U.S. v. Sungard Data Systems, Inc.

• Decision Date: 14 November 2001
• Docket Number: No. 01-02196(ESH).,01-02196(ESH).
• Citation: 172 F.Supp.2d 172
• Parties: UNITED STATES of America, Plaintiff, v. SUNGARD DATA SYSTEMS, INC., et al., Defendants.
• Court: U.S. Court of Appeals — District of Columbia Circuit

172 F.Supp.2d 172

UNITED STATES of America, Plaintiff, v. SUNGARD DATA SYSTEMS, INC., et al., Defendants.

No. 01-02196(ESH).

United States District Court, District of Columbia.

November 14, 2001.

N. Scott Sacks, Kent R. Brown, U.S. Department of Justice Antitrust Division, Washington, DC, for Plaintiff.

Stephen M. Axinn, John D. Harkrider, Michael L. Keeley, Axinn, Veltrop & Harkrider LLP, New York City, J. Mark Gidley, Frank A. Vasquez, Jr., White & Case LLP, Washington, DC, for Defendant SunGard Data Systems Inc.

Neal R. Stoll, Linda SooHoo, Skadden, Arps, Slate, Meagher & Flom LLP, New York City, for Defendant Comdisco, Inc.

REDACTED MEMORANDUM OPINION

HUVELLE, District Judge.

Plaintiff, the United States of America, has filed suit pursuant to Section 15 of the Clayton Act, 15 U.S.C. § 25, to enjoin SunGard Data Systems, Inc. ("SunGard") from acquiring the disaster recovery solutions assets of Comdisco, Inc. ("Comdisco") on the grounds that the acquisition would substantially lessen competition in the market for shared hotsite disaster recovery services for mainframe and midrange computers, in violation of Section 7 of the Clayton Act, 15 U.S.C. § 18.

Defendants have set forth a series of arguments in opposition to the government's complaint. First, defendants dispute the government's narrow definition of the relevant product market. Contending that the appropriate market is not simply shared hotsite services, but the entire continuum of disaster recovery services, defendants assert that the proposed acquisition will not substantially lessen competition in this broader product market. Second, defendants argue that, even assuming that the government has established a presumption that the acquisition would violate the Clayton Act, the transaction will not actually produce an anticompetitive effect. Defendants offer six theories in support of this argument: 1) plaintiff's statistics regarding the product market are unreliable because they do not reflect the rapidly changing technologies in the disaster recovery industry; 2) price discrimination would not be profitable for the new entity under a Critical Loss analysis, because of the risk of losing too many existing customers; 3) SunGard and Comdisco are not in competition for the vast majority of customers, and therefore, then merger will have only a minimal anticompetitive effect; 4) there are a host of domestic and foreign companies that are poised to enter the market due to the low barriers to entry; 5) defendants' knowledgeable and sophisticated customers would impede the exercise of market power by the new entity; and 6) the efficiencies resulting from the transaction will actually cause prices to drop and service to improve.

The proposed acquisition has been postponed by agreement of the parties pending the Court's decision. After thorough consideration of the parties' briefs; the exhibits, testimony, and arguments presented by the parties at an expedited trial on November 8 and 9, 2001; and the proposed findings of fact and conclusions of law submitted by the parties; and for the reasons set forth herein, the Court will deny the plaintiff's request for permanent injunctive relief. This Memorandum Opinion constitutes the Court's findings of fact and conclusions of law.

BACKGROUND

I. The Disaster Recovery Industry

To state the obvious, today's society relies extensively on computer systems in order to function effectively. Many entities, both private and public, run applications on IBM mainframe and other high-end computing platforms because the operations they perform require the high levels of performance and reliability provided by these systems. The functions that these computer platforms typically perform include processing and storing transaction information, maintaining customer accounts, controlling production resources, inventory and shipping, and maintaining financial and administrative records.

As the tragic events of September 11, 2001 demonstrate, the possibility of a disaster that destroys or disables an entity's computer capacity is a contingency for which a prudent business should be prepared. For a computer system, however, disasters need not be on the grand scale of a terrorist attack, fire, or earthquake to cause serious disruptions; network, hardware, or operational failures can also irreparably damage a company's computer system. Because of the essential role that computer applications play in the operation of any business, many companies have come to rely on a disaster recovery plan to reduce the potentially devastating impact of a disaster on their computer system. Disaster recovery vendors fill this need by selling a variety of services that enable the restoration of computer applications at another location if a natural disaster, major power outage, or other event causes their customer's primary data centers to become unavailable.

