Opinion ID: 676997
Heading Depth: 3
Heading Rank: 3

Heading: AMI's Massive Losses From Inventory Costs

Text: 114 In addition to finding that AMI would attract no customers at the price the court believed it would have to charge for its service, the district court also found that AMI would suffer massive losses at the IBM hourly rate. It based this conclusion on its belief that AMI would have to maintain an inventory of expensive upgrade parts to provide adequate turnaround time. Because IBM's revenues would average only 1.2% of the net price for the upgrade and its carrying costs for the parts inventory would average 3%, the district court concluded that AMI stood to lose over $35 million by competing with IBM. Id. at 288. Although the court acknowledged that AMI's principal argument was that leasing companies inventoried their own parts and thus saved AMI the costs of doing so, it nevertheless included these carrying costs when calculating AMI's ability to make a profit, based on a purported admission by AMI. 115 It is, of course, true that AMI would have to carry an inventory of parts to give its customers fast turnaround on upgrade installations. This is exactly what AMI did for the earlier 303X series of computers. The exception would be if the customer itself maintained an inventory of parts. Thus, to the extent AMI intended to compete for the business of end-users, who typically do not inventory parts, AMI would have to maintain an inventory, which presumably would be unprofitable given the revenue generated by the installation. Leasing companies, on the other hand, constituted over 90% of AMI's business and were known to inventory their own parts. So, while the relatively minuscule end-user business may have been foreclosed from AMI by the low margins generated by TCM-based upgrades, the business from leasing companies was not. 116 It would be both a non-sequitur and clearly erroneous on its face to find that AMI's argument that leasing companies would inventory their own parts and relieve AMI of that cost is invalid solely because AMI admitted it will incur such costs on its own inventory. The district court, however, relied on its belief that Mr. Allen admitted that AMI would incur inventory costs if it were permitted to compete in the market of 308X net priced upgrades. Id. at 288-89. The record contains the following exchange: 117 Q. And according to Mr. Hamilton's report on damages, he indicates that you have told him that AMI must maintain a certain worth of inventory of upgrades and parts, and that a fair estimate of AMI's carrying costs for that inventory, just for the carrying costs of the interest involved is approximately three percent of IBM's price, whatever you happen to pay for those parts. 118 Did you tell Professor Hamilton that, sir? 119 A. I identified for Professor Hamilton, when he was doing a damage study, he asked me, if you were permitted to compete in this market of net priced MESs, what would be your costs? 120 I identified it would be AMI's intent, similar to the volume procurement agreement, to order many parts from IBM. 121 There was a question whether these parts would come from the parts center on a very rapid response or whether AMI would have to inventory, virtually millions of dollars of inventory. 122 From going on prior experience with the VPA, where we ordered large quantities for inventory and were not using the parts center, he said, wouldn't you have some type of carrying charges? 123 Now, that number that he picked of three percent was if the prime rate were 12 percent.... 124 I don't know further the--all the economic data in regard to what--Mr. Hamilton went further from that, but the question was asked. 125 On the next page of the transcript, Allen then stated that as long as upgrade parts could arrive quickly from the IBM Parts Center, there would be no need for AMI to maintain an inventory. This admission (Allen stated only that the question was asked) does not admit that AMI would be required to carry an inventory for all of its customers. It was therefore insufficient grounds upon which to conclude that inventory costs must be included in every situation in which AMI does business. 22 4. Low Margins and Separate Markets 126 The district court also found that the value of the labor content of 308X MIPS upgrades was de minimis for antitrust purposes. Id. at 283. Later, it referred to another purported admission by AMI's counsel, to the effect that, if the labor content of upgrades were de minimis, then parts and labor would have to be considered a single market. Id. at 289 n. 71. 127 To the extent it might be argued that AMI admitted that a 1.2% margin caused parts and installation to fold into one market, as a matter of law we cannot agree. The record indicates that the total value of all 308X MIPS upgrades performed between 1981 and 1985 was over $2 billion. 1.2% of a $2 billion market amounts to over $20 million. See Allen-Myland, 693 F.Supp. at 292. This amount is not de minimis within the meaning of the antitrust laws. See Fortner I, 394 U.S. at 501-02, 89 S.Ct. at 1257-58 ($190,000 not considered de minimis by the Supreme Court). 5. Conclusion 128 The district court's finding that no separate market existed for installations of upgrades cannot stand. We will accordingly vacate it and remand for further proceedings. On remand, the district should re-examine the issue de novo.