Allen-Myland, Inc. v. Int.nat'l Bus. Mach. Corp

• Court: Court of Appeals for the Third Circuit
• Decided: August 12, 1994
• Docket: 93-1586, 93-5547
• Status: Unknown

Opinion

Opinions of the United 1994 Decisions States Court of Appeals for the Third Circuit

8-12-1994

Allen-Myland, Inc. v. Int.nat'l Bus. Mach. Corp Precedential or Non-Precedential:

Docket 93-1586, 93-5547

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Recommended Citation "Allen-Myland, Inc. v. Int.nat'l Bus. Mach. Corp" (1994). 1994 Decisions. Paper 109. http://digitalcommons.law.villanova.edu/thirdcircuit_1994/109

This decision is brought to you for free and open access by the Opinions of the United States Court of Appeals for the Third Circuit at Villanova University School of Law Digital Repository. It has been accepted for inclusion in 1994 Decisions by an authorized administrator of Villanova University School of Law Digital Repository. For more information, please contact Benjamin.Carlson@law.villanova.edu. UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT

No. 93-1586

ALLEN-MYLAND, INC., Appellant

V.

INTERNATIONAL BUSINESS MACHINES CORPORATION

ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA (D.C. Civil Action No. 85-06166)

Argued January 24, 1994

Before: MANSMANN and NYGAARD, Circuit Judges and SEITZ, Senior Circuit Judge

(Opinion Filed August 12, l994)

ROBERT G. LEVY, ESQUIRE (Argued) WILLARD K. TOM, ESQUIRE JOEL E. HOFFMAN, ESQUIRE JAMES H. CLINGER, ESQUIRE Sutherland, Asbill & Brennan 1275 Pennsylvania Avenue, N.W. Washington, DC 20004-2404

CARL A. SOLANO, ESQUIRE Schnader, Harrison, Segal & Lewis 1600 Market Street Suite 3600 Philadelphia, PA 19103 Attorneys for Appellant

ROBERT N. FELTOON, ESQUIRE Conrad, O'Brien, Gellman & Rohn 1515 Market Street 16th Floor Philadelphia, PA 19102

EVAN R. CHESLER, ESQUIRE (Argued) PETER T. BARBUR, ESQUIRE Cravath, Swaine & Moore 825 Eighth Avenue Worldwide Plaza New York, NY 10019-7415 HOWARD WEBER, ESQUIRE Davis, Scott, Weber & Edwards, P.C. 100 Park Avenue New York, NY 10017 Attorneys for Appellee

ALAN J. WEINSCHEL, ESQUIRE ROBERT P. STEFANSKI, ESQUIRE LUCIA MANDARINO, ESQUIRE Weil, Gotshal & Manges 767 Fifth Avenue New York, NY 10153 Attorneys for Amici-Appellants1

OPINION OF THE COURT

NYGAARD, Circuit Judge.

Allen-Myland, Inc. ("AMI") appeals from the district court's

judgment in favor of IBM in this intricate antitrust tying case.

We conclude that the district court erred and will vacate its

judgment and remand the cause for further proceedings.2

1Amici consist of the Computer Dealers and Lessors Association, Inc., Digital Dealers Association, and National Association of Telecommunications Dealers. 2 Although upon review we concentrate on errors, it is well to say at the outset that in a case that has been litigated as vigorously as this one, either finding facts or reviewing those findings for clear error is no easy task. The thirty-volume record on appeal contains 17,469 pages of court filings, trial and deposition transcripts, and exhibits. The district court, of course, was in even a more difficult position. Over 3.5 million pages of discovery documents were produced and 65 days of deposition testimony were taken. The trial transcript alone fills 1,750 pages, there were 2,750 pages of deposition testimony admitted, and there were no fewer than 734 trial exhibits. I. FACTS and PROCEDURE

A. Mainframes and Upgrades

The facts underlying this nine-year-old dispute are minutely

detailed and quite voluminous. The district court has set forth

these facts in great detail in its forty-four page opinion,

Allen-Myland, Inc. v. IBM Corp., 693 F. Supp. 262 (E.D. Pa.

1988), and we will present only a brief summary here.

IBM is the world's largest manufacturer of large-scale

mainframe computers. These machines have the capacity to process

millions of records at a time and manage a tremendous volume of

information, making modern operations possible for large

corporations, public utilities and government agencies. Without

them, business would soon slow or halt. Mainframes are

physically large machines, generally occupying significant floor

space and requiring a full-time staff to keep them in operation.

Needless to say, they are quite expensive, with prices commonly

in excess of $1 million.

Mainframes are available in a wide range of computing

capacities, to fit the needs of each individual customer. One

common measure of capacity is computing speed, measured in

millions of instructions per second ("MIPS"). IBM mainframes may

also be upgraded, as its customers' computing needs change over

time, in what is known as a MIPS upgrade. Many IBM mainframes are not purchased outright from IBM by

their end users, but are instead leased through third-party

leasing companies such as CMI and Comdisco.3 A mainframe will

typically be leased to several end users during its life cycle,

and then when obsolete will be scrapped. Often, when the lease

term expires and the mainframe returns to the lessor, the

computer will need to be reconfigured to meet the needs of the

next lessee.

Companies like AMI found a profitable market reconfiguring

mainframe computers such as the IBM 303X series.4 Lessors could

not afford to have their machines idle and generating no revenue

while waiting for a reconfiguration, yet IBM often took months to

install an upgrade. AMI, on the other hand, would turn the job

around in a matter of only a few days. Either AMI or the leasing

company would buy the required parts outright from IBM for

inventory on what were known as SWRPQ terms, meaning that IBM

installation was not included. It would then install the parts

in the user's computer, set up the appropriate software and test

the system. Old parts could often then be used on another

computer. Because the 303X series of computers was based on

"MST" circuit board technology, which required significant

technical skill and time to reconfigure, AMI was in a position to

3 IBM itself is barred from leasing computers to end users under the terms of a 1956 consent decree entered into with the United States in another antitrust case. 4 An "X" in an IBM model number indicates that several numerical designators may be used in that position, e.g., 3031, 3033. add considerable value in terms of its labor. As a result, AMI

grew into a company with $50 million in annual revenue.

In 1980, however, IBM introduced its next generation of

mainframe computers, the 308X series, which caused a major

erosion in AMI's reconfiguration business. These machines used a

new technology, the thermal conduction module, or TCM. A TCM is

essentially a water-cooled can containing a much greater density

of circuits than the system it replaced. Because more circuitry

can be placed in a TCM, there are fewer TCMs to replace; hence,

there is much less labor involved in performing an upgrade on a

TCM-based computer than on earlier models.

In marketing its 308X series, IBM used a policy known as net

pricing. Under this policy, IBM installation labor was bundled

in with the price of the parts for TCM-based MIPS upgrades; SWRPQ

pricing was either eliminated or was priced prohibitively high.

In addition, any old TCMs recovered from a mainframe during

reconfiguration became IBM's property. As a result, customers

desiring non-IBM installation of upgrades were required to pay

IBM's labor charge anyway. And because the net pricing policy

limited the supply of the TCMs on the open market, acquiring

parts from sources other than IBM became impractical.

IBM contended that net pricing's purpose was to insure that

the old TCMs recovered from reconfigured machines were returned

to IBM. TCMs are extremely durable and can easily be refurbished

to "equivalent to new" condition. IBM, faced with a

manufacturing capacity shortage, stated that it merely wanted to

refurbish TCMs that were returned for later reuse in a future upgrade or in a brand-new machine. As for bundling the labor

charge, IBM contended its purpose was to ensure that it got its

TCMs back, which was enhanced when IBM personnel performed the

labor.

B. Procedural History

AMI, however, soon found that much of its reconfiguration

business was drying up and filed this action. AMI's four-count

complaint alleged that IBM violated sections 1 and 2 of the

Sherman Act, 15 U.S.C. §§ 1, 2, and also asserted state law

unfair competition and tortious interference claims. IBM

counterclaimed for copyright infringement of its software

programs and documentation manuals; IBM also asserted state law

counterclaims for breach of contract and tortious interference.

AMI's section 1 claim was tried in a bench trial, contending

that IBM had tied its upgrade installation services to the parts

needed to perform the upgrades.5 AMI alleged that this tying

arrangement constituted a per se violation of the Sherman Act;

alternatively, it asserted that the tie was still a section 1

violation under the rule of reason.

