Addamax Corp. v. Open Software Foundation, Inc.

• Decision Date: 05 January 1998
• Docket Number: No. 97-1807,97-1807
• Parties: 1998-2 Trade Cases P 72,260 ADDAMAX CORPORATION, Plaintiff, Appellant, v. OPEN SOFTWARE FOUNDATION, INC., Digital Equipment Corporation and Hewlett-Packard Company, Defendants, Appellees. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 48

152 F.3d 48

1998-2 Trade Cases P 72,260

ADDAMAX CORPORATION, Plaintiff, Appellant, v. OPEN SOFTWARE FOUNDATION, INC., Digital Equipment

Corporation and Hewlett-Packard Company,

Defendants, Appellees.

No. 97-1807.

United States Court of Appeals, First Circuit.

Heard Jan. 5, 1998.

Decided Sept. 4, 1998.

Alan R. Kusinitz with whom Samuel Adams, Keith C. Long, and Warner & Stackpole LLP were on brief for appellant.

James C. Burling with whom Michelle D. Miller, Hale and Dorr LLP, William L. Patton, Jane E. Willis, Ropes & Gray, Kevin P. Light and Choate, Hall & Stewart were on brief for appellees.

Before BOUDIN, Circuit Judge, COFFIN, Senior Circuit Judge, and SHADUR, ^* Senior District Judge.

BOUDIN, Circuit Judge.

Addamax Corporation brought a federal antitrust suit against Open Software Foundation ("OSF"), Hewlett-Packard Company and Digital Equipment Corporation. After a bench trial limited to the issues of causation and damages, the district court found that antitrust violations, even if they were assumed to have occurred, were not a material cause of Addamax's failure in the line of business at issue. Addamax now appeals and we affirm.

We begin with a statement of those background facts that are more or less undisputed. Addamax was created by Dr. Peter A. Alsberg in 1986 and, in 1987, began to focus on developing security software for Unix operating systems. Unix is a very popular operating system for larger computers, and security software is a component that can be used with the operating system to restrict outside access to sensitive information and to restrict a particular user to information consistent with that user's security classification.

During this period, the National Computer Security Center, a division of the federal government's National Security Agency, rated security software, giving ratings (ranging from the most to the least secure) of A, B-3, B-2, B-1, C-2, C-1 and D. Addamax decided to produce B-1 software for Unix operating systems, a level of security demanded primarily by government users. During the years 1988-89, Addamax did develop B-1 security software for at least two different versions of Unix. ¹

While Addamax was trying to produce its security software, a different struggle was developing between AT & T--the inventor of Unix--and a number of major computer manufacturers. Although originally Unix had been freely licensed by AT & T, it appears that in the late 1980s AT & T began restricting its licenses in the face of various software modifications being introduced by individual licensees; and at the same time, AT & T began to develop a close working relationship with Sun Microsystems, a major microprocessor manufacturer. Other hardware manufacturers professed to fear that AT & T was trying to establish a single dominant version of Unix, intending to exclude the proprietary Unix variations from the market.

Accordingly, in May 1988, a number of important computer manufacturers--including defendants Hewlett-Packard and Digital Equipment Corp.--formed the Open Software Foundation as a non-profit joint research and development venture. ² OSF registered under the National Cooperative Research Act of 1984, 15 U.S.C. § 4301, although that status has no direct importance for the issues before us. At least one of OSF's professed objectives was to develop an alternative Unix operating system, denominated OSF-1, as a competitor to the Unix system being developed jointly by AT & T and Sun Microsystems.

In 1989, while OSF-1 was still being developed, OSF decided that it should include security software at the B-1 level. At that time, only three companies--AT & T, Addamax and SecureWare, Inc.--were producing security software for the Unix system. On November 1, 1989, OSF sent a "request for technology" to Addamax and SecureWare, soliciting bids for a B-1 security component for the new OSF-1 system. Bids were submitted on November 27, 1989, and OSF selected SecureWare on December 22, 1989. There is some indication that the Addamax security software was more sophisticated--one witness agreed that the contrast was between a Cadillac and a Chevette--but the Addamax price may also have appeared more substantial. ³ In any event, OSF-1 itself was never a very successful product.

Addamax continued to sell its own B-1 software for some period after losing the bid. Nothing prevented OSF "sponsors" (the founding members of OSF) or "members" (a great many other companies) from using Addamax security software for their own programs; and OSF sponsors and members were not the only potential buyers of Addamax's program. However, by 1991, Addamax began to phase out its B-1 security software, turning away new buyers so that it could devote its resources to the development of a new security software product, in which it appears that the company was successful.

