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TABLE OF CONTENTS
Page
I. Introduction.................................................1
II. Procedural Background.......................................1
III. The Legal Standard Governing The Court's
Public Interest Determination...............................4
IV. The Proposed Modification Is In The Public Interest.........8
A. Provisions Subject To Immediate Termination............10
B. AS/400..................................................10
C. System/390 And The Remainder Of The Final Judgment.....14
V. Conclusion...................................................16
Tab 1 .
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TABLE OF AUTHORITIES
CASES
Sam Fox Publishing Co. v. United States, 366 U.S. 683 (1961)5
United States v. American Cyanamid Co., 719 F.2d 558 (2d
Cir. 1983), cert. denied, 465 U.S. 1101
(1984).............9
United States v. Bechtel Corp., 648 F. 2d 660 (9th Cir.),
cert. denied 454 U.S. 1083 (1981).........................8
United States v. Loew's Inc., et. al., 783 F. Supp. 211
(S.D.N.Y. 1992)..................................................5,6
United States v. Microsoft Corp., 56 F.3d 1448 (D.C. Cir.
1995)..........................................................6,7
United States v. Mid-American Dairymen, Inc., 1977-1 Trade
Cas. ¶61,508 (W.D. Mo. 1977)....................................6
United States v. Swift & Co., 1975-1 Trade Cas. ¶60,201
(N.D. Ill. 1975).................................................6
United States v. Swift & Co., 286 U.S. 106 (1932)........5
United States v. Western Elec Co., 993 F.2d 1572 (D.C.
Cir.) cert. denied sub nom. Consumer Federation of America v.
United States, 114 S. Ct. 487 (1993).........................8
United States v. Western Electric Co., 900 F.2d 283 (D.C.
Cir.), cert. denied sub nom. MCI Communications Corp. v.
United States, 498 U.S. 911 (1990)...........................5,7,8
STATUTES AND RULES
15 U.S.C. § 16(e)................................................6
Fed. R. Civ. P. 60(b)(5) and (6).................................5
.
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UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
___________________________________
)
UNITED STATES OF AMERICA , )
)
Plaintiff, ) Civil Action
)
- against - ) No. 56-344 (AGS)
)
INTERNATIONAL BUSINESS )
MACHINES CORPORATION , )
)
Defendant. )
___________________________________)
UNITED STATES' MEMORANDUM IN SUPPORT OF
JUDGMENT MODIFICATION
___________________________________________
N. Scott Sacks (NS-6689)
James J. Tierney (JT-7842)
Ian Simmons (IS-7468)
U.S. Department of Justice
Antitrust Division
600 E Street, N.W.
Suite 9500
Washington, D.C. 20530
(202) 307-6132
Attorneys for Plaintiff United States of
America
David Turetsky
Deputy Assistant Attorney General
Rebecca P. Dick
Deputy Director of Operations
July 11, 1996.
Page 1
I. Introduction
The Government has tentatively consented, subject to the
evaluation of public comments, to modify the January 25, 1956,
Final Judgment entered in this action ("Final Judgment") to
sunset, over a five-year period, the remaining provisions that
apply to defendant International Business Machines
Corporation's ("IBM") AS/400 and System/390 families of
products and services. The Government has concluded that a
transitional period is necessary to protect the investments of
AS/400 and System/390 customers and to protect competitors who
have made business investments and decisions in reliance on
the Final Judgment. The Government's tentative consent to
modify the Final Judgment has been given only after extensive
consideration of the equitable and competitive issues raised
by IBM's Motion to Terminate. Accordingly, the Government is
confident that the proposed sunset periods are "within the
reaches of the public interest," the legal standard applicable
here.
II. Procedural Background
The Complaint that lead to the Final Judgment was filed
on January 21, 1952.1 The Government alleged that
IBM had
Page 2
monopolized, attempted to monopolize and restrained trade in
the tabulating industry, in violation of Sections 1 and 2 of
the Sherman Act. Among other things, the Complaint alleged
that IBM only leased, and refused to sell, tabulating
machines. Through its lease agreements, IBM allegedly:
charged lessees a single price for machine rental and repair
and maintenance; limited machine uses; restricted attachments
to, alterations in, or experimentation with such machines; and
required grant backs of any inventions resulting from a breach
of the prohibition on experimentation. By 1955, IBM had
adopted the same lease-only strategy with respect to
computers.
