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510 F2d 894 Telex Corporation v. International Business Machines Corporation | OpenJurist
510 F. 2d 894 - Telex Corporation v. International Business Machines Corporation
510 F2d 894 Telex Corporation v. International Business Machines Corporation
510 F.2d 894
184 U.S.P.Q. 521, 1975-1 Trade Cases 60,127
The TELEX CORPORATION, and Telex Computer Products, Inc.,
Plaintiffs-Appellees-Appellants (and Appellants on
Counterclaim),
Defendant-Appellant-Appellee (and Cross-Appellant
on Counterclaim).
Nos. 73--1874 to 73--1878, 73--1961 and 73--1962.
Order Jan. 24, 1975.
Opinion Jan. 28, 1975.
Rehearing Denied March 27, 1975.
Thomas D. Barr, New York City, and Nicholas DeB. Katzenbach, Armonk, N.Y. (Frederick A. O. Schwarz, Jr., Robert F. Mullen, and George Vradenburg III, New York City, Truman B. Rucker, Rucker, Tabor, McBride & Hopkins, Tulsa, Okl., Robert H. Harry, Davis, Graham & Stubbs, Denver, Colo., and Cravath, Swaine & Moore, New York City, of counsel, with them on the brief), for defendant-appellant, International Business Machines Corp.
Floyd L. Walker, Walker, Jackman & Associates, Inc., Tulsa, Okl., and Richard B. McDermott, Boesche, McDermott & Eskridge, Tulsa, Okl. (Serge Novovich, Tulsa, Okl., with them on the brief), for plaintiffs-appellees, The Telex Corp., and Telex Computer Products, Inc.
COMPLAINT AND DISCOVERY PROCEEDINGS.
The appellant, International Business Machines Corporation (IBM), here appeals a judgment in favor of Telex Computer Products, Inc. (Telex), appellee, in the total amount of $259.5 million, plus.$1.2 million in attorneys' fees and costs (this latter amount was stipulated by the parties). Actual damages were determined to be in the amount of $117.5 million. This amount was reduced substantially before trebling so as to prevent Telex from profiting as a result of certain advantages obtained from unlawful competitive activities and its illegal obtaining of trade secrets of IBM. Originally the trial court had ordered damages in favor of Telex in the amount of $352.5 million, but in amended findings and judgment this was reduced as stated above.
Telex has alleged in the complaint that IBM violated sections 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1, 2, and section 2 of the Clayton Act, 15 U.S.C. § 13, in that IBM had monopolized and attempted to monopolize the manufacture, distribution, sale, and leasing of electronic data processing equipment. The complaint was later amended to charge IBM in more specific terms with monopolization in the manufacture, distribution, sale, and leasing of plug compatible peripheral products which are attached to IBM central processing units.
A supplemental complaint was filed by Telex. This charged that IBM had violated section 2 of the Sherman Act by announcing its 'Fixed Term Plan' and 'Extended Term Plan' for the leasing of IBM equipment.
EVIDENCE PRESENTED AT THE TRIAL.
The evidence established that IBM was first incorporated in 1924 and operated as a producer of office machinery and equipment. However, in the early 1950's it entered the electronic data processing industry. It produced a research computer in 1953 and installed its first computer for use in commercial work in 1955. Telex began manufacturing electronic data processing products in the year 1959. The evidence established in the court found that the electronic data processing industry was a young, dynamic one with a tremendous amount of revenue. In 1952 its total revenues were $48 million. By 1970 its total revenues equalled $10.2 billion. The number of companies in the electronic data processing business grew from thirteen in 1952 to 1,773 in 1970. Nevertheless, IBM, although originally dominant, steadily declined. It had 64.1 per cent of the electronic data processing revenues in 1952, but only 35.1 per cent of the total revenue in the year 1970. Although IBM was recognized as an industry leader, having more revenue from the industry than any other company, it did not, according to the finding of the trial court, have monopoly power or status in the industry as a whole.1
In addition to the central processing unit, a data processing system also has a number of so-called peripheral devices which are connected with the central processing unit and which perform various special functions in the data processing system. These include information storage components like magnetic tape drives, magnetic disk drives, magnetic drums and magnetic strip files; terminal devices such as printers; memory units, which are specialized storage units, and other similar types of peripheral components. Sometimes these devices are included in the central processing unit, that is, do not exist as external components. It is these peripheral components with which we are primarily concerned in this lawsuit. The importance of these can be judged from the fact that the court found that they constitute 50 to 75 per cent of the total price of an electronic data processing system. The term 'plug compatible peripheral device' is the specific class of equipment that enters into this case. What is meant is that a producer of a complete electronic processing unit manufactures, as noted, the central processing unit and peripheral components which are geared to use on that central processing unit. Many manufacturers produce peripheral components primarily for attachment to central processing units of a particular manufacturer and so, therefore, the plug compatible peripheral device refers to a component which is functionally equivalent to the manufacturer's peripheral device and can be readily plugged into that central processing unit. Undoubtedly it is the wide use of the IBM central processing unit that caused Telex and others to market peripheral devices which were plug compatible with the IBM unit and which could replace IBM peripheral devices which had been made for the IBM central system.
Originally, of course, IBM, being the only manufacturer of peripheral products plug compatible with its system, had 100 percent of the market. The court found that as other manufacturers entered the plug compatible market with IBM, the IBM share became substantially eroded and this is particularly true starting in 1968, at which time market erosion occurred first in the tape drive line followed by the disk drive line in 1969 and with continued erosion into 1970.2
These took place following the erosion of the IBM share of the plug compatible peripheral market. Management became even more concerned when in January 1970 the United States Bureau of the Budget notified the federal agencies that they should consider the possibility of using the less expensive non-IBM plug compatible peripheral devices with the IBM central processing unit. IBM's management committee thereafter designated peripherals as a key corporate strategic issue which was their way of designating the problem as a key and important one. A Peripheral Task Force, headed by H. E. Cooley, Vice President of IBM's Systems Development Division, was created in March 1970. The purpose of this was to examine the competitive threat to IBM of plug compatible suppliers. Judge Christensen found that one of the purposes of this was to study and recommend plans and product strategies to impede the growth of IBM's plug compatible competition and further found that the task force made in-depth analyses of various plans and product strategies, each having as a significant purpose containment and retardation of the growth of IBM plug compatible competitors.3
The IBM 2314 disk drive was produced in three basic configurations or 'boxes'; the 2312, a box containing one 2314 disk drive; the 2318, a box containing two disk drive spindles; and the 2313, a box containing four disk drive spindles. The 2319A was basically a 2313 box with one 2314 spindle removed, leaving a three-spindle box. Unlike the 2312, 2313, or 2318, or the competitors' plug compatible equivalents, the 2319A could only be connected to the IBM System 370 CPU through an integrated file adapter (IFA) built into the CPU itself, rather than through the formerly used external disk control unit. Except for this difference in the way it was connected to the CPU (at that time not duplicated by IBM's competitors), the 2319A was the functional equivalent of three 2314 disk drive spindles; that is, a 2312 box and a 2318 box.
The 2319A using the integrated file adapter was priced substantially below either the IBM three-spindle configuration having the external disk controller or the non-IBM plug conpatible three-spindle unit. The total rental for the 2319A was $1,550 as compared with a monthly charge of $1,420 for the old external control unit plus $1,455 for three 2314 spindles, a total of $2,875. Not only did this furnish an incentive for use of the 2319A rather than the older IBM disk configurations, it furnished an incentive for utilization of the 2319A rather than the competitors' plug compatible equivalents to the 2314, since it was priced below the price then being offered by IBM's plug compatible competitors, including being $100 per month per spindle below Telex's current price for equivalent disk drives. However, the 2319A price was not below production costs and IBM anticipated profit on the item to be in excess of 20 per cent.4
Following the announcement of the 2319A program in September 1970, a second peripheral task force was organized in October 1970 to further analyze competitors in the plug compatible disk drive area. The analysis included Telex which was determined to be a viable and aggressive competitor, although its manufacturing costs were 10 to 15 per cent above IBM's. It is to be gleaned from the trial court's Finding 80 that Telex's greatest problem was the impact of IBM which thereby shortened product lief. The task force determined that Telex and Memorex were IBM's biggest competitors in the plug compatible disk drive area. It studied likely impact on these two companies of various possible price cuts, forecasting the price reactions which Telex and Memorex could be expected to make and the impact of such price cuts on the profits and revenues of Telex and Memorex.
On December 14, 1970, the 2319B merchandising program was announced. This enabled price cuts which were not possible with the 2319A to be extended to a larger body of users having the IBM system 360 computer. The 2319B was a box containing three 2314 disk drives, utilizing an external disk controller designed for 2314 units being attached to the CPU rather than using the internal IFA controller to which the 2319A had to be attached. Here again the prices were reduced in a very substantial amount, an amount which was below any of its plug compatible disk competitors. Although this price cut was not below cost, the court found that it did not represent any technological advance over former 2314 configurations, and it also found that it was a predatory action which was designed to maintain for IBM a 94 per cent share of the plug compatible disk drive market which it controlled at the time of the announcement.5
In December 1970, according to the finding of the court (undoubtedly this is supported by the evidence), IBM eliminated its 'additional use' charges on all disk drive devices (Numbers 2314, 2319 and 3330). This amounted to a further price reduction on IBM disk drives.
