Opinion ID: 373838
Heading Depth: 2
Heading Rank: 3

Heading: CalComp's Evidence

Text: 53 The foregoing analysis of the elements of § 2 monopolization and attempt to monopolize demonstrates that if CalComp presented sufficient evidence to go to the jury on the issue of IBM's monopoly power in a relevant market, both of its § 2 claims may be analyzed together. The only remaining elements necessary to establish the monopolization offense in this case would be monopolizing conduct and causal antitrust injury. If CalComp failed to show either of these, its attempt claim must necessarily also fail: first, because as discussed Supra, 13 conduct lawful for a monopolist must, a fortiori, be excluded as a basis for the attempt offense, 14 and second, because the requirement of causal antitrust injury is common to both.
54 Earlier it was noted that CalComp sought to define three relevant product markets: (a) a general purpose computer systems market; (b) an all disk drive and associated controller market; and (c) a plug-compatible disk drive and associated controller market (which excluded disk products for use with the CPU's of other manufacturers). 15 Several experts and industry executives testified, and a great deal of documentary evidence was admitted, in an effort to support each of these market definitions. Not only did the evidence concerning the various market definitions often conflict, but also the testimony and documents purportedly supporting a single market were sometimes internally inconsistent. Still, we assume Arguendo that the third category is an appropriately defined product market. As noted earlier, it is the only market about which CalComp has standing to sue. See Part II Supra. 55 The evidence of IBM's share of the product markets was similarly irresolute. For example, CalComp introduced the testimony of employees of IBM and other industry members concerning IBM's share of the loosely defined general purpose computer systems market; their estimates ranged from as low as 60% To as high as 80%, while IBM's proof was designed to show that none of these figures was even based on the particular market alleged. CalComp offered expert testimony that in 1970, 1971 and 1972, IBM's share of the all disk drive and associated controller market was 79.4%, 70.1% And 67.6% Respectively, while IBM's evidence was that its share was under 30% During these years: CalComp's figures reflected cumulative shipments of disk products, while IBM's data was based on annual shipments. IBM contended that because its share of market was rapidly declining (from 100% When it invented disk products in 1960 to 25% In 1975), cumulative measures were misleading. In the plug-compatible market, IBM again, because it invented these products began with a 100% Share; here too, CalComp's own evidence showed that IBM's share of market declined steadily. 56 While the district judge expressly made no finding on the adequacy of proof of share of a relevant market, he noted in passing that he was not inclined to direct a verdict solely on that ground. Because we conclude that there was no substantial evidence that any of IBM's alleged acts both constituted unreasonable conduct for a monopolist and produced causal antitrust injury to CalComp, we need not become enmeshed in the hundreds of pages of conflicting and complex evidence on this element of CalComp's claim. For purposes of this decision, we assume that IBM possessed monopoly power in the third purported market during the period 1963 to 1972. 57 We may therefore accept, with one important addition, CalComp's statement in its brief that the main issue of this appeal is whether the Acts and Practices of IBM . . . constitute a violation of either the monopolization or attempt to monopolize clauses of Section 2 of the Sherman Act, or both. Should we decide this question in the affirmative, the additional question we must answer would be whether any loss CalComp suffered actually resulted from the asserted § 2 violation (as opposed to lawful competitive practices).
