Opposition Brief — International Business Machines Corp. v. Allen-Myland, Inc.

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Supreme Court, US

: U,

FILED

No. 94-695 NOV 17 1994

OFFICE UF THE CLERK

IN THE

Supreme Court of the Gnited States

OCTOBER TERM, 1994

INTERNATIONAL BUSINESS MACHINES CORPORATION,

Petitioner,

ALLEN-MYLAND, INC.,

Respondent.

On Petition for a Writ of Certiorari

to the United States Court of Appeals

for the Third Circuit

RESPONDENT?’ S BRIEF IN OPPOSITION

ROBERT G. LEVY

Counsel of Record

JOEL E. HOFFMAN

KAREN L. GRIMM

THOMAS M. DUGARD

WILLIAM H. STALLINGS

SUTHERLAND, ASBILL & BRENNAN

1275 Pennsylvania Avenue, N.W.

Washington, D.C. 20004

(202) 383-0100

Attorneys for Respondent

Allen-Myland, Inc.

PRESS OF BYRON S. ADAMS, WASHINGTON, D.C. 1-800-347-8208

QUESTION PRESENTED FOR REVIEW

Whether it was permissible for the court of appeals

to vacate the district court’s disposition of a tying case

under Section 1 of the Sherman Act and to remand for de

novo reconsideration, including possible additional

discovery and evidentiary hearings on certain issues,

where the court of appeals, after an exhaustive review of

the record, concluded: (a) That key findings of the

district court on the contours of the market for the tying

product, and on the existence of a separate market for

the tied product, were "clearly erroneous” under Fed. R.

Civ. P. 52(a); (b) that the district court had misconstrued

the established market definition principles of "cross-

elasticity of demand” and "reasonable interchangeability"

as applied to the facts of this case; and (c) that the

district court should be allowed to consider the impact of

this Court’s intervening decision in Eastman Kodak Co.

v. Image Technical Servs., Inc., 504 U.S. __, 112 S.

Ct. 2072 (1992).

RULE 29.1 LISTING

Respondent Allen-Myland, Inc. has no parent

company or non-wholly owned subsidiary.

TABLE OF CONTENTS

Page

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Reasons for denying the writ ............. 15

I GGA a kw 6 44 04 5 8 04 0 24

TABLE OF AUTHORITIES

Cases: Page

Allen-Myland, Inc. v. International Business

Mach. Corp., 746 F. Supp. 520

YP I 6 Naki Gia kg. po. 0 WD 7

Anderson v. City of Bessemer City,

i Oe | ar 23, 24

Eastman Kodak Co. v. Image Technical

Servs., Inc., 504 U.S. _,

fee Be er 12-13

Gonzalez v. St. Margaret’s House Hous.

Dev. Fund Corp., 880 F.2d 1514

EE a 19

In re IBM Peripheral EDP Devices Antitrust

Litigation, 481 F. Supp. 965

(N.D. Cal. 1979), aff'd, 698 F.2d 1377

(9th Cir.), cert. denied, 464 U.S. 955

a a es 21

Jefferson Parish Hosp. Dist. No. 2 v. Hyde,

a Ba oes ek ig ve 4 oo 18

United States v. Aluminum Co. of Am.,

148 F.2d 416 (2d Cir. 1945) ...... 11, 19-21

United States v. Aluminum Co. of Am.,

oR er ee 22

- iv -

United States v. Continental Can Co.,

cp BoP Fd eer ee 22

United States v. International Business

Mach. Corp., 1956 Trade Cas. (CCH)

Fe fF 8 st 4 | Be ee eee 3

United States v. Philadelphia Nat’l Bank,

pe ea ee 22

United States v. Phillipsburg Nat’l Bank

& Trust Co. , 399 U.S. 350 (1970) ........ 22

United States v. United States Gypsum Co.,

pe Re a ee ee er eee 23

Virtual Maintenance, Inc. v. Prime Computer,

Inc., 11 F.3d 660 (6th Cir. 1993),

cert. dismissed, 114 S. Ct. 2700 (1994) ..... 19

Statutes and Rules:

ee EE eo de oe a Re ee se eee 2

Sherman Act:

SS Sree A ae a are 2,7, 14

Es kk ag ke kw ee 7, 19

so yy ele ew ee a el 22, 23

i a a lk 12-13

IN THE

Supreme Court of the United States

OCTOBER TERM, 1994

No. 94-695

INTERNATIONAL BUSINESS MACHINES CORPORATION,

Petitioner,

ALLEN-MYLAND, INC.,

Respondent.

On Petition for a Writ of Certiorari

to the United States Court of Appeals

for the Third Circuit

RESPONDENT’S BRIEF IN OPPOSITION

Respondent Allen-Myland, Inc. respectfully requests

that the petition for a writ of certiorari to the United

States Court of Appeals for the Third Circuit be denied.

