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 113 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 113 of 140)
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Charlton, who was a key mechanical engineer working on Merlin. It was not
luitil the summer of 1971 that Kuehler heard reports that, contrary to Martin's
representation, Telex salesmen were telling customers that they planned to
deliver a Merlin type subsystem by the first quarter of 1972.

At the time said representations were made by Martin, and continuing there-
after. Telex intended to attempt to recruit and hire and in fact did thereafter
hire key IBM jjersonnel by offering them large bonuses and stock options, and
intended to utilize and in fact did continue to utilize IBM trade secrets and
confidential information in conducting Telex business.

F173. Key IBM engineering personnel upon leaving IBM acknowledged that
they had had access to IBIM trade secrets and proprietary and confidential in-
formation during their IBM employment and agreed not to divulge such informa-
tion despite having prior knowledge that the respective positions they had ac-
cepted at Telex required the use of such information to a greater or less degree.

All IBM employees signed a Confidental Information and Inventions Agree-
ment upon being employed by IBM. Among those so signing were Clemens,
Charlton, Glover, Hancock, Hon. Ice, Kevill, and Wilson. By signing such an
agreement an IBM employee bound himself not to disclose to anyone outside of
IBM or use in other than IBM's business any confidental information relating
to IBM's business either during or after his IBM employment.

When a key employee left IBM to join one of its competitors his manager, and
usually a patent attorney, conducted an exit interview during which an attempt
was made to define the types of trade secrets and confidential and proprietary in-
formation the employee had received. That information was documented and
during the exit interview reviewed.

The employee was told he was free to make any change he desired, after which
the information was recorded in a letter to the employee in confirmation of his
re.sponsibility of secrecy. Among the recipients of such letters were Charlton,
Clemens. Glover, Hancock, and Kevill.

F174. Telex's President .lames upon terminating employment at IBM to join
Telex concealed the fact Telex hired him at least in part to obtain proprietary
IBM information and that he knew he would have to use such information to
perform his duties at Telex. When James terminated his employment at IBM in
March of 1970, IBM was left with the impression that he was solicited for his over-
all accounting experience and not for any particular proprietary data of which
he might be possessed.

As part of his termination interview James signed a statement referring to his
previous agreement with IBM not to disclose to anyone outside of IBM. or use
in other than IBM's business, confidental or proprietary information after his
IBM employment without IBM's written permission. IBM under all the cir-
cumstances had no reasonable notice or knowledge of the existence of the facts
on which the counterclaim is based until within two years of the filing of such
counterclaim.

XI. IBM's FURTHER EFFORTS TO PROTECT ITS TRADE SECRETS

F175. During and following the year 1970. IBM has had significant security
measures in place to protect its trade secrets and design information, including
magnetic locks on building doors ti> allow access only to authorized personnel,
procedure to control the distribution and use of documents containing IBM trade
secrets or confidential information, designated '"Registered IBM Confidential
Documents", and signed agreements by which employees undertake not to disclose
such information, as well as exit interviews reaffirming the responsib.ilities of the
employee.

In the early I970's it learned that some trade secrets and confidential informa-
tion, including parts, specifications, drawings and processes, were being stolen by
40-927 — 75 59



5758

persons other than plaintiffs, and beginning in the latter part of 1970 IBM sig-
nificantly increased its security measures, including tliose i>ertaining to d>cu-
juents. to hardware manufactured within IBM, and to its hardware manufactured
outside of IBM.

F176. IBM has been impelled to expend more money on additional security
measures by reason of increasing violation of its trade secrets and confidential
information by Telex. IBM's System Development Division is spending .$2 mil-
lion a year more than in 1969-1970 on increased security measures.

At the IBM San Jose laboratory direct expenditures on increased security pre-
cautions such as guards, television cameras, sensors, locks, safes, computer con-
trolled access system, and the like, implemented since November, 1970, have been
in the neighborhood of .$1 million.

The necessity of manufacturing specialized and sensitive parts in view of
threats to its security rather than to contract tliem with an outside vendor has
raised IBM's production costs : its additional cost in manufacturing within IBM
the Merlin head arm for security reasons has been more than $400,000. The
efficiency, essential intercompany communication and morale of IBM's engi-
neering staff have suffered by reason of the more stringent security measures.

F177. Reasonable eft'orts and precautions to protect trade secrets and con-
fidential information are to be expected on the part of tliose entitled to their
benefit. The expenses of reasonable protection should not be shifted to competitors
whose mere existence motivates s ich protection.

