U.S. Litigation over a Russian Real Estate Project

Moscow, Russia

After the collapse of the Soviet Union in 1989, many U.S. businesses sought new opportunities in Russia.

One was Ellerbe Becket Construction Services, Inc. (Ellerbe), a Minneapolis-based firm that offered architectural, engineering and construction management services. To assist them in this effort, it hired Nicholas Loukianoff, a Russian-American citizen who was bilingual in English and Russian.

One of the potential projects for Ellerbe was a Korea-Russia Trade Center in Moscow, and Ellerbe asked Loukianoff to help find a site in Moscow for such a building. However, the potential Korean client decided not to proceed, and the building was not built.

Nevertheless, Mr. Loukianoff’s company sued Ellerbe in federal court in San Francisco, California for damages under various legal theories. I was the principal lawyer for Ellerbe in this case.

During the pre-trial discovery, I took the deposition of Mr. Loukianoff’s expert witness, a newly minted Russian real estate agent. I did so by telephone from my office in Minneapolis to Ellerbe’s Moscow office with the English-Russian interpreter in Moscow. During the course of my examination, I asked him something like, “Private real estate transactions in Russia have only been happening in the last several years, right?” He did not agree with that statement and mentioned Russia’s sale of Alaska to the U.S. in 1867. That comment still makes me chuckle.

Several weeks before the trial was scheduled to start in January 1999, the court granted Ellerbe’s motion for summary judgment on three of plaintiff’s claims. Thus, the only claims left for trial were breach of contract and quantum meruit (reasonable value of services).[1]

At the start of the trial, the court granted other Ellerbe motions to exclude certain plaintiff’s evidence at trial, including a new damage theory (1% of the total built-out cost of the Center that was never built).[2] As a result, the potential value of plaintiff’s case collapsed, and the case immediately settled with a very modest payment by Ellerbe.

I still wish that I had obtained a trip to Moscow for this case.


[1] Memorandum Decision & Order, NAL Associates, Inc. v. Ellerbe Becket Construction Services, Inc., No. C-97-0997 (N.D. Cal. Jan. 8, 1999).

[2] Order , NAL Associates, Inc. v. Ellerbe Becket Construction Services, Inc., No. C-97-0997 (N.D. Cal. Jan. 26, 1999).

Dysfunctional U.S. Congress Averts Default

The good news: the U.S. Congress and the President, at the last moment, were able to come to an agreement on increasing the U.S. Government’s debt limit and thereby avert a default on the government’s securities.

More good news: military spending is specifically included for possible reduction, rather than leaving all the cuts to discretionary spending for the benefits of our citizens.

The bad news: the Congress demonstrated its functionality in reaching this agreement. The rest of the world has looked in disbelief at the congressional spectacle and has less confidence in our political system and leaders.[1]

More bad news: the agreement calls for cuts in discretionary government spending when our economy is sputtering. Keynesian economics suggests the need for the federal government to run deficits during economic recessions.[2]

More bad news: the agreement means that much attention will continue to be spent on deficit reduction, rather than improving our deteriorated infrastructure and frayed social safety net.

The public is disgusted at the recent spectacle in the Congress and eager to blame all who were involved. Democrats, in my opinion, although not blameless, need to focus attention on the destructive role played by the Tea Party in the House of Representatives and to seek their defeat in the 2012 election.[3]


[1] See Post: Disgusting U.S. Political Scene (July 23, 2011); Post: The Founder of Modern Conservatism’s Perspective on the Current U.S. Political Turmoil (July 28, 2011); Post: Dysfunctional U.S. Congress Careens Towards U.S. Default (July 30, 2011).

[2] Krugman, The President Surrenders, N.Y. Times (July 31, 2011).

[3] Krugman, The Centrist Cop-Out, N.Y. Times (July 28, 2011).

