United States. Congress. Senate. Committee on the.

The Industrial reorganization act. Hearings, Ninety-third Congress, first session [-Ninety-fourth Congress, first session], on S. 1167 (Volume pt. 7) online

. (page 110 of 140)
Online LibraryUnited States. Congress. Senate. Committee on theThe Industrial reorganization act. Hearings, Ninety-third Congress, first session [-Ninety-fourth Congress, first session], on S. 1167 (Volume pt. 7) → online text (page 110 of 140)
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cast was caused solely by the IBM actions complained of, or to be found as
unlawful by the court, without giving weight to the effect of established internal
ditficulties within Telex over which IBM had no control and the claimed unlawful
integration action that has now been found to have been nonactionable.

F120. These and other limitations in the sufficiency of plaintiffs' proof to sup-
port their claim for deprivation of market share in full leave the question
whether any such claim is thereby defeated entirely or, if not, what amount
of damages has been established by way of fair approximation on the evidence
in view of the fact that IBM's predatory actions have deprived the plaintiffs
of the opportunity of positive proof of what their experience would have been
in the aljsence of such action.

There must also be evaluated in any award the question of to what extent
the uncertainty of proof relates to IBM's predatory action and to what extent,
if any, it relates to any inexcusable failure on the part of the plaintiff's to submit
evidence reasonably available to it. As to the latter problem, if trial counsel
is not to be hindsighted, I am inclined to believe that generally speaking the
plaintiffs must be considered to have submitted the best proof of which the nature
and complexity of the case reasonably were susceptible.

There is no evidence that there were any better forecasts available nor any
indication that those used were contrived particularly for the purpose of
prospective litigation. The opinion evidence was based on plaintiffs' theory
of liability and as it turns out it would have been more applicable had it been
based upon the court's findings after trial of what conduct was lawful or
unlawful rather than upon pre-trial expectations or hopes concerning bases of
liability.

Beyond such forecasts and opinions, it is ditfieult to see how loss of market
share could be established with any specificity, or how elements of loss of market
share could be traced and evaluated much more in detail with reference to vari-
ous factors that may have entered in by way of possible influence. To attempt
by expert testimony to evaluate and weigh each individual factor and to
categorize and evaluate the relative influence of each alleged predatory act
against the possibility that the court might not sustain contentions as to some
of them might so complicate a trial, extend the evidence and compromise the
trial position pf a party from the inception as fairly to be considered impractical
and unjustified.

While the question is not free from doubt, it appears to the court that any
uncertainty concerning the amount of the loss of market share is not so as-
cril)able to fault on the part of plaintiffs as to deprive them of the benefit of
the rule that ^^here the existence of impact and damages have been shown
b.y a preponderance of the evidence, reasonable approximations of the extent
of damage leased upon the reasonably available evidence is not to be rejected.

F121. It has been found that sufficient evidence was introduced to show pre-
ponderantly that plaintiffs suffered substantial damages in an ascertainable ap-
proximate amount from the unlawful acts of the defendant in deprivation of
the market share that it would have enjoyed had the unlawful acts of the de-

40-927 — 75 5S



5742

fendant not been committed, and that taking into consideration the strengths
and weaknesses of he plaintiffs' proof as to damages in view of the whole
record, eliminating the results of internal, collateral or other considerations over
which IBM had no control and unrelated to its unlawful acts, and excluding
damages for lost rental profits and lost sales profits hereinafter to be separately
considered, such element of damage reasonably awardable herein amounts to
iflO million.

F122. It has been found that suflicient evidence has been introduced to show
preponderantly that plaintiffs suffered, from lost rental profits, substantial dam-
ages in an ascertainable approximate amount from the unlawful acts of defend-
ant, and that taking into consideration the strengths and weaknesses of
plaintiffs' proof in view of the whole record, and eliminating the results of
circumstances over which IBM had no control and which were unrelated to its
unlawful acts, such element of damage reasonably awardable herein amounts to
$39 million.

This sum represents the difference in profits from Telex's installed luiits based
upon rental charges actually received and that would have been received in view
of defendant's unlawful acts, as compared to rental profits that would have been
received on rental prices in effect prior to IBM's 2319 and FTP announcements,
with elimination of factors not attributable to IBM.

