Allen-Myland, Inc. v. Intern. Business Machines

• Decision Date: 21 July 1988
• Docket Number: Civ. A. No. 85-6166.
• Citation: 693 F. Supp. 262
• Parties: ALLEN-MYLAND, INC. v. INTERNATIONAL BUSINESS MACHINES CORPORATION.
• Court: U.S. District Court — Eastern District of Pennsylvania

693 F. Supp. 262

ALLEN-MYLAND, INC. v. INTERNATIONAL BUSINESS MACHINES CORPORATION.

Civ. A. No. 85-6166.

United States District Court, E.D. Pennsylvania.

July 21, 1988.

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Bancroft Haviland, Philadelphia, Pa., Robert G. Levy, Berryl Speert, Allan Hillman, Cynthia Leppert, Frank, Bernstein, Conaway & Goldman, Baltimore, Md., for Allen-Myland, Inc.

Sandra K. Manning, Cravath, Swaine & Moore (pro hac vice), Richard A. Solomon, Robert J. Marvin, Jr., Davis, Markel & Edwards, New York City, Conrad & O'Brien, Philadelphia, Pa., Robert N. Feltoon, Kaare Phillips, Evan R. Chesler, Richard W. Clary, Eric M. Nelson, Cravath, Swaine & Moore, New York City, Steven M. Edwards, Howard Weber, Davis, Markel, Dwyer & Edwards, James Szymanski, Paula L. Liang, New York City, for Intern. Business Machines Corp.

MEMORANDUM

O'NEILL, District Judge.

AMI brought this action asserting federal and state law claims against IBM,¹ which filed several counterclaims.² The parties agreed to try the liability aspect of AMI's claim under Section 1 of the Sherman Act³ separately. AMI's claim has two parts:⁴ AMI alleges that IBM's net pricing policy constitutes an unlawful tying arrangement and that IBM's Installation and Warranty Service Charge constitutes an unreasonable restraint of trade. The issues were tried before me non-jury;⁵ this memorandum constitutes my findings of fact and conclusions of law. See Fed.R.Civ.P. 52(a). Jurisdiction over the Section 1 claims is based on 28 U.S.C. § 1337. Suit is brought pursuant to Section 4 of the Clayton Act, 15 U.S.C. § 15.

NET PRICING

An IBM 308X net priced upgrade is an MES (Miscellaneous Equipment Specification) or feature (a specific set of computer products) that is installed in an IBM model 308X computer by removing parts from the computer and replacing them with different parts. Ritchie, Tr. 1076-77; Rizzo, Tr. 1188-90. Generally, the purpose of any up grade (308X upgrades included) is to enhance the performance of the computer, often to increase the capabilities of a used computer to match the performance level of a newer model. Upgrades include model upgrades (MIPS upgrades), increases in memory capacity (memory upgrades), and increases in the number of computer channels (channel upgrades). See Ritchie, Tr. 1077; Bigando, Tr. 1232; Lynn, Dep.Tr. 62.

IBM 308X net priced upgrade contracts provide that the installation and removal of parts is to be performed by IBM employees, and that the removed parts become the property of IBM and are returned to the company.⁶ Ritchie, Tr. 1086-87; Rizzo, Tr. 1188-90; Levin, Tr. 78-80, 744; PX 139; PX 140; PX 138. IBM issues its net priced upgrade customers a credit for the parts removed by IBM engineers during the installation of a net-priced MES. E.g., Levin, Tr. 78; PX 457; PX 145. A customer who purchases a net priced upgrade from IBM is not charged separately for the labor associated with performing the upgrade. See DX 829. The customer receives a single price quotation for the final, installed product.⁷

IBM's 308X product line consists of 14 models with a performance power range of 3 to 30 million instructions per second (MIPS), and a price range of $960,000 (3083E) to $6,300,000 (3084Q). See DX 1799. Upgrades are net priced only if they involve the removal and return of parts (such as TCMs)⁸ from the upgraded computer. The majority of MIPS upgrades,⁹ see Levin, Tr. 78, and numerous memory upgrades¹⁰ are net priced by IBM.

Upgrades which do not require the removal of TCMs or other parts (such as the 3083J to 3081K model upgrade) are not net priced and are optionally available from IBM on an SWRPQ basis; i.e., without IBM's labor included.¹¹ An upgrade purchased on an SWRPQ basis may be installed by third parties, such as AMI, or by IBM, if the customer chooses and pays for the service. All 308X channel upgrades and many memory upgrades are available on an SWRPQ basis.

AMI asserts that IBM's net pricing of 308X upgrades constitutes an unlawful tying arrangement under Section 1. As ultimately defined by AMI, the alleged tying product consists of the IBM parts necessary to fabricate and install the equivalent of 308X net priced upgrades, and the tied product consists of the engineering services involved in the fabrication and installation of such upgrades.¹² AMI's Post-Trial Reply Memorandum of Law (hereinafter "A.R.M.") at 9.

I.

