|
|
STEPHEN D.
SUSMAN
CHARLES R. ESKRIDGE III
JAMES T. SOUTHWICK
HARRY P. SUSMAN
SUSMAN GODFREY L.L.P.
1000 Louisiana, Suite 5100
Houston, Texas 77002-5096
Telephone: (713) 651-9366
www.SUSMANGODFREY.COM
RALPH H.
PALUMBO
MATT HARRIS
PHIL McCUNE
LYNN M. ENGEL
SUMMIT LAW GROUP PLLC
WRQ Building, Suite 300
1505 Westlake Avenue N., Suite 300
Seattle, Washington 98109-3050
Telephone: (206) 281-9881
www.SUMMITLAW.COM
|
PARKER C.
FOLSE III
SUSMAN GODFREY L.L.P.
1201 Third Avenue, Suite 3090
Seattle, Washington 98101
Telephone: (206) 516-3880
www.SUSMANGODFREY.COM
STEPHEN J.
HILL (A1493)
RYAN E. TIBBITTS (A4423)
SNOW, CHRISTENSEN & MARTINEAU
10 Exchange Place, 11th Floor
P.O. Box 45000
Salt Lake City, Utah 84145
Telephone: (801) 521-9000
www.SCMLAW.COM
|
Attorneys for Caldera,
Inc.
IN THE UNITED STATES
DISTRICT COURT
DISTRICT OF UTAH, CENTRAL DIVISION
|
CALDERA,
INC.,
Plaintiff
vs
MICROSOFT
CORPORATION,
Defendant
|
|
CALDERA INC.'S MEMORANDUM
IN OPPOSITION TO DEFENDANT'S
MOTION FOR PARTIAL SUMMARY
JUDGMENT ON PLAINTIFF'S
"LICENSING PRACTICES" CLAIMS
Judge Dee
V. Benson
Case No.
2:96CV 645B
FILED UNDER SEAL
|
|
TABLE OF
CONTENTS
TABLE OF AUTHORITIES
INTRODUCTION
RESPONSE TO MICROSOFT'S
"STATEMENT OF UNDISPUTED FACTS"
REITERATION OF
CONSOLIDATED STATEMENT OF FACTS, IN PART, FROM MICROSOFT'S
OEM STATUS REPORTS
ARGUMENT
CONCLUSION
CERTIFICATE OF SERVICE
TABLE OF
AUTHORITIES
CASES
Automatic Radio Mfg. Co. v. Hazeltine Research,
339 U.S. 827, 70 S. Ct. 894 (1950) 4, 27
Barr Labs, Inc. v. Abbott Lab.,
1989-1 Trade Cas. (CCH), 68,647 (D. N.J. 1989)
aff'd, 978 F.2d 98 (3rd Cir. 1992) 14, 16
Barry Wright Corp. v. ITT Grinnell Corp.,
724 F.2d 227 (1st Cir. 1983) 25
Bowen v. New York News, Inc.,
366 F. Sup. 651, 679-80 (S.D.N.Y. 1973) 19
Chicago Bd. of Trade v. United States,
246 U.S. 231, 38 S. Ct. 242 (1918) 2
Continental T.V. v. GTE Sylvania Incorp.,
433 U.S. 36, 97 S. Ct. 2549 (1977) 2
Eastman Kodak Co. v. Image Technical Svcs,
504 U.S. 451, 112 S. Ct. 2072 (1992) 2, 9
Greyhound Computer v. IBM,
559 F.2d 488 (9th Cir. 1977)
cert. denied, 434 U.S. 1040 (1978) 29
Hull v. Brunswick Corp.,
704 F.2d 1195 (10th Cir. 1983) 28
Image Technical Services v. Eastman Kodak Co.,
125 F.3d 1195 (9th Cir. 1997) 19, 29
Industrial Co. v. Zenith Radio Corp.,
475 U.S. 574, 106 S.Ct. 1348 (1986) 2
In re 'Apollo' Air Passenger Computer Reservations
Sys. (CRS),
720 F. Supp. 1068 (S.D.N.Y. 1989) 25
Intergraph Corp. v. Intel Corp.,
3 F. Supp. 1255 (N.D. Ala. 1998) 29
Jefferson Parish Hospital Dist. No. 2 v. Hyde,
466 U.S. 2, 45, 104 S. Ct. 1551 (1984) 17
Machinery Corp. v. United States,
258 U. S. 451, 457, 42 S. Ct. 363 (1922) 10
Matsushita Electric Industrial Co. v. Zenith Radio
Corp.,
475 U.S. 574, 106 S. Ct. 1348 (1986) 2
Oahu Gas Service, Inc. v. Pacific Resources,
Inc.,
838 F.2d 360, 368 (9th Cir. 1988)
cert. denied, 488 U.S. 870 (1988) 29
Perington Wholesale, Inc. v. Burger King Corp.,
631 F.2d 1369 (10th Cir. 1979) 9, 10
Perryton Wholesale, Inc. v. Pioneeer Distributing
Co.,
353 F.2d 618 (10th Cir. 1965) 12
Ratino v. Medical Service,
718 F.2d 1260 (4th Cir. 1983) 1
SCFC ILC, Inc. v. Visa USA, Inc.,
36 F.3d 958 (10th Cir. 1994) 24
SmithKline Corp. v. Eli Lilly & Co.,
427 F. Supp. 1089 (E.D. Pa.1976) 7
575 F.2d 1056 (3rd Cir. 1978) 7, 8, 11
Spitt Spark Plug Co.,
840 F.2d 1253 (5th Cir. 1988) 12
Standard Oil Co. v. United States,
221 U.S. 1, 31 S. Ct. 502 (1911) 9
Standard Oil Co. v. United States (Standard
Stations),
337 U.S. 293, 69 S. Ct. 1051 (1940) 24, 26
Sullivan v. National Football League,
34 F. 3d 1091 (1st Cir. 1994) 24
Tampa Electric Co. v. Nashville Coal Co.,
365 U.S. 320, 81 S. Ct. 623 (1961) 9, 10, 16, 17, 24,
26
United Airlines, Inc. v. Austin Travel Corp.,
867 F.2d 737 (2nd Cir. 1989) 12
United Shoe Machinery Corp. v. United States,
258 U.S. 451 (1922) 10
United States v. Griffith,
334 U.S. 100, 68 S. Ct. 941 (1948) 9
United States v. Microsoft Corp (including
Microsoft Consent Decree),
59 Fed. Reg. 42,845 (1994) 3, 6
U.S. Health Care, Inc. v. Healthsource, Inc.,
986 F.2d 589 (1st Cir. 1993) 17, 26
Western Parcel Express v. United Parcel Service,
No. C-96-1526-CAL, 1998 WL 328621, (N.D. Cal. June 15,
1998) 12
Zenith Radio Corp. v. Hazeltine Research, Inc.,
395 U.S. 100, 89 S Ct. 1562 (1969) 28
STATUTES
Clayton Act 3, 15 U.S.C. 14 16
U.S. Department of Justice,
Antitrust Guidelines for the Licensing of Intellectual
Property 4.1.2 (1995) 11
OTHER
P. Areeda & H. Hovenkamp, Antitrust Law 3, 5, 10, 11,
16, 20, 29
E. Kintner & J. Lahr, An Intellectual Property Law
Primer
(2nd 1982) 27
United States v. Microsoft
98cv01232, 1999 WL 97524 (Feb. 25, 1999) x
COMES NOW Caldera, Inc. complaining of Microsoft
Corporation, and files this Memorandum in Opposition to
Defendant's Motion for Partial Summary Judgment on
Plaintiff's "Licensing Practices" Claims.
INTRODUCTION
Beginning in 1990, Microsoft deployed what would become
one of its most effective weapon against DR DOS: exclusive
licenses with OEMs. Although these licenses did not contain
express exclusivity clauses, they utilized a collection of
devices to create the same exclusive effect as an express
contractual clause. Under these licenses, an OEM would have
to pay Microsoft a royalty on every machine the OEM
shipped regardless of whether the machine contained
MS-DOS. This "per processor" term meant that an OEM could
only ship a competing operating system if it was willing to
pay twice: The OEM had to pay the maker of the competing
system, such as DRI, and it had to pay Microsoft.
Microsoft's licenses also required the OEM to make large
minimum commitments with up-front payments for these
commitments. Because Microsoft's pricing structure rewarded
OEMs that made overly-optimistic minimum commitments, OEMs
regularly had large pre-paid balances when their licenses
expired. OEMs would forfeit these balances unless they
renewed their license with Microsoft. Further tightening its
stranglehold on OEMs , Microsoft dramatically increased the
duration of these licenses to two, three, or even four years
-- far in excess of the product life of MS-DOS versions.
Microsoft's own documents show that these restrictive
terms were introduced to ensure that no OEM could switch to
DR DOS. In fact, almost no OEM that adopted one of
Microsoft's restrictive licenses ever patronized DR DOS.
OEMs simply could not afford to license DR DOS even though
it was a superior product. Microsoft's OEM licenses thus cut
off DR DOS from the single most important customer base for
operating systems.
Return to Table of Contents
RESPONSE TO
MICROSOFT'S "STATEMENT OF UNDISPUTED
FACTS"
Caldera disputes in every material respect Microsoft's
purported "Statement of Undisputed Facts." Caldera
incorporates by reference its Consolidated Statement of
Facts in its entirety.
Caldera responds to Microsoft's numbered paragraphs as
follows:
1. Caldera generally agrees with Microsoft's descriptions
of its per copy, per system, and per processor license
agreements. Though Microsoft obscures the fact, the Court
should understand that under a per processor license,
Microsoft required an OEM to identify the particular
microprocessors used in its computers and to pay a royalty
to Microsoft for all computers shipped containing one of the
designated microprocessors, regardless of whether the
computers contained MS-DOS. Leitzinger
Report at 10-13.
2. Disagreed. Overwhelming record evidence demonstrates
that OEMs were, in fact required to take per processor
licenses, and were not given the option to choose either per
copy or per system licenses. Consolidated Statement
of Facts 299-304, 387-388. Microsoft also ignores
the economic coercion involved in the purported "choice" it
offered OEMs. Id. 139-143. Even
its own evidence -- McLauchlan Depo. at
31-32, Hosogi Depo. at 30; Lin DOJ
Decl.; and Waitt DOJ Decl. --
recognizes this fact. Microsoft's proffer also explicitly
recognizes an OEM had to pay Microsoft a royalty under a per
processor license whether or not MS-DOS was
included. See, e.g., Lum Depo. at
90; Fade Depo. at 110; Hosogi
Depo. at 30.