Although the trial court characterized the leasing plans as being predatory, at the same time it recognize that IBM was facing the loss of considerable systems and peripheral business and that some such plan was necessary. The court also recognize that these leasing plans were not per se invalid; that they might in a different context have been justified. But the court in Finding 88 expressed the viewpoint that these long-term leasing plans were invalid in the light of IBM's dominant market position in the plug compatible business. DP The IBM Fixed Term Plan provided a 15 per cent reduction in purchase price plus one and two year leases on certain IBM disks, tapes, and printers, with an 8 per cent monthly rental discount for one year leases and a 16 per cent discount for two year leases. It provided stringent penalties in the event of termination. The termination of a two year lease during the first twelve months brought about a penalty of five times the monthly rental charge; the termination of a one year lease or of a two year lease during the second year caused a penalty of two and one-half times the monthly rental charge. Nevertheless, the Fixed Term Plan reduced IBM's prices substantially. However, Telex's prices were actually lower than those of IBM because Telex often bargained concessions which reduced the prices below their lists.
The chief executive officer of IBM, Mr. Carey, testified that the peripherals were subject to the fixed term plan because of the necessity for either reducing prices or going out of business 'and so they were logical candidates . . .' But in June 1971, IBM's competitors controlled only 14.5 per cent of the disk market and 13.7 per cent of the tape market plug compatible with IBM's central processing units.
IBM's 2319B program which was announced December 14, 1970, failed to retard the growth of the IBM plug compatible competition during the first quarter of 1971. After the announcement, Telex and the other plug compatible manufacturers had reduced their own prices below the IBM 2319B price. So at the first meeting following the lowering of prices by the other equipment manufacturers, a study was undertaken of possible alternatives to the rental plan of IBM. During the year 1971 the competitors installed 3,006 spindles equivalent to IBM's 2314. In ensuing months even more were installed.6 The Management Committee studying the problem estimated that IBM could lose over one-half of its lease base in the disk drive market and could lose up to 20 per cent of its tape lease business to its competitors and that by 1976 it could lose 1,500 printers to Telex.
During this period of time, Telex was gaining considerably in connection with the plug compatible printers and Telex offered a price advantage in that their product could be used without limit.7
'Moreover, there is considerable direct evidence on vital points to indicate that top management itself did in fact subscribe to the anticompetitive views and objectives of lower echelons.'
'IBM's Fixed Term Plan was generated and implemented at the time it was with the primary intent and purpose of suppressing plug compatible competition and to maintain its monopoly power in the plug compatible disk, tape and printer markets and the general plug compatible market for peripheral devices.'IBM's Fixed Term Plan successfully contained the growth of plug compatible competition in the peripheral device market. After June 1971, the plug compatible manufacturers' share of the disk market remained within 17.5 per cent and its share of the tape market did not exceed 15 per cent. But the competitors made a price reduction in response to the Fixed Term Plans.
Despite the response of the competition to IBM's Fixed Term Plan, there was some inability to successfully compete with the IBM Fixed Term Plan. Mr. Rodgers, IBM's Director of Marketing, estimated that the Fixed Term Plan reduced the order rate of the competitors by 50 per cent. The records of IBM establish that 93 per cent of its new disk and tape products were being installed under the Fixed Term Plan and that customer acceptance of it was extremely high (95 per cent).
'The competitor will offer long-term leases similar to IBM's with the base rental initially 10% below ours and declining 5% per year. The competitor will face a new environment; however, in that the bulk of his early installations will represent conversions from PC or IBM 2314's rather than plug for plug replacements of installed 330's. This will be due to the user's reluctance to break the IBM contract due to the penalty payment required. As a result, the competitor will face harder selling and harder installation since he has not yet shown the capability to provide systems, conversion, and application support.'
A confidential report issued in December 1971 showed that since the announcement of the Fixed Term Plan there had been a 62 per cent decrease in the competition tape sales rate and in the 4.5 months following the Fixed Term Plan announcement, the competition sales rate for disk drives was off 48 per cent as against the first five months of 1971.
'The purpose was to determine to what extent IBM's Fixed Term Plan was responsible for cancellations of Telex orders and to make preliminary contact with potential credibility witnesses.
'Of twenty customers surveyed, only three admit that FTP was a significant factor influencing their decision to cancel Telex in favor of IBM. Furthermore, these three list other reasons in conjunction with FTP . . . No one indicated a willingness to be a witness although this point was not pursued vigorously for fear of damaging future customer relationships.
'Additionally, this may be a dangerous approach since IBM could probably produce witnesses to the effect that no FTP agreement was signed because the customer knew that Telex would be offering an IBM replacement in the near future, probably at less cost. Survey found that Thiokol Chemical took a monthly lease on IBM 3420's and that Amoco Production did the same in anticipation of replacing them with Telex 6420's.' (DB 117; E 2886--2887).
A study force had examined the problem in 1969--70 and had concluded that the competition would become viable unless IBM's rental price were below $6,000 per megabyte of FET memory. Subsequently, a memory task force was formed in March 1971 to develop a strategy in conjunction with IBM's announcement of its two new CPU's, Olympus and Pisces.8
'The MC is convinced that memory is our next great exposure. In May 1970, there were five competitive memories installed on our equipment. Presently (nine months later) there are 26 main memories and 33 large core storage memories installed, with 13 on order and over 200 proposed. This is the kind of rapid acceleration which we experienced in the tape and disk area. As you know, peripherals, including memory, is a Key Corporate Strategic Issue and the MC plans to spend considerable time on the subject.'
THE AWARD OF DAMAGES TO TELEX BASED ON ITS COMPLAINT.
The original award of damages was in the amount of $359.2 million. However, in the amended opinion this amount was reduced. The court was seeking to correct what it regarded as its original error which was reducing the award after trebling instead of before. The amended award was in the total amount of $259.5 million plus.$1.2 million in attorneys' fees and costs. The particular elements of damage which the court found were:
2. An additional reduction of $17.5 million, representing the 'best available quantification' of advantage obtained by Telex through illegal activities in establishing its market position upon which antitrust damages were initially determined.
'. . . Notwithstanding the difficulty involved, I have found that there is reasonable basis in the evidence to fairly approximate the damages to which plaintiffs are entitled as proximately caused by the unlawful acts and conduct of the defendant.'
On loss of sales profits, Telex claimed the sum of $11.3 million. This again was prices and hence its profits. The losses included $8.5 million lost profits in a sale to Pepsico, $1.3 million on the Hudson disk transaction and $1.5 million on the Transamerica disk transaction. In response to Telex's evidence, IBM introduced evidence that many other variables other than IBM's activities could have caused a decrease of Telex's profits in these sales. Damages were awarded in the amount of $8.5 million, a reduction from Telex's claim. This again was another approximation.
The reductions referred to above in the award prior to trebling were:
There was a further reduction in the amount of $7.5 million prior to trebling representing additional unlawful competitive. advantage realized by Telex through misappropriation of IBM's trade secrets. This also was a generalized amount. The court gave no indication as to how it arrived at this.IV.
IBM'S COUNTERCLAIM AGAINST TELEX AND THE DAMAGES AWARDED TO IBM.
Telex was able to keep abreast of IBM in the production of IBM's copies only by the hiring of employees or former employees in order to ascertain what IBM was doing or planning to do. This pirating of information was carried out by the employment of key personnel capable of developing the Telex technology in IBM peripherals on the basis of IBM designs. There were numerous such employees hired by Telex. The District Court stated that the number of IBM employees so hired was not statistically significant, but the employees who were hired were key personnel.9
The court said that the IBM employees had furnished an important and vital part of Telex technology and development. The court then went on to say that in March 1970, for example, Telex hired Jack James, who possessed substantial confidential information about IBM's future production plans. He had been approached by an employee of Telex regarding the possibility of resigning from IBM and taking a position with Telex. The court went on to find that James had access to confidential data relating to IBM products under development. He was furnishing information to Telex even while on IBM's payroll. The court in Finding 138 outlined the various IBM products that James had had access to and delivered to Telex. These included confidential information concerning IBM products under development and its future plans and forecasts, especially as to IBM's Plan 25 Forecast and its SCAN Forecast. James copied large amounts of information from IBM confidential documents and delivered this to Telex when he arrived there. Telex was allowed, as a result, to conform and adjust its production strategy, entering many new production areas and offering a much broader production line in peripherals in 1970 than it had offered in 1969. According to further findings of the court, this constituted deliberate misappropriation by James in violation of his agreement with IBM not to disclose such confidential information. Telex knew that it was confidential and that it had been unlawfully appropriated or should have known. The court further found that Telex officials fully expected and intended James to appropriate this information.
One particular item furnished by James was information about IBM's new Aspen 3420 tape drive announced by IBM in November 1970. Based on this information, Telex decided to produce a copy of the Aspen and in furtherance of this hired Howard Gruver, an IBM engineer in charge of the Aspen control unit development project. Gruver, the court found, disclosed IBM trade secrets in violation of his agreement with IBM not to do so, whereby Telex was able to produce an Aspen-type product by November 1971, ten or eleven months, according to the court, sooner than it would have been able to do without the copy and the information. The court determined that the misappropriation resulted in Telex's unjust enrichment in the amount of.$4.5 million in monthly rentals of the Aspen tape units and an additional $3 million in other losses. Other products which were expanded as a result of this kind of practice was the disk file subsystems and IBM Merlin 3330 disk file subsystem which was announced in 1970.
