Stephen D. Susman
Charles R. Eskridge III
Harry P. Susman
James T. Southwick
SUSMAN GODFREY L.L.P
1000 Louisiana, Suite 5100
Houston, Texas 77002-5096
Telephone: (713) 651-9366
Ralph H. Palumbo
Matthew R. Harris
Lynn M. Engel
Philip S. McCune
Lawrence C. Locker
SUMMIT LAW GROUP PLLC
1505 Westlake Avenue N., Suite 300
Seattle, Washington 98109-3050
Telephone: (206) 281-9881
Parker C. Folse III
Timothy K. Borchers
SUSMAN GODFREY L.L.P.
1201 Third Avenue, Suite 3090
Seattle, Washington 98101
Telephone: (206) 516-3880
Max D. Wheeler (A3439)
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
IN THE UNITED STATES DISTRICT COURT
DISTRICT OF UTAH, CENTRAL DIVISION
Case No. 2:96CV 0645B
Judge Dee V. Benson
CALDERA, INC.'S MEMORANDUM IN OPPOSITION TO DEFENDANT'S MOTION FOR PARTIAL SUMMARY JUDGMENT ON PLAINTIFF'S "TECHNOLOGICAL TYING" CLAIM
TABLE OF CONTENTS
I. INTRODUCTION *
II. RESPONSE TO MICROSOFT'S "BACKGROUND" STATEMENT *
III. RESPONSE TO MICROSOFT'S "STATEMENT OF UNDISPUTED FACTS" *
IV. ADDITIONAL STATEMENT OF MATERIAL FACTS *
A. Separate Consumer Demand for Two Products: DOS and Windows. *
B. Windows 95 Is Nothing More Than Windows 4.x and MS-DOS 7.x Packaged Together and Sold as a Single Product. *
C. Microsoft's Internal Documents Prove That MS-DOS 7.x and Windows 4.x Are Separate Products and There Was No Technical Reason to Package Them as a Single Product. *
1. MS-DOS 7.x and Windows 4.x Were Developed as Separate Products. *
2. Microsoft Packaged Windows and MS-DOS Together to Eliminate DR DOS and Novell as Threats to Its Desktop Operating System Monopoly. *
3. Microsoft's Predatory Acts Caused Novell to Discontinue Development and Marketing of DR DOS. *
D. Microsoft's Engineers Admit the Falsity of Microsoft's Claim That the Windows 95 package Is an "Integrated" Operating System. *
E. Consumer Demand Would Have Existed for Separate DOS and Windows 4 Products. *
V. ARGUMENT *
A. Windows 95 Is an Illegal Tie. *
1. Two Products: Separate Consumer Demand Test Governs. *
a. Jefferson Parish and Eastman Kodak: Consumer demand test. *
b. Multistate Legal Services: Product improvement does not make two products one for tying purposes. *
2. "Technological Tying" Jurisprudence Is Inapplicable Here. *
a. "Technological tying" cases involve "compatibility tying." *
b. Tying of inseparable products. *
c. New product rationale. *
d. Separate consumer demand for GUI and DOS products exists. *
B. The D.C. Circuit's Erroneous Dicta. *
1. The D.C. Circuit's Opinion Is Wrong. *
a. The D.C. Circuit's analysis has previously been rejected by the Supreme Court and the Tenth Circuit. *
b. Even the authority cited by the D.C. Circuit does not support its position. *
c. The cornerstone of the D.C. Circuit's opinion is a doubt about the institutional competence of judges to decide matters involving the software industry and product design. *
d. The D.C. Circuit opinion is entirely dicta. *
e. The D.C. Circuit Had No Factual Record Before It, Especially Regarding the "Integration" of Windows and MS-DOS, an Issue Not Even Litigated by the Parties. *
2. Even Under D.C. Circuit's Standard, Caldera Is Entitled to a Jury Trial. *
C. Caldera Has Standing to Bring Its Section 1 Claim. *
1. Caldera Has Standing as an Actual Competitor. *
2. Caldera Has Standing as a Potential Competitor. *
a. Ability to finance. *
b. Affirmative action. *
c. Background and experience. *
D. Caldera's Section 2 Claim. *
For ten years‹from 1985 to 1995‹Microsoft sold MS-DOS and Windows as separate products. During this time period, Microsoft released seven successive versions of MS-DOS and five successive versions of Windows. The last of these separately marketed products, MS-DOS 6.22 and Windows 3.11, were released in 1993 and 1994. Although Microsoft did not admit it publicly‹and denies it to this day‹Microsoft released upgraded MS-DOS and Windows versions again in 1995. Microsoft upgraded MS-DOS 6.22 to MS-DOS 7.0 and it upgraded Windows 3.11 to Windows 4.0. Instead of selling them separately, though, Microsoft packaged them together in a single box, labeled the package Windows 95, and presented it to the world as a brand new operating system‹a system so "advanced" that it did not need DOS anymore. See Exhibit 404 to Consolidated Statement of Facts.
The truth is much different. As Caldera's experts explain and as Microsoft's internal documents reveal, the Windows 95 package is simply a naked tie of updated versions of MS-DOS and Windows:
Microsoft is intent on convincing this Court and the public that this is not true, that the Windows 95 package is "a complete, integrated protected-mode operating system that does not require or use a separate version of MS-DOS." (Exhibit 404 to Consolidated Statement of Facts), and that the supposed integration resulted in great benefits to users. Microsoft wants this Court and the public to believe that the Windows 95 package is not an upgraded MS-DOS tied to upgraded Windows. To create this illusion, Microsoft simply hid MS-DOS 7 behind the screen of blue sky and white clouds displayed during the now-familiar Windows 95 startup process.
Yet Caldera's experts have demonstrated that, in fact, the Windows 95 package consists of two separate products, and the link between them is no tighter, no more complex and no stronger than it was between the previous versions of MS-DOS and Windows. See Expert Report of Lee Hollaar ("Hollaar Report") at 15-26, Record Support, v. 6 to Consolidated Statement of Facts; see also Deposition of Phillip Barrett ("Barrett Dep.") at 60-61, Record Support, v. 1 to Consolidated Statement of Facts (Microsoft Windows developer: the Windows 95 package is MS-DOS and Windows tied together with "baling wire and bubble gum"). MS-DOS and Windows are separate products and there is separate consumer demand for them‹yet Microsoft decided it would not permit the purchase of one without the other. In short, notwithstanding Microsoft's characterization of Caldera's Windows 95 claim, it is a straightforward Section 1 tying claim.
Microsoft undertook the tie in an effort to foreclose competition in the DOS market. At the time Microsoft made the Windows 95 packaging decision, Microsoft had monopolies in the DOS and Windows markets. For years, however, Microsoft had viewed DRI's DR DOS as a significant threat to its DOS monopoly. When Novell, with its financial and marketing strength, announced its merger with DRI, Microsoft reacted strongly:
Novell is after the desktop . . . . This is perhaps our biggest threat. We must respond in a strong way by making Chicago a complete Windows operating system, from boot-up to shut-down. There will be no place or need on a Chicago machine for DR DOS (or any DOS).
Exhibit 309 to Consolidated Statement of Facts (emphasis added).
Make it so there is no reason to try DR DOS to get Windows . . . . We need to slaughter Novell before they get stronger.
Exhibit 175 to Consolidated Statement of Facts (emphasis added).
The packaging of MS-DOS and Windows as a single product was not done for any technical reasons or because it benefited users. Rather, the combination of MS-DOS and Windows was a marketing decision, designed to shove DR DOS out of the DOS market. See, e.g., Deposition of Ralph Lipe ("Lipe Dep.") at 80, Record Support, v. 1 to Consolidated Statement of Facts; Deposition of Paul Maritz ("Maritz Dep.") at 18-19, Record Support, v. 2 to Consolidated Statement of Facts. Microsoft's tie of MS-DOS and Windows in the Windows 95 package constitutes a per se Section 1 violation.
In an effort to avoid antitrust scrutiny of this conduct, Microsoft consistently mischaracterizes Caldera's claim and makes two diversionary arguments. In its opposition to Caldera's motion to amend the complaint and in its brief here, Microsoft repeatedly asserts that Caldera claims the Windows 95 package is nothing more than MS-DOS 6 packaged together with Windows 3. See, e.g., Microsoft's Memorandum in Support of Its Motion for Partial Summary Judgment on Plaintiff's "Technological Tying" Claim ("Microsoft's Tech. Tying Memo.") at 9, 15, 17 & 18. Microsoft then argues it is so obvious that the Windows 95 package is an improvement over MS-DOS 6 plus Windows 3, that Caldera's claim is patently false. Microsoft couples this argument with its contention that the new features and functionalities available in the Windows 95 package were a direct result of the "integration" of MS-DOS and Windows, and thus the "integration" is not subject to scrutiny. See id. at 17-18. This is wrong for several reasons. Caldera has never alleged that the Windows 95 package is nothing more than MS-DOS 6 plus Windows 3. Rather, Caldera offers proof that both products were upgraded‹just as they had been upgraded time and again during the prior ten years‹and then the two separate products were packaged together. Windows 95 is nothing more than MS-DOS 7 plus Windows 4. That tie is the tie Caldera challenges, not the straw-man tie Microsoft constructs in its brief. Equally important, the new features and functionality in Windows 95 that Microsoft identifies result from the individual upgrades to MS-DOS and Windows, not from packaging the two products together. This point is important: the record demonstrates, and Caldera will prove at trial, that none of the improvements in the Windows 95 package required‹or even resulted from‹the MS-DOS/Windows packaging tie. See, e.g., Hollaar Report at 23-26, Record Support, v. 6 to Consolidated Statement of Facts; see also Lipe Dep. at 113-14, Record Support, v. 1 to Consolidated Statement of Facts.