3. Disagreed. Microsoft offers no contemporaneous
evidence of when, where, and why per processor licenses were
originally offered, and the credibility and honesty of its
employees is at issue. When investigated by the Korean Fair
Trade Commission, Microsoft's general counsel specifically
represented that the practice began in early 1990.
Exhibit 276; see
Consolidated Statement of Facts 58.
Although Microsoft purports that per processor licenses made
"contract amendments" easier, it fails to recognize that the
only thing complicating its licensing practices was the fact
that it had itself needlessly complicated its
licensing practices. Microsoft's own economist testified
that other ways aside from a per processor license were
available to simplify contract administration.
Schmalensee Depo. at 346.
4. Disagreed. Again, Microsoft offers absolutely no
contemporaneous documentation that reduction of piracy was
in any way a motivating factor for Microsoft's
implementation of the per processor license, and the
credibility and honesty of its witnesses is at issue.
See Consolidated Statement of
Facts 305. Microsoft's economist testified that any
OEM bent on perpetrating fraud against Microsoft could do so
under a per processor license, as well as under a per system
or per copy license. Schmalensee Depo. at
335-336, 371. Insofar as "naked" machines (i.e.,
machines sold without pre-loaded operating systems) are
concerned, Microsoft did not need to receive a royalty
itself for every machine it shipped, but at most needed to
ensure that some royalty was paid as to every machine,
whether to itself or to a supplier of competing operating
systems. See Leitzinger Report at
36-37. Moreover, Microsoft's economist agrees that per
processor licenses were implemented even with major
worldwide OEMs that posed absolutely no threat of piracy.
Schmalensee Depo. at 343; see also
Leitzinger Report at 37-38.
5. Disagreed. Microsoft purports to identify a scant 27
instances in which it "negotiated exemptions" with the many
thousands of OEMs worldwide. Of its witnesses
cited, Kempin was equivocal and could recall at best one
instance; Lum stated it "might" have happened but could not
recall any particular instance; and Apple referred only to a
small exemption for orders from the federal government at a
time when Microsoft was then under investigation. Beyond
this, Microsoft cites nothing other than an interrogatory
response to the DOJ to support its contention; that response
neither attaches the licenses nor identifies pertinent
contract language and expressly includes exceptions granted
to both per processor and per system licenses without any
indication of which exceptions covered which type of
license. As to Microsoft's suggestion that "other OEMs . . .
nonetheless offered non-Microsoft operating systems with
their computers during the term of their per processor
licenses," Microsoft cites the following: (1) Richard Fade's
testimony that unidentified OEMs bought an extra operating
system for a special group of customers who desired
computers with two systems (DOS and UNIX); (2) the
declaration of Kent Roberts from Dell Computers, in which he
claims Dell would pay for a second operating system if a
customer wanted it instead of MS DOS; and (3) Theo Lieven's
testimony in which he merely says Vobis bought DR DOS and MS
DOS at different times. See Licensing
Memo. 5. Only Roberts's explanation actually
supports Microsoft's assertion that an OEM was willing to
pay for MS-DOS even though it was not actually loaded on a
machine. But his explanation of Dell's position, which was
provided in an effort to help Microsoft with the FTC, is at
odds with what Dell actually told Novell in 1991: "Due to
the contract with Microsoft DR DOS needs to be offered
on a no cost basis except for the upgrade program
cost." Exhibit 242 at A0116293 (emphasis
added). As the DOJ's current case against Microsoft reveals,
Microsoft and Dell have a special relationship. See
Testimony of Joachim Kempin, United States v.
Microsoft, 98cv01232, 1999 WL 97524, at 69-72 (Feb. 25,
1999) (Dell is charged less for Windows than other OEMs).
And even as to Dell, Microsoft makes no suggestion that it
or any other OEM already under a Microsoft per processor
license negotiated a further license for DR DOS. In fact,
the evidence is to the contrary. See
Consolidated Statement of Facts 136-138,
293, 299-300, 302-303, 387-388.
6. Disagreed. Microsoft was well aware of the price
points and tight margins involved in the OEM business.
Microsoft presented extremely harsh price differentials to
OEMs that made per system licenses, in fact, not a viable
option. See Consolidated Statement of
Facts 139-143. As to the purported ability of OEMs
to license "new processor lines as the OEM introduced them,"
Microsoft ignores that only five types of Intel x86 (or
compatible) processors existed in 1992 -- 8086, 8088, x286,
x386, and x486 -- and that licenses typically covered
multiple processors and enhanced processors that had not yet
come to market. See, e.g., Exhibit
214 (specifying 386 and "486 or above");
Leitzinger Report at 12. Microsoft asks
this Court to ignore reality when suggesting that new
processors were an ordinary and frequent occurrence.
7. Disagreed. The record evidence is that Microsoft
emphasized onerous price differentials, not "relatively
minor suggested price differentials" as Microsoft argues.
See Consolidated Statement of
Facts 139-143. As to Microsoft's internal price
guidelines, record evidence shows dramatic departure from
such guidelines. See Consolidated Statement
of Facts 139-143.
8. Microsoft makes assertions about the extent of its use
of per processor licenses, but in no way provides actual
evidence for Caldera or the Court to scrutinize. Microsoft
has elsewhere provided evidence that, in 1991 for example,
per processor licenses accounted for 77.5% of all MS-DOS
contracts signed. See Leitzinger
Report, Exhibit 4. Microsoft also ignores that it
selectively deployed per processor licenses at OEMs where
DRI/Novell had successfully made sales or was considered a
threat. See Consolidated Statement of
Facts 137, 302-304 and Appendix C.
9. Disagreed. DRI did not do anything "similarly" to
Microsoft. Microsoft is a monopolist. Its actions alone are
subject to scrutiny in this antitrust litigation. In any
event, Microsoft ignores the fact that any such terms in DRI
contracts were "highly exceptional" and were never employed
for the purpose of excluding competitors from OEMs.
DiCorti Depo. at 357; Gunn
Depo. at 270, 271. Moreover, in stark contrast to
Microsoft, DRI only deployed such contract terms in
circumstances where specific acts of piracy had been
previously identified; thus, such contracts addressed
particular OEMs selling illegal copies of DR DOS.
DiCorti Depo. at 168-173. Moreover, any
pricing policy encouraging the actual bundling of
DR DOS was not anti-competitive: DRI was only paid when DR
DOS was installed. Microsoft's per processor licenses, on
the other hand, were designed to extract a royalty
whether or not the OEM shipped MS-DOS on any
particular computer.
10. Caldera generally agrees with Microsoft's description
of the mechanics of its minimum commitment practices.
However, Microsoft totally ignores its coercive use of
minimum commitments, and that it had in fact established a
practice to ensure that large prepaid balances existed at
the end of a license term to coerce affected OEMs to
negotiate follow-up licenses with Microsoft. See
Consolidated Statement of Facts 144-146,
294-296. Microsoft recognized that its minimum commitment
practices tied OEMs to MS-DOS, and blocked out DR DOS.
Id. 146-148, 292, 294-296.
11. Disagreed. Microsoft did not allow OEMs to recoup
prepaid balances "to preserve good will," as suggested by
Microsoft. Indeed, the cited testimony of Hosogi and
McLauchlan does not express such motivation at all, and
Kempin's testimony is oblique, at best. Instead, Microsoft
ensured that prepaid balances would exist so that they could
use them to block out DR DOS in subsequent negotiations.
See Consolidated Statement of
Facts 146, 294, 296.
12. Disagreed. DRI and Novell's licensing practices did
not operate anything "like" Microsoft's minimum commitment
provisions. Microsoft is a monopolist. Its actions alone are
subject to scrutiny in this antitrust lawsuit. In any event,
minimum commitment provisions in DRI and Novell licenses did
not result in prepaid balances that were subject to
forfeiture at the end of the term, as were
Microsoft's. See Consolidated Statement of
Facts 144-146. DRI's licenses for DR DOS were
open-ended and never placed OEMs in the position of losing
prepaid royalties due to contract expiration.
Speakman Depo. at 97-99; Owens
Depo. at 72. Even if an OEM chose not to renew a
license with DRI or Novell, they were entitled to work off
any prepaid balance after expiration of the license term.
Speakman Depo. at 97-99.
13. The term "standard" is ambiguous as to the duration
of Microsoft's OEM licenses. Microsoft ignores that even a
two-year term exceeds the MS-DOS life cycle, and that it was
pushing for its "standard" term to increase to three years
after DR DOS arrived on the scene. See
Consolidated Statement of Facts 150-154,
297-298. If by "standard" Microsoft means that OEMs were
subject to a penalty if they opted for a one year
term, and that they received a discount if they
opted for three or more years, then Caldera agrees.
See Consolidated Statement of
Facts 152. As to the "discount" received for
entering into a three-year agreement, OEM executives have
testified that even a one dollar price differential was
significant, given the tight margins in the industry.
Id. 139.
Return to RESPONSE TO MICROSOFT'S
"STATEMENT OF UNDISPUTED FACTS"
Return to Table of Contents
REITERATION OF
CONSOLIDATED STATEMENT OF FACTS, IN PART,
FROM MICROSOFT'S OEM STATUS
REPORTS
Contrary to the arguments of Microsoft's attorneys now,
Microsoft employees knew exactly the exclusionary effect of
their licensing tactics. Their OEM status reports are awash
with evidence crippling to Microsoft's lame after-the-fact
rationalizations to avoid liability. Although laid out
clearly in its Consolidated Statement of Facts, Caldera
reiterates some of the evidence here for emphasis.
- As To Per Processor Licenses:
Repeated entries in Microsoft OEM status reports starkly
reveal awareness that per processor licenses excluded DRI
from the market:
Opus agreement has finally been signed by Redmond.
Another DRI prospect bites the dust with a per processor
DOS agreement.
Exhibit 81 (emphasis added)
Hyundai Electronics INC. (HEI)
DRI is still alive. We are pushing them to sign the
amendment on processor based license. This will block
out DR once signed.