Approximately $20 million of this total amount is made up of past and future
claimed lost rentals on all Telex shipments prior to April 1, 1972. The other $19
million is lost rentals on shipments reasonably to be anticipated as taking place
after March 31, 1972.

F123. Telex's claim of '$11.3 million damages for "lost sale profits" from leas-
ing company transactions is based on a reduction in the price and sale "multiples"
as a result of IBM's pricing actions. Telex claims $8.5 million in lost profits on
the Pepsico transaction, $1.3 million on the Hudson disk transaction, and $1.5
million on the Transamerica disk transaction.

As in the cases of other classes of damage claimed by Telex, I find generally
speaking that plaintiffs' witness Heavener properly analyzed and applied the
formula for fixing damages to the data and assumptions available to him, the ac-
curacy of the results being limited by the limitations of these data and assump-
tions. I cannot agree that a comparison of sales multiples in different third party
agi-eements and other possible variables pressed by defendant indicate neither
the fact of injury nor the amount of damage.

The variables were explored or touched upon in a general way in the evidence
as are other possible adjusting factors. 1 am convinced that allowing IBM the
maximum reasonable benefit of these and other possible variables would not
decrease Telex's claim of lost sale profits from leasing company transactions by
more than $2.8 million, or roughly 25%, and that other objections to the validity
of the plaintiffs' figure adequately have been met by the evidence.

Accordingly, I find actual damages suffered by plaintiff's in lost sale profits
proximately caused by the defendant's unlawful acts amount to be $8..50 million.
F124. Accordingly the court finds that as a proximate result of IBM's unlaw-
ful acts and conduct the plaintiffs have suffered actual damages totaling $117.5
million. It is further found that this is a fair and reasonable approximation
based on the evidence before the court.

It is believed in this connection that any greater amount, while it could be con-
sidered supported by some evidence, would be speculative and not supported by
preponderant evidence applying the rule of liberality commended by the authori-
ties. Weighing all relevant factors on the whole record, it is believed that any
less award would be contrary to the preponderance of the credible and suflicieut
evidence.

Vin. EQTJITxiJBLE RELIEF ON ANTITRUST CLAIMS

F125. The court further finds that defendant threatens to, and will unless re-
strained by the following equitable relief, continue its unlawful conduct to the
irreparable injury of plaintiffs and of the industry and the public generally, but
Avith the damage and equitable constraints herein provided it is likely that such
further injury can be avoided.

To reestablish and maintain competitive environment in the market, IBM's
ability to exert monopoly market power and control the plug compatible industry
and particularly the relevant submarkets for magnetic tape products, disk prod-
ucts, printer products, memory products and communication controllers should
be limited by the following equitable relief. .



5743

F126. International Business Machines 'Corporation sliould be permanently
enjoinetl from enforcing or collecting any conti'actually specified penalty pay-
ments which it otherwise might he entitled to collect because of termination upon
ninety days' notice of any long term lease agreements heretofore entered into
between IBM and any of its end-user customers, including but not limited to
IBM Fixed Term Plan leases, Extended Tenn Plan leases and Term Lease Plan
leases.

For a period of three years from and after the date of this judgment it should
be enjoined and prohibited from including in any lease agreement for electronic
data processing products for terms in excess of 90 days any provision requiring
payment of any liquidated damages or penalty because of a customer's earlier
termination of said lease agreement.

F127. At the time of a product announcement concerning any peripheral EDP
product, or at tlie time of release for manufacturing or production, whichever
first occurs, International Business Machines Corporation should be enjoined
and required to publicly describe and disclose the design of the electronic inter-
face for such product essential for connection to a CPU or its channel, in suffi-
cient detail as to render reasonably feasible the reproduction of such interface
by other qualified manufacturers ; and within 60 days from the entry of this
judgment International Business Machines Corporation should be ordered to
similarly describe and disclose the details of the design of the electronic inter-
face for each System 370 peripheral EDP product announced heretofore.

