Novell v. Microsoft Corporation , 731 F.3d 1064 ( 2013 )

FILED
United States Court of Appeals
Tenth Circuit
September 23, 2013
PUBLISH Elisabeth A. Shumaker
Clerk of Court
UNITED STATES COURT OF APPEALS
TENTH CIRCUIT
NOVELL, INC.,
Plaintiff-Appellant,
v.
No. 12-4143
MICROSOFT CORPORATION,
Defendant-Appellee.
Appeal from the United States District Court
for the District of Utah
(D.C. No. 2:04-CV-01045-JFM)
David Boies of Boies, Schiller & Flexner LLP, Armonk, New York (Stuart H.
Singer and Samuel C. Kaplan of Boies, Schiller & Flexner LLP, Ft. Lauderdale,
Florida, and Washington, D.C.; Jeffrey M. Johnson, James R. Martin, and Miriam
R. Vishio of Dickstein Shapiro LLP, Washington, D.C.; Max D. Wheeler and
Maralyn M. English of Snow, Christensen & Martineau, Salt Lake City, Utah; and
R. Bruce Holcomb of Adams Holcomb LLP, Washington, D.C., with him on the
briefs), for Plaintiff-Appellant.
David B. Tulchin of Sullivan & Cromwell LLP, New York, New York (Steven L.
Holley, Sharon L. Nelles, and Adam S. Paris of Sullivan & Cromwell; James S.
Jardine of Ray Quinney & Nebeker, P.C., Salt Lake City, Utah; and Steven J.
Aeschbacher of Microsoft Corporation, Redmond, Washington with him on the
brief), for Defendant-Appellee.
Before KELLY, GORSUCH, and HOLMES, Circuit Judges.
GORSUCH, Circuit Judge.
A straggler of a case, this one drags us back twenty years. To a time before
the dot-com boom busted and boomed again, a time when Microsoft was busy
amassing a virtual empire — if sometimes in violation of the antitrust laws. Long
since found liable for a rich diversity of antitrust misdeeds in the 1990s, this case
calls on us to decide whether Microsoft back then committed still another, as-yet
undetected antitrust violation — this time at Novell’s expense.
Novell’s suit against Microsoft finally found its way to trial in 2011 but the
jury couldn’t manage a verdict. Reviewing the record for itself after trial, the
district court decided it could fairly admit of only one conclusion: Microsoft’s
conduct did not offend section 2 of the Sherman Act. So the district court entered
judgment as a matter of law, see Fed. R. Civ. P. 50, a decision Novell now asks us
to overturn but one we find we cannot. Novell complains that Microsoft refused
to share its intellectual property with rivals after first promising to do so. But the
antitrust laws rarely impose on firms — even dominant firms — a duty to deal
with their rivals. With respect to Novell at least, Microsoft did nothing unlawful.
***
Despite a long trial — 8 weeks — and a voluminous record — 16,696
pages — the facts relevant to this appeal are straightforward enough. Looking at
them as favorably to Novell as the record allows, they tell us this much.
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By the mid-1990s Microsoft had become the leading provider of Intel-
compatible personal computer operating systems. An operating system amounts
to the computer’s core software — software that allows the everyday user to take
advantage of a computer’s functions. Users often rely on an operating system to
open and close other applications — word processors, spreadsheets, calendars, or
the like. Those applications often depend on the operating system, too, drawing
on the operating system’s code to read and write files on the hard drive, draw
images and text on the screen, or transmit information. In 1981, Microsoft
introduced MS-DOS, an operating system that required users to type commands
on the keyboard. Beginning in 1990, the company developed successive versions
of its Windows operating system, one that featured a “graphical user interface”
allowing users to issue commands simply by pointing and clicking a mouse on
visual icons. Windows proved a huge commercial success for Microsoft, quickly
becoming by a wide margin the most popular operating system on personal
computers.
Microsoft’s relationship with independent software vendors (ISVs) during
this period proved a complicated one. On one hand, Microsoft had some
incentive to cooperate with ISVs. After all, ISVs wrote applications for
Microsoft’s operating system; increasing the number of applications that could
run on Microsoft’s operating system meant increasing the utility of the operating
system for users; and that meant more sales for Microsoft. On the other hand,
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Microsoft didn’t just supply the operating system — it also competed with ISVs
in the development and sale of applications for use on its Windows operating
system. So, for example, by the mid-1990s, “office suites” containing
applications for word processing, spreadsheets, and other everyday office tasks
were all the rage and Microsoft began to offer its Microsoft Office suite
(including Microsoft Word and Microsoft Excel) in competition with ISVs.
Among the ISVs with whom Microsoft competed during this era was Novell. In
the mid-1990s (and well before then), Novell produced WordPerfect — Microsoft
Word’s leading rival in word processing applications — and the company
harbored ambitions to create an office suite of its own to rival Microsoft Office,
one it called PerfectOffice.
This case concerns the tensions inherent in Microsoft’s relationship with
ISVs in general and Novell in particular, and how those tensions played out in
Microsoft’s development of the Windows 95 operating system.
As it was planning to roll out its Windows 95 operating system, the
successor to Windows 3.0, Microsoft faced the questions whether and to what
degree it should share its intellectual property with ISVs. Should it share a pre-
release development version of the new operating system, and perhaps provide
access to its internal workings, all to help ISVs develop applications ready for use
by the public when the final version of Windows 95 went on sale? The firm was
torn. Doing so would help the marketing of Windows 95, allowing the company
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to boast a robust range of applications users could employ on the new operating
system straight away. At the same time, helping ISVs develop and sell
applications threatened to hurt Microsoft’s own applications business, perhaps
most especially its new office suite product, Microsoft Office.
At first, Microsoft opted to share. Anticipating the release of Windows 95
to the public sometime in 1995, in June 1994 it shared a beta, or test, version of
the operating system with ISVs. At the same time, Microsoft also gave ISVs
access to Windows 95’s application programming interfaces (APIs). APIs allow
programs to invoke the operating system’s built-in abilities to perform certain
functions; each API consists of a set of named procedures that automate particular
tasks an application might need to perform. By publishing the names of the
procedures in an API and providing information about how to invoke each one,
Microsoft essentially permitted ISVs a shortcut — they could rely on Microsoft’s
APIs when writing their own code rather than having to design custom code to
perform the same functions.
