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UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
UNITED STATES OF AMERICA,
Plaintiff,
-against-
INTERNATIONAL BUSINESS MACHINES
CORPORATION,
Defendant.
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Civil Action
No. 72-344 (AGS)
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UNITED STATES' PRELIMINARY STATEMENT OF ISSUES
Kent Brown (KB-5429)
Sanford Adler (SA- )
James J. Tierney (JT- )
Ian Simmons (IS-7468)
U.S. DEPARTMENT OF JUSTICE
Antitrust Division
555 4th Street, N.W.
Suite 9901
Washington, DC 20001
(202)
Attorneys for Plaintiff
David Turetsky
Counselor to the Assistant Attorney General
Rebecca P. Dick
Deputy Director of Operations
N. Scott Sacks
Assistant Section Chief, Computers and Finance
July 19, 1995
Table of Contents
I. INTRODUCTION.............................................................................................................................................. 1
II. BACKGROUND.............................................................................................................................................. 2
III. AN INDEPENDENT PURPOSE OF THE JUDGMENT IS TO CONSTRAIN IBM'S EXERCISE
OF MARKET POWER IN THE COMPUTER INDUSTRY.................................................................... 6
A. The Purpose Of The Decree Was To Terminate IBM's Monopoly And Prohibit Practices That
Might Result In Monopolization .............................................................. 6
B. The Judgment Has Consistently Applied Unambiguously And Independently To IBM's
Conduct In The Computer Industry ........................................................................................... 7
C. The Parties' Contemporaneous Statements And The Circumstances Of The Judgment
Negotiations Confirm That The Decree Applies Independently To Computers ......... 9
IV. IBM HAS THE BURDEN OF PROVING THAT CONTINUATION OF THE JUDGMENT
WOULD BE DETRIMENTAL TO THE PUBLIC INTEREST IN COMPETITION............................. 17
A. The Public Interest Requires That The Judgment Not Be Terminated Until Its Purposes Have
Been Fully Achieved .................................................................................................................. 17
B. If The Government Consents To Termination Or Modification, The Court's Public Interest
Review Is Limited To Whether The Government Has Offered A Reasoned And
Reasonable Explanation For Its Consent .................................................................... 21
C. If The Government Opposes Termination, IBM Must Demonstrate That Continuation Of The
Judgment Would Be Detrimental To The Public Interest In Competition .............................. 22
V. IBM CANNOT SATISFY ITS BURDEN WITHOUT THE REQUISITE MARKET ANALYSIS............. 23
A. Market Definition Principles........................................................................................... 25
B. If IBM Has Market Power In Any Primary Market Or Aftermarket, The Court Must Assess
Whether The Decree Constrains The Exercise Of That Market Power........................................ 28
1. IBM May Possess Market Power in the Market for System 390 Mainframes and
Software. .................................................................................................... 30
2. IBM May Possess Market Power in the Aftermarkets for Service and Parts of System
390 Mainframes and AS/400 Mid-range Computer Products ...................... 34
C. IBM's Arguments Do Not Address The Central Issue of Whether Termination of the
Judgment Would Harm the Public Interest In Competition. ........................ 40
Page 1 .
I. INTRODUCTION
Pursuant to the Court's request at the June 19, 1995 hearing, the government respectfully
submits this preliminary statement of the issues. We write this statement prior to the requisite
discovery of the issues raised by the motion of International Business Machines Corporation
("IBM") to terminate the final judgment in this case (the "judgment" or "decree"), and thus will
seek to modify or supplement our views should the need arise. The purpose of this statement is
to set forth the legal and factual issues raised by the motion to terminate. Specifically, by this
submission we wish to underscore that:
(1) to satisfy its burden for obtaining unilateral termination of the judgment in its current
application to any market, IBM must show that continuation of the judgment would be
detrimental to the public interest in competition in that market. Accordingly, any
assessment of the impact of termination can be made only in the context of an analysis of
current market conditions, and any relief must be suitably tailored to the harm that IBM
demonstrates;
(2) by its own terms, the decree applies to electronic data processing (viz., the computer
industry) and IBM's emphasis on the complaint's focus on tabulating machines is
misguided;
(3) IBM's arguments and factual assertions in its various memoranda and in-court
statements fail to provide for a meaningful competitive analysis of the likely effect of
judgment termination and present an incomplete portrait of the circumstances leading up
the decree;
(4) despite IBM's failure to address the issues in a manner that allows for a meaningful
competitive analysis of the effect of judgment termination, the government concurs that
the judgment should be terminated to the extent that it no longer serves to promote the
public interest in competition. Below, we identify the areas where tentatively we do not
object to appropriate limitations on the judgment, subject to our having an opportunity to
evaluate public comments. We also identify the areas as precisely as possible where our
continuing investigation suggests that termination of the judgment could threaten the
public interest in competition; and
(5) we still need substantial information to reach a definitive position on the issues raised
below and thus we propose a plan that will enable us to complete our investigation of the
complex competitive issues posed by IBM's motion with the aid of the Court's discovery
process.
Page 2 .
II. BACKGROUND
At the outset, we note that on the basis of our inquiry to date and subject to our review of
public comments, we will not oppose termination of decree Sections V(b)-(c)(which concerns
IBM's obligations to offer to sell to used equipment dealers computers that it obtains in trade)
and VIII (which creates standards for the operation of IBM's service bureau business).
Moreover, we will not oppose termination of the remaining provisions of the decree insofar as
they apply to products and services that are outside the System 360-390 or AS/400 families of
products. Thus, we would not oppose termination insofar as the decree now applies to all of
IBM's current PC computer products. We will not further address these judgment sections or
products in this memorandum, but we note that IBM appears to base its termination motion
primarily on arguments about the sections or products that we are willing to terminate.
The judgment was entered on January 25, 1956, four years after the government's
complaint had charged that IBM engaged in longstanding monopolization and attempted
monopolization and agreements in restraint of trade in the tabulating industry, in violation of
Sherman Act sections 1, 2, 15 U.S.C ｧｧ 1-2. (Complaint ｧ IV, ｶ 45 (U.S. Selected Docs. tab 1)). 1
Many sections of the judgment were intended to be temporary and have terminated by their own terms. See IBM's Preliminary Statement of Issues (dated June 6, 1995) ("IBM Prelim.") at 26 n.
Page 3
24. The remaining sections were intended to apply perpetually, and the judgment contains no
express or implied provision for termination of those sections. Below, we describe those
remaining provisions to which we have not consented to termination.
The judgment applies to all of IBM's computer hardware products and to its operating
system software products that are necessary for operation of any particular computer or computer
system, as provided in the definitions of "Electronic data processing system" (EDP system) and
"Electronic data processing machine" (EDP machine or equipment) (Decree ｧｧ II(e)-(f)). 2
Section IV of the judgment enjoined IBM's longstanding lease-only policy. 3 Among
Page 4
other things, it requires IBM to offer computers for sale at prices and on terms and conditions
that are not substantially more advantageous to IBM than lease charges and that have a
commercially reasonable relationship to the lease charges for such computers. (Decree ｧｧ IV(a),
(c)(2)).
Section V(a) enjoins IBM from acquiring used IBM computers owned by persons other
than IBM except as a trade-in on the purchase of a new computer or as a credit against a debt
owed to IBM. This section does not prohibit IBM from reacquiring possession to computers that
it has been leasing to any customer.
Section VI prohibits IBM from discriminating against owners of computers in favor of
lessees. 4 Section VI(a) requires IBM to provide without separate charge the same type of
services, except repair and maintenance, that it provides to lessees without separate charge.
Section VI(b) generally requires IBM to provide at reasonable and nondiscriminatory prices and
terms repair and maintenance services for computer owners. Section VI(c) requires IBM to sell
computer repair and replacement parts and subassemblies at reasonable and nondiscriminatory
prices to IBM computer owners and third party computer repair companies for as long as such
parts are available for use in its leased machines.
Section VII(b) enjoins IBM from requiring any IBM computer lessee or purchaser to
disclose the use of its computer. Section VII(c) enjoins IBM from requiring that any IBM
computer purchaser obtain from IBM repair and maintenance or repair parts. Section VII(d)(2)-
Page 5
(3) restricts IBM from limiting the ability of IBM consumers to experiment with their computers
or to make alterations in or attachments to those computers. 5
Section IX(b) requires IBM to provide at reasonable and nondiscriminatory charges to
IBM computer owners, third party repair and maintenance firms and distributors the same
technical informational documents that it provides generally to its own repair and maintenance
employees. Section IX(c) requires IBM to provide on a nondiscriminatory basis and at
reasonable charges to IBM computer lessees and purchasers manuals, books of instruction and
other documents pertaining to the operation or application of their computers.
Section XV(a) enjoins IBM from participating in agreements with its competitors or
potential competitors in the computer industry to allocate markets or restrain imports into the
United States or exports from the United States. 6 Section XV(b) prohibits IBM from
conditioning the sale or lease of one computer product on the purchase or lease of any other
computer product.
.
Page 6 . .
III. AN INDEPENDENT PURPOSE OF THE JUDGMENT IS TO CONSTRAIN IBM'S
EXERCISE OF MARKET POWER IN THE COMPUTER INDUSTRY
A. The Purpose Of The Decree Was To Terminate IBM's Monopoly And Prohibit
Practices That Might Result In Monopolization
Although the complaint alleged that IBM had obtained and maintained a longstanding
monopoly through a wide variety of exclusionary practices and anticompetitive agreements, the
consent decree did not rely primarily on divestiture to disgorge IBM of its ill-gotten gains,
restore competition and eliminate the threat of any future anticompetitive conduct. Nor did the
decree prevent IBM from participating in other related businesses. 7 Rather, it sought to
encourage competition with provisions that constrain IBM's ability to exercise market power.
Much of the judgment was patterned on the decree entered by Judge Wyzanski in United States
v. United Shoe Machinery Corp., 110 F. Supp. 295 (D. Mass. 1953), aff'd per curiam, 347 U.S.
521, 745 S. Ct. 699 (1954); see also Allen-Myland, Inc. v. IBM, 746 F. Supp. 520, 547 (E.D. Pa
1990), vacated in part on other grounds, 33 F.3d 194 (3d Cir.), cert. denied, 115 S. Ct. 684
(1994); July 20, 1955 tr. at 22 (U.S. Selected Docs. tab 8); May 5, 1960 letter from Robert A
Bicks to Murray A. Reiter (U.S. Selected Docs. tab 16). 8
Page 7 .
B. The Judgment Has Consistently Applied Unambiguously And Independently To
IBM's Conduct In The Computer Industry
IBM's suggestion that the continued viability of the judgment to the computer industry
must be assessed in connection with its position (or lack of position) in the tabulating industry is
an effort to rewrite the bargain to which it consented. The decree provisions that remain in effect
today apply unambiguously to constrain its exercise of market power in the computer industry, as
IBM concedes. (IBM Chron. at 27.). IBM would search in vain for any language in the
judgment suggesting even faintly that the decline of the tabulating industry and IBM's position in
it should or could support decree termination without regard to current market conditions in the
computer industry.