F128. International Business Machines Corporation should be enjoined and
prohibited from single, or '-bundled" pricing of memories with its System 370
<'entral processing units, that is, from charging a single price for both the cen-
tral processing unit and the memory, and within 60 days from the entry of the
judgment herein IBM shall separately price its CPU's and memories.

This should not prohibit, restrict or enjoin IBM from selecting the physical
locations of its products so long as these requirements and those stated in the
next succeeding paragraph are followed.

F129. International Business Machines Corporation should be enjoined and
required to separately price its functionally different products, including mem-
f)ries, tape products and their controllers, disli products and their controllers,
printer products and their controllers and communication controllers regardless of
whether it elects to place such products in single cabinets or in multiple boxes
or cabinets.

International Business Machines Corporation should be further enjoined and
required to set its prices for all such functionally similar EDP products by using
and applying a substantially uniform percentage markup over actual design,
manufacturing and marlieting costs as between such integrated and separately
boxed products.

F130. International Business Machines Corporation should be enjoined from
adopting, implementing or carrying out predatory pricing, leasing or other acts,
practices or strategies with intent to obtain or maintain a monopoly in the
market for EDP peripheral equipment plug compatible to its CPU's, or any
relevant submarkets thereof.

F131. Since I have found evidence insuflicient to establish that IBM actually
imjlemented with monopolistic intent or without reasonable cause suggestions
made internally that as a competitive strategy it withhold from the public
existing, available and developed technology relevant to specific product an-
iiouncements to frustrate plug compatible competition, and because it is be-
lieved that any requirement that IBM describe all product enhancements that
are i-lanned or anticipated to be made to a product during its product life would
be competitively unreasonable and inhibiting to technological developments in
the industry, requested injunctive relief in this respect should be denied.

Nor do I believe the evidence warrants the order of divestiture sought bv
]ilaintiffs. it being my view that the damages and equitable relief above-
mentioned in connection with normal corrective trends in the industry, will serve
to_ obviate the found monopoly and to restore a healthy competitive climate
within a reasonable time, if the enjoined acts and conduct are discontinued or
carried out, as the case may be.

IX. IBM's COtTNTERCLAIM AGAINST TELEX FOB UNFAIR COMPETITION, MISAPPRO-
PRIATION OF TRADE SECRETS AND PROPRIETARY INFORMATION

F132. Telex's first plug compatible tape drive, its Model 4700, was offered to
the market in 1966 to compete with IBM Model 729, which had then been on the



5744

matket for a number of years. Telex's second plug compatible tape drive, its
Model 4800, was delivered to the market in 1967 to compete with IBM Model
2401, which had been on the market for several years. Telex's next plug com-
patible tape drive, its IModel 5420. was delivered to the market in December,

1970. to compete with IBM Model 2420 which had then been on the market for
more tlian one year.

Telex's current tape drive subsystem, being its Model 6420/6803-1. was de-
livered to the market in November. 1971, to be plug compatible to the IBM chan-
nel interface of the System 360, which had been on the market since 1964. This
model was likewise competitive with IBM tape drive subsystem model 3420/
3803. which had been announced by IBM in November, 1970.

Telex's plug compatible disk drive, its Model .1311. was delivered to the market
in 1969 to compete with IBM Model 2311. which had been on the market for
about five years. Telex's disk product was a disk drive subsystem, its Model r>314,
which was' plug compatible to IBM CPU's and was delivered to the market in
April of 1970.

The said model was competitive with IBM IModel 2314 which had been on the
market since 1965. Telex's current disk drive system, its Model 6330/6830. was
delivered on the market in October of 1972. to compete with IBil's Model 3330/
3830, which had been announced in June of 1970 and first delivered in August of

1971. since which date it had been on the market.

Telex also manufactures and markets semi-conductor main memories which
are plug compatible to IBM CPU's. These were first offered in November of 1971.
IBM offers a variety of main memories with which the Telex products compete.
Telex also manufactures a plug compatible printer system. Its Model 5403/5821,
which was offered on the market in November. 1970, to compete with IBM Model
1403X1/2821, which had then been on the market for several years.

