BRIEF FOR THE UNITED STATES
Of Counsel:
John F. Greaney
N. Scott Sacks
James J. Tierney
Attorneys
U.S. Department of Justice
*Counsel of Record |
Joel I. Klein
Assistant Attorney General
Donna E. Patterson
Deputy Assistant Attorney General
Robert B. Nicholson
Adam D. Hirsh*
Attorneys
U.S. Department of Justice
Antitrust Division -- Appellate
601 D Street NW, Room 10535
Washington, DC 20530
(202) 305-7420
Attorneys for Plaintiff-Appellee
United States of America
|
Page I
TABLE OF CONTENTS
QUESTION PRESENTED ...............................................1
STATEMENT OF THE CASE.............................................1
SUMMARY OF ARGUMENT...............................................11
ARGUMENT . . . . ...............................................14
INTRODUCTION .................................................14
I. THE DISTRICT COURT APPLIED THE APPROPRIATE
STANDARD AND REVIEWED ALL OF THE EVIDENCE. ..............16
II. THE DISTRICT COURT DID NOT ABUSE ITS
DISCRETION IN TERMINATING SECTIONS VI(c),
VII(c), AND IX(b)-(c) OF THE DECREE AS IN
THE PUBLIC INTEREST. ...................................20
A. The Kodak Holding. .........................22
B. The District Court Was Well Within Its
Discretion In Finding No Significant Risk
To The Competitive Spare Parts And Service
Markets In The Proposed Phase-Out Of
Sections VI(c), VII(c), and IX(b)-(c). ............24
C. It Is Unlikely That IBM Would Profit From
Any Attempt To Raise Parts Or Maintenance
Prices Above Competitive Levels. ..................30
1. The district court rightly found that
mid-range and mainframe computer owners
engage in accurate lifecycle pricing. .........31
2. The ability of IBM's mid-range and
mainframe computer customers to migrate
computer software applications to other
equipment effectively protects against
any possible effort by IBM to charge
supracompetitive prices for service
by tying. .....................................34
D. The Sherman Act Provides Effective Protection
Against Any IBM Effort To Exercise Market
Power Anticompetitively. .........................42
Conclusion . . . ................................................45
Certificate of Service.
Page ii
TABLE OF AUTHORITIES
FEDERAL CASES
Digital Equip. Corp. v. Uniq Digital Tech., Inc.,
73 F.3d 756 (7th Cir. 1996)....................................31
Eastman Kodak Co. v, Image Technical Servs., Inc.,
504 U.S. 451 (1992) ...........................................12,21,22,23,30,31,32,33,35,40
Hirschfeld v. Spanakos, 104 F.3d 16 (2d Cir. 1997).........20
Image Technical Servs., Inc. v. Eastman Kodak Co.,
1997 WL 549134 (9th Cir. Aug. 26, 1997)........................23
Jefferson Parish Hosp. Dist. No. 2 v. Hyde,466 U.S. 2 (1984)..............43
Lee v. Life Ins. Co. of Am., 23 F.3d 14 (1st Cir.),
cert. denied, 513 U.S. 964 (1994) ..............................29
NAACP v. FPC, 425 U.S. 662 (1976)..........................16
PSI Repair Servs. v. Honeywell, Inc., 104 F.3d 811
(6th Cir.), cert. denied, 117 S. Ct. 2434 (1997) ...............33
Sam Fox Publishing Co. v. United States, 366 U.S. 683
(1961)..........................................................18
United States v. American Cyanamid Co., 719 F.2d 55
8
(2d Cir. 1983), cert. denied, 465 U.S. 1101
(1984)..........................................................9,12,16,17,18,19,29
United States v. Bechtel Corp., 648 F.2d 660 (9th Cir.),
cert. denied, 454 U.S. 1083 (1981).......................19
United States v. Borden, 347 U.S. 514 (1954)...............15
United States v. Eastman Kodak Co., 63 F.3d 95
(2d Cir. 1995) ("Kodak II").....................................16,20
United States v. Loew's Inc., 371 U.S. 38 (1962) ..........42
United States v. Loew's Inc., 783 F. Supp. 211
(S.D.N.Y. 1992).................................................19,42
United States v. Microsoft Corp., 56 F.3d 1448
(D.C. Cir. 1995)...............................................18,19,43
Page iii
United States v. Paramount Pictures, Inc., 334 U.S. 131
(1948)..........................................................15
United States v. Western Elec. Co., 900 F.2d 283
(D.C. Cir.) (per curiam), cert. denied, 498 U.S. 911
(1990)("Western Elec. I").......................................19
United States v. Western Elec. Co., 993 F.2d 1572
(D.C. Cir.), cert. denied, 510 U.S. 984 (1993)
("Western Elec. II")............................................17,18,20
FEDERAL STATUTES
Sherman Act, 15 U.S.C. &167; 1 et seq.:........................12,16,41,43
Section 1.......................................................1,2,9,10,11,17,19
Section 2.......................................................1,2,9,10,11,17,19
MISCELLANEOUS
U.S. Dept. of Justice & FTC, Horizontal Merger Guidelines
rev. Apr. 8, 1997) ............................................30
Page 1....
IN THE UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
____________________
PUBLIC VERSION--No. 97-6184
REDACTED ____________________
UNITED STATES OF AMERICA,
Plaintiff-Appellee,
v.
INTERNATIONAL BUSINESS MACHINES CORPORATION,
Defendant-Appellee,
INDEPENDENT SERVICE NETWORK INTERNATIONAL,
Intervenor-Appellant.
____________________
ON APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF NEW YORK
____________________
BRIEF FOR THE UNITED STATES
____________________
QUESTION PRESENTED
Whether it was an abuse of discretion for the district
court to review the uncontroverted evidence offered by the two
parties to a forty-year-old antitrust consent decree, credit the
reasoned views of the United States, and conclude that
termination of the remaining provisions of the decree, subject to
four- and five-year sunset provisions, was in the public
interest.
STATEMENT OF THE CASE
This case began on January 21, 1952, when the United
States filed a complaint alleging that IBM had monopolized,
attempted to monopolize, and restrained trade in the electronic
Page 2..
tabulating machine industry in violation of sections 1 and 2 of
the Sherman Act, 15 U.S.C. &167;&167; 1-2. J.A. 37, 51-52 ¶ 45. The
government and IBM ultimately settled their differences, and the
court entered a consent decree on January 25, 1956 (the
"Decree"). J.A. 147.1
Although the complaint did not allege any violation in
the computer industry, the parties agreed to extend the Decree's
coverage beyond tabulating machines to include computers as well
(defined by the Decree as "electronic data processing machines").
J.A. 149; 96, 98-99. The Decree did not require IBM to divest any
product or division. Rather, the Decree sought to encourage
competition by constraining IBM's ability to exercise market
power.
The heart of the Decree is sections IV2 and
V. Section IV requires IBM to offer its computers for sale, not
just for lease, and on terms that are not substantially more
advantageous to IBM than lease terms. J.A. 151-52, 1608-09.
Section V, in turn, essentially prohibits IBM from re-acquiring
machines it sells. J.A. 152, 1609-10. Together, sections IV and
V were intended "to establish in the United States a used machine
market which has never been heretofore." J.A. 109. To reinforce
the sale requirement, a subsidiary goal of the Decree was to
Page 3
establish a secondary parts market for IBM computers and to
establish a market for repair and maintenance services of IBM
computers by independent service organizations (ISOs). J.A. 110.
Many Decree provisions were intended to be temporary
and expired long ago. See J.A. 1608-12. Other provisions,
relating to tabulating machines, are obsolete and do not apply to
any ongoing IBM business. In the forty-plus years of the
Decree's existence, the government has never filed an enforcement
action against IBM, although it has investigated a number of
complaints. See J.A. 1503, 1517-18.3
In June 1994, IBM moved to terminate all remaining
provisions of the Decree with respect to all services and product
lines, including service bureaus, personal computers,
workstations, the AS/400 line of mid-range computer systems
("AS/400"), and the System/360...390 line of mainframe computer
systems ("S/390"). J.A. 180. In July 1995, the government agreed
to terminate all sections relating to IBM's service bureaus and
its PC and workstation products and services. J.A. 345, 354-55.
On January 17, 1996, the court terminated these provisions (the
"January 1996 Order").4 J.A. 498, 1608-12. Neither the
January 1996 Order, nor the Decree provisions addressed therein,
are on appeal here.