The Final Judgment applies to IBM's conduct with respect
to tabulating machines, which IBM has not manufactured for
many years, and to computers. Certain provisions of the Final
Judgment have expired or no longer apply to IBM's business.
Other provisions, however, continue to govern IBM's computer
business. On June 13, 1994, IBM filed its Motion seeking the
immediate termination of the Final Judgment.
In September 1995, the Government tentatively consented
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to partial termination. After a public comment period, and
upon motion of the Government, the Court on January 17, 1996,
found that partial termination was in the public interest and
entered an order terminating: (1) Sections V(b) and (c), which
required IBM to offer to sell at no more than specified prices
and to hold for a specified period used IBM computers that IBM
acquired as trade-ins or as a credit; and (2) Section VIII,
which specified conditions under which IBM could engage in
"service bureau business," as defined by Section II(k) of the
Final Judgment. The Court also terminated all other
provisions of the Final Judgment as they applied to IBM's
computers, other than the AS/400 and System/390 families of
products and services.
The Government was permitted a period of time to
investigate the likely impact of termination on IBM's AS/400
and System/390 customers and competitors. During the course
of its investigation, the Government interviewed more than 100
AS/400 and System/390 customers and dozens of IBM's
competitors; reviewed well over 100,000 pages of documents
produced by IBM and third parties; deposed seven IBM
witnesses; and consulted with in-house and outside economic
and technical experts. The Government then weighed all of the
evidence. The Government concluded that it could not consent
Page 4.
to IBM's Motion seeking the outright termination of the Final
Judgment. The Government, however, concluded that it would be
appropriate to establish specific sunset periods to permit the
gradual phase-out of the Final Judgment.
On July 2, 1996, the parties agreed to modify the Final
Judgment to establish specific sunset periods for all
provisions that currently apply to IBM's AS/400 and System/390
products and services. The Court on July 2, 1996, entered a
Stipulation and Order suspending further proceedings and
directing the parties to submit by July 12, 1996, a proposal
for a public comment period on the proposed consensual
settlement. The parties today have filed a stipulation and
proposed order to implement procedures that will give non-
parties notice of, and an opportunity to comment upon, the
proposed modification of the Final Judgment. This memorandum
sets forth the legal standard governing a court's review of a
consensual judgment modification and explains why the
Government, subject to having an opportunity to evaluate
public comments, has tentatively consented to modification of
the judgment in this instance.
III. The Legal Standard Governing the Court's Public
Interest Determination
This Court has jurisdiction to modify the Final Judgment
Page 5....
pursuant to Section XIX of the Judgment, Fed. R. Civ. P.
60(b)(5) and (6), and "principles inherent in the jurisdiction
of the chancery." United States v. Swift & Co., 286
U.S. 106, 114 (1932).
Where, as here, the Government tentatively consents to
the proposed modification of an antitrust judgment, the issue
before the Court is whether the modification "is in the public
interest." United States v. Loew's Inc., et. al., 783
F. Supp. 211 (S.D.N.Y. 1992). As discussed in our Preliminary
Statement, the ultimate question before the Court in this
antitrust case is whether modification of the Final Judgment
serves the public interest in competition. U.S. Prelim.
at 21-24.
It has long been recognized that the Government has broad
discretion in settling antitrust litigation on terms that will
best serve the public interest in competition. See Sam Fox
Publishing Co. v. United States, 366 U.S. 683, 689 (1961).
In settling a case, the Government may consider the full range
of settlements that are consistent with the public interest.
See, e.g., United States v. Western Electric
Co., 900 F.2d 283, 307-09 (D.C. Cir.), cert. denied sub
nom. MCI
Page 6.....
Communications Corp. v. United States, 498 U.S. 911
(1990). Consequently, when the Government consents to modify
a judgment, the Court should accept the proposed settlement
absent a clear showing that the Government has abused its
prosecutorial discretion. Loew's, 783 F. Supp. at 214;
United States v. Mid-American Dairymen, Inc., 1977-1
Trade Cas. ¶ 61,508 at 71,980.
