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DIGIDYNE CORPORATION, FAIRCHILD CAMERA AND INSTRUMENT
CORPORATION, Plaintiffs-Appellants, v. DATA GENERAL
CORPORATION, Defendant-Appellee; DIGIDYNE CORPORATION,
FAIRCHILD CAMERA AND INSTRUMENT CORPORATION,
Plaintiffs-Appellants, v. DATA GENEAL CORPORATION,
Defendant-Appellee; DIGIDYNE CORPORATION, FAIRCHILD CAMERA
AND INSTRUMENT CORPORATION, Plaintiffs-Appellants, v. DATA
GENERAL CORPORATION, Defendant-Appellee; DIGIDYNE
CORPORATION, FAIRCHILD CAMERA AND INSTRUMENT CORPORATION,
Plaintiffs-Appellants, v. DATA GENERAL CORPORATION,
Defendant-Appellee.
No. 81-4628; No. 81-4667; No. 81-4671; No. 82-4162
UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT
734 F.2d 1336; 1984-1 Trade Cas. (CCH) P66,053
Argued and Submitted May 10, 1983
June 7, 1984
PRIOR HISTORY: Appeal from the United States District Court for the
Northern District of California
COUNSEL: Jack E. Brown, Esq., BROWN & BAIN, P.C., Phoenix, AZ, for
Appellant/Petitioner
Stephen R. Steinberg, Esq., REAVIS & McGRATH, New York, NY, for
Appellee/Respondent
JUDGES: William H. Orrick, District Judge, Presiding
OPINIONBY: BROWNING
OPINION: [*1338]
Before: BROWNING, Chief Judge, PECK * and ALARCON, Circuit Judges
* Honorable John W. Peck, Senior Judge, United States Court of
Appeals for the Sixth Circuit, sitting by designation.
OPINION
BROWNING, Chief Judge:
The issue presented for review is whether Data General's refusal to
license its NOVA operating system software except to purchasers of its
NOVA central processing units (CPUs) is an unlawful tying arrangement
under section 1 of the Sherman Act, 15 U.S.C. @ 1 (1976) and section 3
of the Clayton Act, 15 U.S.C. @ 14 (1976). We conclude that it is.
I.
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734 F.2d 1336, *1338; 1984-1 Trade Cas. (CCH) P66,053
Defendant Data General manufactures a computer system known as
NOVA. The system consists of a NOVA CPU designed to perform a
particular "instruction set" or group of tasks, and a copyrighted NOVA
operating system called RDOS containing the basic commands for
operation of the system. Not all operating systems work with all
CPUs. Plaintiffs produce emulator NOVA CPUs designed to perform the
NOVA instruction set and thus to make use of defendant's RDOS.
Data General refuses to license its RDOS to anyone who does not
also purchase its NOVA CPU. Plaintiffs allege that this constitutes
an unlawful tying arrangement; the defendant's RDOS being the tying
product, the NOVA instruction set CPU being the tied product.
Plaintiffs filed a number of actions alleging violations of section
1 of the Sherman Act and section 3 of the Clayton Act. The actions
were consolidated. The issues of liability and damages were
segregated for trial. This appeal is from a judgment on liability.
After extensive discovery, the parties filed cross-motions for
summary judgment. The district court denied the motions, but found
certain facts to be uncontroverted under Fed. R. Civ. P. 56(d).
Trial, limited to the issue of defendant's economic power, resulted in
a jury verdict for plaintiffs. Defendant's motion for judgment n.o.v.
or for a new trial was granted. Plaintiffs appealed.
II.
A tying arrangement is illegal if it is shown to restrain
competition unreasonably or is illegal per se, without such a showing,
if certain prerequisites are met. Fortner Enterprises v. U.S. Steel
Corp., 394 U.S. 495, 498-500 (1969) (Fortner I). The prerequisites of
per se illegality are: (1) separate products, the purchase of one
(tied product) being conditioned on purchase of the other (tying
product); (2) sufficient economic power with respect to the tying
product to restrain competition appreciably in the tied product; and
(3) an effect upon a substantial amount of commerce in the tied
product. Fortner I, 394 U.S. at 499; Moore v. Jas. H. Matthews & Co.,
550 F.2d 1207, 1212 (9th Cir. 1977). These prerequisites were
satisfied in this case.We therefore do not consider whether
competition was in fact unreasonably restrained.
