Appendix — Memorex Corp. v. International Business Machines Corp.
Supreme Court brief1981
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Office-Supreme Court, U.S.
80-1384 FILED
VAY 6 1981
No.
ALEXANDER 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.
Appendix to 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 Petitioner
Of Counsel:
GIBSON, 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 f
PANDICK PRESS, WEST—SO. CAL., 1945 S. FIGUEROA, LOS ANGELES, CALIFORNIA (213) 747-4321
TABLE OF CONTENTS
Memorex Corp. etc., et al. v. International Business
Corp., 9th Cir. 1980, 636 F.2d 1180.0... eeeseeeee
ILC Peripherals Leasing Corp., et al. v. Inter-
national Business Machines Corp., N.D. Cal. 1978,
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ILC Peripherals Leasing Corp., et al., v. Inter-
national Business Machines Corp., N.D. Cal. 1978,
OEE OI, FEE isan A iitninshkosvisecshanibchassipndiglanin oibioehas
California Computer Products, Inc., et al. v. Inter-
national Business Machines Corp., 9th Cir. 1979,
GUS Fee at saitinpiskebbothin atpibetvachssconaneakesibedincdibecusoieesie
Memorex Corp. etc., et al. v. International Business
Machines Corp., 9th Cir. 1981, Order Denying
Suggestion of a Rehearing In Banc..................cces0000
A-14
A-67
i
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MEMOREX CORPORATION, etc., et al.,
Plaintiffs-Appellants,
Vv
INTERNATIONAL BUSINESS MACHINES
CORPORATION,
Defendant-Appellee.
MEMOREX CORPORATION, etc., et al.,
Plaintiffs-Appellees,
¥
INTERNATIONAL BUSINESS MACHINES
CORPORATION,
Defendant-Appellant.
Nos. 78-3050, 78-3236.
United States Court of Appeals, Ninth Circuit.
Argued and Submitted Sept. 10, 1980.
Decided Nov. 18, 1980.
Rehearing Denied in No. 78-3050 Feb. 5, 1981.
Ronald S. Beard, Gibson, Dunn & Crutcher, Los Angeles,
Cal., argued for Memorex Corp., ILC Peripherals; Karl A.
Limbach, Limbach, Limbach & Sutton, San Francisco, Cal., on
brief.
Patrick Lynch, O’Melveny & Myers, Los Angeles, Cal.,
argued for International Business Machines Corp.; Edward B.
Rogin, Orrick, Herrington, Rowley & Sutcliffe, San Francisco,
Cal., James V. Selna, Los Angeles, Cal., on brief.
Appeal from the United States District Court for the
Northern District of California; Samuel Conti, District Judge,
Presiding.
Before DUNIWAY and GOODWIN, Circuit Judges, and
KASHIWA,* Judge, United States Court of Claims.
* The Honorable Shiro Kashiwa, sitting by designation.
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PER CURIAM:
In this anti-trust case the trial judge, after a full trial lasting
80 days, granted a motion for a directed verdict. JLC
Peripherals Leasing Corp., et al. v. International Business
Machines Corp., N.D. Cal., 1978, 458 F.Supp. 423. It had
previously granted a motion for a directed verdict on one issue.
ILC Peripherals Leasing Corp. v. International Business Ma-
chines Corp., N.D. Cal., 1978, 448 F.Supp. 228. Plaintiffs
appeal.
The case is one of several similar cases. One of these is
California Computer Products, Inc. v. International Business
Machines Corp., 9 Cir., 1979, 613 F.2d 727. There we affirmed
a judgment based upon the granting of a motion for a directed
verdict in a case that presented substantially the same issues
and much of the same evidence. We are unable to distinguish
Memorex’s case from the California Computer Products case,
and we conclude that, on the authority of that case the
judgment should be affirmed. See also The Telex Corp. v.
International Business Machines Corp., 10 Cir., 1975, 510 F.2d
894, reversing N.D. Okl., 1973, 367 F.Supp. 258; In re IBM
EDP Devices Antitrust Litigation, Transamerica Computer Co.,
Inc. v. International Business Machines Corp., N.D. Cal. 1979,
481 F.Supp. 965.
Our disposition of the case makes it unnecessary to decide
whether it was error for the court to enter an order striking
plaintiffs’ demand for a jury trial in the event of a new trial.
See, however, In re Financial Securities Litigation, Fabrikant v.
Bache and Co., 9 Cir., 1979, 609 F.2d 411.
Affirmed.
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ILC PERIPHERALS LEASING CORPORATION,
Plaintiff,
v.
INTERNATIONAL BUSINESS MACHINES
CORPORATION,
Defendant.
MEMOREX CORPORATION and MRX Sales
and Service Corporation,
Plaintiffs,
v.
INTERNATIONAL BUSINESS MACHINES
CORPORATION,
Defendant.
Nos. C-73-2238 SC and C-73-2239 SC.
United States District Court, N. D. California.
April 5, 1978.
Plaintiff brought antitrust action alleging that defendant’s
practice of selling disk drive unit and head/disk assembly for
single price constituted illegal tying arrangement, and defend-
ant moved for directed verdict. The District Court, Conti, J.,
held that where disk drive and head/disk assembly were
designed to satisfy recognized customer need and were de-
signed to be and would be used as one unit, where head/disk
assembly was not customer removable, where integration of
head/disk assembly into disk drive resulted in cost savings, and
where practice in computer industry was to sell integrated disks
and drives on which they operated for single price, head/disk
assembly was component part of disk drive and assembly and
disk drive constituted single product.
Motion for directed verdict granted.
1. Monopolies 17(2.5)
A “tying arrangement” involves seller’s refusal to sell one
product, the “tying product,” unless buyer also purchases
another, the “tied product.” Sherman Anti-Trust Act, § 1, 15
U.S.C.A. § 1; Clayton Act, § 3, 15 U.S.C.A. § 14.
See publication Words and Phrases for other judicial
constructions and definitions.
2. Monopolies 10
Antitrust laws were not designed to insure maintenance of
status quo for any competitor.
3. Monopolies 17(2.5)
Where defendant’s head/disk assembly and disk drive
were designed to satisfy recognized customer need and were
designed to be used as one unit, where head/disk assembly was
not customer removable but could be removed by field engi-
neer, where integration of head/disk assembly into disk drive
resulted in cost savings, where head/disk assembly and disk
drive were normally sold or used as unit with fixed proportions,
and where practice in computer industry was to sell integrated
disks and drives on which they operated for single price,
head/disk assembly and disk drive were single product and
defendant’s practice of selling assembly and disk drive for
single price did not violate federal antitrust laws. Sherman
Anti-Trust Act, §1, 15 U.S.C.A. §1; Clayton Act, §3, 15
_ US.C.A. § 14.
4. Monopolies 17(2.5)
For purpose of federal antitrust laws prohibiting tying
arrangements, good intentions will not change two products
into one and single product does not become separate and
distinct products because of malevolent intent. Sherman Anti-
Trust Act, § 1, 15 U.S.C.A. § 1; Clayton Act, § 3, 15 U.S.C.A.
§ 14.
tas
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John L. Endicott, Gibson, Dunn & Crutcher, Los Angeles,
Cal., for plaintiffs.
O’Melveny & Myers, Patrick Lynch, Los Angeles, Cal., for
defendant.
CONTI, District Judge.
This matter is before the court on IBM’s motion for a
directed verdict. F.R.Civ.P.50(a). In Chisholm Brothers Farm
Equipment Co. v. International Harvester Co., 498 F.2d 1137,
1140 (9th Cir.), cert. denied, 419 U.S. 1023, 95 S.Ct. 500, 42
L.Ed.2d 298 (1974), the Ninth Circuit said:
When considering the propriety of the grant or denial of a
motion for directed verdict, the correct standard is whether
or not, viewing the evidence as a whole, there is substantial
evidence present that could support a finding, by reason-
able jurors, for the nonmoving party. “Substantial evi-
dence is more than a mere scintilla.”. The evidence must
be examined in a light most favorable to the nonmovant,
and there can be no weighing of evidence. Finally, [the
nonmoving party] is entitled to the benefit of all reason-
able inferences that may be drawn from its evidence.
[ Citations omitted; emphasis in the original. ]
With this standard in mind, the court will review the evidence
that Memorex has presented. First, however, it is necessary to -
briefly discuss the substantive law that controls this case.
[1] Memorex has alleged that IBM’s Madrid disk drive is
an illegal tying arrangement. A tying arrangement involves a
seller’s refusal to sell one product (the tying product) unless the
buyer also purchases another (the tied product). Northern
Pacific Railway Co. v. United States, 356 U.S. 1, 5-6, 78 S.Ct.
514, 2 L.Ed.2d 545 (1958). Memorex claims that IBM’s
practice of selling the Madrid drive unit (the tying product)
and the Madrid head/disk assembly (the tied product) for a
single price violates Section 1 of the Sherman Act, 15 U.S.C.
§ 1, and Section 3 of the Clayton Act. 15 U.S.C. § 14.
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In Moore v. Jas. H. Matthews & Co., 550 F.2d 1207, 1212
(9th Cir. 1977), the Ninth Circuit said:
Three criteria must be found to establish the illegality of a
tying arrangement. First, there must in fact be a tying
arrangement between two distinct products or services.
Second, the defendant must have sufficient economic pow-
er in the tying market to impose significant restrictions in
the tied product market. Third, the amount of commerce
in the tied produce market must not be insubstantial.
[ Citations omitted. ]
The court indicated that in theory, Section 1 of the Sherman Act
requires that both the second and third criteria must be found
to establish the illegality of a tying arrangement, while either is
sufficient under Section 3 of the Clayton Act. However, the
court recognized that the practical difference between these two
statutory prohibitions has steadily eroded. We need not
concern ourselves with this distinction because the only issue
here is whether the Madrid disk drive is “two separate and
distinct products. . . tied into a single package.” Jd. at 1214.
“{ A]ntitrust decisions and literature contain astonishingly
little discussion of the criteria to be applied to distinguish
between component parts of a single product and a multiplicity
of products.” N. W. Controls, Inc. v. Outboard Marine Corp.,
333 F.Supp. 493, 501 (D.Del.1971). The Ninth Circuit has —
come as close as any court to setting out a workable standard in
this area. In Siegel v. Chicken Delight, Inc., 448 F.2d 43, 47
(9th Cir. 1971), cert. denied, 405 U.S. 955, 92 S.Ct. 1172, 31
L.Ed.2d 232 (1972), the Ninth Circuit said:
Rules governing tying arrangements are designed to strike,
in a not at the mere coupling of physically separable
objects, but rather at the use of a dominant desired product
to compel the purchase of a second, desired commodity.
The court supplemented this general statement with a specific
standard which it indicated would be applicable in a case such
as this:
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In determining whether an aggregation of separable items
should be regarded as one or more items for tie-in
purposes in the normal cases of sales of products the courts
must look to the function of the aggregation. Consid-
eration is given to such questions as whether the amalga-
mation of products resulted in cost savings apart from
those reductions in sales expenses and the like normally
attendant upon any tie-in, and whether the items are
normally sold or used as a unit with fixed proportions.
Id. at 48.
Thus, the court enumerated three “criteria to be applied to
distinguish between component parts of a single product and a
multiplicity of products.” ‘N. W. Controls, Inc. v. Outboard
Marine Corp., supra, 333 F.Supp. at 501.
In Moore v. Jas. H. Matthews & Co., supra, the Ninth
Circuit had the opportunity to apply this standard. In that case
plaintiffs were in the retail grave memorial business and also
operated an installation service for grave markers. They sued a
number of cemeteries, alleging that it was illegal to tie the
purchase of a cemetery lot with the requirements that pur-
chasers of markers buy the memorial from or through the
cemetery and use the cemetery’s installation service. Reversing
the District Court’s judgment for defendants, the court said:
In this circuit, we have looked carefully to the “function of
the aggregation” in order to determine whether only a
single product is sold. In Siegel we observed that, unless
there are such considerations as legitimate cost savings or
products used in a unit with fixed proportions, the tied
product generally is regarded as “generically” distinct.
[Citations omitted] 550 F.2d at 1215.
The court concluded that “consideration of the ‘function of the
aggregation’ leads inescapably to the conclusion that separate
products and services are involved in each of the tying arrange-
ments before us.” Jd.
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The court must, therefore, review Memorex’s evidence
with an eye to the “function of the [Madrid] aggregation.” It
must also consider whether integration of the head/disk assem-
bly into the drive unit resulted in cost savings, and whether the
head/disk assembly and the drive unit are normally sold or
used as a unit with fixed proportions. However, before
undertaking this evaluation, the court feels the need to recount
some of the history leading up to the Madrid disk drive.
Storage of information is one of the vital functions of an
electronic data processing system. In modern computers, this
function is performed by devices peripheral to the central
processing unit which are known either as tape drives or disk
drives depending on the storage medium. For reasons which
should become clear below, they are also described as serial
access storage devices and direct access storage devices, respec-
tively.
Tape drives were developed first and their operation is
similar to conventional audio tape recorders. Information is
recorded sequentially on the tape and may only be accessed in
the same manner. Thus, the access time for data located at
opposite ends of a reel of tape is relatively slow. Disk drives
were developed in response to this shortcoming of serial access
storage devices. The disks in a disk drive resemble a stack of
phonograph records. Information is recorded randomly on the
disks and may be accessed directly in much the same manner as
the cuing mechanism on a stereo turntable makes it possible to
set the needle down anywhere on a record. Access times for
direct access storage devices are independent of the location of
the data and are very fast.
The disk drive was invented by IBM in 1956. The first disk
drive contained a number of large disks which could not be
removed without destroying the information that was recorded
on them. This device was a major breakthrough, but its limited
storage capacity minimized its impact.
dace.
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, a) 8
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To accommodate the growing storage needs of users with
the disk technology of the early 1960’s, IBM introduced the
customer-removable disk pack. A disk pack contains several
smaller disks which can be removed from the drive unit and
stored in a plastic case. By increasing the number of disk packs
per drive, users are able to increase the effective storage
capacity of their drives. Disk packs are completely inter-
changeable between compatible drive units, and since their
introduction, storage capacity has increased from 7.5 megabytes
per pack to 200 megabytes per pack.
IBM introduced another new concept with its Winchester
disk drive. The disk pack was replaced by a more elaborate
mechanism called a data module. The data module was still
customer removable, but some of the equipment that had
originally been part of the drive unit was combined with the
disks and the whole arrangement was enclosed in a protective
plastic shell. One of the parts moved into the data module was
the heads so that the same heads that recorded information
would read it. Thus, it was no longer necessary for the heads
on all compatible drive units to be aligned periodically to the
same tolerance. The larger of the two versions of the data
module had a storage capacity of 70 megabytes. While this
capacity is considerably smaller than the larger disk packs, it is
not unusual for technological advances to be tested initially on
a limited basis.
The Madrid disk drive followed after the Winchester. It
did not have a customer-removable disk pack or data module.
In their place was something called a head/disk assembly
(HDA). The HDA can be changed by a trained field engineer,
but to run the proper diagnostic tests takes approximately one
hour. The HDA includes even more of the equipment that was
originally part of the drive unit than the data module. The
HDA contains a greater number of disks than the data module
and is considerably heavier, but its storage capacity of 317.5
megabytes is significantly larger than anything that came before
it.
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With these preliminary matters out of the way, the court is
now in a position to review Memorex’s evidence on the Madrid
claim in the light of both the directed verdict standard set forth
in Chisholm Brothers Farm Equipment Co. v. International
Harvester Co., supra and the tie-in standard set forth in Siegel v.
Chicken Delight, Inc., supra.
Under the Siegel standard, the court must first look to the
“function of the [Madrid] aggregation.” As indicated above,
the initial disk drive with its integrated disks had a very limited
storage Capacity. Customer-removable disk packs enabled
users to increase the effective storage capacity of their disk
drives, but with disk packs they lost the ability to keep all their
data on line. As the storage capacity of disk packs increased,
fewer packs were being used per drive so that a number of
customers were paying for the removability feature and not
taking advantage of it. The HDA is not customer removable.
However, the Madrid “aggregation” offers users a significantly
larger on-line storage capacity than has previously been avail-
able. It satisfied a recognized customer need, and regardless of
how it is marketed, the HDA and the Madrid disk drive were
designed to be and will be used as a unit.
The “function of the [Madrid] aggregation” is, therefore,
to provide users with a very large storage capacity that is
permanently on line. The fact it is possible for a field engineer
to remove an HDA from one Madrid disk drive and install it in
another without destroying the information that is recorded on
it does not undermine this conclusion. Such a transfer would
only be made in an emergency situation and goes to the
maintenance and reliability of the “aggregation” not to its
“function.” It is also not important that users are able to
upgrade their operations by having a fixed-head HDA installed.
This change requires the assistance of a field engineer as well.
