Petition — Memorex Corp. v. International Business Machines Corp.

Supreme Court brief1981

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What actually matters in this document.

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8 0 ~- 1 8 8 4 err es U.S.

MAY 6 1981

No. “ALEXAND': L. STEVAS,

CLERK

IN THE

Supreme Court of the United States

OCTOBER TERM 1980

MEMOREX CORPORATION, et al.,

Petitioners,

VS.

INTERNATIONAL BUSINESS MACHINES

CORPORATION,

Respondent.

Petition for Writ of Certiorari to

the United States Court of Appeals

for the Ninth Circuit

JOHN L. ENDICOTT

PAUL G. BOWER

515 South Flower Street

Los Angeles, California 90071

(213 )-488-7000

Attorneys for Petitioners

Of Counsel:

GIBSON, DUNN & CRUTCHER

RONALD S. BEARD

2029 Century Park East

Los Angeles, California 90067

LiIMBACH, LIMBACH & SUTTON

Kar_ A. LIMBACH

2001 Ferry Building

San Francisco, California 94111

(Appendix to the Petition is in a separate volume)

PANDICK PRESS, WEST—SO. CAL., 1945 S. FIGUEROA, LOS ANGELES, CALIFORNIA (213) 747-4321

QUESTIONS PRESENTED

Is a course of conduct of a monopolist that was conceived

and executed with the purpose and effect of excluding com-

petitors from relevant markets immunized from liability under

Section 2 of the Sherman Act because part of the conduct

consisted of price cuts projected by the monopolist to be above

its marginal or average variable cost? Should the proper

standard for assessing the legality of a monopolist’s conduct

that includes price cuts be based upon such a cost-based per se

test, or a rule of reason approach that considers all relevant

factors, including the intent of the monopolist, the nature of

other conduct in addition to price cuts, and the actual effect on

competition?’

1 The parties to this proceeding are petitioners Memorex Corporation,

Memorex Sales and Service Corporation and ILC Peripherals Leasing

Corporation (hereinafter referred to collectively as “Memorex”), and re-

spondent International Business Machines Corporation. The only subsidiaries

of Memorex Corporation which are not wholly-owned are Memorex DIC

Corporation, Memorex Finance Company, Memorex Japan, Ltd., Telex

Computers S.A., and Memorex Ribbon Corporation. The only affiliate of

Memorex Corporation is Teijin Memorex, Ltd.

TABLE OF CONTENTS

PAGE

NE ILD OE oda vn cnchiosasnapnsiciatascvestadnilipbiammmaticns uidiabiteral l

a et ASR Re Oe OH PRT MI APNG AC ED |

SONNE ME SW WHEL UO oi noi calacasadoa test ncbahabboadtliescontaMbbaphn 2

RUUD COU? NNN ON a os. ics casbbbictnesenebppevadecsevaansalos 2

A. Industry and Market Background ...............cccccccccssscessseseseeeeee 2

ee INSTT Re CUMIN! Wo Aa IN, EMAIL io I 3

C. IBM Studied And Systematically Attacked Memorex And

Other PCMs At The Point Of Entry With A Series Of

Interrelated Acts Involving Predatory Pricing, Arbitrary

Product Manipulations And Exclusionary Marketing Prac-

tices; All With The Intent And Effect Of Foreclosing

I i kecsninhtnsntcsnnonccicisdcnapvechiagmmctibalalasalabeisdecks dixie ies 5

1. IBM was unable to respond competitively with im-

proved products, and instead acted to exclude the

PCMs before they could surmount the barriers to entry. 5

2. Asan integral part of its exclusionary course of conduct

IBM identified its target competitors and studied them

ME I sas ostiapecnleh sebshdsheninjsaeatiteandashisbes iddkamasaabiahsaibios 6

3. IBM acted quickly and intentionally to foreclose new

competition at the point of entry .............cccceessseesessesseees 8

4. The effect of the course of conduct was virtual elimina-

UE A I IN piigoconalcccbdascvivsdccsipsicibuninanisinigaacabashaaniaaucls 10

SA SII cisihcaccsincsnasiicepcsosicusapaibbeishosscrveninimenieiina il

Se! PNY 0 COMRINOIIE ociciccicsndiiicnntiasubecendsecabbidedidniincioencanal 11

2. Proceedings in the District Court .............cccccccscesceeseeseeees 11

3. Proceedings in the Ninth Circuit ...........0.cccccccccsssssseeseeees 12

REASONS FOR GRANTING THE WRIT .............ccccccsssesesesesereees 13

iii

PAGE

A. The Decisions Below And CalComp Are In Direct Conflict

With Decisions Of This Court, Are Contrary To The Goals

Of The Sherman Act, And Cannot Be Supported On The

Claimed Goal of Economic Efficiency.................:cccceseeeeeeeeeees 13

1. The Courts below totally ignored the “willful” stan-

dard of monopolization established in leading cases of

SN ial Us. Co nccllbsmaconeseentch ponesbenaibamaes maa’ 13

2. The CalComp/Memorex decisions totally disregard

evidence of defendant’s intent and are thus in direct

conflict with a number of decisions of this Court

stressing the importance of intent in assessing antitrust

SRN issih ids cc chikessnchsarclds eavacdacenshathns Souphanshenccdiapansntenes 15

3. The CalComp/Memorex decisions sacrifice intent and

the willfulness test to mechanistic per se pricing rules .... 18

4. The cost-based per se rules of CalComp/Memorex

sacrifice the broader goals of the Sherman Act for

Purported ECONOMIC EFFICIENCY ............cceeeeercseeereeersseeeees 20

5. The per se tests adopted by CalComp/ Memorex cannot

be supported on grounds of efficiency and result in

virtual immunity for a MONOPOIiSt...............:ceeeeeeeeseeceeee 22

6. The practical effect of the cost-based rules has been to

deprive plaintiffs of their right to jury trial...................... 26

B. There Is Conflict Between The Circuits As To The Proper

A IN sii sikinissdisedeindevsgdcorcacheitmcocsscsiticcivorscoas 27

C. This Court Should Act Now To Settle An Important And

Timely Issue Of Federal Law With Far-Reaching Con-

nob 6, ai, alec eas hgneeuadebabbeconebnnionpgabecee 28

SEIT Grlikdt Suinesiisswidiiullaiesicus nacdonigniebisemoesubedieeanpiminscnoeoneneoees 30

TABLE OF AUTHORITIES

CASES PAGE

American Tobacco Co. v. United States, 328 U.S. 781 (1946) ...14, 21

Appalachian Coals, Inc. v. United States, 288 U.S. 344 (1933)...... 16

Berkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d 263 (2nd Cir.

1979), cert. denied, 444 U.S. 1093 (1980) ccc ceeeccececeseeeees 9

Borden Inc. (1976-1979 Transfer Binder) Trade Reg. Rep. (CCH

DMI CERIO D ins sthesedsanishvegthocnebcocssaisastah Ulam ceités stated tie. 27

Broadcast Music, Inc. v. Columbia Broadcasting System, Inc., 441

Ee PW csc Uothabaltss tcicdkesededincteatbash Goihighl bee coobiadelncudsonsanadcttn 19

Brown Shoe Co. v. United States, 370 U.S. 294 (1962) ....cccccccccceeee 21

California Computer Products, Inc. v. International Business

Machines Corp., 613 F.2d 727 (9th Cir. 1979) ........c:ccssseseseeePQssim

Chillicothe Sand & Gravel Co. v. Martin Marietta Corp., 615 F.2d

SEE © HE IMs RIND caicasicsbi inachcscpimeidhdninicchadloAeoissdcudsos eared ccaiocce 27

City of Morgantown, W.Va. v. Royal Inns Co., 337 U.S. 254

CROP dts cab tinthainckag hh ct ssi annie Aalibeobipuscceiia ides sasha beceoe colacssx 26

Continental Ore. v. Union Carbide, 370 U.S. 690 (1962) .......cccs0000 12

Continental TV, Inc. v. GTE Sylvania, Inc., 433 U.S. 36 (1977) .... 19

Dimick v. Schiedt, 293 U.S. 474 (1935) ....cccccccssssssscscsssescsscsescescecees 26

FTC v. Anheuser-Busch, Inc., 363 U.S. 536 (1960) ....ccccccccccseseeceseee 16

Greyhound Computer Corporation, Inc. v. IBM, 559 F.2d 488 (9th

ERTS ES CARON UP HERERO RD RERUN ioe 24

Hanson v. Shell Oil Co., 541 F.2d 1352 (9th Cir. 1976), cert.

> GR AS OE SOTA CAGTF ) saiscinccnininsinscitstiidilige te nai, 13, 20, 27

I. E. du Pont Nemours & Co. 3 CCH Trade Reg. Rep. 21 pp.

AO COE © EP D vckiciestiphatiiciscnipascosonspiegipisbcaribie hodiccaitaiegti 27

ILC Peripherals Leasing Corp. v. IBM, 448 F.Supp. 228 N.D.

