The IBM Antitrust Litigation

In 1964 International Business Machines Corporation (IBM) introduced its System/360 mainframe computer system family, the first to cover the complete range of applications, from large to small, both commercial and scientific.[1]

One of the models in the family, System 360/91 (92?), was announced as being as fast as the then fastest machine on the market, Model 6600 from Control Data Corporation (CDC). IBM, however, was slow in producing its 360/91, but its mere announcement allegedly had adverse effects on CDC’s sales of Model 6600. As a result, in December 1968, CDC filed an antitrust lawsuit against IBM. The complaint alleged that IBM had monopolized the market for computers in violation of section 2 of the Sherman Act and that this conduct had damaged CDC’s business, entitling CDC to treble damages plus attorneys’ fees under section 4 of the Clayton Act.[2] The case was filed in Minnesota’s federal court.[3]

 

Thomas D. Barr

IBM immediately engaged its outside general counsel, Cravath, Swaine & Moore (CS&M), to defend the case. Partner Tom Barr was in charge of the CS&M team, and drafted several young associates, including Jay Gerber, David Boies and me, for the team. (As previously noted, I was an associate attorney at CS&M, 1966-1970.[4])

All of the CS&M team members soon started to learn about computers at a special school for the IBM lawyers at one of its locations in Westchester County, New York. (I do not recall what we were taught or what we learned, but this was long before the advent of personal computers and long before I had become familiar with their operation.)

Other private antitrust complaints were filed against IBM, and all of these cases were transferred to the Minnesota federal court for pretrial discovery regardless of where they initially had been filed in other federal trial courts. Minnesota’s U.S. District Judge Philip Neville was put in charge of managing all of these complicated cases. As a result, the other members of the team and I had frequent trips to Minnesota for pretrial conferences in the cases with the assistance of IBM’s local counsel, Faegre & Benson. All of the plaintiffs in these cases then embarked on a lengthy process of requesting and obtaining production of millions of IBM documents relevant to the cases.[5]

One of the companies suing IBM, however, had a different strategy. Greyhound Computer Corporation, a leasing company, filed a case under Illinois’ state antitrust law in Illinois state court (Peoria, as I recall) in order to avoid the complications of the consolidated pretrial proceedings in the Minnesota federal court. In addition, Greyhound wanted to take depositions (oral questioning of witnesses under oath) of top IBM officials as soon as possible before spending years in collecting and analyzing millions of IBM documents.

Thomas J. Watson, Jr.
Nicholas Katzenbach

One of the IBM officials to be deposed in the Greyhound case was its President, Thomas J. Watson, Jr.,[6] and I was put in charge of assisting Tom Barr in preparing Mr. Watson for his deposition. This was a daunting challenge. It meant collecting and analyzing as many IBM and public documents as possible that were potentially relevant to the Greyhound and other cases, figuring out the possible questions that might be asked of Mr. Watson by opposing counsel and then meeting with him and IBM’s General Counsel, Nicholas Katzenbach,[7]  to go over these documents and questions, all in a relatively short time period.

At the time my wife and I lived in Brooklyn Heights, across the East River from Wall Street and CS&M’s office. But Cravath had established a special office in White Plains, Westchester County, New York for the IBM litigation; this is where all the documents were stored and where the team members, including IBM employees assigned to help the lawyers, did their work. Thus, every morning I had to drive through Brooklyn and Queens, over the Throgs Neck Bridge and then through the Bronx and Westchester County to White Plains, and every evening I had to reverse this commute to my home. Traffic was heavy both ways, adding to the stress of the job. (Like many New Yorkers at the time, I did not own a car, but IBM supplied a rental car for me.)

Soon after our second son was born in December 1969, there was a bad winter storm in Westchester County, and I did not want to drive back home that night in order to get up early the next morning to return to White Plains. I, however, could not find a hotel room anywhere in the White Plains area. As a result, I had a very slow and dangerous drive home that night, and after a night of little sleep with a crying baby, I had to return to White Plains the next morning in another slow drive. I think that was the night that pushed me over the edge in deciding to leave CS&M and New York City.

Sometime in the process of preparing for this important deposition, I vividly remember Tom Barr and I flew from New York City to San Francisco one day for the sole purpose of flying back to New York City early the next morning on the IBM corporate jet with Mr. Watson because he had time on that flight to talk with us.

Soon the Watson deposition actually took place, probably in January 1970. Tom Barr and I thought it went well for IBM.[8] I then told Mr. Barr that I would be leaving CS&M in April to join Faegre & Benson in Minneapolis.

It is difficult in 2011 to understand how powerful IBM was in the late 1960’s. It did have a large percentage of the market for computers in that earlier period, and one of the major issues in those earlier antitrust cases was defining the market, geographical and product. The plaintiffs argued for definitions that produced large market shares for IBM while IBM argued for different definitions and lower market shares.