But where efforts of a competitor to unhiwfully jienetrate trade secrets oc-
casion extraordinary measures for their protection, it is not unreasonable for
them to be borne by the party so unlawfully occasioning theui.

The evidence renders it difficult, if not impossible, to determine what parts of
the increased cost inaugurated in 1970 l)y IBM in protecting its trade secret and,
confidential information was ordinarily expectnble exiJense or occasioned by per-
sons other than plaintiffs, and what part \\as extraordinary expense rendered
necessary by plaintift"s unlawful activities.

The allocation of Telex's fair share of responsibility, again, rests at best ui>oa
a judgment of fair ap))roximation in view of all of the circumstances, upon
which basis the court finds the fair, non-speculative, niininuun amount would
be approximately ,$3 million for increased extraordinary security costs reason-
ably occasioned by Telex's unlawful activities during 1971 and 1972, together
with $400,000 for extra manufacturing costs.

F177-1. The conduct found herein on the part of plaintiffs in violation of
defendant's confidential information and trade secrets was planned, deliberate
and willful, reasonably justifying the award of punitive damages in the amount
of $1 million.

XII. TELEX COPYING OF IBM COPYRIGHTED MANUALS

F178. In connection with the marketing of IBM's Aspen tape product. IBM
prepared, printed, published and distributed a manual entitled "'Systems Oom-
ponent Description — IBM 3803/3420 Magnetic Tape Subsystems". The purpose
of stich manual was to provide a genei-al introduction to tlie Aspen magnetic
tape subsystem for IBM's customers. IBM lias a valid copyright covering said
manual. Telex lias copied this IBM manual. Telex prior to June, 1971. had
in its possession and control a copy, or copies, of this manual. In connection
with the marketing of its replacement copy of IB^M's Aspen tape subsystem.
Telex on or about June, 1971, and thereafter, prepared, printed, published and
distributed its manual entitled "Systems Component Description — Telex 6803/
(5420 Magnetic Tape Subsystems". The purpose of such manual was to provide
a general introduction to the Telex replacement copy of the Aspen tape sub-
system for Telex's customers. This publication was copied substantially in
wliole from the said IBM manual. Telex has shipped approximately 690 6803/
(5420 tape subsystems through December, 1972, accompanied by said infringing
manual.

F179. Telex has infringed IBM's copyright in the manual "IBM Field En-
gineering Theory of Operations — 2314 Direct Access Storage Model 1 and A
series, 2S44 Auxiliaries Storage Control" four times by copying portions of it
in its following four manuals "Model 730 Storage Control Unit, Volume 1 —
Oiieration and Service", "Model 728 Storage Control I'nit, Functional Descrip-
tion", "Model 728 Storage Control I'nit. Volume 1 — Operation and Service",
and "Model 728 Storage Control Unit Logic Diagrams — Volume 2". In connection
with iiroviding mainteiiMiice services for its 2314 disk i»roduct, IBM prepared,



5739

printed, pulilished and distributed a manual entitled "IBM Field Engineering
Theory of Operation — 2314 Direct Access Storage Facility, Model 1 and A
.series, 2S44 Auxiliary Storage Control". The purpo.se of the IBM Manual is
to provide an understanding of the theory of operation of the equipment to
facilitate its maintenance, preventive maintenance and operation. IBM has
a valid copyright covering .said IBM Manual. Telex has distributed a manual
entitled "Model 730 Storage Contnd Unit, Volume 1 — Operation and Service".
Telex has distributed a manual entitled "Model 728 Storage Control Unit,
Functional De.scription". Telex has distributed a manual entitled "Model 728
Storage Control Unit, Volume 1 — Operation and Service". Telex has distributed
a manual entitled "Model 728 Storage Control Unit Logic Diagram.s — Volume
2". The purpose of said manuals so distributed by Telex is to facilitate main-
tenance, preventive maintenance and operation of the Telex r)314 version of
the IBM 2314 disk subsystem. Telex has exclusive marketing rights to the
5314. Telex's marketing of the 5314 includes providing service to its customers,
and Telex in fact provides such service. Portions of said manuals so distributed
by Telex are substantially similar to, or identical with said IBM Manual.
Telex has shipped approximately 453 728 Storage Control T'nits and approxi-
mately 24 730 Storage Control Units through December, 1972, accompanied by
infringing manuals,