Take, for example, a word processor user who wants to open a document
she earlier created and saved. To do so, she might click “Open” (an option in the
“File” menu on the program’s menu bar), opening the “file open dialog” — an
unwieldy name for the on-screen window that lets the user select a file to open.
But the word processor must somehow gather information about the contents of
various folders on the hard drive, display it, and allow the user to click on or type
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the name of the file she wants to open. When Microsoft suggested it would share
its APIs, it held out the hope that ISVs might avoid the need to develop their own
code to perform each individual task and might instead simply use Microsoft’s
APIs to perform these functions. By offering to share its APIs, Microsoft
essentially suggested to ISVs that they wouldn’t have to “reinvent the wheel.”
Among the APIs Microsoft chose to share information about were
namespace extensions (NSEs). NSEs are a subset of APIs that permit a user to
see (and then open) documents affiliated not just with the current application but
located in wildly different places on the computer or elsewhere. Familiar
namespaces include the “Recycle Bin” — where a user might dispose of an
unwanted document — and the “Desktop” — the computer’s default screen that
displays when the user starts up his computer. If a user wants to open a document
on the Desktop, she might click the Desktop namespace icon on the left side of
the file open dialog in the application she is currently running, and watch the
contents of the Desktop appear on the right side of the window. With a double
click, she might then open the document. NSEs thus provide something of a
shortcut to places outside the current application.
Novell thought access to these NSEs particularly key. Not only would
access to Microsoft’s NSEs allow Novell to ensure users of its programs could
access, say, the Desktop and Recycle Bin without having to leave WordPerfect.
Access to Microsoft’s NSEs would also allow Novell to create custom
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namespaces of its own. So, for example, Novell had in mind the possibility that
someone in its WordPerfect program with the file open dialog screen open could
access, say, items in Novell’s email application or its ClipArt library, all for use
in a WordPerfect document. Novell’s hope was to use NSEs to help make its
product so useful that users might be able to “live in” WordPerfect (or
PerfectOffice) because they could open, modify, and search for their files across
the computer all while remaining within the WordPerfect environment.
All this matters because, after first choosing to share so much of its
intellectual property with ISVs in the beta version distributed in June 1994,
Microsoft reversed course in October, indicating to ISVs that they could no
longer rely on the previously published APIs and that Microsoft would not
guarantee the operability of the previously published APIs in the final version of
Windows 95. The evidence suggests Microsoft did so because it concluded that
— on balance — this move would prove profit maximizing for the firm.
Withdrawing access to information about how to invoke APIs generally and NSEs
in particular would make it harder for ISVs to produce applications for Windows
95 and in this way would marginally reduce the attractiveness of Microsoft’s new
operating system. But withdrawing access would also make Microsoft’s own
applications, including Microsoft Office, more immediately attractive to users.
While ISVs could eventually develop work-arounds to give users the same
effective experience, without advance access to information about how to invoke
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Microsoft’s APIs and NSEs, it would take them time to do so. All the while,
Microsoft’s applications would have a competitive advantage, being the first
applications usable on Windows 95. In an October 3, 1994 email, Bill Gates,
Microsoft’s CEO, explained as much: “I have decided that we should not publish
these [NSEs]. We should wait until we have a way to do a high level of
integration [which] will be harder for the likes of Notes, WordPerfect to achieve,
and which will give [Microsoft] Office a real advantage.”
When Microsoft withdrew access to its NSEs, Novell contends its business
suffered. Effectively forced to reverse engineer Microsoft’s handiwork, it had to
write its own replacement computer code. While Novell was able to achieve the
same functionality for consumers, it took until May 1996, nine months after
Windows 95’s public release, for it to roll out its own applications for Windows
95. That nine month delay, Novell argues, made all the difference. Where once it
had a leading word processing program and hopes of a leading office suite, it
contends the nine month delay gave Microsoft Office a huge leg up, one that it
alleges was designed to be and proved to be a permanent advantage.
***
Given that the damages Novell claims to have suffered came as a result of
lost sales of software applications (WordPerfect, PerfectOffice), one might be
excused for thinking Novell’s lawsuit charges Microsoft with violating section 2
by seeking or maintaining a monopoly in some sort of market for applications
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generally or office suite applications more particularly. When Novell tried to
pursue such a claim, however, it found the case soon dismissed on the ground that
the statute of limitations for conduct back in the 1990s had long since run. See
Novell, Inc. v. Microsoft, No. 05-CV-1087, 2005 WL 1398643 (D. Md. June 10,
2005), aff’d, 505 F.3d 302 (4th Cir. 2007).
To pursue this suit, Novell had to develop a different theory and it
eventually settled on this one. It alleged that Microsoft’s withdrawal of the NSEs
not only helped Microsoft in the applications arena. Novell also alleged that the
move helped Microsoft maintain its monopoly in the market for Intel-compatible
personal computer operating systems. This theory Novell could still pursue
because the government’s long-running antitrust case against Microsoft involved
allegations of monopoly in the operating systems market and thus tolled the
statute of limitations for private plaintiffs like Novell. See Novell, Inc. v.
Microsoft, 699 F. Supp. 2d 730, 736 (D. Md. 2010), rev’d on other grounds, 429
F. App’x 254 (4th Cir. 2011).
Novell initially filed its suit alleging unlawful monopolization in the
operating systems market in federal district court in Utah. While the case was
transferred for a period to a federal court in Maryland for consolidated pre-trial
proceedings with other similar suits, see 28 U.S.C. § 1407, it eventually returned
to Utah for trial — along with Maryland District Judge J. Frederick Motz on an
intercircuit assignment, see 28 U.S.C. § 292; Lexecon, Inc. v. Milberg Weiss
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Bershad Hynes & Lerach, 523 U.S. 26, 40 (1998) (transferee court must transfer a
case back to the original district for trial after pretrial issues are resolved). It was
after that trial in Utah Judge Motz entered judgment as a matter of law for
Microsoft — and it is that result Novell now asks us to undo. 1
***
At this point, one might wonder: How did Microsoft’s withdrawal of the
NSEs help it maintain a monopoly in the operating systems market? Wouldn’t the
withdrawal of NSEs have prevented ISVs from writing applications for Windows
95, at least to some degree? And wouldn’t this have hurt rather than helped
Microsoft’s sales of operating systems? Withdrawing NSEs may have helped
Microsoft’s competitive position against ISVs in selling applications, but any
claim Novell might have involving an applications market was lost long ago.