In November 1970, Telex hired John K. Clemens, who had been IBM's engineering program manager for the Merlin Project. Clemens was fully informed of the aspects of this program, including the development and design, manufacturing, sales, and forecasts. He was hired for the purpose of developing a Merlin-type disk storage system for Telex. In addition to a substantial salary and stock options, Clemens was given a $500,000 bonus if he produced a Telex Merlin-type system for delivery to a Telex customer prior to November 30, 1972. Telex also set out to hire other key personnel in connection with IBM's Merlin project offering them high salaries, bonuses, and stock options. Telex needed to develop this in eighteen months, a schedule which the court found would have been impossible without the thefts since it had taken IBM five years to develop the project. Telex knowingly and intentionally used the IBM trade secrets and hired a number of new employees in order to bring this about. The court concluded that Telex succeeded in misappropriating IBM's trade secrets and appropriating them into the Telex 6830.10
The trial court also found that Telex had misappropriated the source code to IBM's 'FRIEND' Version 2 diagnostic program, a coded computerized program utilized in the diagnosis, checkout, and debugging of various devices in a computing system. Necessary to the use of the 'FRIEND' device was the source code. IBM considered it as confidential property and it was secured carefully. The court found that one of the IBM employees hired by Telex took a copy of the source code with him to Telex and that Telex used this misappropriated material in order to develop a Merlin-type disk file system. The court further found that when Telex sold that project to the Control Data Corporation in May 1972, it also sold the 'FRIEND' source code to Control Data for $500,000.
In Findings 178--187, the District Court detailed the evidence pertaining to Telex's established copyright violations. The court found that Telex had copied all or substantial portions of the IBM manuals dealing with the operation and servicing of IBM's tape drives and tape subsystems, disk drives, tape controllers, and central processing units. After copying these manuals Telex distributed them with its IBM equivalent equipment. All of these manuals were protected by valid copyrights and the portions copied were not trivial.
POINTS ADVANCED BY IBM.
The main quarrel of IBM with the court's determination of the relevant market is that it is limited mainly to peripheral products plug compatible with IBM's equipment. It encompasses only part of the peripheral equipment marketed by Telex and the other plug compatible manufacturers. It fails to include the peripheral equipment market by systems manufacturers other than IBM.11
Finally, IBM maintains that the touchstone of monopoly power is ability to charge unreasonably high prices and to exclude competition. The court did not find that IBM had either of these abilities, although the court did adopt this legal test.12
IBM also points out that the the object of the Sherman Act is to prevent price fixing, control of supply, and deterioration in quality of the monopolized products. It says that none of these problems exist in the case at bar.
It is said that this view is erroneous because IBM's conduct was lawful, involved a reasonable profit, and was responsive to the acts of its competitors, in harmony with the purpose of the Sherman Act to foster competition and give healthy economic results--better products at lower prices.
TELEX'S CROSS-APPEAL CONTENTIONS.
3. A specific objection is raised as to the.$4.5 million lost on tape rentals and $3 million in indeterminate damages. Telex says that there is no way of knowing whether IBM would have had the.$4.5 million and says that the $3 million award is too vague.
CONSIDERATION OF THE ISSUES.
The trial court's initial approach to the problem was restricted to consideration of whether the market 'may be realistically subdivided in the time frame 1969--1972 to focus on and encompass only those parts of current product lines which are respectively attached to IBM systems rather than all those products which actually have similar uses in connection with other systems.' The court recognized that inasmuch as every manufacturer, originally at least, has 100 per cent of its own product, including the peripherals, the likelihood of finding monopolization in this area increases as the circumscribing products market is more circumscribed.13
The trial court also recognized that the cost of adaptation of peripherals to the CPUs of other systems is roughly the same with respect to every system, that is, the cost of the interface, the attachment which allows the use of peripherals manufactured by one system to be used on another central processing unit is generally about the same. But these practical interchange possibilities did not deter the court in reaching a conclusion that the products market was practically restricted. A factor which influenced the trial court was the commitment of Telex to supplying peripherals plug compatible with IBM systems. The court appeared to disregard the interchangeability aspect of the peripherals manufactured by companies other than IBM, giving emphasis to the fact that Telex, for example, had not chosen to manufacture such peripheral products of the kind and character manufactured by companies other than IBM.14 The trial court did, however, recognize the presence of interchangeability of use and the presence of cross-elasticity of demand. The court thought, however, that the presence of these factors were not sufficiently immediate.15
We recognize that market definition is generally treated as a matter of fact and that findings on this subject are not to be overturned unless clearly erroneous. Our question is, therefore, whether it was clearly erroneous for the court to exclude peripheral products of systems other than IBM such as Honeywell, Univac, Burroughs, Control Data Corp. and others, together with peripheral products plug compatible with the systems and, indeed, whether the systems themselves manufactured by the companies are to be taken into account. It is significant, of course, that peripheral products constitute a large percentage of the entire data processing system, somewhere between 50 and 75 per cent.16
Inasmuch as IBM's share of the data processing industry as a whole is insufficient to justify any inference or conclusion of market power17 in IBM, the exclusion from the defined market of those products which are not plug compatible with IBM central processing units has a significant impact on the court's decision that IBM possessed monopoly power.
In dealing with the issue whether peripheral products non-compatible with IBM systems ought to be considered, the court said in Finding 47 that as a practical matter there is no direct competition between IBM peripherals and the peripherals of other systems manufacturers. However, this finding is out of harmony with other findings which the court made. See, for example, Finding 38, wherein the court said that 'It cannot be gainsaid that indirectly at least and to some degree the peripheral products attached to non-IBM systems necessarily compete with and constrain IBM's power with respect to peripherals attached to IBM systems.' The court also stated in Finding 38 that:
'. . . (S)uppliers of peripherals plug compatible with non-IBM systems could in various instances shift to the production of IBM plug compatible peripherals, and vice versa, should the economic rewards in the realities of the market become sufficiently attractive and if predatory practices of others did not dissuade them. In the absence of defensive tactics on the part of manufacturers of CPU's, the cost of developing an interface for a peripheral device would generally be about the same regardless of the system to which it would be attached, and such cost has not constituted a substantial portion of the development cost of the peripheral device.'
The factor of ease of designing interfaces to allow interchange of peripherals was obviously troublesome to the court and this trouble continued after the court had rendered its decision. He was still treating the issue on October 17, 1973, in the posttrial hearing. See Court Papers, 445--446. The court's final words on the subject were:
'I'm down to the edge lawn, and I think the best service I can do is to speed the matter to that final determination. If I'm wrong on my market definition, then you did what you had a right to do.'18
Still another exhibit in the record recognizing the practicability of interface change on peripheral equipment is a February 4, 1972, memorandum of R. M. Wheeler, Chairman of the Board of Telex, requesting a letter or his signature which could be sent to systems manufacturers. This letter was to be sent to systems manufacturers. It offered to sell peripheral equipment plug compatible with the central processing units of the manufacturers. Specific reference was made to the 6420 tape unit, among others, which would normally be compatible to IBM's central processing unit. The Wheeler letter stated that Telex would be willing to interface their equipment at no cost to the purchaser.19
The fact that Telex had substantially devoted itself to the manufacture of peripheral products which were used in IBM CPUs and which competed with IBM peripheral products cannot control in determining product market since the legal standard is whether the product is reasonably interchangeable.
This standard was laid down by the Supreme Court in the famous case of United States v. E. I. DuPont de Nemours & Co., 351 U.S. 377, 76 S.Ct. 994, 100 L.Ed. 1264 (1956). In this case, as in the case at bar, the scope of the products market was crucial. The Supreme Court determined that if one product may substitute for another in the market it is 'reasonably interchangeable.' It was applied there even though DuPont largely controlled the production of cellophane. It was held to be not guilty of monopolization simply because the relevant market included cellophane as well as other flexible wrapping materials. On this the Court stated:
'(W)here there are market alternatives that buyers may readily use for their purposes, illegal monopoly does not exist merely because the product said to be monopolized differs from others. If it were not so, only physically identical products would be a part of the market.' 351 U.S. at 394, 76 S.Ct. at 1006--1007.
'Every manufacturer is the sole producer of the particular commodity it makes but its control in the above sense of the relevant market depends upon the availability of alternative commodities for buyers: i.e., whether there is a cross-elasticity of demand between cellophane and the other wrappings. This interchangeability is largely gauged by the purchase of competing products for similar uses considering the price, characteristics and adaptability of the competing commodities.' 351 U.S. at 380, 76 S.Ct. at 999.
'Determination of the competitive market for commodities depends on how different from one another are the offered commodities in character or use, how far buyers will go to substitute one commodity for another.'
'For example, one can think of building materials as in commodity competition but one could hardly say that brick competed with steel or wood or cement or stone in the meaning of Sherman Act litigation; the products are too different. . . .'
'On the other hand, there are certain differences in the formulae for soft drinks but one can hardly say that each one is an illegal monopoly.' 351 U.S. at 393, 76 S.Ct. at 1006.
