Caldera News

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Software Developer Caldera® Sues Microsoft® For Antitrust Practices Alleges Monopolistic Acts Shut Its DR DOS® Operating System Out of Market

First of Five Hearings on Partial Summary Judgment Begin Today in U.S. District Court in Salt Lake City

Salt Lake City, UT -- July 24, 1996-- Caldera®, Inc., a Utah-based software developer, said today it has filed an antitrust lawsuit against Microsoft® Corp. seeking treble damages, as well an injunction to halt ³illegal conduct by Microsoft calculated and intended to prevent and destroy competition in the computer software industry.²

The lawsuit, filed late Tuesday in the U.S. District Court in Salt Lake City, echoes many of the charges made by the U.S. Department of Justice in its 1994 antitrust complaint against Microsoft, including violations of the Sherman Act. In the complaint, Caldera states that Microsoft¹s anti competitive conduct includes unfair pricing practices and license agreements, as well as false statements and ³vaporware² announcements intended to dissuade consumers from purchasing products in competition with Microsoft¹s MS-DOS® software.

³Unless restrained by order of this court, Microsoft will permanently destroy competition in the DOS Market in the microcomputer software industry, and Caldera will be artificially and illegally prevented from realizing the full financial potential of the DOS Business,² the complaint says. Caldera, which designs, develops and markets system software products, today acquired the DR DOS® operating system and DR DOS-related assets, including this claim, from Novell®, Inc. Raymond J. Noorda, former chief executive officer of Novell, Inc., is the majority owner of Caldera.

In 1991, while Mr. Noorda was CEO of Novell, that company purchased Digital Research Inc.® (DRI), developers of the DR DOS software technologies. According to the lawsuit, Microsoft¹s practices ³have had the effect of excluding competitors [including DR DOS] from the DOS Market, a market in which Microsoft has monopoly power.² The lawsuit continues, ³as a direct and proximate result of [Microsoft¹s] predatory acts and practices, the DR DOS business which Caldera has acquired is being and will continue to be immediately and irreparably injured through.. the loss of profits ... sales ... market presence ... [and] market share that might otherwise have been achieved in a freely competitive market,² as well as ³the substantial reduction in the value of the DR DOS business assets.²

Caldera¹s lawsuit states, ³As outlined in the Justice Department¹s complaint, through various unfair and predatory acts, Microsoft has willfully maintained a monopoly of the market for MS-DOS operating systems software and functionally equivalent operating system software.²

According to the Justice Department complaint, ³Microsoft¹s exclusionary contracting practices have had the effect of excluding competitors on a basis other than competition on the merits and have thereby allowed Microsoft illegally to perpetuate its monopoly in the PC operating system market. Through the unlawful acts and practices described ... [in the antitrust action], Microsoft has harmed competition, consumers and innovation...²

Microsoft settled the U.S. government¹s charges against it by signing a consent decree in 1994. In the consent decree, Microsoft neither admitted nor denied guilt, but did agree to end certain practices, including so-called per-processor license agreements, certain multi-year license agreements and highly restrictive confidentiality agreements with software developers who create programs to work with MS-DOS and Windows.

Stephen D. Susman, of Susman Godfrey in Houston, one of the law firms representing Caldera, said, ³It is my belief, from reading the government¹s antitrust complaint against Microsoft, that it recognized the need to open the market to Microsoft competitors.²

Mr. Susman added, ³It is our intention to finish the job the Justice Department left unfinished when it settled its antitrust complaint through a consent decree.²

Microsoft¹s ³conduct has had a direct, substantial and adverse effect on competition by raising barriers to entry to competing DOS Software, foreclosing competition with Microsoft on the basis of price and performance, and stifling innovation,² the complaint says. ³Buyers of PC¹s and software have thus been forced to pay higher prices for less innovative, inferior products.²

Caldera¹s lawsuit, in addition to asking for treble damages, pursuant to the Clayton Act, seeks permanent injunctive relief :

  • ³Requiring that defendant Microsoft hereinafter refrain from the use of per-processor licenses on MS-DOS or any other operating system software that is competitive with, or an intended replacement for, DOS Software, including Windows 95 and Windows NT.²

  • ³Requiring that defendant Microsoft hereinafter refrain from licensing practices and pricing policies which have the purpose and effect of causing exclusive dealing.²

  • ³Requiring Microsoft, for a period of ten years, to disclose to Caldera all APIs [programming instructions] for any operating system it produces, as well as any modifications, enhancements, updates, or new versions of such operating systems at the time that such products are released for beta testing.²

