In Novell, Inc. v. Microsoft Corp.^[i], the Tenth Circuit affirmed the district court’s post-trial judgment that Microsoft was not liable under Section 2 of the Sherman Act (Section 2) for monopolization of the market for PC operating systems.  In doing so, the court reaffirmed that in order to demonstrate anticompetitive conduct under Section 2 in the refusal to deal context under Aspen Skiing Co. v. Aspen Highlands Skiing Corp.,^[ii] a plaintiff must establish both that (1) the defendant had an existing relationship with a competitor prior to the termination, and (2) the defendant sacrificed short-term profits by ending that relationship in order to achieve an anticompetitive end.  Because the Tenth Circuit concluded that Microsoft did not sacrifice short-term profits when it terminated a particular relationship with Novell – indeed, the record indicated that its conduct was motivated by a desire to increase profits – the court concluded that Microsoft was not liable for monopolization.

Factual Background

This protracted litigation involved allegations dating back to the mid-1990s relating to the Windows 95 operating system.^[iii]  Prior to the rollout of Windows 95, Microsoft made a “beta” version of the operating system available to all independent software vendors (ISVs), including Novell, to facilitate their ability to write software for Windows 95.  Novell, the creator of WordPerfect, sought to develop “office suite” software (including a word processor, spreadsheet, and other applications) called PerfectOffice.  Microsoft, of course, had created its own Microsoft Office software suite, which meant that Microsoft and Novell were both collaborators and competitors.  The “beta” version of Windows 95 gave ISVs (including Novell) access to a certain type of application programming interface (API), known as namespace extensions (NSEs), which Novell later claimed were critically important to it because they enabled it to take advantage of functionality built into Windows to create a new file open dialog.  However, about 4 months after the beta was released and 11 months before the release of Windows 95, Microsoft reversed course and notified ISVs that it would not support certain of the NSEs in the future.  Novell claimed that this action delayed its rollout of WordPerfect for nine months, which in turn allegedly undermined its ability to gain market traction for PerfectOffice.

Novell asserted that Microsoft deceptively induced Novell’s reliance on the NSEs and then withdrew the NSEs in an intentional effort to derail the release of PerfectOffice, which it claimed Microsoft viewed as a competitive threat, thereby allegedly entrenching its monopoly power in the market for operating systems.^[iv]  Novell offered two theories to support its claim.  First, by allegedly causing the delayed release of PerfectOffice, Microsoft increased the number of users of Microsoft Office and thus “locked” those users into Windows, when they allegedly otherwise might have switched to a competing operating system (such as Linux).  Second, Novell argued that its PerfectOffice “middleware” would have allowed software companies to write applications directly for PerfectOffice rather than Windows.  This allegedly would have increased the functionality of PerfectOffice, which would have allowed users to switch more easily to an operating system other than Windows.   

Legal Background – Impermissible Refusals to Deal under Aspen Skiing

It is a familiar and well-established principle of antitrust law that firms generally are free to choose the suppliers and customers with whom they will do business.  Indeed, the Supreme Court has declared in recent years that even an actual monopolist “has no antitrust duty to deal with its competitors.”^[v]  An exception to this rule was established in Aspen Skiing, in which the Supreme Court outlined the circumstances under which a monopolist’s refusal to deal could give rise to liability.  In Aspen Skiing, a monopolist that operated ski resorts had entered into a joint venture with a rival to offer a joint ski pass, an arrangement that continued for many years. Eventually, the monopolist decided to end the arrangement, and it limited the passes only to its own skiing facilities in the relevant market.  The Court held that the defendant could be held liable under Section 2 because it was “willing to sacrifice short-run benefits and consumer goodwill in exchange for a perceived long-run impact on its smaller rival.”^[vi] More recently, however, the Court essentially rendered Aspen Skiing an outlier case that is “at or near the outer boundary of § 2 liability,” and is a “limited exception” to the rule that even a monopolist has no antitrust obligation to deal with a competitor.^[vii]