The district court found that IBM's net pricing structure

did not constitute a per se section 1 violation, for two reasons:

first, that IBM's share of the relevant market was not high

enough to impose per se liability, id. at 270-83; and second,

5 In addition, AMI alleged that IBM's Installation and Warranty Service Charge (IWSC) constituted an unreasonable restraint of trade. The district court found for IBM on this theory, and AMI has not appealed from that finding. that net pricing did not foreclose AMI from a "viable business

opportunity," id. at 283-93. The court also found that net

pricing did not violate section 1 under a rule of reason analysis

because sufficient procompetitive reasons existed for it.6 Id.

at 293-98.

Later, the district court tried most of the remaining claims

and counterclaims, and concluded that AMI was liable to IBM for

copyright infringement and violations of the Lanham Act. Allen-

Myland, Inc. v. IBM Corp., 746 F. Supp. 520 (E.D. Pa. 1990).7

The court also entered judgment for IBM on AMI's Sherman Act

section 2 claim, concluding that such a claim could not possibly

succeed unless its earlier ruling on market power were reversed.

Id. at 525 n.1, 559. Meanwhile, IBM had filed another Lanham Act action against

AMI in the United States District Court for the Northern District

of Illinois, which was transferred to the Eastern District of

Pennsylvania. Moreover, certain issues concerning IBM's relief

against AMI on its counterclaims remained unresolved. On AMI's

motion, the district court issued an order under Fed. R. Civ. P.

54(b) declaring that its 1988 opinion resolving the antitrust

issues constituted a final judgment. Allen-Myland, Inc. v. IBM Corp., 1993-1 Trade Cas. (CCH) ¶ 70,244, 25 Fed. R. Serv. 3d

6 The district court's decision under the rule of reason has not been appealed. 7 AMI later moved for reconsideration, but that motion was denied. Allen-Myland, Inc. v. IBM Corp., 770 F. Supp. 1004 (E.D. Pa. 1991). (Callaghan) 1353, 1993 WL 169849 (E.D. Pa. May 14, 1993). This

appeal followed.

II. OVERVIEW of the LAW of TYING ARRANGEMENTS

The overarching issue in this appeal is AMI's claim that the

district court erred when it found that net pricing was not a per

se violation of section 1 of the Sherman Act. In a tying

arrangement, the seller sells one item, known as the tying

product, on the condition that the buyer also purchases another

item, known as the tied product. Town Sound & Custom Tops, Inc.

v. Chrysler Motors Corp., 959 F.2d 468, 475 (3d Cir.) (in banc),

cert. denied, 113 S. Ct. 196 (1992). Section 1 of the Sherman

Act declares only contracts in restraint of trade illegal. Thus,

the antitrust concern over tying arrangements is limited to those

situations in which the seller can exploit its power in the

market for the tying product to force buyers to purchase the tied

product when they otherwise would not, thereby restraining

competition in the tied product market. Market power is defined

as the ability "to raise prices or to require purchasers to

accept burdensome terms that could not be exacted in a completely

competitive market." United States Steel Corp. v. Fortner Enters., Inc. ("Fortner II"), 429 U.S. 610, 620, 97 S. Ct. 861,

867-68 (1977).

On the other hand, if the seller does not have sufficient

power in the tying product market, buyers wanting to purchase the

tied product from another source will simply avoid the tie by buying the tying product from another supplier. See Town Sound,

959 F.2d at 476 (discussing Jefferson Parish Hosp. Dist. No. 2 v.

Hyde, 466 U.S. 2, 11-14, 104 S. Ct. 1551, 1558-59 (1984)). Such

a tie will not restrain an appreciable amount of trade, and

accordingly, will not constitute an antitrust violation.

The first inquiry in any section 1 tying case is whether the

defendant has sufficient market power over the tying product,

which requires a finding that two separate product markets exist

and a determination of precisely what the tying and tied product

markets are. See Jefferson Parish, 466 U.S. at 21, 104 S. Ct. at

1562-63. If the defendant is found to have sufficient market

power in the tying product market, then the tie may be a "per se"

violation of the Sherman Act. This tie is condemned if the

probability that the contractual arrangement improperly restrains

trade is so high that a judicial inquiry into the actual

prevailing market conditions, including possible procompetitive

justifications for the tie, is deemed unprofitable. Id. at 15-18

& n.25, 104 S. Ct. at 1560-61 & n.25; Town Sound, 959 F.2d at

477.

Assuming the court finds sufficient market power, it must

then decide whether "a substantial amount of interstate commerce"

has been affected by the tie. See, e.g., Town Sound, 959 F.2d at 477. The Supreme Court has defined "substantial" in absolute

dollar terms as an amount which is not de minimis in terms of the

"total volume of sales tied by the sales policy under challenge .

. . ." Fortner Enters., Inc. v. United States Steel Corp. ("Fortner I"), 394 U.S. 495, 501-02, 89 S. Ct. 1252, 1257-58

(1969) ($190,000 sufficient).

Finally, to have standing to bring a private antitrust

action, the plaintiff must show "fact of damage," defined as some

harm flowing from the antitrust violation. Zenith Radio Corp. v.

Hazeltine Research, Inc., 395 U.S. 100, 114 n.9, 89 S. Ct. 1562,

1571-72 n.9 (1969); Pitchford v. Pepi, Inc., 531 F.2d 92, 98-99

(3d Cir. 1975), cert. denied, 426 U.S. 935, 96 S. Ct. 2649

(1976). The amount of the damage is not important for antitrust

standing; it is sufficient that some damage has occurred. There

must, however, be some causal link between the damage and the

violation of the antitrust laws. Put another way, the harm must

be one that the antitrust laws were designed to prevent.

Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 488-89,

97 S. Ct. 690, 697 (1977).

III. SCOPE of the RELEVANT MARKET

A. Introduction

AMI asserts that the tying product is the "large-scale

mainframe computer," defined as computers that are "among the

largest in memory capacity, the fastest in computing speed, and

the most expensive of computers available." Allen-Myland, 693 F. Supp. at 270-71. Alternatively, it sets forth two submarkets

consisting of the parts and services required for the conversion

and upgrade of either IBM mainframes or all manufacturers'

mainframes. AMI defines the tied product as the labor required

to install upgrades. The district court found AMI's proposed market definition

and submarkets to be too narrow. When the court broadened the

market to include various substitutes that it believed shared

cross-elasticity of demand8 with large-scale mainframes, IBM's

market share dropped from as high as 79% to under 34.4%, too low

to impose per se liability. See Jefferson Parish, 466 U.S. at

26-27, 104 S. Ct. at 1566 (30% market share insufficient); Times-

Picayune Publishing Co. v. United States, 345 U.S. 594, 611-12,

73 S. Ct. 872, 882 (1953) (33-40% market share insufficient).

The court stated: Standing alone, AMI's market share evidence tends to show that IBM enjoys substantial economic power. However, AMI's definitions of large scale mainframes and the relevant market are flawed in several respects and tend to overstate IBM's market share and power.

Allen-Myland, 693 F. Supp. at 271. The district court defined

the relevant market to include not only large-scale mainframes,

but also added upgrades to large-scale mainframes, leased and

smaller capacity computers, peripheral products and software,

"box swaps," and upgrades using customer-provided parts to the relevant market. To the extent that the district court's alleged

errors were in formulating or applying legal principles, our

review is, of course, plenary. We review the district court's

findings of fact, however, under the clearly erroneous standard

of review. 8 "The outer boundaries of a product market are determined by the reasonable interchangeability of use or the cross-elasticity of demand between the product itself and substitutes for it." Brown Shoe Co. v. United States, 370 U.S. 294, 325, 82 S. Ct. 1502, 1523-24 (1962). B. Leasing Companies

The district court first added leasing companies into AMI's

proposed market definition. It reasoned as follows: Leasing companies, such as Comdisco and CMI, purchase computer equipment from manufacturers and lease it to users. From a consumer's standpoint, they are an alternative source of computer equipment. They compete with IBM. Leasing companies own approximately 40 percent of all large scale mainframe computers, as defined by AMI. Prof. Levin testified that IBM's share of the market would be reduced by an amount he was unable to determine if leasing companies were taken into account in AMI's market definition. If leasing company transactions involving computers comparable and in many cases identical to the large scale mainframes marketed by IBM are included in the relevant market, and the market is measured on a "transaction basis," IBM's share of the market, according to Prof. Almarin Phillips, who testified for IBM as an expert economist, drops to 34.4 percent. Prof. Phillips testified that such a share would not reflect "overwhelming" activity in the market on IBM's part.