OPINIONS BELOW

The opinion of the court of appeals is reported at 33

F.3d 194 (3d Cir. 1994) and is reprinted in the peti-

tioner’s Appendix at Al-A36. The opinion of the United

States District Court for the Eastern District of

Pennsylvania is reported at 693 F. Supp. 262 (1988) and

is reprinted in the petitioner’s Appendix at A37-A109.

JURISDICTION

The judgment of the court of appeals was entered on

August 12, 1994. The jurisdiction of this Court is

invoked pursuant to 28 U.S.C. § 1254(1).

STATUTE INVOLVED

Section 1 of the Sherman Act, 15 U.S.C. § 1, pro-

vides in relevant part: "Every contract, combination in

the form of trust or otherwise, or conspiracy, in restraint

of trade or commerce among the several States, or with

foreign nations, is declared to be illegal."

STATEMENT OF THE CASE

A. Factual Background

This antitrust case challenges IBM’s “net pricing”

policy, under which IBM tied the services needed to

upgrade its 308X series large-scale mainframe computers

to the parts needed to perform such upgrades. IBM’s

policy made upgrade parts available only if the necessary

reconfiguration services also were obtained from IBM at

a single combined price, and further required purchasers

of upgrades to surrender to IBM all parts removed from

their machines at the time the upgrades were performed

by IBM. Respondent AMI, a provider of the engineering

services needed to upgrade IBM mainframes, was a

victim of that policy, and has spent the last nine years

seeking redress under the antitrust laws.

Throughout the period relevant to this appeal,

1981-1985, IBM was the industry leader in large-scale

mainframe computers. Pet. App. A2.” As the result

of a landmark 1956 Consent Decree settling government

antitrust charges against it, IBM was barred from offer-

ing its computers on a lease-only basis; it also had to

offer to sell them outright.” The result was the emer-

gence of third-party leasing companies, which purchased

mainframes from IBM and marketed them to end users.

Pet. App. A2-A3.

In order to recover their substantial investments in

the equipment, leasing companies had to keep their IBM

mainframes in circulation. To do so, they had to have

their mainframes periodically reconfigured to meet spe-

cific end-user demands.” Pet. App. A3. The leasing

companies’ most important requirements in keeping their

machines fully leased were the availability of parts and

prompt reconfiguration service. See, e.g., JA 743-44,

1259-60. When IBM failed to provide such service in a

timely manner (see, e.g., Pet. App. A3), leasing

Y Citations to the cpinions below are to the Appendix to the Petition

("Pet. App.”), and those to the record are to the Joint Appendix in the

court of appeals ("JA"). IBM’s petition for certiorari is cited as "Pet."

Y United States v. International Business Mach. Corp., 1956 Trade

Cas. (CCH) { 68,245 (S.D.N.Y. 1956). In its petition, IBM states that

the court of appeals erred when it asserted that IBM is barred from

leasing computers. Pet. 9 n.5. While it may have inaccurately stated

the particulars of the Consent Decree in this footnote, it is apparent that

the court of appeals understood its import. See Pet. App. All n.11

("IBM’s past practices of offering tabulating and computer equipment

only for lease and not for sale" gave rise to the Consent Decree).

¥ In reconfiguring the processing capacity of an IBM mainframe,

certain core parts are removed and replaced with more powerful (or

less powerful) parts. Pet. App. A39.

companies turned to independent engineering firms such

as AMI.

AMI was extremely successful in obtaining recon-

figuration work on the 303X series of IBM mainframe

computers, the predecessor to the 308X series. See,

e.g., Pet. App. A61. AMI’s ability to compete success-

fully against IBM for 303X reconfiguration business was

attributable not only to its specialized expertise and

responsiveness to leasing company and end-user needs,

but also to the relatively poor quality of service offered

by IBM. See, e.g., JA 6516. As the court below ex-

plained, "“[I]essors could not afford to have their

machines idle and generating no revenue while waiting

for a reconfiguration, yet IBM often took months to

install an upgrade. AMI, on the other hand, would turn

the job around in a matter of only a few days." Pet.

App. A3. Instead of improving its performance, how-

ever, IBM chose to hinder the leasing companies’ ability

to utilize independent reconfiguration firms like AMI by

erecting a variety of "roadblocks," one of which was

IBM’s net pricing policy.

“ As described by IBM’s Director of Industry Relations, who was in

charge of IBM’s dealings with leasing and service companies (JA

6989):

They [the leasing companies] bought our assets. They are

upgrading it. They are moving the used equipment. They’re

putting IBM MES and features [i.e., upgrades] on it, and we are

throwing roadblock and roadblock, and roadblock in their way.

Over and over again. And they think we’re loosing [sic] our

minds.

Under that policy, IBM sold parts for practically

all "MIPS" and many "memory" upgrades” under “net-

priced" contracts providing that installation of the new

parts would be performed by IBM field engineers and re-

quiring that valuable removed parts, which could be used

by the leasing companies to reconfigure other machines

in their inventories, be surrendered and become the prop-

erty of IBM. Pet. App. A3-A4. The used parts were

either ostensibly refurbished (made "equivalent-to-new,"

or "ETN") by IBM or destroyed. See Pet. App. A89-

A90. Many of the ETN parts were then sold back as

part of net-priced upgrades, at new parts prices, for use

in upgrading other old machines.” Pet. App. A4, A89.

