Addamax Corp. v. Open Software Foundation, Inc., CA. No. 91-11152-JLT.

• Citation: 964 F.Supp. 549
• Decision Date: 12 May 1997
• Docket Number: CA. No. 91-11152-JLT.
• Parties: ADDAMAX CORPORATION, Plaintiff, v. OPEN SOFTWARE FOUNDATION, INC., Digital Equipment Corporation, and Hewlett-Packard Company, Defendants.
• Court: U.S. District Court — District of Massachusetts

964 F.Supp. 549

ADDAMAX CORPORATION, Plaintiff, v. OPEN SOFTWARE FOUNDATION, INC., Digital Equipment Corporation, and Hewlett-Packard Company, Defendants.

CA. No. 91-11152-JLT.

United States District Court, D. Massachusetts.

May 12, 1997.

Samuel Adams, Ralph T. Lepore, III, Keith C. Long, Warner & Stackpole, Boston, MA, James V. O'Gara, Alan R. Kusinitz, Patricia Oveis Kahn, Kelley, Drye & Warren, New York City, for Addamax Corp.

James C. Burling, Michelle D. Miller, Charles J. Gray, Peter A. Spaeth, Hale & Dorr, Boston, MA, for Open Software Foundation, Inc.

William L. Patton, Eric Jaeger, Ropes & Gray, Boston, MA, Richard H. Alpert, Digital Equipment, Maynard, MA, for Digital Equipment Corp.

Brian A. Davis, Robert S. Frank, Jr., Kevin P. Light, Nicholas J. Nesgos, Choate, Hall & Stewart, Boston, MA, Robert W. Sutis, Hewlett-Packard Co., Palo Alto, CA, Robert A. Skitol, Drinker, Biddle & Reath, Washington, DC, for Hewlett-Packard Co., Inc.

James B. Conroy, Donnelly, Conroy & Gelhaar, Boston, MA, for G2 Computer Intelligence, Inc.

MEMORANDUM

TAURO, Chief Judge.

Plaintiff, Addamax Corporation ("Addamax"), provides computer security programming to companies which manufacture and market computers. Defendant, Open Software Foundation, Inc. ("OSF"), is a nonprofit corporation created, in part, to produce an operating system for use in computers. Defendants, Digital Equipment Corporation ("Digital") and Hewlett-Packard Company ("HP"), develop and sell computer hardware and software. Both Digital and HP were original sponsors of OSF.

Addamax brings this action claiming that Defendants attempted to, and succeeded in, driving it out of a certain segment of the security software market in violation of Section 1 of the Sherman Act, 15 U.S.C. § 1, Section 7 of the Clayton Act, 15 U.S.C. §§ 14 and 18, Section 12 of the Massachusetts Antitrust Act, M.G.L. ch. 93, §§ 4 and 6, Section 2 of the Massachusetts Unfair Trade Practices Act, M.G.L. ch. 93A, §§ 2 and 11, and the common law of Massachusetts.

The parties agreed to try the issue of damages, jury waived, before the issue of liability. Presently before the court, therefore, is Addamax's claim that Defendants caused it to suffer damages in excess of $50 million.

The computer industry is inherently volatile. The incredible pace of technological innovation creates an environment in which companies without the ability to keep up are likely to fail. And so, the fundamental question presented in this litigation is whether the damage to Addamax's financial stability was caused by its own limitations or, instead, by the improperly anticompetitive conduct of Defendants.

I. COMPUTER INDUSTRY

A. Operating Systems

In order for a computer to work, three components are necessary: the hardware, software, and an operating system. The hardware includes the chips, the drives, and the hard-wiring. The software includes the programs that users wish to access. Computer novices best recognize software in the form of "discs."

Here, we are concerned with operating systems, the component that enables a computer's hardware to "read" its software. Without this connecting link, the hardware and software components are useless.

B. UNIX

One popular operating system is UNIX. UNIX can be used on many different types of computers. (Amended Complaint, ¶ 8). It is not difficult to convert software originally intended to run on one computer system using UNIX to another using UNIX. (Defense Exhibit 81 ("DX ____"); DX 2136 at 49989). Also, UNIX is "scalable." (Amended Complaint, ¶ 8). That is, it can be used, in various forms, on personal computers, mainframes, workstations, supercomputers, as well as other forms of computers. Id.

AT & T began licensing UNIX to general purpose¹ computer vendors in 1982. (Amended Complaint, ¶ 31). AT & T, at first, did not place many requirements on those wishing to obtain a license. Eventually, however, for a later version of UNIX, AT & T added restrictions to those wishing a license. (Lytle Deposition 6:1077-78; Bell Deposition 1:67). Prospective licensees had to agree to comply with the specifications found in the System V Interface Definition ("SVID"). Id. Eventually, pursuant to an agreement between Sun Microsystems, Inc. ("Sun") and AT & T, SVID included a requirement to use certain technology created by Sun. (Joint Exhibit 5 ("JX ____") at A017158).

C. Security Software

As of 1987, the sellers of computers recognized the need to include security programming with their products. (Comanor Tr.T. 11:137-142 ("Witness Tr. T.____: ")).