58 CalComp argues that IBM directly injured it in three ways. Principally, CalComp contends that IBM engaged in predatory pricing by cutting its peripheral equipment prices in response to competition from CalComp and other manufacturers. CalComp also attempts to show that IBM made design changes on certain of its CPUs, disk drives and controllers of no technological advantage and solely for the purpose of frustrating competition from plug-compatible manufacturers. Finally, it urges that IBM raised CPU prices in an effort to offset revenue losses caused by its price reductions on peripheral equipment, and that these price increases constituted impermissible conduct for a monopolist. 16 59
60 When IBM introduced its new System 370 Model 145 in September, 1970, it designated as the standard disk drive for use with this CPU a reworked version of earlier disk drives that had been replaced by competitive equipment and returned to IBM. The monthly rental for this three-drive disk product, the 2319A, was 30% Below that for IBM's other four-, two-, and single-drive disk products on a per-drive basis in part because the reuse of earlier disk drives permitted reduced development and manufacturing costs. The integrated control function in the Model 145-2319A system was also priced 60% Lower than earlier stand-alone controllers, also due at least in part to cost-saving design changes. As opposed to the System 370 Models 155 and 165, which were high-end processors using the newly-designed 3300 high-speed disk product, the Model 145 was to be the lower-priced mainstay of System 370 for commercial applications. Viewing all of the relevant evidence in the light most favorable to CalComp, IBM's purpose in offering the lower-priced 2319A disk drive in conjunction with its Model 145 was twofold: primarily, to regain market share from peripheral equipment manufacturers who were flourishing under IBM's high price umbrella; 17 and secondarily, to reduce the overall price of the 145 system, thereby providing the lower-priced alternative to the higher-performance, higher priced models using the 3300 disk product that was to be the 145's market niche. 18 CalComp introduced no evidence that the lower-priced 2319A was not substantially profitable, as IBM asserted. 19 61 Three months after the announcement of the 2319A, IBM introduced the 2319B disk drive for use with all System 360 models. Like the 2319A, this was also a retread manufactured from older IBM disk drives that had been replaced with other equipment and returned by customers. IBM similarly priced the three- drive 2319B more than 30% Below its other disk drives on a per-drive basis. Also, it made no additional use charges (for use above a fixed number of hours per month) for the 2319B as it did with its other disk drives, in effect a further reduction in price Vis-a-vis these other products. 20 The 2319B, viewing all of the evidence in the light most favorable to CalComp, was introduced for the express purpose of abating competitive inroads by other peripheral manufacturers. 21 CalComp introduced no evidence that the 2319B, like the 2319A, was not substantially profitable. 22 62 Following IBM's 2319B announcement, virtually all of the plug compatible manufacturers reduced their own prices below the 2319B. 23 As a further response to this competition, 24 IBM reduced its prices on peripheral products in still another way with the introduction of its Fixed Term Plan (FTP) on May 27, 1971, described by CalComp as the single most important act in the CalComp litigation and the principal basis for its damage claim. Prior to the introduction of FTP, IBM offered its products only for sale or 30-day lease, although virtually all of its competitors offered reduced prices for longer leases ranging from one to eight years. Under FTP, IBM customers were given the additional option of an 8% Discount for signing a one-year lease and a 16% Discount for a two-year lease on certain peripheral equipment, principally disk drives, tapes and printers. Additional use charges were also eliminated on FTP leases, consistent with the practice of most of IBM's competitors. Customers but not IBM could cancel the leases in return for a termination charge. Purchase prices on FTP products were also reduced by 15%. The evidence at trial was uncontroverted that FTP price reductions were expected to return a profit of 30% Of revenue before taxes. Lease revenues would be reduced through 1972, but through 1975, FTP was expected to generate $165 million more profit than would have been the case without FTP lease options. This increased profitability due to FTP stemmed not only from an expected increase in market share, but also from longer average lease lives and reduced sales, reconditioning and reinstallation costs. 