Novell has to show that withdrawing NSEs helped Microsoft maintain its
dominant position in operating systems. How could it have done that?
Novell offers two theories.
First, Novell argues that — but for Microsoft’s withdrawal of the NSEs —
it would have released PerfectOffice earlier and acquired a greater following for
1
Novell’s successor as owner of WordPerfect, Caldera, settled antitrust
claims with Microsoft in 1996. The Fourth Circuit held that Novell’s Asset
Purchase Agreement with Caldera did not encompass Novell’s remaining claim
before us; in other words, Novell did not transfer its operating systems market
claim to Caldera. See Novell, Inc. v. Microsoft Corp., 429 F. App’x 254, 261 (4th
Cir. 2011).
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its products. This larger group of consumers — now freed from dependence on
Microsoft office suite applications — would have proven more susceptible to the
lure of other operating systems (like Linux) also capable of running Novell’s
applications. Put simply, Novell alleges that by delaying the release of
WordPerfect, Microsoft was able to lock more people into using Microsoft Office,
and because Microsoft Office could only run on a Windows operating system
those consumers were then locked into using a Windows operating system too.
Second, Novell explains that PerfectOffice was equipped with middleware
— PerfectFit and AppWare — that permitted ISVs to write applications directly
for PerfectOffice rather than for the operating system. If PerfectOffice could
perform more of the tasks traditionally performed by operating systems, more
users would be more inclined to “live in” PerfectOffice rather than Windows.
And because PerfectOffice was designed to work on other operating systems,
these users too might be more easily enticed away from Windows.
Could a rational trier of fact find Novell was a victim of unlawful
monopolization under these theories? To prevail on a section 2 claim, a plaintiff
generally must show the defendant possessed sufficient market power to raise
prices substantially above a competitive level without losing so much business
that the gambit becomes unprofitable. See United States v. Grinnell Corp., 384
U.S. 563, 571 (1966); Olympia Equip. Leasing Co. v. W. Union Tel. Co., 797 F.2d
370, 373 (7th Cir. 1986). Then the plaintiff must show that the defendant
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achieved or maintained that market power through the use of anticompetitive
conduct. See Verizon Commc’ns v. Law Offices of Curtis V. Trinko, 540 U.S. 398(2004). Finally, a private plaintiff must show that its injuries were caused by the
defendant’s anticompetitive conduct. See Brunswick Corp. v. Pueblo Bowl-O-
Mat, Inc., 429 U.S. 477, 489 (1977); Four Corners Nephrology Assocs., P.C. v.
Mercy Med. Ctr. of Durango, 582 F.3d 1216, 1225-26 (10th Cir. 2009); 3 Phillip
E. Areeda & Herbert Hovenkamp, Antitrust Law ¶ 501, at 85 (3d ed. 2008). How
do Novell’s theories stack up against these standards? 2
***
Not infrequently, the initial question of market power proves decisive.
Plaintiffs usually seek to prove market power indirectly or circumstantially — by
defining a relevant product and geographic market, pointing to the defendant’s
share of that market and perhaps barriers to entry (like the costs of regulatory
compliance), and then asking us to infer from this evidence the power to raise
price. See, e.g., United States v. Aluminum Co. of Am. (Alcoa), 148 F.2d 416 (2d
Cir. 1945) (Hand, J.); Eastman Kodak Co. v. Image Technical Servs., Inc., 504
U.S. 451, 481-82 (1992); United States v. E. I. du Point de Nemours & Co., 351
U.S. 377 (1956); DOJ-FTC Horizontal Merger Guidelines (2010),
2
Section 2 addresses not just successful monopolies but also attempted
ones, allowing liability when the defendant “intends” to achieve a monopoly and
comes “dangerous[ly]” close to achieving it. See Spectrum Sports v. McQuillan,
506 U.S. 447, 459 (1993). In this case, though, Novell doesn’t pursue an attempt
claim, only one for unlawful monopoly maintenance.
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www.justice.gov/atr/public/guidelines/hmg-2010.pdf. In these circumstances, the
viability of the plaintiff’s claim can and often does turn on the market’s definition
— which products are found to be sufficiently substitutable to fit within the same
product market, which territories are found to constitute the terrain in which
competition takes place. The greater the elasticity of demand and the larger the
relevant geographic area of competition, the higher the chance that the
defendant’s market share will dilute past the point where it can be taken as posing
a serious threat to the competitive process. Alternatively but less often, a
plaintiff will try to show market power not by inference but directly — by
showing the defendant has actually raised prices substantially above a competitive
level without sacrificing business. See, e.g., United States v. Microsoft, 253 F.3d
34, 51 (D.C. Cir. 2001); see also United States v. Dentsply Int’l, Inc., 399 F.3d
181, 190-91 (3d Cir. 2005) (using direct evidence to show market power in a
section 1 case).
Though often the focus of section 2 disputes, questions of market definition
and power aren’t in play here. Microsoft doesn’t dispute that in the 1990s a
nationwide product market existed for Intel-compatible personal computer
operating systems, as Novell alleges. Neither does Microsoft dispute it possessed
market power in that market. To be sure, one could well debate whether the same
product market that existed back then still exists today. Not infrequently, the
quickly shifting gears of market innovation outstrip the slowly grinding gears of
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the law, and today Microsoft may face greater competition in providing operating
systems for personal computers (think Apple, which now produces an Intel-
compatible operating system) and the personal computer itself may face more
competition from other devices (think tablets and smartphones). See, e.g., Henry
Blodget, In Case You Don’t Appreciate How Fast the ‘Windows Monopoly’ Is
Getting Destroyed . . . , Bus. Insider (July 17, 2013), www.businessinsider.com/
windows-monopoly-is-getting-destroyed-2013-7. But however that may be, the
antitrust laws and this lawsuit beckon us to look back in time to the marketplace
as it once was and perhaps might have been, not as it now is.
