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

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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 115 of 140)
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the "tying" of its peripheral products, including memories and control units;, to
its CPU's which were similarly predatory. While, as already observed, there
is some evidence that actions which might be so characterized were designed to
help stem the growth of its plug compatible competition, we conclude that pre-
dominant evidence demonstrates that they really represented technological
advancements, a desire to make available in the market improved devices at
the earliest practicable time even though other improvements were contemplated
as soon as they could be developed and other legitimate elforts that cannot
be fairly regarded as predatory within the contemplation of antitrust policy.

C20. Defendant points out that "the youth, growth and technological eliiuige
of the electronic data processing industry render improbable the acquisition of
monopoly power" and that the "quality of economic performance ... in terms
of consumer satisfaction, product innovation and price reduction is indicative of
competition and not monopoly power."' If it were not for the more direct and per-
suasive evidence to the contrary, and the fact that technological dynamics in
this remarkable industry are adaptable to dynamic antitrust programs and ef-
fects also, these considerations would be persuasive. But antitrust applications
and interpretations must not be inextricably tied to entrenchments of long stand-
ing when the monopolization can be accomplished in modern context and par-
ticularly in such industries as the EDP industry by fast acting strategies and
sophisticated selectivity. In this sense, the dynamics of the industry and the
intent of IBM may be more relevant than market shares : ". . . It is true that in-
novation in products in certain industrial areas where the rate of innovation —
and consequently of obsolescence — is rapid, market share is essentially irrelevant
to a judgment of market power. United (States v. Columbia Steel Company, .334
U.S. 495 at 527-8. It is no answer to say that this industry is the youngest in
which monopolization has ever been found because it might also be said that
here rewards from monopolization may be among the highest and the opportunity
in view of its rapid technological and market developments perhaps among the
greatest.

C. Attempt to monopolize

C21. Should I be in error in the precise delineation of the relevant market and
submarkets or mistaken in my view of the general systems business of leading
companies as interchangeable or elastic parts of these mai'kets and submarkets,
I am of the opinion, nonetheless, and so conclude, that attempted monopoly has
been clearly made out by plaintiffs with like effect.

C22. I do not agree with plaintiffs tha tin an attempt to monopolize case it is
unnecessary to establish either the relevant product market or that the attempt
involves a dangerous probability of success. Little if anything is found in several
of the cases cited by plaintiffs. United States v. E. I. Du Pont De Nemours & Co.,
supra, at 395 n. 23; United States v. Grinnell Corp., 236 F. Supp. 244 (D.C.R.I.
19r>4), aff-d, United States v. Grinnell Corp., 384 U.S. 563 (1966) ; Union Carbide
and Carbon Corporation v. Nisley. .300 F.2d 561 (10th Cir. 1961) ; United States v.
Consolidated Laundries Corporation, 291 F.2d 563 (2d Cir. 1961), reh'g denied,
291 F.2d 576; and Rawlins v. American Oil Co., Civil Number C-89-67 (D. Utah
1969) (aj)peal dismissed by reason of settlement), to support plaintiffs" view
on this point. Lessig v. Tidewater Oil Company, 327 F.2d 459 (9th Cir. 1964), and
Industrial Building Materials, Inc. v. Interchemical Corp., 437 F.2d 1336 (9th
Cir. 1970), also cited by plaintiffs, are in point by broad expression but are not
convincing in view of subsequent decisions of the Ninth Circuit, Bushie v. Steno-
cord Corp.. 460 F.2d 116 (9th Cir. 1972) : Cornwell Quality Tools Co. v. C.T.S.
Co., 446 F.2d 825 (9th Cir. 1971), and for other reasons. The Tenth Circuit case
of Union Carhide and my American Oil perhaps are explainable by the absence
therefrom of any focus upon, or determinative importance of the point there.

C23. In any event, the great weight of current authority supr)Orts the relevant
market and dangerous probability tests in attempts to monopolize cases. Walker
Process Equipment, Inc. v. Food Machinery & Chemical Corp., 382 U.S. 172
(1965) ; American Tobacco Co. v. United States, 328 U.S. 781 (1946) ; Agrashell
Inc. V. Hammons Products Company. 479 F.2d 269 (8th Cir. 1973) ; Bernard
Food Industries Inc. v. Dietene Co., 415 F.2d 1279 (7th Cir. 1969), cert, denied,
397 U.S. 912 (1970) ; Central Savings and Loan Ass'n v. Federal Home Loan



5768

Bank Board, 422 F.2d 504 (Sth Cir. 1970) ; Hiland Dairy Inc. v. Kroger Co., 402
F.2d 9GS (Sth Cir. 1968), cert, denied, 395 U.S. 961 (1969) ; Kansas City Star v.
United States, 240 F.2d 643 (8tli Cir. 1957) ; Dobbins v. Kawasaki Motors Cor-
poration, — F. Siipp. (D. Or. No. 71-105, June 15, 1973).