The second factor the court must consider is whether the
integration of the HDA into the Madrid disk drive resulted in
cost savings apart from those reductions in sales expenses and
the like normally attendant upon any tie-in. The data module
which was used on the Winchester disk drive had an automatic
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loading mechanism so that all the user had to do was set the
module in the drive, push a button, and wait a short time for a
ready light to come on. This mechanism was not necessary on
the HDA because the HDA is not customer removable. Elimi-
nation of these parts resulted in cost savings to IBM some of
which were passed on to customers in the form of a lower cost
per megabyte of storage.
The third factor the court must consider under the Siegel
standard is whether the HDA and the Madrid disk drive are
normally sold or used as a unit with fixed proportions. It is
already clear that these two items were designed to be and
normally will be used as a unit, and IBM concedes that they are
always sold as a unit. This situation contrasts sharply with the
customer-removable disk packs and data modules which were
neither sold nor used as a unit with the disk drives on which
they operated.
In addition, other equipment manufacturers who devel-
oped disk subassemblies that were not customer removable,
including Memorex, sold the subassembly and the drive on
which it operated as a unit for a single price. Whether industry
practice is considered to be subsumed under the third factor
above, Siegel v. Chicken Delight, Inc., supra, 448 F.2d at 48,
n.4, or an independent factor, N. W. Controls, Inc. v. Outboard
Marine Corp., supra, 333 F.Supp. at 501, it is clear that the
practice in this industry is to sell integrated disks and the drives
on which they operate for a single price. !
Upon reviewing the evidence Memorex has presented in
the light of the Siegel tie-in standard, the court concludes that
the HDA and the Madrid drive unit are a single product, and
that no reasonable jury could find otherwise. Indeed, Memorex
itself has as much as conceded this fact in some of its product
literature. In its 60] OEM Disk Storage Drive Introduction it
said:
The recent announcement of the IBM 3344 and 3350
[Madrid] and System 32 indicates that IBM has recog-
nized the advantages of and made a commitment to the
fixed disc concept, using ““Winchester” head and sealed
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environment technologies. This approach has increased
the bit packing density and reduced the cost per Megabyte.
Such a commitment by IBM indicates their confidence in
this technology and certainly assures that it will be the
accepted approach for the generation of systems to be
designed and built during the next decade.
The traditional disc drive equipment manufacturer must
now integrate disc media technology into his products to
meet this technological challenge. Within the industry
today, few manufactureres have this capability.
Memorex has long been the independent leader in
supplying superior media and disc drive products for the
OEM and end-user markets. [IBM Exhibit 12255 at 3]
Memorex undertook to develop the 601 or Maverick product
prior to IBM’s announcement of the Madrid program. How-
ever, it was obviously aware of the Madrid program when this
brochure was written. On page 10 of the brochure, the
Maverick disks are described as fixed (non-removable ) and it is
emphasized that because the disks are included in the price of
the drive, there are no packs or cartridges to buy. Finally, on
page 11, Memorex stresses that the sealed deck plate assembly
makes for easy maintenance and allows for field upgradeability.
The Maverick product was sold to original equipment
manufacturers. However, Memorex’s Madrid-type product,
which competes in the end-user market against IBM’s Madrid,
is also sold for a single price. Memorex indicated to customers
that separate prices would be quoted if requested, but it would
have been more consistent with its position in this case to have
offered the disk subassembly and the disk drive at separate
prices as a rule rather than as the exception.
[2] It appears to the court that what Memorex is really
attempting to do here is to hold the line against progress in disk
storage technology. The limited storage capacity of the first
disk drive was responsible for the growth of separate markets
for customer-removable disk products and drive units, but there
was no guarantee that these dual markets would not merge .
again as storage capacities increased. If IBM had simply bolted
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a disk pack or data module into a drive and sold the two items
as a unit for a single price, the “aggregation” would clearly
have been an illegal tying arrangement. Instead, IBM in-
troduced a new product with the largest permanent on-line
storage capacity ever offered. Just as buggy whip manufac-
turers had to face the fact that the invention of the automobile
meant the end of their market as they had known it, this new
disk storage technology will have a serious impact on the
market for customer-removable disk products. However, the
antitrust laws were not designed to insure the maintenance of
the status quo for any competitor.
[3] The court concludes that the HDA is a component
part in the Madrid disk drive. While it would be possible for
IBM to sell the HDA for a separate price from the rest of the
drive unit, just as it would be possible to sell many of the other
components separately, IBM is not required to do so by Section
1 of the Sherman Act or Section 3 of the Clayton Act.
After reviewing Memorex’s evidence, the court is con-
vinced that the Madrid disk drive is a single product and that
no reasonable jury could come to any other conclusion. The
evidence shows that the Madrid head/disk assembly was not
customer removable. As a consequence, IBM was able to use
new technology to dramatically increase the storage capacity of
disk storage devices. Integration of the disks into the drive
resulted in lower manufacturing costs and lower costs per
megabyte of storage to users. Customers wanted a large
permanent on-line storage capacity, and there was a practice in
the industry to offer such devices as a unit for a single price.
[4] Because the court has concluded that the Madrid disk
drive is a single product, IBM’s intent is irrelevant. Good
intentions will not change two products into one, and likewise, a
single product does not become separate and distinct products
because of a malevolent intent. For the reasons indicated
above, the court hereby grants IBM’s motion for a directed
verdict on the tie-in aspect of Memorex’s Madrid claim.
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ILC PERIPHERALS LEASING CORPORATION, Plaintiff,
Vv
INTERNATIONAL BUSINESS MACHINES
CORPORATION, Defendant.
MEMOREX CORPORATION, MRX Sales and
Service Corporation, Plaintiffs,
v.
INTERNATIONAL BUSINESS MACHINES
CORPORATION, Defendant.
Nos. C-73-2238 SC, C73-2239 SC.
United States District Court, N. D. California.
Aug. 11, 1978.
Action was brought for monopolization or attempted
monopolization of various markets in the computer industry.
After declaration o. mistrial following jury deadlock, defendant
moved for directed verdict. The District Court, Conti, J., held
that: (1) plaintiff's evidence was insufficient to establish rele-
vant product market; (2) assuming validity of market defini-
tions, plaintiff failed to satisfy its burden or proving defendant’s
monopoly power in those markets; (3) plaintiff failed to prove
claim of predatory pricing; (4) plaintiffs evidence was too
speculative to establish amount of damages; (5) plaintiff failed
to prove that various acts of defendant, including certain
interface and pricing changes, were anticompetitive, predatory,
or unnecessarily exclusive of competition, and (6) in the event
of remand for retrial, plaintiff's jury demand would be stricken
since the magnitude and complexity of the suit rendered it, as a
whole, beyond the ability and competency of any jury to
understand and decide rationally.
Motion for directed verdict granted; jury demand stricken.
et ceed
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1. Monopolies 12(1.3)
One element of the offense of monopolization is the
possession of monopoly power in a relevant market or sub-
market.
2. Monopolies 12(1.3)
The two important factors to consider in defining the
relevant product market in connection with alleged monopoli-
zation are substitutability in use and substitutability in produc-
iion of commodities.
3. Monopolies 12(1.3)
Primary concern in defining submarket in connection with
alleged monopolization is whether domination of the product
market or markets defined by plaintiff would enable defendant
to control prices and exclude competition.
4. Monopolies 28(7.4)
In antitrust suit, plaintiff failed to satisfy its burden of
proving that the general purpose computer systems market was
a relevant market or submarket, both because it excluded
reasonable alternative products and services and because the
accuracy of the underlying market information was question-
able.
5. Monopolies 28(7.4)
In antitrust action against computer systems manufacturer,
plaintiff failed to satisfy its burden of proving that three of
defendant’s plug compatible markets were relevant markets or
submarkets, because they excluded reasonable alternative prod-
ucts in light of competition from aiternative storage media,
competition from manufacturers of comparable products not
plug compatible with defendant’s products, and importance of
prices for peripheral products, and because, in one instance,
there was insufficient evidence to show that the alleged market
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existed because of marketing of units as a subsystem. Sherman
Anti-Trust Act, § 2, 15 U.S.C.A. § 2.
6. Monopolies 12(1.3)
Monopoly power is defined as the power to control prices
or exclude competition, and market share does not alone
determine the presence or absence of monopoly power.
7. Monopolies 12(1.3)
To determine a firm’s monopoly power as of a given date,
its current market share is the relevant figure and is normally
measured in terms of current output, and market share was not
sufficiently shown by figures which lump past manufactures
with present, including products over which defendant no
longer had any pricing discretion.
8. Monopolies 28(7.4)
Plaintiff in antitrust suit failed to satisfy its burden of
proving that defendant possessed monopoly power in the
markets it defined.
9. Monopolies 17(1.7)
Tests for predatory pricing are pricing below marginal or
average variable costs and pricing above such costs but below
short run profit-maximizing price where barriers to entry are
high; the second test should be appied only in limited circum-
stances and should probably be considered an exception to the
first test rather than an independent test itself, and the tests are
the same even if evidence of price discrimination or price
balancing is offered.
10. Monopolies 17(1.8)
Company should not be guilty of predatory pricing,
regardless of its costs, when it reduces prices to meet lower
prices already being charged by by its competitors.
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11. Monopolies 28(7.4)
Evidence in antitrust suit was insufficient to support finding
that prices for any of defendant’s products were predatory,
under test relied on by plaintiff of showing barriers to entry and
prices below short run profit-maximizing price.
12. Monopolies 28(7.6)
Plaintiff's damage evidence was insufficient in antitrust suit
in that verdict rendered thereon would be result of speculation
and guesswork because there was no basis in record for jury to
determine what effect on damages would be if it found one or
more of the challenged acts lawful, and, because plaintiff failed
to explain away the effect of any of the factors other than
defendant’s allegedly illegal conduct that had an adverse effect
on plaintiff's operations during the relevant time period, in-
cluding management problems, general recession and com-
petition from third parties.
13. Monopolies 28(9)
In calculation of damages caused by alleged monopoliza-
tion, condition of the overall economy is an important factor.
14. Monopolies 28(7.6)
Injured plaintiff in antitrust suit need not show the amount
of damages with precision, but must provide the jury with a
theory of recovery that is both reasonable and the best measure
available.
15. Monopolies 17(1.3)
Computer systems manufacturer’s policy of not disclosing
interface information until the first customer shipment of its
products did not constitute act of monopolization as claimed by
plug compatible manufacturer.
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16. Monopolies 28(7.4)
Plaintiff plug compatible manufacturer failed to present
sufficient evidence in antitrust suit that defendant computer
systems manufacturer’s introduction of longer-term leasing plan
constituted act of monopolization, in absence of evidence that
the overall profitability of the program depended on later price
increases to recoup present losses, and where the lease terms,
which were shorter than those offered by competitors, were not
so long as to have any significant lock-out effect.
17. Monopolies 28(8)
Where there is difference of opinion in antitrust suit as to
the advantages of two alternatives which can both be defended
from an engineering standpoint, court will not allow itself to be
enmeshed in a technical inquiry into the justifiability of product
innovations.
18. Monopolies 28(7.4)
Evidence in monopolization suit established that various
products and series of products introduced by defendant com-
puter systems manufacturer were genuine innovations and did
not constitute monopolization in connection with interface
changes and pricing as contended by plaintiff plug compatible
manufacturer, considering, among things, absence of evidence
that defendant was sacrificing present profits with the ex-
pectation of recouping its losses with subsequent price increases.
19. Monopolies 17(1.8)
Proper focus with respect to predatory pricing claim was
whether defendant’s overall program was projected to be
profitable.
20. Monopolies 17(1.7)
Even assuming that item is a separate product, the antitrust
laws do not require separate pricing when no competitive
alternative is available.
a Bet
A-19
21. Monopolies 17(1.3)
Where all acts of defendant computer systems manufac-
turer challenged by plaintiff plug compatible manufacturer
were reasonable responses to competition in that plaintiff and
others were making serious inroads into defendant’s business
through reverse engineering and in that defendant met this
competition by introducing a new generation of computers and
by developing more advanced peripheral products that were
able to take advantage of the latest technology and were
offered to customers at lower prices, thus benefiting users, such
conduct by defendant was of type which the antitrust laws were
meant to encourage and were not anticompetitive, predatory, or
unnecessarily exclusive of competition; antitrust laws could not
be used to make time stand still and preserve plaintiffs
profitable position.
22. Federal Civil Procedure 2061
In the event of retrial in antitrust case, plaintiff's jury
demand would be stricken even though jury is ordinarily
appropriate in antitrust damage action, where the magnitude
and complexity of the suit was such as to render it, as a whole,
beyond the ability and competency of any jury to understand
and decide rationally, as indicated by five-month trial which
had already taken place and resulted in deadlock, and in light
of fact that length of any trial in the case would be such as to
render it questionable whether jury would be a true cross
section of the community, and considering possibility that if
retrial was also by jury, no decision would be made.
U.S.C.A.Const. Amend. 7.
23. Jury 13(1)
Where issues in a case are beyond the practical abilities
and limitations of a jury, legal remedy is inadequate and equity
jurisdiction will attach, so that jury is not required.
U.S.C.A.Const. Amend. 7.
S&S
nee
=
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24. Federal Civil Procedure 2061
Where there had already been a five-month trial in
antitrust case resulting in a jury deadlock and jury expenses
amounting to more than $32,000, and where the case was
technically and financially complex, right to jury trial should be
limited to one jury trial. U.S.C.A.Const. Amend. 7.
John L. Endicott, Gibson, Dunn & Crutcher, Los Angeles,
Cal., for plaintiffs.
Patrick Lynch, O’Melveny & Myers, Los Angeles, Cal., for
defendant.
ORDER
CONTI, District Judge.
The jury in the trial of this action was asked to decide
whether IBM monopolized or attempted to monopolize various
markets in the computer industry. After five months of trial,
and after the jury reported itself deadlocked, the court declared
a mistrial.
IBM has moved this court for a directed verdict on the
grounds that no reasonable jury could find for Memorex on any
of its contentions. The court now entertains this motion.
The court, in ruling on IBM’s motion for a directed verdict,
will discuss the issues and evidence and analyze the same by
dividing them into four categories. These are:
(1) MARKETS AND MONOPOLY POWER;
(11) PRICING;
(111) DAMAGES;
(IV) ACTS:
(1) Interface disclosure;
(2) The Fixed Term Plan;
(3) 2319A and 2319B disk drives;
A-21
(4) The New Attachment Strategy;
(5) 3705 Communications Control] Units;
(6) System/370 Models 112 and 125.
I. MARKETS AND MONOPOLY POWER:
[1] One element of the offense of monopolization is the
possession of monopoly power in a relevant market or submar-
ket. United States v. Grinnell, 384 U.S. 563, 570-71, 86 S.Ct.
1698, 16 L.Ed.2d 778 (1966). By agreement of the parties in
this case, an element of the offense of attempt to monopolize is
the specific intent to possess monopoly power in a relevant
market or submarket. Memorex offered evidence to establish
the following markets; (1) general purpose computer systems;
(2) IBM plug compatible disk drives; (3) IBM plug compatible
disk drive control units; and (4) IBM plug compatible com-
munications control units. IBM contends that Memorex has
failed to satisfy its burden of proving that any of these markets
is a relevant market or submarket as those terms are defined by
the antitrust laws.
[2] In Twin City Sportservice, Inc. v. Charles O. Finley &
Co., 512F.2d 1264 (9th Cir. 1975), the Ninth Circuit discussed
relevant market at length. An excerpt from this opinion
follows:
The proper point of departure in any discussion of the
relevant product market must be the rule of “‘reasonable
interchangeability,” enunciated in United States v. E. I. du
Pont de Nemours & Co., 351 U.S. 377, 395, 76 S.Ct. 994,
100 L.Ed. 1264... (1956). According to the Court,
In considering what is the relevant market for
determining the control of price and competition, no
more definite rule can be declared than that com-
' The parties agreed that the relevant geographic market is the United
States. Their disagreement was over the definition of the relevant product
market.
a"
ae
A-22
modities reasonably interchangeable by consumers for
the same purposes make up that “part of trade or
commerce”, monopolization of which may be illegal.
That is, where there is a high degree of substitutability in
the use of two commodities, it may be said that the cross-
elasticity of demand between them is relatively high, and
therefore the two should be considered in the same market.
A like analysis applies when the market is viewed from the
production rather than the consumption standpoint; the
degree of substitutability in production is measured by
cross-elasticity of supply. Substitutability in production
refers to the ability of firms in a given line of commerce to
turn their productive facilities toward the production of
commodities in another line because of similarities in
technology between them. Where the degree of
substitutability in production is high, cross-elasticities of
supply will also be high, and again the two commodities in
question should be treated as part of the same market.
While the majority of the decided cases in which the rule
of reasonable interchangeability is employed deal with the
“use” side of the market, the courts have not been unaware
of the importance of substitutability on the “production”
side as well. Brown Shoe Co. v. United States, 370 U.S.
