UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

UNITED STATES OF AMERICA,

Plaintiff,

-against- Civil Action

No. 72-344 (AGS)

INTERNATIONAL BUSINESS MACHINES

CORPORATION,

Defendant.

UNITED STATES' MEMORANDUM ON THE 1969 CASE

Kent Brown (KB-5429)

Sanford M. Adler (SA-7428)

Richard L. Irvine (RI-8783)

Don Allen Resnikoff (DR-2017)

Ian Simmons (IS-7468)

James J. Tierney (JT-7842)	U.S. DEPARTMENT OF JUSTICE

Antitrust Division

555 4th Street, N.W.

Suite 9901

Washington, DC 20001

(202) 307-6200

Attorneys for Plaintiff United States of America

David Turetsky

Deputy Assistant Attorney General

Rebecca P. Dick

Deputy Director of Operations

N. Scott Sacks

Assistant Chief, Computers and Finance Section

October 5, 1995

TABLE OF CONTENTS

I.	INTRODUCTION	1

II.	THE 1969 CASE SOUGHT STRUCTURAL RELIEF BASED ON IBM'S ALLEGED PREDATORY ACTIONS THAT WENT BEYOND THE CONDUCT COVERED BY THE 1956 DECREE	1

A.	The 1969 Case Alleged That IBM Illegally Acquired And Maintained Its Monopoly Of General Purpose Digital Computers Through Exclusionary And Predatory Conduct Going Beyond The 1956 Decree.	2

B.	The 1969 Predatory Interface Manipulation Issues Are Different From The Interface Issues Under The Decree.	6

III.	THE 1969 CASE SHEDS NO LIGHT ON KODAK'S CONTROLLING INQUIRY	9

A.	The 1969 Case Provides No Dispositive Information On The Likely Effect Of Decree Termination Under Current Market Conditions.	9

B.	Kodak Requires That The Court Employ Standard Antitrust Analysis To Assess The Likely Effect Of Decree Termination Under Current Market Conditions.	11

C.	The Termination Test That IBM Proposes Does Not Conform To The Requirements Of Kodak.	14

IV.	THE 1969 CASE SHEDS NO LIGHT ON WHETHER THE DECREE'S PURPOSE HAS BEEN FULFILLED AND IBM'S PROFFERED "PURPOSE" IS CONTRARY TO THE DECREE'S TEXT, PROPER DECREE INTERPRETATION AND THE FACTS	20

A.	The Language Of The Decree Applies To EDPM To Constrain The Exercise Of Market Power Through The Recurrence Of Anticompetitive Conduct, Irrespective Of IBM's Tabulating Machine Market Position.	20