The Lutheran Pastor at the 1973 Siege of Wounded Knee

Wounded Knee, SD, 1973
Wounded Knee, SD, 1973

In February 1973, leaders and members of the American Indian Movement (AIM) and others occupied the town of Wounded Knee, South Dakota to protest the administration of a tribal chairman and the alleged U.S. failure to honor its treaties with the American Indian nations. They controlled the town for 71 days while U.S. government law enforcement, including FBI agents, surrounded the town. The two sides exchanged gunfire daily, and people on both sides were killed.[1]

In May 1973, AIM leaders invited Rev. Paul Boe of the American Lutheran Church (ALC) to visit them at Wounded Knee for religious counseling.[2] Boe had an established relationship with them as a result of the ALC’s ministry to American Indians under his leadership. Indeed, AIM had been formed with ALC financial assistance at Rev. Boe’s urging; he then was the Executive Director of its Division of Social Services.[3]

Thereafter a South Dakota grand jury conducted an investigation as to what happened during the siege. Rev. Boe was subpoenaed by the grand jury. He was not asked to divulge any confessions he received at Wounded Knee, but he was asked about what he saw. He answered those questions he deemed did not violate any confidences. But he refused to answer questions as to whom he saw carrying guns on the ground that it would require him to betray confidential communications.[4]

As a result, the federal district court held Rev. Boe in civil contempt of court and ordered him to be confined in jail until he decided to answer the questions. The latter order was stayed or postponed while he appealed the contempt finding to the U.S. Court of Appeals for the Eighth Circuit.[5]

This is where I entered the drama with David E. Engdahl[6] as the lawyers to prepare an amici curiae (friends of the court) brief supporting Rev. Boe’s appeal of the contempt citation. The 11 amici were the ALC, the National Council of Churches of Christ in the U.S.A., the United States Catholic Conference, the Lutheran Church in America, the United Presbyterian Church in the U.S.A., the Right Rev. John E. Hines (Presiding Bishop of the Episcopal Church), the Center for Social Action of the United Church of Christ, the Board of Church and Society of the United Methodist Church, Msgr. John Egan (Executive Director of the Catholic Committee on Urban Ministry), the Department of Church and Society of the Division of Homeland Ministries of The Christian Church (Disciples of Christ) and the Lutheran Church-Missouri Synod.[7]

The Amici Brief asserted two arguments. First, the U.S. Constitution’s First Amendment religion clauses fobid compelling a clergyman to answer questions concerning communications and incident observations which his church requires him to keep confidential. Second, a clergyman has a federal common law privilege to refuse to disclose to a federal grand jury his confidential professional communications with his others and his observations incident thereto.[8]

On January 16, 1974, the Eighth Circuit reversed the judgment of contempt on the ground that Rev. Boe was denied due process requirements of notice and a meaningful opportunity to present his defense. The court said nothing about the issues raised by the amici curiae.[9]

Afterward two AIM leaders, Dennis Banks and Russell Means, were indicted on charges related to the events, but their 1974 case was dismissed by the federal court for prosecutorial misconduct, a decision upheld on appeal.[10]


[1] Wikipedia, Wounded Knee Incident, http://en.wikipedia.org/wiki/Wounded_Knee_incident.

[2] Reverend Boe (1915-1990) was a social activist who was instrumental in opening discussion about Native American issues in the ALC and with the American public. Boe’s position regarding AIM made him an unpopular figure in the ALC, and he resigned from the church in 1974 and traveled the country with his “Why Wounded Knee?” lecture series. (Center for Western Studies, Paul Boe Collection, http://www.augie.edu/cws/PaulBoespeech.html.

[3] Brief of the ALC, et al., Amici Curiae at 14-15, U.S. v. Boe (8th Cir. Jan. 9, 1974)[“Amici Brief”].

[4] Kelley, Tell All or Go to Jail: A Dilemma for the Clergy, Christian Century at 96 (Jan. 30, 1974).

[5] Id.

[6] At the time Mr. Engdahl was a professor at the University of Colorado Law School. Now he is a professor at Seattle University School of Law. (Seattle Univ. School of Law, David Engdahl, http://www.law.seattleu.edu/Faculty/Faculty_Profiles/David_Engdahl.xml.)

[7]  Amici Brief.

[8] Id. at 10-38.

[9] U.S. v. Boe, 491 F.2d 970 (8th Cir. 1974).

