¶5, (emphasis
added).) It is important to understand that
IBM's objection is not founded on a claim that the
Government's discovery is not relevant to
market analysis. Rather, the objection is based on the erroneous
argument that the decree has
nothing to do with market power, hence a market analysis has no
bearing on the Court's
consideration of IBM's motion. Indeed, IBM can not plausibly
claim that the Government's
requests are not relevant to market power issues, for it has all but
conceded such relevance. (See
10/30/95 Tr., tab 18, at 82 ("[v]irtually all of [the Government's
discovery request], your Honor,
. . . goes on the question of whether we [IBM] have a monopoly in
a number of computer
markets or not."); Tierney decl., ¶18.)
Although the Court has not yet resolved the fundamental
difference between the
Government and IBM with respect to the role of market analysis in
this proceeding, even in the
absence of such resolution, the information and documents
requested from IBM are relevant to
the equitable issues that the Court ultimately must address,
notwithstanding IBM's protestations
about the relevance of market power discovery.
Page 7 . .
A. Whether IBM Possesses Market Power In Properly Defined
Markets Is
Relevant To The Disposition Of
IBM's Motion And Thus Discoverable
On May 1, 1996, notwithstanding the pendency of the issues
pertaining to market
analysis, the Court entered a scheduling order that contemplates
that the parties would proceed
with previously served discovery requests. In so doing, the Court
did not accommodate IBM's
view that IBM should be allowed to hold in abeyance the
Government's requests as to "market
issues" until the Court rules on the need to conduct a market power
analysis. (See 08/07/95 Tr.,
tab 17, at 44-46; 10/30/95 Tr., tab 18, at 95).
The Government's market power discovery should go forward
because the law requires
that a market power analysis be performed. Indeed, the Court of
Appeals for the Second Circuit
recently has spoken on the issue in United States v. Eastman
Kodak Co., 63 F.3d 95 (2d Cir.
1995). There, the Court of Appeals affirmed the District Court's
market power inquiry in the
termination of two antitrust consent decrees entered in 1921 and
1954 that enjoined the defendant
from a variety of potentially anticompetitive practices with respect
to photographic film and
photofinishing products and services. Just as the Government has
urged the Court in this case, in
Kodak the District Court employed standard antitrust analysis
-- including the definition of
relevant product and geographic markets and the evaluation of
other issues relating to market
structure -- to determine whether Kodak possessed market power in
properly defined markets.
With respect to the 1921 Kodak decree, the Court's reliance
on standard antitrust analysis led it
to consider the likely market effects of termination with specific
reference to the relevant market
for color photographic film. The Court arrived at this definition of
the relevant product market
even though the decree had been predicated on defendant's
monopolization of an overarching
Page 8 . . .
"market" for photographic supplies, which covered all kinds of
related products, such as cameras,
film, plates, and photographic paper. United States v. Eastman
Kodak Co., 853 F. Supp. 1454,
1467, 1483-85 (W.D.N.Y. 1994); see also U.S. 1969 Mem.,
tab 16, at 17-18.
In affirming the District Court in Kodak, the Court of
Appeals recognized that equitable
considerations must guide a court's analysis as to whether to vacate
an antitrust consent decree.
Kodak, 63 F.3d at 101 (citing Rufo v. Inmates of
Suffolk County Jail, 502 U.S. 367 (1992)). The
Court of Appeals also reiterated that the standard set forth in
United States v. United Shoe Mach.
Corp., 391 U.S. 244 (1968) is the burden that antitrust
defendants should be expected to satisfy
in seeking termination of an antitrust decree:
However, we also believe that United Shoe provides a
useful starting point for
evaluating an antitrust defendant's request to modify or terminate
a consent
decree. In most cases, the antitrust defendant should be prepared
to demonstrate
that the basic purposes of the consent decrees -- the
elimination of monopoly and
unduly restrictive practices -- have been achieved.
