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 134 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 134 of 140)
Font size
QR-code for this ebook


Agreement, and the subsequent use of and ability to use each other's know-
how by SR and IBM, was to confer a competitive advantage on the parties
and to put the other EDP competitors at a competitive disadvantage with
respect to SR and IBM and each of them as they both are held to have realized
Sit t\iG tiniG Rud tliGrG3,ftGr.

15.25.10 Conversely stated, the cause of the other EDP competitors being put
at a competitive disadvantage was the technological merger accomplished by
the 1956 Agreement, and the subsequent use of and the opportunity and ability
to use each others know-how by SR and IBM which the competitors lacked.

15.25.11 The impact of the total EDP and TAB system technological merger
between IBM and SR in 1956 was stifling on the growth of EDP compftitors
and the EDP industry generally ; since 1956, all EDP industry members except
IBM and SR (and CDO to a limited degree) have been oi>erating under arti-
ficial EDP market constraints imposed by having had to compete against the
combined technological portfolios of IBM and SR during the critical .starting
and developmental period of the EDP industry.

15.25.12 The technological merger between IBM and SR restrained and
hampered the EDP industry from growing in time and size, restrained and
hampered the ability of other members of the EDP industry to thrive and grow
and depressed the incentive to invent within the industry.

15.25.13 Prior to and after the 1956 technological merger between SR and IBM,
technological competition was the single most important component of comjie-
tition among entrants to the EDP industry ; in perhaps no other industry has
technological development been so important to the success of the participants.

15.25.14 The competitive structure of the EDP industry, particularly prior
to 1956, created a substantial incentive toward technological innovation.

15.25.15 The importance of technological competition in the computer industry
is illustrated by the large outlays for research and development (hereinafter
R&D) made by the various members of the EDP industry.

15.25.16 The R&D expenditures for the EDP divisions of .sever.il electronics
firms frequently excee^ded 10% of total revenues and, in early stages of de-
A'elopment, R&D expenditures actually exceed total EDP system revenues.

15.25.17 For example, Honeywell made annual R&D expenditures con-
siderably in excess of its annual world EDP system revenues in the entire
period 1955-1960, and in excess of 20% of EDP system revenues in the follow-
ing five year period 1961-1965.

15.25.18 Even SR, although a party to the technological merger with IB^NI
in 19.56. made annual R & D expenditures in excess of 10% of its nnntial
world EDP revenues in all except one of the four years from 1957 to 1960.

15.25.19. Because of the benefi^^s obtained from the technology shared under
the SR-TBM Agreement of 19,56, both SR and IBM realized a dulling of
their individual incentive to innovate which would have continued but for the
Agreement.

15.25.20 At the time of the SR-IBM Agreement of 19.56, IBM and SR had
already developed substnntial technological expertise in the EDP field and were
the two dominant firms in the tabulating machine market who.se customers were
the most likely prospects for EDP systems.

15.25.21 Thus, the SR~IBM Agreement of 19.56 solidified an already dominant
consortium.



5875

15.25.22 The terms of the SR-IBM Agreement of 1956 assured that the
dominance of the consortium would persist since the parties agreed to exchange
existing know-how and information on developments then in progress as well as
future patents.

1.5.2r).23 The SR-IB:\I technological merger gave SR and IBM a decisive ad-
vantage over the actual and potential EDP manufacturers who were not parties
to the Agreement and, as a consequence, significantly reduced the competitive
potential of outsiders.

15.25.23.1 After the 1956 IBM-SR agreement, SR's share of EDP business
declined.

15.25.23.2 Although SR's UNIVAC Division had been claimed to be profitable
before the 1956 IBM-SR agreement, it lost $250,000,000 in the 1957-1965 period.

15.25.23.3 In the 1957 to 1967 period, Honeywell, RCA, Contorl Data and NCR
grew from having practically no EDP business to having annual EDP shipments
each about as large as SR's.

15.25.23.4 In the 1957-67 period, SR spent $223,000,000 (18% of its EDP
revenues) on EDP research and development; in the same period Honeywell
spent $95,000,000 (21% of its EDP revenues) on EDP research and development.

15.25.23.5 The 1956 IBM-SR patent cross-license was de facto exclusive, and
SR conspired and agreed with IBM to prevent Honeywell from obtaining access
to any IBM or SR patent licenses and know-how.