294, 325 n. 42 [82 S.Ct. 1502, 8 L.Ed.2d 510] .. . (1962);
United States v. Columbia Steel Co., 334 U.S. 495, 510-11
[68 S.Ct. 1107, 92 L.Ed. 1533] ... (1948). [Emphasis by
the court. ]
See also, Greyhound Computer Corp., Inc. v. International
Business Machines Co., 559 F.2d 488, 493 n. 4 (9th Cir. 1977),
cert. denied, 434 U.S. 1040, 98 S.Ct. 782, 54 L.Ed.2d 790
(1978). The two important factors to consider in defining the
relevant product market are, therefore, substitutability in the
use and substitutability in production of commodities.
[3] In United States v. Grinnell Corp., supra, 384 U.S. at
572, 86 S.Ct. at 1704, the Supreme Court indicated that “[i]n
§ 2 cases under the Sherman Act, as in §7 cases under the
ai
A-23
Clayton Act (Brown Shoe Co. v. United States, 370 U.S. 294,
325 [82 S.Ct. 1502, 8 L.Ed.2d 510] .. .) there may be
submarkets that are separate economic entities.” In Brown
Shoe Co. of United States, 370 U.S. 294, 325, 82 S.Ct. 1502,
1523, 8 L.Ed.2d 510 (1962), the Supreme Court discussed
submarkets:
The outer boundaries of a product market are determined
by the reasonable interchangeability of use or the cross-
elasticity of demand between the product itself and substi-
tutes for it. However, within this broad market, well-
defined submarkets may exist which, in themselves, con-
stitute product markets for antitrust purposes. United
States v. E. I. du Pont de Nemours & Co., 353 U.S. 586,
593-595, 77 S.Ct. 872, 1 L.Ed.2d 1057... . The boundaries
of such a submarket may be determined by examining
such practical indicia as industry or public recognition of
the submarket as a separate economic entity, the product’s
peculiar characteristics and uses, unique production facil-
ities, distinct customers, distinct prices, sensitivity to price
changes, and specialized vendors.
The submarket issue was cast by the Ninth Circuit in Greyhound
Computer Corp., Inc. v. International Business Machines Co.,
supra, 559 F.2d at 493, in the following terms:
The question is whether [plaintiff] offered evidence from
which the jury could have reasonably concluded that the
submarkets which [ plaintiff] defined were sufficiently dis-
tinct in commercial reality to permit a company that
dominated these submarkets to exclude competition and
control prices.
Thus, the primary concern in the submarket context is still
whether domination of the product market or markets defined
by the plaintiff would enable the defendant to control prices
and exclude competition. This inquiry boils down to whether
there are products that restrain a defendant’s ability to act
without regard for other manufacturers and suppliers.
=<
4
A-24
[4] The first market defined by Memorex is the general
purpose computer systems market. IBM contends that this
market is too narrow because it excludes products as min-
icomputers and programmable communications control units
and terminals, and because it excludes competitors such as
software suppliers, leasing companies, and service organiza-
tions. IBM further contends that the reason this market is too
narrow is that Memorex’s market experts relied on an in-
accurate source of market information.
IBM offered evidence that a reasonable alternative to a
central processing unit is a series of minicomputers. As
minicomputers have improved, a number of large companies
and organizations have adopted this alternative. Mini-
computers can also be used to supplement a central processing
unit. In addition, where a user’s computing needs are not all at
one location, programmable communications control units and
terminals can link and supplement a series of minicomputers or
a central processing unit. Leasing companies, which purchase
computer equipment from manufacturers and lease it to users,
are an alternative source of all kinds of computer equipment for
all kinds of users. Finally, service bureaus that sell computer
time or specific functions such as payroll offer another non-
manufacturer option. Exclusion of these alternative products
and services weighs against Memorex’s general purpose com-
puter systems market.
The evidence indicates that Memorex’s market expert’s
primary source of information for this market was IBM’s
COMSTAT categories. COMSTAT was an internal IBM
reporting procedure designed to assist in product development
and marketing, not to measure competition. The usefulness of
this data was questioned by IBM even before this litigation
started, and also by a staff member of Memorex’s market
expert. Other sources of information were available, and while
they were used to make adjustments in the COMSTAT data,
the use of the COMSTAT categories colors the accuracy of this
market definition. The court concludes that Memorex has not
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satisfied its burden of proving that th. general purpose comput-
er systems market is a relevant market or submarket both
because it excludes reasonable alternative products and services
and because the accuracy of the underlying market information
is questionable.
[5] Memorex also defined three IBM plug compatible
product markets. The parties’ agreed definition of 2 plug
compatible product is ‘“‘a device which can be used in place of
another device without substantial electronic, mechanical or
programming modifications and without significant change in
the operation of the computer system.” What this means in
this case is that a Memorex disk drive, disk drive control unit, or
communications control unit can replace that comparable IBM
product in a system using an IBM central processing unit. IBM
contends that these plug compatible markets are too narrow
because they exclude other storage devices such as tape drives
and main memory, because they exclude comparable products
manufactured for use on non-IBM systems, and because they
exclude systems of other systems manufacturers.
These three plug compatible markets include only disk
drives, disk drive control units, and communications control
units manufactured by IBM and replacements for these prod-
ucts manufactured by Memorex and others. Before examining
these product markets more closely, some general comments
are in order. In United States v. E. I. du Pont de Nemours &
Co., supra, the Government attempted to limit the market to a
single product, cellophane, which was manufactured by du
Pont and one other company that was a licensee of du Pont
patents. In affirming the district court’s rejection of this market,
the Supreme Court said:
[O]ne can theorize that we have monopolistic competition
in every nonstandardized commodity with each manufac-
turer having power over the price and production of his
own product. However, this power that, let us say,
automobile or soft-drink manufacturers have over their
A-26
trademarked products is not the power that makes an
illegal monopoly. Illegal power must be appraised in
terms of the competitive market for the product. 351 U.S.
at 393, 76 S.Ct. at 1006.
The Court continued later in its decision:
[Where there are market alternatives that buyers may
readily use for their purposes, illegal monopoly does not
exist merely because the product said to be monopolized
differs from others. If it were not so, only physically
identical products would be part of the market. To accept
the Government’s argument, we would have to conclude
that the manufacturers of plain as well as moistureproof
cellophane were monopolists, and so with films such as
Pliofilm, foil, glassine, polyethylene, and Saran, for each of
these wrapping materials is distinguishable. These were all
exhibits in the case. New wrappings appear, generally
similar to cellophane, is each a monopoly? What is called
for is an appraisal of the “cross-elasticity” of demand in
the trade.
Id. at 394, 76 S.Ct. at 1006.
The same problem the Supreme Court found with the cello-
phane market exists in this case because there are or could be
comparable plug compatible markets for the other systems
manufacturers. A market definition that would inevitably lead
to so many monopolies should be carefully scrutinized.
After considering the evidence, the court concludes that
Memorex has not satisfied its burden of proving that the three
IBM plug compatible markets are relevant markets or sub-
markets because they exclude reasonable alternative products.
The court finds that Memorex improperly disregarded the
existence of competition from alternative storage media. While
there may be situations where disk storage is the only prac-
ticable medium, there are many other situations where either
tape or memory are reasonable alternatives. The decision is
A-27
influenced by the price/performance ratios of the available
options. Thus, these other storage media restrain the price IBM
can charge for disk drives and disk drive control units.
The second retraint on IBM’s disk drives, disk drive control
units, and also on communications control units is potential
competition from manufacturers of comparable non-IBM plug
compatible products. These include plug compatible manufac-
turers who market their products to end users of non-IMB
systems, original equipment manufacturers who market their
products to other systems manufacturers for inclusion in their
systems, and other systems manufacturers themselves. Memo-
rex contended that the cost of modifying an interface precluded
competition between IBM compatible and non-IBM compatible
products. However, IBM demonstrated that the conversion cost
was within the means of even small manufacturers and that the
engineering difficulties were manageable. It also offered evi-
dence of interface modifications that had been made at its
request and by others.
Finally, the IBM plug compatible product markets ignore
the importance of prices for peripheral products in the choice of
a system. Peripheral products are devices, including disk
drives, disk drive control units, and communications control
units, that are outside the central processing unit. These devices
have become an increasingly large part of the cost of a system.
The higher their prices, the greater the cost of a system, and the
less competitive the system is with the systems of other manu-
facturers. Competition between systems is, therefore, an impor-
tant restraint on IBM’s prices for disk drives, disk drive control
units, and communications control units.
There are additional difficulties with the IBM plug com-
patible disk drive control unit and communitcations control unit
markets. Disk drives and disk drive control units have been
marketed as a subsystem by plug compatible manufacturers,
including Memorex. In such circumstances, it is doubtful
whether a separate market for disk drive control units even
A-28
exists. With respect to the communications control unit market,
there is insufficient evidence to show that such a market exists.
Memorex’s market experi specifically excluded this market
from his testimony, and the few documents offered in support of
this market were inconclusive.
For the reasons indicated above, the court concludes that
viewing the evidence as a whole, there is not substantial
evidence present that could support a finding by reasonable
jurors that Memorex has satisfied its burden of proving that the
markets it defined are relevant markets or submarkets for
antitrust purposes. As the Ninth Circuit said in evaluating
monopolization claims under Section 7 of the Clayton Act and
Section 2 of the Sherman Act, “Plaintiffs’ contentions must fail
because of their failure adequately to define and prove the
relevant market which is ‘a necessary predicate’ for evaluating
claims under these provisions of the antitrust laws.” Fount-
Wip, Inc. v. Reddi-Wip, Inc., 568 F.2d 1296 at 1301 (9th Cir.
1978). It is hereby ordered that IBM’s motion for a directed
verdict on this ground is granted.?
[6] IBM further argues that even assuming the validity of
these market definitions, Memorex has failed to satisfy its
burden of proving that IBM possessed monopoly power in these
markets. Monopoly power is defined as the power to control
prices or exclude competition. United States v. E. I. du Pont de
Nemours & Co., supra, 351 U.S. at 391, 76 S.Ct. 994. In United
States v. Grinnell Corp., supra, 384 U.S. at 571, 86 S.Ct. at
1704, the Supreme court indicated that “[t]he existence of such
power ordinarily may be inferred from the predominant share
of the market.” However, in Pacific Coast Agricultural Export
Ass'n v. Sunkist Growers, Inc., 526 F.2d 1196, 1204 (9th Cir.
1975), cert. denied, 425 U.S. 959, 96 S.Ct. 1741, 48 L.Ed.2d 204
(1976), the Ninth Circuit stated that “it is now well settled that
market share, while being perhaps the most important factor,
2 By agreement of the parties, this failure of proof affects the attempt to
monopolize claim as well as the monopolization claim.
‘haga
om
es
A-29
does not alone determine the presence or absence of monopoly
power.” IBM contends that the evidence precludes an infer-
ence of monopoly power from its market share, and that the
evidence affirmatively demonstrates the absence of monopoly
power.
In United States v. Aluminum Co. of America, 148 F.2d
416, 424 (2d Cir. 1945), Judge Learned Hand said, “The
percentage we have already mentioned—over ninety—. . . is
enough to constitue a monopoly; it is doubtful whether sixty or
sixty-four percent would be enough; and certainly thirty-three
percent is not.” Because market share does not alone deter-
mine the presence or absence of monopoly power, neither the
Supreme Court nor the Ninth Circuit has been able to improve
on these guidelines during the more than thirty years since that
case was decided. See Greyhound Computer Corp., Inc. v.
International Business Machines Co., supra, at 496 n. 18.
However, the court in Greyhound indicated another factor to be
considered:
The record indicates that IBM’s market share is declining.
A declining market may reflect an absence of market power,
but it does not foreclose a finding of such power. /d. [Citations
omitted. ]
In t! > case, Memorex offered evidence of relatively high IBM
market shares, but even this evidence indicates that its shares
were declining.
[7] Because the court feels that Memorex’s market share
evidence is inaccurate, no extended discussion of the effect of
these shares is necessary. Memorex’s market expert stated that
he used installed base figures to calculate IBM’s market shares.
Installed base figures attribute al] products IBM has ever
manufactured io its shares, regardless of who owns the prod-
ucts. Thus, these figures lump past manufacturers with present,
and include products over which IBM no longer has any pricing
discretion. To determine a firm’s monopoly power as of a given
date, its current market share is the relevant figure and is
normally measured in terms of current output. See P. Areeda &
> | i ¥
a
A-30
D. Turner, Antitrust Law J 520, at 350 (1978). Memorex’s
market expert conceded that current output figures are nor-
mally used, and offered no convincing reason for treating these
markets differently. He also conceded that exclusion of prod-
ucts sold by IBM in earlier years would reduce its market
shares. Monopoly power should not be inferred from such
questionable evidence.
[8] There was also considerable evidence that regardless
of IBM’s market shares, it lacked the power to control prices or
exclude competition in these markets. Both competitors and
customers of IBM in the computer industry stated that the
industry is extremely competitive. In addition, IBM was forced
to lower its prices On numerous occasions to prevent plug
compatible manufacturers from squeezing it out of these mar-
kets entirely. A substantial number of new competitors entered
these markets and the degree of product innovation is high.
Viewing this evidence as a whole, the court concludes that there
is not substantial evidence present that could support a finding
by reasonable jurors that Memorex has satisfied its burden of
proving that IBM possessed monopoly power in the markets it
defined. It is hereby ordered that IBM’s motion for a directed
verdict on this ground is granted.
Il. PRICING:
Memorex challenged the prices at which IBM sold a
number of its products. IBM has argued throughout this
litigation that prices may be predatory only when they are
below marginal or average variable cost. Memorex concedes
that it made no effort to prove that IBM’s prices were below this
level, so, if IBM ic correct about the standard to be applied, the
court should direct a verdict in its favor on the pricing issues.
Even under the standard proposed by the court, IBM contends
that it reduced prices to meet lower prices of its competitors,
3 This failure of proof affects only the monopolization claim.
aaa,
A-31
and that Memorex has failed to satisfy its burden of proving
that IBM was sacrificing present profits to obtain supranormal
profits in the future.
[9] In Hanson v. Shell Oil Co., 541 F.2d 1352 (9th Cir.
1976), cert. denied, 429 U.S. 1074, 97 S.Ct. 813, 50 L.Ed.2d 792
(1977), the Ninth Circuit discussed predatory pricing. An
excerpt from this opinion follows:
To demonstrate predation, Hanson had to show that the
prices charged by Shell were such that Shell was foregoing
present profits in order to create a market position in which
it could charge enough to obtain supranormal profits and
recoup its present losses. This could be shown by evidence
that Shell was selling its gasoline at below marginal cost or,
because marginal cost is often impossible to ascertain,
below average variable cost.5
[5 An alternative possibility might be a showing that
the defendant charged a price which, although above
marginal or average variable costs, was below its short
run profit-maximizing price and that barriers to entry
were great enough to prevent other entry before the
predator could reap the benefits of his oligopolistic or
monopolistic market position. There is some question,
however, whether pricing below a profit maximizing
point which is still above marginal and average
variable costs should be considered predatory; it only
discourages inefficient new entrants who must have
higher prices to survive. ]
Hanson made no effort to prove that the prices Shell was
charging at either the wholesale or the retail level were below
marginal or average variable costs, and for all that appears
Shell’s new pricing policies were nothing more than an attempt
to gain a larger share of the market because of its stronger
competitive position. If its prices were above its costs, and
nevertheless Shell’s did drive Hanson out of business, this can
only be because Hanson was so inefficient that at prices at
A-32
which Shell could make a reasonable profit he could not. The
antitrust laws were not intended, and may not be used, to
require businesses to price their products at unreasonably high
prices (which penalize the consumer) so that less efficient
competitors can stay in business. The Sherman Act is not a
subsidy for inefficiency. Hanson’s failure to show that Shell’s
prices were below its marginal or average variable costs was a
failure as a matter of law to present a prima facie case under
§ 2.
Id. at 1358-59. [Citations omitted. ]
The court interprets this case as establishing two tests for
predatory pricing: (1) pricing below marginal or average
variable costs, and (2) pricing above marginal or average
variable costs but below the short run profit-maximizing price
where barriers to entry are high. Hanson lost because he failed
to satisfy the first test. There is no indication that he offered any
evidence that would have invoked the second.
The court in Hanson cited International Air Industries, Inc.
v. American Excelsior Co., 517 F.2d 714, 723-24 (Sth Cir.
1975), to support this dual test. In that case, plaintiffs argued
that the district court should have directed a verdict in its favor
on its Robinson-Patman Act price discrimination claim. The
Fifth Circuit indicated that the basic substantive issues raised
by the Robinson-Patman Act and the Sherman Act were
identical. In affirming the lower court’s refusal to direct a
verdict for plaintiffs, the Fifth Circuit said, “When price
discrimination exists—as in the case before us—we see no
reason to depart from the average variable cost test for
predation unless it can be shown that there are significant
barriers of entry in the relevant market.” Jd. at 724. The court
expanded on this statement in a footnote:
We employ the profit maximizing standard only because of
our deference to a situation in which a monopolist could
drive a slightly less efficient firm out of the market by
charging a price above its own average cost, but then
fe ls
A-33
charge a very high price because of the difficulty of new
entry. This standard should be applied only when the
barriers to entry are extremely high. The lower the
barriers to entry to a market, the closer to marginal cost a
monopolist would have to set its price in order for a
plaintiff to prevail as a matter of law, for we see no social
utility in insuring the survival of inefficient firms where a
new entry is possible. Jd. at 724-25, n. 31.
