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August 4, 1987

THE ELEPHANT & THE FLEA – 5 THE JUDGE CONSIDERS HIS VERDICT

By CBR Staff Writer

Having accused IBM of antitrust law violations, the tiny Allen-Myland Inc, a company that refurbishes and upgrades IBM mainframes, has been trying to prove that IBM’s pricing practices are illegal (CI Nos 725, 727, 729, 734). AMI cited three distinct areas where it felt IBM had gone beyond the law. One was the way IBM reduced the international flow of some mainframes by imposing a surcharge on machines still under warranty. Another was the allegation that IBM somehow interfered with the availability of certain parts made by ITT and used in IBM mainframes. The third focus of AMI’s case is the way IBM prices parts and labour used in 308X upgrades.

Surprising discovery

In order to emphasise the effect of IBM’s pricing policies, AMI’s lawyer decided to call as a witness a computer leasing authority. Exactly one week before IBM’s vice-chairman Paul Rizzo testified in court, Robert Levy, the lawyer representing Allen-Myland Inc, put a leasing expert on the witness stand. Robert van Hellemont, at the time a lease investment executive with the Wall Street firm of Thomson-McKinnon, used to work for CMI. CMI, headquartered outside of Detroit, is the second largest independent lessor of IBM mainframes in the US. According to van Hellemont, AMI had come to CMI in 1983 and told the lessor about a surprising discovery its technicians had made: the parts used to upgrade IBM’s smallest 3083, the model E, to its fastest 3081, the model K, and those used to upgrade a 3081-D to a K were the same! At the time, IBM charged $400,000 to upgrade a 3081-D to a 3081-K during a special sale; the usual price of the upgrade was $600,000. By way of comparison, IBM charged about $1.5m to upgrade a 3083-E to a 3081-K. These were all net prices; as the upgrades were installed, different parts were returned to IBM in each case.AMI said, van Hellemont recalled, that we could… supply [AMI] with an E and then also supply them with a D-to-K upgrade…give them those two pieces of equipment and they could produce a 3081-K, which was a machine that was clearly much more valuable to us than a 3083-E and a D-to-K upgrade. CMI just happened to have such an upgrade MES, and a 3083-E, too. There may have been another TCM needed by AMI, according to testimony provided by the refurb house’s co- founder Larry Allen, who recalls getting one additional can of circuitry from CMI. The record on this matter is not perfectly clear.

IBM got wise

So we used the D-to-K upgrade, van Hellemont continued, gave it to them and they created a K out of them and it was subsequently installed at Philadelphia Electric.IBM inspected the 3081-K at AMI’s plant in Broomall, and certified it for maintenance. But IBM got wise to the situation. It asked CMI for parts back, the parts that should have come out of a 3081-D when it’s turned into a 3081-K. CMI, of course, didn’t have them, and neither did AMI. How could they? There was never a 3081-D involved in this upgrade.When IBM demanded the parts back, van Hellemont went on, and we said, you know, no… they insisted we pay for them. And we, of course, we insisted that we already paid for them.We paid them in full, the full $400,000. In any event, they insisted, they told us the purchase price of the parts would be approximately $4.5m.For the parts you had used? asked Levy.Right, van Hellemont responded, which in our judgment was ludicrous, since the entire machine – this was only an upgrade, you know, from – you could have bought a D for say three million, you could buy a K for three million six. They’re charging us four-and-a-half million just for that upgrade.In the end, CMI had to retreat. The lessor had another machine pulled apart so it could give IBM back the parts. Ironically, at the time this dispute occurred, the 3081-D was not even in new production. The machine had been succeeded by the 3081-G, a slightly faster version of the dyadic processor, which used different parts. So CMI, which had hoped that IBM wouldn’t wants parts back for a machine it no longer made, discovered, to its chagrin, just how intra

nsigent IBM could be.AMI, like its client CMI, may find itself in an untenable position. IBM has offered the refurb house chances to settle out of court, and, until the courtroom phase of the trial wound up, AMI had refused to accept a deal. Any settlement would have to get AMI off the hook on IBM’s countercharges, for not only did IBM seek to defend itself, but also to punish AMI for behaviour IBM says was improper and illegal. Among other things, IBM says that AMI illegally copies IBM’s microcode and manuals. IBM additionally said that AMI induced IBM’s customers to breach some agreements. IBM’s charges may serve more than one purpose. First of all, IBM must protect its microcode and manuals. If AMI has abused IBM’s rights, and IBM does not defend itself, the microcode and manuals could end up in the public domain. Second, AMI’s antitrust allegations will never stand up in court if IBM can show that its adversary is seeking to defend an illegal business. Antitrust laws protect only lawful business from predatory actions. AMI had wanted the two suits tried separately, but IBM prevailed and they were consolidated. If, in the course of defending itself, AMI can prove that IBM did not protect its microcode and manuals, old wounds from the IBM-Hitachi battles may be reopened. IBM had gone after Hitachi for its alleged theft of IBM’s secrets, including microcode.

Blizzard of lawsuits

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The stakes are high for both sides. AMI believes its very survival may be at stake. IBM knows that if by some chance it loses, and then fails on appeal, a blizzard of lawsuits could follow. Other parties – leasing companies, end users, even the US Government – could use a court decision against IBM as a proven fact in their legal actions. All they would have to do is establish the amount of damage that IBM’s practices caused.In the meantime, the matter is before Judge O’Neill. There’s no telling when he will render his judgement, nor what it might be. The two parties can still settle out of court. And even when a decision does get handed down, a lengthy appeals process could well ensue. As AMI has undoubtedly learned, and as IBM’s customers ought to know, IBM is a very tough outfit. Whether or not all its tactics are pleasing to rivals, IBM says that it intends to make 30% pre-tax profit on its $8,000m-plus a year mainframe business, and to maintain its gross manufacturing margins in the range of 75% to 80%. Copyright (C) 1987 Hesh Wiener

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