TABLE OF CONTENTS
C. As Domestic Corporations Engaged in U.S. Export and Domestic Commerce, DRI and Novell had standing to Assert Claims for Damages Suffered from Anticompetitive Conduct by Microsoft Outside the United States.
TABLE OF AUTHORITIES
Caribbean Broadcasting System v. Cable & Wireless, 148 F.3d
Coors Brewing Company v. Miller Brewing Co., 889 F. Supp. 1394
de Atucha v. Commodity Exch., Inc., 608 F. Supp. 510
Galavan Supplements, Ltd. V. Archer Daniels Midland Co.,
Hartford Fire Ins. Co. v. California, 509 U.S. 764 (1993) 14, 21
McGlinchy v. Shell Chemical Co., 845 F.2d 802 (9th Cir. 1988) 18
Optimum, S.A. v. Legent Corp., 926 F. Supp. 530 (W.D.Pa. 1996) 18
S. Megga Telecomm'ns Ltd., 1997 WL 86413 (D.Del. 1997) 20
Sweeney v. Athens Regional Medical Center, 709 F. Supp. 1563
The 'In' Porters, S.A., v. Hanes Printables, Inc., 663
F. Supp. 494
United States v. Nippon Paper Indus. Co., 109 F.3d 1 (1st Cir. 1997) 14, 18, 21
Yellow Pages Cost Consultants v. GTE Directories, 951 F.2d 1158
1 International Copyright Law and Practice 2 at INT-38, 3 at INT-41 to -64 passim (Melville B. Nimmer & Paul Edward Geller ed. 1991) 7
Phillip E. Areeda & Herbert Hovenkamp, antitrust Law,
Statutes, Rules and Regulations
15 U.S.C. 1-7 (the "Sherman Act") 15, 21
Foreign Trade Antitrust Improvements Act of 1982 14-16, 18, 20
U.S. Dept. of Justice & FTC Antitrust Enforcement Guidelines for
Microsoft has moved for partial summary judgment on Caldera's Sherman Act claims for damages suffered "(i) by DRI US's(1) European subsidiaries in European markets or European trade, and (ii) by DRI US's Japanese subsidiary in Japanese markets or Japanese trade." Defendant's Memorandum in Support of its Motions for Partial Summary Judgment on Plaintiff's European and Japanese Claims (hereinafter "Defendant's Memo") at ix. Microsoft's motion fundamentally misapprehends Caldera's claims because Caldera has not asserted claims for damages suffered by DRI's European and Japanese subsidiaries.
Rather, Caldera's claims seek recovery only of damages suffered directly by DRI and Novell as a result of Microsoft's anticompetitive conduct in Europe, Japan, and other countries throughout the world. Caldera's damages study is predicated solely on the loss of revenue to DRI and Novell and includes no calculation or claim for revenues lost by DRI's European and Japanese subsidiaries. Microsoft's motion either misunderstands this fact or chooses to ignore it.
Thus, Microsoft's motion is misguided and proceeds from a faulty premise.
It deals with no claims Caldera has made. It precludes no evidence of
Microsoft misconduct abroad. It has no impact on Caldera's claims for
CALDERA'S RESPONSE TO MICROSOFT'S STATEMENT OF UNDISPUTED FACTS
Caldera responds immediately below to the respective numbered paragraphs of Microsoft's Statement of Undisputed Facts.(2) For convenience, Caldera incorporates by reference its Consolidated Statement of Facts in Support of its Responses to Motions for Summary Judgment by Microsoft Corporation (hereinafter "Consolidated Statement"), referring to the specific numbered paragraphs of or exhibits to the Consolidated Statement where appropriate.
2. Disputed. Microsoft oversaw and directed all overseas marketing from its headquarters in Redmond, Washington. See Consolidated Statement, Exhibit 324 at MS0013259 (OEM Business Manual).
4. Disputed to the extent that Microsoft intends this paragraph to indicate it licensed no packaged product in Europe. Microsoft, for example, directly licensed packaged product to Vobis, a German OEM. Reichel Depo at 25-26, 196-97; Exhibit 1 (Microsoft/Vobis license, Depo. Exhibit 619, MSC5033652-83).
5. Disputed. DRI and Novell's OEM license agreements clearly contemplate and prescribe rules governing the re-export of computers and operating systems to countries throughout the world. See Exhibits 7, 8, and 9 described in 10 infra.