Page 4
After the January 1996 Order, the following Decree
provisions continued to apply to IBM's S/390 and AS/400 computer
lines (and only those lines):
1. Section IV, which enjoins IBM's lease-only policy by
requiring IBM to sell as well as lease its computers;
2. Section V(a), which restricts IBM's ability to re-
acquire used IBM computers in the aftermarket;
3. Section VI, which prohibits IBM from discriminating
against computer owners in favor of lessees, including
VI(c), which requires IBM to sell repair and
replacement parts to computer owners and ISOs;
4. Sections VII(b)-(c), which enjoin IBM from requiring
purchasers to obtain maintenance services from IBM and
from prohibiting customer experimentation with their
computers;
5. Sections IX(b)-(c), which require IBM to furnish on a
nondiscriminatory basis to owners as well as lessees
the same technical manuals and informational documents
that IBM supplies to its own repair and maintenance
employees and that pertain to the "operation or
application" of their computers;
6. Section XV, which enjoins IBM from agreeing with
competitors to allocate markets or from conditioning
the sale or lease of certain computers upon the
purchase or lease of any other computer product; and
7. Sections XVII, XVIII, and XIX, which provide for
governmental and judicial oversight of the Decree,
including the power to modify or terminate.
J.A. 1608-12.
The government then conducted a thorough investigation
of the likely impact on the public interest of terminating these
provisions, focusing on potential effects on IBM's S/390 and
AS/400 customers and competitors. The government reviewed more
than 100,000 pages of IBM documents, including its strategic
business plans and high-level documents analyzing the S/390 and
Page 5
AS/400 markets and IBM's competitors; deposed seven IBM
executives; interviewed 93 customers from various industries, and
30 of IBM's competitors; reviewed over 20,000 pages of documents
submitted by government agencies, customers, competitors, and
other third parties; and held extensive meetings or interviews
with third-party industry and economic experts. J.A. 1613-14
¶¶ 2-7.
The investigation revealed first that most consumers of
the AS/400 and S/390 are large corporations with sophisticated
knowledge about their computer systems. Although many customers
said they had benefitted from the competitive environment created
by the Decree, no IBM customer, and very few IBM competitors,
voiced concern that Decree termination would enable IBM to
exercise any significant degree of market power, particularly in
the aftermarkets for spare parts and maintenance services. In
fact, many customers felt they had leverage over IBM. J.A. 1561.
Second, there is currently an active secondary market for spare
parts and maintenance for the AS/400 and S/390 that is largely
independent of the need to buy parts from IBM. ISOs instead
obtain the vast majority of their parts by cannibalizing existing
machines and through purchases from independent distributors.
J.A. 1048 ¶ 22; 833-34 ¶¶ 6-7. Third, xxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxx IBM has instituted a policy of "system
openness," making its computer systems more compatible with those
of other manufacturers. Consistent with this, IBM has encouraged
independent vendors to develop software for IBM's S/390.
Page 6
J.A. 1546-47; 1587 ¶ 16. The evidence is that this policy derives
from considerations independent of the Decree, and will continue
after the Decree terminates. Fourth, there was no indication
that IBM plans to cut off ISO access to spare parts. J.A. 1702,
1724, 1727.
Fifth, AS/400 and S/390 consumers, aided by consultants
and trade publications, take the time and expense to calculate
the total cost of their computers -- including the expected need
and cost of future parts and maintenance service during their
period of possession -- at the time of purchase so that they can
accurately comparison shop (so-called "lifecycle" pricing).
J.A. 1567-70 ¶¶ 10-14; 1051-52 ¶¶ 28-29; 1585 ¶ 9, 1588 ¶ 20.
Sixth, the market analysis revealed that the mid-range AS/400
faces a competitive market today. J.A. 1528-29; 1566-67 ¶ 8.
Seventh, although the S/390 still possesses a large share of the
mainframe market, it faces strong competition from plug-
compatible mainframes, mid-range computers and networks of
personal computers to run particular software applications that
consumers use. J.A. 1566-67 ¶ 8; 1586 ¶ 11, 1588 ¶ 20. Thus,
although some users are "locked in" to using the S/390 for some
purposes, only a few were locked in completely; most consumers
have competitive alternatives. J.A. 1586 ¶ 12, 1590-91 ¶ 26; 1539.
Moreover, the trend toward moving, or "migrating," applications
off mainframes to mid-range computers is likely to continue and
accelerate in the next few years. J.A. 1586 ¶ 12; 1532-35.
Page 7
Based on this investigation, the government concluded
that termination of the remaining Decree provisions subject to
equitable sunset provisions would be in the public interest and
was not likely to result in competitive abuses. J.A. 1683, 1706-
07. In July 1996, the government and IBM agreed on the proposed
modifications and submitted them to the district court, and the
government filed a memorandum explaining why it had tentatively
agreed to phase out the Decree with respect to the S/390 and
AS/400. J.A. 650. The district court ordered a period of public
comment on the proposal.
Seven public comments were filed. Three of those
comments supported termination of the Decree with respect to the
S/390 and AS/400 subject to the sunset provisions: (1) Computer
Service Corporation, the only IBM customer to file a comment
(J.A. 1633); (2) Amdahl Corporation, IBM's leading competitor of
S/390 plug-compatible mainframes (J.A. 764); and (3) CCIA, a trade
association that previously had sought to intervene in this
matter, many members of which manufacture or provide computer
products in competition with IBM.5 J.A. 756. Three opposing
comments came from various IBM competitors or their trade
associations.6 Appellant ISNI filed one of those
opposing
Page 8
comments. J.A. 674. None of the commenters -- most notably, ISNI
-- submitted any factual support or expert affidavits with its
comments. On November 13, 1996, the government and IBM submitted
lengthy responses to the public comments -- each supported by
expert declarations7 and factual declarations and
exhibits. J.A. 1503, 1759 (U.S. response); 770, 1894 (IBM
response).8 That same day, the government and
IBM formally filed their Joint Motion For Order Modifying 1956
Final Judgment (the "Joint Motion"). J.A. 1498. On December 18,
1996, ISNI filed a reply to the parties' responses to the public
comments. J.A. 1636. Once again, ISNI's submission was devoid of
any expert or fact affidavit.9
Chief Judge Griesa held a hearing on the parties' Joint
Motion on February 13, 1997. Only ISNI, participating as an
amicus curiae, appeared in opposition, and its objections quickly
became the focus of the hearing. J.A. 1701-02. ISNI's objections
centered on aftermarket tying. In particular, ISNI claimed that
IBM would stop selling parts to ISOs and would
Page 9...
institute a tie between service and either of two elements --
parts or operating systems -- for the AS/400 or S/390, and
thereby exclude ISOs from competing with IBM in the service
aftermarket.
At the hearing, as before this Court (ISNI Br. 8-9 &
n.1), ISNI objected to the termination only of sections VI(c),
VII(c), and IX(b)-(c) of the Decree. Section VI(c) requires IBM
to sell repair and replacement parts on nondiscriminatory terms
to IBM computer owners and ISOs for as long as such parts are
available for use in leased machines; section VII(c) enjoins IBM
from requiring any computer purchaser to obtain parts or
maintenance from IBM; section IX(b) requires IBM to provide to
computer owners at reasonable and nondiscriminatory prices the
same technical manuals and informational documents it provides to
IBM's own repair and maintenance employees; and section IX(c)
requires IBM to provide to lessees and owners at reasonable and
nondiscriminatory prices books of instruction and other documents
pertaining to the "operation or application" of their computers.
J.A. 154-55, 1610-11.
On May 1, 1997, the district court entered its Order
granting the parties' Joint Motion (the "May 1 Order"). J.A. 24.
In its accompanying opinion, the court sought to "determine
whether that agreement is in the public interest" as framed by
&167;&167; 1 and 2 of the Sherman Act. J.A. 27-28 (relying on United
States v. American Cyanamid Co., 719 F.2d 558 (2d Cir.
1983), cert. denied, 465 U.S. 1101 (1984)). The district court
Page 10..
recognized that the government and IBM had "amassed a great deal
of information about the current competitive practices of IBM in
the marketplace" for the S/390 and AS/400. J.A. 28.
Based on this "extensive record" (J.A. 29), the district
court made specific findings. It found that "there is at the
present time an active market in computer repair services, in
which IBM competes with many independent repair companies."
J.A. 29. Further, the court found as "the salient fact [] that a
market in IBM spare parts exists, and this market is largely
independent of the need of buying such parts from IBM." Id.