The legal standard to be applied in this judgment
modification proceeding is the same standard that a district
court applies in determining, pursuant to the Tunney Act,
whether to enter a consent decree in a government antitrust
proceeding. Loew's 783 F. Supp at 213-14; see
United States v. Swift & Co., 1975-1 Trade Cas. ¶
60,201 at 65,702-03. In a Tunney Act proceeding, the
reviewing court must determine whether entry of the proposed
consent decree "is in the public interest." 15 U.S.C. §
16(e). Under this deferential standard, "the court's function
is not to determine whether the resulting array of rights and
liabilities is the one that will best serve society, but only
to confirm that the resulting settlement is within the
reaches of the public interest." United States v. Microsoft
Corp., 56 F.3d 1448, 1460 (D.C. Cir. 1995)(emphasis in
original)(internal
Page 7..
quotations omitted).
The Court's role necessarily is limited because an
antitrust settlement reflects the Antitrust Division's
predictive judgment concerning the efficacy of the proposed
settlement or modification and is thus an exercise of
prosecutorial discretion. Indeed, courts must bear in mind
that antitrust settlements have the virtue of enabling "the
Department of Justice to reallocate necessarily limited
(enforcement) resources," id., at 1459, and bring the
public the certain benefit of some measure of relief when no
such certainty exists if the case proceeds to trial.2
See id. at
Page 8....
1461.
Thus, the Court's review to determine whether the
parties' consensual modification is "within the reaches of the
public interest" must remain narrowly focused. The Court's
inquiry should be limited to whether the Government has
offered a reasoned and reasonable explanation for its consent,
United States v. Bechtel Corp., 648 F. 2d 660, 666 (9th
Cir.), cert. denied 454 U.S. 1083 (1981), and approval
should be granted "so long as the resulting array of rights
and obligations is within the zone of settlements consonant
with the public interest today." Western Elec. Co., 900
F.2d at 307.; see also United States v. Western Elec
Co., 993 F.2d 1572, 1577 (D.C. Cir.) cert. denied sub
nom. Consumer Federation of America v. United States, 114
S. Ct. 487 (1993)("court may reject an uncontested
modification only if it has exceptional confidence that
adverse antitrust consequences will result ...")
IV. The Proposed Modification Is In The Public
Interest
The Government tentatively has concluded, subject to an
opportunity to evaluate public comments, that modifying the
Final Judgment to establish specific sunset periods for the
remaining substantive provisions of the Final Judgment --
Page 9.
Sections IV, V, VI, VII, IX, and XV -- is well within the
reaches of the public interest. The Government has concluded
that sunsetting the Final Judgment is appropriate given the
major changes in the computer industry over the forty years
that the Judgment has been in effect and IBM's market position
today.
Determining the appropriate sunset period requires the
consideration of the consequences of termination on the
public, including IBM. The Government considered the
equitable and competitive interests of AS/400 and System/390
customers and competitors who have made decisions and
investments in reliance on the Final Judgment. The Government
also considered the costs and inefficiencies allegedly imposed
on IBM by some provisions of the Final Judgment and any
resulting harm to competition. Added to this analysis were
the risks and uncertainty inherent in litigating the complex
issues presented by IBM's Motion and the fact that any
settlement requires compromise by both parties. Because the
consideration of these factors worked out differently for
different provisions and different products, the Government
has agreed to sunset the Final Judgment in stages over a five-
year period. Generally, the Final Judgment as it applies to
the AS/400 will sunset in four years and will sunset in five
Page 10..
years with respect to the System/390. (A chart summarizing
the sunset periods for the AS/400 and System/390 is attached
at Tab 1.)
The Second Circuit has recognized that should
circumstances so warrant, a court properly may exercise its
equitable powers to phase-out a final judgment. See United
States v. American Cyanamid Co., 719 F.2d 558, 566 (2d
Cir. 1983), cert. denied, 465 U.S. 1101 (1984).
A. Provisions Subject To Immediate Termination
The Government has tentatively consented to terminate
Sections IV(b)(3) and (c)(7) and Section VII(d)(1) immediately
upon entry of an Order by the Court.
Section IV(b)(3), which relates to the sale of "special
purpose" computers designed for individual users, can be
terminated immediately without adverse impact on competition.