IBM's argument that the "continuing viability of the 1956 IBM Consent Decree must be
evaluated solely on the basis of the conduct and the market alleged in the 1952 complaint," (IBM
Prelim. at 8), ignores the Supreme Court's admonition that the purposes of a consent decree must
be determined by "the purposes of the litigation as incorporated in the decree ...." United Shoe,
391 U.S. at 248, 88 S. Ct. at 1499 (emphasis added). The Supreme Court recognizes that consent
decrees embody compromises in which parties waive their rights to litigate the issues and seek
language that furthers their own, often opposing interests as reflected by their respective
bargaining power and skill:
For these reasons, the scope of a consent decree must be discerned within its four corners,
and not by reference to what might satisfy the purposes of one of the parties to it.
Because the defendant has, by the decree, waived his right to litigate the issues raised, a
Page 8
right guaranteed to him by the Due Process Clause, the conditions upon which he has
given that waiver must be respected, and the instrument must be construed as it is written,
and not as it might have been written had the plaintiff established his factual claims and
legal theories in litigation.
United States v. Armour & Co., 402 U.S. 672, 681-82, 91 S. Ct. 1752, 1757 (1971).
As to IBM's fixation on the complaint as the sole guide for determining the purpose of the
judgment, we acknowledge that Courts may rely on conventional "aids to construction" in
interpreting ambiguous consent decree provisions. United States v. ITT Continental Baking Co.,
420 U.S. 223, 238, 95 S. Ct. 926, 935 (1975). "Extrinsic evidence, however, may generally be
considered only if the terms of the judgment, or of documents incorporated in it, are ambiguous."
SEC v. Levine, 881 F. 2d 1165, 1179 (2d Cir. 1989); accord United States v. O'Rourke, 943 F. 2d
180, 187 (2d Cir. 1991)(quoting Levine, 881 F. 2d at 1179); Western Elec. Co., 900 F. 2d at 306.
No "aids to construction" are necessary to determine the purpose of the judgment in this
case because the decree unambiguously applies to EDP equipment and is in no way conditioned
on IBM's continued participation in the tabulating industry. Moreover, consistent with the
unambiguous purpose of the judgment, as stated in the four corners of the document, IBM
continues to acknowledge that, after nearly forty years, the decree continues to constrain its
behavior in the computer industry. (IBM Chron. at 27.). The consistent longstanding application
of the judgment to computers without regard to IBM's position in the tabulating industry (which
IBM exited many years ago) refutes IBM's argument at this late date that the decree's continuing
viability in the computer industry is now linked to the IBM's position in the tabulating industry.
See United States v. Atlantic Refining Co., 360 U.S. 19, 23-24, 79 S. Ct. 944 946-47
(1959)(where language of consent decree supports longstanding interpretation supported over
many years by the parties' conduct and intended by the parties, the interpretation will not be
Page 9 .
changed because another reading might seem more consistent with the government's reasons for
entering into the decree).
C. The Parties' Contemporaneous Statements And The Circumstances Of The Judgment
Negotiations Confirm That The Decree Applies Independently To Computers
Even if the judgment were ambiguous in its application to EDP equipment independent of
IBM's position in the tabulating machine industry, which it is not, IBM is wrong in contending
that the purpose and continuing viability of the decree must be evaluated solely or even primarily
on the basis of conduct alleged in the complaint. (IBM Prelim. at 5, 8, 14-15.). 9 Instead, as the
Second Circuit has made clear, "when the language of a consent decree provision is not clear on
its face, a court of equity may, in construing the provision, consider the purpose of the provision
in the overall context of the judgment at the time the judgment was entered." United States v.
American Cyanamid Co., 719 F. 2d 558, 564 (2d Cir. 1983), cert. denied sub nom. American
Cyanamid Co. v. Melamine Chemicals, Inc., 465 U.S. 1101, 104 S. Ct. 1596 (1984) (emphasis
supplied). When the purpose of a decree provision is ambiguous, the Court should first seek
Page 10
interpretative assistance from "''contemporaneous statements of [the decree's] objectives.''"
United States v. Western Elec. Co., 900 F. 2d 283, 306 (D.C. Cir.), cert. denied sub nom. MCI
Communications Corp. v. United States, 498 U.S. 911, 111 S. Ct. 283 (1990)(quoting United
States v. Western Elec. Co., 894 F. 2d 1387, 1391 (D.C. Cir. 1990) and United States v. Western
Elec. Co., 846 F. 2d 1422, 1427 (D.C. Cir.), cert. denied, U.S. , 109 S. Ct. 306 (1988); see also
ITT Continental Baking Co., 420 U.S. at 238, 95 S. Ct. at 935 (interpretative aids include "the
circumstances surrounding the formation of the consent order, any technical meaning words used
may have had to the parties, and any other documents expressly incorporated in the decree").
To be sure, the complaint identifies the alleged statutory violations and the government's
theory of competitive harm, which helps to shape a Court's review of a motion to terminate a
decree. American Cyanamid Co., 719 F. 2d at 565-66. However, the law's focus on
contemporaneous statements of the decree's objectives is particularly appropriate in this case
because four years passed between the filing of the complaint and the entry of the judgment.
Contemporaneous statements made by the parties to the Court, the public and each other provide
no support for the conclusion that the final judgment's continuing application to computers
would be linked in any way to IBM's position in the tabulating industry. Rather, the government
explained to the Court that, because the industry was dynamic, the parties agreed to include EDP
equipment within the scope of the judgment. (January 25, 1956 tr. at 58-59 (U.S. Selected Docs.
tab 11)). Moreover, the government's stated concern that failure to include EDP equipment
would make "the decree obsolete before it is operative,"(September 23, 1955 tr. at 4 (U.S.
Selected Docs. tab 9)), refutes any contention that the viability of the judgment was intended to
be linked to the tabulating industry.
Page 11
Documents IBM includes as attachments to IBM's Chronology of the 1956 Consent
Decree make clear that the government had received information to support its concern that
failure to include EDP equipment within the judgment could make the decree obsolete. Thus,
although IBM chides the government for seeking information from industry participants, (IBM
Chron. at 17), the government obtained information indicating that IBM already was
merchandising computers with the same "tactics which gave it a monopoly in the tabulating
field, ... and may be seeking a monopoly position in its new field." March 30, 1955 Wehrmann
mem. at 5 (IBM Chron. tab 28). Information suggested that computers would completely change
the nature of the punch card business and that IBM was already using its entrenched position in
the tabulating industry to monopolize electronic computing systems. April 15, 1955 Prezis mem.
at 11-12 (IBM Chron. tab 29); May 12, 1955 Prezis mem. at 2 (IBM Chron tab 30); January 21
1956 letter to Marcus A. Hollabaugh at 2, 5 (IBM Chron. tab 34); May 3, 1955 Bronaugh mem.
at 2 (IBM Chron. tab 31)(statement attributed to T.J. Watson, Jr., President of IBM that "within
five years, there would be no card operated accounting machines in use"). Indeed, it was alleged
that IBM was one of only two suppliers of computers used for commercial purposes. June 17,
1955 Jones mem. at 3 (IBM Chron. tab 32). In l955, IBM was alleged to be by far the largest
supplier of EDP equipment, and in particular the largest supplier of medium sized EDP
equipment, having installed or had on order 1,117 machines, in comparison to 31 installations or
orders for its main competitor. January 21, 1956 letter to Marcus A. Hollabaugh at 1-2 (IBM
Chron. tab 32).
This information regarding IBM's rise to dominance in the computer industry has been
echoed by Thomas J. Watson, Jr., former President and Chief Executive Officer of IBM:
Page 12
By the spring of 1954, IBM and UNIVAC [Remington Rand] were running a
close horse race....
In a little over a year [summer 1955] we started delivering those redesigned
computers. They made the UNIVAC obsolete and we soon left Remington Rand in the
dust. By the time the presidential elections rolled around in 1956, we had eighty-seven
machines in operation and one hundred ninety on order, against forty-one in operation
and forty on order for all other computer-makers.
T.J. Watson, Jr., and P. Petre, Father Son & Co. My Life at IBM and Beyond, 242-43 (1990)
(attached at tab ____). Mr. Watson also explained how IBM was able to place its 650 computer,
which was introduced in 1954, with tabulating machine users:
Over the next several years it enabled us to bring thousands of punch-card customers into
the computer age. The 650 rented for about four thousand dollars a month, and was the
perfect choice for companies eager to try computing because we designed it to work
along with ordinary punch-card equipment. ... While our giant, million-dollar 700 series
machines got the publicity, the 650 became computing's Model T.
Id. at 244. Another commentator has elaborated on why the success of the 650 was built in part
on IBM's 90 percent market share of the tabulating machine market:
IBM's tabulating machine customers already had large quantities of information coded on
punched cards and formalized procedures for processing it. Consequently, it was
relatively easy to sell these customers an IBM 650, which could be viewed as an
extremely fast and versatile tabulating machine that could read their existing cards.
G.W. Brock, The U.S. Computer Industry A Study of Market Power, 12 (1975).
By 1956, the computer industry had become an important capital market. The total retail
value of computers installed in 1956 exceeded $269 million, and IBM's share of the market was
75.3 percent, up from 56.1 percent in 1955. Id. at 13. IBM had already overcome Remington
Rand's early lead, and its lead was increasing rapidly. Id. Remington Rand lacked IBM's large
base of tabulating machine customers to provide easy upgrades, and "[d]uring 1956, IBM
shipped 85.2 percent of the value of new systems, and Remington Rand only 9.7 percent--
Page 13
approximately the same relative shares as then existed in the tabulating machine market." Id. The government may have had incomplete information about IBM's future position in the
EDP industry, but it had sufficient competitive concerns about IBM's conduct in that industry to
determine early in the judgment negotiations to seek relief that would enjoin IBM's lease only
policy for all products and require it to sell computers. (April 26, 1955 Hollabaugh mem at 1
(IBM Chron. tab 39)).
In fact, although the complaint alleged violations in the tabulating industry, the
parties negotiated the judgment with the specific understanding that the government might
amend the complaint to include the EDP industry or seek relief after trial sufficiently broad to
cover the EDP industry even if the complaint were not amended. (July 6, 1955 Jones and Reich
mem. at 2 (IBM Chron. tab 47); May 9, 1955 mem. at 1 (IBM Chron tab. 40)). These facts are
revealing because, as the Second Circuit has observed, consent decrees are "motivated by
threatened or pending litigation," American Cyanamid Co., 719 F. 2d at 563(emphasis supplied),
and, as IBM concedes, (IBM Prelim. at 6), Courts may impose on nonconsenting defendants in
litigated antitrust cases relief that goes beyond the specific acts alleged in the complaint. See
National Soc'y of Professional Eng'rs v. United States, 435 U.S. 679, 697, S. Ct. ,
(1978)(antitrust decree in litigated case should "avoid recurrence of the violation and ... eliminate
its consequences) 10 ; International Salt Co. v. United States, 332 U.S. 392, 400-01, 68 S. Ct. 12,
17 (1947) (rejecting the argument that in litigated antitrust case "the injunction should go no
Page 14
farther than the violation or threat of violation"). 11
As IBM concedes, the parties negotiated for months over the terms of the judgment and
how it would apply to EDP equipment. IBM Chron at 17-25. IBM initially sought to exclude all
EDP equipment from the scope of the judgment. IBM Chron. at 17. Ultimately, however, it
agreed to include all of its EDP equipment within the scope of the judgment, IBM Chron. at 27
& n.27; January 25, 1956 letter from Thomas J. Watson, Jr. to the Attorney General (IBM Chron.
tab 60). It focused instead on negotiating limitations on the length of various provisions and the
way specific provisions would apply to EDP equipment. June 20, 1955 tr. at 24-26 (U.S.