15.25.23.6 Honeywell has proven that it was injured in its business or property
by reason of the 1956 EDP patent cross-license between IBM and SR.

15.25.23.7 As to licenses under IBM EDP patents, any apiilicnnt under the
IBM consent decree had a right to obtain such licenses, and Honeywell and the
other major EDP companies did obtain such licenses.

15.25.23.8 Honeywell offered no evidence that it over tried to design around
an SR patent or even altered its conduct because of an SR patent. In fact,
in answers to defendants' Interrogatories 248 and 251. Honeywell admitted that
it never studied any of the SR patents and applications involved in the 1956
IBM-SR cross-license and that it never designed any of its EDP machines to
avoid any of their claims.

15.25.24 The SR-IBM technological merger in 1956 injured competition in the
EDP industry by conspiratorially allowing the perpetuation of the high com-
bined market share of the two parties to the merger and tending to protect
the proportion of each conspirator.

15.26 In 1956 IBM and SR had about 95% of the EDP market and each had
a duty to the remaining members of the industry to make full disclosure of the
agreement.

15.26.1 SR had the duty to seek out Honeywell and offer it access to technical
information equal to that offered IBM.

15.26.2 On May 10, 1956, a meeting was held between IBM and SR at which
representatives of both companies discussed a then proposed settlement between
SR and IBM.

15.26.2.1 At this meeting. F. .7. McNaniara of SR stated that as a part of the
settlement, he contemplated an exchange of know-how between IBM and SR
which would cover the EDP field as well as the TAB systems ai-ea.

15.26.3 On May 15, 1956, Birkenstock of IBM sent a letter to outside counsel
with an attached copy of suggested points to be negotiated between IBM and
SR, including an exchange of EDP know-how.

15.26.4 On May 22, 1956, IBM concluded that the proposed know-how exchange
between IBM and SR would raise serious problems under the antitrust laws
unless both companies were willing to provide the same know-how to all licensees.

15.26.5 On May 28. 1956, a meeting was held between representatives of IBM
and SR to discuss further a proposed settlement between the two companies.

15.26.6 One of the principal points at this meeting was the antitrust problems
which might arise out of the proposed settlement.

15.26.6.1 Judge Bromley, outside counsel of IBM, stated that the proposed
settlement between the two principal occupants of the field was fraught with
antiti'ust difficulties.

15.26.6.2 McNamara of SR stated that an exchange of EDP know-bow would
give rise to antitrust problems and that SR was not then disiwsed towards a
know-how exchange.

15.26.7 On .Tune 6, 1956, Birkenstock of IBM and McNamara of SR discussed
the fact that should an exchange of know-how be concluded between the two
companies, IBM would l)e obligated to provide EDP know-how, at least coexten-
sive to the patent grant, to all licensees.



5876

15.26.7.1 IBM had made it clear to SR throughout their negotiatons that be-
cause of its consent decree, IBM would make available to all competitors who re-
quested it the same patent licenses and technical information it provided to SR.
IBM did nothing effectual to implement this requirement.

15.26.8 At a June 20, 1956 meeting with IBM, McNamara stated that, based
upon a previous conference with Birkenstock, there was an understanding that
the objective of a settlement between IBM and SR was to place SR in such a
position with respect to patents, applications and know-how that it would be on
the same level as IBM ; this was what occurred.

15.26.9 At a June 29, 1956 meeting with SR, Birkenstock of IBM stated that,
contrary to the advice of IBM's antitrust counsel, IBM would agree to a cutoff
date of June 1, 1956, for an IBM-SR know-how exchange; the ultimate date
became October 1, 1956.

15.26.10 Birkenstock further stated that IBM's counsel had advised IBM that
it would be obligated to provide to all licensees, with respect to any particular
machine, the same know-how exchanged with SR.

15.26.11 The 1956 consent decree required IBM to grant technology access to
specifically defined tabulating systems [not EDP systems technology] to certain
applicants; Section XIII of the decree also prohibited IBM from exchanging
disclosures of technical information on an exclusive basis.

15.26.12 During the course of the 1956 negotiations IBM had become con-
cerned that any settlement with SR, if publicized, might be construed as an
admission of guilt to SR's monopoly charges or that SR's salesmen might
make unfair use of it in the way they might describe or talk about the agree-
ment. This concern first appears in the "minutes" of a June 29, 1956 SR^IBM
n^otiating session ; these memoranda indicate that IBM and SR then dis-
cussed having a joint press release as a possible solution.