7. See 2 and 3 supra.
8. Caldera admits that DRI and later Novell offered several versions of DR DOS in competition with Microsoft's MS-DOS from approximately 1988 through 1996. There is disagreement between the parties as to who really cloned whom, and even as to the meaning of the word clone. The following facts, however, are beyond dispute. Microsoft's first version of MS-DOS was based on a product it obtained from Seattle Computing called QDOS -- Quick and Dirty Operating System. Consolidated Statement 8, 9. QDOS was a clone of DRI's CP/M (for "Control Program for Microprocessors"), i.e., it mirrored CP/M's function calls. Id. 8, 11, 12. CP/M was the dominant operating system in the market for 8-bit personal computers in the late 1970s and early 1980s. Id., 4. Although DR DOS was designed to support applications written for MS-DOS, it evolved from CP/M and its successors, including Concurrent DOS and DOS plus. Constant FTC Decl. 9; Tucker Decl. 3-5; DiCorti Decl. 2. When released, DR DOS 5.0 and subsequent versions of DR DOS provided functionality not available in any version of MS-DOS, continually forcing Microsoft to play catch-up. Consolidated Statement 74-76, 186-188, 346-347.
9. Disputed. Although development of DR DOS was undertaken at DRI's European Development Center (the "EDC") in Hungerford, England, significant portions of the code included in the initial version of DR DOS came directly from Concurrent DOS, which was developed by DRI engineers at DRI's facilities in Monterey, California. Tucker Decl. 3-5; Consolidated Statement 18. EDC engineers developed DR DOS for DRI as a work-for-hire, and DRI has at all times owned the product. Tucker Decl. 6. DRI reimbursed the EDC for its research and development expenses. Tucker Decl. 2 ("the EDC was the only facility outside of the United States that ever engaged in software development [for DRI] other than for product translation"); Exhibit 2 (Registration Statement, Amendment No. 2 to Form S-4, submitted by Novell, Inc., on September 2, 1991, Depo. Exhibit 1626 ("Registration Statement")) at 73 11 ("the parent reimburses research and development expenses plus 9% to one foreign subsidiary"). EDC developers wrote copyright strings for all DR DOS code showing copyright ownership by DRI. Tucker Decl. 6.. At all times prior to its merger with Novell, DRI owned all intellectual property rights to DR DOS. Id.; DiCorti Decl. 2; Exhibit 3 (Agreement and Plan of Reorganization Among Novell, Inc., MDAC Corp. and Digital Research, Inc. dated July 16, 1991 (hereinafter "Merger Agreement")) 3.1(r), Disclosure Schedule 3.1(r) Technology). Following the Novell/DRI merger, DRI assigned to Novell all intellectual property rights to the product. Exhibit 4 (Certificate of Recordation dated December 21, 1992, and Assignment between Digital Research, Inc., and Novell, Inc., dated December 10, 1992). Novell assigned those rights to Caldera on July 23, 1996. Defendant's Memo, Exhibit 20 (Asset Purchase Agreement between Caldera, Inc., and Novell, Inc., dated July 23, 1996 ("Asset Purchase Agreement")) 2, 3. Novell engineers in Provo, Utah developed networking features that Novell incorporated into Novell DOS 7.0. Tucker Depo. (7/16/97) 106-108. In short, regardless of the location of development teams, DR DOS has at all times been the property of U.S. companies -- DRI, Novell and Caldera.
10. Disputed. DRI licensed DR DOS to its sales subsidiaries in Europe and Japan, which in turn sublicensed the product to OEMs. See, e.g., Exhibit 7 (OEM License Agreement between Digital Research SA [ DR France] and Hanatarex S.p.A. ("Digital Research has granted [DR France] the right to grant licenses to reproduce, use, supply, distribute and market DRI's products")); Exhibit 8 (OEM License Agreement between Digital Research (UK) Ltd. [DR UK] and TOBAR (UK) Ltd. ("Digital Research Inc. has granted [DR UK] the right to grant licenses to reproduce, use, supply, distribute and market DRI's products")); Exhibit 9 (OEM License Agreement between Digital Research GmbH [DR Germany] and Soft-Tronik GmbH ("Digital Research Inc. has granted [DR Germany] the right to grant licenses to reproduce, use, supply distribute and market DRI's products")); Exhibit 10 (OEM License Agreement between Digital Research (Japan) Inc. [DR Japan] and Sekisui Chemical Co., Ltd. ("[DR Japan] has been granted a license by [DRI] . . . to grant ... exclusive, nontransferable licenses to use, reproduce, and distribute Licensed Programs")). See also 3 infra.