As the court noted, “If a discriminator’s price in the competitive
market increases his new revenues in the short run, he will have
no need to ‘subsidize’ losses in the competitive market with the
profit from his other market.” Jd. at 725. While these
comments were made in the context of a price discrimination
claim, they are equally applicable to Memorex’s theory of price
balancing. Price balancing is defined by Memorex as lowering
prices for a product in a competitive market and at the same
time raising prices for a different product in a market without
substantial competition. The second test for predatory pricing
should be applied only in the limited circumstances described
above, and should probably be considered an exception to the
marginal or average variable cost test rather than an independ-
ent test itself.
The Ninth Circuit recently discussed predatory pricing
again in Janich Bros., Inc. v. American Distilling Co., 570 F.2d
848 (9th Cir. 1977). The court said, “As implied in Hanson, an
across-the-board price set at or above marginal cost should not
ordinarily form the basis for an antitrust violation.” Jd. at 857.
[Emphasis added.] This statement indicates that the exception
for a market with high barriers to entry is still recognized. The
court added, “[A]s stated in Hanson, average variable cost can
be used as evidence of marginal cost.” Jd. at 858. In affirming
the district court’s direction of a verdict in favor of American,
the Ninth Circuit concluded:
On the basis of the present record, and even assuming that
the products were sold at the prices indicated on the price
list, Janich has not come forth with sufficient evidence to go
VES
oe
(Re
s ’
A-34
to the jury on a contention that American sold gin and
vodka below average variable cost for the period 1961-62.
Id.
As was the case in Hanson, there is no indication that Janich
offered any evidence that barriers to entry in the relevant
market were high.
Memorex concedes that it offered no evidence that any of
IBM’s prices were below its marginal or average variable costs.
Thus, Memorex did not satisfy the first test for predatory
pricing set forth in Hanson. Memorex did offer evidence that
the barriers to entry in the markets it defined were high,
attempting to invoke the second test or the exception to the
marginal or average variable cost test from Hanson. IBM
contends that Memorex has failed to satisfy its burden of
proving that the barriers to entry in these markets were high or
that IBM’s. prices were below its short run profit-maximizing
prices. IBM further contends that it reduced prices to meet
lower prices of its competitors.
[10] The “meeting competition” defense is similar to a
statutorily recognized defense to a price discrimination charge
under the Robinson-Patman Act. See 15 U.S.C. §13(b). A
company should not be guilty of predatory pricing, regardless
of its costs, when it reduces prices to meet lower prices already
being charged by its competitors. To force a company to
maintain non-competitive prices would be to turn the anti-trust
laws on their head. Such a price cut cannot create the kind of
market position that the prohibition of predatory pricing was
meant to preclude. The evidence in this case indicates that
IBM’s prices for the 2319 disk drives, the Fixed Term Lease
P'in, and the 3705 communications control unit were set at a
level established by Memorex and the other plug compatible
manufacturers. In fact, IBM’s prices were higher in most
instances even after the reductions. Memorex will not be heard
to complain that they should have been still higher so that it
could take even more business away from IBM.
458 F.Supp.—10
:
f
Ak
aa
A-35
To satisfy the second test or the exception to the marginal
or average variable cost test from Hanson, Memorex had to
prove that IBM was sacrificing present profits to obtain super-
normal profits in the future. If IBM were able to force the plug
compatible manufacturers out of the markets defined by Mem-
orex, it would still face competition from leasing companies and
other systems manufacturers. However, even discounting the
importance of this check, Memorex had to show that IBM’s
prices were below its short run profit-maximizing prices and
that barriers to entry in these markets were high.
[11] The court in International Air Industries, Inc. v.
American Excelsior Co., supra, indicated that this second test or
exception to the first should only be used when the barriers to
entry were “extremely high.” The evidence in this case
indicates that entry into the markets defined by Memorex was
not overly difficult. Memorex itself made the change over from
original equipment to plug compatible manufacturer very
quickly. Other companies have been able to enter the plug
compatible markets directly, and systems manufacturers have
also entered with relative ease. In these circumstances, IBM
had little prospect of future gain by undercutting its current
competitors.
Finally, Memorex has not offered any convincing evidence
that any of IBM’s prices were not considered to be short run
profit-maximizing when they were adopted. There is some
testimony from a Memorex expert that a few of the thousands
of possible configurations of the 3705 communications control
unit were priced below IBM’s total costs. However, IBM
successfully impeached this after-the-fact analysis, and in Ja-
nich Bros., Inc. v. American Distilling Co., supra, at 856-57, the
court indicated that the proper focus is on the product line as a
whole. The evidence on IBM’s other product prices does not
even speak to their short-run profitability.
For the reasons indicated above, the court concludes that
viewing the evidence as a whole, there is not substantial
evidence present that could support a finding by reasonable
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jurors that the prices for any of IBM’s products were predatory.
Memorex did not even try to satisfy the first test for predatory
pricing from Hanson, and it failed to satisfy the second or the
exception to the first. The tests are the same even if evidence of
price discrimination or price balancing is offered. In addition,
even if its prices were below the levels established by these
tests, IBM has established the meeting competition defense. It
is hereby ordered that IBM’s motion for a directed verdict on
this ground is granted.4
Ill. DAMAGES:
In its final damage claim, Memorex sought to recover
$306,580,000 for injuries suffered as a result of IBM’s alleged
anti-trust violations.5 Memorex calculated its damages by
measuring the difference between forecasted and actual results
for certain of its products. IBM contends that Memorex’s proof
on its damage claim was fatally speculative. Because damages
were not related to individual IBM acts, IBM asserts that there
was no reasonable basis in fact for the jury to determine what
the effect on damages would be if it found one or more of the
challenged acts lawful. IBM also asserts that Memorex improp-
erly attributed all of its shortfall in anticipated revenues to
IBM’s alleged antitrust violations despite the presence of other
adverse factors.
In Bigelow v. RKO Radio Pictures, Inc., 327 U.S. 251, 264,
66 S.Ct 574, 579, 90 L.Ed. 652 (1946), the Supreme Court
indicated that “even where the defendant by his own wrong has
4As will be discussed more fully below in the section on damages,
Memorex has structured its damage claim in such a way that it is impossible
to separate the injury it suffered from IBM’s pricing practices from the injury
it suffered from IBM’s other acts. The court’s ruling on the pricing issues is,
therefore, dispositive of the entire action.
5 As originally presented, the Memorex damage claim was $333,345,000.
Subtracting damages for the Madrid claim on which the court has already
directed a verdict in favor of IBM leaves $306,580,000.
A-37
prevented a more precise computation, the jury may not render
a verdict based on speculation or guesswork.” The Ninth
Circuit expressed the same idea in Flintkote Co. v. Lysfjord, 246
F.2d 368, 393-94 (9th Cir. ), cert. denied, 355 U.S. 835, 78 S.Ct.
54, 2 L.Ed.2d 46 (1957), where it said:
We recognize the fact that as we examine this feature of
the case, injured plaintiffs and a wrongdoing defendant
face the court. In such a context the record will not
ordinarily be searched with a microscopic eye. Yet
something better is required to sustain a jury verdict than
an interested guess.
IBM argues that a jury verdict based on the evidence offered by
Memorex on its damage claim in this case would be no more
than a guess.
[12] According to IBM, Memorex’s damage evidence was
defective because it did not provide any means for determining
how much Memorex was injured by any IBM act considered by
itself. Memorex’s damage expert professed to be unable to
isolate the impact of each act. However, IBM offered evidence,
and the court concludes, that there were alternatives to these
lump sum figures. Adjustments to Memorex’s pre-impact
forecasts after each IBM act would have given the jury a
reasonable measure of the impact of that act. Memorex was
able to make after-the-fact adjustments in its pre-impact fore-
casts where this was necessary to increase its damage claim.
The way Memorex structured its damage claim there was no
basis in the record for the jury to determine what the effect on
damages would be if it found one or more of the challenged
acts lawful. Thus, if one of IBM’s acts was not a violation of the
antitrust laws, much of the damage claim would become
invalid. In addition, even if the jury found IBM guilty of every
violation alleged, there was no basis for it to independently
evaluate what the separate effect of each violation was. It
would have to take Memorex at its word. In either case, a
verdict rendered on the damage evidence offered by Memorex
would have been speculative.
A-38
Memorex’s damage expert stated that its damage claim
had not been adjusted to take account of adverse factors other
than IBM’s alleged antitrust violations. Although another
Memorex witness testified that the effect of these factors was
implicit in at least some of Memorex’s forecasts, the jury would
have had to take Memorex at its word that their influence was
properly reflected. In Bigelow v. RKO Radio Pictures, Inc.,
supra, 327 U.S. at 264, 66 S.Ct. at 579, the Supreme Court said:
. . « []]n the absence of more precise proof, the jury could
conclude as a matter of just and reasonable inference from
proof of defendants’ wrongful acts and their tendency to
injure plaintiffs’ business, and from the evidence of the
decline in prices, profits and values, not shown to be
attributable to other causes, that the defendants’ wrongful
acts had caused damage to the plaintiffs. [Emphasis
added. }
IBM offered evidence of a number of factors other than its
allegedly illegal conduct that had an adverse effect on Memo-
rex’s operations during the relevant time period. These include:
(1) Memorex’s own mismanagement and the failure of other
portions of its business to perform up to expectations; (2)
adverse comment on Memorex in the financial community; (3)
the recession in the early 1970’s; (4) competition from other
companies; and (5) lawful competition from IBM. Because
Memorex failed to explain away the effect of any of these
factors, the court concludes that a jury verdict rendered on
_Memorex’s damage evidence would have been speculative.
Memorex conceded that it had management problems in
the early 1970's. In Capra, Inc. v. Ward Foods, Inc., 536 F.2d
39, 52 (Sth Cir. 1976), the court said:
In addition to presuming the accuracy of both | financial ]
statements, [the Jacks Report] assumed out any effect of
poor management. The proposition is elementary that
estimates and opinions may be based upon assumptions,
es eee
ad a “
a
A-39
but only so long as the assumptions rest on adequate data.
Here the ultimate conclusion was taken as “given”. The
award is bereft of evidentiary support; it accordingly fails.
{Emphasis by the court. ]
The damage evidence offered by Memorex suffered from the
same defect. There is also evidence in the record that other
portions of Memorex’s business failed to achieve projected
results. These shortfalls may have had a carry-over effect in the
markets where Memorex competed with IBM, especially in the
systems market where Memorex was in desperate need of
capital. Memorex’s management problems had a public rela-
tions aspect as well. Their exposure in the financial press
affected Memorex’s ability to raise money.
[13] Memorex did not dispute the fact that there was a
recession in the early 1970’s. Industry conditions were consid-
ered an important factor in the calculation of damages by the
Ninth Circuit in Sunkist Growers, Inc. v. Winkler & Smith
Citrus Products Co., 284 F.2d 1, 31, 33 (9th Cir. 1960), rev'd on
other grounds, 370 U.S. 19, 82 S.Ct. 1130, 8 L.Ed.2d 305
(1962). The condition of the overall economy should be no
less important a factor. Memorex offered no evidence of the
effect of the recession on its operations and hence its damage
claim.
Memorex also focused on IBM’s alleged antitrust viola-
tions to the exclusion of competition from other plug com-
patible manufacturers. Its own salesmen were warning that
Memorex was in a position to lose business to these competitors
for the same reason that it was able to take business away from
IBM. Their prices were lower. The court in Delaware Valley
Marine Supply Co. v. American Tobacco Co., 184 F.Supp. 440,
447 (E.D.Pa. 1960), indicated that competition from third
parties was a factor the plaintiff should take into account.
Memorex has not done so in its damage claim. In addition,
during the relevant time period, IBM introduced a number of
products in the markets defined by Memorex as to which no
challenge is made. Failure to separate out the effect of lawful
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from unlawful competition was a factor in the Second Circuit’s
affirmation of the district court’s exclusion of plaintiff's damage
evidence in Herman Schwabe, Inc. v. United Shoe Machinery
Corp., 297 F.2d 906, 911 (2d Cir.), cert. denied, 369 U.S. 856,
82 S.Ct. 1031, 8. L.Ed.2d 85 (1962).
In addition to arguing that failure to explain why the effect
of these five factors made it impossible for the jury to independ-
ently assess the extent of damage Memorex suffered as a result
of IBM’s alleged antitrust violations, IBM also asserts that there
were erroneous assumptions in Memorex’s forecasts. First, IBM
argues that the 1270 communications control unit forecast was
based on certain features being available at specified dates, and
that when these features were not delivered on time, the
attractiveness of the Memorex product was reduced. The 1270
forecast also assumed that there would be no competitive
response like the 3705 from IBM. Second, the systems forecast
assumed a substantial mix of Memorex/50’s while the over-
whelming percentage of Memorex computers actually placed
were Memorex/40’s. Third, the 660 disk drive forecast depend-
ed on the assumption that only 2314-type disk drives would be
attached to the IBM System/370 Models 135 and 145 comput-
ers, when IBM predicted that more than half of its customers
would use the 3330 disk drive. Memorex made no effort to
adjust these forecasts to reflect the results of actual experience,
yet it was able to adjust its 1270 forecast upward when the
product exceeded its earlier projections.
[14] In the Herman Schwabe, Inc. v. United Shoe Machin-
ery Corp., supra, 297 F.2d at 912, the Second Circuit cautioned
that courts must carefully evaluate damage evidence where
plaintiff offers
... an array of figures conveying a delusive impression of
exactness in an area where a jury’s common sense is less
available than usual to protect it. It might indeed have
been possible for a judge, with days in which to study the
exhibits of plaintiff's expert, to come up with some rational
A-41
computation of damages, on a theory wholly different from
what the expert advocated, that would satisfy the Supreme
Court’s modest requirements in this area; it would be fool-
hardy to expect a jury to do so.
For the reasons indicated above, the court concludes that
viewing the evidence as a whole, there is not substantial
damage evidence present on which reasonable jurors could
base a verdict for Memorex that would not be speculation or
guesswork. An injured plaintiff need not show the amount of
his damages with precision, but he must provide the jury with a
theory of recovery that is both reasonable and the best measure
available. Memorex has not done so in this case.
It is hereby ordered that IBM’s motion for a directed
verdict on this ground is granted.
IV. ACTS:
Memorex challenged a number of IBM acts on a number
of grounds. These acts include: (1) not disclosing interface
information until first customer shipment of a product; (2) the
introduction of the Fixed Term Plan; (3) the introduction of
the 2319A and 2319B disk drives; (4) the introduction of the
New Attachment Strategy; (5) the announcement of the 3705
communications control unit; and (6) the announcement of the
System/370 Models 125 and 115. Memorex claims that this
conduct was anticompetitive and predatory and unnecessarily
excludec’ competition. Greyhound Computer Corp. Inc. vy.
International Business Machines Co., supra, at 498. IBM
contends that these acts were nothing more than reasonable
responses to competition. Jd. at 498-99. The court will discuss
each of these acts in turn.
(1) INTERFACE DISCLOSURE:
[15] Memorex challenged IBM’s policy of not disclosing
interface information until first customer shipment of its prod-
ucts. Memorex claimed that plug compatible manufacturers
needed this information at the time of product announcement
A-42
in order to compete with IBM. IBM contends that it had no
duty to disclose interface information, and that what Memorex
sought was more than iust the physical description of the
interconnections between IBM products.
The parties agreed definition of an interface is
A shared boundary which enables transfer of information
in accord with a prescribed format, sequence, timing and
encoding. An interface may refer to either hardware or
software or a combination of both.
At trial, Memorex used the analogy of an electric plug and a
wall socket to describe the physical interconnections between
the component devices in a computer system. IBM argues that
the mechanical, electrical, and logical information which Mem-
orex sought makes this analogy an oversimplification. While
the physical description of an electric plug reveals very little
about the nature of the device at the end of the cord, the same
is not true of a computer “plug.” IBM offered evidence, and
the court concludes, that the kind of information Memorex
sought would reveal valuable information about the design of
the products involved.