In April 1991, Addamax filed a complaint in the district court against OSF, Hewlett-Packard and Digital, alleging various violations of federal and state antitrust law. As later amended, the complaint charged the defendants, together with other companies associated with OSF, with horizontal price fixing, boycott, and otherwise unlawful joint venture behavior in violation of the Sherman and the Clayton Acts, 15 U.S.C. §§ 1-2, 18. A central theme, although not the only one, was that the defendants had conspired to force down the price for security software below the free-market level and otherwise to limit or impair the ability of Addamax to compete as a supplier of security software. ⁴

Considerable discovery was conducted, and in due course the defendants moved for summary judgment. In a thoughtful decision in May 1995, the district judge dismissed Addamax's per se claims on the ground that the alleged conduct of the defendants did not fit within the narrow categories for which per se treatment was appropriate; but the court declined to dismiss Addamax's rule of reason claims, saying that the factual issues involving market power and anticompetitive effect were unsuitable for disposition on summary judgment. Addamax Corporation v. Open Software Foundation, Inc., 888 F.Supp. 274 (D.Mass.1995).

Thereafter, the parties entered into a stipulation that the damage phase of the case would be tried first, on a jury waived basis, to determine "whether the defendants' conduct was a material cause of injury in fact to the plaintiff and, if so, the amount of damages." The stipulation further provided:

Solely for purposes of this stipulation, the Court will assume that the defendants' conduct as alleged in the Amended Complaint and described in the non-damages portions of the expert reports of Drs. Comanor and Howe occurred and violates the federal and state law accounts. However, the Court will not assume, but will hear and take evidence on, whether there was injury in fact to the plaintiff as a result of that conduct and, if so, the amount of damages, which is the subject of this phase of the trial.

Trial was conducted over 12 days between November 18 and December 16, 1996. Addamax presented as live witnesses Dr. Alsberg, three experts, and a single Addamax customer. The defendants did not present live witnesses but did cross-examine extensively and relied on documentary submissions and deposition testimony.

In May 1997, the district court issued a decision concluding that the defendants' conduct was "not a material cause" of Addamax's losses. Addamax Corporation v. Open Software Foundation, Inc., 964 F.Supp. 549, 555 (D.Mass.1997). The court found that the B-1 software market was a highly risky business, that Addamax's belatedly-offered product was "too expensive and too complex, and ... actually exceeded B-1 requirements." Id. at 553. The court said that Addamax faced severe competition from AT & T in the B-1 market and that SecureWare's product was "a cheaper and simpler" one. Id. Accordingly, the court held on the merits that Addamax was not entitled to any damages.

Addamax has now appealed and argues what in substance are three different points: that the district court erred in its factual determination that defendants' conduct was not a material cause of Addamax's losses in the B-1 security software market; that the stipulation, pertinent case law or both required the district court to find that the defendants' conduct had caused damage to Addamax; and that the court erred in dismissing the per se claims against the defendants. Because the legal issues set the frame for the factual ones, it is more convenient to take these claims in reverse order.

1. As we explained in an earlier case, per se rules under section 1 of the Sherman Act have left only a couple of "serious candidates" for per se treatment: these include price or output fixing agreements (horizontal market division agreements are of essentially the same character) and "certain group boycotts or concerted refusals to deal." U.S. Healthcare, Inc. v. Healthsource, Inc., 986 F.2d 589, 593 (1st Cir.1993). Since those words were written, the categories have been narrowed even further by the Supreme Court's decision to overrule Albrecht v. The Herald Co., 390 U.S. 145, 88 S.Ct. 869, 19 L.Ed.2d 998 (1968) and thereby to exclude from per se treatment vertical maximum resale price fixing agreements. State Oil Co. v. Khan, 522 U.S. 3, 118 S.Ct. 275, 139 L.Ed.2d 199 (1997).

Where a plaintiff proves conduct that falls within a per se category, nothing more is needed for liability; the defendants' power, illicit purpose and anticompetitive effect are all said to be irrelevant. United States v. Socony-Vacuum Oil Co., 310 U.S. 150, 60 S.Ct. 811, 84 L.Ed. 1129 (1940). But courts have been very careful to confine per se treatment to conduct of the type that is almost always actually or potentially anticompetitive and has no redeeming benefits (e.g., reduced costs, increased competition) worthy of being weighed against the negative effects. Broadcast Music, Inc. v. Columbia...