[10] Wikipedia, Wounded Knee Incident, http://en.wikipedia.org/wiki/Wounded_Knee_incident.

Buying Banks and Selling Hot Dogs Are the Same Under the Law

Federal Reserve Building, Washington, D.C.

In the early 1970’s the Board of Governors of the Federal Reserve System (the Board) approved the acquisition of two Iowa (Bettendorf and Keokuk) banks by Minneapolis-based Northwest Bancorporation (Northwest).[1]

At the time, federal law provided that no acquisition of a state bank by an out-of-state bank holding company was permissible unless such an acquisition was “specifically authorized by the statute laws of the State in which . . . [the acquired] bank is located.”[2] An Iowa statute at the time generally barred out-of-state bank holding company acquisitions of Iowa banks “unless such bank holding company was on January 1, 1971, registered with the federal reserve board as a bank holding company, and on that date owned at least two banks in [Iowa].”[3] This is what is colloquially called a “grandfather clause,” and at the time Northwest was the only out-of-state bank holding company owned or controlled any Iowa banks and thus was the only person covered by this grandfather clause.[4]

The Board’s approval was contested and challenged by the Iowa Independent Bankers Corporation (Iowa Bankers), an association of over 400 Iowa banks on various grounds. The key ground was the Equal Protection Clause of the 14th Amendment to the U.S. Constitution. The Iowa Bankers argued that the Iowa statute violated equal protection by creating two classes of out-of-state bank holding companies: (a) those owning one or no Iowa banks and (b) those owning two or more Iowa banks with Northwest being the only such holding company in the latter class.[5]

The Board in approving the acquisitions declined to rule on this constitutional objection. It said that only the judiciary could do so.[6] Thus, the Iowa Bankers petitioned the appropriate federal court of appeals in Washington, D.C. to set aside the Board’s approval on this and other grounds.

Faegre & Benson was the regular outside general counsel for Northwest, and I was designated as the Faegre lawyer responsible for defending the Board’s approval of the acquisitions. With the help of others at the law firm, I wrote the appellate brief for Northwest and argued the case before the appellate court.

U.S. Courthouse, Washington, D.C.

In February 1975, the appellate court unanimously affirmed the Board’s approval of the acquisitions and dismissed the petition by the Iowa Bankers.

On the Equal Protection issue, the court stated that as the Iowa statute did not create a suspect classification or impinge upon fundamental rights, the court’s review was limited to determining whether the statute had a rational relationship to a legitimate state purpose. The appropriate classes under the statute, said the court, were those holding companies not owning any Iowa banks and those that already did. More importantly, the court concluded it was “perfectly rational for the Iowa legislature to determine that Northwest . . .  [had] a pre-existing stake in the Iowa banking system and [had] . . . proven itself to be a positive force in the system [and] should be allowed to compete on the same basis as other Iowa banks . . . .” Likewise it was rational for the Iowa legislature, according to the court, to decide that Iowa would not be well served if other out-of-state holding companies “were allowed wholesale entry into the Iowa market.”[7]

Jackson Square, French Quarter, New Orleans
French Quarter, New Orleans

At the same time as the Northwest litigation, the same legal issue was presented to the U.S. Supreme Court. In City of New Orleans v. Duke, a New Orleans ordinance banned pushcart vendors in the French Quarter except for those who already had done so continuously for over eight years with only two such vendors (one hot dogs; the other, ice cream) qualifying under that grandfather clause.[8] The Supreme Court held that the ordinance was constitutional. It stated, “When local economic regulation is challenged solely as violating the Equal Protection Clause, this Court consistently defers to legislative determinations as to the desirability of particular statutory discriminations.” Such regulations are valid, according to the Court, so long as their classifications are “rationally related to a legitimate state interest. States are accorded wide latitude in the regulation of their local economies under their police powers, and rational distinctions may be made with substantially less than mathematical exactitude.” Therefore, the Supreme Court concluded that the “record makes abundantly clear that the . . .  ordinance, including the ‘grandfather provision,’ is solely an economic regulation aimed at enhancing the vital role of the French Quarter’s tourist-oriented charm in the economy of New Orleans.”[9]

That is why I say buying banks is the same as selling hot dogs under the law.