C24. Mr. Baker, Director of Policy Planning for tlie Antitrust Division of the
Department of Justice, told the American Bar Association last year :

"Monopolization is basically a structural offense and therefore relevant mar-
ket and position in it are important considerations. Attempted monopoly is basi-
cally a conduct offense ; and, where we are dealing with conduct which is clearly
predatory and unfaii', there is no public policy reason for protecting it from judi-
cial sanction. To eliminate the 'dangerous probability' and 'market' require-
ments from Section 2 attempt to monopolize cases would make it a much more
effective tool for dealing with indefensible single firm conduct." Vol. 5 CCH Trade
Cas. H 50.145 at p. 55.247.

Even the Department position does not suggest a belief that the attempt to
monopolize doctrine has already become the "more effective tool" hoped for. It
may well be that a complete restatement of the rule of American Tohacco is
soon due, to reach abuses that thereby may be masked or protected in future
context. But in view of the justification and authority for applying the present
formalization to the present situation here I shall not assay it. Suffice it to say
now that under the presently accepted rule the precise boundaries of relevant
markets and the likelihood of success in and of themselves become less impor-
tant in attempt to monopolize cases as aggressive predatory intent and conduct
emerge more clearly. See Dobbins v. Kawasaki Motors Corporation, supra, and
Power Replacements Corp. v. Air Preheater Co., Inc., supra. And the precise ar-
ticulation of the rule is not as important as the idea of likelihood of monopoliza-
tion if a predatory intent remains unchecked. See Kansas City Star Company v.
United States, 240 F.2d 643 (Sth Cir. 1957).

In one of the latest cases on the subject. Power Replacements Coi-p- v. Air
Preheater Co., Inc., 356 F. Supp. 872 (E.D. Pa. 1973), the plaintiff alleged among
other things that the defendants violated Sections 2 of the Sherman Act in con-
nection with the sale of a replacement element in installations of air preheaters.
There were no allegations of monopolistic activity in the manufacture and sale
of air preheaters themselves. The defendants sold around 90% of all of the
regenerative type air preheaters sold in the United States, which were the most
successful type, and there was no question that the.v achieved this position in
the market lawfully. The focal point of the case was the competition in the sale
of replacement elements for use in the regenerative type of preheaters (Ljung-
strom). The court held that "(t)he relevant product market to be used in testing
the plaintiff's claim in its lawsuit is replacement element for use in Ljungstrom
Air Preheaters".

In 1963 the defendant Air Preheater Company had a complete monopoly of
the air preheater replacement business (as a result of its manufacture of the pre-
heater itself). The high profitability of its replacement business invited compe-
tition. The users of heating elements because of defendants' high prices looked
around for competitive alternatives and this was the genesis of plaintiff's bu.'ji-
ness. With plaintiff's entry into the market, the defendants gave immediate
attention to pricing strategy, believing that if moderate strategy did not work
it was a "big enough operation so that we could beat this comijetition and what-
ever other competition might develop in other areas." The share of the market
to be expected by plaintiff was predicted by defendants depending on the latter
strategies. The defendants forecast of its sales of the market "was not just a
prediction but the percentage it set for itself a.? a goal". Among other sti-ategies
defendants coded their element in vew of the previous simple description and
this handicapped the plaintiff in working up a bid for potential customers. The
court referred to presumption of market control flowing from command of a high
percentage of the market in view of the decided cases but added:

"In the present case, while it has been established that the defendants have
managed to maintain approximately 75% of the business known to them, we
have not been provided with suflScient evidence to compute precise percentages
as to the actual share of the market for each company during each year. This
was no comfort for the defendants, however, since we had concluded that Air
Preheater's power to exclude the competition of power replacements has been
proven directly so that no inference from the market share percentage is
necessary . . .