(emphasis added). Moreover, the court found that terminating
section V(a) of the Decree (not challenged by ISNI on appeal)
will further "increase competition in the spare parts market."
Id. (emphasis added). With respect to consumers, the court
found that IBM's S/390 and AS/400 customers are "well informed
about the lifetime cost of a computer (including service)," that
they could exert pressure upon IBM to ensure that ISOs continue
to receive parts from IBM, and that the "market as it exists
today" acts as a "powerful deterrent against IBM engaging in
monopolistic tactics." J.A. 30. The court also took specific
notice of the fact that none of ISNI's customers joined in ISNI's
objections to Decree termination. J.A. 31. Based on these
findings and the record as a whole, the court concluded that
termination of the remaining Decree provisions would not only not
present any "material threat of violation of &167;&167; 1 and 2 of the
Page 11...
Sherman Act," but would increase IBM's efficiency and would
"benefit both IBM and consumers." J.A. 31-32 (emphasis added).
Under the May 1 Order, certain Decree provisions
terminated immediately while others will be phased out. In
general, the Decree will cease to apply to IBM's AS/400 mid-range
family of products and services after July 2, 2000 (a four-year
sunset provision), and will cease to apply to the S/390 mainframe
series after July 2, 2001 (a five-year sunset). J.A. 25, 1608-
12. Thus, after July 2, 2001, no portion of the Decree will
remain in effect.
After the district court granted ISNI's request to
intervene for the sole purpose of appealing the May 1 Order,
J.A. 23, this appeal followed.
SUMMARY OF ARGUMENT
When fashioned in 1956, the Decree was intended to
constrain IBM's market power in the new computer industry by
establishing a secondary market for IBM equipment and, to support
that market, an independent parts and maintenance market. Those
objectives have been achieved. ISNI argues that four Decree
provisions are still necessary to restrict IBM's ability to
exercise market power in its AS/400 mid-range and S/390 mainframe
computer systems by raising the price of maintenance services to
supracompetitive levels. After conducting a thorough
investigation of the market -- including interviewing over 120
IBM customers and competitors -- the United States concluded that
Page 12...
termination of the Decree, including the provisions raised by
ISNI, was in the public interest because termination would not
substantially increase the likelihood that IBM could or would
exercise market power. The district court considered all of the
evidence presented by the government and IBM (unrebutted by ISNI)
and agreed that termination was in the public interest as shaped
by Sherman Act precedent. The district court did not abuse its
discretion in reaching that conclusion; thus, this Court should
affirm.
Under this Court's decision in United States v.
American Cyanamid Co., 719 F.2d 558, 565 (2d Cir. 1983), cert.
denied, 465 U.S. 1101 (1984), the appropriate test for approving
an agreed-upon termination of this Decree is whether such
termination is in the "public interest" in light of Sherman Act
precedent. The government investigated the prospect that
vacating the Decree might lead to harmful aftermarket tying under
the analysis employed by the Supreme Court in Eastman Kodak Co.
v. Image Technical Services, Inc., 504 U.S. 451 (1992), and
found such a consequence unlikely because (a) the evidence
suggests IBM is unlikely to engage in harmful aftermarket tying
after the Decree terminates, and (b) maintaining the Decree would
do little to prevent IBM from engaging in the forms of
aftermarket tying that are the focus of ISNI's concern. Once the
government and IBM presented their evidence, including factual
and expert affidavits, and reasons for terminating the Decree,
the district court did not simply defer to the judgment of the
government and
Page 13
enter its Order. Rather, the district court considered all of
the evidence and the arguments in opposition presented by ISNI
before agreeing that termination was in the public interest. The
district court supported its conclusion with findings.
ISNI wants a standard whereby the Decree cannot be
terminated unless the government or IBM can prove that no
anticompetitive effect will result. Such certainty is neither
possible nor required. Terminating a consent decree requires a
predictive judgment about what will likely happen in a post-
decree environment. Based on its investigation in this case and
its experience in administering the antitrust laws, the
government believes that (1) a market for parts and maintenance
currently exists and that ISOs do not depend on IBM directly for
parts, (2) it is unlikely that IBM would choose to stop selling
parts to ISOs because such a policy would be inconsistent with
xxxxxxxxxxxxxxxxxxxxxxx system openness, (3) market forces will
adequately check any attempt by IBM to exercise market power,
(4) the concerns expressed in Kodak of customer inability to
engage in accurate lifecycle pricing and of customer lock-in are
not substantial here, (5) any market power IBM possesses will
continue to diminish rapidly during the sunset periods, (6) the
antitrust laws provide ample means to stop any unlawful
anticompetitive acts by IBM, and (7) in any event, the four Decree
provisions to which ISNI clings would not constrain any market
power IBM does possess, particularly in IBM's proprietary
operating system.
Page 14..
It is understandable why ISOs, as IBM's competitors and
direct beneficiaries of the current regulated environment, want
the Decree to continue. The government finds it significant,
however -- as did the district court -- that IBM's customers do
not share in ISNI's concern. Rather, consumers of the AS/400 and
S/390 are confident that they have enough leverage over IBM to
thwart any attempt by IBM to raise maintenance prices above
competitive levels. Although some of these customers felt they
had benefitted from competition that the Decree in part created,
they were not very concerned that Decree termination would lead
to higher prices.
Simply put, the Decree has outlived its usefulness and
termination of the four provisions at issue here is unlikely to
increase the probability that IBM could exercise market power in
hardware maintenance aftermarkets. Accordingly, this district
court's conclusion that termination is in the public interest was
not an abuse of discretion and should be affirmed.
ARGUMENT
INTRODUCTION
In 1956 computers were in their infancy, and the United
States feared that IBM would develop and exercise its market
power to the detriment of competition in this new industry as it
had in the market for tabulating machines. The 1956 consent
Decree was intended to constrain IBM's incipient market power in
computer markets by establishing a secondary market for IBM
Page 15..
equipment and an independent maintenance market to support that
equipment. Today, the computer market has changed dramatically.
The United States, after a thorough examination of the relevant
markets and an analysis of the public interest, concluded that
the Decree's goals have been achieved, that there is no longer a
significant risk that IBM can and will exercise market power in
the markets under consideration here at the end of the sunset
periods, and that the time has come to treat IBM like any other
competitor.
Significantly, no IBM computer customer objected to the
government's conclusion. ISNI's members, direct beneficiaries of
the regulated environment created by the Decree, have a private
interest in continuing the Decree's restrictions and contend that
this Court may not affirm the district court's decision unless it
is certain that anticompetitive abuses will not result. Such
certainty can never be achieved. The record discloses no abuse
of discretion by the district court. The government, as
representative of the public interest in competition,10
and IBM, as party to the Decree, reached agreement on when and
how to terminate the remaining Decree provisions, thereby
avoiding protracted litigation. The district court, after
reviewing the arguments and record evidence presented to it by
the parties (ISNI chose not to present any factual or expert
testimony), independently agreed with the government that
terminating the
Page 16.....
Decree subject to the sunset provisions serves the public
interest. That decision should be affirmed.
I. THE DISTRICT COURT APPLIED THE APPROPRIATE STANDARD AND
REVIEWED ALL OF THE EVIDENCE.
The United States agrees with ISNI (Br. 9) that the
appropriate standard for the district court's evaluation of the
parties' Joint Motion to terminate the Decree is the "public
interest." Cyanamid, 719 F.2d at 565. On appeal, this Court
reviews for an abuse of discretion the district court's
conclusion that Decree termination serves the public interest.
United States v. Eastman Kodak Co., 63 F.3d 95, 109 (2d Cir.
1995) ("Kodak II").
Nor should there be any dispute that the "public
interest" derives its substantive content from the Sherman Act's
promotion of competition, as laid out in Supreme Court and Second
Circuit precedent. This Court emphasized in Cyanamid that when
the district court assesses whether termination is in the "public
interest," that term takes its meaning from the antitrust laws,
not from the court's independent notions of the general welfare,
and thus that the analysis should focus on the competitive effect
of termination.11
719 F.2d at 565 (citing NAACP v. FPC, 425 U.S. 662, 669 (1976)).
Page 17....
Here, neither the government nor IBM asked the court,
in reviewing the proposed termination of the Decree, to
substitute contemporary economic theory for controlling legal
principles. Rather, the parties presented evidence on the state
of the relevant market to determine whether termination would be
in the public interest as consistent with &167;&167; 1 and 2 of the
Sherman Act -- the same theory upon which the case was brought in
1952. The district court, in turn, analyzed the Joint Motion the
same way. See J.A. 27-28 (considering the "public interest" in
light of "the issues which arise under the antitrust laws which
gave rise to the consent decree -- here, &167;&167; 1 and 2 of the Sherman
Act") (citing Cyanamid).