[1] Iowa Independent Bankers v. Board of Governors, 511 F.2d 1288 (D.C. Cir. 1975), cert. denied, 423 U.S. 875 (1976). Northwest Bancorporation in 1983 changed its name to Norwest Corporation, which in 1998 was merged into Wells Fargo & Company of San Francisco.

[2] 12 U.S.C. § 1842(d).

[3] Iowa Code Ann. § 524.1805.

[4] 511 F.2d at 1291-92.

[5] Id. at 1292, 1294.

[6] Id. at 1292-93.

[7] Id. at 1294-96.

[8] City of New Orleans v. Duke,  472 U.S. 297 (1976).

[9] Id.

[10] Iowa Independent Bankers v. Federal Reserve Board, 423 U.S. 875 (1975).

Minneapolis Police’s Pretextual Arrests of Political Dissidents in 1970

Early 1970 was a turbulent time in the U.S. We were still in the Viet Nam War in the Nixon Presidency. On February 18th a Chicago jury found the “Chicago Seven” guilty of conspiring to incite a riot at the 1968 Democratic National Convention. On March 6th a bomb being constructed by members of the Weathermen political dissenters group for use at an upcoming military dance exploded in Manhattan, killing three members of the group. On March 17th the U.S. Army charged Lieutenant Calley and other officers of suppressing information related to the 1968 My Lai massacre in Viet Nam. On April 29th the U.S. invaded Cambodia to hunt out the Viet Cong, sparking antiwar protests throughout the U.S. On May 4th four students at Kent State University in Ohio were killed and nine others wounded by Ohio National Guardsmen at a protest against the Cambodian incursion (only 10 days later (May 14th) two other students were killed and 12 injured at antiwar demonstrations at Jackson State University in Mississippi). On May 9th an estimated 100,000 marched on the Pentagon to protest the war and the killings at Kent State.[1]

These protests also touched Minnesota. On May 9th there was a large crowd that marched from the University of Minnesota (UM) campus in Minneapolis to the State Capitol Building in St. Paul. There also was a student strike at the UM.[2]

David Lykken

At the same time, a Minneapolis fundraiser was being planned by “People Against Missiles,” an ad hoc group, for Saturday night, May 9th, at the south Minneapolis home of Professor David Lykken, a noted UM behavioral geneticist and professor of psychology and psychiatry.[3] The fundraiser sought to raise money to send people to North Dakota to protest a proposed antiballistic missile installation. It was publicized by mailing postcards to people on local peace organizations’ mailing lists, by including notices in newsletters of several organizations and by distributing flyers primarily at the UM. The flyer stated that there would be “donations and cash bar.”[4]

Two days before the fundraiser, a Minneapolis policeman saw the flyer and took it to a meeting with the head of the Department’s Morals Squad. Since selling liquor without a license was a violation of a city ordinance, the Department head instructed two other policemen to “handle it in the usual manner,” which meant sending an officer to the gathering undercover and attempting to purchase some liquor.[5]

On the night of May 9th, 20 or so middle-aged adults attended the fundraiser. They were quiet, mainly engaging in small-group conversation about the antiballistic missile system, protesting the system, and current political issues, including the protest march earlier that day at the UM. Some had coffee and soda; others, beer. No one had wine or hard liquor. There was a basket for donations; another for “Donations, Beer 50 cents, Pop 25 cents.”[6]

Around 10:00 p.m. two police officers, under cover, came to the fundraiser. One of them had a beer and left a marked $5 bill in the basket and later 50 cents for another beer. He stayed for about an hour and engaged in conversation about the missile system and the activities of “People Against Missiles.”[7]

He and the other undercover policemen left the house for a nearby meeting with another officer of the Morals Squad and others from the Tactical Squad. They then made a plan for arresting the people at the professor’s home.[8]

Around midnight 10 to 20 uniformed officers descended on the house, arrested everyone and took them all (except the professor’s wife and their young son) downtown to Police headquarters where they were charged with being in a disorderly house and the professor with operating a disorderly house and selling liquor without a license; they also were fingerprinted, photographed and then released.[9]

