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

Heading: Leasing Companies

Text: The district court first added leasing companies into AMI's proposed market definition. It reasoned as follows: Leasing companies, such as Comdisco and CMI, purchase computer equipment from manufacturers and lease it to users. From a consumer's standpoint, they are an alternative source of computer equipment. They compete with IBM. Leasing companies own approximately 40 percent of all large scale mainframe computers, as defined by AMI. Prof. Levin testified that IBM's share of the market would be reduced by an amount he was unable to determine if leasing companies were taken into account in AMI's market definition. If leasing company transactions involving computers comparable and in many cases identical to the large scale mainframes marketed by IBM are included in the relevant market, and the market is measured on a transaction basis, IBM's share of the market, according to Prof. Almarin Phillips, who testified for IBM as an expert economist, drops to 34.4 percent. Prof. Phillips testified that such a share would not reflect overwhelming activity in the market on IBM's part. Allen-Myland, 693 F. Supp. at 273-74 (footnote and record citations omitted). We cannot affirm the district court's finding that leasing companies form a part of the relevant market. First, the district court relied on the testimony of Professor Levin, AMI's own expert, as an admission that IBM's market share would have to be reduced if leasing companies were added to the relevant market. This reliance is misplaced. Although Professor Levin did affirmatively answer the tautological question whether leasing companies are competitors of IBM when they market IBM manufactured equipment in competition with IBM, this and our review of the trial transcript indicate that he neither addressed the issue of market share reduction nor made an admission about it. More importantly, we think that the opinion reveals an analytical flaw. Leasing companies lease both new and used computers. They purchase new mainframes from IBM and lease them to end users; when the lease term is up, if the mainframe is not obsolete and can be leased again, the leasing company will place it with another end user. In addition, leasing companies deal in both IBM and non-IBM computers. There are important legal and competitive distinctions between the various types of equipment in which the leasing companies deal, so they cannot be lumped together. New computers are, of course, already in the relevant market as defined by AMI. It was therefore incorrect to add them in again when end users lease new computers rather than purchase them outright. In this situation, leasing companies provide nothing more than an alternate way of financing a new computer, but do nothing to increase the supply of new machines. See Transamerica Computer Co. v. IBM Corp. (In re IBM Peripheral EDP Devices Antitrust Litig.), 481 F. Supp. 965, 979 (N.D. Cal. 1979), aff'd, 698 F.2d 1377 (9th Cir.), cert. denied, 464 U.S. 955, 104 S. Ct. 370 (1983). They do not increase the number of new mainframes, as leasing companies still must purchase them from their manufacturers. Thus, to the extent that IBM had the power to set prices, that power would not be diminished, or at most would only be slightly diminished,9 by its sales to leasing companies rather than end users. Since these purchases are already in the relevant market, it was double counting to also include them as part of the leasing market. Cf. id. With respect to leases of used computers, there is a significant difference whether those machines were made by IBM or by some other manufacturer. Where used IBM computers are leased, we think that United States v. Aluminum Co. of America (Alcoa), 148 F.2d 416 (2d Cir. 1945)10 is apposite. There, Alcoa controlled 90 percent of the market for virgin aluminum ingot. It sought to reduce its market share for antitrust purposes by arguing that secondary ingot derived from scrap competed with virgin ingot for sales. The court held that because all secondary ingot was ultimately derived from virgin ingot, Alcoa, by properly exercising its power over the supply of virgin, could indirectly control the supply of secondary as well. Id. at 425. 