Greyhound Computer Corp., Inc. v. International Business Machines Corp.

Decision Date17 August 1977
Docket NumberNo. 72-2553,72-2553
Citation559 F.2d 488
Parties1977-2 Trade Cases 61,603 GREYHOUND COMPUTER CORPORATION, INC., Plaintiff-Appellant, v. INTERNATIONAL BUSINESS MACHINES CORPORATION, Defendant-Appellee.
CourtU.S. Court of Appeals — Ninth Circuit

Edward L. Foote, Edward J. Wendrow, Stephen B. Diamond, Winston, Strawn, Smith & Patteson, Chicago, Ill., argued, for plaintiff-appellant.

Thomas D. Barr, Frederick A. O. Schwarz, Jr., Cravath, Swaine & Moore, New York City, argued, for defendant-appellee.

Appeal from the United States District Court for the District of Arizona.

Before BROWNING, MOORE, * and WALLACE, Circuit Judges.

BROWNING, Circuit Judge:

Greyhound Computer Corporation brought this action against International Business Machines Corporation alleging IBM had monopolized or attempted to monopolize various markets in the electronic data processing industry in violation of section 2 of the Sherman Act, 15 U.S.C. § 2. Greyhound also charged IBM with breaching contracts to provide certain services in conjunction with the sale of computer equipment. After presentation of Greyhound's case the district court granted IBM's motion for a directed verdict. This appeal followed.

We affirm the directed verdict on the contract issue, but reverse and remand for trial of the monopolization and attempt to monopolize claims.

I. Factual Background and Standard of Review

The computer industry, which is little more than 25 years old, has witnessed the introduction of three (and possibly four) "generations" of equipment, each generation representing a major technological advance. The first computers, introduced in 1952, were built with vacuum tubes. The second generation, introduced in 1958, utilized transistor technology. In 1964 IBM introduced the third generation with the System 360 family of computers, employing integrated circuits and other advances. In 1970 IBM announced an improved third (or possibly fourth) generation, the System 370 line. Because the electronic components of second and third generation equipment are virtually indestructible, the life of this equipment is a function of price and technological obsolescence rather than wear from usage.

A computer system consists of a central processing unit (or "mainframe") and peripheral equipment. Peripheral equipment includes means for storing information such as disk and tape drives, and input and output devices such as printers and terminals. Programmed instructions, or software, must be designed to enable the equipment to perform particular functions. Computer systems vary greatly in size and capacity to perform specified tasks.

IBM manufactures entire computer systems, including mainframes and peripherals. It also provides software and support services to its customers. Like other manufacturers, IBM both leases and sells its computers.

Greyhound is a leasing company; it does not manufacture computers. It buys computers from others and leases them in competition with computer manufacturers and other leasing companies. 1

Greyhound is both a customer and competitor of IBM. Greyhound's antitrust claim is that IBM restricted sales of its computer equipment in order to monopolize the leasing market in which Greyhound competes. Greyhound's contract claim is that IBM breached an obligation to provide services to Greyhound's lessees.

The district court granted the motion for a directed verdict on the antitrust claim because (1) the evidence was insufficient to establish a relevant market and IBM's share of the market; (2) the evidence was insufficient to establish IBM's control of a market; (3) the share of any market IBM holds "has been achieved as a result of superior skill, foresight, and industry"; (4) IBM's activity of which Greyhound complains was a competitive response to economic factors over which IBM had no control; and (5) Greyhound's damages were "purely speculative." The court directed the verdict on the contract claim because the evidence was insufficient and because the claim was barred by the parol evidence rule, the statute of frauds, and local rules of court.