Microsoft also contends Caldera's tying claim should be treated differently than all other tying claims. Under well-settled law, a tying claim requires a plaintiff to show: (1) the defendant actually tied two products together; (2) the defendant had appreciable economic power in the tying market; and (3) the tie affected a substantial volume of commerce. See Eastman Kodak Co. v. Image Technical Services, Inc., 504 U.S. 451, 461 (1992). Once all three elements are proven, the plaintiff has established a per se violation of the Sherman Act. Rather than explain how Caldera's claim fails under this established framework, Microsoft offers only the repeated assertion that courts have made it impossible to bring what Microsoft calls "technological tying" claims. See, e.g., Microsoft's Tech. Tying Memo. at 9-15.
Microsoft's analysis is premised on its mischaracterization of Caldera's claim as something other than a straight-forward Section 1 tying claim. It is also premised on a skewed view of the law. Microsoft does not explain what types of claims constitute "technological tying" and thus merit immunity from antitrust scrutiny: Does this immunity attach every time computer software is involved? Does it apply only in highly technical industries? Only when the products are physically integrated? Or, perhaps whenever the defendant attempts to justify the tie by asserting technological benefits?
In fact, there are two relatively small categories of cases where courts have been hesitant to entertain tying claims. The first category involves tying claims where the tied products are integrated so tightly that separation is difficult, if not impossible. The recent D.C. Circuit opinion in the Consent Decree action is such a case. See United States v. Microsoft Corp., 147 F.3d 935 (D.C. Cir. 1998). The second category involves so-called "technological tying" or "compatibility tying" where the defendant stands accused of developing two products to be compatible only with each other, although sold separately. Almost all the so-called "technological tying" cases relied upon by Microsoft fall into this second category.
Caldera, however, makes neither of these claims. In contrast to the facts before the D.C. Circuit, the two products here‹MS-DOS 7 and Windows 4‹can easily be separated. See Hollaar Report at 20-23, Record Support, v. 6 to Consolidated Statement of Facts. And Caldera's claim does not depend on any changes Microsoft made to Windows 4 that may have rendered it incompatible with pre-existing versions of DR DOS. Rather, Caldera's claim is that Microsoft's refusal to offer consumers the choice to buy Windows 4 separate from MS-DOS 7 was an illegal tie, designed to take advantage of Microsoft's monopoly in the Windows market in order to eliminate competition in the DOS market. Caldera's tying claim does not raise questions of product design or innovation; it does not assert a "technological tying" claim. It challenges a packaging decision and is no different from numerous other claims that the United States Supreme Court and Tenth Circuit have upheld as unlawful ties.
Microsoft also tries to avoid scrutiny of its Windows 95 packaging decision by arguing that Caldera lacks standing to pursue the claim, because neither Caldera nor its predecessors sold a product identical to the tied product, i.e., MS-DOS 7. But tying law does not require a plaintiff to sell a product exactly identical to the tied product; rather, tying law requires that the plaintiff be a competitor in a properly defined product market for the tied product‹which Caldera's predecessors were. Although in September 1994 Novell decided to stop developing and actively marketing DR DOS, Novell continued to sell DR DOS. Moreover, Caldera continues to sell DR DOS today.
Microsoft argues, though, that it is undisputed Novell had no intention of becoming a competitor because it decided to "exit" the DOS market and therefore Caldera can not have standing as a potential competitor. Microsoft conveniently ignores the fact that its announced intention to tie MS-DOS with Windows in the Windows 95 package, before the tied products were actually released, is what forced Novell to surrender the DOS market to Microsoft. It would subvert the very purpose of the antitrust laws to allow a monopolist's successful threats of illegal conduct to immunize it from liability.
Starting as early as 1992, Microsoft threatened the DOS market with a product tie that would destroy competition. In late 1993 and early 1994, Microsoft flooded the market with statements that it would release Windows 95 by the end of 1994 and that Window 95 "would not need DOS to run." Novell took the threat seriously. In September 1994, believing that Microsoft would carry out its threat, Novell directed its resources and efforts elsewhere. And Microsoft did carry out its threat‹it implemented the product tie as promised, and the DOS market vanished behind a bitmap of blue sky and white clouds.
Microsoft presents an eleven-page "Background" that is largely unsupported by any proffer of evidence, or else simply points to specifics in its later "Statement of Undisputed Facts." See Microsoft's Tech. Tying Memo at ix-xx. To the extent this purported "Background" is argumentative and devoid of evidence, Caldera objects to it providing any basis for Microsoft's summary judgment motion. To the extent this "Background" cites to the "Statement of Undisputed Facts," Caldera responds to those numbered paragraphs below. To the extent that this "Background" contains any assertions of fact, Caldera denies each and every one, and will respond specifically to them if and when Microsoft complies with the local rules and sets forth the factual assertions in separate numbered paragraphs in an amended statement of undisputed material facts.
Caldera incorporates by reference here in its entirety its prior filed Consolidated Statement of Facts. Caldera responds to Microsoft's numbered paragraphs as follows:
Uhmm . . . denying DRI the VxD [Windows 3.1 virtual driver] smells of an antitrust lawsuit. You are not suppose to use your control of one market, in this case Windows, to influence another market, in this case DOS. err something like that.
. . . Microsoft's graphical operating system, Windows, runs on top of MS DOS, preserving customer investments in DOS applications and peripheral hardware.
. . . .
There are no foreseeable technological barriers to this approach: Microsoft is adding new technologies‹such as object-oriented user interface functions, file systems, programming environments, and distributed computing capabilities‹to Windows and DOS in this evolutionary manner.
Exhibit 103 (emphasis added).
Q. What about the relationship between DOS and Windows? Or to put it another way, is Windows ever going to incorporate DOS and become an operating system itself?
A. Today, Windows is an operating system. . . . So Windows is mostly an operating system, and it has been designed synergistically with DOS to run alongside DOS.
* * *
Q. But why not put the file system and other functions in Windows so that GUI users can have a single operating system?
A. Good question. There's a little bit more we can do, and we'll certainly be providing OEMs with an installation program that installs DOS and Windows as if they were one product. But not all hardware vendors want to sell Windows and not all end-users want to run Windows. And there is nothing we give up technically by offering Windows and DOS separately; any new features in DOS will be designed totally to make sense in the context of what is going on in Windows.
Engel Decl., Ex. 3 (emphasis added).
The news on the street continues to confirm the IBM and Novell announcements this week. DRDOS 6, Novell bundling, SLRP, and IBM reselling DRDOS are the words. Still no real data on the details.
. . . .
2. integrate Windows with DOS. Common install. Make it so that there is no reason to try DRDOS to get Windows. This is much more important than 1, given the OEM deals that Novell will try to do for DRDOS on the clone machines.
We must slow down Novell! As you said Bill, it has to be dramatic.
We need to slaughter Novell before they get stronger.
Exhibit 175 (emphasis added).
‹Reclaim market from Cloners
your proposal only half way addresses this. In a sense, you lock cloners out of the WIN4 market, but we only benefit from this if you increase the price of WIN4 to be that of WIN3 + DOS. Otherwise, we've destroyed the DOS market under WIN4, revenue-wise, so this is a phyrric victory.
Exhibit 113 (emphasis added).
So, DOS is still DOS. It runs on all x86 platforms. After we tune up DOS 5.0 and add new disk support (and flash memory card file systems, etc.), we can sell that as DOS 5.1, say. And we can sell DOS + EnhDOS as DOS 6.0. Or, we can sell EnhDOS + Win4 as Win4 [Windows 95]. These are strictly packaging issues, and our development approach does not dictate which one we pursue.
. . . .
If DOS 5.1 is sufficient on its own to deter cloners, then there is no reason we have to merge DOS and EnhDOS. If it is not sufficient, then we can easily merge the two.
Exhibit 117 (emphasis added).
Or, we can sell EnhDOS + Win4 as Win4 [Windows 95]. These are strictly packaging issues, and our development approach does not dictate which one we pursue.
SYSTEMS DIVISION QUARTERLY REPORT
. . . .
The kernel functions of "Chicago" (next major version of Windows & MS-DOS) are now functional, and the team is looking at a first developers release in late Q1¹CY93.
Exhibit 298 (emphasis added). A Microsoft presentation explicitly notes that "Chicago" would be "Windows and new MS-DOS packaged together." Exhibit 299 (emphasis added).
In the corporate market we should probably start to raise the profile of . . . Chicago‹we have to keep the focus on Windows as the way to go, and start to undermine Novell's story that DOS and Windows decision can be made entirely separately. Maybe we need a corporate Chicago tour later this year that under NDA shows how we are going to mate DOS and Windows and shows how Chicago technically cant work on DR-DOS.???
Exhibit 316 (emphasis added).
Chicago is the code name for the next major release of Windows from the Personal Systems Group.
. . . .
Competition in the operating system business is intense. There are a number of dire competitive threats which Chicago must address.
Novell is after the desktop. . . . We must respond in a strong way by making Chicago a complete Windows operating system, from boot-up to shut-down. There will be no place or need on a Chicago machine for DR-DOS (or any DOS).
. . . .
While Chicago is being developed as a single integrated Windows operating system, it's being designing and built so that 3 specific retail products can be packaged up and sold separately. Which products actually ship other than full Chicago is a marketing issue.
. . . .
Exhibit 309 (emphasis added).
Recently I discovered a document on my hard disk called "STRATEGY.DOC." It was written in June of '92 to communicate to the team and to the executives what the key elements of Windows 95 (it was Chicago then) were. Then we boiled it down to what we called the 10 Commandments of Windows 95. I thought, "This should be funny, reading what we thought two years ago that this product was going to be." As I read it, what struck me was, "Wow! We had really nailed it! We built that product!" So, before we had even gotten that deep into writing any of the code, we clearly understood what that product was and stayed focused on building it. In fact, we had articulated it so well that I was just blown away. We made the right choices. What seemed compelling in 1992 is just as compelling and exciting in 1994.
Exhibit 433 (emphasis added).
In the corporate market we should probably start to raise the profile of Chicago we have to keep the focus on Windows as the way to go, and start to undermine Novell's story that DOS and Windows decision can be made entirely separately. Maybe we need a corporate Chicago tour later this year that under NDA shows how we are going to mate DOS and Windows and shows how Chicago technically cant work on DR-DOS.???