***
With issues of market definition and power by the board, our focus turns to
the next question in the sequence required to establish liability: Did Microsoft
engage in anticompetitive conduct in violation of section 2 when it withdrew
access to its NSEs from Novell and other ISVs? Or was this legally permissible
competition?
In earlier days, some courts suggested that a monopolist must lend smaller
rivals a helping hand. If a monopolist so much as expanded its facilities to meet
anticipated demand, or failed to keep its prices high enough to permit less
efficient rivals to stay afloat, it could find itself held liable under section 2. See,
e.g., Alcoa, 148 F.2d at 430; Telex Corp. v. Int’l Bus. Machs. Corp., 510 F.2d
894, 925 (10th Cir. 1975) (rejecting district court’s view that monopoly
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maintenance “need not be evidenced by predatory practices”). The Supreme
Court and this one, however, have long and emphatically rejected this approach,
realizing that the proper focus of section 2 isn’t on protecting competitors but on
protecting the process of competition, with the interests of consumers, not
competitors, in mind. Forcing monopolists to “hold[] an umbrella over inefficient
competitors” might make rivals happy but it usually leaves consumers paying
more for less. Olympia, 797 F.2d at 375; see also Trinko, 540 U.S. at 411; Four
Corners, 582 F.3d at 1225-26; Christy Sports v. Deer Valley Resort Co., 555 F.3d
1188, 1195 (2009); 3 Areeda & Hovenkamp, supra, ¶ 651, at 107.
So what exactly qualifies as anticompetitive conduct under section 2,
properly understood? It’s been said that anticompetitive conduct comes in too
many forms and shapes to permit a comprehensive taxonomy. See Copperweld
Corp. v. Independence Tube Corp., 467 U.S. 752, 767-68 (1984); Caribbean
Broad. Sys., Ltd. v. Cable & Wireless P.L.C., 148 F.3d 1080, 1087 (D.C. Cir.
1998). But the question we often find ourselves asking is whether, based on the
evidence and experience derived from past cases, the conduct at issue before us
has little or no value beyond the capacity to protect the monopolist’s market
power — bearing in mind the risk of false positives (and negatives) any
determination on the question of liability might invite, and the limits on the
administrative capacities of courts to police market terms and transactions. See 3
Areeda & Hovenkamp, supra, § 651a, at 96-97. With time and a gathering body
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of experience, courts have been able to adapt this general inquiry to particular
circumstances, developing considerably more specific rules for common forms of
alleged misconduct — like tying, Eastman Kodak, 504 U.S. at 461-62; exclusive
dealing, Microsoft, 253 F.3d at 69; or efforts to defraud or lie to regulators or
consumers, Conwood Co. v. U.S. Tobacco Co., 290 F.3d 768, 783-88 (6th Cir.
2002); Caribbean, 148 F.3d at 1087.
As these common categories and the rules associated with them suggest,
section 2 misconduct usually involves some assay by the monopolist into the
marketplace — to limit the abilities of third parties to deal with rivals (exclusive
dealing), to require third parties to purchase a bundle of goods rather than just the
ones they really want (tying), or to defraud regulators or consumers. By contrast,
and “as a general rule . . . purely unilateral conduct” does not run afoul of section
2 — “businesses are free to choose” whether or not to do business with others and
free to assign what prices they hope to secure for their own products. See Pac.
Bell Tel. Co. v. Linkline Commc’ns, 555 U.S. 438, 448 (2009). Put simply if
perhaps a little too simply, today a monopolist is much more likely to be held
liable for failing to leave its rivals alone than for failing to come to their aid. See
id.; Four Corners, 582 F.3d at 1224-25; 3 Areeda & Hovenkamp, supra, ¶ 658, at
183.
Many antitrust values lie behind the boundary line the law sketches here. If
the law were to make a habit of forcing monopolists to help competitors by
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keeping prices high, sharing their property, or declining to expand their own
operations, courts would paradoxically risk encouraging collusion between rivals
and dampened price competition — themselves paradigmatic antitrust wrongs,
injuries to consumers and the competitive process alike. Forcing firms to help
one another would also risk reducing the incentive both sides have to innovate,
invest, and expand — again results inconsistent with the goals of antitrust. The
monopolist might be deterred from investing, innovating, or expanding (or even
entering a market in the first place) with the knowledge anything it creates it
could be forced to share; the smaller company might be deterred, too, knowing it
could just demand the right to piggyback on its larger rival. See Einer Elhauge,
Defining Better Monopolization Standards, 56 Stan. L. Rev. 253, 300-06 (2003);
A. Douglas Melamed, Exclusionary Conduct Under the Antitrust Laws:
Balancing, Sacrifice, and Refusals To Deal, 20 Berkeley Tech. L.J. 1247, 1254
(2005).
Administrability considerations are also at play here. If forced sharing
were the order of the day, courts would have to pick and choose the applicable
terms and conditions. That would not only risk judicial complicity in collusion
and dampened price competition. It would also require us to become “central
planners,” a role for which we judges lack many comparative advantages and a
role in which we haven’t always excelled in the past. See Trinko, 540 U.S. at
407-08; 3B Areeda & Hovankamp, supra, ¶ 772, at 220.
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The bottom line, then, is that antitrust evinces a belief that independent,
profit-maximizing firms and competition between them are generally good things
for consumers. Just as courts have held particular forms of antitrust conduct per
se illegal because experience teaches that they are almost always destructive of
competition, so too courts have fashioned rules of presumptive legality for certain
forms of conduct that experience teaches almost never harm consumers.
Experience teaches that independent firms competing against one another is
almost always good for the consumer and thus warrants a strong presumption of
legality. Acknowledging as much in the form of a general rule gives a degree of
predictability to judicial outcomes and permits reliance by all market participants,
themselves goods for both the competitive process and the goal of equal treatment
under the law. See Trinko, 540 U.S. at 407-8; Schor v. Abbott Labs., 457 F.3d
608, 613 (7th Cir. 2006).
Of course, most every rule proves over- or under-inclusive in some way.