Selected Docs. tab 8); September 23, 1955 tr. at 3-5 (U.S. Selected Docs. tab 9); November 30,
1955 tr. at 33-35, 45 (U.S. Selected Docs. tab 10); January 25, 1956 tr. at 59-60, 85-89 (U.S.
Selected Docs. tab 11). To this end, expiration dates for various provisions were specifically
negotiated. (IBM Chron. 26 n.24.). The Judgment's patent licensing provisions allowed IBM, as
conditions to the licenses it granted under patents relating to tabulating machines and EDP
equipment but not for licenses under existing patents relating to tabulating cards or card
machinery, to charge royalties and obtain immunity from suit or cross licenses under the
licensees' patents. (Decree ｧ XI(d)(2), (g)). And IBM was required to provide manufacturing
information relating to tabulating equipment, cards and card machinery but not for EDP
Page 15
equipment. (Id. ｧ XIV.).
Both parties acknowledged in contemporaneous statements that the provisions of the
judgment that continue in effect today were specifically intended to apply in perpetuity. January
25, 1956 Department of Justice Press Release at 1 (IBM Chron. tab 56); June 6, 1955 tr. at 22
(U.S. Selected Docs. tab 8)(IBM counsel explaining to the Court that negotiations were difficult
because "the decree looks into eternity"). Like the judgment, neither the government's press
release announcing the decree (IBM Chron. tab 56) nor the transcript of the parties' lengthy
explanation of the judgment to the Court (U.S. Selected Docs. tab 11) contains any statement
indicating that the decree obligations pertaining to the EDP industry were in any way linked to
IBM's continuing position in the tabulating industry.
Under these circumstances, IBM's speculation about weaknesses in the government's
case, as perceived by IBM or suggested by the internal deliberations of individual government
employees, is irrelevant to any assessment of the meaning or purpose of otherwise unambiguous
provisions in the judgment. (IBM Prelim. at 5; IBM Chron. at 23-24.). There is no evidence to
suggest that the government ever conceded that the relief it sought was too broad or could not be
obtained as a result of litigation. 12 IBM could have tested the strength of the government's case
by proceeding to trial or seeking a different bargain during the negotiations. It could have
continued to oppose any application of the judgment to computers or it could have sought
additional limitations on the judgment's application to EDP equipment, such as a provision, like
Page 16
the decree interpretation it is now urging on the Court, linking the continued viability of the
judgment's application to computers to IBM's position in the tabulating industry. During the
months of bargaining over the consent decree, it surrendered its position on these issues, and
having consented to the decree, it is bound by the judgment's provisions and has waived its right
to challenge whether the government's evidence in the case would have supported the same relief
now contained in the judgment after trial. Armour, 402 U.S. at 681-82, 91 S. Ct. at 1757. 13
IV. IBM HAS THE BURDEN OF PROVING THAT CONTINUATION OF THE JUDGMENT
WOULD BE DETRIMENTAL TO THE PUBLIC INTEREST IN COMPETITION
A. The Public Interest Requires That The Judgment Not Be Terminated Until Its
Purposes Have Been Fully Achieved
This Court has jurisdiction to modify or terminate the judgment pursuant to Section XIX
of the judgment, Rules 60(b)(5) and (6) of the Federal Rules of Civil Procedure, and "principles
inherent in the jurisdiction of the chancery." United States v. Swift & Co., 286 U.S. 106, 114
(1932). See United States v. Loew's Inc., 783 F. Supp. 211, 213 (S.D.N.Y. 1992).
Subject to consideration of public comment, the government will consent to terminate
Page 17 . .
certain provisions of the judgment and to limit the scope of other provisions. However, IBM's
proposal to terminate the judgment in its entirety raises competitive concerns in some segments
of the computer industry, and we will oppose IBM's motion to the extent that termination would
harm the public interest in competition in any market.
Regardless of the government's ultimate position on the motion, the Court should focus
its review of IBM's motion on whether the purpose of the judgment has been achieved such that
continuation of "the decree without modification would be detrimental to the public interest."
Rufo v. Inmates of the Suffolk County Jail, 502 U. S. 367, 384, 112 S. Ct. 748, 760 (1992). The
words "public interest" "take meaning from the purposes of the regulatory legislation." NAACP
v. FPC, 425 U.S. 662, 669, 96 S. Ct. 1806, 1811 (1976); see also System Federation No. 91 v.
Wright, 364 U.S. 642, 651, 81 S. Ct. 368, 373 (1961); American Cyanamid Co., 719 F. 2d at 565.
In this case, the Sherman Act is the underlying statute, and "the policy unequivocally laid down
by [that] Act is competition." Northern Pacific Railway v. United States, 356 U.S. 1, 4, 78 S. Ct.
514, 517 (1958); see also United States v. Penn-Olin Chemical Co., 378 U.S. 158, 170, S. Ct.
,(1964); Brown Shoe Co. v. United States, 370 U.S. 294, 320, 82 S. Ct. 1502, 1521 (1961);
American Cyanamid Co., 719 F. 2d at 565. "Thus, the ultimate question before the Court is
whether termination of the Final Judgment would serve the public interest in 'free and unfettered
competition as the rule of trade.'"United States v. Columbia Artists Management, Inc., 662 F.
Supp. 865, 870 (S.D.N.Y. 1987)(quoting Northern Pacific Railway, 356 U.S. at 4, 78 S. Ct. at
517; see also Western Elec. Co., 900 F. 2d at 308; Loew's Inc., 211 F. Supp. at 213.
The Supreme Court held in Rufo that a party seeking modification of a consent decree
entered in institutional reform litigation "must establish that a significant change in facts or law
Page 18
warrants revision of the decree and that the proposed modification is suitably tailored to the
changed circumstance." 502 U.S. at 383, 112 S. Ct. at 765. 14 IBM has sought to support its
motion on the basis of changes in the facts. (IBM Prelim. at 4.). 15 The Court in Rufo held that
decree modifications may be warranted because of changes in factual conditions that (1) "make
compliance with the decree substantially more onerous," (2) make the decree "unworkable
because of unforeseen obstacles" or (3) make "enforcement of the decree without modification ...
detrimental to the public interest ...." 502 U.S. at 384, 112 S. Ct. at 760.
Although IBM makes the tautological argument that compliance with the judgment is
costly, it has made no showing that compliance has become substantially more onerous or that
Page 19
the judgment has become unworkable due to unforeseen obstacles. 16 Thus, under Rufo, to obtain
termination of the judgment based on changes in facts, IBM has the burden of proving that
enforcement of the decree without modification would be detrimental to the public interest in
competition and that any change in the judgment is suitably tailored to the changed
circumstances.
The decree modification standard in Rufo was presented in the context of institutional
reform litigation. The Court emphasized "that a flexible approach is often essential to achieving
the goals of reform litigation." 502 U.S. at 381, 112 S. Ct. at 758. Since the same factors are not
applicable to antitrust consent decrees that were intended to operate in perpetuity, Dowell, 498
U.S. at 248, 111 S. Ct. at 637, the Court's analysis in Rufo is not particularly helpful in showing
when changed circumstances would make continuation of an antitrust consent decree detrimental
to the public interest. 17 The Supreme Court, however, already has addressed this issue and has
made clear that an antitrust consent decree "may not be changed in the interest of the defendants
if the purposes of the litigation as incorporated in the decree (the elimination of monopoly and
restrictive practices) have not been fully achieved." United Shoe, 391 U.S. at 248, 88 S. Ct. at
Page 20
1499. 18
Any assessment of an antitrust judgment's continued contribution to the public interest in
competition should therefore focus on whether the facts have changed sufficiently to achieve
fully the purposes of the litigation as incorporated in the decree. 19 In this case, if the judgment
continues to promote competition in any market to which it applies, then the circumstances will
not have changed sufficiently to achieve the purpose of the litigation in that market. If
continuation of the judgment would harm the public interest in competition in any market, then
circumstances will have changed sufficiently to achieve the purpose of the litigation in that
market and retention of the judgment in that market would serve only to impose unnecessary
costs.
B. If The Government Consents To Termination Or Modification, The Court's Public
Page 21 .
Interest Review Is Limited To Whether The Government Has Offered A Reasoned Reasonable Explanation For Its Consent
As we explained in the Consolidated Reply of the United States to Proposed Intervenors'
Responses to United States' Opposition to Motions to Intervene (U.S. Reply), at 6-7, the legal
standard under which the Court considers IBM's motion will depend on the government's
ultimate position on the motion. Where the government agrees that termination would serve the
public interest, the Court's review of the motion should be limited to whether the government has
offered a reasoned and reasonable explanation of why the termination or modification vindicates
the public interest in competition. Loew's, Inc., 783 F. Supp. at 214; Columbia Artists
Management, 662 F. Supp. at 870.
In government antitrust actions, the government represents the public interest in
competition, United States v. IBM, No. 72-344 (AGS), slip. op. at 2 (S.D.N.Y., June 16, 1995),
and the government has broad discretion in controlling and settling antitrust litigation on terms
that will best serve the public interest in competition. Sam Fox Publishing Co. v. United States,
366 U.S. 683, 689, 81 S. Ct. 1309, 1313 (1961); Loew's, Inc., 783 F. Supp. at 214.
Consequently, when the government consents to a proposed modification or termination, the role
of the Court is not to substitute its opinion on the appropriate disposition of the case. Id.;
Columbia Artists Management, 662 F. Supp. at 870; see also United States v. Mid-America
Dairymen, Inc., 1977-1 Trade Cas. (CCH) ｶ 61,508, at 71,980 (W.D. Mo. 1977) (in determining
whether the initial entry of a consent decree is in the public interest, absent a showing that the
government abused its discretion or failed to discharge its duty, Court's role is to determine the
reasonableness of the government's explanation and not to substitute its opinion).
Rather, the Court's function is "only to confirm that the resulting 'settlement is 'within the
Page 22 .
reaches of the public interest.''" Western Elec. Co., 900 F. 2d at 309 (quoting United States v.