It is helpful to consider the rulings of lower courts based on the DuPont decision. An example is United States v. Charles Pfizer & Co., 246 F.Supp. 464 (D.C.N.Y.1965), where the court applied the ruling of DuPont that complete identity of use is not a prerequisite to a finding of interchangeability. The Government had argued that the defendant had a monopoly in the citric acid market. The record, however, disclosed that citric acid was in competition with lactic acid, tartaric acid, phosphoric acid, and fumaric acid in its uses in the food and beverage industry. Since these different products were functionally interchangeable, the court decided that the relevant market included all such acidic products, and on that account the Government was held to have not proven that the relevant market was solely the citric acid market.
In still another case, Advance Business Systems & Supply Co. v. SCM Corp., 287 F.Supp. 143 (D.C.Md.1968), the plaintiff sought to establish that the relevant market was restricted to the paper used in SCM machines, but the court delineated the product market in much broader terms:
'When SCM introduced its first machine it had a natural monopoly for a few months of the sale of paper and other supplies for use with that machine. But competition quickly developed for the sale of paper, and by 1965 for replenisher. The evidence shows that SCM has attempted by various means to keep for itself the sale of paper for use in its own machines. If paper for use in SCM machines is a relevant market, which one may attempt to monopolize in violation of section 2 of the Sherman Act, SCM has made such an attempt. But the facts in this case do not show that the relevant market should be defined in such unrealistically narrow terms. The relevant submarket is the sale of coated paper for use in SCM and other machines which employ the direct electrostatic process.' 287 F.Supp. at 153--154. (Emphasis added)
In South End Oil Co. v. Texaco, Inc., 237 F.Supp. 650 (D.C.Ill.1965), the court found that there was no monopolization and again on the basis that the product market as defined by the plaintiff was too limited. The court said that where commodities are competitive and reasonably interchangeable, the relevant market is not to be confined to the products of one manufacturer.
One of the most significant decisions of all is that of the Supreme Court in United States v. Grinnell Corp., 384 U.S. 563, 86 S.Ct. 1698, 16 L.Ed.2d 778 (1966). In the opinion of Mr. Justice Douglas who had dissented in DuPont, the DuPont case is cited approvingly. The opinion recognizes that substitute products are to be included within the definition of relevant market 'since customers may turn to them if there is a slight increase in the price of the main product.' 384 U.S. at 571, 86 S.Ct. at 1704. The relevant market in Grinnell was broadly defined and included the entire accredited central station service business involving such systems as automatic burglar alarms, automatic fire alarms, aprinkler supervisory service, and watch signal service. The basis for combining these various products was that all of them provided protection of property.
The consequences of the Court's holding are very clear; there can be no ruling of monopolization where the issue is judged on the basis of the entire market rather than a small segment of it. See the decision of the Fifth Circuit in Cliff Food Stores, Inc. v. Kroger, Inc., 417 F.2d 203 (5th Cir. 1969). In footnote 14 the court said that the essence of monopoly is that 'power exists to raise prices or to exclude competition when it is desired to do so.' American Tobacco Co. v. United States, 1946, 328 U.S. 781, 811, 66 S.Ct. 1125, 1140, 90 L.Ed. 1575. The court went on to say that:
'. . . It appears that something more than 50% of the market is a prerequisite to a finding of monopoly. See, e.g., Standard Oil Co. v. United States, 1911, 221 U.S. 1, 31 S.Ct. 502, 55 L.Ed. 619 (90%); United States v. Paramount Pictures, Inc., 1948, 334 U.S. 131, 68 S.Ct. 915, 92 L.Ed. 1260 (70%); and United States v. Grinnell Corp., 1966, 384 U.S. 563, 86 S.Ct. 1698, 16 L.Ed.2d 778 (87%). . . .'
2. The 'Acts' of IBM.
IBM announced a new marketing plan in May 1971. This was the leasing of peripheral units, not central processing units, for a fixed term of years rather than on its old lease which permitted the user to cancel on thirty days' notice. Comparable 'Extended Term Leases' were instituted thereafter.
'F89a. In 1970 and 1971 IBM experienced the effects of a nationwide recession combined with inflation, which caused a substantial increase in the level of returns and discontinuance of its EDP equipment including peripheral equipment. IBM at that time offered equipment only on short-term leases or for sale; its rental customers could effectively return their equipment to IBM on 30 days' notice. As a result of the economy, many of IBM's rental customers took advantage of this privilege and returned a significant amount of equipment to IBM. IBM's experience was not shared by its leasing company, systems manufacturer or peripheral equipment manufacturer competitors, since their equipment was generally leased for terms of one, two or more years, with termination charges or other costs in the event of cancellation. Another factor affecting IBM's business in this period was the increasingly lower rental prices charged by leasing companies and peripheral equipment manufacturers for equipment similar to IBM's. As a consequence of these factors, IBM's sales force in 1970 achieved only 50% of its selling objective. In 1971, IBM experienced the worst sales record year in its history for EDP equipment.'
'In view of the fact that most of IBM's systems manufacturer, leasing company and peripheral equipment manufacturer competitors were offering long term leases by the Spring of 1971 (Finding F100), IBM expected to, and was likely to, continue to lose substantial systems and peripheral business unless some plan was adopted.'
'C29. Agreements reached under IBM's fixed term and extended term plans are commonplace commercial agreements fixing the terms and conditions upon which users may lease some equipment for periods of up to two years. The terms of these leases are limited to provisions governing the use of the particular equipment under lease. They impose in and of themselves no restraints on the freedom of the lessee to trade. They do not obligate the lessee to any exclusive dealing arrangement. They do not obligate the lessee to purchase its requirements of the electronic data processing equipment, supplies or services from IBM. The term of leases contain no 'restraints' of the kind traditionally found violative of Section 1 of the Sherman Act. The terms of the leases are shorter than leases which had been offered by IBM's competitors, including plaintiffs, for some time prior to IBM's adoption of the fixed term and extended term plan. In a different context, the court in United States v. United Shoe Machinery Corp., 110 F.Supp. 295 at 297 (D.Mass.1953), aff'd per curiam, 347 U.S. 521, 74 S.Ct. 699, 98 L.Ed. 910 (1954), supra, expressly sanctioned the use of five year term leases despite its conclusion that defendant had monopolized the market for shoe machinery. The court concludes that the leases offered by IBM pursuant to the fixed term and extended term plans are not contracts in restraint of trade violative of Section 1 of the Sherman Act.'
'I have concluded that the leases in question would not be unlawful without the monopoly power held possessed by IBM or the found attempt to monopolize.'
'Again, there seems little question but that in a different context, or directed to general competition, the leasing plans adopted by IBM might be unexceptional or entirely justified. The question remains, however, whether in the setting of IBM's dominant position in the plug compatible submarkets and in view of the evidence as to its specifically directed intent and concern with reference to the plug compatible competition in those markets, the two leasing plans above-mentioned can be sustained as against Telex's attack.'
The trial court concluded (C29) that the leases were 'commonplace commercial agreements,' as above noted, and when the leases were announced, most of the competition had similar leases in effect. Thus the customers had the choice of a lease, rental arrangement, or purchase.
The trial court found that the leasing of equipment by or the change to a leasing plan was a violation of the Sherman Act. The trial court refers to the Fixed Term Leasing Plan as 'FTP.' Of this leasing plan, the court found (F96):
'. . . Defendant's officers at the trial expressed the view that FTP was simply to render the company 'more competitive' and to obtain more business by meeting the competitive efforts on a basis similar to that of plug compatible suppliers. It is the court's view that such justification, which could be convincing under different circumstances, is overpowered by IBM's monopoly position in the particular markets involved and the rather clear indication that its action was directed not at competition in an appropriate competitive sense but at competitors and their viability as such. The products specified by FTP were those peripheral products on which IBM was receiving, or on which it anticipated that it would receive, substantial plug compatible competition.' The court again found some justification for the fixed term plan, but concluded it was illegal. It found in F100
'. . . By 1971, most of IBM's competitors, including systems and peripheral competitors and leasing companies, were offering users long term lease options. IBM's studies indicated that a long term lease plan on peripheral products, among other things, would reduce IBM's costs through decrease in 'churning' of IBM's leased equipment at the same time and for similar reasons that its competitive position in relation to PCM's would be enhanced. But preponderant evidence demonstrates that IBM's fixed term plan was generated and implemented at the time it was with the primary intent and purpose of suppressing plug compatible competition and to maintain its monopoly power in the plug compatible disk, tape and printer markets and the general plug compatible market for peripheral devices.'
'F74. After the designation of peripherals as KCSI, a task force was formed in March of 1970 to be headed by H. E. Cooley, Vice President of the Systems Development Division. The Peripheral Task Force, or Cooley Task Force, as it became known, met regularly both in formal and informal meetings from the middle of March of 1970 until its report to the Management Committee of IBM on July 31, 1970. The objective of this task force was to examine the competitive threat to IBM of plug compatible suppliers. A Telex trial witness, Richard Whitcomb, who was IBM's manager of I/O Systems Marketing from the fall of 1968 to the summer of 1971, participated in the work of the Peripheral or Cooley Task Force on behalf of the Data Processing Division. A purpose of the Peripheral Task Force was to study and recommend plans and product strategies to impede the growth of IBM's plug compatible competition. The Peripheral Task Force made indepth analyses of various plans and strategies each having as a significant purpose the containment and retardation of the growth of IBM plug compatible competitors. The task force made in-depth assessments of the status of plug compatible competition and analyzed the viability of particular plug compatible competitors, including Telex.'
