In re IBM Peripheral EDP Devices, etc.

• Decision Date: 20 December 1979
• Docket Number: No. C-73-1832 RHS. MDL No. 163-RM.,C-73-1832 RHS. MDL No. 163-RM.
• Citation: 481 F. Supp. 965
• Parties: In re IBM PERIPHERAL EDP DEVICES ANTITRUST LITIGATION. TRANSAMERICA COMPUTER COMPANY, INC., a corporation, Plaintiff, v. INTERNATIONAL BUSINESS MACHINES CORPORATION, a corporation, Defendant.
• Court: U.S. District Court — Northern District of California

481 F. Supp. 965

In re IBM PERIPHERAL EDP DEVICES ANTITRUST LITIGATION TRANSAMERICA COMPUTER COMPANY, INC., a corporation, Plaintiff, v. INTERNATIONAL BUSINESS MACHINES CORPORATION, a corporation, Defendant.

No. C-73-1832 RHS. MDL No. 163-RM.

United States District Court, N. D. California.

October 18, 1979.

As Amended December 20, 1979.

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Richard J. Lucas, Orrick, Herrington, Rowley & Sutcliffe, San Francisco, Cal., for plaintiff.

William W. Vaughn, O'Melveny & Myers, Los Angeles, Cal., for defendant.

OPINION

SCHNACKE, District Judge.

I.

Plaintiff, Transamerica Computer Company, Inc. ("Transamerica"), has alleged that certain activities of Defendant, International Business Machines Corporation ("IBM"), violated Section 2 of the Sherman Act which forbids the monopolization or attempted monopolization of any part of trade or commerce.¹

An appreciation of the nature of the computer industry and the parties' respective roles is helpful to an understanding of, and indispensable to an evaluation of, that conduct.

Computers, like the punched card accounting equipment that preceded them, depend upon the capabilities of the electronic circuits. Because of the laws of physics involved, an electronic circuit, if properly designed, is capable of performing both arithmetic and logical functions. For instance, it is possible to design a circuit that will add two numbers together (an arithmetic function), and another circuit that will compare the result of the addition to a third number and choose between various alternatives on the basis of that comparison (a logical function). The sequence of arithmetic and logical functions that are to be performed is known as a program. With punched card accounting equipment, programs were "hard-wired", that is, the sequence of functions to be performed by the arithmetic and logical circuits was predetermined, and could only be altered by actually switching wires around within the machine.

In 1951, in response to the needs of the Bureau of the Census, Sperry Rand Corporation introduced the first stored-program computer, the Univac 1. This first computer differed from its predecessors in that it was possible easily to alter the program that determined the sequence of functions to be performed. No longer was it necessary to "hard-wire" the program; the sequence of functions desired could now be indicated to the computer through "softer" and more flexible means. A program could be punched into a series of cards and the content of those cards could then be read into the computer. The computer would turn to this data read in from the cards for instructions as to what arithmetic and logical functions it was to perform, and in what sequence. A program could be altered simply by altering a punched card, and new programs could be carried out merely by causing the machine to read in a different set of punched cards.

IBM offered its first electronic computer in 1953. That machine, like those offered by competitors, utilized vacuum tubes to perform the electronic circuit functions. Before long, this first generation of computers was outmoded by a second-generation whose transistorized circuits performed more economically and more reliably. In 1964, IBM announced a series of machines, the System/360; these were the first of the third generation computers. The 360s not only employed improved components (integrated circuits replace transistors), they also relied upon a single general design or architecture for a broad spectrum of machines. That meant that one computer was capable of efficiently performing both scientific and commercial tasks, and, perhaps most important, it meant that customers who outgrew their smaller machines could "migrate" to larger machines without the need to change their existing programs; the whole 360 family of computers was program-compatible to an unprecedented degree. As a result, System/360 was a tremendous commercial success.

In 1970 IBM announced its 370 system, a further significant improvement, and superior to the 360 system.

The new 370 system involved improved central processing units as well as new and improved peripherals. All of the acts Transamerica claims caused it damage were related to the introduction of the 370 system.

