UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

UNITED STATES OF AMERICA,

Plaintiff,

-against- Civil Action

No. 72-344 (AGS)

INTERNATIONAL BUSINESS MACHINES

CORPORATION,

Defendant.

UNITED STATES' PRELIMINARY STATEMENT OF ISSUES

Kent Brown (KB-5429)

Sanford Adler (SA- )

James J. Tierney (JT- )

Ian Simmons (IS-7468)

U.S. DEPARTMENT OF JUSTICE

Antitrust Division

555 4th Street, N.W.

Suite 9901

Washington, DC 20001

(202)

Attorneys for Plaintiff

David Turetsky

Counselor to the Assistant Attorney General

Rebecca P. Dick

Deputy Director of Operations

N. Scott Sacks

Assistant Section Chief, Computers and Finance

July 19, 1995

Table of Contents

I. INTRODUCTION	1

II. BACKGROUND	2

III. AN INDEPENDENT PURPOSE OF THE JUDGMENT IS TO CONSTRAIN IBM'S EXERCISE OF MARKET POWER IN THE COMPUTER INDUSTRY	6

A. The Purpose Of The Decree Was To Terminate IBM's Monopoly And Prohibit Practices That Might Result In Monopolization	6

B. The Judgment Has Consistently Applied Unambiguously And Independently To IBM's Conduct In The Computer Industry	7

C. The Parties' Contemporaneous Statements And The Circumstances Of The Judgment Negotiations Confirm That The Decree Applies Independently To Computers	9

IV. IBM HAS THE BURDEN OF PROVING THAT CONTINUATION OF THE JUDGMENT WOULD BE DETRIMENTAL TO THE PUBLIC INTEREST IN COMPETITION	17

A. The Public Interest Requires That The Judgment Not Be Terminated Until Its Purposes Have Been Fully Achieved	17

B. If The Government Consents To Termination Or Modification, The Court's Public Interest Review Is Limited To Whether The Government Has Offered A Reasoned And Reasonable Explanation For Its Consent	21

C. If The Government Opposes Termination, IBM Must Demonstrate That Continuation Of The Judgment Would Be Detrimental To The Public Interest In Competition	22

V. IBM CANNOT SATISFY ITS BURDEN WITHOUT THE REQUISITE MARKET ANALYSIS	23

A. Market Definition Principles	25

B. If IBM Has Market Power In Any Primary Market Or Aftermarket, The Court Must Assess Whether The Decree Constrains The Exercise Of That Market Power	28

1. IBM May Possess Market Power in the Market for System 390 Mainframes and Software.	30

2. IBM May Possess Market Power in the Aftermarkets for Service and Parts of System 390 Mainframes and AS/400 Mid-range Computer Products	34

C. IBM's Arguments Do Not Address The Central Issue of Whether Termination of the Judgment Would Harm the Public Interest In Competition.	40

I. INTRODUCTION

Pursuant to the Court's request at the June 19, 1995 hearing, the government respectfully submits this preliminary statement of the issues. We write this statement prior to the requisite discovery of the issues raised by the motion of International Business Machines Corporation ("IBM") to terminate the final judgment in this case (the "judgment" or "decree"), and thus will seek to modify or supplement our views should the need arise. The purpose of this statement is to set forth the legal and factual issues raised by the motion to terminate. Specifically, by this submission we wish to underscore that:

(1) to satisfy its burden for obtaining unilateral termination of the judgment in its current application to any market, IBM must show that continuation of the judgment would be detrimental to the public interest in competition in that market. Accordingly, any assessment of the impact of termination can be made only in the context of an analysis of current market conditions, and any relief must be suitably tailored to the harm that IBM demonstrates;

(2) by its own terms, the decree applies to electronic data processing (viz., the computer industry) and IBM's emphasis on the complaint's focus on tabulating machines is misguided;

(3) IBM's arguments and factual assertions in its various memoranda and in-court statements fail to provide for a meaningful competitive analysis of the likely effect of judgment termination and present an incomplete portrait of the circumstances leading up the decree;

(4) despite IBM's failure to address the issues in a manner that allows for a meaningful competitive analysis of the effect of judgment termination, the government concurs that the judgment should be terminated to the extent that it no longer serves to promote the public interest in competition. Below, we identify the areas where tentatively we do not object to appropriate limitations on the judgment, subject to our having an opportunity to evaluate public comments. We also identify the areas as precisely as possible where our continuing investigation suggests that termination of the judgment could threaten the public interest in competition; and

(5) we still need substantial information to reach a definitive position on the issues raised below and thus we propose a plan that will enable us to complete our investigation of the complex competitive issues posed by IBM's motion with the aid of the Court's discovery process.

II. BACKGROUND

At the outset, we note that on the basis of our inquiry to date and subject to our review of public comments, we will not oppose termination of decree Sections V(b)-(c)(which concerns IBM's obligations to offer to sell to used equipment dealers computers that it obtains in trade) and VIII (which creates standards for the operation of IBM's service bureau business). Moreover, we will not oppose termination of the remaining provisions of the decree insofar as they apply to products and services that are outside the System 360-390 or AS/400 families of products. Thus, we would not oppose termination insofar as the decree now applies to all of IBM's current PC computer products. We will not further address these judgment sections or products in this memorandum, but we note that IBM appears to base its termination motion primarily on arguments about the sections or products that we are willing to terminate.

The judgment was entered on January 25, 1956, four years after the government's complaint had charged that IBM engaged in longstanding monopolization and attempted monopolization and agreements in restraint of trade in the tabulating industry, in violation of Sherman Act sections 1, 2, 15 U.S.C §§ 1-2. (Complaint § IV, ¶ 45 (U.S. Selected Docs. tab 1)). Many sections of the judgment were intended to be temporary and have terminated by their own terms. See IBM's Preliminary Statement of Issues (dated June 6, 1995) ("IBM Prelim.") at 26 n. 24. The remaining sections were intended to apply perpetually, and the judgment contains no express or implied provision for termination of those sections. Below, we describe those remaining provisions to which we have not consented to termination.

The judgment applies to all of IBM's computer hardware products and to its operating system software products that are necessary for operation of any particular computer or computer system, as provided in the definitions of "Electronic data processing system" (EDP system) and "Electronic data processing machine" (EDP machine or equipment) (Decree §§ II(e)-(f)).

Section IV of the judgment enjoined IBM's longstanding lease-only policy. Among other things, it requires IBM to offer computers for sale at prices and on terms and conditions that are not substantially more advantageous to IBM than lease charges and that have a commercially reasonable relationship to the lease charges for such computers. (Decree §§ IV(a), (c)(2)).

Section V(a) enjoins IBM from acquiring used IBM computers owned by persons other than IBM except as a trade-in on the purchase of a new computer or as a credit against a debt owed to IBM. This section does not prohibit IBM from reacquiring possession to computers that it has been leasing to any customer.

Section VI prohibits IBM from discriminating against owners of computers in favor of lessees. Section VI(a) requires IBM to provide without separate charge the same type of services, except repair and maintenance, that it provides to lessees without separate charge. Section VI(b) generally requires IBM to provide at reasonable and nondiscriminatory prices and terms repair and maintenance services for computer owners. Section VI(c) requires IBM to sell computer repair and replacement parts and subassemblies at reasonable and nondiscriminatory prices to IBM computer owners and third party computer repair companies for as long as such parts are available for use in its leased machines.