Now, however, IBM no longer is the dominant force in the U.S. and world markets for the manufacture of computers. In 2005, IBM sold its personal computer manufacturing operations to a Chinese company, Lenovo Group Limited. Now IBM is a large, multinational computer technology and IT consulting business with some computer manufacturing business.[9] IBM’s loss of a dominant position in the computer industry is another instance of what economist Joseph Schumpeter calls “creative destruction,” capitalism’s evolutionary process of revolutionizing itself from within.[10]

IBM thus survived after the scary early 1990’s when it nearly ran out of money. In June 2011 it celebrated its centennial as a company with strong profits, a robust portfolio of products and services and stock market valuation exceeding new-start Google. The central lesson of its survival and renewed success, experts believe, was an ability to identify and build upon its past success. For IBM, its key assets were strong, long-term customer relationships; deep scientific and research capabilities; and broad technical skills in computer hardware, software and services. The company was able to take these assets and recast itself as the one that can best manage and bring together diverse technologies in modern data centers.[11]


[1] Wikipedia, IBM System/360, http://en.wikipedia.org/wiki/IBM_System/360.

[2]  Id.; Wikipedia, Control Data Corporation, http://en.wikipedia.org/wiki/Control_Data_Corporation; Computers: Tackling IBM, Time, Dec. 20, 1968. Section 2 of the Sherman Act of 1890 provides that it is a felony for any “person . . . [to] monopolize or attempt to monopolize, or combine or conspire . . . to monopolize any part of the trade or commerce among the several States.” (15 U.S.C. § 2.) This crime requires proof of (a) the possession of monopoly power in the relevant market and (b) the willful acquisition or maintenance of that power (rather than the growth or development as a result of superior product, business acumen or historic accident). (U.S. v. Grinnell Corp., 384 U.S. 563 (1966).) Under section 4 of the Clayton Act of 1914, any person injured in his business or property by reason of a violation of the Sherman Act may sue for treble damages plus attorneys’ fees. (15 U.S.C. § 15(a).

[3] See Post: Minnesota’s Federal Court (June 28, 2011).

[4] See Post: Lawyering on Wall Street (April 14, 2011); Post: The Adam Clayton Powell, Jr. Litigation (May 31, 2011).

[5] In January 1969 the U.S. Department of Justice filed a civil lawsuit against IBM alleging that it had monopolized the market for general purpose computers. In 1982 the Department concluded that the case was without merit and dropped the suit. (Wikipedia, History of IBM, http://en.wikipedia.org/wiki/History_of_IBM.) I had no direct involvement in this case.

[6] Wikipedia, Thomas J. Watson, Jr., http://en.wikipedia.org/wiki/Thomas_Watson_Jr. In 1952 Watson succeeded his father, Thomas J. Watson, Sr., as IBM’s president and held that office until 1971. In 1964 President Lyndon Johnson awarded him the Presidential Medal of Freedom, and in the Carter Administration, Watson was the U.S. Ambassador to the Soviet Union (1979-81). (Id.)

[7] Mr. Katzenbach was General Counsel of IBM from 1969 through 1986. From 1961 through 1966 he was an attorney in the U.S. Department of Justice, serving as the U.S. Attorney General, 1965-66. From 1966 through 1969 Katzenbach was Under Secretary of State. (Wikipedia, Nicholas Katzenbach, http://en.wikipedia.org/wiki/Nicholas_Katzenbach.

[8] In 1972 the Greyhound case went to trial in federal court in Arizona with a directed verdict for IBM on the antitrust claims. However, in 1977 the court of appeals reversed this decision, holding there was sufficient evidence for a verdict for Greyhound, and remanded the case for retrial. (Greyhound Computer Corp. v. IBM, 559 F.2d 488 (9th Cir. 1977), cert. denied, 434 U.S. 1040 (1978).) Just before the retrial was to start in January 1981, IBM and Greyhound settled the case for $17.7 million. (IBM Antitrust Suit Records,  http://www.hagley.lib.de.us/library/collections/.) Earlier, in 1973 IBM settled the CDC case for about $80 million in cash and assets (transfer of an IBM computer service company at less than market value). (Computers: A Settlement for IBM, Time (Jan. 29, 1973).) (I had no involvement in any of these subsequent proceedings.)

[9] Wikipedia, History of IBM, http://en.wikipedia.org/wiki/History_of_IBM.

[10]  Schumpeter, Capitalism , Socialism and Democracy (1942); Wikipedia, Joseph Schumpeter, http://en.wikipedia.org/wiki/Joseph_Schumpeter.

[11] Lohr, Lessons in Longevity, From I.B.M., N.Y. Times (June 19, 2011).

Published by

dwkcommentaries

As a retired lawyer and adjunct law professor, Duane W. Krohnke has developed strong interests in U.S. and international law, politics and history. He also is a Christian and an active member of Minneapolis’ Westminster Presbyterian Church. His blog draws from these and other interests. He delights in the writing freedom of blogging that does not follow a preordained logical structure. The ex post facto logical organization of the posts and comments is set forth in the continually being revised “List of Posts and Comments–Topical” in the Pages section on the right side of the blog.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s