9 Conceivably, a few large, sophisticated buyers could place certain limits on even a dominant seller's power to set prices. There is no evidence that such pressure was applied here. 10 Although Alcoa was decided by the United States Court of Appeals for the Second Circuit, the procedural circumstances under which it reached that court give it added weight as precedent. Under the then-existing version of 15 U.S.C. § 29, appeals from the decrees of district courts in antitrust cases where the United States was a complainant would lie only to the Supreme Court. In Alcoa, however, a sufficient number of justices were recused that a quorum could not be obtained; accordingly, the Supreme Court, pursuant to the above statute, remanded the case to the three most senior judges of the Second Circuit: Learned Hand (the author of Alcoa), Augustus N. Hand, and Swan. The Supreme Court itself has recognized the special weight of the Alcoa opinion. See American Tobacco Co. v. United States, 328 U.S. 781, 811-13 & n.10, 66 S. Ct. 1125, 1140 & n.10 (1946). Alcoa's analysis is persuasive. Indeed, we think the case is even stronger here for excluding the secondary market. Refined aluminum can be melted down and reused repeatedly, and in any event, products made with it may last for decades before they are scrapped and the aluminum is recycled. It therefore may have been quite difficult for Alcoa to estimate future supply and demand for aluminum ingot over a long period of time with sufficient accuracy to maximize its profits by manipulating the supply of virgin ingot it produced. See 2 Phillip Areeda & Donald F. Turner, Antitrust Law § 530c (1978). Computers, however, have considerably more limited lives than aluminum ingot. Technology and price/performance ratios have been advancing so rapidly in the computer industry that used machines cannot be re-leased indefinitely.11 Accordingly, a powerful manufacturer like IBM was in a position to maximize its profits by carefully controlling the number of mainframes that would later appear on the used leasing market. This is particularly true when, as here, that control was enhanced by IBM's policy of recapturing old parts that could otherwise have 11 Moreover, IBM's net pricing and parts recapture policies further reduced whatever control the leasing companies might have had over the prices of used equipment. By recapturing old parts from upgraded mainframes, IBM effectively curtailed the leasing companies' ability to reconfigure their used machines into different models that could have competed against IBM's offerings over the medium term. This effect is similar to that caused by IBM's past practices of offering tabulating and computer equipment only for lease and not for sale. These practices also spawned antitrust litigation, resulting in a 1935 injunction and a 1956 consent decree. See Control Data Corp. v. IBM Corp., 306 F. Supp. 839 (D. Minn. 1969), aff'd, 430 F.2d 1277 (8th Cir. 1970). been used to extend the useful service lives of existing used mainframes by allowing them to be upgraded and placed with new customers. We therefore conclude that the district court erred when it added leases of used IBM mainframes into the relevant market.12 On the other hand, to the extent that leasing companies deal in used, non-IBM mainframes that have not already been counted in the sales market, these machines belong in the relevant market for large-scale mainframe computers. Unlike IBM, there is no allegation that the manufacturers of these computers possess the market power to control prices, much less that they would do so in concert with IBM.13 When these computers are placed in service by leasing companies, they provide an alternative that limits IBM's power in the market.14 12 We also disagree with the district court's view that AMI admitted that leasing companies compete with IBM and constrain IBM's ability to set prices or exclude competition in the market for new large scale main frame computers. Allen-Myland, 693 F. Supp. at 274. The district court cited AMI's proposed finding of fact 29 in support of its conclusion, but AMI asserted only that IBM and lessors compete in the placement of mainframes with end users; in other words, IBM installs computers, and so do Comdisco and CMI. This does not constitute an admission on market crosselasticity or the scope of the relevant market. 13 Indeed, the so-called plug-compatible manufacturers have built their businesses around providing mainframes and peripherals compatible with, but in competition with those of IBM. 14 This holds most true for plug-compatible mainframes. There is actually a considerable question to what extent noncompatible computers are a realistic short-run alternative for a customer whose computer software and data are tailored to IBM mainframes. We do not reach the issue, however, as Allen-Myland is constrained by its own definition of the market as large scale mainframe computers, regardless of manufacturer or Accordingly, we conclude that the district court erred when it included all leasing company transactions in the relevant market. On remand, the court should include only leases of used, non-IBM mainframes and determine the extent to which those leases reduce IBM's market share.