Kodak, 63 F.3d at 101 (citing United Shoe, 391 U.S. at
248) (emphasis added). Though
acknowledging that other limited circumstances may justify
modification or termination of an
antitrust consent decree (for instance when controlling law has
changed or when the decree is
ineffective in accomplishing its goals), the Court of Appeals stated
that:
[A]s a general matter, . . . an antitrust defendant should not be
relieved of the
restrictions that it voluntarily accepted until the purpose of the
decree has been
substantially effectuated, or when time and experience
demonstrate that the decree
is not properly adapted to accomplishing its purposes.
Kodak, 63 F.3d at 102 (citation & internal quotation marks
omitted). A market analysis is
required to determine whether the purpose of an antitrust decree
has been fully achieved or if
changed circumstances have rendered the decree incapable of
accomplishing its purposes and in
Page 9 . . . .
Kodak the court undertook that analysis:
In determining whether a firm possesses market power, "the first
step in a court's
analysis must be a definition of the relevant markets." Berkey
Photo, Inc. v.
Eastman Kodak Co., 603 F.2d 263, 268 (2d Cir. 1979),
cert. denied, 444 U.S.
1093 (1980). Without a definition of the relevant market, there is
no way to
measure a company's ability to act as a monopolist. Walker
Process Equip., Inc.
v. Food Mach. & Chem. Corp., 382 U.S. 172, 177 (1965).
Kodak, 63 F.3d at 104. The Court of Appeals concluded that
the District Court had applied the
correct legal principles and that its factual findings were not clearly
erroneous. Id. at 109.
A market analysis is necessary because it will permit an
assessment of the likely effects of
decree termination. Here, the Court clearly recognized the
relevance of the likely effects of
decree termination when it allowed Government discovery to
proceed unilaterally as to IBM's
post-termination plans. However, IBM's future conduct in the
event of termination will depend
on how termination will effect IBM's ability to avoid or undermine
competition that currently is
facilitated by the decree. The case law makes clear that this
assessment of the likely effects of
termination can only be meaningful in the context of standard
antitrust analysis.
Just as market power issues were
at the core of the Kodak proceeding, so too, they are
central to this resolution of the instant motion. In light of this
controlling case law, the
Government's discovery falls squarely within the scope of Fed. R.
Civ. P. 26(b)(1). Indeed,
analysis under Fed. R. Civ. P. 26(b)(1) focuses on the likelihood of
whether the requested
information has a possible bearing upon the subject matter at issue.
We have amply satisfied this
standard. See, e.g., Jones v. Boeing, Co., 163 F.R.D. 15, 16
(D. Kan. 1995) ("[a] request for
discovery should be considered relevant if there is any
possibility that the information sought
may be relevant to the subject matter of this action. Discovery
should ordinarily be allowed
Page 10 . . .
under the concept of relevancy unless it is clear that the
information sought can have no possible
bearing upon the subject matter of this action.") (citations
omitted & emphasis added).
Although Kodak teaches that a defendant ordinarily should
not be relieved of a consent
decree if elimination of monopoly power and restrictive practices
has not occurred, IBM disputes
the import of that case, resting its argument that a market power
analysis is unwarranted on the
incorrect supposition that the purpose of its decree in applying to
computers was strictly to
prevent it from leveraging its tabulating machine monopoly power
in to computers -- an
argument that we have refuted and is now before the Court.
(U.S. 1969 Mem., tab 16, at 11-14.)
But IBM also is unwilling to stipulate that it possesses market
power for the purposes of this
proceeding (10/30/95 Tr., tab 18, at 77-79) and it raises its
purported lack of market power in
countering the Government's concerns, thereby effectively placing
market power in issue. (See
Memorandum of Law in Support of IBM's Motion to Terminate the
1956 Consent Decree (dated
August 24, 1993), tab 21, at 10 ("However any likely relevant
market is defined, IBM's share
today is too low to justify the ongoing regulation of the 1956
Consent Decree.").) Moreover, as
we pointed out in our Preliminary Statement (U.S.
Prelim., tab 4, at 24), IBM affirmatively
raised competitive and market issues in asserting that changed
circumstances warrant
termination. (See generally IBM Prelim., tab 2, at
17-27.)