Memorex conceded that IBM’s disclosure policy was as
forthcoming as any in the industry, including its own. In point
of fact, interface information is never disclosed as such, but
rather is gleaned from maintenance manuals that are published
for and distributed with each product. IBM argues that this
information is a trade secret, and that it needs the lead time
created by not disclosing this information until first customer
shipment to recover its product development costs. In Kewanee
Oil Co. v. Bicron Corp., 416 U.S. 470, 94 S.Ct. 1879, 40 L.Ed.2d
315 (1974), the Supreme Court held that state trade secret
protection is not pre-empted by the federal patent laws. The
. Court indicated that one of the stated policies behind trade
secret law was “the encouragement of invention.” Jd. at 481,
94 S.Ct. 1879. It emphasized that just because a discovery
—
, i
A-43
might not be patentable did not “ ‘destroy the value of the
discovery to one who makes it, or advantage the competitor
who. . . obtains the desired knowledge without himself paying
the price in labor, money, or machines expended by the
discoverer.”” Jd. at 482, 94 S.Ct. at 1886. The Court
recognized that “[a] trade secret, however, does not offer
protection against discovery by fair and honest means, such as
by independent invention, accidental disclosure, or by so-called
reverse engineering, that is by starting with the known product
and working backward to divine the process which aided in its
development or manufacture.” Jd. at 476, 94 S.Ct. at 1883.
IBM argues that Memorex should be limited to reverse
engineering its interfaces with the help of the maintenance
manuals. Memorex contends that it should have access to this
information at the time of product announcement under some
sort of licensing arrangement. It cited no authority in support
of its position, but even if it could, the court concludes that
Memorex has not shown that it and other plug compatible
manufacturers cannot compete with IBM under present circum-
stances. Memorex’s replacements for IBM products have been
profitable, and as its own technical capabilities have improved,
it has been able to reduce IBM’s lead time considerably. The
same is true of other competitors who have continued to enter
the plug compatible markets. Depriving IBM of its lead time
would remove its incentive to invent.
(2) THE FIXED TERM PLAN:
[16] Prior to the introduction of the Fixed Term Plan
(FTP) in May 1971, IBM only leased its peripheral equipment
for 30 days. These 30-day leases put IBM at a competitive
disadvantage because most of its competitors, including systems
and plug compatible manufacturers and leasing companies,
offered longer term leases at a discount. In addition, there was
a recession in 1970-71 which caused computer users to cut back
the amount of equipment they had on lease. IBM equipment
on 30-day lease was more easily discontinued than competitive
eke
A-44
equipment. Both IBM and its competitors recognized that if
IBM did not respond to this competition, it would be forced out
of the peripheral equipment markets.
FTP gave customers the option of leasing certain IBM
peripheral equipment for one year at an 8% discount or two
years at a 16% discount. Memorex asserts that FTP was an
illegal price cut. As discussed above in the section on pricing,
Memorex did not allege that FTP prices were below marginal
or average variable cost. Rather, it asserts that IBM expected
its revenues and profits from the products covered by FTP to
decrease during the first 18 months of the program. However,
there is no evidence that the overall profitability of the program
depended on later price increases to recoup present losses. IBM
offered evidence that its FTP revenues and profits would
increase over time as a result of additional placements and
extended product lives. The traditional object of a price cut is
to make up lost profits per unit with increased volume, and the
court concludes that this is what IBM was attempting to do with
FTP. The fact that this price cut took place in a lease context
where profitability depends on both the lease rate and the
revenue-producing life of a product should not be allowed to
cloud the issue.
Memorex also asserts that the one and two year leases
locked out IBM’s competitors during the term of the lease. In
addition to the fact that these competitors offered even longer
term leases and the fact that IBM still offered customers the
option of a 30-day lease, the FTP lease terms were not so long
as to have any significant lockout effect. See United States v.
United Shoe Machinery Corp., 110 F.Supp. 295 (D.Mass.
1953), aff'd per curiam, 347 U.S. 521, 74 S.Ct. 699, 98 L.Ed.
910 (1954) (approving five-year lease terms). In Greyhound
Computer Corp., Inc. v. International Business Machines Co.,
_ supra, at 498-99, the Ninth Circuit held that as to FTP,
“Greyhound failed to show that IBM’s action with respect to
peripheral equipment was anything more than a reasonable
A-45
response to competition.” The court concludes that Memorex’s
proof suffers from the same failure.
(3) THE 2319A and 2319B DISK DRIVES:
The 2319A was a 3-spindle version of the IBM 2314 series
disk drive which had been modified to allow attachment to the
integrated file adapter (IFA) of the System/370 Models 135
and 145. The IFA supplied low-cost disk control function for
these 370 models by eliminating the need for a channel and
separate disk drive control unit. Memorex conceded that the
IFA was a technological innovation which represented a cost
saving to the user. In the design stage, IBM considered
attaching several different disk drives to these intermediate
systems. Memorex claims IBM chose the 2319A because it
involved a change in interface that would assure that the first
three drives attached to the central processing unit were IBM
drives. It also challenged the price at which IBM offered the
2319A to customers. IBM contends that the 2319A, including
the interface change, was based on sound engineering consid-
erations, and led to the introduction of a better product at a
lower price.
The interface change between the 2314 series disk drives
and the 2319A was primarily the result of moving the customer
engineering panel and the mixer board from the central
processing unit to the drive. Memorex asserts that IBM’s
Apricot plan, which was one of the alternatives considered,
would have resulted in an interface compatible with IBM’s
2314 series disk drives, while the 2319A was introduced with a
different interface. IBM argues that there were technological
justifications for the new interface, and that neither Memorex
nor any other plug compatible manufacturer had ever used the
old interface so that Memorex disk drives would not have been
compatible with the IFA under any circumstances.
[17] Memorex’s expert testified that there were sound
reasons for the change on both sides of the interface. Locating
the customer engineering panel in the disk drive reduced
Tia
Pics
A-46
maintenance time and interference with the central processing
unit. He also indicated that the gating circuits found in the
2319A mixer board are best located in the drive. Moving these
two assemblies out of the central processing unit saved space
which was an important consideration in the design of the
intermediate System/370 processors, especially the Model 135.
Despite these advantages, Memorex’s expert still maintained
that the Apricot plan was superior. Where there is a difference
of opinion as to the advantages of two alternatives which can
both be defended from an engineering standpoint, the court
will not allow itself to be enmeshed “in a technical inquiry into
the justifiability of product innovations.” Response of Carolina,
Inc. v. Leasco Response, Inc., 537 F.2d 1307, 1330 (Sth Cir.
1976).
[18] IBM offered uncontroverted evidence that Memorex
and other plug compatible manufacturers did not attach their
disk drives at the interface between IBM’s 2314 series disk
drives and disk drive control units, but instead marketed entire
replacement subsystems. Thus, Memorex would have had to
make a change in its interface even if IBM had adopted the
Apricot plan. Because Memorex never completed work on
either interface, there is no real indication whether it would
have found the new interface more difficult to reverse engineer
than the old. An IBM expert testified that he had duplicated
the new interface in six and one-half man weeks. The court
does not see how Memorex was injured by this interface
change.
The 2319A was priced by IBM at $1,000 or $333 per
spindle. Memorex did not allege that this price was below
marginal or average variable cost. Rather, it asserts that IBM
should have adopted a price of $1,400 or $467 per spindle
because IBM’s financial analysis showed that at that price the
drives themselves would generate greater revenue and profit.
IBM offered evidence that its financial analysis also showed that
its overall revenues and profits would be higher at the an-
A-47
nounced price because of additional sales of disk drives and
systems beyond the 2319A’s themselves. The court concludes
that IBM’s choice was proper. There is no evidence that the
profitability of the 2319A depended on a future price increase,
and even at the lower price, IBM’s price was above that of its
competitors in most instances.
The 2319B was a lower cost, modified 3 spindle version of
the 2319 disk drive for use on systems that did not offer the IFA
feature. It attached to a 2314B disk drive control unit which
connected to the central processing unit through a channel.
This subsystem: could be connected to any IBM system that had
a channel, but was primarily attractive to System/360 users.
The 2319 disk drive was primarily a reuse program. These
drives were manufactured from 2313 series disk drives which
were being displaced in the field by large System/370 models
which used a later generation disk drive as well as by plug
compatible disk drives. Memorex again challenged the engi-
neering justification for the interface change between the 2319B
and the 2314B, and the price at which IBM offered the 2319B to
customers. IBM again contends that Memorex had never used
the old interface, and that the 2319B was essentially a price cut
involving 2314 series disk drives to match the 2319A price.
In 1970, Memorex and other plug compatible manufac-
turers were offering 2314-type disk drives at prices considerably
below IBM’s. The 2319B was IBM’s answer to this com-
petition. The 2319B interface was different than the interface
on the 2314 series disk drives. IBM argued that this difference
facilitated field conversion to the 2319A in the event that the
user elected to move to one of the 370 systems that offered the
IFA, and permitted transfer to a 2319A in the event of lease
cancellation. Putting this justification aside, the court does not
see how Memorex was injured by this interface change. Memo-
rex and the other plug compatible manufacturers connected to
the channel interface, not to the 2314 disk drive control unit,
and the channel interface did not change.
A-48
Memorex did not allege that the 2319B was below IBM’s
marginal or average variable cost, and there was no evidence
that IBM was sacrificing present profits with the expectation of
recouping its losses with subsquent price increases. After the
2319B price reduction, IBM’s competitors further lowered their
prices, and Memorex’s prices remained below IBM’s in all but
two configurations. Memorex asserts that the 2319B enabled
IBM to price discriminate, but there is evidence that the new
IBM subsystem was made generally available.
The court concludes that the 2319A and 2319B were
reasonable responses by IBM to competition from the plug
compatible manufacturers. Both were price cuts and in con-
junction with the IFA, the 2319A was a significant product
innovation.
(4) THE NEW ATTACHMENT STRATEGY:
On August 2, 1972, IBM announced a number of new
products that had been grouped together for a single announce-
ment. Included in this announcement was the first of a series of
products and central processing unit features which represented
a different approach to the attachment of disk drives to
computer systems. This approach has been termed the “New
Attachment Strategy”. It enables users to implement the disk
control function in a variety of ways best suited to their
individual needs. Memorex claims that IBM adopted the New
Attachment Strategy because of all the possible alternatives, it
had the greatest impact on plug compatible manufacturers in
terms of interface changes. Memorex also challenged the prices
at which IBM offered some of these products to customers.
IBM contends that the New Attachment Strategy was an
innovation, and that its prices were proper.
On IBM’s System/360 computers, the disk drives and the
disk drive control unit were separate boxes that connected to
the central processing unit through a channel. The New
Attachment Strategy altered this basic structure. In some cases,
the disk control function was located partly in the central
A-49
processing unit and partly in the first box of a string of disk
drives. The idea was to put the device independent electronics
in the central processing unit and the device dependent elec-
tronics in the disk drive so that later generations of disk drives
did not require entirely new control units. Only the device
dependent electronics in the first box of the new disk drives had
to be changed. In other cases, the device independent elec-
tronics were packaged in a separate box, but the operating
principle was the same.
Memorex argued that IBM should have used what its
expert termed the “Simple Attachment Strategy.” This
approach preserved the channel/control unit/disk drive struc-
ture, and would have required fewer interface changes. IBM
contends, and the court concludes, that it was a misnomer to
call this attachment strategy “simple.”” Under the New Attach-
ment Strategy, the capacity of each control device was in-
creased from 8 spindles to 32. In addition, the use of string
switching permitted access to disk drives by more than one
central processing unit. Duplicating the flexibility of the New
Attachment Strategy is not always possible under the Memorex
attachment strategy, and where it is, the equipment con-
figurations are more complicated.
Memorex claimed that the announcement of the New
Attachment Strategy forced it to change some of its product
designs early in the Memorex product cycle, that the IBM
control alternatives were not priced consistently, and that IBM’s
phased announcements made it more difficult for Memorex to
keep pace. IBM contends that time limits cannot be put on
product innovations, and that coordinating product announce-
ments with the stages of follow-on design work is both neces-
sary and proper. IBM further contends that even if it is
assumed that the prices for the control alternatives under the
New Attachment Strategy varied in their relationship to IBM’s
costs, a company is not required to price all of its products at a
constant markup from cost. The court refused to do so in
United States v. United Shoe Machinery Corp., supra, 110
F.Supp. at 349.
A-50
The court concludes that the New Attachment Strategy
was a Significant innovation. At most, Memorex has only been
able to show that there was an alternative approach available.
Where the approach chosen was at least as justifiable as the
alternative, and in this case it appears to have been superior,
courts should not get involved in second guessing engineers.
Response of Carolina, Inc. v. Leasco Response, Inc., supra. The
New Attachment Strategy was a reasonable response to com-
petition.
(5) THE 3705 COMMUNICATIONS CONTROL UNIT:
Teleprocessing involves the communication of data be-
tween computer devices which are separated geographically
and connected only by telephone or similar communications
lines. Communications control units are generally located in
proximity to a host processor, and perform the function of
controlling the flow of data between the host processor and
other devices that are remote from it. Teleprocessing first
became generally available with IBM’s introduction of the
System/360 line of computers. The communications control
units announced for use with System/360 were the 2701, 2702,
and 2703 (the 270X series). These control units were in-
troduced in 1964, and while they were innovative for their time,
they were of limited flexibility because they were hardwired. A
hardwired control unit is one whose function is controlled by its
physical hardware. Its performance cannot be altered without
' rewiring it.
In the late 1960’s, plug compatible manufacturers began to
market communications control units in competition with the
270X. Memorex’s entry was called the 1270. Like the 270X,
the 1270 was hardwired. However, because the 1270 was’
announced in 1970, Memorex was able to take advantage of
dramatic improvements in technology that took place after the
270X had been designed. Memorex was able to price its
control unit below IBM’s, and to offer more features. Thus, the
270X was becoming increasingly obsolete even as compared to
nee
A-51
other hardwired control units. Of greater long-run concern to
IBM was the emerging competition from programmable com-
munications control units. In contrast to a hardwired control
unit, a programmable control unit is a stored program com-
puter, and some of its functions can be varied simply by
changing the software programming which runs it.
The trend in the industry was toward programmability,
and the experts for both parties agreed that programmable
control units had a competitive advantage. IBM sought to meet
this competition with the introduction of the 3705 program-
mable communications control unit which was announced in
March 1972. At the same time, IBM announced that two
control programs would be available for this unit: an Emulator
Program (EP) which would be available at the time of first
customer shipment, and the more advanced Network Control
Program (NCP) which was expected to be available by March
1973. EP made the 3705 perform as if it were one or more
270X’s. Memorex did not really contest the fact that the 3705
was a product innovation. However, it challenged the pricing
of the 3705, and the accuracy of the NCP announcement. IBM
contends that both were proper.
By virtue of the fact that it was built later than the 270X,
the 3705 was able to incorporate more modern circuitry, was
more compact, could support more lines, and had better
diagnostics. However, the major advantage was that it was
programmable. In teleprocessing, users desire flexibility be-
cause they often change the configuration of their network,
either by adding terminals or by changing the type of terminals.
Programmable control units facilitate these changes. Memorex
suggested that because EP was designed to allow the 3705 to
emulate the function of the 2701, 2702, and 2703 control units,
the 3705 with EP was not really an innovation. It is undisputed
that even with EP, the 3705 allowed for much simpler transi-
tions between the various configurations supported by the 270X
control units because it had the capacity to emulate all of the
270X’s hardware configurations. The 3705 with EP offered a
eel =—_
A-52
number of other minor advantages as well, but its real value
was as a migration aid to more sophisticated programming.
The court concludes that even with EP, the 3705 was a product
innovation. The 3705 with NCP was an even greater in-
novation because it had the ability to offload functions from the
central processing unit.
[19] Memorex did not allege that the 3705 price was
below IBM’s marginal or average variable cost. Memorex
offered evidence, which IBM disputed, that the price of a few of
the many configurations of the 3705 did not return all of IBM’s
costs that might have been allocated to these products. How-
ever, Memorex conceded that the overall program was pro-
jected to be profitable, and this is the proper focus. Janich
Bros., Inc. v. American Distilling Co., supra. There is no
evidence that IBM was sacrificing present profits with the
expectation of recouping its losses with subsequent price in-
creases. The 3705 price while lower than the 270X price, was
still higher than the price for Memorex’s 1270. The court
concludes that this price reduction was necessary to meet lower
prices of IBM’s competitors.
It was never entirely clear to the court what Memorex
claimed was inaccurate about the announcement of NCP. The
3705 announcement had indicated that NCP would be avail-
able in March 1973. The actual delivery of NCP slipped six
months to October 1973, but delivery slippages are not uncom-
mon for complex new products in the computer industry. There
is no evidence to Suggest that when IBM announced NCP for
delivery in March 1973, it did not honestly expect the product
to be available at that time. Memorex argued that various
internal IBM documents indicated that the Telecommunications
Access Method (TCAM) which was the access method chosen
to operate with NCP would not work. An accesss method is a
_ program that resides in the host processor and performs the
function of receiving the data from the communications control
unit. IBM offered evidence that TCAM is in actual operation in
re
we
A-53
a number of teleprocessing systems. The only problem with
TCAM was that relatively few customers were using it, and it
would be difficult to convince those who were using other access
methods to switch. However, the fact that TCAM might have
had limited market appeal did not make the NCP announce-
ment misleading because the announcement made it clear that
TCAM was required if a customer desired to use NCP. The
court concludes that there was nothing knowingly false about
the NCP announcement, and that the 3705 communications
control unit was a reasonable response to competition.
