1994 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

8-12-1994

Allen-Myland, Inc. v. Int.nat'l Bus. Mach. Corp

Precedential or Non-Precedential:

Docket 93-1586, 93-5547

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UNITED STATES COURT OF APPEALS 

FOR THE THIRD CIRCUIT 

 

No. 93-1586 

 

ALLEN-MYLAND, INC., 

 Appellant 

V. 

INTERNATIONAL BUSINESS MACHINES CORPORATION 

 

ON APPEAL FROM THE UNITED STATES DISTRICT COURT 

FOR THE EASTERN DISTRICT OF PENNSYLVANIA 

(D.C. Civil Action No. 85-06166) 

 

Argued January 24, 1994 

Before: MANSMANN and NYGAARD, Circuit Judges and 

SEITZ, Senior Circuit Judge

(Opinion Filed August 12, l994) 

ROBERT G. LEVY, ESQUIRE (Argued) 

WILLARD K. TOM, ESQUIRE 

JOEL E. HOFFMAN, ESQUIRE 

JAMES H. CLINGER, ESQUIRE 

Sutherland, Asbill & Brennan 

1275 Pennsylvania Avenue, N.W. 

Washington, DC 20004-2404 

CARL A. SOLANO, ESQUIRE 

Schnader, Harrison, Segal & Lewis 

1600 Market Street 

Suite 3600 

Philadelphia, PA 19103 

Attorneys for Appellant 

ROBERT N. FELTOON, ESQUIRE 

Conrad, O'Brien, Gellman & Rohn 

1515 Market Street 

16th Floor 

Philadelphia, PA 19102 

EVAN R. CHESLER, ESQUIRE (Argued) 

PETER T. BARBUR, ESQUIRE 
Cravath, Swaine & Moore 

825 Eighth Avenue 

Worldwide Plaza 

New York, NY 10019-7415 

HOWARD WEBER, ESQUIRE 

Davis, Scott, Weber & Edwards, P.C. 

100 Park Avenue 

New York, NY 10017 

Attorneys for Appellee 

ALAN J. WEINSCHEL, ESQUIRE 

ROBERT P. STEFANSKI, ESQUIRE 

LUCIA MANDARINO, ESQUIRE 

Weil, Gotshal & Manges 

767 Fifth Avenue 

New York, NY 10153 

Attorneys for Amici-Appellants1

 

 OPINION OF THE COURT 

 

NYGAARD, Circuit Judge.

 Allen-Myland, Inc. ("AMI") appeals from the district court's 

judgment in favor of IBM in this intricate antitrust tying case. 

We conclude that the district court erred and will vacate its 

judgment and remand the cause for further proceedings.2

 

 1Amici consist of the Computer Dealers and Lessors 

Association, Inc., Digital Dealers Association, and National 

Association of Telecommunications Dealers. 

 

2Although upon review we concentrate on errors, it is well 

to say at the outset that in a case that has been litigated as 

vigorously as this one, either finding facts or reviewing those 

findings for clear error is no easy task. The thirty-volume 

record on appeal contains 17,469 pages of court filings, trial 

and deposition transcripts, and exhibits. The district court, of 

course, was in even a more difficult position. Over 3.5 million 

pages of discovery documents were produced and 65 days of 

deposition testimony were taken. The trial transcript alone 

fills 1,750 pages, there were 2,750 pages of deposition testimony 

admitted, and there were no fewer than 734 trial exhibits. 
 I. FACTS and PROCEDURE

 A. Mainframes and Upgrades

 The facts underlying this nine-year-old dispute are minutely 

detailed and quite voluminous. The district court has set forth 

these facts in great detail in its forty-four page opinion, 

Allen-Myland, Inc. v. IBM Corp., 693 F. Supp. 262 (E.D. Pa. 

1988), and we will present only a brief summary here. 

 IBM is the world's largest manufacturer of large-scale 

mainframe computers. These machines have the capacity to process 

millions of records at a time and manage a tremendous volume of 

information, making modern operations possible for large 

corporations, public utilities and government agencies. Without 

them, business would soon slow or halt. Mainframes are 

physically large machines, generally occupying significant floor 

space and requiring a full-time staff to keep them in operation. 

Needless to say, they are quite expensive, with prices commonly 

in excess of $1 million. 

 Mainframes are available in a wide range of computing 

capacities, to fit the needs of each individual customer. One 

common measure of capacity is computing speed, measured in 

millions of instructions per second ("MIPS"). IBM mainframes may 

also be upgraded, as its customers' computing needs change over 

time, in what is known as a MIPS upgrade. 
 Many IBM mainframes are not purchased outright from IBM by 

their end users, but are instead leased through third-party 

leasing companies such as CMI and Comdisco.3 A mainframe will 

typically be leased to several end users during its life cycle, 

and then when obsolete will be scrapped. Often, when the lease 

term expires and the mainframe returns to the lessor, the 

computer will need to be reconfigured to meet the needs of the 

next lessee. 

 Companies like AMI found a profitable market reconfiguring 

mainframe computers such as the IBM 303X series.4 Lessors 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. Either AMI or the leasing 

company would buy the required parts outright from IBM for 

inventory on what were known as SWRPQ terms, meaning that IBM 

installation was not included. It would then install the parts 

in the user's computer, set up the appropriate software and test 

the system. Old parts could often then be used on another 

computer. Because the 303X series of computers was based on 

"MST" circuit board technology, which required significant 

technical skill and time to reconfigure, AMI was in a position to 

 

 

3IBM itself is barred from leasing computers to end users 

under the terms of a 1956 consent decree entered into with the 

United States in another antitrust case. 

 

4An "X" in an IBM model number indicates that several 

numerical designators may be used in that position, e.g., 3031, 

3033. 
add considerable value in terms of its labor. As a result, AMI 

grew into a company with $50 million in annual revenue. 

 In 1980, however, IBM introduced its next generation of 

mainframe computers, the 308X series, which caused a major 

erosion in AMI's reconfiguration business. These machines used a 

new technology, the thermal conduction module, or TCM. A TCM is 

essentially a water-cooled can containing a much greater density 

of circuits than the system it replaced. Because more circuitry 

can be placed in a TCM, there are fewer TCMs to replace; hence, 

there is much less labor involved in performing an upgrade on a 

TCM-based computer than on earlier models. 

 In marketing its 308X series, IBM used a policy known as net 

pricing. Under this policy, IBM installation labor was bundled 

in with the price of the parts for TCM-based MIPS upgrades; SWRPQ 

pricing was either eliminated or was priced prohibitively high. 

In addition, any old TCMs recovered from a mainframe during 

reconfiguration became IBM's property. As a result, customers 

desiring non-IBM installation of upgrades were required to pay 

IBM's labor charge anyway. And because the net pricing policy 

limited the supply of the TCMs on the open market, acquiring 

parts from sources other than IBM became impractical. 

 IBM contended that net pricing's purpose was to insure that 

the old TCMs recovered from reconfigured machines were returned 

to IBM. TCMs are extremely durable and can easily be refurbished 

to "equivalent to new" condition. IBM, faced with a 

manufacturing capacity shortage, stated that it merely wanted to 

refurbish TCMs that were returned for later reuse in a future 
upgrade or in a brand-new machine. As for bundling the labor 

charge, IBM contended its purpose was to ensure that it got its 

TCMs back, which was enhanced when IBM personnel performed the 

labor. 

 B. Procedural History

 AMI, however, soon found that much of its reconfiguration 

business was drying up and filed this action. AMI's four-count 

complaint alleged that IBM violated sections 1 and 2 of the 

Sherman Act, 15 U.S.C. §§ 1, 2, and also asserted state law 

unfair competition and tortious interference claims. IBM 

counterclaimed for copyright infringement of its software 

programs and documentation manuals; IBM also asserted state law 

counterclaims for breach of contract and tortious interference. 

 AMI's section 1 claim was tried in a bench trial, contending 

that IBM had tied its upgrade installation services to the parts 

needed to perform the upgrades.5 AMI alleged that this tying 

arrangement constituted a per se violation of the Sherman Act; 

alternatively, it asserted that the tie was still a section 1 

violation under the rule of reason. 

 The district court found that IBM's net pricing structure 

did not constitute a per se section 1 violation, for two reasons: 

first, that IBM's share of the relevant market was not high 

enough to impose per se liability, id. at 270-83; and second, 

 

 

5In addition, AMI alleged that IBM's Installation and 

Warranty Service Charge (IWSC) constituted an unreasonable 

restraint of trade. The district court found for IBM on this 

theory, and AMI has not appealed from that finding. 
that net pricing did not foreclose AMI from a "viable business 

opportunity," id. at 283-93. The court also found that net 

pricing did not violate section 1 under a rule of reason analysis 

because sufficient procompetitive reasons existed for it.6 Id.

at 293-98. 