15.26.13 An IBM draft agreement dated July 6, 1956 contained an express
provision that there should be a joint press release and that the terms and
conditions of the agreement would be kept confidential ; this draft contained
no provision for an exchange of EDP technical information.

15.12.14 In July of 1956. IBM was specifically advised by outside counsel and
so told SR, that a know-how and patent exchange with SR would violate the
antitrust laws unless IBM made arrangements for other companies in the indus-
try to get the same benefits royalty-free ; no provision implementing this neces-
sity was included in the technological merger.

15.26.15 At an August 1, 1956 meeting of IBM and SR representatives, Birken-
stock of IBM reported that IBM had been unable to avoid mentioning the settle-
ment negotiations to the editors of Fortune magazine ; however, SR representa-
tives were assured that Fortune would not publish any details.

15.26.16 Both companies desired to gain technological peaceful coexistence
and expressed their mutual concern over antitrust problems which would arise
from the two dominant companies exchanging EDP know-how and patent li-
censes when these same benefits would not be available royalty-free to the
industry; nonetheless, they made their Agreement de facto exclusive.

15.26.17 Both conspirators desired to keep factual information from their
competitors and the public concerning the true scope of their proposed tech-
nological merger and concealed, to the maximum degree details of the 1956
Agreement, both before and after it was executed.

15.26.18 SR and IBM were naturally sensitive about candid disclosure of
the full details of their know-how exchange when they did not heed the warnings
of counsel by making the technology available to all ; they agreed upon a closely
worded and innocuous-sounding press release and agreed that no other com-
ment would be allowed by any representative of either company.

15.26.19 By issuing the jointly drafted press release, SR and IBM appeared
to disclose the nature of their settlement, but the press release did not contain
enough information to make it self-explanatory nor to prevent it from being mis-
leading as to the true content of the technological merger ; the press release was
calculated to allay suspicions which the conspirators knew would follow the
inevitable leak of information about the deal.

15.26.19.1 The joint press release was issued a few hours after the 1956 Agree-
ment was signed. The release stated :

"Culminating more than a year's negotiations, International Business Ma-
chines Corporation and Sperry Rand Corporation today entered into a non-
exclusive licensing agreement to exchange licenses to manufacture punched



5877

card accounting machines and electronic data processing machines under the
respective patents and patent applications in existence as of October 1, 1956.

"Based on IBM's greater production of these machines, IBM will pay to
Sperry Rand a fixed amount royalty of $1,250,000 for eight years as a credit
against production royalties, after which time no further royalty payments
will be due. „ ^^,. , 4. • 4.

"The two companies also agreed upon a procedure for setthng patent inter-
ferences now pending in the United States Patent Office and arranged to ex-
change technical information with respect to punched card accounting and elec-
tronic data processing machines announced or released to production prior to
October 1, 1956. „ t. ^ ■^^,

"Simultaneously with execution of the above agreements, Sperry Rand with-
drew its Anti-trust complaint, filed December 27, 1955, and IBM withdrew its
counterclaim, charging patent infringement, filed June 6, 1956.

15.26.19.2 The fact of the 1956 IBM-SR Agreement, but not the details, re-
ceived publicity : -r 1 rm,

(a) Versions of the press release appeared in the Wall Street Journal. Ibe
New York Times and in trade journals such as Computers and Automation.

(b) The press release was mailed to thousands of IBM stockholders, and an
expanded version of it appeared in the 1957 SR Annual Report.

(c) The Wall Street Journal account stated that technical information was
to be exchanged on "all data processing and punched card euipment, announced
or released for production before October 1."

(d) SR had several hundred copies of the agreement printed; these copies
were circulated to SR personnel and some copies went to outsiders.

15.26.20 On August 21, 1956, T. J. Watson, Jr., chief executive of IBM sent a
worldwide memorandum to all executives and department managers, district
managers, IBM branch managers and plant and laboratory executives in which
he specified what could and should be said regarding the technological merger
and attached a script with prescribed answers to questions; the script was
designed to disclose none of the details of the Agreement.

