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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3'our position, when you say' there are types of activities that our
Government should carefully control, police, and enforce.

But when we get into the area that involves business judgments and
activities that are legal and lawful and are not predatory, and so on,
then we are in deep trouble, if we are going to get to the point where
we are going to form a Government entity to say. "Well, we will step
in and we are going to exercise judgment : all you have to do is comply
and pav for that compliance."

That is a little difficult to accept unless there is a demonstration,
unless there is proof that the benefits of such results will outweigh the
cost thereof, whatever the cost might be in money, or disadvantage,
or price of goods, and so on.

Isn't it a matter of balancins: one or the other ?



4854

Mr. Katzenbach. Yes. it is. Senator. I agree with that.

Senator Hruska. Thank you.

Senator Hart. Mv. Barr, did you care to add anything in light of
the exchange ?

Mr. Bark. Maybe after the cases are over, Senator, I would have a
lot to say, but not now, thanlc you.

Senator Hart. Thank you very much, gentlemen.

Mr. Katzexbach. Thank you, Mr. Chairman.

Senator Hart. The decision as to whether to recess now or later has
been sort of resolved by that vote signal. The signal has just been
given which indicates a roUcall is in process on the floor.

I would suggest, therefore, that we recess until 1 :30 p.m.

[Whereupon, at 12 :18 p.m. the subcommittee recessed, to reconvene
at 1 :oO p.m. this same day.]

[The following was received for the record.]

MATERIAL RELATING TO THE TESTIMONY OF NICHOLAS deB.

KATZENBACH

Exhibit 1.— Exchange of correspondence between Senator Hart and Mr. Katzcn-
bach re hearings postponement request.

IBM,
Interxational Business Machines Corporation,

Armonk, N.Y., June 28, 197/,.
Hon. Philip A. H.\rt,
Smote Office Building,
Washington, D.C.

Dear Senator: I want to thank you for the courtesy which you showed in
talking with Mr. Barr and me with respect to the possible hearings of your sub-
committee in the near future with respect to the data processing business. You
were generous with both your time and thought, and I sincerely appreciate it —
whether or not we have persuaded you of the merits of our position.

I save you the i)rincii>al reasons for our very strong belief that these hearings,
coming immediately before the biggest antitrust trial probably in the history of
antitrust enforcement, are unnecessary to the substantive work of your subcom-
mittee and potentially prejudicial to IBM. For your convenience, I am attaching
another copy of the memorandum I prepared on this subject, but I would like to
add a few words, based on our discussion, to what I said there.

Yon pointed out to me that if your committee could not have hearings with
respect to so-called concentrated industries because of the fact of pending liti-
gation, then, in many instances, the committee would be precluded from knowl-
edge with respect to that industry. To a degree, this is, of course, true. But I do
tliink the IBM istuation differs from the others which the committee has under
consideration. I offer the following reasons for this :

1, the imminence of trial in this case

The trial of United States v. IBM is scheduled to begin on October 7, and Judge
Edelstein has made that a firm date. In effect, the very burden of the work of
preparation for that case precludes our participation in any hearings on the
industry which you might wish to have. In addition, if prejudicial publicity in
fact occurs, it will occur virtually on the eve of the trial. I do not suggest such
publicity would influence the objectivity of the court, Imt it could influence the
testimony of witnesses and certainly would have an adverse effect on employees
and on the press reporting of the trial.

2. THE scope of THE CASE

I'nlike the other industries which you had under consideration, the IBM case
involves the whole history, structure, and practices of the industry for a period
of years, both here and ai)road. Everything about the indnstry — every fact which
the" committee could wish to know — is likely to be thoroughly investigated in the
course of proceedings which will involve many hundreds of witnesses, many



4855

thousands of documents, and which will last for over a year in my judgment.
\11 of that information will he availahle to the committee in making its deci-
sions and if any area is omitted, the committee should appropriately have hear-
ings with respect to that area. Thus, the situation is not one where the com-
mittee wishes to make a broader investigation than might be involved in par-
ticular litigation, and certainly is not one in which the committee will have to
develop information not otherwise available to it. I think this fact alone is ade-
quate di><tinction from the other matters before your subcommittee.