63 Finally, following its adoption of FTP, IBM introduced two other new products: the Integrated Storage Controller (ISC) and the Integrated File Adaptor (IFA). ISC and IFA were options available for use with certain System 370 models, allowing direct attachment of disk products to the CPU. Customers choosing one of these inboard storage control units could save money by avoiding purchase or lease of a separate controller for some of their disk products, because the price of the ISC and IFA options were lower. Thus, ISC and IFA represented price cuts Vis-a-vis IBM's outboard controllers. 25 However, there is little evidence in the record that the ISC and IFA inboard storage control units were priced in response to competition. Rather, the evidence indicates that these products were less expensive to produce. CalComp's chairman, for example, testified that IFA enabled the CPU to perform functions which had been performed in the standalone controller, at a much cheaper cost of design and manufacture. For purposes of analysis, however, we will assume that the IFA and ISC options, like the 2319A, 2319B and FTP products, were priced primarily in response to competition from the plug compatible manufacturers. 64 The test of the reasonableness of the foregoing pricing actions, and the principal question facing us in this case, is whether IBM which was the inventor and dominant supplier of the disk products in question had the right to respond to the lower prices of its competitors with reduced, but still substantially profitable, prices on its own products. We conclude that it did. 65 CalComp's principal damages claim is for lost revenues as a result of price reductions it made following IBM's 2319B and FTP announcements. 26 But since these price reductions admittedly resulted from competition by IBM and since, as both CalComp's and IBM's evidence clearly demonstrates, IBM's stimulus to price competition was in turn competition from peripheral equipment manufacturers such as CalComp it is impossible to say that CalComp's losses represent compensable injury from acts of IBM unnecessarily Excluding or Restricting competition. See Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. at 488, 97 S.Ct. 690. Rather, IBM's price cuts were a part of the very competitive process the Sherman Act was designed to promote. To accept CalComp's position would be to hold that IBM could not compete if competition would result in injury to its competitors, an ill-advised reversal of the Supreme Court's pronouncement that the Sherman Act is meant to protect the competitive process, not competitors. See id. 66 In Grinnell, as noted Supra, the Supreme Court excepted from monopolizing conduct those actions directed toward establishing growth by means of a superior product, business acumen, or historic accident. 384 U.S. at 571, 86 S.Ct. at 1704. IBM's dominance in disk products, of course, was not due to historic accident. CalComp witnesses repeatedly testified that IBM's position and success were due to its capable management, technological leadership, market orientation and superior products. Particularly relevant is the fact that IBM invented the disk products that CalComp and other manufacturers copied. As one of CalComp's witnesses, a former chairman of Scientific Data Systems, acknowledged, IBM pioneered in the use of moveable head disk technology . . . . More bluntly, according to CalComp's Chairman: 67 (I)f they (IBM) weren't there and hadn't created the market and hadn't made installations, we wouldn't have any market at all. So it's hard to call the guy who's created your opportunity a competitor although certainly IBM doesn't give up easily on any particular order. 68 Granted that IBM's technological innovations resulted in growth as a consequence of a superior product, it was entitled to maintain its consequent dominant position in the market it created through business acumen, which we take to include shrewdness in profitable price competition. The Sherman Act does not draw a distinction between competition on the bases of price and of performance: the two are inseparable parts of any competitive offering. Where the opportunity exists to increase or protect market share profitably by offering equivalent or superior performance at a lower price, even a virtual monopolist may do so. Cf. United States Steel Corp. v. Fortner Enterprises, Inc., 429 U.S. 610, 612 n.1, 97 S.Ct. 861, 864, n.1, 51 L.Ed.2d 80 (1977) (in attempt context, purposes of  'increasing sales' and 'increasing market share' are normal business goals, not forbidden by § 2 without more). As Judge Aldrich observed in Dehydrating Process Co. v. A. O. Smith Corp., 292 F.2d 653, 657 (1st Cir. 1961), the antitrust laws do not require a business to cut its own throat. 