B.	IBM's Interpretive Method Fails As A Matter of Law And Is Inconsistent With The Facts.	27

V.	THE 1969 CASE SHEDS NO LIGHT ON WHETHER THE DECREE APPLIES TO OPERATING SYSTEM SOFTWARE PRODUCTS	32

VI.	CONCLUSION	36

TABLE OF AUTHORITIES

Cases

Allen-Myland, Inc, v. International Business Machs. Corp.,

33 F.3d 194 (3d Cir.), cert. denied, 115 S.Ct. 684 (1994)	10

Aspen Skiing Co. v. Aspen Highlands Skiing Corp.,

472 U.S. 585 (1985)	10

Berkey Photo, Inc. v. Eastman Kodak Co.,

603 F.2d 263 (2d Cir. 1979), cert denied,

444 U.S. 1093 (1980)	13, 22

Cellar Door Prods., Inc. v. Kay,

897 F.2d 1375 (6th Cir. 1990)	5

Eastman Kodak Co. v. Image Technical Servs., Inc.,

504 U.S. 451 (1992)	10

Eddy v. Prudence Bonds Corp.,

165 F.2d 157 (2d Cir. 1947)	23

FTC v. Raladam Co.,

316 U.S. 149 (1942)	5

Galli v. Metz,

973 F.2d 145 (2d Cir. 1992)	29

Grumman Allied Indus., Inc. v. Rohr Indus., Inc.,

748 F.2d 729 (2d Cir. 1984)	23

Hughes v. United States,

342 U.S. 353 (1952)	21

Hunt Ltd. v. Lifschultz Fast Freight, Inc.,

889 F.2d 1274 (2d Cir. 1989)	29

In re PCH Assocs.,

949 F.2d 585 (2d Cir. 1991)	5

Ingersoll Milling Mach. Co. v. M/V Bodena,

829 F.2d 293 (2d Cir. 1987)	29

Investors Ins. Co. of Am. v. Dorinco Reinsurance Co.,

917 F.2d 100 (2d Cir. 1990)	29

Jim Beam Brands Co. v. Beamish & Crawford Ltd.,

937 F.2d 729 (2d Cir. 1991)	5

Lawlor v. National Screen Serv. Corp.,

349 U.S. 322 (1955)	5

Network Pub. Corp. v. Shapiro,

895 F.2d 97 (2d Cir. 1990)	23

NLRB v. Express Pub. Co.,

312 U.S. 426 (1941)	22

Rothenberg v. Lincoln Farm Camp, Inc.,

755 F.2d 1017 (2d Cir. 1985)	24

Rufo v. Inmates of Suffolk County Jail,

502 U.S. 367 (1992)	11, 12

Sayers v. Rochester Tel. Corp.,

7 F.3d 1091 (2d Cir. 1993)	23

SEC v. Levine,

881 F.2d 1165 (2d Cir. 1989)	21, 23

United Nat'l Ins. v. Waterfront New York Realty Corp.,

994 F.2d 105 (2d Cir. 1993)	27, 29

United States v. American Cyanamid Co.,

719 F.2d 558 (2d Cir. 1983), cert. denied sub nom.

American Cyanamid Co. v. Melamine Chem. Inc.,

465 U.S. 1101 (1984)	11, 13

United States v. American Soc'y of Composers, Authors & Pub.,

782 F. Supp. 778 (S.D.N.Y. 1991)	23

United States v. Armour & Co.,

402 U.S. 673 (1971)	27, 28, 32

United States v. Eastman Kodak Co.,

63 F.3d 95 (2d Cir. 1995)	1, 11-17

United States v. Eastman Kodak Co.,

226 F. 62 (W.D.N.Y. 1915)	17

United States v. Eastman Kodak Co.,

853 F. Supp. 1454 (W.D.N.Y. 1994), aff'd,

63 F.3d 95 (2d Cir.1995)	16, 18

United States v. Farley,

11 F.3d 1385 (7th Cir. 1993)	32

United States v. Griffith,

334 U.S. 100 (1948)	22

United States v. IBM,

69 Civ. 200 (S.D.N.Y. 1969)	1

United States v. ITT Continental Baking Co.,

420 U.S. 223 (1975)	20, 21, 23, 27

United States v. National Broadcasting Co.,

842 F. Supp. 402 (C.D. Cal. 1993)	19, 20

United States v. O'Rourke,

943 F.2d 180 (2d Cir. 1991)	21, 28

United States v. Swift & Co.,

1975-1 Trade Cas. (CCH) ¶ 60,201 (N.D. Ill. 1975)	19

United States v. Swift & Co.,

1983-1 Trade Cas. (CCH) ¶ 65,250 (N.D. Ill. 1980)	19

United States v. United Shoe Mach. Corp.,

110 F. Supp. 295 (D. Mass. 1953),

aff'd per curiam, 347 U.S. 521 (1954)	28

United States v. United Shoe Mach. Corp.,

391 U.S. 244 (1968)	11, 12, 28

United States v. Western Elec. Co.,

894 F.2d 1387 (D.C. Cir. 1990)	35

United States v. Western Elec. Co.,

900 F.2d 283 (D.C. Cir.), cert. denied sub nom.

MCI Communications Corp. v. United States, 498 U.S. 911 (1990)	11, 18, 19, 28

Walker Process Equip., Inc. v. Food Mach. & Chem. Corp.,

382 U.S. 172 (1965)	13

Zenith Radio Corp. v. Hazeltine Res. Inc.,

395 U.S. 100 (1969)	22

Statutes and Rules

Clayton Act Section 7, 15 U.S.C. § 18	13

Sherman Act Section 2, 15 U.S.C. § 2	2

Miscellaneous Materials

Emerson W. Pugh, Building IBM:

Shaping an Industry and its Technology	31, 36

Fed. R. Civ. P. 60(b)(5)	12

II P. Areeda & H. Hovenkamp, Antitrust Law ¶ 334c (1995)	10

M.G. Lane & J.D. Mooney,

A Practical Approach to Operating Systems (1988)	34

Restatement (Second) of Contracts §§ 203-204	25, 28

Thomas J. Watson, Jr., & P. Petre, Father Son & Co.

My Life at IBM and Beyond (1990)	31

I.	INTRODUCTION

Pursuant to the Court's request at the August 7, 1995 hearing, the Government respectfully submits this Memorandum addressing the significance to this proceeding of United States v. IBM, 69 Civ. 200 (S.D.N.Y. 1969) (the "1969 case"). We also respond to several arguments of International Business Machines Corporation ("IBM") in its more recent filing, including its erroneous reiteration that, in ruling on a contested decree termination motion, the Court need not perform a competitive analysis in properly defined markets to assess the competitive consequences of terminating the 1956 Final Judgment ("Final Judgment" or "Decree"). Accordingly, below we show that: (1) the 1969 litigation sought drastic relief against IBM going well beyond the Decree and based on conduct going beyond that proscribed by the Decree; (2) the 1969 litigation does not vitiate IBM's burden of establishing, by means of a forward-looking market analysis required by United States v. Eastman Kodak Co., 63 F.3d 95 (2d Cir. 1995) ("Kodak"), that the Decree's purposes have been fully achieved, or that changed circumstances have rendered the Decree incapable of accomplishing its purposes; (3) the Decree contains provisions designed to constrain the exercise of market power by IBM in computers (i.e., electronic data processing machines ("EDPM")); and (4) operating system software is covered by the Decree.

II.	THE 1969 CASE SOUGHT STRUCTURAL RELIEF BASED ON IBM'S ALLEGED PREDATORY ACTIONS THAT WENT BEYOND THE CONDUCT COVERED BY THE 1956 DECREE

We do not seek to relitigate the 1969 case. In fact, the 1969 case simply did not address the issues now before the Court. It did not address, much less resolve, whether IBM currently has market power in any market covered by the Decree such that continued Decree enforcement constrains the exercise of that power. In short, we submit that the 1969 case has no bearing on whether the purposes of the Decree have been fully achieved or whether changed circumstances have rendered the Decree incapable of accomplishing its purposes. The 1969 litigation, then, is irrelevant to the question whether the Decree should be terminated.

A.	The 1969 Case Alleged That IBM Illegally Acquired And Maintained Its Monopoly Of General Purpose Digital Computers Through Exclusionary And Predatory Conduct Going Beyond The 1956 Decree.

The 1969 action alleged that IBM had undertaken exclusionary and predatory conduct with the aim and effect of eliminating competition so that IBM could maintain its monopoly position in general purpose digital computers. (See Plaintiff's Statement of Triable Issues (dated September 23, 1974) at 8; U.S. 1969 tab 1.) Specifically, the Government contended that from 1961 to 1969 IBM engaged in anticompetitive practices "for the purpose or with the effect of restraining or attempting to restrain actual or potential competitors from entering" the relevant markets. (Id. at 8.) Such practices allegedly included anticompetitive price discrimination such as giving away software services for "the purpose or with the effect of . . . enabling IBM to maintain or increase its market share . . . . " (Id. at 9.) The Government also alleged that IBM's bundling of software with "related computer hardware equipment" for a single price was anticompetitive. (Id. at 10.)

The Government further averred that IBM predatorily priced and preannounced specific hardware that the Government termed "fighting machines." (Id. at 12-14.) IBM allegedly introduced certain products "knowing [the products] had unusually low profit expectations." (Id. ¶ 1 at 12 .) Allegedly, IBM "developed and announced" the specified hardware products "primarily for the purpose or with the effect of discouraging actual and potential customers from acquiring . . . [competing products] . . . in markets . . . where IBM's monopoly position had eroded or threatened to erode." (Id. ¶ 3 at 12.) Also, in an effort to deter entry and injure competition, IBM allegedly "announced future production and marketing [of certain products] when it believed or had reason to believe that it was unlikely to be able to produce and market such products within the announced time frame . . . ." (Id. ¶ 5 at 13.) Additionally, the Government alleged that IBM was engaged in various below cost and discriminatory discount conduct in marketing its products to educational and scientific institutions (Id. at 14-16) in order to injure peripheral manufacturers and leasing companies. (Id. at 16-19.)

To remedy these alleged violations, the Government sought, inter alia, divestiture. (See Amended Complaint ¶ 7 at 11; U.S. Selected Docs. tab 25; Plaintiff's Preliminary Memorandum on Relief (dated October 13, 1972) at 3-4; U.S. 1969 tab 1.) Rather than merely seeking to constrain the exercise of market power by proscribing or requiring certain conduct as the Decree does, the 1969 action requested the far more drastic remedy of divestiture.

Moreover, IBM misreads history when it asserts that the Government in 1982 concluded that IBM lacked market power in EDPM. The Government dismissed the 1969 action on the basis of its failure to prove that "[IBM] maintained [its] market share by some unpermitted practices . . . ." (Transcript of Assistant Attorney General Baxter's Department of Justice Press Conference (Jan. 8, 1982) at 7; U.S. Selected Docs. tab 31.) Assistant Attorney General Baxter stated that "the record is very, very weak on the existence of any such unpermitted or unlawful practices." (Id.) He also stated, however, that IBM had "a very substantial market share, depending on how one defines the market precisely . . ." and that "indeed today IBM continues to have a very substantial market share." (Id. at 6.) Notably, Assistant Attorney Baxter pointed out:

It would not be impossible to say that IBM has a monopoly position within the meaning of Section 2 doctrine, although that is a debatable question. But it is not a violation of Section 2 to have a monopoly position. One must have either attained it unlawfully or maintained it by unlawful acts. It is perfectly clear from the record that IB[M] obtained its very large market share in an entirely legal way.