Allen-Myland, 693 F. Supp. at 273-74 (footnote and record

citations omitted). We cannot affirm the district court's

finding that leasing companies form a part of the relevant market.

First, the district court relied on the testimony of

Professor Levin, AMI's own expert, as an admission that IBM's

market share would have to be reduced if leasing companies were

added to the relevant market. This reliance is misplaced.

Although Professor Levin did affirmatively answer the

tautological question whether "leasing companies are competitors

of IBM when they market IBM manufactured equipment in competition

with IBM," this and our review of the trial transcript indicate that he neither addressed the issue of market share reduction nor

made an admission about it.

More importantly, we think that the opinion reveals an

analytical flaw. Leasing companies lease both new and used

computers. They purchase new mainframes from IBM and lease them

to end users; when the lease term is up, if the mainframe is not

obsolete and can be leased again, the leasing company will place

it with another end user. In addition, leasing companies deal in

both IBM and non-IBM computers. There are important legal and

competitive distinctions between the various types of equipment

in which the leasing companies deal, so they cannot be lumped

together.

New computers are, of course, already in the relevant market

as defined by AMI. It was therefore incorrect to add them in

again when end users lease new computers rather than purchase

them outright. In this situation, leasing companies provide

nothing more than an alternate way of financing a new computer,

but do nothing to increase the supply of new machines. See

Transamerica Computer Co. v. IBM Corp. (In re IBM Peripheral EDP Devices Antitrust Litig.), 481 F. Supp. 965, 979 (N.D. Cal.

1979), aff'd, 698 F.2d 1377 (9th Cir.), cert. denied, 464 U.S.

955, 104 S. Ct. 370 (1983). They do not increase the number of

new mainframes, as leasing companies still must purchase them

from their manufacturers. Thus, to the extent that IBM had the

power to set prices, that power would not be diminished, or at most would only be slightly diminished,9 by its sales to leasing

companies rather than end users. Since these purchases are

already in the relevant market, it was double counting to also

include them as part of the leasing market. Cf. id.

With respect to leases of used computers, there is a

significant difference whether those machines were made by IBM or

by some other manufacturer. Where used IBM computers are leased,

we think that United States v. Aluminum Co. of America ("Alcoa"),

148 F.2d 416 (2d Cir. 1945)10 is apposite. There, Alcoa

controlled 90 percent of the market for virgin aluminum ingot.

It sought to reduce its market share for antitrust purposes by

arguing that secondary ingot derived from scrap competed with

virgin ingot for sales. The court held that because all

secondary ingot was ultimately derived from virgin ingot, Alcoa,

by properly exercising its power over the supply of virgin, could

indirectly control the supply of secondary as well. Id. at 425. 9 Conceivably, a few large, sophisticated buyers could place certain limits on even a dominant seller's power to set prices. There is no evidence that such pressure was applied here. 10 Although Alcoa was decided by the United States Court of Appeals for the Second Circuit, the procedural circumstances under which it reached that court give it added weight as precedent. Under the then-existing version of 15 U.S.C. § 29, appeals from the decrees of district courts in antitrust cases where the United States was a complainant would lie only to the Supreme Court. In Alcoa, however, a sufficient number of justices were recused that a quorum could not be obtained; accordingly, the Supreme Court, pursuant to the above statute, remanded the case to the three most senior judges of the Second Circuit: Learned Hand (the author of Alcoa), Augustus N. Hand, and Swan. The Supreme Court itself has recognized the special weight of the Alcoa opinion. See American Tobacco Co. v. United States, 328 U.S. 781, 811-13 & n.10, 66 S. Ct. 1125, 1140 & n.10 (1946). Alcoa's analysis is persuasive. Indeed, we think the case

is even stronger here for excluding the secondary market.

Refined aluminum can be melted down and reused repeatedly, and in

any event, products made with it may last for decades before they

are scrapped and the aluminum is recycled. It therefore may have

been quite difficult for Alcoa to estimate future supply and

demand for aluminum ingot over a long period of time with

sufficient accuracy to maximize its profits by manipulating the

supply of virgin ingot it produced. See 2 Phillip Areeda &

Donald F. Turner, Antitrust Law § 530c (1978).

Computers, however, have considerably more limited lives

than aluminum ingot. Technology and price/performance ratios

have been advancing so rapidly in the computer industry that used

machines cannot be re-leased indefinitely.11 Accordingly, a

powerful manufacturer like IBM was in a position to maximize its

profits by carefully controlling the number of mainframes that

would later appear on the used leasing market. This is

particularly true when, as here, that control was enhanced by

IBM's policy of recapturing old parts that could otherwise have 11 Moreover, IBM's net pricing and parts recapture policies further reduced whatever control the leasing companies might have had over the prices of used equipment. By recapturing old parts from upgraded mainframes, IBM effectively curtailed the leasing companies' ability to reconfigure their used machines into different models that could have competed against IBM's offerings over the medium term. This effect is similar to that caused by IBM's past practices of offering tabulating and computer equipment only for lease and not for sale. These practices also spawned antitrust litigation, resulting in a 1935 injunction and a 1956 consent decree. See Control Data Corp. v. IBM Corp., 306 F. Supp. 839 (D. Minn. 1969), aff'd, 430 F.2d 1277 (8th Cir. 1970). been used to extend the useful service lives of existing used

mainframes by allowing them to be upgraded and placed with new

customers. We therefore conclude that the district court erred

when it added leases of used IBM mainframes into the relevant

market.12

On the other hand, to the extent that leasing companies deal

in used, non-IBM mainframes that have not already been counted in

the sales market, these machines belong in the relevant market

for large-scale mainframe computers. Unlike IBM, there is no

allegation that the manufacturers of these computers possess the

market power to control prices, much less that they would do so

in concert with IBM.13 When these computers are placed in

service by leasing companies, they provide an alternative that

limits IBM's power in the market.14

12 We also disagree with the district court's view that AMI admitted that leasing companies "compete with IBM and constrain IBM's ability to set prices or exclude competition in the market for new large scale main frame computers." Allen-Myland, 693 F. Supp. at 274. The district court cited AMI's proposed finding of fact 29 in support of its conclusion, but AMI asserted only that IBM and lessors compete in the placement of mainframes with end users; in other words, IBM installs computers, and so do Comdisco and CMI. This does not constitute an admission on market cross- elasticity or the scope of the relevant market. 13 Indeed, the so-called "plug-compatible manufacturers" have built their businesses around providing mainframes and peripherals compatible with, but in competition with those of IBM. 14 This holds most true for plug-compatible mainframes. There is actually a considerable question to what extent non- compatible computers are a realistic short-run alternative for a customer whose computer software and data are tailored to IBM mainframes. We do not reach the issue, however, as Allen-Myland is constrained by its own definition of the market as "large scale mainframe computers," regardless of manufacturer or Accordingly, we conclude that the district court erred when

it included all leasing company transactions in the relevant

market. On remand, the court should include only leases of used,

non-IBM mainframes and determine the extent to which those leases

reduce IBM's market share.

C. Box Swaps

The district court also added "box swaps" -- replacing an

existing computer with a more powerful, new or used computer --

into the relevant market, although it did not calculate the

degree to which these box swaps eroded IBM's market share.

The analytical problem with this finding is similar to the

error with respect to leasing companies. To the extent that a

box swap involves purchasing a new IBM or a new or used non-IBM

mainframe computer, it constitutes double counting to add box

swaps to the market because those sales are already included in

the market definition. On the other hand, if a used IBM computer

is used in the swap, then to include that machine in the market

is incorrect under Alcoa for the same reason it was error to

include them in the leasing market.

D. Used Parts Upgrades Including "used parts upgrades" in the relevant market was

also error. A used parts upgrade is an upgrade performed with

parts obtained from another computer, either one belonging to the

compatibility. See Edward J. Sweeney & Sons, Inc. v. Texaco, Inc., 637 F.2d 105, 117 (3d Cir. 1980) (antitrust plaintiff held to theory advanced in district court), cert. denied, 451 U.S. 911, 101 S. Ct. 1981 (1981). organization needing the upgrade or one belonging to a leasing

company. See Allen-Myland, 693 F. Supp. at 277.