Section IV(c)(7), which requires orders to be filled in the
order received, can also be terminated immediately. IBM
claims that specifying delivery practices in this manner
imposes some inflexibility and inefficiencies on its delivery
scheduling. We believe that the specificity mandated by this
provision is no longer warranted; the general non-
discrimination requirement of Section IV(c)(3) is sufficient.
Page 11
Section VII(d)(1), relating to tabulating card purchases, is
no longer of any practical effect, and also can be terminated
immediately.
B. AS/400
With respect to the AS/400 family of products and
services, the Government has tentatively consented to
terminate: (1) Section V(a) immediately upon entry of an order
by the Court; (2) Section IV (except Section IV(c)(3) as it
applies to operating systems) and Section VI(a) six months
after entry of an Order by the Court; and (3) all other
provisions of the Final Judgment as they apply to the AS/400,
including Section IV(c)(3) as it applies to operating systems,
on July 2, 2000. While competition in the markets for AS/400
products and services is generally healthy, it is essential to
protect, for equitable reasons, the substantial investments of
AS/400 customers and firms providing leasing and maintenance
services in reliance on conditions that exist because of the
Final Judgment.
Section V(a), which the Government tentatively consents
to terminate immediately, prohibits IBM from acquiring used
equipment except as a trade-in or credit. Immediate
termination of Section V(a) to allow IBM greater freedom to
acquire used equipment is not likely to interfere
Page 12
substantially with the continuing viability of the used AS/400
market.
Section IV(b), and related provisions of Section IV(c)
and Section VI(a), to which the Government would consent to a
six-month sunset period, requires IBM to sell equipment on
terms not substantially more advantageous to IBM than its
lease terms, and contains some related requirements. In our
judgment, such restrictions are unnecessary to protect
customers or the equitable interests of competitors. The
Government, however, would subject Section IV(c)(3) to a four-
year sunset period to the extent the Section applies to the
provision of operating system software. Section IV(c)(3)
requires IBM to establish nondiscriminatory terms for the
purchase -- as opposed to the lease -- of a computer. The
Government contends that Section IV(c)(3) enjoins IBM from
discriminating in providing the operating system to both
original and subsequent purchasers of IBM equipment.3
The
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Government believes that a longer sunset period for Section
IV(c)(3) to ensure the availability of the AS/400 operating
system is required to protect customer investment in the
AS/400 platform.
The Government has agreed to sunset the Final Judgment's
remaining provisions -- Sections IV(c)(3)(as it applies to
operating system software), VI(b) and (c); VII(b) (c) and
(d)(2)-(3); IX (b) and (c); and XV(a) and (b) -- as they apply
to the AS/400 on July 2, 2000. Sections VI(b) and (c) require
IBM to offer to computer owners at reasonable and
nondiscriminatory prices repair and maintenance service and
require IBM to offer to computer owners and independent
service organizations, at reasonable and nondiscriminatory
prices, repair and replacement parts. Sections VII(b) (c) and
(d)(2)-(3) restrain IBM from requiring that lessees or
purchasers of IBM computers disclose to IBM the uses of such
computers; from requiring that purchasers of IBM computers
have them maintained by IBM; and generally from prohibiting
experimentation with, alterations in or attachments to IBM
computers. Sections IX(b) and (c) require IBM to furnish to
owners of IBM computers manuals, books of instructions and
other documents that IBM furnishes to its own repair and
maintenance employees and require IBM to furnish to purchasers
Page 14.
and lessees of IBM computers manuals, books of instruction and
other documents that pertain to the operation and application
of such computers. Finally, Sections XV(a) and (b) enjoin IBM
from entering into certain agreements to allocate markets and
prohibit IBM from conditioning the sale or lease of one
computer product on the purchase or lease of another computer
product.
A four-year sunset protects the interests of AS/400
customers, giving them a four-year period in which to assess
and adjust investments, data processing strategies, and
contracts in anticipation of Final Judgment termination.
Moreover, competitors in leasing, maintenance services, and
plug-compatible equipment will be able to continue to operate
their businesses pursuant to the competitive environment
created by the Final Judgment for an additional four years.
This is a reasonable and sufficient time to protect
investments already made and to make business adjustments in
anticipation of termination.