 Later, the district court tried most of the remaining claims 

and counterclaims, and concluded that AMI was liable to IBM for 

copyright infringement and violations of the Lanham Act. AllenMyland, Inc. v. IBM Corp., 746 F. Supp. 520 (E.D. Pa. 1990).7 

The court also entered judgment for IBM on AMI's Sherman Act 

section 2 claim, concluding that such a claim could not possibly 

succeed unless its earlier ruling on market power were reversed. 

Id. at 525 n.1, 559. 

 Meanwhile, IBM had filed another Lanham Act action against 

AMI in the United States District Court for the Northern District 

of Illinois, which was transferred to the Eastern District of 

Pennsylvania. Moreover, certain issues concerning IBM's relief 

against AMI on its counterclaims remained unresolved. On AMI's 

motion, the district court issued an order under Fed. R. Civ. P. 

54(b) declaring that its 1988 opinion resolving the antitrust 

issues constituted a final judgment. Allen-Myland, Inc. v. IBM 

Corp., 1993-1 Trade Cas. (CCH) ¶ 70,244, 25 Fed. R. Serv. 3d 

 

 

6The district court's decision under the rule of reason has 

not been appealed. 

 

7AMI later moved for reconsideration, but that motion was 

denied. Allen-Myland, Inc. v. IBM Corp., 770 F. Supp. 1004 (E.D. 

Pa. 1991). 
(Callaghan) 1353, 1993 WL 169849 (E.D. Pa. May 14, 1993). This 

appeal followed. 

 II. OVERVIEW of the LAW of TYING ARRANGEMENTS

 The overarching issue in this appeal is AMI's claim that the 

district court erred when it found that net pricing was not a per 

se violation of section 1 of the Sherman Act. In a tying 

arrangement, the seller sells one item, known as the tying 

product, on the condition that the buyer also purchases another 

item, known as the tied product. Town Sound & Custom Tops, Inc. 

v. Chrysler Motors Corp., 959 F.2d 468, 475 (3d Cir.) (in banc), 

cert. denied, 113 S. Ct. 196 (1992). Section 1 of the Sherman 

Act declares only contracts in restraint of trade illegal. Thus, 

the antitrust concern over tying arrangements is limited to those 

situations in which the seller can exploit its power in the 

market for the tying product to force buyers to purchase the tied 

product when they otherwise would not, thereby restraining 

competition in the tied product market. Market power is defined 

as the ability "to raise prices or to require purchasers to 

accept burdensome terms that could not be exacted in a completely 

competitive market." United States Steel Corp. v. Fortner 

Enters., Inc. ("Fortner II"), 429 U.S. 610, 620, 97 S. Ct. 861, 

867-68 (1977). 

 On the other hand, if the seller does not have sufficient 

power in the tying product market, buyers wanting to purchase the 

tied product from another source will simply avoid the tie by 
buying the tying product from another supplier. See Town Sound, 

959 F.2d at 476 (discussing Jefferson Parish Hosp. Dist. No. 2 v. 

Hyde, 466 U.S. 2, 11-14, 104 S. Ct. 1551, 1558-59 (1984)). Such 

a tie will not restrain an appreciable amount of trade, and 

accordingly, will not constitute an antitrust violation. 

 The first inquiry in any section 1 tying case is whether the 

defendant has sufficient market power over the tying product, 

which requires a finding that two separate product markets exist 

and a determination of precisely what the tying and tied product 

markets are. See Jefferson Parish, 466 U.S. at 21, 104 S. Ct. at 

1562-63. If the defendant is found to have sufficient market 

power in the tying product market, then the tie may be a "per se" 

violation of the Sherman Act. This tie is condemned if the 

probability that the contractual arrangement improperly restrains 

trade is so high that a judicial inquiry into the actual 

prevailing market conditions, including possible procompetitive 

justifications for the tie, is deemed unprofitable. Id. at 15-18 

& n.25, 104 S. Ct. at 1560-61 & n.25; Town Sound, 959 F.2d at 

477. 

 Assuming the court finds sufficient market power, it must 

then decide whether "a substantial amount of interstate commerce" 

has been affected by the tie. See, e.g., Town Sound, 959 F.2d at 

477. The Supreme Court has defined "substantial" in absolute 

dollar terms as an amount which is not de minimis in terms of the 

"total volume of sales tied by the sales policy under challenge . 

. . ." Fortner Enters., Inc. v. United States Steel Corp. 
("Fortner I"), 394 U.S. 495, 501-02, 89 S. Ct. 1252, 1257-58 

(1969) ($190,000 sufficient). 

 Finally, to have standing to bring a private antitrust 

action, the plaintiff must show "fact of damage," defined as some 

harm flowing from the antitrust violation. Zenith Radio Corp. v. 

Hazeltine Research, Inc., 395 U.S. 100, 114 n.9, 89 S. Ct. 1562, 

1571-72 n.9 (1969); Pitchford v. Pepi, Inc., 531 F.2d 92, 98-99 

(3d Cir. 1975), cert. denied, 426 U.S. 935, 96 S. Ct. 2649 

(1976). The amount of the damage is not important for antitrust 

standing; it is sufficient that some damage has occurred. There 

must, however, be some causal link between the damage and the 

violation of the antitrust laws. Put another way, the harm must 

be one that the antitrust laws were designed to prevent. 

Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 488-89, 

97 S. Ct. 690, 697 (1977). 

 III. SCOPE of the RELEVANT MARKET

 A. Introduction

 AMI asserts that the tying product is the "large-scale 

mainframe computer," defined as computers that are "among the 

largest in memory capacity, the fastest in computing speed, and 

the most expensive of computers available." Allen-Myland, 693 F. 

Supp. at 270-71. Alternatively, it sets forth two submarkets 

consisting of the parts and services required for the conversion 

and upgrade of either IBM mainframes or all manufacturers' 

mainframes. AMI defines the tied product as the labor required 

to install upgrades. 
 The district court found AMI's proposed market definition 

and submarkets to be too narrow. When the court broadened the 

market to include various substitutes that it believed shared 

cross-elasticity of demand8 with large-scale mainframes, IBM's 

market share dropped from as high as 79% to under 34.4%, too low 

to impose per se liability. See Jefferson Parish, 466 U.S. at 

26-27, 104 S. Ct. at 1566 (30% market share insufficient); TimesPicayune Publishing Co. v. United States, 345 U.S. 594, 611-12, 

73 S. Ct. 872, 882 (1953) (33-40% market share insufficient). 

The court stated: 

 Standing alone, AMI's market share evidence tends to 

show that IBM enjoys substantial economic power. 

However, AMI's definitions of large scale mainframes 

and the relevant market are flawed in several respects 

and tend to overstate IBM's market share and power. 

 

Allen-Myland, 693 F. Supp. at 271. The district court defined 

the relevant market to include not only large-scale mainframes, 

but also added upgrades to large-scale mainframes, leased and 

smaller capacity computers, peripheral products and software, 

"box swaps," and upgrades using customer-provided parts to the 

relevant market. 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. 

 

 

8 "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 

substitutes for it." Brown Shoe Co. v. United States, 370 U.S. 

294, 325, 82 S. Ct. 1502, 1523-24 (1962). 
 B. Leasing Companies

 The district court first added leasing companies into AMI's 

proposed market definition. It reasoned as follows: 

 Leasing companies, such as Comdisco and CMI, 

purchase computer equipment from manufacturers and 

lease it to users. From a consumer's standpoint, they 

are an alternative source of computer equipment. They 

compete with IBM. Leasing companies own approximately 

40 percent of all large scale mainframe computers, as 

defined by AMI. Prof. Levin testified that IBM's share 

of the market would be reduced by an amount he was 

unable to determine if leasing companies were taken 

into account in AMI's market definition. If leasing 

company transactions involving computers comparable and 

in many cases identical to the large scale mainframes 

marketed by IBM are included in the relevant market, 

and the market is measured on a "transaction basis," 

IBM's share of the market, according to Prof. Almarin 

Phillips, who testified for IBM as an expert economist, 

drops to 34.4 percent. Prof. Phillips testified that 

such a share would not reflect "overwhelming" activity 

in the market on IBM's part. 

Allen-Myland, 693 F. Supp. at 273-74 (footnote and record 

citations omitted). We cannot affirm the district court's 

finding that leasing companies form a part of the relevant 

market. 

 First, the district court relied on the testimony of 

Professor Levin, AMI's own expert, as an admission that IBM's 

market share would have to be reduced if leasing companies were 

added to the relevant market. This reliance is misplaced. 

Although Professor Levin did affirmatively answer the 

tautological question whether "leasing companies are competitors 

of IBM when they market IBM manufactured equipment in competition 

with IBM," this and our review of the trial transcript indicate 
that he neither addressed the issue of market share reduction nor 

made an admission about it. 

 More importantly, we think that the opinion reveals an 

analytical flaw. Leasing companies lease both new and used 

computers. They purchase new mainframes from IBM and lease them 

to end users; when the lease term is up, if the mainframe is not 

obsolete and can be leased again, the leasing company will place 

it with another end user. In addition, leasing companies deal in 

both IBM and non-IBM computers. There are important legal and 

competitive distinctions between the various types of equipment 

in which the leasing companies deal, so they cannot be lumped 

together. 

