Data General Corp. v. Grumman Systems Support Corp.

• Decision Date: 08 September 1994
• Docket Number: No. 93-1637,93-1637
• Parties: 1994-2 Trade Cases P 70,716, 1994 Copr.L.Dec. P 27,319, 32 U.S.P.Q.2d 1385 DATA GENERAL CORPORATION, et al., Plaintiffs, Appellees, v. GRUMMAN SYSTEMS SUPPORT CORPORATION, Defendant, Appellant. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 1147

36 F.3d 1147

1994-2 Trade Cases P 70,716, 1994 Copr.L.Dec.

P 27,319,

32 U.S.P.Q.2d 1385

DATA GENERAL CORPORATION, et al., Plaintiffs, Appellees, v. GRUMMAN SYSTEMS SUPPORT CORPORATION, Defendant, Appellant.

No. 93-1637.

United States Court of Appeals, First Circuit.

Heard Sept. 8, 1994.

Decided Sept. 14, 1994.

Charles A. Gilman, with whom Cahill, Gordon & Reindel, Robert A. Alessi, Marshall Cox, Allen S. Joslyn, Immanuel Kohn, William T. Lifland, Gerard M. Meistrell, Roy L. Regozin, Dean Ringel, Laurence T. Sorkin, Goodwin, Procter & Hoar, and Coudert Brothers, were on brief, for appellant.

Robert S. Frank, Jr., with whom Robert M. Buchanan, Jr., Brian A. Davis, Choate, Hall & Stewart, Jacob Frank, and Morris G. Nicholson, were on brief, for appellees.

Before TORRUELLA, CYR and STAHL, Circuit Judges.

STAHL, Circuit Judge.

Grumman Systems Support Corporation ("Grumman") assigns error to the district court's handling of litigation arising from Grumman's acquisition, duplication, and use of MV/Advanced Diagnostic Executive System ("ADEX"), a sophisticated computer program developed by Data General Corporation ("DG") to diagnose problems in DG's MV computers. DG claimed that Grumman had infringed DG's ADEX copyrights and misappropriated trade secrets embodied in ADEX. A jury agreed, awarding DG $27,417,000 in damages (excluding prejudgment interest and attorney's fees). Grumman contends that the district court prematurely dismissed its affirmative defenses and counterclaims and committed several errors during and after the trial.

While this case raises numerous issues touching on copyright law, Grumman's most intriguing argument--presented below as both a defense and a counterclaim--is that DG illegally maintained its monopoly in the market for service of DG computers by unilaterally refusing to license ADEX to Grumman and other competitors. The antitrust claims are intriguing because they present a curious conflict, namely, whether (and to what extent) the antitrust laws, in the absence of any statutory exemption, must tolerate short-term harm to the competitive process when such harm is caused by the otherwise lawful exercise of an economically potent "monopoly" in a copyrighted work.

After a careful analysis, we affirm on all but one relatively minor issue concerning the calculation of damages.

I. BACKGROUND ¹

DG and Grumman are competitors in the market for service of computers manufactured by DG, and the present litigation stems from the evolving nature of their competitive relationship. DG not only designs and manufactures computers, but also offers a line of products and services for the maintenance and repair of DG computers. Although DG has no more than a 5% share of the highly competitive "primary market" for mini-computers, DG occupies approximately 90% of the "aftermarket" for service of DG computers. As a group, various "third party maintainers" ("TPMs") earn roughly 7% of the service revenues; Grumman is the leading TPM with approximately 3% of the available service business. The remaining equipment owners (typically large companies in the high technology industry) generally maintain their own computers and peripherals, although

they occasionally need outside service on a "time and materials" basis.

A. Computer Service: Outputs and Inputs

Support service for DG computers entails a variety of activities and a corresponding array of goods and services. The principal activities are maintenance and repair of computer equipment. Maintenance includes care of parts subject to failure as well as replacement of hardware components to bring equipment up to date. Repair involves the diagnosis and correction of hardware failure. Service technicians remedy equipment problems either by actually mending a malfunctioning part (e.g., reformatting a "broken" disk drive) or replacing the part.