Exhibit 316 (emphasis added).
MS-DOS 7.0‹code named "Chicago" internally at MICROSOFT‹will be out in a year. . . . Gates said DOS 7.0 will be "Windows for DOS and DOS itself."
Š some details about next year¹s DOS and Windows releases are beginning to emerge.
MS-DOS will continue to be improved Š says Brad Chase, general manager, MS-DOS. . . . In addition, he says, "We may put things in MS-DOS that will help Windows apps run faster."
Code-named Chicago, the next version of Windows will not need DOS in order to run.
Exhibit 364 (emphasis added).
Chicago will be a complete, integrated protect-mode operating system that does not require or use a separate version of MS-DOS, Š.
Exhibit 404 (emphasis added).
We met with the product manager of Chicago (upcoming new version of DOS and Windows) who indicated the product is still on schedule to ship later this calendar year.
Exhibit 421 (emphasis added)
Schedule and Packaging for Windows "Chicago"
Ship: 2H 1994
Exact packaging decision are not yet final
During last month we put a number of electronic information distribution networks in place to distribute Chicago information. The goal is to achieve near simultaneous distribution of Chicago information worldwide.
The material we're distributing consists of whitepapers, press releases, guides, speeches, powerpoint slides, and Q&As. The information we have sent out so far includes: [lengthly list of documents attached].
Exhibit 425. See Exhibit 426 & 429.
Due to the lock-out Microsoft has achieved in the OEM market and the imminent combining of DOS and Windows in Chicago no significant revenue can be expected from the OEM Channel.
Microsoft Corporation today announced that Windows 95 may not be available until August 1995. The company made this announcement based on its continued commitment to deliver a vigorously tested product of the highest quality.
Q. I think when you and I talked about it before, you described Windows 95 as DOS and Windows stuck together with baling wire and bubble gum?
A. That is a fair if colloquial representation of it, yes.
Q. And what do you mean by that?
A. That basically, yes, there is DOS on the underlying‹under the hood there is DOS. There is a form of DOS, a version of DOS that was‹and I don't know all of the details of what developed. I don't understand all they did there, but you can actually produce a bootable DOS diskette. There is still 16-bit code inside.
Q. And when you said they were tied together with baling wire and bubble gum, you were referring to the amount of integration between DOS and Windows in Windows 95?
. . . .
Barrett Dep. at 60-61, Record Support, v. 1 to Consolidated Statement of Facts (emphasis added).
There's still a certain number of people who buy today from us MS-DOS without Windows, as far as we can determine, but the number is getting smaller and smaller every month.
Kempin Dep. at 170, Record Support, v. 1 to Consolidated Statement of Facts.
A tying claim has three elements: (1) two separate products must be tied together; (2) the defendant must have "appreciable economic power" in the tying market; and (3) the tie must affect a "substantial volume of commerce" in the tied market. Eastman Kodak Co. v. Image Technical Services, Inc., 504 U.S. 451, 461 (1992). Although Microsoft asserts that "technological tying" cases always fail, it does not explain what element of a tying claim is always found lacking. Microsoft's evasiveness on this crucial point is understandable: both the Supreme Court and the Tenth Circuit have rejected the argument that product "integration" or functional improvement is a defense to a per se Section 1 tying offense.
The Supreme Court held in Jefferson Parish Hospital Dist. v. Hyde, 466 U.S. 2 (1984), and reiterated in Eastman Kodak, that something sold by the defendant as a single package or bundle actually consists of two or more products if there is consumer demand for each of the products separately (apart from the package) and there is sufficient consumer demand to make separate distribution economically efficient. See Jefferson Parrish, 466 U.S. at 21-22 (two products exist if there is "sufficient demand for the purchase of [the tied product] separate from [the tying product] to identify a distinct product market in which it is efficient to offer [the tied product] separately from [the tying product]"); Eastman Kodak, 504 U.S. at 462 (separate products exist when there is "sufficient consumer demand so that it is efficient for a firm to provide" the product separately). It is irrelevant that the two products might function better when joined together. See JeffersonParish, 466 U.S. at 18-19 (rejecting defendant's claim that it was "providing a functionally integrated package of services" instead of a tie).
The "consumer demand" test makes perfect sense in light of the conduct that the per se ban on tying is designed to prohibit. The antitrust law sensibly looks to consumer demand at the outset of any tying claim because offering consumers the option to buy two products together is not prohibited; forcing consumers to buy two products together is prohibited. As a result, tying law does not forbid a manufacturer from upgrading separate products or even forbid a manufacturer from selling the upgraded products together. Rather, tying law simply prohibits a manufacturer from eliminating a consumer's meaningful option to buy the products separately.
The Tenth Circuit has soundly rejected Microsoft's argument, explaining that the Supreme Court's consumer demand test is based on economics, not technology or product design. In Multistate Legal Studies, Inc. v. Harcourt Brace Jovanovich Legal & Professionals Pubs., Inc., 63 F.3d 1540 (10th Cir. 1995), the plaintiff alleged that the defendant created an illegal tie by "integrating" a specialized bar review course covering only the multistate portion of the exam with a more exhaustive course to form a single, comprehensive course. The district court found the new course constituted a single product, apparently concluding "that any effort to improve the full-service course by adding elements to it could not possibly constitute the bundling of a second product." Id. at 1547. The Tenth Circuit reversed, holding that the Supreme Court's "consumer demand" test was applicable even where there was a claim that integration brought improved functionality. Id. ("The Supreme Court has made clear that the test for determining whether two components are separate products turns not on their function, but on the nature of any consumer demand for them."). Because consumers wanted the option to buy the products from separate vendors, the Tenth Circuit concluded two products were involved. As the Tenth Circuit observed: "Product improvements may be the cause and/or effect of changes in consumer demand, but the nature of that demand is what counts." Id. at 1546 n.4.
The Tenth Circuit noted that claimed efficiencies of joint distribution could be relevant to the two-product inquiry‹i.e., there could be insufficient consumer demand to justify separate distribution‹but it explained that this inquiry is different from a product improvement defense, such as Microsoft urges here. More specifically, the court observed that product improvement claims are irrelevant to evaluation of a Section 1 tying claim. Id. at 1551 n.9 ("[A] product improvement motivation‹at least without something more, such as demonstrated efficiencies‹will not save an otherwise illegal tying arrangement under section 1. . . ."). The court did note that product improvement might be relevant under a Section 2 analysis, where concerns about interfering with product design decisions and chilling innovation might play a role. Id. The court nevertheless dismissed such concerns in the case before it: "Where . . . the claimed product improvement takes the form of a marketing change, rather than some complex technological integration of previously separate functions, our degree of deference to product designs is reduced." Id. at 1552 n.10. Likewise, even were this Court to review Caldera's claim under the stricter Section 2 rubric (i.e., no per se ban), it should reject Microsoft's request for summary judgment because Caldera has demonstrated that the combination of products in the Windows 95 package was "a marketing change, rather than some complex technological integration." See Statement of Additional Material Facts, above.
Microsoft may claim that Multistate Legal Services is not a "technological tie" case, and therefore does not control the issues here. Although Microsoft conspicuously makes no mention of Multistate Legal Services in its summary judgment motion before this Court, Microsoft was not so cavalier about the opinion in moving for summary judgment last fall in the on-going DOJ action. There, Microsoft struggled to distinguish Multistate Legal Services claiming it was not a "technological tying" case. See Defendant Microsoft Corporation's Memorandum in Support of Its Motion for Summary Judgment at 32, Engel Decl., Ex. 7. This attempted distinction‹should Microsoft offer it in this case‹raises the question of what constitutes a "technological tie" case, a question Microsoft never attempts to answer.
The answer is that a technological tie case is one where the alleged tie takes the form of product development such that two products are compatible only with each other and there are no available substitutes for the tying product. See 10 P. Areeda & H. Hovenkamp, Antitrust Law ¶ 1757a at 335. These cases are irrelevant to Caldera's claim. Of course, this class of cases is not the only type of case where courts have been reluctant to entertain tying claims; courts have also hesitated in rare cases where the two products are so tightly integrated that separation, particularly physical separation, is almost impossible. Microsoft slaps the "technological tie" label on the latter type of case in the hope that this Court will think these "separation difficulty" cases have some relevance to Caldera's claim. But Caldera's claim, which admittedly involves a technological product, raises no problematic issues of technological separation, since MS-DOS 7.x and Windows 4.x continue as separate programs inside the Windows 95 box.
Multistate Legal Services did not involve a high technology industry, but this fact does not rule out the possibility that it raised a "technological tying" claim. In so-called "technological tying" or "compatibility tying" cases, the plaintiff complains that the defendant had made technological advances to the "tying" product so that it became compatible only with the defendant's version of the "tied" product and no longer worked with the plaintiff's version of the tied product. For example, perhaps the preeminent "technological tying" case‹which did not involve a particularly "high tech" product‹arose from Kodak's introduction of the "110" instamatic photographic system. This new format worked only with Kodak's new cameras, film, and processing equipment. The Ninth Circuit rejected a tying challenge to this innovation:
As a general rule, therefore, we hold that the development and introduction of a system of technologically interrelated products is not sufficient alone to establish a per se unlawful tying arrangement even if new products are incompatible with the products then offered by the competition. . . . Any other conclusion would unjustifiably deter the development and introduction of those new technologies so essential to the continued progress of our economy.
Foremost Pro Color v. Eastman Kodak Co., 703 F.2d 534 (19
Foremost Pro Color v. Eastman Kodak Co., 703 F.2d 534 (19
83). Innovation indeed might be stifled if such a claim, without more, were permitted to trigger the per se ban on tying. In such a case, the plaintiff is unwilling (or unable due to lawful intellectual property rights) to upgrade its version of the tied product to become compatible with the defendant's new tying product. For example, the Foremost Pro Color plaintiff did not and could not make a camera that worked with the 110 system. Forcing Kodak to sell 110 film separately from the camera would have provided plaintiff with no relief. The only relief for such a plaintiff, therefore, would be to force the defendant to restore the tying product to its old, perhaps inferior, form.