 New computers are, of course, already in the relevant market 

as defined by AMI. It was therefore incorrect to add them in 

again when end users lease new computers rather than purchase 

them outright. In this situation, leasing companies provide 

nothing more than an alternate way of financing a new computer, 

but do nothing to increase the supply of new machines. See

Transamerica Computer Co. v. IBM Corp. (In re IBM Peripheral EDP 

Devices Antitrust Litig.), 481 F. Supp. 965, 979 (N.D. Cal. 

1979), aff'd, 698 F.2d 1377 (9th Cir.), cert. denied, 464 U.S. 

955, 104 S. Ct. 370 (1983). They do not increase the number of 

new mainframes, as leasing companies still must purchase them 

from their manufacturers. Thus, to the extent that IBM had the 

power to set prices, that power would not be diminished, or at 
most would only be slightly diminished,9 by its sales to leasing 

companies rather than end users. Since these purchases are 

already in the relevant market, it was double counting to also 

include them as part of the leasing market. Cf. id.

 With respect to leases of used computers, there is a 

significant difference whether those machines were made by IBM or 

by some other manufacturer. Where used IBM computers are leased, 

we think that United States v. Aluminum Co. of America ("Alcoa"), 

148 F.2d 416 (2d Cir. 1945)10 is apposite. There, Alcoa 

controlled 90 percent of the market for virgin aluminum ingot. 

It sought to reduce its market share for antitrust purposes by 

arguing that secondary ingot derived from scrap competed with 

virgin ingot for sales. The court held that because all 

secondary ingot was ultimately derived from virgin ingot, Alcoa, 

by properly exercising its power over the supply of virgin, could 

indirectly control the supply of secondary as well. Id. at 425. 

 

 

9Conceivably, a few large, sophisticated buyers could place 

certain limits on even a dominant seller's power to set prices. 

There is no evidence that such pressure was applied here. 

 

10Although Alcoa was decided by the United States Court of 

Appeals for the Second Circuit, the procedural circumstances 

under which it reached that court give it added weight as 

precedent. Under the then-existing version of 15 U.S.C. § 29, 

appeals from the decrees of district courts in antitrust cases 

where the United States was a complainant would lie only to the 

Supreme Court. In Alcoa, however, a sufficient number of 

justices were recused that a quorum could not be obtained; 

accordingly, the Supreme Court, pursuant to the above statute, 

remanded the case to the three most senior judges of the Second 

Circuit: Learned Hand (the author of Alcoa), Augustus N. Hand, 

and Swan. The Supreme Court itself has recognized the special 

weight of the Alcoa opinion. See American Tobacco Co. v. United 

States, 328 U.S. 781, 811-13 & n.10, 66 S. Ct. 1125, 1140 & n.10 

(1946). 
 Alcoa's analysis is persuasive. Indeed, we think the case 

is even stronger here for excluding the secondary market. 

Refined aluminum can be melted down and reused repeatedly, and in 

any event, products made with it may last for decades before they 

are scrapped and the aluminum is recycled. It therefore may have 

been quite difficult for Alcoa to estimate future supply and 

demand for aluminum ingot over a long period of time with 

sufficient accuracy to maximize its profits by manipulating the 

supply of virgin ingot it produced. See 2 Phillip Areeda & 

Donald F. Turner, Antitrust Law § 530c (1978). 

 Computers, however, have considerably more limited lives 

than aluminum ingot. Technology and price/performance ratios 

have been advancing so rapidly in the computer industry that used 

machines cannot be re-leased indefinitely.11 Accordingly, a 

powerful manufacturer like IBM was in a position to maximize its 

profits by carefully controlling the number of mainframes that 

would later appear on the used leasing market. This is 

particularly true when, as here, that control was enhanced by 

IBM's policy of recapturing old parts that could otherwise have 

 

 

11Moreover, 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. This effect is similar to that caused by 

IBM's past practices of offering tabulating and computer 

equipment only for lease and not for sale. These practices also 

spawned antitrust litigation, resulting in a 1935 injunction and 

a 1956 consent decree. See Control Data Corp. v. IBM Corp., 306 

F. Supp. 839 (D. Minn. 1969), aff'd, 430 F.2d 1277 (8th Cir. 

1970). 
been used to extend the useful service lives of existing used 

mainframes by allowing them to be upgraded and placed with new 

customers. We therefore conclude that the district court erred 

when it added leases of used IBM mainframes into the relevant 

market.12

 On the other hand, to the extent that leasing companies deal 

in used, non-IBM mainframes that have not already been counted in 

the sales market, these machines belong in the relevant market 

for large-scale mainframe computers. Unlike IBM, there is no 

allegation that the manufacturers of these computers possess the 

market power to control prices, much less that they would do so 

in concert with IBM.13 When these computers are placed in 

service by leasing companies, they provide an alternative that 

limits IBM's power in the market.14

 

 

12We also disagree with the district court's view that AMI 

admitted that leasing companies "compete with IBM and constrain 

IBM's ability to set prices or exclude competition in the market 

for new large scale main frame computers." Allen-Myland, 693 F. 

Supp. at 274. The district court cited AMI's proposed finding of 

fact 29 in support of its conclusion, but AMI asserted only that 

IBM and lessors compete in the placement of mainframes with end 

users; in other words, IBM installs computers, and so do Comdisco 

and CMI. This does not constitute an admission on market crosselasticity or the scope of the relevant market. 

 

13Indeed, the so-called "plug-compatible manufacturers" have 

built their businesses around providing mainframes and 

peripherals compatible with, but in competition with those of 

IBM. 

 

14This holds most true for plug-compatible mainframes. 

There is actually a considerable question to what extent noncompatible computers are a realistic short-run alternative for a 

customer whose computer software and data are tailored to IBM 

mainframes. We do not reach the issue, however, as Allen-Myland 

is constrained by its own definition of the market as "large 

scale mainframe computers," regardless of manufacturer or 
 Accordingly, we conclude that the district court erred when 

it included all leasing company transactions in the relevant 

market. On remand, the court should include only leases of used, 

non-IBM mainframes and determine the extent to which those leases 

reduce IBM's market share. 

 C. Box Swaps

 The district court also added "box swaps" -- replacing an 

existing computer with a more powerful, new or used computer -- 

into the relevant market, although it did not calculate the 

degree to which these box swaps eroded IBM's market share. 

 The analytical problem with this finding is similar to the 

error with respect to leasing companies. To the extent that a 

box swap involves purchasing a new IBM or a new or used non-IBM 

mainframe computer, it constitutes double counting to add box 

swaps to the market because those sales are already included in 

the market definition. On the other hand, if a used IBM computer 

is used in the swap, then to include that machine in the market 

is incorrect under Alcoa for the same reason it was error to 

include them in the leasing market. 

 D. Used Parts Upgrades

 Including "used parts upgrades" in the relevant market was 

also error. A used parts upgrade is an upgrade performed with 

parts obtained from another computer, either one belonging to the 

 

compatibility. See Edward J. Sweeney & Sons, Inc. v. Texaco, 

Inc., 637 F.2d 105, 117 (3d Cir. 1980) (antitrust plaintiff held 

to theory advanced in district court), cert. denied, 451 U.S. 

911, 101 S. Ct. 1981 (1981). 
organization needing the upgrade or one belonging to a leasing 

company. See Allen-Myland, 693 F. Supp. at 277. 

 The district court correctly recognized that the viability 

of used parts upgrades could be limited by the scarcity of the 

necessary parts. It then relied on the many memory and channel

upgrades and downgrades that had been performed with used parts 

not acquired from IBM. The record indicates, however, that most 

memory and channel upgrade parts are not based on TCM technology 

and were thus not subject to IBM's net pricing and parts 

recapture policies. The parts required for MIPS upgrades, 

however, were mostly TCM-based and subject to net pricing and 

recapture. Thus, that other non-net priced parts were readily 

available does not support the implicit conclusion that there was 

no scarcity of MIPS upgrade parts. 

 Even if used parts were available to perform MIPS upgrades, 

the record does not suggest any manufacturer of those parts other 

than IBM. Hence, the reasoning of Alcoa is as controlling here 

as it was for used IBM computers. To the extent that IBM 

controls the supply and price of the new mainframes from which 

upgrade parts must be salvaged, it has the power to indirectly 

control those upgrades as well. Accordingly, it would have been 

error to include used parts upgrades in the relevant market even 

if parts had been available. 

 E. Smaller Capacity Computers

 The district court considered AMI's proposed market 

definition to be too narrow because it failed to include "smaller 

capacity computers" -- computers below the size and 
sophistication of a large-scale mainframe that nevertheless would 

be reasonable substitutes, either singly or in combination. See

Allen-Myland, 693 F. Supp. at 274-75. AMI argues that it was 

error for the district court to include these smaller machines 

because there was not sufficient evidence of substitutability 

between these two types of computers. The district court 

rejected AMI's argument, citing evidence that smaller computers 

had effectively displaced mainframes in certain applications and 

noting a trend toward the replacement of large, centralized 

systems with "distributed" systems consisting of greater numbers 

of smaller capacity computers. Id.