A company can submit its security software to the National Computer Security Center ("NCSC") for evaluation. (Chokhani Tr. T. Day 3: pp. 16-19). Software can receive ratings of A, B-3, B-2, B-1, C-2, C-1, and D, ranging from the most secure to the least secure. Id. at 3:19. Demand for B-level security software comes, for the most part, from the government. (Beare Tr. T. 5:18, 36-37). Commercial users tend not to need security software above the C-level. Id.

The Defense Intelligence Agency of the United States Department of Defense ("DIA") independently rates security software. (Alsberg Tr. T. 6:89). The DIA evaluates the software and decides whether it merits a Compartmented Mode Workstation ("CMW") rating. Id. A CMW rating is given to security software that meets B-1 standards and has some additional security features. (Chokhani Tr. T. 3:21-24; Alsberg Tr. T. 6:77; DX 478 at F025640).

II. INCEPTION OF ADDAMAX

In 1986, Dr. Peter A. Alsberg created Addamax. (Alsberg Tr. T. 4:6). He wanted to provide the users of the Ada programming language with software. Id. But, business did not flourish. Id. at 4:120-21; (Howe Tr. T. 2:102). There was little demand for the services and products that Addamax offered. (DX 2248 at 042739; DX 2018 at 014080). In 1987, having used up all of its available capital, Addamax withdrew from the business for which it was originally created. (Alsberg Tr. T. 4:120-21).

III. ADDAMAX ENTERS A NEW BUSINESS

Addamax then turned its attention to the production of B-1 level security software for UNIX based computer systems. (DX 2030). As Addamax knew, its new venture was very risky. (Alsberg Tr. T. 4:123; (DX 2046 at 042003)). It faced a limited market size, a narrow window of opportunity, a high cost of development, strong competition, and a weak cash flow. (Alsberg Tr. T. 4:122-125; DX 2030; DX 2036 at 024453-55; DX 2046; DX 2248 at 042776-77). Indeed, Addamax warned its investors of those risks, and of the consequential possibility of losing their investments. (DX 2018; DX 2248; DX 2248 at 042777).

"Start-up" companies are generally high risk propositions. (Howe Tr. T. 2:69). Addamax was typical. It faced a number of obstacles. For example, the government was the major buyer of B-1 security software. If that market disappeared Addamax faced large losses. (DX 2036 at 024453; Plaintiff Exhibit 252 ("PX ____") at 034236). Also AT & T already sold a B-1 security system for UNIX based systems. (DX 2050 at 045156). AT & T was a large corporation with many resources, and the creator and licensor of UNIX. Moreover, AT & T had announced that it was going to introduce a B-2 level security system. See (DX 2232; Alsberg Tr. T. 6:53-55). This led customers to purchase AT & T's B-1 product, with the expectation of a simple upgrade to B-2 technology. (Alsberg Tr. T. 6:61). Addamax, therefore, was at a great competitive disadvantage. (DX 2038 at 024878; DX 2018 at 014085).

Furthermore, the market for B-1 security was small and fleeting. (DX 2036; DX 2050; Wigel Deposition 1:108; DX 2046 at 041999; DX 2050 at 045156-57; DX 2036 at 024455; Grossman Deposition 1:25-36). As a result, Addamax's president warned that it might sell its B-1 product to only a small handful of customers. (Alsberg Tr. T. 4:125). Addamax was also aware that the lifespan of B-1 technology as a viable product was very short. (DX 2046; Alsberg Tr. T. 5:51-53, 56). It recognized that B-1 technology would soon give way to B-2 technology. Id.; (DX 2036). Yet it chose not to pursue the B-2 security system market. (Alsberg Tr. T. 4:125, 6:58-59; DX 246).

IV. OSF

In reaction to the agreement between Sun and AT & T to market UNIX specifically meant for Sun's computer hardware, certain UNIX licensees, with a large market share, formed OSF, (Howe Tr. T. 2:28, 32, 36; Comanor Tr. T. 8:21, 27, 31; Lytle Deposition 1:108, 5:793-94, 804-05, 6:1041-46; Bell Deposition 2:466; JX 25), and announced its formation on May 17, 1988.² PX 1210T. The plan was for OSF to create an operating system that would compete with the UNIX/ Sun technology partnership. Id. That plan led to the creation of the OSF/1 operating system. (DX 185).

OSF recognized the need for security technology for OSF/1, and accepted bids from both Addamax and SecureWare, Inc. ("SecureWare"), another producer of security software for UNIX. (JX 149). OSF, in December 1989, chose SecureWare to supply its B-1 security technology. (Alsberg Tr. T. 4:116).

V. PROBLEMS AT ADDAMAX

Addamax did not have a marketable version of its B-1 product, the B1st Kit, until June 1989. (DX 2043; DX 2761; Alsberg Tr. T. 5:67). This was much later than what Addamax had hoped for and, in fact, much later than Addamax considered necessary for success. (Alsberg Tr. T. 5:56; DX 2031; DX 2246 at 042014). It had originally expected to have its B-1 product available by the middle of 1988. DX 2046 at 041999. That deadline subsequently became a moving target, drifting to September 1988, December 1988, February 1989, and May 1989. (DX 2248 at 042760; DX 2249 at 042912; DX 2200 at 012947; DX 2175 at 005150). Addamax met none of these deadlines. Id.

The delay in producing a marketable B-1 product was caused by Addamax's own development, marketing, and business strategies. Addamax had to divert some of its professional staff, and stay development of a B-1 product, in order to keep promises made to customers who had signed...