Section VII(b) enjoins IBM from requiring any IBM computer lessee or purchaser to disclose the use of its computer. Section VII(c) enjoins IBM from requiring that any IBM computer purchaser obtain from IBM repair and maintenance or repair parts. Section VII(d)(2)- (3) restricts IBM from limiting the ability of IBM consumers to experiment with their computers or to make alterations in or attachments to those computers.

Section IX(b) requires IBM to provide at reasonable and nondiscriminatory charges to IBM computer owners, third party repair and maintenance firms and distributors the same technical informational documents that it provides generally to its own repair and maintenance employees. Section IX(c) requires IBM to provide on a nondiscriminatory basis and at reasonable charges to IBM computer lessees and purchasers manuals, books of instruction and other documents pertaining to the operation or application of their computers.

Section XV(a) enjoins IBM from participating in agreements with its competitors or potential competitors in the computer industry to allocate markets or restrain imports into the United States or exports from the United States. Section XV(b) prohibits IBM from conditioning the sale or lease of one computer product on the purchase or lease of any other computer product.

III. AN INDEPENDENT PURPOSE OF THE JUDGMENT IS TO CONSTRAIN IBM'S EXERCISE OF MARKET POWER IN THE COMPUTER INDUSTRY

A. The Purpose Of The Decree Was To Terminate IBM's Monopoly And Prohibit Practices That Might Result In Monopolization

Although the complaint alleged that IBM had obtained and maintained a longstanding monopoly through a wide variety of exclusionary practices and anticompetitive agreements, the consent decree did not rely primarily on divestiture to disgorge IBM of its ill-gotten gains, restore competition and eliminate the threat of any future anticompetitive conduct. Nor did the decree prevent IBM from participating in other related businesses. Rather, it sought to encourage competition with provisions that constrain IBM's ability to exercise market power. Much of the judgment was patterned on the decree entered by Judge Wyzanski in United States v. United Shoe Machinery Corp., 110 F. Supp. 295 (D. Mass. 1953), aff'd per curiam, 347 U.S. 521, 745 S. Ct. 699 (1954); see also Allen-Myland, Inc. v. IBM, 746 F. Supp. 520, 547 (E.D. Pa 1990), vacated in part on other grounds, 33 F.3d 194 (3d Cir.), cert. denied, 115 S. Ct. 684 (1994); July 20, 1955 tr. at 22 (U.S. Selected Docs. tab 8); May 5, 1960 letter from Robert A Bicks to Murray A. Reiter (U.S. Selected Docs. tab 16).

B. The Judgment Has Consistently Applied Unambiguously And Independently To IBM's Conduct In The Computer Industry

IBM's suggestion that the continued viability of the judgment to the computer industry must be assessed in connection with its position (or lack of position) in the tabulating industry is an effort to rewrite the bargain to which it consented. The decree provisions that remain in effect today apply unambiguously to constrain its exercise of market power in the computer industry, as IBM concedes. (IBM Chron. at 27.). IBM would search in vain for any language in the judgment suggesting even faintly that the decline of the tabulating industry and IBM's position in it should or could support decree termination without regard to current market conditions in the computer industry.

IBM's argument that the "continuing viability of the 1956 IBM Consent Decree must be evaluated solely on the basis of the conduct and the market alleged in the 1952 complaint," (IBM Prelim. at 8), ignores the Supreme Court's admonition that the purposes of a consent decree must be determined by "the purposes of the litigation as incorporated in the decree ...." United Shoe, 391 U.S. at 248, 88 S. Ct. at 1499 (emphasis added). The Supreme Court recognizes that consent decrees embody compromises in which parties waive their rights to litigate the issues and seek language that furthers their own, often opposing interests as reflected by their respective bargaining power and skill:

For these reasons, the scope of a consent decree must be discerned within its four corners, and not by reference to what might satisfy the purposes of one of the parties to it. Because the defendant has, by the decree, waived his right to litigate the issues raised, a right guaranteed to him by the Due Process Clause, the conditions upon which he has given that waiver must be respected, and the instrument must be construed as it is written, and not as it might have been written had the plaintiff established his factual claims and legal theories in litigation.

United States v. Armour & Co., 402 U.S. 672, 681-82, 91 S. Ct. 1752, 1757 (1971).

As to IBM's fixation on the complaint as the sole guide for determining the purpose of the judgment, we acknowledge that Courts may rely on conventional "aids to construction" in interpreting ambiguous consent decree provisions. United States v. ITT Continental Baking Co., 420 U.S. 223, 238, 95 S. Ct. 926, 935 (1975). "Extrinsic evidence, however, may generally be considered only if the terms of the judgment, or of documents incorporated in it, are ambiguous." SEC v. Levine, 881 F. 2d 1165, 1179 (2d Cir. 1989); accord United States v. O'Rourke, 943 F. 2d 180, 187 (2d Cir. 1991)(quoting Levine, 881 F. 2d at 1179); Western Elec. Co., 900 F. 2d at 306.

No "aids to construction" are necessary to determine the purpose of the judgment in this case because the decree unambiguously applies to EDP equipment and is in no way conditioned on IBM's continued participation in the tabulating industry. Moreover, consistent with the unambiguous purpose of the judgment, as stated in the four corners of the document, IBM continues to acknowledge that, after nearly forty years, the decree continues to constrain its behavior in the computer industry. (IBM Chron. at 27.). The consistent longstanding application of the judgment to computers without regard to IBM's position in the tabulating industry (which IBM exited many years ago) refutes IBM's argument at this late date that the decree's continuing viability in the computer industry is now linked to the IBM's position in the tabulating industry. See United States v. Atlantic Refining Co., 360 U.S. 19, 23-24, 79 S. Ct. 944 946-47 (1959)(where language of consent decree supports longstanding interpretation supported over many years by the parties' conduct and intended by the parties, the interpretation will not be changed because another reading might seem more consistent with the government's reasons for entering into the decree).

C. The Parties' Contemporaneous Statements And The Circumstances Of The Judgment Negotiations Confirm That The Decree Applies Independently To Computers

Even if the judgment were ambiguous in its application to EDP equipment independent of IBM's position in the tabulating machine industry, which it is not, IBM is wrong in contending that the purpose and continuing viability of the decree must be evaluated solely or even primarily on the basis of conduct alleged in the complaint. (IBM Prelim. at 5, 8, 14-15.). Instead, as the Second Circuit has made clear, "when the language of a consent decree provision is not clear on its face, a court of equity may, in construing the provision, consider the purpose of the provision in the overall context of the judgment at the time the judgment was entered." United States v. American Cyanamid Co., 719 F. 2d 558, 564 (2d Cir. 1983), cert. denied sub nom. American Cyanamid Co. v. Melamine Chemicals, Inc., 465 U.S. 1101, 104 S. Ct. 1596 (1984) (emphasis supplied). When the purpose of a decree provision is ambiguous, the Court should first seek interpretative assistance from "''contemporaneous statements of [the decree's] objectives.''" United States v. Western Elec. Co., 900 F. 2d 283, 306 (D.C. Cir.), cert. denied sub nom. MCI Communications Corp. v. United States, 498 U.S. 911, 111 S. Ct. 283 (1990)(quoting United States v. Western Elec. Co., 894 F. 2d 1387, 1391 (D.C. Cir. 1990) and United States v. Western Elec. Co., 846 F. 2d 1422, 1427 (D.C. Cir.), cert. denied, U.S. , 109 S. Ct. 306 (1988); see also ITT Continental Baking Co., 420 U.S. at 238, 95 S. Ct. at 935 (interpretative aids include "the circumstances surrounding the formation of the consent order, any technical meaning words used may have had to the parties, and any other documents expressly incorporated in the decree").