In this connection, I would make the further observation that the committee
can not possibly iu three or four days of testimony— even if that testimony were
to be unbiased— gain anvthing approaching the understanding of the industry
which will be revealed in the trial of the IBM case. I could emphasize this point
by the fact that the Department of Justice has had many people involved in this
case for a period of some seven years, a fact which is in stark contrast to the
resources of the committee's staff, and the time they have been able to spend
on this industry.

3. THE FACT THAT THE GOVERNMENT IS THE PLAINTIFF

In my opinion the fact that the suit against IBM was brought by the Depart-
ment of Justice, rather than a private party, puts IBM at a peculiar disadvan-
tage. I am sure that the Department of Justice would not testify on this subject,
if invited by the committee, on the grounds that it would be improper for them
to comment on pending litigation. There are, however, a number of competitors
who have a vested financial and business interest in the success of the govern-
ment in this case. However biased, prejudiced, or inaccurate their testimony
before the committee, the very fact that the Department of Justice has brought
a case against IBM tends to throw a mantle of objectivity and "public interest"
over their statements. The government, therefore, can take the high road of not
testifying while others make a public presentation of what they characterize
as the Department of Justice's viewpoint.

4. THE PRETPaAL ORDER OF THE DISTRICT COURT

Tbere exists a Pretrial Order from the Southern District C^urt of New York
which prohibits either party from making any public comment on the pending
case. Tliis Order was originally sought by IBM because of inaccurate leaks of
information with respect to discovery by the Department of Justice. It is.
however, cast in extremely broad terms. While I do not believe the court would
object to IBM's testimony before a Congressional committee in response to
eitlier a subpoena or an invitation, it would be virtually impossible to testify
without commenting on issues soon to be litigated in the government case. Even
if the court were to permit such general comment, any IBM witness would be
acting to a degree at his iioril in trying to define the line between what the court
would regard as proper and improper.

I cannot honestly take the position that the foregoing reasons, as supple-
mented by the attachment to this letter, are in any sen.se conclusive as to the
need or propriety of the hearings which the committee is contemplating. I accept
the fact that reasonable men could differ with me. I do think you appreciate
that I make the.se arguments with sincerity and witli conviction. And I believe
you think they have some merit, although they may not be persuasive.

If I am correct in thc^^-e beliefs, I wonder whether you would find it possible to
share this letter, and the attached memorandum, with other members of the
sulK-ommittee. While I would like you to do so. I will, of course, abide by
your judgment. From long acquaintance and experience, I know that it will
be a fair one. even if I disagree with it.

It was good to see you. Once again, my thanks for your time.
Sincerely,

Nicholas deB. Katzenbach.

June 21, 191. 'f
Memorandum :
Re : U.S. v. IBM

Facts

1. The Department of Justice began its investigation of IBM in early 196T.
IBM cooperated fully in this investigation. IBM voluntarily produced several
thousand documents requested by the government. The suit again.st IBM was



4856

filed by the goverument on January 17, 1969, the last clay of the Johnson
Administration.

2. The Department of Justice did virtually nothing to prepare the case for
trial during the first two to three years of the Nixon Administration. During the
last two years both sides have been actively involved in discovery and deposi-
tions. IBM has produced to the government several million documents, and the
government as user has produced from various agencies .several million docu-
ments to IBM. In addition, the government and IBM have deposetl over a thou-
sand witnesses.

3. Trial date has been set by the District Court in New York (Edelstein J.) to
begin October 7, 1974. He has stated that that date is absolutely firm, and he will
l)rook no further delays. The government has submitted a witness list of some
175 witnesses, and IBM has submitted a list of some 400 witnesses. Both lists
contain many people with expertise in the technology, economics, and experience
in the industry. Both lists contain IBM's competitors, and IBM is offering testi-
mony from a large number of users of its equipment. The trial will take approxi-
mately a year or more, depending on the number of days which the court sits
each week.