SNIP UD esithiatienicicalindbaonbsleadlini caidas applet ea 11

In Re U.S. Financial Securities Litigation, 609 F.2d 411 (9th Cir

SFE P sicstinetichtaiintaiiiicsssantdllecpeatibcnnicessandinerccdaieightiae sinesipkaaiioalioticee ts 26

International Air Industries v. American Excelsior Co., 517 F.2d

714 (Sth Cir. 1975), cert. denied, 424 U.S. 943 (1976)... 27

International Boxing Club of New York, Inc. v. United States, 358

Weis BEA BIO iciriictienentpaininsente CMC ARE BALE aN ON 14

eal

CASES PAGE

Jacob v. City of New York, 315 U.S. 752 (1942) ....ccccccccccseeeeeeeeeeees 26

Janich Bros., Inc. v. American Distilling Co., 570 F.2d 848 (9th

Cir. 1977), cert. denied, 439 U.S. 829 (1978) ........ccceeseees 13, 20, 27

National Society of Professional Engineers v. United States, 435

I, MU eR IIPTE Baihiscnciudipantipnticiaksndnenickaigiadilidsendimessicccakechiceiietabateanndine 19

Northeastern Tel. Co. v. American Tel. & Tel. Co., 497 F. Supp.

SO IE 0 SUED saciteicinicstieccichtencviendingnacleb sorendtangchiiouiinianeistaiibbonntal 27

O. Hornusel Co. v. Ferro Corp., 472 F. Supp. 793 (W.D. Pa.

a Ec alensetpmesnsiedininepenelipnsiilisnalilpeeininicedes 27

Pacific Engineering & Production Co. of Nevada v. Kerr-McGee

Corp., 551 F.2d 790 (10th Cir.), cert. denied, 434 U.S. 879

ARIE a wi thstasaininsphnatiorendbenmetohiecapentnestaiabaehtalebeenaiaibaessaigeuianiane 27

Poller v. Columbia Broadcasting, 368 U.S. 464 (1962) ............c00008 16

Richter Concrete Corp. v. Hilltop Basic Resources, Inc., 1981-1

Trade Cas. J 63,947 (S.D. Olio 1961 ) ........cccccococccccccccsccscesccesesees 27

Schine Chain Theatres v. United States, 334 U.S. 110 (1948)........ 18

Standard Oil Co. v. United States, 221 U.S. 1 (1911)................. 14, 21

Swift & Co. v. United States, 196 U.S. 375 (1905) .....cccccccccseeeseeeeees 12

Telex Corp. v. IBM Corp., 510 F.2d 894 (10th Cir.), cert.

NN FLEE SEN UY OBIE D neciss cde licearscereenestacnnbiocncnseintancnnbinsneniaie 27

Transamerica Computer Co., Inc. v. International Business Ma-

chines Corp., 481 F. Supp. 965 (N.D. Cal. 1979) ............. 15, 27, 28

United States v. Aluminum Company of America, 148 F.2d 416

EA A OUED siihciliinniatibncdibadsininccbepntescciantnapahiouliiadiieninibite 14, 15, 21, 28

United States v. American Tobacco Co., 221 U.S. 106 (1911)........ 14

United States v. Crescent Amusement Co., 323 U.S. 173 (1944) .... 14

United States v. E. I. du Pont de Nemours & Co., 351 U.S. 377

CR HES SE BR AE OLE PEE ee SOc RS NA RRA 14

United States v. Griffith, 334 U.S. 100 (1948) .......ccccceeeceeeeeeeeees 14

United States v. Grinnell Corporation, 384 U.S. 563 (1966) ...... 14, 16

, ar

CASES PAGE

United States v. International Harvester’Co., 274 U.S. 693 (1927) 14

United States v. Otter Tail Power Co., 410 U.S. 366 (1973)............ 14

United States v. Reading Co., 253 U.S. 26 (1920) .....cccccccsscccesceseeeee 14

United States v. Terminal Railroad Association of St. Louis, 224

eT TMP HEB Wichii ing oacecs costanbccadhredsilivadibaeascbbosbacnstmactbetit decossss 14

United States v. TransMissouri Freight Assn., 166 U.S. 290

IPT Miikgk elit ch ntlls cciisdsanos nocd Mlocsppdapidiadcussbiasetedecs thieudsdhadesuchares 21

United States v. United Shoe Machinery Co., 347 U.S. 521

PCN silicide sth epilcmbiichnakeivinthssbcisiesinlenysenhboiodaneonmnaneraiiabtisiedeaniidccrscis 14, 15

United States v. U.S. Gypsum Co., 333 U.S. 364 (1948)... 14

United States v. United States Gypsum Co., 438 U.S. 422 (1978)... 16

United States v. U.S. Steel Corporation, 241 U.S. 417 (1920)........ 14

United States v. Von’s Grocery Co., 384 U.S. 270 (1966) ......c..c0000- 21

Utah Pie Co. v. Continental Baking Co., 386 U.S. 685 (1967)...16, 17

Walker Process Equipment, Inc. v. Food Machinery & Chemical

nas 6 FA WTI D sccccctssonscesdisaacesnasecsotsasbosoceootodesscenonsodors 14

Wever v. Wynne, 431 F. Supp. 1048 (D.N.J. 1977) .....cccccccscesseeseeeee 27

STATUTES AND RULES

EE TITER OA ll

Clayton Act, Section 4 (15 U.S.C. § 15) ..ccccccccccccccsssscesesceeseseeeeee 2

Sherman Act, Section 2 (15 U.S.C. § 2) ..........cccsscsscsscscescescscceceors 2, 11

MISCELLANEOUS

A.D. Neale, The Antitrust Laws of the U.S.A., pp. 427-32

(Cambridge University Press 1970) ............ccccccssccesssscesessessenceceece 21

Areeda and Turner, Antitrust Law (1978) 9 715, 1.7 ......cc.cccccsceceeee 18

Areeda and Turner, Predatory Pricing: A Rejoinder, 88 Yale L.J.

POPE A, MUFF IAD schicilselalosetpsachckasntnndtgnpba eiacalitehaasinsinibedcnntssiiabitchsdaabikiisaes 23

vii

MISCELLANEOUS PAGE

Areeda and Turner, Predatory Pricing and Related Practices

under Section 2 of the Sherman Act, 88 Harv. L. Rev. 697

CREED Aiton iis cseteetienngaatlinnspcodetiicinyishecabbinkephechaxiucninpadievececsocs 13, 18

Areeda and Turner, Scherer on Predatory Pricing: A Reply, 89

NUN: Gis Us OE PTO Paice aa 23

Areeda and Turner, Williamson On Predatory Pricing, 87 Yale

ereN EAI P vconptnC bins childs ssinccttudistaancdneinesbvaahsotbenvab ead viene 23

Bartkus, Innovation Competition: Beyond Telex v. IBM, Note, 28

SUN Mita EE BO PO so ole a a 23

Baumol, Quasi Permanence of Price Reductions: A Policy for

Prevention of Predatory Pricing, 89 Yale L.J. 1 (1979) ..........000 23

Beckenstein and Gable, Predation Rules: An Economic and

Behavioral Analysis, The Colgate Darden Graduate School of

Business Administration, University of Virginia, December

SMa ANA ta cineca dah hited daaiatuslaeobea Micadisoisacivcesaatavksdocsgeadeaiiirespumseosiade 23

Berk, The Antitrust Paradox, 154 (1978) ......c.ccccccscscssesscesscessseseeeeee 24

Brock, Price and Product Actions—Partial Systems, The U.S.

Computer Industry, a Study of Market Power, p. 109, Ballinger

NS, EBERT A AS SAO IA AON ENON OT A 23

Commentary, An Appraisal of Marginal Cost and Predatory

Pricing Under Section 2 of the Sherman Act, 30 Ala. L. Rev.

a ee 23

Elzinga, Predatory Pricing: The Case of the Gunpowder Trust, 13

IGT. RA ORE ON. BEF CAGTO ) cisciivieisciccksctivcccdsiconectsédesciunepcdtice 23

Geer, A Critique of Areeda and Turner’s Standard for Predatory

Practices, 24 Antitrust Bull. 233 (Summer 1979) ..........c.ccccc0000 23

Koller, On the Definition of Predatory Pricing, 20 Antitrust Bull.

aR ih saat ssedadtedaersaineciiobsoailiodll 24

Koller, The Myth of Predatory Pricing: An Empirical Study, 4

Antitrust Law and Econ. Rev. 105 ...........cccccccccscccesscceccececereceeceeees 24

MISCELLANEOUS PAGE

Koller, When is Pricing Predatory?, 24 Antitrust Bull. 283 (Sum-

DUE TOS Piccndsinsiictardacetntaemistiien piinteshaancatesahienistt Madina 24

Jordan, Telex v. IBM: Remodeling the Crisis in Antitrust, Note,

2S CLA Bi. Bs Fa a BPO hit hasennacccdasicsnsebeocsboitiviinttamnnubeideswoste 24

Joskow and Klevorick, A Framework for Analyzing Predatory

Pricing Policy, 89 Yale LJ. 213 (1979) .......c.ccccccccscseccrsosecesseossees 23

McGee, Predatory Price Cutting: The Standard Oil (N.J.) Case, |

Rotel. Bat WG Hae, USE 1 VISE ¥ cisticcccsccidistaiccacsccsceccdenstesinttoceses 24

National Commission for the Review of Antitrust Laws and

Procedures, Report, Section 2, pp. 149-50, GPO ed. (1979)....... 17

Note, Telex v. IBM, Monopoly Pricing Under Section 2 of the

Siarmean ict, B4 Veale 1.5. SSS C1STS) .ccnccesctcsocescsncvecactsorseccsccsiees 24

Posner, Antitrust Law: An Economic Perspective, University of

IIE BITS DP ahi sscocsvaszssdincsenteectivsnimmessedsapeshthenndsipatebeteionaio 24

Posner, The Chicago School of Antitrust Analysis, 127 U. Pa. L.