(Id. at 6-7.)

IBM seeks to use the Government's voluntary dismissal of the 1969 case as a basis for precluding the Government and this Court from addressing the issue of market power in this proceeding. Although IBM as the moving party bears the burden of proving that termination of the judgment serves the public interest in competition, IBM claims it would be "unfair" to permit a market power analysis. (IBM 1969 Mem. at 21). Any unfairness, however, will befall the public interest if the Government and this Court are denied the opportunity to assess the competitive consequences of termination should IBM be permitted to circumvent its burden of proof. Ironically, by relying on the voluntary dismissal of the 1969 action in asking the Court to preclude the Government from undertaking a meaningful assessment of the instant motion, IBM effectively seeks all of the benefits of res judicata and issue preclusion without satisfying any of their prerequisites. Indeed, it is doubly ironic that in seeking to preclude the Government from undertaking a meaningful competitive analysis of the termination motion (something no court has ever examined), IBM essentially asks the Court to impute greater preclusive effect to the 1969 voluntary dismissal than would have arisen had IBM actually prevailed on the merits at trial that its 1961-1975 conduct was not illegal.

The dismissal of the 1969 action therefore is irrelevant to the issues now before the Court, including those relating to IBM's present and future market power. In fact, as we have pointed out (U.S. Prelim. at 48-50), had Assistant Attorney General Baxter felt that the 1969 dismissal was dispositive on all market power questions, presumably he would have agreed with IBM's request to terminate the 1956 Decree. In fact, he declined the request solely on the basis of the 1969 record and authorized a decree termination investigation that was closed with no action after IBM failed to produce requested information.

B.	The 1969 Predatory Interface Manipulation Issues Are Different From The Interface Issues Under The Decree.

IBM's interface disclosure practice is the only specific conduct that IBM states was fully litigated during the 1969 case. (See IBM 1969 Mem. at 29-33.) However, the interface issues now before the Court differ from the interface issues in the 1969 action. In the 1969 action, the Government alleged that IBM manipulated specific interfaces with the intent and effect of injuring competition. (See Plaintiff's Statement of Triable Issues at 16-18; U.S. 1969 tab 1.) In contrast, here we must assess the consequences of terminating IBM's obligation to disclose any interface information at any time, apart from IBM's right to manipulate peripheral interface information prior to releasing it or to refrain from releasing that information prior to product shipment.

Specifically, the 1969 action alleged that IBM predatorily manipulated interfaces for the purpose of excluding competition. IBM allegedly changed interfaces for some new products with the purpose of rendering competing products incompatible or obsolete, thereby insulating IBM's products from competition until plug compatible manufacturers had converted their products to the new interface. This attempt to exclude competition allegedly raised plug compatible manufacturers' costs because it required them to make continuous investments to adapt their products to new interfaces. Moreover, because IBM allegedly did not always provide all interface specifications at the time of new product announcements (IBM 1969 Mem. at 31) (which generally precede actual product shipment), plug compatible manufacturers' ability to design products implementing the new interface sometimes was allegedly delayed until IBM disclosed the specifications at the time of product shipment. (1969 U.S. Pretrial Br. at 148; U.S. Selected Docs. tab 32.) This allegedly placed compatible manufacturers at a severe disadvantage because the competitive products that they ultimately developed had a much shorter life than the comparable IBM products. (Id. at 148, 170; Government's Opening Statement, May 19 1975 Tr. at 133-34; IBM 1969 Author. tab 8.)

The 1956 Decree does not require disclosure of interface information before product shipment. Section IX(c) of the Decree requires IBM to provide to IBM computer purchasers and lessees, on a nondiscriminatory basis and at a reasonable charge, manuals, books of instruction, diagrams and other similar documents pertaining to the operation or application of their computers. (See U.S. Prelim. at 5.) Moreover, Section IX(b) requires IBM to provide to IBM computer owners, at reasonable and nondiscriminatory charges, technical manuals, books of instruction, diagrams and other similar documents that it provides generally to its own repair and maintenance employees. (Id.) IBM has complied with these provisions in part by disclosing interface information to IBM computer purchasers, including manufacturers of compatible equipment. As IBM acknowledged in its 1969 case Pretrial Brief:

IBM also publishes manuals which make available to other manufacturers the detailed interface specifications necessary for manufacturers to manufacture equipment which will communicate with IBM processing units and replace IBM equipment.

(IBM 1969 Pretrial Br. at 111; U.S. Selected Docs. tab 33.)

And as counsel for IBM argued during the 1969 case:

I do not know of any claim made in any statement of the issues, in any brief, in any opening statement, that asserts a claim of any kind by the plaintiff against the defendant in this case relating to what information IBM ought or should or does make available with respect to its products to other persons.

(1969 case Tr. at 36957; IBM 1969 Author. tab 9.) In contrast, IBM's counsel was very familiar with the information disclosure provisions of the Decree and sought assurance that the Government was not contending that IBM was in violation of the Decree:

On the other hand ... there is a provision in the consent decree that your Honor signed, which requires IBM to make certain kinds of information available at certain times and under certain conditions. And I do not perceive there to be claim being made, or if there is I would like to know that, that there is some violation of that decree.

(Id. at 36957.) Government counsel confirmed that the Government was not alleging that IBM withheld information from plug-compatible manufacturers in violation of the Decree. (Id. at 36959.)

Even after dismissal of the 1969 case, the European Commission continued proceedings alleging, among other things, that IBM abused its dominant position in the European Community by failing to make advance disclosure of interface information before product shipment to permit the timely development of competitive compatible products. (Aug. 2, 1984 Press Release from the Commission of the European Communities, No. IP (84) 290. at 11444, 11446-447;U.S. Selected Docs. tab 34.) IBM resolved that case with an Undertaking that specified conditions under which IBM would disclose interface information prior to the date of product shipment. IBM has now withdrawn from the Undertaking and, to date, we have been unable to learn how IBM plans to change its interface disclosure policies. The withdrawal ended any formal obligation of IBM to make advance disclosures of interface information, and this development may adversely affect the competitive viability of plug-compatible equipment manufacturers. The Decree therefore imposes the sole surviving requirement that IBM disclose any interface information, but it does not require disclosure prior to product shipment. Accordingly, the information disclosure provisions in the Judgment should not be terminated unless a careful analysis establishes that they no longer serve to constrain IBM's exercise of market power by requiring disclosure of interfaces and other information.

III.	THE 1969 CASE SHEDS NO LIGHT ON KODAK'S CONTROLLING INQUIRY

A.	The 1969 Case Provides No Dispositive Information On The Likely Effect Of Decree Termination Under Current Market Conditions.

IBM asserts that the Government's dismissal of the 1969 case should relieve IBM of its burden of proving, through an assessment of current market conditions using standard antitrust analysis, that Decree termination is consistent with the public interest in competition because the Decree has accomplished its purpose or because changed circumstances have rendered the Decree incapable of accomplishing its purposes. More precisely, IBM contends that it should not be required to perform a competitive analysis of the likely effect of Decree termination because the Government ultimately dismissed the 1969 case and that case also concerned the computer industry. (IBM 1969 Mem. at 21-29.)