The Novell v. Microsoft Decision

Following a trial that resulted in a hung jury, the District Court granted judgment as a matter of law in favor of Microsoft, finding that “Novell has not created a jury question on the issue of whether Microsoft’s conduct was anticompetitive.”^[viii]  The District Court judge determined that Novell did not establish that Microsoft’s withdrawal of support for the NSEs was deceptive and that there was no evidence that Microsoft actually had terminated its relationship with Novell.^[ix]

The Tenth Circuit affirmed the District Court’s decision, but with somewhat different reasoning.   Judge Gorsuch, writing for the panel, only considered whether Novell had satisfied the test established in Aspen Skiing, which he described as the “high water mark” of refusal to deal cases.[x]  Referring to the Supreme Court’s post-Aspen views, the Tenth Circuit held that in order to state a Section 2 claim for a refusal to deal, a plaintiff must meet two requirements:  (1) that there is a “preexisting voluntary and presumably profitable course of dealing between the monopolist and rival,” and (2) that “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.’”^[xi]  On appeal, Novell had relied on a 1995 Tenth Circuit decision, Multistate Legal Studies, Inc. v. Harcourt Brace Janovich Legal & Prof’l Publ’ns, Inc.,^[xii] for the proposition that Microsoft’s conduct was anticompetitive because it was not “competition on the merits,” and was “reasonably capable of contributing significantly to creating or maintaining monopoly power.”  The Tenth Circuit did not apply this standard, thus implicitly rejecting it in the refusal to deal context.

The Tenth Circuit concluded that Novell had met the first prong of the Aspen test, because Microsoft and Novell plainly had an existing business relationship.  Notably, the Court did not tackle – and thus left open – the question of whether the District Court erred in ruling that Microsoft in fact had not terminated that relationship (given that Microsoft continued to work with Novell after withdrawing the NSEs).   Instead, the Tenth Circuit focused primarily on the second prong of the test, concluding 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.”^[xiii]  Thus, the fundamental question was whether there was no economic justification for Microsoft’s conduct other than an anticompetitive goal.  The Tenth Circuit observed that it was unclear that Microsoft lost or had expected to lose any revenues in the operating system market as a result of withdrawing support for the NSEs.  More importantly, even if Microsoft had expected to forego profits in the operating systems market, the evidence indicated that Microsoft was motivated by a desire to increase profits in the market for its Microsoft Office product—the market in which Novell competed with Microsoft.  While Novell relied heavily on an e-mail written by then-Microsoft CEO Bill Gates that Novell argued suggested a desire to deprive software rivals of NSEs in order to “give Office a real advantage,” the Tenth Circuit concluded that such conduct only evidenced an “uncharitable intent towards rivals” and, most significantly, a desire to increase, not forego, short-term profits—as required by Aspen.^[xiv]  As the court concluded, even if one were to fully credit Novell’s assertions, “[w]e fail to see any reason why the law should be more concerned about deterring a clumsy monopolist than the more sophisticated one.”^[xv]

The Tenth Circuit also rejected one of Novell’s principal arguments, namely that by offering the NSEs to induce reliance, and then pulling them back, Microsoft engaged in “affirmative” conduct that went beyond just a simple unilateral refusal to deal.  The court concluded that there is no difference between a “withdrawal of assistance” and a refusal to deal for the purpose of Section 2, noting that the conduct in Aspen  (allowing the defendant’s competitor  access to skiing facilities for many years and then withdrawing that access) was no different than what Novell alleged: “[w]hether 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.”^[xvi]

Analysis

Although this Tenth Circuit decision may not be novel, it nonetheless serves as a strong reaffirmation of the Supreme Court’s post-Aspen view of an alleged monopolists’ refusal to deal with rivals.  First, the Tenth Circuit made it clear that both aspects of the test must be present for a refusal to deal claim to be viable, i.e., a pre-existing and voluntary business relationship, and a decision by the monopolist to sacrifice short-term profits without any economic justification.

