Addamax Corporation v. Open Software

• Court: Court of Appeals for the First Circuit
• Decided: September 4, 1998
• Docket: 97-1807
• Status: Published

Opinion

USCA1 Opinion

                 United States Court of Appeals

                     For the First Circuit


No. 97-1807



                       ADDAMAX CORPORATION,



                      Plaintiff, Appellant,



                                v.



  OPEN SOFTWARE FOUNDATION, INC., DIGITAL EQUIPMENT CORPORATION

                   and HEWLETT-PACKARD COMPANY,



                      Defendants, Appellees.

                       ____________________



           APPEAL FROM THE UNITED STATES DISTRICT COURT



                FOR THE DISTRICT OF MASSACHUSETTS



           [Hon. Joseph L. Tauro, U.S. District Judge]

                       ____________________



                              Before



                      Boudin, Circuit Judge,



                  Coffin, Senior Circuit Judge,



and Shadur, Senior District Judge.



                         ____________________



    Alan R. Kusinitz with whom Samuel Adams, Keith C. Long, and

Warner & Stackpole LLP were on brief for appellant.

    James C. Burling with whom Michelle D. Miller, Hale and Dorr

LLP, William L. Patton, Jane E. Willis, Ropes & Gray, Kevin P.

Light and Choate, Hall & Stewart were on brief for appellees.


September 4, 1998


BOUDIN, Circuit Judge.  Addamax Corporation brought a

federal antitrust suit against Open Software Foundation ("OSF"),

Hewlett-Packard Company and Digital Equipment Corporation.  After

a bench trial limited to the issues of causation and damages, the

district court found that antitrust violations, even if they were

assumed to have occurred, were not a material cause of Addamax's

failure in the line of business at issue.  Addamax now appeals and

we affirm.

  We begin with a statement of those background facts that

are more or less undisputed.  Addamax was created by Dr. Peter A.

Alsberg in 1986 and, in 1987, began to focus on developing security

software for Unix operating systems.  Unix is a very popular

operating system for larger computers, and security software is a

component that can be used with the operating system to restrict

outside access to sensitive information and to restrict a

particular user to information consistent with that user's security

classification.

  During this period, the National Computer Security

Center, a division of the federal government's National Security

Agency, rated security software, giving ratings (ranging from the

most to the least secure) of A, B-3, B-2, B-1, C-2, C-1 and D. 

Addamax decided to produce B-1 software for Unix operating systems,

a level of security demanded primarily by government users.  During

the years 1988-89, Addamax did develop B-1 security software for at

least two different versions of Unix.

   While Addamax was trying to produce its security

software, a different struggle was developing between AT&T--the

inventor of Unix--and a number of major computer manufacturers. 

Although originally Unix had been freely licensed by AT&T, it

appears that in the late 1980s AT&T began restricting its licenses

in the face of various software modifications being introduced by

individual licensees; and at the same time, AT&T began to develop

a close working relationship with Sun Microsystems, a major

microprocessor manufacturer.  Other hardware manufacturers

professed to fear that AT&T was trying to establish a single

dominant version of Unix, intending to exclude the proprietary Unix

variations from the market.

   Accordingly, in May 1988, a number of important computer

manufacturers--including defendants Hewlett-Packard and Digital

Equipment Corp.--formed the Open Software Foundation as a non-

profit joint research and development venture.  OSF registered

under the National Cooperative Research Act of 1984, 15 U.S.C. 

4301, although that status has no direct importance for the issues

before us.  At least one of OSF's  professed objectives was to

develop an alternative Unix operating system, denominated OSF-1, as

a competitor to the Unix system being developed jointly by AT&T and

Sun Microsystems.

   In 1989, while OSF-1 was still being developed, OSF

decided that it should include security software at the B-1 level. 

At that time, only three companies--AT&T, Addamax and SecureWare,

Inc.--were producing security software for the Unix system.  On

November 1, 1989, OSF sent a "request for technology" to Addamax

and SecureWare, soliciting bids for a B-1 security component for

the new OSF-1 system.  Bids were submitted on November 27, 1989,

and OSF selected SecureWare on December 22, 1989.  There is some

indication that the Addamax security software was more

sophisticated--one witness agreed that the contrast was between a

Cadillac and a Chevette--but the Addamax price may also have

appeared more substantial. In any event, OSF-1 itself was never a

very successful product.