IBM's suggestion that the evidence adduced in the 1969 case disposes of the need for any market analysis in this Decree proceeding runs afoul of the requirement in Kodak and other controlling authority that IBM's termination motion be assessed under present market conditions. (U.S. Prelim. at 23-24, 29 n.30.) As shown below, Kodak establishes that if the Government opposes antitrust decree termination, the defendant has the burden of proving that under current market conditions, it is in the public interest to lift the decree. As demonstrated by the Second Circuit's extensive market power inquiry in Kodak, market definition is a prerequisite to this assessment. (Id. at 26-34.)

Furthermore, market characteristics such as lock-in and switching costs bear on demand substitutability and are factual predicates that any meaningful antitrust analysis must address. (See U.S. Prelim. at 29-33; 40-44.) A large mainframe shop with hundreds of legacy applications cannot switch to another platform as easily as someone might switch from a pen to a pencil. The magnitude of those switching costs, as well as other factors important in defining relevant markets, are issues of fact for which the 1969 case provides no useful data. The information pertaining to market definition in the 1969 case is dated and of no value in defining markets today. Moreover, Supreme Court cases subsequent to the dismissal of the 1969 case have clarified the proper role of market definition and competitive analysis in monopolization cases. See, e.g., Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 451, 465-78 (1992); Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585, 600-05 (1985); see also II P. Areeda & H. Hovenkamp, Antitrust Law ¶ 334c at 120 (1995); U.S. 1969 tab 2 ("courts may refuse to follow an earlier validation of the defendant's conduct if significant intervening change has occurred in the decisional law"); (U.S. Prelim. at 29-31; 40-45.)

B.	Kodak Requires That The Court Employ Standard Antitrust Analysis To Assess The Likely Effect Of Decree Termination Under Current Market Conditions.

We concur with IBM that Kodak articulates the standard the Court must employ in ruling on a contested motion to terminate an antitrust consent decree. (IBM 1969 Mem. at 4.) However, after acknowledging that Kodak is controlling authority, IBM retreats from the decision's import. Kodak requires a showing that the Decree's purposes have been fully achieved or that changed circumstances have rendered the Decree incapable of accomplishing its purposes. That requirement necessitates an assessment of current market conditions using standard antitrust analysis. Kodak and other important authority, such as United States v. American Cyanamid Co., 719 F.2d 558 (2d Cir. 1983), cert. denied sub nom. American Cyanamid Co. v. Melamine Chem. Inc., 465 U.S. 1101 (1984), and United States v. Western Elec. Co., 900 F.2d 283 (D.C. Cir.), cert. denied sub nom. MCI Communications Corp. v. United States, 498 U.S. 911 (1990), thus flatly contradict IBM's assertion that the Decree may be terminated without resort to standard market analysis.

In fact, the Second Circuit in Kodak specifically endorsed the market-based methodology of the District Court:

[T]he district court required Kodak to prove that: (1) it no longer possesses market power over film and photofinishing, and therefore that the primary purposes of the decrees — the elimination of monopoly and unduly restrictive practices — have been achieved; and (2) termination of the consent decrees would benefit consumers.

Kodak, 63 F.3d at 102. The Court of Appeals reached this decision on the basis of its analysis of Rufo v. Inmates of Suffolk County Jail, 502 U.S. 367 (1992), and United States v. United Shoe Mach. Corp., 391 U.S. 244 (1968).

The Court of Appeals noted that Rufo requires the party seeking decree termination or modification to establish that a "'significant change in circumstances warrants revision of the decree.'" Kodak, 63 F.3d at 101 (quoting Rufo, 502 U.S. at 383). The Court of Appeals observed that nothing in Fed. R. Civ. P. 60(b)(5) exempts antitrust consent judgments from the equitable considerations that Rufo recognized must guide the power of courts to modify or terminate consent decrees. Kodak, 63 F.3d at 101. The Second Circuit also confirmed that United Shoe provides the initial standard that must be considered in antitrust consent decree proceedings:

However, we also believe that United Shoe provides a useful starting point for evaluating an antitrust defendant's request to modify or terminate a consent decree. In most cases, the antitrust defendant should be prepared to demonstrate that the basic purposes of the consent decrees — the elimination of monopoly and unduly restrictive practices — have been achieved. See United Shoe, 391 U.S. at 248.

Kodak, 63 F.3d at 101. While there may be some other limited circumstances that would warrant termination or modification of an antitrust consent decree, such as a change in controlling law or when changed circumstances render the decree ineffective in achieving its goals, Kodak confirms that:

[A]s a general matter, . . . an antitrust defendant should not be relieved of the restrictions that it voluntarily accepted until the purpose of the decree has been substantially effectuated, or when time and experience demonstrate that the decree "is not properly adapted to accomplishing its purposes."

Id. at 102 (citation omitted).

The only accurate way to determine if the purpose of an antitrust consent decree has been fully achieved or if changed circumstances have rendered the decree incapable of accomplishing its purposes is to conduct a market analysis. (U.S. Prelim. at 23-29.) The Second Circuit in Kodak meticulously undertook that analysis:

In determining whether a firm possesses market power, "the first step in a court's analysis must be a definition of the relevant markets." Berkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d 263, 268 (2d Cir. 1979), cert denied, 444 U.S. 1093 . . . (1980). Without a definition of the relevant market, there is no way to measure a company's ability to act as a monopolist. Walker Process Equip., Inc. v. Food Mach. & Chem. Corp., 382 U.S. 172, 177 . . . (1965).

Kodak, 63 F.3d at 104.

The Court of Appeals then conducted an extensive review of the District Court's market analysis and concluded that the District Court had applied the correct legal principles and that its factual findings were supported by the record. Id. at 109. In considering the Government's objections to the District Court's factual conclusions, id. at 104-09, the Second Circuit employed the same "standard framework" for defining relevant markets and assessing market power that it had earlier required of the District Court in American Cyanamid, 719 F.2d at 566-67, and that we urge on the Court in this case. (See U.S. Prelim. at 23-24, 29 n.30.) Here, too, the Court must apply established antitrust law to assess whether the Decree has achieved its purpose or whether changed circumstances have rendered the decree incapable of accomplishing its purposes.

C.	The Termination Test That IBM Proposes Does Not Conform To The Requirements Of Kodak.

IBM claims that under Kodak it will be entitled to Decree termination upon a showing that its market power in tabulating machines has dissipated and that it has not engaged in the restrictive practices enjoined by the Decree. (IBM 1969 Mem. at 10.) IBM plans to satisfy the test's first prong by showing that it no longer manufactures tabulating machines and that the tabulating industry no longer exists. IBM apparently would seek to satisfy the second prong merely by showing that it has complied with the Decree's restrictions in the computer industry.

Conspicuously absent from IBM's proposal is any requirement that it demonstrate that the purposes of the Decree with respect to computers have been fully achieved through an assessment of the likely effect of judgment termination on the public interest in competition in the computer industry. IBM thus seeks termination without regard to whether the judgment plays a continuing role in preserving competition. (See IBM Prelim. at 16-19; IBM 1969 Mem. at 10.) It argues, inconsistent with Kodak, that the Court should consider irrelevant whether termination would result in higher prices or reduced output or innovation in any market other than the market for tabulating machines.