One of the Police leaders conducted a search of the house and seized beer (and wine and hard liquor that was not available at the event) as well as every piece of paper in sight on the first floor of the house, including People Against Missiles and other anti-war literature.[10]

Later all of the criminal charges were dismissed by the local court, and another lawyer (Bill Kampf[11]) and I volunteered to be the pro bono (no fee) lawyers on behalf of the Minnesota Civil Liberties Union[12] for those who had been arrested in a lawsuit for damages against the policemen who were involved for violation of their constitutional rights. We did just that with a complaint by the 20 people who had been arrested against the 20 or so policemen and other officials who had been involved.[13]  The case was filed in Minnesota’s federal court.[14]

During the course of pretrial discovery, I obtained what turned out to be critical evidence in the Police files. These documents indicated that immediately after the arrests the Police leader of the raid called the local office of the FBI to report the identity of the arrestees and the political nature of the seized documents. Some, for example, mentioned the Socialist Workers Party.[15]

Eventually Bill Kampf and I tried the case to the court without a jury. U.S. District Judge Philip Neville[16] conducted the trial and concluded that three of the policemen were liable to the 20 plaintiffs for $11,500 compensatory damages plus $7,500 punitive damages. As the court stated, these three policemen “instigated, planned, and directed the raid [with two of them] . . . actually effecting the arrests. They had first-hand knowledge of the true nature of the gathering . . . and were the only ones who effectively might have and should have prevented the raid. . . . Their decision . . . not only evidences bad judgment . . ., but more importantly displays a callous disregard for the constitutional rights of other who may have been of different political persuasion. Such activity . . . will not be tolerated. . . .”[17]

In concluding that the three policemen had violated the plaintiffs’ constitutional protection under the U.S. Constitution’s  Fourth Amendment’s ban on unreasonable searches and seizures, the court stated, “the arrests . . . were improperly motivated, undertaken not in furtherance of good faith law enforcement but for the purpose of harassing those at the gathering because of their political beliefs.” Under all the circumstances, the “police could only have been motivated by a desire to harass the guests at the fundraiser, and/or attempt to set an example for others who might stage antiwar gatherings.” Important in that regard was the evidence of the lead Policeman’s immediately calling the FBI about the political documents that were seized.[18]

After the judgment was entered against the three policemen, the Minneapolis City Council voted to pay the judgment on behalf of the three, a decision that was upheld by the Minnesota Supreme Court in a taxpayer’s lawsuit.[19]

This case shows how the U.S. political passions of 1970 affected a city in the middle of the country. It also illustrates the importance of lawyers willing to defend civil liberties on a pro bono basis and of a strong, independent judiciary.


[2] Lykken v. Vavreck, 366 F. Supp. 586, 588 (D. Minn. 1973. I found copyrighted photos of the large May 9th crowd in front of the Minnesota Capitol under the heading Minnesota State Capitol Demonstrations at http://www.flickr.com/photos/minnesotahistoricalsociety.

[3] Obituary, David Lykken, U of M psychology professor, StarTribune (Sept. 20, 2006).

[4]366 F. Supp at 587.

[5] Id. at 588.

[6] Id.

[7] Id. at 588-89.

[8] Id. at 589.

[9] Id.

[10] Id. at 590.

[11] Lerner, Attorney W. Kampf dies; was expert on bankruptcy, StarTribune (Sept. 18, 2005). As Bill and I worked on the case together, we became friends and often joked that we brought our different skills to make a good team. I was organized, methodical and persistent, and Bill was more instinctive and risk-taking.

[12] The Minnesota Civil Liberties Union was an affiliate of the American Civil Liberties Union and is now known as the American Civil Liberties Union of Minnesota, http://www.aclu-mn.org.

[13] 366 F. Supp. at 587, 590.

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

[15] 366 F. Supp. at 590; Minnesota Historical Society, Socialist Workers Party: Minnesota Section (Box 2), http://www.mnhs.org/library/findaids/00632.xml; Minnesota Historical Society, Minnesota Civil Liberties Union (Box 23), http://www.mnhs.org/library/findaids/00497.xml.