   Addamax continued to sell its own B-1 software for some

period after losing the bid.  Nothing prevented OSF "sponsors" (the 

founding members of OSF) or "members" (a great many other

companies) from  using Addamax security software for their own

programs; and OSF sponsors and members were not the only potential

buyers of Addamax's program.  However, by 1991, Addamax began to

phase out its B-1 security software, turning away new buyers so

that it could devote its resources to the development of a new

security software product, in which it appears that the company was

successful.

   In April 1991, Addamax filed a complaint in the district

court against OSF, Hewlett-Packard and Digital, alleging various

violations of federal  and state antitrust law.  As later amended,

the complaint charged the defendants, together with other companies

associated with OSF, with horizontal price fixing, boycott, and

otherwise unlawful joint venture behavior in violation of the

Sherman and the Clayton Acts, 15 U.S.C.  1-2, 18.  A central

theme, although not the only one, was that  the defendants had

conspired to force down the price for security software below the

free-market level and otherwise to limit or impair the ability of

Addamax to compete as a supplier of security software.

   Considerable discovery was conducted, and in due course

the defendants moved for summary judgment.  In a thoughtful

decision in May 1995, the district judge dismissed Addamax's per se

claims on the ground that the alleged conduct of the defendants did

not fit within the narrow categories for which per se treatment was

appropriate; but the court declined to dismiss Addamax's rule of

reason claims, saying that the factual issues involving market

power and anticompetitive effect were unsuitable for disposition on

summary judgment.  Addamax Corporation v. Open Software Foundation,

Inc., 888 F. Supp. 274 (D. Mass. 1995).

   Thereafter, the parties entered into a stipulation that

the damage phase of the case would be tried first, on a jury waived

basis, to determine "whether the defendants' conduct was a material

cause of injury in fact to the plaintiff and, if so, the amount of

damages."  The stipulation further provided:

   Solely for purposes of this stipulation, the

   Court will assume that the defendants' conduct

   as alleged in the Amended Complaint and

   described in the non-damages portions of the

   expert reports of Drs. Comanor and Howe

   occurred and violates the federal and state

   law accounts.  However, the Court will not

   assume, but will hear and take evidence on,

   whether there was injury in fact to the

   plaintiff as a result of that conduct and, if

   so, the amount of damages, which is the

   subject of this phase of the trial.



   Trial was conducted over 12 days between November 18 and

December 16, 1996.  Addamax presented as live witnesses Dr.

Alsberg, three experts, and a single Addamax customer.  The

defendants did not present live witnesses but did cross-examine

extensively and relied on documentary submissions and deposition

testimony.

   In May 1997, the district court issued a decision

concluding that the defendants' conduct was "not a material cause"

of Addamax's losses.  Addamax Corporation v. Open Software

Foundation, Inc., 964 F. Supp. 549, 555 (D. Mass 1997).  The court

found that the B-1 software market was a highly risky business,

that Addamax's belatedly-offered product was "too expensive and too

complex, and . . . actually exceeded B-1 requirements."  Id. at

553.  The court said that Addamax faced severe competition from

AT&T in the B-1 market and that SecureWare's product was "a cheaper

and simpler" one.  Id.  Accordingly, the court held on the merits

that Addamax was not entitled to any damages.

   Addamax has now appealed and argues what in substance are

three different points:  that the district court erred in its

factual determination that defendants' conduct was not a material

cause of Addamax's losses in the B-1 security software market; that 

the stipulation, pertinent case law or both required the district

court to find that the defendants' conduct had caused damage to

Addamax; and that the court erred in dismissing the per se claims

against the defendants.  Because the legal issues set the frame for

the factual ones, it is more convenient to take these claims in

reverse order.

   1.  As we explained in an earlier case, per se rules

under section 1 of the Sherman Act have left only a couple of

"serious candidates" for per se treatment: these include price or

output fixing agreements (horizontal market division agreements are

of essentially the same character) and "certain group boycotts or 

concerted refusals to deal."  U.S. Healthcare, Inc. v.

Healthsource, Inc., 986 F.2d 589, 593 (1st Cir. 1993).  Since those

words were written, the categories have been narrowed even further

by the Supreme Court's decision to overrule Albrecht v. The Herald

Co., 390 U.S. 145 (1968) and thereby to exclude from per se

treatment vertical maximum resale price fixing agreements.  State

Oil Co. v. Khan, 118 S. Ct. 275 (1997).

