Dickson v. Microsoft Corp.

Page 193

309 F.3d 193

Mark H. DICKSON, Plaintiff-Appellant, and Carey D. Ebert, Trustee in Bankruptcy for Gravity, Inc., Trustee-Appellant, and 403 West Loop 820 N, Plaintiff, v. MICROSOFT CORPORATION; Compaq Computer Corporation; Dell Computer; Packard Bell Nec, Incorporated, Defendants-Appellees.

No. 01-2458.

United States Court of Appeals, Fourth Circuit.

Argued June 5, 2002.

Decided October 28, 2002.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

ARGUED:

Michael K. Kellogg, Kellogg, Huber, Hansen, Todd & Evans, P.L.L.C., Washington, D.C., for Appellants. David Bruce Tulchin, Sullivan & Cromwell, New York, New York; Paul M. Smith, Jenner & Block, L.L.C., Washington, D.C., for Appellees.

ON BRIEF:

Mark C. Hansen, Steven F. Benz, Scott K. Attaway, Kellogg, Huber, Hansen, Todd & Evans, P.L.L.C., Washington, D.C.; R. Stephen Berry, J. Daniel Leftwich, Gregory Baruch, Berry & Leftwich, Washington, D.C.; Nelson Roach, Nix, Patterson & Roach, Daingerfield, Texas, for Appellants. Daryl A. Libow, Joseph J. Matelis, Sullivan & Cromwell, New York, New York; Thomas W. Burt, Richard J. Wallis, Steven J. Aeschbacher, Microsoft Corporation, Redmond, Washington; Michael F. Brockmeyer, Piper, Marbury, Rudnick & Wolfe, L.L.P., Baltimore, Maryland; Charles B. Casper, Montgomery, McCracken, Walker & Rhoads, L.L.P., Philadelphia, Pennsylvania; Steve W. Berman, Hagens Berman, L.L.P., Seattle, Washington, for Appellee Microsoft. Susan R. Podolsky, Jenner & Block, L.L.C., Washington, D.C.; Jerold S. Solovy, Barbara S. Steiner, Jenner & Block, L.L.C., Chicago, Illinois; Samuel R. Miller, Folger, Levin & Kahn, L.L.P., San Francisco, California, for Appellee Dell; William D. Coston, Martin L. Saad, Venable, Baetjer, Howard & Civiletti, L.L.P., Washington, D.C., for Appellee Compaq; G. Brian Busey, Morrison & Foerster, L.L.P., McLean, Virginia; Penelope A. Preovolos, Morrison & Foerster, San Francisco, California, for Appellee Packard Bell.

Before WILLIAMS and GREGORY, Circuit Judges, and MICHAEL, JR., Senior United States District Judge for the Western District of Virginia, sitting by designation.

Affirmed by published opinion. Judge WILLIAMS wrote the majority opinion, in which Senior Judge MICHAEL joined. Judge GREGORY wrote a dissenting opinion.

OPINION

WILLIAMS, Circuit Judge.

Mark H. Dickson and Carey D. Ebert, trustee in bankruptcy for Gravity, Inc., (collectively, Gravity) appeal the district court's dismissal under Federal Rule of Civil Procedure 12(b)(6) of Gravity's consumer class action claims against Microsoft Corporation and three original equipment manufacturers (OEMs) — Compaq Computer Corporation (Compaq), Dell Computer Corporation (Dell), and PB Electronics, Inc. (PB) (collectively, the OEM Defendants) — in the United States District Court for the District of Maryland. For the reasons set forth below, we affirm.

I.

In February 1999, Gravity filed this action in the United States District Court for the District of Columbia, alleging a "hub-and-spoke" conspiracy between Microsoft and the OEM Defendants to restrain trade, in violation of § 1 of the Sherman Act, and a conspiracy to maintain Microsoft's alleged monopolies¹ in the sale of operating systems,² word processing, and spreadsheet software, in violation of § 2 of the Sherman Act.³ The proposed class action consists of two separate classes. The first class is composed of "United States purchasers, between October 20, 1993 and the present, of Microsoft Windows or MS DOS operating software... installed and sold with personal computers compatible with Intel x86/Pentium architecture purchased directly from Compaq, Dell, or [PB]." (J.A. at 103.) The second class is composed of "United States purchasers, between October 20, 1993 and the present, of Microsoft word processing software and/or Microsoft spreadsheet software installed and sold with personal computers compatible with Intel x86/Pentium architecture purchased directly from Compaq, Dell, or [PB]." (J.A. at 103.)