Exhibit 96 at MS0049007 (emphasis
added)
Congratulations are in order for John "DRI Killer"
McLaughlan (No, he isn't having another baby) who signed a
$2.5M agreement with Acbel (Sun Moon Star). The agreement
licenses DOS 5 per processor on a worldwide basis for 3
years (they will be replacing DRI DOS which they currently
ship outside the US).
Exhibit 101
Trigem
Their new agreement is per 86/286/386 processor system
license for DOS3/4/5. No more DR-DOS from
Trigem.
Exhibit 102 (emphasis added)
Hyundai Electronics (HEI)
-- DRI visited Hyundai executives and the pricing issue
was raised again. The new license is a per processor
deal, which allowed us to completely kick out DRI.
Exhibit 108 at X556822 (emphasis
added)
Liuski, which has been an MS-DOS PP [packaged
product] customers for several years now at a run rate
of approximately 25k-27k per year, has signed a license for
MS-DOS 4.01 & 5.0. The PER PROCESSOR license is a one
year license at a one year minimum of 18k units per year at
a royalty rate of $[ ]. On the surface this
would seem like a decrease in revenues. They currently
pay $[ ] for MS-DOS PP (remember there are cogs in
the $[ ]). The reason for the conversation to
royalty is to retain their loyalty to MS-DOS. They were
seriously considering DRI product, thus we needed to be more
aggressive.
Exhibit 119 at X0590013 (emphasis
added)
Budgetron is the one account in Canada where DRI's
presence was very strong. Budgetron's market is strictly the
low end VAR (or dealer) who would endure DRI DOS for a lower
priced machine. This new contract guarantees MS-DOS on
every processor manufactured and shipped by Budgetron,
therefore excluding DRI.
Exhibit 125 at X190989 (emphasis
added)
We have told EMI that we will discuss direct licensing
with them if we can get MS-DOS "per processor" and lock
out DRI. I dont want to do this but if they are really
shipping 20K PC's a month loaded up with DRI -- I have no
choice. IF this continues and EMI grows in the mass
merchant channel then other oems in this channel will start
looking at DRI as a cheap alternative.
Exhibit 212 (emphasis added)
looks like it is not as bad as we may think. However,
I still think we should get a version ready for per
processor deals and lock Novell OUT! I will work with
Johnlu to make this happen.
Exhibit 329 (emphasis added)
- As To Minimum Commitments:
As with per processor licenses, Microsoft's OEM status
reports reveal that Microsoft
used minimum commitments to block out DR DOS:
HYUNDAI ELECTRONICS INC. (HEI)
-- The DR threat still lives, especially in the export
section which needs a low priced DOS for XTs to be shipped
to Eastern Block. We will maintain and utilize HEI's UPB
[unspecified product billing] situation to keep out
DRI.
Exhibit 74 at X561629 (emphasis
added)
Through adjustments to the minimum commitments for
OS/2 and DOS Shell in order to get a Per Processor DOS/Shell
agreement, we have effectively reduced our expected
revenue for FY91 to less than $3 Million. . . . The major
goal was to go Per Processor, and we are within weeks of
signing this three year commitment. Albeit still at a very
good royalty, but Per Processor is a major commitment from
HP.
Exhibit 122 at X0597322 (emphasis
added)
Will sign WIN and DOS per proc. LICENSE this Friday. . .
. This will include all of Compuadd's notebooks (386sx up)
which they had never licensed for Win. The only
concession we had to make was to let them recoup 500k
prepaids this Q.
Exhibit 302 (emphasis added)
OEM status reports also reveal that Microsoft was using a
"UPB [unspecified product billing] Reduction Plan"
to continue to wage war against DR DOS. See, e.g.,
Exhibit 209; Exhibit 170
("I believe $2.3M PPB [prepaid balance] is favorable
balance for us to push Samsung at our site. (not too big and
not too small)"); Exhibit 226 ("Be ready to
merge their agreements with UPB issue"; "close new 3 year
agreement with UPB plan"); Exhibit 253
("The risk with this is that there is no loyalty with our
package product customers. Their cost to switch to DR-DOS is
minimal since they have no long term financial commitment
with Microsoft").
Microsoft plainly manipulated minimum commitments to its
advantage. An internal memo entitled "Discussion of Prepaid
Balances, Worldwide OEM, Q90-4" contains the following
admission:
Prepaid balances have become a by-product of the way we
conduct our OEM business. They are well understood by our
OEMs. They also have definite benefits, tying customers
to us.
We can use prepaid balances to encourage OEMs to license
more of our systems products, increase our market
penetration and create opportunities for increased sales of
our application products.
Exhibit 98 at X200770 (emphasis added)
The exclusionary nature of Microsoft's minimum commitment
practices were so well-established that they found their way
into Microsoft's Board of Directors Report for the fourth
quarter of 1991:
Because prepaid balances can be recouped with royalties
from products shipped in succeeding quarters, prepaid reduce
the amount of revenue we will recognize related to future
customer shipments. On the other hand, prepaid balances not
only smooth the revenue stream somewhat, but, in the
face of increasing competition (Novell/DRI, IBM), make it
costly for a customer to move to a competitor.
Exhibit 104 at MS0164489 (emphasis
added)
Indeed, the "OEM Sales Business Manual, Policies and
Procedures" from September 1992 notes: "When properly
managed at moderate levels, PPB [pre-paid balances]
can benefit Microsoft." Exhibit 324 at
MS0013277.
Microsoft's increasing push for three-year license
duration is evident in Microsoft's status reports and
pricing proposals. See, e.g., Exhibit
79; Exhibit 101. The blocking
effect was well understood:
Printaform
The new deal is effective 10/1 for DOS 4.01/5.0 in
Windows 3.0 on all 286, 386, and future 486 systems. They
will license DOS 3.3 on the 8088's. The new contract is for
a three year term so that we don't have to worry about low
end competition. This will be the first OEM in Mexico
bundling Windows 3.0 on its systems, and we eliminated
DRI's chances with Printaform for at least 3 years.
Exhibit 68 at X0590649 (emphasis
added)
Microsoft's OEM reports from this era make repeated
reference to the "competitive defense against DR DOS
provided by 2-3 year license agreements." Exhibit
167; see also Exhibit 255
at X0597052 ("Joon Park closed Samsung license much to my
relief. It is a 3 year per processor license agreement.");
Exhibit 211 at MS7090708 ("aggressively go
after existing DR DOS accounts and keep them out of our
current ones . . . secure long term MS-DOS 5.0 contracts
(three or more years) whenever possible"); Exhibit
225 at MS7031119 ("MS will verify if DR is a real
threat or a device to obtain lower royalties . . . if the
threat is real I suggest MS lower their high volume
royalties for the 386 SX to $[ ] and increase the
term of the agreement to three years"); Exhibit
226 (repeated reference to closing new three-year
agreements).
At a presentation in June 1991 to the Microsoft OEM sales
force, the "Strategy Against DRI" -- indeed, one of the "Key
Objectives for FY92" -- was to "Push Longer Term Per
Processor Contract." Exhibit 132. See
also Exhibit 145 at X518126 (Kempin
memo, July 1991: "Secure long term contract with OEMs,
whereby the standard contract length should be three years
instead of two to deny entry . . .").
Return to REITERATION OF
CONSOLIDATED STATEMENT OF FACTS, IN PART, FROM MICROSOFT'S
OEM STATUS REPORTS
Return to Table of Contents
ARGUMENT
Microsoft's arguments defending its licensing practices
are lifeless and stale. That is hardly surprising: Microsoft
presented the self-same arguments to the United States
Department of Justice, the European Commission on
Competition, and the Korean Fair Trade Commission, and
each condemned Microsoft. See
Consolidated Statement of Facts 408-413.
What is particularly objectionable, however, is that
Microsoft lacks any sense of candor with this Court on these
issues. On the one hand, Microsoft ignores or distorts the
evidence against it; and, on the other hand, cites
misleading propositions of law without any attempt
to make a connection with the facts of this case, and
without any effort to understand (or even to
undertake analysis of) the complex issues it glibly raises.
The facts and the law are overwhelmingly against
Microsoft. Summary judgment should be denied.
Return to Table of Contents
SUMMARY JUDGMENT IS PARTICULARLY
INAPPROPRIATE WHERE THE MONOPOLIST DEFENDS ITS CONDUCT BY
REFERENCE TO PRO-COMPETITIVE BENEFITS
Summary judgment is generally disfavored in antitrust cases.
See Consolidated Statement of
Facts at 9-11. Summary adjudication concerning
Microsoft's licensing practices is particularly
inappropriate, where the sole issue raised by Microsoft is
whether its licensing practices, when engaged in by a clear
monopolist, had an unreasonable anti-competitive effect.
See Ratino v. Medical Service, 718 F.2d
1260, 1268 n. 23 (4th Cir. 1983) ("The question of whether a
restraint promotes or suppresses competition is not one that
can typically be resolved through summary proceedings.
Rather, resolution must await a full-developed trial record.
This is also particularly applicable in cases of novel
antitrust claims."). Such a determination requires that "the
factfinder weigh[] all of the circumstances of a
case in deciding whether a restrictive practice should be
prohibited."(1)
Continental T.V. v. GTE
Sylvania Incorp., 433 U.S. 36, 49 (1977).
The Supreme Court also disapproves granting summary
judgment merely because the monopolist offers some
theoretical economic justification for its practices in
order to convince the court that the practices should be
declared legal as a matter of law. As the Supreme Court has
emphasized, economic theory is no substitute for development
of a factual record, unless special circumstances exist,
such as when the plaintiff's theory is incredible or
counter-intuitive. See Eastman Kodak Co. v.
Image Technical Svcs, 504 U.S. 451, 471-478, 112 S.Ct.
2072, 2084-88 (1992); see also Consolidated
Statement of Facts at 10 n. 3 (distinguishing
Matsushita Electric Industrial Co. v. Zenith Radio
Corp., 475 U.S. 574, 106 S.Ct. 1348 (1986)).
Return to Table of Contents
MICROSOFT'S LICENSES
CONSTRUCTED ILLEGAL EXCLUSIVE DEALINGS
It is a simple matter for this Court to conclude triable
issues of fact exist to send Microsoft's licensing practices
to the jury. The Department of Justice specifically
condemned Microsoft's practices, and the most influential of
antitrust treatises agrees. Beyond this, Caldera has amassed
a mountain of evidence demonstrating the anti-competitive
effect of Microsoft's per processor licenses, minimum
commitment practices, and extended license duration. As
well, the evidence refutes Microsoft's purported
pro-competitive justifications.