 AMI argues on appeal that this reasoning was flawed because 

it failed to consider the rapid development of technology over 

the life cycle of a typical computer. It agrees that some 

installations that initially required older generation mainframes 

might be satisfied with "smaller" machines when it came time to 

replace their mainframes, because the smaller machines would by 

then have all the power of the earlier mainframes. Nevertheless, 

AMI contends, the fact that some users of older mainframe 

computers might switch to smaller capacity machines proves 

nothing about whether those smaller machines effectively compete 

against IBM's current, more powerful mainframes, which are the 

focus of this litigation. AMI's argument is sound, but 

unavailing. There was testimony admitted at trial indicating that 

at least one smaller capacity computer, the Hewlett-Packard HP 

3000 series, competed against the IBM 308X series "in many 
applications." The district court was entitled to, and did, 

credit this evidence. Allen-Myland, 693 F. Supp. at 275. 

 The amici argue that the district court failed to consider 

the problem of "lock-in." Although mainframes and smaller 

capacity computers may be substitutable when a new computer 

application is being developed or when an existing application is 

no longer useful and must be rewritten anyway, they argue that 

there are significant switching costs that prevent this from 

happening in the short run. For example, to "port" an existing 

application from a mainframe to a smaller computer, the 

applications software may have to be rewritten, the data files 

may have to be converted to new formats, and personnel may have 

to be extensively trained on the new system. The costs of doing 

so and the delay involved could well cause the computer user to 

remain with a mainframe-based system rather than convert to a 

smaller computer; indeed, one court has noted that, for 

compatibility reasons, over 80 percent of users remain loyal to 

the manufacturer of their original systems. See Transamerica, 

481 F. Supp. at 980 & n.32. 

 Ordinarily, we would not consider this argument because it 

was not raised in the district court. This case, however, is 

unusual in that the district court reached its decision in 1988, 

but the antitrust issues did not become final and appealable 

until 1993. During that hiatus, the Supreme Court issued its 

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

504 U.S. ____, 112 S. Ct. 2072 (1992). Because Kodak is directly 

relevant to the lock-in argument and the district court never had 
the opportunity to consider the effect of that case, we would be 

remiss if we did not analyze the issue now. 

 Eastman Kodak manufactured photocopying equipment that it 

sold in a competitive market. According to the plaintiffs, who 

provided service and repair to those copiers, Kodak sought to 

maintain control over service by restricting the availability of 

necessary repair parts. Although Kodak argued that it did not 

have sufficient market power to restrain trade because the market 

for new copiers was competitive, the Supreme Court held that, 

under certain circumstances, the fact that the buyer of such 

equipment was locked into a single supplier could give rise to a 

finding of market power: 

 If the cost of switching is high, consumers who already 

have purchased the equipment, and are thus "locked-in," 

will tolerate some level of service-price increases 

before changing equipment brands. Under this scenario, 

a seller profitably could maintain supracompetitive 

prices in the aftermarket if the switching costs were 

high relative to the increase in service prices, and 

the number of locked-in customers were high relative to 

the number of new purchasers. 

Id. at 2087. 

 The situation may be analogous here. If it is prohibitively 

expensive to switch to a smaller capacity computer before the 

normal end of an application system's life cycle, then IBM, at 

least for those locked-in customers, would not face any realistic 

competition from smaller machines and would thus possess market 

power as if they did not exist. 

 The district court cited several anecdotes in the record 

suggesting that smaller machines are vigorously competing with 
large-scale mainframes and are often winning out over them. Our 

review of the record, however, shows that in none of the 

incidents mentioned was there a mainframe user with a significant 

base of applications software and data that would have to be 

rewritten and converted before the application could be moved to 

a smaller computer. Indeed, in the vast majority of cases, the 

customer was developing a new application and had an unfettered 

choice of which type of computer to purchase. In a few others, 

the system was approaching the end of its useful life and was 

slated for replacement. This evidence, then, does not support 

the conclusion that there was not a significant lock-in problem. 

 Nevertheless, this remains an issue of fact for the district 

court to resolve in the first instance. However, whether to 

consider new issues on remand is not for us to determine, but is 

properly a matter for the district court's discretion as presider 

over subsequent proceedings. Therefore, we express no view on 

whether the district court should permit a new argument to be 

pursued at this stage of the litigation. The district court may 

conclude, for example, that allowing AMI to pursue a new theory 

not raised until after discovery and the completion of an entire 

trial would result in undue prejudice to IBM. See Habecker v. 

Clark Equipment Co., 942 F.2d 210, 218 (3d Cir. 1991). We hold 

only that the determination whether to consider the lock-in 

argument, to permit further discovery on the issue, and to hear 
additional evidence are all within the district court's sound 

discretion.15 See id.

 F. Peripheral Devices and Software

 AMI also argues that the district court erred when it added 

peripheral devices and software into the relevant market. The 

court found that these items, which provide data input, storage 

and output capabilities and direct the computer in its processing 

of information, "provided significant and reasonable alternatives 

to a wide variety of upgrades and modifications of large scale 

mainframes." Allen-Myland, 693 F. Supp. at 276. 

 Similar or substitute products are those that "have the 

ability -- actual or potential -- to take significant amounts of 

business away from each other." SmithKline Corp. v. Eli Lilly & 

Co., 575 F.2d 1056, 1063 (3d Cir.), cert. denied, 439 U.S. 838, 

99 S. Ct. 123 (1978). Thus, the relevant product market "is 

composed of products that have reasonable interchangeability for 

 

 

15If it does so, the district court should then proceed to 

determine the percentage of the mainframe market occupied by 

existing mainframe users who are locked in to that type of 

computer by prohibitively high switching costs; the greater that 

percentage is, the more power IBM has to maintain 

supracompetitive prices in the mainframe market. See Phillip E. 

Areeda & Herbert Hovenkamp, Antitrust Law ¶ 521.1a, at 604-05 

(1993 Supp.). The court can then determine if IBM's power in the 

large-scale mainframe market is constrained by the existence of 

smaller capacity computers, and if so, whether such computers 

should be included in the relevant market. It may be that the 

district court will conclude that, while smaller capacity 

computers cannot be fully excluded from the market, neither can 

they be fully included. The court may, after considering the 

evidence and the nature of the market, exercise its discretion 

and reduce IBM's market share by a number greater than zero 

percent but less that the full extent of the market for smaller 

capacity computers. 
the purposes for which they are produced -- price, use and 

qualities considered." Id. at 1062-63 (quoting United States v. 

E.I. du Pont de Nemours & Co., 351 U.S. 377, 404, 76 S. Ct. 994, 

1012 (1956) (The Cellophane Case)); Tunis Bros. Co. v. Ford Motor 

Co., 952 F.2d 715, 722 (3d Cir. 1991), cert. denied, 112 S. Ct. 

3034 (1992). 

 "Interchangeability" implies that one product is roughly 

equivalent to another for the use to which it is put; while there 

might be some degree of preference for the one over the other, 

either would work effectively. A person needing transportation 

to work could accordingly buy a Ford or a Chevrolet automobile, 

or could elect to ride a horse or bicycle, assuming those options 

were feasible. The key test for determining whether one product 

is a substitute for another is whether there is a crosselasticity of demand between them: in other words, whether the 

demand for the second good would respond to changes in the price 

of the first. Tunis Bros., 952 F.2d at 722. 

 In the six years since the district court issued its 

opinion, the personal computer has consolidated its position in 

modern life, and what once seemed mired in impenetrable technical 

jargon is now within the vocabulary of the general public. 

Moreover, technology changes rapidly and if one has an older 

computer and wishes to use the latest software applications, one 

often must either upgrade the central processor -- the equivalent 

of a MIPS upgrade -- or buy a new computer. Increasing the size 

of the disk drive, buying more memory or installing the latest 

version of the operating system may help in some cases but in 
many others will be ineffective. It thus may be argued that the 

same situation obtains in the case of larger computers; that is, 

peripherals and software are complementary goods but are not 

substitutes for mainframe computers. 

 The issue, nevertheless, remains a factual one for the 

district court to resolve. Here, if peripherals and software are 

reasonable substitutes for mainframes, we should expect to see an 

increased demand for them as the price of mainframes rises, but 

the district court cited no evidence of this type. Instead, it 

relied on the fact that IBM considers peripheral products and 

software when pricing its computer systems. Allen-Myland, 693 F. 

Supp. at 276. Pricing a large mainframe system on the basis of 

peripherals included with it against competitive offerings by 

other manufacturers, however, is simply not evidence that 

peripherals and mainframes are substitutes for one another. 