Computer applications vary both in terms of the types of computer platforms on which they run¹ and the degree to which they are mission-critical. In particular, these applications have different "recovery time objectives" ("RTOs"). Some applications are so critical that they require virtually instantaneous recovery; for some it is sufficient that they be restored within a few days; and for others restoration within a week or more will suffice. Accordingly, different types of disaster recovery services exist to meet these varying needs.

A. Hotsite Services

1. Shared Hotsites

Shared hotsite services are a widely-used disaster recovery system sold by vendors to companies that depend on main-frames and other high-end platforms. Because hotsites are shared by multiple clients, they provide cost-effective disaster recovery for large companies.² Three vendors in North America provide the vast majority of shared hotsite services to companies that use large-scale mainframe and midrange data processing centers — defendants SunGard and Comdisco, and IBM. Approximately 7,500 North American customers currently use external shared hotsite services provided by defendants. (See Def. Ex. 151, Declaration of James Simmons ("Simmons Decl.") ¶ 13; Gov. Ex. 106, Sullivan Dep. at 74.)

Shared hotsite services are remote facilities that have a wide variety of computer systems and communication facilities that are needed for a client to recover its business applications should its own data center become unavailable. A shared hotsite enables a customer to replicate its own computer center at a separate location, thereby avoiding the risk that the hotsite will also be disabled by a regional disaster. Most shared hotsites service business applications with RTOs ranging from 24 to 96 hours.

Shared hotsite services rely on back-up tapes of a client's data center, which are recorded and maintained at a third location. When disaster strikes a client's data center, those back-up tapes are taken from the third location to the hotsite. Once delivered, the client's personnel and hotsite technicians load the software onto the computers at the hotsite, transfer the back-up tapes onto the hotsite's computer storage systems, and commence operations. This process generally requires between 24 and 96 hours, and hotsite vendors typically allow customers to use the facility for up to six weeks.³

Because only a small number of customers are likely to experience a disaster at any given time, hotsite vendors sell the same physical assets and services to many customers, which "share" the hotsite, thereby reducing the cost. If multiple simultaneous disasters occur, hotsite vendors either make their facilities available on a first-come, first-served basis, or they allocate their capacity among customers. Clients can also use alternate hotsites run by the same vendor if that customer's primary hotsite is occupied.

2. Internal Hotsites

An internal hotsite performs the same functions and satisfies the same RTO as a shared hotsite, but the hotsite facility is owned by the company itself, rather than by an external vendor. This solution typically involves a company sending daily back-up tapes to a remote location — whether to a second office in another city, or to a computer records management company, such as Iron Mountain, which stores about 100 million reels of magnetic tape and has approximately 40 percent of the outsourced records management business in the United States. (Def.Ex. 96.) Internal hotsites require a business to own a second computer processing system, although this can be part of a business' infrastructure.

B. Other Disaster Recovery Services

The parties have identified five other forms of business continuity services — quick-ship services, coldsites, work area recovery, mobile hotsite recovery, and high availability services (also known as dedicated recovery services) — that are relevant to this proceeding.

1. Quick-Ship Services

Quick-ship services ship computer equipment to locations designated by the customer within a specified time, but do not set up or provide support for the equipment, instead, the client retains these responsibilities. RTOs for quick-ship services vary dramatically, depending on the vendor and computer equipment: the Hewlett-Packard Company ("HP") has a policy of quick-shipping systems within six hours (Def. Ex. 143, Deposition of Brian Fowler ("Fowler Dep.") at 25), while quick-shipment of large systems may take up to one week. Plaintiff acknowledges that some small midrange computers can be shipped and installed to meet the same RTO as a shared hotsite. (Complaint ¶ 17.)

2. Coldsites

Coldsites are computer-ready facilities that contain the temperature control and communication links suitable for a data center, but do not contain any computer hardware. Unlike hotsites, coldsites require clients to supply, install, and configure the computer equipment necessary to replicate their data center. The process of shipping and configuring the necessary computer systems is time-consuming....