RE Ne 0 PT Bis ccelies deiechbccaliobicentndatedallidecksnpeisbscasaiios<ceinnerenisedpensutiia 24

Potter, Pacific Engineering & Production Co. v. Kerr-McGee

Corp—Predatory Pricing Under Section 2 of the Sherman Act,

PROG ee tin Bs FIT TP hisccaivesevecectucapaecbincscsinstcteabeneianine 24

Salop, Strategic Entry Deterrance, American Economic Associ-

wchcies CI US FD) iitedincotn csecisdssctesceqeies -tetiibansccscelpestecvessnevtiieseesoagsie 24

Scherer, Book Review, the Posnerian Harvest: Separating Wheat

from ChaG, G6 Yale 1.5. 974 CUGT2) ...ccccossasiosiinnavessrecsncsensoessesioses 24

Scherer, Predatory Pricing and the Sherman Act: A Comment, 89

BRAS Y, De. Beer GS 6 DTD in secicikeencsoccocesecessentesiestheniisbensaittaniiiinnnnnigees 24

Scherer, Some Last Words on Predatory Pricing, 89 Harv. L. Rev.

DOS SGI wii scitein tha crenichccciossnatiiignigiedapacitiaiteidiiniadabginassliahiididodnasiie 24

Schmalensee, On the Use of Economic Models in Antitrust: the

Realemon Case, 127 U. Pa. L. Rev. 994 (1979) .......ccccccseeceeeeeees 24

Sullivan, Antitrust §§ 39, 43 (1977) ...........cccccccssseesesesecereesesseesesseees 16

Sullivan, Antitrust Microeconomics and Politics: Reflections on

Some Recent Relationships, 68 Cal. L. Rev. 1 (1980) ..............0. 21

MISCELLANEOUS PAGE

Sullivan, Economics and More Humanistic Disciplines: What Are

The Sources of Wisdom For Antitrust?, 125 U. Pa. L. Rev. 1214

CRITE F Piiitiipsaiibtmeicicastertbnaimnip lh litle aati nd at cadtsiitie meg 20, 21, 24, 26

Sullivan and Wiley, Recent Antitrust Developments: Defining the

Scope of Exemptions, Expanding Coverage, and Refining the

Rule of Reason, 27 UCLA L. Rev. 265 (1979) .......ccccccscseseeseeees 24

Turner, Antitrust Policy and the Cellophane Case, 70 Harv. L.

AGAR RI iriide asistencia dati ice valnisaieisaseecevconse 14

Williamson, Commentary, Williamson on Predatory Pricing II, 88

Yale L.J. 1183 (1979) ............. CBE RES BTS RN OS 24

Williamson, Predatory Pricing A Strategic and Welfare Analysis,

Oe ey ie SOE BFE D sitintedladehicinhieditbindehatbiditicacastninhsecserivecesces 24

Yamey, Predatory Price Cutting: Notes and Comments, 15 Jour. of

ft BET REERDIISS SN SPEER EBA RRC oe 24

No.

IN THE

Supreme Court of the United States

OCTOBER TERM 1980

MEMOREX CORPORATION, et al.,

Petitioners,

vs.

INTERNATIONAL BUSINESS MACHINES

CORPORATION,

Respondent.

Petition for Writ of Certiorari to

the United States Court of Appeals

for the Ninth Circuit

OPINIONS BELOW

The opinion of the Court of Appeals for the Ninth Circuit

is Officially reported at 636 F.2d 1188. The opinions of the

District Court for the Northern District of California are

reported in 448 F. Supp. 228 and 458 F. Supp. 423. Copies are

in the Appendix (filed separately); references to the opinions

will be cited to the Appendix.

JURISDICTION

Although the judgment of the Court of Appeals was

entered November 18, 1980, Memorex filed a timely petition

for rehearing and suggestion for rehearing en banc which was

denied on February 5, 1981. This petition for Writ of Certiorari

was filed within ninety (90) days of the denial of the petition

for rehearing. The jurisdiction of this Court is invoked pursuant

to 28 U.S.C. § 1254(1).

STATUTES INVOLVED

Sherman Act, Section 2 (15 U.S.C. § 2):

Every person who shall monopolize, or attempt to

monopolize, or combine or conspire with any other person

or persons to monopolize, any part of the trade or com-

merce among the several States, or with foreign nations,

shall be deemed guilty of a felony... .

Clayton Act, Section 4 (15 U.S.C. § 15):

Any person who shall be injured in his business or

property by reason of ahything forbidden in the antitrust

laws may sue therefor in any district court of the United

States in the district in which the defendant resides or is

found or has an agent, without respect to the amount in

controversy, and shall recover threefold the damages by

-him sustained, and the cost of suit, including a reasonable

attorney’s fee.

STATEMENT OF THE CASE

A. Industry and Market Background.

This case involves the computer industry and IBM’s re-

sponse to new competitive entry into markets which until that

entry had been IBM’s private terrain. The relevant time period

extends back to the early 1960s, but is primarily 1970-1973.

A general purpose computer system of the type marketed

by IBM and a few other companies is composed of physical

components called hardware and programmed instructions

called software. The primary unit of hardware is the central

processing unit (“CPU”), sometimes referred to as the main-

frame. (12 RT 1840)? The remaining hardware consists of

® References to the reporter’s transcript will be “RT” preceded by the

volume number and followed by the page number. Memorex exhibits will be

identified by the abbreviation “PX” followed by the exhibit number.

ya ok

peripheral products which attach to the mainframe, including

storage devices (disc drives and tape drives), control devices

and input-output devices (printers and card readers). (PX

10649)

This case involves disc drives and control units and other

peripheral products that are “plug compatible” with IBM CPUs

at interfaces established by IBM. “Plug compatible” meant

that the device could be attached to and used with the IBM

system without significant adjustment. The plug compatible

manufacturers or “PCMs” generally limited their products to

those plug compatible with IBM CPUs because IBM was the

only company with a sufficient number of installed CPUs to

justify the expense involved in designing, manufacturing and

marketing compatible products. These products, which were

lower priced and equal to or better than those offered by IBM,

thus represented an alternative to users who otherwise would

have been required to take all components of the system from

IBM.

B. Parties Involved.

Memorex is a California corporation with its principal

office located in Santa Clara, California. It is a supplier of

computer equipment, including control units and disc drives,

and certain computer sur lies such as computer tape and disc

packs. Although Memorex supplied primarily peripheral

equipment, during the relevant time period it also undertook

the initial steps in a plan to become a full-scale participant in

the general purpose computer systems market by manufac-

turing its own system. (PX 3964)

IBM, a New York corporation headquartered in Armonk,

New York, is one of the world’s wealthiest and most powerful

corporations. It is by far the dominant worldwide supplier of

computer equipment.

In 1969, the year prior to meaningful entry into the IBM

peripherals markets by the PCMs, IBM had revenues in excess

of $7 billion, net income before taxes of almost $2 billion, and

cash equivalents of $1.6 billion. (PXs 10659-10661) In stark

contrast, in the same year Memorex’s revenues, net income

before taxes and cash equivalents were, respectively, 1%, 1.1%

and % of 1% of those of IBM. (PX 3964)

Historically, IBM has been preoccupied with maintaining

its monopoly position and market power, a monopoly that

dates back to the time when IBM had more than 90% of the

tabulating machine market. As succinctly stated in 1964 by

Thomas J. Watson, Jr., IBM’s then Chairman of the Board and

Chief Executive Officer:

I think the main aim of this company must be to protect

and expand our position in the market place and this must

be a consideration well above that of profit.

(PX 11759, p. 2) [emphasis added ]

Since IBM computed its own share of the market at well

over 75% at the time of these remarks (PXs 6662, p. 1; 6663, p.

28), “protecting and expanding” its market position was but a

euphemism for the “willful maintenance of monopoly power.”

Six years later, as the PCMs were entering the peripherals

markets, IBM accepted “the premise that legal defense is more

desirable than major losses in the marketplace” and decided

that acts should be taken to indicate to the PCMs “and the

financial community that IBM could and would protect its .

market share.” (PXs 2626, p. 2; 3131 pp. 2-3)

This then is not a case between companies competing on a

reasonably equal footing. It is instead a case about attempted

entry into markets created and dominated by IBM. IBM

designed and controlled the interfaces required for attachment

to each system. IBM determined the pace of new product

introduction and had an “exclusive” on each product until it

was first delivered and the required interface could be known to

competitors. IBM selected and then maintained short term

lease or rental as the basic method of marketing computer

equipment. While such control over products and marketing

practices constituted a formidable barrier to entry, the greatest

barrier, clearly recognized as such by IBM, was the lease

market itself which placed the “greatest financial strain on

competing equipment manufacturers.” (PX 3141) Since

revenues would be received not at the point of sale but in

installments over a number of years, even successful entry

would entail several years of negative cash flow and thus

substantial needs for capital.

