Comes v. Microsoft Corp.

• Decision Date: 27 January 2006
• Docket Number: No. 05-0097.,05-0097.
• Citation: 709 N.W.2d 114
• Parties: Joe COMES and Riley Paint, Inc., an Iowa Corporation, Appellees, v. MICROSOFT CORPORATION, a Washington Corporation, Appellant.
• Court: Iowa Supreme Court

Page 114

709 N.W.2d 114

Joe COMES and Riley Paint, Inc., an Iowa Corporation, Appellees, v. MICROSOFT CORPORATION, a Washington Corporation, Appellant.

No. 05-0097.

Supreme Court of Iowa.

January 27, 2006.

COPYRIGHT MATERIAL OMITTED

Edward W. Remsburg of Ahlers & Cooney, P.C., Des Moines, Thomas W. Burt, Richard J. Wallis, and Steven J. Aeschbacher, Redmond Washington, David B. Tulchin, Joseph E. Neuhaus, and Richard C. Pepperman II, of Sullivan & Cromwell, L.L.P., New York City, and Charles B. Casper of Montgomery, McCracken, Walker & Rhoads, L.L.P., Philadelphia, PA, for appellant.

Roxanne Barton Conlin of Roxanne Conlin & Associates, P.C., Des Moines, and Richard M. Hagstrom of Zelle, Hofmann, Voelbel, Mason & Gette, L.L.P., Minneapolis, MN, for appellees.

STREIT, Justice.

Justice Felix Frankfurter once observed, "to some lawyers, all facts are created equal." However, for the purposes of collateral estoppel, they are not. The defendant, Microsoft Corporation, was granted permission to take an interlocutory appeal from the district court's ruling that collateral estoppel would apply to 352 findings of fact arising from prior federal antitrust litigation. Because we find the district court's application of the "necessary and essential" requirement of collateral estoppel was too broad, we reverse the district court's order and remand with instructions.

I. Facts and Prior Proceedings

Joe Comes and Riley Paint sued Microsoft Corporation for violating provisions of the Iowa Competition Law. See Iowa Code §§ 553.4, 553.5 (1997). This is the third time this case has journeyed into this court. See Comes v. Microsoft Corp., 696 N.W.2d 318 (Iowa 2005) (finding plaintiffs established the prerequisites for class certification); Comes v. Microsoft Corp., 646 N.W.2d 440 (Iowa 2002) (holding indirect purchasers may maintain an antitrust suit against Microsoft). The facts were set out fully in our first decision, and we now state only those facts necessary for this appeal.

In the spring of 1998, the United States and several states (including Iowa) filed a civil action against Microsoft Corporation in the District of Columbia for violations of the Sherman Act (hereinafter the "Government Action"). A bench trial before Judge Thomas Jackson lasted 76 days and included testimony from 26 live witnesses, deposition excerpts from 79 additional witnesses, and over 2700 exhibits. Rather than issue one decision and judgment, Judge Jackson bifurcated his decision by first making 412 findings of fact "proved by a preponderance of the evidence." See generally United States v. Microsoft Corp., 84 F.Supp.2d 9 (D.D.C.1999). Five months later, Judge Jackson entered his decision concluding Microsoft (1) illegally maintained a monopoly in the market of licensing Intel-compatible PC operating systems, (2) attempted to monopolize the web browser market, and (3) entered into an illegal tying arrangement by bundling its Internet Explorer web browser with its Windows operating system, in violation of sections 1 and 2 of the Sherman Act. United States v. Microsoft Corp., 87 F.Supp.2d 30, 35, 44 (D.D.C.2000). This decision did not refer to a large number of the factual findings entered five months earlier.

Microsoft appealed this decision, and the United States Court of Appeals for the District of Columbia affirmed Judge Jackson's conclusion that Microsoft illegally maintained a monopoly in the PC operating systems market. United States v. Microsoft Corp., 253 F.3d 34, 80 (D.C.Cir. 2001). However, the D.C. Circuit reversed the attempted monopolization claim and remanded the claim of illegally tying the Internet Explorer web browser to Windows for a new trial. Id. at 94. The D.C. Circuit also vacated the district court's remedy and disqualified Judge Jackson for ethical violations related to his discussion of the merits of the case with reporters. Id. at 117. On remand, the case was reassigned to Judge Kollar-Kotelly. Judge Kollar-Kotelly rejected almost all of the additional remedies requested by the states and determined many of Judge Jackson's 412 findings of fact "were ultimately not relied upon by the district court in conjunction with the imposition of liability for violation of § 2 of the Sherman Act." New York v. Microsoft Corp., 224 F.Supp.2d 76, 138 (D.D.C.2002).