For upgrades of machines up through the 303X

series, a purchaser seeking to avoid using IBM’s engi-

neering service and surrendering valuable parts to IBM

had the option of purchasing the parts over-the-counter

("OTC") from IBM rather than in a net-priced upgrade.

Beginning with the 308X, however, the OTC price was

either “unavailable” or was set at a level that precluded

Y There are three principal types of upgrades to IBM mainframe

computers: Memory upgrades, processing speed ("MIPS") upgrades

(also known as “model upgrades"), and channel upgrades. Pet. App.

A39. Although IBM in its petition focuses solely on MIPS upgrades,

which utilized thermal conduction modules ("TCMs”"), the IBM net

pricing policy also extended to memory upgrades, many of which did

not utilize such technology. Pet. App. A39, A76 n.60, A91.

at "new" prices as many as three times. JA 1705-06.

it from being a viable option. Pet. App. A43 n.15.7

With new parts either not offered for sale at all or priced

at levels rendering them economically unavailable -- and

with used parts similarly unavailable because IBM’s net

pricing policy included recapture of removed parts --

purchasers of IBM net-priced upgrades had no meaning-

ful alternative. See Pet. App. A3-A4.

Not surprisingly, IBM’s net pricing policy proved

to be a highly effective means of foreclosing the com-

petition posed by AMI and other third-party engineering

organizations while, at the same time, imposing sig-

nificant constraints upon the leasing companies’

ability to market IBM mainframes.” Seeing its business

Y For more than two years after it introduced the 308X, IBM failed to

establish any OTC price for the TCMs needed for 308X MIPS memory

upgrades. Pet. App. A43 0.15. When it finally established such prices

in late 1983, the prices were too high to provide users with a viable

alternative to net-priced upgrades. Jd. For example, in 1983, a 308D

machine soid for $3 million and a 308K sold for $3.6 million. Pet.

App. A43-A44 n.15. Although IBM charged $600,000 for the D to K

net-priced upgrade, the OTC price for the parts needed for such

upgrade was $4.58 million, or $980,000 more than the entire new

308K machine. Id.

¥ Just how effective is illustrated by comparing sales data on the 303X

MIPS upgrades (for which parts were freely available) with similar data

on the 308X MIPS upgrades (for which they were not). From 1981

through 1983, AMI performed nearly as many MIPS upgrades on IBM

303X machines as IBM did. See JA 6696-97, 7274. In contrast, on

the 308X series, IBM performed more than 1,800 net-priced MIPS

upgrades from 1981 through 1985. AMI was able to perform only

(continued...)

evaporate, AMI sued IBM under Section 1 of the

Sherman Act, alleging that IBM’s net pricing policy

constituted an unlawful tie between the parts and

engineering services required to perform an upgrade.”

B. The Proceedings Below

1. Opinion of the District Court

AMI’s tying claims were tried without a jury in the

United States District Court for the Eastern District of

Pennsylvania (O’Neill, D.J.). A principal issue at trial

was whether, during the relevant period (1981-1985),

IBM possessed sufficient economic power in the tying

product (the parts needed for upgrades) to restrain

trade in the tied product (the engineering services

needed to install such upgrades). Because a manufac-

turer’s apparent power as the sole source of new parts

for upgrades of its own equipment might in some

¥ (...continued)

Meanwhile, the net pricing policy paid off very well for IBM.

IBM’s revenues from the sale of net-priced 308X MIPS upgrades

(including the parts necessary for such upgrades) during the 1981 to

1985 period were over $2 billion (Pet. App. A34), and its revenues

from the sale of all net-priced memory upgrades in 1984 alone

exceeded $70 million. Pet. App. A91 n.82.

” In addition to its Section 1 claim, AMI also alleged an attempt to

monopolize under Section 2 of the Sherman Act, 15 U.S.C. § 2, and

various state law claims. The district court, with consent of the

parties, entered judgment for IBM on the Section 2 claim on the ground

that unless its ruling as to market power on the Section 1 claim was

reversed, that claim could not survive. Pet. App. AS; see Allen-

Myland, Inc. v. International Business Mach. Corp. , 746 F. Supp. 520,

525 n.1, 559 (E.D. Pa. 1990). The parties agreed to stay AMI’s

tortious interference claim, and ADMI's unfair competition claim was

dismissed. Pet. App. A38 n.1.

circumstances be negated by an absence of market power

in the market for the equipment itself, a major focus

at trial concerned whether IBM possessed a sufficient

degree of power in the market for large-scale main-

frames.

On this issue, the district court acknowledged that

IBM, which accounted for approximately 70% of the

industry revenues attributable to large-scale mainframes,

would have “substantial economic power" if the market

were defined as large-scale mainframes. Pet. App. A47.