The district court properly granted summary judment on the first
and third of the required elements of a per se violation, holding that
on the undisputed facts [*1339] the NOVA instruction set CPU and
defendant's RDOS are separate products and the volume of commerce in
NOVA instruction set CPUs tied to the purchase of defendant's RDOS is
substantial. In re Data General Corp. Antitrust Litigation, 490 F.
Supp. 1089, 1104-1107, 1116-1117 (N.D. Cal. 1980).
We adopt the district court's reasoning on these issues, adding
that the court's analysis of defendant's "single product" claim is
supported by the Supreme Court's recent discussion in Jefferson Parish
Hospital District No. 2 v. Hyde, U.S. , 104 S. Ct. 1551, 1561-65
(1984). The undisputed facts summarized in the district court's
opinion establish that a demand existed for NOVA instruction set CPUs
separate from defendant's RDOS, and that each element of the NOVA
computer system could have been provided separately and selected
separately by customers if defendant had not compelled purchasers to
take both. See also Klamath-Lake Pharmaceutical Association v.
Klamath Medical Service
PAGE 4
734 F.2d 1336, *1339; 1984-1 Trade Cas. (CCH) P66,053
Bureau, 701 F.2d 1276, 1289 (9th Cir. 1983). n1
n1 The district court also granted summary judgment for plaintiffs
on the issues of (1) whether plaintifs were damaged in fact by the
tie-in (490 F. Supp. at 1117-19) and (2) whether the tie-ins were
justified by legitimate business considerations (id. at 1120-24). We
agree with the court's rulings on these issues and the grounds upon
which the court based them.
The remaining element necessary to establish a per se violation --
defendant's possession of sufficient economic power with respect to
the tying product, defendant's RDOS -- was tried to a jury and
resolved in plaintiff's favor. The district court erred in setting
aside this verdict or, alternatively, ordering a new trial.
III.
One of the purposes of a per se rule is to avoid an "incredibly
complicated and prolonged economic investigation . . . to determine at
large whether a particular restraint has been unreasonable." Northern
Pacific Railway Co. v. United States, 356 U.S. 1, 5 (1958). See also
Jefferson Parish Hospital, 104 S. Ct. at 1560, n.25. Although not
requiring as extensive an inquiry as would be necessary to determine
whether the tie-in violated the general standard of reasonableness,
the district court held that plaintiffs "could not recover on the
alleged tie-ins unless they identified and proved the relevant market
for the tying and tied products." In re Data General Corp. Antitrust
Litigation, 529 F. Supp. 801, 809 (N.D. Cal. 1981). The trial that
followed "focused upon the definition of the relevant markets" for the
two products, which the Court characterized as the "critical issue,"
(id. at 806) and consumed forty-five days. Id. at 804.
The district court recognized that detailed market analysis was not
required in a per se tying case prior to United States Steel Corp. v.
Fortner Enterprises, Inc., 429 U.S. 610 (1977) (Fortner II), but read
that opinion as rejecting this approach in favor of a requirement of
"some degree of market analysis even in a per se case." 529 F. Supp.
at 808. The Court relied particularly upon language in Fortner II,
which states the question to be:
whether the seller has the power, within the market for the tying
product, to raise prices or to require purchasers to accept burdensome
terms that could not be exacted in a completely competitive market.
In short, the question is whether the seller has some advantage not
shared by his competitors in the market for the tying product.
429 U.S. at 620.
From the district court's analysis of the asserted deficiencies in
plaintiffs' proof, it appears the court read this statement as
requiring proof of power to fix the price fo the tying product in the
whle of the relevant market as defined by the inquiry described in
United States v. E.I. duPont de Nemours & Co., 351 U.S. 377 (1956), a
monopolization case. In this the district court erred. Possession by
the seller of such monopoly [*1340] power is sufficient to establish
per se illegality, but it is not required.
As the Supreme Court said in United States v. Loew's Inc., 371 U.S.
38, 45 (1963):
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Market dominance -- some power to control price and to exclude
competition -- is by no means the only test of whether the seller has
the requisite economic power. Even absent a showing of market
dominance, the crucial economic power may be inferred from the tying
product's desirability to consumers or from uniqueness in its
attributes. n4
n4 Since the requisite economic power may be found on the basis of
either uniqueness or consumer appeal, and since market dominance in
the present context does not necessitate a demonstration of market
power in the sense of @ 2 of the Sherman Act, it should seldom be
necessary in a tie-in sale case to embark upon a full-scale factual
inquiry into the scope of the relevant market for the tying product
and into the corollary problem of the seller's percentage share in
that market. This is even more obviously true when the tying product
is patented or copyrighted, in which case, as appears in greater
detail below, sufficiency of economic power is presumed.
