Fourth Circuit Gives Novell 'Half a Loaf' in Antitrust Case Against Microsoft

The Fourth Circuit Court of Appeals held that Novell, Inc. had standing to bring antitrust claims against Microsoft arising from Microsoft's monopolization of the PC operating system market because "its popular applications, though themselves not competitors or potential competitors to Microsoft's Windows, offered competing operating systems the prospect of surmounting the applications barrier to entry and breaking the Windows monopoly. However, the Court found that the Novell claims alleging injury in the office productivity market were barred by the statute of limitations, which was not tolled by the government's antitrust case against Microsoft because "the office-productivity market... is neither identical to nor completely encompassed by the PC operating-system market at issue in the government action." Novell, Inc. v. Microsoft Corp., No. 06-1134 (4th Cir., October 15, 2007).

The case came before the Court on cross appeals from two interlocutory orders in an antitrust action filed by Novell, Inc. against Microsoft Corp. in the wake of Microsoft's settlement of antitrust claims brought by the federal government. As described by the Court:

Novell pursues six claims on appeal. Four of these, styled Counts II, III, IV, and V, allege monopolization or attempted monopolization of the markets for office-productivity applications. Novell's products, Word Perfect and Quattro Pro, directly competed in such markets. The other two claims, Counts I and VI, are based on the same alleged conduct as Counts II through V and seek recovery for damage to the same Novell products, but are predicated on the theory that Microsoft's conduct injured competition in the market for PC operating systems, a market in which Novell did not directly compete.

According to the Court, all six of Novell's claims arose prior to March 1996, and are time-barred under the four-year federal statute of limitations for antitrust actions, 15 U.S.C. §15b, unless the statute of limitations is tolled by the filing of the DOJ complaint in May 1998, which tolls the statute of limitations for private antitrust actions "based in whole or in part on any matter complained of" by the government.

On Microsoft's motion, the district court dismissed Counts II through V of Novell's complaint on the ground that the claimed injury was not specifically alleged in the DOJ complaint, and therefore the statute of limitations on those claims was not tolled. The district court denied Microsoft's motion to dismiss Counts I and VI, finding that Novell has antitrust standing to raise those claissms. The district court certified its rulings for interlocutory review.

The Court first reviewed the district court's ruling that Novell has antitrust standing to bring Counts I and VI. According to the Court, "Novell concedes that its products did not directly compete in the market for PC operating systems," but "contend[ed] that the technological connection between operating systems and applications gives rise to a significant barrier to entry into the operating-systems market and thus protects Microsoft's Windows monopoly. As explained by the Court, "Novell maintains that its office-productivity applications could perform well on a variety of operating systems and that, during the relevant time period, they were the dominant office-productivity applications in the market."

The thrust of Novell's argument is that its popular applications, though themselves not competitors or potential competitors to Microsoft's Windows, offered competing operating systems the prospect of surmounting the applications barrier to entry and breaking the Windows monopoly. That is, Novell argues its products could provide a path onto the operating-system playing field for an actual competitor of Windows, because a competing operating system, running the popular Novell software applications, would offer consumers an attractive alternative to Windows.

Novell alleged three unlawful actions on the part of Microsoft that harmed its products and also harmed competition in the PC operating-systems market. As characterized by the Court—

First, Novell claims Microsoft withheld frosm Novell key technical information necessary to make well-functioning office-productivity applications for Windows 95….
Second, Novell argues that Microsoft impeded Novell's access to distribution channels, including original equipment manufacturers ("OEMs")….
Finally,… Novell claims that Microsoft required it, as a condition of being certified as Windows-compatible, to use Windows-specific technologies that degraded the performance of Novell's office-productivity applications on other operating systems….

