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July 15, 1987

THE ELEPHANT & THE FLEA – 1 IBM’s VICE-CHAIRMAN SPENDS LINCOLN’s BIRTHDAY IN COURT

By CBR Staff Writer

The dog days of summer are no time for heavy reading, so today we begin serialisation of that ideal holiday standby – the courtroom drama.

IBM’s vice chairman Paul J Rizzo, the second most powerful person in the computer business, sat in the witness’ chair and faced the antitrust lawyer. He was all business. It didn’t seem to matter that a snowstorm was hovering over the Federal Courthouse in Philadelphia. Nor was Rizzo less attentive that Thursday afternoon because it was a holiday, Lincoln’s Birthday, February 12, 1987. Rizzo’s attention was locked on the lawyer, Robert G Levy, who was trying to beat IBM in an antitrust suit. Levy had been hired by a tiny Pennsylvania company, Allen-Myland Inc, known as AMI in the trade. AMI is a so-called refurb house, one of a handful of companies that reconfigure and refurbish IBM computers. AMI’s clients are mainly computer leasing companies, like Comdisco and CMI, although it occasionally serves an end user directly. If the court accepted AMI’s accusations, IBM was in big trouble. The refurb house had accused Big Blue of several illegal practices, activities that it not only hurt AMI and its clients, but also raised the cost to users of owning or renting IBM’s mainframes. Rizzo was on the stand because he, more than any other IBM executive, knew a great deal about an IBM policy that had crippled international trading in the largest mainframe of IBM’s last generation, the model 3033 processor.

Foot in his mouth

AMI’s lawyer was trying to prove that Rizzo did more than play a role in implementing this particular policy, which ostensibly protected IBM from honouring certain warranty claims. Levy was out to show that Rizzo knew the policy would knock out some of IBM’s competition, and that it was illegal. Levy had previously interrogated Rizzo regarding this matter. On November 12, 1986, in the presence of a legal stenographer, IBM’s vice chairman had put his foot in his mouth. It happened this way: Levy had asked Rizzo to provide a deposition about certain IBM practices. Some of Levy’s questions concerned documents among the 350,000 pages of printed matter churned up by the discovery process. One of these items – labelled Plaintiff’s Exhibit 10 – was a one-page handwritten memo. Levy had realised it was important. But until he deposed Rizzo, Levy had been unable to tie it into the case he was building. Plaintiff’s Exhibit 10 refers to one of IBM’s pricing gimmicks, a policy that IBM called the International Warranty Service Charge, or IWSC. The IWSC was a surcharge forservice placed on mainframes that were still under warranty when they were moved between countries. On Exhibit 10, the word objective appeared near the top of the page. Below it were some notes. But it was the statement at the bottom of the page that most interested Levy, who told the court that the memo concluded, prevent the non-IBM export of machines. The Baltimore lawyer cited this as proof that IBM had instituted the IWSC surcharge in order to block competitors.What happened as Levy examined Rizzo regarding Plaintiff’s Exhibit 10 is all on the record, even though the actual memo has been restricted from public examination. Some time after Levy had deposed Rizzo, he explained the circumstances to Federal Judge Clarence C Newcomer Jr during a hearing that was part of the litigation. I was very lucky, your Honour, the lawyer said. I wasn’t even going to ask him [Rizzo] about it for a minute. But I said, ‘Well, I might as well try it; nobody else knows anything about this document.’ And I showed the document to Mr Rizzo and he recognised his handwriting. He wrote it.As it turned out, things weren’t exactly as Levy originally surmised, and they didn’t happen exactly as Levy recalled. The actual transcript of the deposition shows that Levy had asked Rizzo, Do you recognise the handwriting on Exhibit 10? Rizzo had replied, I think it’s my handwriting.The exact words used by Rizzo became important three months later. The trial was under way; it had begun on February 3. On its eighth court day, February 12

, Rizzo was in the courtroom, being examined by Levy. Rizzo was not alone. He was supported by Evan Chesler and IBM’s other attorneys from New York’s top law firm, Cravath, Swain and Moore. Cravath is the firm that has been so successful on IBM’s behalf in other antitrust cases, and masterminded IBM’s legal attack on Hitachi and others over the alleged theft of IBM’s trade secrets.In the Philadelphia courtroom, Rizzo’s story had changed. I am positive I did not write this document, IBM’s vice chairman asserted. I recall none of the circumstances surrounding it, he added. And as I look at this document today, while it is similar to my handwriting, it is not my handwriting. It was not Rizzo who wrote Plaintiff’s Exhibit 10, said IBM. The company claimed that the memo was written by someone named Philip Guthoff. Guthoff is a staffer at IBM – his relation to Rizzo was never detailed – and he was not, like Rizzo, an officer of the company. Guthoff was also not a member of the elite Management Committee that sets IBM’s most important policies, as Rizzo was. The implication was clear: whatever Guthoff wrote was not necessarily IBM’s official policy.

Paid big bucks

At the time of his courtroom appearance, 59-year-old Rizzo was at the tail end of a spectacular career. He’d joined IBM’s corporate financial staff in 1958 and in 14 years rose to chief financial officer. Two years later he was named senior vice president of the data processing group. In 1980 he was appointed to the Management Committee as a senior vice president, and three years later promoted to vice chairman. Rizzo is credited with playing a key role in transforming IBM into the low-cost producer in many of its markets. IBM had been grateful. Rizzo was paid big bucks – in excess of $700,000 a year. Nevertheless, his final months at IBM would be clouded by his embarrassment. For when he was first confronted with Plaintiff’s Exhibit 10, his response was forthright, but impulsive. He explained what he said in court last Lincoln’s Birthday: I had absolutely no recollection of the document until [Levy] confronted me with the document at my deposition. I made the radical assumption that it came from my files.Rizzo’s decision to retire from IBM was officially announced on March 31, six weeks after his court appearance. In August, Rizzo will become dean of the School of Business Administration at his alma mater, University of North Carolina in Chapel Hill; he’s been an active alumnus and advisor to the university for years. Since August 1985, Rizzo has been a trustee of UNC’s Institute for the Study of Private Enterprise. So there’s a bit of irony in AMI’s allegation that IBM tried to block international traffic in its largest computers by illegal means, and that Paul Rizzo, an advocate of ethical business practices, was central to AMI’s case. Copyright (C) 1987 Hesh Wiener

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