(6) THE SYSTEM/370 MODELS 125 and 115:
The System/370 Models 125 and 115 were IBM central
processing units that were announced in October 1972 and
March 1973, respectively. These processors were designed and
marketed as low-end systems in the System/370 line of comput-
ers. It was anticipated that these two models would be fully
compatible with the more advanced processors in the 370
family, and that they would provide a migration path for users
of IBM’s small systems such as the System/360 Model 20 and
the larger models in the System/3 line. The 125 was initially
planned to be the bottom entry in the 370 family. However,
when it became apparent that the 125 would not meet its price
objective, the lower-priced 115 was developed. It was intended
that the Winchester disk drive would be the primary disk
storage device for both these processors. Because the Winches-
ter was not ready at the time of first customer shipment of the
125, IBM ultimately decided to attach the Merlin disk drive
until the Winchester became available. The Merlin offered
better price/performance than the older technology 2311 and
2314 series disk drives, and converting from Merlin to Winches-
ter only required a simple change of microprogramming in the
disk control device. The Winchester disk drive was available at
the time of first customer shipment of the 115.
BY in ae
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Disk drives were attached to both the 125 and 115 through
a direct disk attachment (DDA) device. The DDA was part of
the New Attachment Strategy, and was similar in principle to
the integrated file adapter in that it eliminated the need for a
channel and separate disk drive control unit. Memorex argued
that the 125 and 115 processors should have included a channe!
as well as the DDA. IBM contends that the cost of adding a
channel would have defeated the low-price objective of these
two models. Witnesses for both parties agreed that the DDA
was the cheapest method for attaching disk drives. The
additional cost of a channel would have had to have been
borne by all users of the 125 and 115, regardless of whether
they desired a channel. Furthermore, Winchester disk drives
could not have been attached through a channel. The only
benefit that would have been derived from the addition of a
channel, the ability to do on-line data conversion, was accom-
plished in another manner.
IBM conceded that the DDA precluded attachment of
2311 and 2314-type disk drives, but it argued that other low-
end computers, including Memorex’s systems, have employed a
design based on direct attachment of a limited range of disk
storage devices to reduce costs. Another example of the
emphasis on low cost attachment techniques in small systems
was IBM’s System/360 Model 20 which was the predecessor of
the 125 and 115. It was uncontroverted that 2311-type disk
drives and only 2311-type disk drives attached directly to the
Model 20 processor, and that no channel was ever provided. In
addition, there is evidence that Memorex was able to attach
plug compatible disk drives to the 125 and 115 processors. The
court concludes that the DDA was a product innovation, and
that IBM was not required to provide a channel on the 125 and
115 to facilitate attachment of Memorex products.
[20] Memorex also suggested that the 125 and 115
processors impacted its systems program, but its own witnesses
acknowledged that the losses from this venture resulted from a
shortage of capital. Still another complaint was that the DDA
A-55
should have been separately priced. On the 115, the same
circuits that comprise the DDA also perform other functions so
they must be included in the processor in any event, and neither
the 125 nor the 115 will function without the disk drives that
the DDA attaches. Memorex’s expert indicated that the lower
prices made possible by direct attachment made the chan-
nel/control unit/disk drive attachments used on some larger
systems noncompetitive. Even assuming that the DDA is a
separate product, the antitrust laws do not require separate
pricing when no competitive alternative is available. Response
of Carolina, Inc. v. Leasco Response, Inc. supra, 537 F.2d at
1330 n. 50.
Finally, Memorex challenged the accuracy of the 115
announcement. It claimed that the memory offered with the
115 processor was not capable of supporting virtual storage in a
multiprogramming environment as_ represented. Multi-
programming was defined as doing two or more jobs at the
same time. Memorex’s own expert testified that there were no
untrue statements in the announcement materials, and that the
115 could operate in two partitions as required for
multiprogramming. The court concludes that there was nothing
misleading in the 115 announcement, and that both the Sys-
tem/370 Models 125 and 115 were reasonable responses to
competition.
[21] The court has determined that all of the IBM acts
challenged by Memorex were reasonable responses to com-
petition. In the early 1970’s Memorex and the other plug
compatible manufacturers were making serious inroads into
IBM’s business. They had reverse engineered a number of the
peripheral products that IBM marketed with the System/360
line of computers, and because they did not have to recover the
costs of developing these products, they were able to undersell
IBM. IBM met this competition by introducing a new gener-
ation of computers, the System/370, and by developing more
advanced peripheral products that were able to take advantage
of the latest technology and were offered to customers at lower
prices.
A-56
Users clearly benefited from these product innovations and
price cuts. They had a detrimental impact on Memorex and the
other plug compatible manufacturers because of the need to
undertake a new round of reverse engineering programs.
However, this kind of conduct by IBM is presicely what the
antitrust laws were meant to encourage. For the reasons
indicated above, the court concludes that viewing the evidence
as a whole, there is not substantial evidence present that could
support a finding by reasonable jurors that any of IBM’s acts
were anticompetitive or predatory or unnecessarily excluded
competition. Memorex sought to use the antitrust laws to make
time stand still and preserve its very profitable position. This
court will not assist it and the others who would follow after in
this endeavor. It is hereby ordered that IBM’s motion for a
directed verdict on this ground is granted.
The court hereby grants IBM’s motion for a directed
verdict on all grounds stated, and finds that as a matter of law,
the record in this case cannot justify a verdict by a reasonable
jury in favor of Memorex.
Having ruled upon IBM’s motion for a directed verdict, the
court hereby makes a separate and distinct ruling in the event
of a remand for retrial.
STRIKING OF THE JURY DEMAND IN THE
EVENT OF A REMAND FOR RETRIAL
As indicated above, the jury in the trial of this action was
asked to decide whether IBM monopolized or attempted to
monopolize various markets in the computer industry. Memo-
rex alleged that certain IBM price cuts and product changes in
the early 1970’s violated the antitrust laws, while IBM’s defense
contended that any injury suffered by Memorex was caused by
poor management. Resolution of these issues required an
understanding of a vast amount of advanced computer tech-
nology and sophisticated financial principles. The trial lasted
for five months and consumed 96 trial days. The parties called
aie a
A-57
87 witnesses whose testimony filled more than 19,000 pages of
transcript. More than 2,300 exhibits were admitted into
evidence. After deliberating for 19 days, the jury reported itself
hopelessly deadlocked, and the court declared a mistrial.
Before the jury was selected, IBM moved to strike Memo-
rex’s jury demand on the ground that the issues in the case were
too complex for a jury to fairly decide. The court denied IBM’s
motion at that time, but since the trial ended as it did, the court
feels that this question deserves further consideration in light of
its experience.
The Seventh Amendment to the United States Constitution
preserves the right of trial by jury “[i]n Suits at common law.
where the value in controversy shall exceed twenty dollars.” In
England and in the federal courts in the United States until
1938, there was a clear division between law and equity. This
situation changed with the adoption of the Federal Rules of
Civil Procedure. In Ross v. Bernhard, 396 U.S. 531, 539-40, 90
S.Ct. 733, 739, 24 L.Ed.2d 729 (1970), the Supreme Court said:
Under the Rules ‘there is only one action—a “civil ac-
tion” —1in which all claims may be joined and all remedies
are available... . Under the Rules, law and equity are
procedurally combined; nothing turns now upon the form
of the action or the procedural devices by which the parties
happen to come before the court.
The Court indicated that “[t]he Seventh Amendment question
depends on the nature of the issue to be tried rather than the
character of the overall action.” Jd. at 538, 90 S.Ct. at 738.
The Court continued in a footnote:
As our cases indicate, the “legal” nature of an issue is
determined by considering, first, the pre-merger custom
with reference to such questions; second, the remedy
sought; and, third, the practical abilities and limitations of
juries. Jd. at 538 n. 10, 90 S.Ct. 738.
A-58
The issue in Ross v. Bernhard was whether the Seventh
Amendment guaranteed the right to a jury trial is stockholder’s
derivative actions. Rejecting the argument that the derivative
action was an equitable device, the Court held that “the
Seventh Amendment preserves to the parties in a stockholder’s
suit the same right to a jury trial that historically belonged to
the corporation and to those against whom the corporation
pressed its legal claims.” Jd. at 542, 90 S.Ct. at 740.
Before examining the nature of the issues in this case in
terms of the three factors enumerated in Ross v. Bernhard, two
other Supreme Court decisions must be considered briefly. In
Beacon Theatres, Inc. V. Westover, 359 U.S. 500, 79 S.Ct. 948,
3 L.Ed.2d 988 (1959), and Dairy Queen, Inc. v. Wood, 369 U.S.
469, 82 S.Ct. 894, 8 L.Ed.2d 44 (1962), the court held that
where equitable and legal claims are joined in the same action,
there is a right to a jury trial on the legal claims which may not
be infringed either by trying the legal issues.as incidental to the
equitable ones or by a court trial of a common issue existing
between the claims. In Beacon Theatres, the Court said:
The basis for injunctive relief in the federal courts has
always been irreparable harm and inadequacy of legal
remedies. ... Inadequacy of remedy and irreparable harm
are practical terms, however. As such their existence today
must be determined, not by precedents decided under
discarded procedures, but in the light of the remedies now
made available by the Declaratory Judgment Act and the
Federal Rules.
359 U.S. at 500, 79 S.Ct. at 954.
It continued later in the decision:
Since in the federal courts equity has always acted when
legal remedies were inadequate, the expansion of adequate
legal remedies provided by the Declaratory Judgment Act
and the Federal Rules necessarily affects the scope of
equity.
359 US. at 509, 79 S.Ct. at 956.
ait
A-59
In Dairy Queen, the Court said:
The necessary prerequisite to the right to maintain a suit
for an equitable accounting, like all other equitable re-
medies, is, aS we pointed out in Beacon Theatres, the
absence of an adequate remedy at law. Consequently, in
order to maintain such a suit on a cause of action
cognizable at law, the plaintiff must be able to show that
the ‘“‘accounts between the parties” are of such a “com-
plicated nature” that only a court of equity can satisfac-
torily unravel them.
369 U.S. at 478, 82 S.Ct. at 900.
These cases demonstrate that the inadequacy of legal remedies
is the primary basis for granting equity jurisdiction, and that the
complexity of a case is relevant to this inquiry.
[22] Under the test set forth in Ross v. Bernhard, the
nature of an issue is determined by looking first to the
premerger custom. With reference to private antitrust actions,
the Supreme Court in Fleitmann v. Walsbach Street Lighting
Co., 240 U.S. 27, 29, 36 S.Ct. 233, 234 (1916), indicated that
“when a penalty of triple damages is sought to be inflicted, the
statute should not be read as attempting to authorize liability to
be enforced otherwise than through the verdict of a jury in a
court of common law.” See also, Beacon Theatres, Inc. v.
Westover, supra, 359 U.S. at 504, 79 S.Ct. 948. These same
comments are applicable to the consideration of the second
factor deemed significant in Ross v. Bernhard. The remedy
sought by Memorex for IBM’s alleged antitrust violations is
damages which has traditionally been regarded as a legal
remedy. It is the third factor of the equation, the practical
abilities and limitations of jurors, that causes the court to
conclude that the issues in this case must be considered to be
equitable.
In reaching this conclusion, the court recognizes that
“‘[mJaintenance of the jury as a fact-finding body is of such
importance and occupies so firm a place in our history and
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jurisprudence that any seeming curtailment of the right to a jury
trial should be scrutinized with the utmost care.” Dimick v.
Schiedt, 293 U.S. 474, 486, 55 S.Ct. 296, 301, 79 L.Ed. 603
(1935). However, “to hold that a jury trial is required in this
case would be to hold that the ‘Seventh Amendment gives a
single party at its choice the right to an irrational verdict.”
Bernstein v. Universal Pictures, Inc., 79 F.R.D. 59, at 71
(S.D.N.Y. 1978).
While there is no authority cited for the third factor in the
Ross v. Bernhard test, in Fowle v. Laurason, 30 U.S. (5 Pet.)
495, 503, 8 L.Ed. 204 (1831), the Supreme Court said:
In all actions in which an action of account would be the
proper remedy at law .. . the jurisdiction of a court of
equity is undoubted. It is the appropriate tribunal. But in
transactions not of this peculiar character, great complexity
ought to exist in the accounts, or some difficulty at law
ought to interpose .. . in order to induce a court of
chancery to exercise jurisdiction.
Some fifty years later in Kirby v. Lake Shore & Michigan
Southern Railroad Co., 120 U.S. 130, 134, 7 S.Ct. 430, 432, 30
L.Ed. 569 (1866), the Court said:
The case made by plaintiff is clearly one of which a court
of equity may take cognizance. The complicated nature of
the accounts between the parties constitutes a sufficient
ground for going into equity. It would have been difficult,
if not impossible, for a jury to unravel the numerous
transactions involved in the settlements between the
parties, and reach a satisfactory conclusion as to the
amount of drawbacks to which Alexander & Co. were
entitled on each settlement.
Thus, at an early date, the Supreme Court recognized that
equity had a special role to play in the trial of complex cases.
Several subsequent decisions suggested that mere com-
plication of facts was not a sufficient basis for equity jurisdic-
a aol
A-61
tion. In United States v. Bitter Root Development Co., 200 U.S.
451, 472-73, 26 S.Ct. 318, 325, 50 L.Ed. 550 (1906), the
Supreme Court said:
The bill shows that whatever was done in the way of
cutting timber and carrying it away was done by the
defendants as tort feasors, and the various devices alleged
to have been resorted to by the deceased, Daly, by way of
organizing different corporations in order to, as alleged,
cover up his tracks, and to render it most difficult for the
complainant to make proof of his action, does not in the
least tend to give a court of equity, jurisdiction on that
account. It is simply a question of evidence to show who
did the wrong and upon that point the fact could be
ascertained as readily as law as in equity.
And in Curriden v. Middleton, 232 U.S. 633, 636, 34 S.Ct. 458,
58 L.Ed. 765 (1914), the Court said:
Being a suit for damages, the proper remedy is an action at
law, as was held below. [Citation omitted] It is said that
the facts are complicated, but they are not so on the
allegations of the bill, which merely discloses a series of
acts alieged to have been parts of the plan to deceive; and
further, mere complication of facts alone and difficulty of
proof are not a basis of equity jurisdiction.
In this case, more is involved than simply complicated facts.
The accounting and especially the engineering concepts are far
beyond the experience and understanding of an ordinary jury.
Jury demands have been stricken in three recent cases. In
In re Boise Cascade Securities Litigation, 420 F.Supp. 99, 104
(W.D. Wash. 1976), the court said:
Central to the fairness which must attend the resolution of
a civil action is an impartial and capable fact finder. A
properly selected panel of veniremen must generally be
presumed to yield an impartial and capable jury. How-
ever, at some point, it must be recognized that the com-
A-62
plexity of a case may exceed the ability of a jury to decide
the facts in an informed and capable manner. When that
occurs, the question arises as to whether the right and
necessity of fairness is defeated by relegating fact finding
to a body not qualified to determine the facts. The third
part of the analysis in footnote 10 to the majority opinion
in Ross v. Bernard | Bernhard], supra, recognizes this.
An additional problem the court foresaw was that “any jury
chosen to hear this case will not be a fair cross section of the
community at large because of the estimated trial time of four
to six months.” Jd.
In Jn re United States Financial Securities Litigation, 75
F.R.D. 702, 710 (S.D. Cal. 1977), the court said:
The basis for granting equity jurisdiction over cases of
extraordinary complexity is, of course, the inadequacy of
the legal remedy, or more specifically, the inadequacy of
the jury to handle the case and render a fair decision, as
the Court noted in Dairy Queen. Recently the Court had
occasion to formulate a test which is to be used in deciding
whether a case is legal or equitable in nature. One part of
the test is whether a jury is capable of rendering such a
decision; if it is not then the case should be tried in equity
by the court without a jury.
The court listed three guidelines for deciding whether a particu-
lar case is so complex that equity jurisdiction will attach and
permit the case to be tried without a jury:
First, although mere complexity is not enough, com-
plicated accounting problems are not generally amenable
to jury resolution. Although such problems often arise
only during the damages portion of a trial, they sometimes
are present during the liability portion as well... .
Second, the jury members must be capable of under-
standing and of dealing rationally with the issues of the
case.
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And third, an unusually long trial may make extraordinary
demands upon a jury which would make it difficult for the
jurors to function effectively throughout the trial.
Id. at 711.
When these criteria, and especially the second, are applied to
the facts of this case, they clearly favor a court trial.
Finally, in Bernstein v. Universal Pictures, Inc., supra, at
70, the court said:
Assuming a minimum length for a trial in this case of four
(4) months, an estimate which I now consider low, it
would be impossible to empanel a representative jury in
this case, whose verdict would enjoy the appearance of
fairness.