We often accept a degree of over- and under-inclusion as the price that must be
paid for the benefits associated with a clear rule of law. But rarely is the law so
unsubtle that it fails to acknowledge and candidly account for at least a rule’s
most glaring exceptions. And certainly section 2 doctrine isn’t so unsubtle.
Though “rare,” liability can sometimes be assigned even when the monopolist
engages in “purely unilateral” conduct. Pac. Bell Tel. Co., 555 U.S. at 448.
Predatory pricing presents a notable and easy example. Brooke Grp. Ltd. v.
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Brown & Williamson Tobacco Corp., 509 U.S. 209, 222-23 (1993); United States
v. AMR Corp., 335 F.3d 1109, 1115 (10th Cir. 2003). Refusals to deal supplies is
another if somewhat more controversial example. Aspen Skiing Co. v. Aspen
Highlands Skiing Corp., 472 U.S. 585, 600-01 (1985); Trinko, 540 U.S. at 408-
10; see also 3B Areeda & Hovenkamp, supra, ¶ 772. Essential facilities doctrine
offers perhaps an even more controversial example still. Compare Otter Tail
Power Co. v. United States, 410 U.S. 366, 377-79 (1973) (forebearer of essential
facilities doctrine), with Trinko, 540 U.S. at 411 (“We have never recognized such
a doctrine.”).
Our case revolves around the second of these exceptions to the general rule
protecting unilateral conduct. Novell seeks to impose section 2 liability on
Microsoft for refusing to deal with its rivals. Initially, Microsoft chose to share
its internal NSE protocols with ISVs in an effort to spur them into writing
software for Windows 95. Then Microsoft reversed course, choosing to keep its
NSEs to itself. Normally, this sort of unilateral behavior — choosing whom to
deal with and on what terms — is protected by the antitrust laws. Even a
monopolist generally has no duty to share (or continue to share) its intellectual or
physical property with a rival. Novell insists, however, that Microsoft had an
affirmative duty to continue sharing its intellectual property and that the firm’s
decision to withdraw that assistance violated section 2. Predatory pricing appears
nowhere in the case and Novell disclaims any reliance on essential facilities
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doctrine. So if a path to recovery lies anywhere for Novell, it lies through the
narrow-eyed needle of refusal to deal doctrine.
***
Refusal to deal doctrine’s high water mark came in Aspen. There, this
court and the Supreme Court upheld a jury verdict finding liability when a
monopolist (Aspen Skiing Company) first voluntarily agreed to a sales and
marketing joint venture with a rival (Aspen Highlands) and then later
discontinued the venture even when the evidence suggested the arrangement
remained a profitable one. This result, however, falls “at or near the outer
boundary of § 2 liability.” Trinko, 540 U.S. at 409. Since Aspen, the Supreme
Court has refused to extend liability to various other refusal to deal scenarios,
emphasizing that Aspen represents a “limited exception” to the general rule of
firm independence. Trinko, 540 U.S. at 409; see also Pac. Bell Tel. Co., 555 U.S.
at 448. To invoke Aspen’s limited exception, the Supreme Court and we have
explained, at least two features present in Aspen must be present in the case at
hand.
First, as in Aspen, there must be a preexisting voluntary and presumably
profitable course of dealing between the monopolist and rival. Trinko, 540 U.S.
at 409; Four Corners, 582 F.3d at 1224-25; Christy Sports, 555 F.3d at 1197. To
be sure, requiring a preexisting course of dealing as a precondition to antitrust
liability risks the possibility that monopolists might be dissuaded from
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cooperating with rivals even in procompetitive joint venture arrangements — for
fear that, once in them, they can never get out. Inversely, this condition risks
deterring the termination of joint ventures when they no longer make economic
sense. See Dennis W. Carlton, A General Analysis of Exclusionary Conduct and
Refusals To Deal — Why Aspen and Kodak Are Misguided, 68 Antitrust L.J. 659,
677 (2001). But the requirement at least advances the larger principle that
unadulterated unilateral conduct — situations in which no course of dealing ever
existed — won’t trigger antitrust scrutiny. It keeps courts, too, out of the
business of initiating collusion and helps address, at least to some degree,
administrability concerns — presumably profitable terms already agreed to by the
parties may suggest terms a court can use to fashion a remedial order without
having to cook them up on its own. Trinko, 540 U.S. at 407.
Second, as in Aspen, the monopolist’s discontinuation of the preexisting
course of dealing must “suggest[] a willingness to forsake short-term profits to
achieve an anti-competitive end.” Id.; Four Corners, 582 F.3d at 1224-25;
Christy Sports, 555 F.3d at 1197. In Aspen, the Supreme Court held, the evidence
suggested that the parties’ joint venture was profitable for all concerned and that
Aspen Skiing Company (the monopolist) discontinued the arrangement simply to
reduce the value of Aspen Highlands, force Highlands to sell, and in this way
-21-
allow the monopolist to win control of all four ski mountains in Aspen. 3 Much as
in predatory pricing doctrine, the animating concern here is that a dominant firm
may be able to forgo short-term profits longer than smaller rivals, and it may have
an incentive to take on those losses to drive rivals from the market or to discipline
them for having the audacity to try competition on the merits rather than abide as
price-takers under the monopolist’s umbrella. Giving up short-term profits in
these particular circumstances may risk doing less to enhance competition and
consumer interests than to entrench a dominant firm and enable it to extract
monopoly rents once the competitor is killed off or beaten down. See Brooke
Grp., 509 U.S. at 222-23; 3 Areeda & Hovenkamp, supra, ¶ 651, at 102-03.
Of course, firms routinely sacrifice short-term profits for lots of legitimate
reasons that enhance consumer welfare (think promotional discounts). Neither is
it unimaginable that a monopolist might wish to withdraw from a prior course of
dealing and suffer a short-term profit loss in order to pursue perfectly
procompetitive ends — say, to pursue an innovative replacement product of its
own. See 3 Areeda & Hovenkamp, supra, ¶ 651, at 102-03; Elhauge, supra, at
274. To avoid penalizing normal competitive conduct, then, we require proof not
3
Something that wound up happening anyway, despite antitrust’s
intervention. For an interesting account of this history and of questions
surrounding market definition in Aspen, see Jeffrey Macher & John Mayo,
Making a Market Out of a Molehill? Geographic Market Definition in Aspen
Skiing, 6 J. Competition L. & Econ. 911 (2010).