Nonetheless, the district court, relying largely on

anecdotal and generalized opinion evidence offered by

IBM, rejected large-scale mainframes as constituting a

relevant market. Pet. App. A47-A59.10

Instead, the district court found the relevant market

to include a wide-ranging array of data processing

products and services, including computer leasing

companies; smaller, lower capacity computers; peripheral

products (such as memory storage devices, input/output

devices, and disk drives); computer software; box

1” In contrast to IBM’s anecdotal evidence, AMI’s expert witness,

Yale economics professor Richard C. Levin (now president of Yale)

based his market definition in large part on documents generated by

IBM, including a series of internal IBM reports known as “Significant

Win/Loss Reports" ("SWLRs"). These reports, sent monthly to IBM’s

Chairman and members of its Management Committee, showed, for

each individual competitive situation surveyed, the IBM product

offering, the competitive product offerings, and which product the

customer chose. Pet. App. A49. The SWLRs showed that in 97% of

the instances in which the IBM offering was an IBM large-scale

mainframe, the competing offerings were also large-scale mainframes

or upgrades to them. Pet. App. A21, A49.

swaps; upgrades using customer parts; and even data

processing service bureaus. Jd. The district court found

that when all of these purported substitutes were included

in the relevant market, IBM’s share declined so steeply

from the original 70% level as to preclude a finding of

market power. Pet. App. A58-A59. In addition, the

district court found that non-market share evidence

offered by IBM concerning entry into the data processing

business, the extent of technological innovation, and

IBM’s own market/pricing performance also undermined

AMI’s contention that IBM had sufficient economic

power for per se tying liability. Pet. App. A59-A63.

The district court also concluded that AMI had not

been foreclosed from a viable business opportunity by

IBM’s net pricing policy. Pet. App. A68-A86. It found

that the TCM technology introduced by IBM for MIPS

upgrades had reduced the added value of the labor com-

ponent on a MIPS upgrade to a de minimis amount (Pet.

App. A68-A77); that the inventory expense for parts that

AMI would have borne would have been so high that

AMI could not have made a profit on performing MIPS

upgrades, and, in fact, would have experienced signifi-

cant losses (Pet. App. A77-A79); and that customers

would not be willing to pay any more for upgrades from

AMI than they would from IBM (Pet. App. A80-A83).

Accordingly, the district court concluded that even if

IBM had market power, AMI could not establish that

IBM’s net pricing policy was per se unlawful. Pet. App.

A68.

l/ A “box swap” is the replacement of an existing machine by another

machine with the desired characteristics.

For the same reasons, the district court ruled that

AMI had also failed to show that net pricing as practiced

by IBM was unlawful under the Rule of Reason. Pet.

App. A90. Noting that “market power is one test of rea-

sonableness,” the court held that "[tJhe availability of

wide-ranging alternatives to IBM net priced upgrades

. . . precludes a finding that IBM’s net pricing policy has

any appreciable anticompetitive effect on the market as

a whole.” Pet. App. A87 (footnote omitted). And in

light of its “business opportunity” determination, the

court further held that "AMI has also failed to establish

that net pricing has an anticompetitive impact on the

market for 308X upgrade labor services." Jd. Conclud-

ing in addition that the net pricing policy was justified

by “legitimate reasons,” i.e., "to ensure the prompt and

proper return of TCMs needed to sustain the ETN pro-

gram and the commercial success of the 308X line of

products,” and that the policy’s consequent “procom-

petitive effects outweigh[ed] its virtually nonexistent

anticompetitive impact,” the court ruled that "AMI’s rule

of reason challenge to net pricing fails.” Pet. App. A90.

2. Opinion of the Court of Appeals

Based upon an exhaustive review of the record, a

unanimous court of appeals (Seitz, Sr. Cir. J., and

Mansmann and Nygaard, Cir. JJ.) vacated the district

court’s judgment in favor of IBM and remanded the case

for further proceedings. Specifically, the court of

appeals vacated the district court’s finding that IBM

lacked sufficient market power to support per se liability

and directed the district court to re-examine the issue

de novo. Pet. App. A25. The court of appeals also

found that the district court erred in concluding that AMI

had not been deprived of a viable business opportunity,

. F

and instructed the district court to re-examine that issue

de novo as well. Pet. App. A34, A35-A36.

Market Power. The court of appeals rejected the

district court’s extraordinarily broad definition of the

relevant market. With respect to mainframes placed by

leasing companies, the court of appeals rejected the

district court’s wholesale inclusion of leasing companies

in the relevant market and instead concluded that dis-

tinctions must be drawn (i) between IBM-manufactured

mainframes and those manufactured by other companies,

and (ii) between new and used machines. Pet. App. A8-

Al2.

Including new mainframes, the court of appeals

concluded, would result in double counting (Pet. App.