 The district court relied even more heavily on several 

anecdotes in which large mainframe users had upgraded memory, 

disks, software or other peripherals rather than perform a MIPS 

upgrade. Id. at 276-77. This testimony fell into two 

categories. First, some users testified that it was possible to 

delay a MIPS upgrade for a while by upgrading peripherals or 

software: akin perhaps to saying that installing new brakes may 

delay the necessity of purchasing a new car, but it is not 

sufficient evidence on which to conclude that the products are 

reasonably interchangeable in use. See Kaiser Aluminum & 

Chemical Corp. v. Federal Trade Comm'n, 652 F.2d 1324, 1331-32 

(7th Cir. 1981) ("specialties," which delayed the necessity of 
replacing refractory bricks in furnaces, did not belong in the 

same relevant market). 

 Second, there was testimony to the effect that there are 

many ways to enhance the performance of a computer system, 

including MIPS upgrades and peripheral/software upgrades. 

Although it is doubtless true that improvements to peripherals or 

software will improve a computer's performance somewhat under 

certain circumstances, we find no evidence on how much or under 

what conditions improvement could be expected. There was thus no 

evidence from which to conclude whether peripheral and software 

upgrades were reasonably interchangeable with either a MIPS 

upgrade or a different mainframe computer in enough cases that 

those alternate upgrades could properly be termed substitutes. 

Nor was there evidence that, because of a price change in 

mainframes, there was a greater or lesser demand for 

peripheral/software upgrades. In sum, the evidence was 

insufficient to support the wholesale inclusion of peripherals 

and software into the relevant market for large-scale mainframes. 

 We emphasize, however, that we are not holding that 

peripheral and software must be excluded from the relevant 

market, only that, upon review, the evidence cited in the 

district court's opinion is insufficient to warrant including 

them. On remand, the district court will of course determine 

whether there is some degree of interchangeability or other 

evidence of cross-elasticity of demand. If there is, then the 

court is free to adjust IBM's share of the market by its best 

estimate of the true competition from peripherals and software. 
 G. AMI's Proposed Submarkets

 As a separate ground for reversal, AMI argues that the 

district court erred by rejecting its two alternate submarkets: 

the parts and services required for the upgrade and conversion of 

all large-scale mainframes, and an even narrower submarket 

confined to parts for upgrading IBM mainframes. The district 

court rejected the larger submarket based on evidence that 

upgrades to large-scale mainframes competed with various 

alternatives, including large-scale mainframes themselves. 

Allen-Myland, 693 F. Supp. at 282-83. It rejected the narrow 

submarket because "[c]ourts have generally rejected market 

definitions limited to a defendant's products." Id. at 282 n.43. 

 In Brown Shoe Co. v. United States, 370 U.S. 294, 325, 82 S. 

Ct. 1502, 1524 (1962), the Supreme Court stated that within a 

broader product market "well-defined submarkets may exist which, 

in themselves, constitute product markets for antitrust 

purposes."16 Thus, if upgrades and mainframes are not reasonably 

interchangeable with each other, a valid submarket would exist 

here. The district court, however, found that replacing the 

 

 

16The use of the term "submarket" is somewhat confusing, and 

tends to obscure the true inquiry: whether IBM is constrained by 

the prices of large scale mainframe computers when pricing its 

upgrades. If it is so constrained, then the relevant market 

consists of both mainframes and upgrades. If not, then it is 

simpler and more accurate to say that the relevant market itself, 

not some submarket of it, contains only upgrades. See Areeda & 

Hovenkamp, supra, ¶ 581.1c, at 535-36 (1993 Supp.). 

Nevertheless, because the term has been commonly used in the 

reported cases over the years, we will also continue to use it, 

being nonetheless mindful that it is inaccurate and of the true 

question before us. 
computer itself is an alternative to an upgrade. Moreover, it 

found that IBM priced upgrades and mainframes so that buyers 

would be indifferent whether to purchase an upgrade or install a 

more powerful computer. These factual findings are not disputed 

on appeal, and so the district court's conclusion on the larger 

submarket must stand. By implication, if the broader submarket 

fails, the narrower one would appear to fail as well. 

 Instead of arguing that the district court's factfinding was 

clearly erroneous, AMI attempts to revive its narrow submarket by 

relying on the testimony of its expert, Professor Levin, that 

certain IBM mainframe users were locked into upgrading their 

computers and lacked the alternative of replacing the whole 

machine. By so arguing, it attempts to bring this issue within 

the ambit of Kodak, which was decided four years after the 

district court's opinion in this case. 

 In Kodak, as we have already discussed, the Supreme Court 

held that when users are locked into a particular vendor by the 

sunk cost of the product, market power may exist in the 

aftermarket for parts even though the equipment market is 

competitive. Here, while the district court found that largescale mainframes were generally reasonable substitutes for 

upgrades, its opinion did not address whether there was a 

subpopulation of IBM mainframe users who for economic reasons 

were locked into MIPS upgrades when they needed increased 

computing power. AMI's argument appears to be that if a 

sufficient number of users actually were locked into using 

upgrades rather than replacing their computers, then IBM may have 
had the power to set prices for MIPS upgrades, wholly separate 

from whether it possessed that power over the large-scale 

mainframe market, including upgrades. Under this reasoning, we 

should remand and allow the district court to determine the 

extent, if any, to which this was the case. 

 Such a remand would be futile, however, since if IBM had 

market power over upgrades with respect to a large number of 

mainframe users, we would expect it to charge supracompetitive 

prices for upgrades. Yet, the district court found that IBM 

prices its upgrades such that the user pays the same amount for 

an upgrade as the price differential between the prices of the 

more powerful and the existing computers if purchased new. 

Allen-Myland, 693 F. Supp. at 282. This belies any special power 

over an upgrade submarket; IBM's power is limited to whatever 

control it is able to maintain over the larger relevant market. 

Hence, we will affirm the district court's finding that a valid 

IBM-only parts submarket did not exist. 

 H. The "Significant Win/Loss Reports"

 Additionally, AMI argues that the district court improperly 

rejected one of its strongest pieces of evidence in support of 

its proposed market definition, the "Significant Win/Loss 

Reports," also known as the SWLRs. These reports were prepared 

monthly for the top management of IBM and showed, for each 

competitive situation IBM faced, IBM's product offering, the 

offering of its competitors, and whether IBM won or lost the 

sale. See Allen-Myland, 693 F. Supp. at 272. According to the 

testimony of AMI's expert who reviewed the SWLRs (Professor 
Levin), in 97.6 percent of the reported cases in which the IBM 

offering was a large-scale mainframe, the competitor's offering 

was also a large-scale mainframe or an upgrade. AMI asserts that 

these reports proved that a distinct product market for largescale mainframe computers exists. 

 The district court rejected this evidence for several 

reasons. First, it noted that IBM itself viewed the SWLRs as 

"poor and unrepresentative indicators of actual market activity" 

and eventually stopped using them. Id. at 273. In the 

alternative, it relied on the SWLRs themselves, which contained 

many examples in which non-IBM mainframes competed against IBM 

computers smaller than IBM mainframes. The district court 

believed that this additional competition undermined AMI's 

definition of the relevant market. 

 Reports such as the SWLRs, which are used by IBM's 

management, can be powerful evidence in an antitrust case. In 

United States v. United Shoe Machinery Corp., 110 F. Supp. 295, 

304 (D. Mass. 1953), aff'd per curiam 347 U.S. 521, 74 S. Ct. 699 

(1954), the court stated: 

 When a business allows its own important judgments 

constantly to be affected by a statistical survey 

unflaggingly made, diligently kept current, and 

repeatedly consulted at least by subordinate advisers 

to the officers, then the statistical material may be 

used by a court to some degree as reliable evidence 

against the business. 

Nevertheless, notwithstanding the potentially probative value of 

this type of evidence, there is nothing that requires courts to 

credit such evidence. Here, as the district court pointed out, 
the record shows that IBM itself found the SWLRs were unreliable. 

As the trier of fact, the district court was entitled to credit 

that testimony and reject the SWLRs.17 Based on our conclusions 

about the relevant market and the various additions to it, 

however, it is possible that the district court may wish to 

reconsider the probative value, if any, of the SWLRs. On remand, 

of course, it is free to do so. 

 IV. OTHER FACTORS BEARING ON MARKET POWER

 Market share, of course, is only one type of evidence that 

may prove the defendant has sufficient market power to impose per 

se antitrust liability. "Market share is just a way of 

estimating market power, which is the ultimate consideration. 

When there are better ways to estimate market power, the court 

should use them." Ball Memorial Hosp., Inc. v. Mutual Hosp. 

Ins., Inc., 784 F.2d 1325, 1336 (7th Cir. 1986). The district 

court, in addition to its findings on market share, also held 

that the lack of entry barriers and the rapid technological 

change of the computer industry independently precluded any 

finding of market power. 

 

 

17We do not accept the district court's alternative reason 

for discrediting the SWLRs. Although it may well be true that in 

some circumstances non-IBM mainframes competed with smaller IBM 

computers, we must be aware of the true market inquiry in an 

antitrust tying case: can the defendant exercise market power 

over the tying product to restrain trade in the tied product 

market? Although the above evidence could lead to the conclusion 

that the relevant market here is somewhat broader than mainframes 

only, a user seeking to avoid IBM's tie needs an alternative to 

an upgrade or a computer of the type it currently has installed. 