-22-
just that the monopolist decided to forsake short-term profits. Just as in predatory
pricing cases, we also require a showing that the monopolist’s refusal to deal was
part of a larger anticompetitive enterprise, such as (again) seeking to drive a rival
from the market or discipline it for daring to compete on price. Put simply, the
monopolist’s conduct must be irrational but for its anticompetitive effect. See
Aspen, 472 U.S. at 597 (a refusal to deal with a competitor doesn’t violate section
2 if “valid business reasons exist for that refusal”); Trinko, 540 U.S. at 407(defendant must be seeking “an anti-competitive end”); 3B Areeda & Hovenkamp,
supra, ¶ 772, at 223 (the refusal must be “irrational” but for its anticompetitive
tendencies); see also Gregory J. Werden, Identifying Exclusionary Conduct Under
Section 2: The “No Economic Sense” Test, 73 Antitrust L.J. 413, 422-25 (2006).
At this point, one might object: refusal to deal doctrine requires the
monopolist to sacrifice short-term profits to be held liable, but surely a
monopolist can find ways to harm competition while still making money. And
that’s undoubtedly right. Filing false papers with regulators and misleading
consumers or others, for example, don’t (necessarily) involve the short-term
sacrifice of profits but can at least conceivably harm competition as much as
profit-sacrificing maneuvers. As we have already seen, though, a rival is always
free to bring a section 2 claim for affirmatively interfering with its business
activities in the marketplace. See, e.g., Caribbean, 148 F.3d at 1087; Conwood,
290 F.3d at 783-84; 3B Areeda & Hovenkamp, supra, ¶ 782 (discussing
-23-
relationship between antitrust and business torts). Refusal to deal doctrine targets
only a discrete category of section 2 cases attacking a firm’s unilateral decisions
about with whom it will deal and on what terms. It doesn’t seek to displace
doctrines that address a monopolist’s more direct interference with rivals. It
bears remembering, too, that to the extent that Aspen’s test still might be accused
of being underinclusive to some degree even in the narrow field of refusals to
deal, the general rule is firm independence and refusal to deal doctrine exists only
to address one of the most obvious exceptions to that general rule. If the doctrine
fails to capture every nuance, if it must err still to some slight degree, perhaps it
is better that it should err on the side of firm independence — given its
demonstrated value to the competitive process and consumer welfare — than on
the other side where we face the risk of inducing collusion and inviting judicial
central planning. See Melamed, supra, at 1266 (considering alternatives and
defending the profit sacrifice test as “a sensible middle ground” for refusal to deal
cases); Areeda & Hovenkamp, supra, ¶ 651.
***
There’s no question that Novell can satisfy the first essential component of
refusal to deal doctrine. A voluntary and profitable relationship clearly existed
between Microsoft and Novell. Microsoft doesn’t dispute that at first it freely
offered its applications rivals, including Novell, access to its NSEs. Neither does
Microsoft dispute that doing so was profitable enough, encouraging software
-24-
companies to write for its new operating system and in that way making Windows
more attractive to consumers.
The difficulty is that Novell has presented no evidence from which a
reasonable jury could infer that Microsoft’s discontinuation of this arrangement
suggested a willingness to sacrifice short-term profits, let alone in a manner that
was irrational but for its tendency to harm competition. To the contrary, all the
evidence suggests that Microsoft’s decision came about as a result of a desire to
maximize the company’s immediate and overall profits. And, as we’ve seen,
refusal to deal doctrine specifically and section 2 generally seek to protect, not
penalize, such prosaic profit-maximizing (and presumptively pro-competitive)
conduct by independently operating firms, even dominant firms.
Within the operating systems market alone, it’s not clear Microsoft lost or
expected to lose revenues in the short term — or ever. By withdrawing NSEs,
Microsoft may have handicapped the ability of ISVs to write for Windows 95.
But as Novell acknowledges, ISVs had a reasonably strong incentive to write for
Microsoft’s operating system with or without access to Window’s NSEs — given
Microsoft’s significant presence in the operating systems market (already about a
90 percent share before Windows 95). In fact, the record suggests that
Microsoft’s market share continued to grow even after the introduction of
Windows 95 without shared NSEs (to at least 95 percent). To be sure, Novell’s
CEO testified that Windows 95 would have done even better (to some unspecified
-25-
degree) had Microsoft continued to provide access to NSEs. But Novell’s own
expert refused to opine on the question. And Novell’s own theory of monopoly
maintenance posits that Microsoft’s withdrawal of the NSEs helped its position in
the operating systems market by wedding consumers to Microsoft applications
that themselves could run only on its operating system. Perhaps Novell would
respond that this strategy only helped Microsoft in the long run after a period of
forgone short-term profits — but here again Novell presents no evidence to
support such a theory.
Besides, even assuming Microsoft’s conduct did suggest a willingness to
forgo short-term profits in the operating systems market, that would still account
for only part of the story. As we’ve seen, Microsoft also produced various
applications and, by everyone’s estimation, its withdrawal of the NSEs helped the
firm win additional profits in that field. Indeed, Novell’s theory in this lawsuit
rests on the view that Microsoft’s withdrawal of NSEs allowed it to win
significant profits in the sale of office suite applications — and to do so
immediately. Put differently, even if Microsoft’s decision to withdraw the NSEs
ultimately made Windows 95 less successful, any losses in that market have to be
considered in light of the acknowledged and immediate gains it achieved in the
applications arena. Microsoft is an integrated firm with the goal of maximizing
overall profits. And viewed overall, there’s no evidence that Microsoft took any
-26-
course other than seeking to maximize the company’s net profits in the short- as
well as long-term.
Perhaps Novell might reply that we should disaggregate operating systems
from applications — that proof of a design to forgo short-term profits in one line
of business (operating systems) should suffice without consideration of
admittedly inevitable short-term gains in another (applications). Novell, however,
never attempts the argument for itself — and for good reason. It would be
inconsistent with both the formal aspects and the reasoning behind Aspen and
Trinko. In Aspen, the Supreme Court found that Aspen Skiing Company’s
conduct had no economic justification except its tendency to exclude a rival.