To be sure, the complaint identifies the alleged statutory violations and the government's theory of competitive harm, which helps to shape a Court's review of a motion to terminate a decree. American Cyanamid Co., 719 F. 2d at 565-66. However, the law's focus on contemporaneous statements of the decree's objectives is particularly appropriate in this case because four years passed between the filing of the complaint and the entry of the judgment. Contemporaneous statements made by the parties to the Court, the public and each other provide no support for the conclusion that the final judgment's continuing application to computers would be linked in any way to IBM's position in the tabulating industry. Rather, the government explained to the Court that, because the industry was dynamic, the parties agreed to include EDP equipment within the scope of the judgment. (January 25, 1956 tr. at 58-59 (U.S. Selected Docs. tab 11)). Moreover, the government's stated concern that failure to include EDP equipment would make "the decree obsolete before it is operative,"(September 23, 1955 tr. at 4 (U.S. Selected Docs. tab 9)), refutes any contention that the viability of the judgment was intended to be linked to the tabulating industry.

Documents IBM includes as attachments to IBM's Chronology of the 1956 Consent Decree make clear that the government had received information to support its concern that failure to include EDP equipment within the judgment could make the decree obsolete. Thus, although IBM chides the government for seeking information from industry participants, (IBM Chron. at 17), the government obtained information indicating that IBM already was merchandising computers with the same "tactics which gave it a monopoly in the tabulating field, ... and may be seeking a monopoly position in its new field." March 30, 1955 Wehrmann mem. at 5 (IBM Chron. tab 28). Information suggested that computers would completely change the nature of the punch card business and that IBM was already using its entrenched position in the tabulating industry to monopolize electronic computing systems. April 15, 1955 Prezis mem. at 11-12 (IBM Chron. tab 29); May 12, 1955 Prezis mem. at 2 (IBM Chron tab 30); January 21 1956 letter to Marcus A. Hollabaugh at 2, 5 (IBM Chron. tab 34); May 3, 1955 Bronaugh mem. at 2 (IBM Chron. tab 31)(statement attributed to T.J. Watson, Jr., President of IBM that "within five years, there would be no card operated accounting machines in use"). Indeed, it was alleged that IBM was one of only two suppliers of computers used for commercial purposes. June 17, 1955 Jones mem. at 3 (IBM Chron. tab 32). In l955, IBM was alleged to be by far the largest supplier of EDP equipment, and in particular the largest supplier of medium sized EDP equipment, having installed or had on order 1,117 machines, in comparison to 31 installations or orders for its main competitor. January 21, 1956 letter to Marcus A. Hollabaugh at 1-2 (IBM Chron. tab 32).

This information regarding IBM's rise to dominance in the computer industry has been echoed by Thomas J. Watson, Jr., former President and Chief Executive Officer of IBM:

By the spring of 1954, IBM and UNIVAC [Remington Rand] were running a close horse race....

•	•	•

In a little over a year [summer 1955] we started delivering those redesigned computers. They made the UNIVAC obsolete and we soon left Remington Rand in the dust. By the time the presidential elections rolled around in 1956, we had eighty-seven machines in operation and one hundred ninety on order, against forty-one in operation and forty on order for all other computer-makers.

T.J. Watson, Jr., and P. Petre, Father Son & Co. My Life at IBM and Beyond, 242-43 (1990) (attached at tab ____). Mr. Watson also explained how IBM was able to place its 650 computer, which was introduced in 1954, with tabulating machine users:

Over the next several years it enabled us to bring thousands of punch-card customers into the computer age. The 650 rented for about four thousand dollars a month, and was the perfect choice for companies eager to try computing because we designed it to work along with ordinary punch-card equipment. ... While our giant, million-dollar 700 series machines got the publicity, the 650 became computing's Model T.

Id. at 244. Another commentator has elaborated on why the success of the 650 was built in part on IBM's 90 percent market share of the tabulating machine market:

IBM's tabulating machine customers already had large quantities of information coded on punched cards and formalized procedures for processing it. Consequently, it was relatively easy to sell these customers an IBM 650, which could be viewed as an extremely fast and versatile tabulating machine that could read their existing cards.

G.W. Brock, The U.S. Computer Industry A Study of Market Power, 12 (1975).

By 1956, the computer industry had become an important capital market. The total retail value of computers installed in 1956 exceeded $269 million, and IBM's share of the market was 75.3 percent, up from 56.1 percent in 1955. Id. at 13. IBM had already overcome Remington Rand's early lead, and its lead was increasing rapidly. Id. Remington Rand lacked IBM's large base of tabulating machine customers to provide easy upgrades, and "[d]uring 1956, IBM shipped 85.2 percent of the value of new systems, and Remington Rand only 9.7 percent-- approximately the same relative shares as then existed in the tabulating machine market." Id.

The government may have had incomplete information about IBM's future position in the EDP industry, but it had sufficient competitive concerns about IBM's conduct in that industry to determine early in the judgment negotiations to seek relief that would enjoin IBM's lease only policy for all products and require it to sell computers. (April 26, 1955 Hollabaugh mem at 1 (IBM Chron. tab 39)).

In fact, although the complaint alleged violations in the tabulating industry, the parties negotiated the judgment with the specific understanding that the government might amend the complaint to include the EDP industry or seek relief after trial sufficiently broad to cover the EDP industry even if the complaint were not amended. (July 6, 1955 Jones and Reich mem. at 2 (IBM Chron. tab 47); May 9, 1955 mem. at 1 (IBM Chron tab. 40)). These facts are revealing because, as the Second Circuit has observed, consent decrees are "motivated by threatened or pending litigation," American Cyanamid Co., 719 F. 2d at 563(emphasis supplied), and, as IBM concedes, (IBM Prelim. at 6), Courts may impose on nonconsenting defendants in litigated antitrust cases relief that goes beyond the specific acts alleged in the complaint. See National Soc'y of Professional Eng'rs v. United States, 435 U.S. 679, 697, S. Ct. , (1978)(antitrust decree in litigated case should "avoid recurrence of the violation and ... eliminate its consequences); International Salt Co. v. United States, 332 U.S. 392, 400-01, 68 S. Ct. 12, 17 (1947) (rejecting the argument that in litigated antitrust case "the injunction should go no farther than the violation or threat of violation").