The district court correctly recognized that the viability

of used parts upgrades could be limited by the scarcity of the

necessary parts. It then relied on the many memory and channel

upgrades and downgrades that had been performed with used parts

not acquired from IBM. The record indicates, however, that most

memory and channel upgrade parts are not based on TCM technology

and were thus not subject to IBM's net pricing and parts

recapture policies. The parts required for MIPS upgrades,

however, were mostly TCM-based and subject to net pricing and

recapture. Thus, that other non-net priced parts were readily

available does not support the implicit conclusion that there was

no scarcity of MIPS upgrade parts.

Even if used parts were available to perform MIPS upgrades,

the record does not suggest any manufacturer of those parts other

than IBM. Hence, the reasoning of Alcoa is as controlling here

as it was for used IBM computers. To the extent that IBM

controls the supply and price of the new mainframes from which

upgrade parts must be salvaged, it has the power to indirectly

control those upgrades as well. Accordingly, it would have been

error to include used parts upgrades in the relevant market even

if parts had been available.

E. Smaller Capacity Computers The district court considered AMI's proposed market

definition to be too narrow because it failed to include "smaller

capacity computers" -- computers below the size and sophistication of a large-scale mainframe that nevertheless would

be reasonable substitutes, either singly or in combination. See

Allen-Myland, 693 F. Supp. at 274-75. AMI argues that it was

error for the district court to include these smaller machines

because there was not sufficient evidence of substitutability

between these two types of computers. The district court

rejected AMI's argument, citing evidence that smaller computers

had effectively displaced mainframes in certain applications and

noting a trend toward the replacement of large, centralized

systems with "distributed" systems consisting of greater numbers

of smaller capacity computers. Id.

AMI argues on appeal that this reasoning was flawed because

it failed to consider the rapid development of technology over

the life cycle of a typical computer. It agrees that some

installations that initially required older generation mainframes

might be satisfied with "smaller" machines when it came time to

replace their mainframes, because the smaller machines would by

then have all the power of the earlier mainframes. Nevertheless,

AMI contends, the fact that some users of older mainframe

computers might switch to smaller capacity machines proves

nothing about whether those smaller machines effectively compete

against IBM's current, more powerful mainframes, which are the focus of this litigation. AMI's argument is sound, but

unavailing. There was testimony admitted at trial indicating that

at least one smaller capacity computer, the Hewlett-Packard HP

3000 series, competed against the IBM 308X series "in many applications." The district court was entitled to, and did,

credit this evidence. Allen-Myland, 693 F. Supp. at 275.

The amici argue that the district court failed to consider

the problem of "lock-in." Although mainframes and smaller

capacity computers may be substitutable when a new computer

application is being developed or when an existing application is

no longer useful and must be rewritten anyway, they argue that

there are significant switching costs that prevent this from

happening in the short run. For example, to "port" an existing

application from a mainframe to a smaller computer, the

applications software may have to be rewritten, the data files

may have to be converted to new formats, and personnel may have

to be extensively trained on the new system. The costs of doing

so and the delay involved could well cause the computer user to

remain with a mainframe-based system rather than convert to a

smaller computer; indeed, one court has noted that, for

compatibility reasons, over 80 percent of users remain loyal to

the manufacturer of their original systems. See Transamerica,

481 F. Supp. at 980 & n.32.

Ordinarily, we would not consider this argument because it

was not raised in the district court. This case, however, is

unusual in that the district court reached its decision in 1988,

but the antitrust issues did not become final and appealable

until 1993. During that hiatus, the Supreme Court issued its

decision in Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. ____, 112 S. Ct. 2072 (1992). Because Kodak is directly relevant to the lock-in argument and the district court never had the opportunity to consider the effect of that case, we would be

remiss if we did not analyze the issue now.

Eastman Kodak manufactured photocopying equipment that it

sold in a competitive market. According to the plaintiffs, who

provided service and repair to those copiers, Kodak sought to

maintain control over service by restricting the availability of

necessary repair parts. Although Kodak argued that it did not

have sufficient market power to restrain trade because the market

for new copiers was competitive, 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: If 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 increases 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.

Id. at 2087.

The situation may be analogous here. If 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.

The district court cited several anecdotes in the record

suggesting that smaller machines are vigorously competing with large-scale mainframes and are often winning out over them. Our

review of the record, however, shows that in none of the

incidents mentioned was there 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.

Nevertheless, this remains an issue of fact for the district

court to resolve in the first instance. However, whether to

consider new issues on remand is not for us to determine, but is

properly a matter for the district court's discretion as presider

over subsequent proceedings. Therefore, we express no view on

whether the district court should permit a new argument to be

pursued at this stage of the litigation. The district court may

conclude, for example, that allowing AMI to pursue a new theory

not raised until after discovery and the completion of an entire

trial would result in undue prejudice to IBM. See Habecker v.

Clark Equipment Co., 942 F.2d 210, 218 (3d Cir. 1991). We hold

only that the determination whether to consider the lock-in

argument, to permit further discovery on the issue, and to hear additional evidence are all within the district court's sound

discretion.15 See id.

F. Peripheral Devices and Software

AMI also argues that the district court erred when it added

peripheral devices and software into the relevant market. The

court found that these items, which provide data input, storage

and output capabilities and direct the computer in its processing

of information, "provided significant and reasonable alternatives

to a wide variety of upgrades and modifications of large scale

mainframes." Allen-Myland, 693 F. Supp. at 276.

Similar or substitute products are those that "have the

ability -- actual or potential -- to take significant amounts of

business away from each other." SmithKline Corp. v. Eli Lilly &

Co., 575 F.2d 1056, 1063 (3d Cir.), cert. denied, 439 U.S. 838,

99 S. Ct. 123 (1978). Thus, the relevant product market "is

composed of products that have reasonable interchangeability for

15 If it does so, the district court should then proceed to determine the percentage of the mainframe market occupied by existing mainframe users who are locked in to that type of computer by prohibitively high switching costs; the greater that percentage is, the more power IBM has to maintain supracompetitive prices in the mainframe market. See Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law ¶ 521.1a, at 604-05 (1993 Supp.). The court can then determine if IBM's power in the large-scale mainframe market is constrained by the existence of smaller capacity computers, and if so, whether such computers should be included in the relevant market. It may be that the district court will conclude that, while smaller capacity computers cannot be fully excluded from the market, neither can they be fully included. The court may, after considering the evidence and the nature of the market, exercise its discretion and reduce IBM's market share by a number greater than zero percent but less that the full extent of the market for smaller capacity computers. the purposes for which they are produced -- price, use and

qualities considered." Id. at 1062-63 (quoting United States v.

E.I. du Pont de Nemours & Co., 351 U.S. 377, 404, 76 S. Ct. 994,

1012 (1956) (The Cellophane Case)); Tunis Bros. Co. v. Ford Motor

Co., 952 F.2d 715, 722 (3d Cir. 1991), cert. denied, 112 S. Ct.

3034 (1992).

"Interchangeability" implies that one product is roughly

equivalent to another for the use to which it is put; while there

might be some degree of preference for the one over the other,

either would work effectively. A person needing transportation

to work could accordingly buy a Ford or a Chevrolet automobile,

or could elect to ride a horse or bicycle, assuming those options

were feasible. The key test for determining whether one product

is a substitute for another is whether there is a cross-

elasticity of demand between them: in other words, whether the

demand for the second good would respond to changes in the price

of the first. Tunis Bros., 952 F.2d at 722.

In the six years since the district court issued its

opinion, the personal computer has consolidated its position in

modern life, and what once seemed mired in impenetrable technical

jargon is now within the vocabulary of the general public.

Moreover, technology changes rapidly and if one has an older

computer and wishes to use the latest software applications, one

often must either upgrade the central processor -- the equivalent

of a MIPS upgrade -- or buy a new computer. Increasing the size

of the disk drive, buying more memory or installing the latest

version of the operating system may help in some cases but in many others will be ineffective. It thus may be argued that the

same situation obtains in the case of larger computers; that is,

peripherals and software are complementary goods but are not

substitutes for mainframe computers.

The issue, nevertheless, remains a factual one for the

district court to resolve. Here, if peripherals and software are

reasonable substitutes for mainframes, we should expect to see an

increased demand for them as the price of mainframes rises, but

the district court cited no evidence of this type. Instead, it

relied on the fact that IBM considers peripheral products and

software when pricing its computer systems. Allen-Myland, 693 F.

Supp. at 276. Pricing a large mainframe system on the basis of

peripherals included with it against competitive offerings by

other manufacturers, however, is simply not evidence that

peripherals and mainframes are substitutes for one another.