Aspen, 472 U.S. at 608. Neither did the Court disaggregate profits from different
lines of business in Trinko: in concluding that Verizon’s behavior failed to show
a willingness to sacrifice short-term profits, the Court didn’t separately consider
the wholesale and retail markets at play there. The point of the profit sacrifice
test is to isolate conduct that has no possible efficiency justification. See id.; see
also supra at 22. Parsing profits from different product lines would defeat this
project, holding firms liable for making moves that enhance their overall
efficiency, if at the expense of a particular business line. It would risk as well
returning us to a day when larger firms had to forgo immediate overall gains in
order to subsidize a less efficient rival that happens to do business only in one
particular product line. And it would present a serious administration challenge
-27-
to say the least. After all, businesses have the ability “to recoup [their]
investment[s]” in any number of ways. Christy Sports, 555 F.3d at 1194. And
selling operating systems surely isn’t the only way to recoup the costs of
developing a new operating system — a company might just as easily recoup
costs through the sale of applications designed for that operating system. All this
courts would have to account for and police.
When pressed at oral argument to point to evidence of Microsoft’s
willingness to sacrifice short-term profits, Novell contended that Mr. Gates’s
internal October 3, 1994 email did the trick. That email, however, indicates only
a desire to keep NSEs from rivals “until we have a way to do a high level of
integration [that] will be harder for the likes of Notes, WordPerfect to achieve,
and which will give Office a real advantage.” J.A. 1967. This may suggest a
hard-nosed intent to undo rivals in the applications field, to assure Microsoft a leg
up, but it doesn’t suggest Microsoft intended to forgo profits. More nearly, it
suggests just the opposite — a wish to increase the firm’s immediate profits —
and in this way it tends to show that Microsoft’s conduct was hardly irrational but
for its exclusionary tendencies. Maybe the e-mail suggests an uncharitable intent
toward rivals, maybe even a wish to “hurt” or “destroy” them. But as we’ve seen,
experience teaches that the process of firms investing in their own infrastructure
and intellectual property and competing rather than colluding normally promotes
competition and consumer gains — and the intent to undo a competitor in this
-28-
process should hardly surprise. “Competition,” after all, “is a ruthless process.”
Ball Memorial, 784 F.2d at 1338. “Most businessmen don’t like their
competitors” and the antitrust laws aren’t designed to be a guide to good manners.
Olympia, 797 F.2d at 379. Were intent to harm a competitor alone the marker of
antitrust liability, the law would risk retarding consumer welfare by deterring
vigorous competition — and wind up punishing only the guileless who haven’t
figured out not to write such things down despite (no doubt) the instructions they
received in countless “antitrust compliance” seminars. We fail to see any reason
why the law should be more concerned about deterring the clumsy monopolist
than the more sophisticated one. See Ronald A. Cass and Keith N. Hylton,
Antitrust Intent, 74 S. Cal. L. Rev. 657, 676 (2001). 4
4
There is still another feature of refusal to deal doctrine worth mention.
In Trinko, the Supreme Court emphasized that the monopolist in Aspen effectively
refused to deal with its smaller rival even on terms it offered everyone else. See
Aspen, 472 U.S. at 593; Trinko, 540 U.S. at 410. The Aspen Skiing Company
sold its tickets at retail price to others, and participated in a town-wide system of
credit, but when its smaller rival Aspen Highlands offered to pay retail with credit
the monopolist initially refused. Since Aspen and Trinko, some have suggested
that this kind of discrimination is also an essential element to any claim for a
refusal to deal. See, e.g., MetroNet Servs. Corp. v. Qwest Corp., 383 F.3d 1124,
1132-33 (9th Cir. 2004). At the same time, it’s conceivable a monopolist might at
least sometimes have procompetitive rationales for treating a rival differently
(say, because it’s more costly to deal with distant rivals than other nearby
customers). See Four Corners, 585 F.3d at 1225 (hospital justified in refusing to
deal with particular doctor because it was unprofitable for the hospital to do so).
And one can question whether discrimination is necessary to establish potential
for competitive harm. Our analysis, after all, already seeks to ascertain whether a
monopolist’s conduct makes any economic sense. Neither are we sure how a
(continued...)
-29-
***
Still, that is not quite the end of the story. Unable to travel the hard road of
refusal to deal doctrine, Novell seeks an escape route, trying to recast Microsoft’s
conduct as an “affirmative” act of interference with a rival rather than a
“unilateral” refusal to deal. Novell says Microsoft “affirmatively” induced
reliance on its intellectual property only then to pull the rug out from underneath
it, raising Novell’s cost of doing business in the process — and that, Novell says,
should be enough to state a claim under section 2. Essentially Novell asks us to
toy with the act-omission distinction, seeking to have us describe Microsoft’s
conduct as an “affirmative” act of interference rather than an “omission” of
assistance, and to replace the profit sacrifice test with a raising rivals’ cost test.
Traditional refusal to deal doctrine is not so easily evaded. One could just
as easily recast the monopolists’ “withdrawals” of assistance in Aspen or Trinko
as “affirmative” acts of interference with the plaintiff’s efforts to win customers,
ones that raised the rival’s costs of doing business in the process. Indeed, in
almost any case where a monopolist first shares and then withdraws its property
— as in Aspen and Trinko — the dominant firm might be said to raise the rival’s
4
(...continued)
discrimination rule might apply to a situation like this case where the contested
conduct (withdrawing NSEs) affected only rivals. So far, our cases haven’t
decided whether discrimination is essential for success in a refusal to deal case or
just helpful to its cause. Neither must we here because, as we’ve seen, Novell’s
refusal to deal claim fails anyway.
-30-
costs of doing business by forcing it to forgo reliance on the monopolist’s
facilities or intellectual property and compete on its own. That’s the whole
reason why competitors sue for refusals to deal — because they now have to incur
costs associated with doing business another firm previously helped subsidize.