As IBM concedes, the parties negotiated for months over the terms of the judgment and how it would apply to EDP equipment. IBM Chron at 17-25. IBM initially sought to exclude all EDP equipment from the scope of the judgment. IBM Chron. at 17. Ultimately, however, it agreed to include all of its EDP equipment within the scope of the judgment, IBM Chron. at 27 & n.27; January 25, 1956 letter from Thomas J. Watson, Jr. to the Attorney General (IBM Chron. tab 60). It focused instead on negotiating limitations on the length of various provisions and the way specific provisions would apply to EDP equipment. June 20, 1955 tr. at 24-26 (U.S. Selected Docs. tab 8); September 23, 1955 tr. at 3-5 (U.S. Selected Docs. tab 9); November 30, 1955 tr. at 33-35, 45 (U.S. Selected Docs. tab 10); January 25, 1956 tr. at 59-60, 85-89 (U.S. Selected Docs. tab 11). To this end, expiration dates for various provisions were specifically negotiated. (IBM Chron. 26 n.24.). The Judgment's patent licensing provisions allowed IBM, as conditions to the licenses it granted under patents relating to tabulating machines and EDP equipment but not for licenses under existing patents relating to tabulating cards or card machinery, to charge royalties and obtain immunity from suit or cross licenses under the licensees' patents. (Decree § XI(d)(2), (g)). And IBM was required to provide manufacturing information relating to tabulating equipment, cards and card machinery but not for EDP equipment. (Id. § XIV.).

Both parties acknowledged in contemporaneous statements that the provisions of the judgment that continue in effect today were specifically intended to apply in perpetuity. January 25, 1956 Department of Justice Press Release at 1 (IBM Chron. tab 56); June 6, 1955 tr. at 22 (U.S. Selected Docs. tab 8)(IBM counsel explaining to the Court that negotiations were difficult because "the decree looks into eternity"). Like the judgment, neither the government's press release announcing the decree (IBM Chron. tab 56) nor the transcript of the parties' lengthy explanation of the judgment to the Court (U.S. Selected Docs. tab 11) contains any statement indicating that the decree obligations pertaining to the EDP industry were in any way linked to IBM's continuing position in the tabulating industry.

Under these circumstances, IBM's speculation about weaknesses in the government's case, as perceived by IBM or suggested by the internal deliberations of individual government employees, is irrelevant to any assessment of the meaning or purpose of otherwise unambiguous provisions in the judgment. (IBM Prelim. at 5; IBM Chron. at 23-24.). There is no evidence to suggest that the government ever conceded that the relief it sought was too broad or could not be obtained as a result of litigation. IBM could have tested the strength of the government's case by proceeding to trial or seeking a different bargain during the negotiations. It could have continued to oppose any application of the judgment to computers or it could have sought additional limitations on the judgment's application to EDP equipment, such as a provision, like the decree interpretation it is now urging on the Court, linking the continued viability of the judgment's application to computers to IBM's position in the tabulating industry. During the months of bargaining over the consent decree, it surrendered its position on these issues, and having consented to the decree, it is bound by the judgment's provisions and has waived its right to challenge whether the government's evidence in the case would have supported the same relief now contained in the judgment after trial. Armour, 402 U.S. at 681-82, 91 S. Ct. at 1757.

IV. IBM HAS THE BURDEN OF PROVING THAT CONTINUATION OF THE JUDGMENT WOULD BE DETRIMENTAL TO THE PUBLIC INTEREST IN COMPETITION

A. The Public Interest Requires That The Judgment Not Be Terminated Until Its Purposes Have Been Fully Achieved

This Court has jurisdiction to modify or terminate the judgment pursuant to Section XIX of the judgment, Rules 60(b)(5) and (6) of the Federal Rules of Civil Procedure, and "principles inherent in the jurisdiction of the chancery." United States v. Swift & Co., 286 U.S. 106, 114 (1932). See United States v. Loew's Inc., 783 F. Supp. 211, 213 (S.D.N.Y. 1992).

Subject to consideration of public comment, the government will consent to terminate certain provisions of the judgment and to limit the scope of other provisions. However, IBM's proposal to terminate the judgment in its entirety raises competitive concerns in some segments of the computer industry, and we will oppose IBM's motion to the extent that termination would harm the public interest in competition in any market.

Regardless of the government's ultimate position on the motion, the Court should focus its review of IBM's motion on whether the purpose of the judgment has been achieved such that continuation of "the decree without modification would be detrimental to the public interest." Rufo v. Inmates of the Suffolk County Jail, 502 U. S. 367, 384, 112 S. Ct. 748, 760 (1992). The words "public interest" "take meaning from the purposes of the regulatory legislation." NAACP v. FPC, 425 U.S. 662, 669, 96 S. Ct. 1806, 1811 (1976); see also System Federation No. 91 v. Wright, 364 U.S. 642, 651, 81 S. Ct. 368, 373 (1961); American Cyanamid Co., 719 F. 2d at 565. In this case, the Sherman Act is the underlying statute, and "the policy unequivocally laid down by [that] Act is competition." Northern Pacific Railway v. United States, 356 U.S. 1, 4, 78 S. Ct. 514, 517 (1958); see also United States v. Penn-Olin Chemical Co., 378 U.S. 158, 170, S. Ct. , (1964); Brown Shoe Co. v. United States, 370 U.S. 294, 320, 82 S. Ct. 1502, 1521 (1961); American Cyanamid Co., 719 F. 2d at 565. "Thus, the ultimate question before the Court is whether termination of the Final Judgment would serve the public interest in 'free and unfettered competition as the rule of trade.'"United States v. Columbia Artists Management, Inc., 662 F. Supp. 865, 870 (S.D.N.Y. 1987)(quoting Northern Pacific Railway, 356 U.S. at 4, 78 S. Ct. at 517; see also Western Elec. Co., 900 F. 2d at 308; Loew's Inc., 211 F. Supp. at 213.

The Supreme Court held in Rufo that a party seeking modification of a consent decree entered in institutional reform litigation "must establish that a significant change in facts or law warrants revision of the decree and that the proposed modification is suitably tailored to the changed circumstance." 502 U.S. at 383, 112 S. Ct. at 765. IBM has sought to support its motion on the basis of changes in the facts. (IBM Prelim. at 4.). The Court in Rufo held that decree modifications may be warranted because of changes in factual conditions that (1) "make compliance with the decree substantially more onerous," (2) make the decree "unworkable because of unforeseen obstacles" or (3) make "enforcement of the decree without modification ... detrimental to the public interest ...." 502 U.S. at 384, 112 S. Ct. at 760.

Although IBM makes the tautological argument that compliance with the judgment is costly, it has made no showing that compliance has become substantially more onerous or that the judgment has become unworkable due to unforeseen obstacles. Thus, under Rufo, to obtain termination of the judgment based on changes in facts, IBM has the burden of proving that enforcement of the decree without modification would be detrimental to the public interest in competition and that any change in the judgment is suitably tailored to the changed circumstances.

The decree modification standard in Rufo was presented in the context of institutional reform litigation. The Court emphasized "that a flexible approach is often essential to achieving the goals of reform litigation." 502 U.S. at 381, 112 S. Ct. at 758. Since the same factors are not applicable to antitrust consent decrees that were intended to operate in perpetuity, Dowell, 498 U.S. at 248, 111 S. Ct. at 637, the Court's analysis in Rufo is not particularly helpful in showing when changed circumstances would make continuation of an antitrust consent decree detrimental to the public interest. The Supreme Court, however, already has addressed this issue and has made clear that an antitrust consent decree "may not be changed in the interest of the defendants if the purposes of the litigation as incorporated in the decree (the elimination of monopoly and restrictive practices) have not been fully achieved." United Shoe, 391 U.S. at 248, 88 S. Ct. at 1499.