In the present case, the class of plaintiffs alleges 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 Iowa Code sections 553.4 (prohibiting restraint of trade) and 553.5 ("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."). These allegations are based in part on the factual findings and conclusions made in the Government Action. In July of 2004, the plaintiffs filed a motion requesting the court use the doctrine of collateral estoppel to foreclose Microsoft from relitigating 352 of the 412 factual findings made in the Government Action.

The district court granted this motion through a pretrial order applying the doctrine of "offensive" collateral estoppel to preclude Microsoft from relitigating the 352 factual findings. We granted Microsoft's application for leave to appeal the district court's ruling.

The overarching issue in this appeal is whether the district court correctly applied the requirement that facts subject to collateral estoppel be "necessary and essential" to the judgment in the prior litigation. Microsoft contends the court's misapplication of this standard led to an overbroad ruling in which preclusive effect was given to 336 factual findings that were not "necessary and essential" to the judgment.¹

II. Standard of Review

Because this appeal is premised upon the district court's application of an incorrect legal standard, our review is for error. See Walters v. Herrick, 351 N.W.2d 794, 796 (Iowa 1984) (stating, as a general rule, an "assertion that an incorrect legal standard was applied is reviewed on error").

III. Merits

The doctrine of collateral estoppel, sometimes referred to as issue preclusion, prevents parties from relitigating issues previously resolved in prior litigation if certain prerequisites are established. Hunter v. City of Des Moines, 300 N.W.2d 121, 123 (Iowa 1981). In general, collateral estoppel prevents parties to a prior action in which judgment has been entered from relitigating in a subsequent action issues raised and resolved in the previous action. Id. This doctrine may be utilized in either a defensive or offensive manner. Id. Defensive use of the doctrine is when "a stranger to the judgment, ordinarily the defendant in the second action, relies upon a former judgment as conclusively establishing in his favor an issue which he must prove as an element of his defense." Id. Offensive use of the doctrine is when "a stranger to the judgment, ordinarily the plaintiff in the second action, relies upon a former judgment as conclusively establishing in his favor an issue which he must prove as an essential element of his cause of action or claim." Id.

This case involves offensive use of the collateral estoppel doctrine. The plaintiffs, who were strangers to the first judgment, seek to rely upon the prior judgment that Microsoft had maintained an operating system monopoly by anticompetitive means and ask the court to accord preclusive effect to 352 of the 412 findings of fact entered in the Government Action.

Collateral estoppel may be invoked if four prerequisites are met:

(1) the issue concluded must be identical; (2) the issue must have been raised and litigated in the prior action; (3) the issue must have been material and relevant to the disposition of the prior action; and (4) the determination made of the issue in the prior action must have been necessary and essential to the resulting judgment.

Id. The fighting issue in this case involves the application of the fourth prerequisite to the findings of fact entered in the Government Action.

Admittedly, the fourth requirement of our collateral estoppel analysis—the determination made of the issue in the prior action must have been necessary and essential to the resulting judgment—is exceedingly vague. However, prior cases demonstrate that we apply this requirement somewhat narrowly.

Almost 150 years ago, long before we articulated the present collateral estoppel analysis, we said "[m]atters which arise only incidentally in the evidence, however much they may influence the mind of the judge or jury in arriving at a conclusion, are not matters adjudicated." Haight v. City of Keokuk, 4 Iowa 199, 4 Clarke 199, 208 (Iowa 1857) (emphasis in original).

In Hutchinson v. Maiwurm, 162 N.W.2d 408, 410-11 (Iowa 1968), we prefaced our analysis of a case involving the collateral estoppel doctrine by stating "a judgment is not binding or conclusive as to facts or questions of law, although put in issue and actually tried and expressly determined by the court in the former action, where such matters were immaterial or unessential to the determination of the real and decisive issue." In applying this standard to the facts of the case, we looked to other jurisdictions for guidance. Hutchinson, 162 N.W.2d at 411-12. In particular, we considered a Wyoming case, where a factual finding that was not "vital to the case" and was "not the point upon which the case turned" was not given estoppel effect. Id. at 412 (citing Willis v. Willis, 48 Wyo. 403, 49 P.2d 670, 677 (1935), overruled on other grounds by Shaw v. Smith, 964 P.2d 428 (Wyo.1998)). In another case, the Supreme Court of New Mexico did not grant estoppel effect to a prior court's conclusions of fact because the facts "were not ultimate facts . . . without which the [previous] judgment would lack support in an...