Summary judgment should be denied.
A. Per Processor Licenses: An
Infamous Pedigree
Microsoft argues that no reasonable juror could conclude
that Microsoft's per processor licensing scheme was
unreasonably anti-competitive. Yet Professor Areeda's
frequently cited antitrust treatise and the United
States Department of Justice (after a lengthy investigation)
expressly condemned Microsoft's licensing
practices. Moreover, Microsoft agreed to stop
these practices as part of the Consent Decree. United
States v. Microsoft, 1995-2 Trade Cases 71.096, 1995 WL
505998, at * 6 (D.D.C. 1995) (Consent Decree was in the
"public interest"). This infamous pedigree alone suggests
that a triable issue of fact exists as to whether per
processor licenses are anti-competitive.
Areeda & Hovenkamp specifically condemn
Microsoft's per processor licenses
In their authoritative text on antitrust law, Areeda
& Hovenkamp condemn Microsoft's per processor license as
anti-competitive conduct, lacking any pro-competitive
justification. 3A P. Areeda & H. Hovenkamp, Antitrust
law 768b4, at 151-53; 11 id., 1807b, at 117-118. In
a shocking lack of candor with this Court, Microsoft ignores
this treatise entirely in its summary judgment papers on
this issue.
Areeda & Hovenkamp begin by warning of the dangerous
possibilities for foreclosure by a dominant firm in the
computer software business:
Intellectual property has a peculiar attribute: Once
developed, it can be used an infinite number of times at no
incremental cost to the owner. As a result, there is no
"capacity constraint" on the number of times that a
particular piece of, say, computer software can be licensed.
This makes market-dominating software particularly
useful for foreclosure, because the number of licenses can
always be infinitely expanded to take up the entire
market.
Id. at 151 (emphasis added).
Next, with explicit citation to Microsoft's conduct and
the Consent Decree, the treatise gives an apt summary of the
exclusionary nature of per processor licenses:
Suppose, for example, that one firm manufactures a
market-dominating software operating system for new
computers, which computer manufacturers ordinarily install
at the factory before shipping the computer. Other
nondominant operating systems are also available, however,
and in open competition and markets subject to quick
technological change it is quite possible that the dominant
software will lose its position to a rival. However,
the dominant firm takes advantage of its current position by
using a license agreement requiring computer manufacturers
to pay a fee for each computer they produce, whether or not
that computer actually employs the dominant firm's operating
system.
For example, a computer manufacturer able to install any
operating system it pleases on 1000 computers annually might
respond to customer demand by installing 700 of the dominant
firm's operating system and 300 of the various alternative
operating systems of nondominant firms. But suppose that the
license fee for using the dominant firm's system is $50 per
computer manufactured, rather than per computer that
actually incorporates the system. In that case, the
manufacturer must pay the $50 for each of the 1000
computers, whether or not it installs the dominant firm's
system, and will have to add an additional licensing fee for
installing the alternative system of a nondominant firm.
Alternatively the only way the nondominant system maker
can compete in price with the dominant firm is to charge a
licensing fee of zero.
Such licensing arrangements have been upheld when it is
difficult to determine whether a particular unit of the
product incorporates the licensed technology; so the mutual
convenience of licensor and licensee requires royalties
based on the number of units produced rather than the number
actually thought to employ the license. But software on
computers is readily detected, and there seem to be few or
no offsetting efficiency benefits from arrangements that
simply raise the costs of nondominant firms.
Id. at 152 (emphasis added) (citing
Automatic Radio Mfg. Co. v. Hazeltine Research, 339
U.S. 827 (1950); Microsoft Consent Decree, 59 Fed.
Reg. 42,845 (1994)). The last paragraph of the above
quotation is especially significant: Areeda & Hovenkamp
anticipate and reject Microsoft's attempt to defend
the per processor license as some sort of total sales
royalty. See Licensing Memo. at
9-17.
Areeda & Hovenkamp also expressly condemn the
coercive "discount" Microsoft offered to OEMs that signed
per processor licenses. After observing that a de
facto exclusive dealing arrangement is created by a
policy of offering discounts only to those buyers who agree
to use exclusively the seller's product, the treatise again
takes Microsoft to task:
Also troublesome is the "all or none" quality of
discounting policies of this nature. For example . . .
[t]he impact of [Microsoft's] policy was to
give computer makers the incentive, first, to agree to the
fee structure in order to get the lower price; and second,
to install Microsoft operating systems on all their
computers once the agreement was in place.
Such a scheme is problematic, however, only when the
defendant is a dominant firm in a position to force
manufacturers to make an all-or-nothing choice. For
example, suppose that Microsoft has a 90 percent share of
IBM-compatible operating systems, and compatibility concerns
led some 90 percent of customers to prefer a Microsoft
operating system. At the same time, however, the remaining
10 percent of customers have unique needs or tastes and
would prefer a non-Microsoft system such as IBM's OS2
system. In such circumstances the computer manufacturer
would be best off serving the mix of customers that come to
its door, perhaps selling 90 percent of its computers with a
Microsoft system installed and the remaining 10 percent with
the systems of rivals. In that case the discount policy
effectively forces the manufacturer to make the choice of
either installing the Microsoft system on 100 percent of its
computers or on none at all. Since the hardware makers
cannot afford the second alternative, given Microsoft's
dominance, it selects the first.
11 P. Areeda & H. Hovenkamp, 1807b, at 117-118
(emphasis added).
Once again, Areeda & Hovenkamp anticipate and reject
Microsoft's efforts to defend its actions. Microsoft claims
that OEMs were "free" to reject the per processor license,
and seeks to defend its actions by reference to DRI's. As
the treatise explains, only Microsoft -- the monopolist --
was "in a position to force manufacturers to make an
all-or-nothing choice" presented by per processor licenses.
Id. As a result, such discounts effectively coerce
the buyer and make it impossible for competing firms to
match the discount.
The United States Department of Justice condemned
Microsoft's per processors as anti-competitive
The Department of Justice also soundly condemned
Microsoft's per processor license. The DOJ published the
following "Competitive Impact Statement" explaining the
anti-competitive effect of this practice:
Microsoft's licensing practices deter OEMs from
entering into licensing agreements with operating system
rivals and discourage OEMs who agree to sell
non-Microsoft operating systems from promoting those
systems. By depriving rivals of a significant number of
sales that they might otherwise secure, Microsoft makes
it more difficult for its rivals to convince ISVs to write
applications for their systems, for OEMs to offer and
promote their systems, and for users to believe that their
systems will remain viable alternatives to MS-DOS and
Windows.
Microsoft's exclusionary contracts harm
consumers. OEMs that sign Microsoft's exclusionary
licenses but offer consumers a choice of operating systems
may charge a higher price, in order to cover the double
royalty, for PCs using a non-Microsoft operating system.
Even consumers who do not receive a Microsoft operating
system still pay Microsoft indirectly. Thus, Microsoft's
licensing practices have raised the cost of personal
computers to consumers. Microsoft's conduct also
substantially lengthens the period of time required for
competitors to recover their development costs and earn a
profit, and thereby increases the risk that an entry attempt
will fail. In combination, all these factors deter entry by
competitors and thus harm competition. By deterring the
development of competitive operating systems, Microsoft has
deprived consumers of a choice of potentially superior
products. Similarly, the slower growth of competing
operating systems has retarded the development of
applications for such systems.
United States v. Microsoft Corp., 59
Fed. Reg. 42,845, at 42,851 (Aug. 19, 1994) (Proposed Final
Judgment and Competitive Impact Statement) (emphasis added).
In another shocking lack of candor, Microsoft utterly
ignores this finding by the DOJ -- and offers no explanation
why it abandoned its practices rather than face
prosecution. As well, Microsoft ignores similar
findings by the Korean Fair Trade Commission and the
European Commission on Competition. See
Consolidated Statement of Facts 408-413.
SmithKline Corp. v. Eli Lilly &
Co.
In SmithKline Corp. v. Eli Lilly & Co., the
Third Circuit invalidated an arrangement that is closely
analogous to Microsoft's per processor licensing scheme. Eli
Lilly produced five different brands of a particular drug,
but offered a three percent discount on all
purchases if the buyer bought certain minimum levels of
three of the five brands. SmithKline Corp. v.
Eli Lilly & Co., 427 F. Supp. 1089, 1105 (E.D. Pa.
1976). Two of the brands -- Keflin and Keflex -- were
dominant market leaders, accounting for 75% of all
purchases. Both were under patent to Lilly. Two of the other
brands had no market appeal. The fifth brand -- Kefzol --
was a generic brand that was growing in popularity. As a
practical result, hospitals could only qualify for the
discount if they bought the requisite minimums of the
Keflin, Keflex, and Kefzol brands.(2)
See id., at 1106 ("This
meant that the great bulk of hospitals, in accordance with
the prescribing habits of their physicians and in order to
qualify for the bonus rebate on Keflin and Keflex, would
purchase Kefzol in the specified amount").
This alleged volume discount had an exclusionary effect
akin to that of the per processor license. Another
manufacturer, SmithKline, had a license to make the generic
brand. In other words, the SmithKline generic -- like DR DOS
-- was in unique position to offer a competing version of
the same product without violating intellectual property
laws. And like OEMs under per processor licenses, hospitals
were theoretically "free" to buy the generic brand from
SmithKline and the non-generic brands (Keflin and Keflex)
from Lilly. Doing so, however, would cause hospitals -- like
any OEM that wanted to put DR DOS on some portion of its
machines -- to lose the discount not only as to the generic
portion of their purchases, but also as to their purchases
of Keflin and Keflex, the dominant market brands.
See id. Likewise, nothing in theory
stopped the hospital from buying the generic drug twice:
once from Lilly to get the discount and once from SmithKline
to sell to customers. OEMs, of course, also had this same
highly theoretical "choice."
The Third Circuit declared the arrangement illegal: "the
practical effect of that decision [to buy some portion
of requirements from SmithKline] would be to deny the .
. . purchaser the 3% bonus rebate on all its . . .
purchases." SmithKline Corp. v. Eli Lilly &
Co., 575 F.2d 1056, 1061-62 (3rd Cir. 1978). Given the
much greater consumer demand for the non-generic brand over
the generic brand, the only way SmithKline could match
Lilly's 3% across-the-board discount was to offer between a
16% and 35% discount on its brand. Id., at 1062.