   Where a plaintiff proves conduct that falls within a per

se category, nothing more is needed for liability; the defendants'

power, illicit purpose and anticompetitive effect are all said to

be irrelevant.  United States v. Socony-Vacuum Oil Co., 310 U.S.

150 (1940).  But courts have been very careful to confine per se

treatment to conduct of the type that is almost always actually or

potentially anticompetitive and has no redeeming benefits (e.g.,

reduced costs, increased competition) worthy of being weighed

against the negative effects.  Broadcast Music, Inc. v. Columbia

Broadcasting System, 441 U.S. 1 (1979).  Per se offenses remain

very important--they include horizontal price fixing--but only for

conduct that fits squarely within the "ever narrowing per se

niche."  U.S. Healthcare, 986 F.2d at 593.

   Joint venture enterprises like OFC, unless they amount to

complete shams, cf. Palmer v. BRG  of Georgia, 498 U.S. 46 (1990),

are rarely susceptible to per se treatment.  Where the venture is

producing a new product--here, the OFC-1 software package--there is

patently a potential for a productive contribution to the economy,

and conduct that is strictly ancillary to this productive effort

(e.g., the joint venture's decision as to the price at which it

will purchase inputs) is evaluated under the rule of reason.  This

is so even if we accept, pursuant to the stipulation, the arguendopremise that OSF and those connected with it represented a large

portion of the market for purchasing B-1 security software and

represented a large portion of some kind of output market for

integrated Unix software programs.

   Addamax points to fragments of evidence that, assuming a

full context were established, might or might not suggest that OSF

was an aggressive response to the AT&T Sun venture and that

Hewlett-Packard had a secret agenda to favor SecureWare over

Addamax (for reasons that are never made quite clear), regardless

of whether Addamax offered a superior product.  None of the

evidence pointed to by Addamax suggests that OSF-1 was other than

a legitimate, if ultimately unsuccessful, product; and there is

nothing to suggest that the ancillary decisions--what inputs to

purchase, at what price, and from whom--were not legitimately

related to this effort.  In this context, flinging around terms

like "cartel" and "boycott" do not convert a rule of reason claim

into a per se one.

   2.  On the other hand, neither is a joint venture "per

se" legal.  Any joint venture, especially one that involves

competitors, tends to be susceptible to attack under section 1's

rule of reason--on the theory that the operations of the joint

venture represent collaboration of the separate entities that own

or control it.  How far this theory can be pressed in the case of

a truly integrated enterprise, whose "owners" were no more than

stockholders, is a matter we need not pursue; we will assume here

that the OSF joint venture, or some aspect of it, could be

condemned under section 1 if the balance of harms and benefits

tipped in favor of harms; questions of power and motive are

primarily clues to such effects.

   At this point, Addamax's most straightforward claim would

be that OSF's concentration of purchasing power in the supposed

"market" for acquiring B-1 security software was so great that it

imposed a significant risk of forcing prices below competitive

levels, and that those risks outweighed any benefit from the

venture or, more plausibly, that the venture could achieve those

benefits in a less restrictive fashion, i.e., without creating a

substantial threat of monopsony pricing.  Whether or not this

theory could be proved, we are here assuming liability arguendo. 

The question remains whether Addamax established--either as a

matter of law or based on the evidence--some causal connection

between this assumed violation by defendants and Addamax's failure

in the B-1 security software business.

   Addamax first argues that the stipulation required the

district court to find that the assumed violation was a material

cause of injury to Addamax.  Addamax's reading is contrary both to

the explicit language of the stipulation and to its evident

purpose.  The stipulation said that the first phase of the bench

trial was to determine "whether" defendants' conduct was "a

material cause of injury in fact" to Addamax (and, if so, the

amount of damages), assuming arguendo that a violation of law had

occurred.  Pointedly, the stipulation went on to emphasize that

although the existence of a violation was to be assumed, the court

"will not assume, but will hear and take evidence on," the question

whether there was "injury in fact to the plaintiff as a result of"

the attributed conduct. 