69 The boundaries of reasonable price competition have recently been defined in this circuit. In Hanson v. Shell Oil Co., 541 F.2d 1352, 1359 (9th Cir. 1976), Cert. denied, 429 U.S. 1074, 97 S.Ct. 813, 50 L.Ed.2d 792 (1977), we affirmed a directed verdict for a defendant charged with attempted monopolization, holding that the plaintiff's failure to show that the defendant's prices were below its marginal or average variable costs 27 was a failure as a matter of law to present a prima facie case under § 2. More recently in Janich Brothers, also an attempt case, we stated that  'pricing at marginal cost is the competitive and socially optimal result'  of § 2 enforcement. 570 F.2d at 857, Quoting Areeda & Turner, Predatory Pricing and Related Practices Under Section 2 of the Sherman Act, 88 Harv.L.Rev. 697, 711 (1975). The analysis in Hanson and Janich Brothers is precisely apposite in the monopolization context. Indeed, the preceding passage quoted in Janich Brothers dealt specifically with pricing by a monopolist. The thrust of this analysis is that price reductions up to the point of marginal cost are consistent with competition on the merits, since in this case only less efficient firms will be disadvantaged, while a firm pricing below marginal cost by definition incurs losses, so that competition on the basis of efficiency in this situation is frustrated. 70 We recognize that refinement of the marginal or average variable cost test will be necessary as future cases arise. For instance, limit pricing by a monopolist might, on a record which presented the issue, be held an impermissible predatory practice. See, e. g., P. Areeda & D. Turner, Antitrust Law P P 711-722 (1978); Williamson, Predatory Pricing: A Strategic and Welfare Analysis, 87 Yale L.J. 284 (1977); Areeda & Turner, Williamson on Predatory Pricing, 87 Yale L.J. 1337 (1978); Williamson, A Preliminary Response, 87 Yale L.J. 1353 (1978); Scherer, Predatory Pricing and the Sherman Act: A Comment, 89 Harv.L.Rev. 868 (1976); Areeda & Turner, Scherer on Predatory Pricing: A Reply, 89 Harv.L.Rev. 891 (1976); Scherer, Some Last Words on Predatory Pricing, 89 Harv.L.Rev. 901 (1976). And we do not foreclose the possibility that a monopolist who reduces prices to some point above marginal or average variable costs might still be held to have engaged in a predatory act because of other aspects of its conduct. On this record, however, IBM's pricing policies were not predatory. 71 The case before us presents an A fortiori situation as compared to Hanson and Janich Brothers. CalComp has not only failed to produce evidence of pricing below marginal or average variable cost, but it has also failed as well to introduce any evidence to controvert IBM's substantial proof that its price cuts were highly profitable. Moreover, the evidence of both parties established that IBM's disk price reductions were a response to lower-priced competition to which IBM was rapidly losing its disk business. Were § 2 interpreted not to exempt price cuts from attack under these circumstances, there could be no adequate guidelines for a jury to decide the issue of whether the prices at issue were reasonable. The directed verdict as to CalComp's claims based on IBM's price competition was therefore proper. 72
73 As noted above, when IBM introduced its System 370 Model 145 in September, 1970, it announced the 2319A as the standard disk product for use with the 145. The control function for the 2319A disk drive was integrated into the Model 145 CPU, and thus the interface between the disk drive and its control function was different from earlier models. 28 CalComp claimed that it was competitively disadvantaged as a result of these design changes, because it could not legally begin to copy the 2319A until IBM shipped the first of these disk drives, thereby disclosing the design requirements. 74 In February, 1971, IBM introduced its optional Integrated Storage Controller for use with its System 370 Models 158 and 168 which integrated the disk control function into the CPU. CalComp claimed it was injured by the introduction of ISC and the similar IFA, described above, because it was thereby precluded from replacing the control functions on CPUs with these options. 29 75 CalComp characterized these design changes as technological manipulation which did not improve performance. It also complained of the fact that the newly integrated functions were priced below their non-integrated counterparts. But as we have stated, price and performance are inseparable parts of any competitive offering; and equivalent function at lower cost certainly represents a superior product from the buyer's point of view. The evidence at trial was uncontroverted that integration was a cost-saving step, consistent with industry trends, which enabled IBM effectively to reduce prices for equivalent functions. Moreover, there was substantial evidence as well that in the case of Models 145, 158 and 168 the integration of control and memory functions also represented a performance improvement. 