Bechtel Corp., 648 F. 2d 660, 666 (9th Cir.), cert. denied, 454 U.S. 1083, 102 S. Ct. 638 (1981)
(quoting United States v. Gillette Co., 406 F. Supp. 713, 716 (D. Mass. 1975)). The Court
should approve an uncontested modification "so long as the resulting array of rights and
obligations is within the zone of settlements consonant with the public interest today." Id. at
307; see also United States, v. Western Elec. Co., 993 F. 2d 1572, 1577 (D.C. Cir. 1993) ("court
may reject an uncontested modification only if it has exceptional confidence that adverse
antitrust consequences will result"), cert. denied sub nom. Consumer Federation of America v.
United States, 114 S. Ct. 481 (1993).
C. If The Government Opposes Termination, IBM Must Demonstrate That Continuation
Of The Judgment Would Be Detrimental To The Public Interest In Competition
If the government opposes termination of all or part of the judgment, the Court's inquiry
is not limited to reviewing the reasonableness of IBM's proffered explanations in support of
termination. Rather, as to any part of the judgment that the government seeks to retain, the Court
must decide whether IBM has shown that continuation of the judgment would be detrimental to
the public interest in competition in any affected market. Western Elec. Co., 900 F. 2d at 308
(appropriate question is "whether the proposed modification would be certain to lessen
competition in the relevant market") 20 ; American Cyanamid Co., 719 F. 2d at 567 (reversal of
District Court's decision to terminate antitrust decree on basis of "'contemporary economic
theory'" and remand for District Court "to make findings of fact as to the current state of the
Page 23 .
melamine market and the market for products that contain melamine"). 21 As to any part of IBM's
motion that the government does not yet have sufficient information to take a position on the
merits, IBM must proceed at this time as if it is unilaterally seeking to terminate the judgment.
V. IBM CANNOT SATISFY ITS BURDEN WITHOUT THE REQUISITE MARKET
ANALYSIS
In its Preliminary Statement of Issues, IBM declares that the decree causes "[h]arm to
IBM and to Competition". (IBM Prelim. at 25.) (emphasis added). 22 By distinguishing the harm
the decree ostensibly imposes on IBM from the harm that allegedly befalls competition, IBM
appears to agree that injury to competition is separate from and does not necessarily flow from
harm to a competitor. In drawing this important distinction, IBM adheres to the command of the
Supreme Court, which it cites in its Memorandum In Response To The Proposed Intervenors'
May 11 Briefs (dated May 25, 1995) at 4, that "[t]he antitrust laws . . . were enacted for 'the
protection of competition not competitors.'". Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429
U.S. 477, 488 (1977) (appended to Defendant's May 25, 1995 brief).
In fact, in its Memorandum of Law In Response To SunGard And ACS's Motion to
Intervene, IBM correctly identifies the question at issue but prematurely and conclusorily
attempts to resolve it by stating that "SunGard and ACS's failure to competition that allegedly results from the Decree not only merits that their motion be denied,
but is further evidence that the Decree should be terminated. It is in fact their fear of the
increased competition that termination of the Decree will bring that motivates SunGard and
ACS's motion." IBM's Memorandum of Law In Response To SunGard And ACS's Motion to
Intervene (dated January 13, 1995) at 4 (emphasis added). Whether, in fact, competition will
increase or decrease absent the decree, is at the heart of this proceeding because, as IBM
underscores, the ultimate protectable interest at stake is the "consumers' interest in competition".
(IBM's Memorandum In Response To The Proposed Intervenors' May 11 Briefs (dated May 25,
1995) at 4.). 23
As the Second Circuit has noted in the rule of reason context: "[i]nsisting on proof of
harm to the whole market fulfills the broad purpose of the antitrust law that was enacted to
ensure competition in general, not narrowly focused to protect individual competitors." Capital
Imaging v. Mohawk Valley Medical Ass'n, 996 F.2d 537, 543 (2d Cir.), cert. denied, 114 S. Ct.
388 (1993). Determining whether competition has been harmed in turn "requires a careful and
complete analysis of the competitive effects of the challenged restraint." Id. So, too, the instant
motion only can meaningfully be assessed within the context of a market analysis. The question,
then, before the Court is whether and to what degree the public interest in competition will be
served by retaining or by terminating the decree. But this question can only be resolved in the
context of a market analysis; an analysis that IBM -- as the movant who bears the burden of
Page 25 .
proof -- seems reluctant to concur must be performed. 24
A. Market Definition Principles
To assess an injury to competition -- whether that injury stems from the decree itself, as
IBM maintains or may arise from termination of the decree, a concern of the government -- the
methodology is the same: relevant markets must be defined because "'[w]ithout a definition of
[the] market there is no way to measure [the defendant's] ability to lessen or destroy
competition.'" Spectrum Sports, Inc. v. McQuillan, 113 S. Ct. 884, 890 (1993) (quoting Walker
Process Equip., Inc. v. Food Mach. & Chem. Corp., 382 U.S. 172, 177 (1965)). That is, " . . . the
purpose of the inquiries into market definition and market power is to determine whether an
arrangement has potential for genuine adverse effects on competition . . . " F.T.C. v. Indiana
Federation of Dentists, 476 U.S. 447, 460 (1986). See also Berkey Photo, Inc. v. Eastman Kodak
Co., 603 F.2d 263, 268 (2d Cir. 1979) ("[i]t is, of course a basic principle in the law of
monopolization that the first step in a court's analysis must be a definition of the relevant
markets."), cert. denied, 444 U.S. 1093 (1980). 25
As a threshold matter, the Court must determine the relevant markets in which the IBM
Page 26
competes and ascertain whether IBM would possess market power or increased market power in
any of those markets if the judgment were terminated. Hayden Pub. Co. v. Cox Broadcasting
Corp., 730 F.2d 64, 68 (2d Cir. 1984). A relevant market is comprised of those "commodities
reasonably interchangeable by consumers for the same purposes", United States v. E.I. Du Pont
de Nemours & Co., 351 U.S. 377, 395 (1956), and "[i]n making this determination, the trier must
decide whether the product is unique or has close substitutes, as to which there are substantial
cross-elasticities of demand." Fishman v. Estate of Wirtz, 807 F.2d 520, 531 (7th Cir. 1986);
Hayden, 730 F.2d at 70-71. And "[t]he product market must be plausibly defined according to
the traditional 'methodology courts prescribe to define a market for antitrust purposes an analysis
of the interchangeability of use or the cross-elasticity of demand for potential substitute
products.'" Rosen v. Hyundai Group (Korea), 829 F. Supp. 41, 47 (E.D.N.Y. 1993) (quoting
Gianna Enters. v. Miss World (Jersey) Ltd., 551 F. Supp. 1348, 1354 (S.D.N.Y. 1982)). 26
Because market definition is a prerequisite to determining whether competition is being
injured, we are puzzled by the apparent non sequitur that "IBM should not be required to make a
detailed presentation concerning the structure of the computer industry", (id.), even though IBM
insists that the decree ". . . reduces the competition that the antitrust laws are designed to
protect." (Id. at 2.) (emphasis added.). Apparently, IBM wishes merely to assert, but not
demonstrate, the market definition predicate of a competitive analysis; in fact, the sole relevant
market proffered by IBM thus far is the "worldwide information handling industry", (see IBM
Term. Mem. at 9-10.). Plainly, this is an over-broad definition which cannot sustain IBM's
Page 27
burden to show that the public interest in competition warrants termination of the decree. 27
IBM bears the burden of establishing the markets that are subject to the public interest
test and it must accept the consequences of erroneous market definition. We simply would
repeat what we indicated in our Consolidated Reply at 8-9, that it is our experience in other
investigations in the computer industry that the industry is not composed of one market, as IBM
suggests, "but includes a wide array of interrelated markets for computer hardware, software and
services." (Id. at 9.). Thus, without an adequate showing of market definition, the Court cannot
be sure even in granting relief whether the decree is being modified to an extent beyond the point
warranted by the changed circumstances, notwithstanding IBM's insistence that changed
circumstances compels termination. See Rufo, 502 U.S. at 383, 112 S. Ct. at 760 ("a party
seeking modification of a consent decree bears the burden of establishing that a significant
change in circumstances warrants revision of the decree. If the moving party meets this standard,
the court should consider whether the proposed modification is suitably tailored to the changed
circumstance.") It surely proves too much to say that circumstances have changed since 1956
and that the decree should be terminated in its entirety. The government agrees that
circumstances in the computer industry have changed but this tells us nothing about the relevant
markets that fall under the decree's definition of Electronic Data Processing Systems, nor
whether IBM possesses market power in any of those markets and whether that power
Page 28 .
beneficially is constrained by the decree. This is the inquiry before us. 28
B. If IBM Has Market Power In Any Primary Market Or Aftermarket, The Court Assess Whether The Decree Constrains The Exercise Of That Market Power.
Once relevant markets have been defined in accordance with antitrust principles, the
inquiry turns to whether judgment termination would enable IBM to possess market power or
increased market power in any relevant market. International Distribution Centers, Inc. v. Walsh
Trucking Co., 812 F.2d 786, 791 (2d Cir.), cert. denied, 482 U.S. 915 (1987); Hayden, 730 F.2d
at 68. Market power or monopoly power 29 can be defined as "the power to control prices or
exclude competition." Broadway Delivery Corp. v. United Parcel Service of America, Inc., 651
F.2d 122, 127 (2d Cir.), cert. denied, 454 U.S. 968 (1981). See N.C.A.A. v. Board of Regents of
Univ. of Oklahoma, 468 U.S. 85, 109 n.38 (1984) ("[m]arket power is the ability to raise prices
above those that would be charged in a competitive market.") (citations omitted). And "while
market share is not the sole factor in the determination of market power, it is a highly significant
one." Delaware & Hudson R. Co. v. Consolidated Rail Corp., 902 F.2d 174, 179 (2d Cir. 1990).
Under Second Circuit case law, a number of factors are relevant in determining whether
monopoly power exists, including, "the strength of competition, the probable development of the
industry, and consumer demand, as well as the percentage of market share enjoyed by the alleged
Page 29
monopolist". Hayden, 730 F.2d at 68-69. (reversing dismissal of monopolization claim).
Because the existence of market power generally is a question of fact, Frito-Lay, Inc. v.
Bachman Co., 659 F. Supp. 1129, 1139 (S.D.N.Y. 1986), IBM must demonstrate with facts that
decree termination would not enable it to exercise market power in any relevant market falling
within the scope of "[e]lectronic data processing system[s]" (Final Judgment ｧ II(e).) and
"[e]lectronic data processing machine[s]" (Final Judgment ｧ II(f).). 30 To the extent that
judgment termination would enable IBM to exercise or augment its market power -- as the
Government suspects might be possible in the markets for System/390 mainframe or AS/400
mid-range computer products or services 31 -- then IBM must show that the decree nevertheless is
anticompetitive. As set forth below, if the decree constrains the exercise of IBM's market power
in either a primary market (such as System/390 mainframes or operating systems) or aftermarket
(such as the market for service and parts for System/390 mainframes), then IBM must show that
the net competitive benefits of these constraints are outweighed by the net competitive costs. 32
The concerns expressed below about IBM's market power are meant to be illustrative, not
exhaustive, and should be considered within the context of consumers' expectations and past
investments. Those investments likely took place with the expectation that competition in
Page 30 .
primary and secondary markets would be at least robust as it is today. The discussion below,
then, is meant to suggest to the Court only our preliminary concerns, providing the context for
discovery.