The other "technological tying" cases fall into this same category, although in most of these cases the plaintiff was unwilling to make (although not prevented by intellectual property rights from making) a compatible tied product. See, e.g., ILC Peripherals Leasing Corp. v. IBM, 458 F. Supp. 423, 440-441 (N.D. Cal. 1978); Response of Carolina, Inc. v. Leasco Response, Inc., 537 F.2d 1307 (5th Cir. 1976). Although these courts noted the difficulty of evaluating product design and expressed fears about stifling innovation, they ultimately threw out the claims because the plaintiff could not show that the defendant coerced buyers to purchase both products together. See Telex Corp. v. IBM Corp., 367 F. Supp. 258, 347 (N.D. Okla. 1973), rev'd on other grounds, 510 F.2d 894 (10th Cir. 1975) (the bundle was "wholly optional" and "customers remain free to lease . . . from IBM, Telex, or whomsoever they choose"); Innovation Data Processing, Inc. v. IBM Corp., 585 F. Supp. 1470, 1475 (D.N.J. 1984) ("I conclude that here IBM customers are for the purposes of the Sherman and Clayton Acts free to take either [program] by itself and that on this basi[s] alone there is no illegal tying arrangement."); see also Response of Carolina, Inc. v. Leasco Response, Inc., 537 F.2d 1307 (5th Cir. 1976) (no tie of software program and hardware because "the decision of the franchisees to sign the hardware lease was completely voluntary on their part, motivated by business reasons, not by coercion on the part of Leasco"). In other words, the plaintiffs actually lost not because of some deferential standard of review but because the plaintiffs failed to prove a fundamental element of a tying claim: coercion.
Indeed, Microsoft would be correct to argue that Multistate Legal Services is not a "technological tying" case to the extent that term means "compatibility tying." But Caldera's claim is not a "technological tying" claim in that sense either. The plaintiff in Multistate Legal Services did not claim its review course had been rendered incompatible with defendant's tying product. Likewise, Caldera's claim does not rest on the fact Windows 4.x was not compatible with then-existing versions of DR DOS. Rather, Caldera objects to the fact that consumers could not buy Windows 4.x alone. The fundamental premise of Caldera's tying claim is that it would have, and could have, made a version of DR DOS compatible with Windows 4.x. Microsoft could have made all sorts of legitimate changes to Windows, so long as it offered consumers the option to buy the product separately from MS-DOS. As a result, the success of Caldera's claim will not chill Microsoft's ability or incentive to innovate, but it will chill Microsoft's ability to use tying as a means of destroying a competitor's incentive to match or exceed innovations to remain competitive.
There is a second category of cases where courts have been reluctant to entertain tying claims; these cases involve products that are so tightly integrated that separation is difficult. The primary example of such a case is the D.C. Circuit's opinion in the Consent Decree action, where the DOJ claimed that Microsoft had violated the 1994 Consent Decree. Although the DOJ was focused primarily on Microsoft's per processor licenses and minimum commitments practices in negotiating the Decree, a provision was inserted to prohibit Microsoft from conditioning the license of one "covered product" on the agreement to license any "other product." Yet, so-called "integrated" products were permitted. See Consolidated Statement of Facts ¶ 423. The DOJ claimed that Microsoft violated this provision by bundling Windows 95, a "covered product," with its Internet Explorer browser. Microsoft responded by arguing that this combination fell within the "integrated" product exception.
The D.C. Circuit found it hard to determine whether the Windows 95/Internet Explorer combination was an "integrated" product because Microsoft had intricately "knitted" together the software code for Windows 95 and Internet Explorer. Only four lines of code were unique to Internet Explorer and ostensibly neither product would work if separated. Id. at 951-952 & n.17. As a result, the D.C. Circuit felt compelled to endorse in dicta a broad definition of the word "integrated," which encompassed any product combination that created a "plausible claim" of consumer benefit, lest the court be forced to delve into the complexity of product design. In so ruling, the D.C. Circuit observed that its understanding of the word "integrated" in the Consent Decree was "consistent with tying law," although in the very next paragraph, the Court expressed doubt "[w]hether or not this is the appropriate test for antitrust law generally." Id. at 950.
Regardless of whether the D.C. Circuit's opinion is correct as a matter of antitrust law, the fundamental premise of the opinion is that antitrust law may apply a more lenient standard of review to tying claims involving inseparable products. In fact, in moving for summary judgment in the current DOJ case, Microsoft attempted to distinguish Jefferson Parish, Eastman Kodak, and Multistate Legal Services as cases that did not involve "physically integrated products." See Defendant Microsoft Corp.'s Reply in Support of its Motion for Summary Judgment at 5-6, Engel Decl., Ex. 6. In particular, Microsoft distinguished Multistate Legal Services on the ground that it did not involve inseparable products, like Windows 95 and Internet Explorer. See Defendant Microsoft Corporation's Memorandum in Support of its Motion for Summary Judgment at 21, Engel Decl., Ex. 7. ("Here, it is the exact same software that provides web browsing functionality [Internet Explorer] also provides critical functionality such as the new user interface in Windows 95.")
To the extent Microsoft intends for the label "technological tying" to apply to cases where separation of two constituent products is difficult, it must confront two problems: Caldera's claim does not raise separation problems, and contrary to Microsoft's characterization in the DOJ case, Multistate Legal Services rejected this exact argument.
First, in contrast to the Windows 95/Internet Explorer product combination, the product combination at issue here‹Windows and MS-DOS‹poses no technological separability problem. There is no shared software code between Windows 4.x and MS-DOS 7.x, and the two products not only can be easily separated but they work properly once separated. See Hollaar Report at 20-23, Record Support, v. 6 to Consolidated Statement of Facts. There are no issues of intermingled code here‹MS-DOS and Windows packaged as Windows 95 remain as separate products, easily separable. See Hollaar Report at 15-23, Record Support, v. 6 to Consolidated Statement of Facts. Although the D.C. Circuit may have felt a need to adopt a forgiving standard of review in interpreting the Consent Decree because it was difficult to separate Windows 95 and Internet Explorer, this Court is in a very different position.
Second, the plaintiff's claim in Multistate Legal Services raised the exact separation problem posed by the combination of Windows 95 and Internet Explorer. Unlike the D.C. Circuit, which dodged the problem by crafting a standard tantamount to judicial abdication, the Tenth Circuit adhered to Supreme Court case law and applied the consumer demand test. In Multistate Legal Services, the more exhaustive bar review course already contained a one-day multistate review course before being "integrated" with the three-day specialized multistate course. As a result, the plaintiff's claim potentially posed difficult questions of product overlap, definition, and separation. For example, if all the multistate review material were extracted from the exhaustive course, the exhaustive course would be degraded because it would no longer include a one-day multistate review course. The defendant seized on this difficulty, urging a special rule for cases involving what the defendant labeled "overlap markets." The Tenth Circuit rejected this effort to avoid traditional tying analysis in difficult cases through the use of fancy labels:
[W]e are not persuaded either that the "overlap markets" characterization does anything more than restate the problem, or that, if it does, the Supreme Court's Kodak/Jefferson Parish test is somehow less controlling in such cases than in any others.
Multistate Legal Studies, Inc. v. Harcourt Brace Jovanovich Legal & Professionals Pubs., Inc., 63 F.3d 1540, 1547 (10th Cir. 19
Multistate Legal Studies, Inc. v. Harcourt Brace Jovanovich Legal & Professionals Pubs., Inc., 63 F.3d 1540, 1547 (10th Cir. 19
95). The exact same logic applies to Microsoft's repeated invocation of the "technological tying" label.
Professor Areeda's treatise proposes a special test for tying cases involving "new product" design. See 10 P. Areeda & H. Hovenkamp, Antitrust law ¶¶ 1746 & 1746b. Both Microsoft and the D.C. Circuit cite this portion of the treatise. See Microsoft's Tech. Tying Memo. at 11; United States v. Microsoft Corp., 147 F.3d 935, 949 (D.C. Cir. 1998). To the extent Microsoft believes the Areeda treatise supports the application of a lenient standard of review to Caldera's claim, it is mistaken.
The treatise expressly advocates application of a special rule to cases where a manufacturer introduces a new product that consists "product bundles that others have not significantly marketed" or "integrate[s] previously unbundled inputs." 10 P. Areeda & H. Hovenkamp, Antitrust law ¶¶ 1746 & 1746b at 224, 225-26. Most important, the treatise notes that such new products might be exempt from tying scrutiny under the consumer demand test because there would be no pre-existing market in which to gauge consumer demand. Id., at 224 ("Thus they cannot be found a single product under the market practices test."). Nevertheless, the treatise proposes that such product combinations should be subject to tying scrutiny, but only through a very forgiving lens, focusing on whether the "newly bundled items operate better when bundled by the defendant." Id. In other words, the test is designed to strengthen tying law, albeit incrementally, by providing some review for product combinations that otherwise would be immune.
Whatever the merits of this novel test, it cannot possibly be applicable to Windows 95 because the GUI and DOS products had a long history of being bundled together by Microsoft before Windows 95 was ever introduced. It is relatively easy to determine that separate consumer demand exists for these two inputs by looking to the pre-existing market for the Windows 3.x and DOS bundle. Windows 95 is simply not the sort of "new product" combination envisioned by the Areeda treatise.
The question whether consumer demand exists for separate purchases of the allegedly tied products is an empirical inquiry that focuses on past and present conduct by consumers. Specifically, the inquiry turns on whether the products were sold separately in the past and whether the products are still sold separately. See Eastman Kodak, 504 U.S. at 462; Multistate Legal Services, supra, 63 F.3d at 1547. Courts acknowledge, however, that current demand for the products may be deceptive, for the monopolist's success at eliminating a separate product market through a tying arrangement should not be used to demonstrate that separate products do not exist. PSI Repair Services, Inc. v. Honeywell, Inc., 104 F.3d 811, 816-17 (6th Cir.) ("Honeywell's own actions have essentially limited the existence of a separate market for components. . . . Honeywell cannot point to its one component parts customer as evidence of a lack of a market for components, when it was Honeywell's own restrictive policy that assured the absence of a component market."), cert. denied, 520 U.S. 1265 (1997); Allen-Myland, Inc. v. International Business Machines Corp., 33 F.3d 194, 214 (3d Cir.), cert. denied, 513 U.S. 1066 (1994). In certain circumstances, courts may consider other factors such as whether there are separate charges for the components of the tied products, whether efficiencies are gained by combining the sale of the products, and whether the products are sold in fixed proportions.
