US Memorandum in Support of its Motion to compel discovery in judgment termination proceeding

Friday, May 24, 1996
Document Type: 
Modification/Termination Papers

Download the WordPerfect version

Page 1 .       




       Plaintiff, )    
         ) Civil Action
       v. ) No. 72-344 (AGS)
       CORPORATION, )    
       Defendant. )    
       __________________________________________ )  







                                      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

             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

             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

             IBM'S DISCLOSURES OF INTERFACE INFORMATION........................................... 18

             DOCUMENTS LOCATED OUTSIDE THE UNITED STATES..................................... 20

             INFORMATION AND DOCUMENTS............................................................................ 22

        VIII. CONCLUSION.................................................................................................................. 24

Page 3      

                            TABLE OF AUTHORITIES

        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      


             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
") 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., カ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. カカ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 僧arkets' or 壮ub-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, カ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., カ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. カ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. カ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.
, 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 喪elevant to any subject matter involved in the pending
        action' has been construed broadly to 粗ncompass 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, カ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., カ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.
, 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
        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., カ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., カ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.
, 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, カ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., カ21; see also IBM May 10, 1996
, 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 ァ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. ァ II (e).) So defined, EDPS includes operating system software
        because, as IBM has acknowledged, "computers simply do not work without software." (IBM
., 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 ァ 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 粗lectronic 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 ァ
        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, ァ 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, ァ VII(d)(3), limits the ability of IBM to prohibit the
        attachment of used or plug compatible equipment to its operating system, and ァ VII(b) limits
        IBM's ability to require that customers even disclose to IBM the uses of their operating systems.
        And as noted before, ァ 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., カ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 ァ 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 ァ 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, ァ 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
        ï½§ 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 ァ 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 ァ 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, ァ 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 ァ 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., カ24.)
             Although the term "interface" does not nominally appear in any decree provision, it is
        within the reach of ァァ 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 ァァ 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 訴nterface' 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 ァ 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., カ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, カ 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., カ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. カ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. カカ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
             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. カ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.,カ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., カ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. カ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., カ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)




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 ァ 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.

Updated August 18, 2015