This position was re-affirmed in the Fortner cases.
In Fortner I:
The standard of "sufficient economic power" does not, as the
District Court held, require that the defendant have a monopoly or
even a dominant position throughout the market for the tying product.
Our tie-in cases have made unmistakably clear that the economic power
over the tying product can be sufficient even though the power falls
far short of dominance and even though the power exists only with
respect to some of the buyers in the market.
* * *
. . . [T]he presence of any appreciable restraint on competition
provides a sufficient reason for invalidating the tie. Such
appreciable restraint results whenever the seller can exert some power
over some of the buyers in the market, even if his power is not
complete over them and over all other buyers in the market. . . .
[D]espite the freedom of some or many buyers from the seller's power,
other buyers -- whether few or many, whether scattered throughout the
market or part of some group within the market -- can be forced to
accept the higher price because of their stronger preferences for the
product, and the seller could therefore choose instead to force them
to accept a tying arrangement that would prevent free competition for
their patronage in the market for the tied product. Accordingly, the
proper focus of concern is whether the seller has the power to raise
prices, or impose other burdensome terms such as tie-in, with respect
to any appreciable number of buyers within the market.
394 U.S. at 502-03 (emphasis added).
In Fortner II the Court reiterated that its prior decisions "do not
require that the defendant have a monopoly or even a dominant position
throughout the market for a tying market," 429 U.S. at 620, and
approved a commentator's summary of the holding in Fortner I;
"Whenever there are some buyers who find a seller's product uniquely
attractive, and are therefore willing to pay a premium above the price
of its nearest substitute, the seller has the opportunity to impose a
tie to some other good." 429 U.S. at 620, n.14. (quoting Note, The
Logic of Foreclosure: Tie-In Doctrine after Fortner v. U.S. Steel, 79
Yale L.J. 86, 93-94 (1969) (emphasis added). The language from
Fortner II relied upon
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734 F.2d 1336, *1340; 1984-1 Trade Cas. (CCH) P66,053
by the district court is not inconsistent with this interpretation; it
required only "power, within the market for the tying product, to
raise prices to require purchasers to accept burdensome terms that
could not be exacted in a completely competitive market." 429 U.S. at
620 (emphasis added).
In its most recent decision on the question (filed after the ruling
of the district court in this case) the Supreme Court again made it
clear that a tying arrangement is illegal per se if the seller of the
tying product has the capacity to force [*1341] some buyers to
purchase a tied product they do not want or would have preferred to
purchase elsewhere. When such forcing occurs "competition on the
merits in the market for the tied item is restrained." Jefferson
Parish Hospital, U.S. , 104 S. Ct. at 1558 (1984). Thus, what is
required in a per se case is not power over the whole market for the
tying product, but only, as the court said, a "type of market power
[that] has sometimes been refered to as "leverage . . . defined here
as a supplier's ability to induce his customers for one product to buy
a second product from him that would not be purchased solely on the
merit of that second product."" Id. at 1559, n.20, quoting V. P.
Areeda & D. Turner, Antitrust Law, P1134a at 202 (1980). "[We] have
condemned tying arrangements", the Court said, "when the seller has
some special ability -- usually called "market power" -- to force a
purchaser to do something that he would not do in a competitive
market." Id. at 1559.
Nor is a restraint on competition that is substantial in terms of
the entire market for the tied product required. "If only a single
purchaser were "forced" with respect to the purchase of a tied item,
the resultant impact on competition would not be sufficient to warrant
the concern of antitrust law." Id. at 1560. Beyond that, however, it
need only appear that "a substantial volume of commerce is
foreclossed," id., which the court earlier defined as "substantial
enough in terms of dollar-volume so as not to be merely de minimis."
Fortner I at 501. See also Moore v. Jas. H. Matthews & Co., 550 F.2d
at 1216.
In accordance with these holdings, we review the record not for
what it may reveal as to defendant's position in a defined market in
which defendant's RDOS was sold, but only to determine whether the
jury reasonably could have concluded defendant's RDOS was sufficiently
unique and desirable to an appreciable number of buyers to enable
defendant to force those buyers also to buy a substantial volume of
defendant's NOVA instruction set CPUs they would have preferred not to
buy.
IV.