Despite the barriers to entry, the monopoly profits being

earned by IBM on its huge lease base of peripheral products

invited entry. As a result a number of PCMs risked entry into

IBM terrain. This is the competitive process that the Sherman

Act was designed to foster: new firms enter a market offeting

better products at lower prices and, if permitted to compete in

an environment free from exclusionary acts by a dominant firm,

bring consumers the benefits of choice, more innovation and

competitive pricing.

IBM became preoccupied with the “threat” to its mono-

poly profits posed by entry of the PCMs and, having invited the

entry, took action to derail it in its infancy. The course of

conduct designed and used by IBM to exclude the PCMs is the

subject matter of this lawsuit.

C. IBM Studied And Systematically Attacked Memorex And

Other PCMs At The Point Of Entry With A Series Of

- Interrelated Acts Involving Predatory Pricing, Arbitrary

Product Manipulations And Exclusionary Marketing

Practices; All With The Intent And Effect Of Foreclosing

Competition.

1. IBM was unable to respond competitively with im-

proved products, and instead acted to exclude the PCMs

before they could surmount the barriers to entry.

By the late 1960s Memorex had demonstrated that it could

compete effectively with IBM in the computer tape market, a

market characterized by sale and thus lacking the high barriers

to entry created by the lease environment of the computer

equipment markets. Encouraged by its success, Memorex

began to offer lower-priced IBM plug compatible disc drives

which IBM recognized were superior to IBM’s own disc drives.

(PX 8682) Other PCMs did likewise. In the face of this new

entry into “its” markets, IBM embarked upon a course of °

conduct deliberately intended to block entry and thereby

foreclose any meaningful competition by the PCMs.

Prior to this entry IBM maintained its prices for peripheral

equipment at extremely high levels and thus earned monopoly

profits despite large cost reductions occasioned by technological

advances. For example, a report to IBM’s president in 1971

acknowledged that the prices of memory products ( peripheral

devices for which competition was just emerging) had re-

mained unchanged for 16 years despite a “precipitous drop in

costs.” (PX 4004, p.7)

IBM’s monopoly power also gave it control over the timing

of introduction of new technology. IBM introduced new

products at a controlled pace in order not to impact the steady

stream of revenues from its huge lease base of older equipment.

Faced with entry by the PCMs in 1970, IBM realized that it

could not compete with them on a technological basis because

“ijn previous years when we had little effective plug com-

patible competition it was possible . . . to achieve quite long

product lives and attractive profitabilities . . . by stretching out

the rate of new product introduction. Owing to the change

[emergence of competition], this is no longer possible, . . .

[and] we have some problems in reorienting to a competitive

situation.” (PX 5484, p. 10) Unable to respond competitively,

but aware that it controlled many of the barriers to entry, IBM

acted to render the plug compatible markets virtually impene-

trable.

2. As an integral part of its exclusionary course of conduct

IBM identified its target competitors and studied them

in detail.

IBM studied the PCMs continuously and in depth, not to

gain background information about the new competitors and

their products, but principally to ascertain their weaknesses so

that an attack could be launched to stop the PCMs before they

ve agers

Ve fe ae

could effectively enter the markets. IBM’s early studies showed

the PCMs to be well managed with good products and sound

marketing and service organizations. (e.g., PXs 3148; 11064)

These early studies also identified the principal area of

vulnerability—the PCMs would need substantial financing until

their lease bases were of sufficient size so that current product

shipments could be financed by continuing revenues from

shipments in prior years. (PXs 170; 2699) IBM recognized that

it would require six years for the PCMs to achieve that size and

turn cash flow from negative to positive. (PX 3034, p. 2)

Many of IBM’s studies centered on Memorex, identified by

IBM as the ‘eading PCM in the disc drive and controller

market. They were not studies by IBM of how to improve its

own operations or effect cost savings which could be passed on

to customers. The studies, primarily financial “impact” studies

of how proposed IBM actions would affect Memorex, were

instead literally war games by a dominant firm targeting its

fledgling competitors. (PXs 435; 5138; 3024)

The IBM studies of Memorex were relied upon by top

management of IBM in the formulation of actions taken against

the PCMs. (PX 11084) A former IBM employee testified that

the studies were “used to determine the various impacts IBM

actions might have on their [the PCMs] viability” and that as a

result of IBM acts Memorex “no longer was a break-even

proposition under the impact case” and “was a very risky

proposition and it was going to be touch and go whether

[Memorex] survived.” (20 RT 3380, 3401-A, 3503)

One key study calculated the impact on Memorex’s cash

flow over a six year period of a proposed IBM price cut. (PX

3024) The impact of the proposed price cut was that Memo-

rex’s peak cash needs would increase by a staggering $100

million. One month later IBM announced a price cut at the

same level analyzed in the study. The study concluded that the

effect on Memorex of the IBM price action would be “2314 [a

disc drive] program losses, double cash deficits and reduced

financing capability” (i.e. by one act IBM caused Memorex to

have greater cash needs and yet a reduced ability to meet those

needs from either internal or external sources). (PX 3024, p.

5) IBM was right. As a direct result of the IBM price cut,

Memorex saw its orders drop by 50% and was forced to cut

back production by 30%.

3. IBM acted quickly and intentionally to foreclose new

competition at the point of entry.

In early 1970, when the PCMs as a group had less than 5%

of the peripherals markets, IBM formed a “Key Corporate

Strategic Issue” task force to study the PCMs and develop a

Strategy to contain the new entry. A long range strategy was

developed which included most of the acts which were to

unfold in a carefully orchestrated course of conduct over the

ensuing 2-3 years. IBM’s own analysis of this conduct showed

that there would be adverse impact on IBM customers and on

IBM itself as a result of the acts. The primary effect, however,

would be the adverse impact on the PCMs. (PX 10294) In the

long run only IBM would benefit from the successful exclusion

of competition.

Memorex introduced extensive evidence to detail the entire

course of IBM’s conduct, including hundreds of IBM business

records, testimony of key IBM officials, and expert testimony in

regard to markets, pricing activities, product changes, and

damages. In total some 87 witnesses testified, with more than

19,000 pages of testimony and 3,200 exhibits.

The acts that made up IBM’s course of conduct can only be

summarized here. In general terms, the course of conduct

consisted of the following acts:

— pricing below IBM’s average total or fully allocated

costs on certain products.

Fee

— “limit” pricing designed to force the PCMs below

their cost of production.3

— selective, discriminatory price cuts designed to force

all PCM prices drastically lower while limiting the

impact on IBM.

— manipulation of designs and interfaces so as to fore-

close certain markets to the PCMs by creating tech-

nological incompatibilities which prevented the PCMs

from attaching to IBM mainframes and tied the IBM

peripherals to the mainframe.

— concealment of IBM interface information needed to

design compatible products.

— adoption of lease plans for the purpose of locking-in

customers to IBM systems and foreclosing the PCMs

from certain product markets before they could com-

mence manufacture of competing products.

— misleading and premature product announcements

designed to “freeze” the market while customers

waited for the announced IBM product.

— tying a media product to an IBM disc drive to

foreclose competition.

3In the spring of 1971 IBM was “dusting off [its] Memorex data” to

once again test the assumption that the “‘[PCM] floor for the [control unit]

and drive should be $900/$300.” (PX 3202, p. 2)

‘The Court of Appeals for the Second Circuit noted “[t]he possibility

lurking in Memorex that IBM, by creating technological incompatibilities, was

tying peripherals sales to its CPUs... .” Berkey Photo, Inc. v. Eastman

Kodak Co., 603 F.2d 263, 283 (2d Cir. 1979); cert. denied, 444 U.S. 1093

(1980). With respect to one of the interface manipulations involved in this

case, IBM acknowledged that “it was decided to add the control board to a 3-

drive 2313 unit, thereby make it mandatory that the first 3 drives attached to

the CPU are IBM’s.” (PX 401, p. 7)

Throughout the entire course of conduct, IBM continued its

studies of Memorex and other PCMs in order to monitor the

effect of its acts and to plan new attacks if the prior acts did not

have sufficient impact. One study used input from an IBM

designed computer model of Memorex, a model that permitted

IBM “‘to identify what the critical variables are in [Memorex’s }

financial structure. .. .” (19 RT 3288)

IBM also developed a sophisticated computer model

termed “STRIPIM” (Strategic IBM PCM Impact Model) to

study PCM competitors. (PXs 10238; 10240; 10241) Use of

STRIPIM permitted IBM to calculate what IBM called both

precisely and vividly the “death level—price at which PCMs

can no longer discount.” (PX 6932, p. 9) If the PCMs could not

discount below IBM’s prices, they simply could not market their

products. Death or bankruptcy would be imminent.

4. The effect of the course of conduct was virtual elimina-

tion of the PCMs.