To the extent that the user needs more computing power, a smaller

IBM computer would not appear to be much of a substitute. 
 A. Ease of Entry Into the Relevant Market

 Notwithstanding the extent of an antitrust defendant's 

market share, the ease or difficulty with which competitors enter 

the market is an important factor in determining whether the 

defendant has true market power -- the power to raise prices. 

 In many cases a firm's share of current sales does 

indicate power. . . . In other cases, however, a 

firm's share of current sales does not reflect an 

ability to reduce the total output in the market, and 

therefore it does not convey power over price. . . . 

[T]he lower the barriers to entry, and the shorter the 

lags of new entry, the less power existing firms have. 

When the supply is highly elastic, existing market 

share does not signify power. 

Id. at 1335. 

 The district court relied on three pieces of evidence that 

purportedly showed that competitors were relatively free to enter 

the relevant market. First, it noted: 

 A number of companies other than IBM manufacture a wide 

range of computers having the processing power of IBM 

large-scale mainframe computers. Several of these 

(including Digital Equipment Corporation, Data General, 

Hewlett Packard, Tandem, and NCR) were admittedly 

excluded from the report upon which Prof. Levin relied 

to determine what constitute large-scale mainframes. 

Allen-Myland, 693 F. Supp. at 278. 

 This statement is somewhat ambiguous. First, we have 

already noted that the district court may wish to reconsider the 

issue of whether the relevant market includes the smaller 

capacity computers these manufacturers produce in light of the 

Supreme Court's opinion in Kodak. Thus, to the extent the court 

finds on remand that these computers do not belong in the 

relevant market, its conclusion will have to be re-evaluated. 
 More importantly, the district court's reasoning conflates 

ease of entry into the market with what belongs in the relevant 

market in the first instance. Even if all the computers made by 

these manufacturers were properly included in the market, that 

would say nothing about how easy or difficult it currently is to 

enter the market. It is conceivable that all these firms have 

been in the market for many years and that there has been very 

little recent entry. To use an example from another industry, 

just because there may be a sizable number of steelmakers of 

various sizes and specialties, that does not necessarily make it 

easy to build a steel mill and enter the business today. 

Accordingly, the district court's finding of ease of market entry 

is not supported by the mere presence of these manufacturers of 

smaller capacity computers. 

 Second, the district court relied on the recent growth of 

leasing companies as evidence that the market was easy to enter. 

Again, we have already held that, except for certain leases of 

used, non-IBM computers, leasing companies do not belong in the 

relevant market. Because of this, the ease of entry into the 

leasing market is legally irrelevant; if IBM has market power 

over the supply of large-scale mainframes, the immediate entry 

into the market of these essentially financial intermediaries can 

do nothing to increase the supply of such computers. 

Accordingly, leasing companies prove nothing about ease of entry 

into the relevant market here. 

 Finally, the district court cited the relative ease of entry 

into the computer reconfiguration business itself as evidence of 
a lack of barriers to market entry. The question, however, in an 

antitrust tying case is whether the defendant can use its power 

over the tying product market to control the tied product market 

as well. If IBM has market power over large-scale mainframes 

(including upgrade parts), that power could not be curtailed even 

to the slightest degree by the fact that it is easy to enter the 

tied market of installing upgrades. Indeed, it seems likely that 

in most if not all tying cases, the tied product market will be 

competitive, otherwise the defendant would have no reason to 

impose the tie and restrain competition in the first place. 

 Accordingly, because the district court's reasons for 

finding ease of entry into the relevant market were erroneous, 

its finding that ease of entry vitiated IBM's market power cannot 

stand. 

 B. Technological Innovation and Declining Prices

 The district court also believed that market power was 

inconsistent with the fact that technology in the computer 

industry was rapidly advancing. 

 Although the performance of computers has been rapidly 

increasing as costs for performance have plummeted, it proves too 

much to say that this improvement is inconsistent with market 

power. Indeed, in Greyhound Computer Corp. v. IBM Corp., 559 

F.2d 488, 497 (9th Cir. 1977), cert. denied, 434 U.S. 1040, 98 S. 

Ct. 782 (1978), another antitrust action brought against IBM and 

relied upon by the district court, the court stated: 

 IBM also contends that price reduction and product 

improvement are characteristics of the industry and are 

inconsistent with the existence of monopoly power. But 
rapid technological progress may provide a climate 

favorable to increased concentration of market power 

rather than the opposite. Moreover, a decline in 

prices does not necessarily imply an absence of 

monopoly power; a fair profit might have been made at 

even lower cost to users. 

559 F.2d at 497 (footnote omitted) (citing Alcoa, 148 F.2d at 

427). Indeed, were we to accept the district court's reasoning, 

a great many defendants with market power, such as Alcoa in the 

1920s and perhaps even the former AT&T telephone monopoly, could 

be insulated from antitrust attack. Here, technology was 

improving and prices were steadily falling, but the district 

court cited no evidence that these changes had any connection 

with a decrease in IBM's market power. We hold that the district 

court erred when it ruled that innovation and price reductions 

precluded a finding of market power.18

 C. Conclusion

 Accordingly, we will vacate the district court's finding 

that IBM lacked sufficient market power for per se antitrust 

liability and remand for further proceedings, during which the 

district court should re-examine the issue de novo. 

 V. "VIABLE BUSINESS OPPORTUNITY"

 In addition to finding that IBM lacked sufficient market 

power for per se liability to be imposed on it, the district 

court also found that AMI had not been foreclosed from a "viable 

business opportunity" by IBM's net pricing policy. Allen-Myland, 

 

 

18We do not, however, hold as a matter of law that price 

reductions and technological improvements can never evidence a 

lack of market power. Each case must be decided on its own 

facts, and facts must be found on the evidence presented. 
693 F. Supp. at 283. The court found that the labor-saving 

advantages of TCM technology changed what had once been a 

lucrative reconfiguration business involving a great deal of 

added value into one whose labor content had become de minimis, 

averaging only 1.2 percent of the net upgrade price. Id. 

According to the district court, because AMI would be required to 

inventory a supply of upgrade parts in order to compete with IBM, 

its carrying costs would be so high in comparison to its 

projected revenues from performing upgrades that AMI would have 

actually lost over $35 million if IBM had provided upgrades on 

non-net priced (SWRPQ) terms. Id. at 288. Accordingly, because 

the antitrust laws protect competition rather than competitors, 

the court held that net pricing was not worthy of condemnation 

under the antitrust laws. 

 There is no requirement that one be deprived of a "viable 

business opportunity" to recover under section 1 of the Sherman 

Act. We instead interpret 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; second, that a 

substantial volume of interstate commerce was affected by the 

tie. Additionally, the district court's analysis appears to bear 

on the "fact of damage" issue of whether AMI has standing to 

bring a private antitrust suit against IBM. 

 A. Separate Product Markets

 In Jefferson Parish, the Supreme Court said that, in a tying 

case, "the answer to the question whether one or two products are 
involved turns not on the functional relation between them, but 

rather on the character of the demand for the two items." 466 

U.S. at 19, 104 S. Ct. at 1562. It then went on to hold that a 

tying arrangement cannot exist unless there is a sufficient 

demand for the purchase of the tied product separate from the 

purchase of the tying product so as to identify a market 

structure in which it is efficient to offer the tied product 

separately from the tying product. Id. at 21-22, 104 S. Ct. at 

1563. There, the tying product was hospital services and the 

tied product was anesthesiological services; because on the facts 

presented, there was evidence of separate patient demands for 

specific anesthesiologists, the Court held that separate markets 

existed. Id. at 22, 24, 104 S. Ct. at 1564-65. 

 At least at one time, there was a demand for third-party 

installations of upgrades separate from the demand for parts; the 

successful operation of AMI's business before IBM imposed its net 

pricing policy is conclusive evidence of that. The district 

court, however, believed that TCM technology, not net pricing, 

destroyed the separate market for AMI's labor, finding: (1) that 

customers would not be willing to have upgrades installed by AMI 

at any price higher than what IBM would charge if forced to 

provide the service; and (2) that, at the IBM price, AMI would 

lose massive amounts of money if it attempted to install upgrades 

in the same way as before net pricing. Allen-Myland, 693 F. 

Supp. at 283-91. 

 1. Customer Willingness to Pay Premium Prices
 The district court credited the testimony of end-user 

witnesses who said they had no interest in having upgrades 

installed by a third party such as AMI. It then went on to 

acknowledge that representatives of leasing companies did 

indicate an interest in third-party installation, but only at 

prices competitive with IBM's net price. Id. at 290. 

 The court properly found that, with a few adjustments, IBM 

would charge $165 per hour for installing upgrades. Id. at 287. 

AMI takes strong exception to the next logical step in the 

court's reasoning: that AMI would not be able to charge its 

customers any more than IBM for its services. We are convinced 

by AMI's argument. 