IBM recognizes that the Kodak court inquired into whether the defendant continued to possess market power. (IBM 1969 Mem. at 4-5.) However, IBM claims that a market power analysis was required in Kodak solely because the decrees in that case were intended to remedy Kodak's monopolies in the film and film processing markets and because Kodak continued to compete in those markets. In contrast, IBM asserts, the Decree's purpose was not to remedy any monopoly in the computer industry. Therefore, it argues, despite the Decree's clear applicability to the computer industry, it can satisfy the Kodak standard without an examination of IBM's power in any market for computer products or services. (Id. at 6.) But this overlooks the fact that one clear purpose of the Decree was to prescribe relief in the EDPM industry to prevent a recurrence of the harms imposed by IBM's practices in the tabulating machine industry. And before terminating the Decree, this Court must assess whether that purpose has been accomplished.

Kodak recognizes that a court must be "guided by equitable considerations." Kodak, 63 F.3d at 101. In applying these considerations, the court specifically approved as "a proper basis for the court's decision to terminate the consent decrees," a requirement that the defendant prove that it no longer possesses market power and that termination would benefit consumers. Id. at 102.

It would be inequitable under Kodak to terminate a decree that benefitted consumers by constraining the exercise of IBM's market power, when termination would deprive consumers of the protection from anticompetitive conduct afforded by the provisions to which IBM consented. This is true regardless of whether the applicable decree provisions protect against conduct that resulted in the charged violation or other anticompetitive conduct. In Kodak, the 1921 decree imposed both short and long term obligations. Over the short term, the decree required the dissolution of the combination that was found to violate the antitrust laws. Over the long term, the decree enjoined certain anticompetitive sales and distribution practices. Although the Kodak court found that Kodak had satisfied its short-term decree obligations long ago, thus eliminating any lasting effects from the original antitrust violations, Kodak, 63 F.3d at 98, the court nonetheless engaged in a detailed market analysis to determine whether Kodak had market power. See also id. at 108 (indicating that whether a defendant's market power derives from its illegal monopoly or from its continued leadership in the industry has no relevance).

IBM also seeks to avoid Kodak's market analysis requirement on the grounds that in Kodak, unlike this case, there was no difference between the markets covered by the decrees and the markets that were the subjects of the antitrust violations alleged in the complaint. (IBM 1969 Mem. at 5; Aug. 7, 1995 Tr. at 20-21.) But the 1921 Kodak decree did not result from an allegation of monopolization in the film market alone. It resulted from a finding that Kodak had monopolized the combined market for photographic supplies which included cameras, film, plates and photographic paper. Kodak, 63 F.3d at 98; see also United States v. Eastman Kodak Co., 226 F. 62, 64, 79-80 (W.D.N.Y. 1915). The decrees constrained Kodak's conduct with respect to all articles and supplies and did not apply solely to film.

During the Kodak termination proceeding, the Government agreed to terminate the decree in its application to all products except film. Nonetheless, just as IBM has suggested that any market analysis in the computer industry in this case should be limited to all EDPM because the decree does not distinguish between different types of computers (IBM 1969 Mem. at 24-25 n.16; IBM Reply Br. at 13), Kodak argued that the court should examine market power only in the market found to have been the subject of monopolization, photographic supplies, and not in the market of concern to the Government, film. The District Court not only rejected this argument but also analyzed whether all speeds and sizes of color film and types of photofinishing, respectively, were in the same markets. See Kodak, 853 F. Supp. at 1467 (relevant market includes amateur color negative film of all speeds and sizes); 1483-85 (relevant market includes all types of photofinishing). The court's aim was to determine markets that reflected current economic conditions, just as must be done in this case. (U.S. Prelim. at 23-24, 29 n.30, 41-42 & nn.44-45.) Plainly, these inquiries, as well as the court's extensive analysis of geographic market issues, would have been unnecessary if the contours of the relevant market in a judgment termination proceeding were dictated not by market realities but by the complaint's allegations or the decree's terminology.

IBM's contention that it need not satisfy Kodak's market analysis requirement because the computer industry was not mentioned in the Complaint, contradicts the only authority that has specifically addressed that issue. To our knowledge, Western Elec. is the only antitrust case that expressly addresses the standard of review of a motion to terminate a decree restriction that was not a subject of the original litigation. Western Elec., 900 F.2d at 307-09. That case involved the AT&T consent decree's restriction on the provision of information services by the Regional Bell Operating Companies ("BOCs"). In determining the appropriate standard of review of a motion to terminate the restriction, the court first noted that the AT&T antitrust litigation centered exclusively on the interexchange-service and equipment- manufacturing markets and not on information services. Id. at 307. In fact, "there was no record to speak of concerning AT&T's activities in the information services market. The parties agreed to the information services restriction as a precautionary measure in light of uncertainty about how divestiture of AT&T would affect the development of this embryonic market." Id. Under these circumstances, it would not have been erroneous for the District Court initially to approve a decree without the information services restriction. Id. Nonetheless, the information-services restriction could not be terminated if "removing it would be against the public interest now." Id. at 308 (emphasis added).

Because the Government consented to termination of the information-services restriction in Western Elec., the Court of Appeals also held that the District Court should employ the deferential standard of review that is applicable to uncontested motions. Id. at 308-09; see also (U.S. Prelim. at 21-23.) Yet, even under this more lenient standard, the Court of Appeals required that the review focus on whether termination "would be anticompetitive under current market conditions." Id. at 309. Western Elec. thus firmly establishes that it is irrelevant in the current proceedings that the computer industry was not the focus of the 1952 Complaint. Although the computer-related relief in the Decree applies to an industry that was not mentioned in the Complaint, just like the information services restrictions in the AT&T Decree, the Court still must focus its inquiry in this proceeding on whether termination of the Decree "would be anticompetitive under current market conditions." Id. at 309.

IV.	THE 1969 CASE SHEDS NO LIGHT ON WHETHER THE DECREE'S PURPOSE HAS BEEN FULFILLED AND IBM'S PROFFERED "PURPOSE" IS CONTRARY TO THE DECREE'S TEXT, PROPER DECREE INTERPRETATION AND THE FACTS

Since the 1969 case challenged conduct going beyond the 1956 Decree, and sought additional relief, it sheds no light on whether the purpose of the Decree has been fulfilled. Failing to acknowledge the significant differences between the 1969 action and the Decree, IBM mistakenly asserts that, if the Decree was meant to impose comprehensive regulation of IBM in the EDpM market, then the 1956 settlement presumably would have been res judicata to the 1969 action. (IBM Prelim. at 10.) But this argument not only ignores the law of res judicata (see supra at 5 & nn.2-3), it wrongly presumes that if the Government obtained relief in the EDPM market in 1956, it could not obtain additional relief in 1969. Yet the Government could have sought additional relief if, as was alleged in the 1969 case, IBM had been engaging in different anticompetitive conduct than that proscribed by the Decree.

A.	The Language Of The Decree Applies To EDPM To Constrain The Exercise Of Market Power Through The Recurrence Of Anticompetitive Conduct, Irrespective Of IBM's Tabulating Machine Market Position.