Each of these support service "outputs" benefit from a range of "inputs." For example, engineering change orders, along with certain documentation and parts, allow service technicians to make technological updates to computer hardware. In order to identify the existence and location of a malfunctioning part, a service technician may use diagnostics (now increasingly sophisticated software), schematics (maps of the location and function of hardware elements), and various types of documentation, together with the technician's own experience acquired by diagnosing equipment problems. In order to actually mend a malfunctioning part, a technician might fix the part on the spot with routine tools or sophisticated software (e.g., a software diagnostic that can reformat a disk drive), or send the part to a repair depot run either by the technician's employer or another service organization. The repair of a malfunctioning part often requires very detailed information about the part (such as the information provided by schematics and other documentation), and may in turn require smaller replacement parts. Finally, replacement of parts naturally requires the availability of spares. At the core of this litigation is a dispute about Grumman's access to software diagnostics and other service "tools" produced by DG for use in the repair, upgrading, and maintenance of DG equipment.

B. TPM Access to Service Inputs

DG's policies concerning TPM access to DG's service tools have developed over time. As described below, DG's policies have evolved through three stages.

1. Initial Suspicion

TPMs made their debut in the 1970s while DG was still relatively new to the computer manufacturing market. DG was suspicious of the ability of TPMs, often run and staffed by former DG technicians, to service DG computers without running afoul of DG's intellectual property rights or confidentiality agreements binding on former DG employees.

In 1975, DG converted its suspicions into legal claims, filing suit against Lloyd Root and Robert Montgomery, two of its former employees, as well as Computer Systems Support Corporation ("CSSC"), the TPM that Root and Montgomery had founded after leaving DG. ² DG's principal allegations were that Root and Montgomery had breached their employment agreements by taking DG information with them when they left DG, and that CSSC personnel had been making unauthorized use of DG proprietary information. It was unclear, however, whether the proprietary items that CSSC was using were items sold or licensed to equipment owners (pursuant to agreements which arguably permitted some use by TPMs), ³ or items taken directly from DG by Root and Montgomery.

Lacking promising proof to support its claims, DG proposed a settlement whereby CSSC would agree to return any proprietary information that Root and Montgomery unlawfully took from DG, and DG would expressly authorize CSSC (and its successors) to use DG proprietary information in the

                maintenance and repair of DG computers. 4  CSSC accepted, and the parties signed a settlement agreement in 1976 ("the Settlement Agreement"). 5
                

2. Peaceful Coexistence

From 1976 until some point in the mid-1980s, DG affirmatively encouraged the growth of TPMs with relatively liberal policies concerning TPM access to service tools. DG sold or licensed diagnostics directly to TPMs, and allowed TPMs to use diagnostics sold or licensed to DG equipment owners. DG did not restrict access by TPMs to spare parts manufactured by DG or other manufacturers. DG allowed (or at least tolerated) requests by TPMs for DG's repair depot to fix malfunctioning circuit boards, the heart of a computer's central processing unit ("CPU"). DG sold at least some schematics and other documentation to TPMs. DG also sold TPMs engineering change order kits. And finally, DG training classes were open to TPM field engineers. Grumman suggests that DG's liberal policies were beneficial to DG because increased capacity (and perhaps competition) in the service aftermarket would be a selling point for DG equipment. ⁶

3. Increased Restrictions

In the mid-1980s, DG altered its strategy. With the goal of maximizing revenues from its service business, DG began to refuse to provide many service tools directly to TPMs. DG would not allow TPMs to use the DG repair depot, nor would it permit TPMs to purchase schematics, documentation, "change order" kits, or certain spare parts. DG no longer allowed TPM technicians to attend DG training classes. Finally, DG developed and severely restricted the licensing of ADEX, a new software diagnostic for its MV computers. The MV series was at once DG's most advanced computer hardware and an increasingly important source of sales and service revenue for DG.

A number of items unavailable to TPMs directly from DG were either available to all equipment owners (even customers of TPMs) from DG, or were available to TPMs from sources other than DG. For example, DG depot service, change order kits, and at least some documentation were available to all equipment owners. There is also evidence that Grumman had its own repair depot and that Grumman could make use of repair depots run by other service organizations (sometimes called "fourth party maintainers"). Likewise, there is evidence that TPMs could purchase at least some spare parts from sources other than DG.

The situation was different with respect to ADEX. DG service technicians would use ADEX in performing service for DG equipment owners. DG would also license ADEX for the exclusive use of the in-house technicians of equipment owners who perform most of their own service. ⁷ However, DG would not license ADEX to its own service customers or to the customers of TPMs. Nor was ADEX available to TPMs from sources other than DG. At least two other diagnostics designed to service DG's MV computers may have become available as early as 1989, but no fully functional substitute was available when this case was tried in 1992.

Grumman found various ways to skirt DG's ADEX restrictions. Some former DG employees, in violation of their employment...