Courts also look to whether competitors have sold the tied product separately as proof that separate demand exists. See, e.g., Thompson v. Metropolitan Multi-List, Inc., 934 F.2d 1566, 1575-76 (11th Cir. 1991) (existence of competitor who only offered tied product suggests separate products).
Prior to the introduction of Windows 95, it is undisputed that consumers bought DOS and Windows separately and from separate manufacturers. Microsoft sold MS-DOS and Windows as both a bundle and separate products for ten years before it tied them together in Windows 95. Some users bought MS-DOS, some users bought Windows, some users bought both‹and some users bought DR DOS or DR DOS and Windows. Even in the face of Microsoft's other anticompetitive practices, DR DOS achieved an 11.5 percent market share of the combined sales of MS-DOS and DR DOS. See Report of William Wecker ("Wecker Report") at Tab 4, Table 1. Although Caldera has not calculated the exact number of DR DOS purchasers who separately bought Windows from Microsoft, it is obvious that the vast majority of these customers bought some version of Windows 3.x to run with their DR DOS. The most persuasive evidence that DR DOS buyers were also separate purchasers of Windows 3.x comes from the AARD code episode: Microsoft inserted this error message precisely because it knew a substantial number of Windows 3.x users would have purchased the DR DOS operating system. See Caldera's Consolidated Response, Section V.D.
Perhaps the most persuasive evidence that separate demand exists for DOS and GUI products comes from the fact that Microsoft claims to continue to sell separate versions of Windows 3.1 and MS DOS 6.x. See Kempin Dep. at 170. While these sales may be relatively small and relate to largely obsolete products, they illustrate the persistence of separate consumer demand even after the introduction of Windows 95. See Exhibits 354, 358, 377, 384, 388 & 389. The fact that the separate sales are comparatively small cannot be used by Microsoft to prove insignificant consumer demand because Microsoft's tying in Windows 95 assured the absence of robust separate demand. In addition, Microsoft has every incentive to hide from consumers the possibility of unbundled purchases. See, e.g., PSI Repair Services, Inc., 104 F.3d at 816-17; Allen-Myland, Inc., 33 F.3d at 214 (fact that only a handful of computer upgrades were sold separately from installation services "does not prove that there was no separate market for installation services, particularly considering that IBM had every economic incentive to protect its [installation] revenues and avoid widely publicizing" the unbundled sales).
Interestingly, Microsoft's own sales figures for Windows 3.x and MS-DOS demonstrate that the products are not purchased in fixed proportions, which is further evidence that two products exist. In fiscal year 1994, Microsoft sold 31 million units of MS-DOS compared to 26 million units of Windows. See Exhibits 2 & 3. In fiscal year 1997, after the release of Windows 95, Microsoft sold over 1 million more copies of Windows 3.x than MS-DOS. See Exhibits 2 & 6.
Although the introduction of Windows 95 eventually destroyed the separate DOS and Windows markets, Microsoft's pre-release pricing strategy of Windows 95 betrays the fact it is merely a tie of two products. Well before the product was released, Microsoft had decided that the price of Windows 95 would reflect the total of its component parts‹Windows and MS-DOS. See Consolidated Statement of Facts ¶¶ 393-395.
Moreover, the question whether separate products exist is a proper subject for expert testimony. See, e.g., Multistate Legal Services, 63 F.3d at 1548; PSI, 104 F.3d at 816. Professor Kearl, Caldera's expert economist, submitted ample evidence in his two reports that Windows and DOS are separate products and sufficient consumer demand exists such that software manufacturers can and did produce the two products separately and efficiently. According to Dr. Kearl, these two products are: (1) graphical user interface products that run on Intel x86 or compatible CPUs; and (2) the operating systems, but not GUIs, that run on Intel x86 CPUs. Kearl Report at 3 & 27-30, Record Support, v. 6 to Consolidated Statement of Facts. Dr. Kearl points out that from the early 1980s, multiple software manufacturers produced and sold GUI products that were not part of any operating system. Rather, these GUI products were sold and used as applications programs for personal computers. Among the products that competed in the relevant GUI market, Dr. Kearl identifies the following products: VisiON, Quarterdeck's DesqView, Norton¹s Desktop, IBM¹s TopView, Gem Desktop, and Microsoft Windows. Id. at 27; see also Expert Rebuttal Report of James R. Kearl ("Kearl Rebuttal Report") at 10, Engel Decl, Ex. 9. During the same period, Dr. Kearl identifies an entirely different set of products that competed in the operating system market: OS/2, PC-UNIX, and three DOS products, PC-DOS, MS-DOS, and DR DOS. Kearl Report at 4. On this point Dr. Kearl is unambiguous: the markets for operating systems and GUIs were distinct and different. Although each market had a variety of competing products and manufacturers, by the early 1990s Microsoft had dominated the OS and GUI markets with MS-DOS and Windows, respectively.
Caldera's evidence establishes that separate consumer demand exists for GUI and DOS products. Those markets would continue to exist but for Microsoft's tying.
Microsoft relies extensively on one opinion: The D.C. Circuit's decision in United States v. Microsoft, 147 F.3d 935 (D.C. Cir. 1998). Although not binding on this Court and irrelevant for reasons explained above, see, supra, Section V.A.2.b. Caldera is compelled to scrutinize the D.C. Circuit¹s opinion in light of Microsoft's heavy reliance on the decision. The opinion should carry no persuasive authority because it is inconsistent with Supreme Court and Tenth Circuit precedent, is dicta, is based on a barren factual record, and is simply wrong.
Before criticizing the D.C. Circuit for failing to attend carefully to substantive antitrust principles, one should note, in fairness, that the court realized it was merely interpreting the Consent Decree and, as Microsoft recognizes, "the decree does not embody either the entirety of the Sherman Act or even all Œtying¹ law." Id. at 946. After the D.C. Circuit¹s opinion came down, however, Microsoft began singing a slightly different tune, seizing on the court¹s observation that its view was "consistent with tying law." Id. at 950. To the degree the D.C. Circuit's opinion does touch upon substantive and relevant issues of antitrust law, its approach has been rejected by both the Supreme Court and the Tenth Circuit.
The D.C. Circuit suggested that the consumer demand test should not be applied to some types of tying claims, without specifying which types of claims were exempt. Instead, the D.C. Circuit held that the question is "merely whether there is a plausible claim that [bundling] brings some advantage" and, if so, that ends the inquiry. 147 F.3d at 950. This standard is wrong in two ways. First, it makes improved product functionality an absolute defense to a per se Section 1 tying claim. Second, it abdicates judicial review, thereby permitting a monopolist to avoid per se liability by making any "plausible" claim of product improvement.
The Supreme Court has rejected the "improved product functionality" argument. In Jefferson Parish, the East Jefferson Parish Hospital forced patients who wanted to buy its operative services to buy also anesthesiology services from Parish Hospital's own doctors. The hospital claimed that "the package does not involve a tying arrangement at all"; rather it was "merely providing a functionally integrated package of services." Jefferson Parish Hospital Dist. v. Hyde, 466 U.S. 2, 18-19 (1984). The Supreme Court rejected the argument and applied the separate consumer demand test to find two products. As explained above, the Tenth Circuit has also confronted and rejected the argument that product improvement is a defense to a per se Section 1 tying claim. See Multistate Legal Studies, Inc. v. Harcourt Brace Jovanovich Legal & Professionals Pubs., Inc., 63 F.3d 1540, 1551 n.9 (10th Cir. 1995) ("product improvement . . . will not save an otherwise illegal tying arrangement under section 1").
As proof that its interpretation of the 1994 Consent Decree was generally "consistent" with antitrust law, the D.C. Circuit cited the Supreme Court's recent decision in Eastman Kodak, in which the Court applied the consumer demand test to a high-tech industry and found copier repair parts and repair service to be separate products. See Eastman Kodak Co. v. Image Technical Services, Inc., 504 U.S. 451 (1992). The D.C. Circuit offered the following statement to reconcile its understanding of the Consent Decree with the Supreme Court¹s case law: "[W]e doubt the Court would have subjected a self-repairing copier to the same analysis; i.e., the separate markets for products and service would not suggest that such an innovation was really a tie-in." 147 F.3d at 950. The point of this example was to illustrate that the consumer demand test should not be applied to products that are impracticable to separate, e.g., how could the self repair function be separated from the copier itself? Whether or not the Supreme Court would abandon the consumer demand test with an inseparable product, the D.C. Circuit¹s observation does not apply to Windows 95: Windows 4.x and MS-DOS 7.x can be easily separated, and consumers clearly saw MS-DOS and DR DOS as substitutes and demonstrated a strong desire to buy DOS separately from Windows. See Additional Statement of Material Facts ¶¶ 1-3.
In supposrt of its decision, the D.C. Circuit cited a few snippets of dicta from readily distinguishable pre-Jefferson Parish cases and quoted Professor Areeda's Antitrust Law treatise. Caldera has explained above that the supposed "technological tying" cases upon which Microsoft and the D.C. Circuit rely deal with a unique and inapposite aspect of tying law. See, supra, pgs. Section V.A.2.b. Moreover, those cases pre-date the Supreme Court¹s decision in Jefferson Parish in which it made clear that functional improvement is not a defense to a Section 1 tying claim. As Judge Jackson recently noted in rejecting Microsoft¹s motion for summary judgment in the current DOJ case, these cases surely do not compel a "more lenient standard than the one articulated by the Supreme Court." See United States v. Microsoft Corp., 1998 WL 614485 at *8-10 (D.D.C. 1998).