[16] Judge Neville also was in charge of the consolidated pretrial proceedings in the private IBM antitrust cases. (See Post: The IBM Antitrust Litigation (July 30, 2011).)

[17] 366 F. Supp. at 599.

[18] Id. at 593.

[19] Douglas v. City of Minneapolis, 304 Minn. 259, 230 N.W.2d 577 (1975).

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).

Dysfunctional U.S. Congress Careens Towards U.S. Default

Yesterday’s actions in the U.S. House of Representatives and Senate regarding the U.S. debt ceiling were depressing signs of the dysfunctionality of our system of government.[1]

In the House Speaker Boehner rejected my advice to craft a truly bipartisan bill to increase our debt ceiling.[2] Instead he added another provision to his bill to gain additional support from the Tea Party members for passage of the Republican measure to increase the debt ceiling. That new provision would require Senate and House approval of a balanced budget amendment to our Constitution before there could be a second increase in the debt ceiling, presumably next year. Even with that provision, the bill was only approved 218 to 210. (In the House, a simple majority is necessary; that currently is 217.)[3]

This is not any way to go about amending our Constitution, in my opinion. Such action should be done calmly and cautiously, as suggested by the constitutional requirement for a two-thirds vote in each house for such amendments.[4] There should be fair and open hearings in both houses of the Congress for careful consideration of the pros and cons of any proposed amendment, including this one. Such has not happened on this proposal. Although I have not studied this particular proposed amendment, I am very skeptical of the merits of the idea for two main reasons. First, I believe it would be difficult to run the federal government under such a system. Second, Keynesian economics suggests the need for the federal government to run deficits during economic recessions.

Now attention turns to the U.S. Senate which yesterday immediately tabled this House bill, 59-41.

Thus, we now enter the world governed by the abominable Senate Rules.[5] Yesterday Majority Leader Reid made a motion to limit debate, and under Senate Rules the earliest that motion can be voted upon is tomorrow (Sunday) at 1:00 a.m. Passage of that motion requires 60 votes, meaning that if all 53 Democratic and Independent Senators support the motion, seven Republican votes are needed for that motion to be adopted. Yesterday Senator Reid said he did not yet have the 60 votes needed for cloture. If the cloture motion is adopted, then under the Senate Rules there has to be 30 hours available for debate, meaning that the earliest the Senate could vote on the merits of the Reid debt-ceiling bill would be 7:30 a.m. on Monday (August 1). (In the unlikely event of unanimous consent, the measure could be voted on before then.)[6]

If somehow the Senate actually adopts a debt-ceiling bill, then it has to go back to the House for its approval by 217 votes. If all the 193 Democratic representatives supported such a bill, then at least 24 Republican representatives would have to join them in order for it to pass the House. Is that possible? (I shudder to think that the House would pass a slightly different bill that would require a conference committee and subsequent votes by the two houses.)[7]

World financial markets already are signaling the adverse impact of an U.S. failure to increase the debt ceiling and an U.S. default on its obligations.

I pray that my analysis is wrong and that somehow by next Tuesday both houses of Congress can pass a debt-ceiling bill that President Obama can sign into law.


[1] See Post: Disgusting U.S. Political Scene (July 23, 2011).

[2] See Post: A Message for Speaker Boehner (July 29, 2011).

[3] Hulse & Pear, Senate Quickly Kills Boehner Debt Bill, N.Y. Times (July 29, 2011).

[4]  U.S. Const., Art. V. Actually such action by the two houses of Congress would result in a proposed amendment that would have to be approved by three-fourths (or 38) of the states in order for the constitutional  amendment to be adopted. (Id.)

[5] See Post: The Abominable Rules of the U.S. Senate (April 6, 2011).

[6] Helderman, Senate headed for critical vote Sunday, Washington Post (July 30, 2011).

[7] Yesterday, the House Republicans said that they would have a symbolic vote today to show that the Reid approach to debt ceiling cannot pass the House. (Hulse & Pear, Senate Quickly Kills Boehner Debt Bill, N.Y. Times (July 29, 2011).)