The district court relied even more heavily on several

anecdotes in which large mainframe users had upgraded memory,

disks, software or other peripherals rather than perform a MIPS

upgrade. Id. at 276-77. This testimony fell into two

categories. First, some users testified that it was possible to

delay a MIPS upgrade for a while by upgrading peripherals or

software: akin perhaps to saying that installing new brakes may

delay the necessity of purchasing a new car, but it is not

sufficient evidence on which to conclude that the products are

reasonably interchangeable in use. See Kaiser Aluminum & Chemical Corp. v. Federal Trade Comm'n, 652 F.2d 1324, 1331-32

(7th Cir. 1981) ("specialties," which delayed the necessity of replacing refractory bricks in furnaces, did not belong in the

same relevant market).

Second, there was testimony to the effect that there are

many ways to enhance the performance of a computer system,

including MIPS upgrades and peripheral/software upgrades.

Although it is doubtless true that improvements to peripherals or

software will improve a computer's performance somewhat under

certain circumstances, we find no evidence on how much or under

what conditions improvement could be expected. There was thus no

evidence from which to conclude whether peripheral and software

upgrades were reasonably interchangeable with either a MIPS

upgrade or a different mainframe computer in enough cases that

those alternate upgrades could properly be termed substitutes.

Nor was there evidence that, because of a price change in

mainframes, there was a greater or lesser demand for

peripheral/software upgrades. In sum, the evidence was

insufficient to support the wholesale inclusion of peripherals

and software into the relevant market for large-scale mainframes.

We emphasize, however, that we are not holding that

peripheral and software must be excluded from the relevant

market, only that, upon review, the evidence cited in the

district court's opinion is insufficient to warrant including

them. On remand, the district court will of course determine

whether there is some degree of interchangeability or other

evidence of cross-elasticity of demand. If there is, then the

court is free to adjust IBM's share of the market by its best

estimate of the true competition from peripherals and software. G. AMI's Proposed Submarkets

As a separate ground for reversal, AMI argues that the

district court erred by rejecting its two alternate submarkets:

the parts and services required for the upgrade and conversion of

all large-scale mainframes, and an even narrower submarket

confined to parts for upgrading IBM mainframes. The district

court rejected the larger submarket based on evidence that

upgrades to large-scale mainframes competed with various

alternatives, including large-scale mainframes themselves.

Allen-Myland, 693 F. Supp. at 282-83. It rejected the narrow

submarket because "[c]ourts have generally rejected market

definitions limited to a defendant's products." Id. at 282 n.43.

In Brown Shoe Co. v. United States, 370 U.S. 294, 325, 82 S.

Ct. 1502, 1524 (1962), the Supreme Court stated that within a

broader product market "well-defined submarkets may exist which,

in themselves, constitute product markets for antitrust

purposes."16 Thus, if upgrades and mainframes are not reasonably

interchangeable with each other, a valid submarket would exist

here. The district court, however, found that replacing the

16 The use of the term "submarket" is somewhat confusing, and tends to obscure the true inquiry: whether IBM is constrained by the prices of large scale mainframe computers when pricing its upgrades. If it is so constrained, then the relevant market consists of both mainframes and upgrades. If not, then it is simpler and more accurate to say that the relevant market itself, not some submarket of it, contains only upgrades. See Areeda & Hovenkamp, supra, ¶ 581.1c, at 535-36 (1993 Supp.). Nevertheless, because the term has been commonly used in the reported cases over the years, we will also continue to use it, being nonetheless mindful that it is inaccurate and of the true question before us. computer itself is an alternative to an upgrade. Moreover, it

found that IBM priced upgrades and mainframes so that buyers

would be indifferent whether to purchase an upgrade or install a

more powerful computer. These factual findings are not disputed

on appeal, and so the district court's conclusion on the larger

submarket must stand. By implication, if the broader submarket

fails, the narrower one would appear to fail as well.

Instead of arguing that the district court's factfinding was

clearly erroneous, AMI attempts to revive its narrow submarket by

relying on the testimony of its expert, Professor Levin, that

certain IBM mainframe users were locked into upgrading their

computers and lacked the alternative of replacing the whole

machine. By so arguing, it attempts to bring this issue within

the ambit of Kodak, which was decided four years after the

district court's opinion in this case.

In Kodak, as we have already discussed, the Supreme Court

held that when users are locked into a particular vendor by the

sunk cost of the product, market power may exist in the

aftermarket for parts even though the equipment market is

competitive. Here, while the district court found that large-

scale mainframes were generally reasonable substitutes for

upgrades, its opinion did not address whether there was a

subpopulation of IBM mainframe users who for economic reasons

were locked into MIPS upgrades when they needed increased

computing power. AMI's argument appears to be that if a

sufficient number of users actually were locked into using

upgrades rather than replacing their computers, then IBM may have had the power to set prices for MIPS upgrades, wholly separate

from whether it possessed that power over the large-scale

mainframe market, including upgrades. Under this reasoning, we

should remand and allow the district court to determine the

extent, if any, to which this was the case.

Such a remand would be futile, however, since if IBM had

market power over upgrades with respect to a large number of

mainframe users, we would expect it to charge supracompetitive

prices for upgrades. Yet, the district court found that IBM

prices its upgrades such that the user pays the same amount for

an upgrade as the price differential between the prices of the

more powerful and the existing computers if purchased new.

Allen-Myland, 693 F. Supp. at 282. This belies any special power

over an upgrade submarket; IBM's power is limited to whatever

control it is able to maintain over the larger relevant market.

Hence, we will affirm the district court's finding that a valid

IBM-only parts submarket did not exist.

H. The "Significant Win/Loss Reports"

Additionally, AMI argues that the district court improperly

rejected one of its strongest pieces of evidence in support of

its proposed market definition, the "Significant Win/Loss

Reports," also known as the SWLRs. These reports were prepared

monthly for the top management of IBM and showed, for each

competitive situation IBM faced, IBM's product offering, the

offering of its competitors, and whether IBM won or lost the

sale. See Allen-Myland, 693 F. Supp. at 272. According to the

testimony of AMI's expert who reviewed the SWLRs (Professor Levin), in 97.6 percent of the reported cases in which the IBM

offering was a large-scale mainframe, the competitor's offering

was also a large-scale mainframe or an upgrade. AMI asserts that

these reports proved that a distinct product market for large-

scale mainframe computers exists.

The district court rejected this evidence for several

reasons. First, it noted that IBM itself viewed the SWLRs as

"poor and unrepresentative indicators of actual market activity"

and eventually stopped using them. Id. at 273. In the

alternative, it relied on the SWLRs themselves, which contained

many examples in which non-IBM mainframes competed against IBM

computers smaller than IBM mainframes. The district court

believed that this additional competition undermined AMI's

definition of the relevant market.

Reports such as the SWLRs, which are used by IBM's

management, can be powerful evidence in an antitrust case. In

United States v. United Shoe Machinery Corp., 110 F. Supp. 295,

304 (D. Mass. 1953), aff'd per curiam 347 U.S. 521, 74 S. Ct. 699

(1954), the court stated: When a business allows its own important judgments constantly to be affected by a statistical survey unflaggingly made, diligently kept current, and repeatedly consulted at least by subordinate advisers to the officers, then the statistical material may be used by a court to some degree as reliable evidence against the business.

Nevertheless, notwithstanding the potentially probative value of

this type of evidence, there is nothing that requires courts to

credit such evidence. Here, as the district court pointed out, the record shows that IBM itself found the SWLRs were unreliable.

As the trier of fact, the district court was entitled to credit

that testimony and reject the SWLRs.17 Based on our conclusions

about the relevant market and the various additions to it,

however, it is possible that the district court may wish to

reconsider the probative value, if any, of the SWLRs. On remand,

of course, it is free to do so.

IV. OTHER FACTORS BEARING ON MARKET POWER

Market share, of course, is only one type of evidence that

may prove the defendant has sufficient market power to impose per

se antitrust liability. "Market share is just a way of

estimating market power, which is the ultimate consideration.

When there are better ways to estimate market power, the court

should use them." Ball Memorial Hosp., Inc. v. Mutual Hosp.

Ins., Inc., 784 F.2d 1325, 1336 (7th Cir. 1986). The district

court, in addition to its findings on market share, also held

that the lack of entry barriers and the rapid technological

change of the computer industry independently precluded any

finding of market power.