The fact that IBM disputes the utility of market analysis gives it no
excuse from
responding to market-related discovery, for in "assess[ing]
relevance in a given case, the court
must view the matter in light of the specific claims and defenses
asserted by the parties."
Fletcher v. Atex, Inc., 156 F.R.D. 45, 48 (S.D.N.Y. 1994).
Until the Court resolves that dispute
with appropriate findings, the Government's discovery should go
forward. Cf. Martin v. Valley
Page 11 . .
National Bank of Arizona, 140 F.R.D. 291, 300-01 (S.D.N.Y.
1991) (defendant was entitled to
discovery on a defense until that defense is "stricken" by the court).
B. The Government's Discovery Is Relevant To Equitable
Issues Raised By IBM's Motion
The information and documents that IBM refuses to produce
because they are "market-
related" also are relevant to assessing the potential for harm that
outright decree termination may
cause to IBM customers, competitors, or other third parties.
(Tierney decl., ¶20.) General
principles of equity require this assessment in considering IBM's
motion to terminate the decree,
even if it did not implicate matters of antitrust policy. See
Fed. R. Civ. P. 60(b)(5). In this
context, the discovery sought by the Government will assist in
determining whether and under
what circumstances it would be equitable to grant the motion in
light of the fact that many
entities have relied on the competitive conditions created by the
decree. (Id.)
As we stated in our Preliminary Statement (U.S.
Prelim., tab 4, at 46-47), the decree has
created certain competitive conditions and has encouraged
investment and reliance upon those
conditions. The effects of decree termination on consumers and
entities that have relied on the
decree is relevant to and should inform the Court's exercise of its
equitable discretion regardless
of whether the Court undertakes to inquire as to IBM's ability to
exercise market power in
properly defined markets. Indeed, IBM seems to be in agreement
on this point, for as IBM
counsel has informed the Court: "[w]e said, I thought fairly clearly
and specifically, what we
think the issues are. And they do not -- they should not be read to
say that there is no reason to
look at the impact of vacating the provisions of the decree
at which our motion is directed. That
would be, frankly, quite silly a position to take. And we don't take
it." (06/19/95 Tr., tab 22, at
Page 12 . .
19.) (emphasis added).
Consideration of the equitable interests of IBM's customers and
others who have relied
on the decree may require a sunset period before termination of the
decree even if market
analysis indicates that termination would not pose significant
competitive risks. In the case of
the AS/400 marketplace, for example, the Government has
concluded that while competitive
conditions and equitable considerations do not warrant opposition
to decree termination, a sunset
period is necessary to allow customers to make orderly adjustments
of expectations and plans,
and to avoid causing undue capital losses to the entities whose
entry into the AS/400 market the
decree has encouraged and facilitated. (Tierney decl., ¶4.)
Such an outcome would be entirely
consistent with the law, for the Second Circuit recognizes the
appropriateness of phasing-out an
antitrust decree that no longer protects consumers, in order to
protect investment made in reliance
on a decree. See United States v. American Cyanamid, 719
F.2d 558, 567 (2d Cir. 1983), cert.
denied, 465 U.S. 1101 (1984).
IV. IBM Should Be Ordered To Produce
Requested Information
And Documents Relating To Operating System Software
The Government's August 4, 1995, discovery requests expressly
define the AS/400 and
System/360 . . . 390 products to include IBM's operating systems
software for the products.
(Interrogatories and Requests for Production of Documents,
tab 6, ¶I.4, II.26.) However, IBM
has refused to produce responsive information or documents
related to operating system
software, based on a relevancy objection which in turn is grounded
on the erroneous premise that
the decree does not apply to software. (Tierney decl.,
¶21; see also IBM May 10, 1996
Objections, tab 13 (as to Interrogatory 7, objection to request
seeking information about IBM's
Page 13 .
policy relating to software licensing).) Regardless of whether the
decree expressly applies
directly to software, issues relating to the distribution and licensing
of operating system software
are highly relevant to this proceeding because a number of
provisions of the decree enjoin IBM
from exploiting any operating systems software market power to
engage in economic
discrimination against purchasers of computers.
