Comes v. Microsoft Corp.

• Decision Date: 12 June 2002
• Docket Number: No. 00-1268.,00-1268.
• Citation: 646 N.W.2d 440
• Parties: Joe COMES and Comes Vending, Inc., Appellants, v. MICROSOFT CORPORATION, a Washington Corporation, Appellee.
• Court: Iowa Supreme Court

646 N.W.2d 440

Joe COMES and Comes Vending, Inc., Appellants, v. MICROSOFT CORPORATION, a Washington Corporation, Appellee.

No. 00-1268.

Supreme Court of Iowa.

June 12, 2002.

Roxanne Barton Conlin of Roxanne Conlin & Associates, P.C., Des Moines, for appellants.

Donald G. Ribble of Lynch, Dallas, Smith & Harman, P.C., Cedar Rapids, and Joseph E. Neuhaus, Alphonzo A. Grant, Jr., and David B. Tulchin of Sullivan & Cromwell, New York, New York, for appellee.

STREIT, Justice.

A group of computer consumers filed suit alleging Microsoft Corporation maintained or used a monopoly in conjunction with its Windows 98 operating system for the purpose of excluding competition or controlling, fixing, or maintaining prices in violation of the Iowa Competition Law. See Iowa Code §§ 553.4, 553.5 (1997). On appeal, the consumers urge us to find our state antitrust law is not controlled by federal law, and thereby allow them to sue in Iowa as indirect purchasers. We conclude the Iowa Competition Law is not controlled by federal law and indirect purchasers may maintain an antitrust action in state court. Therefore, the motion to dismiss should have been denied. We reverse and remand.

I. Background and Facts

Joe Comes is a resident of Polk County, Iowa. Comes Vending, Inc. is a corporation organized and existing under the laws of the State of Iowa. Comes and Comes Vending purchased a Gateway Solo Computer directly from Gateway. The computers came with Windows 98 operating system pre-installed. As a precondition to using Windows 98, they became end-user licensees of Microsoft as to the operation and use of Windows 98. Comes and Comes Vending registered its ownership of the licenses with Microsoft via electronic mail.

Microsoft is a for-profit corporation organized and existing under the laws of the State of Washington. Microsoft's focus is primarily on developing and licensing computer software. Microsoft is the world's leading supplier of operating systems for personal computers.

Comes and Comes Vending represent the group of all end-user licensees of Windows 98 living in Iowa as to whom Microsoft has an electronic mail address that is computer-accessible by Microsoft (all the foregoing the "Class"). Each member of the Class owns or leases an Intel-based personal computer. The Class filed suit alleging Microsoft maintained or used a monopoly in conjunction with its Windows 98 operating system for the purpose of excluding competition or controlling, fixing, or maintaining prices in violation of the Iowa Competition Law. See Iowa Code §§ 553.4, 553.5. The Class further stated,

[w]ell aware of its unlawfully and willfully maintained monopoly power and in unlawful exercise of that monopoly power, Microsoft has knowingly, flagrantly, and with impunity licensed its Windows 98 operating system for Intel-based personal computers without regard to competition, at a monopoly price in excess of what Microsoft would have been able to charge in a competitive market.

The Class asserted that by virtue of its status as end-user licensees, it incurred a monopoly price charged by Microsoft for use of Windows 98. Microsoft filed a motion to dismiss claiming chapter 553 must be interpreted consistently with federal law and under federal law the Class was deemed to be comprised of indirect purchasers barred from recovering damages for alleged antitrust violation. See Illinois Brick Co. v. Illinois, 431 U.S. 720, 97 S.Ct. 2061, 52 L.Ed.2d 707 (1977).

The Iowa district court, persuaded by the policies of Illinois Brick, granted the motion to dismiss. The court concluded the indirect purchaser rule set forth in Illinois Brick applied to the Iowa Competition Law. The court noted the similarity between the federal and state statutes, prior interpretations by this court consistent with federal antitrust law, and the statutory directive to "harmonize" state and federal antitrust laws. The court further found this case did not fall within any of the limited exceptions to Illinois Brick. The Class appeals.

On appeal, the Class argues this court should hold Illinois Brick does not apply and that if it does apply they are direct, not indirect, users under Microsoft's licensing agreement. In the alternative, the Class argues they fall within the exceptions to Illinois Brick allowing suits by indirect purchasers.

II. Scope of Review

We review the grant of a motion to dismiss for correction of errors at law. State v. Hoegh, 632 N.W.2d 885, 887 (Iowa 2001). We will affirm the dismissal of a claim only if the petition shows no right of recovery under any state of the facts. Barnes v. State, 611 N.W.2d 290, 292 (Iowa 2000). In reviewing the trial court's grant of Microsoft's motion to dismiss, we consider the allegations in the petition in the light most favorable to the Class. See Sanford v. Manternach, 601 N.W.2d 360, 363 (Iowa 1999).