The Third Circuit considered the arrangement especially
problematic because Lilly had over 90% market share; there
was evidence Lilly was using the discount to combat erosion
of an industry standard brand in the face of an upstart
substitute; and there were high barriers to entry in the
market. SmithKline, 575 F.2d at 1059, 1061, 1065.
The analogy to Microsoft's use of per processor licenses is
compelling. See Consolidated Statement of
Facts 141-142 (pricing effect);
id. at 2 n. 2, 81-82 (market
share); id. 30-34, 104, 169-171,
292 (Microsoft fears of intra-standard competition);
Kearl Report at 14-19 (barriers to entry).
Return to Argument
Return to Table of Contents
B. A Triable Issue of Fact
Exists as to Whether Per Processor Licenses Were
Exclusionary
Caldera challenges Microsoft's licensing practices under
both sections 1 and 2 of the Sherman Act. See
Exhibit 1 72-77, 86-92 (First Amended
Complaint). Section 1 prohibits contracts that unreasonably
restrain trade. Standard Oil Co. v. United
States, 221 U.S. 1, 59-60 (1911). Likewise, section 2
prohibits "the use of monopoly power 'to foreclose
competition, to gain a competitive advantage, or to destroy
a competitor.'" Eastman Kodak Co. v. Image Technical
Svcs., 504 U.S. 451, 482-83, 112 S. Ct. 2072, 2090
(1992) (quoting United States v. Griffith, 334 U.S.
100, 107, 68 S. Ct. 941, 945 (1948)). As the Tenth Circuit
has explained, contracts and dealings to purchase
exclusively from a single seller run afoul of sections 1 and
2 because of their tendency to destroy competition among
sellers:
The antitrust vice of these arrangements is the
foreclosure of part of the market in which the seller
competes by taking away the freedom of the buyer to choose
from the products of competing traders in the seller's
market.
See Perington Wholesale, Inc. v.
Burger King Corp., 631 F.2d 1369, 1374 (10th Cir.
1979).
A two-part inquiry determines whether an exclusive
dealing arrangement violates the antitrust laws: (1) the
agreement at issue must be exclusive; and (2) the agreement
must have an adverse effect on competition. Tampa
Electric Co. v. Nashville Coal Co., 365 U.S. 320
(1961); see Licensing Memo. at
3-4. The first inquiry focuses on the contract or buyer
level and asks whether the arrangement truly excludes a
particular buyer from purchasing from other sellers. The
second inquiry focuses on the market level and asks
whether the use of the arrangement has an actual
anti-competitive effect on the marketplace.
Return to Argument
Return to Table of Contents
Step One: The Per Processor License Precluded
Individual OEMs From Considering DR DOS
This Court's first enquiry is to determine whether an OEM
under a per processor license could actually buy DOS from
any manufacturer other than Microsoft. As a factual matter,
Caldera has brought forth abundant evidence that individual
OEMs and Microsoft viewed the per processor license as
exclusionary. See Consolidated Statement of
Facts 130-154, 292-300. This alone is enough to
withstand summary judgment.
A contract need not be denominated exclusive nor
must exclusivity be an express condition of the arrangement,
in order for it to be "exclusive" under sections 1 and 2.
Any agreement with the "practical effect" of exclusivity is
covered. Tampa Electric, 365 U.S. at 327 (quoting
United Shoe Machinery Corp. v. United States, 258
U.S. 451, 457 (1922)). As the Tenth Circuit has explained:
"An exclusive supply agreement entails a commitment by a
buyer to deal only with a particular seller. . . . The
agreement need not specifically require the buyer to forego
other supply sources if the practical effect is the
same." Perington Wholesale, Inc., 631 F.2d, at
1374 (emphasis added). De facto exclusive contracts
and dealing arrangements are commonly scrutinized under the
Sherman Act and include requirements contracts and other
arrangements where the seller "gives the buyer a discount, a
rebate, or more favorable terms in exchange for the buyer's
commitment not to purchase a rival's goods." 11 P. Areeda
& H. Hovenkamp, Antitrust law 1821, at 155.
De facto exclusive dealings may be inferred from
the operation of incentive schemes that make exclusivity the
buyer's only feasible economic choice. Courts have readily
found the existence of exclusive dealing where a monopolist
offers a discount on terms that, due to market demand and
price pressure, force a buyer to purchase all its
requirements from the monopolist even though such a
restrictive condition is not explicitly stated.
E.g., SmithKline Corp. v. Eli Lilly
& Co., 575 F.2d 1056 (3rd Cir. 1978) (discussed,
supra, at 7-8). Moreover, in the specific context
of intellectual property licenses, a licensing scheme may
make it economically infeasible for a licensee to try
competing technology: "A license that does not explicitly
require exclusive dealing may have the effect of exclusive
dealing if it is structured to increase significantly a
licensee's cost when it uses competing technologies." U.S.
Department of Justice, Antitrust Guidelines for the
Licensing of Intellectual Property 4.1.2 (1995). Contrary to
Microsoft's argument in its summary judgment brief, a
defendant (particularly a dominant monopolist) cannot escape
liability merely by pointing out that buyers could have
"avoided" the exclusive effect by purchasing on uneconomical
terms. As pointed out above, both Areeda's treatise and the
DOJ specifically rejected Microsoft's argument.
Microsoft's motion makes no sustained argument that
Caldera's claim fails at step one.(3)
Empty rhetoric is all Microsoft can muster:
"Caldera cannot meet this first hurdle: showing that two- or
three- year per processor licenses with minimum commitments
excluded competitors." Licensing Memo. at
4. The current position taken by Microsoft's lawyers is
starkly at odds with the statements of Microsoft's OEM
account managers at the time the licenses were executed.
See supra 15. Microsoft cannot credibly contend
before this Court that the per processor licensee did not
exclude DR DOS from reaching OEMs.
Indeed, Microsoft offers no evidence supporting its
contention that OEMs had a meaningful choice to reject the
per processor license in favor of other licensing schemes.
In fact, no such choice existed, due to the convergence of
two market phenomena: First, OEMs had razor thin margins,
making it hard for OEMs to turn down any discount. See,
e.g., Exhibit 367 ("We consider DR DOS
to be a good and viable product but have since been
precluded from considering it seriously even for a small
number of our systems because of the CPU licensing
arrangement. Margins and competition are such in our
business that we could not afford to use DR DOS."). Second,
MS-DOS was the entrenched monopoly product, and the per
processor discount was all-or-nothing: an OEM could not
merely forego the discount as to those purchases it decided
to make from DRI. See Areeda & Hovenkamp,
supra. As a result, an OEM -- like a hospital in
SmithKline -- could not afford to forfeit the
discount available on MS-DOS sales by rejecting the per
processor license, merely to open up some machines to DR
DOS. See Consolidated Statement of
Facts 139-142.
Under these circumstances, the only way DRI and Novell
could convince an OEM to license DR DOS was to offer it for
a zero royalty. See Exhibit 242
("Due to contract with Microsoft DR DOS needs to be offered
on a no cost basis"). Microsoft's own expert summed up the
effect of this discount as follows:
[T]o the extent there was a discount associated
with the per-processor discount, you could think of it as a
discount for a closer relationship or for something
approaching exclusivity.
Schmalensee Depo. at 342 (emphasis
added).
Even beyond the above evidence, Caldera has produced
evidence that Microsoft simply refused to offer any
choice to OEMs except the per processor license.(4)
As the correspondence and testimony of OEMs
illustrates, OEMs were given a single take-it-or-leave
choice:
- "The second issue is the fact that the only OEM
agreement you have been prepared to offer us on MS-DOS
and Windows is a per processor license." Exhibit
306.
- "3. In order to obtain licensing rights to MS-DOS
from Microsoft, we were required to enter into an OEM
Agreement with Microsoft which stipulates that we must
pay them a license fee for every system shipped,
regardless of whether or not we use MS-DOS on that
particular system.
4. We were not given the option of licensing MS-DOS
on any other basis. Foregoing a license for MS-DOS
altogether was not an option. MS-DOS is used by a
substantial segment of the industry and our business would
not survive if we were not able to offer it to our
customers." Exhibit 367.
Microsoft also argues that the per processor license was
not exclusive because Microsoft granted exceptions.
Licensing Memo. at 5. Yet, Microsoft only
claims to have granted twenty-seven exceptions out of the
many hundreds of OEMs covered by per processor licenses.
Caldera believes even this tiny number of exceptions is
deceptive, see supra 5, and thus is not evidence of
a "habit" of granting exceptions so widespread that in
practice the per processor license was not exclusive.
See Consolidated Statement of
Facts 301-304. But worse, the fact that Microsoft
suggests it had to grant exceptions in order to permit
OEMs to license non-Microsoft operating systems simply
proves that the per processor license itself was exclusive:
The only way an OEM could license another product was to get
out from under the per processor term.(5)
Microsoft also contends the per processor license was not
exclusive because some OEMs actually licensed DR
DOS.(6)
Licensing Memo. at 4-5 .
Assuming Microsoft is not referring to OEMs that got one of
its mysterious exceptions, what Microsoft is really saying
is that some ill-defined (but clearly miniscule) number of
OEMs were willing to pay the penalty for breaking the
exclusive arrangement. See supra 5. The evidence is
overwhelming that very few OEMs were willing to pay
Microsoft's tax. See Exhibit 367
("Both before and after entering into the OEM agreement, we
have had requests from some customers for DR DOS that we
have not been able to fulfill. . . . [W]e could not
afford to . . . pay a double license."); see also
Exhibit 284 ("We clearly do not feel we, or
our customers, should be forced to pay Microsoft a royalty
on your software when it is not supplied or desired.");
Exhibit 306 ("[A] small proportion
of our business involves providing Non Microsoft operating
systems such as networks and others to our customers who
require it. This means that we will be paying a royalty to
Microsoft even though we would not be supplying Microsoft
products.").
And so, although Microsoft suggests that a contract must
be completely exclusionary -- i.e., 100% of a
buyer's purchases must be covered -- to be deemed
exclusionary for antitrust purposes, antitrust law says
otherwise. See 3A P. Areeda & H. Hovenkamp,
Antitrust law 768b4, at 149 (examples of exclusionary
conduct by a seller include where "the buyer agrees . . . to
buy a high proportion of its requirements from the
monopolist . . . [or] to buy a fixed amount that
substantially approximates its requirements"
(emphasis added)). Were Microsoft correct, a monopolist
could escape antitrust scrutiny by offering small exceptions
or carve-outs on a sporadic basis.(7)
In practice, however, the per processor
license was exclusionary, under any definition of that term.