The ultimate aim of IBM was to cripple the PCMs in the

area where they were most vulnerable—the need for outside

financing to offset the negative cash flows incurred while

attempting to surmount the leasing barrier. IBM’s success was

nearly complete. Outside capital, which had been readily

available to the new competitors in 1969 and 1970, was less

available in the early 1970s. By 1974, the year IBM had

predicted that Memorex’s cash needs would peak, capital was

completely unavailable.5 (PX 10656) IBM had successfully

told the financial community that IBM “could and would

protect its market share.” (PX 3131, pp. 2-3)

The impact on Memorex was staggering, ending its ability

to generate cash either internally or externally. Total damages

as a result of the IBM acts amounted to $333,000,000. Memo-

_ Tex was forced to abandon its limited entry into the general

5 IBM well understood that its acts were blocking entry, not only in the |

Memorex markets but in potential future markets as well:

With the financing of printer and memory competition still in the future,

we [IBM] feel fewer companies will enter this market than the tape/disc

area. (PX 170, p. 2)

purpose systems market and wrote off almost $100,000,000. It

avoided bankruptcy only through a complex debt restructuring

agreed to by its major lenders.

The impact on the entire industry was even more devas-

tating. Competition was eliminated by eliminating competitors.

Of the 11 or 12 significant PCMs which entered in the late

1960s and early 1970s, only two or three remained viable by

the time of trial. (PXs 11007; 11185; 48 RT 9880) The

competitive effect was that IBM’s acts deprived customers of the

substantial benefits originally brought by the PCMs—freedom

of choice, more innovation and lower prices.

D. Proceedings Below.

1. Petitioner’s complaint.

In December, 1973 Memorex filed its complaints against

IBM in two private antitrust actions brought pursuant to Section

4 of the Clayton Act. The complaints alleged that IBM had

violated Sections | and 2 of the Sherman Act and Section 3 of

the Clayton Act. Prior to trial the two actions were consoli-

dated and the Section 1 count was abandoned. After extensive

pretrial proceedings, the case was remanded to the Northern

District of California for trial before Judge Samuel Conti.

2. Proceedings in the District Court.

Trial by jury commenced on January 16, 1978. At the

conclusion of some 51 days of plaintiff's evidence, IBM filed

several motions for directed verdicts, all of which were denied

except IBM’s motion on the tie-in claim which was granted.®

Trial continued for 32 more days.

On July 5, 1978, after 19 days of deliberation, the jury

advised it was deadlocked 9 to 2 in favor of Memorex. Judge

Conti declared a mistrial. On August 11, 1978, he granted a

® JLC Peripherals Leasing Corp. v. IBM, 448 F. Supp. 228 (N.D. Cal.

1978).

directed verdict in favor of IBM as to all issues and entered a

final judgment in favor of IBM, stating that Memorex did not

present substantial evidence on any element of its Section 2

claim. Judge Conti also held that in the event of a remand for

retrial Memorex’s demand for a jury trial was stricken and any

retrial would be by the court.? Judge Conti’s opinion is

completely contrary to the standard for ruling on directed

verdict motions. He weighed conflicting evidence, adopted

inferences most favorable to IBM and totally disregarded

substantial portions of Memorex’s evidence, in particular with

respect to IBM’s intent.@ In addition, Judge Conti com-

partmentalized the various IBM acts and judged each in

isolation. Contrary to authority going back to Justice Holmes’

opinion in Swift,9 this approach disregarded voluminous evi-

dence that the acts were interrelated as part of a plan to

“protect and expand [IBM’s] position in the market place.”

(PX 11759, p. 2)

3. Proceedings in the Ninth Circuit.

Memorex filed its Notice of Appeal as to all issues on

September 8, 1978. Prior to completion of briefing, the Ninth

Circuit issued its opinion in California Computer Products, Inc.

v. International Business Machines Corp., 613 F.2d 727 (9th

Cir. 1979) (hereinafter “CalComp”). In CalComp the Ninth

Circuit affirmed a directed verdict in favor of IBM in a case

brought against IBM by CalComp, another PCM. Although

the Ninth Circuit in CalComp purported to establish a rule of

reason standard for assessing the legality of conduct by a

monopolist (App., pp. A-85-86), it in fact established a stan-

dard of per se legality for price reductions above marginal cost,

7 App., pp. A-56-66.

® See, e.g., App., pp. A-24-25, 26-27, 29, 30, 35-36, 38, 44-45, 46, 50, 52,

' $4-56.

® Swift & Co. v. United States, 196 U.S. 375, 396 (1905). See also

Continental Ore v. Union Carbide, 370 U.S. 690, 699 (1962).

regardless of the defendant’s intent. (App., pp. A-99-100)

The rule adopted was initially articulated in Areeda and

Turner, Predatory Pricing and Related Practices under Section 2

of the Sherman Act, 88 Harv. L. Rev. 697 (1975). It was

thereafter adopted in two earlier decisions of the Ninth Cir-

« Cuit.10 CalComp was settled and thus no Petition for Certiorari

was filed.

On November 18, 1980, a panel of the Ninth Circuit issued

a three-paragraph per curiam opinion in this case which

affirmed the district court solely on the authority of CalComp.

(App., p. A-2) Because Memorex rests exclusively on the

CalComp holding, this petition, of necessity, is directed to the

legal errors in the CalComp opinion.

REASONS FOR GRANTING THE WRIT

A. The Decisions Below And CalComp Are In Direct Conflict

With Decisions Of This Court, Are Contrary To The

Goals Of The Sherman Act, And Cannot Be Supported On

The Claimed Goal of Economic Efficiency.

Since the Court of Appeals in CalComp assumed the

possession of monopoly power by IBM, we will assume for

purposes of this petition that IBM possessed monopoly power

in the relevant markets. Our focus will be on the conduct

element of monopolization.

1. The Courts below totally ignored the “willful” standard

of monopolization established in leading cases of this

Court.

The concept of monopolization under Section 2 has been

considered by this Court in relatively few cases, most of them

10 Hanson v. Shell Oil Co., 541 F.2d 1352 (9th Cir. 1976), cert. denied,

429 U.S. 1074 (1977), and Janich Bros., Inc. v. American Distilling Co., 570

F.2d 848 (9th Cir. 1977), cert. denied, 439 U.S. 829 (1978).

involving monopolization by conspiracy or combination."

Unilateral monopolization has been considered in only a

handful of cases.12 None of these cases has included “pre-

datory” conduct as an essential element of monopolization or

even hinted at the use of mechanistic per se tests for judging the

conduct of a monopolist.

Only two decisions have considered in depth the type of

conduct that amounts to unlawful monopolization. One was

United Shoe. The other and the landmark decision on this

subject is Judge Learned Hand’s opinion in United States v.

Aluminum Company of America, 148 F.2d 416 (2d Cir. 1946)

(“Alcoa”). Because this Court could not obtain a quorum

eligible to sit in Alcoa, Judge Hand decided it under a special

grant of jurisdiction and was acting in the capacity of a court of

last resort. In American Tobacco Co. v. United States, 328 U.S.

781 (1946), this Court endorsed certain key elements of the

Alcoa decision. (328 U.S. at 811-14)

Most commentators read Alcoa as holding that monopoli-

zation is a status offense.13 However, even a more liberal

reading, to the effect that monopolists are held to a stricter code

of behavior than non-monopolists and must refrain from taking

11 Standard Oil Co. v. United States, 221 U.S. 1 (1911); United States v.

American Tobacco Co., 221 U.S. 106 (1911); United States v. Terminal

Railroad Association of St. Louis, 224 U.S. 383 (1912); United States v.

Reading Co., 253 U.S. 26 (1920); United States v. U.S. Steel Corporation, 241

U.S. 417 (1920); United States v. International Harvester Co., 274 U.S. 693

(1927); United States v. Crescent Amusement Co., 323 U.S. 173 (1944);

United States v. U.S. Gypsum Co., 333 U.S. 364 (1948); United States v.

Griffith, 334 U.S. 100 (1948); International Boxing Club of New York, Inc. v.

United States, 358 U.S. 242 (1959).

12 United States v. E. I. du Pont de Nemours & Co., 351 U.S. 377 (1956)

(the Cellophane case); Walker Process Equipment, Inc. v. Food Machinery &

Chemical Corp., 382 U.S. 172 (1965); United States v. Grinnell Corporation,

384 U.S. 563 (1966) (“Grinnell”); United States v. Otter Tail Power Co., 410

U.S. 366 (1973); and United States v. United Shoe Machinery Co., 347 U.S.

521 (1954), a per curiam affirmance without opinion of the decision in 110 F.

Supp. 295 (D. Mass. 1953) (“United Shoe”).

13 See Turner, Antitrust Policy and the Cellophane Case, 70 Harv. L. Rev.

281 (1956).

action intended to destroy competition, would condemn IBM

here. Alcoa teaches that any act done with the purpose of

maintaining or enhancing monopoly power is unlawful

monopolization. The result is not dependent upon a finding, or

even consideration, of whether the acts in question promoted

economic efficiency or met some mechanistic test.

Judge Wyzanski reached the same conclusion in United

Shoe. He found that United Shoe had monopolized because its

monopoly was “not attributable solely to defendant’s ability,

economies of scale, research, natural advantages and adaption

to inevitable economic laws” but instead to “other barriers to

competition, and those barriers were erected by United’s own

business policies.” (110 F. Supp. at 343, 344)

This is precisely what occurred here. IBM’s pricing, leasing

practices, interface concealment and product manipulations

were its “own business policies” specifically designed to erect

“barriers to competition.” Neither Alcoa nor United Shoe is

even cited in CalComp. But if Alcoa and United Shoe are the

law or set forth any vital element of it, then the Cal-

Comp/ Memorex decisions are in direct conflict with them and

are clearly wrong.