A9-A10), while inclusion of leased, used-IBM main-

frames would be erroneous under the "control" principle

articulated in United States v. Aluminum Co. of America,

148 F.2d 416, 425 (2d Cir. 1945) ("Alcoa"), as applied

to the facts of this case. As the court of appeals

observed, IBM was able to control the number of

machines available to leasing companies, and that

"contro! was enhanced by IBM’s policy of recapturing

old parts that could otherwise have been used to extend

the useful service lives of existing used mainframes

by allowing them to be upgraded and placed with new

customers." Pet. App. All. IBM’s delay in

iY By recapturing important used parts which the leasing companies

could use for reconfigurations and then repricing them as “new" (Pet.

App. A89), IBM significantly raised leasing company costs.

a. 2

providing upgrades constituted an additional form of

control. 1

Employing similar reasoning, the court also con-

cluded that neither box swaps nor used parts upgrades

were properly includable in the relevant market. Pet.

App. Al2-Al13. The court of appeals concluded, how-

ever, that used, non-IBM machines, when placed in

service by leasing companies, were not controlled by

IBM and did provide a competitive alternative that

limited IBM’s market power and hence were properly

included in the relevant market. Pet. App. Al1-A12.

The court of appeals further concluded that there was

insufficient evidence to support the district court’s

wholesale inclusion of peripheral devices and software in

the relevant market. Pet. App. Al9. It also left to the

district court’s discretion whether to revisit its decision

on the inclusion of smaller capacity computers in the

market in light of this Court’s intervening decision in

Eastman Kodak Co. v. Image Technical Servs. , Inc. , 504

US. _, 112 S. Ct. 2072 (1992). Pet. App. Al4-

Al6.

iY By delaying the availability of upgrades, IBM imposed further

additional costs as IBM mainframes requiring such upgrades sat idle in

leasing companies’ inventories. See Pet. App. A3.

Y The district court issued its opinion in this case on July 21, 1988,

but did not certify the judgment as appealable pursuant to Rule 54(b)

until May 14, 1993. This Court issued its opinion in Kodak on June

8, 1992. The court of appeals found that there was evidence to support

the district court’s finding that, in at least one circumstance, a smaller-

scale computer could be a substitute for a large-scale mainframe. Pet.

(continued...)

= 92.

The court of appeals also rejected the district court’s

findings on non-market share indicia of IBM’s purported

lack of market power. With respect to the IBM-

proffered evidence regarding absence of entry barriers,

the court of appeals ruled that the district court had erred

by equating new entry with what is properly includable

in the relevant market in the first instance, and that the

entry of leasing companies and reconfiguration service

companies such as AMI did not constitute evidence of

entry at the manufacturing level. Pet. App. A22-A24.

With respect to the district court’s findings on

technological innovation and market performance, the

court of appeals held that there was no evidence to

support the proposition that technological innovation in

the computer industry, and/or declining prices for

computer equipment generally, were related to any de-

crease in IBM’s market power, and that the district court

had therefore erred in deeming innovation and price

reductions to preclude a finding that IBM possessed

market power. Pet. App. A25.

Viable Business Opportunity. The court of appeals

also vacated the district court’s determination with

respect to the lack of a viable business opportunity. It

Y (...continued)

App. Al4. The court of appeals observed, however, that the trial court

had not considered whether owners of expensive large-scale mainframes

could be “locked-in” to their systems due to the prohibitive expense of

“porting” their applications from a mainframe to a smaller computer.

Pet. App. Al4. The court of appeals did not attempt to resolve the

lock-in issue, but instead left it to the district court on remand to decide

whether to examine the issue in light of Kodak, including whether "to

permit further discovery on the issue, and to hear additional evidence."

Pet. App. Al6.

~ 3.

"interpret[ed] the district court as holding that AMI

failed to prove the following two prongs of the orthodox

framework for a section 1 tying case: first, that two

separate markets existed for the tying and tied products;

[and] second, that a substantial volume of interstate

commerce was affected by the tie." Pet. App. A26.

The court of appeals also noted that the district court’s

analysis of a viable business opportunity "appear[ed] to

bear on the ‘fact of damage’ issue of whether AMI has

standing to bring a private antitrust suit against IBM."

Id.

With respect to the first issue (the existence of two

separate markets), the court of appeals concluded that the

evidence relied on by the district court failed to support

its findings that: (i) Customers would not be willing to

pay more for AMI services than those provided by IBM;

(ii) there was no significant demand for third party

installation services; (iii) AMI would suffer massive

losses from inventory costs; and (iv) the value of the

labor content of a 308X MIPS upgrade was de minimis.

Pet. App. A27-A34. The court of appeals therefore con-

cluded that the district court’s refusal to recognize a

separate market for installation of upgrades could not

stand, and remanded for further proceedings. Pet.

App. A34.

The court of appeals likewise rejected the district

court’s ruling that a not insubstantial amount of

commerce had been foreclosed, noting the district court’s

acknowledgement “that the $20 million market [IBM’s

assigned value of the engineering services] for upgrade

installations was quantitatively more than sufficient."