Rather, our disagreement with ISNI is about the
appropriate roles for the government and the district court,
where everyone agrees that competitive effect is the relevant
public interest focus, but ISNI disagrees with the predictive
judgments the government has made. The Cyanamid court never
reached this issue. But other courts have reached it, and the
law is well established that once the United States consents to a
defendant's proposed decree modification, including termination,
district court review is limited to whether the government has
offered a reasoned and reasonable explanation for its consent and
whether the modification falls within the reaches of the public
interest as defined by the relevant statutes. United States v.
Western Elec. Co., 993 F.2d 1572, 1578 (D.C. Cir.), cert.
denied, 510 U.S. 984 (1993) ("Western Elec. II"). The
government has
Page 18....
broad discretion in controlling and settling antitrust litigation
on terms that will best serve the public
interest in competition. Sam Fox Publishing Co. v. United
States, 366 U.S. 683, 689 (1961); Western Elec. II, 993 F.2d at
1577 (government exercises "expert, predictive judgment[]").
Such discretion also permits the Department of Justice, the
principal enforcer of the antitrust laws, to "reallocate
necessarily limited resources" in a way that best serves its
enforcement goals. United States v. Microsoft Corp., 56 F.3d
1448, 1459 (D.C. Cir. 1995). The government's considered
judgment is entitled to some deference by the courts such that
"the district court may reject an uncontested modification only
if it has exceptional confidence that adverse antitrust
consequences will result -- perhaps akin to the confidence that
would justify a court in overturning the predictive judgments of
an administrative agency." Western Elec. II, 993 F.2d at 1577.
This standard does not amount to merely "rubber
stamping" an agreed-upon termination; everyone agrees that such
abdication by the district court or this Court would be
inappropriate. Cyanamid, 719 F.2d at 565; J.A. 27 ("the court
cannot grant the joint motion simply because the Government and
IBM have reached an agreement"); Microsoft, 56 F.3d at 1458.
Rather, the district court was required to make an "independent
determination" of the public interest. Microsoft, 56 F.3d at
Page 19.......
1458.12 Yet that "independent
determination" also must recognize the "flexibility of the public
interest inquiry: the court's function is not to determine
whether the resulting array of rights and liabilities `is the one
that will best serve society,' but only to confirm that the resulting
`settlement is "within the reaches of the public interest."'"
United States v. Western Elec. Co., 900 F.2d 283, 309 (D.C.
Cir.) (per curiam) (emphases in original) (citations omitted),
cert. denied, 498 U.S. 911 (1990) ("Western Elec. I"). In other
words, the "court's role in protecting the public interest is one
of insuring that the government has not breached its duty to
the public in consenting to the decree." United States v.
Bechtel Corp., 648 F.2d 660, 666 (9th Cir.), cert. denied, 454
U.S. 1083 (1981); see also Western Elec. I, 900 F.2d at 307
("public interest test directs the district court to approve an
uncontested modification so long as the resulting array of rights
and obligations is within the zone of settlements consonant with
the public interest today") (emphasis in original); United
States v. Loew's Inc., 783 F. Supp. 211, 213-14 (S.D.N.Y. 1992)
(applying test to decree termination).
Here, the district court made that independent
determination. Examining the record evidence through the
Page 20....
appropriate statutory lens, Chief Judge Griesa concluded that the
phasing out of the remaining Decree provisions "present no
material threat of violation of &167;&167; 1 and 2 of the Sherman Act."
J.A. 31; see also id. at 29 ("[t]he extensive record submitted on
this joint motion supports [the government's] conclusions").
The district court did its job. See Western Elec. II, 993 F.2d at 1578
(issue for the district court is "whether the Department's views
were well enough substantiated that it (the Department) could
reasonably conclude that [the modification] was in the public
interest").
Now, on appeal, the task of this Court is to determine
whether the district court "exercised its broad discretion in a
proper manner." Kodak II, 63 F.3d at 109. The district court's
findings merit review only for clear error. Hirschfeld v.
Spanakos, 104 F.3d 16, 19 (2d Cir. 1997). The evidence
submitted by the government and IBM (unrebutted by ISNI at its
own choosing), the transcript of the February 13 hearing on the
parties' Joint Motion, and the district court's May 1 Order are
sufficient bases for this Court to affirm.
II. THE DISTRICT COURT DID NOT ABUSE ITS DISCRETION IN
TERMINATING SECTIONS VI(c), VII(c), AND IX(b)-(c) OF
THE DECREE AS IN THE PUBLIC INTEREST.
ISNI's primary challenge to termination of sections
VI(c), VII(c), and IX(b)-(c) is based on the speculation that in
the absence of these provisions, IBM will cut off ISOs, tie parts
Page 21.
to service,13 and thereby be able to raise
maintenance prices above competitive levels. Relying on the
Supreme Court's decision in Eastman Kodak Co. v. Image Technical
Services, Inc., 504 U.S. 451 (1992), ISNI claims that IBM will
exploit its alleged market power in parts for the S/390 and
AS/400 by tying those items to the receipt of allegedly
overpriced IBM maintenance services. The government agrees that
Kodak provides a useful analogy, but a comparison between Kodak
and this case only highlights their differences and helps explain
why termination of the Decree is in the public interest.
This case is distinguishable from Kodak in several
important respects. First, IBM, unlike Kodak (see id. at 472),
currently exercises no market power in parts. Indeed, ISNI was
unable to demonstrate to the district court that ISOs depend on
IBM even for critical parts. Second, Kodak had clearly taken
steps to cut off the supply of parts to ISOs, and customers had
complained; here, however, it is unlikely that IBM will choose to
cut off ISOs from parts, and no customers appear worried that
Decree termination will result in supracompetitive prices for
service. Third, the Kodak Court expressed concern that market
Page 22..
forces might not be able to constrain Kodak's power because of
the possibilities that consumers were unable to engage in
lifecycle pricing at the time of purchase and that Kodak might be
able to profitably exploit its "locked in" customers. Here,
however, consumers are able to engage in lifecycle pricing and,
for the most part, are not locked in to their IBM equipment.
A. The Kodak Holding.
In Kodak, a group of ISOs alleged that Kodak had
illegally tied the sale of replacement parts for its copiers to
the service of such equipment. Kodak, 504 U.S. at 461-62.
Because Kodak's parts were unique and Kodak restricted the
availability of its parts to ISOs, the ISOs could not perform
repairs on Kodak machines. The Court found that copier parts and
service were two distinct products and that Kodak had in fact
tied the availability of parts to service. Id. at 462-63. The
only remaining question, then, was whether Kodak's tie was
illegal. Kodak argued that as a matter of law and economics it
could not exercise "appreciable market power" in parts because
there was healthy competition in the underlying market for
copiers. Id. at 464. In deciding that the ISOs' allegations
survived summary judgment, the Court held that competition in
the equipment market (the copiers themselves) did not, as a
matter of law, preclude the possibility of market power in
the aftermarkets of parts and service. Id. at 471. The Court
remanded the case to develop a record whether competition in the
equipment market
Page 23..
in fact constrained Kodak's market power in parts.14 Id. at 466 (no "actual data on
the equipment, service, or parts markets"); id. at 474 (no
evidence on information supplied by competitors); id. at 475 (no
information on lifecycle costs); id. at 479 (no evidence of
"actual economic impact" of Kodak's service and parts policy);
id. at 486 (Court cannot reach "conclusions as a matter of law on
a record this sparse").
This case already has a full record from which the
government and district court drew important factual conclusions
about "the economic reality of the market at issue." Id. at
467.
The government agrees that, as in Kodak, AS/400 and S/390 parts
and service are distinct products. Here, however, there is a
flourishing parts market and it is unlikely IBM will cut off ISOs
or tie parts to service in the future.15
Moreover, even if IBM were tempted by such a strategy, IBM could
not profit from it because market forces would check its
behavior. The district court rightly agreed with these
assessments. J.A. 29 ("[t]he extensive record submitted on this
joint motion supports [the government's] conclusions")..
Page 24.
B. The District Court Was Well Within Its Discretion In Finding
No Significant Risk To The Competitive Spare Parts
And Service Markets In The Proposed Phase-Out Of
Sections VI(c), VII(c), and IX(b)-(c).
The district court specifically found that "there is at
the present time an active market in computer repair services, in
which IBM competes with many independent repair companies."
