U.S. v. International Business Machines Corp., Docket No. 97-6184

• Decision Date: 30 December 1998
• Docket Number: Docket No. 97-6184
• Citation: 163 F.3d 737
• Parties: 1999-1 Trade Cases P 72,388 UNITED STATES of America, Plaintiff-Appellee, v. INTERNATIONAL BUSINESS MACHINES CORPORATION, Defendant-Appellee, Independent Service Network International, Intervenor-Appellant.
• Court: U.S. Court of Appeals — Second Circuit

Page 737

163 F.3d 737

1999-1 Trade Cases P 72,388

UNITED STATES of America, Plaintiff-Appellee, v. INTERNATIONAL BUSINESS MACHINES CORPORATION, Defendant-Appellee, Independent Service Network International, Intervenor-Appellant.

Docket No. 97-6184.

United States Court of Appeals, Second Circuit.

Argued March 2, 1998.

Decided Dec. 30, 1998.

Gordon B. Spivack, Coudert Brothers, New York, NY (Ronald S. Katz, Theodore R. Snyder, Coudert Brothers, James R. Eiszner, Joseph G. Matye, Shook Hardy & Bacon LLP, Kansas City, MO, of counsel ), for Intervenor-Appellant.

Adam D. Hirsh, U.S. Dep't of Justice, Washington, DC (Joel I. Klein, Asst. Atty. Gen., Donna E. Patterson, Dep. Asst. Atty. Gen., Robert B. Nicholson, John F. Greaney, N. Scott Sacks, James J. Tierney, U.S. Dep't of Justice, of counsel ), for Plaintiff-Appellee.

Evan R. Chesler, Cravath, Swaine & Moore, New York, NY (Peter T. Barbur, Cravath, Swaine & Moore, Howard Weber, Davis, Weber & Edwards, New York, NY, Donald J. Rosenberg, Kenneth B. Wildstein, International Business Machines Corp., White Plains, NY, of counsel ), for Defendant-Appellee.

Before: NEWMAN, CABRANES, and MERRITT, ^* Circuit Judges.

JOSE A. CABRANES, Circuit Judge:

This appeal has its origins in a joint motion of the parties to a longstanding antitrust decree, seeking the dissolution of that decree. By order dated May 1, 1997, the United States District Court for the Southern District of New York (Thomas P. Griesa, Chief Judge ) granted that motion, over the objection of an intervenor, the Independent Service Network International ("ISNI"). ISNI now appeals, contending that the district court's order ran afoul of our decision in United States v. American Cyanamid Co., 719 F.2d 558 (2d Cir.1983), cert. denied, 465 U.S. 1101, 104 S.Ct. 1596, 80 L.Ed.2d 127 (1984), which allows consensual termination of antitrust decrees only upon the court's determination that termination will serve the "public interest." Id. at 564-65. The "public interest," in turn, is to be evaluated by conducting the same analysis that would govern an antitrust case involving the species of antitrust violation that the decree is meant to forestall. Id. at 565. The parties to this appeal substantially agree that the species of antitrust violation relevant here is the illegal tying arrangement, prohibited under section 1 of the Sherman Antitrust Act, 15 U.S.C. § 1 (the "Sherman Act"). ¹ ISNI maintains, however, that the district court erred by failing to even consider--much less correctly apply--the factors that govern cases of asserted tying arrangements.

Although the district court did not discuss each of the individual elements of an illegal tying arrangement, we conclude that its analysis adequately showed that one element necessary to such a violation was not present. Accordingly, we affirm.

I.

This case arises from a civil antitrust complaint filed against International Business Machines Corporation ("IBM") by the government in 1952. The complaint alleged, inter alia, that IBM had used its monopolistic market power in the electronic tabulation machine industry to force consumers to lease, rather than purchase, its machines. It further alleged that through such activity, IBM monopolized, attempted to monopolize, and restrained trade in violation of sections 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1-2.

In 1956, the government and IBM entered into a consent decree (the "Decree") rather than proceed to trial. The Decree covered both tabulating machines and the emerging market for computers, which it referred to as "electronic data processing machines." The Decree sought to encourage market competition by constraining IBM's ability to exercise its market power. Among other things, the Decree (1) required IBM to sell as well as lease its tabulating machines and computers, (2) prohibited IBM from reacquiring its machines, and (3) required IBM to sell parts and provide training to outside firms that could compete with IBM in the markets for supplies and services on IBM machines. This appeal involves only provisions that implement the third aspect of the Decree.