The first corporate action taken thereafter by IBM to carry out the task force recommendations was a repricing and rearrangement of its disk storage device. The disk drive peripheral units of the competition had made serious inroads on IBM's disk drives. The model announced by IBM was 2319A and was a reworked, rearranged version of units previously marketed, and the results achieved were essentially the same as those by the prior units. This 2319A unit used basic components which were available and returned by users. The rental announced for the 2319A was below that charged on the prior units, and was below the Telex price. stThe trial court found:
'. . . IBM's price cuts for the 2319A and IFA were not justified upon the basis of reduced manufacturing costs.
'F78. IBM may have reduced its cost somewhat through reuse of 2314's which were being returned to IBM because of plug compatible competition, but it is clear from the evidence that any decreased cost was of minor importance or influence in the Mallard plan and that price reduction independent of cost on limited products in competition with plug compatible supliers was the primary purpose of the response. . . .
'F79. The 2319A price cut was designed by IBM specifically to contain plug compatible competition. It originated in the Cooley or Peripheral Task Force and was approved by top management. Its primary purpose was to maintain control of the plug compatible disk market for IBM. It was introduced by IBM with the specific purpose and intent of suppressing plug compatible disk competition. IBM admits, indeed argues, that its action was a competitive response necessitated by the inroads of plug compatible competition and that it in fact did not succeed in maintaining IBM's market share. But IBM already possessed a dominant market share, and continues to do so. Notwithstanding lawful acquisition theretofore, its intent to maintain its monopoly by unlawful predatory conduct cannot be equated reasonably with an ordinary competitive response.'
'F80. IBM, in October, 1970, organized a second peripheral task force to analyze plug compatible competitors in the disk drive area. The scope of the task force study included analyzing of the marketing, management, maintenance, production and engineering capability of IBM's plug compatible competitors. The group was directed to study and estimate the announcement and first customer shipment dates on PCM's 3330 equivalents and make a cash flow analysis, including financing arrangements, of PCM's, to make an estimate of the PCM's 2314 manufacturing cost and to determine 'how long can OEM PC suppliers go on 2314 prices?' This group's report concerning Telex concluded that Telex was viable, that its management was competent and aggressive and that it had a strategy of marketing a full line of high volume IBM plug compatible peripherals, that its inhouse engineering capability was good, but that its manufacturing costs were 10% to 15% above IBM's. The Telex analysis concluded that Telex's cash flow was inadequate to permit Telex to finance its own lease base and that Telex's key exposure was 'impact by IBM--shortens product life."
IBM made studies of the impact on Telex and Memorex of price reductions of disk drives. The management was contemplating a reduction in prices of such units to be used with another type of its central units. The studies indicated that the reduction would cause a price cut by the two competitors and would have a 'very serious impact' on their profits and revenues.
The 2319B project with a rearrangement and repackaging was announced in December 1970 with price reductions. The trial court found that the 2319B announcement 'was purely a price cut to a point below the prices charged by competitors including Telex.' The trial court also found (F84):
'The 2319B was designed by IBM as a predatory action contrived to maintain its 94% control of the plug compatible disk market.'
'After the decrease in Telex disk device prices, the order rate of Telex disk devices again increased significantly.'
'IBM's 2319B announcement failed to retain IBM's high share of the plug compatible disk market and failed to contain the growth of IBM's plug compatible competition during the first quarter of 1971. The latter continued to make strong advances with its installation in the 2314 disk drive area.'
The memory devices underwent a substantial technical change during the period in issue. There were also price reductions on the memory units, and the combination of the units with the CPUs in one 'box.' The older memory unit was a magnetic core unit and the new one based on a different principle was called a FET.
'F108. . . . The work of this memory task force included an attempt to fix a price for IBM's monolithic FET memories that would influence potential plug compatible competitors to stay out of the market. The IBM Management Review Committee set the monthly rental price for IBM's FET monolithic memory at $5,200 per month per megabyte, which was less than the amount reporting experts had indicated a potential competitor would be required to charge in order to enter the market and be profitable and viable.' (The trial court is in error on this point as it has confused the pricing of the old memory device with the FET device. The $5,200 figure rental price the court mentioned was for the older memory device and not the FET.)
'F107. While cost and performance justifications may have existed to an extent, it is found that IBM lowered the price on its FET monolithic memory products and raised prices on its CPU with the primary purpose of creating barriers to entry for potential plug compatible memory competitors. . . .'
'. . . Neither the design of the 370/158 and 370/168 nor the price of $5,200 per megabyte per month prevented Telex from planning competing memory products and in March, 1973, it announced that it would market memory components for 158 and 168 systems. Control Data, Itel, Ampex and Intel have announced memories for IBM's 370/158 and 370/168 systems at prices substantially below IBM's price.'
The trial court found, referring to all price reductions, that 'the price cuts in some instances put IBM prices below those of its plug compatible competitors.'
'F111a. There was no evidence that IBM reduced prices below cost and a reasonable profit. Indeed, when announced the profitability of the 2319 disk storage units, the 370/158 and 168 CPU's and CPU memory elements were anticipated to be in excess of 20%. Likewise, at the announcement of FTP it was anticipated that the profitability of the products to which it applied would be at least 20%. Those profit margins in part, of course, would have been achieved by obtaining leases of products which would have otherwise been made by Telex and other PCM's. Those price reductions are found to be predatory.'The fixed term leasing plan of IBM did not cover central processing units. During the price reductions on peripheral units, IBM increased slightly the charges on its central processing units and on such units including 360 memories. The record shows that the central units on which prices were raised were the result of considerable development costs, had improvements incorporated in them, and contained a larger number of parts newly designed. There is no indication that the increase was not reasonable and the trial court did not find it to be otherwise. These prices are within the general finding of reasonable prices. However, the trial court found the increase to have been made to offset the reduction in prices of the peripherals.
The following finding of the trial court quoted in part sums up the position it took as to the leasing and pricing. It also demonstrates the emphasis the court placed on the IBM task force studies of competition, and the source of the 'predatory' appellation it used:
'F112. IBM'S growth and success in the industry have been due in substantial measure to its skill, industry and foresight. It has tended to set the standard for quality in the EDP industry for products and services. . . .
'. . . I therefore cannot fully agree with Telex's contention that 'IBM did not gain, nor has it maintained its position in the industry through skill, industry and foresight.' No doubt it gained a dominant position in the industry through a praiseworthy degree of these qualities. Whether there was anticompetitive conduct that went along with them in recent years prior to 1969, the record does not disclose. The real problem here is notwithstanding this, whether IBM has maintained its monopoly position, or attempted to do so, by unlawful conduct since 1969. In the respects determined here in the critical period at least it must be recognized that its diligence and foresight have included the competitive studies and the anticompetitive objectives and intent heretofore found, and that particularly as applied to this case have included an attempt to substantially constrain or destroy its plug compatible peripheral competition by predatory pricing actions and by market strategy bearing no relationship to technological skill, industry, appropriate foresight or customer benefit. . . .'
The trial court, to the 'acts' of IBM described above, applied a standard it derived from a group of cases it relied upon and quoted from. Its view was summarized in Conclusion 6 which in part is as follows:
'C6. I believe the applicable rule to be that monopolization in violation of Section 2 of the Sherman Act involves two elements: (1) The possession of monopoly power in the relevant market or submarket and (2) the willful acquisition or maintenance of that power with intent to monopolize, which intent need not be evidenced by predatory practices but which is not to be gathered merely from growth or development as a consequence of a superior product. (Citations omitted).'
'It is sufficient that monopoly power is willfully acquired or maintained as distinct from the growth or development as a consequence of a superior product, business acumen or historic accident.'
It is obvious that the reduction in prices by IBM resulted in price reductions by others in the market. These others had in the past priced below IBM as the record shows that Telex was the next below IBM in price levels and the others below Telex. The reduction was a disturbance in the price structure. As to Telex the record shows that it was able to secure substantial price reductions from its suppliers as to some items when this took place. The record also shows that IBM costs were greater than those of Telex and others in the market and the reasons therefor are obvious. After the price reductions by IBM, the trial court found it was nevertheless earning a 'reasonable' profit (F95A also). The competition thus followed the IBM pricing, but this does not appear to be significant in view of the trial court's finding that IBM set the technical and quality standards, and was the leader in the development of new technology and products. After the initial price reaction with a significant loss of orders by Telex it within a relatively short time again recovered and began to increase its share of the market. The trial court so found (F89, F67, F116, F108). Better products and lower prices came about throughout the period under consideration.
The trial court did not find nor did it hold that the acts of IBM found to be illegal were derived from its power in the market or its size, nor were they acts which could only have been performed by one with the requisite power. The 'acts' found by the trial court to be illegal were ordinary marketing methods available to all in the market. As to pricing, the trial court found it was used by IBM only to a limited extent, that is, within the 'reasonable' range. The resulting prices were reasonable in that they yielded a reasonable profit. This 'profit' the trial court found to be about 20 per cent. Thus there is no use of price reductions by an economic giant to drop prices to a level where it is not receiving an adequate return and must instead rely on its reserves or other activities to continue producing and marketing the particular product. Instead in the case before us, as demonstrated by the trial court's findings, the particular products of IBM here considered stood on their own feet as to financial returns. Furthermore it was also demonstrated that IBM's costs were above others in the market. From these facts it must be concluded that IBM did not use monopoly power even if it assumed that it possessed such power. The cases relied upon by the trial court all refer to the 'use of monopoly power,' and this is all the law condemns. Again under our assumption IBM gained its market position by technical advances and quality products. The record shows, during the period under consideration, that the parties and others in the market produced more advanced products better suited to the needs of the customers at lower prices.