11. Undisputed, although Microsoft hopes to minimize or ignore the significant role DRI played in Europe and Asia. See 10 supra and 13 infra.
12. Undisputed except that Novell signed license agreements with European OEMs beginning in 1992. Defendant's Memo, Exhibit 6, Europe at 31-44.
13. Disputed. DRI oversaw all development, marketing, sales and licensing of DR DOS worldwide under the leadership of Dick Williams, its CEO. Tucker Decl. 7. Williams met with OEMs through the world. Williams FTC Decl. 76, 78, 118. DRI established its foreign subsidiaries for the purpose of marketing and providing technical support for DR DOS. DiCorti Decl. 3; Exhibit 2 at 46. DRI wrote all standard agreements for the license of DR DOS and required its foreign subsidiaries to obtain its approval of all licenses that included deviations from standard provisions. DiCorti Depo. at 27-32, 158-159, 179-183, 195. DRI supervised all foreign sales, id. at 38, did all product pricing, id. at 174-176, and dealt with foreign customers. Id. at 314-15. DRI maintained records of all DR DOS sales, id. at 77-80, and expanded its bank lines to generate capital for the marketing of DR DOS in foreign countries. Id. at 236-37. In short, DRI had substantial direct involvement in the licensing of DR DOS in Europe and Japan, and did enter directly into license agreements with OEMs in all other Asian countries and in Latin America. Defendant's Memo at xiii 12, Exhibit 6.
14. Disputed. The two licenses Microsoft attaches elsewhere as Exhibits 9 and 10 to its memorandum demonstrate the falsity of the statements in this paragraph. Exhibit 9 is not even a license for DR DOS. Moreover, both licenses require DRI to provide the licensed software. See, Defendant's Memo, Exhibit 9 3 (requiring DRI to deliver the licensed products); Defendant's Memo, Exhibit 10 at 1 (providing that DRI granted to DR Japan the right to license the software).
15. Disputed. Microsoft asserts a conclusion of law drawn from disputed facts. DRI registered copyrights for the DR DOS products in the United States. See, Exhibit 4 (Certificate of Recordation showing registered DRI copyrights). Under the Berne Convention of 1989 and the Universal Copyright Convention, foreign states, including all major European countries and Japan, extend copyright protection to works copyrighted in the United States. 1 International Copyright Law and Practice 2 at INT-38, 3 at INT-41 to -64 passim (Melville B. Nimmer & Paul Edward Geller ed. 1991). In most foreign states no copyright filing
is required. Id.
16. Caldera does not dispute that the licenses attached as exhibits to Defendant's Memo provide for payment by the OEM to the foreign DRI subsidiary. But Microsoft's assertion is misleading. DRI's European and Japanese subsidiaries paid a "commission" to DRI of 30%-35% on foreign retail sales and 55%-70% on foreign OEM sales. Exhibit 2 (Registration Statement) at 73 11. Commissions payable by DRI's foreign subsidiaries were set at very high rates so that substantially all of each subsidiary's cash revenues, after payment of sales and other expenses, were remitted to DRI. DiCorti Decl. 4.
17. Undisputed. Indeed, as stated in the foregoing paragraph, the European and Japanese subsidiaries remitted to DRI virtually all revenues above their costs.
18. Caldera does not dispute that DRI did not pay U.S. income taxes on revenues not remitted to the United States.
19. Disputed. DRI owned all rights to the DR DOS software that its subsidiaries sublicensed to European and Japanese OEMs. See, 14 above. Thus DRI provided the licensed product itself to European and Japanese OEMs.
20. Disputed. DRI and Novell also provided technical support out of Monterey, California, and Provo, Utah. Tucker Depo. (7/16/97) at 88-89.
21. See paragraph 5 supra. DRI's
and Novell's OEM license agreements clearly contemplate and prescribe rules governing the re-export of computers and operating systems to countries throughout the world. See Exhibits 7, 8 and 9 hereto.
22. Undisputed. The documents, however, speak for themselves and should be considered in their entirety.
24. Undisputed. The Asset Purchase Agreement speaks for itself and should be considered in its entirety.
25. Caldera does not dispute that DRI's foreign subsidiaries never transferred
rights to claims for Microsoft's anticompetitive conduct. Caldera does
dispute the premise and implications of such assertions. In particular,
Caldera disputes that DRI's subsidiaries ever possessed Sherman Act claims
of their own, separate and distinct from DRI's claims, or that the foreign
subsidiaries needed to transfer anything to DRI/Novell before DRI/Novell
could transfer the claims asserted in this action to Caldera.