17 We do not accept the district court's alternative reason for discrediting the SWLRs. Although it may well be true that in some circumstances non-IBM mainframes competed with smaller IBM computers, we must be aware of the true market inquiry in an antitrust tying case: can the defendant exercise market power over the tying product to restrain trade in the tied product market? Although the above evidence could lead to the conclusion that the relevant market here is somewhat broader than mainframes only, a user seeking to avoid IBM's tie needs an alternative to an upgrade or a computer of the type it currently has installed. To the extent that the user needs more computing power, a smaller IBM computer would not appear to be much of a substitute. A. Ease of Entry Into the Relevant Market

Notwithstanding the extent of an antitrust defendant's

market share, the ease or difficulty with which competitors enter

the market is an important factor in determining whether the

defendant has true market power -- the power to raise prices. In many cases a firm's share of current sales does indicate power. . . . In other cases, however, a firm's share of current sales does not reflect an ability to reduce the total output in the market, and therefore it does not convey power over price. . . . [T]he lower the barriers to entry, and the shorter the lags of new entry, the less power existing firms have. When the supply is highly elastic, existing market share does not signify power.

Id. at 1335. The district court relied on three pieces of evidence that

purportedly showed that competitors were relatively free to enter

the relevant market. First, it noted: A number of companies other than IBM manufacture a wide range of computers having the processing power of IBM large-scale mainframe computers. Several of these (including Digital Equipment Corporation, Data General, Hewlett Packard, Tandem, and NCR) were admittedly excluded from the report upon which Prof. Levin relied to determine what constitute large-scale mainframes.

Allen-Myland, 693 F. Supp. at 278.

This statement is somewhat ambiguous. First, we have

already noted that the district court may wish to reconsider the

issue of whether the relevant market includes the smaller

capacity computers these manufacturers produce in light of the

Supreme Court's opinion in Kodak. Thus, to the extent the court

finds on remand that these computers do not belong in the

relevant market, its conclusion will have to be re-evaluated. More importantly, the district court's reasoning conflates

ease of entry into the market with what belongs in the relevant

market in the first instance. Even if all the computers made by

these manufacturers were properly included in the market, that

would say nothing about how easy or difficult it currently is to

enter the market. It is conceivable that all these firms have

been in the market for many years and that there has been very

little recent entry. To use an example from another industry,

just because there may be a sizable number of steelmakers of

various sizes and specialties, that does not necessarily make it

easy to build a steel mill and enter the business today.

Accordingly, the district court's finding of ease of market entry

is not supported by the mere presence of these manufacturers of

smaller capacity computers.

Second, the district court relied on the recent growth of

leasing companies as evidence that the market was easy to enter.

Again, we have already held that, except for certain leases of

used, non-IBM computers, leasing companies do not belong in the

relevant market. Because of this, the ease of entry into the

leasing market is legally irrelevant; if IBM has market power

over the supply of large-scale mainframes, the immediate entry

into the market of these essentially financial intermediaries can

do nothing to increase the supply of such computers.

Accordingly, leasing companies prove nothing about ease of entry

into the relevant market here.

Finally, the district court cited the relative ease of entry

into the computer reconfiguration business itself as evidence of a lack of barriers to market entry. The question, however, in an

antitrust tying case is whether the defendant can use its power

over the tying product market to control the tied product market

as well. If IBM has market power over large-scale mainframes

(including upgrade parts), that power could not be curtailed even

to the slightest degree by the fact that it is easy to enter the

tied market of installing upgrades. Indeed, it seems likely that

in most if not all tying cases, the tied product market will be

competitive, otherwise the defendant would have no reason to

impose the tie and restrain competition in the first place.

Accordingly, because the district court's reasons for

finding ease of entry into the relevant market were erroneous,

its finding that ease of entry vitiated IBM's market power cannot

stand.

B. Technological Innovation and Declining Prices

The district court also believed that market power was

inconsistent with the fact that technology in the computer

industry was rapidly advancing.

Although the performance of computers has been rapidly

increasing as costs for performance have plummeted, it proves too

much to say that this improvement is inconsistent with market

power. Indeed, in Greyhound Computer Corp. v. IBM Corp., 559 F.2d 488, 497 (9th Cir. 1977), cert. denied, 434 U.S. 1040, 98 S.

Ct. 782 (1978), another antitrust action brought against IBM and

relied upon by the district court, the court stated: IBM also contends that price reduction and product improvement are characteristics of the industry and are inconsistent with the existence of monopoly power. But rapid technological progress may provide a climate favorable to increased concentration of market power rather than the opposite. Moreover, a decline in prices does not necessarily imply an absence of monopoly power; a fair profit might have been made at even lower cost to users.

559 F.2d at 497 (footnote omitted) (citing Alcoa, 148 F.2d at

427). Indeed, were we to accept the district court's reasoning,

a great many defendants with market power, such as Alcoa in the

1920s and perhaps even the former AT&T telephone monopoly, could

be insulated from antitrust attack. Here, technology was

improving and prices were steadily falling, but the district

court cited no evidence that these changes had any connection

with a decrease in IBM's market power. We hold that the district

court erred when it ruled that innovation and price reductions

precluded a finding of market power.18

C. Conclusion Accordingly, we will vacate the district court's finding

that IBM lacked sufficient market power for per se antitrust

liability and remand for further proceedings, during which the

district court should re-examine the issue de novo.

V. "VIABLE BUSINESS OPPORTUNITY"

In addition to finding that IBM lacked sufficient market

power for per se liability to be imposed on it, the district

court also found that AMI had not been foreclosed from a "viable

business opportunity" by IBM's net pricing policy. Allen-Myland, 18 We do not, however, hold as a matter of law that price reductions and technological improvements can never evidence a lack of market power. Each case must be decided on its own facts, and facts must be found on the evidence presented. 693 F. Supp. at 283. The court found that the labor-saving

advantages of TCM technology changed what had once been a

lucrative reconfiguration business involving a great deal of

added value into one whose labor content had become de minimis,

averaging only 1.2 percent of the net upgrade price. Id.

According to the district court, because AMI would be required to

inventory a supply of upgrade parts in order to compete with IBM,

its carrying costs would be so high in comparison to its

projected revenues from performing upgrades that AMI would have

actually lost over $35 million if IBM had provided upgrades on

non-net priced (SWRPQ) terms. Id. at 288. Accordingly, because

the antitrust laws protect competition rather than competitors,

the court held that net pricing was not worthy of condemnation

under the antitrust laws.

There is no requirement that one be deprived of a "viable

business opportunity" to recover under section 1 of the Sherman

Act. We instead interpret the district court as holding that AMI

failed to prove the following two prongs of the orthodox

framework for a section 1 tying case: first, that two separate

markets existed for the tying and tied products; second, that a

substantial volume of interstate commerce was affected by the

tie. Additionally, the district court's analysis appears to bear

on the "fact of damage" issue of whether AMI has standing to

bring a private antitrust suit against IBM.

A. Separate Product Markets In Jefferson Parish, the Supreme Court said that, in a tying case, "the answer to the question whether one or two products are involved turns not on the functional relation between them, but

rather on the character of the demand for the two items." 466

U.S. at 19, 104 S. Ct. at 1562. It then went on to hold that a

tying arrangement cannot exist unless there is a sufficient

demand for the purchase of the tied product separate from the

purchase of the tying product so as to identify a market

structure in which it is efficient to offer the tied product

separately from the tying product. Id. at 21-22, 104 S. Ct. at

1563. There, the tying product was hospital services and the

tied product was anesthesiological services; because on the facts

presented, there was evidence of separate patient demands for

specific anesthesiologists, the Court held that separate markets

existed. Id. at 22, 24, 104 S. Ct. at 1564-65.

At least at one time, there was a demand for third-party

installations of upgrades separate from the demand for parts; the

successful operation of AMI's business before IBM imposed its net

pricing policy is conclusive evidence of that. The district

court, however, believed that TCM technology, not net pricing,

destroyed the separate market for AMI's labor, finding: (1) that

customers would not be willing to have upgrades installed by AMI

at any price higher than what IBM would charge if forced to

provide the service; and (2) that, at the IBM price, AMI would

lose massive amounts of money if it attempted to install upgrades

in the same way as before net pricing. Allen-Myland, 693 F. Supp. at 283-91.

1. Customer Willingness to Pay Premium Prices The district court credited the testimony of end-user

witnesses who said they had no interest in having upgrades

installed by a third party such as AMI. It then went on to

acknowledge that representatives of leasing companies did

indicate an interest in third-party installation, but only at

prices competitive with IBM's net price. Id. at 290.

The court properly found that, with a few adjustments, IBM

would charge $165 per hour for installing upgrades. Id. at 287.