The standard on review of a directed verdict favors Greyhound. We are "bound to view the evidence in the light most favorable to (Greyhound) and to give it the benefit of all inferences which the evidence fairly supports, even though contrary inferences might reasonably be drawn." Continental Ore Co. v. Union Carbide, 370 U.S. 690, 696, 82 S.Ct. 1404, 1409, 8 L.Ed.2d 777 (1962). 2

II. Monopolization

"The offense of monopoly under § 2 of the Sherman Act has two elements: (1) the possession of monopoly power in the relevant market and (2) the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident." United States v. Grinnell Corp., 384 U.S. 563, 570-71, 86 S.Ct. 1698, 1704, 16 L.Ed.2d 778 (1966). 3

A. The Relevant Market

Greyhound's major contention is that IBM has monopolized or attempted to monopolize a submarket for leasing general purpose digital computers for commercial application. Greyhound also contends that IBM has monopolized or attempted to monopolize a separate submarket for IBM's own product line.

The question is whether Greyhound offered evidence from which the jury could have reasonably concluded that the submarkets which Greyhound defined were sufficiently distinct in commercial reality to permit a company that dominated these submarkets to exclude competition and control prices. This depends upon whether efforts to exclude competition or control prices in the submarkets in question would be negated by a shift of buyers to other portions of the market. 4

IBM does not challenge the adequacy of Greyhound's evidence to establish a market limited to general purpose digital computers for commercial applications. It does argue, however, that the evidence will not support a finding that leasing constitutes a separate submarket. IBM also contends that the record does not establish a submarket defined exclusively in terms of IBM's product line.

From the record the jury could have concluded that the market for general purpose computers for commercial applications was distinguishable economically from the market for "dedicated application" computers or other general purpose systems, including minicomputers, process control computers, and large scientific computers. 5 Greyhound offered evidence that other computers are not reasonably interchangeable with general purpose commercial systems, and that no significant substitution in fact takes place. 6 Other evidence indicated that computer systems manufacturers tend to specialize in but one of these types of computers, that the industry and its customers recognized these categories of computers, and that the various categories have distinct prices and distinct sets of competitors employing different marketing techniques. See Brown Shoe Co. v. United States, 370 U.S. 294, 325, 82 S.Ct. 1502, 8 L.Ed.2d 510 (1962). 7 This evidence was sufficient to support a jury conclusion that the market for general purpose computer systems for commercial applications constitutes a relevant market for antitrust purposes.

It is a closer question whether the evidence would permit a jury finding that leasing general purpose computers for commercial applications constituted a submarket economically distinct from others in which such computers are made available to users. We conclude, however, that such a finding would have been justified.

No rule of law or economic principle bars application of section 2 of the Sherman Act to one of several alternative means of distributing a product. The statute prohibits monopolization of "any part" of interstate or foreign commerce. Accordingly, the Sherman Act and other antitrust statutes have been applied to protect competition in one of alternate channels of distribution. 8

The record indicates that data processing services are distributed to users by: (1) sale of computer systems, (2) lease of computer systems, (3) time-sharing, 9 or (4) contracting with service bureaus. 10 The latter two are the most clearly discrete. There was ample evidence that service bureaus and time-sharing arrangements do not provide an acceptable alternative to those who might buy or lease computer systems. Greyhound offered testimony that time-sharing and service bureaus are addressed to needs different from those served by an installed computer, 11 that purchasers and lessees of computers do not consider service bureau and time-sharing arrangements an acceptable substitute, and that leasing companies do not consider suppliers of these services to be their competitors.

The evidence is not so clear that leasing general purpose computers constitutes a market distinct from selling. Considering the weighty presumption in favor of a jury determination, however, we conclude the evidence was sufficient.

Leases and sales serve different customer needs. Greyhound offered testimony that general purpose commercial computers are purchased by banks, insurance companies, and other businesses with predictable long-term data processing needs and the capacity to undertake long-term financial commitments. Computers are leased by customers that have variable business requirements and a need to keep abreast of advancing technology. A single company with a variety of problems may purchase a computer to perform one task and lease a computer to perform another. 12 Because lessees retain the option to cancel (albeit at some penalty), even the long-term lessee has a degree of flexibility unavailable to the purchaser. IBM's senior vice president testified that, at least with some models, the decision to purchase or lease may not be affected by price changes. On this record a jury could infer that the need for flexibility governed the choice between a lease and purchase, and that there was substantial customer resistance to...

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