CALDERA'S STATEMENT OF ADDITIONAL MATERIAL FACTS
The Microsoft conduct at issue affected both U.S. domestic and export commerce. As Caldera has alleged, and as Microsoft's market expert economist Kenneth Elzinga concedes, the relevant geographic market in this case is the world. First Amended Complaint 65; Elzinga Depo. at 127-128, 505. That means predatory Microsoft conduct anywhere in the world will have a ripple effect throughout the world. Elzinga Depo. at 506. Or, stated differently, "[b]ecause the market is worldwide, anti-competitive conduct by Microsoft anywhere in the world will impact domestic commerce." Kearl Rebuttal Report, Addendum at 1.
For example, software operating systems manifest network effects that are not limited by geography or national boundaries. The more consumers that use an operating system anywhere in the world, the more incentive that independent software vendors (ISVs) have to write applications for that operating system. In turn, the more applications there are for an operating system, the more valuable it becomes to consumers. Hence, anticompetitive Microsoft conduct in Europe and Japan that had the effect of excluding DR DOS, such as, for example, per processor licenses and tying arrangements, diminished the value of DR DOS to ISVs, and thus consumers, worldwide. Kearl Rebuttal Report, Addendum at 1.
Software operating systems are also characterized by very high "first copy" costs and essentially zero costs for "second and beyond" copies. The cost of writing the code for an operating system is high; once the code is written, however, it can be duplicated at no additional cost. Thus there are scale economies such that the more copies of a software product a firm sells, the lower will be the average cost per unit of the product and the lower the per copy price. Therefore, a firm's pricing decisions in the United States are linked to actual and expected sales in Europe or Japan or anywhere else in the world. Again, anticompetitive Microsoft conduct that excluded DRI from licensing DR DOS to OEMs abroad would have affected DRI's pricing decisions in the United States and its ability to compete profitably on price. Microsoft anticompetitive conduct in Europe and Japan and elsewhere outside the United States increased DRI's per-copy costs of DR DOS, making the product less viable worldwide. Kearl Rebuttal Report, Addendum at 2.
Microsoft was well aware of these characteristics of software operating systems. As was its intent, Microsoft succeeded first in harming and then in wholly eliminating DR DOS, its most effective interbrand PC operating system competitor,(3) from both domestic and export commerce. Consumers therefore suffered diminished choice and innovation, and, as Microsoft had long desired, higher prices.(4) Kearl Rebuttal Report at 22-24; Leitzinger Expert Report at 43-45.
Indeed, Microsoft knowingly leveraged the effects of its European misconduct into United States commerce. Consolidated Statement 118.(5) And clearly, Microsoft's vaporware and FUD campaigns (including disparagement, beta blacklist, AARD code, and intentional incompatibilities) were worldwide in scope and explicitly designed to influence OEMs and users everywhere simultaneously.
DRI decided to develop DR DOS under the direction of its president, Dick Williams, shortly after Mr. Williams joined the company in 1988. Consolidated Statement 17. In so doing, DRI built upon technologies developed by DRI in Monterey, California. Id., 18. Although most of the code for DR DOS products was written at DRI's European Development Center in Hungerford, England, DRI at all times at issue owned all intellectual property rights to DR DOS.(6) Caldera's Response to Microsoft's Statement of Undisputed Facts (hereinafter "
Caldera's Response") at 5 9 supra.
In addition, DRI management located in Monterey, California, oversaw the continuing development of the product as well as all licensing activities of DRI's foreign subsidiaries in Europe and Japan. Id. at 7 13 supra. Dick Williams traveled the world to meet with OEMs regarding the possible license of DR DOS. Williams FTC Decl. 76, 78, 118. DRI licensed DR DOS to its subsidiaries in Europe and Japan who in turn, under DRI's direction, sublicensed the product to OEMs. Id. at 6 10. These subsidiaries paid DRI a "commission" on revenues from OEM licenses in Europe and Japan of 55-70%. Id. at 8 16. DRI also licensed DR DOS directly to OEMs in other foreign countries throughout the world, notably to OEMs in Korea and Taiwan. Defendant's Memo at xiii 12, Exhibit 6; Dixon FTC Decl. 1-2, 7-12.
Thus, DRI engaged in the export of DR DOS to Europe, Japan and other
countries throughout the world. As explained by Caldera's expert Professor
Kearl, and Microsoft's expert Professor Elzinga, Microsoft anticompetitive
conduct injuring DR DOS anywhere in the world both adversely affected
DRI's ability to export the product and also adversely affected the viability
of the product worldwide.
