Digidyne Corp. v. Data General Corp.

• Decision Date: 07 June 1984
• Docket Number: Nos. 81-4628,81-4671 and 82-4162,81-4667,s. 81-4628
• Citation: 734 F.2d 1336
• Parties: 1984-1 Trade Cases 66,053 DIGIDYNE CORPORATION, Fairchild Camera and Instrument Corporation, Plaintiffs- Appellants, v. DATA GENERAL CORPORATION, Defendant-Appellee. DIGIDYNE CORPORATION, Fairchild Camera and Instrument Corporation, Plaintiffs- Appellants, v. DATA GENERAL CORPORATION, Defendant-Appellee. DIGIDYNE CORPORATION, Fairchild Camera and Instrument Corporation, Plaintiffs- Appellees, v. DATA GENERAL CORPORATION, Defendant-Appellant. DIGIDYNE CORPORATION, Fairchild Camera and Instrument Corporation, Plaintiffs- Appellants, v. DATA GENERAL CORPORATION, Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1336

734 F.2d 1336

1984-1 Trade Cases 66,053

DIGIDYNE CORPORATION, Fairchild Camera and Instrument

Corporation, Plaintiffs- Appellants, v. DATA GENERAL CORPORATION, Defendant-Appellee.

DIGIDYNE CORPORATION, Fairchild Camera and Instrument

Corporation, Plaintiffs- Appellants, v. DATA GENERAL CORPORATION, Defendant-Appellee.

DIGIDYNE CORPORATION, Fairchild Camera and Instrument

Corporation, Plaintiffs- Appellees, v. DATA GENERAL CORPORATION, Defendant-Appellant.

DIGIDYNE CORPORATION, Fairchild Camera and Instrument

Corporation, Plaintiffs- Appellants, v. DATA GENERAL CORPORATION, Defendant-Appellee.

Nos. 81-4628, 81-4667, 81-4671 and 82-4162.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted May 10, 1983.

Decided June 7, 1984.

Jack C. Provine, Miller, Starr & Regalia, San Francisco, Cal., for Digidyne Corp.

Jack E. Brown, Brown & Bain, P.C., Phoenix, Ariz., for Fairchild Camera & Instrument Corp.

Stephen R. Steinberg, Reavis & McGrath, New York City, for defendant-appellee.

Appeal from the United States District Court for the Northern District of California.

Before BROWNING, Chief Judge, PECK ^* and ALARCON, Circuit Judges.

BROWNING, Chief Judge:

The issue presented for review is whether Data General's refusal to license its NOVA operating system software except to purchasers of its NOVA central processing units (CPUs) is an unlawful tying arrangement under section 1 of the Sherman Act, 15 U.S.C. Sec. 1 (1976) and section 3 of the Clayton Act, 15 U.S.C. Sec. 14 (1976). We conclude that it is.

I.

Defendant Data General manufactures a computer system known as NOVA. The system consists of a NOVA CPU designed to perform a particular "instruction set" or group of tasks, and a copyrighted NOVA operating system called RDOS containing the basic commands for operation of the system. Not all operating systems work with all CPUs. Plaintiffs produce emulator NOVA CPUs designed to perform the NOVA instruction set and thus to make use of defendant's RDOS.

Data General refuses to license its RDOS to anyone who does not also purchase its NOVA CPU. Plaintiffs allege that this constitutes an unlawful tying arrangement; the defendant's RDOS being the tying product, the NOVA instruction set CPU being the tied product.

Plaintiffs filed a number of actions alleging violations of section 1 of the Sherman Act and section 3 of the Clayton Act. The actions were consolidated. The issues of liability and damages were segregated for trial. This appeal is from a judgment on liability.

After extensive discovery, the parties filed cross-motions for summary judgment. The district court denied the motions, but found certain facts to be uncontroverted under Fed.R.Civ.P. 56(d). Trial, limited to the issue of defendant's economic power, resulted in a jury verdict for plaintiffs. Defendant's motion for judgment n.o.v. or for a new trial was granted. Plaintiffs appealed.

II.

A tying arrangement is illegal if it is shown to restrain competition unreasonably or is illegal per se, without such a showing, if certain prerequisites are met. Fortner Enterprises v. U.S. Steel Corp., 394 U.S. 495, 498-500, 89 S.Ct. 1252, 1256-1257, 22 L.Ed.2d 495 (1969) (Fortner I ). The prerequisites of per se illegality are: (1) separate products, the purchase of one (tying product) being conditioned on purchase of the other (tied product); (2) sufficient economic power with respect to the tying product to restrain competition appreciably in the tied product; and (3) an effect upon a substantial amount of commerce in the tied product. Fortner I, 394 U.S. at 499, 89 S.Ct. at 1256, Moore v. Jas. H. Matthews & Co., 550 F.2d 1207, 1212 (9th Cir.1977). These prerequisites were satisfied in this case. We therefore do not consider whether competition was in fact unreasonably restrained.