'The anti-trust laws are as much violated by the prevention of competition as by its destruction. . . . It follows a fortiori that the use of monopoly power, however lawfully acquired, to foreclose competition, to gain a competitive advantage, or to destroy a competitor, is unlawful.'
This use of the power to control prices or to exclude competition (United States v. E. I. DuPont de Nemours & Co., 351 U.S. 377, 76 S.Ct. 994, 100 L.Ed. 1264) was there considered to be the basis of the violation.
In United States v. Grinnell Corp., 384 U.S. 563, 86 S.Ct. 1698, 16 L.Ed.2d 778, there was no issue as to the improper use of contracts and acquisitions both to attain and maintain a monopoly. The Court instead considered only the relevant market problem. In several other cases the 'power' aspect is dominant, as evidenced by United States v. Swift & Co., 286 U.S. 106, 52 S.Ct. 460, 76 L.Ed. 999. There it was stated that size was not enough alone, but gave rise to the opportunity for abuse as therein found. The Court thus held that Swift & Co. had used its size for 'abuse.' We have no finding by the trial court, nor does the record indicate, that this is such a 'power' case, although there are several references to the size of IBM.
In American Tobacco Co. v. United States, 328 U.S. 781, 66 S.Ct. 1125, 90 L.Ed. 1575, the Court referred to the 'thrust upon' monopoly power mentioned in United States v. Aluminum Co. of America, 148 F.2d 416 (2d Cir.); stated that such a situation did not exist in the case before it, and there was an actual conspiracy. The Court quotes certain passages from United States v. Aluminum Co. of America opinion relating to the exclusion of competition, and notes that there is no real difference between competitors who are put out of business or whether they are prevented from entering the market. These quotations also include references to the requirement under section 2 of the Sherman Act that there be the 'power' to monopolize and the 'intent' to monopolize. The American Tobacco opinion is thus not particularly helpful in this case except as to the acceptance of portions of the Alcoa opinion. The 'thrust upon' category described in Alcoa was there mentioned, but not necessarily endorsed. It has elsewhere been generally recognized and the same or comparable language has been used. However, there is no detailed consideration of the meaning or scope of the several elements mentioned in the context of monopoly power lawfully acquired. The trial court did not do so here. It also held that there were no other exceptions than those mentioned in Alcoa, and no limited action whatever would be permitted outside them by way of ordinary business practices. The 'thrust upon' exception has been more frequently used in reference to the attainment of a monopolistic position than in reference to what one with legitimately acquired monopoly power may do. The element of 'business acumen' in the exceptions has not been defined. If the 'thrust upon' exceptions are adopted, they must be fitted in with the requirement that a 'use' of monopoly power is required. It would be simple to place the 'acts' here under consideration within the 'business acumen' exception, but it is virtually unlimited. However, we do not accept the requirement that the only permitted exceptions, or that the 'thrust upon' shorthand description means that the events or acts must be entirely involuntary. To do so would permit the defendant corporation to do nothing whatever by way of change in marketing. There must be some room to move for a defendant who sees his market share acquired by research and technical innovations being eroded by those who market copies of its products. It would seem that technical attainments were not intended to be inhibited or penalized by a construction of section 2 of the Sherman Act to prohibit the adoption of legal and ordinary marketing methods already used by others in the market, or to prohibit price changes which are within the 'reasonable' range, up or down. Under the unusual market circumstances before us, to so interpret the Act to prohibit such actions is to protect the others in the market from ordinary competition, and was an incorrect interpretation of applicable law.
It is necessary to briefly consider the characterization of the above considered marketing changes as 'predatory' by the trial court. The term probably does not have a well-defined meaning in the context it was used, but it certainly bears a sinister connotation.
The 'predatory' conclusion was expressed after the trial court had given extended consideration to the creation of 'task forces' by IBM, and the direction of their attention and study to Telex especially and other corporations in the business. The consequences of repricing and the pricing of new products upon competitors was also considered by the trial court to have legal consequences adverse to IBM. The record demonstrates that these acts of IBM are again part of the competitive scene in this volatile business inhabited by aggressive, skillful businessmen seeking to market a product cheaper and better than that of their competitors. To do this, the record shows it was customary for them to study their competitors, all their capabilities, and what may be expected of them when a new product appears on the market. It is IBM's participation in this marketing that the trial court termed 'predatory,' but the record shows this was no more than engaging in the type of competition prevalent throughout the industry. It would not seem necessary to discuss this point at length as it is another manifestation of the conclusions the trial court derived from the 'acts' which we have considered above. This aspect of the case is, for all practical purposes, governed by the opinion in Times-Picayune Pub. Co. v. United States, 345 U.S. 594, 73 S.Ct. 872, 97 L.Ed. 1277. See also Travelers Insurance Co. v. Blue Cross, 481 F.2d 80 (3d Cir.), and Panotex Pipe Line Co. v. Phillips Petroleum Co., 457 F.2d 1279 (5th Cir.).
The 'attempt to monopolize' aspect need not be separately considered.
In the recent case of Kodekey Electronics, Inc. v. Mechanex Corp., 486 F.2d 449 (10th Cir. 1973), we hewed to the oft-repeated statement, found in the Restatement of the Law of Torts, § 757, Comment b, that a trade secret consists of any formula, patent, device, plan, or compilation of information which is used in one's business, and which gives him an opportunity to obtain an advantage over competitiors who do not know it. In that case we also noted that generally just what constitutes a trade secret under the above definition is a question of fact for the trial court. Let us briefly examine the trial court's findings regarding misappropriation of trade secrets. In this regard, of course no one testified that he 'saw' Telex misappropriating IBM's trade secrets, nor did any quondam IBM employee admit that he had taken IBM's trade secrets with him to Telex. But, in our view, the facts and circumstances, when viewed in their totality, do permit the inference that there was such misappropriation.
The heart of the trial court's findings on the issue of misappropriation is that Telex lured key employees away from IBM with the promise of greatly increased salaries, plus substantial bonuses, and that these quondam IBM employees brought with them IBM trade secrets which enabled Telex to market plug compatibles sooner than it would have otherwise been able to by waiting till IBM equipment hit the open market and by then duplicating the same through reverse engineering. It was this 'head start' or 'lead time' that placed Telex in a better economic position because of its misappropriation of IBM trade secrets. Specifically, the trial court found that the hiring of the IBM employees James, Gruver and Clemens, and the utilization of the trade secrets which each brought with him to Telex, enabled Telex to hit the market sooner than it would have otherwise been able to with Telex's version of the Aspen tape controller, and at the same time substantially advanced Telex's work related to a duplication of IBM's Merlin disc controller. The latter project was apparently terminated by Telex before completion.
We do not here propose to summarize all of the trial court's findings on the matter of misappropriation of trade secrets, or to detail the supportive evidence for such findings. As indicated, the trial court made elaborate findings on all phases of this case, and its findings on the counterclaim are numbered 132 to 168, and appear at pages 313 to 328 in its opinion, which in turn appears at 367 F.Supp. 258. These findings speak eloquently for themselves, and it is sufficient here to simply state that our study of the record indicates that the trial court's findings of fact are amply supported by the record.
'The facts here go beyond the mere termination of employment and the acceptance of employment from a competitor; disclosures to employers of information acquired during the course of previous employment which was a matter of general knowledge or information as it might be retained in memory; the utilization of skills, expertise and general technical and business information learned in former employment; the employment of 'key' employees of a former employer to obtain skills and knowledge in the usual course of business; the obtaining or disclosure of data not confidential or which do not constitute trade secrets reasonably protected by others; information disclosed by the products marketed; the disclosure of information that could not be considered to have been 'discovered'; the disclosure of information readily available from other sources; or matters which are generally known in the trade or readily discernible by those skilled in the trade, and such circumstances.
'The trade secrets or confidential information found here clearly fall within the definition of formula, patterns, business plans, compilations of information or technical knowledge which were used in IBM's business, which were important in that business, which were treated and sought to be protected as confidential to IBM for the purposes of its business, and which entitled IBM legitimately, by reason of its exceptional diligence, technology and discovery to obtain legitimate competitive advantage over competitors not possessing such knowledge or information and not able, legitimately and within a reasonable time frame, to obtain it otherwise. Telex obtained these trade secrets from IBM by a massive and persuasive program designed to induce the breach of known obligations of IBM employees or former employees. That such information or part of it could have been subsequently procured by Telex, given enough time and expense, by independent investigation, research or experience, did not justify Telex's conduct. That subsequent to the invasion of IBM's trade secrets a portion of the information in the course of marketing of IBM products became available to the public, including Telex, did not excuse Telex's conduct in the first instance nor insulate it from liability to both monetary and equitable relief. . . .'