A. The Decree Applies To Operating System
Software
We previously have disputed IBM's contention that the decree
does not apply to software.
IBM's Chronology of the 1956 Consent Decree ("IBM
Chron.") (dated June 6, 1995), tab 3, at 27. The decree
applies to electronic data processing machines, or "EDPM," and electronic data
processing systems, or "EDPS." The decree defines "EDPM" as
machines or devices and
attachments therefor used in or with an electronic data
processing system (Decree §II (f));
software is most certainly a device or attachment
under this definition. Further, the decree
defines "EDPS" as any single working machine or group of
intercommunicating machines that is
affirmatively capable of performing the functions described in the
definition, such as "entering,
receiving, storing, classifying, computing, and/or recording
alphabetic and/or numeric accounting
and/or statistical data . . . ." (Id. § II (e).) So defined, EDPS
includes operating system software
because, as IBM has acknowledged, "computers simply do not
work without software." (IBM
Prelim., tab 2, at 21). Operating system software would also
come within the meaning of parts
for repair and replacement that IBM is required to supply to
computer owners and maintenance
service providers on a non-discriminatory basis. (Decree § VI(c).)
The fact that operating system software is colloquially
distinguishable from the hardware
aspects of a computer does not exempt it as a device or attachment
for a machine that is used in
Page 14
or with a working EDPS. Likewise, the fact that operating system
software may have come into
use after entry of the decree does not provide a basis for IBM's
contention. Indeed, the decree
nowhere indicates that the words "device" or "attachment" should
be limited to hardware
products, or to products that IBM only marketed before the decree
was entered. IBM concedes
that an EDPM, as defined in section II(f), includes "anything that is
part of an ‘electronic data
processing system,'" as defined in section II (e). (IBM
Chron., tab 3, at 27.) IBM thus admits
that the decree applies to all IBM hardware and to all forms of
peripheral devices (id.), even
though, just like much of today's software, numerous types of
hardware and peripheral devices
did not exist in 1956. Further, IBM defended the government's
bundling charges in the 1969
case (see Plaintiff's Statement of Triable Issues (dated
September 23, 1974), tab 19, at 8-11) by
pointing out the essential symbiotic relationship between hardware
and software and how
computer functions could be transferred between hardware and
software. 3
Limitation of the
Page 15 . .
decree to hardware not only would contradict the express language
of section II(f), which on its
face allows for no such limitation, but also would permit IBM to
evade the decree simply by
shifting computer functions from hardware to software. 4
IBM consistently has treated software as if it were covered by the
decree. For example, in
1992, IBM charged ISSC, its computer services company, an
additional $100 million than it
otherwise would have charged had it deemed software exempt from
the decree. (IBM's
Memorandum in Support of Terminating the 1956 Consent Decree
(dated August 24, 1993), tab
21, at 38). IBM recently advised the government that it treated
software as if it were covered by
the decree, in asserting that "while it may well be that the software
transactions are not covered
by the Decree, IBM has treated them as if they are." (Id. at
38 n.13).
Moreover, IBM has been unsuccessful in court with the argument
that software is beyond
the bounds of the decree. See Allen-Myland, Inc. v. IBM,
746 F. Supp. 520, 544 (E.D. Pa. 1990),
Page 16 . .
vacated 33 F.3d 194 (3d. Cir. 1994). The court in
Allen-Myland held that IBM violated decree §
VII(d)(3), which prohibits IBM from limiting alterations in its
computers, when it priced the
additional copy of 3090 microcode necessary to split one large
3090 computer into two smaller
computers in a manner that sought to eliminate such splits.