1. IBM May Possess Market Power in the Market for System 390 and Software.
Prima Facia evidence of IBM's market power is IBM's market share, which may account
for between 70 to 80 per cent of all mainframes. 33 See Allen-Myland v. International Bus. Mach.
Corp., 33 F.3d 194, 201 (3d Cir.), cert. denied, 115 S. Ct. 684 (1994). IBM's market share of
System/390 mainframes, 34 which we believe is a relevant market encompassing new machines
that are compatible with IBM System/390 hardware and operating systems and used compatible
machines, may be even higher than 80 percent. And from what we have been able to adduce so
far, IBM is a monopolist in System/390 operating system software. 35 We believe the decree has
Page 31
spawned for consumers two sources of competitive alternatives in the primary market:
manufacturers of compatible systems and vendors/lessors of used equipment (or "independents").
And, as explained below, we are concerned that termination of the decree could injure this competition.
Without the decree, IBM may have greater opportunities to exclude competing
manufacturers of compatible Central Electronic Complexes ("CECs") as effective competitors. 36
By virtue of its monopoly control of System 390 operating systems, IBM is in a unique position
to discriminate if it so chooses against competing manufacturers of compatible by denying them
the important interface information they currently receive pursuant to decree sections IX(b)-(c)
when they purchase IBM mainframes and upon which they rely consistent with decree section
VII(d)(2) to ensure their CECs remain compatible with IBM's operating systems, the industry
standard. 37 Exlcusionary discrimination therefore could occur if IBM withholds in whole or in
part important information relating to compatibility or resorts to its practice before the judgment
was entered of restricting experimentation with that information by competitors. 38 To the extent
Page 32
that the decree's disclosure provisions allow for the existence of the competing CEC
manufacturers, the decree is procompetitive because it guards against the risk those competitors
will have to enter an adjacent market (i.e., operating systems), in order to remain in the CEC
market. See Kodak, 112 S. Ct. at 2091 ("one of the evils proscribed by the antitrust laws [is] . . .
the creation of entry barriers to potential competitors by requiring them to enter two markets
simultaneously."). 39
We also are concerned that if the decree is terminated, IBM may exercise its power
against the independents, to the detriment of consumers. Post-decree, IBM may have little
incentive to continue to offer purchase options that are no less favorable than lease options, as is
currently required by decree section IV (requires IBM to sell at prices that are not substantially
more advantageous than lease charges and to make purchase options know to customers) and
section VI(a)-(b) (requires IBM to offer to maintain machines that are owned by others and to
provide the same services to purchaser that it provides to lease customers). Absent the decree,
there are a number of ways IBM could exercise its market power to threaten the viability of the
independents. One possibility, is that IBM could promise to maintain only machines that it
leases and refuse to maintain the machines that independent vendors provide. Some independent
vendors believe this would be fatal to their businesses. A principal reason consumers consider
Page 33
independents (apart from price competition and financing competition) may be because of decree
section VI(a)-(c) (which ensures that machines remain eligible for IBM maintenance so long as
the used machines are not significantly altered).
Additionally, IBM could exercise its market power to exclude the independents if, post-
decree, it returns to a de facto lease-only policy. This could jeopardize the competitive viability
of the independents to the detriment of consumers because the stock of equipment upon which
independents depend may shrink (and this stock is a source of spare parts when machines are
cannibalized). Moreover, post-decree these competing entities may not be provided with the
disclosure information they currently receive under decree section IX when they purchase a
mainframe; this information is integral to the independents when they perform upgrades, which
often they do in the course of installing a used machine. 40
We anticipate that IBM will assert that smaller capacity computers and various types of
distributed networking computing environments compete head on with mainframes. This is
IBM's prerogative, but to prevail on market definition IBM must show the extent to which (if
any) non-mainframe computers share a cross-elasticity of demand with System 390 mainframes
(and the same showing would be expected of potential relevant markets subsumed therein, such
Page 34 .
as CPUs, operating systems and applications). See Allen-Myland, 33 F.3d at 200; Hayden, 730
F.2d at 70-71. This in turn requires an assessment of whether smaller capacity computers are
reasonable substitutes for mainframes, taking into account attributes bearing on the elasticity of
demand, including, the computing power, speed and security of mainframes and the ability and
willingness of consumers to switch to non-System 390 platforms in response to either hardware
or software price increases by IBM. See supra _____ n. 16.
2. IBM May Possess Market Power in the Aftermarkets for Service and Parts System 390 Mainframes and AS/400 Mid-range Computer Products.
The Allen-Myland case potentially is instructive on some of the government's concerns
about outright termination of the decree as it relates to competition in aftermarkets. In Allen-
Myland, plaintiff Allen-Myland alleged that IBM violated Sherman Act ｧｧ 1 and 2 by creating an
upgrade pricing policy effectively which tied IBM mainframe upgrade installation service to the
IBM parts needed to perform the service, thereby allegedly injuring competition in the tied
product market in which Allen-Myland competed, the market for reconfiguring and upgrading
mainframes. Id. at 199. 41 In vacating the district court's finding that IBM lacked market power
in the market for mainframe computers, the Court of Appeals noted that "[w]hen the [district]
court broadened [the] market that it believed shared cross-elasticity of demand with large-scale
mainframes, IBM's market share dropped from as high as 79% to under 34.4% . . . " Id. at 201
Page 35
(emphasis added and citations omitted). 42
As we noted above, the switching costs inherent to migrating mainframe applications to
non-mainframe computing platforms should be a focus of this inquiry; certainly the Allen-
Myland court recognized the importance of switching costs in assessing whether IBM possesses
market power: "[i]f it is prohibitively expensive to switch to a smaller capacity computer before
the normal end of an application system's life cycle, then IBM, at least for those locked-in
customers, would not face any realistic competition from smaller machines and would thus
possess market power as if they did not exist." Id. at 205 (emphasis added). Because the district
court cited only "anecdotes" suggesting that smaller computers compete against vigorously
against mainframes, the Court of Appeals admonished against reliance upon an incomplete set of
facts:
[o]ur review of the record, however, shows that none of the incidents mentioned involved
a mainframe user with a significant base of applications software and data that would
have to be rewritten and converted before the application could be moved to a smaller
computer. Indeed, in the vast majority of cases, the customer was developing a new
application and had an unfettered choice of which type of computer to purchase. In a few
others, the system was approaching the end of its useful life and was slated for
replacement. This evidence, then, does not support the conclusion that there was not a
significant lock-in problem.
Allen-Myland, 33 F.3d at 205-06.
The Allen-Myland Court's concern for IBM's exploitation of market power against
"locked-in" end users was animated by the Supreme Court's decision in Eastman Kodak Co. v.
Image Tech. Servs., Inc., 504 U.S. ____, 112 S. Ct. 2072 (1992) ("Kodak"). See Allen-Myland,
Page 36
33 F.2d at 205-06 (citing Kodak). In Kodak, Eastman Kodak manufactured photocopy
equipment that it sold in what may have been a competitive market. 43 Plaintiffs, independent
service operators who provided service and repair to Kodak equipment, alleged that Kodak
unlawfully had tied the sale of service for Kodak equipment to the sale of parts for Kodak
copiers, in violation of Sherman Act ｧ 1 and had attempted to monopolize the sale of service for
Kodak machines in violation of Sherman Act ｧ 2 by restricting the availability of the necessary
repair parts to independent service operators like Image Technical. Kodak, 112 S. Ct. at 2078.
Kodak argued that it could not possess any market power in the aftermarket for service and repair
because it lacked market power in the market for new copiers. Id. at 2082. The assumed absence
of market power in the primary market (here, copiers), however, was not dispositive as a matter
of law. Id. at 2084. 44 Rather, the Supreme Court held that under certain circumstances, the fact
that the buyer of such equipment was locked into a single supplier could give rise to a finding of
market power:
[i]f the cost of switching is high, consumers who already have purchased the equipment,
and are thus "locked-in", will tolerate some level of service-price increase before
changing equipment brands. Under this scenario, a seller profitably could maintain
supracompetitive prices in the aftermarket if the switching costs were high relative to the
increase in service prices, and the number of locked-in customers were high relative to
the number of new purchasers.
Page 37
Kodak, 112 S. Ct. at 2087. Rejecting "[l]egal presumptions that rest on formal distinctions rather
than actual market realities", 112 S. Ct. at 2082, id., the Supreme Court noted that "[t]he extent to
which one market prevents exploitation of another market depends on the extent to which
consumers will change their consumption of one product in response to a price change in
another, i.e., the 'cross-elasticity of demand'". Id. at 2083. 45
We share the concern of the Allen-Myland court. Accordingly, to assuage our concern
about IBM's market power in aftermarkets absent the decree, in this proceeding, IBM must
demonstrate whether and the extent to which current System/390 or AS/400 users can and would
switch over to alternative computing environments in response to an exercise of market power.
Indeed, the government's preliminary discussions with some mainframe end users suggests that
for certain data intensive computing tasks, there are no substitutes for mainframes. Moreover,
for certain tasks for which theoretically a substitute may exist, many end users have invested
enormous amounts of time and money into developing applications that run on IBM mainframes
and operating systems. To switch away from IBM computing environments, then, could require
inordinate amounts of human resources, money and time.
Such "switching costs" are one of the market "realities" to which courts increasingly are
becoming sensitive. So, when confronted with antitrust issues in the context of complex
Page 38
purchases such as computer systems, courts understand that they must direct their factual
inquiries into whether competition in the primary equipment market obviates derivative market
power opportunities that may be exploited from an installed base of consumers that is "locked-
in" to the purchase, potentially reliant upon the manufacturer for aftermarket support or service.
See, e.g., Virtual Maintenance Inc. v. Prime Computer, Inc., 11 F.3d 660, 666 (6th Cir. 1993)
(remanding for new trial in light of Kodak on question of whether computer system manufacturer
exercised market power in aftermarkets for its software updates despite interbrand competition in
primary market for package of minicomputers and software). Accordingly, as the Government
indicated in its Consolidated Reply at 9-10, assessing the competitive implications of IBM's
motion therefore requires an evaluation of whether any of IBM's customer currently are "locked
in" to any of IBM's products in a manner that has conferred market power and whether the
exercise of that market power is beneficially limited by the decree, which enjoins potentially
exclusionary conduct like the refusal to sell spare parts and providing maintenance manuals to
independent service companies. (See, e.g., Decree ｧｧ VI(c) (directing IBM to sell at reasonable
and nondiscriminatory prices repair and replacement parts); VII(c) (enjoining IBM from
requiring any lessee or purchaser to have IBM repair their electronic data processing equipment);
IX(b)(requiring IBM to make available to customers and independent service organizations at reasonable and non-discriminatory terms technical materials relating to service and repair that are
provided to IBM's own maintenance and repair employees).