AMI takes strong exception to the next logical step in the

court's reasoning: that AMI would not be able to charge its

customers any more than IBM for its services. We are convinced

by AMI's argument.

At trial, two leasing company witnesses testified that they

would not be interested in paying AMI significantly more than

IBM's effective hourly rate for installation of upgrades.

Comdisco's Mr. Lewis said that he would use AMI installation

service only if it were, at most, slightly more expensive than

IBM's price. Id. at 291. On cross examination, however, he

admitted that AMI had performed an "E to B" upgrade at an

effective hourly rate of $2,400 and admitted that such an amount

(thought by counsel to be $1,500 per hour) was more than slightly

greater than IBM's price. See id. at 291 & n.75. The district

court, irrespective of this contradiction, opined: Mr. Lewis of Comdisco explained that he would use AMI installation service only if it were "lesser than, the same as, or in rare exceptions, only a slight premium above the prevailing IBM list price." Using an E to B upgrade as an example, Mr. Lewis testified that he would not regard an AMI hourly rate of $1500 for installation service as only slightly greater than an IBM hourly rate of $180 or $200.

Id. at 291 (record citation omitted). In a footnote, the court

continued: Using customer-owned parts, AMI charged Comdisco between $25,000 and $30,000 for installing an E to B upgrade, requiring approximately 20 man hours. Based on Mr. Ross's calculations, the value of IBM installation service for an E to B upgrade, requiring about 13 man hours of labor, is $2,400. Based on these facts and Mr. Lewis' assertions, it is fair to conclude that Comdisco would not select AMI over IBM to install a new E to B upgrade if it had the choice. In view of this evidence, I do not accept AMI's assertion at closing argument that leasing companies "don't care whether the service costs $2400 or $20,000."

Id. at 291 n.75 (record citations omitted). We conclude that

this finding, at least as supported by the district court's

opinion, is clearly erroneous. The court did not adequately

address why, if Comdisco was unwilling to pay anything more than

a slight premium over IBM's rate, it paid not $165 per hour, but

a full $2,400 hourly rate. Its statement, that Comdisco would

never pay the $2,400 rate if it "had the choice," is true enough,

but explains nothing; we would all like to pay the lowest

possible price whenever we purchase goods and services. On the

other hand, AMI's explanation for its ability to charge a higher

price is supported: IBM commonly took so long to price and

perform upgrades that the leasing companies' losses from having

their machines idle exceeded the premium charged by AMI -- which

was often able to complete the job within a few days.19

19 We again stress, however, that we cannot and will not substitute our view of the facts for that of the district court. We hold only that the district court's finding of fact is not In a similar vein, "Mr. Smith of CMI testified that, other

things being equal, he did not wish to pay 10, 20 or 30 times

more than necessary to obtain installation service." Id. at 291.

For the reasons stated above, this does not show that CMI, under

certain special circumstances such as the need for fast

turnaround, would be unwilling to pay a considerable premium,

even if under normal conditions it would pay only the IBM rate.

This finding too cannot stand as presently supported.

2. Alleged Lack of Demand for Third-Party Installation

The district court additionally supported its finding of

lack of demand for AMI-installed upgrades by referring to

evidence that, in the few occasions in which IBM had made SWRPQ

pricing available for MIPS upgrades, there were few such upgrades

sold without IBM labor. The court reasoned as follows: There is insufficient evidence of demand for upgrade labor at prices AMI would have to charge to support a conclusion that a competitive market for 308X upgrade labor does or could exist. Leasing companies have purchased virtually no 308X model, memory, or channel upgrades without IBM labor included (in order, for instance, to have AMI install the upgrade) when such upgrades were available on an SWRPQ basis (which roughly equals the price IBM would be entitled to charge for its parts). Every J to K upgrade purchased by CMI and Comdisco was bought with IBM installation service included even though IBM also sold the feature on an SWRPQ basis.

Id. at 290-91 (footnotes and record citations omitted). In a

footnote, the court responded to AMI's argument that the reason

adequately supported by the elaboration contained in its opinion. On remand, the court may of course re-examine this issue and again reach the same conclusion, if it is supported by sufficient evidence and findings of fact. there were so few SWRPQ orders was that the unbundled prices were

not well-publicized: Witnesses from CMI and Comdisco testified that neither company knew that IBM sold upgrades (including the J to K) without IBM labor included. I do not credit such testimony, as there was documentary evidence (requests for IBM "SW" prices) to the contrary. Further, the SWRPQ procedure has existed since 1975. SWRPQ prices are readily available from IBM. AMI acknowledged that SWRPQ prices are made available from IBM when specifically requested.

Id. at 291 n.74. (record cites omitted) AMI argues that this

determination was based on insupportable impeachments of

witnesses and was clearly erroneous.

Mr. Lewis, Vice-President of Comdisco, the largest leasing

company, admitted that, as of the trial date, he knew that IBM installation was not mandatory. He was then cross-examined on

the issue of one particular 308X MIPS upgrade, the J to K model

conversion. He then stated that he acquired nine such upgrades

in the past, all with IBM labor included. But when asked whether

he knew that IBM installation was optional at the time he

purchased the J to K upgrades, he said he did not. Quite simply,

Lewis' admission does not impeach his testimony that he was

unaware of SWRPQ pricing during the relevant time period.

The district court then used certain documentary evidence to

impeach Lewis. DX 2260 is a request from Lewis for SWRPQ pricing

on three upgrades, J16-J24, K16-K24 and G16-G24. None of these

are the J-K upgrade that Lewis testified about at trial.

Moreover, their designations are consistent with memory upgrades, not MIPS upgrades.20 DX 2266 is more explicit, specifically

stating that memory upgrades are involved. 308X memory was

usually neither TCM-based nor subject to net pricing and is thus

not at issue. Accordingly, the conclusion to be drawn from this

evidence is that Lewis was unaware that MIPS upgrades were SWRPQ-

priced, although he had purchased some unrelated memory upgrades

without IBM installation in the past. Lewis' testimony that he

was unaware of SWRPQ pricing for 308X MIPS upgrades was not

impeached. Therefore, nothing can be concluded from Comdisco's

failure to purchase MIPS upgrades under SWRPQ terms other than it

was unaware they were available.

The district court also noted the testimony of Mr. Loria, a

CMI Vice-President. He testified that, to his knowledge, IBM

would not sell upgrades without a labor charge. Much of this

testimony centered on the year 1976, years before IBM introduced

the 308X series of computers. He also stated that he thought

that SWRPQ terms meant simply that IBM did not retain the old

parts. Except for the J-K upgrade, the only SWRPQ upgrades he

testified about were not MIPS upgrades.

The district court believed that this testimony was

impeached by three exhibits, DX 2261, DX 2262 and DX 2263. DX

2261, however, is just a 1986 request for SWRPQ pricing on a 96

20 308X model numbers appear to be classified as follows: 308X-YMM; where X is the CPU family, e.g., 3081, 3083, 3084; Y is the CPU power indicator within the family, e.g., 3081-J, 3081-K; and MM is the main memory in megabytes, e.g., 3081-J16, 3081-J24. This is consistent with the numbering scheme for memory upgrades in DX 2266. to 128 megabyte memory upgrade; Loria never testified that non-

net priced memory upgrades did not exist. DX 2262 and DX 2263

are IBM's responses to CMI requests for SWRPQ-priced memory

upgrades. None of these documents tend to show that Loria knew

that a few MIPS upgrades were available without IBM installation;

accordingly, his testimony to the contrary was not impeached by

this evidence.

Another Vice-President of CMI, a Mr. Smith, testified

similarly to Loria, stating that he was not aware that the J to K

MIPS upgrade was available without IBM installation. The

district court found that DX 2265 impeached Smith's testimony.

That document is a computer printout of requests for price

quotations ("RPQs") with the name "Gary Smith" handwritten at the

top. Some of these RPQs were for SWRPQ terms, but none were for

MIPS upgrades. Once again, this evidence does not impeach

Smith's testimony.