4. To give some notion of the work required for preparation in the case, in
the last 60 days alone IBM has spent 405 days in deposition. 590 days interview-
ing witne.sses, and over 7 million documents have been produced by both sides.
This has involved over 25,000 hours of lawyer time, and many times that in
assistance from paralegals and professionals. There is no reason to believe that
the pace of this work will slow down between now and the time of trial.

Other Litigation

1. At about the time the government filed suit, one major competitor of IBISI
(Control Data Corporation) sued IBM, a leasing company sued IBM. and a lead-
ing producer of software (programming) sued IBM. After extensive discovery in
these cases, they were settled.

2. About a year after the government filed suit another leasing company
(Greyhound Computer Leasing) sued IBM. After extensive discovery, this case
was tried in I'hoenix, Arizona. At the end of Greyhound's case, Judge Walter E.
Ci'aig dismissed the suit for failure of proof. He stated that whatever IBM's
success in the industry, it was clearly based on IB^NI's "superior skill, foresight
and industry". Greyhound appealed that dismissal, and the matter is presently
pending for decision before the Ninth Circuit Court of Appeals.

3. Two and a half years after the government suit was filed, the Telex Corpora-
tion filed a suit against IBM. After extensive discovery, this case was tried
before Judge Sherman Christensen in Tulsa, Oklahoma. Judge Christensen held
for Telex on some of the antitrust issues, and for IBAI on its counterclaim that
Telex had stolen its trade secrets. He awarded Telex damages in the trebled
amount of $259.5 million dollars. He awarded IBM damages of $21.9 million
on the trade secret theft. Both sides appealed and the matter is presently pend-
ing for decision before the Tenth Circuit Court of Appeals. Judge Christensen
held that it was unlawful under Section 2 of the Sherman Act for IBM to make
general price reductions to the level of Telex's competitive prices, even though
after such reductions the products involved were still profitable to IBM. He
found that IBM had a very high .share of products which were connected to IBM's
central proces.sing units, that as a con.sequence IBM was dominant in the
market defined by products connected to IBM central processing units, and that
it was unlawful for IBM to reduce its prices if this in any way was intended
to injure a competitor by retaining business for IBM.

4. Following Judge Christensen's decision in the Telex case, a number of com-
petitors similarly situated to Telex have filed suit against IBM. and these
suits have been consolidated in California. The work described above in con-
nection with the government case does not include the work in connection with
this other litigation, which also involves thousands of hours of lawyer time and
massive discovery.

Argument

The Senate Hearing on the electric data processing industry at this time,
while the government case is pending for trial within less th.'^n four months.
can only be prejudicial to IBil. and cannot be expected to develop anytbing ap-
proaching the extensive information with respect to tb.e industry which must be
developed in the government case. The issues in the government case are co-
extensive with all of the issues which can be raised with respect to the electronic



4857

data i»iocessing industry and the position of IBM in it. All aspects of the industry
in the United States and abroad will be covered by the more than 500 witnesses
whose testimony will be taken. Nothing that the Committee can presently do will
come anywhere near the rigorous testing which is bound to take place in the
government antitrust suit.

On the other hand, hearings at this stage of the game are bound to be prejudicial
to IBM. Leaving aside the proprieties of participation by a defendant in a
public hearing immediately prior to trial of the same issues, it is a physical im-
possibility for IBM lawyers to prepare witnesses for such a hearing. We must
concentrate all of our resources towards presenting our case in the Southern
District of New York. Nor would it be desirable, from IBM's point of view, (again
leaving aside questions of propriety) to attempt to present its case before a
Senate Committee prior to hearing the evidence which the government will
produce.

It would be equally prejudiced and improper for the government to present
its case against IBM before a Senate Committee immediately prior to trial.
There is every reason to believe that the government, for the same reasons as
IBM, would decline to do so.