Whether the decree constrains IBM's exercise of aftermarket market power is relevant
both to the mainframe environment -- a market as noted above where the Government suspects
IBM possesses primary and perhaps derivative market power -- and also to smaller mid-range
Page 39
computers such as the AS/400 where IBM may possess aftermarket power in light of the large
installed base and software investments of AS/400 users. To meet its burden, and assuage
government concerns, one would therefore expect IBM to show that there is, in fact, "unfettered
customer choice" (IBM Prelim. at 22.), in these markets, a characterization of end-user
competitive options that rules out any lock-in effect. IBM also must show that by virtue of
decree sections VI(c) and IX(c) it is "impaired in seeking to exchange [parts and technical]
materials with other manufacturers" and that the net effect of that impairment is anticompetitive.
So to the extent the decree imposes on IBM a "duty" to deal fairly with competitors in
aftermarket goods and services (such as selling spare parts and providing manuals to independent
service operators) obvious questions are what impact would decree termination have on
competition in the primary and secondary markets and what are IBM's intentions with respect to
independent service operators. If IBM plans to discontinue its dealings with independent service
operators, then an important question is whether it has a valid business reason for doing so and if
it does not or the legitimacy of the proffered business reason can be drawn into question, then
this would auger in favor of retaining the decree. See, e.g., High Tech. Careers v. San Jose
Mercury News, 996 F.2d 987, 990-91 (9th Cir. 1993) (reversing grant of summary judgment for
defendant newspaper who refused to continue carrying advertising producer's insert as a genuine
issue of material fact existed as to whether defendant's proffered business justification was
pretextual; "[w]hether valid business reasons motivated a monopolist's conduct is a question of
fact") (citing Eastman Kodak supra at 2091 n.32; Aspen Skiing Co. v. Aspen Highlands Skiing
Corp., 472 U.S. 585, 602-05 (1985); Oahu Gas Serv., Inc. v. Pacific Resources, Inc., 838 F.2d
360, 368 (9th Cir.), cert. denied, 488 U.S. 870 (1988)). Thus it is conceivable post-decree, IBM
Page 40 .
could have no incentive to continue to maintain used equipment as available for IBM
maintenance, to repair used equipment sold by other vendors or even to sell repair parts and
manuals to third parties that it regards as competitors.
To be sure, IBM cites as one of the arguments for terminating the decree that a vibrant
used equipment/service industry exists. (IBM Prelim. at 17-18). 46 But in heralding the
competitive influence of these entities, whose creation IBM agrees was a purpose of the decree,
IBM begs the question: if the decree is the reason that this industry has continued to exist, then
we must assess whether retention of the decree in whole or in part furthers the public interest in
competition.
C.IBM's Arguments Do Not Address The Central Issue of Whether Termination of Judgment Would Harm the Public Interest In Competition.
Although IBM counsel conceded at the June 19 hearing that the Court must consider the
impact of vacating the judgment, 47 it nonetheless invites the Court to grant its motion without
any regard for whether termination would injure the public interest in competition. IBM presents
a plethora of arguments in support of its request that the Court ignore the impact of judgment
termination on consumers. Thus, it argues that the market for tabulating machines, which was
the subject of the complaint, has not existed for many years. (IBM Prelim. at 5) ("That fact alone
should be dispositive of IBM's motion to terminate."). It similarly argues that the viability of the
Page 41
judgment must be evaluated solely on the basis of the conduct and market alleged in the
complaint and that, since IBM's market power in the tabulating machine market no longer exists,
any purposes of the judgment in "dissipating the possible effects of that alleged power in other
areas (i.e., EDPM) have been fulfilled ..." (Id. at 8.). It complains that, if it is required to show
that termination would not harm the public interest in competition, "then the Government's
dismissal of its 1969 suit as 'without merit' would be meaningless." (Id. at 10.). It suggests that
it should benefit from the government's policy, adopted many years after entry of the judgment,
of generally limiting decrees to terms of ten years. (Id. at 11-12.).
Finally, IBM submits that its evidence must address only three issues. It plans to
demonstrate the purposes of the judgment and prove that they have been fulfilled. It plans to
show that the computer industry has changed drastically since the judgment was entered. And it
plans to show that the judgment harms competition by increasing IBM's costs and making it a
less effective competitor. (Id. at 13-14.).
As we demonstrate above, to obtain relief in this case, IBM must only prevail on the first
of the three issues it has identified by showing that the purposes of the litigation as incorporated
in the judgment have been fully achieved. United Shoe, 391 U.S. at 248, 88 S. Ct. at 1499. To
make this showing, IBM must prove that conditions have changed sufficiently such that
continuation of the judgment in any current market would no longer serve to promote the public
interest in competition. However, IBM does not propose to show that the purposes of the
judgment have been fulfilled, or for that matter make any other showing, in the context of current
market conditions. Consequently, IBM's proffered evidence will not be helpful in showing
whether continuation of the judgment would harm the public interest in competition. Western
Page 42
Elec. Co., 900 F. 2d at 309; American Cyanamid Co., 719 F. 2d at 567.
FOOTNOTES
1 The complaint alleged that by 1934 IBM owned about 85 percent of all tabulating machines in the United States and that its market share continued to grow to 90 percent by the time the complaint was filed. (Complaint ｧ III, ｶｶ 28-32.). It alleged that IBM achieved a dominating position by, among other ways, excluding potential competition in the manufacture of tabulating machines and preventing the development and growth of independent maintenance and repair businesses. (Id. ｧ IV, ｶ 45.). The complaint alleged that IBM had excluded competition in many ways, including by systematically acquiring control over potential competitors (id. ｧ IV, ｶ 47.b) or over developments, inventions and patents made or owned by others (id. ｧ IV, ｶ 47.a) and operating its service bureaus to preempt any customer demand for competitors' products (id. ｧ IV, ｶ 48.b.).
2 The government disputes IBM's contention that the judgment does not apply to software. See IBM's Chronology of the 1956 Consent Decree (dated June 6, 1995) ("IBM Chron.") at 27. The definition of "EDP machine" in the judgment means machines or devices and attachments therefor used in or with an electronic data processing system. (Decree ｧ II(f).). The definition of "EDP system" means 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).). However, as IBM concedes, "computers simply do not work without software." (IBM Prelim. at 21.). Certain types of software, including operating systems and perhaps some other systems software products, are necessary for computers to operate. See Stipulation ｶｶ 2, 22 (IBM Chron. tab 10). The fact that operating system software may have come into use after entry of the decree does not exempt it as an "attachment" for a machine that is used in or with a working EDP system. The government contends that the judgment covers IBM's operating system software products that are necessary for any particular computer or computer system to perform the functions specified in the definition of EDP system. The fact that operating system software is included within the decree does not mean that IBM cannot enforce its intellectual property rights in software. The government has recognized that the judgment should be read as limiting IBM's intellectual property rights "only when clearly necessary to give effect to the plain meaning of the decree language and the intent of the parties in drafting such language." (April 13, 1990 letter from James F. Rill to Robert G. Levy at 3 (U.S. Selected Docs. tab 17)).
3 The complaint alleged that IBM refused to sell its products and leased them pursuant to agreements requiring lessees to pay a single charge for rental, instructions on use and repair and maintenance (Complaint ｧ IV, ｶ 50.a). IBM's leasing practices were alleged to have restrained competition in the repair and maintenance of tabulating machines and in the buying and selling of used tabulating machines (id. ｧ IV, ｶ 51.a, c). IBM had agreed in 1931 with its only United States competitor in the tabulating industry that both firms would lease and not sell their products and that they would require customers to purchase their punch card requirements from the lessor or pay a higher rental (id. ｧ III, ｶ 25). In 1932, the government charged that this agreement and that the provisions in leases requiring lessees to pay higher rental for their machines if they did not use cards purchased from the lessor violated the antitrust laws (id. ｧ III, ｶ 27; March 26, 1932 Petition of the United States ｶｶ 23-24 (U.S. Selected Docs. tab 21)). In 1934, the issues relating to the agreement between IBM and its competitor were withdrawn from the case when the agreement was cancelled, and in 1936, the Supreme Court held that the IBM lease provisions which in effect required lessees of IBM machines to purchase cards from the IBM were illegal (1952 Complaint ｧ III, ｶ 27. United States v. IBM, 298 U.S. 131, 135-36, 56 S. Ct. 701, 703-04 (1936)).
4 The complaint alleged that IBM excluded competition by granting discriminatory price and service concessions only to certain of its machine licensees who were most likely to seek competitive alternatives (Complaint ｧ IV, ｶ 48.a).
5 IBM's leases could be cancelled without notice if lessees used leased products for any purpose that was not approved in advance by IBM or if they experimented with the leased products (Complaint ｧ IV, ｶ 50.b(U.S. Selected Docs. tab 1)). Lessees could not make attachments to or alterations in leased products without IBM's prior consent (id. ｧ IV, ｶ 50.c). The complaint alleged that IBM had excluded competition by preventing or controlling experimental use of its machines so that it would obtain control over any inventions made by others as a result of such experimentation (id. ｧ IV, ｶ 47.b (5)-(6)). The complaint also alleged that IBM's leasing practices restrained competition in attachments for tabulating machines and restrained competition generally in the tabulating machine industry by requiring that potential competitors be prepared to enter the market with a full line of products required for use in a complete tabulating system (id. ｧ IV, ｶ 51.d).
6 The complaint alleged that IBM had excluded competition by entering into territorial allocation agreements in which potential competitors agreed not to compete in the United States (Complaint ｧ IV, ｶ 47.a(4), d).
7 The fact that the consent decree did not enjoin IBM from participation in the EDP industry totally distinguishes this case from the cases that IBM cites for the proposition that courts do not consider the effect of decree termination on markets that were not the focus of the allegations in the complaint. (IBM Prelim. at 8-9.). See United States v. National Broadcasting Co., 842 F. Supp. 402 (C.D. 1993); United States v. Swift & Co., 1975-1 Trade Cas. ｶ 60,201 (N.D. Ill. 1975). In both of those cases, the Courts focused their analyses of current market conditions on the markets in which the defendants participated. It would have made no sense for the Courts to assess the defendants' market power in markets from which the decrees had barred their participation. In contrast, an analysis of current market conditions to assess the likely impact of judgment termination in the computer industry is necessary in this case because IBM participates in that industry subject to the requirements in the judgment.
8 Judge Wyzanski explained in United Shoe Machinery Corp., which was a litigated monopolization case: "Where a defendant has monopolized commerce in violation of Sec. 2 [15 U.S.C. ｧ 2], the principal objects of the decrees are to extirpate practices that have caused or may hereafter cause monopolization, and to restore workable competition in the market." 110 F. Supp. at 346-47. The Supreme Court subsequently specifically endorsed Judge Wyzanski's view as to the purpose of a decree in a litigated monopolization case and further clarified that the Court in such a case should prescribe relief that will "terminate the illegal monopoly, deny the defendant the fruits of its statutory violation, and ensure that there remain no practices likely to result in monopolization." United States v. United Shoe Machinery Corp., 391 U.S. 244, 250, 88 S. Ct. 1496, 1500 (1968).