  • ³Prohibiting Microsoft from including code in any software products that has the sole or primary purpose of creating real or perceived incompatibility between Microsoft¹s products and Caldera¹s products.²

The lawsuit explains that, ³In September, 1994, as a result of Microsoft¹s predatory and anti-competitive conduct ... Novell announced that it would cease the marketing and development of DR DOS.²

Mr. Noorda¹s long-term interest in nurturing competitive alternatives in the software industry fit closely with the desires of Caldera¹s chief executive, Bryan Sparks, to pursue the DR DOS business and the legal action against Microsoft to help open the way for Caldera and other companies to compete against the software giant.

Mr. Noorda said that competition is necessary for the growth of the market. He added, ³This lawsuit is about injury to competition. In my opinion, the antitrust decree was too little too late. It is my belief that if Caldera is successful, the entire computer industry -- not just Caldera -- will benefit.² Mr. Sparks said, ³The industry demands an open marketplace. It¹s simply free enterprise. No single organization should have absolute power over the free market process.

³Caldera¹s business philosophy,² Mr. Sparks continued, ³is to dramatically level the technology playing field, giving independent developers open access to system software technologies.² The Caldera complaint continues, ³... By the mid-1980s, MS-DOS had become entrenched as the standard in the DOS Market .... Not surprisingly, in view of Microsoft¹s monopoly power and the absence of competition, the price of MS-DOS in the OEM [original equipment manufacturers] channel escalated from $2-5 per copy in the 1981-1982 period to $25-$28 per copy by 1988. ³At the same time, for much of the 1980s, Microsoft did almost nothing to improve MS-DOS ... Microsoft¹s inaction was remarkable given that improvements in hardware technology and applications software had created a demand among PC users for an enhanced operating system,² the lawsuit continues.

As these demands escalated, the suit explains, ³a number of OEMs approached DRI and requested that it develop a version of DOS that would fill the gaps in functionality that plagued MS-DOS. ... Accordingly, in 1987 DRI began planning for a new version of DOS, to be called DR DOS. ³The result of DRI's initial development effort was a product designated as DR DOS 3.31, introduced on May 28, 1988. DR DOS 3.31 was followed quickly by enhanced versions of the product. Thus DR DOS 5.0, introduced in May 1990, and DR DOS 6.0, introduced in September 1991, were significantly superior to then-existing versions MS-DOS in many areas.²

The Caldera suit continues, ³Industry experts responded enthusiastically to DR DOS. DR DOS 5.0 received several awards including the 1990 BYTE Award of Distinction and Finalist in the 1990 PC Magazine Award for Technical Excellence. DR DOS 6.0 similarly received a number of industry awards, including the 1991 BYTE Award of Excellence, BEST of COMDEX (Fall 1991), and the Infoworld Buyers Assurance Seal.

³The technical superiority of DR DOS resulted in a rise in sales from about $15 million in fiscal year 1990 to $30 million in fiscal year 1991. Notwithstanding Microsoft¹s anticompetitive conduct, DR DOS sold well in the retail distribution channel, but due to Microsoft¹s exclusive dealings and other predatory conduct, it was largely locked out of the OEM channel.²

The suit goes on, ³Microsoft refused to tolerate this challenge to its monopoly position in the DOS Market.... DR DOS posed a particularly significant threat to Microsoft because it was compatible with applications written for MS-DOS; and ... Microsoft could not claim that DR DOS infringed upon any proprietary technology it owned.

³Microsoft's principal defense against any competitive threat, including DR DOS, was the wall of Œper processor¹ licenses that it had begun to construct in 1988, the year that DR DOS was first released to the market. Under per processor licenses, OEMs were required (must to agree)to pay Microsoft a royalty on every PC they sold regardless of whether it contains Microsoft¹s MS-DOS, some other software developer¹s DOS Software or no operating system software. This royalty system effectively imposed a tax in favor of Microsoft whenever an OEM sold a PC equipped with any operating system other than MS-DOS. Given the razor-thin margins on the sale of PC¹s, this royalty scheme caused OEMs to ship MS-DOS exclusively.