Contrary to the plain meaning of the Decree's text and the Supreme Court's disapproval of modifications "in the guise of construing a consent decree," United States v. ITT Continental Baking Co., 420 U.S. 223, 236 n.9 (1975) (citing Hughes v. United States, 342 U.S. 353, 357-58 (1952)), IBM asks this Court to terminate the Decree pursuant to a standard that is not included in and cannot be gleaned from the judgment and that ignores the requirement that the Court assess the likely impact of termination on the public's interest in competition. IBM claims that the Decree should be terminated because IBM no longer manufactures tabulating machines (IBM Prelim. at 5), because the Decree's application to EDPM is contingent on IBM's position in the tabulating machine industry (Id. at 5; 14-15) and because the restrictive practices challenged in the 1952 Case, which are enjoined by the Decree, have not recurred in the computer industry. (IBM 1969 Mem. at 10.) IBM urges this result despite the fact that nothing in the Decree's language or structure supports IBM's reading nor its interpretive methodology of resorting to extrinsic evidence to find such a termination standard in the absence of any ambiguity in specific Decree provisions. (U.S. Prelim. at 7-9.) Searching for an ambiguity where none exists, IBM asserts "[a]lthough it is indisputable that some portions of the Decree 'unambiguously' apply to EDPM, that fact tells us nothing about why the Decree was made applicable to EDPM" and thus recourse to extrinsic evidence to distill the "purpose" of the Decree is proper. (IBM 1969 Mem. at 13-14) (emphasis in original).

But this newly-minted ambiguity cannot withstand scrutiny by the Decree's language and structure. In seeking to prevent the recurrence of anticompetitive conduct in the EDPM industry that IBM had employed in the tabulating industry, the Decree makes plain that it is designed to constrain IBM's exercise of market power in EDPM through recourse to enjoined practices or failure to do what the Decree requires. This is significant for two reasons. First, it underscores that nothing in the Decree's plain language renders any EDPM injunction dependent on IBM's position in the tabulating industry -- something one would expect if a remedy was designed to prevent or undo leveraging. For instance, there is no Decree language whatsoever enjoining IBM from using its tabulating machine monopoly position to "foreclose competition, [or] to gain a competitive advantage . . . " in the EDPM market, standard leveraging language. See, e.g., United States v. Griffith, 334 U.S. 100, 107 (1948). Second, as described above, this Decree seeks to prevent the recurrence of anticompetitive conduct that was not the focus of the 1969 case and the importance of those provisions in protecting the public interest in competition was not addressed or resolved during the 1969 case.

"[D]ecrees are generally to be interpreted consistently with their 'plain meaning' or 'explicit language'." United States v. American Soc'y of Composers, Authors & Pub., 782 F. Supp. 778, 787 (S.D.N.Y. 1991) (emphasis added). To interpret the judgment, we therefore begin with the language itself, because, "the words [of a contract] themselves . . . are always the most important evidence of the parties' intention." Network Pub. Corp. v. Shapiro, 895 F.2d 97, 99 (2d Cir. 1990) (quoting Eddy v. Prudence Bonds Corp., 165 F.2d 157,161 (2d Cir. 1947) (Hand, J.)). "The primary objective in contract interpretation is to give effect to the intent of the contracting parties as revealed by the language they chose to use." Sayers v. Rochester Tel. Corp., 7 F.3d 1091, 1094 (2d Cir. 1993) (citations and quotation marks omitted).

If IBM's interpretation of the Decree is not supported by the Decree's language, it should be rejected, ITT Continental Baking. Co., 420 U.S. at 234-35, especially in light of the fact that the parties spent almost a year negotiating the settlement. (IBM Chron. at 17-25; U.S. Prelim. at 15.) See Grumman Allied Indus., Inc. v. Rohr Indus., Inc., 748 F.2d 729, 734 (2d Cir. 1984) ("[b]y giving effect to explicit contractual terms, a court has a better chance to carry out the intentions of the parties. Particularly where the two sides are sophisticated, their allocation of risk and potential benefit is properly treated as supreme to any conflicting understanding we may have.")

The Decree's language refutes rather than reinforces IBM's unwritten "purpose". The Decree is replete with references to EDPM and the application of remedies to EDPM is in no way linked to IBM's tabulating machine market position. Indeed, as to Decree Section IV, IBM is flatly wrong that there is "nothing about why the Decree was made applicable to EDPM." (IBM 1969 Mem. at 13) (emphasis in original). That Section unambiguously states why it applies to EDPM:

[i]t is the purpose of this Section IV of this Final Judgment to assure to users and prospective users of IBM tabulating and electronic data processing machines at any time being offered by IBM for lease and sale an opportunity to purchase and own such machines at prices and upon terms and conditions which shall not be substantially more advantageous to IBM than the lease charges, terms and conditions for such machines. (emphasis added).

Final Judgment § IV. Consistent with the aim of constraining the exercise of market power through lease-only and other anticompetitive practices, Section IV(b)(2) orders IBM "to sell new standard tabulating and electronic data processing machines of each type at any time thereafter currently being manufactured and offered for lease or sale by IBM . . . " (emphasis added). This provision plainly is designed to constrain the exercise of market power through the recurrence of discriminatory practices against EDPM purchasers, regardless of IBM's tabulating machine market position. Accepting IBM's imported "leveraging" purpose would read into the Decree a time for termination (i.e., when leveraging no longer could occur) that would necessarily render the "at any time" clause superfluous or meaningless. So rather than avoid a reading that creates surplusage, IBM invites it. And it does so even though courts generally refrain from rendering contractual provisions surplusage or of no effect. See Rothenberg v. Lincoln Farm Camp, Inc., 755 F.2d 1017, 1019 (2d Cir. 1985) ("an interpretation that gives a reasonable and effective meaning to all the terms of a contract is generally preferred to one that leaves a part unreasonable or of no effect . . .") (emphasis added). Cf. Restatement (Second) of Contracts § 203 at 93 (comment b); U.S. 1969 tab 4 ("Since an agreement is interpreted as a whole, it is assumed in the first instance that no part of it is superfluous . . . . [W]here an integrated agreement has been negotiated with care and in detail and has been expertly drafted for the particular transaction, an interpretation is very strongly negated if it would render some provisions superfluous.").

Decree Sections VI and VII further the objective of constraining the exercise of market power against prospective purchasers by enjoining IBM from discriminating against owners of computers in favor of lessees (Section VI) and by enjoining IBM from requiring "any purchaser" of an IBM EDPM to have it repaired or maintained by IBM or to obtain spare parts from IBM (Section VII (c)). IBM also is enjoined from requiring "any lessee or purchaser" to disclose to IBM the use to which its computers are put (Section VII (b)). (See U.S. Prelim. at 4- 5.) Indeed, Section VI, by requiring IBM to sell EDPM machines and parts and subassemblies to end users as well as to "persons engaged in the business of maintaining and repairing such machines", plainly is designed to encourage competition in parts, subassemblies and maintenance, creating aftermarket choice for consumers of IBM EDPM. (See also Section VII (d) (2)-(3), which generally prevents IBM from restricting experimentation with IBM computers or alterations in or attachments to its computers.) Again, nothing conditions the application of these provision on IBM's power in tabulating machines. Moreover, the Decree also requires IBM to furnish at reasonable and "nondiscriminatory charges" "to any owner" of EDPMs the same technical information documents that it generally provides to its own repair and maintenance employees. (Section IX(b).) And Section IX(c) requires IBM to provide documents pertaining to the operation or application of their computers on a non-discriminatory basis and at reasonable charges to IBM computer lessees and purchasers.