J.A. 29; see also J.A. 1956, 1958 ¶ 6 (ISOs maintain hundreds of
S/390 and thousands of AS/400 systems). Moreover, contrary to
the impression created by ISNI that ISOs buy significant
quantities of AS/400 and S/390 parts from IBM, the district court
also found as "the salient fact [] that a market in IBM spare
parts exists, and this market is largely independent of the need
of buying such parts from IBM." J.A. 29 (emphasis added).
We do not understand ISNI to dispute these findings.
In any event, the findings are correct and well supported by the
record. See, e.g., J.A. 1039, 1047 ¶ 21 (used parts are "widely
available and far cheaper than new parts"); 1616, 1617 ¶ 7; 1738.
ISOs obtain the vast majority of S/390 and AS/400 parts they need
by cannibalizing existing machines or by purchasing the parts
from independent suppliers that cannibalize existing machines.
J.A. 29; 1048 ¶ 22 (used machines and parts are "widely available
on the market for only a tiny fraction of the original purchase
price"); id. (there are "hundreds of firms . . . that purchase and
sell used parts for all types of computers manufactured by IBM").
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
Page 25
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx16
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx. Nor is there
record evidence that ISOs buy critical parts from IBM,17
nor a realistic possibility that IBM would attempt to "corner the
market" on parts by buying up all existing S/390 or AS/400
machines; the government agrees with IBM that such a strategy
would be prohibitively expensive due to the sheer volume of used
machines in the market. J.A. 770, 827; 1554. Thus, there is no
evidence that IBM currently exercises any market power in
parts.18
To the extent that, in future generations of AS/400 and
S/390 equipment, IBM becomes the sole source of parts that ISOs
find critical, ISNI would have the parties and this Court
Page 26
speculate that IBM, once freed of the shackles of sections VI,
VII, and IX, will seek immediately to destroy ISO competition by
refusing to sell parts to them. As the district court noted,
there is not the "slightest bit of evidence" to substantiate
ISNI's fear. J.A. 1683, 1724.19 IBM told Chief Judge Griesa
that it had no plans to stop selling parts to ISOs. J.A. 1702,
1727. The judge expressly credited what he described as IBM's
"very serious" representation. Id. at 1727.
Moreover, other record evidence supports the view that
IBM will continue to sell parts to ISOs in the absence of the
Decree. First, cutting off ISOs would be inconsistent with xxxxx
xxxxxxxxxxxxxxxxxxx system openness. See J.A. 1503, 1545-47.
(xxxxxxxxxxxxxxxxxxxxxxxxx). xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx IBM has made
its S/390 operating systems "POSIX-compliant"20
so that software.
Page 27
applications on the S/390 can be more compatible with other
systems -- at the risk that customers will take advantage of the
compatibility by migrating existing applications off the S/390 to
other computer systems. J.A. 1582, 1587 ¶ 15; 1571 ¶ 19. In
addition, IBM now encourages independent software vendors (ISVs)
to develop software applications for its S/390 and AS/400
systems, and supplies them with the necessary technical
information to develop IBM-compatible applications, even though
many of these products directly compete with IBM products.
J.A. 1546-47; 1587 ¶ 16, 1592 ¶ 30. In encouraging ISVs, IBM
again makes it easier for customers to switch their applications
from IBM equipment to other manufacturers' equipment. In
addition, IBM lowered the price of S/390 systems (J.A. 1546; 1587
¶ 14 (new CMOS processor "dramatically reduces the cost of
mainframe computing")), all in an effort to make the S/390 more
appealing to a larger base of customers. IBM benefits from "the
availability of efficient providers of service and software."
J.A. 1592 ¶ 30; 1573-74 ¶ 24. Continuing to deal with ISOs xxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx bolsters the
government's belief that IBM would not pursue a policy of harming
consumers by cutting off parts to ISOs.
Second, even if IBM were to xxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxx try to cut off parts to ISOs, the district court is
correct that customers might very well force IBM to continue to
supply parts to ISOs. J.A. 30. The large businesses and
institutions that own or lease IBM's S/390 and AS/400 equipment
Page 28
also own or lease large amounts of non-IBM computer equipment
that also need service. J.A. 1045 ¶ 18. Many of these consumers
prefer dealing with a single firm that can fix all of their
equipment -- not separate firms for separate brands of equipment.
This provides IBM with an additional incentive to ensure that
ISOs that service other manufacturers' systems can also service
IBM products. Thus, as long as sufficient numbers of consumers
demand ISOs, they can ensure that IBM continues to
sell parts to ISOs. See J.A. 1045-47 ¶¶ 17-20; 1564, 1573-74 ¶ 24;
1586-87 ¶ 13 (customers have forced IBM to change behavior
before); 1519 n.9 (ISNI member states that many customers do not
want service from equipment manufacturers).
Third, the equitable sunset periods agreed to by the
parties and ordered by the district court will protect the ISOs'
ability to stay in business. IBM must continue to sell AS/400
parts until July 2000 and S/390 parts until July 2001. This
gives ISOs ample opportunity to stock up on any parts they lack
to service those computers, including parts for IBM's current-
generation processor, the CMOS. J.A. 1592-93 ¶ 32; see also
J.A. 1047-48 ¶ 21 (ISOs are capable of maintaining current-
generation mainframes). In addition, virtually all of IBM's
current maintenance contracts will expire during the sunset
periods, giving ISOs an opportunity to woo away new customers.
This will ensure the competitiveness of the ISOs for several
Page 29..
years after the Decree terminates.21
Similarly, the sunset periods will permit any consumers who are
concerned about post-
Decree events to enter into long-term service contracts that will
guarantee them today's competitive prices.22
This ability alleviates one of the concerns raised in Kodak. See
Lee v. Life Ins. Co. of Am., 23 F.3d 14 (1st Cir.) (lock-in not
a problem if consumer can recoup "unamortized investment" in the
equipment), cert. denied, 513 U.S. 964 (1994).
Finally, the maintenance market in Europe, where the
Decree does not apply, is probative of what to expect
domestically when IBM is freed of the Decree. Even without the
protections of the Decree, according to IBM's experts, ISOs
compete in Europe today, J.A. 1044-45 ¶¶ 14-16, 1053-54 ¶ 32; 903
¶ 50, and IBM has not attempted to buy up or dry up the
independent parts market in Europe.
.
Page 30...
C. It Is Unlikely That IBM Would Profit From Any Attempt To
Raise Parts Or Maintenance Prices Above
Competitive Levels.
Even if after the year 2001 IBM were to control
critical parts and tie their availability to service so as to
exclude ISOs, it is unlikely it would be able to significantly
raise the price of maintenance service. The present case is
readily distinguishable from the facts and hypothetical suggested
by the Kodak Court. To begin, and in contrast with Kodak, where
two of the largest customers of service and parts opposed Kodak,
see id. at 479 n.28, no AS/400 or S/390 customer has voiced
concern, either in a public comment or privately during the
government's investigation, that Decree termination would permit
IBM to exercise market power. Indeed, several customers felt
confident that they had leverage over IBM. J.A. 1561. An
examination of the "economic reality," id. at 467, shows why this
is so.
IBM would be unable to sustain a "small but significant
and nontransitory increase"23 in maintenance prices without
suffering losses in future equipment sales that would outvalue
the increase in maintenance fees. When Kodak offered the same
rationale, the Supreme Court suggested two reasons that might
"undermine" (504 U.S. at 476) Kodak's claim: customers'
inability to gauge the total cost of ownership at the time of
Page 31...
purchase ("lifecycle pricing"), and customers' inability to
switch to a substitute product in the face of an increase in
maintenance prices ("lock-in"). The Court denied summary
judgment to Kodak in order to develop a factual record on these
issues. Id. at 486. In this case, there is a factual record,
and it supports our position.
1. The district court rightly found that mid-range
and mainframe computer owners engage in accurate
lifecycle pricing.
The district court found that "IBM's customers are
generally well informed about the lifetime cost of a computer
(including service) and there are strong indications that they
are quite willing to purchase non-IBM computers if the lifetime
costs of IBM machines should become excessive." J.A. 30. Thus,
prospective computer purchasers will be able to thwart excessive
IBM service prices by buying rival computers with lower overall
costs. As the Seventh Circuit put it, "[c]ompetition among
manufacturers fully protects buyers who accurately calculate life-
cycle costs." Digital Equip. Corp. v. Uniq Digital Tech.,
Inc., 73 F.3d 756, 762 (7th Cir. 1996).