9 IBM's reliance on United States v. Microsoft Corp., No. 95-5037 (D.C. Cir., June 16, 1995) and the Tunney Act, 15 U.S.C. ｧ 16(b)-(h), provide no support for its argument that the continuing viability of a consent decree must be evaluated solely on the basis of the conduct and market alleged in the complaint in a proceeding in which the government has not yet consented to termination. (IBM Prelim. 8). The Tunney Act specifies the criteria that a Court may consider when determining whether the initial entry of a consent decree is in the public interest. Id. ｧ 16(e). In Microsoft, the Court of Appeals held that, in the absence of a showing of bad faith on the part of the government, the Tunney Act does not allow a Court to assume the role of Attorney General and reach beyond the allegations in the complaint in assessing the adequacy of relief in a consent decree. Slip op. at 23-24, 32. The Court of Appeals emphasized that a District Court's review in a Tunney Act proceeding must be even more deferential than the limited review that a Court undertakes when the government consents to a proposed decree modification. Id. at 26-27. The Second Circuit has held that the Tunney Act applies only to the entry of a consent decree and not to decree modification or termination proceedings. American Cyanamid Co., 719 F. 2d at 565 n.7; In re IBM, 687 F. 2d 591, 601 (2d Cir. 1982). Moreover, the deferential standard of review that the Court imposed in Microsoft was founded on the government's consent to the decree. A similar standard of review in this case would be appropriate only as to those portions of IBM's motion with which the government concurs.
10 IBM incorrectly implies that National Soc'y of Professional Eng'rs addressed a Court's ability to accept relief in consent decrees. IBM PSI at 6. Rather, the Supreme Court discussed the scope of relief that a Court could impose on nonconsenting defendants who filed timely objections in litigated cases. 435 U.S. at 685-86, 696-97, S.Ct. at , . The case therefore does not specify any limit to what a defendant may agree in a consent decree.
11 As IBM concedes, it consented to be enjoined from engaging in the same type of conduct in the EDP industry that the judgment prohibited in the tabulating industry. (IBM Prelim. at 15, IBM Chron. at 24.). Thus, the relief imposed by the decree is within the range of what the Court might have imposed even without IBM's consent if the case had proceeded to trial. The Supreme Court has made clear that in a litigated case involving a nonconsenting defendant, a "federal court has broad power to restrain acts which are of the same type or class as unlawful acts which the court has found to have been committed or whose commission in the future unless enjoined, may fairly be anticipated from the defendant's conduct in the past." Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100, 132, 89 S. Ct. 1562, 1581(1969) (citations & internal quotation marks omitted).
12 As to IBM's reliance on internal opinions discussed by individual government employees, the Second Circuit has indicated that such material has little or no evidentiary value. Cf. United States v. Siemens Corp., 621 F. 2d 499, 508 (2d Cir. 1980) ("opinions of lower level employees without management responsibility, absent some indication that the senior management has seriously considered and endorsed those views, simply do not constitute evidence of corporate intent or commitment").
13 The negotiations were not one-sided. The consent decree allowed IBM to avoid admission of liability, (see Judgment preamble), and escape the risk of an adverse adjudication at trial, which would have served as prima facie evidence of liability in follow-on treble damage actions brought by private plaintiffs under 15 U.S.C. ｧ 4(a). See 15 U.S.C ｧ 16. IBM also avoided proof at trial that it had violated the antitrust judgment entered against it in 1935 (U.S. Selected Docs. tab 22). See November 30, 1955 tr. at 41 (U.S. Selected Docs. tab 10). More importantly, the government made a number of concessions as IBM concedes. (IBM Chron. at 20-25.). In return for perpetual provisions constraining IBM's ability to exercise market power, the government abandoned its right to seek more drastic relief, such as divestiture. (See Complaint ｧ VI, ｶ 12); cf. United Shoe, 391 U.S. at 250-52, 88 S. Ct. at 1500-01 (in monopolization case, Court must prescribe relief, which can include divestiture, that will terminate monopoly, deny defendant fruits of violation, and ensure no future violation). Almost 20 years after the judgment was entered, the government adopted a policy of limiting most, but not all, consent decrees to 10 years. If that policy had been in effect in the 1950's and if this case had been designated as an appropriate candidate for a 10-year decree, the government may have approached the negotiations differently and sought relief that would have terminated IBM's market power, and not merely constrained its ability to exercise such power. As such, the subsequent adoption of the 10-year policy is not relevant to the issue of whether the judgment in this case should be terminated.
14 IBM apparently views as significant to this case, (see IBM Prelim. at 3 n. 2), the Supreme Court's unremarkable rejection of the very demanding standard for judgment termination, which would require "a clear showing of grievous wrong evoked by new and unforeseen conditions," enunciated by the Court in United States v. Swift & Co., 286 U.S. 106, 119 (1932). Rufo, 502 U.S. at 379, 112 S. Ct. at 757. However, twenty-four years before Rufo, the Court in an antitrust case had already explained that the standard in Swift must be considered in the context of that case and was not intended for rote application in every case. United Shoe, 391 U.S. at 248, 88 S. Ct. at 1499. See also Board of Education v. Dowell, 498 U.S. 237, 246-47, 111 S. Ct. 630, 636-37(1991)(rejecting application of the Swift decree termination standard in a school desegregation case, relying on United Shoe). The Second Circuit, relying on United Shoe, similarly long ago recognized that Swift must be read in the context of its facts. New York State Ass'n for Retarded Children, Inc. v. Carey, 706 F. 2d 956, 968-69 (2d Cir.) (Friendly, J.), cert. denied, 464 U.S. 915, 104 S. Ct. 277 (1983); King-Seeley Thermos Co. v. Aladdin Industries, Inc., 418 F. 2d 31, 34-35 (2d Cir. 1969). Indeed, the Supreme Court in Rufo relied on the flexible decree modification standard discussed by Judge Friendly in New York State Ass's for Retarded Children, 706 F. 2d at 967-71, in concluding that courts should exercise flexibility in considering requests for modification of institutional reform consent decrees. 502 U.S. at 379-83, 112 S. Ct. at 757-60.
15 IBM also has suggested that its motion may be justified because of unspecified changes in the law that it plans to discuss in a separate submission at some unspecified future time. (IBM Prelim. at 4 n. 3.). Because of IBM's lack of specificity, we cannot yet respond to its claims that the law has changed. However, the relevance of IBM's argument, without supporting facts applicable to this case, that it has become "widely accepted that the antitrust laws should not be used to deprive consumers of the efficiency benefits of vertical integration," id., may be undermined by the Second Circuit's reversal of the District Court's decision to terminate a portion of the judgment on the basis of "'contemporary economic theory'" and without appropriate findings of fact based on "record data" in American Cyanamid Co., 719 F. 2d at 566-67. We also note, and discuss below, that some recent clarifications in antitrust law, such as the Supreme Court's decision in Eastman Kodak Co. v. Image Technical Servs., Inc., 112 S. Ct. 2072 (1992), have served to heighten our concern as to whether judgment termination would threaten the public interest in competition.
16 Even if IBM were to argue that compliance has become substantially more onerous, we would contend that the Court would give appropriate consideration to any such allegation in considering whether continuation of the judgment would be detrimental to the public interest in competition. As we explain below, in the antitrust context, to determine whether a consent decree continues to serve the public interest, the possible benefits of the judgment should be weighed against its costs, including the costs of compliance. If the costs exceed the foreseeable benefits, then the judgment would no longer serve the public interest in competition. In antitrust cases, the public interest review therefore provides a built-in standard for determining whether compliance with a judgment has become too onerous.
17 A forthcoming decision from the Second Circuit may provide better guidance on the application of Rufo to antitrust decree modification proceedings. United States v. Eastman Kodak Co., 853 F. Supp. 1454 (W.D.N.Y. 1994), appeal docketed, No 94-6190 (2d Cir., July 18, 1994).
18 See also Dowell, 498 U.S. at 247, 111 S. Ct. at 636-37 (decree in school desegregation case could be terminated if purposes of the litigation had been "fully achieved," relying on United Shoe); Patterson v. Newspaper & Mail Deliverers' Union 13 F. 3d 33, 39 (2d Cir. 1993)(appropriate for court of equity to terminate decree in civil rights case once its objective has been reached, relying on Rufo, Dowell and United Shoe, id. at 37-38), cert. denied, 115 S. Ct. 58 (1994); Still's Pharmacy, Inc. v. Cuomo, 981 F.2d 632, 639-40 (2d Cir. 1992)(affirming District Court's denial of State's motion to add a sunset clause to settlement order in a Medicaid reimbursement case and inviting State to move to dissolve order when the wrong it "was drafted to cure no longer exists ...").
19 In cases applying Rufo, courts have focused on whether the purpose of the decree has been satisfied. See Vanguards of Cleveland v. City of Cleveland, 23 F.3d 1013, 1020 (6th Cir. 1994)(failure to achieve purposes warrants extending term of decree); Inmates of Suffolk County Jail v. Rufo, 12 F.3d 286, 293 (1st Cir. 1993)(minimum imaginable standards for decree termination include showing that "violations of the type that provoked the original action have been entirely remedied or remedied to the extent feasible); Patterson, 13 F.3d at 39 (decree terminable when it "has served its purpose"); United States v. City of Miami, 2 F.3d 1497, 1508 (11th Cir. 1993)(decree terminable when its purpose has been fulfilled); United States v. Agri-Mark, Inc., 156 F.R.D. 87, 88-89 (D. Vt. 1994)(decree terminated when divestiture eliminated threat to competition); Eastman Kodak Co., 853 F. Supp. at 1487-88 (decrees ordered to be terminated on ground that purposes have been achieved and Kodak no longer has market power). Even before Rufo, the Second Circuit recognized that decrees could be modified to achieve their purpose. New York State Ass'n for Retarded Children, 706 F.2d at 969; King-Seeley Thermos Co., 418 F.2d at 35; see also United Shoe, 391 U.S. at 252, 88 S. Ct. at 1501 (at request of government, court may modify antitrust decree to accomplish its intended result).
20 In a subsequent decision, the District of Columbia Circuit explained that its focus in the passage quoted in the text was not on the word "certain" but on "the nature of the factors that fit within the 'public interest', which the court explained were antitrust considerations--the probable effects on competition within the relevant market." Western Elec. Co., 993 F. 2d at 1576-77.