Microsoft moves for partial summary judgment only with respect to the claims for damages suffered by DRI's European and Japanese subsidiaries. The motion, however, does not address DRI's claims for damages in Europe and Japan; DRI's claims for damages anywhere else in the world; or any of the claims of Novell or its subsidiaries anywhere in the world.
Caldera's damages model for the DRI period, i.e., the period
after Novell's acquisition of DRI, includes no damages for injury to DRI's
European and Japanese subsidiaries.(7)
Caldera claims most of its damages for the period after Novell's
acquisition of DRI.(8) Although DR DOS
sales rose after Novell's acquisition of DRI in November 1991, DR DOS
sales collapsed in the second quarter of 1992. The collapse in sales resulted
from a concerted Microsoft effort following the acquisition to drive DR
DOS from the market.(9) Microsoft was very
concerned about the threat Novell posed to its PC operating system monopoly.(10)
Although Microsoft's motion asks only for partial summary judgment on the claims of DRI's European and Japanese subsidiaries, Microsoft implies that Caldera lacks standing to bring claims for DRI's damages resulting from Microsoft's conduct in Europe and Japan: "Here, Caldera's purported damages arise out of the wholly foreign trade of the European DRI companies and DR Japan." Defendant's Memo at 11. Microsoft's factual predicate for this argument is that:
[T]here is no evidence whatsoever that DRI US ever attempted during the time period at issue to license DR DOS in Europe or Japan or was in any way affected by Microsoft's European or Japanese companies. DRI US simply did not suffer damages in U.S. export commerce to Europe or Japan, as required to establish standing under Paragraph (1)(B) of the FTAIA [the Foreign Trade Antitrust Improvements Act of 1982].
Microsoft misapprehends both the law and the facts. First, the FTAIA has no bearing on the issue of standing. The FTAIA merely sets forth a test for determining whether the Court has subject matter jurisdiction with respect to the defendant's conduct in export commerce. Hartford Fire Ins. Co. v. California, 509 U.S. 764, 796 & n.23 (1993) (London reinsurers who engaged in conspiracy taking place wholly outside the United States to restrain trade in insurance within the United States satisfies standard for subject matter jurisdiction under both existing case law and the FTAIA); United States v. Nippon Paper Indus. Co., 109 F.3d 1 (1st Cir. 1997) (same with respect to Japanese FAX paper suppliers who engaged in criminal conspiracy taking place wholly outside the United States to inflate price of FAX paper in the United States).
Second, DRI was engaged in export commerce. At all relevant times it
exported DR DOS to Europe, Japan and other locations outside the United
States.(11) It suffered
substantial injury as a result of Microsoft's licensing and other anticompetitive
practices in Europe and Japan.
The FTAIA provides:
Sections 1 to 7 of this title [the Sherman Act] shall not apply to conduct involving trade or commerce (other than import trade or import commerce) with foreign nations unless -
(1) such conduct has a direct, substantial, and reasonably foreseeable effect -
(A) on trade or commerce which is not trade or commerce with foreign nations or on import trade or import commerce with foreign nations; or
(B) on export trade or export commerce with foreign nations, of a person engaged in such trade or commerce in the United States; and
(2) such effect gives rise to a claim under the provisions of sections 1 to 7 of this title, other than this section.
15 U.S.C. 6a.
Thus, under the FTAIA, the threshold inquiry is whether the anticompetitive conduct at issue involves foreign trade or commerce. If so, the FTAIA provides that the Court has subject matter jurisdiction under the Sherman Act under subsection (1)(A) if the conduct has a direct, substantial and reasonably foreseeable effect on U.S. domestic trade or commerce, or under subsection (1)(B) if the conduct has a direct substantial and reasonably foreseeable effect on opportunities to export from the United States. E.g.,Coors Brewing Company v. Miller Brewing Co., 889 F. Supp. 1394, 1398 (D.Colo. 1994).
Microsoft acknowledges that it engaged in export trade within the meaning
of the FTAIA. Defendant's Memo at 8. Microsoft admits
that its executives in Redmond, Washington, oversaw its licensing business
in Europe and Japan, and that Microsoft signed licenses with European
and Japanese OEMs in Redmond. Defendant's Memo,
Statement of Undisputed Facts s 1, 6 at x, xi. Hence, the Sherman
Act applies to Microsoft's conduct in Europe and Japan if such conduct
had a direct, substantial and reasonably foreseeable effect on United
States domestic or export trade or commerce.