Step Two: The Per Processor Injured
Competition.
According to the Supreme Court, if use of the exclusive
contract or dealing forecloses a "substantial share" of the
relevant market or causes "a significant fraction of buyers
or sellers [to be] frozen out of a market,"
competition is injured. Tampa Electric Co. v. Nashville
Coal Co., 365 U.S. 320 (1961). What constitutes
foreclosure of a substantial share turns on "the structure
of the market for the products or services in question --
the number of sellers and buyers in the market, the volume
of their business, and the ease with which the buyers and
sellers can redirect their purchases or sales to others."
Jefferson Parish Hospital Dist. No. 2 v. Hyde, 466
U.S. 2, 45 (1984) (O'Connor J., concurring). Additionally,
consideration must be given the particular terms of the
agreement to assess how tightly the exclusivity binds:
Courts consider factors such as the financial incentives of
buyers to enter into the arrangement, the existence of
lengthy terms, and whether there are penalties for
termination or non-renewal.(8)
See U.S. Health Care, Inc., v.
Healthsource, Inc., 986 F.2d 589, 595-596 (1st Cir.
1993).
Microsoft's summary judgment papers make, at best, a
superficial run at the substantial foreclosure issue, but
muster no evidence to define the market, its structure, or
in any way explain OEM business to aid this Court's
consideration. See Licensing Memo.
at 5-6. This is insufficient to put this point at
issue on summary judgment.
Indeed, Microsoft cannot seriously contest that the
exclusionary effect of the per process license injured
competition by foreclosing a substantial share of the
market. Microsoft's highest executives acknowledged that the
per processor license permitted it -- an entrenched
monopolist -- to prevent displacement by a technologically
superior upstart competitor, depriving consumers of choice.
Jim Allchin wrote to Bill Gates on March 26, 1992:
I feel we are much too smug in dealing with Novell.
Perhaps, they didn't hurt us in DOS yet -- but it's not
because of product or their trying. It's because we
already had the OEMs wrapped up.
Exhibit 349 at MS7079459 (emphasis
added)
Moreover, the per processor license precluded and
retarded the ability of competing operating systems to build
reputation, experience, and consumer acceptance that are
essential to longer-term viability, especially in the face
of high barriers to entry and large tipping effects.
See, e.g., Exhibit 212 (explaining
that a per processor license was needed to "lock out DRI" at
an OEM named EMI that was shipping DR DOS because if "EMI
grows in the mass merchant channel then other oems in this
channel will start looking at DRI as a cheap alternative");
Exhibit 118 (desire to get Vobis under per
processor license motivated by "Amstrad and other German
companies . . . noticing Vobis' success and its DRI
bundling"); Leitzinger Report at 5-6;
Kearl Report at 14-19. After extensive
investigation, the Department of Justice found that the per
processor license deprived consumers of choice, raised the
cost for personal computers, and deterred innovation.
See supra, at 5-6.
Even assuming Caldera must show per processor licenses
foreclosed a substantial share of the market, Caldera can
easily meet that burden for summary judgment purposes.
Microsoft concedes that as much as 60% of the OEM market
from 1992 to 1994 was covered by per processor licenses, and
OEMs constitute over 90% of the entire DOS market.
See Licensing Memo. 8. But worse,
Microsoft was forcing OEMs to sign per processor licenses at
an alarming rate: in 1991 alone, 77% of all OEM licenses
Microsoft executed for MS-DOS were per processor
licenses. Leitzinger Report, Exhibit
4. These figures clearly demonstrate that prior to 1994 --
when the Consent Decree forced Microsoft to stop the
practice -- per processor licenses were in place at most
major OEMs around the world and were rapidly being forced
upon the remainder of the OEM channel. And such numbers
actually underestimate the true anti-competitive
effect because Microsoft selectively prosecuted its per
processor strategy: Microsoft specifically deployed per
processor licenses at OEMs where DRI/Novell had successfully
made sales or was considered a threat. See
Consolidated Statement of Facts 137,
302-304, and Appendix C.(9)
Return to Argument
Return to Table of Contents
There Were No Pro-Competitive
Justifications for Per Processor Licenses.
"Neither the aims of intellectual property law, nor the
antitrust laws justify allowing a monopolist to rely upon a
pretextual business justification to mask anticompetitive
conduct." Image Technical Services, 125 F.3d at
1218. Suspicion has clearly been cast on Microsoft's
after-the-fact justifications for its licensing schemes. The
Court should bear in mind that Microsoft offers not one
single piece of paper as contemporaneous evidence of its
justifications -- but only the say-so of its employees in
deposition. The jury is entitled to assess credibility.
Per processor licenses were an overbroad,
restrictive method by which to combat piracy
Microsoft vaguely contends that it changed its licensing
practices in order to combat "piracy" and counterfeiting.
Licensing Memo. at 6. Microsoft's own
economist conceded that per processor licenses would not
deter an OEM bent on defrauding Microsoft.
Schmalensee Depo. at 336. Moreover,
Microsoft contradicts this alleged business justification
arguing out of the other side of its mouth that OEMs were
free to choose whatever license type they wanted,
and were allegedly able to get exemptions anyway.
Microsoft should at least pick a story and stick to it:
giving a "pirate" its choice of licenses is not much
protection against piracy.
If there were a real problem with piracy, an obvious way
existed to address the problem without forcing such
restrictive terms on an OEM and reducing consumer choice:
Microsoft could simply obtain an agreement from its
licensees not to ship naked machines.(10)
See Leitzinger
Report at 37. Charging OEMs MS-DOS license fees for
systems that ship with DR DOS because the customer prefers
DR DOS does nothing to deter piracy, but plenty to deter
competition.
Other major software companies (and indeed, much smaller
companies with far fewer resources than Microsoft) have been
able to address the piracy problem without such measures. P.
Areeda & H. Hovenkamp, Antitrust Law 1502, at 372
(justification defense "will be lost if the plaintiff shows
that it can be achieved by a substantially less restrictive
alternative"). Alternative actions include appropriate
enforcement actions where warranted; use of sophisticated
numbering and labeling (holographic) technology; and regular
compliance audits. Leitzinger Report at
37. Per processor licenses did nothing to address the far
more serious problem of unlawful copying and manufacturing
of MS-DOS packages that were then sold by a licensee to
other OEMs or directly to end users. It did nothing to
prevent an OEM from trying to "cheat" as to the number of
processors it used. In short, it did not address the heart
of any purported piracy problem.
Finally, Microsoft did not employ per processor licenses
only against suspected pirates. Schmalensee
Depo. at 343. The actual targets of Microsoft's per
processor strategy were not small-scale, fly-by-night
operations run out of an alley in Hong Kong or Taiwan, but
were major multinational corporations, including major U.S.
companies, with substantial intellectual property portfolios
of their own and with highly visible and traceable
production and distribution channels. It stretches credulity
to posit a piracy justification for companies such as these.
Per processor licenses were not mere volume
discounts
Per processor licensing is clearly distinguishable from
volume discounting. See Licensing
Memo. at 7. With true volume discounting, marginal
prices paid by an OEM for MS-DOS would decline with
increasing volume, but at no point would the OEM be required
to pay Microsoft a royalty for systems that did not
include Microsoft software. Indeed, Microsoft's own
economist agreed per processor licenses were not volume
discounts. Schmalensee Depo. at 341-342. So
did Microsoft's worldwide director of OEM sales.
Consolidated Statement of Facts 390.
Moreover, in the normal volume-discount situation, DRI or
Novell would have had an opportunity to meet Microsoft's
lowest price for the last increment of
volume required by an OEM. Instead, under the per
processor licensing scheme, a new entrant with a better
product not only had to meet the lowest price, but
also had to recompense the OEM for the penalty it
was required to pay on the units shipped which did not
contain MS-DOS. This raised the costs for Microsoft's
rivals, without corresponding benefit either to the OEM or
to the users. Entry for the innovative product was deterred
because Microsoft chose to make its lowest price available
only in an exclusionary fashion.
From the point of view of the OEM, it may well have
meaningful volume efficiencies to be realized. However,
these efficiencies derive solely from volume --
and high volume does not require a per processor
license. The OEM does not need to cut itself off from a
product it might want to buy in order to gain whatever
efficiencies it seeks. The choice, in any event, should
belong to the OEM.
Per processor licenses achieved no appreciable
efficiencies
Exclusive dealing or total requirements contracts are
often defended on grounds of efficiencies achieved. In
passing, Microsoft trots out the argument here, and asserts
it was "a method of simplifying the processes of contracting
and accounting" for MS-DOS. Licensing Memo.
at 6. Microsoft offers no explanation at all why this is
true.(11)
Any "problems" it had dealing with per
system and per licenses arose not from some
theoretical marketplace constraint, but instead
from the complicated way in which Microsoft itself developed
its contracting practices. See Schmalensee
Depo. at 339-341. Moreover, Microsoft's per
processor contracts imposed the same reporting requirements
on OEMs as did its per system licenses; indeed, even under
the per processor license, OEMs were still required to
report to Microsoft the actual number of copies of MS-DOS
shipped, just as under a per copy license.
Leitzinger Report at 38-39. Microsoft
leaves only deafening silence as to why it is easier for an
OEM to account for the total number of computers shipped
with a particular microprocessor -- rather than account for
the total number of computers shipped using a particular
model number, or simply the total number of MS-DOS copies
used.
Return to Argument
Return to Table of Contents
D. Microsoft's Minimum
Commitments and Increased Duration Contributed to This
Exclusionary Effect
To defend its minimum commitments practice, Microsoft
extolls the virtues of volume discounts. But Caldera does
not object to the concept of volume discounts.(12)
What Caldera objects to is Microsoft's
imposition of a non-refundable commitment to buy
through the minimum commitment arrangement. Unlike the
volume discount cases cited by Microsoft, its minimum
commitments required OEMs to make a prospective, binding
commitment to meet certain levels and then make
non-refundable quarterly payments in order to qualify for
the volume discount. Once an OEM got over-committed
(i.e., where its prepayments exceeded the number of
units actually shipped), it was locked into Microsoft if it
wanted to recoup its prepaid balances. In such a
circumstance, the minimum commitment had an even greater
exclusive effect than a pure requirements contract because
the OEM had to "buy" even more than its actual requirements
from Microsoft.