Any assessment of an antitrust judgment's continued contribution to the public interest in competition should therefore focus on whether the facts have changed sufficiently to achieve fully the purposes of the litigation as incorporated in the decree. In this case, if the judgment continues to promote competition in any market to which it applies, then the circumstances will not have changed sufficiently to achieve the purpose of the litigation in that market. If continuation of the judgment would harm the public interest in competition in any market, then circumstances will have changed sufficiently to achieve the purpose of the litigation in that market and retention of the judgment in that market would serve only to impose unnecessary costs.

B. If The Government Consents To Termination Or Modification, The Court's Public Interest Review Is Limited To Whether The Government Has Offered A Reasoned And Reasonable Explanation For Its Consent

As we explained in the Consolidated Reply of the United States to Proposed Intervenors' Responses to United States' Opposition to Motions to Intervene (U.S. Reply), at 6-7, the legal standard under which the Court considers IBM's motion will depend on the government's ultimate position on the motion. Where the government agrees that termination would serve the public interest, the Court's review of the motion should be limited to whether the government has offered a reasoned and reasonable explanation of why the termination or modification vindicates the public interest in competition. Loew's, Inc., 783 F. Supp. at 214; Columbia Artists Management, 662 F. Supp. at 870.

In government antitrust actions, the government represents the public interest in competition, United States v. IBM, No. 72-344 (AGS), slip. op. at 2 (S.D.N.Y., June 16, 1995), and the government has broad discretion in controlling and settling antitrust litigation on terms that will best serve the public interest in competition. Sam Fox Publishing Co. v. United States, 366 U.S. 683, 689, 81 S. Ct. 1309, 1313 (1961); Loew's, Inc., 783 F. Supp. at 214. Consequently, when the government consents to a proposed modification or termination, the role of the Court is not to substitute its opinion on the appropriate disposition of the case. Id.; Columbia Artists Management, 662 F. Supp. at 870; see also United States v. Mid-America Dairymen, Inc., 1977-1 Trade Cas. (CCH) ¶ 61,508, at 71,980 (W.D. Mo. 1977) (in determining whether the initial entry of a consent decree is in the public interest, absent a showing that the government abused its discretion or failed to discharge its duty, Court's role is to determine the reasonableness of the government's explanation and not to substitute its opinion).

Rather, the Court's function is "only to confirm that the resulting 'settlement is 'within the reaches of the public interest.''" Western Elec. Co., 900 F. 2d at 309 (quoting United States v. Bechtel Corp., 648 F. 2d 660, 666 (9th Cir.), cert. denied, 454 U.S. 1083, 102 S. Ct. 638 (1981) (quoting United States v. Gillette Co., 406 F. Supp. 713, 716 (D. Mass. 1975)). The Court should approve an uncontested modification "so long as the resulting array of rights and obligations is within the zone of settlements consonant with the public interest today." Id. at 307; see also United States, v. Western Elec. Co., 993 F. 2d 1572, 1577 (D.C. Cir. 1993) ("court may reject an uncontested modification only if it has exceptional confidence that adverse antitrust consequences will result"), cert. denied sub nom. Consumer Federation of America v. United States, 114 S. Ct. 481 (1993).

C. If The Government Opposes Termination, IBM Must Demonstrate That Continuation Of The Judgment Would Be Detrimental To The Public Interest In Competition

If the government opposes termination of all or part of the judgment, the Court's inquiry is not limited to reviewing the reasonableness of IBM's proffered explanations in support of termination. Rather, as to any part of the judgment that the government seeks to retain, the Court must decide whether IBM has shown that continuation of the judgment would be detrimental to the public interest in competition in any affected market. Western Elec. Co., 900 F. 2d at 308 (appropriate question is "whether the proposed modification would be certain to lessen competition in the relevant market"); American Cyanamid Co., 719 F. 2d at 567 (reversal of District Court's decision to terminate antitrust decree on basis of "'contemporary economic theory'" and remand for District Court "to make findings of fact as to the current state of the melamine market and the market for products that contain melamine"). As to any part of IBM's motion that the government does not yet have sufficient information to take a position on the merits, IBM must proceed at this time as if it is unilaterally seeking to terminate the judgment.

V. IBM CANNOT SATISFY ITS BURDEN WITHOUT THE REQUISITE MARKET ANALYSIS

In its Preliminary Statement of Issues, IBM declares that the decree causes "[h]arm to IBM and to Competition". (IBM Prelim. at 25.) (emphasis added). By distinguishing the harm the decree ostensibly imposes on IBM from the harm that allegedly befalls competition, IBM appears to agree that injury to competition is separate from and does not necessarily flow from harm to a competitor. In drawing this important distinction, IBM adheres to the command of the Supreme Court, which it cites in its Memorandum In Response To The Proposed Intervenors' May 11 Briefs (dated May 25, 1995) at 4, that "[t]he antitrust laws . . . were enacted for 'the protection of competition not competitors.'". Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 488 (1977) (appended to Defendant's May 25, 1995 brief).

In fact, in its Memorandum of Law In Response To SunGard And ACS's Motion to Intervene, IBM correctly identifies the question at issue but prematurely and conclusorily attempts to resolve it by stating that "SunGard and ACS's failure to identify any benefit to competition that allegedly results from the Decree not only merits that their motion be denied, but is further evidence that the Decree should be terminated. It is in fact their fear of the increased competition that termination of the Decree will bring that motivates SunGard and ACS's motion." IBM's Memorandum of Law In Response To SunGard And ACS's Motion to Intervene (dated January 13, 1995) at 4 (emphasis added). Whether, in fact, competition will increase or decrease absent the decree, is at the heart of this proceeding because, as IBM underscores, the ultimate protectable interest at stake is the "consumers' interest in competition". (IBM's Memorandum In Response To The Proposed Intervenors' May 11 Briefs (dated May 25, 1995) at 4.).

As the Second Circuit has noted in the rule of reason context: "[i]nsisting on proof of harm to the whole market fulfills the broad purpose of the antitrust law that was enacted to ensure competition in general, not narrowly focused to protect individual competitors." Capital Imaging v. Mohawk Valley Medical Ass'n, 996 F.2d 537, 543 (2d Cir.), cert. denied, 114 S. Ct. 388 (1993). Determining whether competition has been harmed in turn "requires a careful and complete analysis of the competitive effects of the challenged restraint." Id. So, too, the instant motion only can meaningfully be assessed within the context of a market analysis. The question, then, before the Court is whether and to what degree the public interest in competition will be served by retaining or by terminating the decree. But this question can only be resolved in the context of a market analysis; an analysis that IBM -- as the movant who bears the burden of proof -- seems reluctant to concur must be performed.

