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 111 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 111 of 140)
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an assessment of IBM's "Aspen Intermediate" tape drive and controller develop-
ment program and a recommendation as to the direction Telex's development
program should take.

Based at least in substantial part on the disclosures by James of IBM business-
confidential information with respect to tape, disk, memory and printer products
developed by IB]\I. Telex took a series of actions in 1970 designed to add com-
parable products to its product line and thereliy reduce the competitive advantage
to IBM of conducting independent research and development efforts. By the-
end of 1970, the Telex product line was becoming significantly broader and m.ore
competitive than it had been at the end of 1969.

F140. The court finds that James deliberately misappropriated IBM confi-
dential information and made that information avalla))le to Telex, and t'liit
principal officers of Telex knew, or should have known, that the information
made available to Telex was confidential IBM information and that it had been
wrongfully misappropriated by James.

F141. Beginning with the hiring of .Tames and continuing at least until com-
mencement of this lawsuit. Telex followed a practice of acquiring as an important
part of its business IBM confidential information and trade secrets through the
hiring of IBM employees with knowledge of such confidential information and
trade secrets.

In July. 1970. Telex hired Howard Gruver from IBM with the intent of obtain-
ing confidential information concerning IBM's unannounced advanced tape snl)-
s.vstem. Aspen. In Xoveml>er. 1970. Telex hired John K. Clemens with intent to
obtain IBM's confidential information concerning its advanced disk subsystem.
Merlin. In or prior to November, 1970. Telex obtained a copy of the Registered
IBM Confidential document, the Storage Products Five Year Plan.

In Mny. 1971. Telex acquired n copv of portions of the IBM confidential docu-
ment 27BN Communications Control Vuit Phase I Forecast Assumidions. Prior to
July 6. 1971. Telex furnished a copy of the Storage Products Five Year Plan to
McDonald who prepared a technical report for Telex based on that document.
In June of 1972. James ordered former IBM employee Kevill to provide him witli
product descriptions and market forecasts for unannounced IBM advanced disk
products and Kevill complied with that request.



5747

In August, 1972, James ordered Jones to hire IBM employees to build a device
patterned after Bircli, an unannounced IBM product. About six months prior to
March 6, 1973, Telex's President James sent to Howard Gruver IBM confi-
dential information concerning the forecast assumptions for the Storage Prod-
ucts Five Year Plan. During 1971, Telex made a copy of the IBM Friend 2 source
diagnostic program, a confidential IBM diagnostic tool.

F142. In April, 1970, at a business planning staff meeting, Telex decided to
proceed with a tape controller program and as the first action it determined to
"identify and recruit from IBM a project engineer with tape controller experience
and 'Aspen' capability". In January, 1971, Wheeler reiterated his prior order to
hire a manager for Telex's memory system program from IBM.

He noted that Telex would benefit in that "in our efforts to employ the right
man we will unquestionably learn what IBM is planning to do in this area which
will be a great assistance to us in planning our future strategy." Desmond Jones
told Martin that one of the prerequisites for a Telex Memory System's manager
was previous active participation in the design phases of IBil"s System K7()
memory, and Martin then instructed Jones to hire a memory manager with IBM
System 379 memory design experience.

In August, 1971, in assessing the hiring of Moore, Telex's Desmond Jones
noted as a positive factor that Moore had knowledge of IBM's future plans. An
important factor in the consideration of the employment of IBM engineer
Roosseim was that he had had the experience designing the IFA for the System
370/145. Grant in 1972 said that Telex must have IBM talent in the disk area
in order to stay current, and on another occasion recommended to James
adoption of a hiring policy making "IBM competence a prerequisite" to
employment.

In June, 1972, Telex employee Deck noted that in the area of advanced disk
development "clearly it is most desirable to get IBM or ex-IBM talent . . . The
only viable alternative is talent from independent disk and head companiei*
who are cognizant of IBM's plans".

In June, 1972, Desmond Jones wrote to Jack James that he had undertaken
to recruit the necessary talent to answer questions regarding the functional def-
initions of various disk programs. Jones stated that "I do feel the need for IBM
talent has become considerably more important since we are trying to compete
against yet-unannounced products. Thus we will most certainly concentrate on
getting IBM talent for not only the disk, but for the memory, advanced tape, and
software programs."