The district court properly granted summary judgment on the first and third of the required elements of a per se violation, holding that on the undisputed facts the NOVA instruction set CPU and defendant's RDOS are separate products and the volume of commerce in NOVA instruction set CPUs tied to the purchase of defendant's RDOS is substantial. In re Data General Corp. Antitrust Litigation, 490 F.Supp. 1089, 1104-07, 1116-17 (N.D.Cal.1980).

We adopt the district court's reasoning on these issues, adding that the court's analysis of defendant's "single product" claim is supported by the Supreme Court's recent discussion in Jefferson Parish Hospital District No. 2 v. Hyde, --- U.S. ----, 104 S.Ct. 1551, 1561-65, 80 L.Ed.2d 2 (1984). The undisputed facts summarized in the district court's opinion establish that a demand existed for NOVA instruction set CPUs separate from defendant's RDOS, and that each element of the NOVA computer system could have been provided separately and selected separately by customers if defendant had not compelled purchasers to take both. See also Klamath-Lake Pharmaceutical Association v. Klamath Medical Service Bureau, 701 F.2d 1276, 1289 (9th Cir.1983). ¹

The remaining element necessary to establish a per se violation--defendant's possession of sufficient economic power with respect to the tying product, defendant's RDOS--was tried to a jury and resolved in plaintiffs' favor. The district court erred in setting aside this verdict or, alternatively, ordering a new trial.

III.

One of the purposes of a per se rule is to avoid an "incredibly complicated and prolonged economic investigation ... to determine at large whether a particular restraint has been unreasonable." Northern Pacific Railway Co. v. United States, 356 U.S. 1, 5, 78 S.Ct. 514, 518, 2 L.Ed.2d 545 (1958). See also Jefferson Parish Hospital, 104 S.Ct. at 1560 n. 25. Although not requiring as extensive an inquiry as would be necessary to determine whether the tie-in violated the general standard of reasonableness, the district court held that plaintiffs "could not recover on the alleged tie-ins unless they identified and proved the relevant market for the tying and tied products." In re Data General Corp. Antitrust Litigation, 529 F.Supp. 801, 809 (N.D.Cal.1981). The trial that followed "focused upon the definition of the relevant markets" for the two products, which the Court characterized as the "critical issue," (id. at 806) and consumed forty-five days. Id. at 804.

The district court recognized that detailed market analysis was not required in a per se tying case prior to United States Steel Corp. v. Fortner Enterprises, Inc., 429 U.S. 610, 97 S.Ct. 861, 51 L.Ed.2d 80 (1977) (Fortner II ), but read that opinion as rejecting this approach in favor of a requirement of "some degree of market analysis even in a per se case." 529 F.Supp. at 808. The court relied particularly upon language in Fortner II, which states the question to be:

whether the seller has the power, within the market for the tying product, to raise prices or to require purchasers to accept burdensome terms that could not be exacted in a completely competitive market. In short, the question is whether the seller has some advantage not shared by his competitors in the market for the tying product.

429 U.S. at 620, 97 S.Ct. at 867.

From the district court's analysis of the asserted deficiencies in plaintiffs' proof, it appears the court read this statement as requiring proof of power to fix the price of the tying product in the whole of the relevant market as defined by the inquiry described in United States v. E.I. du Pont de Nemours & Co., 351 U.S. 377, 76 S.Ct. 994, 100 L.Ed. 1264 (1956), a monopolization case. In this the district court erred. Possession by the seller of such monopoly power is sufficient to establish per se illegality, but it is not required.

As the Supreme Court said in United States v. Loew's, Inc., 371 U.S. 38, 45, 83 S.Ct. 97, 102, 9 L.Ed.2d 11 (1962):

Market dominance--some power to control price and to exclude competition--is by no means the only test of whether the seller has the requisite economic power. Even absent a showing of market dominance, the crucial economic power may be inferred from the tying product's desirability to consumers or from uniqueness in its attributes. ⁴

This position was re-affirmed in the Fortner cases. In Fortner I:

The standard of "sufficient economic power" does not, as the District Court held, require that the defendant have a monopoly or even a dominant position throughout the market for the tying product. Our tie-in cases have made unmistakably clear that the 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....

... [T]he presence of any appreciable restraint on competition provides a sufficient reason for invalidating the tie. Such appreciable restraint results whenever the seller can exert some power over some of the buyers in the market, even if his power is not complete over them and over all other buyers in the market .... [D]espite the freedom of some or many buyers from the seller's power, other buyers--whether few or many, whether scattered throughout the market or part of some group within the market--can be forced to accept the higher price because of their stronger preferences for the product, and the seller could therefore choose instead to force them to accept a tying arrangement that would prevent free competition for their patronage in the market for the tied product. Accordingly, the proper focus of concern 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.

394 U.S. at 502-04, 89 S.Ct. at 1258-59 (emphasis added).

In Fortner II the Court reiterated that its prior decisions "do not require that the defendant have a monopoly or even a dominant position throughout the market for a tying product," 429 U.S. at 620 97 S.Ct. at 867, and approved a commentator's...