Id. at 544, 546. The court
specifically disagreed with IBM's contention that applying the
decree to copyrighted software
would go beyond the "four corners" of the decree. Id. at
544. 5
Inclusion of operating systems software potentially is an important
means by which the
decree stimulates or facilitates competition in markets for EDPM
and EDPS. For example, given
such inclusion, § XV(b) of the decree requires IBM to sell operating
system software licenses to
all interested customers by preventing IBM from conditioning the
sale of such licenses on the
customer's purchase of IBM hardware, instead of used IBM or new
or used plug compatible
hardware. Customers would not have this protection if the software
is not a device or attachment
within the meaning of EDPM. In addition, § VII(d)(3), limits the
ability of IBM to prohibit the
attachment of used or plug compatible equipment to its operating
system, and § VII(b) limits
IBM's ability to require that customers even disclose to IBM the
uses of their operating systems.
And as noted before, § VI(c) requires IBM to supply operating
system software, among other
computer parts, to owners and maintenance service providers on a
non-discriminatory basis.
Page 17
B. The Decree Prohibits IBM From Implementing Operating System
Licensing Or
Maintenance
Practices That Would Allow IBM To Avoid Its Decree Obligations
The Government's discovery as to operating system software is
relevant regardless of
whether the Court determines that operating system software is
included within the product
coverage of the decree. (Tierney decl., ¶23.) The decree
prohibits IBM from implementing
operating system licensing or maintenance practices that would
permit it to avoid its decree
obligations with respect to covered hardware products. IBM is
required under § IV(c)(3) to
establish such nondiscriminatory terms as may be appropriate for
the sale of IBM computers.
Thus, IBM cannot refuse to license its operating system to
purchasers of IBM computers and it
cannot discriminate against purchasers by charging them higher
licensing fees than it charges to
its lessees.
The non-discrimination provision of § IV(c)(3) applies to the sale
of all new and used
IBM computers and on its face it is not limited in applicability to
sales made by IBM. By
requiring IBM to license operating systems to purchasers of used
computers, § IV(c)(3) makes
competition from used computers possible, and provides an
essential safeguard to the
competitive viability of used equipment dealers. This section also
fosters the overall purpose of
§ IV, which IBM concedes was to establish a market for used IBM
computers. (IBM Chron., tab
3, at 29); 11/4/70 Tr. at 2-3 (tab 15 of U.S. Selected Docs
submitted to the Court on April 3,
1995).) The value of a used computer is totally dependent on the
purchaser's ability to obtain an
operating system on terms that do not make acquisition of the
computer an unattractive
investment. Further, the price that a purchaser pays for an IBM
computer will depend on the
product's expected residual value to be recovered after the
computer enters the used market. An
Page 18 .
interpretation of § IV(c)(3) that did not require IBM to provide
operating system software
licenses on a nondiscriminatory basis to all purchasers of IBM
computers, regardless of whether
the computer was purchased from IBM or a used computer dealer,
would be contrary to the
purpose of § IV in establishing a used computer market. A
computer would have no residual
value and would not even be expected to enter into the used market
in competition with IBM
unless the purchaser could be assured that subsequent purchasers
would have access to IBM's
operating system software on a nondiscriminatory basis.
In addition, § VI(b) of the decree requires IBM to provide
maintenance for owners of
IBM computers on a nondiscriminatory basis for as long as IBM
continues to maintain that type
of computer. Because a computer cannot work without an
operating system, IBM cannot fulfill
its maintenance obligation unless it provides all owners of IBM
computers access to its operating
system software on a nondiscriminatory basis. IBM's obligation to
provide operating system
software on a nondiscriminatory basis pursuant to its obligation to
provide maintenance to IBM
computer owners would exist even if the court determines that IBM
has no independent
maintenance obligations for licensed operating systems under §
VI(b).
V. IBM Should Be Ordered To Comply With Requests Relating
To
IBM's Disclosures Of Interface Information
A number of the Government's discovery requests seek
information or documents
relating to IBM's disclosure of interface information to users of its
computers. 6 As
defined in
Page 19
our requests, an "interface" is a logical or physical interconnection
or interaction that allows
different computer products to interoperate with each other, while
"interface information" refers
to descriptive material that would enable a person to design a
product to interoperate with IBM
computer products. IBM has refused to produce the requested
information or documents on the
erroneous premise that the decree does not apply to interface
information. (Tierney decl., ¶24.)