Pet. App. A35.

Finally, the court of appeals addressed the "fact of

damage” issue. Observing that the district court, while

declining to rule on the issue, had noted that its analysis

of the business opportunity issue “seemed to preclude

any finding that AMI suffered the requisite damage," the

court of appeals also remanded the "fact of damage”

issue to the district court for reconsideration. Pet. App.

A36.

REASONS FOR DENYING THE WRIT

IBM suggests that the "necessary implication” of the

decision below is that "procompetitive justifications” for

a tie “must be ignored” if the defendant is found to

possess market power triggering the so-called per se rule

applicable to some tying arrangements, and that this

"implication" conflicts with rulings in other circuits

permitting antitrust defendants to demonstrate a business

justification for an otherwise per se illegal tying

arrangement. Pet. 15-18. Although the court of appeals

made no ruling, and indeed offered no opinion whatso-

ever, on the significance of the “procompetitive

justification" asserted by IBM in this case,’ IBM

1¥ The court did note, however, the anti-competitive impact of IBM’s

recapture policy and the net pricing requirement that ensured its success

(Pet. App. All n.11):

By recapturing old parts from upgraded mainframes, IBM effec-

tively curtailed the leasing companies’ ability to reconfigure their

used machines into different models that could have competed

against IBM’s offerings over the medium term. This effect is

similar to that caused by IBM’s past practices of offering tabu-

lating and computer equipment only for lease and not for sale.

«ee.

nevertheless insists that the remand necessarily implies a

Third Circuit holding on the business justification issue,

which it now invites this Court to address. Pet. 14.

The “procompetitive justification” asserted by IBM

was that its net pricing policy “facilitated the develop-

ment and marketing of TCM technology” and “allowed

IBM properly to recover its investment in the tech-

nology." Pet. 8-9, Pet. App. A90. It did so, according

to IBM, by “insur[ing] that the old TCMs recovered

from reconfigured machines were returned to IBM [for]

refurbish[ing] to ‘equivalent to new’ condition,” thus

averting a “manufacturing capacity shortage” allegedly

faced by IBM. Pet. App. A4. IBM’s ability to “ensure

that it got its TCMs back . . . was enhanced,” IBM

argued, "when IBM personnel performed the labor." Jd.

In exonerating net pricing as "procompetitive" under

the Rule of Reason, the district court accepted this

rationale, although not without qualms. Pet. App.

A91.4 IBM argues that this Rule of Reason holding

was not appealed by AMI and therefore must be deemed

“undisputed” (Pet. 11), from which IBM indignantly

infers that the court of appeals, in supposed conflict with

if As the district court noted, "[tJ]he fact that IBM applies net pricing

to numerous 308X memory upgrades that do not require the return of

TCMs.. . . is inconsistent with IBM’s principal stated justification for

net pricing and therefore raises doubts about IBM’s motives... ."

Pet. App. A91 (citations omitted). IBM’s own expert economist, Prof.

William Baumol, when asked whether his opinion that the net pricing

policy was not anticompetitive would change if the policy were applied

to non-TCM technology, testified that, had he known that to be true,

he “might very well had [sic] been on the other side.” JA 2350-51.

other circuits, held procompetitive justifications to be

irrelevant when market power is shown.

Preliminarily, we note that on the merits of the

alleged issue, IBM now takes precisely the opposite of its

position in the court of appeals. There, IBM castigated

AMI for even “discussing the origin of net pricing for

308X upgrades,” on the ground that this was “irrelevant

to the issues presented on appeal” in that, according to

IBM, "a per se tying claim does not involve any exami-

nation of the intent underlying, or the business justi-

fications for, the challenged practice.” Brief for

Appellee at 3 (emphasis added); see also id. at 17.

To whatever extent the court of appeals’ opinion may be

deemed to “imply” that business justifications cannot be

considered in a per se tying case, the “implication”

merely echoes IBM’s own representations to the court.

More importantly, the inter-circuit conflict claimed

by IBM is specious. IBM’s tortured construction of the

opinion below ignores what was actually before the court

of appeals for review. The twin premises for the district

court’s Rule of Reason holding were its antecedent deter-

minations (i) that there were “wide-ranging alternatives

to IBM net priced upgrades,” so that IBM lacked market

power, and (ii) that there was no separate demand for,

and thus no anticompetitive impact on, "the market for

308X upgrade labor services.” Pet. App. A87. When

these premises fell, so did the district court’s rationale

1” This was itself a reversal of IBM’s position in the district court,

where it argued that business justifications are relevant in applying the

per se standard. See IBM Post-Trial Mem. at 38; IBM Post-Argument

Mem. at 59-60.

—.

for accepting IBM’s proffered "justification" as suffi-

ciently procompetitive. See Jefferson Parish Hosp. Dist.

No. 2 v. Hyde, 466 U.S. 2, 35 (1984) (O’Connor, J.,

concurring) (recognizing the illegality of a tie that

"abet[s] the harmful exercise of market power that the

seller possesses in the tying product market").