A. Market Definition Principles

To assess an injury to competition -- whether that injury stems from the decree itself, as IBM maintains or may arise from termination of the decree, a concern of the government -- the methodology is the same: relevant markets must be defined because "'[w]ithout a definition of [the] market there is no way to measure [the defendant's] ability to lessen or destroy competition.'" Spectrum Sports, Inc. v. McQuillan, 113 S. Ct. 884, 890 (1993) (quoting Walker Process Equip., Inc. v. Food Mach. & Chem. Corp., 382 U.S. 172, 177 (1965)). That is, " . . . the purpose of the inquiries into market definition and market power is to determine whether an arrangement has potential for genuine adverse effects on competition . . . " F.T.C. v. Indiana Federation of Dentists, 476 U.S. 447, 460 (1986). See also Berkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d 263, 268 (2d Cir. 1979) ("[i]t is, of course a basic principle in the law of monopolization that the first step in a court's analysis must be a definition of the relevant markets."), cert. denied, 444 U.S. 1093 (1980).

As a threshold matter, the Court must determine the relevant markets in which the IBM competes and ascertain whether IBM would possess market power or increased market power in any of those markets if the judgment were terminated. Hayden Pub. Co. v. Cox Broadcasting Corp., 730 F.2d 64, 68 (2d Cir. 1984). A relevant market is comprised of those "commodities reasonably interchangeable by consumers for the same purposes", United States v. E.I. Du Pont de Nemours & Co., 351 U.S. 377, 395 (1956), and "[i]n making this determination, the trier must decide whether the product is unique or has close substitutes, as to which there are substantial cross-elasticities of demand." Fishman v. Estate of Wirtz, 807 F.2d 520, 531 (7th Cir. 1986); Hayden, 730 F.2d at 70-71. And "[t]he product market must be plausibly defined according to the traditional 'methodology courts prescribe to define a market for antitrust purposes an analysis of the interchangeability of use or the cross-elasticity of demand for potential substitute products.'" Rosen v. Hyundai Group (Korea), 829 F. Supp. 41, 47 (E.D.N.Y. 1993) (quoting Gianna Enters. v. Miss World (Jersey) Ltd., 551 F. Supp. 1348, 1354 (S.D.N.Y. 1982)).

Because market definition is a prerequisite to determining whether competition is being injured, we are puzzled by the apparent non sequitur that "IBM should not be required to make a detailed presentation concerning the structure of the computer industry", (id.), even though IBM insists that the decree ". . . reduces the competition that the antitrust laws are designed to protect." (Id. at 2.) (emphasis added.). Apparently, IBM wishes merely to assert, but not demonstrate, the market definition predicate of a competitive analysis; in fact, the sole relevant market proffered by IBM thus far is the "worldwide information handling industry", (see IBM Term. Mem. at 9-10.). Plainly, this is an over-broad definition which cannot sustain IBM's burden to show that the public interest in competition warrants termination of the decree.

IBM bears the burden of establishing the markets that are subject to the public interest test and it must accept the consequences of erroneous market definition. We simply would repeat what we indicated in our Consolidated Reply at 8-9, that it is our experience in other investigations in the computer industry that the industry is not composed of one market, as IBM suggests, "but includes a wide array of interrelated markets for computer hardware, software and services." (Id. at 9.). Thus, without an adequate showing of market definition, the Court cannot be sure even in granting relief whether the decree is being modified to an extent beyond the point warranted by the changed circumstances, notwithstanding IBM's insistence that changed circumstances compels termination. See Rufo, 502 U.S. at 383, 112 S. Ct. at 760 ("a party seeking modification of a consent decree bears the burden of establishing that a significant change in circumstances warrants revision of the decree. If the moving party meets this standard, the court should consider whether the proposed modification is suitably tailored to the changed circumstance.") It surely proves too much to say that circumstances have changed since 1956 and that the decree should be terminated in its entirety. The government agrees that circumstances in the computer industry have changed but this tells us nothing about the relevant markets that fall under the decree's definition of Electronic Data Processing Systems, nor whether IBM possesses market power in any of those markets and whether that power beneficially is constrained by the decree. This is the inquiry before us.

B. If IBM Has Market Power In Any Primary Market Or Aftermarket, The Court Must Assess Whether The Decree Constrains The Exercise Of That Market Power.

Once relevant markets have been defined in accordance with antitrust principles, the inquiry turns to whether judgment termination would enable IBM to possess market power or increased market power in any relevant market. International Distribution Centers, Inc. v. Walsh Trucking Co., 812 F.2d 786, 791 (2d Cir.), cert. denied, 482 U.S. 915 (1987); Hayden, 730 F.2d at 68. Market power or monopoly power can be defined as "the power to control prices or exclude competition." Broadway Delivery Corp. v. United Parcel Service of America, Inc., 651 F.2d 122, 127 (2d Cir.), cert. denied, 454 U.S. 968 (1981). See N.C.A.A. v. Board of Regents of Univ. of Oklahoma, 468 U.S. 85, 109 n.38 (1984) ("[m]arket power is the ability to raise prices above those that would be charged in a competitive market.") (citations omitted). And "while market share is not the sole factor in the determination of market power, it is a highly significant one." Delaware & Hudson R. Co. v. Consolidated Rail Corp., 902 F.2d 174, 179 (2d Cir. 1990). Under Second Circuit case law, a number of factors are relevant in determining whether monopoly power exists, including, "the strength of competition, the probable development of the industry, and consumer demand, as well as the percentage of market share enjoyed by the alleged monopolist". Hayden, 730 F.2d at 68-69. (reversing dismissal of monopolization claim).

Because the existence of market power generally is a question of fact, Frito-Lay, Inc. v. Bachman Co., 659 F. Supp. 1129, 1139 (S.D.N.Y. 1986), IBM must demonstrate with facts that decree termination would not enable it to exercise market power in any relevant market falling within the scope of "[e]lectronic data processing system[s]" (Final Judgment § II(e).) and "[e]lectronic data processing machine[s]" (Final Judgment § II(f).). To the extent that judgment termination would enable IBM to exercise or augment its market power -- as the Government suspects might be possible in the markets for System/390 mainframe or AS/400 mid-range computer products or services -- then IBM must show that the decree nevertheless is anticompetitive. As set forth below, if the decree constrains the exercise of IBM's market power in either a primary market (such as System/390 mainframes or operating systems) or aftermarket (such as the market for service and parts for System/390 mainframes), then IBM must show that the net competitive benefits of these constraints are outweighed by the net competitive costs. The concerns expressed below about IBM's market power are meant to be illustrative, not exhaustive, and should be considered within the context of consumers' expectations and past investments. Those investments likely took place with the expectation that competition in primary and secondary markets would be at least robust as it is today. The discussion below, then, is meant to suggest to the Court only our preliminary concerns, providing the context for discovery.

1. IBM May Possess Market Power in the Market for System 390 Mainframes and Software.

Prima Facia evidence of IBM's market power is IBM's market share, which may account for between 70 to 80 per cent of all mainframes. See Allen-Myland v. International Bus. Mach. Corp., 33 F.3d 194, 201 (3d Cir.), cert. denied, 115 S. Ct. 684 (1994). IBM's market share of System/390 mainframes, which we believe is a relevant market encompassing new machines that are compatible with IBM System/390 hardware and operating systems and used compatible machines, may be even higher than 80 percent. And from what we have been able to adduce so far, IBM is a monopolist in System/390 operating system software. We believe the decree has spawned for consumers two sources of competitive alternatives in the primary market: manufacturers of compatible systems and vendors/lessors of used equipment (or "independents"). And, as explained below, we are concerned that termination of the decree could injure this competition.

