A question arising from end-user license agreements ("EULAs"), which accompany applications software programs that have been preinstalled on personal computers, is whether they are sufficient to create the type of direct economic relationship between the end-users and the software maker that could support an action under the federal antitrust laws. See Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977) (barring indirect purchasers claims for recovery of illegal overcharges under the federal antitrust laws). A related question is whether such end-users would have standing to allege antitrust damages claims under the Associated General Contractors v. California State Council of Carpenters, 459 U.S. 519 (1983) (barring remote claims when more direct victims existed who could sue). The Fourth Circuit recently addressed both issues and upheld the District Court’s dismissal of federal antitrust claims on behalf of 26 end-user licensees pursuant to Fed. R. Civ. P. 12(b)(6). Kloth v. Microsoft, 444 F.3d 312 (2006).

Kloth was filed in the aftermath of the United States’ civil action against Microsoft in which Microsoft was found to have maintained an illegal monopoly in the worldwide market for licensing Intel-compatible PC operating systems. 444 F.3d at 317; United States v. Microsoft, 253 F.3d 34 (D.C. Cir. 2001). In Kloth, plaintiffs alleged that, subsequent to eliminating other competitors from the operating systems software market and obtaining a monopoly in that market, Microsoft "used this monopoly power to raise prices and to leverage its power into other markets, including markets for applications software such as word processing, spreadsheet, and office suite software," thereby "achieving market shares approaching 90 percent" in the market for those applications software. Id. Plaintiffs thus alleged that, since the mid-1990s, Microsoft has had monopoly power in four product markets relating to Intel-compatible personal computers: (1) operating systems software, (2) word processing applications software, (3) spreadsheet applications software, and (4) office suite applications software. Id.

Plaintiffs maintained that Microsoft illegally advanced its monopoly by "refusing to sell its software to manufacturers, retailers and consumers" and by using a "two-tier" licensing system. Id. (emphasis in original). First, Microsoft entered into licensing arrangements with original equipment manufacturers ("OEMs") which allegedly forced them to preinstall software on the personal computers that the OEMs in turn sold to "consumers or ‘end users.’" Id. Then, allegedly acting as "Microsoft’s agents," the OEMs purportedly were required to offer EULAs for acceptance or rejection by consumers who purchased their computers. Id. at 318. If an end-user rejected the EULA, it could obtain a refund directly from Microsoft. Id. Plaintiffs alleged that the EULAs imposed significant restrictions on licensees’ use of the software, and that Microsoft dictated the terms under which retailers and distributors could sell EULAs to end-users. Id. None of the plaintiffs had purchased software licenses directly from Microsoft. Rather, they bought computers from OEMs or retailers with preinstalled software that incorporated Microsoft’s offer to issue an end-user license. Id. Plaintiffs alleged that, through its restrictive practices, Microsoft harmed them "by charging them supra-competitive prices for operating systems software and applications software, by denying them the benefit of new and superior technologies, and by preventing them from reselling Microsoft software products." Id. They also claimed that, by integrating its Internet Explorer web browser with its operating system, Microsoft deprived them of alternative search engines and degraded the performance of their computers, making them more susceptible to security breaches. Kloth, 444 F.3d at 318.

In January 2001, The District Court dismissed Plaintiffs’ damages claims under both Illinois Brick and Associated General Contractors. The District Court also later dismissed Plaintiff’s equitable relief claims in November of 2004 on grounds that "plaintiffs . . . were not pursuing injunctive claims with diligence" and "[t]he focus was on monetary damages." Id. at 319. The court also concluded that resurrecting the injunctive claims at that late point would be prejudicial to Microsoft and against public policy. Id.

On appeal, the Fourth Circuit rejected each of plaintiffs’ arguments as to why Illinois Brick did not bar their federal antitrust damages claims. As a preliminary matter, the Court noted that, for Illinois Brick to apply, "Plaintiffs have to be (1) indirect purchasers (2) seeking recovery for illegal overcharges. ‘Indirect purchasers’ are those purchasers in the distribution chain, [who] are not the immediate buyers from the alleged antitrust violators." Id. at 320 (quoting Kansas v. UtiliCorp United, Inc., 497 U.S. 199, 207 (1990)).

Plaintiffs first contended that Illinois Brick did not apply because the EULAs "functioned as contracts directly between them and Microsoft" and constituted "the relevant economic transaction." Id. at 320. The Court rejected that contention, noting that, although Plaintiffs could have purchased licenses directly from Microsoft, they instead acquired them from OEMs and retailers, "paying them, not Microsoft, for their licenses at prices set by the OEMs and retailers." Id. at 321. Accordingly, Plaintiffs were indirect purchasers, and their claims implicated all of the concerns voiced in Illinois Brick and its progeny. Id.

Plaintiffs next contended that, because the EULAs entitled them to a refund directly from Microsoft in the event they declined a license, "the meaningful transaction is between them and Microsoft." Id. Rejecting that argument, the Court noted, "it does not follow from this observation that the plaintiffs were direct purchasers of Microsoft’s licenses." Id. (emphasis in original). Accordingly, "even though Microsoft might be required by the EULA to provide refunds or other reimbursement, that obligation did not give Microsoft the ability to control retail prices set by OEMs and retailers for the sale of the license agreements." Id. The Court then observed, "Were we to accept plaintiffs’ argument, we would have to consider the very complex price adjustments within Microsoft’s distribution chain that Illinois Brick sought to avoid." Id.