There was abundant evidence that defendant's RDOS was distinctive
and particularly desirable to a substantial number of buyers, and
could not be readily produced by other sellers. There was also
substantial evidence that defendant's insistence upon licensing its
RDOS only to purchasers of defendant's NOVA instruction set CPU, led
buyers to purchase defendant's NOVA CPUs who would not have bought
them or would have bought them elsewhere absent the tying requirement.
Although expressing some doubt as to the sufficiency of the
evidence, the district court assumed defendant's RDOS was superior to
competing operating systems and was viewed as uniquely desireable by
buyers. 529 F. Supp. at 816.We do not share the court's hesitancy
about the adequacy of the proof of the strong preference of many
customers for RDOS. It was a most popular product.
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734 F.2d 1336, *1341; 1984-1 Trade Cas. (CCH) P66,053
Experts, customers and even competitors testitifed to its many
advantages over competitive products. n2 Defendant's own officials
expressed the same opinion in pre-litigation documents.
n2 There was documentary and oral testimony that RDOS was the best
in the industry, the most comprehensive, compatible, field proven, and
rapid. One customer testified, for example, that tests showed RDOS
ran approximately four times faster than any similarly-priced system.
Another witness called it "the only full service operating system
available for the NOVA."
Defendant's RDOS has copyright protection. Defendant also claimed
the production of RDOS required use of defendant's trade secrets. The
RDOS copyright established both the distinctiveness of RDOS and a
legal bar to its reproduction by competitors. "The requisite economic
power is presumed when the tying product is patented or copyrighted."
United States v. Loew's, Inc., 371 U.S. at 45. The copyright confers
upon defendant "some advantages not shared by his competitors in the
market for the tying product." Fortner II, 429 U.S. at 620: [*1342]
"[T]he copyright monopolies in United States v. Paramount Pictures,
Inc., 334 U.S. 131, and United States v. Loew's Inc., 371 U.S. 38 . .
. represented tying products that the Court regarded as sufficiently
unique to give rise to a presumption of economic power." 429 U.S. at
619."[P]er se prohibition is appropriate if anticompetitive forcing is
likely. For example, if the government has granted the seller a
patent or similar monopoly over a product, it is fair to presume that
the inability to buy the product elsewhere gives the seller market
power." Jefferson Parish Hospital, 104 S. Ct. at 1560. See also Moore
v. Jas H. Matthews & Co., 550 F.2d at 1215-16.
There is abundant evidence, including testimony of defendant's own
executives, customers, and plaintiffs' expert witnesses, that
defendant's RDOS could not be reproduced without infringing
defendant's copyright and utilizing defendant's trade secrets. n3
Defendant vigorously pursued those who assertedly violated defendant's
proprietary rights. Additionally, there was evidence that creating
and testing a compatible system would require millions of dollars and
years of effort. One of the defendant's officers testified that the
passage of the time required to reproduce RDOS would render the
completed software obsolete.
n3 One of the defendant's officers admitted it would be impossible
to develop operating system software performing all the functions of
defendant's RDOS without violating defendant's copyright and utilizing
its trade secrets.
The power to coerce that RDOS gave the defendant was enhanced by
the fact that many of defendant's customers were "locked in" to the
use of RDOS. Briefly, defendant sells RDOS and NOVA CPUs primarily to
original equipment manufacturers (OEMs) who combine them with
application software (a set of instructions that allows the system to
accomplish a certain task) to create a complete computer system for
resale. Application system software for particular uses is developed
by OEMs at substantial expense. Once developed, application software
for a particular use may be used by an OEM in producing any number of
computer systems for that use for resale to different customers.
However, application software is designed to function only with a
particular operating system. OEMs who construct their application
software to function with defendant's RDOS therefore must purchase an
RDOS for each computer system they assemble using that application
software. Because of the tying condition, they also must purchase one
of defendant's NOVA instruction set CPU for each such
PAGE 8
734 F.2d 1336, *1342; 1984-1 Trade Cas. (CCH) P66,053
computer system they sell.
An OEM can free itself from this "lock in" only by abandoning its
application software compatible with defendant's RDOS, in which it has
a substantial investment, or converting the software so that it may be
used with another operating system. There was abundant testimony that
conversion was not economically feasible. n4
n4 Defendant's former marketing manager could recall no instance in
which an existing OEM customer had abandoned defendant's equipment and
switched to a new supplier.Competitors and customers of defendant
testified that conversion was virtually impossible without a complete
rewriting of application software. One OEM estimated the cost of
conversion to be 90 percent of the original development costs.