On the other hand, there is no lack of people who have a vested interest in
public attack upon IBM. Some of these have law suits presently pending against
IBM, and ba.se<l upon past experience, have no hesitation in taking advantage
of every public forum to attack IBM. There are organizations, such as the so-
called Computer Industry Association (CIA), which represents a small segment
of the computer industry and none of the important competitors, but which has
as its sole pui^ose the promotion of anti-IBM literature. And there are a group
of professional IBM haters who continuously look for a public forum in which to
attack IBM. If tlie Committee hears witnesses such as this, without the oppor-
tunity or time for exploring all of the aspects, then the result will be merely to
create a one-sided misimpression of the EDP industry. There is every reason to
Itelieve this is precisely what will occur.

Obviously, the Committee must be free, irrespective of pending litigation, to
explore those matters which are important to its mission. But here, unlike other
industries which also have some litigation pending, the issues in tJie government
case and the hssues of interest to the Committee are totally and completely over-
lapping. There is no reason to believe that it is possible for the Committee to
explore these problems in the depth they will be explored in the pending litiga-
tion, and all of that information will, of course, he available to the Committee.
If there are issues not developed in the government case, the Committee could,
at an appropriate future time, explore those issues to supplement the record in
the case. And the timing of these particular hearings is as prejudicial as any
timing could possibly be from the point of view of the defendant.

Nicholas deB. Katzenbach.

July 8, 197J,.
Hon. Nicholas deB. Katze^'bach,

Genernl Counsel, International Business Maehine Corp.,
Armonk, N.Y.

Dear Nick : Once in awhile an easy one comes along. IMost of them are tough.
Once in awhile an extra-difficult one comes along, and what to do about the
Subcommittee's hearings on the computer industry is one of the few which are
so tough that you wish you were in Tahiti.

There was no mistaking, as we visited with you and Tom, the depth of your
conviction that in proceeding with the four days of hearings in July, IBM would
be prejudiced by the publicity. Additionally, it would confront you with the
dilemma of whether to present in testimony IB!\I's point of view in advance of
the October trial, or leaving much of the time to the critics, and no Subcommittee
hearing would approach in thoroughness the record to be anticipated being made
in the trial at the District Court in New^ York.

I am not sure what fact is strongest in persuading me that we should go
forward with the hearings. If we were to postpone until a "better day"— meaning
one when IBM would not be in, about to go in. or just coming out of, a lawsuit —
we would be postponing for a long time. That other industries would assign
similar reasons for postponing their hearings, I have no doubt. And at least
some would be convinced that any distinction we sought to draw were strained. I
cannot claim that there would be no publicity for the very purpose of a Congres-
sional hearing is to stimulate discussion and direct attention to some problem,
real or imagined. But I am sure you were right that the trade press, in the



4858

case of the computer industry, would give it thorough coverage and I would incline
to the belief that most of the general press would find it unnewsworthy, and
those who ran it at all would do it as a one-day report. In any event, in contrast
to certain other events and anticipated trials which will go forward nonethe-
less it will get very little attention.

Feeling as I do that Congress must attempt to put antitrust on a more effective
course, while not claiming^ that the reorganization l)ill is the answer, it is my
decision that we should proceed with the hearings. I am under no illusion that
four days will do other than hit highlights, and it will be many months before
we get even to the first stopping place to see what the records suggest with respect
to legislation. At best it will be slow and I conclude we ought not, in this case,

make it slower. , , ^ , i, <-

That this will make disappointing reading for you, I have no doubt, and that
really is why the deci-sion and letter are so difficult.

Sincerely, ^ ^ ^^

Philip A. Hart.

Exhibit 2.— Letter From Asftociation of Data Processing Service Organizations.
Inc., Transmitting Position Paper re IBM Monopolization of Software and
Services Industry

Association of Data Processing Service Organizations, Inc.,

Montvale, N.J., August 16, 197ft.
Hon. Philip A. Hart,
U.S. Senate, Senate Office Building,
Washington, D.C.

Dkau Senator Hart: The Association of Data Processing Service Organiza-
tions (ADAPSO) has been following closely your hearings on the Industrial
Reorganization Act, as it i)ertains to the computer industry.