5769

"It is important to note that plaintiff would have proven a violation of Section
2 even if they had not shown tliat success rewarded defendant's attempt to
monopolize. Plaintiffs have had no difficulty in establishing that Air Preheater,
while possessing a significant degree of market power, engaged in a course of
conduct which was likely to achieve monopoly power, and that also Air Preheater
committed certain commercially unfair acts with the specific intent to injure
plaintiff and eliminate competition, thereby proving attempted monopolization.
See Times I'icayune Publishing Co. v. United States, 345 U.S. 594, 73 S.Ct. 872,
97 L.Ed. 1277 (1953) ; Lorain Journal v. United States, 342 U.S. 143, 72 S.Ct.
181, 96 L.Ed. 162 (1951)."

The court concluded that the defendants violated both Section 2 of the Sherman
Act and the Robinson-Patman Act but limited damages because of the insuffi-
ciency of plaintiff's proof. The court concluded as to Section 2 :

"Without restating the evidence contained in this voluminous record, the sum
and substance of our findings of fact number 55 to 81 is that since the latter part
of 1965 Air Preheater has willfully attempted to monopolize the replacement
element market and that Air Preheater has successfully maintained that monop-
oly power."

C25. I find the last mentioned case singularly in point, and persuasive not only
with respect to the issue of relevant markets based upon the product of a single
manufacturer, but covering the effect of proof of predatory conduct on the issue
of probability of monopolization. If the old "dangerous probability rule" is to
be literally applied, I believe that it can be deemed satisfied by the circumstances
established by the i-ecord from which sufficient market dominance, organizational
capability and determination to control, can be found to render it likely to the
point of danger that IBM's program, if unchecked, will maintain or achieve
monopolization in the relevant market and submarkets, whether or not the
business of leasing companies is included and irrespective of the precise bound-
aries of any reasonable relevant market or submarkets,

C26. Tlie sum total of all evidence must be considered on the issue of predatory
intent, and there is no set formula for such a finding. Continental Baking Co. v.
Old Homestead Bread Co., F. 2(1 (10th Cir. 1973). The court is convinced that
the sum total of all of the evidence establishes that IBM undertook the 2319A,
2319B. FTP and memory pricing, with specitic and predatory intent of suppress-
ing and eliminating its plug compatible competition and that such conduct taken
pursuant to this anticompetitive purpose in fact suppressed and eliminated
IBM's plug compatible comi)etition to a substantial extent. Each of the price
cuts, and in the case of disk drives the 2319B/FTP price cuts upon price cuts,
were expressly formulated, analyzed, planned and aimed by IBM specifically at
its plug compatible competition. Tape price cuts were substantial and were below,
and were planned to be below, the prices charged by IBM's plug compatible com-
petitors, including Telex, whereas IBM knew that, in order to survive, its plug
compatible competition would have to charge less than IBM for comparable
products. Price cuts through the P'^TP were accompanied by long term leases
with punitive termination provisions planned to foreclose IBM's plug compatible
competition from a substantial share of the plug compatible peripheral market
on disks. tai)e and printers and were planned by IBM to foreclose, and did fore-
close. IB^I's plug compatible competitors from access to most of the plug com-
patible market for the new ,3330 type disk drives, and 3420 type tape drives.

At the time IBM was aiming its price cuts and long term lease plans at its
jilug compatible competition, it oft'set those price cuts by price increases in markets
in which it was not facing plug compatible competition. Memory price cuts were
aimed in important part by IBM at its plug compatible competition and had the
effect of substantially suppressing plug compatible comi>etition on these peripheral
products. While the so-called control and memory bundling had predominate
technological and marketing objectives which in and of themselves cannot be
regarded as unlawful, even this action was motivated in part b.v IBM's anti-
competitive intent: but specifically with respect to the memory price cut lack of
any such justification rendered this unadulterated predator.v action in my opinion.
All of these actions were taken by a competitor having a major sliare of the plug
compatible peripheral market and submarkets. of enormous eccmomic size and
jiower and with the studied purpose of containing the competition of its plug
compatible competition which was lecognized as a threat to its market domina-
tion. The record leaves little room to doubt that this course of conduct did not
rei»resent normal competitive reactions to be countenanced under Section 2. but
willful conduct with predatory intent. Here, as an analogy to the general law on



5770

attempts, there was an effort and intent to achieve, or maintain, an unlawful
monopoly, coupled with the apparent present ability to do so, unless checked, in
view of the intransigence, skill and organization with which this intent was
pursued ; and the powerful and resourceful base from which the program was
launched.