ISNI's attempts to avoid the force of this finding are
unpersuasive. Relying on Kodak, but offering no evidence, it
argues that lifecycle pricing is not possible. ISNI Br. 34-35.
This plainly misreads Kodak. Although the Supreme Court noted
that "[l]ife-cycle pricing of complex, durable equipment is
difficult and costly," 504 U.S. at 473, it also expressly
Page 32.
recognized that, even with respect to copiers, "there likely will
be some large-volume, sophisticated purchasers" with the desire,
ability, and resources to engage in accurate lifecycle pricing.
Id. at 475. Ultimately, the Supreme Court cautioned only that
"it makes little sense to assume, in the absence of any
evidentiary support, that equipment-purchasing decisions are
based on an accurate assessment of the total cost of equipment,
service, and parts over the lifetime of the machine." Id. at
475-76 (emphasis added).
ISNI's claim that the district court's finding is
clearly erroneous (Br. 33) is also insubstantial because the
district court had before it abundant evidentiary support,
including the affidavit of an expert on lifecycle pricing. See
J.A. 1039. Mid-range and especially mainframe computers are
expensive pieces of equipment. Depending on the configuration,
the AS/400 often sells for several hundred thousand dollars,
while a new S/390 often runs in the millions of dollars.
J.A. 1528-29; 770, 793. Individuals or even small businesses do
not buy mainframe computers; large corporations do. The record
is replete with evidence that these consumers are very
sophisticated, have the ability, and take the time to determine
the total cost of ownership based on the length of time they will
need the machine. J.A. 1567-70 ¶¶ 10-14; 1051-52 ¶¶ 28-29; 1585
¶ 9, 1588 ¶ 20; 924 ¶ 81. In addition, IBM and its rival
manufacturers, trade publications, and consultants all supply
Page 33..
lifecycle cost information upon which purchasers rely.24
J.A. 1617-19 ¶¶ 8-12, 15; 924-25 ¶ 81. Thus, the level of customer
sophistication seen in this portion of the computer market is far
above that found in Kodak. For example, Kodak pointed out that
the federal government did not engage in lifecycle pricing when
buying copiers. 504 U.S. at 475. When buying mainframe
computers, however, the government does. J.A. 1617-19 ¶¶ 4-15.
ISNI attempts to downplay this evidence by suggesting
that these consumers do not estimate lifecycle costs
"accurately." ISNI Br. 33. The district court, however, found
that consumers estimate lifecycle costs accurately enough to find
and switch to rival manufacturers' computers if service costs are
too high. That is all that matters. Customer omniscience is not
possible or required: "our economy is not one of perfect
information, a factor that alone should not invoke antitrust
condemnation." PSI Repair Servs., Inc. v. Honeywell, Inc., 104
F.3d 811, 820, 819 (6th Cir.) (rejecting similar argument by ISOs
that too many variables precluded accurate lifecycle
pricing), cert. denied, 117 S. Ct. 2434 (1997).
.
Page 34.
2. The ability of IBM's mid-range and mainframe
computer customers to migrate computer software
applications to other equipment effectively
protects against any possible effort by IBM to
charge supracompetitive prices for service by
tying.
All customers, whether large or small, buy computers to
do specific tasks. Although every computer system has hardware
(the physical equipment such as memory chips, keyboards, etc.)
and operating system software (which interacts with software
applications and runs the machine internally), it is the
application software programs that people use -- whether the
program does modest word processing at home or runs an entire
airline reservation network. Application software decisions
determine hardware purchasing decisions. Businesses have greater
software needs than families, and so they buy more powerful
computers. But neither the computer nor the applications
software market is static: there is a constant development of
new application software and a constant desire of the makers of
all sorts of computers to improve their machines to run as much
software as possible. Similarly, consumer demand for new
software grows annually.
The ability of IBM customers to switch, or "migrate,"
software applications to non-IBM equipment is thus an important
protection against any IBM effort to engage in anticompetitive
tying. As a practical matter, computer consumers' applications
divide into two categories: "locked-in" applications and
Page 35.
"unlocked" applications.25 J.A. 1586 ¶ 12; see Kodak, 504
U.S. at 477 (the degree of lock-in for any particular user is a
question of fact). Customers with unlocked applications include
not only new customers (e.g., companies that are just
establishing an in-
house computer capability), but also customers who are replacing
their current equipment (if they have alternatives that use the
same operating system) and, more importantly, existing customers
that are adding new applications to their existing computer
systems or are considering migrating certain applications off one
computer system to a different computer system.
If IBM tries to exploit these customers with high
service costs, they can and will retaliate by using other firms'
equipment to run these applications. These customers may also
have certain locked-in applications -- applications that must run
on a specific operating system or for which it would be
prohibitively expensive to migrate to another computer platform.
Importantly, however -- and this is the point ISNI misses -- as
long as the customer has some unlocked applications, it will be
able to constrain IBM's ability to exercise market power in
locked applications.
IBM, like all equipment manufacturers, wants to
maximize the number of customer applications that run on its
machines. Computers have as many uses as there are software
applications. The greater the number of applications a customer
Page 36
runs on its S/390, for example, the more likely that customer
will soon need an upgrade to its S/390 or to replace the existing
S/390 with a new and more powerful S/390 altogether. Thus,
equipment manufacturers want to maximize both the number of
applications that can run on their machines26
and the number of applications that customers do run on their
machines. If a customer feels exploited by IBM's aftermarket
pricing -- or fears such exploitation in the future27
-- it will stop adding applications to its existing IBM equipment
and will try to migrate existing applications off its AS/400 or
S/390 to a different computer platform. J.A. 1570 ¶ 16, 1571
¶ 18, 1572 ¶ 21 ("interest in marketing incremental products to
their established customers limits IBM's incentives for
opportunistic behavior"); 1588 ¶ 20. IBM does not want to be left
with a dwindling installed base of existing customers and ever
fewer applications running on those computers. See J.A. 1546 (xxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx); 1570 ¶ 16, 1572
¶ 21; 1588 ¶ 20, 1592 ¶ 31.
Page 37
A customer's ability to exert leverage over a
manufacturer, then, will increase with the customer's ability to
choose among different manufacturers' equipment not only when
deciding how to replace current equipment, but also when deciding
where to place a new application or where to migrate an existing
application. Thus, equipment manufacturers compete at the
application level. The government's investigation revealed that
the AS/400 faces a competitive market today. J.A. 1528-29; 1566-
67 ¶ 8. Moreover, most mid-range customers interviewed felt that
computers made by IBM's competitors were good substitutes for the
AS/400, and none of IBM's AS/400 competitors voiced concern that
Decree termination would enable IBM to exert any market power.
J.A. 1529. All evidence indicates that competition in the mid-
range market will continue to intensify dramatically during the
sunset period, especially because the price/performance ratio in
mid-range platforms continues to increase rapidly. J.A. 1519.
Similarly, most existing AS/400 customers are not locked in to
their AS/400 to run their existing software. Switching off the
AS/400 is relatively easy because many applications are off-the-
shelf products that can more simply be migrated to other
platforms. J.A. 1538. In short, almost all mid-range customers
have entirely unlocked applications. ISNI does not seriously
challenge these conclusions, and does not offer any concrete
example of how IBM could exploit its AS/400 parts position to
raise maintenance prices above competitive levels. AS/400
customers simply do not face a Kodak-type problem.
Page 38
A competitive analysis of mainframes leads to the same
conclusion. The IBM S/390 faces "substantial competition" on
both a systemwide and application-specific basis.28
J.A. 1566-67 ¶ 8; 1586 ¶ 11, 1588 ¶ 20; 1531-32. Systemwide
competition to S/390 equipment comes from plug-compatible
mainframes (PCMs) manufactured by Amdahl and Hitachi. These
computers use the same operating system as the S/390 and are
complete substitutes for the S/390 equipment. J.A. 1531. Thus,
consumers who need a new mainframe, including those who are
replacing their current S/390 equipment, have only unlocked
applications.29
Importantly, and a fact that ISNI ignores, even
consumers that do not have current plans to replace their S/390
still exert a significant check on IBM's exercise of market
power. This is because most S/390 customers have a mixture of
locked and unlocked applications. Virtually all mainframe
consumers already have other, smaller platforms of mid-range
and/or personal computer systems. Many new applications can be
Page 39
run on either mainframe or mid-range systems,30
and more and more existing applications can be economically moved
off mainframes to mid-range computers. The number of unlocked
applications for mainframes is already large and predicted to
grow steadily. J.A. 1586 ¶ 12; 1538-39. This is due in part to
the marked increase in the power of mid-range computer systems,
but also due to IBM's decision to "open up" its S/390 system.