21 Unlike the judgment in this case, the decree in American Cyanamid Co. had a provision allowing the defendant to seek termination pursuant to a standard that tracked Section 7 of the Clayton Act, 15 U.S.C. ｧ 18, one of the antitrust statutes at issue in that case. 719 F. 2d at 565. However, the Second Circuit recognized that "the 'public interest' derives meaning specifically from the Clayton Act, and so, the criteria used for determining a Clayton Act violation are applicable here for determining the 'public interest.'" Id. Accordingly, the Court concluded that the standards for decree termination established by the decree language and the public interest were identical. Id. at 565-66.
22 (See also IBM Prelim. at 13.) ("IBM will demonstrate that the current operation of the Decree is detrimental to competition.")
23 See Consolidated Reply of The United States to Proposed Intervenors' Responses To United States' Opposition To Motions To Intervene (dated May 25, 1995) at 6; 8-9 ("Consolidated Reply") ("the government stands ready to oppose modification or termination that would harm competition in any market.") (emphasis added.)).
24 To the extent the decree imposes costs on IBM, those costs only are relevant in the context of a competitive analysis which assesses the effects of the decree on competition in properly defined markets. As noted above, the government tentatively has reached the decision not to oppose termination of Decree Section V(b)-(c) (requires IBM to offer to sell to equipment dealers used machines that it acquires in trade) and Decree Section VIII (restrictions on IBM's ability to operate service bureaus) and the remainder of the decree's provisions pertaining to electronic data processing machines and systems outside the System/360-390 or AS/400 families of products, including all of IBM's current personal computer products. For this reason, IBM's extensive comments on the decree's service bureau provisions, (See IBM Prelim. at 16; 18-19; 26.), and other discussion pertaining to products that are no longer the focus of our concerns, are irrelevant.
25 See also Gianna Enterprises v. Miss World (Jersey) Ltd., 551 F. Supp. 1348, 1354 (S.D.N.Y. 1982) ("[t]he absence of an adequate market definition makes it impossible even to approximate the market effect of defendants' allegedly anticompetitive agreement.") Accord Apex Oil Co. v. DiMauro, 713 F. Supp. 587, 595 (S.D.N.Y. 1989)("[t]he relevant market must first be defined and analyzed before examining the alleged anticompetitive effects.").
26 A relevant market also "consists of the geographic market -- the location in which a potential buyer may rationally seek specific goods or services." Soap Opera Now, Inc. v. Network Publ. Corp., 737 F. Supp. 1338, 1344 (S.D.N.Y. 1990).
27 As noted in its Consolidated Reply of The United States to Proposed Intervenors' Responses To United States' Opposition To Motions To Intervene (dated May 25, 1995) at 8-9 ("Consolidated Reply"), the Government submits that the "world-wide information handling industry", (IBM Term. Mem. at 9-10.), facially is an inadequate product market definition in which to assess IBM's market power.
28 The Court's review should determine whether termination of the judgment "would be anticompetitive under present market conditions." Western Elec. Co., 900 F. 2d at 309; see also American Cyanamid Co., 719 F. 2d at 567 (court must make findings of fact as to current state of market). This assessment will require, among other things, a determination of relevant markets, market shares, concentration of sellers and buyers in the market, capital cost required to enter the market and other barriers to entry, the minimum market share needed by a seller to achieve a profitable level of production and other scale economies, the degree of market power that IBM would possess if the judgment were terminated and the strength of competing suppliers and purchasers, and the likelihood and size of any market foreclosure resulting from judgment termination. See id. at 566-67 (discussing standard framework of analysis of vertical merger).
29 "Market power" is a synonym for "monopoly power". International Dist. Centers, Inc. v. Walsh Trucking, 812 F.2d 786, 791 n.3 (2d Cir. 1987) (citing Broadway Delivery Corp. v. United Parcel Service, Inc., supra).
30 See also Virgin Atlantic Airways v. British Airways, 872 F. Supp. 52, 63 (S.D.N.Y. 1994) (denying defendant's motion to dismiss monopoly leveraging claim because "such a ruling is only possible once all the facts have been developed, either on summary judgment or after trial").
31 As we noted in the Consolidated Reply at 9, we are concerned that "IBM may possess substantial [market] power in the markets for hardware, replacement parts and/or operating systems for larger computers, especially mainframes."
32 This is because "'the use of monopoly power, however lawfully acquired, to foreclose competition, to gain a competitive advantage, or to destroy a competitor, is unlawful.'" Ortho Diagnostic Sys. v. Abbott Laboratories, 822 F. Supp. 145, 153 (S.D.N.Y. 1993) (quoting United States v. Griffith, 334 U.S. 100, 107 (1948)).
33 Market share is important to a market power inquiry because "[t]he existence of monopoly power 'ordinarily is inferred from the seller's possession of a predominant share of the market.'" Caldwell v. American Basketball Ass'n, Inc., 825 F. Supp. 558, 575 (S.D.N.Y. 1993) (quoting Eastman Kodak Co. v. Image Tech. Inc., ____ U.S ____, 112 S. Ct. at 2081).
34 In this submission, the term "System/390" denotes IBM's current and predecessor generation of mainframe computers, ESA/390 (Enterprise System Architecture) and operating systems. The System/390 is a successor to the System/360 (which was introduced in the mid-1960s) and System/370 and IBM's operating systems provide for upward compatibility which allows a consumer to use software applications for an earlier system (such as the System/360) on later systems (such as the System/390). As IBM itself has noted, this obviously is of immense benefit to consumers who effectively are locked into the System/390 hardware and software; IBM's 1994 Annual Report states at page 10: "We also made sure that these advanced systems can run all existing System/390 software. That's no small consideration to customers who have invested more than $1 trillion in large system software."
35 The statement that IBM competes against a "large number of computer manufacturers" (IBM Prelim. at 23) is unedifying because it fails to denote the product markets in which the listed companies compete and the extent to which (if any) they exert competitive pressures on IBM. For example, many of these companies appear to be personal computer manufactures, and, as noted, the Government tentatively does not oppose termination of the Decree as applied to personal computers.
36 A System 390 mainframe is comprised of a number of hardware products. First, there is the CEC, which generally is comprised of at least one Central Processing Units (the "brains" of the system that often can execute more than 50 million instructions per second), main memory (the repository of electronic data, often with a capacity of hundreds of millions of characters) and channels (which are the CEC's communications link to peripherals, transferring data to and from main memory under the commands of the CPU). Second, there are peripherals (which consist of different product groupings, including tape and disk drives, printers and terminals).
37 The copyright laws do not protect this interface information because such information is the key to compatibility with the products within the System/390 family of products. Computer Associates v. Altai, 982 F. 2d 693 (2d Cir. 1992)
38 As we noted in our Consolidated Reply, at 10 n.7, until July 5, 1995, IBM committed itself pursuant to the European undertaking to make timely disclosure of the crucial interface information necessary for the design of System/390 compatible products. U.S. Selected Docs. tab 34. IBM's withdrawal from the undertaking casts into doubt its future disclosure intentions, which has heightened our concern over the possible termination of the judgment's disclosure requirements and ban on attempts by IBM to prohibit experimentation with its System/390 mainframe products.
39 Manufacturers of System/390 compatible systems ("plug compatibles") also may benefit from decree section XV(b), which prevents IBM from tying its various System/390 products together and from decree section VII(d)(3), which prevents IBM from controlling or otherwise subjecting to its approval products that attach to (i.e., that are compatible with) those IBM products. Moreover, plug compatible manufacturers also benefit from decree section VI(b), in that IBM is enjoined from discriminating in its provision of the maintenance and repair of IBM System 390 products at mixed-vendor installations. This guarantee of nondiscrimantory service may be indispensable to competition in the System/390 market in light of the dependence of virtually all System/390 installations on IBM's mainframe operating system software.
40 In light of the enormous investment that consumers have made in System/390 products, see supra note --, we have doubts that consumers would or could switch away from IBM products in response to an exercise of monopoly power by IBM. For many customers, this substantial investment in software means effectively that they are locked-in to the System/390 architecture. Complete conversion of their systems to alternative platforms in many instances would provide for solutions that functionally are not equivalent to mainframe solutions and in any case most often would be prohibitively expensive. It is our understanding that most System/390 consumers literally have millions of lines of code of customized applications programs that have been written for the particular functions and interfaces of the System/390 environment and that conversion of these programs is extremely expensive. Additionally, consumers would have to incur the opportunity costs associated with diverting skilled programmers away from developing new applications to the task of porting existing applications. It appears that few consumers would make this enormous investment of time, money and human resources in response to an exercise of market power by IBM. Even if some customers would make the switch to a different computer system, we have learned of nothing that would prevent IBM from exploiting its market power only as to those users that would not switch.
41 Allen-Myland defined large-scale mainframes as computers that are "among the largest in memory capacity, the fastest in computing speed, and the most expensive of computers available." Allen-Myland, 33 F.3d at 201 (quoting Allen-Myland v. International Bus. Mach., 693 F. Supp. 262, 270-71 (E.D. Pa. 1988)).
42 The Court of Appeals observed that "[m]arket power is defined as the ability to 'raise prices or to require purchasers to accept burdensome terms that could not be exacted in a completely competitive market.'" Allen-Myland, 33 F.3d at 200 (quoting United States Steel Corp. v. Fortner Enters., Inc., 429 U.S. 610, 620 (1977)).
43 Before the Supreme Court, respondent Image Technical did not contest Kodak's assertion that its market shares indicated a competitive equipment market. Kodak, 112 S. Ct. at 2081 n.10. This question, along with the other issues in the case, is being tried in the Northern District of California.
44 The Court observed that "there is no immutable physical law -- no 'basic economic reality' -- insisting that competition in the equipment market cannot coexist with market power in the aftermarkets." Kodak, 112 S. Ct. at 2084. Moreover, the Court also rejected outright Kodak's argument that as a matter of law a single brand of a product -- such as service and parts for Kodak copiers (which were not interchangeable with other manufacturers' services and parts) -- can never be a relevant market for antitrust purposes. Kodak, 112 S. Ct. 2090 (citing, inter alia, du Pont, 351 U.S. at 404). Thus to the extent parts for IBM system/390 mainframes are not interchangeable with parts from other mainframe manufacturers, those parts may constitute relevant markets.
45 Kodak's emphasis on the primacy of record facts over economic theory was echoed by the Supreme Court in Brook Group v. Brown & Williamson Tobacco, 113 S. Ct. 2578, 2591 (1993) (rejecting predatory pricing scheme in oligopoly setting because facts indicated that alleged predator could not recoup monopoly profits to recover from below-cost pricing) ("theory will not stand in the way of liability" when "the realities of the market and record facts" indicate that liability has occurred) (citing Kodak). See also F.T.C. v. Indiana Federation of Dentists, 476 U.S. 447, 461 (1986) (restrictive dental practices have to be "viewed in light of the reality" that markets for dental services tend to be relatively localized.); Balaklaw v. Lovell, 14 F.3d 793, 799 (2d Cir. 1994) ("[t]he basic principle is that the relevant market definition must encompass the realities of competition.") (internal quotation marks omitted).
46
47
IBM counsel stated: We 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. (Transcript of June 19, 1995 Hearing at 19.).
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