In a June 8, 1972. disk program proposal. Deck stated, among other things,
that "what we are after is not skill per se but information. The best source of
people with required information is current or recent employees of IBiM's disk
development group". Bangel, in a memorandum to Desmond Jones in regard to
Blunk, noted that "Telex has a requirement for the type of experience Blunk has
had at IBM.

Those areas where I feel he could aid Telex are as follows : 1. 370/l;jS-lfiS
memory design ; 2. compatible main frame design ; 3. backup support to present
370 memory design ; 4, recent knowledge of IBM plans and design schemes." In
September, 1972, Jones wrote to James concerning the employment of IBM engi-
neer Glen Day. Jones was interested in Day because of his IBM experience with
a new terminal. Jones said, "As yet tliis product has not been announced )>ut
from my information today it appears it would contribute a significant part to
any communications program and might well give us a jump on IBM."

F143. None of the IB^M employees hired by Telex had any contract with IB^I
for a fixed term of employment : nor did they have any agreement or contract
not to accept employment by a competitor of IB]M. All of them had either ex-
pressly contracted to respect IBM's confidential information and trade secrets or
had impliedly undertaken to do so by reason of briefings, discussions or general
conditions of employment at IBM.

Few. if any. of the former IBM employees employed by Telex who testified at
the trial or l)y deposition admitted expressly that they had delivered or revealed
IBM trade secrets or confidential information to Telex, and most of them ex-
pressly testified by way of summary or conclusion that they had not.

But by reason of Telex's massive and pervasive policy, some direct evidence,
and overwhelming circumstantial evidence to the contrary, the court nnist find
that in numerous instances IBM's trade secrets and confidential data whicli it was
entitled to have respected by former employees were revealed to, and utilized by,
Telex ; and that in combination, and by reason of a planned and intended program
to this effect, these revelations transcended any acceptable utilization of the



5748

employees' general expertise, training, experience and capabilities and consti-
tuted an unacceptable program of industrial espionage and unfair competition.

F144. IBM's 3420 tape drive and 3803 tape drive controller were announced
in November, 1970, and first shipi>ed to customers in September, 1971. Telex's
■6420 tape drives and 6803 tape controller, which were offered as replacements
for the IBM 3420/3803, were announced in December, 1970, and first shipi^ed to
customers in November, 1971.

The IBM 3420 and 3803 had been deevloped by IBM under the code name
"Aspen", beginning in January, 1969. The basic design work on the Aspen tech-
nology had gotten underway in 1966. The Aspen control unit and tape drive em-
bodied significant new technology. The innovations In Aspen resulted largely from
17 specific design characteristics which represented trade secrets in combination
and, in certain respects as individual components, particularly in their applica-
tion to tape devices.

All 17 of these design characteristics and their combination, as embodied in
the Aspen tape drive and controller, were treated and protected as confidential
information by IBM. The first intended disclosure by IBM of any of the Aspen
design characteristics occurred in November, 1970, when ten of the seventeen
characteristics were disclosed by the public announcement of Aspen. This dis-
closure was of the existence of their features, not their design or method of
implementation.

F145. In April, 1970, approximately seven months before the Aspen tape drive
and controller were announced by IBM as the 3420 and 3803, James discolsed
information about the confidential Aspen program to the management of Telex.
On the basis of that information. Telex decided to design, manufacture and
market a plug compatible replacement for Aspen.

An important method by which Telex intended to design such a product was
to recruit away from IBM an engineer who was working on Aspen and to employ
him in the designing of an Aspen type product for Telex. In July, 1970, Telex
management hired Howard Gruver, the IBM engineer in charge of the Aspen
control unit development project, with the intent that he build for Telex an Aspen
type control unit using the knowledge and information which Gruver had accumu-
lated at IBM.

Gruver was offered a salary of $35,000, a guai-anteed bonus of $5,000, and
options on 2,500 shares of Telex stock, the total compensation package being
more than twice Gruver's compensation at IBM. Gruver knew from the time he
was hired that Telex had hired him to take advantage of his Aspen experience
and knowledge of IBM's N/S technology and thereby to get a head-start with
Telex's replacement for Aspen.