As above mentioned, the trial court awarded IBM the sum of $20,900,000 as compensatory damages. This sum is broken down as follows: (1) $7,500,000 as damages sustained by IBM in connection with its Aspen tape system; (2) $10,000,000 as damages sustained by IBM in connection with its Merlin disc system; (3) $3,000,000 as damages for increased plant security measures put into effect by IBM as a result of Telex's efforts to appropriate IBM trade secrets; and (4) $400,000 as additional expense incurred by IBM for work performed by IBM in its own plant, which work would otherwise have been farmed out at a lesser cost, but was not farmed out because of the fear by IBM that in so doing trade secrets would somehow be 'leaked' to outsiders, including Telex. The sum of these four items equals $20,900,000, the amount awarded IBM by the trial court as compensatory damages.
In International Industries v. Warren Petroleum Corp., 248 F.2d 696 (3d Cir. 1957), the Third Circuit declared that by analogy to patent infringement, the proper measure of damages in a misappropriation of trade secrets case 'is not what the plaintiff lost, but rather the benefits, profits, or advantage gained by defendant in use of the trade secret.' In assessing the 'benefit' accruing to the misappropriator of trade secrets, that court applied the so-called 'standard of comparison' test. That test contemplates a comparison of the costs incurred by the defendant using the stolen trade secret, and the costs that would have been incurred had he not used the trade secret. The difference between the two is the 'benefit' accruing to the defendant, and is the measure of plaintiff's damages.
Somewhat in line with the foregoing is Gordon Form Lathe Co. v. Ford Motor Co., 133 F.2d 487 (6th Cir. 1943). That was a patent infringement case but, as was above mentioned, courts have indicated that trade secrets cases are analogous to patent infringement as concerns measure of damages. In Gordon Form Lathe Co., the court held that the correct measure of damages is the 'advantage' accruing to the infringer, namely, the 'savings' which the infringer derived from using the plaintiff's patent, which saving constitutes 'profit' which the plaintiff, the patent holder, was entitled to recover.
However, in Sperry Rand Corp. v. A--T--O, Inc., 447 F.2d 1387 (4th Cir. 1971), the Fourth Circuit indicated that perhaps 'loss' to the plaintiff, rather than 'benefit' to the defendant, was the better measure of damages in a misappropriation of trade secrets case. In this regard that court commented as follows:
'. . . There are two basic methods of assessing damages for misappropriation of trade secrets: one, the damages sustained by the victim (the traditional common law remedy), and the other, the profits earned by the wrongdoer by the use of the misappropriated material (an equitable remedy which treats the wrongdoer as trustee ex maleficio for the victim of the wrongdoer's gains from his wrongdoing). R. Ellis, Trade Secrets § 286 (1953); Restatement of the Law of Torts §§ 746 and 747 (1938); R. Callman, The Law of Unfair Competition, Trademarks and Monopolies § 59.3 (1965). Ordinarily a plaintiff may recover either, but not both, because to allow both would permit double recovery. Ellis, supra, § 287; Restatement, supra, § 747(c); Harley & Lund Corp. v. Murray Rubber Co., 31 F.2d 932 (2d Cir. 1929), cert. den., 279 U.S. 872, 49 S.Ct. 513, 73 L.Ed. 1007 (1929); Consolidated Boiler Corp. v. Bogue Elec. Co., 141 N.J.Eq. 550, 58 A.2d 759 (1949). Since the objective in allowing damages is to compensate the plaintiff for the difference in his position before and after the misappropriation of his secret, his probable loss may be the more significant measuring rod than the misappropriator's actual gain. Callman, supra, § 59.3 at 497. . . .'
In Clark v. Bunker, 453 F.2d 1006 (9th Cir. 1972), the Ninth Circuit indicated that the measure of damages for wilful misappropriation of a trade secret was not limited to the misappropriator's profits, and that the plaintiff there was also entitled to his 'loss,' which in that case was not in any manner related to the benefit accruing to the misappropriator. That court commented that since the unification of law and equity, the proper measure of damages was no longer an 'either or' matter, i.e., damages limited to either plaintiff's loss, or defendant's benefit, and that it could be a combination of both where the circumstances called for such in order to make the plaintiff whole. And perhaps that is a common thread in all of these cases, i.e., the plaintiff should be made whole, and, at the same time, there should be no double recovery. Let us examine the damages awarded in the instant case against this backdrop of cases.
As previously mentioned, the trial court awarded IBM the sum of $7,500,000 as damages sustained in connection with the Aspen project. Of this amount $4,500,000 represented monthly rentals lost by IBM as a result of Telex's misappropriation of trade secrets which enabled Telex to get its product on the market sooner than would otherwise have been the case. In other words, through the use of these trade secrets, Telex was able to market its peripheral units much sooner than if it had waited for the IBM product to be marketed, and then have duplicated it through reverse engineering. The net result was that because of its misappropriation of trade secrets Telex products displaced IBM products in the rental market sooner than would otherwise have been the case, resulting in a loss of rentals to IBM. In this regard the trial court first determined the total number of rental months lost by IBM, and then the average monthly rental price, and in this manner arrived at the loss incurred by IBM when its machines were displaced by Telex products, which rented at a lower figure. We find no error in the award of this sum, which represents a direct loss of income to IBM. There is some suggestion that this item should be limited to the 'net profit' which IBM would have realized from the continued rental of its products. The record indicates, however, that IBM lost the entire monthly rental when its products were displaced by Telex products. In sum, this item of damage is in our view proper, and finds support in the record.
The trial court also allowed IBM an additional $3,000,000 as further damage sustained by it in connection with the Aspen project. Some of the Telex products directly and immediately displaced IBM rental units. However, Telex also marketed its products to others who had not themselves done business with IBM. The trial court was of the view the IBM should be recouped for the profit realized by Telex in connection with the marketing of its products to persons other than those who had been using IBM products, and attempted to do so by determining the extent to which Telex had been unjustly enriched. In arriving at this award the trial court first found that IBM had expended $10,000,000 on the development of the Aspen project from the start of the program till the date of the first customer shipment, and that Gruver and others left IBM half way through the development program, taking with them a substantial part of the information developed through the first half of the program at the cost of $5,000,000. The trial court then recognized the 'standard of comparison' test referred to in International Industries v. Warren Petroleum Corp., supra, and attempted to ascertain the unjust enrichment accruing to Telex through savings, separate and apart from the specifically proven lost rentals. For this reason it scaled down the $5,000,000, which was the total unjust enrichment accruing to Telex, to $3,000,000, and awarded IBM that sum, in addition to the earlier award of $4,500,000. We think such was proper and is not a form of double recovery. Not to have allowed such would have been a denial to IBM of a substantial portion of the damage sustained by it in connection with the Aspen project. In sum, we are not inclined to disturb the award of the trial court of $7,500,000 in connection with the Aspen project.
As was recognized in Gordon Form Lathe Co. v. Ford Motor Co.,supra, in a proceeding such as this one, damages can seldom be proven with mathematical certainty, 'nor anything approaching it, but we should reach the degree of likelihood on which reasonable men are content to act in the every day concerns of business life.' We conclude that the award of the trial court of damages for $7,500,000 in connection with the Aspen project, and $10,000,000 in connection with the Merlin project are not speculative, and, while such may not have been established with mathematical precision, they do meet the 'degree of likelihood' test. The fact that such damages may be difficult to pin down should not militate in favor of the wrongdoer.
The trial court also awarded IBM the sum of $3,000,000 for 'increased extraordinary security costs reasonably occasioned by Telex's unlawful activities,' the trial court observing that such figure was a 'fair approximation' and a 'nonspeculative' minimum amount. In our view, however, this particular item is speculative and cannot be sustained. The reasoning of the court was that this stepped-up plant security on the part of IBM, consisting of additional guards, television cameras, sensors, locks, safes, computer-controlled access system, and the like, was occasioned by the fact that Telex was luring IBM's employees away from IBM by the offer of substantial salary increases, and bonuses. This item of damage might well under different circumstances be proper. But here we fail to perceive how the increased security costs were the proximate result of Telex's hiring of IBM employees. Telex was not climbing fences or breaking down doors in its appropriation of IBM trade secrets. Telex's methods were more subtle, involving the luring of IBM employees who brought with them the trade secrets in question. In any event, we fail to see how this particular $3,000,000 figure is attributable to Telex and it is too tenuous to be permitted to stand.
The judgment of the trial court against IBM must be reversed because it is based upon an erroneous determination of a fundamental element in the case. This element is the 'market' as the term is used in the antitrust laws, and in which the competition, the market shares, the acts, and the identity of the competitors may be evaluated and compared. The trial court's definition of this 'market' was in error as described above.
The judgment against IBM must also be reversed because, as stated above, the findings of fact as to the 'acts' of IBM made by the trial court when evaluated under the Sherman Act and when set in the context of the prevailing court opinions do not constitute a violation of law.
The case is so reversed, and is remanded for entry of judgment for defendant on the complaint, for consideration of trial costs and trial attorney fees, and for entry of judgment for IBM on its counterclaim as above provided.*
By way of comparison, Telex's share of the total EDP industry has been considerably smaller than IBM's, although its growth has been rapid. Telex reported EDP revenues of $870,000 in fiscal 1967, increasing to almost $57 million in fiscal 1971
In Finding 66, Finding 67 and Finding 68, the District Court enunciates the statistics which it feels are relevant to a consideration of IBM's status in this 'plug compatible peripheral market.' IBM's revenues in 1970 for its plug compatible peripheral products equalled $1,137,819,000--slightly less than one-third of its total 1970 revenues for all electronic data processing products. In that same year, all other manufacturers of IBM plug compatible peripheral products received slightly less than $100 million in revenues. With regard to revenues from specific types of peripheral products in 1970, IBM was said to have 90% of revenues from tape units attached to IBM CPU's, with plug compatible competitors having 10%; IBM had 68% of revenues from disk drive units, with competitors having 32%; IBM had 99.6% of all revenues for memory products attached to IBM CPU's, with competitors having the remaining 0.4%; IBM had 92.3% of revenues from communications controllers attached to IBM CPU's, with competitors having the remaining 7.7%.