The court of appeals clearly recognized this when it

vacated the judgment for IBM on the tying count of

AMI’s complaint in its entirety, not just on the per se

theory of liability. Pet. App. A2.1” The weight to be

accorded IBM’s asserted business justification, if any, is

a matter for the district court to consider on remand.

The "implication" IBM discerns from the decision

below thus is illusory, and the asserted conflict with

1” As IBM admitted in the district court (JA 699), TCMs were

reusable, reliable and durable. Without IBM’s policy of recapturing

used TCMs and reselling them for reuse at “new” parts prices, TCMs

would have remained in the marketplace for use by leasing companies

and independent reconfigurers like AMI to fabricate and install

upgrades, thereby reducing the demand for TCMs supplied directly by

IBM and obviating any need for it to create redundant manufacturing

capacity. Thus, the only “efficiencies” flowing from IBM’s tying

scheme were efficiencies in maintaining IBM’s own market power.

1” Indeed, IBM itself appears to have recognized as much, as it never

argued to the court of appeals that the district court’s allegedly

“undisputed” finding of “procompetitive justification" made market

power -- the issue to which both parties addressed the bulk of their

presentations -- irrelevant. The closest IBM came to asserting the legal

theory it now presses before this Court was a single paragraph in its

brief, characterizing the “context” of the case as “unusual” and

criticizing AMI for allegedly asking the court of appeals “to ignore” the

district court’s Rule of Reason holding. Brief for Appellee at 17-18.

other circuits is nonexistent.2” IBM raises no issue in

this respect warranting review by this Court.

Il.

IBM purports to find in the opinion below “an un-

precedented rule of law," premised on the landmark

Sherman Act Section 2 decision in United States v.

Aluminum Co. of America, 148 F.2d 416 (2d Cir. 1945)

("Alcoa"), to the effect that "used equipment is not, as a

matter of law, in the same market as new equipment

made by the same manufacturer defendant.” Pet. 18, 24.

Once again, IBM relies solely on “implication” in its

search for a ruling it can challenge.2” And once again,

the purported “implication” is nowhere to be found in the

opinion.

2 To buttress its claim of inter-circuit conflict, IBM suggests (Pet. 15

& n.8) that the Second Circuit in Gonzalez v. St. Margaret's House

Hous. Dev. Fund Corp., 880 F.2d 1514, 1519 (2d Cir. 1989) and the

Sixth Circuit in Virtual Maintenance, Inc. v. Prime Computer, Inc., 11

F.3d 660 (6th Cir. 1993), cert. dismissed, 114 S. Ct. 2700 (1994),

“apparently” view the business justification defense as unavailable in a

per se tying case. As IBM itself acknowledges, however, Virtual

Maintenance at best is “somewhat ambiguous on this point." Pet. 15

n.8. And in Gonzalez, the Second Circuit simply declined to adopt a

requirement that the defendant have an “economic interest” in the tied

product (880 F.2d at 1517) and remanded to determine whether the

alleged tie had a substantial impact on interstate commerce (id. at

1519). But whatever the true import of those decisions, the case at bar

presents no conflict with other circuits.

/ See Pet. 19-20 n.11.

Contrary to IBM, the court of appeals correctly

understood Alcoa as holding merely that, depending

on the facts, a manufacturer with power to control the

supply of new product may be in a position thereby to

control the extent to which used product provides a

competitive alternative to prospective buyers, in which

case used product must be disregarded in identifying

competitive substitutes. Pet. App. Al0. Far from

transmuting this principle into the “rule of law" attacked

by IBM, the court of appeals went on -- in language

glaringly omitted by IBM from its attack on the court’s

analysis -- to observe:

This is particularly true when, as here, that control

was enhanced by IBM’s policy of recapturing old

parts that could otherwise have been used to extend

the useful service lives of existing used mainframes

by allowing them to be upgraded and placed with

new customers.

Pet. App. All (emphasis added). As the court explained

(id. n.11):

® Significantly, IBM does not criticize the court of appeals’

restatement of the Alcoa holding on this point. See Pet. 19.

Indeed, in the district court IBM’s own counsel acknowledged that

if IBM’s practices restrained leasing company competition, Alcoa re-

quired exclusion of leasing companies in defining the relevant market

(JA 2513):

And if it turns out that the exercise of [market] power inhibits

anybody from competing with you, against you with a used ver-

sion of your product, then it may not be appropriate to consider

that used product competition.

- 2% -

IBM’s net pricing and parts recapture policies further

reduced whatever control the leasing companies

might have had over the prices of used equipment.

By recapturing old parts from upgraded mainframes,

IBM effectively curtailed the leasing companies’

ability to reconfigure their used machines into

different models that could have competed against

IBM’s offerings over the medium term.

It was explicitly on this basis that the court of appeals |

"conclude[d] that the district court erred when it added

leases of used IBM mainframes into the relevant

market.” Pet. App. All.

