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From Antitrust Law Daily, September 24, 2013

Novell’s refusal to deal claims against Microsoft properly rejected

By Jeffrey May, J.D.

Microsoft Corporation was not illegally maintaining its monopoly in the market for Intel-compatible personal computer operating systems when it stopped sharing intellectual property with independent software vendors (ISVs) that wrote applications for word processing, spreadsheets, and other tasks that would compete with Microsoft’s applications for Windows 95, including the company’s Office suite, the U.S. Court of Appeals in Denver has ruled. The refusal to deal with ISVs, such as Novell, Inc., did not amount to anticompetitive conduct for purposes of a Sherman Act, Section 2 claim raised by Novell. Judgment as a matter of law in favor of Microsoft (2012-2 Trade Cases ¶77,979) was affirmed (Novell, Inc. v. Microsoft Corp., September 23, 2013, Gorsuch, N.).

As Microsoft developed its Windows 95 operating system in the 1990s, the company shared a test version of the operating system with ISVs. Microsoft also provided the ISVs access to Windows 95’s application programming interfaces (APIs), which allow programs to invoke the operating system’s built-in abilities to perform certain functions. As a result, ISVs could rely on these “shortcuts” when writing their own code. They did not have to design custom code to perform the same functions.

Among the APIs Microsoft chose to share information about were namespace extensions (NSEs). NSEs provided a shortcut to places outside the current application, such as the “Recycle Bin” and the “Desktop.” Novell, which was marketing the word processing application WordPerfect, was particularly interested in these NSEs. Microsoft later decided to withdraw access to its NSEs. This made it harder for ISVs to produce applications for Windows 95, and it gave Microsoft Office an advantage over rival applications, such as WordPerfect. Novell claimed that it took nine months following the public release of Windows for it to roll out its own applications for Windows 95, thereby providing Microsoft Office with a “permanent advantage.”

Novell sought to impose Section 2 liability on Microsoft for refusing to deal with its rivals. Although a monopolist generally has no duty to share (or continue to share) its intellectual or physical property with a rival, Novell contended 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.

The court noted that Novell’s claim rested on the “narrow-eyed needle of refusal to deal doctrine.” According to the court, Novell needed to show that Microsoft’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.” The conduct had to be “irrational but for its anticompetitive effect.”

Novell presented no evidence from which a reasonable jury could infer that Microsoft’s discontinuation of the voluntary and profitable relationship with Novell suggested a willingness to sacrifice short-term profits in a manner that was irrational but for its tendency to harm competition, the court held. Microsoft’s decision appeared to have come about as a result of a desire to maximize the company’s immediate and overall profits.

“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,” the court noted.

Interference with rivals. The court also rejected Novell’s efforts to recast Microsoft’s conduct as an “affirmative” act of interference with a rival. “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,” the court explained.

Deception. Lastly, Novell could not evade the refusal to deal doctrine by arguing that Microsoft’s deceptive conduct in withdrawing the NSEs amounted to anticompetitive conduct to support its monopolization claim. While business torts generally, and acts of fraud more particularly, can sometimes give rise to antitrust liability, Novell could not pursue this theory. The conduct Novell complained about (deception) was divorced from the conduct that allegedly caused harm to it and to consumers (the refusal to deal), according to the court. Novell failed to establish the antitrust injury requirement to pursue such a claim.

The case is No. 12-4143.

Attorneys: David Boies (Boies, Schiller & Flexner LLP), Jeffrey M. Johnson (Dickstein Shapiro LLP), Max D. Wheeler (Snow, Christensen & Martineau), R. Bruce Holcomb (Adams Holcomb LLP) for Novell, Inc. David B. Tulchin (Sullivan & Cromwell LLP), James S. Jardine (Ray Quinney & Nebeker, P.C.) for Microsoft Corp.

Companies: Microsoft Corp.; Novell, Inc.

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