Without the decree, IBM may have greater opportunities to exclude competing manufacturers of compatible Central Electronic Complexes ("CECs") as effective competitors. By virtue of its monopoly control of System 390 operating systems, IBM is in a unique position to discriminate if it so chooses against competing manufacturers of compatible by denying them the important interface information they currently receive pursuant to decree sections IX(b)-(c) when they purchase IBM mainframes and upon which they rely consistent with decree section VII(d)(2) to ensure their CECs remain compatible with IBM's operating systems, the industry standard. Exlcusionary discrimination therefore could occur if IBM withholds in whole or in part important information relating to compatibility or resorts to its practice before the judgment was entered of restricting experimentation with that information by competitors. To the extent that the decree's disclosure provisions allow for the existence of the competing CEC manufacturers, the decree is procompetitive because it guards against the risk those competitors will have to enter an adjacent market (i.e., operating systems), in order to remain in the CEC market. See Kodak, 112 S. Ct. at 2091 ("one of the evils proscribed by the antitrust laws [is] . . . the creation of entry barriers to potential competitors by requiring them to enter two markets simultaneously.").

We also are concerned that if the decree is terminated, IBM may exercise its power against the independents, to the detriment of consumers. Post-decree, IBM may have little incentive to continue to offer purchase options that are no less favorable than lease options, as is currently required by decree section IV (requires IBM to sell at prices that are not substantially more advantageous than lease charges and to make purchase options know to customers) and section VI(a)-(b) (requires IBM to offer to maintain machines that are owned by others and to provide the same services to purchaser that it provides to lease customers). Absent the decree, there are a number of ways IBM could exercise its market power to threaten the viability of the independents. One possibility, is that IBM could promise to maintain only machines that it leases and refuse to maintain the machines that independent vendors provide. Some independent vendors believe this would be fatal to their businesses. A principal reason consumers consider independents (apart from price competition and financing competition) may be because of decree section VI(a)-(c) (which ensures that machines remain eligible for IBM maintenance so long as the used machines are not significantly altered).

Additionally, IBM could exercise its market power to exclude the independents if, post- decree, it returns to a de facto lease-only policy. This could jeopardize the competitive viability of the independents to the detriment of consumers because the stock of equipment upon which independents depend may shrink (and this stock is a source of spare parts when machines are cannibalized). Moreover, post-decree these competing entities may not be provided with the disclosure information they currently receive under decree section IX when they purchase a mainframe; this information is integral to the independents when they perform upgrades, which often they do in the course of installing a used machine.

We anticipate that IBM will assert that smaller capacity computers and various types of distributed networking computing environments compete head on with mainframes. This is IBM's prerogative, but to prevail on market definition IBM must show the extent to which (if any) non-mainframe computers share a cross-elasticity of demand with System 390 mainframes (and the same showing would be expected of potential relevant markets subsumed therein, such as CPUs, operating systems and applications). See Allen-Myland, 33 F.3d at 200; Hayden, 730 F.2d at 70-71. This in turn requires an assessment of whether smaller capacity computers are reasonable substitutes for mainframes, taking into account attributes bearing on the elasticity of demand, including, the computing power, speed and security of mainframes and the ability and willingness of consumers to switch to non-System 390 platforms in response to either hardware or software price increases by IBM. See supra _____ n. 16.

2. IBM May Possess Market Power in the Aftermarkets for Service and Parts of System 390 Mainframes and AS/400 Mid-range Computer Products.

The Allen-Myland case potentially is instructive on some of the government's concerns about outright termination of the decree as it relates to competition in aftermarkets. In Allen- Myland, plaintiff Allen-Myland alleged that IBM violated Sherman Act §§ 1 and 2 by creating an upgrade pricing policy effectively which tied IBM mainframe upgrade installation service to the IBM parts needed to perform the service, thereby allegedly injuring competition in the tied product market in which Allen-Myland competed, the market for reconfiguring and upgrading mainframes. Id. at 199. In vacating the district court's finding that IBM lacked market power in the market for mainframe computers, the Court of Appeals noted that "[w]hen the [district] court broadened [the] market that it believed shared cross-elasticity of demand with large-scale mainframes, IBM's market share dropped from as high as 79% to under 34.4% . . . " Id. at 201 (emphasis added and citations omitted).

As we noted above, the switching costs inherent to migrating mainframe applications to non-mainframe computing platforms should be a focus of this inquiry; certainly the Allen- Myland court recognized the importance of switching costs in assessing whether IBM possesses market power: "[i]f it is prohibitively expensive to switch to a smaller capacity computer before the normal end of an application system's life cycle, then IBM, at least for those locked-in customers, would not face any realistic competition from smaller machines and would thus possess market power as if they did not exist." Id. at 205 (emphasis added). Because the district court cited only "anecdotes" suggesting that smaller computers compete against vigorously against mainframes, the Court of Appeals admonished against reliance upon an incomplete set of facts:

[o]ur review of the record, however, shows that none of the incidents mentioned involved a mainframe user with a significant base of applications software and data that would have to be rewritten and converted before the application could be moved to a smaller computer. Indeed, in the vast majority of cases, the customer was developing a new application and had an unfettered choice of which type of computer to purchase. In a few others, the system was approaching the end of its useful life and was slated for replacement. This evidence, then, does not support the conclusion that there was not a significant lock-in problem.

Allen-Myland, 33 F.3d at 205-06.

The Allen-Myland Court's concern for IBM's exploitation of market power against "locked-in" end users was animated by the Supreme Court's decision in Eastman Kodak Co. v. Image Tech. Servs., Inc., 504 U.S. ____, 112 S. Ct. 2072 (1992) ("Kodak"). See Allen-Myland, 33 F.2d at 205-06 (citing Kodak). In Kodak, Eastman Kodak manufactured photocopy equipment that it sold in what may have been a competitive market. Plaintiffs, independent service operators who provided service and repair to Kodak equipment, alleged that Kodak unlawfully had tied the sale of service for Kodak equipment to the sale of parts for Kodak copiers, in violation of Sherman Act § 1 and had attempted to monopolize the sale of service for Kodak machines in violation of Sherman Act § 2 by restricting the availability of the necessary repair parts to independent service operators like Image Technical. Kodak, 112 S. Ct. at 2078. Kodak argued that it could not possess any market power in the aftermarket for service and repair because it lacked market power in the market for new copiers. Id. at 2082. The assumed absence of market power in the primary market (here, copiers), however, was not dispositive as a matter of law. Id. at 2084. Rather, the Supreme Court held that under certain circumstances, the fact that the buyer of such equipment was locked into a single supplier could give rise to a finding of market power:

[i]f the cost of switching is high, consumers who already have purchased the equipment, and are thus "locked-in", will tolerate some level of service-price increase before changing equipment brands. Under this scenario, a seller profitably could maintain supracompetitive prices in the aftermarket if the switching costs were high relative to the increase in service prices, and the number of locked-in customers were high relative to the number of new purchasers.