Based on the above and other figures, qualified by certain other factors which the District Court felt appropriate, the court made a specific finding that IBM's share of the relevant submarkets or the combined submarkets comprehended in the general market classification 'peripheral equipment plug compatible to IBM' was such as to permit and support an inference of monopoly power on the part of IBM.
A cursory analysis of many of the exhibits relative to the work of the Cooley Task Force leaves one with some doubt as to whether the findings of the court are established. These exhibits do reflect that the task force was concentrating on the subject of plug compatible peripherals, that they were interested in determining IBM's 'exposure areas,' and that they wanted to develop an 'optimum strategy.' The exhibits also indicate that the competitive areas were being studied on a product-by-product basis. But the exhibits also indicate that the task force was concerned with better economies and price performance, accelerated technological development, and shielding products through subsystem design as a way of maintaining IBM's market share. The task force did evidence an interest in knowing about IBM competitors' economic 'viability, or lack thereof,' in particular about Telex and Memorex
Briefing charts used by the task force in its report to the Management Committee on July 31 indicated that price was the big reason why IBM was losing customers in the plug compatible market. The Management Committee was also given forecasts of what would happen to IBM's share of the plug compatible peripheral market by 1976 if the trend of erosion continued. Whatever decisions were reached in the Management Committee meeting, Cooley concluded in an August 3 memo that future action in the peripherals area would be 'product strategy oriented.'
IBM argued that the 2319A was a competitive response to market conditions. They also justified the project on the ground that it enabled them to reuse 2314 disk units which were being turned back into IBM by customers who were switching to competitors' plug peripheral products. While the court considered this argument, it considered it of minor importance as a motive for IBM's price cut. Instead, it considered the 2319A a price cut not justified on the basis of reduced manufacturing costs, designed to have the maximum impact on IBM's plug compatible competitors. It considered the price cut designed to contain and suppress IBM's plug compatible disk competition, and intended to unlawfully maintain IBM's monopoly share of the disk drive market
The court did acknowledge that the price cut was not below cost or below a reasonable expectation of profit for IBM. (Finding 111a)
The District Court found that at this time Telex was IBM's leading competitor in the plug compatible field
'Telex is actively marketing their new 1403 plug compatible printer. It is faster, cheaper and has unique on-line or off-line capability. On top of these advantages, Telex offers unlimited use versus our 30% additional use charge on the 1403. This raises the Telex discount from 25% to 40%. Since the first of the year, 99 Telex competitive situations have been reported.
'The key attraction to Telex is the unlimited use plan. Our 30% additional use charge is a source of customer irritation as well as expense. . . . We believe that an earlier response to the needs of the marketplace is called for.' (PB 52; E 989).
Referred to under the code name of SMASH (shades of James Bond!)
'Statistically, the number of IBM employees hired by Telex has not been impressive. Of those personnel who had formerly been employed by IBM some of them were employed by Telex after intervening employment by third parties and some were employed immediately after the termination of their employment at IBM. On March 31, 1970, Telex employed 50 engineers of whom one was a former employee of IBM. On March 31, 1971, Telex employed a total of 88 engineers, of whom 18 were former IBM employees, 8 of these were employed directly from IBM. On March 31, 1972, Telex employed a total of 145 engineers, of whom 31 were former IBM employees; 13 of these were employed directly from IBM positions. On March 31, 1973, Telex employed a total of 129 engineers, of whom 12 were former IBM employees; 3 of these were employed directly from IBM. The remainder of Telex's engineering staff was employed after no previous IBM experience. They were obtained either directly from schools or with work experience from self-employment or from some 60 other employers. One of the principal sources of engineering personnel was RCA, which abandoned its electronic data processing venture in 1971; a total of 32 of Telex engineers employed as of March 31, 1973, came to Telex directly from RCA. On March 31, 1973, Telex had a total employees of 1,929, of whom 152 had former IBM employment experience.'
Telex never actually completed its project of copying a Merlin-type subsystem, but stopped work on the project in April 1972, at which time the court estimated that it had completed more than half of the work on the project. In May 1972, Telex sold its rights to the Merlin-type project under a license agreement to Control Data Corporation. The court found that at the time of abandonment of the project in April 1972, as a proximate result of improper utilization of IBM trade secrets, Telex had unjustly enriched itself at IBM's expense in the amount of at least $10 million
Over 250 companies manufacture peripheral devices for use in non-IBM computer systems, and 100 of these companies supply peripheral products for IBM systems. Because it is relatively easy to adapt peripheral equipment for installation in another system, most companies (including Telex) market their equipment for installation in more than one system. Thus, the 'plug compatible' peripheral equipment marketed for use in one system is the same as that marketed for use in another system, except for a necessary change in the 'interface.' IBM claims that the cost of modifying an interface so that it can be used with another system amounts to less than 1% of the product's purchase price
Expert economic witnesses for both parties agreed that, absent control over the entry and growth of competitors, there is no monopoly power. In the plug compatible peripheral industry, the number of companies supplying peripherals has grown from three in 1966 to over 100 in 1974. Such entry into the market has been relatively easy since the PCM merely copies the products originated by IBM
The dramatic improvement in product performance together with the reduction in the price of peripherals disproves monopoly power. Progressively better products at progressively lower prices were not present in cases where monopolization existed
The rapid rate at which IBM's PCM competition has taken peripheral business from IBM in the last five years is inconsistent with the existence of monopoly power
The sophistication, power, and knowledge of computer customers have put pressure on IBM and its competitors. Because sophisticated customers are able to demand and select the best, the number of competitive alternatives has increased, making success in the peripheral market well earned and difficult to achieve
The growth, innovation, and increasingly technological changes in peripheral products are antithetical to the stagnancy which characterizes monopolization
Competition by superior business skill, better products, and greater efficiency, industry, and foresight do not give rise to monopolization. These qualities are allegedly responsible for IBM's success in the market
Many competitive systems manufacturers (e.g. Control Data, Burroughs, Digital Equipment Co., Hewlett-Packard, Honeywell) supply plug compatible peripherals for installation in IBM systems. The ease with which other EDP systems companies can enter into the IBM market is further evidence of the increase in competition in the peripherals industry
IBM's continual introduction of new products does not constitute monopoly power, but represents the historic, legitimate, and merely temporary advantage of the innovator over the copier
See Finding 37
'F52. The court finds that the peripheral devices plug compatible with the CPU's of IBM may be considered the relevant market for the purposes of this case, and that relevant submarkets existed for plug compatible tapes, disks, memories, and printers with their respective controllers, and communications controllers.
'F53. CPU's are not reasonably includable within this market and these submarkets, nor are software as such, but the peripheral equipment plug compatible to IBM CPU's which are separately leased by leasing companies to end-users are. Alternate sources of computer time such as service bureaus, timesharing companies, data centers, users selling excess time and the like are not reasonably includable in the relevant market or submarkets with which we are concerned in this case, since their competitive relationships are tangential and indirect, and do not supply a real or substantial competitive force in the relevant markets mentioned. It is true that a large part of the competition in the industry takes place on a systems basis, but the relationship of this competition to the relevant markets with which we are concerned against is tangential and practically indiscernible. Certainly in another context the competition between systems manufacturers would constitute, or be a part of, a relevant market, but such relevant market is not material under the facts of this case since the competition involved here is not between systems manufacturers but between IBM and plug compatible manufacturers and suppliers.
This is all expressed in the court's final wrap-up on this factual issue
See Finding 38
See Finding 61. For example, according to the U.S. Bureau of the Census figures, IBM's share of the value of 1971 equipment of 'electronic computers and peripheral equipment, except parts,' was only 36.7 per cent
'Q. How about this problem with interfaces, Mr. Grant? Generally speaking, on these peripheral products, what is involved in changing the interface from an interface which will plug in with an IBM system and one which will plug in with another system? A. I don't think I'm qualified to give you an answer to that.
'Q. Sir? A. I don't believe I'm qualified to give you an answer to that.
'Q. Well, you believe, don't you sir; and have said many times before, within the company, that the expense in order to change interfaces is minimal, haven't you?
'Q. And you have been an advocate, have you not, of modifying the interfaces in a way that would enable Telex to attach its products to systems manufactured by other system manufacturers other than IBM? A. Yes, I have.
'Q. How long Mr. Grant, have you urged upon your fellow officers at Telex, that Telex ought to modify its interfaces and offer its products for attachment to other systems other than IBM. A. I don't recall, specifically, but in the general area--the initial request and the initial effort was approximately two or two and a half years ago.'
'(f) We would be willing to interface our equipment with their mainframe at no cost to them and offer this equipment on lease to their customers if they would prefer this route (this would be a mild threat that we could possibly compete with them in the market place if they didn't get on our band wagon.'
Each member of the panel named above collaborated fully in the preparation and writing of the within opinion