Yet neither Trinko nor Aspen Skiing suggested this is enough to evade their profit
sacrifice test, and we refuse to do so either. Whether one chooses to call a
monopolist’s refusal to deal with a rival an act or omission, interference or
withdrawal of assistance, the substance is the same and it must be analyzed under
the traditional test we have outlined.
This shouldn’t be (mis)taken as suggesting raising rivals’ costs theories
play no role in antitrust. It is to say only and much more modestly that they do
not displace Aspen and Trinko’s profit sacrifice test in the narrow world of refusal
to deal cases, whether one wants to conceive of those cases as involving acts or
omissions. Aspen and Trinko’s more demanding inquiry applies in this particular
arena because — as we have already explained — the law views with an
especially wary eye claims that competition and consumers benefit from collusion
between rivals, and it views doubtfully too the ability of courts to identify “the
proper price, quantity, and other terms” associated with compelled sharing.
Trinko, 540 U.S. at 408; see also 3 Areeda & Hovenkamp, supra, ¶ 651, at 102,
109 (profit sacrifice test is “useful in unilateral refusal to deal cases to the extent
that, if we wish to condemn refusals to deal at all, we must have a mechanism for
-31-
identifying the very small subset of refusals that are anticompetitive”; raising
rivals’ costs theory “is sometimes useful” but “can never operate as a complete
test for exclusionary conduct”). Indeed, the primary case on which Novell relies,
Multistate Legal Services, made plain that it was willing to apply a raising rivals’
cost theory only because that case did not involve a situation in which the
defendant had refused to deal or share with a rival — and thus a situation in
which the profit sacrifice test would apply. See Multistate Legal Studies v.
Harcourt Brace Publ., 63 F.3d 1540, 1553 n.12 (10th Cir. 1995).
Novell seeks to evade refusal to deal doctrine in one final way. It charges
Microsoft with acting deceptively when it withdrew the NSEs. Microsoft gave
pretextual technical reasons for withdrawing the NSEs, Novell says, when
Microsoft’s real reasons were competitive in nature. This act of deception,
Novell submits, is actionable under the antitrust laws without regard to traditional
refusal to deal doctrine.
Business torts generally, and acts of fraud more particularly, can sometimes
give rise to antitrust liability. At least when the defendant’s deceptive actions —
usually aimed at third parties in the marketplace — are so widespread and
longstanding and practically incapable of refutation that they are capable of
injuring both consumers and competitors. See, e.g., Caribbean, 148 F.3d at 1087;
Conwood, 290 F.3d at 783; 3B Areeda & Hovenkamp, supra, ¶ 782b. Here,
however, at least that last element is missing. Whatever other problems exist with
-32-
Novell’s theory, it falters when it comes to the antitrust injury requirement. See
supra at 12.
Suppose Microsoft had admitted its “real” reasons for withdrawing the
NSEs, as Novell says it should have. Novell and consumers still would have
suffered the same alleged harm — the delayed release of PerfectOffice.
Deception, then, wasn’t the cause of Novell’s injury or any possible harm to
consumers — Microsoft’s refusal to deal was. And that refusal to deal must be
analyzed under the doctrine we’ve described. The antitrust laws don’t turn
private parties into bounty hunters entitled to a windfall anytime they can ferret
out anticompetitive conduct lurking somewhere in the marketplace. To prevail, a
private party must establish some link between the defendant’s alleged
anticompetitive conduct, on the one hand, and its injuries and the consumer’s, on
the other. Here, that essential element is missing: the conduct Novell complains
about (deception) is divorced from the conduct that allegedly caused harm to it
and to consumers (the refusal to deal). Even if Microsoft had behaved just as
Novell says it should have, it would have helped Novell not at all. See Brunswick
Corp., 429 U.S. at 489; Four Corners, 582 F.3d at 1225-26; Covad Commc’ns Co.
v. Bell Atl. Corp., 398 F.3d 666, 674 (D.C. Cir. 2005). 5
5
Novell points to dicta in Christy Sports suggesting that “[w]e would not
even preclude the theoretical possibility that” a defendant’s change in business
model “could give rise to an antitrust claim, for example, if by first inviting an
(continued...)
-33-
***
At the end of the day it is clear to us, as it was to the district court, that
Microsoft’s conduct does not qualify as anticompetitive behavior within the
meaning of section 2. The district court offered still other rationales for rejecting
Novell’s claim — ruling that Microsoft’s conduct didn’t harm competition in the
operating systems market, and that Novell’s delay in producing its Windows 95
software was really attributable to its own mismanagement and not Microsoft’s
withdrawal of the NSEs. We have no need to reach those alternative holdings or
tangle with the parties’ arguments over them. The district court’s first and
primary holding is correct and sufficient to support the judgment. Novell’s
5
(...continued)
investment and then disallowing the use of the investment the [defendant]
imposed costs on a competitor that had the effect of injuring competition in a
relevant market.” 555 F.3d at 1196. The court in Christy Sports proceeded to
hold, however, that the plaintiffs in that case couldn’t succeed because they didn’t
satisfy the profit sacrifice test. Id. at 1197 (dismissing because “we have no
indication that [the defendant] is terminating a profitable business relationship”);
see also Four Corners, 582 F.3d at 1225 (“[I]n Christy Sports, we held that ‘the
key fact’ permitting liability in Aspen Skiing ‘was that the defendant terminated a
profitable relationship without any economic justification.’”) (quoting Christy
Sports, 555 F.3d at 1197). The dicta, moreover, is open to considerable
interpretation on its own terms. To the extent the dicta suggests liability may
attach based on deceptive conduct by a dominant firm, we’ve already seen why
Novell can’t prevail. To the extent the dicta suggests raising rivals’ cost theory
displaces the profit sacrifice test within the traditional refusal to deal context, that
cannot be the case. As we have already seen, unilateral refusals to deal are
almost always lawful. Trinko, 540 U.S. at 409. Cases that meet the profit
sacrifice test represent a “limited exception.” Id. Where, as here, there is no
evidence that the defendant has sacrificed short-term profits to further an
anticompetitive agenda, the plaintiff cannot prevail.
-34-
motion to seal portions of the joint appendix is granted. The judgment is
affirmed.
-35-