F133. As already found. Telex's business has been largely directed toward
offering plug to plug interchangeable replacements for products manufactured
by IBM. The lower prices by which Telex induces such customers to replace IBINI
equipment with Telex equipment are aclueved by copying as closely as possil)le-
the IBM design. In order to maximize its return on investment. Telex has at-
tempted to bring its plug compatible replacements to the marketplace as soon
after IBM announces its products as possible.

The life cycle of the Telex plug compatible products is dependent on the life
cycle of IBM products to an important measure since Telex generally has not
marketed products of independent design but rather has waited until IBM has
designed a product which Telex plans to replace. Telex has been motivated to
determine the specifications and plan for new IBM products as soon as it is able
and. if possible, before the products are announced to the public. One of the
ways it has found to implement this objective has been the hiring of IBM em-
plovees or former employees.

F134. Statistically, the number of IBM employees hired by Telex has not been
impressive. Of those personnel who had formerly been employed by IBM some of
them were employed by Telex after intervening employment by third parties and
some were employed immediately after the termination of their eniployment at
IBM. On March 31. 1970. Telex emi»loyed 50 engineer? of whom one was a former
emplovee of IBINI. On March 31. 1971. Telex employed a total of 88 engineers, of
whom 18 were former IBM employees. 8 of these were employed directly from
IBM. On March 31. 1972. Telex employed a total of 145 engineers, of whom 31 were
former IBM employees; 13 of these were employed dii-ectly from IBM positions.
On March 31. 1973, Telex employed a total of 129 engineers, of a\ bom 12 were
former TBIM employees : 3 of these were employed directly from TB?iI.

Tlie remainder of Telex's engineering staff was employed after no previous IBM
experience. They were obtained either directly from schools or with work experi-
ence from self-employment or from some 60 other employers. One of the principal
sources of ensineering personnel was RCA, which abandoned its electronic data
processing venture in 1971: a total of 32 of Telex engineers employed as of
March 3l'. 1973, came to Telex directly from RCA. On March 31. 1973, Telex had
tfvtal emplovees of 1,929, of whom 152 had former IBM employment experience.
F135. However, it must be recognized, complementary to these figures, that
former IBM emplovees have furnished an important and vital part of Telex
teehnologv and business development. In March. 1970. Telex hired IBM employee
Jack .Tames who possessed substantial confidential information about IBM s

future product plans. ^ ■, ^ ^ , i

At the suggestion of Telex Vice President of Sales, Grant, who had worked

with James at IBM, Telex contacted James in January, 1970, regarding the pos-



5745

sibility of his resigning from IBM and taking a position witli Telex. He tiad been
employed as the Systems Requirement and Business Manager for the General
Systems Division of IBM and was in a position of responsibility relating to
planning for various IBM products and services.

In the course of his duties at IBM, James had access to confidential data relat-
ing to IBM products under development and relating to IBM's forecast and
financial information. While James was still an employee of IBM, but considering
employment by Telex, he provided Telex Chairman Wheeler with an appraisal of
the wisdom of Telex's entering into the marketing of terminal products and with
advice as to what types of products Telex should offer in the future.

After returning from a meeting with Telex executives, James returned to IBM
and collected a substantial yuantity of IBM planning data, including shipment
forecasts, with respect to IBM products as to which Telex offered plug compatible
rephieements and, in addition, with respect to IBM's printer products. James was
oheied the position of Vice President of Finance for Telex Computer Productjj
Inc.. iiiid accepted that position in March, 1970.

Yina. James had no contract with IBM for a fixed term of employment and had
made no agreement not to accept employment from a competitor of IBM ; but he
understood that he .should not disclose IBM's secret or confidential information or
documents, and prior to his leaving IBM he had a termination interview in which
his obligations with respect to IBM trade secrets and business confidential infor-
mation such as marketing analysis, product costs and plans for potential new
products were discussed. On March 28, James acknowledged these obligations in
writing.

F1.37. It was natural, proper and to be expected that James's general knowledge
of electronic data products, both of IBM and its competitors, his knowledge of
the markets exisitng tlierefor, or anticipated to exist therefor, his knowledge of
price performance factors, of equipment available in the market, and his ac-
quaintance with sales and marketing problems relating to such equipment,
including competitive factors, were the currency of his qualifications for any
position he might accept.