A tie exists when a seller refuses to sell a product (the tying product) alone and insists that any buyer who wants it must also purchase another product (the tied product). See L. Sullivan, Handbook of the Law of Antitrust § 150, at 431 (1977). "The Sherman Act does not prohibit `tying', it prohibits `contracts ... in restraint of trade'." Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 21 n. 34, 104 S.Ct. 1551, 1563 n. 34, 80 L.Ed.2d 2 (1984). Only a tying arrangement which imposes an unreasonable restraint of trade is unlawful.

Certain tying arrangements are per se unlawful under the antitrust laws; that is, they are deemed unreasonable as a matter of law and "no specific showing of unreasonable competitive effect is required." Fortner Enterprises v. United States Steel, 394 U.S. 495, 498, 89 S.Ct. 1252, 1256, 22 L.Ed.2d 495 (1969) ("Fortner I"); see generally Northern Pacific Railway Co. v. United States, 356 U.S. 1, 5, 78 S.Ct. 514, 518, 2 L.Ed.2d 545 (1958) (respecting per se unlawful arrangements in general: "There are certain agreements or practices which because of their pernicious effect on competition and lack of any redeeming virtue are conclusively presumed to be unreasonable and therefore illegal without elaborate inquiry as to the precise harm they have caused or the business excuse for their use.").¹³ A tying arrangement which does not warrant per se condemnation may be found to violate the Sherman Act under a rule of reason analysis.¹⁴Hyde, 466 U.S. at 17-18, 104 S.Ct. at 1560-61; Bogus v. American Speech & Hearing Ass'n, 582 F.2d 277, 287 (3d Cir.1978). Per se rules and the rule of reason are mechanisms "employed `to form a judgment about the competitive significance of the restraint.'" NCAA 468 U.S. at 103, 104 S.Ct. at 2961 (quoting National Soc'y of Prof. Engineers v. United States, 435 U.S. 679, 692, 98 S.Ct. 1355, 1365, 55 L.Ed.2d 637 (1978)).

II.

AMI contends that IBM's net pricing of 308X upgrades is per se unlawful. A.M. at 15. To establish a per se tying violation, plaintiff must show: 1) the existence of two separate and distinct products or services and an agreement conditioning the sale of the tying product to the purchase of the tied product; 2) that the seller possesses sufficient economic power with respect to the tying product to restrain free competition appreciably in the market for the tied product; and 3) that the seller has thereby foreclosed a "not insubstantial" amount of interstate commerce in the tied product. See, e.g., Hyde, 466 U.S. 2, 104 S.Ct. 1551; Fortner I, 394 U.S. 495, 89 S.Ct. 1252; Columbia Pictures Indus. v. Redd Horne, Inc., 749 F.2d 154 (3d Cir. 1984); Bogus, 582 F.2d 277 (3d Cir.1978). The Supreme Court's decision in Hyde, 466 U.S. 2, 104 S.Ct. 1551, suggests that an inquiry into the legality of a tying arrangement under the per se rule requires an elaborate economic analysis.

I conclude that IBM's net pricing policy does not warrant per se condemnation. AMI has failed to establish that IBM possesses the requisite market power. AMI has also failed to prove that it, or anyone, has been foreclosed from a viable business opportunity as a result of IBM's conduct.¹⁵ My finding that AMI has not been deprived of a viable business opportunity implicates several of the concerns underlying the Sherman Act and the per se rule against tying in particular.

A.

Application of the per se rule against tying requires proof that the seller possesses economic power in the market for the tying product. The degree or form of economic power which must be established has been described in various ways. The Supreme Court, however, has consistently held that proof of the existence of monopoly power is not required.

In Times-Picayune Publishing Co. v. United States, 345 U.S. 594, 611, 73 S.Ct. 872, 882, 97 L.Ed. 1277 (1953), in an attempt to define the requisite economic power, the Court referred to "the wielding of monopolistic leverage", or the exploitation by a seller of "his dominant position in one market to expand his empire into the next." This language was "construed" in Northern Pacific as requiring only "sufficient economic power to impose an appreciable restraint on free competition in the tied product." 356 U.S. at 11, 78 S.Ct. at 521. "The source from which the power is derived and whether the power takes the form of a monopoly or not" were said to be irrelevant. Id. In Fortner I, the Court explained that "economic power over the tying product can be sufficient even though the power falls far short of dominance and even though the power exists only with respect to some of the buyers in the market." 394 U.S. at 502-03, 89 S.Ct. at 1258. For purposes of assessing economic power, the Court stated that the proper focus is "whether the seller has the power to raise prices, or impose other burdensome terms such as a tie-in, with respect to any appreciable number of buyers within the market."¹⁶ 394 U.S. at 504, 89 S.Ct. at 1259. In United States Steel Corp. v. Fortner Enterprises, Inc., 429 U.S. 610, 620, 97 S.Ct. 861, 867, 51 L.Ed.2d 80 (1977) ("Fortner II"), the Court repeated that there is no requirement "that the defendant have a monopoly or even a dominant position throughout the market for a tying product." Instead, the focus of attention is on "whether the seller has the power, within the market of the tying product, to raise prices or to require purchasers to accept burdensome terms that could not be exacted in a completely competitive market." Id. (footnote omitted). "In...