   Certainly both Addamax's complaint and its experts

asserted that the alleged conduct has caused injury, but this was

not part of the facts to be assumed arguendo.  The stipulation did

not assume the truth of the complaint, but only that defendants had

engaged in the "conduct" alleged in the complaint.  Under the

stipulation, the reports of Addamax's experts were assumed to be

true only in describing the conduct and not its consequences; that

is made clear by the reference in the stipulation to assuming the

truth of the "non damages portions of the expert reports."

   Addamax's more interesting argument is its claim that the

case law, and the economic theory that underlies it, require a

conclusion that the conduct assumed arguendo to comprise a

violation must have caused injury to Addamax.  The broadest version

of this proposition is Addamax's claim that under the rule of

reason, conduct is condemned only because it has an anticompetitive

effect.  Therefore, Addamax argues, there must have been some

injury to it, and the only question that remains is to calculate

the amount of damages.

   A more specific version of the argument, also advanced,

is that in this very case the complaint's straightforward charge is

that the defendants engaged in an agreement that had the effect of

reducing price for B-1 security systems and since Addamax was a

provider of B-1 security programs, it necessarily was injured by a

reduction in price.  An alternative version is Addamax's claim that

the joint venturers were engaged in suppressing demand for their

own output--Unix programs like OSF-1 embodying B-1 software--and

this in turn reduced the demand, and presumably therefore price,

volume or both, for suppliers of the input.

   It is technically an overstatement to say that actual

anticompetitive impact is a requirement of liability in a rule-of-

reason case.  True, as a practical matter, most courts would be

unlikely to condemn an otherwise legitimate joint venture absent

some showing of anticompetitive effect.  But in principle, a

sufficiently high risk of an anticompetitive effect, coupled with

marginal benefits (or none at all that could not be achieved

through an easily available less restrictive alternative) might

justify condemnation under the rule of reason.

   But all this is beside the point.  Even if we assume that

the OSF purchasing consortium was capable of exercising monopsony

power directly or through coordination of its sponsor\members'

actions, it does not follow that Addamax was a victim or that the

alleged below-market price offered by the consortium materially

affected Addamax.  The only formal purchase by OSF involving

Addamax was based on the November 1989 request for technology, in

which SecureWare was the successful supplier.  If below market

price was paid, SecureWare, and not Addamax, was directly injured.

   To be sure, Addamax claims that its sales opportunities

were indirectly curtailed.  While the OSF sponsors and members were

free to purchase B-1 security programs from anyone they wanted on

an individual basis, Addamax claims that winning the OSF-1 sale

would have amounted to a valuable OSF endorsement, spurring other

sales.  But it is hard to see this loss as a consequence of

monopsony pricing.  In all events, Addamax's claim of secondary

injury reduces itself to an issue of fact--not an issue that can be

taken as resolved by stipulation or case law.

   3.  As a preface to its factual claims, Addamax asserts

that the district court's decision recognizes a "defense" of

mismanagement.  A plaintiff's mismanagement is not a bar to

recovery where an antitrust violation is a material cause of

injury.  Engine Specialties, Inc. v. Bombardier Ltd., 605 F.2d at

14 n.21.  But mismanagement is certainly relevant to the factual

question whether the antitrust violation had such an effect or

whether the plaintiff is entirely the cause of its own failure. 

Argus Inc. v. Eastman Kodak Co., 801 F.2d 38, 42-45 (2d Cir. 1986).

   We turn then to the question whether the district court

erred in its factual determination that Addamax's inability to 

succeed in its efforts to sell its B-1 security program for Unix

more widely was materially caused by the defendants' conduct.  On

this issue, Addamax bore the burden of proof at trial.  Irvin

Industries, Inc. v. Goodyear Aerospace Corp., 974 F.2d 241, 244 (2d

Cir. 1992).  On appeal, the district court's findings and ultimate

conclusion of fact are entitled to stand unless found to be clearly

erroneous.  La Esperanza De P.R., Inc. v. Perez Y Cia. De Puerto

Rico, Inc., 124 F.3d 10, 15 (1st Cir. 1997).

   Addamax is mistaken in its suggestion that the district

court misunderstood the legal standard for causation: quite unlike

Haverhill Gazette Co. v. Union Leader Corp., 333 F.2d 798 (1st Cir.

