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

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URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385007_1707%3A1

## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition
- **Published:** January 1, 1981
- **Citation:** 452 U.S. 972

## Text

’
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.

ij

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

iv
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

v
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).

2

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

3

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

4

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

5

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

6

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

7

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

8

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

9

— “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)

10

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)

11

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).

12

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).

13

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).

14

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).

15

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).

16

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).

17

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

18

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.

19

[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).

20

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).

o

21

(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).

22

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.

23

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)

24

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).

25

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-

26

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).

27

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).

28

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).

29

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.

30

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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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385007_1707%3A1. Public record. Not legal advice.