Gravity alleges that the OEM Defendants and Microsoft violated the Sherman Act by entering into licensing agreements with the following anticompetitive provisions: (1) a prohibition against removing icons, folders, or Start menu entries from the Windows desktop; (2) a prohibition against modifying the initial Windows boot sequence; (3) the integration of Internet Explorer (IE), Microsoft's Internet browser software, and other application software with Microsoft's operating software; and (4) the inclusion of long-term distribution contracts, exclusive dealing distribution arrangements, and per-processor license fees.⁴

In exchange for agreeing to these provisions, the OEM Defendants allegedly received various benefits, including discounts on software and "greater cooperation from Microsoft in product development." Gravity, Inc. v. Microsoft Corp., 127 F.Supp.2d 728, 732 n. 5 (D.Md.2001); see also United States v. Microsoft Corp., 84 F.Supp.2d 9, 42 (D.D.C.1999) (stating that Compaq and several other OEMs enjoyed "early access to Windows source code"). Gravity also alleges that the agreements benefitted the OEM Defendants by allowing them to sell more computer hardware than they would have sold if the relevant software markets were competitive and by ensuring that the OEM Defendants would not be undercut by rivals offering either comparable hardware with lower-priced software or comparable hardware without software.

Gravity claims that the restrictive licensing agreements were predicated, at least in part, on the perceived threat from emerging "middle-ware" platforms. Gravity's theory is that middleware platforms feasibly could replace most operating software functions by allowing developers to write programs interfacing with middleware rather than the operating system.⁵ United States v. Microsoft Corp., 253 F.3d 34, 74 (D.C.Cir.2001). The D.C. Circuit has explained the threat of middleware platforms to Microsoft's monopoly in the operating systems market as follows:

If a consumer could have access to the applications he desired — regardless of the operating system he uses — simply by installing a particular browser on his computer, then he would no longer feel compelled to select Windows in order to have access to those applications; he could select an operating system other than Windows based solely upon its quality and price. In other words, the market for operating systems would be competitive.

Id. at 60. Gravity also alleges that Microsoft has faced challenges from competing operating software, such as DR DOS.

The restraints on trade in the licensing agreements allegedly have denied the class members the choice of competitive software products and have resulted in supracompetitive prices for Microsoft's operating system and application software. Gravity does not allege any conspiracy between Microsoft and the OEM Defendants to set the resale price of the software. Instead, it claims that overcharges were passed on to the consumers by the OEM Defendants when the consumers purchased personal computers (PCs) from the OEM Defendants.

Microsoft and the OEM Defendants moved to dismiss the First Amended Complaint (FAC). While those motions were under submission, the Judicial Panel on Multidistrict Litigation transferred the action to the United States District Court for the District of Maryland, where it was coordinated with approximately sixty-four other antitrust actions against Microsoft. The other antitrust actions were consolidated into a single class action. Gravity's complaint was not consolidated with these actions because it was the only complaint alleging claims against OEMs as defendants. In re Microsoft Corp. Antitrust Litig., 127 F.Supp.2d 702, 704 & n. 2 (D.Md.2001).

In January 2001, the district court dismissed Gravity's FAC for failure to state a claim. Following this dismissal, Gravity moved for leave to file a Second Amended Complaint (SAC). In the SAC, Gravity alleged two separate vertical conspiracies between Dell and Microsoft and Compaq and Microsoft.⁶ Gravity did not name PB as a defendant.⁷ Gravity repeated its allegations of anticompetitive conduct and included a claim that Microsoft's licensing agreements "bundl[ed] or t[ied] the distribution of Microsoft's middleware, the Internet Explorer browser, with Microsoft's Windows operating software." (J.A. at 465.) The district court denied leave to file the SAC on the ground of futility, concluding that the SAC also failed to state a claim upon which relief could be granted.

On appeal, Gravity contends that both complaints allege proper claims under § 1 and § 2 of the Sherman Act. Gravity also argues that the district court erred in applying the indirect purchaser rule of Illinois Brick Co. v. Illinois, 431 U.S. 720, 97 S.Ct. 2061, 52 L.Ed.2d 707 (1977), to foreclose compensatory damages. We address each argument in turn.

II.

Before turning to our consideration of Gravity's claims of error, a brief overview of the public enforcement action for injunctive relief brought by the federal government and nineteen states against Microsoft in the United States District Court for the District of Columbia is warranted.⁸ See United States v. Microsoft Corp., 253 F.3d 34 (D.C.Cir.2001). In analyzing the § 2 claim against Microsoft, the D.C. Circuit upheld the district court's finding that Microsoft has monopoly power in the market for operating system software for Intelcompatible PCs with its Windows software, which has gained more than 95% market share. See id. at 51-58. It further affirmed the district court's finding that Microsoft had "engag[ed] in exclusionary [or anticompetitive] conduct `as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident'" for the purpose of maintaining its monopoly power in the operating systems market. Id. at 58. In detailing Microsoft's anti-competitive conduct, the D.C....