U.S. Will Not Fight I.B.M. on Court Ruling

By John Markoff
The New York Times

June 8, 1994

The Justice Department will not, for the time being, oppose I.B.M.'s efforts to end a 1956 Federal court order restricting its business operations, the Government's top antitrust lawyer told a Federal judge in Manhattan yesterday.

I.B.M. plans later this week to seek repeal of the 38-year-old rules, which among other measures require the company to provide computer services as an entirely separate business from the company's computer manufacturing and sales operations.

Anne K. Bingaman, a United States Assistant Attorney General, told the judge yesterday that the Justice Department planned initially neither to oppose nor support that move, preferring to let the court hear from the computer industry and other interested parties. But she reserved the right for the Justice Department to later take a position.

The International Business Machines Corporation, which contends that the strictures hinder it from competing effectively in the computer-services market against rivals like E.D.A. and Computer Sciences, will argue that the industry has changed substantially since the 1950's -- when the Justice Department accused I.B.M. of monopolizing the market for the pre-computer "tabulating machines" of the day and the punch cards for storing information on the contraptions.

But one thing has not changed in all those years: the judge on the case. Hearing the preliminary motions yesterday was David N. Edelstein, the 84-year-old judge for the Southern Federal District Court of New York, who heard the Government's original antitrust suit against I.B.M. and oversaw the 1956 consent decree by which the company agreed to settle the suit.

Judge Edelstein and I.B.M. have sparred in the decades since. And yesterday, when an I.B.M. lawyer, Thomas D. Barr, said the company would file its motion to dismiss the consent decree if the judge would first recuse himself from the case, Judge Edelstein stood his ground.

"I would suggest you file the recusal motion first," the judge replied, according to an official transcript of the meeting. "Let's get that out of the way first."

Judge Edelstein had also presided when the Justice Department brought a second antitrust suit against I.B.M. in 1969, hearing the arguments and counterarguments for 13 years. When the Government finally decided to drop the case in 1982, it was Judge Edelstein who resisted dismissing it until he was overruled by an appeals court.

Terms of 1956 Agreement

Under the 1956 agreement, I.B.M. was forced to move beyond leasing its tabulating machines and begin selling them outright to customers and to competitors. The company was also forced to give up its control of the nation's punch card manufacturing business. But the more enduring proviso has been the requirement that the company operate its computer services business as a separate subsidiary, which is required to pay the same retail prices for equipment and software that I.B.M. charges to customers -- and to companies that use the products to provide data-processing services in competition with I.B.M.

This provision first became an important factor in the late 1960's when I.B.M. was forced to compete with companies that were purchasing its mainframe computers and then competing directly against I.B.M. by leasing them. As long as I.B.M. remained the world's dominant computer company, that was perhaps a bearable burden for the corporation.

But during the 1990's, as the Microsoft Corporation has gained power in the software business and the mainframe hardware industry has begun to decline, I.B.M. has increasingly lost its control and influence over the computer industry. As a result, the computer maker has begun to look toward businesses in which it offers broad-based "solutions" for customers, competing increasingly against so-called systems integration companies like the Electronic Data Systems Corporation, a unit of the General Motors Corporation.

Yesterday, Ms. Bingaman, who is chief of the Justice Department's antitrust division, told Judge Edelstein that I.B.M. had approached the Government in April and said that Louis V. Gerstner Jr., the company's chairman, was seeking to end the decree.

She said: "We have no position simply because, as Your Honor knows far better than I, this is an extremely complex industry with many facets to it, many interested parties, many businesses with concerns about the effect of the decree who strongly support, in fact, retention of the decree. I.B.M. equally strongly wants to see the decree lifted."

She also said that by not taking a position the Justice Department would significantly speed up the legal process. She indicated that she believed that a number of I.B.M.'s competitors would intervene in the process.

I.B.M. officials would not comment on their action except to acknowledge that they had met with the judge and to say that there had been sweeping changes in their business since the decree was established.

"The information technology industry today bears no resemblance to the industry in 1956," Scott Brooks, a spokesman for I.B.M., said

Industry analysts noted that I.B.M. had been shifting its business toward the services sector during the 1990's.

'Taking Hits'

"I.B.M. has been proclaiming for four or five years that the services business is central to the future of the I.B.M. company," said David Yoffie, a professor at Harvard Business School, who is an expert on the computer industry. "I.B.M. is taking hits in the profit margins of its services when it compete against companies like E.D.S."

Signing the consent decree was originally opposed by I.B.M.'s founder, Thomas Watson, but his son, Thomas Watson Jr., convinced his father that signing the decree without admitting wrongdoing would be in the computer maker's favor.

Under the decree, I.B.M. was ordered to divest itself of sufficient capacity so that it produced less than half the tabulating cards for the nation. The younger Mr. Watson reasoned that the company should be willing to sacrifice a profitable but slowing business in order to obtain a freer hand in the developing computer market.

I.B.M.'s Integrated Systems Solutions Corporation was founded in 1991 and is building a business providing completing computer services packages for corporations such as Eastman Kodak. I.B.M. operates the film manufacturer's data processing operations under a contract.