IBM unconvincingly states that the EDPM provisions dealing with compulsory patent licensing (e.g. Decree Section XI) are in some unspecified way less restrictive than those provisions applicable to tabulating machines. (IBM 1969 Mem. at 12-13 n.8.) Actually, IBM's contention is simply wrong. The Decree's compulsory patent licensing provisions provide identical treatment for tabulating machine and EDPM patents. Of course, the fact that the Decree specifically required compulsory licensing of EDPM patents at all undermines IBM's "purpose" argument. If this Decree was not concerned with EDPM competition for its own sake, it is difficult to understand why Section XI would be included.

B.	IBM's Interpretive Method Fails As A Matter of Law And Is Inconsistent

With The Facts.

IBM does not and cannot point to any Decree language that links or in any way conditions the Decree's application to EDPMs to IBM's tabulating machine monopoly. Moreover, IBM does not point to any identifiable ambiguity, defined as a word or phrase "capable of more than a single meaning" when viewed objectively. United Nat'l Ins. v. Waterfront New York Realty Corp., 994 F.2d 105, 107 (2d Cir. 1993). Refusing to take the Decree's explicit application to EDPMs at face value in adducing the Decree's purpose (i.e., to constrain the exercise of market power through the recurrence of anticompetitive practices and to create aftermarket choice), IBM injects what it deems "extrinsic evidence", even though that evidence (as we show in the our Preliminary Statement (U.S. Prelim. at 11-17) and further demonstrate below) does not support its argument. It contends that because the Decree is silent on why it applies to EDPMs, extrinsic evidence must be consulted.

This approach to Decree interpretation ignores the Supreme Court's observation that "it is inappropriate to search for the 'purpose' of a consent decree and construe it on that basis," ITT Continental Baking., 420 U.S. at 235, and shies away from construing "the instrument . . . as it is written, and not as it might have been written . . . " Id. at 236 (quoting United States v. Armour & Co., 402 U.S. 673, 682 (1971). In contrast to IBM's interpretive method here, in Armour, the Court relied on the decree's text in rejecting the Government's argument that the decree required a complete separation between the defendant's business and another business. Id. at 677-78 (noting that the language of "the decree itself, carefully worked out between the parties in exchange for their right to litigate the issues, does not effect a complete separation, but, rather, prohibits particular actions and relationships not including the one here in question.") The court did not engage in a searching inquiry into whether the absence of such a prohibition should be explained by extrinsic evidence: "If the parties had agreed to such a prohibition, they could have chosen language that would have established the sort of prohibition that the Government now seeks . . . language that would have been apt either to create a complete separation or to bar with particularity the sort of transaction involved here was not used." Id. at 679-80.

Similarly, here, the complete absence of language supporting IBM's tabulating machine "purpose" theory counts heavily against it— especially in light of the fact, as shown above, that such an imported provision would contradict Section IV's express purpose and is neither suggested by nor consistent with any Decree provision. IBM's importation also departs from the practice that "the meaning of the words used" should inform the process of supplying an omitted term. See Restatement (Second) of Contracts § 204 at 98 (comment d.), U.S. 1969 tab 4; Galli v. Metz, 973 F.2d 145, 149 (2d Cir. 1992) (when interpreting a contract, the court must consider the entire contract and choose the interpretation which "best accords" with the remainder of the contract). Thus rather than reach the common sense and accurate conclusion that the complete absence of language conditioning the remedies of EDPM on IBM's monopoly position in the tabulating machine industry evinces that EDPM remedies were not meant to be so conditioned, IBM abandons all proper methods of decree interpretation in a desperate search for ambiguity in the face of clarity.

Apart from contradicting the plain language of the Decree, IBM's derived overarching "purpose" is belied by the historical record. For one thing, the "prevent-leveraging- from-tabulating-machine-market-to-EDPM-market purpose" IBM now expounds was never mentioned nor alluded to during the January 25, 1956 hearing before Judge Edelstein. In fact, during that hearing, in which counsel for IBM appeared and spoke, the Government indicated that the Decree requires the compulsory sale of machines (January 25, 1956 Tr. at 61-62; U.S. Selected Docs. tab 11) and it provides that the prices to be charged for new machines must have a commercially reasonable relationship to the lease charge for the machine (Id. at 63-64). Moreover, Government counsel indicated that the purpose of Section V was to "establish in the United States a used machine market which has never been heretofore" (Id. at 69) and that it does so by placing restrictions on IBM from "taking back or acquiring IBM machines." (Id. at 68-69.) Consistent with the Decree's language and structure, the Government indicated that Section VI "is also an effort to implement the sales requirements of the machines and to establish an independent repair and maintenance service industry regarding those machines." (Id. at 70) (emphasis added). And Section VII enjoins the recurrence of anticompetitive leasing practices. (Id. at 73-75.) Section IX, as counsel for the Government informed the court, relates "to the disclosure of technology" to purchasers and "to any present or prospective independent repair man or maintenance personnel." (Id. at 78.)

Indeed, during the November 4, 1970 modification proceedings before Judge Edelstein, counsel for IBM acknowledged that "the most drastic relief which was imposed by the consent judgment was the requirement that IBM sell as well as lease equipment, and the primary purpose of that provision was that by sale there would be created a second-hand market which, in turn, would create competition with the IBM new equipment." (U.S. Selected Docs. tab 15 at 2- 3) (emphasis added). Once again, no one alluded to IBM's new-found "purpose". In short, IBM's attempt to connect the continuing viability of the judgment in the computer industry to IBM's position in the tabulating industry is an effort to rewrite the bargain to which it consented. It also is contrary to the historical facts.

Moreover, when IBM agreed to the judgment, it waived its right to challenge the sufficiency of the Government's evidence or to insist only on relief that would have been supported by the evidence at trial. Armour, 402 U.S. at 682; see also U.S. Prelim. at 16-17. As a result, IBM's renewed arguments (see IBM 1969 Mem. at 13-20) as to the nature or quality of the Government's evidence and its speculation based on an internal discussion by an individual staff attorney as to whether the Government could or would modify the complaint, are irrelevant.

V.	THE 1969 CASE SHEDS NO LIGHT ON WHETHER THE DECREE APPLIES TO OPERATING SYSTEM SOFTWARE PRODUCTS

IBM continues to argue that the Decree does not apply to IBM's operating system software products that are necessary for operation, including interoperability, of any particular computer or computer system. (IBM 1969 Mem. at 24-25 n.16.) Although IBM makes no showing as to how its software argument pertains to the 1969 case, we nonetheless are constrained to respond.