In addition, the sheer size of the litigation and the com-
plexity of the relationships among the parties render it as a
whole beyond the ability and competence of any jury to
understand and decide with rationality. Of course, anti-
trust cases in general are by their very nature complex, so
that special rules have been developed in response to their
complexity. [Citation omitted] The ordinary antitrust case
is clearly within the competence of juries. This lawsuit is
the exception case, not the rule. [Emphasis by the court]
These comments, made in the context of an antitrust case,
are equally applicable here.
[23] The teaching of these three cases is that where the
issues in a case are beyond “the practical abilities and limita-
tions of a jury,” the legal remedy is inadequate and equity
jurisdiction will attach. The court concludes that such a
situation exists in the present case, and that the posture of this
case poses a different problem than confronted the courts in
Boise Cascade, United States Financial, and Berstein [sic] v.
Universal Pictures.
A-64
In those cases, the decision to strike the jury was made
before trial. While the courts were able to draw upon their
experience as trial courts in evaluating the complexity of the
cases and the nature of the issues involved, their conclusions
were inescapably somewhat speculative. Here, on the contrary,
the court is able to base its decision on its own observations
during the five month trial. The jurors were conscientious and
diligent, but their past experience had not prepared them to
decide a case involving technical and financial questions of the
highest order.
Throughout the trial, the court felt that the jury was having
trouble grasping the concepts that were being discussed by the
expert witnesses, most of whom had doctorate degrees in their
specialties. This perception was confirmed when the court
questioned the jurors during the course of their deliberations
and after they were discharged. When asked by the court
whether a case of this type should be tried to a jury, the
foreman of the jury said, “If you can find a jury that’s both a
computer technician, a lawyer, an economist, knows all about
that stuff, yes, I think you could have a qualified jury, but we
don’t know anything about that.” (Tr. 19,548). Several of the
other jurors indicated that they thought that the major stum-
bling block was the requirement that the verdict be unanimous.
When they were questioned after the trial, most of the jurors
indicated that they thought a complex antitrust case like this
one should be tried to the court.
The parties initially estimated that the trial of. this case
would last ten months. Because the hardship that such a long
trial would impose on the jurors was obvious, a special pool of
175 prospective jurors was called in for this case. After excuses,
there were only 29 candidates remaining from which to select
14 jurors. The 11 jurors to whom this case was submitted
probably represented a random cross-section of people in the
community who could afford to spend 10 months serving on a
jury, but it is open to question whether they were a true cross-
A-65
section of the community. The six men and five women on the
jury ranged in age from 32 years to 65 years, with the majority |
over 50. Several of the jurors were housewives, one was retired,
and those who were employed worked at jobs where they could
be replaced, but where neither their jobs nor their incomes were
in jeopardy. Only one of the jurors had even limited technical
education. While the court was appreciative of the effort they
put into deciding the case, it is understandable that people with
such backgrounds would have trouble applying concepts like
cross-elasticity of supply and demand, market share and market
power, reverse engineering, product interface manipulation,
discriminatory pricing, barriers to entry, exclusionary leasing,
entrepreneurial subsidiaries, subordinated debentures, stock
options, modeling, and etc.
An additional consideration which the court feels warrants
discussion is the burden that cases of this type impose upon the
judicial system. The trial of this case occupied the time of the
court and its staff almost exclusively for seven months. Because
of the estimated length of the trial, the court went off the new
case assignment wheel for its duration, thereby increasing the
work load of the other courts and personnel of the Northern
District. In addition, the jury expenses (borne by the govern-
ment in this case) amounted to more than $32,000. All of this
time and expense went for naught when the court was forced to
declare a mistrial.
[24] When a trial is by jury rather than to the court, there
is the possibility that no decision will be made. In this case, a
second trial by jury could very easily suffer the same fate as the
first because the composition of the jury will not change
significantly. While there may be a right to a jury trial in every
case, the court feels that where the cost to both the litigants and
the government of such a trial is as great as it was in this case,
and where the case is as technically and financially complex as
this one is, the right should be limited to one jury trial.
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As heretofore stated, the court has reviewed those cases in
which a jury demand has been stricken. In all previous
instances this was done before trial. It may be that through the
use of good pretrial procedures, the complexity of a case ( both
in law and fact) can become known. However, in the instant
case the court has listened to all the evidence and argument,
and reviewed the law, and it is after the fact (i. e. trial) that the
court has come to the conclusion that in the event of a retrial of
this case it would not serve the ends of justice that the final
outcome be determined by a lay jury verdict. Even if one does
not want to eliminate jury trials completely in complex antitrust
cases, then surely if the first trial results in a mistrial, the system
and probably the parties themselves, are better served if the
decision is ultimately made by the court, with the right of the
parties to supplement the record.
For the reasons indicated above, the court hereby finds
that the magnitude and complexity of the present lawsuit
render it, as a whole, beyond the ability and competency of any
jury to understand and decide rationally, and orders, in the
event of a remand for retrial, that Memorex’s jury demand be
stricken. The jury was originally conceived as a protective
shield between the litigants and the danger of an arbitrary
decision by the sovereign. It would be a subversion of this ideal
to insist upon submitting a case to a jury when there is a
substantial risk that its decision will be arbitrary.
ie)
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CALIFORNIA COMPUTER PRODUCTS, INC.
and Century Data Systems, Inc.,
Plaintiffs-Appellants,
v.
INTERNATIONAL BUSINESS MACHINES CORPO-
RATION,
Defendant-Appellee.
No. 77-1563.
United States Court of Appeals, Ninth Circuit.
June 21, 1979.
Rehearing Denied Nov. 16, 1979.
Manufacturer of computer disks and other peripheral
equipment brought antitrust action against computer manufac-
turer. The United States District Court for the Central District
Court for the Central District of California, Ray McNichols,
Chief Judge, directed verdict in favor of computer manufac-
turer and plaintiff manufacturer appealed. The Court of
Appeals, Choy, Circuit Judge, held that: (1) manufacturer of
peripheral equipment compatible with that of the defendant
did not have standing to maintain antitrust action based on
injury to general purpose computer system’s manufacturers or
leasing companies; (2) computer manufacturer had the right to
respond to lower prices of its competitors with reduced, but still
substantially profitable, prices on its own products; (3) defend-
ant manufacturer was entitled to maintain its dominant market
position, which it had acquired as a result of a superior product;
(4) where the opportunity exists to increase or protect market
share profitably by offering equivalent or superior performance
of the lower price, even a virtual monopolist may do so; (5)
design changes made by manufacturer integrating its disk
functions into the central processing unit was shown to be a cost
saving step and not an impermissible attempt to monopolize.
Affirmed.
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1. Monopolies 28( 1.6)
Clayton Act confers standing to sue only upon those
persons causally injured by antitrust violations. Clayton Act,
§ 4, 15 U.S.C.A. § 15.
2. Monopolies 28(7.1, 7.2, 7.5, 7.6)
In order to prevail in an antitrust claim, the plaintiff must
prove not only injury causally connected to the asserted viola-
tion but also that the injury is of the type the antitrust laws were
intended to prevent; plaintiff's burden of proving the former is
satisfied by proof of some damage flowing from the antitrust
violation; satisfying the latter burden is dependent upon a
showing that the injury was caused by a reduction, rather than
an increase, in competition flowing from the defendant’s acts.
Clayton Act, § 4, 15 U.S.C.A. § 15.
3. Monopolies 28(6.2)
In order to recover for an antitrust violation, plaintiffs must
demonstrate that the defendant’s conduct was intended to or
did have some anticompetitive effect beyond his own loss of
business or the market’s loss of a competitor; it is not sufficient
for an antitrust plaint*f to allege an indirect ripple effect.
Clayton Act, § 4, 15 U.S.C.A. § 15.
4. Monopolies 28(1.6)
Antitrust plaintiff which did not include itself in the class of
general purpose computer systems manufacturers or the class of
leasing companies and which did not demonstrate any direct
causal injury as a result of defendant’s alleged anticompetitive
tactics with respect to those two classes did not have standing to
maintain that Clayton Act action for antitrust violations affect-
ing the two classes. Clayton Act, § 4, 15 U.S.C.A. § 15.
5. Federal Civil Procedure 2142
Although the district court may direct a verdict either
against the party who does not bear the burden of persuasion or
the party who does bear that burden, the amount of evidence
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required for a directed verdict differs; party seeking a directed
verdict must bear a stronger showing of evidence if he bears the
burden of persuasion.
6. Federal Civil Procedure 2152
In ruling on motion for directed verdict, district court must
consider all the evidence, both favorable and unfavorable, but,
in order to avoid passing on the credibility of witnesses in
weighing contradictory evidence, the court must resolve all
inferences in favor of the party with the burden of persuasion.
7. Federal Civil Procedure 2152
In order to benefit from the favorable inferences available
in ruling on motion for a directed verdict, the party against
whom the motion is made must present substantial evidence.
8. Federal Courts 764
Sole issue in an appeal from a directed verdict against the
party with the burden of persuasion is the sufficiency of the
evidence of the appellant’s claim.
9. Federal Civil Procedure 2121, 2601
Federal Courts 764
Standard for determining the propriety of a directed
verdict is identical to that for determining the propriety of a
judgment n. o. v., and is the same for both district and appellate
judges.
10. Monopolies 28(8)
Standard for determining whether to grant a directed
verdict in an antitrust action is the same as in other actions.
11. Monopolies 28(2)
Essential elements to a successful claim under § 2 of the
Sherman Act are possession of monopoly power in the relevant
market, wilful acquisition or maintenance of that power, and
ay) om
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causal antitrust injury. Sherman Anti-Trust Act, §2, 15
U.S.C.A. § 2.
12. Monopolies 12(1.3), 28(7.4)
“Monopoly power” is the power to control prices or
exclude competition; that power can be demonstrated by
evidence of the exercise of actual control over prices or
exclusion of competitors. Sherman Anti-Trust Act, §2, 15
U.S.C.A. § 2.
See publication Words and Phrases for other judicial
constructions and definitions.
13. Monopolies 12(1.3, 1.5)
In order to show the wilful acquisition or maintenance of
monopoly power, the conceded monopolist must have engaged
in wilful acts directed at establishing or retaining its monopoly
as distinguished from growth or development as a consequence
of a superior product, business acumen, or historic accident;
plaintiff need not show that the conceded monopolist’s acts
were of a kind that would be unlawful for an ordinary
enterprise but rather must show that the monopolist’s acts
necessarily excluded competition from the relevant market; it is
not necessary to show a specific intent to eliminate a competitor.
Sherman Anti-Trust Act, § 2, 15 U.S.C.A. § 2.
14. Monopolies 12(1.2)
The acts of a defendant in a § 2 Sherman Act action are
properly analyzed analogous to contract, combinations and
conspiracies under § 1; test is whether the defendant’s acts,
otherwise lawful, were unreasonably restrictive of competition.
Sherman Anti-Trust Act, §§ 1, 2, 15 U.S.C.A. §§ 1, 2.
15. Monopolies 12(1.1, 1.3)
Although acts of monopolization are frequently the end
products of conduct which restrains trade, that is not always
true as the prohibition on restraints of trade is limited to
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concerted activity and contractual restraints while individual
activity may also give rise to liability for monopolistic activity;
conversely, not all restraints of trade constitute acts of
monopolization as the monopoly must be acquired or main-
tained by means of a restraint of trade and not all such
restraints have the requisite causal effect. Sherman Anti-Trust
Act, §§ 1, 2, 15 U.S.C.A. §§ 1, 2.
16. Monopolies 12(1.3)
Four elements to a successful claim of attempt to monopo-
lize are specific intent to control prices or destroy competition
with respect to a part of commerce, predatory or anticompeti-
tive conduct directed to accomplishing the unlawful purpose, a
dangerous probability of success, and a causal anti-trust injury.
Sherman Anti-Trust Act, § 2, 15 U.S.C.A. § 2.
17. Monopolies 17(1.8)
The intent to build a monopoly is logically synonymous
with the intent to control prices or exclude competition in the
relevant market. Sherman Anti-Trust Act, § 2, 15 U.S.C.A. § 2.
18. Monopolies 12(1.6)
Direct evidence of specific intent-to control prices or
destroy competition is not always necessary when the claim of
attempt to monopolize is founded upon a substantial claim of
restraint of trade; in those circumstances, the requisite specific
intent may be inferred. Sherman Anti-Trust Act, §2, 15
U.S.C.A. § 2.
19. Monopolies 28(7.1)
Market power is relevant to determining whether an
inference of an attempt to monopolize is proper but where a
restraint of trade violation clearly exists, proof of market power
is unnecessary to support an inference of specific intent. Sher-
man Anti-Trust Act, §§ 1, 2, 15 U.S.C.A. §§ 1, 2.
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20. Monopolies 12(1.3)
Market definition is necessary to establish an attempt to
monopolize where specific intent is sought to be shown by an
inference unless a per se restraint of trade is made out.
Sherman Anti-Trust Act, §§ 1, 2, 15 U.S.C.A. §§ 1, 2.
21. Monopolies 12(1.10)
Even though the restraint of trade effected may be reason-
able under § 1 of the Sherman Act, it may constitute an attempt
to monopolize if a specific intent to monopolize can be shown.
Sherman Anti-Trust Act, §§ 1, 2, 15 U.S.C.A. §§ 1, 2.
22. Monopolies 12(1.3, 1.10)
Since individual actions may constitute an attempt to
monopolize, no contractual agreement is required but individ-
ual conduct is still measured against the same reasonableness
standard governing concerted contractual activity in restraint of
trade. Sherman Anti-Trust Act, §§ 1, 2, 15 U.S.C.A. §§ 1, 2.
23. Monopolies 12(1.3, 1.10)
Because monopoly power is a necessary element of the
completed offense of monopolization but is not necessary for
attempt, the same conduct may provide a basis for the
monopolization offense and yet be excluded as a basis for the
attempt offense as a defendant’s monopoly power or lack
thereof is part of the reasonableness calculus and conduct
reasonable for other funds is not necessarily reasonable for the
monopolist. Sherman Anti-Trust Act, § 2, 15 U.S.C.A. § 2.
24. Monopolies 28(7.5)
The specific intent on the part of an attempted monopolist
to control prices or destroy competition may be shown to have a
dangerous probability of success by either direct proof of
market power or by inference from the proven specific intent
itself; because the element may be inferred from the existence
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of specific intent in a proper case, it is not an essential element
of the attempt claim; neither is proof of any particular degree of
market power necessarily an independent element of such a
claim. Sherman Anti-Trust Act, § 2, 15 U.S.C.A. § 2.
25. Monopolies 28(8)
Even if the evidence were sufficient to go to the jury on the
issue of whether alleged monopolist, prior to cutting prices on
some of its products, offset losses on other products with
monopolistic profits from its then high-priced equipment, di-
rected verdict in favor of the defendant would still be required
because of the lack of showing of any causal injury to the
plaintiff as a result of the high prices. Clayton Act, § 4, 15
U.S.C.A. § 15.
26. Monopolies 28(7.5)
In the absence of any showing that computer manufacturer
priced its disk products below marginal cost, there was no
showing of predatory pricing as a means of obtaining or
maintaining a monopoly. Sherman Anti-Trust Act, § 2, 15
U.S.C.A. § 2.
27. Monopolies 17(1.3)
Alleged monopolist had the right to respond to the lower
prices of its competitors with reduced, but still subtantially
profitable, prices on its own products. Sherman Anti-Trust Act,
§ 2, 15 U.S.C.A. § 2.
28. Monopolies 28( 1.4)
Where plaintiffs price reductions resulted from com-
petition by the alleged monopolist and where the alleged
monopolist’s stimulus to price competition was competition
from the plaintiff and other of its competitors, the plaintiff's
losses as a result of price reduction did not represent com-
A-74
pensable injury from the acts of the alleged monopolist unnec-
essarily excluding and restricting competition. Sherman Anti-
Trust Act, § 2, 15 U.S.C.A. § 2.
29. Monopolies 12(1.3)
Where alleged monopolist’s technical innovations resulted
in growth as a consequence of a superior product, it was entitled
to maintain its consequent dominant postion in the market
which it had created through business acumen. Sherman Anti-
Trust Act, § 2, 15 U.S.C.A. § 2.
30. Monopolies 12(1.3)
Sherman Act does not provide distinction between com-
petition on the basis of price and of performance; the two are
inseparable parts of any competitive offering and where the
opportunity exists to increase or protect markets share profit-
ably by offering equivalent or superior performance at a lower
price, even a virtual monopolist may do so. Sherman Anti-
Trust Act, § 2, 15 U.S.C.A. § 2.
31. Monopolies 17(1.3)
Price reductions up to the point of marginal cost are
consistent with competition on the merits while a firm pricing
below marginal cost by definition incurs efficiency so that
competition on the basis of the efficiency in that situation is
frustrated. Sherman Anti-Trust Act, § 2, 15 U.S.C.A. § 2.