It is unfortunate, that the representative Association for the computer serv-
ices industry did not have the opportunity to verbalize its position before your
Committee. We hope at some later date, that we may be able to contribute
testimony before your Committee. I enclose a series of position papers produced
by the Association that may be of interest to your Committee and its deliberations.

On behalf of the Association, I again reiterate our desire to cooperate with

you and your C/Ommittee in the near future.

Respectfully,

Jerome Dreyer.

ADAPSO/SIA Position Paper on IBM's Monopolization of the Software
Products And Services Industry

introduction

ADAPSO/SIA is the trade association representing the software segment of
the computer industry. Its members are engaged in the marketing of software
products and software services to computer users and to hardware manu-
facturers.

We believe the IBM Corporation is currently, and has been since before the
announcement of System/360, monopolizing In the area of software product
development for IBM computers. This monopolization, which has resulted in
the inefficient use of IBM hardware by the Government and by commercial users,
is a major contributor to high cost and poor utilization of computers.

Consequently, this paper requests the Justice Department to eliminate what
we believe to" be unfair competition and illegal practices under the current
law of the United States.

HOW IBM's CURRENT SOFTWARE PRODUCTS MONOPOLY AND POLICIES HURT ALL USERS

OF IBM HARDWARE

An extremely important and often overlooked factor contributing to poor com-
puter usage is the cost and quality of the required software (programming)
effort. The performance of hundreds of thousands of programmers is directly a
function of the software tools available to them. Operating systems, computer
languages, compilers, programming aids, performance measurement systems,
sorts, data management packages, and other software are currently being given



4859

ostensibly "free" by IBM to users of IBM computers. ADAPSO/SIA believes that
over the last fifteen years IBM has profited by this monopoly of the software
industry t(» the detriment of all users of IBM computers.

It is well known that although IBM does market software capabilities, they
normally price only their hardware. As a result, IBM is motivated to produce
the minimal software necessary to sell computers, or to produce software that
maximizes the utilization of its hardware. Each software expenditure is evalu-
ated in terms of its contribution to selling more hardware. Under sucli conditions,
the user is the loser, since independent software companies which cannot compete
against ostensibly free or misprices software are forced out of the market. Thus,
less revolutionary computer software is developed and fewer innovations or im-
provements are made.

IBil's monopoly over the software industry, therefore, is a real contributor to
the ineffective use of computers, rather than IBM's control of the hardware indus-
try. Substandard software, as fostered by the current non-competitive climate,
Increases the cost of computer usage and the number of day-to-day problems en-
countered by computer users.

It is important to recognize that the efficient utilization of computer hardware
is dependent on the software or data services being used. Good software, there-
fore, must not simply work, but it must work as effectively as possible to mini-
mize overall operating expense. This objective is patently inconsistent with IBM's
goal of maximizing the number of installed mainframe computers, which is par-
ticularly true of the manufacturer which has captured more than majority of
the market.

To the extent that a computer buyer uses the software and services so supplied
by IBM, the user may experience poorer equipment utilization and excessive
equipment requirements. There is less Incentive to IBM — indeed, there is a pen-
alty—to supply optimum software or services. Further, there is no incentive to
IBM to cooperate with or contribute to the formulation of standards that would
minimize in any way the computer run time necessary for widely used programs.

Finally, it niast be recognized that, by virtue of its dominant position within
the industry, IBM conditions that market so that both users and competitors are
forced to react rather than initiate.

PROBLEMS IN COMPETING WITH IBM

The difficulties in offering viable alternative sources of software to the com-
puter-using community are compounded by IBM's marketing policies and prac-
tices. The obstacles to be confronted include :

(a) "Free" Cotnpetition

Software manufacturers must compete against "free" IBM products or services
whose costs are actually buried in the price of hardw^are.

( 6 ) Unfair Sales Practices

IBM offers "tied-in" products or services which are selectively priced and/or
supported in such a way as to preclude potential competition.

(c) InntJequate IBM Product Information

Many software products or services must be developed with less than adequate
background information necessary to interface with existing IBM systems —
either hardware or software.



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 4 of 140)