C27. Thus by unlawful and egregious conduct and with specific intent to main-
tain and further achieve monopolization under circumstances from which it can
be and is fairly inferred that there was a dangerous probability of unlawful
monopoly if defendant's conduct remained unchecked, the defendant attempted
to monopolize the F:DP market for peripheral devices and each part thereof. The
court further finds accordingly that defendant has been guilty of violating Section
2 of the Sherman Act not only by monopolization but by an attempt to monopolize.
D. Restraint of trade

C28. Plaintiffs in addition to their claims of monopoly and attempt to monopolize
under Section 2 of the Sherman Act assert that under Section 1 of that Act IBM's
FTP and ETP agreements with their users covering disks, tapes, printers and
•communication controllers constituted agreements in unreasonable restraint of
trade in violation of Section 1, citing Albrecht v. Herald Co., 390 U.S. 145 (196S).
In construing the Sherman Act's prohibition against contracts, combinations and
■consiiiracies "in restraint of trade or commerce among the several states" the
-courts have long applied a rule of limiting the reach of that section' to contracts
■^:^•hich unreasonably or unduly restrain trade. Standard Oil Company of New
Jersey v. United States, 221 U.S. 1 (1911). Every contract may be said to restrain
trade to some degree. Applying the "rule of reason" the courts have separated
from such ordinary commercial agreements necessary for the conduct of trade,
f.vpes of contracts which fall within relatively narrow and increasingly well de-
fined categories deemed unreasonably in restraint of trade either as a matter of
law or fact. Contracts and conduct not proscribed by Section 1 may, and in this
ease do, impinge upon the inhibitions of Section 2. I have concluded that the
leases in question would not be unlawful without the monopoly power held
possessed by IBM or the found attempt to monopolize.

C29. Agreements reached under IBM's fixed term and extended term plans are
commonplace commercial agreements fixing the terms and conditions upon which
users may lease some piece of electronic data processing equipment for periods
of up to two years. The terms of these leases are limited to provisions governing
the use of the particular equipment under lease. They impose in and of themselves
no restraints on the freedom of the lessee to trade. They do not obligate the lessee
to any exclusive dealing arrangement. They do not obligate the lessee to purchase
its requirements of the electronic data processing equipment, supplies or services
from IBM. The terms of leases contain no "restraints" of the kind traditionally
found violative of Section 1 of the Sherman Act. The terms of the leases are
sliorter than leases which had been offered by IBM's competitors, including plain-
tiffs, for some time prior to IBM's adoption of the fixed term and extended term
plan. In a different context, the court in United States v. United Shoe Machinery
Corp.. 110 F. Supp. 295 at 297 (D. Mass. 1953), aff'd per curiam, 347 U.S. 521
(1954), mpra, expressly sanctioned the use of five year term leases despite its
conclusion that defendant had monopolized the market for shoe machinery. The
court concludes that the leases offered by IBM pursuant to the fixed term and
extended term plans are not contracts in restraint of trade violative of Section 1
of the Sherman Act.
E. Integrated functions as tying agreements

C30. Plaintiffs claim that the integration of additional memory and control
functions in certain System 370 central processing units is the basis of, or con-
stitutes, tying agreements or arrangements violative of Section 1 of the Sherman
Act and Section 3 of the Clayton Act. Section 3 of the Clayton Act prohibits the
sale or lease of goods uv commodities, or the fixing of a price or discount, on the
condition or agreement that the lessee or purchasers thereof shall not deal in the
goods of a competitor where the effect of such sale or lease may be substantially
to lessen competition or to create a monopoly in any line of commerce. Section 3
of the Clayton Act and Section 1 of the Sherman Act have been applied to
proscribe ". . . the forced purchase of a second commodity with the desired pur-
chase of a dominant 'tying' product," Times-Picayune Pub. Co. v. United States,
345 U.S. 594, (il4 (1953). where "a party has suflacient economic power with
respect to the tying product to appreciably restrain free competition in the market



5771

for the tied product and a 'not iusubstantial' amount of interstate commerce is
affected." Northern Pac. R. Co. v. United States, supra, at p. 6.