Although the term "interface" does not nominally appear in any
decree provision, it is
within the reach of §§ IX(b)-(c), which require IBM to disclose to
users the same information
that it makes available to its repair and maintenance employees as
well as information relating to
the operation and application of IBM computers. The utility of
IBM's computers is critically
dependent on users' ability to operate the computers with other
products that the users develop
themselves or purchase from third parties. Many users devote
considerable staff and resources to
the sole purpose of developing or enhancing products to be used
with IBM's computers. The
information that IBM discloses pursuant to §§ IX(b)-(c), which
shows how the computers are
designed, how they work, how they are operated and how they are
applied, clearly includes
interface information that users need to design and attach products
that will work with IBM
computers. IBM's failure to provide such information would
severely constrain the potential
applications and operation of its computers. In this context, IBM's
response to the Government's
Interrogatories 12 and 13, that it has never disclosed pursuant to
any decree obligation "what it
considers to be ‘interface' information" (as compared to the actual
definitions of "interface" and
"interface information" in the Government's discovery request), is
unresponsive and misleading.
IBM has a longstanding practice of making interface information
widely available to
owners and lessees of IBM computers, including manufacturers of
computer products that are
Page 20 .
plug compatible with IBM computers. IBM even defended itself
against the charges in the
Government's 1969 case by admitting:
IBM also publishes manuals which make available to other
manufacturers the detailed
interface specifications necessary for manufacturers to
manufacture equipment which will
communicate with IBM processing units and replace IBM
equipment.
(IBM 1969 Pretrial Br., tab 20, at 111.) Access to interface
information can be essential to the
competitive viability of a plug compatible manufacturer who uses
IBM computers in the design
and development of competitive compatible products.
Since § IX requires IBM to disclose interface information, the
Government's requests for
information about IBM's interface disclosure practices and possible
changes in those practices
clearly seek relevant information or information reasonably
calculated to lead to the discovery of
admissible evidence. (Tierney decl., ¶26.) IBM's assertion
that it disclosed interface information
for reasons apart from the decree does not answer the question as to
whether the decree would
now act as a constraint if IBM found itself otherwise free to curtail
these disclosures. In any
event, so long as there is a dispute as to whether the decree requires
interface information
disclosure, the Government's discovery should go forward. See
discussion at 11, supra.
VI. IBM Should Be Ordered To Produce
Responsive Information
And Documents Located Outside The United States
IBM generally has objected to the Government's discovery on the
grounds that "they are
not reasonably calculated to lead to the discovery of admissible
evidence to the extent that they
seek information located outside the United States." IBM May
10, 1996 Objections, tab 13, ¶ 6.
Before explaining why this objection cannot be sustained on the
basis of relevance, we note that
to the extent that production of relevant foreign information
imposes burdens on IBM, the
Page 21 .
Government has been and remains committed to reducing those
burdens as much as possible.
(See Tierney decl., ¶13.) We have offered to allow IBM to
defer any efforts to produce
responsive foreign material until we have examined IBM's initial
responses, and we have
informed IBM that any subsequent requests for foreign material
would likely be much more
narrowly drawn given review of the initial responses. (Id.
¶32.) However, by failing to reach an
appropriate agreement to allow the Government to reserve the right
to seek enforcement of our
discovery beyond the May 24 cutoff for motions to compel, IBM
has forced the Government to
move to compel before the parties have had an opportunity to
address issues of burden that IBM
may wish to raise. (Id. ¶¶29-34.) In any event, the
Government is more than willing to consider
any proposals that IBM may suggest in terms of narrowing or
refining the scope of any of our
discovery requests that may entail the production of information or
documents outside the United
States.
Before having completed review of IBM's initial responses,
however, the Government
cannot responsibly allow IBM to avoid completely the production
of information from its
foreign operations, because that information may prove to be
critical to the market analysis and
assessment of competitive conditions needed to resolve IBM's
motion to terminate the decree.