F146. When he joined Telex, Gruver was under an obligation not to disclose
any infonnation with respect to the design characteristics of Aspen. On March 15,
1965, Gruver had executed an employee confidential information and invention
agreement with IBM. This agreement obligated Gruver not to disclose any IBM
confidential information to others either during or after his employment with
IBM.

Upon leaving IBM, Gruver was informed in an interview and letter, which
he acknowledged in writing, of the trade secrets and other IBM confidential
information which he was obligated not to divulge. Such trade secrets and
IBM confidential information included information concerning IBM's data
storage and retrieval technology programs and concepts, head development
programs and concepts, and current programs and concepts concerning various
aspects of tape handling and processing, and any information regarding products
that had not then been announced.

In violation of his obligation Gruver used his knowledge of IBM's traae
secrets with respect to the design to the unannounced Aspen tape products
to design for Telex a replacement version of Aspen.

F147. Largely because of Gruver's disclosure of the IBM trade secrets relating
to Aspen, Telex was able to incorporate in its 6420 tape drive and 6803 control
unit the design characteristics of the Aspen control unit and tape drive before
they w^ere announced by IBM, to announce its 6803/6420 Aspen replacements a
month after IBM announced the 3803 tape drive controller and .3420 tape drive,
and to deliver the 6803 and the 6420 two months after IBM delivered its
3420 and 3803.

Telex's engineering department anticipated the announcement of Aspen
several months prior to November, 1970, and by the time of the IBM announcement
"had significant development work underway".



5749

Gruver told IBM engineer Richard Moore, wlio was being recruited by Telex^
that "be (Gruver) bad come to Telex sometime previously and bad effectively
duplicated the efforts be bad — the machine be bad made at IBM, at Telex . . ."
Telex Sales Vice President, Grant, informed his sales force on November 6,

1970, the day after the Aspen announcement by IBM, that as a result of having
hired Gruver the Aspen announcement "held no technical surprises wliatever*'
for Telex and Telex expected to be able to ship its replacement products very
shortly after IBM deliveries."

ri48. Telex's 6803 and 6420 development program, which incorporated the
17 Aspen design features above-mentioned, consumed 16 months from the com-
mencement of the product program to the shipment of the first unit in November,

1971, and was accomplished by engineers working under Gruver who did not
have extensive expertise or experience for the purpose.

IBM's 3803 and 3420 development program consumed 32 months from the
commencement of the program to the shipment of the first units in Septemljer,
1971, and was accomplished by engineers with extensive tape controller
experience.

Products such as the Aspen control unit could not have been designed, devel-
oped and manufactured by Telex's independent efforts within eleven months
after the IBM announcement of Aspen or even within 16 months of Gruver's
joining Telex.

Telex could not have incorporated into the 6803 design the Aspen design-
features which bad not been announced in November, 1970, by reverse engineer-
ing those features in the two months interval between IBM's first customer
shipment and Telex's first customer shipment.

Since the combination of 17 design characteristics embodied in IBM's Aspen
tape control unit and tape drive was the result of numerous trade-offs, the
probability that another group of design engineers working independently would
arrive at a combination of greater than 10 of those design characteristics would
be negligible despite the fact that most of these characteristics in and of them-
selves an'd in different and separate context might not be considered secret,
innovative or novel, and some embraced techniques well known in other contexts.

F149. The court must and does find that Telex deliberately set out to misap-
propriate the IBM Aspen trade secrets, hired Gruver as an important step in
furtherance of this purpose and succeeded in misappropriating various Aspen
trade secrets and incorporating them in the Telex 6803/6420.

Notwithstanding that, as hereinabove found, IBM took approximately 16
months longer to develop its Aspen products than Telex took to develoji their
replacements. I do not think it necessarily follows that Telex saved 16 months
in development time because of incorporating into its design program the Aspen
trade secrets disclosed by Gruver.

Telex apart from any trade secret revelations was entitled to, and no doubt
did, benefit by the general expertise, knowledge and know-bow brought b.y
Gruver to his Telex emijloyment which undoubtedly would have facilitated the
design and development of the Telex products had there been no utilization
of IBM's trade secrets.