2. The CalComp/Memorex decisions totally disregard

evidence of defendant’s intent and are thus in direct

conflict with a number of decisions of this Court

stressing the importance of intent in assessing antitrust

violations.

Memorex introduced literally dozens of IBM documents

together with related testimony clearly demonstrating IBM’s

anticompetitive intent in undertaking the various pricing, mar-

keting and product actions in issue. These business records do

not evidence a “careless word once spoken in a board room’”’"4

or a clumsy choice of words to describe innocent behavior.

They show that the course of conduct engaged in by IBM was

4 Transamerica Computer Co., Inc. v. International Business Machines

Corp., 481 F. Supp. 965, 990 (N.D. Cal. 1979).

aimed directly at Memorex and the other PCMs and was

developed and monitored at all levels of IBM’s management,

including top officials and a so-called “Blue Ribbon Task

Force.” The words used in many of these records are more

appropriate to war games than to corporate strategy and vividly

displayed IBM’s grand design—e.g. the IBM acts would make

each PCM “a dying company”; price reductions were made to

the “death level” of PCM competitors; the “Memorex 2314

[disc drive] will not recover full cost at low [impact] price”;

the “SMASH” announcement would “wipe out” an entire PCM

product line; certain product manipulations were characterized

to IBM’s Chairman of the Board by an IBM official as

“gimmicky tactics”; and one IBM product with a changed

interface was referred to within IBM as a “kludge” (a computer

System made up of poorly matched components).'5

These are only a few examples of the vast amount of evidence

which demonstrated IBM’s intent to crush the new competition.

The trial judge in Memorex did not even mention the

overwhelming evidence of anticompetitive intent. Nor did the

Ninth Circuit. Like evidence was also ignored in CalComp.

The reason for this complete neglect is presumably because the

per se pricing rules do not even include intent as a part of the

equation.

This neglect, however, is in direct conflict with numerous

pronouncements of this Court emphasizing the importance of

intent in antitrust cases.‘ In Grinnell this Court in discussing

the “willful” acquisition or maintenance standard stated:

® PXs 2919, p. 4; 6932, p. 9; 11225; 5318, p. 15; 2179, p. 12; 763, p. 1;

2915, p. 2.

18 See, e.g., United States v. United States Gypsum Co., 438 U.S. 422,

440-41 (1978); Utah Pie Co. v. Continental Baking Co., 386 U.S. 685, 696-97,

n.12, 702-03, n.14 (1967); FTC v. Anheuser-Busch, Inc., 363 U.S. 536, 552

(1960); Appalachian Coals, Inc. v. United States, 288 U.S. 344, 372 (1933 );

Poller v. Columbia Broadcasting, 368 U.S. 464, 473 (1962); see generally

Sullivan, Antitrust §§ 39, 43 (1977).

We shall see that this second ingredient presents no major

problem here, as what was done in building the empire

was done plainly and explicitly for a single purpose. 384

US. at 571

Recently, several lower courts have taken the position that

deep price cuts are nothing more than tough competition

encouraged by the Sherman Act. In Utah Pie Co. v. Continen-

tal Baking Co., 386 U.S. 658 (1967), however, this Court had

the following to say about such price cuts when accompanied

by exclusionary intent:

It might be argued that the respondents’ conduct

displayed only fierce competitive instincts. Actual intent to

injure another competitor does not, however, fall into that

category. . . . 386 US. at 702-3, n.14.

The National Commission for the Review of Antitrust Laws

and Procedures rejected the marginal cost rule for a broader

inquiry because the rule excluded a number of relevant factors,

including intent:

Conversely, where there is other evidence of ex-

clusionary or predatory intent, the fact that prices were

-above marginal cost should not absolutely bar a finding of

liability. Rather, the relation of price to marginal cost

should be considered in its context along with the separate

evidence of intent and the defendant’s market power. For

example, where a firm with a dominant market position

undertakes a pattern of pricing behavior directed at ex-

cluding new entrants from a market in circumstances in

which the firm could expect such efforts to be successful,

liability may be found even if the prices charged were above

marginal cost. Such pricing behavior directed at existing

competitors by a dominant firm in a market with high

entry barriers, for example, should be reachable under

Section 2. Report, pp. 149-50, GPO ed. (1979) (emphasis

added ).

In short, exclusionary intent is axiomatic to Section 2,

whether it be the general intent required for monopolization or

the “specific intent” needed to show attempt. Direct evidence

of intent may often be. difficult to discover; in such cases

conduct can be examined in order to infer the requisite intent.

What the decisions below and other recent cases in lower courts

have lost sight of, however, is that when direct evidence of the

requisite intent in fact exists, it is highly relevant. Even

Professors Areeda and Turner, who started the search for

mechanistic tests six years ago, conclude in their recent treatise

that “clear direct evidence of disciplinary intent” can bring

price cuts to levels above marginal cost within the proscriptions

of Section 2.17 _[emphasis in original ]

3. The CalComp/Memorex decisions sacrifice intent and

the willfulness test to mechanistic per se pricing rules.

Although Ca/Comp purports to state a rule of reason test

for determining the legality of the conduct of a monopolist

(App., pp. A-85-86), it actually holds that when price cuts are

involved a per se standard comes into play which resolves, as a

matter of law, whether the conduct is reasonable. (App., pp.

A-99-100) If the price cuts are found by the court to be

“profitable,” they become per se lawful without consideration

of any other factors. Although the per se rule so far has been

used by the Ninth Circuit and other courts solely to affirm

dismissals of Section 2 claims, presumably the converse would

also be true; i.e., if the price cuts are below average variable or

marginal cost, they are per se unlawful. '®

A holding that rejects any consideration of factors other

than a specific measure of profitability in assessing price cuts is

in conflict with clear pronouncements of this Court. For

example, in Schine Chain Theatres v. United States, 334 US.

110 (1948) this Court stated:

17 Areeda and Turner, Antitrust Law (1978) 9 715, n.7.

8 Areeda and Turner, Predatory Pricing and Related Practices Under

Section 2 of the Sherman Act, 88 Harv. L. Rev. 697, 712-13 (1975); see also

Areeda & Turner, Antitrust Law (1978) 4715.

[P]rice cutting without more is not a violation of the

Sherman Act. It is indeed a competitive practice which this

record shows to have been common in the industry. It may

be used in violation of the Act. Thus it may be the

instrument of monopoly power to eliminate competitors or

to bring them to their knees. But since it is not unlawful

per se, facts and circumstances must be adduced to show

that it was in purpose or effect employed as an instrument

of monopoly power. 334 U.S. at 120-21

The CalComp/Memorex per se rules are also in direct

conflict with several recent pronouncements of this Court

establishing that the rule of reason rather than a per se rule is

the norm for antitrust enforcement.19 This Court has endorsed

a few per se rules of illegality. But there has never been a rule

of per se legality.

Even where per se rules have been adopted, this Court has

moved with considerable caution, and recently stated that a per

se rule is inappropriate “until after considerable experience

with the type of challenged restraint.” Broadcast Music, Inc. v.

Columbia Broadcasting System, Inc., 441 U.S. 1, 19 n.33

(1979); id. at 9-10. No Court has any meaningful experience

with the various mechanistic per se tests for pricing which have

been proposed. Moreover, the limited experience has been

conflicting and inconsistent. A per se rule of legality is thus

particularly inappropriate for monopoly pricing.

Indeed, not until lower courts began embracing Areeda

and Turner’s marginal cost rule approximately five years ago

did anyone surmise that sales below cost might be a condition

precedent to recovery under Section 2. Sales below cost

constitute conduct supporting an inference of the requisite

19 See, e.g., Continental TV, Inc. v. GTE Sylvania, Inc., 433 U.S. 36

(1977); National Society of Professional Engineers v. United States, 435 U.S.

679 (1978).

general or specific intent to monopolize, but to make that

evidence a sine qua non to recovery regardless of other proof of

intent is to stand Section 2 on its 91 year old head.

The recent preoccupation with cost-based and similar tests

for pricing behavior may result from attempt cases such as

Hanson and Janich2° in the Ninth Circuit. These cases,

representative of others in recent years, involved nothing more

than price cuts. There was no other evidence of intent to

exclude. The courts thus were being urged to infer specific

intent to monopolize solely from a reduction in price. Price

cuts, and for that matter design changes, though potential

means for predation, are also the very life blood of competition.

In a case such as Hanson, courts must be wary of labeling

competitive pricing unlawful without independent evidence of

exclusionary intent. But when a record is replete, as here, with

explicit evidence of a subjective intent to exclude, an intent

confirmed at the highest managerial levels, replacing the rule of

reason with a per se test of legality is totally inappropriate.

4. The cost-based per se rules of CalComp/Memorex

sacrifice the broader goals of the Sherman Act for

purported economic efficiency.

The mechanistic tests of CalComp/ Memorex are said to be

appropriate regardless of the impact on competitors because

“only less efficient firms will be disadvantaged... .”

(App., p. A-100)2". Under such a view of the antitrust laws it is

apparently of no consequence that competitors may be deliber-

ately driven from the market because “the Sherman Act is

meant to protect the competitive process, not competitors.”

20 Note 10, supra.

21 Sullivan, Economics and More Humanistic Disciplines: What Are The

Sources of Wisdom For Antitrust?, 125 U. Pa. L. Rev. 1214, 1214-16 (1977).