Second, the Tenth Circuit’s analysis reflects solicitude for most forms of unilateral conduct by a monopolist, strictly limiting the circumstances in which liability should arise.  The court distinguished conduct that “involves some assay by the monopolist into the marketplace,” such as tying or efforts to defraud or lie to regulators or consumers, from “purely unilateral conduct,” such as a refusal to deal.^[xvii]   “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.”^[xviii]  The court noted that imposing liability for a refusal to deal with a rival would result in “forced sharing,” which would undermine antitrust values, because “antitrust evinces a belief that independent, profit-maximizing firms and competition between [rivals] are generally good things for consumers.”^[xix]  Indeed, the Tenth Circuit’s policy preferences were evident from its comment that even if its test might be under-inclusive to some 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.”^[xx]  The decision thus may demonstrate that plaintiffs will be hard-pressed to state a cognizable refusal to deal claim against an alleged monopolist without evidence that the defendant’s conduct was economically irrational. 

Practitioners with an international focus should take note, however, that the European Commission takes a different view.  It has declared that a dominant company’s “refusal to supply” raises an enforcement issue in the EU when:  (1) the refusal to supply relates to a product or service that is “objectively necessary” for a rival to compete; (2) the refusal is likely to lead to the elimination of competition; and (3) the refusal is likely to lead to consumer harm.^[xxi]  This more relaxed standard for liability indicates that, while refusals to deal by dominant companies might seldom give rise to liability in the United States, they will be scrutinized more closely in the EU.

_{[i] No. 12-4143, 2013 WL 5303259 (10th Cir. Sept. 23, 2013).}

_{[ii] 472 U.S. 585 (1985).}

_{[iii] Novell’s claim was not time-barred because the government’s lengthy pursuit of monopolization allegations against Microsoft had tolled the statute of limitations.  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).}

_{[iv] Unlike Novell’s claim relating to the operating systems market, any claim asserting monopolization by Microsoft of the market for applications or “office suite” software was barred by the statute of limitations.  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).}

_{[v] Pacific Bell Tel. v. linkLine Comm’cns, 555 U.S. 438, 449-50 (2009) (citing Verizon Commc’ns v. Law Offices of Curtis V. Trinko, 540 U.S. 398, 409 (2004)).}

_{[vi] Aspen, 472 U.S. at 610-11.}

_{[vii] Trinko, supra note 5.}

_{[viii] Novell, Inc. v. Microsoft Corp., Civ. No. 2:04-cv-01045-JFM, 2012 WL 2913234, at *10 (D. Utah July 16, 2012).  The District Court also ruled that Novell had not presented sufficient evidence that Microsoft’s conduct caused any injury to competition in the operating systems market, and that Microsoft’s withdrawal of the namespace extension APIs was not in fact a material cause in the delay in the release of Perfect Office.  Id. at *14, 15.  The Tenth Circuit did not reach either of these alternate bases for its decision.}

_{[ix] Id. at *9-10.}

_{[x] 2013 WL 5303259 at *8.}

_{[xi] Id. at *9 (citing Trinko, 540 U.S. at 407, 409).} 

_{[xii] 63 F.3d 1540, 1550 (10th Cir. 1995).}

_{[xiii] 2013 WL 5303259 at *10.}

_{[xiv] Id. at *12.} 

_[xv] Id.

_[xvi] Id.

_{[xvii] Id. at *6-7.}

_{[xviii] Id. at *7.} 

_[xix] Id.

_{[xx] Id. at *10.} 

_{[xxi]Guidance on the Commission’s enforcement priorities in applying Article 82 of the EC treaty to abusive exclusionary conduct by dominant undertakings, Feb. 24, 2009, available athttp://ec.europa.eu/competition/antitrust/art82/.}