F180. Telex has infringed IBM's copyright in the manual "IBM Field Engineer-
ing Theory — Maintenance Magnetic Tape Units 2420 Model 7", three times,
liy copying portions of it in the following three Telex manuals "5420 INIod 7
Maintenance Manual". 6420 Magnetic Tape Drive Maintenance Manual", "5420
^1(h\ 5 and 7 — ^Theory of Operation". In connection with the maintenance of its
2420. Model 7 magnetic tape drive, IBM prepared, printed, published and dis-
triljuted an IBM manual entitled "IBil Field Engineering Theory — Maintenance
Magnetic Tape Units 2420 Model 7". The purpose of said IBM Manual is to
provide an understanding of the theory of operation of the equipment to fa-
cilitate maintenance, preventive mainteimnce and operation of the equijiment.
IBM has a valid copyright coverinir said IBM Manual. Telex has copied said
IBM Manual. Telex prior to April. 1!i71, had in its pos.session and Control a < opy,
or copies, of the IBM manual entitled IBM Field Engineering Theory — Mainte-
nance Magnetic Tape Units 2420 Model 7". In connection with the maintenance
of its replacement version of the IBM 2420 tape drives, Telex, in or about April
1971, prepared, printed, published and distributed a Telex manual entitled "5420
Mod 5 and 7 Maintenance Manual". In connection with the maintenance of its
replacement version of the IBM 3420 tape drive, Telex in or about November,
1971, and thereafter, prepared, printed, published and distributed the Telex
manual entitled "C420 Magnetic Tape Drive Maintenance Manual". In connec-
tion with the maintenance of its replacement version of the IBM 2420 tape
drive. Telex printed, published and distrihuted the manual entitled "5420 Mod
5 and 7 — Theory of Operation".

The purpose of these manuals is to facilitate repair, preventive maintenance
and operation of the 5420, Telex's replacement version of the IBM 2420 tape
drive. Portions of Telex's said Maimals were substantially similar to. or identical
with, said IBM IManual. Telex has shipped approximately 9.33 .5420 tape drives
and approximately 2,006 6420 tape drives through December, 1972, accompanied
by infringing manuals.

F181. Telex has infringed IBlNI's copyright in the n)anual "IBM Field Engineer-
ing Theory — Maintenance Magnetic Tape Units, 2420 Model 5, 2420 :Model 7",
twice by copying portions of it in two Telex manuals "5420 Mod 5 and 7 Mainte-
nance Manual" and "6420 Magnetic Tape Drive Maintenance Manual". In con-
nection with the maintenance of its 2420 tape drives, IBM prepared, printed,
published and distributed a manual entitled "IBM Field Engineering Theory —
^laintenance :Magnetic Tape T'nits. 2420 ?Jodel 5. 2420 Model 7". The purpnst- of
said IBM Manual is to provide an imderstanding of the theory of operation
of tlie equipment to facilitate repair, preventive maintenance and operation of
tlie equipment. IBM has n valid copyright covering said Manual. Telex has
copied said IB]\I INIanual. In connection with the maintenance of its replace-
ment version of the IBM 2420 tape product. Telex, in or al>out April. 1971.
prepared, printed, published and distributed a Telex manual entitled "5420 Mod
5 and 7 Maintenance Manual". In connection with the maintenance of its re-
placement version of the IBM 2-120 tape product. Telex in or about November,
1971. and thereafter prepared, ])rinted. published and distributed the Telex
manual entitled "6420 Magnetic Tape Drive Maintenance Manual". The purpose
of these Telex manuals is to facilitate repair, preventive maintenance and opera-



5760

tion of the 5420, Telex's replacement copy of the IBM 2420 tape drive and the
6420, Telex's replacement copy of the IBM 3420 tape drive. Portions of Telex's
said Manuals are substantially similar to, or identical with, IBM Manual DX 1720,
Telex has shipped approximately 933 5420 tape drives and 2,006 6420 tape drives
through December, 1972, accompanied by infringing manuals.

F182. Telex has infringed IBM's copyright in the manual "IBM Field Engineer-
ing Theory of Operation Tape Controls— 2803 Model 1 ; 2803 Model 2 ; 2803 Model
1 and 2", three times, by copying portions of it in the foUovs^ing three Telex
manuals, "6803-1 Tape Control Unit Maintenance Manual", "6803-2/3 Tape
Control Unit Maintenance Manual", and "Printer System, Tape Adapter Unit",
In connection with the maintenance of its 2803 magnetic tape controller, IBM
prepared, printed, published and distributed a manual entitled "IBM Field Engi-
neering Theory of Operation Tape Controls— 2803 Model 1 ; 2803 Model 2 ; 2803
Model 1 and 2". The purpose of the said Manual is to provide an understanding
of the theory of operation of the equipment to facilitate its repair, preventive
maintenance and operations. IBM has a valid copyright covering said IBM
Manual. Telex has copied said IBM Manual. In connection with the maintenance
of its replacement version of the IBM 3803 tape controller, in or about November,