1. Microsoft's Conduct Affected Domestic Commerce.
Under subsection (1)(A) of the FTAIA, the Court has subject matter jurisdiction, as Microsoft concedes, if Microsoft's conduct in Europe and Japan affected United States commerce. Defendant's Memo at 9. There is substantial evidence that Microsoft's conduct had the requisite domestic effect.
Caldera has pleaded, and Microsoft's economic market expert admits, that the relevant geographic market is the entire world.(12) First Amended Complaint 65; Elzinga Depo. at 127-128, 505. Consequently, Microsoft's anticompetitive conduct anywhere in the world will impact domestic commerce. Kearl Rebuttal Report, Addendum at 1; Elzinga Depo. at 506.
For purposes of this motion, Microsoft does not dispute that it engaged in the anticompetitive conduct Caldera complains of in Europe and Japan (or, for that matter, anywhere else in the world). Such conduct included the following: exclusionary MS-DOS licenses,(13) having the purpose and effect of "blocking out" DR DOS,(14) Consolidated Statement 130-154, 292-306, 387-390; tying, price tying and retaliatory tying, id. 60-62, 110-118, 281-291, 375-382; FUD, beta blacklist, AARD code, intentional Windows incompatibilities, id. 38-51, 195-280, 383-386; vaporware, id. 83-109, 307-319, 353-374 and the DOS/Windows merge into Windows 95. Id. 63-68, 155-161, 320-340, 391-407.
In a world market, as Caldera's and Microsoft's economists agree, such
anticompetitive conduct can be expected to have a worldwide effect. Hence,
Microsoft anticompetitive conduct in Europe and Japan had the direct,
substantial and reasonably foreseeable effect of driving DR DOS from the
worldwide market, harming United States consumers. Similarly, Microsoft
misconduct elsewhere in the world caused injury to DRI in Europe and Japan.
Kearl Rebuttal Report, Supplement at 1-2; Caribbean
Broadcasting System v. Cable & Wireless, 148 F.3d 1080, 1087
(D.C.Cir. 1998) (defendants' anticompetitive conduct to protect their
advertising and broadcasting monopoly in the Eastern Caribbean precluded
plaintiff from competing for radio advertising customers located in the
United States, thereby causing United States customers to pay excessive
prices for advertising and thus affecting United States domestic commerce);
United States v. Nippon Paper Indus. Co., 109 F.3d 1 (1st Cir.
1997) (criminal conspiracy among Japanese FAX paper suppliers taking place
wholly outside the United States to inflate price of FAX paper in the
United States had effect on domestic commerce); Coors Brewing Company
vs. Miller Brewing Company, 889 F. Supp. 1394, 1398 (D.Colo. 1995)
(distribution alliance between Miller Brewing Company and Molson Breweries
of Canada Limited in Canada had a direct, substantial and reasonably foreseeable
effect on Coors' ability to export to Canada; given the integrated nature
of the North American beer market, the alliance also affected United States
domestic commerce). Hence, the Court has subject matter jurisdiction with
respect to Microsoft's anticompetitive conduct in Europe and Japan under
subsection (1)(A) of the FTAIA.
The Court also has subject matter jurisdiction pursuant to subsection (1)(B). To establish subject matter jurisdiction under this subsection, an antitrust plaintiff must establish that the defendant's conduct had a direct, substantial and reasonably foreseeable effect on plaintiff's continuing ability to export from the United States. McGlinchy v. Shell Chemical Co., 845 F.2d 802, 814 (9th Cir. 1988); The 'In' Porters, S.A., v. Hanes Printables, Inc., 663 F. Supp. 494, 499-500 (M.D.N.C. 1987).
DRI exported DR DOS from the United States. DRI entered into licenses with its European and Japanese subsidiaries authorizing them to sublicense the product to OEMs in those areas. Caldera's Response at 6, 10, supra. E.g., Optimum, S.A. v. Legent Corp., 926 F. Supp. 530 (W.D.Pa. 1996) (sale in Argentina through a foreign distributor of software products designed and sold by an American firm involved United States export commerce). It also directly entered into DR DOS licenses with OEMs in other parts of the world outside the United States. Defendant's Memo at xiii 12, Exhibit 6.