Another ruled out the possibility of changing operating
systems because "it would simply take too long to change all the
software that we have, all the software on hand. We can't shut down
the operation we have going. . . ." And another, "it is just not
possible to do in our environment because it would just take forever."
The defendant argues that "lock-in" is irrelevant in determining
its market power because OEMs are aware of the tie when they select an
operating system for the computer system they are assembling. At that
point, defendant argues, the OEM has made no investment in application
software and, as a result, chooses freely among competing systems.
529 F. Supp. at 821. This characterization of the market is not
accurate. As the evidence in this case establishes, the initial
choice is not free of forcing.Defendant's operating system has [*1343]
been shown to be unique as a matter of law and distinctively
attractive as a matter of fact. Defendant's initial leverage is
magnified by the lock-in. By 1979, 93 percent of defendant's NOVA CPU
sales were made to locked-in customers. These buyers were not only
forced to buy defendant's CPUs initially to acquire the operating
system they found most attractive, they were thereafter forced to buy
defendant's CPUs for their subsequent needs in order to acquire the
only operating system they could economically use. Not even a
decision by CPU manufacturers to broaden their base and compete in the
operating system market would have alleviated the problem, for the
locked-in customers were not free to choose among competing operating
systems. RDOS was the only operating system that would allow them to
realize the benefit of their investment in application software, an
investment that in some cases totalled millions of dollars.
OEM testimony confirmed defendant's potential power to coerce
arising from the lock-in. For example, one OEM witness testified
"[w]ithout [the RDOS operating system] I can't operate"; and another:
"economically I was in a position where I had to use RDOS. I had no
choice at that point."
The power arising from the special attraction of RDOS, coupled with
the copyright protection, the trade secret barrier, and the lock-in,
was evidenced by defendant's minimum equipment configuration (MEC)
program. To obtain defendant's RDOS all licensees were required to
purchase not only defendant's CPU but also a set of quantity of other
peripheral hardware, or pay a program license charge. Defendant's
national accounts manager accurately referred to the charge as a
"penalty." Customers testified they were forced to buy peripherals
from defendant they otherwise would not have purchased. An OEM
testified he purchased defendant's fixed disc because he "had to . . .
or pay a $5,000 fine." He also testified he could have brought a
superior disc drive
PAGE 9
734 F.2d 1336, *1343; 1984-1 Trade Cas. (CCH) P66,053
for this pruposes from another source at half the price. Another
customer testified "we've had to take equipment that we either
couldn't use, or equipment that, for one reason or another, might, in
our opinion, have been best -- best obtained from another source."
Still another OEM called the MEC "arbitrary" because it required the
purchase of "items of hardware specified in the Minimum Equipment
Configuration for certain products that have no functional bearing or
are not required, or not used necessarily by the programs themselves."
Defendant's senior vice president testified the complaints were
received from customers about the MEC program "all the time."
Defendant retained the MEC program despite buyer resistance
because, as defendant's president testified, if required to forgo the
program defendant would have suffered a loss in revenues. The tie-in
of RDOS of defendant's NOVA instruction set CPU was an equally
conscious exercise of economic power in one market to gain an
advantage in others. As one of defendant's managers wrote in an
intra-company memorandum, "[p]rotection from knock-off products still
lies in software licensing restrictions."
The district court properly rejected defendant's argument,
vigorously renewed in this court, "that it must bundle its software
together with its CPUs in order to recover its substantial investment
in software research and development," (490 F. Supp. at 1121) and that
"it would be unfair to permit emulator-CPU manufacturers to reap the
benefits of [defendant's] software [research and development] when
they sell their competing CPUs for use with [defendant's] software."
490 F. Supp. at 1121-22.
Defendant's president testified the tie was devised to ensure
recovery of RDOS development costs. He testified the decision to tie
was made after a competitive manufacturer of NOVA emulator CPUs
requested permission to use RDOS. Rather than sell the software
separately at a price that would reflect research and development,
defendant chose to restrict availability to its own CPU customers,
thus restricting competition for the tied product. As the district
court said, "Recovery of investment costs has been explicitly excluded
[*1344] from the narrowly-construed exceptions to the per se rule
against tie-ins." Id. at 1122. Defendant "has not shown, nor has it
raised a genuine issue of fact with respect to its ability to show at
trial, that it is any less capable than was Jerrold Electronics [see
United States v. Jerrold Electronics Corp., 187 F. Supp. 545 (E.D. Pa.