 At trial, two leasing company witnesses testified that they 

would not be interested in paying AMI significantly more than 

IBM's effective hourly rate for installation of upgrades. 

Comdisco's Mr. Lewis said that he would use AMI installation 

service only if it were, at most, slightly more expensive than 

IBM's price. Id. at 291. On cross examination, however, he 

admitted that AMI had performed an "E to B" upgrade at an 

effective hourly rate of $2,400 and admitted that such an amount 

(thought by counsel to be $1,500 per hour) was more than slightly 

greater than IBM's price. See id. at 291 & n.75. The district 

court, irrespective of this contradiction, opined: 

 Mr. Lewis of Comdisco explained that he would use AMI 

installation service only if it were "lesser than, the 

same as, or in rare exceptions, only a slight premium 

above the prevailing IBM list price." Using an E to B 

upgrade as an example, Mr. Lewis testified that he 

would not regard an AMI hourly rate of $1500 for 
installation service as only slightly greater than an 

IBM hourly rate of $180 or $200. 

Id. at 291 (record citation omitted). In a footnote, the court 

continued: 

 Using customer-owned parts, AMI charged Comdisco 

between $25,000 and $30,000 for installing an E to B 

upgrade, requiring approximately 20 man hours. Based 

on Mr. Ross's calculations, the value of IBM 

installation service for an E to B upgrade, requiring 

about 13 man hours of labor, is $2,400. Based on these 

facts and Mr. Lewis' assertions, it is fair to conclude 

that Comdisco would not select AMI over IBM to install 

a new E to B upgrade if it had the choice. In view of 

this evidence, I do not accept AMI's assertion at 

closing argument that leasing companies "don't care 

whether the service costs $2400 or $20,000." 

Id. at 291 n.75 (record citations omitted). We conclude that 

this finding, at least as supported by the district court's 

opinion, is clearly erroneous. The court did not adequately 

address why, if Comdisco was unwilling to pay anything more than 

a slight premium over IBM's rate, it paid not $165 per hour, but 

a full $2,400 hourly rate. Its statement, that Comdisco would 

never pay the $2,400 rate if it "had the choice," is true enough, 

but explains nothing; we would all like to pay the lowest 

possible price whenever we purchase goods and services. On the 

other hand, AMI's explanation for its ability to charge a higher 

price is supported: IBM commonly took so long to price and 

perform upgrades that the leasing companies' losses from having 

their machines idle exceeded the premium charged by AMI -- which 

was often able to complete the job within a few days.19

 

 

19We again stress, however, that we cannot and will not 

substitute our view of the facts for that of the district court. 

We hold only that the district court's finding of fact is not 
 In a similar vein, "Mr. Smith of CMI testified that, other 

things being equal, he did not wish to pay 10, 20 or 30 times 

more than necessary to obtain installation service." Id. at 291. 

For the reasons stated above, this does not show that CMI, under 

certain special circumstances such as the need for fast 

turnaround, would be unwilling to pay a considerable premium, 

even if under normal conditions it would pay only the IBM rate. 

This finding too cannot stand as presently supported. 

 2. Alleged Lack of Demand for Third-Party Installation

 The district court additionally supported its finding of 

lack of demand for AMI-installed upgrades by referring to 

evidence that, in the few occasions in which IBM had made SWRPQ 

pricing available for MIPS upgrades, there were few such upgrades 

sold without IBM labor. The court reasoned as follows: 

 There is insufficient evidence of demand for 

upgrade labor at prices AMI would have to charge to 

support a conclusion that a competitive market for 308X 

upgrade labor does or could exist. Leasing companies 

have purchased virtually no 308X model, memory, or 

channel upgrades without IBM labor included (in order, 

for instance, to have AMI install the upgrade) when 

such upgrades were available on an SWRPQ basis (which 

roughly equals the price IBM would be entitled to 

charge for its parts). Every J to K upgrade purchased 

by CMI and Comdisco was bought with IBM installation 

service included even though IBM also sold the feature 

on an SWRPQ basis. 

Id. at 290-91 (footnotes and record citations omitted). In a 

footnote, the court responded to AMI's argument that the reason 

 

adequately supported by the elaboration contained in its opinion. 

On remand, the court may of course re-examine this issue and 

again reach the same conclusion, if it is supported by sufficient 

evidence and findings of fact. 
there were so few SWRPQ orders was that the unbundled prices were 

not well-publicized: 

 Witnesses from CMI and Comdisco testified that neither 

company knew that IBM sold upgrades (including the J to 

K) without IBM labor included. I do not credit such 

testimony, as there was documentary evidence (requests 

for IBM "SW" prices) to the contrary. Further, the 

SWRPQ procedure has existed since 1975. SWRPQ prices 

are readily available from IBM. AMI acknowledged that 

SWRPQ prices are made available from IBM when 

specifically requested. 

Id. at 291 n.74. (record cites omitted) AMI argues that this 

determination was based on insupportable impeachments of 

witnesses and was clearly erroneous. 

 Mr. Lewis, Vice-President of Comdisco, the largest leasing 

company, admitted that, as of the trial date, he knew that IBM 

installation was not mandatory. He was then cross-examined on 

the issue of one particular 308X MIPS upgrade, the J to K model 

conversion. He then stated that he acquired nine such upgrades 

in the past, all with IBM labor included. But when asked whether 

he knew that IBM installation was optional at the time he 

purchased the J to K upgrades, he said he did not. Quite simply, 

Lewis' admission does not impeach his testimony that he was 

unaware of SWRPQ pricing during the relevant time period. 

 The district court then used certain documentary evidence to 

impeach Lewis. DX 2260 is a request from Lewis for SWRPQ pricing 

on three upgrades, J16-J24, K16-K24 and G16-G24. None of these 

are the J-K upgrade that Lewis testified about at trial. 

Moreover, their designations are consistent with memory upgrades, 
not MIPS upgrades.20 DX 2266 is more explicit, specifically 

stating that memory upgrades are involved. 308X memory was 

usually neither TCM-based nor subject to net pricing and is thus 

not at issue. Accordingly, the conclusion to be drawn from this 

evidence is that Lewis was unaware that MIPS upgrades were SWRPQpriced, although he had purchased some unrelated memory upgrades 

without IBM installation in the past. Lewis' testimony that he 

was unaware of SWRPQ pricing for 308X MIPS upgrades was not 

impeached. Therefore, nothing can be concluded from Comdisco's 

failure to purchase MIPS upgrades under SWRPQ terms other than it 

was unaware they were available. 

 The district court also noted the testimony of Mr. Loria, a 

CMI Vice-President. He testified that, to his knowledge, IBM 

would not sell upgrades without a labor charge. Much of this 

testimony centered on the year 1976, years before IBM introduced 

the 308X series of computers. He also stated that he thought 

that SWRPQ terms meant simply that IBM did not retain the old 

parts. Except for the J-K upgrade, the only SWRPQ upgrades he 

testified about were not MIPS upgrades. 

 The district court believed that this testimony was 

impeached by three exhibits, DX 2261, DX 2262 and DX 2263. DX 

2261, however, is just a 1986 request for SWRPQ pricing on a 96 

 

 

20308X model numbers appear to be classified as follows: 

308X-YMM; where X is the CPU family, e.g., 3081, 3083, 3084; Y is 

the CPU power indicator within the family, e.g., 3081-J, 3081-K; 

and MM is the main memory in megabytes, e.g., 3081-J16, 3081-J24. 

This is consistent with the numbering scheme for memory upgrades 

in DX 2266. 
to 128 megabyte memory upgrade; Loria never testified that nonnet priced memory upgrades did not exist. DX 2262 and DX 2263 

are IBM's responses to CMI requests for SWRPQ-priced memory 

upgrades. None of these documents tend to show that Loria knew 

that a few MIPS upgrades were available without IBM installation; 

accordingly, his testimony to the contrary was not impeached by 

this evidence. 

 Another Vice-President of CMI, a Mr. Smith, testified 

similarly to Loria, stating that he was not aware that the J to K 

MIPS upgrade was available without IBM installation. The 

district court found that DX 2265 impeached Smith's testimony. 

That document is a computer printout of requests for price 

quotations ("RPQs") with the name "Gary Smith" handwritten at the 

top. Some of these RPQs were for SWRPQ terms, but none were for 

MIPS upgrades. Once again, this evidence does not impeach 

Smith's testimony. 

 In short, that to which the district court refers does not 

bear out its conclusion that these witnesses were untruthful when 

they claimed not to know of a few MIPS upgrades without IBM 

installation.21 Thus, the fact that a few MIPS upgrades were 

 

 

21In addition, the district court relied on the fact that 

the SWRPQ procedure has existed since 1975, that "SWRPQ prices 

are readily available from IBM," and that AMI acknowledged this 

fact. This all appears to be true, in general, but there is no 

indication in the portions of the record cited by the court below 

that these facts impeached the testimony of the Comdisco and CMI 

witnesses that they were unaware of SWRPQ-priced MIPS upgrades 

for 308X series computers. That these prices were available for 

memory upgrades and for earlier series of computers could not 

have reasonably put these witnesses on notice that a very small 

number of SWRPQ-priced MIPS upgrades were made available for the 

308X series, given IBM's well-publicized policy of net pricing. 
sold under SWRPQ terms does not prove that there was no separate 

demand for installation services, particularly considering that 

IBM had every economic incentive to protect its revenues and 

avoid widely publicizing the existence of such upgrades. 