Microsoft's anticompetitive conduct in Europe and Japan had the same direct, substantial and reasonably foreseeable effect on DRI's continuing ability to export DR DOS as it did on U.S. domestic commerce. In both instances Microsoft's predatory acts blocking DR DOS sales in Europe and Japan contributed to the commercial collapse of the product and Novell's ultimate withdrawal of the product from the market. Microsoft's anticompetitive conduct thus eliminated competition and thereby harmed consumers in both U.S. domestic and export trade and commerce. See U.S. Dept. of Justice & FTC Antitrust Enforcement Guidelines for International Operations, Illustrative Example D (1995) (hereinafter "International Guidelines"), reprinted in Phillip E. Areeda & Herbert Hovenkamp, antitrust Law, App. B, at 563, 584 (Supp. 1998) (agreement of dominant foreign producers to coerce their foreign distributors into not marketing a competing U.S. product creates a direct and reasonably foreseeable effect on U.S. export commerce); cf. International Guidelines, Illustrative Example E, reprinted in Areeda & Hovenkamp, supra, App. B, at 585 (agreement of trade association composed of foreign producers and distributors to boycott distributions of competing U.S. product creates a direct and reasonably foreseeable effect on U.S. export commerce).
Microsoft's anticompetitive conduct in Europe and Japan contributed to
the commercial demise of DR DOS worldwide and thus had an effect on both
United States domestic and foreign commerce. Hence, the Court may exercise
subject matter jurisdiction as to Microsoft's conduct in Europe and Japan
pursuant to subsections (1)(A) and (B) of the FTAIA.
C. As Domestic Corporations Engaged in U.S. Export and Domestic Commerce, DRI and Novell had standing to Assert Claims for Damages Suffered from Anticompetitive Conduct by Microsoft Outside the United States.
Microsoft cites numerous authorities for the proposition that foreign persons or corporations who do not do business in the United States lack standing to bring suit under the antitrust laws, even when such persons are directly harmed by anticompetitive behavior that has a direct and reasonably foreseeable effect on U.S. commerce. See Defendant's Memo at part II-B (discussing Galavan Supplements, Ltd. v. Archer Daniels Midland Co., 1997 WL 732498, at *4 (N.D. Cal. 1997) (Irish corporation with principal place of business in Ireland which purchased citric acid directly from defendant's foreign facilities lacked standing to sue for damages suffered from defendant's anticompetitive conduct because it was "neither a competitor nor a consumer in the United States domestic market"); S. Megga Telecomm'ns Ltd., 1997 WL 86413 (D.Del. 1997) (Hong Kong corporation with manufacturing operations in the PRC lacked standing to sue for damages suffered from defendant's alleged anticompetitive foreign conduct because it did not allege that imported or intended to import its products within the United States, and did not suffer an injury within the United States); de Atucha v. Commodity Exch., Inc., 608 F. Supp. 510 (S.D.N.Y. 1985) (resident of Argentina who purchased silver on the London commodity market lacks standing to sue for damages suffered as the result of defendant's anticompetitive conduct committed in United States commodities markets)).
These authorities have nothing to do with the case that Caldera has brought.
DRI and Novell are both domestic corporations which were engaged in both
export and domestic commerce in connection with the development and marketing
of DR DOS. Caldera's Response 9-10, 13-15 supra.
Thus, it is beyond dispute that these corporations (and Caldera as their
successor) have standing to sue for damages suffered as the result of
anticompetitive conduct by Microsoft in foreign countries which has a
direct and foreseeable effect on the very export and domestic commerce
in which these corporations were engaged. Compare Hartford
Fire Ins. Co. v. California , 509 U.S. 764, 796 (1993) ("[I]t
is well established by now that the Sherman Act applies to foreign conduct
that was meant to produce and did in fact produce some substantial effect
in the United States."); United States v. Nippon Paper Indus.
Co., Ltd., 109 F.3d 1, 4 (1st Cir. 1997) ("[T]he case law now
conclusively establishes that civil antitrust actions predicated on wholly
foreign conduct which has an intended and substantial effect in the United
States come within Section One's jurisdictional reach."); II Areeda
& Hovenkamp, supra, 373d1, at 278 & n.16 ("Standing
is clear and seldom challenged when the plaintiff alleges that its rival
engaged in an exclusionary practice designed to rid the market of the
plaintiff . . . so that the defendant could maintain or create a monopoly.")