Microsoft has never offered a justification explaining
why its volume discounts had to be structured in this way
and, more importantly, why a traditional volume discount
would not have achieved the same efficiencies allegedly
provided by the minimum commitment. Microsoft's minimum
commitments violate the Sherman Act for the simple reason
that Microsoft is a monopolist, and must use devices that
are "no broader than necessary to effectuate [its]
business." SCFC ILC, Inc. v. Visa USA, Inc., 36
F.3d 958, 970 (10th Cir. 1994); see also Sullivan v.
National Football League, 34 F.3d 1091, 1103 (1st Cir.
1994) (a restraint is not reasonable "if a reasonable, less
restrictive alternative to the policy exists that would
provide the same benefits as the current restraint").
Microsoft suggests that minimum commitments were
widespread in the industry. Licensing Memo.
at 7. Even if that were true, widespread industry use of an
exclusionary practice does not justify it; to the contrary,
such widespread use may make the monopolist's use of
exclusive dealing especially egregious because competition
in the market is already dampened. See Tampa
Electric Co. v. Nashville Coal Co., 365 U.S. 320, 334
(1961) (pointing out that one of the serious problems with
exclusive dealing invalidated in Standard Oil Co.
v. United States (Standard Stations), 337 U.S. 293
(1940), was that "there was an industry-wide practice of
relying upon exclusive contracts"); see also
infra, at 27-28 (noting that conduct which is legal
when done by a non-dominant firm, may be illegal when
engaged in by a monopolist).
Microsoft asserts, with scarcely any support,(13)
that "[m]inimum commitments have
no anticompetitive effects so long as the amounts to which
OEMs committed themselves were reasonable estimates of their
likely use of the licensed product (and there is no evidence
to the contrary in this case)." Licensing
Memo. at 7. Yet Microsoft's own documents --
indeed, its OEM Sales Manual and a report to its Board of
Directors -- specifically note that Microsoft pushed OEMs to
over-commit so as to give Microsoft leverage to block out
would-be competitors. Consolidated Statement of
Facts 294-96.
Microsoft's assertion -- that minimum commitments can
only have an anti-competitive effect if OEMs over-committed
-- overlooks the fact that Microsoft did not use minimum
commitments in isolation. Rather, Microsoft used them in
connection with per processor licenses and the unreasonable
extension of the duration of the licenses.(14)
Caldera's section 2 claim challenges the
entirety of Microsoft's licensing practices, not
merely each component individually. See U.S. Healthcare,
Inc. v. Healthsource Inc., 986 F.2d 589, 597 (1st Cir.
1993) ("Exclusive contracts might in some situations
constitute the wrongful act that is an ingredient in the
monopolization claims under section 2"); see also
Caldera's Motion to Strike Memo.
at 4-6 (totality of conduct must be considered under
section 2).
Moreover, the extended duration of Microsoft's licenses
meant that DRI or Novell only got the chance to "match"
Microsoft's volume discount when licenses expired, which
Microsoft was pushing from two to three years. See
Consolidated Statement of Facts 150-154.
Microsoft does not even dispute Caldera's allegation that
Microsoft intentionally extended the license terms beyond
the life-cycle of MS-DOS in an effort to foreclose DR DOS.
Again, Microsoft's own documents show that this allegation
is true. See Consolidated Statement of
Facts 152-154. The exclusionary effect is almost
tautological: If per processor licenses and minimum
commitments were objectionable when executed two-years at a
time, then they are 50% worse three-years at a
time.(15)
See Consolidated
Statement of Facts 154 (Lieven testimony).
Return to Argument
Return to Table of Contents
III. MICROSOFT'S "TOTAL SALES
ROYALTY PROVISIONS" CASES ARE INAPPOSITE, AND OFFER NO
PROTECTION IN ANY EVENT
Microsoft devotes the bulk of its argument to a line of
cases dealing with the permissibility of calculating a
patent royalty based on total sales, rather than actual use.
These cases actually hurt Microsoft's defense, for their
premise is that there is something improper about a seller
charging something for nothing, even when the seller is, by
virtue of his patent, a lawful monopolist. Here,
Microsoft stands accused of using unlawful
monopolization practices to achieve the same end.
Microsoft cannot avail itself by analogy to the total
sales royalty defense, which is only a defense to patent
misuse. This is a special creature of patent law designed to
accommodate the unique features of patent licensing. Patent
law sanctions such arrangements when it is difficult to
determine whether a particular patent has been incorporated
into a product, e.g., when a patent is licensed as
part of a package where many patents may be used in
combination with each other and some not used at all.
See E. Kintner & J. Lahr, An Intellectual
Property Law Primer 69 (2nd ed. 1982). As a result, charging
a royalty only for those products that incorporate the
patent becomes an exceedingly complex task, and consequently
total sales royalties are permitted for convenience
sake. See Automatic Radio Manufacturing
Co. v. Hazeltine Research, Inc., 339 U.S. 827
(1950). Indeed, where it is difficult to determine if the
patent is in use, the licensee is not really paying
"something for nothing," even in the event the licensee does
not use the patent: The licensee is, in effect, buying
insurance against a claim of infringement by the licensor.
See Zenith Radio Corp. v. Hazeltine Research, Inc.,
395 U.S. 100, 139-140 (1969). If the licensee only
paid on a usage basis, the licensor could claim the patent
made its way into a product on which the licensee did not
pay a royalty, resulting in protracted litigation as the
licensee attempted to prove the patent was not used.
No comparable justification exists in the record here. As
the Areeda treatise explains, such policy considerations
have no place in the context of operating system software
whose use in a particular computer unit is easy to detect:
It readily appears when you turn on the machine.
See supra, at 4.
Finally, the total sales royalty cases cited by
Microsoft, Licensing Memo. at 10-16,
indicate that the law seeks to discourages a monopolist,
whether lawful or not, from coercing lucrative royalties
untethered from an actual sale. See, e.g.,
Hull v. Brunswick Corp., 704 F.2d 1195,
1199 (10th Cir. 1983) (meaningful alternatives must be made
available). Caldera not only contends that Microsoft's
pricing structure made any alternative to per processor
licenses not meaningfully available, but also that Microsoft
used naked coercion by offering only per processor licenses
to OEMs who required Microsoft's monopoly product on some of
its computers. See Consolidated Statement
of Facts 302-04. This is precisely the sort of
conduct condemned by the Supreme Court in Zenith Radio
Corp. v. Hazeltine Research, Inc., 395 U.S. 100, 140
(1969). Even given Microsoft's understanding of the law, a
triable issue of fact exists as to whether Microsoft has
satisfied a key requirement for utilizing the total sales
royalty defense -- i.e., absence of coercion.
Return to Argument
Return to Table of Contents
MICROSOFT'S ATTEMPT TO ASSERT
AN IN PARI DELICTO DEFENSE IS TO NO
AVAIL
Microsoft argues, without development, that both DRI and
Novell engaged in the same anti-competitive behavior as
Microsoft. Licensing Memo. at 6. This
allegation, even if true, would present no defense for
Microsoft. Microsoft is a dominant monopolist with 90%
market share. See Consolidated Fact
Statement at 2 n.2. As one court recently observed
in a case involving a similarly dominant monopolist (Intel),
the antitrust law imposes "affirmative duties" on
monopolists to refrain from anti-competitive conduct.
Intergraph Corp. v. Intel Corp., 3 F. Supp. 1255,
1277 (N.D. Ala. 1998). Even conduct by a monopolist that is
otherwise lawful may violate the antitrust laws where it has
anti-competitive effects. Image Technical Services, Inc.
v. Eastman Kodak Co., 125 F.3d 1195, 1207 (9th Cir.
1997) ("Legal actions, when taken by a monopolist, may give
rise to liability, if anticompetitive."); Greyhound
Computer v. IBM, 559 F.2d 488, 498 (9th Cir. 1977),
cert. denied, 434 U.S. 1040 (1978) (otherwise
lawful conduct may be unlawfully exclusionary when practiced
by a monopolist); Oahu Gas Service, Inc. v. Pacific
Resources, Inc., 838 F.2d 360, 368 (9th Cir. 1988),
cert. denied, 488 U.S. 870 (1988) ("Because of a
monopolist's special position the antitrust laws impose what
may be characterized as affirmative duties").
Moreover, a monopolist cannot escape antitrust liability
upon allegation that its victim may have engaged in similar
conduct. See Caldera's Product
Pre-announcement Opposition at 24-25. This is
especially true given the conduct at issue. As Areeda &
Hovenkamp explain, Microsoft's licensing practices had an
anti-competitive effect precisely because of its dominant
market position. See 11 P. Areeda & H.
Hovenkamp, Antitrust law 1807b, at 117 ("Such a scheme is
problematic, however, only when the defendant is a dominant
firm in a position to force manufacturers to make an
all-or-nothing choice.").
In any event, the licensing practices of DRI and Novell
were fundamentally different from Microsoft's in that they
were not exclusionary and were in fact
justified by legitimate business reasons. See
supra 6, 9.
Return to Argument
Return to Table of Contents
CONCLUSION
For all of the foregoing reasons, Microsoft's Motion for
Partial Summary Judgment Regarding Plaintiff's "Licensing
Practices" Claims should be denied.
|
Max D. Wheeler (A3439)
Stephen J. Hill (A1493)
Ryan E. Tibbitts (A4423)
SNOW, CHRISTENSEN & MARTINEAU
10 Exchange Place, Eleventh Floor
Post Office Box 45000
Salt Lake City, Utah 84145
Telephone: (801) 521-9000
Ralph H. Palumbo
Matt Harris
Phil McCune
Lynn M. Engel
SUMMIT LAW GROUP
WRQ Building, Suite 300
1505 Westlake Avenue North
Seattle, Washington 98109
Telephone: (206) 281-9881
Return to Table of
Contents
|
Respectfully submitted,
SUSMAN GODFREY L.L.P.
Stephen D. Susman
Charles R. Eskridge III
James T. Southwick
Harry P. Susman
SUSMAN GODFREY L.L.P.
1000 Louisiana, Suite 5100
Houston, Texas 77002-5096
Telephone: (713) 651-9366
Parker C. Folse III
SUSMAN GODFREY L.L.P.