IBM incorrectly asserts that the Government has included software within the scope of the Decree in order to "gerrymander software based 'markets' for the System/390 and AS/400." (Id.; see also August 7, 1995, Tr. at 28-29, 31.) We have focused our inquiry on the AS/400 and System/390 product families because our preliminary information raises concern that judgment termination might permit IBM to exercise power in markets for AS/400 or System/390 products or services. (U.S. Prelim. at 35-36.) Our preliminary concern is the result of our continuing review of the likely impact of judgment termination under current market conditions. (U.S. Prelim. at 20-21; 29 n.30.) This review requires an assessment of whether Decree termination would facilitate IBM's exercise of market power in properly defined markets. (Id. at 26-37.) We include within the relevant market products that are reasonably interchangeable by consumers for the same purpose (Id. at 27) and assess competitive conditions in the context of current market realities, including lock-in considerations. (Id. at 31-33 & n.31; 40-43 & nn.44- 45.)

As suggested by this standard antitrust analysis, whether operating system software is covered by the Decree, as the Government contends, has no bearing on whether one product is reasonably interchangeable with another product under current market realities. The defined markets will be the same even if, as IBM contends, the Decree does not apply to operating system software. Although the Decree's scope does not affect the process of market definition, it does affect IBM's overall obligations in the markets for S/390 and AS/400 products and services.

IBM wrongly contends that operating system software is not a "device or attachment" under Decree Section II(f) used primarily in or with an electronic data processing system. That section provides no indication that the words "device or attachment" should be limited to hardware products. Section II(e)'s definition of "electronic data processing system" includes machines that are affirmatively capable of performing certain specified functions, and IBM concedes that computers do not work without software. (Id. at 3 n.2.) However, IBM maintains that operating system software is not covered by the Decree because little software existed in 1956. (IBM Reply Br. at 8-9.) But IBM concedes that an electronic data processing machine, as defined in Section II(f), includes "anything that is part of an 'electronic data processing system'" (as defined in section II(e) (IBM Chron. at 27.)) It thus admits that the Decree applies to all IBM hardware and to all forms of peripheral devices (id.), even though, just like much of today's software, numerous types of hardware and peripheral devices did not exist in 1956 and even though IBM defended the Government's bundling charges in the 1969 case by pointing out the symbiotic relationship between hardware and software (particularly operating system software) and how computer functions could be transferred between hardware and software. It was precisely these types of related products that the "device or attachment" provision of the Decree encompasses. Limitation of the Decree to hardware not only would contradict the express language of Section II(f), which on its face allows no such limitation, but also would permit IBM to evade the Decree simply by shifting computer functions from hardware to software.

Largely to prevent this type of decree evasion, in an analogous setting, the Court of Appeals for the District of Columbia affirmed the District Court's conclusion, over the Government's objection, that a provision in the AT&T consent decree prohibiting the Bell Operating Companies ("BOCs) from manufacturing "telecommunications equipment" also prohibited the development of software that is integral to telecommunications hardware. United States v. Western Elec. Co., 894 F.2d 1387, 1394 (D.C. Cir. 1990). The Court of Appeals explained:

Indeed, because "firmware" circuitry has largely supplanted the more cumbersome vacuum tubes, wires and switches that formerly comprised the heart of many pieces of telecommunications equipment, the reading of section II(D)(2) urged by the DOJ would leave the BOCs free to perform the most significant design and development functions associated with the manufacture of telecommunications products.

Id.

IBM complains that the Government did not earlier state specifically that operating system software is subject to the Decree, even though the Government had no reason to publicize its interpretation of the judgment until after IBM sought to make the Decree's coverage of software an issue in this litigation. (IBM Chron. at 27.) Until that time, as recently as August 24, 1993, IBM had advised the Government that it treated software as if it were covered by the Decree. (U.S. Prelim. at 3 n.2.) And for more than 20 years after the judgment was entered, IBM gave away its operating system programs "'free of charge.'" (Building IBM at 293; IBM 1969 Pretrial Br. at 353.) Under these circumstances, the Government had no reason to expect that anyone would want to buy new or used operating systems.

Indeed, it appears that IBM has a number of different policies with respect to operating system software and the Government cannot know the details of these policies or understand their ramifications under the Decree without further discovery. We are unaware of any complaint that IBM has failed to sell software. We express no opinion at this time on IBM's contention that it would be deprived of its intellectual property rights if it were required to sell software. Indeed, as we noted before (U.S. Prelim. at 3-4 n.2), we are sympathetic to IBM's desire to protect its software intellectual property rights, which IBM only began to assert two decades after entry of the Judgment. But we do believe that we are entitled to discovery on these issues and on how IBM's software policies would change in the event the Decree is terminated.

VI.	CONCLUSION

The Court should reject IBM's request for exemption from the Kodak market power evaluation simply because the Government once initiated and then dropped an unrelated antitrust suit against it. IBM voluntarily entered into the Decree with the understanding that the Decree would govern its conduct in the computer industry in perpetuity. Under the controlling authority, IBM bears the burden of demonstrating that the Decree has achieved its purpose or that changed circumstances have rendered the Decree incapable of accomplishing its purposes. This showing requires an assessment of current market conditions using standard antitrust analysis. The 1969 litigation simply does not speak to, much less resolve, these issues.

Estopping the Government and the Court from analyzing current and future market conditions, then, is the surest road to error. The Decree has established industry rules that have been in effect for almost forty years. In reliance on the judgment, new market participants have emerged and have invested billions of dollars. Consumers may substantially benefit from the competition those participants provide. The truncated proceeding that IBM proposes, in short, is contrary to law and would deny the Court the facts it needs to make a reasoned determination.

Accordingly, for the foregoing reasons and the reasons stated in the Government's Preliminary Statement of Issues, the United States respectfully submits that the 1969 case is irrelevant to this proceeding, which instead is concerned with determining, through examination of likely market effects, whether termination is now warranted because the 1956 Decree has achieved its purposes or changed circumstances have rendered the Decree incapable of accomplishing its purposes. In order to permit an examination of the relevant issues, the Government urges the Court to approve the investigation plan with the aid of discovery set forth in our Preliminary Statement.

October 5, 1995

Respectfully submitted,

___________________________	Kent Brown (KB-5429)

Sanford M. Adler (SA-7428)

Richard L. Irvine (RI-8783)

Don Allen Resnikoff (DR-2017)

Ian Simmons (IS-7468)

James J. Tierney (JT-7842 )

U.S. DEPARTMENT OF JUSTICE

Antitrust Division

Computers & Finance Section

555 4th Street, N.W.

Suite 9901

Washington, DC 20001

(202) 307-6200

CERTIFICATE OF SERVICE

This is to certify that, by agreement of the parties, the United States' Memorandum on the 1969 Case was delivered on October 5, 1995, by facsimile (without attachments) to:

Peter T. Barbur, Esq.

Cravath, Swaine & Moore

Worldwide Plaza

825 Eight Avenue

New York, New York 10019

Fax: (914) 288-4085

and made available (with attachments) for pick-up at the Antitrust Division's New York Field Office, 26 Federal Plaza, Room 3630, New York, New York.

_________________________

Ian Simmons (IS-7468)