1960), aff'd per curiam, 365 U.S. 567 (1961)] of adopting the less
restrictive alternative of restructured prices in order to recoup its
investment costs and maintain its incentive for further innovation."
Id. at 1122.
If the tie were allowed, competing manufacturers of CPUs would be
forced
not only to match existing sellers of the tied product in price and
quality, but to offset the attraction of the tying product itself.
Even if this is possible through simulataneous entry into production
of the tying product, entry into both markets is significantly more
expensive than simply entry into the tied market. . . .
Jefferson Parish Hospital, 104 S. Ct. at 1558 n.19 (quoting Fortner
I, 394 U.S. at 513 (White, J., dissenting)). In short, defendant must
recover the cost of RDOS development by pricing RDOS appropriately,
not by tying it to a separate product.
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Evidence regarding the potential sources of power with respect to
RDOS (copyright, trade secret, and "lock-in"), was submitted to the
jury under appropriate instructions. The jury found as a fact that
defendant possessed and used the power by means of the tying
arrangement to appreciably restrain competition in the market for NOVA
instruction set CPUs. The evidence outlined above fully supported the
jury's verdict.
V.
Most, although not all, of the trial court's reasons for setting
aside the verdict are traceable to the court's view that the legality
of a tying arrangement must be tested by the seller's economic power
throughout the market for the tying product, and by the relative
substantially of the restraint on competition in the tied product
market considered as a whole.
As we have said, the trial court assumed customers regarded RDOS as
"uniquely desirable and that it in fact possesses various features
which render it superior to other software," but concluded that
plaintiffs had failed to prove that defendant's "competitors were
prevented from developing functionally equivalent software." 529 F.
Supp. at 816. Conceding that the copyright on RDOS and the trade
secrets involved in its creation precluded development by defendant's
competitors of "compatible" software, the court held plaintiffs had
failed to prove the effect of defendant's copyright and secrets on the
development of software "comparable" to RDOS. Id. at 816-17.
The court erroneously imposed the burden of proof on plaintiffs.
The RDOS copyright created a presumption of economic power sufficient
to render the tying arrangement illegal per se. n5 The burden to rebut
the presumption shifted to defendant.
n5 The district court suggested that "the presumption of economic
power may be inappropriate in the computer software context because
copyright notices do not necessarily prevent others from copying the
material embodiment of the source program." 529 F. Supp at 816. The
premisse of this position was laid to rest in Apple Computer, Inc. v.
Formula Inter'l, Inc., 725 F.2d 521 (9th Cir. 1984); and Apple
Computer, Inc. v. Franklin Computer Corp., 714 F.2d 1240, 1249-54 (3d
Cir. 1983), decided after the district court's opinion in this case
was filed.
More basically, the court was misled by its conception that power
throughout the product market for the tying product was required.
Earlier in its opinion the court indicated the relevant market must be
defined to permit the jury to determine whether defendant's
competitors "were prevented from developing competitive software." Id.
at 809. The court continued:
The focus in defining a relevant product market must be upon
recognizing those firms and products which present relevant
alternatives to the defendant's product, to the extent that they are
"reasonably interchangeable" for the same or similar uses, and thus
restrict the [*1345] defendant's power to raise prices. See United
States v. E.I. Du Pont de Nemours & Co., 351 U.S. 377 (1956).
Id. Thus the court's concern was whether there were reasonably
interchangeable substitutes for RDOS in the operating systems market
as a whole, a question of critical importance if the question were
whether that market had
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been monopolized.
As the authorities cited earlier establish, the focus of the
prohibition against tying arrangements is quite different. The
concern is not with the restraint on competition in the tying product
but on competition in the market for the tied product. What is
required is not monopoly power in the tying product market, but only
sufficient power to enable the seller to restrict competition in the
tied product. If a seller's product is distinctive, not available
from other souces, and sufficiently attractive to some buyers to
enable the seller by tying arrangements to foreclose a part of the
market for a tied product, the adverse impact on competition in the
tied product is not diminished by the fact that other sellers may be
selling products similar to the tying product. And, of course, if the
products of other sellers are also sufficiently distinctive and
attractive to enable each to impose similar tying arrangements upon a
group of purchasers, the adverse impact upon competition in the tied
product would be enhanced, not diminished.