1201 Third Avenue, Suite 3090
Seattle, Washington 98101
Telephone: (206) 516-3880
|
ATTORNEYS FOR PLAINTIFF
CERTIFICATE OF
SERVICE
I hereby certify that on April ____, 1999, true and
correct copies of the above and foregoing
instrument (Case No. 2:96CV0645B, U.S. District Court,
District of Utah, Central Division) were sent via Federal
Express to:
|
Richard J. Urowsky
Steven L. Holley
Richard C. Pepperman, II
SULLIVAN & CROMWELL
125 Broad St.
New York, N.Y. 10004
James R. Weiss
PRESTON, GARES ELLIS
& ROUVELS MEEDS
1735 New York Avenue, N.W.
Washington, D.C. 20006
Return to Table of
Contents
|
James S. Jardine
Mark M. Bettilyon
RAY, QUINNEY & NEBEKER
79 South Main, Ste. 500 (84111)
Post Office Box 45385
Salt Lake City, UT 84142
William H. Neukom
Thomas W. Burt
David A. Heiner, Jr.
MICROSOFT CORPORATION
One Microsoft Way
Building 8
Redmond WA 98052
Charles R. Eskridge III
|
Footnotes
1. This is no small task. The
factfinder "must ordinarily consider facts peculiar to the
business to which the restraint is applied; its condition
before and after the restraint was imposed; the nature of
the restraint and its effects, actual or probable. The
history of the restraint, the evil believed to exist, the
reason for adopting the particular remedy, the purpose or
end sought to be attained . . . ." Chicago Bd. of Trade
v. United States, 246 U.S. 231, 238 (1918). Moreover,
evaluation of the specific type of restraint at issue here
-- mechanisms to effectuate exclusive dealing -- requires
analysis of the practice's actual effect on
competition in the relevant market, which itself requires a
detailed understanding of the operating system market.
See infra, at 15-18. Microsoft has not even
bothered to define the relevant market, much less proffer
evidence concerning the impact on either competition or the
market.
Return
Return to Table of Contents
2. This arrangement was not analyzed
as a tie because the discount only involved the purchase of
different brands of the same product type, not the linking
of two separate products. See id., at
1101, 1107.
Return
Return to Table of Contents
3. According to Microsoft,
"[c]ourts have not hesitated to reject antitrust
claims where the agreements were not truly exclusive."
Licensing Memo. at 4. It cites four cases,
without development or analogy -- indeed, without even a
parenthetical explanation. Microsoft's cases are not helpful
to its cause. First, Caldera is entitled to a jury trial.
See Spitt Spark Plug Co., 840 F.2d 1253,
1257-58 (5th Cir. 1988): "jury question" as to
exclusivity created even by contract expressly denominated
"non-exclusive," where defendant allegedly offered
promotional gifts to buyers who refused to carry competing
products; upholding directed verdict only because defendant
lacked sufficient market power. Second, Microsoft is
confused about the step-one and step-two inquiries.
See Perryton Wholesale, Inc. v. Pioneer
Distributing Co., 353 F.2d 618, 624 (10th Cir. 1965):
no antitrust violation where truly exclusive contract
foreclosed only 5% of the market. Third, Microsoft is
confused about the evidence in this case, or rather, chooses
to ignore it. See United Air Lines, Inc. v.
Austin Travel Corp., 867 F.2d 737, 742 (2nd Cir. 1989):
refusing to label a contract requiring customers to use
defendant's service for 50% of business a de facto
exclusive contract because the plaintiff failed to
produce any evidence customers actually
refrained from using competing products; Western Parcel
Express v. United Parcel Service, No. C-96-1526-CAL,
1998 WL 328621, *14 (N.D. Cal. June 15, 1998): contract was
not truly exclusive because it was terminable at will by
either party; did not require exclusivity; and did
not base any discount upon exclusive use; and the
plaintiff failed to provide any testimony of customers that
they believed the contract had an exclusionary
effect.
Return
Return to Table of Contents
4. This is precisely why the principle
case relied upon by Microsoft -- Barr Labs., Inc. v.
Abbott Lab., 1989-1 Trade Cas. (CCH) 68,647 (D. N.J.
1989) -- in fact aids Caldera. There, the defendant merely
offered a traditional volume discount to customers. However,
plaintiff presented some testimony that defendant's practice
was to coerce exclusivity. The court held it "cannot find at
this time that there is no evidence to show that there might
not have been some implied or verbal agreement whereby the
purchaser also would not buy the product from Barr."
aff'd, 978 F.2d 98 (3rd Cir. 1992). Similarly, this
Court must assume for summary judgment purposes that
Microsoft did not offer OEMs any choice, but per
processor licenses.
Return
Return to Table of Contents
5. One wonders why exceptions would be
granted, too, if piracy were a true motivating factor.
See infra.
Return
Return to Table of Contents
6. Microsoft also baldly asserts that
imposing an exclusionary arrangement on a
distributor is less harmful to competition than
imposing it on actual consumers. See
Licensing Memo. at 5. Microsoft knows that
such argument is deceptive and misleading, because OEMs are
not mere "distributors" of operating systems; they are the
key consumers, accounting for almost 90% of the
market. See Kearl Report at 8.
Microsoft has put forth not a single shred of evidence that
a competing manufacturer could circumvent Microsoft's
exclusionary arrangements by creating its own exclusive
distributorship.
Return
Return to Table of Contents
7. Microsoft cites Barr Lab.,
Inc. v. Abbot Lab., 978 F.2d 98, 110 n.24 (3rd
Cir. 1992), for the proposition that "[a]n agreement
affecting less than all purchases does not amount to true
exclusive dealing." See Licensing Memo.
at 5. In fact, that opinion merely poses the
question whether a partial exclusionary contract comes
within the coverage of the Clayton Act 3, which has the
express limitation that it applies to contracts containing a
provision that a buyer "shall not use or deal in the goods .
. . of a competitor." 15 U.S.C. 14. That statutory phrasing
has caused some courts to conclude that partial exclusive
contracts are not covered by the Clayton Act because the
buyer can use or deal in goods of a competitor, albeit only
partially. See Tampa Electric Co. v. Nashville
Coal Co., 365 U.S. 320 (1961) (declining to answer the
question). Sections 1 and 2 have no similar statutory
limitation.
Were this Court to accept Microsoft's argument that
section 1 has some technical requirement that the contract
be 100% exclusionary, Caldera would still have a claim under
section 2. Cf. 3A P. Areeda & H. Hovenkamp,
Antitrust law 768b2 ("[W]e see little need for an
independent 2 offense, except in the rare case where the
buyer might be thought constrained in the absence of a
qualifying agreement [under section 1].").
Return
Return to Table of Contents
8. In addition to the per processor
term, Microsoft included a host of other terms to magnify
the exclusive effect, including: (1) the use of minimum
commitments, see infra; (2) unreasonably extending
the duration of the licenses, see infra; (3) no
early termination provision; and (4) requiring accelerated
payment of all minimum commitments in the event of default.
See Exhibit 214, at 8 and exhibit
B.
Return
Return to Table of Contents
9. Microsoft cites Bowen v. New
York News, Inc., 366 F. Supp. 651, 679-80 (S.D.N.Y.
1973), where the court found no substantial foreclosure
because the plaintiff had failed to produce any evidence
that intra-brand competition was lessened and, in fact,
competitors had "successfully competed" with defendant. In
contrast, DRI was run out of business, eliminating the only
competing DOS product.
Return
Return to Table of Contents
10. A "naked machine" is one shipped
without an operating system, which likely may be loaded
illegitimately later.
Return
Return to Table of Contents
11. As well, Microsoft offers nothing
but unsupported and contradictory evidence to support its
claim that OEMs requested per processor licenses to ease
their administrative burdens. See supra 3.
Return
Return to Table of Contents
12. Ordinarily, volume discounting is
associated with cost savings since increases in the volume
purchased result in decreased production and transaction
costs. However, the marginal cost to Microsoft of producing
an additional unit of an operating system for an OEM is
zero. Thus, no volume-related transaction costs exist where
the OEM copies what it needs from the single copy of
software provided by Microsoft.
Return
Return to Table of Contents
13. Without any development or
explanation, Microsoft cites two cases dealing with
liquidated damages provisions. The unremarkable conclusion
is that such clauses are not exclusionary so long as they
are reasonable. See Barry Wright Corp. v. ITT
Grinnell Corp., 724 F.2d 227, 238-239 (1st Cir. 1983);
In re 'Apollo' Air Passenger Computer Reservations Sys.
(CRS), 720 F. Supp. 1068, 1075-76 (S.D.N.Y. 1989).
Reasonable liquidated damages, however, serve a specialized
function -- i.e., to calculate damages in the event
of breach -- and are the least restrictive alternative of
achieving this purpose. Caldera's complaint is quite
different: Microsoft's minimum commitment provisions are not
the least restrictive means by which to implement a volume
discount, and so "reasonableness" does not even enter the
equation.
Return
Return to Table of Contents
14. The Department of Justice stated
it this way: "Microsoft has further foreclosed the OEM
channel through the use of long-term contracts with major
OEMs, some expiring as long as five years from their
original negotiation date. In some cases these contracts
have left OEMs with unused balances on their minimum
commitments, which Microsoft can allow to be used if the
contract is extended, but which would be forfeited if the
OEM does not extend the contract. These practices have
allowed Microsoft to extend the effective duration of its
OEM contracts, further impeding the access of PC operating
system competitors to the OEM channel." 59 Fed. Reg. 42,845,
at 42,850 (Proposed Final Judgment and Competitive Impact
Statement).
Return
Return to Table of Contents
15. Microsoft's suggestion that
longer-term exclusive dealings have been upheld in other
cases, such as the 20-year requirement contract in Tampa
Electric, is disingenuous. See
Licensing Memo. at 8. This sort of raw,
numerical comparison is obviously irrelevant: Microsoft
would surely object if Caldera argued a one-year term was
unreasonable because that was the length of the contracts
invalidated in Standard Oil Co. v. United
States (Standard Stations), 337 U.S. 293 (1940). As
Tampa Electric itself indicates, whether a
durational term is reasonable turns entirely on the
"particularized considerations" of the industry and product
at issue. 365 U.S., at 334. And of course, Microsoft offers
nothing other than bald assertion, without reference to
industry structure or reality. But see
Consolidated Statement of Facts 150-154
and Appendix A.
Return
Return to Table of Contents
|