Although the Areeda treatise has not been revised since the D.C. Circuit's opinion was released, the most recent supplement was written after the District Court found that Windows 95 and Internet Explorer constituted an illegal tie, and the supplement endorses the District Court's opinion, which ironically was reversed by the D.C. Circuit based on its reading of the treatise. See 1998 Supplement, 10 P. Areeda & H. Hovenkamp, Antitrust Law ¶1741b, at 469, 467-469. Additionally, after the D.C. Circuit opinion was released, the author of the sections of the treatise cited by the D.C. Circuit (Professor Einer Elhauge of Harvard Law School) publicly criticized the D.C. Circuit for misapplying his standard. See Einer Elhauge, Microsoft Gets an Undeserved Break, New York Times, op-ed (June 29, 1998), Engel Decl., Ex. 10. The D.C. Circuit's hodgepodge of dicta, misquotes, and misapplications is a weak basis upon which to craft a broad immunity for so-called "technological tying" claims from the longstanding per se prohibition of all tying arrangements. See State Oil Co. v. Khan, 522 U.S. 3, 118 S. Ct. 275, 285 (1997) (in altering per se antitrust prohibitions, courts should not "lightly assume that economic realities underlying earlier decisions have changed") (quoting Business Electronics v. Sharp Electronic Corp., 485 U.S. 717, 731 (1988)).
The second part of the D.C. Circuit's standard is its almost complete deference to defendants who can postulate any "plausible" justification for an otherwise illegal tie. For unexplained reasons, the D.C. Circuit doubts the competence of judges to decide matters involving innovation and product design. This concern is unfounded.
For this proposition, the D.C. Circuit and Microsoft cite a handful of judicial decisions during the 1970s in which courts expressed doubts about their ability to evaluate technological changes in the computer industry. In fact, it appears the seeds of this judicial doubt were sown by a single decision in 1973, Telex Corp. v. IBM Corp., 367 F. Supp. 258, 347 (N.D. Okla. 1973), rev¹d on other grounds, 510 F.2d 894 (10th Cir. 1975). See Response of Carolina, Inc. v. Leasco Response, Inc., 537 F.2d 1307 (5th Cir. 1976) (citing Telex, 367 F. Supp. at 347); ICL Peripherals Leasing Corp. v. IBM, 458 F. Supp. 423, 440-441 (N.D. Cal. 1978) (citing Response of Carolina, 537 F.2d 1307); United States v. Microsoft, 147 F.3d 935, 950 (D.C. Cir. 1998) (citing Response of Carolina, 537 F.2d 1037 and ICL Peripherals, 458 F. Supp 423).
As Judge Wald noted in her concurrence/dissent from the D.C. Circuit opinion, the "post Jefferson-Parish trend is to apply [traditional tying law] even in the technological realm." United States v. Microsoft, 147 F.3d 935, 960 (D.C. Cir. 1998) (Wald, J. concurring and dissenting) (citing Allen-Myland v. IBM Corp., 33 F.3d 194, 200-16 (3d Cir. 1994) (reversing judgment for defendant on alleged tie of large-scale mainframe computers and labor to install upgrades to mainframes)); Service & Training, Inc. v. Data Gen. Corp., 963 F.2d 680, 683-85 (4th Cir. 1992) (reversing grant of summary judgment to defendant on claim of tie between ADEX and repair services); Digidyne Corp. v. Data General Corp., 734 F.2d 1336, 1339 (9th Cir. 1984) (holding tie of NOVA computer system to NOVA operating system unlawful); Data General v. Grumman Systems Support, 36 F.3d 1147, 1178-81 (1st Cir. 1994) (alleged tie of ADEX software and services).
The explanation for this trend is simple. First, courts have become more accustomed to dealing with complicated technological issues, whether in adjudicating patent and copyright disputes or in determining the admissibility of scientific expert evidence. As well, courts have become accustomed to making decisions about product design, as they have done in numerous products liability, environmental, and engineering malpractice cases. Second, the Supreme Court has disapproved the creation of special tying rules for specific industries. See, e.g., Jefferson Parish, 466 U.S. at 25 n.42 ("In the past, we have refused to tolerate manifestly anticompetitive conduct simply because the health care industry is involved"). Third, courts have recognized that a deferential standard of review for alleged "product improvement" cases is simply unnecessary and dangerous. As one prophetic judge noted about his colleagues' reluctance to adjudicate tying claims involving IBM:
One court has even suggested that where there is a valid engineering dispute over a product's superiority the inquiry should end; the product is innovative and the design is legal. [citing ILC Peripherals]. That view, probably the result of a concern for the creativity that has characterized the history of computers, is overprotective. It ignores the possibility that a superior product might be used as a vehicle for tying sales of other products, and would pronounce other products superior even where the predominant evidence indicated they were not.
In re IBM Peripheral EDP Devices Antitrust Litig., 481 F. Supp. 965, 1003 (N.D. Cal.
In re IBM Peripheral EDP Devices Antitrust Litig., 481 F. Supp. 965, 1003 (N.D. Cal.
1979). These doubts about judicial competence, therefore, are likely merely the product of judicial unfamiliarity with computers during the 1970s and early 1980s. Finally, if courts shied away from potentially complex inquiries into the legalities of competition, antitrust jurisprudence would have died long ago, rather than evolving into the robust guarantor of fairness and economic health that it is today.
Only after the Circuit Court determined that the District Court had entered a procedurally improper preliminary injunction against Microsoft, did the Circuit Court proceed to opine‹absent a mature factual record‹about the meaning of the Consent Decree and, in the process, make its sweeping statements about tying law. United States v. Microsoft Corp., 147 F.3d 935, 944-945 (D.C. Cir. 1998)http://www.westdoc.com/find/default.asp?rs=CLWD1.1&vr=1.0&cite=147+F.3d+935. Thus, because the Circuit Court overturned the injunction on procedural grounds, its statements about tying are dicta and have no precedential weight. See, e.g., Lowry Federal Credit Union v. West, 882 F.2d 1543, 1546 n.7 (10th Cir. 1989) ("to the extent the . . . court¹s analysis goes beyond the issue it resolved, we conclude it is dicta and we reject it out of hand.").
Because the D.C. Circuit had no factual record before it, the court made a number of statements that are simply wrong as a factual matter, such as:
Windows 95 is integrated in the sense that the two functionalities‹DOS and graphical interface‹do not exist separately: the code that is required to produce one also produces the other.
United States v. Microsoft, Corp., 147 F.3d 935, 949 (D.C. Cir.
United States v. Microsoft, Corp., 147 F.3d 935, 949 (D.C. Cir.
Looking to the language of the 1994 Consent Decree (to which Novell and Caldera were not parties), the D.C. Circuit determined that inclusion of Windows 95 in the definition of "covered products" was an "explicit acceptance of Windows 95" as a permissible product:
The decree's evident embrace of Windows 95 as a permissible single product can be taken as manifesting the parties¹ agreement that it met this test.
As shown above, at the time the United States negotiated the Consent Decree with Microsoft in 1994, Microsoft was making false public statements that:
Chicago will be a complete, integrated protect-mode operating system that does not require or use a separate version of MS-DOS. . . .
Since Microsoft did not release Windows 95 until August 1995, the Justice Department could not independently evaluate Microsoft's characterization of what Windows 95 would be. It had no choice but to take Microsoft at its word. See Consolidated Statement of Facts ¶¶ 423 & Exhibit 442. To put it starkly, Microsoft's statements leading up to the 1994 Consent Decree¹s apparent acceptance of Windows 95 as a "permissible product" raise serious questions about Microsoft's candor in its negotiations with the United States.
Having put Windows 95 behind it with the 1994 Consent Decree, the Justice Department did not re-evaluate Windows 95 when it brought its case challenging the integration of Microsoft's Internet browser and Windows 95. Instead, the Justice Department continued to accept Microsoft's false assertion that:
Windows 95 was a next-generation operating system that began with parts of the existing MS-DOS and Windows 3.1 products but went far beyond them to become a fundamentally new system‹one that Microsoft has never claimed to be, and that it could not plausibly claim to be, simply a package of MS-DOS and Windows 3.1.
Reply Brief of Petitioner United States at 7, Engel Decl., Ex. 5.
Again, the United States did not base its statement on an expert¹s evaluation of Windows 95. Rather, the Justice Department relied on a paralegal's reading of a Microsoft Windows 95 manual. The paralegal states:
I have reviewed a Microsoft manual. . . . The manual provides an overview of the features, functionality, and components of the not-yet-released Windows 95. . . . it states, ŒWhen you first boot Windows 95 it is immediately apparent that the old world of Windows running on top of MS-DOS is no more. . . .¹
See Reply Brief of Petitioner United States at 7, citing Declaration of Mark Gaspar at ¶ 22, Engel Decl., Ex. 5 (emphasis added).
Thus, there were no facts before either the Justice Department or the D.C. Circuit as to the true nature of Windows 95‹only Microsoft's assertions. Significantly, even Microsoft¹s own engineers dispute these assertions. See Barrett Dep. at 60, Record Support, v. 1 to Consolidated Statement of Facts (MS-DOS and Windows are put together in Windows 95 with "bubble gum and bailing wire"). Indeed, after examining the Windows 95 source code and undertaking an extensive review of Windows 95 itself, Professor Hollaar has concluded:
[The D.C. Circuit's] statements about Windows 95 and the description of Windows 95 set forth in the opinion is factually incorrect. As I have stated, there are two separate products in Windows 95. They are just as separate as MS-DOS 6.x and Win 3.x were. Furthermore, the description of code "integration" set forth in the footnote in the opinion does not apply to Windows 95. Windows 95 does not commingle code between the DOS and Windows included as part of Windows 95. The DOS modules exist separately from the Windows modules. The relationship between DOS and Windows in Windows 95 is the same as it was before Windows 95. And no one can dispute that prior versions of DOS and Windows were separate products.
Hollaar Rebuttal Report at 13, Engel Decl., Ex. 1.