1971, Telex printed, published and distributed a manual entitled "6803-1 Tape
Control Unit Maintenance Manual". In connection with the maintenance of its
replacement version of the IBM 3803 tape controller, in or about January, 1972,
Telex printed, published and distributed the manual entitled "6803-2/3 Tape
Control Unit Maintenance Manual". In connection with the maintenance of its
5822 tape adapter unit, on or about August 6, 1971, Telex printed, published and
distributed a manual entitled "Printer System, Tape Adapter Unit". The purijose
of these Telex manuals was to facilitate the repair, preventive maintenance and
operation of the 6803, Telex's replacement version of IBM's 3803 magnetic tape
controller, and the repair, preventive maintenance and operation of Telex's 5822
tape adapter unit. Portions of said Telex Manuals are substantially similar to,
or identical with, said IBM Manual. Telex has shipped approximately 12 tape
adapter units and approximately 690 6803 tape controllers through December,

1972. accompanied by infringing manuals.

F183. Telex has infringed IBM's copyright in the manual "IBM System/360.
Disk and Tape Operating System. Assembler Language", by copying portions
of it in Telex Manual "Functional Specifications for the Processors Subprogram
of the APS Compiler". In connection with marketing its System/360 computer
systems, IBM prepared, printed, published and distributed a manual entitled
"IBM System/360, Disk and Tape Operating System, Assembler Language".
The purpose of this IBM Manual was to provide reference information for
customer's employees who were writing programs for System/360. IBM has a
valid copyright covering said IBM Manual. Telex has prepared a document en-
titled "Functional Specifications for the Processors Subprogram of the APS
Compiler" portions of which are substantially similar to, or identical with said
Manual. IBM has proved no damages with reference to the last mentioned
document.

F184. In each of the foregoing instances in which valid copyrights have been
found to exist, the corresponding manual contained a notice of copyright in due
form and substance and the register of copyright issued a valid certificate
of registration complete and regular in form and substance. In each instance
where it had been held above that portions of Telex manuals are substantially
similar to or identical with the copy-righted manuals, such portions were sub-
stantial rather than trivial or de minimis and constituted substantial infringe-
ments with reference to material of a nature to be entitled to copyright protec-
tion, and the infringements related to both the form and substance of tlie
writings so copyrighted rather than to the mere ideas expressed therein.

F185. Certain of the Telex manuals above-mentioned relate to the Itel/ISS —
made .5314 disk drive subsystem and on their face purport to be Itel/ISS pub-
lications. Assuming that the actual copying was done by Itel/ISS, that fact would
not immunize Telex against the claim of infringement under the circumstances
of this case, since these manuals were used to facilitate maintenance, preventive
maintenance and operation of the Telex 5314. The evidence shows that Telex has
the exclusive marketing rights for the 5314 and provides services as a part of
its marketing of that device.

F186. Prior to its filing of the counterclaim herein. IBM did not give Telex
specific notice of copyright infringement or request Telex to discontinue distri-
buting its manuals mentionefl, although in the course of discovery in these ac-
tions IBM informed Telex that it intended to file counterclaims including those
for copyright infringement.



5761

F1S7. Except as hereinabove specifically found, the court has detennined that
the other counterclaims tiled hy IBM for copyright infringement have been
abandoned and that no damages or other i-elief can be based thereon.

From the foregoing Findings of Fact the court now makes the following :

Co>x'Lusioxs OF Law; Discussion

A. Jurisdiction and venue

Conclusion 1. The court has jurisdiction of plaintiffs' claims of violations of
Sections 1 and 2 of the Sherman Act, 15 U.S.C. §§1 and 2, and Section 3 of the
Clayton Act, 15 U.S.C. § 14, by reason of 15 U.S.C. § 15. The court has jurisdic-
tion of the defendant's counterclaims for violations of it.s trade secrets and
confidential information, unfair competition and copyright infringement by rea-
son of the diversity of citizenship between the parties within the contemplation
of 28 U.S.C. § 1332, and pursuant to 28 U.S.C. § 1338 concerning copyrights ana
unfair competition. The court also has jurisdiction over the persons of all of the
parties. Venue of this action is properly laid in the Northern District of Okla-
homa by reason of 15 U.S.C. § 22 and the defendant's transaction of business
there.