15.26.21 Although IBM and SR made reference to an exchange of EDP and
TAB systems technical information in their jointly drafted press release of
August 21, 1956, and a letter to IBM shareholders dated the same date contain-
ing the same reference, both companies were careful to disclose no factual details
concerning the extent to which IBM and SR had acomplished a practical tech-
nological merger by the 1956 Agreement. .. .. ^

15.26.22 At a September 5, 1956 meeting of SR executives, McNamara stated
that the privileges of the deal with IBM, including the know-how exchange,
were not available to other industry members.

15.26.23 IBM and SR, singly and together, had the duty to explain the 195b
Agreement openly to the other members of the EDP industry and the public and
to offer the opportunity to gain access to the joint power base on nondiscrimina-
tory terms; the 1956 Agreement created an affirmative obligation to inform
others of the availability of the pooled EDP know-how.

15 26.24 However, neither IBM nor SR ever told any EDP competitor about
the extent of the EDP information exchange in 1956, nor did either ever offer
any EDP competitor any of the EDP know-how of either company ; neither pur-
sued a program of bringing their know-how, patent or application technology
into the public domain ; neither engaged in any program or plan to make their
de facto exclusively shared technology available on any terms to any EDP
industrv members or the public.

15.26.24.1 SR's executives testified that they had remained entirely willing after
the 1956 agreement to discuss patent licensing and technical information with
competitors but did nothing overt to make this willingness effective.

15.25.25 In fact, every effort was made by SR and IBM to keep such informa-
tion from their competitors and the public, and only a limited number of men
in each company were given access to the information.

15.26.26 The 1956 Agreement betwen IBM and SR had significant anti-
competitive impact on the development of the EDP industry and there was a
less restrictive alternative available, namely, to grant the EDP industry access to
the technological merger with accompanying freedom to innovate and compete.

15.26.27 IBM and SR were both specifically familiar with how to achieve pub-
lication of the availability of know-how as a result of the 1956 IBM govern-
mental consent decree experience; however, neither took any steps reasonably



5878

calculated to publicize the availability of the EDP teehuology and know-how
shared between themslves.

15.26.28 While IBM and SR filed copies of the 1956 Agreement with the Justice
Department, they knew and intended that the Justice Department would treat
the matter as confidential under the express provisions of the 1956 Consent
Decree ; it was so treated.

15.26.29 SR knew, before it entered into the 1956 Agreement with IBM, that
there was a probability that the technological merger provided for in the agree-
ment between the two then dominant companies in the EDP and TAB industries
would violate the antitrust laws.

15.26.30 Therefore, in July of 1956 and thereafter, SR and IBM agreed to and
did keep the details of the Agreement secret from the EDP industry and the
public ; the 1956 technology sharing was regarded by SR to be "company con-
fidential and not to be disclosed" ; further. SR and IBM agreed that there would
be no publicity regarding any of their technology sharing activities.

15.26.31 Consequently, no industry member actually realized or knew the
scope and breadth of the Agreement and information exchange between IBM
and SR in 1956 nor until much later.

15.26.32 Honeywell had no actual knowledge or realization of the full signifi-
cance of the technological merger between SR and IBM or the conspiratorially
intended effects thereof until the discovery processes provided by this lawsuit.

15.26.33 The 1956 EDP know-how exchange between IBM and SR, although
labeled "non-exclusive" was effectively "exclusive", i.e., de facto exclusive as it
was intended by the parties to be.

15.26.34 The true scope of the 1956 Agreement and the hreadth of information
exchanged was kept secret by the conspirators until unearthed by Honeywell
during discovery in this lawsuit in 1969.

15.26.35 When IBIM and SR finally, under legal demand, produced copies of
the 1956 Agreement in this lawsuit, both demanded that the copies be treated
as "eonfidentiar' by Protective Orders of the Court.

15.27 Plaintiff knew of the 1956 Agreement, the 1956 IBM Consent Decree, and
the 1955 antitrust suit of SR against IBM.

15.28 Though plaintiff knew of the 1956 Agreement, it made no demand then
or within a reasonable time thereafter for the agreement or the information
contained therein.

15.28.1 Honeywell oflicials read the press accounts of the 1956 IBM-SR agree-
ment. In fact. Hanson (the head of Honeywell's EDP patent department) in a
September 10. 1956 memorandum to Finke (the head of Honeywell's EDP op-
erations) described the 1956 IBM-SR Agreement and wrote :

"There is also alleged to be a mutual exchange of technical information be-
tween the two companies in the tabulating machine and electronic data processing
machine field."