 3. AMI's "Massive Losses" From Inventory Costs

 In addition to finding that AMI would attract no customers 

at the price the court believed it would have to charge for its 

service, the district court also found that AMI would suffer 

massive losses at the IBM hourly rate. It based this conclusion 

on its belief that AMI would have to maintain an inventory of 

expensive upgrade parts to provide adequate turnaround time. 

Because IBM's revenues would average only 1.2 percent of the net 

price for the upgrade and its carrying costs for the parts 

inventory would average 3 percent, the district court concluded 

that AMI stood to lose over $35 million by competing with IBM. 

Id. at 288. Although the court acknowledged that AMI's principal 

argument was that leasing companies inventoried their own parts 

and thus saved AMI the costs of doing so, it nevertheless 

included these carrying costs when calculating AMI's ability to 

make a profit, based on a purported admission by AMI. 

 It is, of course, true that AMI would have to carry an 

inventory of parts to give its customers fast turnaround on 

upgrade installations. This is exactly what AMI did for the 

earlier 303X series of computers. The exception would be if the 

customer itself maintained an inventory of parts. Thus, to the 

extent AMI intended to compete for the business of end-users, who 

typically do not inventory parts, AMI would have to maintain an 
inventory, which would be presumably unprofitable given the 

revenue generated by the installation. Leasing companies, on the 

other hand, constituted over 90 percent of AMI's business and 

were known to inventory their own parts. So, while the 

relatively minuscule end-user business may have been foreclosed 

from AMI by the low margins generated by TCM-based upgrades, the 

business from leasing companies was not. 

 It would be both a non-sequitur and clearly erroneous on its 

face to find that AMI's argument that leasing companies would 

inventory their own parts and relieve AMI of that cost is invalid 

solely because AMI admitted it will incur such costs on its own

inventory. The district court, however, relied on its belief 

that Mr. Allen admitted that AMI would incur inventory costs if 

it were permitted to compete in the market of 308X net priced 

upgrades. Id. at 288-89. The record contains the following 

exchange: 

 Q. And according to Mr. Hamilton's report on damages, 

he indicates that you have told him that AMI must 

maintain a certain worth of inventory of upgrades and 

parts, and that a fair estimate of AMI's carrying costs 

for that inventory, just for the carrying costs of the 

interest involved is approximately three percent of 

IBM's price, whatever you happen to pay for those 

parts. 

 Did you tell Professor Hamilton that, sir? 

 A. I identified for Professor Hamilton, when he was 

doing a damage study, he asked me, if you were 

permitted to compete in this market of net priced MESs, 

what would be your costs? 

 I identified it would be AMI's intent, similar to 

the volume procurement agreement, to order many parts 

from IBM. 
 There was a question whether these parts would 

come from the parts center on a very rapid response or 

whether AMI would have to inventory, virtually millions 

of dollars of inventory. 

 From going on prior experience with the VPA, where 

we ordered large quantities for inventory and were not 

using the parts center, he said, wouldn't you have some 

type of carrying charges? 

 Now, that number that he picked of three percent 

was if the prime rate were 12 percent. . . . 

 I don't know further the -- all the economic data 

in regard to what -- Mr. Hamilton went further from 

that, but the question was asked. 

 On the next page of the transcript, Allen then stated that 

as long as upgrade parts could arrive quickly from the IBM Parts 

Center, there would be no need for AMI to maintain an inventory. 

This "admission," (Allen stated only that the question was 

asked), does not admit that AMI would be required to carry an 

inventory for all of its customers. It was therefore 

insufficient grounds upon which to conclude that inventory costs 

must be included in every situation in which AMI does business.22

 

 

22Earlier in its opinion, the district court found that 

Allen had admitted that AMI could not make a profit on a labor 

value of 1.2 percent of the net upgrade price. Allen-Myland, 693 

F. Supp. at 284. The trial testimony shows that counsel for IBM 

asked Allen whether he would take on an upgrade for $25,500 labor 

charge when the net price was $2,090,000, a 1.2% margin. Allen 

replied that he would, and that he thought it was a viable 

business opportunity. Counsel then tried to impeach him with a 

letter he wrote to IBM in the context of settlement negotiations. 

On the witness stand, Allen admitted the existence of this letter 

but claimed that counsel was taking it out of context. We do not 

think this letter can be fairly read to concede that AMI could 

never make a profit on a 1.2 percent margin. Like the statement 
 4. Low Margins and Separate Markets

 The district court also found that the value of the labor 

content of 308X MIPS upgrades was de minimis for antitrust 

purposes. Id. at 283. Later, it referred to another purported 

admission by AMI's counsel, to the effect that, if the labor 

content of upgrades was de minimis, then parts and labor would 

have to be considered a single market. Id. at 289 n.71. 

 To the extent it might be argued that AMI admitted that a 

1.2 percent margin caused parts and installation to fold into one 

market, as a matter of law we cannot agree. The record indicates 

that the total value of all 308X MIPS upgrades performed between 

1981 and 1985 was over $2 billion. 1.2 percent of a $2 billion 

market amounts to over $20 million. See Allen-Myland, 693 F. 

Supp. at 292. This amount is not de minimis within the meaning 

of the antitrust laws. See Fortner I, 394 U.S. at 501-02, 89 S. 

Ct. at 1257-58 ($190,000 not considered de minimis by the Supreme 

Court). 

 5. Conclusion

 The district court's finding that no separate market existed 

for installations of upgrades cannot stand. We will accordingly 

vacate it and remand for further proceedings. On remand, the 

district should re-examine the issue de novo. 

 B. Substantial Volume of Commerce

 

discussed in the above text, it admits no more than that, to the 

extent AMI must buy and inventory the parts, it cannot earn a 

profit on that margin. 
 As part of its "viable business opportunity" inquiry, the 

district court also found that AMI had not proved that IBM's 

tying arrangement foreclosed a substantial volume of commerce. 

Allen-Myland, 693 F. Supp. at 292-93. Although the court 

acknowledged that the $20 million market for upgrade 

installations was quantitatively more than sufficient, it found 

that AMI had not shown "that it engaged in an activity foreclosed 

by IBM's net pricing." Id. The district court believed that it 

was the changes brought about by the 308X's TCM technology, not 

net pricing, that foreclosed AMI from the upgrade business. 

Thus, according to the court, competition with IBM in the 

installation of upgrades had become unprofitable because of 

advancing technology, quite apart from any anticompetitive 

effects of the tie. 

 First of all, to the extent the district court based this 

conclusion on its findings that AMI lacked a viable business 

opportunity, it necessarily erred. We have already pointed out 

the factual and analytical errors behind those conclusions. 

Although we do not decide those factual issues ourselves, it 

appears likely from this record on appeal that AMI could have 

successfully performed upgrades and made a profit in the absence 

of net pricing; at least, the district court's findings that no 

one would pay AMI any more than IBM and that AMI would be 

burdened with across-the-board inventory costs were not supported 

by the evidence it cited. 

 Second, and more importantly, there is no requirement that 

an antitrust plaintiff show profitability in addition to showing 
some foreclosure of commerce. If the competition foreclosed by a 

tying arrangement had to be profitable, then many anticompetitive 

tying arrangements would be immunized from antitrust attack. For 

example, a new competitor attempting to break into a dominated 

market might well lose money for a time, either because of 

aggressive introductory pricing or because its sales had not yet 

grown to the point where economies of scale made its production 

operations sufficiently inexpensive to turn a profit. Yet, the 

defendant could exploit its market power with impunity on the 

ground that the plaintiff could not profitably compete against 

it, and continue using that power to keep all new competitors out 

of the tied market. Such a result would be contrary to the 

purpose of the antitrust laws. Accordingly, we hold that the 

district court erred when it found that a substantial amount of 

commerce was not foreclosed. 

 C. Fact of Damage

 An antitrust plaintiff must also prove what is known as 

"fact of damage," defined as harm of a type which the antitrust 

laws were designed to prevent. See supra typescript at 10. The 

district court declined to rule on this issue, but noted that its 

earlier findings that AMI was not deprived of a viable business 

opportunity seemed to preclude any finding that AMI suffered the 

requisite damage. Allen-Myland, 693 F. Supp. at 298. We, of 

course, make no finding, but observe that the district court's 
errors on what it termed the business opportunity issue call its 

tentative conclusion on fact of damage into question as well. 

The matter remains, however, an issue for that court to resolve 

in the first instance. 

 VI. CONCLUSION

 We will accordingly vacate the district court's judgment in 

favor of IBM and remand for further proceedings consistent with 

this opinion.