(App., p. A-98). Such statements and the holdings they induce

fly in the face of pronouncements from this Court emphasizing

that the goals of the antitrust laws are far broader than static

notions of economic efficiency. The very case that is the source

of the “competition not competitors” statement makes this

point clear. As stated by this Court in Brown Shoe Co. v. United

States, 370 U.S. 294 (1962):

It is competition, not competitors, which the Act protects.

But we cannot fail to recognize Congress’ desire to promote

competition through the protection of viable, small, locally

owned businesses. Congress appreciated that occasional

higher costs and prices might result from the maintenance

of fragmented industries and markets. It resolved these

competing considerations in favor of decentralization. We

must give effect to that decision. 370 U.S. at 344 22

A number of other authorities render it clear that the

purpose of the antitrust laws encompasses not merely economic

standards of efficiency with all spoils awarded to the “winner,”

but broad populist goals of dispersion of power.23 These goals

22 This same view was stated succinctly by Judge Hand in the Alcoa

decision:

[Congress in passing the Sherman Act] was not necessarily actuated by

economic motives alone. It is possible, because of its indirect social or

moral effect, to prefer a system of small producers, each dependent for

his success upon his skill and character, to one in which the great mass of

those engaged must accept the direction of few.

* - om

Throughout the history of these statutes it has been constantly assumed

that one of their purposes was to perpetuate and preserve, for its own

sake and in spite of possible cost an organization of industry in small

units which can effectively compete with each other. 148 F.2d at 427-29

23 United States v. Von’s Grocery Co., 384 U.S. 270, 274 (1966);

Standard Oil Co. v. United States, 221 U.S. 1, 50, 76 (1911); United States v.

TransMissouri Freight Assn., 166 U.S. 290, 323 (1897); American Tobacco

Co. v. U.S., 328 U.S. 781, 813 (1946); A.D. Neale, The Antitrust Laws of the

U.S.A., pp. 427-32 (Cambridge University Press 1970); Sullivan, Economics

and More Humanistic Disciplines: What Are The Sources of Wisdom for

Antitrust, 125 U. Pa. L. Rev. 1214, 1219-20 (1977); Sullivan, Antitrust

Microeconomics and Politics: Reflections on Some Recent Relationships, 68

Cal. L. Rev. 1 (1980).

are totally inconsistent with per se rules of legality based upon

Static economic models of pricing practices. The choice was

made and the goals were established in 1890. Congress has not

seen fit to change them.

5. The per se tests adopted by CalComp/Memorex can-

not be supported on grounds of efficiency and result in

virtual immunity for a monopolist.

CalComp justified the per se rule of marginal cost on

grounds of economic efficiency because “‘only less efficient firms

will be disadvantaged... . .” (App., p. A-100) This is simply

not true. In fact, the most pernicious aspects of the cost-based

rules are their reliance on static economic analysis and their

singular focus on the short run. Real world markets, in

particular those involved here, are often complex and charac-

terized by barriers to entry which are ignored in the type of

analysis which led to the marginal cost rule.

As pointed out by the commentators, if a monopolist can

reduce its prices to some point above its marginal cost to repel a

new entrant, it can deliberately and successfully preclude entry

even by equally or more efficient firms in the long run. A new

entrant often must discount below the prices of the established

firm, at least until some degree of market recognition is

attained. In addition, the entrant requires considerable time to

increase its output to a level that affords the economies of scale

available to the dominant firm. Strategic use of price reductions

above marginal cost but below the entrant’s survival level can

thus force the new firm out of the market before it achieves

market recognition and economies of scale.24 In addition, an

otherwise well-qualified but new firm suffers the disavantage of

an inexperienced work force and the perception by would-be

investors that it is a high risk venture. Again, any cost-based

rule would permit a monopolist to exclude such firms prior to

the time they overcome these entry problems.25

24 Williamson, infra, note 26 at 289-90, 296; Scherer, supra, note 26 at

870-75.

25 Williamson, infra, note 26 at 302-4.

The only consistent strain in the vast amount of economic

and legal literature which has dealt with the issue raised in

Areeda and Turner’s first article in 1975 has been that their

marginal cost rule fits only very limited circumstances which are

not applicable in CalComp or Memorex. The literature pro-

poses so many different cost-based, output restriction, profit

maximization and other so-called efficiency-related tests that

only one truth is evident—our leading economists and antitrust

scholars are not even close to agreement on what test will even

allegedly promote efficiency in either the short or long run.26

In a vain search for precision, objectivity and efficiency

those adopting cost-based rules have used simplistic, short-run,

static theory to solve complex, long-run, strategic problems.

Indeed, a cost-based rule invites a dominant firm to strike early

while an entrant faces a short-run cost disadvantage and the

need to discount and before entry barriers can be overcome.

Not only is such a cost-based rule deficient under sound

economic theory, it is not workable for evaluating predatory

pricing for numerous practical reasons. As knowledgeable

26 Areeda and Turner, Williamson On Predatory Pricing, 87 Yale L.J.

1337 (1978); Areeda and Turner, Predatory Pricing: A Rejoinder, 88 Yale

L.J. 1641 (1979); Areeda and Turner, Scherer on Predatory Pricing: A Reply,

89 Harv. L. Rev. 891 (1976); Bartkus, Innovation Competition: Beyond Telex

v. IBM, Note, 28 Stan. L. Rev. 285 (1976); Baumol, Quasi Permanence of

Price Reductions: A Policy for Prevention of Predatory Pricing, 89 Yale L.J. |

(1979); Beckenstein and Gable, Predation Rules: An Economic and Behav-

ioral Analysis, The Colgate Darden Graduate School of Business Adminis-

tration, University of Virginia, December 1979; Brock, Price and Product

Actions—Partial Systems, The U.S. Computer Industry, a Study of Market

Power, p. 109, Ballinger Publishing Company; Commentary, An Appraisal of

Marginal Cost and Predatory Pricing Under Section 2 of the Sherman Act, 30

Ala. L. Rev. 562 (1979); Elzinga, Predatory Pricing: The Case of the

Gunpowder Trust, 13 Jour. Law and Econ. 223 (1970); Greer, A Critique of

Areeda and Turner’s Standard for Predatory Practices, 24 Antitrust Bull. 233

(Summer 1979); Joskow and Klevorick, A Framework for Analyzing Pre-

datory Pricing Policy, 89 Yale L.J. 213 (1979); Jordan, Telex v. IBM:

Remodeling the Crisis in Antitrust, Note, 23 UCLA L. Rev. 737 (1976);

(Footnote continued on following page)

commentators have pointed out, cost estimation poses very

serious difficulties. Professor Williamson states that a marginal

cost test would be a “defendant’s paradise”27? because of the

uncertainties in estimating costs. Professor Bork notes that true

average variable costs (Areeda and Turner’s surrogate for

marginal cost) cannot be reconstructed adequately from busi-

ness records in a firm of any complexity.28 As IBM itself

admitted in Greyhound Computer Corporation, Inc. v. IBM, 559

F.2d 488 (9th Cir. 1977), in a lease market “future rental

income and future expenses are unknown and highly specula-

tive.” 559 F.2d at 506

(Footnote continued from previous page)

Koller, When is Pricing Predatory?, 24 Antitrust Bull. 283 (Summer 1979);

Koller, On the Definition of Predatory Pricing, 20 Antitrust Bull. 329 (Summer

1975); Koller, The Myth of Predatory Pricing: An Empirical Study, 4 Antitrust

Law and Econ. Rev. 105; McGee, Predatory Price Cutting: The Standard Oil

(N.J.) Case, 1 Jour. Law and Econ. 137 (1958); Posner, Antitrust Law: An

Economic Perspective, University of Chicago Press (1976); Posner, The

Chicago School of Antitrust Analysis, 127 U. Pa. L. Rev. 925 (1979); Potter,

Pacific Engineering & Production Co. v. Kerr-McGee Corp.— Predatory Pricing

Under Section 2 of the Sherman Act, Note, 2 Utah L. Rev. 377 (1977); Salop,

Strategic Entry Deterrence, American Economic Association (May 1979);

Scherer, Predatory Pricing and the Sherman Act: A Comment, 89 Harv. L.

Rev. 868 (1976); Scherer, Some Last Words on Predatory Pricing, 89 Harv. L.

Rev. 901 (1976); Scherer, Book Review, The Posnerian Harvest: Separating

Wheat from Chaff, 86 Yale L.J. 974 (1977); Schmalensee, On the Use of

Economic Models in Antitrust: The Realemon Case, 127 U. Pa. L. Rev. 994

(1979); Sullivan and Wiley, Recent Antitrust Developments: Defining the

Scope of Exemptions, Expanding Coverage, and Refining the Rule of Reason,

27 UCLA L. Rev. 265 (1979); Sullivan, Economics and More Humanistic

Disciplines: What are the Sources of Wisdom for Antitrust? 125 U. Pa. L. Rev.

1214 (1977); Williamson, Predatory Pricing: A Strategic and Welfare

Analysis, 87 Yale L.J. 284 (1977); Williamson, Commentary, Williamson on

Predatory Pricing II, 88 Yale L.J. 1183 (1979); Note, Telex v. 1BM, Monopoly

Pricing Under Section 2 of the Sherman Act, 84 Yale L.J. 558 (1975); Yamey,

Predatory Price Cutting: Notes and Comments, 15 Jour. of Law and Econ.