See pp. 26-27 above. As a result, fewer and fewer applications
must be run on mainframes, and this trend will only accelerate
during the sunset period. There is no question that IBM feels
tremendous pressure to continue to make the S/390 more attractive
to users. Thus, IBM has continued to innovate -- increasing the
speed, capacity, and reliability of the S/390; has successfully
repositioned the S/390 as a server, not just as a mainframe
computer system; and has cut the price of the S/390 in recent
years. J.A. 1520, 1546, 1548. These are all signs that IBM is
striving to make the S/390 more competitive, not to take
advantage of market power. See J.A. 1567 ¶ 8
(xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxx).
ISNI points to the amount of S/390-specific
applications and asserts, without foundation, that it is
prohibitively expensive for consumers to migrate off the S/390
Page 40.
system. ISNI Br. 30-33, 37. ISNI is correct that it is unlikely
many consumers will migrate all of their applications off their
S/390 systems immediately. However, the government's
investigation revealed a considerable number of S/390 customers
who have or who are considering migrating some applications from
their S/390 to another platform. J.A. 1535, 1540. The threat of
this application-specific migration is enough to exert
competitive pressures on IBM; xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx. J.A. 1570-71 ¶¶ 16, 17,
19; 1534. Migration of applications off mainframes to smaller
computers or networks of smaller computers is a frequent
occurrence and growing rapidly, especially when, as inevitably
happens, customers' existing computers age or their computing
needs grow. J.A. 1532-35; 1586 ¶ 12. This helps explain why many
of the 93 customers we interviewed felt they have leverage over
IBM and are not worried about any attempt by IBM to raise
maintenance prices above competitive levels. J.A. 1561. Thus,
unlike Kodak, lock-in does not appear to be a significant problem
here.31
It is also true, however, that a few existing S/390
customers are locked in to the S/390. These customers have
solely locked-in applications and have no plans to add new
Page 41.
applications or to replace their S/390 equipment, which they
could use as leverage over IBM. Our investigation reveals that
this class of customers is small and will continue to decline
during the sunset period; they are not a significant portion of
the mainframe market. J.A. 1539; 1586 ¶ 12, 1590-91 ¶ 26 ("there
may be few or no unprotected locked-in customers" by the end of
the sunset period). IBM's concern for its reputation will act as
some additional check on its willingness to exploit these
customers.32 Nevertheless, to the extent
that IBM can identify these customers, they are potentially
susceptible to aftermarket exploitation.33
Even so, concern for this small group of locked-
in customers does not justify deciding this appeal in ISNI's
favor, because continuation of the Decree provisions raised by
ISNI are unnecessary and will not prevent such exploitation from
occurring, as explained below.
.
Page 42...
D. The Sherman Act Provides Effective Protection Against
Any IBM Effort To Exercise Market Power
Anticompetitively.
For all the reasons already explained, it is highly
unlikely that IBM will engage in anticompetitive tying to raise
prices in the maintenance business once the Decree provisions
finally expire in July 2001. J.A. 31. If, however, IBM should
choose to engage in such conduct, it would face the powerful
threat of liability under the antitrust laws.
The expiration of the Decree, after all, does no more
than release IBM from a 41-year-old consent decree that has
outlived its usefulness. IBM is most assuredly not receiving any
exemption from the antitrust laws. If, after the Decree
terminates, IBM engages in any anticompetitive activity that
would violate the antitrust laws, it would immediately be liable
to suit. For example, should IBM engage in anticompetitive tying
-- be it to parts or operating systems -- the United States could
bring an action for injunctive relief both to stop the illegal
conduct and to get other, broader prophylactic relief. See
United States v. Loew's, Inc., 371 U.S. 38, 53 (1962) ("[t]o
ensure [] that relief is effectual, otherwise permissible
practices connected with the acts found to be illegal must
sometimes be enjoined"); see also United States v. Loew's Inc.,
783 F. Supp. 211, 214 (S.D.N.Y. 1992) (terminating decree and
finding it "significant[]" that the Justice Department could
again bring suit if necessary).
Page 43...
Also, IBM would be liable to a host of potential
private treble damage actions. See Microsoft, 56 F.3d at 1461
n.9 ("decree does not preclude [third party] from bringing its
own private antitrust suit against Microsoft to gain the specific
relief it seeks"). Injured service competitors, such as ISNI,
could sue. Equally important, IBM customers injured by the tying
could also sue. Given the deep pockets and legal sophistication
of IBM's mainframe and mid-range customers, this threat is
particularly serious. Moreover, any plaintiff, whether
government or private, would have the advantage of the Supreme
Court's rulings that at least certain tying arrangements are not
merely unlawful under the Sherman Act, but unlawful per se. See,
e.g., Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2,
12-
16 (1984).
The effectiveness of the threat of litigation as a
deterrent against tying is made all the more powerful by the
incentive it gives to IBM to exercise any market power it might
have in other ways that it is likely to find less costly -- and
that are not now prohibited by the Decree. For example, IBM
could exploit its unquestioned market power in S/390 and AS/400
operating systems software34 simply by raising the license
fees
Page 44
for those systems to supracompetitive levels.35
Operating systems did not even exist in 1956, and nothing in the
entire Decree (not just sections VI(c), VII(c), and IX(b)-(c)),
which ISNI has raised here) would bar such action.36
If IBM wants to exploit market power, it will do so through its
operating system, not through parts or maintenance services, and
nothing in the Decree can stop it. That IBM has chosen not to
exploit its operating system in this way provides yet another
illustration of the fundamental point: that the market and the
antitrust laws effectively constrain IBM, even in the absence of
the Decree.
Page 45.
CONCLUSION
For the foregoing reasons, the judgment of the district
court should be affirmed.
Of counsel:
John F. Greaney
N. Scott Sacks
James J. Tierney
Attorneys
*Counsel of Record
|
Joel I. Klein
Assistant Attorney General
Donna E. Patterson
Deputy Assistant Attorney General
Robert B. Nicholson
Adam D. Hirsh*
Attorneys
U.S. Department of Justice
Antitrust Division -- Appellate
601 D Street NW, Room 10535
Washington, DC 20530
(202) 305-7420
Attorneys for Plaintiff-Appellee
United States of America |
November 7, 1997
Page 46
CERTIFICATE OF SERVICE
I hereby certify that on this 7th day of November,
1997, I caused two copies of the foregoing Brief For The United
States to be served by Federal Express (for Saturday delivery)
on:
Gordon B. Spivack, Esq.
Ronald S. Katz, Esq.
Theodore R. Snyder, Esq.
Coudert Brothers
1114 Avenue of the Americas
New York, NY 10036
James R. Eiszner, Esq.
Joseph G. Matye, Esq.
Shook, Hardy & Bacon LLP
One Kansas City Place
1200 Main Street
Kansas City, MO 64105
Evan R. Chesler, Esq.
Peter T. Barbur, Esq.
Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, NY 10019
___________________________
Adam D. Hirsh
.
FOOTNOTES
1
A section-by-section summary chart of the Decree's
provisions, including the date of expiration or termination for
each section, is found at J.A. 1608-12.
2
Section IV is the only portion of the Decree that states its
purpose expressly. J.A. 151.
3
In 1969, the government did bring a separate antitrust suit
against IBM, which the government dismissed in 1982; that case is
irrelevant to this appeal.
4
There was no significant objection to the January 17
terminations (one anonymous public comment was received), and the
January 1996 Order was not appealed to this Court.
5
In addition, the Computer Dealers and Lessees Association
(CDLA), members of which compete with IBM to finance computer
purchases, and which originally had opposed IBM's June 1994
motion to terminate the Decree, hailed the parties' Joint Motion
in the press as "a significant victory" for CDLA, competition,
and consumers. J.A. 1550 n.22.
6
In addition, the government received one anonymous comment
in opposition to the proposed termination. J.A. 1634, 1554.
7
The government's comments were supported by two expert
economists. J.A. 1564, 1582, 1823, 1841. IBM's comments were
supported by one economic and one computer maintenance expert.
J.A. 870, 1039.
8
8Although ISNI complains that it originally received
redacted versions of the government's and IBM's responses, ISNI
Br. 4, on appeal ISNI received the full, unredacted versions of
those filings in return for its agreement to abide by the
protective order issued in this case. See J.A. 1759-2933 (filed
under seal).