IBM is a supplier of computer systems, supplying all, or nearly all of the user's computing needs. It offers a wide range of services and products, both software and hardware.²

The hardware of a computing system consists of a central processing unit ("CPU"), which houses the arithmetic and logical electronic circuits, and a variety of peripheral gear.

The functions of peripherals include: storing data for later access by the CPU; feeding data into the CPU (input); and accepting data from the CPU (output). A machine capable of reading data on punched cards and transferring that data to the CPU is considered an input peripheral, while a printer attached to the CPU functions as an output peripheral. Some peripherals perform all three functions. Disk drives and tape drives are examples of peripherals capable of storing data, inputting data, and outputting data. Data is stored on disks and is "randomly" accessed very rapidly by an access arm with the capability of reading or writing data. The access arm can be made to move to a particular track on the disk where the data is to be read or written. Tape drives are used for reading and writing data sequentially. Random access of data on tape reels is impractical because it is so time consuming.

The tape and disk drives which attached to System/360 CPUs were a lucrative part of IBM's business, so lucrative in fact, that they attracted competition. In the late 1960's, several companies began marketing copies of IBM's tapes, disks and printers, which were "plug-compatible" with IBM CPUs. A user could simply unplug the IBM peripheral, substitute the cheaper copy, and plug it into the IBM CPU. The companies providing this new competition became known in the industry as plug-compatible manufacturers ("PCMs").

The PCMs enjoyed a tremendous success. They were offering equivalent or better performance at a substantial discount. But in order to sustain their growth the PCMs needed funds. Most computer systems were leased rather than sold. This meant that the PCMs were unable to realize a quick return on their capital investment; much of their capital was tied up in ownership of leased machines, an investment that would not be recouped for years. The PCMs needed money to finance the manufacture of machines to meet a growing demand as well as to pay for the engineering costs of developing new products. They sought financing from a variety of sources: the sale of equity and debt securities; bank loans; the use of leasing companies; and more complex arrangements.

Transamerica Computer Company, Inc., was incorporated in late 1967 as a wholly-owned subsidiary of Transamerica Corporation, a large non-bank financial conglomerate with wholly-owned subsidiaries in the insurance, auto rental, motion picture and other businesses. The parent was well financed, with nearly unlimited credit, and desired a "window to the computer industry." Transamerica made a number of ventures into computer related financing. The transactions central to this case are Transamerica's purchase of millions of dollars worth of on-lease tapes and disks from two PCMs, Marshall Industries ("Marshall") and Telex Corporation ("Telex").

These manufacturers leased their equipment to end users. After it was on lease, the equipment was "sold" to Transamerica under an arrangement by which the manufacturers were obligated to collect the rents, to service and maintain the equipment, and to remarket it as leases expired. Unlike some leasing companies which buy equipment, find users, collect rentals, etc., Transamerica had no function except to supply capital. In many cases the end users were unaware of Transamerica's ownership of their equipment, and, indeed, at various times there was considerable doubt as to whether specific equipment was owned by Transamerica or the manufacturer. The arrangements also contemplated that, after Transamerica had been reimbursed some agreed amount, further rental revenues would be shared between it and the manufacturer. There were two important reasons for this structuring of what was basically a financing arrangement. First, Transamerica expected that, as "owner" of the equipment, it would be permitted to take, for the substantial benefit of its parent, the investment tax credit then available under the tax laws. And, second, the manufacturers hoped to treat the transfers of title to Transamerica as sales, thus increasing their current profit picture, and aiding them in sales of their corporate stock. Neither of these benefits would have resulted if Transamerica had simply lent money to the manufacturer.

Telex and Marshall were but two of the companies which were successful in displacing IBM peripheral equipment by offering it at prices well below those IBM was charging. IBM responded to the PCM competition by offering certain of its own products at substantially reduced prices, and by offering its peripherals for lease on longer and better terms than it had previously. In addition, new CPUs were introduced that were incompatible with the PCMs' existing peripherals. These actions, and others described herein, are those that Transamerica contends were the means by which IBM monopolized and attempted to monopolize in violation of Section 2.

Following a seven month trial, a jury was unable to reach a unanimous verdict on any of the issues presented. The parties, before commencement of the trial, foresaw that possibility, and, stipulated that the case would be submitted to the Court for decision in the event of jury disagreement. (It might be well for the courts or Con...