For purposes of Section 3 of the Clayton Act and Section 1 of the Sherman Act,
'•. . . a tying arrangement may be defined as an agreement by a party to sell one
proiluet but only on the condition that the buyer also purchases a different (or
tied; product . . ." Northern Pac. R. Co. v. United States, supra, at 5. It is estab-
lished by these authorities that for a commercial arrangement to be unlawful as a
tying agreement under Section 3 or Section 1, there must exist two distinct
proLiucts the sale of which is linked. This does not mean that a defendant may
avoid judicial scrutiny under Section 3 by pretending that two separate and
distinct products are one. Nor can tying consequence be avoided if in fact there
is a tying agreement, by putting it in the form or an innocuous arrangement
but with the effect, by reason of tlie products involved, or requiring the purchase
of one distinct product as a condition for the acquisition of another. However,
where a court is dealing with what is physically and in fact a single product, Sec-
tion 3 does not contemplate judicial dissection of that product into parts and
the reconstruction of these parts into a tying agreement. Colorado Pump & Supply
Co. v. Febco, Inc., 472 F. 2d (J37 (10th Cir. 1973).

Some the recent cases finding or not finding tying arrangements to be in-
dicated sufficiently explicate the governing considerations to permit disposition
of these tying contentions on the basis of the record. Cole v. Hughes Tool Com-
pany, 215 F.2d 924 (10th Cir. 19-54) ; Dehydrating Process Co. v. A. O. Smith
Corp., 292 F.2d 653 (1st Cir. 1901) : MDC Data Centers v. International Business
Mach. Coi-ii., 3-!2 F. Supp. 502 (E.D. Pa. 1972) ; same, 352 F. Supp. 03 (1972) ;
United States v. Jerrold Electronics Corp., 187 F. Supp. 545 (E.D. Pa. 1960), aff'd
per CHrimn, 365 U.S. 567 (1961). Cf. Jerrold Electronics Corp .v. Wescoast
Broadcasting Co., 341 F.2d 6.53 (9th Cir.). cert, denied. 382 U.S. 817 (196.5) ;
Citv Sportservice. Inc. v. Charles O. Finley and Co., supra; Stavrides v. Mellon
N.-irional Bank & Trust Company, a.lS F. Supp. 1072 ( W.D. Pa. 1973) ; McMackin
v. Schwinn Bicycle Company, 3.54 F. Supp. 1154 (X.D. 111. 1973) ; Falls Church
Bratwursthaus v. Bratwursthaus M. Corp., 354 F. Supp. 1237 (E.D. Va. 1973) ;
Anderson v. Home Style Stores, Inc., 358 F. Supp. 253 (E.D. Pa. 1973). See also
International Business Machines Corp. v. United States. 298 U.S. 131, (1936).

C31. Control of memory function has Ijeen integrated with processing func-
tions over a long period of time in varying degrees. Technological progress in com-
ponent miniaturization has made possible the integration of additional memory
and control functions and such additional integration has made possible cost
reductions and enhanced utility. The integration of which plaintiffs complain in-
volves in form or substance no tying of the sale or lease of one product to that
of jinotlier. To ride otherwise would enmesh the courts with technical and un-
certain inquiry into the technological justifiability of functional integration and
cast unfortunate doubt on the legalit.v of product innovations in serious detriment
to the industry and without any legitimate antitrust purpose. The integrated
control in the System 370 is wholly optional. IBM c<mtinues to offer central
proces.sing units without integrated controllers. Customers remain free to lease
such processing units and to lease independent controllers from IBM. Telex, or
whomsoever they choo.se. The court concludes that the integration of additional
controller and memory functions in the System 370 central processing units does
not constitute a tying agreement violative of Section 3 of the Clayton Act or
Section 1 of the Sherman Act.

C32. Nor do IBM's Fixed and Extended Term Plan leases constitnte tying
agreements in violation of Section 3 of the Clayton Act or Section 1 of the Sher-
man Act. It has already been determined that these plans were unlawfully utilized
by the defendant with intent to maintain and protect its monopoly control and in
this sense they were illegal. Acts which are in themselves legal lose that character
when they become constituent elements of an unlawful scheme. Continental Ore
Co. v. Union Carbide & Carbon Co.. 370 U.S. 690 (1962). However, apart from the
ifft-nses of monopolization and attempts to monopolize under the circumstances of
this case nothing can be seen in the leases in and of themselves which would con-
stitute a tying arrangement within the ])rohibitions of Section 3 of the Clayton
Act or Section 1 of the Sherman Act. They did not require the lessees to lease
any other equipment from IBM. They did not impo.se any exclusive dealing obli-
gations on the lessees. They did not require the lessees to secure their require-
ments of data processing services or equipment from IBM. The leases contain no
covenants which directly or inferentially impose any tying restrictions on lessee.



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 115 of 140)