(Tierney decl. ¶28.) Information from IBM's foreign
operations is likely to be highly relevant to
questions as to defining the geographic market in which to assess
IBM's ability to exercise
market power. (Id.) Indeed, definition of the relevant
geographic market presented major issues
of contention in the Kodak case. 63 F.3d at 102, 105-09. In
this case, the only market that IBM
has thus far alleged is worldwide information handling.
(Memorandum of Law in Support of
IBM's Motion to Terminate the 1956 Consent Decree (dated
August 24, 1993), tab 21, at 9.)
Page 22 .
Information from IBM's foreign locations may be uniquely relevant
and necessary to test the
validity of this alleged worldwide market and to determine the
structure of any other appropriate
markets. The Government is entitled to discover this information.
In addition to geographic market definition and structure,
discovery of information from
IBM's foreign operations can provide significant insights as to
whether the decree has
constrained IBM from wielding market power. Since the decree
does not apply to IBM's
business outside the United States, comparisons of IBM's domestic
and foreign pricing,
profitability, and distribution and sales practices could be highly
probative. Moreover, foreign
discovery may be necessary to evaluate IBM's claims that the
decree has imposed various costs
on its domestic operations that it does not encounter overseas.
(Tierney decl.,¶28). IBM has
made other comparisons of IBM's businesses inside and outside the
United States to suit its own
interests, but it has not provided pertinent underlying details sought
by the Government. (Id.)
The Government is entitled to discovery of the information
necessary to test these assertions.
Without better certainty as to whether adequate evidence on these
issues will be produced from
IBM's domestic records, the Government cannot forego the right to
seek relevant information
from IBM locations outside the United States.
VII. IBM Should Be Ordered To Produce Previously
Deferred Information And Documents
With respect to its partial responses to certain of the Government's
requests, IBM has for
the most part produced or promised to produce information or
documents only to the extent they
are found at certain of its headquarters locations. (Tierney
decl., ¶31.) The Government was
willing to accept these partial responses during the initial phase of
its investigation, but expressly
reserved its right to obtain additional responses to pending requests
as the need arose and as the
Page 23
investigation progressed. (Id. ¶32) 7 Similarly, IBM has not
produced any information or
documents located outside the United States, although it is willing
to provide information about
foreign operations to the extent otherwise found in responding to
our discovery. Again, we were
willing to accept such a limitation on IBM's initial responses, but
we reserved our right to
request responsive information from foreign locations on an as
needed basis. Accordingly, the
Government permitted IBM broadly to defer production of all
responsive information and
documents that have not yet been produced or promised, subject to
possible future recall.
In anticipation of the May 24, 1996, cutoff date for motions to
compel responses to the
parties initial discovery, the Government raised with IBM the
question of how to treat the
deferred documents. In an effort to narrow the discovery issues to
be resolved by the Court, the
Government offered to accept on a conditional basis IBM's partial
responses and to allow
unproduced responsive material, including all responsive material
at IBM's foreign locations and
all domestic locations that it has not yet searched, to remain
deferred for the present time subject
to any subsequent motion to compel. As proposed to IBM,
continued deferral of all unproduced
information and documents, would be conditioned on IBM's
agreement that the Government not
be bound by the May 24 deadline for filing a motion to compel
discovery of the currently
deferred material, in the event that we later ask IBM to submit
supplemental responses. Under
our proposal, the Government would have the opportunity to
review the adequacy of IBM's
Page 24 .
partial responses before deciding whether to seek, if ever, any
additional responsive information.
We assured IBM that, except for good cause shown, we would not
seek to rely upon the filing of
any such motion to compel to alter any of the timetables set forth in
the May 1, 1996, Scheduling
Order. (Tierney decl., ¶33.)
Unfortunately, the parties were unable to reach agreement along
the lines proposed by the
Government, necessitating this motion to compel discovery of the
responsive information and
materials that up until now has been deferred. If this motion is
granted, the Government is
willing and prepared to meet with IBM to consider any issues that
it may wish to raise
concerning the scope and timing of additional responses.