(citing Yellow Pages Cost Consultants v. GTE Directories, 951
F.2d 1158 (9th Cir. 1991); Sweeney v. Athens Regional Medical Center,
709 F. Supp. 1563 (M.D.Ga. 1989)).
Caldera does not assert claims for damages suffered by DRI's European
and Japanese subsidiaries and its case is unaffected by exclusion of claims
for damages suffered by those subsidiaries, if any. However, Caldera does
assert claims for DRI's and Novell's damages suffered in export commerce,
and its damages model consequently computes damages only for injury suffered
by DRI and Novell. Microsoft's anticompetitive conduct abroad impeded
both DRI's and Novell's ability to export and to compete domestically.
The Court therefore has subject matter jurisdiction with respect to such
conduct, and Caldera has standing to assert claims relating thereto. Microsoft's
motion should be denied in all respects.
SNOW, CHRISTENSEN & MARTINEAU
Stephen J. Hill
Attorneys for Plaintiff
1. As referred to herein, "DRI" means Digital Research, Inc., the U.S. company based in Monterrey, California. Defendant's Memo refers to DRI as DRI US. Return
2. Caldera's responses to Microsoft's Statement of Undisputed Facts are for purposes of this motion only. Caldera objects to, and disputes, Microsoft's unnumbered paragraphs as improper argument. Microsoft Memo at ix. Return
3. In a memo dated May 18, 1989, Bill Gates wrote: "I believe people underestimate the impact DR DOS has had on us in terms of pricing." Consolidated Statement 54. Return
4. Following the demise of DR DOS, Joachim Kempin, Microsoft's Vice President for Worldwide OEM Sales, wrote Bill Gates: "While we have increased our prices over the last 10 years other component prices have come down and continue to come down." Quoted in Kearl Rebuttal Report at 24. A Microsoft internal document shows both average operating system revenue per system and operating system share of PC cost steadily increasing from 1990 through 1996. Id. at 23. Return
5. Microsoft issued a press release in the United States on DRI's loss of the Vobis account. Exhibit 5 (E-mail from Stefanie Reichel dated July 5, 1992, Depo. Exhibit 2744, which the Consolidated Statement erroneously refers to as Exhibit 334). Return
6. DRI assigned its copyrights to DR DOS to Novell on December 10, 1992 following the merger of DRI into Novell. Exhibit 4 (Assignment dated December 10, 1992). Return
7. See, generally, Wecker Report (Consolidated Statement, Record Suppport, Volume 7). Return
8. Caldera claims a total of $590 million (base case) in damages. Of this amount, only $ 11.9 million is for the period prior to Novell's acquisition of DRI. Wecker Report, Exhibit 4, Table 1, Column 9. Return
9. See, Consolidated Statement of Facts 223-242 (Windows 3.1 beta containing the AARD code), 198-222 (beta blacklist), 265-284 (the DR DOS 6.0 FUD campaign), 391-401 (Chicago vaporware campaign), 110-118 (the Vobis lockup), 281-284 (MS-DOS/Windows tying), 292-306 (per processor license push), and 414-418 (Windows 95 tying arrangement). Return
10. Consolidated Statement of Facts 53-55, 169-171 (memoranda referring to Novell threat on the desktop). On August 6, 1989, Bill Gates wrote the following in an e-mail to Steve Ballmer: "DOS being cloned has had a dramatic impact on our pricing for DOS. I wonder if we would have it around 30-40% higher if it wasn't cloned. I bet we would!" Consolidated Statement, Exhibit 29. Return
11. DRI exported DR DOS to its foreign subsidiaries pursuant to license agreements with such subsidiaries who in turn sublicensed DR DOS to OEMs in Europe and Japan. DRI also exported DR DOS pursuant to direct licenses with OEMs located in other areas outside the United States. See, section II.B.2. infra. Return
12. Microsoft notes that Novell's Complaint to the European Commission stated that the EC (the European Community) was the relevant geographic market. Defendant's Memo at 6. Novell's Complaint stated further that DR DOS was sold in every member state of the EC (the only area over which the Commission had jurisdiction) under substantially similar conditions of competition. Defendant's Memo, Exhibit 19 55-57. Novell's Complaint did not state that the market was limited to the EC. Rather, as Caldera and Microsoft agree, the relevant market encompasses the world and necessarily encompasses all of the EC's member states. Return
13. Such licenses included per processor pricing, high minimum commitments, and long durations. Return
14. The following are typical comments of Microsoft sales people when they signed OEMs to per processor licenses: "Another DRI prospect bites the dust with a per processor DOS agreement"; "The [per processor license] will block out DR once signed"; and "The new license is a per processor deal, which allowed us to completely kick out DRI." Consolidated Statement 137 Return