76 One of CalComp's witnesses stated: I think in general the manufacturer will try and minimize his costs and where he integrates the control unit the assumption must be that he is achieving a lower cost solution. 30 Other of CalComp's evidence showed that among the reasons a separate control unit is more expensive than integrated control circuitry are that the former requires its own cabinet, frames, power supply, additional cabling and electronics. According to an IBM witness, the monolithic systems technology that preceded the 145-2319A system required a large standalone controller, whereas the new generation technology represented by the 145-2319A system produced a comparable control function which was in the area of ten times smaller . . . . (Y)ou could now put that into the 145 system, utilizing its frames and its covers and then passing on the advantages of that to the customer in a price reduction. CalComp's Chairman stated that as a result of integration, the customer uses less floor space which tends to be relatively expensive in a computer room. 31 77 IBM, assuming it was a monopolist, had the right to redesign its products to make them more attractive to buyers whether by reason of lower manufacturing cost and price or improved performance. It was under no duty to help CalComp or other peripheral equipment manufacturers survive or expand. IBM need not have provided its rivals with disk products to examine and copy, See 3 P. Areeda & D. Turner, Antitrust Law P 738, at 286 (1978), nor have constricted its product development so as to facilitate sales of rival products. The reasonableness of IBM's conduct in this regard did not present a jury issue. 78
79 In July, 1971, IBM announced price increases on certain of its CPUs of up to 8%. The weighted average price increase of all CPUs was 1.5%. CalComp argued that these price increases, instituted two months after FTP was announced, were designed to offset the short-term revenue losses expected from FTP price cuts. After FTP users were locked into IBM peripherals for one or two year lease terms, according to CalComp, they would be unable to change CPUs, thus enabling IBM to raise CPU prices without appreciably affecting demand or profitability. 80 However, CalComp's own evidence indicated that the net effect of FTP and the CPU price increases was not expected to be a wash with respect to either CPU demand or overall profitability. CalComp introduced an IBM memo written after the CPU price increases went into effect stating that the net effects of the Fixed Term Plan and (CPU) price change will probably be a wash insofar as Business volumes are concerned. (Emphasis added). The author of this memo went on to explain that FTP would have the effect of increasing peripheral volume, while the CPU price increases would probably induce adverse reaction on the part of some customers . . . . In terms of overall business volume, the author concluded, (a)ny decrease in system acceptances which occurs will probably be offset by . . . the Fixed Term Plan. In other words, there was not a single demand function for CPUs and peripherals; IBM did not expect to raise CPU prices with impunity, as CalComp asserts, by virtue of the effects of FTP. 81 Moreover, there was no evidence that CPU price increases actually offset the FTP price cuts. According to CalComp's amended complaint, (p)eripheral devices . . . account for between 50% And 75% Of the total value of a system configuration. The trial testimony of Richard Whitcomb, Director of Product Planning at Itel and a former IBM employee, and Edwin McCollister, Director of Market Development at Burroughs, confirmed this. Since, as discussed Supra, the FTP price cuts amounted to 8% And 16%, a jury would be hard pressed to conclude from CalComp's evidence that the CPU price increases in fact offset FTP losses i. e., that a weighted average price increase of 1.5% On CPUs made up for price cuts of 8% And 16% On peripheral products of equal or greater value. 82 Other evidence portrayed IBM's decision to raise CPU prices as motivated by inflation and cost concerns. IBM had not raised its mainframe prices in over four years; its 1971 increases were approved as cost-justified by the newly-formed Price Commission under the Economic Stabilization Program then in effect. 83 Viewed in the light most favorable to CalComp, this evidence does not provide support for its offset theory. Especially since we have already determined that the FTP price cuts allegedly facilitated by the CPU price increases were themselves profitable and reasonable even for a monopolist in any event, 32 it was proper to take the case from the jury on this issue.