32. Monopolies 12(1.3)
Assuming that manufacturer was a monopolist, it had the
right to redesign his product to make them more attractive to
buyers, whether by reason of lowering manufacturing costs and
price or by improved performance. Sherman Anti-Trust Act,
§ 2, 15 U.S.C.A. § 2.
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33. Monopolies 12(2)
Computer manufacturer was under no duty to help a
competitor in the field of periphery equipment survive or
expand and was not required to provide its competitor with its
disk products in order to permit it to examine and copy them;
nor was it required to constrict its product development so as to
facilitate the sales of rival products. Sherman Anti-Trust Act,
§ 2, 15 U.S.C.A. § 2.
34. Monopolies 17(1.1)
Action of computer manufacturer in redesigning its prod-
ucts sO as to integrate disk control function into the central
processing unit as a cost saving step consistent with industry
trends, thus enabling the manufacturer to reduce prices for
equivalent functions, did not violate the Sherman Act. Sher-
man Anti-Trust Act, § 2, 15 U.S.C.A. § 2.
35. Monopolies 28(7.5)
In view of the fact that price cuts in disk equipment
announced by manufacturer which allegedly facilitated price
increases in its central processing units were themselves profit-
able and reasonable even for a monopolist, evidence did not
show that computer manufacturer engaged in impermissible
monopoly activity by raising the prices on its central processing
units while lowering the prices on disk units with respect to
which it was facing competition. Sherman Anti-Trust Act, § 2,
15 U.S.C.A. § 2.
36. Federal Civil Procedure 2142
The complexity of a plaintiff's case does not entitle it to
avoid a directed verdict if the evidence, no matter how much of
it there may be, is weak.
37. Monopolies 28(1.4)
There could be no synergistic monopolistic result from a
number of acts, none of which showed causal antitrust injury to
the plaintiff. Clayton Act, § 4, 15 U.S.C.A. § 15.
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Maxwell M. Blecher, Harold R. Collins, Jr., Daphne M.
Stegman, of Blecher, Collins & Hoecker, Los Angeles, Cal., for
plaintiffs-appellants.
David Boies, Ronald S. Rolfe, Stuart W. Gold, Cravath,
Swaine & Moore, New York City, Ernest J. Getto, Kadison,
Pfaelzer, Woodward, Quinn & Rossi, Los Angeles, Cal.,
Nicholas deB. Katzenbach, Anthony L. Clapes, Armonk, N. Y.,
for defendant-appellee.
Appeal from the United States District Court for the
Central District of California.
Before CHOY and KENNEDY, Circuit Judges, and
PALMIERI,* District Judge.
CHOY, Circuit Judge:
California Computer Products, Inc. (““CalComp”’) appeals
from the judgment entered on a directed verdict in favor of
appellee International Business Machines Corp. (“IBM”’) as to
all counts of its complaint charging IBM with violations of § 2
of the Sherman Act, 15 U.S.C. § 2. We affirm.
1. Background and Proceedings Below
IBM is one of the largest industrial corporations in the
world. It achieved technical leadership in the computer
industry: over other early entrants, such as Sperry Rand, in the
mid-1950’s and thereafter pioneered, the development of many
electronic data processing products, including the disk products
involved in this litigation.
Disk products are part of a broader cetegory of what is
known as peripheral equipment, such as disks, tapes, printers,
and terminals, which is connected to the central processing unit
(“CPU”) to enable the data processing system to perform
particular functions. Included in the reference to disk products
are disk drives, devices using magnetic disks similar in appear-
ance to phonograph records to store information, and con-
*The Honorable Edmund L. Palmieri, Senior United States District
Judge for the Southern District of New York, sitting by designation.
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trollers, used for communication between disk drives and the
CPU. Occasionally these devices are built into the CPU;
alternatively, they exist as external components that may be
“plugged into” the CPU. As a general purpose computer
systems manufacturer, IBM sells both CPU’s and peripherals,
including disk products.
CalComp began manufacturing computer products in
1960, when it made plotting devices—peripheral equipment
that provides graphic, printed or pictorial output. CalComp
claims no injury with respect to these products. With the
acquisition of Century Data Systems in 1969, CalComp entered
the disk products market, manufacturing disk drives and con-
trollers that were “plug compatible” with IBM’s and other
suppliers’ CPUs. CalComp’s business strategy with respect to
IBM-compatible disk products was straightforward: copy and,
where possible, improve upon an IBM design, and undersell
IBM to its own customers. By the “reverse engineering” of
simply buying a device from IBM, taking it apart, and building
a similar one, CalComp was able to avoid IBM’s expenditures
for research and development and pass the savings on through
lower prices.
CalComp commenced this lawsuit on October 3, 1973.
The complaint alleged that IBM’s introduction of new CPU’s
and disk products, its price cuts on existing disk products, its
leasing policies, and other marketing practices prevented Cal-
Comp from effectively competing with IBM for disk product
sales and thus violated §1 and §2 of the Sherman Act.!
CalComp alleged and attempted to prove that these acts by
IBM took place within a ten year span, from late 1963 to 1972,
resulting in treble damages of $306 million. Following over
three years of discovery and pretrial, trial to a jury began on
November 15, 1976. At the conclusion of fifty-four days of trial
covering three months, the district court granted IBM’s motion
for directed verdict on February 11, 1977.
The records and transcript on this appeal comprise 132
volumes. Voluminous briefs and supplemental briefs by the
parties and amicus briefs were permitted. We have considered
1 CalComp has dropped its § 1 claim on this appeal.
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all of the arguments advanced and scrutinized pertinent parts of
the record, particularly in view of the nature of the appellate
task on review of a directed verdict.
Il. Antitrust Standing
CalComp has asserted that IBM’s actions created
anticompetitive effects on three classes of IBM competitors: (1 )
general purpose computer systems manufacturers, (2) leasing
companies and (3) IBM-compatible peripheral equipment
manufacturers. We believe that CalComp, an IBM-compatible
peripheral equipment manufacturer, lacks antitrust standing as
to the first two categories of claims.
[1-3] Section 4 of the Clayton Act, 15 U.S.C. § 15,
authorizing private antitrust suits for damages, provides in part:
Any person who shall be injured in his business or
property by reason of anything forbidden in the antitrust
laws may sue therefor... .
This statute confers standing to sue only upon those persons
causally injured by antitrust violations. Kapp v. National
Football League, 586 F.2d 644, 648-49 (9th Cir. 1978); John
Lenore & Co. v. Olympia Brewing Co., 550 F.2d 495, 498-99
(9th Cir. 1977). Moreover, in order to prevail the plaintiff must
prove not only injury causally linked to the asserted violation,
but also that the injury is of the type the antitrust laws were
intended to prevent. Brunswick Corp. v. Pueblo Bowl-O-Mat,
Inc., 429 U.S. 477, 489, 97 S.Ct. 690, 50 L.Ed.2d 701 (1977);
John Lenore & Co. v. Olympia Brewing Co., 550 F.2d at 498-99;
In re Multidistrict Vehicle Air Pollution M.D.L. No. 31, 481
F.2d 122, 125 (9th Cir. 1973), cert. denied, 414 U.S. 1045, 94
S.Ct. 551, 38 L.Ed.2d 336 (1975). The plaintiffs burden of
proving the former is satisfied by proof of some damage flowing
from the antitrust violation. Zenith Radio Corp. v. Hazeltine
Research Inc., 395 U.S. 100, 114 n.9, 89 S.Ct. 1562, 23 L.Ed.2d
129 (1969). Satisfying the latter burden is dependent on a
showing that the injury was caused by a reduction, rather than
an increase, in competition flowing from the defendant’s acts,
since “[t]he antitrust laws . .. were enacted for ‘the protection
of competition not competitors,’” Brunswick Corp. v. Pueblo
ra Se ee
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Bowl-O-Mat, Inc., 429 U.S. at 488, 97 S.Ct. at 697, quoting
Brown Shoe Co. v. United States, 370 U.S. 294, 320, 82 S.Ct.
1502, 8 L.Ed.2d 510 (1962). See Oreck Corp. v. Whirlpool
Corp., 579 F.2d 126, 133 (2d Cir. 1978). Accordingly, the
plaintif must demonstrate that the defendant’s conduct was
intended to or did have some anticompetitve effect beyond his
own loss of business or the market’s loss of a competitor. See
Knutson v. Daily Review, Inc., 548 F.2d 795, 803 (9th Cir.
1976). Moreover, it is not sufficient for an antitrust plaintiff to
allege an indirect ripple effect. As this court wrote in John
Lenore & Co.:
It is not enough to confer standing that plaintiff just prove
some injury and show that this injury is within the affected
area of the economy. Antitrust violations admittedly
create many foreseeable ripples of injury to individuals,
but the law has not allowed all of those merely affected by
the ripples to sue for treble damages.
550 F.2d at 499.
[4] In the present case CalComp has alleged that IBM’s
actions injured general purpose computer systems manufac-
turers and leasing companies. But CalComp does not include
itself among these two classes of IBM competitors. Nor does
CalComp’s evidence demonstrate a direct causal injury which
would afford it standing. Rather, at best CalComp argues that
injury to these two groups has had an indirect ripple effect upon
it. As John Lenore & Co. indicates, such an indirect ripple effect
is not sufficient to allow CalComp to sue for treble damages on
its first two categories of claims.
III. CalComp’s Claims as to IBM-Compatible Peripheral
Equipment Manufacturers
A. Standard of Review on Appeal from Directed Verdict
[5, 6] As a general rule, the district court has the power to
direct a verdict if “the evidence permits only one reasonable
conclusion as to the verdict.” Fountila v. Carter, 571 F.2d 487,
489-90 ( 9th Cir. 1978), quoting Kay v. Cessna Aircraft Co., 548
A-80
F.2d 1370, 1372 (9th Cir. 1977); see Syufy Enterprises v.
National General Theatres, 575 F.2d 233, 235 (9th Cir.
1978).2 The district court must consider all the evi-
dence—both favorable and unfavorable. But in order to avoid
passing on the credibility of witnesses and weighing con-
tradictory evidence, the court must resolve all inferences in
favor of the party with the burden of persuasion, because
[i]t is the jury, not the judge, which “weighs the con-
tradictory evidence and inferences, judges the credibility of
witnesses, ... and draws the ultimate conclusion as to the
as
Fount-Wip, Inc. v. Reddi-Wip, Inc., 568 F.2d 1296, 1301 (9th
Cir. 1978), quoting Cockrum v. Whitney, 479 F.2d 84, 86 (9th
Cir. 1973) and Tennant v. Peoria & Pekin Union Ry., 321 U.S.
29, 35, 64 S.Ct. 409, 88 L.Ed. 520 (1944); see Marquis v.
Chrysler Corp., 577 F.2d 624, 639 (9th Cir. 1978); Kay v.
Cessna Aircraft Co., 548 F.2d at 1372.8
2 Although the district court may direct a verdict either against the party
who does not bear the burden of persuasion or the party who does bear that
burden, the amount of evidence required for a directed verdict differs. The
party seeking a directed verdict must make a stronger showing of evidence if
he bears the burden of persuasion. See United California Bank v. THC
Financial Corp., 557 F.2d 1351, 1356 (9th Cir. 1977); Juhnke v. EIG Corp.,
444 F.2d 1323, 1325 (9th Cir. 1971); Comment, “Directing the Verdict in
Favor of the Party with the Burden of Proof,” 50 N.C.L.Rev. 843 (1972).
Thus directed verdicts for defendants are more frequent than for plaintiffs.
See C. Wright, Federal Courts 464 (3d ed. 1976).
3 This test is a hybrid of the so-called “new trial” and “most favorable
evidence” tests. Shortly after the power of the federal courts to grant directed
verdicts consistently with the seventh amendment was established in Galloway
v. United States, 319 U.S. 372, 63 S.Ct. 1077, 87 L.Ed. 1458 (1943), two
polar tests were proposed for determining whether the evidence in a
particular case is sufficient to warrant a directed verdict against the bearer of
the persuasion burden. The first, the “setting aside” or “new trial” test,
permitted a directed verdict against the party with the burden of persuasion if
the judge, looking at all the evidence, both favorable and unfavorable,
determined that he would be duty bound to set aside a verdict for that party.
In the second, the “most favorable evidence” test, the court was to consider
only the evidence favorable to the party with the persuasion burden,
completely disregarding all unfavorable evidence, and determine whether a
reasonable jury, viewing the evidence in the light most favorable to that party,
(Footnote continued on following page)
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Thus, this court in Maheu v. Hughes Tool Co., 569 F.2d
459, 464 (9th Cir. 1977), upholding the denial of a directed
verdict against the party with the burden of persuasion, made it
clear that application of the general standard of Fountila and
Kay, supra, required it to view the evidence “in the light most
favorable to the party opposing the motion,” and that it “must
examine ail the evidence” (emphasis added). See also id. at
481 (concurring and dissenting opinion); Wescott v. Impresas
Armadoras, S.A., 564 F.2d 875, 882 (9th Cir. 1977); Santa
Clara Valley Distributing Co. v. Pabst Brewing Co., 556 F.2d
942, 944 (9th Cir. 1977); Kay v. Cessna Aircraft Co., 548 F.2d
at 1372; Chisholm Brothers Farm Equipment Co. v. Inter-
national Harvester Co., 498 F.2d 1137, 1140 (9th Cir.), cert.
denied, 419 U.S. 1023, 95 S.Ct. 500, 42 L.Ed.2d 298 (1974).
[7, 8] In order to benefit from the favorable inferences
available under this standard, the party against whom the
motion is made must present “substantial evidence.” As stated
in Rutledge v. Electric Hose & Rubber Co., 511 F.2d 668 (9th
Cir. 1975);
In considering a motion for a directed verdict, the court
must give the party against whom the motion is made the
benefit of all reasonable evidentiary inferences. [Cited
authority omitted.] This is no less true in an antitrust case.
However, if there is no substantial evidence to support the
claim, the court must direct a verdict.
Id. at 677 (emphasis added), Quoting Cleary v. National
Distillers & Chemical Corp., 505 F.2d 695, 696 (9th Cir. 1974).
The “sole issue” in an appeal from a directed verdict against
the party with the burden of persuasion is thus the sufficiency of
the evidence of the appellant’s claim. Cleary v. National
( Footnote continued from previous page)
could find every essential part in that party’s favor. If it could not, a directed
verdict for the other party would be proper. See McBaine, “Trial Practice:
Directed Verdicts; Federal Rule,” 31 Calif.L.Rev. 454, 460-61 (1943). The
principal differences between these polar tests were that the “setting aside”
test involved passing upon the credibility of witnesses and weighing con-
tradictory evidence, while the “most favorable evidence” test did not; and the
former test permitted consideration of all the evidence, while the latter did
not.
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Distillers & Chemical Corp., 505 F.2d at 696. As stated in
Chisholm Brothers Farm Equipment Co. v. International
Harvester Co., 498 F.2d at 1140, “the correct standard is
whether or not, viewing the evidence as a whole, there is
substantial evidence present that could support a finding . . . for
the nonmoving party.” Accord, Janich Bros., Inc. v. American
Distilling Co., 570 F.2d 848, 853 & n.2 (9th Cir. 1977)
(substantial evidence is “more than a mere scintilla” and
consists of “such relevant evidence as a reasonable mind might
accept as adequate to support a conclusion”), cert. denied, 439
U.S. 829, 99 S.Ct. 103, 58 L.Ed.2d 122 (1978).
[9] Thé: standard for determining the propriety of a
directed verdict—identical to that for determining the propriety
of a judgment n. o. v., Fountila v. Carter, 571 F.2d at 489;
Cockrum v. Whitney, 479 F.2d at 85—is the same for district
and appellate judges. Maheu v. Hughes Tool Co., 569 F.2d at
481 (concurring and dissenting opinion ).
[10] In its amicus brief the Department of Justice argues
that:
Because of the generally complex nature of antitrust
litigation and the important role which motive and intent
often play therein, the Supreme Court has generally dis-
approved of the use of summary’ procedures, such as
motions for directed verdicts, ir antitrust cases. Poller v.
Columbia Broadcasting, 368 U.S. 464, 473 [, 82 S.Ct. 486,
7 L.Ed. 2d 458] (1962); Hospital Bldg. Co. v. Rex Hospital
Trustees, 425 U.S. 738, 746 [, 96 S.Ct. 1848, 48 L.Ed.2d
338] (1976); see also Chisholm Bros. Farm Equip. Co. v.
International Harvester Co., supra, 498 F.2d at 1139.
Complex Section 2 cases, such as this case, involve numer-
ous factual issues such as market definition, whether the
defendant possesses monopoly power in a relevant market
and whether the defendant had the purpose or intent to
exercise that monopoly power. These issues must be
resolved by the jury after receiving appropriate instructions
from the court.
A-83
However, in Santa Clara Valley Distributing Co. v. Pabst
Brewing Co., 556 F.2d at 944-45 n.1, this court dealt extensively
and definitively with the meaning of Poller and Hospital
Building Co. in the context of a directed antitrust verdict. That
case, emphasizing that the
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