³Microsoft compounded this per processor licensing scheme by insisting on long-term licenses of MS-DOS from its OEM customers, contracts that tended to be longer than typical product cycles. Microsoft also obtained large Œtake or pay¹ minimum commitment licenses that also effectively foreclosed the ability of competitors such as Novell to sell competing DOS Software products to OEMs, and engaged in other licensing practices that had the effect of coercing OEMs to deal exclusively with Microsoft.²

³In the fall of 1991, Microsoft announced to the market that DR DOS would not be compatible with the next release of Windows known as Windows 3.1 .... The market perceived that it was critical for an operating system to support Windows; therefore Microsoft¹s statements that DR DOS could not do so substantially undercut Novell¹s efforts to penetrate the DOS Market.²

Microsoft reinforced this misleading impression of incompatibility between DR DOS and Windows 3.1, when, ³beginning in December, 1991, Microsoft released beta versions of Windows 3.1 containing code that generated error messages when Windows 3.1 ran on top of DR DOS rather than MS-DOS.

Microsoft created these error messages solely for the purpose of creating the impression that DR DOS would be incompatible with Windows in order to dissuade customers from purchasing DR DOS.² Caldera¹s lawsuit also states that Microsoft ³refused to provide a Windows 3.1 beta to Novell. Microsoft¹s refusal to do so was another predatory effort to ... hamper Novell¹s ability to offer a Windows 3.1-compatible release of DR DOS to the market.²

Microsoft officials made ³false public statements,² the suit also states, ³concerning future product features and anticipated shipment dates, known in the industry as Œvaporware,¹ timed to match announcements or releases of new versions of competing DOS Software, in particular DR DOS.² For instance, ³Microsoft responded to DR DOS 5.0 by announcing, in May 1990, that it intended to issue a new release of MS-DOS, to be called MS-DOS 5.0, that would mirror the technical advantages already present in DR DOS 5.0. Microsoft indicated that the new release of MS-DOS would be available within a few months. Industry experience indicates that it would have been near-impossible for Microsoft to develop and release a commercial version of its product matching the features of DR DOS 5.0 within that period. Nonetheless, Microsoft repeated this vaporware announcement throughout the summer and into the fall of 1990. In fact, MS-DOS 5.0 was not released until June 1991 and, when finally released, it did not offer the features Microsoft had promised.²

Microsoft unfairly used ³other pricing tactics,² Caldera¹s complaint charges. ³Microsoft also informed certain PC manufacturers that they could not obtain Windows or be given access to essential information, product support and service if they did not purchase and ship MS-DOS, to the exclusion of DR DOS.

³Similarly, Microsoft established a pricing structure for Windows that made it prohibitive to buy that product in the absence of MS-DOS.²

For example, certain Korean OEMs were informed that the price of Windows without MS-DOS would be double the price of Windows with MS-DOS.

³Microsoft's most devastating tactic, however, was its massive expansion of per processor licenses in the OEM channel. Following the announcement of Novell¹s acquisition of DRI, Microsoft substantially stepped up its efforts to coerce OEMs to enter into per-processor licenses or comparably exclusionary MS-DOS licenses. Thereafter, Novell¹s sales force found the OEM channel virtually impenetrable... thwarted in account by account by Microsoft¹s per-processor license wall.²

³The combined effect of Microsoft¹s anticompetitive practices on DR DOS was devastating. DR DOS sales plummeted during fiscal year 1992, totaling $15.5 million in the first quarter, $13.7 million in the second quarter, $6.9 million in the third quarter, and $1.4 million in the fourth quarter (which ended October 31, 1992).

³Microsoft continued with its predatory practices throughout 1992 and up to the present day. Microsoft has employed another tactic for locking OEMs exclusively to MS-DOS, namely, Œcliff pricing,¹ through which a commercially reasonable price is provided to OEMs if and only if they commit to obtain all of their requirements for operating system software from Microsoft. ³Although various governmental agencies, including the United States Department of Justice, have sought to bar certain of Microsoft's predatory practices such as the per-processor license, Microsoft has been permitted to employ its Œcliff pricing¹ practice with impunity.² Caldera intends ³to reintroduce the full line of DR DOS products to the market and to offer additional product features,² the company said in its complaint.

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Caldera designs, develops and markets to consumers and businesses a line of full-featured, economical system software as alternatives to such products as Microsoft¹s Windows NT®, Sun Solaris® and SCO UNIX®. It uses its own technological and marketing resources to leverage technologies ‹ including the Linux operating system ‹ created by independent developers worldwide. Caldera¹s web site is at http://www.caldera.com.

PRESS CONTACT:

Caldera, Inc.

Lyle Ball

Tel: (801) 426-5001x305

Fax: (801) 426-6166

lyle@lineo.com