The dimly lit factual parchment upon which the D.C. Circuit wrote was fundamentally flawed. The D.C. Circuit¹s misinformed and incorrect statements do not provide a sound basis for making any determination as to whether Windows 95 is an unlawful tie. In contrast, the admissible evidence offered by Caldera in this case demonstrates that, in fact, Windows 95 is not a "fundamentally new system;" it is a package of MS-DOS and Windows designed to eliminate a competitor.
The D.C. Circuit did not have before it any of the admissible evidence Caldera has introduced with respect to the true nature of Windows 95. In light of that evidence, even under the D.C. Court's standard (which the Supreme Court has heard before and rejected), Caldera would be entitled to try its case to the jury. The D.C. Circuit defines "integrated product" as:
. . . a product that combines the functionalities (which may also be marketed separately and operated together) in a way that offers advantages unavailable if the functionalities are bought separately and combined by the purchaser. . . . If an OEM or user . . . could buy separate products and combine them himself to produce the "integrated product," then the integration looks like a sham.
147 F.3d at
147 F.3d at
Caldera's evidence proves that, but for Microsoft's refusal to offer the Windows 4.x and MS-DOS 7.x as separate products, OEMs could easily combine the products to produce Windows 95. See Statement of Additional Material Facts. Caldera has demonstrated that Windows 4.x and MS-DOS 7.x can be pulled apart, and both products operate independently of the other. See Hollaar Report at 15-26, Record Support, v. 6 to Consolidated Statement of Facts. Moreover, Caldera has demonstrated that Windows 4.x can be combined with an enhanced version of DR DOS to produce essentially the same features and functionality provided by Windows 95. Thus, under the D.C. Circuit's standard, Windows 95 is "a sham." As the D.C. Circuit states:
The concept of integration should exclude the case where the manufacturer has done nothing more than to metaphorically "bolt" two products together. . . .
Even if Windows 95 were determined to be an "integrated product" as defined by the D.C. Circuit (which it cannot be), Caldera would still be entitled to go to trial on its Windows 95 tying claim. Under the standard announced by the D.C. Circuit, the determination that a product is "integrated " does not end the tying inquiry. Microsoft would still have to demonstrate that that the integrated product is "better in some respect; there should be some technological value to integration." 147 F.3d 949. Microsoft has not even attempted to make such a showing. Although Microsoft claims that the features and functionalities of Windows 95 are improved, it has offered no evidence whatsoever that those improvements require or are related to the combination of MS-DOS and Windows. To the contrary, Microsoft¹s software engineers have testified that Windows 4.x and MS-DOS 7.x "could have been done as two separate products"; the only difference is that Windows 95 provides a common installation program, and common installation is not a technical benefit, nor does it require that the two products be packaged together. See Statement of Additional Material Facts.
Moreover, Caldera has offered admissible evidence that: (1) there are no features or functionalities in Windows 95 which require, or otherwise rely on, packaging MS-DOS and Windows as a single product; (2) OEMs and PC users could combine MS-DOS 7.x and Windows 4.x in the same way Microsoft has to produce Windows 95; (3) enhanced DR DOS and Windows 4.x could be combined to produce a product with essentially the same features and functionalities as Windows 95, and (4) there would even be user benefits from the DR DOS/Windows 4.x combination that do not exist in Windows 95. Microsoft has offered no facts to controvert Caldera¹s evidence. Even if it attempted to do so, Caldera¹s proffer of evidence creates a factual dispute that must be resolved by the jury.
Microsoft relies heavily on language in the D.C. Circuit opinion that it deems favorable. But Microsoft neglects to acknowledge that, taking into account the legal standard announced by its own Circuit, the District Court still permitted the United States to go to trial against Microsoft in the Windows 95/Internet Explorer case. Thus, if anything, that case supports the fact that Microsoft's motion for summary judgment must be denied.
A competitor has "clear standing to challenge the conduct of rival(s) that is illegal precisely because it tends to exclude rivals from the market. Predatory pricing is the classic example, along with illegal Œforeclosures¹ of the plaintiff from the market." 2 P. Areeda & H. Hovenkamp, Antitrust Law ¶ 373a at 275. Microsoft suggests, citing the Areeda treatise, that this Court should view Caldera's tying claim with skepticism. In fact, according to Areeda, Caldera falls squarely within the category of those competitors whose standing to bring suit under the antitrust laws is clear: "The rival supplier harmed by an illegal foreclosure clearly has standing. . . ." Id. ¶ 373d at 278. When "[t]he defendant illegally forecloses possible customers from patronizing plaintiff . . . [t]he plaintiff generally has standing." Id. ¶ 375 at 296. Here, Caldera's claim focuses on Microsoft's foreclosure of competition in the DOS market through its tying together in Windows 95 of two functionally distinct products, Windows 4.x and MS-DOS 7.x through this tie, Microsoft used its monopoly power in the Windows market to effectively preclude further competition in the DOS market. As a rival supplier of DOS, Caldera's standing to pursue its claim against Microsoft for illegally tying Windows and DOS is evident.
Microsoft disputes that Caldera qualifies as a "rival supplier" of the tied product. By labeling the product at issue "the real-mode DOS component of Windows 95," rather than DOS, and arguing that neither Caldera nor its predecessors ever produced a substitute product for "the real-mode DOS component of Windows 95," Microsoft obfuscates Caldera's claim that Microsoft effectively foreclosed access to the DOS market by tying its DOS product together with its functionally distinct Windows product to create the Windows 95 package. Microsoft next argues that neither Novell nor Caldera had the capacity or interest to compete in the market for "the real-mode DOS component of Windows 95," which shows, according to Microsoft, that Caldera was never an actual or potential competitor in the market for a "real-mode DOS component of Windows 95." Microsoft thus contends that Caldera lacks standing to pursue its technological tying claim.
Microsoft's transparent obfuscations, however, merely ignore the material facts that establish Caldera's standing as an actual competitor: (1) Microsoft developed, produced and sold Windows and DOS as separate products for ten years before it packaged the products together; (2) the DOS and Windows products included in Windows 95 were developed separately based on these prior versions of MS-DOS and Windows, see Statement of Additional Material Facts, above; (3) the DOS and GUI elements of Windows 95 remained functionally distinct, held together by no more than "baling wire and bubble gum," see, supra, Statement of Additional Material Facts; (4) any improvements in Windows 95 (as compared with the combination of the previous versions of DOS and Windows) were in no way dependent on the DOS and Windows components being packaged and sold together, but were instead, upgrades made to MS-DOS 6.22 and Windows 3.11, which were then packaged, marketed and sold together as Windows 95, see Response to Microsoft's Facts ¶ 6; and (5) prior to Microsoft's campaign to destroy its DOS competition by tying together its distinct DOS and Windows products, Caldera, through its predecessors, had managed to compete successfully in the DOS market for years, even in the face of Microsoft¹s other anticompetitive tactics.
Based on these facts, Caldera has standing as an actual competitor in the DOS market. Caldera suffered a concrete injury that is directly attributable to Microsoft's conduct‹Caldera's predecessor Novell was driven out of the market completely. Microsoft claims that Novell's decision to "exit" the DOS market evidences Novell's lack of intent or desire to compete in the DOS market. See Microsoft's Tech. Tying Memo. at 6. In fact, Novell decided to discontinue active development and marketing of DR-DOS expressly because of Microsoft's announced intention to tie the DOS and Windows in Windows 95. A Novell planning document from August 1994 outlines the thought process that went into the decision to cut marketing and development of DR-DOS:
Due to the lock-out Microsoft has achieved in the OEM market and the imminent combining of DOS and Windows in Chicago no significant revenue can be expected from the OEM channel.
Exhibit 430 (emphasis added). In making this decision, Novell effectively disabled a business for which it had paid $123 million three years before and in which it had invested millions in research, development, and marketing. Deposition of Ray Noorda ("Noorda Dep.") at 183-84, Record Support, v. 3 to Consolidated Staement of Facts. Caldera, through Novell, suffered an injury in fact that was directly caused by Microsoft's anticompetitive conduct. The law requires no more to confer antitrust standing.
Whether or not Caldera and its predecessors could have made a version of DR DOS that was perfectly compatible with Windows 4.x is a question of causation and damages, not standing. See Huron Valley Hospital, Inc. v. City of Pontiac, 666 F.2d 1029, 1033 (6th Cir. 1981) ("A plaintiff may . . . have standing to bring an unmeritorious claim."). The latter questions, however, depend on the highly disputed factual issue of whether DR-DOS would work well enough with the Windows 4.x to satisfy customers whose business Caldera claims to have lost, and thus should be left to the jury.
Furthermore, even if Microsoft was correct that standing as an actual competitor would have required that Caldera actually produce and market a virtual clone of Microsoft's "real-mode DOS component of Windows 95," Caldera would still have standing as a potential competitor. Courts are, in fact, reluctant to deny standing to potential competitors because otherwise "competition could be frustrated with impunity by established companies through the simple expedient of picking off and eliminating potential competition." Utah Gas Pipelines Corp. v. El Paso National Gas Co., 233 F. Supp. 955, 965 (D. Utah 1964).
According to Microsoft, Caldera must show: (1) it had the ability to finance the development of a Windows 95 compatible version of DR DOS; (2) took affirmative action to enter this market; and (3) had the relevant background and experience. See Microsoft¹s Tech. Tying Memo. at 7-8. As one court has put it, the question therefore is "[d]id [the plaintiff] have a substantial prospect of creating an enterprise to market its . . . product, or did it have only an expectancy or hope of entering into a new business which was never realized only because of its own shortcomings?" Laurie Visual Etudes, Inc. v. Chesebrough-Ponds, Inc., 473 F. Supp. 951, 956 (S.D.N.Y. 1979) (emphasis added). The evidence shows that Caldera and its predecessors had much more than an expectancy or hope of selling a version of DR DOS that was compatible with Windows 4.x. DRI and Novell had already developed and sold DR DOS versions that were compatible with prior versions of Windows. Novell was the largest seller of network operating system software. Even applying this test, Novell‹and therefore Caldera‹clearly has standing as a potential competitor.