Over the years, a number of the provisions automatically terminated; others, relating to tabulating machines, became obsolete. IBM moved, in June 1994, to terminate all remaining provisions of the Decree. In July 1995, the government agreed to terminate all of the remaining Decree provisions, except as they applied to two IBM product lines--namely, "S/390" mainframe computers and "AS/400" mid-range computers. ² The district court thereafter entered an order terminating the Decree as to all IBM products except the S/390 and AS/400 lines. (ISNI does not appeal from this order.)

The government then proceeded to investigate the likely impact of terminating the Decree with respect to S/390 and AS/400 computers. Its detailed investigation included the review of more than 100,000 pages of IBM documents, including its strategic business plans, and interviews with IBM's customers, competitors, and executives. The government concluded that (1) the customers of S/390 and AS/400 computers were mostly large corporations, none of whom voiced concern over the termination of the Decree, and many of whom believed that they held some leverage over IBM; (2) there is currently an active secondary market for spare parts and maintenance for these machines; the independent firms that operate in this industry obtain the vast majority of their spare parts by cannibalizing existing machines and by purchasing from independent distributors; (3) there is no indication that IBM plans to cut off spare parts sales to independent firms; (4) consumers of these products "comparison shop" the expected lifetime price of parts and servicing when they choose a business computer; and (5) although the AS/400 faces a competitive market, the S/390 has a substantial share of the mainframe market. ³

Based on the above investigation and determinations, the government concluded that termination of the remaining provisions, subject to a phase-out period, would be in the public interest. Accordingly, the government joined IBM in a motion to eliminate all remaining provisions by July 2, 2001.

The district court ordered a period of public comment regarding the termination proposal. The only comment received from an IBM customer was in favor of termination. Five comments were received from IBM's competitors or their trade associations--two favoring termination, and three (including the comment submitted by ISNI) opposing termination. IBM and the government filed lengthy responses to these public comments.

On February 13, 1997, the district court held a hearing on the joint motion, at which ISNI was allowed to participate as amicus curiae. ISNI challenged the termination of only the following sections of the Decree, and only as they relate to the S/390 and AS/400 computer lines: (1) Section VI(c), which requires IBM to sell repair parts to independent maintenance companies (and to computer owners) at reasonable and non-discriminatory prices, so long as those parts are available for use in equipment leased by IBM; (2) Section VII(c), which prohibits IBM from requiring that equipment purchasers purchase repair and maintenance services or repair parts from IBM; (3) Section IX(b), which requires IBM to provide to equipment owners--at reasonable and nondiscriminatory prices--the same training and documentation pertaining to repair and maintenance that it provides to its own repair and maintenance employees; and (4) Section IX(c), which requires IBM to provide customers with documentation regarding the operation of the equipment that is owned or leased by the customer.

ISNI argued that if the Decree were terminated, IBM would cease selling parts to independent service firms and would institute a tie between the computers, on the one hand, and maintenance, on the other, using its monopoly on spare parts as leverage. It appears that ISNI did not provide any evidence for these predictions, and relied entirely on the evidence gathered and presented by the government.

In an opinion dated May 1, 1997, the district court granted the joint motion of IBM and the government to terminate the Decree. See United States v. International Business Machines, No. 52 CIV. 72-344(TPG), 1997 WL 217588 (S.D.N.Y. May 1, 1997). The court held that termination was in the public interest, for essentially two reasons. See id.

at * 3. First, the court found that the phasing-out of the remaining Decree provisions "present[s] no material threat of violation of §§ 1 and 2 of the Sherman Act." Id. at * 4. In support of this conclusion, the court noted that there was now an active market in computer repair services. See id. at * 3. Moreover, the court found that this market was likely to remain even after the Decree's termination, because IBM would continue selling necessary spare parts to the independent maintenance providers; if IBM were to refuse to supply such parts to service providers, and to begin charging monopolistic servicing prices, it would risk offending potential computer purchasers. Indeed, the court emphasized that IBM faced some competition in the market for its machines, and that "the market as it exists today is a powerful deterrent against IBM engaging in monopolistic tactics designed to shut off the supply of parts to independent repair companies." Id.

Second, the court noted that the Decree had "resulted in artificial restraints on IBM's marketing of spare parts, which do not further the cause of healthy competition." Id. The court cited evidence that IBM had earlier planned to close certain of its regional parts distribution centers, on the theory that there were an excessive number; however, IBM had withdrawn these plans because of complaints that such closings would violate the Decree. See id.

Thereafter, ISNI sought and obtained the district court's permission to intervene for the sole purpose of...