The court’s application of the Alcoa principle to this

case thus was based entirely on what the record showed,

as a factual matter, on whether used IBM equipment

imposed competitive constraints on IBM’s market power

over mainframe computers, not on any supposed

automatic “rule."*““ This resolution of the matter was

plainly correct, and presents no issue warranting review

by this Court.

# This approach is fully consistent with the decisions in other circuits

with which IBM asserts a “conflict” (Pet. 21-22), as well as with a

decision understandably but inexcusably not cited by IBM, holding that

although general purpose computer systems previously sold by IBM (its

"installed base”) should not be counted in measuring IBM’s market

share, the argument that “IBM, as the original manufacturer, indirectly

controls the prices at which such machines and services can be offered

. . - SUpports an exclusion of this competition from market definition."

In re IBM Peripheral EDP Devices Antitrust Litigation, 481 F. Supp.

965, 980 (N.D. Cal. 1979), aff'd, 698 F.2d 1377 (9th Cir.), cert.

denied, 464 U.S. 955 (1983).

- 2} .

Ii.

Nor does the decision below raise any issue under

Fed. R. Civ. P. 52(a) warranting consideration by this

Court. The Rule 52(a) question IBM asks the Court to

"settle" (Pet. 25) is merely whether reversal of the

district court’s market definition and “viable business

opportunity” rulings was justified on the facts of this

case. This is a question properly left to the court of

appeals, which clearly understood the proper scope of its

review.

Moreover, the “clearly erroneous” rule does not re-

strict court of appeals review of antitrust market defi-

nitions. This Court long ago made clear that when the

district court in an antitrust case has employed an

improper “construction of . . . ‘reasonable interchange-

ability of use or the cross-elasticity of demand’ in

judging the facts,” so as to define the product market

improperly, Rule 52(a) does not restrict the appellate

court’s corrective authority. United States v. Continental

Can Co., 378 U.S. 441, 452 (1964).

3/ The court of appeals described its role as follows (Pet. App. A8):

To the extent that the district court’s alleged errors were in

formulating or applying legal principles, our review is, of course,

plenary. We review the district court’s findings of fact, however,

under the clearly erroneous standard of review.

2 Rev’g 217 F. Supp. 761 (S.D.N.Y. 1963). See also United States

v. Phillipsburg Nat’l Bank & Trust Co., 399 U.S. 350, 360 (1970),

rev’g 306 F. Supp. 645 (D.N.J. 1969); United States v. Aluminum Co.

of Am., 377 U.S. 271, 275 & n.3 (1964), rev’g 214 F. Supp. 501

(N.D.N.Y. 1963); United States v. Philadelphia Nat’! Bank, 374 U.S.

321 (1963), rev’g 201 F. Supp. 348 (E.D. Pa. 1962).

-%.-

Finally,*’ IBM complains that in reversing on the

"viable business opportunity" issue, the court of appeals

did not respect alleged “credibility” determinations by the

district court. Pet. 28-29.4 But the same precedents

relied upon by IBM elsewhere in its Petition (at 26-27)

make clear that where "[djocuments or objective evi-

dence . . . contradict the witness’ story[,] . . . the court

of appeals may well find clear error even in a finding

purportedly based on a credibility determination.”

‘Anderson v. City of Bessemer City, 470 U.S. 564, 575

(1985), citing United States v. United States Gypsum

Co., 333 U.S. 364, 396 (1948).

That is what the court of appeals did here, pursuant

to its authority under Rule 52(a) to reverse "if the

reviewing court on the entire evidence is left with the

definite and firm conviction that a mistake has been

committed” (Gypsum, supra, at 395). And far from

failing to consider "the record viewed in its entirety"

@ TBM also claims a violation of Rule 52(a) in the court of appeals’

ruling (Pet. App. A25) that the evidence cited by the district court did

not support a conclusion “thet innovation and price reductions

precluded a finding of market power." Pet. 27-28. But even on IBM’s

reading of the evidence, there was no showing that innovation and price

reductions had diminished IBM’s market power, only that they were

“driven by and reflected ‘strong competitive forces.’" Pet. 27 (omitting

IBM’s emphasis on words it added to district court quote). As the

court of appeals recognized, the district court’s leap to the conclusion

that IBM necessarily must have lacked market power was simply a non

Sequitur, and the record as made did not support the district court’s

inference. Pet. App. A25 & n.18 ("Each case must be decided on its

own facts, and facts must be found on the evidence presented.").

® Significantly, IBM does not seek review of any substantive issue

relating to this aspect of the decision below.

(Anderson, supra, at 573), as IBM inexplicably asserts

(Pet. 25), the opinion below is if anything notable for the

extraordinary care and thoroughness with which the court

canvassed the entire voluminous record. Nothing in its

performance needs either “clarification” or “correction,”

IBM to the contrary notwithstanding (Pet. 30).

CONCLUSION

The petition for a writ of certiorari should be denied.

Respectfully submitted,