Tenth Circuit Affirms Microsoft's Antitrust Win Over Novell

Practical Law Legal Update 7-543-4985 (Approx. 5 pages)

Tenth Circuit Affirms Microsoft's Antitrust Win Over Novell

by Practical Law Antitrust

Background

This case arose out of Microsoft Corporation's business relationship with Novell, Inc., an independent software vendor (ISV). In the 1990s, Microsoft and Novell competed in the sale and development of computer software applications such as Microsoft Word and Novell's WordPerfect. In June 1994, as Microsoft developed its Intel-compatible Windows 95 system, it decided to share the intellectual property (IP) used in developing the software with ISVs, including Novell, for marketing purposes.

In October 1994, Microsoft reversed its course and notified ISVs that they should no longer rely on the previously-released IP and that it may not function correctly with Microsoft's Windows 95 system. Microsoft reasoned that by requiring ISVs to develop their own software independent of Microsoft IP, Microsoft's own products would gain a competitive advantage during the time it took the ISVs to develop their software.

Novell alleged that by withdrawing access to its IP, Microsoft:

Delayed Novell's software development by nine months.
Caused significant lost sales of Novell's software applications.

Novell initially charged Microsoft with violating Section 2 of the Sherman Act by monopolizing the market for software applications or office suite applications. However, that claim was time-barred by the statute of limitations. To circumvent the statute of limitations, Novell piggybacked on the government's long-running case against Microsoft for an alleged monopoly in the operating systems (OS) market (where the statute of limitations was tolled for private plaintiffs) and alleged Microsoft violated Section 2 by:

Illegally maintaining its monopoly in the Intel-compatible personal computer OS market by refusing to deal with its competitors.
Affirmatively inducing Novell's reliance on its IP and upon discontinuation, interfering with Novell's business.
Deceptively withdrawing its IP by giving pretextual reasons for the withdrawal.

The US District Court for the District of Utah held that Microsoft did not violate Section 2 and entered judgment as a matter of law for Microsoft. Novell appealed to the Tenth Circuit.

For more information on Section 2 of the Sherman Act, see Practice Note, Section 2 of the Sherman Act: Overview.

Facts

In its complaint, Novell alleged that:

But for Microsoft's withdrawing its IP, Novell would have:
- released its product earlier; and
- gained a greater customer base by attracting customers before they were locked into using Microsoft applications.
Once customers developed preferences for Novell and other non-Microsoft applications, they would have been more willing to use an alternate (non-Microsoft) OS that ran Novell's applications.
Since Novell's application's launch was delayed by Microsoft's conduct, customers became hooked on Microsoft's applications and were then locked into Microsoft's OS as it was the only OS that could run Microsoft's applications.

Novell further alleged that its application suite reduced reliance on an OS and if customers had been able to use Novell's suite, they would have been less likely to be locked into Microsoft's OS.

Outcome

The court held that Microsoft did not have a duty to deal with Novell and its actions therefore did not violate Section 2 of the Sherman Act. The court noted that although some courts have held that under Section 2 monopolists must help their smaller rivals, the Tenth Circuit and US Supreme Court agree that Section 2 is focused on protecting competition, not competitors. The court explained that for conduct to be anticompetitive under Section 2, it must have little to no other purpose than to protect the monopolist's market power.

Refusal to Deal

The court explained that although refusals to deal occasionally signal anticompetitive conduct under Section 2, there is generally no duty to deal with competitors. The court further explained that generally, even monopolists are not required to share their IP with competitors. The court noted that there is a limited exception to the refusal to deal rule set out in Aspen Skiing Co. v. Aspen Highlands Skiing Corp. The court explained that, as discussed in Verizon Commc'ns v. Law Offices of Curtis V. Trinko, Aspen set forth a particular set of facts that resulted in the limited exception to the rule. To fall under Aspen's exception, two factors must be present:

A preexisting, voluntary and profitable course of dealing between the monopolist and its competitor.
The discontinuation of the course of dealing must indicate an irrational willingness to forgo short-term profits to produce an anticompetitive effect. That is to say, there is no valid business reason for the refusal to deal.

The court stated that although Novell satisfied the first requirement of the Aspen exception test, there was no evidence that suggested Microsoft's discontinuation of the relationship was intended to irrationally sacrifice short-term profits in order to harm competition. Instead, evidence shows that the discontinuation helped Microsoft become more profitable.

In holding that Microsoft did not have a duty to deal with Novell, the court stated that competition between independent firms should be presumptively legal as competition almost always benefits consumers.

The court noted that requiring monopolists to help competitors would:

Risk encouraging collusion.
Dampen firms' incentive to:
- innovate;
- invest; and
- expand their businesses.

Affirmative Interference with Business

Next, the court held that Microsoft did not affirmatively interfere with Novell's business. The court explained that Novell's second claim alleging that Microsoft affirmatively interfered with Novell's business by inducing it to rely on Microsoft's IP and then withdrawing that IP was essentially another name for a refusal to deal, and failed for the same reasons.

Deceptive IP Withdrawal

Finally, the court held that Microsoft's alleged deceptive IP withdrawal did not violate antitrust laws. The court explained that because Novell's claims of consumer harm (namely, that they were harmed by the delayed launch of Novell's product) would have existed no matter what reasons Microsoft gave for its withdrawal, honest or deceptive, there was no antitrust injury from Microsoft's alleged deception.

Practical Implications

The Tenth Circuit's decision reinforces the general consensus that there is generally no duty to deal under the antitrust laws, even for monopolists. It also further limits the unilateral refusal to deal claim for plaintiffs and highlights how difficult the Aspen exception is to establish.

Tenth Circuit Affirms Microsoft's Antitrust Win Over Novell | Practical Law