Opinion ID: 3009612
Heading Depth: 2
Heading Rank: 5

Heading: Smaller Capacity Computers

Text: The district court considered AMI's proposed market definition to be too narrow because it failed to include smaller capacity computers -- computers below the size and sophistication of a large-scale mainframe that nevertheless would be reasonable substitutes, either singly or in combination. See Allen-Myland, 693 F. Supp. at 274-75. AMI argues that it was error for the district court to include these smaller machines because there was not sufficient evidence of substitutability between these two types of computers. The district court rejected AMI's argument, citing evidence that smaller computers had effectively displaced mainframes in certain applications and noting a trend toward the replacement of large, centralized systems with distributed systems consisting of greater numbers of smaller capacity computers. Id. AMI argues on appeal that this reasoning was flawed because it failed to consider the rapid development of technology over the life cycle of a typical computer. It agrees that some installations that initially required older generation mainframes might be satisfied with smaller machines when it came time to replace their mainframes, because the smaller machines would by then have all the power of the earlier mainframes. Nevertheless, AMI contends, the fact that some users of older mainframe computers might switch to smaller capacity machines proves nothing about whether those smaller machines effectively compete against IBM's current, more powerful mainframes, which are the focus of this litigation. AMI's argument is sound, but unavailing. There was testimony admitted at trial indicating that at least one smaller capacity computer, the Hewlett-Packard HP 3000 series, competed against the IBM 308X series in many applications. The district court was entitled to, and did, credit this evidence. Allen-Myland, 693 F. Supp. at 275. The amici argue that the district court failed to consider the problem of lock-in. Although mainframes and smaller capacity computers may be substitutable when a new computer application is being developed or when an existing application is no longer useful and must be rewritten anyway, they argue that there are significant switching costs that prevent this from happening in the short run. For example, to port an existing application from a mainframe to a smaller computer, the applications software may have to be rewritten, the data files may have to be converted to new formats, and personnel may have to be extensively trained on the new system. The costs of doing so and the delay involved could well cause the computer user to remain with a mainframe-based system rather than convert to a smaller computer; indeed, one court has noted that, for compatibility reasons, over 80 percent of users remain loyal to the manufacturer of their original systems. See Transamerica, 481 F. Supp. at 980 & n.32. Ordinarily, we would not consider this argument because it was not raised in the district court. This case, however, is unusual in that the district court reached its decision in 1988, but the antitrust issues did not become final and appealable until 1993. During that hiatus, the Supreme Court issued its decision in Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. ____, 112 S. Ct. 2072 (1992). Because Kodak is directly relevant to the lock-in argument and the district court never had the opportunity to consider the effect of that case, we would be remiss if we did not analyze the issue now. Eastman Kodak manufactured photocopying equipment that it sold in a competitive market. According to the plaintiffs, who provided service and repair to those copiers, Kodak sought to maintain control over service by restricting the availability of necessary repair parts. Although Kodak argued that it did not have sufficient market power to restrain trade because the market for new copiers was competitive, the Supreme Court held that, under certain circumstances, the fact that the buyer of such equipment was locked into a single supplier could give rise to a finding of market power: If the cost of switching is high, consumers who already have purchased the equipment, and are thus locked-in, will tolerate some level of service-price increases before changing equipment brands. Under this scenario, a seller profitably could maintain supracompetitive prices in the aftermarket if the switching costs were high relative to the increase in service prices, and the number of locked-in customers were high relative to the number of new purchasers. Id. at 2087. The situation may be analogous here. If it is prohibitively expensive to switch to a smaller capacity computer before the normal end of an application system's life cycle, then IBM, at least for those locked-in customers, would not face any realistic competition from smaller machines and would thus possess market power as if they did not exist. The district court cited several anecdotes in the record suggesting that smaller machines are vigorously competing with large-scale mainframes and are often winning out over them. Our review of the record, however, shows that in none of the incidents mentioned was there a mainframe user with a significant base of applications software and data that would have to be rewritten and converted before the application could be moved to a smaller computer. Indeed, in the vast majority of cases, the customer was developing a new application and had an unfettered choice of which type of computer to purchase. In a few others, the system was approaching the end of its useful life and was slated for replacement. This evidence, then, does not support the conclusion that there was not a significant lock-in problem. Nevertheless, this remains an issue of fact for the district court to resolve in the first instance. However, whether to consider new issues on remand is not for us to determine, but is properly a matter for the district court's discretion as presider over subsequent proceedings. Therefore, we express no view on whether the district court should permit a new argument to be pursued at this stage of the litigation. The district court may conclude, for example, that allowing AMI to pursue a new theory not raised until after discovery and the completion of an entire trial would result in undue prejudice to IBM. See Habecker v. Clark Equipment Co., 942 F.2d 210, 218 (3d Cir. 1991). We hold only that the determination whether to consider the lock-in argument, to permit further discovery on the issue, and to hear additional evidence are all within the district court's sound discretion.15 See id.