C2. The defendant concedes, and the court finds and concludes, that the com-
merce involved herein is interstate commerce and that the commerce require-
ments of Section 1 and 2 of the Sherman Act and Section 3 of the Clayton Act
have been satisfied.

B. Antitrust claims — Monopolisation

C3. In applying antitrust laws, especially to new or novel situations of the
nature presented here, courts should be especially sensitive to their broad policy,
mindful of economic realities in the marketplace, hospitable to healthy economic
practices and developments, inhospitable toward subterfuge and pretense, and
practical, as well as vigilant, in avoiding control by mere custom, form, appear-
ance or contrivance. Fair and reasonable business practice should be the watch-
word, predatory conduct a red flag, considerate judgment the measure, and free
and unfettered competition in the spirit of Northern Pac. R. Co. v. United States,
356 U.S. 1, 4 (1958), the large objective :

"The Sherman Act was designed to be a comprehensive charter of economic
liberty aimed at preserving free and luifettered competition as the rule of trade.
It rests on the premise that the unrestrained interaction of competitive forces
will yield the best allocation of our economic resources, the lowest prices, the
highest quality and the greatest material progress, while at the same time pro-
viding an environment conducive to the preservation of our democratic political
and social institutions."

C4. As extensive and detailed as it has been deemed necessary to make the
foregoing findings for disposition of the case and an understanding of that dis-
position, and in a sense because of them, it does not appear necessary to docu-
ment the bases of my conclusions w'ith similar detail, in view of my belief that
they rest upon basic antitrust principles that hardly reqiiire extension to meet
the peculiar circumstances. Nonetheless, related legal problems are numerous
and significant ; and an effort will be made to indicate the rationale of any such
adaptations and to notice some of the rejected contentions of one party or the
other that have seemed most persuasive on their face, though indeterminative.

Co. Defendant says that "to maintain an action under Section 2 of the Sher-
man Act, plaintiffs bear the burden of establishing, inter alia, that there exists
some relevant market in which IBM has unlawfully acquired monopoly power—
the power to exclude competition and control prices"', citing e.g., Walker, Inc.
V. Food Machinery, 382 U.S. 172, 177-8 (1965) ; American Tobacco Co. v. United
States, 328 U.S. 781, 785 (1946) ; and United States v. E. I. Du Tout De Nemours
& Co., 118 F. Supp, 41 (D. Del. 1953), aff'd, 351 U.S. 377 (1956). Plaintiffs'
burden of proof is not subject to question, but the unlawful acquisition of monop-
oly power is not a sine qua non for liability if a lawfully acquired monopoly be
vmlawfully maintained or attempted. Walker w^as in a limited patent context.
American Tohacco accepts monopoly intent as being controlling. I find nothing to
the contrary in Du Pont which through its patent context and the interchange-
ability rule really found it unnecessary to treat a situation where a lawfully
acquired monopoly is unlawfully maintained with requisite intent. In the con-
text of the present case I subscribe in large part to the statement contained iu
National Screen Service CoiiJ. v. Poster Exchange, Inc., 305 F.2d 647, 651 (5th
Cir. 1962) (see also Poster Exchange, Inc. v. National Screen Service Corp., 362
F.2d 571 (5th Cir.), cert, denied, 385 U.S. 948 (1966) :



5762

"Every illegal mouopoly is condemned regardless of the circumstances which
brought it into existence. The law does not condition its condemnation upon a
history of misconduct or baleful practices. Indeed, a position of illegal monopoly
may be achieved by enterprise and sagacity [citing Associated Press et al. v.
TTuited States, 326 U.S. 1, 65 S.Ct. 1416, 89 L.Ed. 2013 and United States v.
Klearflax Linen Looms, Inc., 63 F. Supp. 32 (D. Minn. 194.5).] The symptoms
are not always the same. In its common forms, price fixing, price leadership,
una exclusion of competitors from the market are criteria of illegality under
the act. In any case the real question is whether there is an illegal monopoly.
Gamco, Inc. v. Providence Fruit & Produce Building, 1 Cir., 194 F.2d 484. in
practically all cases where a course of conduct is under inquiry, the universal te.st
;seems to be whether there is 'any purpose to create or maintain a monopolv.'
JLorain Journal Co. v. United States, 342 U.S. 1^3, S.Ct. 181. 96 L.Ed. 162
'(1953) ; United States v. Colgate Co., 250 U.S. 300, 39 S.Ct. 465, 63 L.Ed. 992,
7 A.L.R. -133 (1919) . . . Ultimately, the courts must decide under the facts



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 113 of 140)