VIII. Conclusion
For the foregoing reasons, the Government's motion should be
granted and IBM should
be ordered to produce all information and documents that it has
withheld from the Government's
discovery on the basis of its objections as to the relevance of
market analysis, operating system
Page 25
software, or disclosures of interface information. In addition, IBM
should be ordered to produce
all responsive information and documents that previously had been
deferred from production.
Respectfully submitted,
N. Scott Sacks (NS-6689)
FOOTNOTES
1 Appended as tab
6 to the Declaration of James J. Tierney, May 24, 1996, (Tierney decl."); all other tabbed
materials cited herein are likewise appended thereto. Copies of the cases cited herein are also
provided to the Court under separate cover and arranged alphabetically.
2 See United
States' Memorandum on the 1969 Case ("U.S. 1969 Mem.") (dated October 5, 1995),
tab 16, at 1-2; 9-19; 21 n.14; U.S. Prelim., tab 4, at 1; 17-21; 24-45; IBM Prelim., tab 2;
IBM's Memorandum Addressing the Significance of the Government's 1969 Case (dated
September 7, 1995).
3 In defending its
policy of giving away software against the Government's illegal bundling charges, IBM stated:
IBM did not and does not now separately price that operating systems programming which is
"fundamental to the operation of a system." . . . . Such programs are an integral component of
any computer and are essential to render it capable of performing any useful task whatsoever.
Moreover, operating system software is intimately intertwined with computer hardware during
the design process. System functions are often transferred from hardware to operating systems
software and back again in the design process as cost, function and technology evolve. As a
practical matter, manufacturers must design an operating system together with their hardware. . . .
[G]iven the current state-of-the-art and sophistication, the computer hardware and operating
system software are technologically and economically a single product. Customers and
manufacturers alike treat the operating system as an integral element of the computer.
(Pretrial Brief for Defendant International Business Machines Corporation ("IBM
1969 Pretrial Br.") (dated January 15, 1975), tab 20, at 353.).
4 Largely to
prevent this type of decree evasion, in an analogous setting, the Court of Appeals for the District
of Columbia Circuit affirmed the District Court's conclusion, over the government's objection,
that a provision in the AT&T consent decree prohibiting the Bell Operating Companies
("BOCs") from manufacturing telecommunications equipment also prohibited the development
of software that is integral to telecommunications hardware. In United States v. Western
Elec. Co., 894 F.2d 1387, 1394 (D.C. Cir. 1990), the Court of Appeals explained: Indeed,
because "firmware" circuitry has largely supplanted the more cumbersome vacuum tubes, wires
and switches that formerly comprised the heart of many pieces of telecommunications
equipment, the reading of section II(D)(2) urged by the DOJ would leave the BOCs free to
perform the most significant design and development functions associated with the manufacture
of telecommunications products. Id.
5 The court in
Allen-Myland concluded that 3090 microcode, which IBM provides without extra charge as
"Licensed Internal Code" with each computer, is a necessary element of a 3090 system, but is not
in and of itself an EDPM as that term is defined in decree § II(f). Id. at 542. Thus, the court
seems to have accepted the contention, as to 3090 microcode, that IBM argued with respect to
operating system software in the 1969 case--that microcode is an integral and fundamental
component of a computer that cannot be separately sold. See supra, n.3. Because IBM now
separately licenses operating system software, it can no longer make this contention as to
operating systems.
6 See
Interrogatory 12 (seeking descriptions of the interface information historically disclosed by IBM),
Interrogatory 13 (seeking information on changes that IBM plans to make in the disclosure of
interface information or in the licensing, enforcement, or assertion of rights under copyrights or
licenses) and Document Requests 23, 24, and 25 (requesting documents relating to various
aspects of IBM's interface information disclosures). (Interrogatories and Requests for Production
of Documents, tab 6.)
7 In its Objections
to the Government's discovery, IBM repeatedly indicated that it had "fully responded . . . in
accordance with the parties' agreement." In fact, the Government has not agreed to any
limitations on the scope of any of our requests, other than permitting IBM to defer production of
additional responses to requests for which it had made or promised a partial response. As
explained above, we permitted the deferrals subject to our right to seek additional future
responses to the extent necessary.
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