Opinion ID: 373838
Heading Depth: 4
Heading Rank: 1

Heading: Price cuts on peripherals

Text: 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1970, it designated as the standard disk drive for use with this CPU a reworked version of earlier disk drives that had been replaced by competitive equipment and returned to IBM.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