Plaintiffs’ third argument was based on the doctrine of judicial estoppel. They argued that, because, in certain past litigation, Microsoft had denied making a "first sale" to OEMs, it was now estopped "from asserting that it sells software to OEMs or other retailers." Id. The Court rejected that argument, holding that, "[a]lthough Microsoft may have argued in the past that it did not sell title to its software, plaintiffs have not shown that Microsoft ever denied selling OEMs the right to charge consumers for licenses or the options to enter into licenses." Id. (emphasis in original). Because Microsoft did not rely on "mutually inconsistent positions," the Court found no basis for applying the judicial estoppel doctrine. Id.

Plaintiffs next argued that they should not be treated as indirect purchasers because of the "so-called ‘market forces’ exception referred to in Illinois Brick." Id. The Court explained that the Supreme Court stated in Illinois Brick that a "’situation in which market forces have been superseded and the pass-on defense might be permitted is where the direct purchaser is owned or controlled by its customer.’" Kloth, 444 F.3d at 321 (quoting Illinois Brick, 431 U.S. at 736). However, as the Court noted, Plaintiffs had not alleged such facts, and so the Court of Appeals could not "overlook the Supreme Court’s admonition against enlarging market-based exceptions that would undermine the indirect-purchaser rule." Id. at 321.

The Court then addressed Plaintiff’s "more serious argument for bypassing Illinois Brick," i.e., "whether the damages that plaintiffs claim resulted from an illegal overcharge passed on to them by the intermediaries." Id. at 322. Relying on Blue Shield of Virginia v. McCready, 457 U.S. 465 (1982), Plaintiffs argued that "the Illinois Brick rule does not require that consumers have made payments directly to antitrust defendants." Id. In McCready, the Court allowed plaintiffs to pursue antitrust claims against their healthcare insurers when their insurers implemented a boycott of psychologists and refused to reimburse insurers for payments to psychologists under the plans. However, as the Court of Appeal explained, McCready was distinguishable because, in that case, "there was no intermediary threatening duplicative recovery. The psychologists were paid by the plaintiffs and therefore had no claim against the insurer based on its failure to reimburse. Nor did the case present difficulties in ‘disentangling overlapping damages claims,’ since McCready’s ‘damages were fixed . . . they could be ascertained to the penny.’" Kloth, 444 F.3d at 322; Blue Shield, 457 U.S. at 475 n.11. By contrast, Plaintiffs in Kloth stood "at the end of a distribution chain in which the intermediaries have independently set prices and passed on alleged overcharges." 444 F.3d at 322.

The Court also rejected Plaintiffs’ claims that Microsoft nonetheless caused them direct injuries "by (1) suppressing competitive technologies, (2) restricting the terms of end-user licenses, and (3) degrading computer performance." Id. As for the first two reasons, the Court noted that they basically boiled down to a claim that plaintiffs paid supra competitive prices, and thus fell within the Illinois Brick rule. Id. at 322-23. As for degradation in computer performance claim, the Court explained that this was basically a products liability claim, not an antitrust claim. Id. at 323.

The Court next addressed plaintiff’s standing to sue for antitrust injuries. Here, the Court stated, "When considering the three types of injury that plaintiffs claim to have sustained directly—injuries other than supra competitive prices—we conclude, by applying Associated General Contractors factors, that plaintiffs’ injuries were too generalized or speculative; that some injuries were not of the type covered by the antitrust law; that there were more direct victims [i.e., OEMs and retailers]; and that plaintiffs’ claims raise insuperable problems in measuring and allocating damages." Id. at 324. The Court agreed with the District Court’s reasoning that, with respect to claims that Microsoft deprived Plaintiffs of competitive technology, "[i]t would be entirely speculative and beyond the competence of a judicial proceeding to create in hindsight a technological universe that never came into existence," and "even more speculative to determine the relevant benefits and detriments that non-Microsoft products would have brought to the market and the relative monetary value . . . to a diffuse population of end users." Id. at 324. The Court explained, "At bottom, the harms that the plaintiffs have alleged with respect to the loss of competitive technologies are so diffuse that they could not possibly be adequately measured. The problem is not one of discovery and specific evidence, but of the nature of the injury claimed. Where the purported injuries amount to generalized or abstract societal harms, the plaintiffs cannot claim that they, as distinct from others in society, were specifically injured in their business or property by the alleged antitrust violation as required by § 4." Kloth, 444 F.3d at 324. With respect to the impact of EULA restrictions, the Court noted that there were more direct victims—"i.e., the retailers and OEMs—and . . . it is too costly for courts to discern the allocation of such damages." Id. at 325. With respect to Plaintiffs’ third and final rationale, computer performance degradation, the Court once again noted that "[t]o the extent that these claims are for actual injury to plaintiffs’ computers, the plaintiffs’ claims amount to claims for defective products. This type of injury is simply not a type for which plaintiffs can recover under the antitrust law." Id. at 325.

Finally, the Court upheld the District Court’s discretion to dismiss the equitable claims when plaintiffs failed to prosecute those claims for nearly four years after the District Court dismissed their damages claims. Id. at 325-26.

Authored by:

Mona Solouki