III. The Merits

The only issue on appeal is whether the United States Supreme Court case, Illinois Brick, should be followed in interpreting the Iowa Competition Law. The Class argues this case should not be applied because the Iowa Competition Law does not limit the class of plaintiffs who may bring a state antitrust suit. Microsoft argues Iowa must harmonize the Iowa Competition Law with federal law articulated in Illinois Brick such that only direct purchasers may recover damages for antitrust violations. We now turn to the holding of Illinois Brick and its applicability to our state competition law.

A. The Origins of State and Federal Antitrust Laws

In 1976, the Iowa legislature overhauled our state competition law using federal law as a model. Since then, the Iowa Competition Law has provided

[a] person shall not attempt to establish or establish, maintain, or use a monopoly of trade or commerce in a relevant market for the purpose of excluding competition or of controlling, fixing or maintaining prices.

Iowa Code § 553.5. The Iowa Competition Law also authorizes a very broad category of persons to maintain a suit in our state courts for damages resulting from anticompetitive conduct.

[A] person who is injured ... by conduct prohibited under this chapter may bring suit to: ... [r]ecover actual damages resulting from conduct prohibited under this chapter.

Id. § 553.12(2).

A year after the Iowa legislature enacted our current state antitrust law, the United States Supreme Court was called upon to determine who has standing to sue in federal court for damages resulting from monopolistic conduct. Illinois Brick, 431 U.S. at 720, 97 S.Ct. at 2061, 52 L.Ed.2d at 707. The Court's decision in Illinois Brick was built upon the Court's prior holding in Hanover Shoe, Inc. v. United Shoe Mach. Corp., 392 U.S. 481, 88 S.Ct. 2224, 20 L.Ed.2d 1231 (1968). In Hanover Shoe, plaintiff shoe manufacturer alleged the defendant manufacturer and distributor of shoe-making machinery unlawfully inflated the price of the machinery. The defendant argued the plaintiff, despite being a direct purchaser, did not suffer a legally cognizable injury because the plaintiff had passed on the overcharge to indirect purchasers. The Court held the defendant could not use the pass on ¹ theory as a defense. Hanover Shoe, 392 U.S. at 494, 88 S.Ct. at 2232, 20 L.Ed.2d at 1242. In so ruling the Court explained,

[a]s long as the seller continues to charge the illegal price, he takes from the buyer more than the law allows. At whatever price the buyer sells, the price he pays the seller remains illegally high, and his profits would be greater were his costs lower.

Id. at 489, 88 S.Ct. at 2229, 20 L.Ed.2d at 1239. In effect, the Hanover Shoe Court acknowledged that in a system allowing pass ons, the real victims—those who paid extra money as a result of the pass on— are not compensated. However, in the interests of antitrust public policies, the Court concluded the defendants should not be allowed to use the pass on theory as a defense.² The Court would later revisit similar antitrust issues in Illinois Brick. In Illinois Brick, the State of Illinois brought suit against concrete block manufacturers, alleging price fixing in violation of section four of the Clayton Act. See 15 U.S.C. § 15. The provision of the Clayton Act at issue there provides "[a]ny person who shall be injured ... by reason of anything forbidden in the antitrust laws may bring suit to recover damages sustained by him." Id. The United States Supreme Court held the state was an indirect purchaser because it did not buy concrete blocks directly from the manufacturers. Illinois Brick, 431 U.S. at 726,97 S.Ct. at 2065,52 L.Ed.2d at 713. The Court drew a line at which the law will not permit remote antitrust claims to be asserted. This bright line has become known as the "indirect-purchaser rule."

The rule provides indirect purchasers are barred from bringing claims for overcharges under federal law. Id. at 728-29, 97 S.Ct. at 2065-66, 52 L.Ed.2d at 714. The Court explained the "direct purchaser, and not others in the chain of manufacture or distribution, is the party `injured in his business or property' within the meaning of [section 4 of the Clayton Act]." Id. Accordingly, the Court concluded federal antitrust law bars claims by indirect purchasers. Id. at 745-46, 97 S.Ct. at 2074-75, 52 L.Ed.2d at 725.

Over ten years after Illinois Brick, the United States Supreme Court clarified the extent of its ruling. The Court was faced with the question of whether state statutes expressly granting standing to indirect purchasers were preempted by federal law to the contrary. It held nothing in the Sherman Act³ or in Illinois Brick prevents the states from allowing indirect purchasers to bring antitrust actions, even if this results in multiple recoveries. California v. ARC Am. Corp., 490 U.S. 93, 101-02, 109 S.Ct. 1661, 1665, 104 L.Ed.2d 86, 95 (1989). However, this decision itself did not create a cause of action for indirect purchasers to pursue.⁴ It merely authorized the states to...