C. System/390 And The Remainder Of The Final Judgment
With respect to the System/390 family of products and
services and the remainder of the Final Judgment, the
Government has tentatively consented to terminate all
provisions on July 2, 2001. The Government's position that
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all the Final Judgment's substantive provisions -- Sections
IV, V, VI, VII, IX and XV -- require a five-year sunset period
is premised on its assessment of competitive concerns related
to the markets for System/390 products and services and
equitable concerns related to customer and competitor reliance
on the Judgment.
For competitive reasons, a five-year sunset period is
necessary to protect the substantial investments of System/390
customers. The Final Judgment continues to constrain the
exercise of market power by IBM with respect to System/390
products and services, for those customers with existing
applications that must, as a practical matter, be maintained
on the System/390 platform for the time being. While
increasingly there are alternative platforms to which
System/390 customers can migrate, and while they are doing so
in increasing numbers, some functions cannot now feasibly be
migrated. The number of these functions will diminish in the
coming years. Moreover, System/390 customers that do not
migrate are not without bargaining power since they also have
a variety of other computer needs that they can meet with IBM
products or not, depending on the nature of their overall
commercial relationship with IBM. A five-year sunset is
adequate to permit customers to adjust business plans and
Page 16.
contract for protections while the decree acts to constrain
IBM's surviving but diminishing market power.
Moreover, the substantial equitable interests of
customers who have enormous investments in the S/390 platforms
at the core of their businesses and the equitable interests of
competitors who entered into leasing, maintenance services,
and used and plug-compatible businesses in reliance on
conditions that exist because of the Final Judgment, would be
adequately protected by a five-year sunset. This period would
give them time to earn a return on investments already made in
reliance on the Final Judgment and to adjust their business
strategies to a post-termination marketplace.
V. Conclusion
For the foregoing reasons, the Government recommends,
subject to having an opportunity to consider public comments,
that the Final Judgment be modified to establish sunset
periods in accordance with the timetable described in this
memorandum.
Respectfully submitted,
_________________________
N. Scott Sacks (NS-6689)
James J. Tierney (JT-7842)
Page 17
Ian Simmons (IS-7468)
U.S. Department of Justice
Antitrust Division
600 E Street, N.W.
Suite 9500
Washington, D.C. 20530
(202) 307-6132
July 11, 1996
.
Page 18
CERTIFICATE OF SERVICE
This is to certify that the United States'
Memorandum in Support of Judgment Modification was sent by
Federal Express to the following counsel of record on July 11,
1996:
INTERNATIONAL BUSINESS MACHINES CORPORATION
Peter T. Barbur, Esq.
Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, New York 10019-7475
Fax: (914) 765-0676
James J. Tierney
.
FOOTNOTES
1
For details on the purpose and history of the
Complaint and Final Judgment, see the United States'
Preliminary Statement of the Issues (U.S.
Prelim.)(dated July 19, 1995) and IBM's Preliminary
Statement of the Issues and Chronology of the 1956 Consent
Decree (dated June 6, 1995).
2
Though the Microsoft court in dictum
suggests that a district judge must be even more deferential
in reviewing "entry of an initial proposed decree" than in
reviewing "the parties' request for approval of modification",
Microsoft, 56 F.3d at 1460-61, the court made clear that
stipulated modifications deserve considerable deference from
the reviewing court. Indeed, the D.C. Circuit observed that
"[u]nder our own precedent dealing with uncontested
modifications of a consent decree, we have repeatedly
said that a district judge must approve such modifications so
long as the proposal falls ‘within the reaches of the public
interest'." Id. at 1457-58 (citing Western Elec.
Co., 900 F.2d at 309) (third emphasis in original). And
the D.C. Circuit reiterated that the public interest is a
flexible one. Id. at 1460. Accordingly, "a court should
not reject an agreed-upon modification unless it has
exceptional confidence that adverse antitrust consequences
will result -- perhaps akin to the confidence that would
justify a court in overturning the predictive judgments of an
administrative agency." Microsoft, 56 F.3d at 1460
(citations & internal quotation marks omitted).
3
Section IV(c)(3) is a key provision for ensuring
purchasers of new and used computers access to the operating
system on a nondiscriminatory basis. IBM is the only supplier
of the operating systems for its computers and therefore an
appropriate term for the sale of a computer is access to the
operating system. In order to comply with the
nondiscrimination requirement of Section IV(c)(3), IBM has had
to establish and observe a published price schedule for its
operating system software.
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