Kodak, 112 S. Ct. at 2087. Rejecting "[l]egal presumptions that rest on formal distinctions rather than actual market realities", 112 S. Ct. at 2082, id., the Supreme Court noted that "[t]he extent to which one market prevents exploitation of another market depends on the extent to which consumers will change their consumption of one product in response to a price change in another, i.e., the 'cross-elasticity of demand'". Id. at 2083.

We share the concern of the Allen-Myland court. Accordingly, to assuage our concern about IBM's market power in aftermarkets absent the decree, in this proceeding, IBM must demonstrate whether and the extent to which current System/390 or AS/400 users can and would switch over to alternative computing environments in response to an exercise of market power. Indeed, the government's preliminary discussions with some mainframe end users suggests that for certain data intensive computing tasks, there are no substitutes for mainframes. Moreover, for certain tasks for which theoretically a substitute may exist, many end users have invested enormous amounts of time and money into developing applications that run on IBM mainframes and operating systems. To switch away from IBM computing environments, then, could require inordinate amounts of human resources, money and time.

Such "switching costs" are one of the market "realities" to which courts increasingly are becoming sensitive. So, when confronted with antitrust issues in the context of complex purchases such as computer systems, courts understand that they must direct their factual inquiries into whether competition in the primary equipment market obviates derivative market power opportunities that may be exploited from an installed base of consumers that is "locked- in" to the purchase, potentially reliant upon the manufacturer for aftermarket support or service. See, e.g., Virtual Maintenance Inc. v. Prime Computer, Inc., 11 F.3d 660, 666 (6th Cir. 1993) (remanding for new trial in light of Kodak on question of whether computer system manufacturer exercised market power in aftermarkets for its software updates despite interbrand competition in primary market for package of minicomputers and software). Accordingly, as the Government indicated in its Consolidated Reply at 9-10, assessing the competitive implications of IBM's motion therefore requires an evaluation of whether any of IBM's customer currently are "locked in" to any of IBM's products in a manner that has conferred market power and whether the exercise of that market power is beneficially limited by the decree, which enjoins potentially exclusionary conduct like the refusal to sell spare parts and providing maintenance manuals to independent service companies. (See, e.g., Decree §§ VI(c) (directing IBM to sell at reasonable and nondiscriminatory prices repair and replacement parts); VII(c) (enjoining IBM from requiring any lessee or purchaser to have IBM repair their electronic data processing equipment); IX(b)(requiring IBM to make available to customers and independent service organizations at reasonable and non-discriminatory terms technical materials relating to service and repair that are provided to IBM's own maintenance and repair employees).

Whether the decree constrains IBM's exercise of aftermarket market power is relevant both to the mainframe environment -- a market as noted above where the Government suspects IBM possesses primary and perhaps derivative market power -- and also to smaller mid-range computers such as the AS/400 where IBM may possess aftermarket power in light of the large installed base and software investments of AS/400 users. To meet its burden, and assuage government concerns, one would therefore expect IBM to show that there is, in fact, "unfettered customer choice" (IBM Prelim. at 22.), in these markets, a characterization of end-user competitive options that rules out any lock-in effect. IBM also must show that by virtue of decree sections VI(c) and IX(c) it is "impaired in seeking to exchange [parts and technical] materials with other manufacturers" and that the net effect of that impairment is anticompetitive.

So to the extent the decree imposes on IBM a "duty" to deal fairly with competitors in aftermarket goods and services (such as selling spare parts and providing manuals to independent service operators) obvious questions are what impact would decree termination have on competition in the primary and secondary markets and what are IBM's intentions with respect to independent service operators. If IBM plans to discontinue its dealings with independent service operators, then an important question is whether it has a valid business reason for doing so and if it does not or the legitimacy of the proffered business reason can be drawn into question, then this would auger in favor of retaining the decree. See, e.g., High Tech. Careers v. San Jose Mercury News, 996 F.2d 987, 990-91 (9th Cir. 1993) (reversing grant of summary judgment for defendant newspaper who refused to continue carrying advertising producer's insert as a genuine issue of material fact existed as to whether defendant's proffered business justification was pretextual; "[w]hether valid business reasons motivated a monopolist's conduct is a question of fact") (citing Eastman Kodak supra at 2091 n.32; Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585, 602-05 (1985); Oahu Gas Serv., Inc. v. Pacific Resources, Inc., 838 F.2d 360, 368 (9th Cir.), cert. denied, 488 U.S. 870 (1988)). Thus it is conceivable post-decree, IBM could have no incentive to continue to maintain used equipment as available for IBM maintenance, to repair used equipment sold by other vendors or even to sell repair parts and manuals to third parties that it regards as competitors.

To be sure, IBM cites as one of the arguments for terminating the decree that a vibrant used equipment/service industry exists. (IBM Prelim. at 17-18). But in heralding the competitive influence of these entities, whose creation IBM agrees was a purpose of the decree, IBM begs the question: if the decree is the reason that this industry has continued to exist, then we must assess whether retention of the decree in whole or in part furthers the public interest in competition.

C.IBM's Arguments Do Not Address The Central Issue of Whether Termination of the Judgment Would Harm the Public Interest In Competition.

Although IBM counsel conceded at the June 19 hearing that the Court must consider the impact of vacating the judgment, it nonetheless invites the Court to grant its motion without any regard for whether termination would injure the public interest in competition. IBM presents a plethora of arguments in support of its request that the Court ignore the impact of judgment termination on consumers. Thus, it argues that the market for tabulating machines, which was the subject of the complaint, has not existed for many years. (IBM Prelim. at 5) ("That fact alone should be dispositive of IBM's motion to terminate."). It similarly argues that the viability of the judgment must be evaluated solely on the basis of the conduct and market alleged in the complaint and that, since IBM's market power in the tabulating machine market no longer exists, any purposes of the judgment in "dissipating the possible effects of that alleged power in other areas (i.e., EDPM) have been fulfilled ..." (Id. at 8.). It complains that, if it is required to show that termination would not harm the public interest in competition, "then the Government's dismissal of its 1969 suit as 'without merit' would be meaningless." (Id. at 10.). It suggests that it should benefit from the government's policy, adopted many years after entry of the judgment, of generally limiting decrees to terms of ten years. (Id. at 11-12.).

Finally, IBM submits that its evidence must address only three issues. It plans to demonstrate the purposes of the judgment and prove that they have been fulfilled. It plans to show that the computer industry has changed drastically since the judgment was entered. And it plans to show that the judgment harms competition by increasing IBM's costs and making it a less effective competitor. (Id. at 13-14.).

As we demonstrate above, to obtain relief in this case, IBM must only prevail on the first of the three issues it has identified by showing that the purposes of the litigation as incorporated in the judgment have been fully achieved. United Shoe, 391 U.S. at 248, 88 S. Ct. at 1499. To make this showing, IBM must prove that conditions have changed sufficiently such that continuation of the judgment in any current market would no longer serve to promote the public interest in competition. However, IBM does not propose to show that the purposes of the judgment have been fulfilled, or for that matter make any other showing, in the context of current market conditions. Consequently, IBM's proffered evidence will not be helpful in showing whether continuation of the judgment would harm the public interest in competition. Western Elec. Co., 900 F. 2d at 309; American Cyanamid Co., 719 F. 2d at 567.