It was natural and proper, also, that his general knowledge and opinions respect-
ing the then existing future markets for electronic data processing equipment,
and even limited general notes of information or opinions respecting the fields of
his employment which he had made as a part of his work experience, would be
carried with him into any future employment.

Beyond this, it might have been reasonably expected that he would utilize in
his new employment the totality of his general knowledge concerning the EDP
industry, his general judgment based upon the sum total of his experience and
his experience and comijetence derived from dealing with the problems and plans
of his former employer, IBM.

F13S. But beyond this, I am compelled to find from the evidence as a whole
that Telex expected, and James intended as a part of liis new employment, to
capitalize and exploit confidential IBM documents and studies themselves. Prior
to leaving IBM James had access, among other things, to IBM's Plan 25 Forecast
and IBM's SCAN forecast assumptions.

James knew that the Plan 25 Forecast and the SCAN Forecast assumptions
were IBM confidential documents and entitled to protection as such. He took with
him from IBM to Telex confidential information copied from the Plan 25 Forecast
and from the SCAN Forecast assumptions, including information on IBM Fore-
casts : IBM product announcements and information about the performance of
its products.

Beginning immediately after he joined Telex, James prepared and disseminated
to (jther top officials of Telex a series of memoranda wihch disclosed the IBM con-
fidential information in his possession relating to unannounced IBM products and
to IBM future business plans and projections, which disclosures were in detail
and specific, negating any idea that they constituted merely general information
or opinions based upon his experience.

Beginning in March, 1970, based upon IBM confidential information with respect
to ijeripheral equipment to be attached to the NS series of CPU's later announced
as System 370, Telex adopted new business and product plans.

On March 26. 1970, James told Martin of his intent to revise Telex's budget
based upon "new market forecast — information that should result in higher
projections of revenue, profit and cash requirements and a constant or slightly
reduced expense picture." On April 15. 1070, a two day off-site business planning
meeting was held by Telex's four top officers to discuss "financial analysis of
present products and growth strategy".



5746

The material which provided the basis for the discussions at the meeting
was confidential IBM marliet forecast and product information prepared by
James and disseminated just prior to the meeting. The materials which James
prepared consisted of forecasts of installations of IBM CPU's and certain IBM
and Telex peripheral products in the United States and overseas for the years
1070-1975, together with recommended product strategies based on IBM forecasts.

The SCAN forecast assumptions and the IBM Plan 25 forecast to which
James had access and utilized for the benefit of his new employer were registered
IBM confidential documents. The designation "registered IBM confidential"
indicates a specially controlled document containing highly sensitive trade
secrets for IBM's condential information.

F139. In the ensuing months James disclosed further IBM confidential infoi -
mation which was used in forming Telex's product strategy and in determining
Telex's development program. On June 11, 1970, James proposed to TCP Presi-
dent Martin that Telex enter the business of offering plug compatible replacement
memories for NS Systems.

James's recommendation was based on his knowledge of the unannounced
prices for NS memories and confidential forecast data with respect to tliose
products. On July 20. 1!>70. President Jatras reported to Telex's board of
directors that Telex had just adopted the objective of offering plug compatible
memories for IBM systems.

Telex officers and employees thereafter engaged in a concerted effort to recruit
IBM memory engineers and to discover technical and business confidential
information through that recruiting process, to gain access to proprietary docu-
ments locked in cabinets under the jurisdiction of IBM's maintenance personnel
and otherwise to obtain proprietary information concerning IBM's NS or
System 370 memories.

On June 15, 1970. James provided Martin wath an assessment of "the IP.M
printer strategy and my opinions on how Telex should counter". This strategy
was based on Jame's knowledge of unannounced printers and card products being
developed at IB^NI and the planning assumptions for those products.

On June 15, 1970. four days after his memorandum on memory programs and
the date of his memorandum on printer strategy, James provided INIartin with



Online LibraryUnited States. Congress. Senate. Committee on theThe Industrial reorganization act. Hearings, Ninety-third Congress, first session [-Ninety-fourth Congress, first session], on S. 1167 (Volume pt. 7) → online text (page 110 of 140)