In Assoc. Gen. Contractors of Cal., Inc. v. Cal. State Council of Carpenters ("AGC"), 459 U.S. 519, 529-30, 103 S.Ct. 897, 74 L.Ed.2d 723 (1983), the Supreme Court held that a multi-factor analysis is required to determine whether a private plaintiff has antitrust standing. The Fourth Circuit distilled five factors in Kloth v. Microsoft, 444 F.3d 312 (4th Cir., 2006):

(1) the causal connection between an antitrust violation and harm to the plaintiffs, and whether that harm was intended; (2) whether the harm was of a type that Congress sought to redress in providing a private remedy for violations of the antitrust laws; (3) the directness of the alleged injury; (4) the existence of more direct victims of the alleged antitrust injury; and (5) problems of identifying damages and apportioning them among those directly and indirectly harmed.

Applying those factors in this case, the Court found that "the injury that Novell alleges here is plainly an injury to competition that the anti-trust laws were intended to forestall," and "the analysis of the causal link between these activities and the decline in Novell's office-productivity-applications market share is straightforward."

Microsoft's use of its monopoly power in the operating-system market to foreclose the distribution channels for Novell's applications, for example, would have naturally tended to decrease Novell's market share and consequently decrease the value of its applications. Likewise, withholding crucial data on its soon-to-be-released Windows 95 operating system would have put Novell at a competitive disadvantage vis-a-vis Microsoft's office-productivity applications, leading naturally to a loss of market share for Novell. This loss of market share could make a competing operating system featuring Novell's office-productivity applications less attractive to consumers, harming that competing operating system's potential to surmount the barrier protecting the Windows monopoly.

"In sum," according to the Court, "the first two AGC factors weigh in favor of granting Novell antitrust standing."

The facts alleged by Novell, taken as true for the purposes of this appeal, are sufficient to demonstrate that Novell suffered an antitrust injury and that its injury can be traced to Microsoft's alleged antitrust violations. While the showing of an antitrust injury demonstrates that a case is of the type for which antitrust standing is recognized, such a showing is not necessarily sufficient to demonstrate that the particular plaintiff has antitrust standing. Thus, we now turn to an analysis of the remaining AGC factors.

The latter three AGC factors—"the directness of the alleged injury;" "the existence of more direct victims of the alleged antitrust injury;" and "problems of identifying damages and apportioning them among those directly and indirectly harmed"—"are intended to further restrict entry into the federal courts for private enforcement of the antitrust laws," according to the Court.

The Court found that "Microsoft's withholding of information from Novell's software developers relating to Windows 95 clearly has no more direct victim than Novell," and that "Novell may be the best-situated plaintiff to assert these claims. Indeed, today Novell may be one of the few private plaintiffs whose claims in this regard are neither time-barred nor too tenuous to support antitrust standing."

With respect to the fifth factor, the Court observed that "there is little risk that any damages Novell might prove would need to be allocated or apportioned among any more-directly injured parties."

In sum, according to the Court, "we therefore find that the AGC factors favor granting standing to Novell to assert Counts I and VI," and "thus affirm the district court's denial of Microsoft's motion to dismiss as to these claims on the antitrust-standing issue."

With respect to Novell's standing to bring Counts II through V, the Court rejected Novell's argument that there was a substantial overlap between its own claims and those brought by the Government. According to the Court, "Novell's reading would require us to look beyond the face of the DOJ complaint," which "only expressly alleges harm to the markets for PC operating systems and for Internet browsers." The Court found that "Novell's allegations of harm to the office-productivity-applications market… overlap little with the subject matter of the DOJ complaint.

In addition, "a straightforward application of the different-markets rule also bars application of the tolling provision here."

Though Novell characterizes the different-markets rule as merely "a helpful rule of thumb," … Novell cites only cases involving either the same markets in the government and private suits, or markets much more closely linked than the PC operating-system market and the office-productivity-applications market. Indeed, the Supreme Court has accepted tolling only where the private plaintiffs make claims in markets identical to, or completely encompassed by, those at issue in the earlier government suit…. Because the office-productivity market at issue in Counts II through V is neither identical to nor completely encompassed by the PC operating-system market at issue in the government action, these cases are of little service to Novell.

Accordingly, "we therefore hold that the tolling provision of §5(i) of the Clayton Act does not preserve Counts II through V of Novell's complaint. After tarrying with these claims for more than eight years, Novell cannot now resurrect stale causes of action, and Microsoft is entitled 'to the comfort of repose.'"