As the Supreme Court said in Northern Pacific Railway v. U.S., 356
U.S. at 10 n.8, "the defendant in International Salt offered to prove
that competitive salt machines were readily available which were
satisfactory substitutes for its machines (a fact the Government did
not controvert), but the Court regarded such proof as irrelevant."
And, again, in United States v. Loew's, Inc., 371 U.S. at 49, "[T]he
mere presence of competing substitutes for the tying product, here
taking the form of other programming material as well as other feature
films, is insufficient to destroy the legal, and indeed the economic,
distinctiveness of the copyrighted product."
The law was succinctly summarized in Carpa, Inc. v. v. Ward Foods,
Inc., 536 F.2d 39, 48 (5th Cir. 1976), a trademark tying case, in a
manner particularly pertinent here:
What is required is a factual assessment of the tying product's
uniqueness and desirability, not its market power in the sense of a
Section 2 Sherman Act violation. United States v. Loew's, Inc., 371
U.S. 38, 45, 83 St. Ct. 97, 9 L.Ed.2d 11 (1962). Uniqueness, of
course, presupposes that competitors are in some way foreclosed from
offering the distinctive product. Fortner points out at 505, 89 S.
Ct. 1252, note 2, that such barriers may be legal, as in the cases of
patented or copyrighted products. Trademarks surely may be included in
the list of such legal restraints, and, as with copyrighted material,
the mere presence of competing substitutes is insufficient to destroy
the legal, and more importantly the economic, distinctiveness of the
trademark. See Loew's, 371 U.S. at 49, 83 S. Ct. 97.
(emphasis added). See also Seigel v. Chicken Delight, Inc., 448
F.2d 43, 49-50 (9th Cir. 1971).
Fortner II is not to the contrary, as the district court
thought.There must, of course be power to coerce. Fortner II holds
only that a seller lacks such power if buyers may choose between
fungible products offered by different sellers. In Fortner II the
tying item was favorable credit terms, the tied product U.S. Steel's
prefabricated homes. U.S. Steel's credit was not unique; money is
fungible. Anyone willing to accept less profit could have offered
credit terms similar to those offered by U.S. Steel. As the Supreme
Court said, "[t]he unusual credit bargain offered to Fortner proves
nothing more than a willingness to provide cheap financing in order to
sell expensive houses."
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734 F.2d 1336, *1345; 1984-1 Trade Cas. (CCH) P66,053
Fortner II, 429 U.S. at 62. In contrast, no one but defendant could
offer RDOS. It was not fungible, but rather in many ways unique.
The question is not whether other operating systems with which RDOS
competed [*1346] were as good as RDOS or better in the eyes of some
buyers, but rather whether RDOS, available only from defendant, was
sufficiently attractive to some customers to enable defendant to
require those who wished to obtain it also to buy from defendant NOVA
instruction set CPUs they might otherwise have purchased from others.
n6 As we have seen, evidence of the defendant's possession of such
power was ample.
n6 One of the defendant's customers stated the Fairchild NOVA
instruction set CPU was ahead of its time technologically but he had
to eliminate it from consideration because Fairchild "did not have an
operating system available." Another customer testified the SCI
Mercury 3 emulator was superior to Data General's NOVA CPU.The record
is rich in testimony from customers who stated the tie prevented them
from puchasing any CPU other than Data General's.
Clearly the availability of "comparable" or "functionally
equivalent" operating systems would not have freed "locked-in" OEMs of
the pressure, imposed by their investment in application software
"compatible" only with RDOS, that compelled them to accede to
defendant's condition that they purchase defendant's NOVA CPU in order
to obtain RDOS.
The district court held that the "lock-in" did not confer upon
defendant any "legally cognizable power over price" because OEMs who
purchased RDOS and defendant's NOVA instructions set CPUs for use in
assembling computer systems for resale were constrained by competition
in the resale market from paying non-competitive prices for components
of their systems, and that, in fact, defendant's prices to OEMs were
fully competitive. 529 F. Supp. at 814-15, 817-18. There are several
answers. Some OEMs are insulated from strict price sensitivity. As
defendant's marketing manual stated: "[M]any OEM's have an effective
monopoly or near-monopoly for their product, because of patent
position, market share dominance, control of distribution channels, or
whatever. This guy isn't forced to go the lowest possible unit cost."