In short, that to which the district court refers does not

bear out its conclusion that these witnesses were untruthful when

they claimed not to know of a few MIPS upgrades without IBM

installation.21 Thus, the fact that a few MIPS upgrades were 21 In addition, the district court relied on the fact that the SWRPQ procedure has existed since 1975, that "SWRPQ prices are readily available from IBM," and that AMI acknowledged this fact. This all appears to be true, in general, but there is no indication in the portions of the record cited by the court below that these facts impeached the testimony of the Comdisco and CMI witnesses that they were unaware of SWRPQ-priced MIPS upgrades for 308X series computers. That these prices were available for memory upgrades and for earlier series of computers could not have reasonably put these witnesses on notice that a very small number of SWRPQ-priced MIPS upgrades were made available for the 308X series, given IBM's well-publicized policy of net pricing. sold under SWRPQ terms does not prove that there was no separate

demand for installation services, particularly considering that

IBM had every economic incentive to protect its revenues and

avoid widely publicizing the existence of such upgrades.

3. AMI's "Massive Losses" From Inventory Costs

In addition to finding that AMI would attract no customers

at the price the court believed it would have to charge for its

service, the district court also found that AMI would suffer

massive losses at the IBM hourly rate. It based this conclusion

on its belief that AMI would have to maintain an inventory of

expensive upgrade parts to provide adequate turnaround time.

Because IBM's revenues would average only 1.2 percent of the net

price for the upgrade and its carrying costs for the parts

inventory would average 3 percent, the district court concluded

that AMI stood to lose over $35 million by competing with IBM.

Id. at 288. Although the court acknowledged that AMI's principal

argument was that leasing companies inventoried their own parts

and thus saved AMI the costs of doing so, it nevertheless

included these carrying costs when calculating AMI's ability to

make a profit, based on a purported admission by AMI.

It is, of course, true that AMI would have to carry an

inventory of parts to give its customers fast turnaround on

upgrade installations. This is exactly what AMI did for the

earlier 303X series of computers. The exception would be if the

customer itself maintained an inventory of parts. Thus, to the

extent AMI intended to compete for the business of end-users, who

typically do not inventory parts, AMI would have to maintain an inventory, which would be presumably unprofitable given the

revenue generated by the installation. Leasing companies, on the

other hand, constituted over 90 percent of AMI's business and

were known to inventory their own parts. So, while the

relatively minuscule end-user business may have been foreclosed

from AMI by the low margins generated by TCM-based upgrades, the

business from leasing companies was not.

It would be both a non-sequitur and clearly erroneous on its

face to find that AMI's argument that leasing companies would

inventory their own parts and relieve AMI of that cost is invalid

solely because AMI admitted it will incur such costs on its own

inventory. The district court, however, relied on its belief

that Mr. Allen admitted that AMI would incur inventory costs if

it were permitted to compete in the market of 308X net priced

upgrades. Id. at 288-89. The record contains the following

exchange: Q. And according to Mr. Hamilton's report on damages, he indicates that you have told him that AMI must maintain a certain worth of inventory of upgrades and parts, and that a fair estimate of AMI's carrying costs for that inventory, just for the carrying costs of the interest involved is approximately three percent of IBM's price, whatever you happen to pay for those parts.

Did you tell Professor Hamilton that, sir?

A. I identified for Professor Hamilton, when he was doing a damage study, he asked me, if you were permitted to compete in this market of net priced MESs, what would be your costs?

I identified it would be AMI's intent, similar to the volume procurement agreement, to order many parts from IBM. There was a question whether these parts would come from the parts center on a very rapid response or whether AMI would have to inventory, virtually millions of dollars of inventory.

From going on prior experience with the VPA, where we ordered large quantities for inventory and were not using the parts center, he said, wouldn't you have some type of carrying charges?

Now, that number that he picked of three percent was if the prime rate were 12 percent. . . .

I don't know further the -- all the economic data in regard to what -- Mr. Hamilton went further from that, but the question was asked.

On the next page of the transcript, Allen then stated that

as long as upgrade parts could arrive quickly from the IBM Parts

Center, there would be no need for AMI to maintain an inventory.

This "admission," (Allen stated only that the question was

asked), does not admit that AMI would be required to carry an

inventory for all of its customers. It was therefore

insufficient grounds upon which to conclude that inventory costs

must be included in every situation in which AMI does business.22

22 Earlier in its opinion, the district court found that Allen had admitted that AMI could not make a profit on a labor value of 1.2 percent of the net upgrade price. Allen-Myland, 693 F. Supp. at 284. The trial testimony shows that counsel for IBM asked Allen whether he would take on an upgrade for $25,500 labor charge when the net price was $2,090,000, a 1.2% margin. Allen replied that he would, and that he thought it was a viable business opportunity. Counsel then tried to impeach him with a letter he wrote to IBM in the context of settlement negotiations. On the witness stand, Allen admitted the existence of this letter but claimed that counsel was taking it out of context. We do not think this letter can be fairly read to concede that AMI could never make a profit on a 1.2 percent margin. Like the statement 4. Low Margins and Separate Markets

The district court also found that the value of the labor

content of 308X MIPS upgrades was de minimis for antitrust

purposes. Id. at 283. Later, it referred to another purported

admission by AMI's counsel, to the effect that, if the labor

content of upgrades was de minimis, then parts and labor would

have to be considered a single market. Id. at 289 n.71.

To the extent it might be argued that AMI admitted that a

1.2 percent margin caused parts and installation to fold into one

market, as a matter of law we cannot agree. The record indicates

that the total value of all 308X MIPS upgrades performed between

1981 and 1985 was over $2 billion. 1.2 percent of a $2 billion

market amounts to over $20 million. See Allen-Myland, 693 F.

Supp. at 292. This amount is not de minimis within the meaning

of the antitrust laws. See Fortner I, 394 U.S. at 501-02, 89 S.

Ct. at 1257-58 ($190,000 not considered de minimis by the Supreme

Court).

5. Conclusion

The district court's finding that no separate market existed

for installations of upgrades cannot stand. We will accordingly

vacate it and remand for further proceedings. On remand, the

district should re-examine the issue de novo. B. Substantial Volume of Commerce

discussed in the above text, it admits no more than that, to the extent AMI must buy and inventory the parts, it cannot earn a profit on that margin. As part of its "viable business opportunity" inquiry, the

district court also found that AMI had not proved that IBM's

tying arrangement foreclosed a substantial volume of commerce.

Allen-Myland, 693 F. Supp. at 292-93. Although the court

acknowledged that the $20 million market for upgrade

installations was quantitatively more than sufficient, it found

that AMI had not shown "that it engaged in an activity foreclosed

by IBM's net pricing." Id. The district court believed that it

was the changes brought about by the 308X's TCM technology, not

net pricing, that foreclosed AMI from the upgrade business.

Thus, according to the court, competition with IBM in the

installation of upgrades had become unprofitable because of

advancing technology, quite apart from any anticompetitive

effects of the tie.

First of all, to the extent the district court based this

conclusion on its findings that AMI lacked a viable business

opportunity, it necessarily erred. We have already pointed out

the factual and analytical errors behind those conclusions.

Although we do not decide those factual issues ourselves, it

appears likely from this record on appeal that AMI could have

successfully performed upgrades and made a profit in the absence

of net pricing; at least, the district court's findings that no

one would pay AMI any more than IBM and that AMI would be

burdened with across-the-board inventory costs were not supported

by the evidence it cited.

Second, and more importantly, there is no requirement that

an antitrust plaintiff show profitability in addition to showing some foreclosure of commerce. If the competition foreclosed by a

tying arrangement had to be profitable, then many anticompetitive

tying arrangements would be immunized from antitrust attack. For

example, a new competitor attempting to break into a dominated

market might well lose money for a time, either because of

aggressive introductory pricing or because its sales had not yet

grown to the point where economies of scale made its production

operations sufficiently inexpensive to turn a profit. Yet, the

defendant could exploit its market power with impunity on the

ground that the plaintiff could not profitably compete against

it, and continue using that power to keep all new competitors out

of the tied market. Such a result would be contrary to the

purpose of the antitrust laws. Accordingly, we hold that the

district court erred when it found that a substantial amount of

commerce was not foreclosed.

C. Fact of Damage

An antitrust plaintiff must also prove what is known as

"fact of damage," defined as harm of a type which the antitrust

laws were designed to prevent. See supra typescript at 10. The

district court declined to rule on this issue, but noted that its

earlier findings that AMI was not deprived of a viable business

opportunity seemed to preclude any finding that AMI suffered the

requisite damage. Allen-Myland, 693 F. Supp. at 298. We, of

course, make no finding, but observe that the district court's errors on what it termed the business opportunity issue call its

tentative conclusion on fact of damage into question as well.

The matter remains, however, an issue for that court to resolve

in the first instance.

VI. CONCLUSION

We will accordingly vacate the district court's judgment in

favor of IBM and remand for further proceedings consistent with

this opinion.