1964), the district judge properly asked whether the defendants'

assumed conduct had been a substantial or material cause of the

losses claimed by Addamax.  Although we there cautioned against an

unduly rigid view of causation in computing damages once injury had

been established, id. at 808 n.16, nothing in the opinion relieved

the plaintiff from making the statutory showing (fully satisfied in

Haverhill) that the violation had caused at least some injury to

the plaintiff's business or property. 15 U.S.C.  15.

   Here, the district court was presented with two competing

versions of reality.  Addamax's witnesses took the view that

Addamax developed a superior B-1 product and its failure to succeed

resulted from defendants' mechanizations which forced down the

price of the product to sub-competitive levels and suppressed

output for Unix software incorporating B-1 security programs.  In

some places, Addamax describes itself as the target, and elsewhere

as the accidental victim, of a larger conspiracy directed against

AT&T.

   The defense version, which the district court adopted,

was derived from defense depositions, cross-examination of the

plaintiffs' experts and numerous documents.  In this view, Addamax

engaged in risky entry into a market dominated by AT&T, an

established supplier of B-1 security software for Unix; the Addamax

system was oversophisticated, expensive, arrived late, and never

received the  important certification from NSA's National Computer

Security Center.  And, in a market characterized by ever-changing

demands, AT&T's promised development of a follow-on B-2 system 

made the market for B-1 security software for Unix inherently risky

and in some measure transitional.  There is nothing inherently

implausible about either version; everything depends on the

evidence.

   In fairness to Addamax, the factual analysis in its brief

represents exactly the kind of detailed critique of the evidence

that fairly presents the question whether the district judge's

findings are adequately supported by the record.  Addamax

identifies specific findings with which it disagrees, cites to

record evidence it thinks was misconstrued, furnishes citations to

the record for propositions it advances, points to counterveiling

evidence that says the district judge ignored and misinterpreted. 

In this respect, the brief deserves to be taken seriously, and we

have done so.

   But while in a few instances the district court may have

misinterpreted an exhibit or ignored some fact that softens or

qualifies the inference it draws, Addamax's own critique is filled

with one-sided versions of events and refusals to confront evidence

in support of the district court's findings.  What emerges from our

own review of the record is that the district court had evidence to

support each of its key findings: that the business was a risky

one; that Addamax entered late, with a high-priced, overbuilt and

uncertified product; that AT&T and SecureWare, in different ways,

posed major problems for Addamax; that many of Addamax's problems,

including losses of customers, had begun before the OSF selection

of SecureWare; and that changes in market conditions proved to be

adverse to Addamax.

   Further, the evidence is largely derived from Addamax

itself, including the deposition and trial testimony of Dr. 

Alsberg.  The risky nature of Addamax's venture was stressed in its

disclosures to investors, and the delays and cost overruns

concerning its B-1 product emerge from its own records; it was

Addamax that expressed concern with competition from AT&T and

especially its ability to offer a smooth transition to its own

promised B-2 offering; and the defection of existing and

prospective customers to AT&T, apparently before OSF-1, can be

traced through Addamax records.  The district court did not commit

"clear error" in finding the facts in favor of defendants.

   Addamax attacks the district court's findings as

inadequate under Fed. R. Civ. P. 52(a).  By this, it means not that

the explicit findings were wrong (it argues this elsewhere) but

that the findings are either not sufficiently detailed or did not

affirmatively find specific facts helpful to Addamax or did not

address evidence that favored Addamax where there was evidence both

ways.  But the district court was not required to make findings on

every detail, was not required to discuss all of the evidence that

supports each of the findings made, and was not required to respond

individually to  each evidentiary or factual contention made by the

losing side.  Knapp Shoes, Inc. v. Sylvania Mills Co., 15 F.3d

1222, 1228 (1st Cir. 1994); Applewood Landscape & Nursery Co. v.

Hollingsworth, 884 F.2d 1502, 1503-04 (1st Cir. 1989).  

   There is no mechanical rule for determining the exact

level of findings required by Rule 52(a).  In this instance, the

district court made explicit intermediate findings (e.g.,

competition from AT&T, the strengths and weaknesses of Addamax's

product) making clear the bases for its ultimate finding on

causation; and, with the help of counsel, it has been relatively

easy to discern the evidence underlying these key findings.  The

district court could have written a 200-page decision on this case,

but the far more compact assessment it made was entirely adequate

under Rule 52(a).

   Affirmed.