Moreover, it is a fair inference from the circumstances that Telex, from
developing related technology regularly released by IBM and otherwise obtain-
altle had an advantage over the i)ioneer efforts of IBM. Because of these and
other related circumstances, while it could be possible that Telex had the
full 16 months time advantage by reason of appropriating IBM's trade secrets,
the probability is that the advantage thus improperly secured was between ten
and eleven months.

F150. From September, 1971, to December, 1972, inclusive, shipments of 6S03
and 6420 units represented a total of 3,561 rental months for 6803"s and 9,348-
rental months for 6420's. The IBM 3803 rents for $675 per month. Using the
16 month differential, had IBM's 3803's been shipped to those IBM customers
rather than Telex 6r-i03's, the 3,561 rental mouths would have resulted in
$2,403,675 in rental to IBM.

The average monthly rental price of IBM's 3420 series tape drives is $471.67
per month. Tbe IBM 3420 model 3 rents for $355 : the 3420 model 5 rented for
$475; tbe 3420 model 7 rented for $585. Had IBM's 3420's been shipped to those
IBM customers rather than Telex 6420's, assuming the 16 month differential, the
9348 rental months would have resulted in $4,-109,171 in rental income to IBM.

On the last mentioned bases, through the end of 1972, IBM could be deemed
to have been deprived of approximately $6,800,000 in monthly rentals of 3803:



5750

and 3420 units as a result of the accelerated shipments of Telex 6803 and
•6420 replacement units made possible by misappropriation of IBM's trade secrets,
as contended by IBM.

However, the court is not convinced that loss in that full amount was
proximately caused by reason of the factors above-mentioned and other likely
variables, but is convinced by what it regards as the preponderance of the
levidence that after discounting IBM's claims accordingly and considering the
entire record bearing upon this element of damage, the defendant was deprived
of ?4.5 million in monthly rentals of 3803 and 3420 units. «uoh result is generally
confirmed by consideration of sales actually made by Telex of its 6803 controller
and its 6420 tape drive during the ten to eleven months period of advantage.

F151. IBM expended approximately $100 million on the development of Aspen
from the start of the progx'am in January, 1969, until the date of first customer
shipment ; Gruver left IB]M approximately half way through the development
program and took with him a substantial part of the information developed
through the first half of the program at a cost of approximately $5 million.

By what part of those development costs Telex was unjustly enriched beyond
the more specifically proved damages above-mentioned, or, viewed differently,
what damages, if any, should be allowed for the Aspen misappropriation on a
■"standard of comparison" basis, is a difficult problem factually, not to mention
legally.

In addition to revenue derived from shipping 6803 and 6420 units to users of
IBM systems. Telex would have derived an additional indetenninate amount
of income from the marketing of the 6803, and 6420 to companies such as
INLahawk, Data Systems. Itel, Formation, Xerox, CDC, and Telefunken, for which
figures are not available.

There is no doulit that by reason of the improper use of confidential trade secret
information of IB]M Telex was unjustly enriched to a substantial amount beyond
the $4.5 million, but. again, defendant's additional claim of $5 million for unjust
enrichment cannot be accepted ; it seems more likely that a reasonable amount
Avou'd approximate, and not in any event exceed, $3 million.

F1.52. In the first half of 1970, l)ased on IBM information provided to Telex
toi> management by former IBM employee James, Telex made the decision to
expand its product line to include disk file subsystems. James provided detailed
information to Telex concerning IBM Merlin 3330 and advised tluxt Telex must
l>e in a position to ship a 2314B (Merlin) product by the fourth quarter of 1971
and Telex decided to try and establish an inhouse capability to manufacture a
3330 disk system in mid-1970. Thereupon, Telex adopted the plan of identifying
tind recruiting from IBM key employees who had developed the subsystem for
IBM. During the period 1970, and prior thereto. John K. Clemens was the engi-
neering program manager at IBM for the Merlin project.

Clemens had assumed full responsibility for this project in April or May of
1969. and was fully informed of all areas of the program including but not lim-
ited to manufacturing, sales and fore<:'asts in addition to development and de-
sign. Telex offered a large bonus to Clemens to induce him to join Telex and
recruit from IBil a development team to build for Tele'x a :Merlin competitive
product.