Moreover, to the extent that end-users considered defendant's RDOS to
be superior to other operating system software, the OEM's price to the
end-user and thus defendant's price of hardware to the OEM, could
exceed that of other suppliers. Most important, the passage in
Fortner II to which defendant refers ("whether the seller has the
power, within the market for the tying product, to raise prices or to
require purchasers to accept burdensome terms that could not be
exacted in a completely competitive market," (429 U.S. at 620)
(emphasis added) recognizes that a seller's power to impose an onerous
tying agreement is sufficient to invoke per se condemnation. Even
assuming defendant's package of RDOS and defendant's NOVA instruction
set CPU was competitively priced, the record established that
defendant could, and did, force that package upon some buyers who, if
free to choose, would have brought RDOS from defendant but NOVA
instruction set CPUs from others.
"Fundamentally," the district court held, "plaintiffs have not
presented evidence demonstrating that their alleged inability to
compete with [defendant's] NOVA CPUs is attributable to the software
licensing restrictions rather than this failure to meet" defendant's
standards of quality and service.Even from the brief summary presented
here, it is evident there was ample direct and circumstantial evidence
to support the jury's verdict to the
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734 F.2d 1336, *1346; 1984-1 Trade Cas. (CCH) P66,053
contrary.
VI.
The district court also concluded that plaintiffs failed to proave
an appreciable restraint in the market for the tied product, the NOVA
instruction set CPU. The court noted that the general market for CPUs
was highly competitive, "characterized by a wide range of competitive
hardware offerings, intense price competition, ease of entry, and
rapid growth." 529 F. Supp. at 818. The court noted many competitors
had entered the CPU market after the introduction of defendant's RDOS
tied to defendant's CPU. Id. Even assuming the tie-in appreciably
restrained competition "in the NOVA instruction set sub-market," the
court said, "the portion of the broad market conceivably affected by
this phenomenon is so smalll that it cannot be [*1347] characterized
as indicative of power "appreciably to restrain competition" in the
general market." Id.
But as we have already seen, a detailed analysis of competitive
conditions in the tied product market is inappropriate in a per se
case. Indeed as the district court held in its first opinion, see 490
F. Supp. at 1116-17, all that is required in respect to the extent of
the restraint in the market for the tied product is that a
"substantial volume of commerce be foreclosed," Jefferson Parish
Hospital District No. 2 v. Hyde, 104 S. Ct. at 1560 (emphasis added);
and "substantial volume" in this context means only an amount greater
than de minimis, a requirement clearly satisfied here. See 490 F.
Supp. at 1117.
VII.
Defendant argues that it is entitled to a new trial both on
liability and damages even if the the judgment notwithstanding the
verdict is overturned.
Although the district court's ruling on the alternative motion for
new trial involved the exercise of a measure of discretion, a
stringent standard applies when the motion is based on insufficiency
of evidence. A motion for new trial may be granted on this ground
only if the verdict is against the "great weight" of the evidence, J &
H Auto Trim Co. v. Bellefonte Ins. Co., 677 F.2d 1365, 1373 (11th Cir.
1982); Conway v. Chemical Leaman Tank Lines, Inc., 610 F.2d 360, 363
(5th Cir. 1980), or "it is quite clear that the jury has reached a
seriously erroneous result". Coffran v. Hitchcock Clinic, Inc., 683,
F.2d 5, 6 (1st Cir. 1982). In this case, the jury's verdict, rather
than being clearly contrary to the weight of the evidence, was a
more-than-defensible resolution of a difficult issue.
Neither do we think the single issue submitted to the jury
(defendant's power to restrain competition) was so intertwined with
the issue of damage that the latter cannot be submitted to a new jury
without such confusion and uncertainty that the separate trial would
amount to denial of a fair trial. See Gasoline Products Co. v.
Champlin Refining Co., 283 U.S. 494, 499-500 (1931). Defendant has
offered nothing but a general assertion to support its contention to
the contrary. Greenwood Ranches, Inc. v. Skie Construction Co., 629
F.2d 518, 522 (8th Cir. 1980). See C. Wright & A. Miller, Federal
Practice and Procedure, @ 2814 (1973).
Reversed on the appeal, affirmed on the cross-appeal, and remanded
for further proceedings consistent with this opinion. n7
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734 F.2d 1336, *1347; 1984-1 Trade Cas. (CCH) P66,053
n7 Our conclusion that the verdict for plaintiffs should be
reinstated disposes of defendant's appeal from the dismissal of
defendant's counterclaim alleging this and other similar suits were
"sham litigation", the institution of which constituted a violation of
the Sherman Act.
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