Planson also wrote in the same memorandum that the Honeywell system "is
capable of outperforming the Univac I and Univac II and they might be in-
terested in obtaining know-how from us".

15.28.2 In late 1956, Honeywell explicitly considered whether it should ap-
proach SR or IBM or whether it should stall and wait for IBM or SR to ap-
proach Honeywell. It adopted the latter course in the hope that it could in the
meantime develop trading stock so that it would not have to pay cash for any
IBM or SR patent licenses.

l.".28.3 lentil this lawsiTit, neither Binger (Honeywell's chief executive), Finke
nor Hanson ever sought any additional details concerning the 1956 Agreement
from IBM or SR. nor did they ever ask to see a copy of the agreement.

15.28.4 Honeywell has never sought any technical information from SR or
from IBM.

15.29 If the demand had been refused, legal action in antitrust or other
theory would have forced disclosure of the agreement.

15.29.1 See 18.8.

15..30 In 19.56 plaintiff knew that SR had a high speed printer and that IBM
had RAMAC and knew that it suffered competitively for lack of such devices
or information.

15.30.1 See 15.40.49 through 15.40.70 and 15.40.83 through 15.40.94.

15.31 Plaintiff, however, took no legal action in 1956 or within a reasonable
time thereafter to eliminate the restraint of trade or continued monoimly uower.

1.5.,32 As in Section 7 cases, the Cotirt believes that whatever happened after
19.56 has relevnnce.

15.33 The history of the industry indicates that defendants in no way as-
sumed or obtained a dominant or monopolistic position.



5879

15.34 SR from 1956 to 1967 remained at about 10% of the EDP industry, and
in most of tliose years operated at substantial losses.

15.34.1 See 15.19.1.

15.35 SR and ISD are the defendants in this lawsuit, not IBM.

15.36 The relevant market is the EDP industry and the geographic market is
the United States and foreign markets for sales or rentals of EDP products manu-
factured in the United States.

15.36.1 The relevant product market for purposes of this lavpsuit is defined to
include those EDP systems and machines falling within the following definition :

EDP System. — Shall mean any machine or group of automatically inter-
communicating machine units capable of entering, receiving, storing, classify-
ing, computing and/or recording alphabetic and/or numeric accounting and/or
statistical data without intermediate use of tabulating cards, which system
includes one or more central data processing facilities and one or more storage
facilities, and has either

(a) the ability to receive and retain in the storage facilities at least some
of the instructions for the data processing operations required, or

(b) means, in association with storage, inherently capable of receiving and
utilizing the alphabetic and/or numeric representation of either the location
or the identifying name or number of data in storage to control access to such
data, or

(c) storage capacity for 1,000 or more alphabetic and/or decimal numeric
characters or equivalent thereof.

EDP Machine. — Shall mean a machine or device and attachments thereof
used primarily in or with an electronic data processing system.

All systems and machines falling within the above definition or included in
the relevant product market, with the exception of those so-called "special pur-
pose" systems designed to accomplish a specialized task and sold or leased to
the United States or any agency or department thereof, as long as no such
system was ever offered generally to the public, and with the proviso that
business or scientific electronic data processing machines or systems ordinarily
sold or leased in the commercial market, which happen also to be sold or leased
to the military, the United States Department of Defense or any other United
States Government department are included.

15.36.2 The relevant geographic markets for purposes of this lawsuit are the
United States and the world market (a combination of the foreign and United
States markets).

15.36.3 At least since the early 1950's, there has been a definable relevant
market in the development, manufacture, sale, lease, and use of electronic data
processing machines and systems (as defined above) in each of the geographic
markets (as defined above).

15.37 I find a violation of Section 1 in the agreement.
15.37.1 See 15.24, 15.25 and 15.26.

15.38 Though the agreement was a further attempt to extend the monopoly,
I find that in view of later events that defendants did not create any monopoly
in violation of Section 2.

15.38.1 Honeywell has failed to prove that SR's participation in the 1956 IBM
SR Agreement violated Section 2 of Sherman Act.

15.39 I find that in view of plaintiff's knowledge of the fact of the agreement
and of the dominant position of SR and IBM in 1956, that plaintiff failed to act



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 134 of 140)