While Microsoft makes much of Caldera's relatively modest finances, Microsoft overlooks the inconvenient fact that Novell had tremendous resources in 1994 and 1995. Surely, if a small company like Caldera can create a piece of software ("WinBolt") that allows DR DOS to run Windows 4.x, Novell could have done the same with little effort. As Caldera's technical expert has explained, it would have taken very little effort to enhance Novell DOS 7 so that it would work with Windows 4.x because Windows 4.x is merely an upgrade of Windows 3.x. See Hollaar Report, at 22, Record Support, v. 6 to Consolidated Statement of Facts ("[I]t is clear that if Caldera had decided to enhance DR DOS to work with Windows 4 at the time beta test versions of Windows 95 were first available, they would have had their enhanced DR DOS available at the time Windows 95 was released.").
Although Novell did not attempt to enter the narrow market of the DOS 7.x that was included in Windows 95, Novell and its predecessor, DRI, took numerous affirmative steps to enter the market for a Windows-compatible DOS. Novell could have produced an identical product with little effort, especially given its past history of making DR DOS compatible with Windows. This fact cannot be discounted in determining whether Novell would have taken such steps but for Microsoft's illegal tie. See Fine v. Barry & Enright Productions, 731 F.2d 1394, 1397 (9th Cir. 1984) (plaintiff challenging restrictions on game show contestants was found to have standing because he "made six attempts to compete in four years and has been successful on three occasions Fleer Corp. v. Topps Chewing Gum, Inc., 415 F. Supp. 176, 180 (E.D. Penn. 1976) ("It is significant, however, that there are alleged repeated attempts to enter over a number of years.").
Moreover, the plaintiff does not have to continue attempting to enter the tied market after it becomes apparent that such attempts are futile given the monopolist's illegal conduct. In other words, Novell did not have to keep developing and marketing DR DOS in the face of Microsoft's announced intention to destroy competition by tying. To do so would have been an exercise in futility. According to Novell's former CEO, Robert Frankenberg, Novell could have maintained DR DOS as a business only if it received a "miracle . . . like Microsoft deciding to get out of the business. . . . [or] more money than God." Frankenberg Dep. at 238, Record Support, v. 3 to Consolidated Statement of Facts. Significantly, Frankenberg never mentions that making DR DOS compatible with Windows 4.x was an obstacle to competing with Microsoft; the insurmountable obstacle was overcoming Microsoft's anti-competitive conduct. Forcing Novell to spend further resources on Novell DOS in order to have standing to bring its tying claim would be precisely the waste of resources that the antitrust laws are designed to prevent. As one court has noted:
We cannot find that [plaintiff's] steps toward entry were insubstantial if it is true that the taking of any further steps would have been a sheer waste of resources. It would be inconsistent with one purpose of the Clayton Act‹to protect the business interests of the victims of monopolistic practices to require an antitrust plaintiff to pay a courtroom entrance fee in the form of an expenditure of substantial resources in a clearly futile competitive gesture.
Fleer Corp. v. Topps Chewing Gum, Inc., 415 F. Supp. 176, 180 (E.D. Penn.
Fleer Corp. v. Topps Chewing Gum, Inc., 415 F. Supp. 176, 180 (E.D. Penn.
It is undisputed that Novell and its predecessor DRI had a wealth of background and experience in developing DR DOS. Indeed, from 1989 to 1993 Novell and DRI demonstrated a particular aptitude for making innovations in DR DOS which Microsoft struggled to match. See Exhibit 350. Microsoft's announced intention to tie MS-DOS with its GUI in Windows 95 ended this cycle of innovation.
In potential competitor cases, "it may be hard to say exactly where the line falls between an idea for entry into a business, insufficient to confer standing, and Œsignificant demonstrable steps,¹ sufficient for standing." In re Dual-Deck Video Cassette Recorder Antitrust Litig., 11 F.3d 1460, 1466 (9th Cir. 1993). Nevertheless, Caldera, through its predecessors DRI and Novell, clearly took "significant demonstrable steps" to enter the market for the DOS component of Windows 95. Thus, there is no question that Caldera has standing to bring its Windows 95 tying claim either as an actual competitor in the PC operating system market or as a potential competitor in the market for the DOS 7.x component of Windows 95.
Microsoft's motion is directed solely to Caldera's claims under Section 1 of the Sherman Act and Section 3 of the Clayton Act. This point is made explicitly in the preamble to the "Argument" Section of Microsoft's brief: "Microsoft is entitled to summary judgment dismissing Caldera's claim that the development and marketing of Windows 95 constitutes an illegal tie because Caldera cannot establish one or more essential elements of its claims. As a result, Caldera's claims under both Section 1 of the Sherman Act and Section 3 of the Clayton Act fail, regardless of whether Microsoft possesses monopoly power in any product or geographic market." Microsoft Tech. Tying Memo at 2. Microsoft makes no mention of Caldera's monopolization claim under Section 2 of the Sherman Act. However, based on statements in its recent motion for leave to file a "clarification" of its summary judgment motions, Microsoft apparently intends to take the position that the relevant standards under Sections 1 and 2 of the Sherman Act are the same, and therefore its arguments for summary judgment under Section 1 would necessarily dispose of the Section 2 claim.
Microsoft is wrong. The legal standards for judging whether the development, marketing and packaging of Windows 95 constitutes exclusionary conduct in aid of monopolization under Section 2 are different. The Section 2 standards apply irrespective of whether Windows 95 is a "tie" of two products under Section 1. Microsoft has made no attempt to discuss the Section 2 standards, much less explain why in applying them the Court should grant summary judgment. Any effort by Microsoft to do so for the first time in its reply brief, at a time when Caldera has no further opportunity to respond, would be improper.
The offense of monopolization under Section 2, of course, requires proof of monopoly power in a relevant market. At least for purposes of the pending motion, Microsoft expressly does not contest Caldera's ability to prove that element. Monopolization also requires proof that the defendant acquired or maintained that power by means that can be "fairly characterized as Œexclusionary¹ or Œanticompetitive¹ . . . or Œpredatory,¹ to use a word that scholars seem to favor." Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585, 602 (1985). In analyzing that question, the Supreme Court in Aspen Skiing underscored the importance of four factors:
In short, the Supreme Court has held that even where the defendant offers business justifications for its behavior‹even facially plausible justifications‹the courts must still closely scrutinize the evidence of the defendant's actual intent, the extent to which competition has been impaired, and whether the defendant could have served its legitimate business objectives through means that were less restrictive on competition.
The Aspen Skiing framework applies equally when the alleged exclusionary conduct takes the form of product development, marketing, or packaging. The so-called "technological tying" cases recognize a distinct Section 2 analysis, focusing on whether the defendant designed the product at issue for anti-competitive reasons. For example, the court in In re IBM Peripheral EDP Devices, 481 F. Supp. 965 (N.D. Cal. 1979), explained the analysis as follows:
If the design choice is unreasonably restrictive of competition, the monopolist's conduct violates the Sherman Act. This standard will allow the factfinder to consider the effects of design on competitors; the effects of the design on consumers; the degree to which the design was the product of desirable technological creativity; and the monopolist¹s intent, since a contemporaneous evaluation by the actor should be helpful to the factfinder in determining the effects of a technological change.
Likewise, the court in Innovation Data Processing v. IBM, 585 F. Supp. 1470 (D. N.J. 1984), granted summary judgment against the plaintiff's Section 1 tying claim in part because it found a single integrated product‹a ruling the court revisited after Jefferson Parish. See, supra, Section V.A.2.a. at n.8. But the court refused to grant summary judgment under "the general standards" of the Sherman Act because material issues of fact existed as to "IBM's intent, motive or purpose in linking the [products]" and "its practical effect both beneficial and detrimental." Id. at 1477. The Tenth Circuit clearly endorses a Section 2 analysis which focuses on the anti-competitive purpose and effect of the product change rather than merely whether the change constitutes a "tie." See Multistate Legal Studies v. Harcourt Brace Publ., 63 F. 3d 1540, 1551 (10th Cir. 1995) (In Section 2 analysis, "[b]oth the purpose and results of a product change, including customer's reception of the change, are relevant to whether a claimed product improvement is pro- or anti-competitive.").
Microsoft has made no effort to analyze the facts of this case as they relate to Windows 95 according to the framework set out in Aspen Skiing. Certainly, it is not enough to lean on the D.C. Circuit's opinion in United States v. Microsoft, because that opinion makes no effort to reconcile its interpretation of the Consent Decree with the Supreme Court's standards for monopolization under Section 2 of the Sherman Act. And, in fact, neither the D.C. Circuit's opinion nor the legal arguments made by Microsoft can be squared with Aspen Skiing. According to Microsoft, even though it is a monopolist, it is entitled to immunity under "the antitrust laws" (and Microsoft now claims that it means both Section 1 and Section 2) as long as it can make a plausible claim of technological benefit from the development and marketing of its product or service. If it can, then its actual intent in creating the product is "irrelevant," and it is equally irrelevant whether there were means available to it to produce the alleged benefits that were less restrictive of competition. See Microsoft Memo. at 14. It is simply not possible to square those legal assertions with Aspen Skiing.
Caldera is not obligated under Rule 56 to respond to a summary judgment argument that Microsoft has not made. Microsoft has not attempted to explain why it is entitled to summary judgment on Caldera's Windows 95 claim under Section 2 of the Sherman Act. As shown above, its arguments under Section 1 simply do not apply because the standards under the two statutes are different. Nevertheless, Caldera submits that the evidence discussed at the outset of this memorandum amply demonstrates that Microsoft's development of Windows 95 can be "fairly characterized as exclusionary" under binding Supreme Court precedent. Any attempt by Microsoft in its reply to foreclose Caldera from pursuing a Section 2 claim should be rejected.
DATED this _____ day of May, 1999.
SNOW, CHRISTENSEN & MARTINEAU
Stephen J. Hill
Ryan E. Tibbitts
Attorneys for Plaintiff, Caldera, Inc.
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