9
ISNI's reply comments did include one exhibit, a copy of an
IBM Information Bulletin for Customers. J.A. 1681.
10
See, e.g., United States v. Paramount Pictures, Inc., 334
U.S. 131, 177 (1948); United States v. Borden, 347 U.S. 514, 518
(1954).
11
In Cyanamid, the district court had erred by failing to
apply the specific standard set forth in that consent decree in
favor of "contemporary economic theory" not contained in
precedent. 719 F.2d at 567.
12
Microsoft arose in the context of judicial disapproval of an
initial consent decree under the Tunney Act. 56 F.3d at 1457-58.
Although the extant case concerns terminating an existing decree,
Cyanamid recognized that the Tunney Act "provides useful guidance
to the courts in deciding how modification procedures should be
addressed." 719 F.2d at 565 n.7.
13
ISNI also contends that IBM may tie its proprietary AS/400
and S/390 operating systems to maintenance services; that
argument is addressed at pp. 42-44 below. At times it is unclear
whether ISNI contends that an operating system is a type of
"part." Compare ISNI Br. 11 (referring to "parts (including
operating systems)"), with id. 25 (alleging that IBM could refuse
to sell "critical parts or to lease the operating systems")
(emphasis added). To the extent ISNI is suggesting that an
operating system is a "part" under section VI(c) of the Decree,
it is simply wrong. Operating systems do provide IBM with an
additional potential avenue of tying, but they are not "parts."
14
On remand, when facts were required, the ISOs dropped their
tying claim but won a substantial judgment on monopolization and
attempted monopolization claims, which was mostly upheld on
appeal. Image Technical Servs., Inc. v. Eastman Kodak Co., 1997
WL 549134 (9th Cir. Aug. 26, 1997) (petitions for rehearing
pending). Here, ISNI asks this Court "to address only the tying
claim" against IBM. ISNI Br. 18.
15
Section XV of the Decree prohibits ties. J.A. 161, 1612.
The United States has never filed an enforcement action against
IBM for violating the Decree, including the anti-tying provision.
Section XV will terminate at the end of the sunset periods and is
not on appeal here.
16
As the reliability and durability of the AS/400 and S/390
continues to improve, the need for any maintenance at all
continues to decline. See J.A. 1039, 1049-51 ¶¶ 23-27.
17
At the hearing, ISNI's counsel attempted to persuade the
district court that ISOs bought certain critical parts from IBM,
especially on an emergency basis, but counsel was unable to point
to any evidence in the record that supported his assertion. See
J.A. 1751-53. xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
18
ISNI suggests that the existence of a competitive parts
market is somehow "irrelevant" because when section IV(b) expires
in 2001, IBM may revert to a lease-only policy and thus
eventually make used machines unavailable as a source of parts.
ISNI Br. 24 n.8. Far from being "irrelevant," the existence of a
market today means that ISOs are in no present danger of being
driven out of the market. Although the creation of a market for
parts is no doubt attributable in part to the Decree, that does
not mean, as ISNI contends, that continuation of the Decree is
necessary to maintain competition, and that is the proper focus
here. ISNI's decision not to appeal the termination of section
IV(b) (ISNI Br. 8-9 & n.1) means that nothing in this appeal will
affect IBM's right to adopt a lease-only policy, and at least
suggests that ISNI thinks that IBM is not likely to adopt such a
policy.
19
This section addresses only the likelihood that IBM will
attempt to cut off the ISOs. Whether the market would permit IBM
to profit in such an attempt is a different question, and one
addressed at pp. 30-41 below.
20
POSIX is the set of industry standard interfaces for UNIX, a
non-IBM operating system of choice for many computer systems.
UNIX can run on a wider variety of equipment than other operating
systems. As a consequence, the term "UNIX" has become synonymous
with "open systems" because it enables various computer platforms
to be connected and interoperate. For further explanation of
UNIX, see J.A. 1529 n.19, 1544; 870, 882-83 ¶ 23.
21
The sunset periods also provide sufficient time for ISOs to
recoup their investments in parts, personnel, and training made
in reliance on the Decree and to plan for a post-Decree
environment. J.A. 1575 ¶ 28; 1592-93 ¶¶ 32-33. Such equitable
considerations are valid factors in the calculus of determining
the public interest. See Cyanamid, 719 F.2d at 567.
22
ISNI simultaneously argues that maintenance prices will
increase post-Decree, yet that permitting customers to enter into
long-term maintenance contracts is undesirable because they will
miss out on consistently dropping maintenance prices. ISNI Br.
48. ISNI cannot have it both ways. The fact that customers
currently enter into long-term maintenance contracts is evidence
that customers are in the best position to decide whether such
contracts are in their interests. See J.A. 1585-86 ¶ 10, 1589
¶ 21.
23
This is the standard the United States Department of Justice
and Federal Trade Commission use to define relevant product
markets. See U.S. Dept. of Justice & FTC, Horizontal Merger
Guidelines &167; 1.12 (rev. Apr. 8, 1997).
24
The ability of competitors and consultants to supply
consumers with the necessary information is one of the questions
of fact left open by the Supreme Court in Kodak. See 504 U.S. at
474.
25
Lock-in is a concern to current owners of equipment because
they "will tolerate some level of service-price increases before
changing equipment brands." Kodak, 504 U.S. at 476.
26
This is why IBM's cooperative approach toward ISVs makes
sense. See p.27 above. An equipment manufacturer benefits
whenever the pool of software that can run on its equipment
increases.
27
Such fear may arise either by anticipating a change in IBM's
policy toward customers or by knowing of others who are currently
exploited. ISNI speculates that customers do not know when they
are being exploited or when others are exploited. ISNI Br. 46.
Once again, however, the record evidence is to the contrary.
J.A. 1573 ¶ 23 (noting that consumers can compare maintenance
costs from one manufacturer to another and rely on trade
publications to provide price information).
28
ISNI mischaracterizes the government's position as relying
solely on future competition to constrain IBM (ISNI Br. 12, 42);
rather, the government believes that IBM faces competition and
market constraints today, which will only intensify during the
sunset periods.
29
Thus, ISNI's statement that the number of new buyers of
mainframes is neither large nor expected to grow significantly,
ISNI Br. 36, is true but irrelevant. Most new mainframes are
sold to existing mainframe consumers. These consumers are either
adding additional mainframe capacity or are replacing their older
mainframe equipment. The relevant fact is that these customers
have a choice between the S/390 and a PCM. J.A. 1572 ¶ 21.
30
Electronic mail is a prime example. Originally, large e-mail
systems were run entirely on mainframes. Today, most e-mail
systems are run on mid-range platforms. When a customer decides
it wants to add an e-mail system, it can buy an application that
will run on its mainframe, or it can buy an application that will
run on its mid-range computer. That ability to shop forces IBM
to remain competitive.
31
ISNI is also incorrect (Br. 22, 28) that the district court
did not consider the lock-in issue. The district court was fully
aware of lock-in as a potential problem, see J.A. 1733, but
ultimately was unpersuaded by ISNI's arguments on this point.
32
Such reputational concerns are not easily dismissed. ISNI
Br. 45-46. As two experts have explained, IBM has considerable
goodwill tied up in its reputation, and any exploitation of one
group of customers is likely to be discovered by other groups and
will tarnish IBM's image in their eyes. J.A. 1570 ¶ 16, 1572-73
¶¶ 22-23; 1589 ¶ 23. Because IBM must compete vigorously for
these other customers' business, IBM is less likely to risk their
business by taking advantage of a small minority of locked-in
customers.
33
ISNI suggests that customers will not know when they are
being exploited. ISNI Br. 46. Again, however, the record
evidence is to the contrary. See J.A. 1573 ¶ 23.
34
IBM is the sole supplier of such operating systems. IBM's
market share for its suite of S/390 operating systems is
approximately 80% -- even consumers who use PCM equipment from
other manufacturers tend to use IBM's S/390 operating system.
J.A. 1531. Computers today will not run without an operating
system.
35
All parties agree that IBM is able to alter the terms of its
operating system licensing agreements on short notice. J.A. 1526,
1718-20.
36
Although the United States has interpreted the Decree so as
to prohibit IBM from discriminating in the licensing of it
operating system between purchasers and licensees (section IV),
and from tying any other product or service to the license of its
operating system (section XV), the Decree would not prevent
exploitation of market power through an increase in the licensing
fee. Moreover, ISNI has not appealed the termination of sections
IV or XV.
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