(1972).

27 Williamson, supra, note 26 at 305 and 1196.

28 Bork, The Antitrust Paradox, 154 (1978).

Indeed, there is no meaningful way to determine costs of a

particular product of a large multi-product manufacturer where

numerous cost allocations must be made, many of them on the

basis of revenue. In addition, each element of cost and revenue

in a profitability analysis is solely an estimate or a prediction.

As such, they are subject to manipulation by the litigation-

minded monopolist which, absent other evidence of intent to

exclude, will be virtually impossible to second-guess years later

in a court of law.

IBM clearly recognized that all of these estimates were

under its control. In a presentation to top management of how

price increases might be justified to the government under the

1971 price controls, it was stated “depending on the [cost]

variables utilized . . . prices could vary as much as —20% to

+15%. ...” (PX 10120, p. 4) Application of the Areeda

and Turner per se rule thus provides a company such as IBM

with absolute judicial immunity for a course of conduct by

which it systematically eliminated competition. IBM can justify

its acts by predicting its success at excluding competition.

Judges and juries attempting to apply cost-based tests are

thus faced not only with theoretical confusion as to what

objective norms should be used to test pricing policies, but also

with almost impossible empirical problems in identifying

marginal, variable and average total costs. The great virtue of

direct evidence of intent, when it is available, is that, given the

strengths and limitations of judicial institutions, it provides a far

more reliable guide to socially dangerous conduct than does

any available objective test. As indicated by Professor Sullivan:

If we are going to rely on judges and jurors to discover

predatory practices perhaps their inquiry cannot be limited

to price-cost relationships or focused exclusively on effi-

ciency as a value. The traditional legal rule. . . speaks in

terms of intent and identifies the predatory firm as one

trying to inhibit others in ways independent of the pred-

ator’s own ability to perform effectively in the mar-

ket... . A price reduction or expenditure is predatory

. when it is designed to impose losses on other firms in

order to exclude them. The traditional rule,. . . instead of

seeking objective indicia of competitive injury solely in the

price-cost relationship . . . gives credit to the common

insight that a purpose to avoid competition by disposing of

competitors is likely to lead to competitive injury.

Sullivan, Economics and More Humanistic Disciplines: What

Are the Sources of Wisdom for Antitrust, 125 U. Pa. L. Rev.

1214, 1229 (1977).

6. The practical effect of the cost-based rules has been to

deprive plaintiffs of their right to jury trial.

IBM maintained,in the CalComp and Memorex proceed-

ings that the legality of its conduct should not be decided by a

civil jury because, in IBM’s view, the case was too complex to

understand. This position is directly contrary to a number of

statements by this Court stressing the importance of the civil

jury.28 The “complex case” argument was recently rejected by

the Ninth Circuit in Jn Re U.S. Financial Securities Litigation,

609 F.2d 411 (9th Cir. 1979).

The practical effect, however, of the application of the per

se pricing rules to real world situations has been to deprive

plaintiffs of their right to jury trial. Both CalComp and

Memorex involved directed verdicts granted by the trial court

and affirmed by the Ninth Circuit. As shown in the following

section, the same result has taken place in a number of other

circuits. The major degree of “certainty” introduced by the per

se pricing rules is that, for the reasons discussed above,

defendants in monopolization cases invariably will prevail

without having their conduct assessed by a jury.

29 Jacob v. City of New York, 315 U.S. 752, 762 (1942); Dimick v.

Schiedt, 293 U.S. 474, 486 (1935); City of Morgantown, W. VA. v. Royal Ins.

Co., 337 U.S. 254, 258 (1949).

B. There Is Conflict Between The Circuits As To The proper

Test for Monopolization.

There is a conflict between the Circuits and the Federal

Trade Commission regarding the proper test for unlawful

conduct of a monopolist when the conduct involves price

reductions. There is like conflict when the price reductions are

viewed in the context of an attempt to monopolize rather than

monopolization.

The per se marginal cost rule (or a close variation thereof)

has been adopted in the Fifth Circuit,30 Ninth Circuit31 and

Tenth Circuit.32 In the Third Circuit, a lower court adopted the

rule.33

The per se marginal cost rule has been specifically rejected

by the Seventh Circuit34 and the Federal Trade Commission.35

There are no circuit court decisions in the Second and Sixth

Circuits, but lower courts have rejected the test.36

% International Air Industries v. American Excelsior Co., 517 F.2d 714,

722-25 (Sth Cir. 1975), cert. denied, 424 U.S. 943 (1976).

31 Memorex; CalComp; Hanson v. Shell Oil Co., 541 F.2d 1352 (9th Cir.

1976), cert. denied, 429 U.S. 1074 (1977); Janich Bros., Inc. v. American

Distilling Co., 570 F.2d 848 (9th Cir. 1977), cert. denied, 439 U.S. 829

(1978); but see Transamerica Computer Co., Inc. v. International Business

Machines Corp., 481 F. Supp. 965, 988-96 (N.D. Cal. 1979) (appeal

pending).

32 Pacific Engineering & Production Co. of Nevada v. Kerr-McGee Corp.,

551 F.2d 790, 795-97 (10th Cir. ), cert. denied, 434 U.S. 879 (1977); see also

Telex Corp. v. IBM Corp., 510 F.2d 894, 925-26 (10th Cir.), cert. dismissed,

423 U.S. 802 (1975).

33 Weber v. Wynne, 431 F. Supp. 1048 (D.N.J. 1977); but see O.

Hornusel Co. v. Ferro Corp., 472 F. Supp. 793, 795-96 (W.D. Pa. 1979).

% Chillicothe Sand & Gravel Co. v. Martin Marietta Corp., 615 F.2d 427,

432 (7th Cir. 1980).

36 Borden, Inc. (1976-1979 Transfer Binder) Trade Reg. Rep. (CCH)

1 21490 (1979); see also J. E. du Pont Nemours & Co., 3 CCH Trade Reg.

Rep. ¥ 21, 770, pp. 21970-983 (1980).

9€ Northeastern Tel. Co. v. American Tel. & Tel. Co., 497 F. Supp. 230,

240-41 (D. Conn. 1980); Richter Concrete Corp. v. Hilltop Basic Resources,

Inc., 1981-1 Trade Cas. 4 63,947 (S.D. Ohio 1981).

C. This Court Should Act Now To Settle An Important And

Timely Issue Of Federal Law With Far-Reaching Con-

sequences.

It has been over 35 years since Judge Hand decided Alcoa.

As developed above, since that time this Court has considered

the standard of conduct for a monopolist in a very few cases,

with no case approaching the in-depth analytical review of the

conduct issue by Judge Hand. The result has been confusion

and conflict in the courts, the Federal Trade Commission, and

the private bar, with extensive and conflicting legal and eco-

nomic commentary on the issue of the appropriate rules for

judging the legality of price reductions.

An immense amount of judicial time, and public and

private resources, have been consumed in trying cases with

results that have in many instances led to summary dispositions

after lengthy trials when the standards were different from what

they were when trial commenced. For example, the 7Jrans-

america case%’? consumed months of trial time. The day before

the jury was to be instructed the CalComp decision came down

causing the court to modify certain key jury instructions.

An articulation by this Court of the appropriate standards

could eliminate, and will certainly diminish, the uncertainties

involved in trying these cases, and would lead to more certain

decisions by the trier of fact. A knowledge of the standards

should deter the bringing of questionable cases and lead to

better enforcement of the antitrust laws.

Extremely important cases presently pending in lower

federal courts could well be affected by this Court’s estab-

lishment of a clear standard for monopolization. In particular,

the massive government cases against IBM and American

37 Transamerica Computer Co., Inc. v. International Business Machines

Corp., 481 F. Supp. 965 (N.D. Cal. 1979).

Telephone and Telegraph Company would undoubtedly ben-

efit from a clear articulation of the appropriate standards for

judging the conduct of a monopolist.

Given the number of recent cases on the issues presented

by this petition, many of them decided on a summary basis,

firms with substantial market power may feel justified in

concluding that they can lower prices to any level above cost

even if they intend to eliminate new rivals which have not yet

achieved optimum efficiency or overcome other barriers to

entry. Such was the scenario in CalComp and Memorex. Such

may well be the scenario in other markets and industries. And

victims, by definition bankrupt or crippled, may not be able to

finance proceedings as Memorex has done at a cost of millions

of dollars. Accordingly, whether this Court wishes to reject or

reaffirm its prior teachings under Section 2, the time is indeed

now.

CONCLUSION

We respectfully submit that a Writ of Certiorari should

issue and that the decision of the court below should be

reversed with directions to remand the case for trial using the

appropriate standard for monopolization under Section 2 of the

Sherman Act.

Dated: May 6, 1981.

JOHN L. ENDICOTT

PauL G. BOWER

515 South Flower Street

Los Angeles, California 90071

Attorneys for Petitioners

Of Counsel:

G1BSON, DUNN & CRUTCHER

RONALD S. BEARD

2029 Century Park East

Los Angeles, California 90067

LIMBACH, LIMBACH & SUTTON

KaRL A. LIMBACH

2001 Ferry Building

San Francisco, California 94111

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