On November 22, 1970. Telex and Clemens executed two oontracts of employ-
ment. Both contracts provided that Clemens would be responsible for the develop-
ment of a 3330 type disk storage system. The contracts provided for compensa-
tion consisting of a salary of $40,000. a lionus based on performance of $500,000,
stock options for Telex stock having total market value of $50,000. authorization
to offer $500,000 in bonuses and $300,000 stock options to other employees to be
recruited.

One contract signed l>y both Clemens and Telex on Xovemlier 22. 1970, made
the realization of a portion of the $500,000 cash bonus contingent upon delivery of
a Merlin system to a Telex customer prior to August 31. 1972. A copy of this con-
tract, signed before copying and again after copying lioth bv Clemens and Telex,
was retained by Clemens, under which he operated while at Telex. This con-
tract had no section concerning any new and original design.

A second contract signed botli by Telex and Clemens on November 22, 1970.
made the realization of the $.500,000 cash bonus contingent upon delivery of a Mer-
lin system to a TCP customer prior to November 30. 1972. This contract included
a section mentioning a "new and orisinal" design as a prerequisite to the lionus
and was retained by Telex. The $500,000 cash bonus offered to Clemens by Telex
was the largest bonus offered in the history of the company. After hiring Clemens,



5751

Telex set out to hire other IBM key engineers on the Merlin disk drive and Mer-
lin controller.

Telex offered the!?e IBM engineers extremely large salaries, bonuses and stock
options to induce them to join Telex and build a Merlin product for Telex using
IBM contidential and trade secret information. The following additional IBM
expert employees were hired by Telex for this project : Chartlon, Glover, Han-
cock, Hon. Ice, Kevill, McGuire and Wilson.

F153. The IBM Merlin had been under development for five years before it
A\a,s announced in June, 11)70. The Telex time schedule called for the develop-
ment of the Merlin drive and controller to be completed in 18 months.

Wilmer, a prospective employee with IBM experience, told ,T;itras and Clemens
during a meeting in Jatras' liotel room in Palo Alto that to develop a Merlin
.system in 18 months was unrealistic and that the only way you could meet such
.a schedule would be by copying IBM's 33.">0 Merlin system.

Kerill and Hancock indicated to Wade that they wanted him to come to work for
Telex and help Telex build an exact replica or copy of the IBM 3830 control
:iuiit for a Merlin system. It would have been impossible to have independently
developed the Merlin system in 18 months by using only information that was
in the public domain or information that was not IBM proprietary and
confidential.

The information that had been released by IBM in .Tune of 1970, when Merlin
Avas announced, was only a small portion of that which would have been re-
t]nired to develop the Merlin disk drive. Through numerous other similar state-
ments from Telex officers and employees in connection with its recruitment
jirogram and from other circumstances it is apparent that Telex was not pri-
marily interested in a new product design or in an advance in the state of the
-•ut through technology developed independently, but rather in a Merlin-type
ilcvice copied from IBM's design through utilization of IBM information.

F154. IBM considered tlie Merlin program to be a confidential project ami
expended a great deal of effort to maintain its confidentiality. When Merlin was
announced in June of 1970. the basic functional characteristics were disclosed
)iut the design details of how to achieve the characteristics were not announced
or made public.

All of the IBM employees who were either successfully recruited by Telex or
wli.nm Telex attempted to recruit had signed an IBM Employee Confidential
Information and Invention Agreement at the commencement of their employ-
ment with IBM. All of the IBM employees that Telex successfully recruited from
IH]\I to work on the Telex 3330 Merlin type system were reminded prior to their
departure from IBM of the particular information they had had access to while
f>mployed by IBM and IBM considered to be proprietary, confidential and trade
stH-ret information.

Fl.iri. Telex oflicers were conscious of the trade secret problem and on occasion
sought to rationalize or differentiate between manners of acquisition and on
other occasions to dissemble. Telex corporation President Jatras informed
AVilmer that it was Telex's position that there was nothing unethical or illegal
in copying an IBM jiroduct unless they took IB:M drawings or documents.

Jatras had a copy of the complaint in an IBM legal action against Memorex
involving alleged trade secrets and assured Wilmer that there was little chance



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 111 of 140)